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on Industrial Competition |
| By: | Federico Etro (Department of Economics, University of Milan-Bicocca) |
| Abstract: | This article derives antitrust implications for markets where entry can be regarded as endogenous (contrary to most analysis within the post-Chicago tradition). Many applications concern issues of abuse of dominance. Endogenous entry requires a wide revision of our understanding of the role of incumbents in pricing, producing in the presence of network externalities and multi-sided markets, bundling products, price discriminating and delegating to retailers through vertical restraints: when entry is endogenous, leaders adopt aggressive strategies without exclusionary purposes and without affecting welfare negatively. Endogenous entry has also implications for the analysis of mergers (that take place only if create enough cost efficiencies and do not harm consumers), the evaluation of collusive cartels (that are unfeasible in markets where entry is endogenous) and state aids for exporting firms (which are always unilaterally optimal for international markets with free entry). The spirit of the policy recommendations of the Chicago school is broadly supported by our analysis in a solid game-theoretic framework. |
| Keywords: | Antitrust, Endogenous entry, Leadership, Chicago school |
| JEL: | L1 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:122&r=com |
| By: | Marco Alderighi (University of Valle d'Aosta, Italy.); Claudio A. Piga (Dept of Economics, Loughborough University) |
| Abstract: | We study when a monopolistically-competitive firm may optimally choose to limit the size of its market. This may be the case when the cost of serving the market with geographically dispersed customers is increasing in size. We also investigate the incentives faced by a firm to limit the reach of its market, when it adopts different pricing schemes. We show that under certain assumptions the derived equilibria are constrained socially optimal. |
| Keywords: | Monopolistic competition; Transport costs; Endogenous fixed costs; Overlapping market areas |
| JEL: | D21 D43 F12 L13 R12 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2007_21&r=com |
| By: | Eugenio Miravete (University of Texas at Austin); ; |
| Abstract: | I study how firms actually compete in nonlinear tariffs by analyzing whether the incumbent and entrant’s decisions to offer a given number of tariff options are interrelated. The goal is to shed some light on those dynamic and strategic aspects of tariff menus that are currently ignored by theoretical models of nonlinear pricing competition in order to highlight some basic features of the market that future theoretical work should address. This paper also introduces a generalized multivariate count data model that allows to account for the possibility of correlation of any sign among the pricing decisions of competing firms in a manner that is robust to the existence of over and underdispersion of counts. Pricing strategies appear to be strategic complements that respond positively to the existing heterogeneity of consumers’ tastes. While this is a common source driving the number of tariff options offered, results also show that previous pricing decisions by the incumbent affect the entrant’s current offering of tariff options, thus free riding on information about the market revealed by the likely better informed firm of the industry. The strategic complementarity result disappears when we only consider non-dominated tariffs. |
| Keywords: | Nonlinear Pricing Competition; Tariff Menus; Strategic Complementarity; Bivariate Count Data Regression |
| JEL: | D43 L96 M21 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0702&r=com |
| By: | Ravi Mantena (Simon Graduate School of Business Administration, University of Rochester); Ramesh Sankaranarayanan (School of Business, University of Connecticut); Siva Viswanathan (Smith School of Business, University of Maryland) |
| Abstract: | This paper develops and analyzes a model of competition between platforms in an industry with indirect network effects, with a specific focus on complementary product exclusivity. The objective is to understand the determinants of exclusivity and explore its effects on competition. We find that the stage of platform market maturity and the asymmetry between the installed bases of platforms are critical determinants of exclusivity. Exclusivity is the dominant outcome in the nascent stage of the platform market and is sometimes the outcome in mature stages as well, while non-exclusivity is the usual outcome in the intermediate stages. In the nascent stages, the bigger platform secures exclusivity, while in the mature stages it is the smaller platform. |
| Keywords: | Licensing; exclusive; networks; complementarity |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0704&r=com |
| By: | Tobias Wenzel |
| Abstract: | This paper studies competition in prices and opening hours in a model with free entry. It is shown that under free competition a market failure arises: Entry is excessive and opening hours are under-provided. Restrictions on opening hours aggravate this failure. I analyze the impact of a liberalization of opening hours. The model predicts that in the short run prices will remain constant, but increase in the long run. Concentration in the retail sector will rise and opening hours will increase in two steps, immediately after deregulation and further over time. Finally, employment in the retail sector increases. |
| Keywords: | Opening hours, retailing, deregulation |
| JEL: | L13 L51 L81 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0013&r=com |
| By: | Elijah Brewer, III; Julapa Jagtiani |
| Abstract: | This paper examines an important aspect of the “too-big-to-fail” (TBTF) policy employed by regulatory agencies in the United States. How much is it worth to become TBTF? How much has the TBTF status added to bank shareholders’ wealth? Using market and accounting data during the merger boom (1991-2004) when larger banks greatly expanded their size through mergers and acquisitions, we find that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion in added premiums for the nine merger deals that brought the organizations over $100 billion in total assets. These added premiums may reflect that perceived benefits of being TBTF and/or other potential benefits associated with size. |
| Keywords: | Bank mergers |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp07-05&r=com |
| By: | Michiel van Leuvensteijn; Jacob A. Bikker; Adrian A.R.J.M. van Rixtel; Christoffer Kok-Sørensen∗ |
| Abstract: | This paper is the first that applies a new measure of competition, the Boone indicator, to the banking industry. This approach is able to measure competition of bank market segments, such as the loan market, whereas many well-known measures of competition can consider the entire banking market only. A caveat of the Boone-indicator may be that it assumes that banks generally pass on at least part of their efficiency gains to their clients. Like most other model-based measures, this approach ignores differences in bank product quality and design, as well as the attractiveness of innovations. We measure competition on the lending markets in the five major EU countries as well as, for comparison, the UK, the US and Japan. Bearing the mentioned caveats in mind, our findings indicate that over the period 1994-2004 the US had the most competitive loan market, whereas overall loan markets in Germany and Spain were among the best competitive in the EU. The Netherlands occupied a more intermediate position, whereas in Italy competition declined significantly over time. The French, Japanese and UK loan markets were generally less competitive. Turning to competition among specific types of banks, commercial banks tend to be more competitive, particularly in Germany and the US, than savings and cooperative banks. |
| Keywords: | Banking industry, competition, loan markets, marginal costs, market shares; |
| JEL: | D4 G21 L1 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2007-6&r=com |
| By: | Jens Høj |
| Abstract: | The aim of this paper is to construct indicators that measure the strength of policies aimed at preserving and promoting market competition by empowering antitrust and sectoral authorities. The indicators, which cover both general and sector-specific competition policies, extend previous OECD work covering economy-wide and sector-specific regulations that restrict competition and promote governance. It focuses on information for 2003 provided by a number of OECD sources. The results show relatively little variation in the overall indicator across countries, partly reflecting the convergence of competition policies across the OECD area over the past decade. However, inspection of individual elements reveals that enforcement efforts (both in terms of devoted resources and actually implemented sanctions) and policies in network industries vary considerably across countries. Thus, the main conclusion arising from this work is that member countries have been improving the general competition policy framework, but still have to fully implement the improved framework. Moreover, there remains a considerable scope for further progress in promoting competition in network industries. <P>Indicateurs de l'efficacité de la politique de la concurrence dans les pays de l'OCDE <BR>Ce document de travail présente la construction d'indicateurs mesurant l'impact des politiques qui encouragent le maintien et le développement de la concurrence des marchés en renforçant les autorités pro-concurrentielles et sectorielles. Ces indicateurs qui couvrent les politiques de concurrence au niveau global et sectoriel sont un prolongement des travaux précédents de l'OCDE concernant les restrictions de la concurrence dans l'économie au sens large ainsi que par secteur. Les indicateurs décrits ici sont construits à partir de données en provenance de sources de l'OCDE et concernent l'année 2003. L'indicateur le plus agrégé varie peu d’un pays à un autre, reflétant en partie la convergence des politiques pro-concurrentielles au sein de l’OCDE au cours de la dernière décennie. Une analyse plus détaillée montre cependant que les efforts de mise en oeuvre des régulations sur les marchés des biens et services (ressources allouées, sanctions prises) et les politiques concernant les industries de réseaux sont beaucoup plus variables. Au total, les pays membres ont certes mis en place des politiques pro-concurrentielles théoriquement bonnes, mais il reste encore à compléter leur mise en oeuvre. De plus, il subsiste de nombreux domaines, notamment dans les industries de réseau où l'amélioration de la concurrence peut grandement progresser. |
| Keywords: | politique de la concurrence, regulated industries, enforcement, product market competition, antitrust law, concurrence sur les marchés de biens |
| JEL: | K2 L5 |
| Date: | 2007–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:568-en&r=com |
| By: | Antonio Nicita; Matteo Rizzolli; Maria Alessandra Rossi |
| Abstract: | This paper explores the interface between two important institutional pillars of market exchange – Intellectual Property (IP) law and Antitrust law – in light of a theory of property rights incompleteness. This theory interprets property as an incomplete bundle of both defined and undefined rights over actual and potential uses of given resources and defines externalities as joint claims over rival production uses of undefined entitlements, irrespective of whether the object of property rights has a tangible or intangible nature. The paper argues that traditional distinctions between physical property and IP based on attributes of tangibility, rivalry and excludability are misleading and bases on the substantial homogeneity of property rights and IPRs an argument supporting the complementarity between IP law and Antitrust law. Far from being an unjustified ex-post limitation to existing property rights, likely to undermine ex-ante incentives, Antitrust intervention represents one of the means by which incompletely specified property rights (both intellectual and tangible) might be redefined over time as externalities emerge. |
| JEL: | O34 L4 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:usi:wpaper:509&r=com |
| By: | Kyoji Fukao; Keiko Ito; Hyeg Ug Kwon; Miho Takizawa |
| Keywords: | FDI, TFP, Acquisition, Selection bias, Propensity score matching, Average treatment effect abstract: Using Japanese firm-level data for the period from 1994-2002, this paper examines whether a firm is chosen as an acquisition target based on its productivity level, profitability and other characteristics and whether the performance of Japanese firms that were acquired by foreign firms improves after the acquisition. In our previous study for the Japanese manufacturing sector, we found that M&As by foreigners brought a larger and quicker improvement in total factor productivity (TFP) and profit rates than M&As by domestic firms. However, it may be argued that firms acquired by foreign firms showed better performance simply because foreign investors acquired more promising Japanese firms than Japanese investors did. In order to address this potential problem of selection bias problem, in this study we combine a difference-in-differences approach with propensity score matching. The basic idea of matching is that we look for firms that were not acquired by foreign firms but had similar characteristics to firms that were acquired by foreigners. Using these firms as control subjects and comparing the acquired firms and the control subjects, we examine whether firms acquired by foreigners show a greater improvement in performance than firms not acquired by foreigners. Both results from unmatched samples and matched samples show that foreign acquisitions improved target firms’ productivity and profitability significantly more and quicker than acquisitions by domestic firms. Moreover, we find that there is no positive impact on target firms’ profitability in the case of both within-group in-in acquisitions and in-in acquisitions by domestic outsiders. In fact, in the manufacturing sector, the return on assets even deteriorated one year and two years after within-group in-in acquisition, while the TFP growth rate was higher after within-group in-in acquisitions than after in-in acquisitions by outsiders. Our results imply that in the case of within-group in-in acquisitions, parent firms may be trying to quickly restructure acquired firms even at the cost of deteriorating profitability. |
| JEL: | C14 D24 F21 F23 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2006-18&r=com |
| By: | Khandelwal, Amit |
| Abstract: | I develop a model predicting that the exposure of firms to low-wage country competition decreases with a product market's degree of quality differentiation. The model's predictions are verified using measures of countries' export quality that exploit both price and market share information, which contrasts to earlier work that uses only price data. The quality estimates reveal that "quality ladder" lengths, measured by the range of qualities, vary considerably across product markets indicating that quality specialization is more feasible in some product markets than in others. Empirical estimates confirm that the impact of low-wage import penetration on U.S. manufacturing employment is weaker in industries characterized by longer quality ladders. The results confirm that product quality is an important consideration for understanding how international trade affects firms and workers. |
| Keywords: | Quality Ladders; Import Competition; Quality Specialization; Product Di®erentiation |
| JEL: | F1 L0 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4496&r=com |
| By: | Ralf Dewenter; Justus Haucap |
| Abstract: | This paper analyses price elasticities in the Austrian market for mobile telecommunications services using data on firm specific tariffs in the period between January 1998 and March 2002. Dynamic panel data regressions are used to estimate short-run and long-run demand elasticities for business customers and for private consumers with both postpaid contracts and prepaid cards.We find that business customers have a higher elasticity of demand than private consumers, where postpaid customers tend to have a higher demand elasticity than prepaid customers. Also demand is generally more elastic in the long run. In addition, the paper also provides estimates for firm-specific demand elasticities which range from –0.47 to –1.1. |
| Keywords: | Mobile telephony, price elasticities, unbalanced panel data, dynamic panel data analysis |
| JEL: | C23 L13 L96 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0017&r=com |
| By: | Bianco, Dominique |
| Abstract: | This paper shows that the results of Bucci (2005) depend critically on the assumption that there are no difference between the intermediate goods share in final output, the returns of specialization and the degree of market power of monopolistic competitors. In this paper, we disentangle the market power parameter from the intermediate goods share in final output and the returns to specialization. The main result of this paper is the death of the inverted-U shape relationship between competition and growth. Indeed, we find a decreasing relationship between competition and growth which is due to the composition of two negative effects on growth : resource allocation and Schumpeterian effects. |
| Keywords: | Endogenous growth; Horizontal differentiation; Technological change; Imperfect competition |
| JEL: | O31 O41 |
| Date: | 2007–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4492&r=com |
| By: | Stefano Comino (Università di Trento,); Fabio Manenti (Università di Padova,); Antonio Nicolò (Università di Padova,) |
| Abstract: | We consider a cumulative innovation process in which a follow-on innovator invests in R&D activities that influence both the expected commercial value as well as the novelty of its innovation. When the second innovator investments are not servable,licensing of the first innovation never occurs efficiently, and, at the equilibrium, the follow-on innovator either underinvests or overinvests. We show that a large patent breadth may be harmful for the first innovator too, and therefore Pareto-dominated;as long as the undervinvestment problem becomes more pronounced, the value generated by the follow-on innovator reduces, and so do the licensing revenues of the first inventor. |
| Keywords: | sequential innovation, patents, licensing, intellectual property |
| JEL: | K3 L5 O3 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0041&r=com |
| By: | Dalia Marin (University of Munich, Department of Economics, Ludwigstr. 28, 80539 Munich, Germany +49-89-2180-2446, dalia.marin@lrz.uni-muenchen.de); Thierry Verdier (Paris School of Economics, 48 Boulevard Jourdan 75014 Paris, France +331 43 13 63 08, verdier@pse.ens.fr) |
| Abstract: | This paper develops a theory which investigates how firms’ choice of corporate organization is affecting firm performance and the nature of competition in international markets. We develop a model in which firms’ organisational choices determine heterogeneity across firms in size and productivity in the same industry. We then incorporate these organisational choices in a Krugman cum Melitz and Ottaviano model of international trade. We show that the toughness of competition in a market depends on who - headquarters or middle managers - have power in firms. Furthermore, we propose two new margins of trade adjustments: the monitoring margin and the organizational margin. International trade may or may not lead to an increase in aggregate productivity of an industry depending on which of these margins dominate. Trade may trigger firms to opt for organizations which encourage the creation of new ideas and which are less well adapt to price and cost competition. |
| Keywords: | international trade with endogenous firm organizations and endogenous toughness of competition, firm heterogeneity, power struggle in the firm. |
| JEL: | F12 F14 L22 D23 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:207&r=com |
| By: | Azar, Ofer H. |
| Abstract: | Consumers often have to decide whether to go to a remote store for a lower price. Only the absolute price difference between the stores should be relevant in this case, but several experiments showed that people exhibit "relative thinking": they are affected also by the relative savings (relative to the good's price). This article analyzes the effects of this bias on firm strategy and market outcomes using a two-period game-theoretic model of location differentiation. Relative thinking causes consumers to make less effort to save a constant amount when they buy more expensive goods. In the location differentiation context this behavior can be modeled by consumers who behave as if their transportation costs are an increasing function of the good's price. This gives firms an additional incentive to raise prices, in order to increase the perceived transportation costs of consumers, which consequently softens competition and allows higher profits. Therefore, the response of firms to relative thinking raises prices and profits and reduces consumer surplus, in both periods. Total welfare is unchanged in the first period, and in the second period it is either unchanged or reduced, depending on whether the objective or subjective transportation costs are used to compute welfare. The main results of the model (firms' response to relative thinking increases prices and reduces consumer surplus) are likely to hold also in the context of search. The article also explains why "relative thinking" is a more appropriate term than "mental accounting" (which was often used before) to describe this behavior, and discusses why people might exhibit relative thinking. |
| Keywords: | Competitive Strategy; Relative Thinking; Pricing; Mental Accounting; Consumer Psychology; Consumer Attitudes & Behavior; Cognitive Processes; Behavioral Decision Making; Industrial Organization; Product Differentiation. |
| JEL: | D10 M31 L10 L13 D43 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4455&r=com |
| By: | Justus Haucap; Uwe Pauly; Christian Wey |
| Abstract: | This paper offers a cartel explanation for the stability of German collective bargaining institutions.We show that a dense net of legal safeguards has been yarned around the wage setting cartel. These measures make deviation by cartel insiders less attractive and simultaneously erect entry barriers for alternative unions. As we argue many recent labor policy measures, which make wages more flexible, serve to further stabilize the labor cartel, while truly pro-competitive proposals have not been implemented exactly because of their destabilizing effects.We propose policy measures that remove entry barriers and facilitate outside competition by alternative collective bargaining organizations. |
| Keywords: | Labor market cartel, labor market institutions, collective bargaining |
| JEL: | J52 K31 L12 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0009&r=com |