nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒08‒08
twenty-two papers chosen by
Russell Pittman
US Department of Justice

  1. On Mergers in Consumer Search Markets By Maarten C.W. Janssen; José Luis Moraga-González
  2. Complementary Platforms By Jo Reynaerts; Patrick Van Cayseele
  3. Product Differentiation when Competing with the Suppliers of Bottleneck Inputs By Duarte Brito; Pedro Pereira
  4. Cournot competition among multiproduct firms:specialization through licensing By Luigi Filippini
  5. Spillovers, disclosure lags, and incentives to innovate. Do oligopolies over-invest in R&D? By Gianluca Femminis; Gianmaria Martini
  6. Complementary research strategies, first-mover advantage and the inefficiency of patents By Luigi Bonatti
  7. The Price Effects of Horizontal Mergers: A Survey By Matthew Weinberg
  8. United States Courts and the Optimal Deterrence of International Cartels: A Welfarist Perspective on Empagran By Alvin K. Klevorick; Alan O. Sykes
  9. The Theory of Market Leaders, Antitrust Policy and the Microsoft Case By Federico Etro
  10. The economic impact of merger control - what is special about banking? By Elena Carletti; Philipp Hartmann; Steven Ongena
  11. The Effect of Bank Competition on the Bank's Incentive to Collateralize By Hainz, Christa
  12. Strategic Assortment Reduction by a Dominant Retailer Strategic Assortment Reduction by a Dominant Retailer By Anthony Dukes; Tansev Geylani; Kannan Srinivasan
  13. The Impact of Cost-Reducing R&D Spillovers on the Ergodic Distribution of Market Structures By Christopher A. Laincz; Ana Rodrigues
  14. Going, Going, Gone. Innovation and Exit in Manufacturing Firms By Cefis, E.; Marsili, O.
  15. An Analysis on Market Structure of Broadcast Service – Issues on Optimal Level of Channel Variety – By Shishikura, Manabu; Kasuga, Norihiro
  16. Dynamic price competition with capacity constraints and strategic buyers By Gary Biglaiser; Nikolaos Vettas
  17. Turbulence in High Growth and Declining Industries By Rui Baptista; Murat Karaoez
  18. Mixed oligopoly with consumer-friendly public firms By Roy Chowdhury, Prabal
  19. Bilateral Information Sharing in Oligopoly By Sergio Currarini; Francesco Feri
  20. The employment effects of mergers in a declining industry: the case of South African gold mining By Alberto Behar; James Hodge
  21. Imperfect Competition and Efficiency in Lemons Markets By Abhinay Muthoo; Suresh Mutuswami
  22. Market Leaders and Industrial Policy By Federico Etro

  1. By: Maarten C.W. Janssen (Erasmus Universiteit Rotterdam); José Luis Moraga-González (University of Groningen, and CESifo)
    Abstract: We study mergers in a market where <I>N</I> firms sell a homogeneous good and consumers search sequentially to discover prices. The main motivation for such an analysis is that mergers generally affect market prices and thereby, in a search environment, the search behavior of consumers. Endogenous changes in consumer search may strengthen, or alternatively, offset the primary effects of a merger. Our main result is that the level of search costs are crucial in determining the incentives of firms to merge and the welfare implications of mergers. When search costs are relatively small, mergers turn out not to be profitable for the merging firms. If search costs are relatively high instead, a merger causes a fall in average price and this triggers search. As a result, non-shoppers who didn’t find it worthwhile to search in the pre-merger situation, start searching post-merger. We show that this change in the search composition of demand makes mergers incentive-compatible for the firms and, in some cases, socially desirable.
    Keywords: consnmer search; mergers; price dispersion
    JEL: D40 D83 L13
    Date: 2007–07–16
  2. By: Jo Reynaerts; Patrick Van Cayseele
    Abstract: We introduce an analytical framework close to the canonical model of platform competition investigated by Rochet and Tirole (2006) to study pricing decisions in two-sided markets when two or more platforms are needed simultaneously for the successful completion of a transaction. The model developed is a natural extension of the Cournot-Ellet theory of complementary monopoly featuring clear cut asymmetric single- and multihoming patterns across the market. The results indicate that the so-called anticommons problem generalizes to two-sided markets because individual platforms do not take into account the negative pricing externality they exert on the other platforms. As a result, mergers between such platforms may be welfare enhancing, but involve redistribution of surplus from one side of the market to the other. Moreover, the limit of an atomistic allocation of property rights however is not monopoly pricing, indicating that there also exist differences with the received theory of complementarity.
    Keywords: Two-Sided Markets, Complements, The Anticommons Problem
    JEL: D43 D62 K11 L13 L4 L5
    Date: 2007
  3. By: Duarte Brito (Universidade Nova de Lisboa); Pedro Pereira (Autoridade da Concorrência)
    Abstract: In this article, we analyze the product differentiation decision of a downstream entrant that purchases access to a bottleneck input from one of two vertically integrated incumbents, who will compete with him in the downstream market. We develop a three-stage model, where first an entrant chooses his product, then the entrant negotiates the access price with two incumbents, and finally the firms compete on retail prices. Contrary to what one might expect, both the entrant and the access provider prefer that the entrant chooses a product that is a closer substitute of the product of the access provider than of the product of the other incumbent. This occurs because the access provider interacts with the entrant both in the retail market and the wholesale market. We also consider the cases where both parties, rather than only the incumbents, make the access price offers, where the bargaining stage precedes the location stage, and where there is open access regulation.
    Keywords: Horizontal differentiation, Location, Access price
    JEL: L25 L51 L96
    Date: 2007–07
  4. By: Luigi Filippini (DISCE, Università Cattolica)
    Abstract: In a duopoly where each firm produces substitute goods, we show that under process innovation, specialization is the equilibrium attained with cross-licensing. Each firm produces only the good for which it has an advantage. Patent pool extension confirms the results.
    Keywords: cross-licensing, patent pool, specialization, process innovation
    JEL: D45 O31
    Date: 2006–12
  5. By: Gianluca Femminis (DISCE, Università Cattolica); Gianmaria Martini (Università di Bergamo)
    Abstract: We develop a dynamic duopoly, where firms have to take into account a technological externality, that reduces over time their innovation costs, and an inter-firm spillover, that lowers only the second comer's R&D cost. This spillover exerts its effect after a disclosure lag. We identify three possible equilibria, which are classified, according to the timing of R&D investments, as early, intermediate, and late. The intermediate equilibrium is subgame perfect for a wide parameters range. When the innovation size is large, it implies that the duopolistic market equilibrium involves underinvestment. Hence, even in presence of a moderate degree of inter-firms spillover, the competitive equilibrium calls for public policies aimed at increasing the research activity. When we focus on minor innovations -- the case in which, according to the earlier literature, the market equilibrium underinvests -- our results imply that the policies aimed at stimulating R&D have to be less sizeable than suggested before, despite the presence of an inter-firm spillover.
    Keywords: knowledge spillover, dynamic oligopoly
    JEL: L13 L41 O33
    Date: 2007–06
  6. By: Luigi Bonatti
    Abstract: In a realistic framework where the potential innovators’ research lines are imperfectly correlated and imitation takes some time, this paper studies an industry regulated by an authority which can tax (subsidize) the firms’ pure profits (R&D expenditures). By comparing the market equilibrium emerging when there is patent protection with the market equilibrium emerging without patents, the paper finds that social welfare is higher in the absence of patents. This result is driven by the fact that—without patents--more than one successful inventor may implement its discovery and enter the market, thus reducing the deadweight loss due to imperfect competition.
    Keywords: Innovation, temporary monopoly, lead time, market regulation, patents.
    JEL: H21 H25 L10 L51 O31
    Date: 2007
  7. By: Matthew Weinberg (University of Georgia)
    Abstract: This paper surveys the literature on the price effects of horizontal mergers. The majority of mergers that have been examined in the nine studies conducted over the past 22 years resulted in increased prices for both the merging parties and rival firms, at least in the short run. There is some evidence that product prices increase after mergers are announced but before they are consummated.
    Date: 2007–01
  8. By: Alvin K. Klevorick (Yale University); Alan O. Sykes (Stanford University)
    Abstract: E. Hoffmann-La Roche Ltd. v. Empagran S.A. concerned a private antitrust suit for damages against a global vitamins cartel. The central issue in the litigation was whether foreign plaintiffs injured by the cartel’s conduct abroad could bring suit in U.S. court, an issue that was ultimately resolved in the negative. We take a welfarist perspective on this issue and inquire whether optimal deterrence requires U.S. courts to take subject matter jurisdiction under U.S. law for claims such as those in Empagran. Our analysis considers, in particular, the arguments of various economist amici in favor of jurisdiction and arguments of the U.S. and foreign government amici against jurisdiction. We explain why the issue is difficult to resolve, and identify several economic concerns, which the amici did not address, that may counsel against jurisdiction. We also analyze the legal standard enunciated by the Supreme Court and applied on remand by the DC Circuit, and we argue that its focus on "independent" harms and "proximate" causation is problematic and does not provide an adequate economic foundation for resolving the underlying legal issues. A revised version of this paper is forthcoming in ANTITRUST STORIES from Foundation Press, edited by Daniel Crane and Eleanor Fox.
    Keywords: Antitrust, Cartels, Competition policy, International trade
    JEL: F13 K21 L41
    Date: 2007–07
  9. By: Federico Etro (Department of Economics, University of Milan-Bicocca)
    Abstract: The New Economy, characterized by dynamic, global and innovative markets, requires a new way to approach many economic issues and also a new way to approach policymaking. This work will analyse a new approach toward competition policy based on recent progress in the theory of market leaders and discuss its implications with special reference to the markets in the New Economy, whose distinctive features, namely high fixed costs of R&D, less relevand marginal costs of production and network e?ects, require a di?erent approach from traditional markets. Close attention will be given to the software market, whose market leader has been (and still is) the subject of the attention of antitrust authorities around the world.The work is organized as follows. In Section1 I will present a brief overview of antitrust policy in US and EU and I will try to motivate the need for a new approach to competition policy, especially for the markets in the New Economy. Section 2 will survey traditional approaches to competition policy, while Section 3 will present the innovations associated with the theory of market leaders. Section 4 will apply the new approach to general issues of abuse of dominance with particular reference to the software market and to the Microsoft case. Section 5 will deal with bundling issues again with reference to the software market. Sections 6 will move to competition for the markets and to interoperability issues which are crucial for the dynamic markets of the New Economy. Section 7 concludes, while the Appendix contains some more technical results on the behaviour of market leaders.
    Date: 2006–10
  10. By: Elena Carletti (Center for Financial Studies, University of Frankfurt, Merton Str. 17-21, HPF 73, 60325 Frankfurt, Germany.); Philipp Hartmann (European Central Bank, DG Research, Kaiserstraße 29, 60311 Frankfurt, Germany.); Steven Ongena (Tilburg University, Department of Finance, P.O. Box 90153, 5000 LE Tilburg, The Netherlands.)
    Abstract: There is a long-standing debate about the special nature of banks. Based on a unique dataset of legislative changes in industrial countries, we identify events that strengthen competition policy, analyze their impact on banks and non-financial firms and explain the reactions observed with institutional features that distinguish banking from non-financial sectors. Covering nineteen countries for the period 1987 to 2004, we find that banks are special in that a more competition-oriented regime for merger control increases banks’ stock prices, whereas it decreases those of non-financial firms. Moreover, bank merger targets become more profitable and larger. A major determinant of the positive bank returns, after controlling inter alia for the general quality of institutions and individual bank characteristics, is the opaqueness that characterizes the institutional setup for supervisory bank merger reviews. Thus strengthening competition policy in banking may generate positive externalities in the financial system that offset unintended adverse side effects on efficiency introduced through supervisory policies focusing on prudential considerations and financial stability. Legal arrangements governing competition and supervisory control of bank mergers may therefore have important implications for real activity. JEL Classification: G21, G28, D4.
    Keywords: Specialness of banks, mergers and acquisitions, competition policy, legal institutions, financial regulation.
    Date: 2007–07
  11. By: Hainz, Christa
    Abstract: It has been argued that competing banks make inefficiently frequent use of collateralization in situations where they are better able to evaluate a project's risk than entrepreneurs. We study the bank's choice between screening and collateralization in a model where banks do not have this superior screening skill. In particular, we study the effect of bank competition on this choice. We find that competing banks use collateral less often than a monopolistic bank because competition will intensify if both banks collateralize. Moreover, bank competition is welfare improving if collateralization is rather costly.
    Keywords: Collateralization; screening; incentives; bank competition
    JEL: D82 G21 K00
    Date: 2007–07
  12. By: Anthony Dukes (University of Aarhus); Tansev Geylani (University of Pittsburgh); Kannan Srinivasan (Tepper School of Business, Carnegie Mellon University)
    Abstract: In certain product categories, large discount retailers are known to offer shallower assortments than traditional retailers. In this paper, we investigate the competitive incentives for such assortment decisions and the implications for manufacturers’ distribution strategies. Our results show that if one retailer has the channel power to determine its assortment first, then it can strategically reduce its assortment by carrying only the popular variety while simultaneously inducing the rival retailer to carry both the specialty and popular varieties. The rival retailer then bears higher assortment costs, which leads to relaxed price competition for the commonly carried popular variety. We also show that when the manufacturer has relative channel power, it chooses alternatively to distribute both product varieties through both retailers. Our analysis suggests, therefore, that when a retailer becomes dominant in the distribution channel, it facilitates retail segmentation into discount shops, carrying limited product lines, and specialty shops carrying wider assortments. We also illustrate how retailer power leading to strategic assortment reduction can lead to lower consumer surplus.
    Keywords: channels of distribution; channel power; assortment; retailing; game theory
    Date: 2006–12
  13. By: Christopher A. Laincz (Drexel University); Ana Rodrigues (Autoridade da Concorrência)
    Abstract: We extend the literature on knowledge spillovers between firms by studying a dynamic duopoly model of R&D. Our analysis highlights the previously ignored welfare effects of spillovers through dynamic changes in industry concentration. In addition, we find that the impact of imperfect appropriability of R&D on concentration and welfare depends crucially on the manner in which spillovers are obtained. To date, the analysis of the impact of knowledge spillovers between firms has been largely restricted to static two-stage models (R&D decisions followed by product market decisions). These models generally predict suboptimal R&D expenditures and lower welfare. Such models are silent on the evolution of the market structure, and the resulting welfare implications, because they need to assume initial conditions (symmetry or asymmetry). We find that when spillovers require absorptive capacity investment in own R&D, larger spillovers lead to declines in concentration while rates of innovation increase and welfare rises. In contrast, when spillovers are costlessly obtained increases in the extent of spillovers rates of innovation fall leading to losses in welfare through both reduced consumer surplus and firm values, while the effect on concentration is ambiguous.
    Date: 2007–06
  14. By: Cefis, E.; Marsili, O. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: This paper examines the effect of innovation on the risk of exit of a firm, distinguishing between different modes of exits. Innovation represents a resource and a capability that helps a firm to build competitive advantage and remain in the market. At the same time, the resources and capabilities of innovative firms make them an attractive target for the acquisition process of other firms, thereby increasing the likelihood of the exiting the market. We explore these effects empirically by linking data on innovation and exits for a large sample of manufacturing firms in the Netherlands. The results show that the effect of innovation on a firm's risk of exit differs according to the mode of exit and, in addition, it is shaped by the nature of the innovation. While a firm can lower its risk of failure by innovating in either products or processes, the introduction of a new product in the absence of innovation in the production process increases the risk of exit as a result of merger and acquisition.
    Keywords: Mergers and acquisitions;Firm exit;Innovation;Competing risks model;
    Date: 2007–03–21
  15. By: Shishikura, Manabu; Kasuga, Norihiro
    Abstract: Unlike general goods, broadcasting service is financed not only by consumer’s direct payment but also by advertisement revenue. In other words, broadcasting service is supported by direct and indirect financial sources. However, rate of dependence on those financial sources are different by each media type; Terrestrial broadcasting carrier primarily depends on advertisement revenue while cable TV carrier and satellite carrier, which is called as pay-TV primarily depend on payment from audience in addition to small amount of advertisement revenue. In this paper, we examine broadcast market, where carriers with different financial sources compete in the market, and analyze market performance as a result of competition. Especially, we focus on the effect of competition in the mixed market which includes advertising supported media and subscription fee supported media. We made economic model and analyze the difference on several types of market. Our principle results of Case III, the market that an advertisement supported carrier and a subscription supported carrier compete in the market, are as follows;. (1) The greater the substitutability is, the number of channels supplied by advertisement supported media increases while those supplied by subscription fee supported carrier decreases. (2) Total number of channels supplied by advertisement supported carrier and subscription fee supported carrier is equal to the number of channels supplied by an advertisement supported carrier (Case II). (3) Total TV watching time of Case III is equal to Case II. (4) Because the amount of payment by consumer increases compared to Case II, consumer surplus decreases. General economic model predicts that the increase of the number of entrants brings the increase of consumer surplus. However, in our model, we show here that the increase of the number of entrants does not necessarily bring the increase of consumer surplus.
    Keywords: broadcast service; market performance; consumer welfare; advertisement supported /subscription fee supported media.
    JEL: D40 L50 L82 D60
    Date: 2007–08–02
  16. By: Gary Biglaiser (University of North Carolina); Nikolaos Vettas (Athens University of Economics and Business)
    Abstract: We analyze a dynamic durable good oligopoly model where sellers are capacity constrained over the length of the game. Buyers act strategically in the market, knowing that their purchases may affect future prices. The model is examined when there is one and multiple buyers. Sellers choose their capacities at the start of the game. We find that there are only mixed strategy equilibria. Buyers may split orders, preferring to buy a unit from both high and low price sellers to buying all units from the low price seller. Sellers enjoy a rent above the amount needed to satisfy the market demand that the other seller cannot meet. Buyers would like to commit not to buy in the future or hire agents with instructions to always buy from the lowest priced seller. Further, sellers’ market shares tend to be asymmetric with high probability, even though they are ex ante identical.
    Keywords: Strategic buyers, capacity constraints, bilateral oligopoly, dynamic competition
    JEL: D4 L1
    Date: 2007–06
  17. By: Rui Baptista (IN+, Instituto Superior Tecnico, Technical University of Lisbon; Max Planck Institute of Economics); Murat Karaoez (IN+, Instituto Superior Tecnico, Technical University of Lisbon; IIBF, Department of Economics, Sueleyman Demirel University, Isparta, Turkey)
    Abstract: We examine turbulence over the product life cycle using the lowest possible level of industry aggregation, allowing for the use of panel data to study the evolution of single product markets. We find that replacement of exiting firms by subsequent entry plays a primary role in generating turbulence in high growth markets, while displacement of incumbents by recent entrants is the main selection force in declining markets. As product life cycles progress, trial-and-error entry subsides, and turbulence decreases.
    Keywords: Entry, Exit, Selection, Product life cycle, Replacement, Displacement
    JEL: L11
    Date: 2007–07–31
  18. By: Roy Chowdhury, Prabal
    Abstract: We consider a mixed oligopoly with a public firm that maximizes the sum of its own profits and consumers' surplus. We characterize the unique pure strategy equilibrium and show that as long as the cost function is not ``too concave'', privatization reduces welfare. We find that while the first best cannot be implemented using a tax/subsidy policy that is the same for all firms, a budget-balancing policy that involves a tax on the public firm, coupled with subsidies to the private firms, can do so. Further, the optimal tax/subsidy policy is critically dependent on whether there is privatization or not.
    Keywords: Mixed oligopoly; public firms; subsidy; tax; irrelevance principle; privatization.
    JEL: L2 L3 L1
    Date: 2007–07
  19. By: Sergio Currarini; Francesco Feri
    Abstract: We study the problem of information sharing in oligopoly, when sharing decisions are taken before the realization of private signals. Using the general model developed by Raith (1996), we show that if firms are allowed to make bilateral exclusive sharing agreements, then some degree of information sharing is consistent with equilibrium, and is a constant feature of equilibrium when the number of firms is not too small. Our result is to be contrasted with the traditional conclusion that no information is shared in common values situations with strategic substitutes - such as Cournot competition with demand shocks - when firms can only make industry-wide sharing contracts (e.g., a trade association).
    Keywords: Information sharing, oligopoly, networks, Bayesian equilibrium
    JEL: D43 D82 D85 L13
    Date: 2007–07
  20. By: Alberto Behar; James Hodge
    Abstract: An industry in decline provides an appropriate setting for the theory that mergers and acquisitions destroy implicit contracts and allow for the shedding of excess labour. We test this theory using provincial data from the South African gold mining industry, which has been in decline over the last two decades. Our data clearly portray rises in real wages and falling employment after the end of apartheid and our econometric results are remarkably consistent with standard labour demand theory. We find evidence of a significant negative effect of mergers/acquisitions on employment of a magnitude similar to that found for Continental Europe. This supports the view that negative employment effects are more likely in rigid labour markets.
    Keywords: Labour Demand, Mergers, Gold Industry
    JEL: G34 J23 L72
    Date: 2007
  21. By: Abhinay Muthoo; Suresh Mutuswami
    Abstract: This paper studies the impact of competition on the degree of inefficiency in lemons markets. More precisely, we characterize the second-best mechanism (i.e., the optimal mechanism with private information) in a stylized lemons market with finite numbers of buyers and sellers. We then study the relationship between the degree of efficiency of the second-best mechanism and market competitiveness. The relationship between the first-best and second best mechanisms is also explored.
    Date: 2007–06–26
  22. By: Federico Etro (Department of Economics, University of Milan-Bicocca)
    Abstract: This article provides an overview of recent progress in the theory of market structure, of the role of market leaders and the scope of industrial policy, presents new results through simple examples of quantity competition, price competition and competition for the market and develops new applications to the theory of competition in presence of network externalities and learning by doing, of strategic debt financing in the optimal financial structure, of bundling as a strategic device, of vertical restraints through interbrand competition, of price discrimination and to the theory of innovation. Finally, it draws policy implications for antitrust issues with particular reference to the approach to abuse of dominance and to the protection of IPRs to promote innovation.
    Keywords: Leadership, Free, Competition Policy, Financial Structure, Bundling, Innovation, Strategic Trade Policy
    JEL: L1
    Date: 2006–11

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