nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒09‒16
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. Mergers and collusion with asymmetric capacities By Emilie Dargaud
  2. Inattentive Consumers and Product Quality By Armstrong, Mark; Chen, Yongmin
  3. Structural Remedies in Merger Regulation in a Cournot Framework By Andrei Medvedev
  4. Market-Share Contracts with Asymmetric Information By Adrian Majumdar; Greg Shaffer
  5. Breadth, Depth, and Competition By Heski Bar-Isaac
  6. Patents and Antitrust: Application to Adjacent Markets By Nicholas Economides; William N. Hebert;
  7. When do R&D subsidies boost innovation? Revisiting the inverted U-shape By Kilponen , Juha; Santavirta, Torsten
  8. The effects of competition on price dispersion in the airline industry: a panel analysis By Kris Gerardi; Adam Hale Shapiro
  9. Nonbanks in the Payments System: Vertical Integration Issues By Nicholas Economides; ;
  10. Cournot Versus Supply Functions: What does the Data Tell us? By Willems, B.R.R.; Rumiantseva, I.; Weigt, H.
  11. Funding Universal Service: The Effect of Telecommunications Subsidy Programs on Competition and Retail Prices By Eric P. Chiang; Janice A. Hauge;
  12. Too little Destruction too little Creation: A Schumpeterian Diagnosis of Barriers to Sustained Growth in Ukraine By Christian Gianella; William Tompson
  13. Consolidation of Banks in Japan: Causes and Consequences By Kaoru Hosono; Koji Sakai; Kotaro Tsuru
  14. Market Imperfections and Wage Inequality By Sandén, Klas
  15. Entry, Exit and Productivity Empirical Results for German Manufacturing Industries By Joachim Wagner
  16. Repercussions of firm size definition on empirical results for firm efficiency and financing research By Alfonso, Galindo Lucas
  17. Networking in a lagged economy By Ana Isabel, Moreno Monroy
  18. Strategic Technology Adoption and Market Dynamics as Option Games. By Flavia Cortelezzi; Giovanni Villani

  1. By: Emilie Dargaud (GATE CNRS)
    Abstract: When it examines the risk of coordinated effects, an antitrust authority will usually compare the situation where the merger is accepted with an attendant risk of collusion with the benchmark case in which competition is present ex-post. The main objective of this paper is to show that the antitrust authority must take into account the possibility for firms to collude if a merger is rejected. In fact, firms can have incitations to make collusion ex-post (after a rejection of a merger) whereas they would not make collusion ex-ante. All the papers on mergers and collusion tend to look at a minimal discount factor threshold for collusion to be sustained. This article does not only suggest necessary and sufficient conditions for collusion to be enforced but it also analyses the choice which firms have as to whether to collude. We consider an industry with cost-asymmetric firms and we study the analysis of collusion under leniency programmes.
    Keywords: leniency programme, merger, oligopoly supergame
    JEL: K42 L11 L41
    Date: 2007–04
  2. By: Armstrong, Mark; Chen, Yongmin
    Abstract: This paper studies a model in which some consumers shop on the basis of price alone, without attention to potential differences in product quality. A firm may offer a low-quality product to exploit these inattentive consumers. In the unique symmetric equilibrium of the model, firms choose prices with mixed strategies, similarly to Varian (1980) in which some consumers purchase from a random seller without attention to market prices. In our model, though, firms also choose quality stochastically, and there is both price and quality dispersion. Two stylized policy interventions are considered: competition policy, which acts to increase the number of sellers, and market transparency reforms which act to increase the fraction of attentive consumers. With fewer inattentive consumers, firms are less likely to "cheat" (i.e., cut quality) which therefore improves welfare, but profit and consumer surplus can either increase or decrease. When there is a large number of sellers, approximately half the sellers cheat (regardless of the fraction of inattentive consumers), and introducing more sellers boosts consumers surplus and reduces profit, while the impact on welfare is ambiguous.
    Keywords: Oligopoly; Complex Products; Market transparency; Competition Policy
    JEL: L15 D18 L13
    Date: 2007–09
  3. By: Andrei Medvedev (Centre for Competition Policy, University of East Anglia)
    Abstract: To prevent possible abuse of market power, an antitrust agency can force merging firms to divest some of their assets. The divested assets can be sold via auction either to existing competitors or to a new entrant. Divestiture of assets extends the range of parameters when a merger satisfies a consumer surplus standard and should be approved. If the agency takes a more active stance toward the selection of a purchaser of the assets (e.g. to exclude an incumbent from the auction), then it could lead to a favourable outcome for consumers and merging firms.
    Keywords: Merger regulation, structural remedies, divestiture
    JEL: D43 K21 L51
    Date: 2007–08
  4. By: Adrian Majumdar (Centre for Competition Policy, University of East Anglia); Greg Shaffer (Simon School of Business, University of Rochester)
    Abstract: In this paper, a dominant supplier and competitive fringe supply goods to a common buyer who has private information about the state of demand. We give conditions under which market-share contracts are profitable, and we show that, in some cases, the full-information outcome can be obtained (unlike in standard screening models, where the agents earns an information rent in the high state and demand is distorted in the low state). Our results also inform the antitrust debate on bundling, fidelity rebates and all-units discounts. We provide a new motive for a dominant firm to bundle its own product with a competitively supplied product (with ambiguous consequences for welfare), and we show that the market-share contracts, which are a subset of fidelity rebates, are more profitable than all-units discounts.
    Keywords: Adverse selection, screening, bundling, fidelity rebates, all-units discounts
    JEL: L13 L41 L42
    Date: 2007–09
  5. By: Heski Bar-Isaac
    Date: 2007
  6. By: Nicholas Economides (Stern School of Business, New York University); William N. Hebert (Calvo & Clark LLP);
    Abstract: We examine the intersection of patents and antitrust where a patent holder uses the monopoly power it possesses in the market for a patented product to exclude competitors in an adjacent market and attempt to monopolize or monopolize the adjacent market. The present scheme for awarding patents cannot judge when the issuance of a patent will lead to the appropriate balance between innovation and efficiency. Where a patent holder’s invention uses an interface with adjacent products, the patent holder may be tempted to extend its patent monopoly into adjacent markets that depend upon the interface with the patented invention. Economic theory suggests that it is inappropriate to immunize a patent holder from antitrust liability when it attempts to extend its patent monopoly into adjacent markets, because it could decrease consumer surplus. Courts have expressed their reluctance to scrutinize a patent holder’s innovations and design changes, because of the potential benefits of the innovations and their reluctance to second-guess the marketplace. However, applying traditional antitrust principles, courts have found that monopolists could be liable for unlawfully extending their monopoly positions into adjacent markets in the areas of computer peripherals and software applications; aftermarkets for replacement parts, service and maintenance of durable goods; design changes to medical devices; and changes in drug formulas. While the patent laws provide a spur to innovation by granting limited monopoly rights, the antitrust laws curb the excessive reach of these monopoly rights by acting as a check on excessive expansion of the scope of the patent grant.
    Keywords: patents, antitrust, adjacent markets, complementarity, innovation, efficiency, aftermarkets
    JEL: K21 Q31 Q34 L42 L40 L12
    Date: 2007–08
  7. By: Kilponen , Juha (Bank of Finland Research); Santavirta, Torsten (Helsinki School of Economics)
    Abstract: We show theoretically that a proportional R&D subsidy accelerates innovation activity at all degrees of competition in the modern Schumpeterian growth model, but less so at high degrees of competition. We then use company-level data on patenting activity, product market competition and R&D subsidies of Finnish firms during 1990–2001 to test the theoretical prediction. The empirical findings can be summarized as follows. Firstly, we find relatively strong evidence in favour of the inverted U-shape between competition and innovation. Secondly, we find some evidence that a direct R&D subsidy increases innovative activity at all but very high degrees of competition. This can be interpreted so mean that the R&D subsidy reinforces the Schumpeterian effect due to the negative cross-effect of R&D subsidy and competition. This is evident from the finding that an increase in the R&D subsidy steepens the inverted U relationship when competition is fierce.
    Keywords: competition; innovation; R&D subsidies; patents
    JEL: D40 H25 L10 O31
    Date: 2007–09–12
  8. By: Kris Gerardi; Adam Hale Shapiro
    Abstract: This paper analyzes the effects of market structure on price dispersion in the airline industry, using panel data from 1993 through 2006. The results found in this paper contrast with those of Borenstein and Rose (1994), who found that price dispersion increases with competition. We find that competition has a negative effect on price dispersion, in line with the textbook treatment of price discrimination. Specifically, the effects of competition on price dispersion are most significant on routes that we identify as having consumers characterized by relatively heterogeneous elasticities of demand. On routes with a more homogenous customer base, the effects of competition on price discrimination are largely insignificant. We conclude from these results that competition acts to erode the ability of a carrier to price discriminate, resulting in reduced overall price dispersion.
    Date: 2007
  9. By: Nicholas Economides (Stern School of Business, New York University); ;
    Abstract: We discuss and evaluate the incentives for vertical expansion and vertical mergers in the payments systems industry paying particular attention to the implications of the existence of network effects in this industry. We assess the incentives of large merchants to extend vertically into payments systems, noting that this incentive is maximized when there is significant market power in payments systems and merchants are not sufficiently compensated for the business they bring to the network.
    Keywords: payments system; credit cards; debit cards; non-banks; vertical integration; market power; monopoly
    JEL: L13 L42 L50 L80
    Date: 2007–08
  10. By: Willems, B.R.R.; Rumiantseva, I.; Weigt, H. (Tilburg University, Center for Economic Research)
    Abstract: The liberalization of the electricity sector increases the need for realistic and robust models of the oligopolistic interaction of electricity firms. This paper compares the two most popular models: Cournot and the Supply Function Equilibrium (SFE), and tests which model describes the observed market data best. Using identical demand and supply specifications, both models are calibrated to the German electricity market by varying the contract cover of firms. Our results show that each model explains an identical fraction of the observed price variation. We therefore suggest using Cournot models for short term analysis, as more market details, such as network constraints, can be accommodated. As the SFE model is less sensitive to the choice of the calibration parameters, it might be more appropriate for long term analysis, such as the study of a merger.
    Keywords: supply function equilibrium;Cournot competition;electricity markets
    JEL: L94 L13 C72 D43
    Date: 2007
  11. By: Eric P. Chiang (Department of Economics, Florida Atlantic University); Janice A. Hauge (Department of Economics, University of North Texas);
    Abstract: There is general concern that producer subsidies distort competition. We examine a telecommunications subsidy system that transfers money from low cost regions to high cost regions of the U.S. Even though the system is designed to be competitively neutral, we find evidence that the system, combined with carrier of last resort policies, promotes cream skimming by entrants in low cost areas and less entry in high cost areas, where incumbents are more likely than entrants to receive subsidies. We are unable to rule out the possibility that state regulatory policies favor incumbents in states that are net beneficiaries of the subsidy system.
    Keywords: subsidies, Universal Service Fund, telecommunications, regulation
    JEL: L52 L96 O11
    Date: 2007–08
  12. By: Christian Gianella; William Tompson
    Abstract: This paper examines problems of entry, exit and competition in Ukrainian product markets. It finds that Ukraine still has too little of all three, and that exit mechanisms, in particular, function poorly. Since impediments to entry and exit are largely the product of excessive and ill administered regulation, the paper also provides a systematic assessment of product-market regulation in Ukraine, using indicators developed by the OECD Economics Department. Finally, the paper presents the main findings of two empirical studies concerned with the potentially large benefits of opening up markets, via both increased competition and further privatisation, for productivity growth in Ukraine. This paper relates to the 2007 Economic Survey of Ukraine ( <P>Une insuffisance de création-destruction : un diagnostic schumpétérien des freins à la croissance en Ukraine <BR>Cet article examine les questions de concurrence, d’entrée et de sortie des entreprises sur le marché des biens. Il montre que toutes trois demeurent insuffisantes en Ukraine, et que les mécanismes de sortie du marché, en particulier, fonctionnent de manière très imparfaite. Compte tenu du fait que les barrières à l’entrée et à la sortie sont largement le produit d’une réglementation excessive et mal appliquée, l’article donne une évaluation systématique du niveau de réglementation du marché des biens en Ukraine, en utilisant les indicateurs développés par le Département des affaires économiques. Enfin, l’article expose les principaux résultats de deux études empiriques évaluant les effets bénéfiques sur la croissance de la productivité de l’ouverture des marchés, d’une part par un accroissement de la concurrence et d’autre part par la poursuite des privatisations. Ce document se rapporte à l’Etude économique de l’Ukraine 2007 (
    Keywords: product market regulation, competition, privatisation, réglementation sur les marchés des biens et du travail, concurrence, restructuring, restructuration, privatisation, entry, exit, Ukraine, Ukraine, creative destruction, destruction créatrice, entrée sur le marché, sortie sur le marché
    JEL: D24 D43 H11 L1 L5 L9 O12 P23
    Date: 2007–09–03
  13. By: Kaoru Hosono; Koji Sakai; Kotaro Tsuru
    Abstract: We investigate the motives and consequences of the consolidation of banks in Japan during the period of fiscal year 1990-2004 using a comprehensive dataset. Our analysis suggests that the government's too-big-to-fail policy played an important role in the mergers and acquisitions (M&As), though its attempt does not seem to have been successful. The efficiency-improving motive also seems to have driven the M&As conducted by major banks and regional banks in the post-crisis period, while the market-power motive seems to have driven the M&As conducted by regional banks and corporative (shinkin) banks. We obtain no evidence that supports managerial motives for empire building.
    JEL: G21 G34
    Date: 2007–09
  14. By: Sandén, Klas (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This paper investigates the relationship between various market imperfections and the skill premium. The model in this paper assumes perfectly competitive labor markets but distorted product and financial markets. The model predicts that the skill premium is positively correlated with market power, modeled using preference for variety, and shorter product cycles. The effect from financial market distortions or taxes on financial income is ambiguous. Positive external effects among firms developing new goods decrease the skill premium. <p>
    Keywords: Wage Inequality; Monopolistic Competition; Innovation
    JEL: D33 D43 D50 D91 D92 J31 L13 O31
    Date: 2007–09–10
  15. By: Joachim Wagner (University of Lueneburg and Max Planck Institute of Economics)
    Abstract: Using panel data from Spain Farinas and Ruano (IJIO 2005) test three hypotheses from a model by Hopenhayn (Econometrica 1992): (H1) Firms that exit in year t were in t-1 less productive than firms that continue to produce in t. (H2) Firms that enter in year t are less productive than incumbent firms in year t. (H3) Surviving firms from an entry cohort were more productive than non-surviving firms from this cohort in the start year. Results for Spain support all three hypotheses. This paper replicates the study using a unique newly available panel data sets for all manufacturing plants from Germany (1995 - 2002). Again, all three hypotheses are supported empirically.
    Keywords: entry, exit, productivity
    JEL: L11 L60
    Date: 2007–09–12
  16. By: Alfonso, Galindo Lucas
    Abstract: A huge number of quantitative and qualitative criteria perform the research practice and legal issuing on firm size and firm-size-related measures. Inside each of those criteria, quantitative boundaries between two firm categories have also been diverse, even arbitrary. This approach to firm size concept finds out a convergence among variables —assets, market share, labour cost— with activity segment remarks (where both a traditional division and a original proposal have been used). It is demonstrated that previous founding on industry-size relations —as well as profitability or financial structure measurements— clearly depend on firm size and industry (explicative variables) definitions and also on depending variables definitions (mainly profitability).
    Keywords: Firm Size definition; Industry sector definition; factorial analysis; efficiency results; financing results.
    JEL: M00 K29 M40 E19 M2 C10
    Date: 2006–10–05
  17. By: Ana Isabel, Moreno Monroy
    Abstract: We analyze the vertical, horizontal and transversal networks that a firm can form in the presence of innovation and technological lags. Our empirical case of study uses three industries of the Colombian manufacturing sector. Within this framework we find a rich variety of interorganizational connections. In vertical relationships, a hierarchical relationship only unidirectional material flows happen. Enterprises of the informal and low-segment level of the market cannot establish content-wise vertical relationships, because they have low legitimacy. We find that in highly competitive scenarios with low product differentiation, firms do not engage in any kind of interchange with similar, competing enterprises. We derived that an important determinant of horizontal cooperation is the knowledge of other agents, fueled by standardized practices. As for the relationships of firms with the institutional support system, we find that the access is limited to enterprises operating in the higher segment of the market. The implication is that a subgroup of enterprises does not have access to the support system and indeed have a pessimistic view towards it. The conclusion is that the heterogeneity in the universe of firms is reflected also in their possibilities to engage in networks.
    Keywords: networks; technology; clusters
    JEL: Z13
    Date: 2007–02
  18. By: Flavia Cortelezzi; Giovanni Villani
    Abstract: Aim of this paper is to analyse the equilibrium strategies of two firms investing in a new technology, when the probability of successful implementation is uncertain and market shares are asymmetric. In particular, we are able to consider three key feature of a new technology adoption. First, it is, at least partially, irreversible. Second, once realized, there is uncertainty about the probability of a successful implementation. Third, the profit flow generated by such an investment is subject to uncertainty according to the evolution of demand function. The first firm to enter the market sustaines the investment cost earlier, but can benefit of a higher market share with respect to the competitor. The follower has just to decide if and when realize the investment. He benefits from the resolution of uncertainty, but he suffers of a reduction in its market share. Using the method of option pricing theory, we address this issue at two levels. First, we model the investment decision of a non-cooperative firm (decentralised case) as a dynamic stochastic game. Then, we solve for the sequential monopolist as a benchmark case. We find the interaction of pre-emption and uncertainty can actually hasten, rather than delay, investment, contrary to the usual presumption.
    Keywords: Real Options; Stopping Timing Game, Asymmetric Demand.
    JEL: C73 G13
    Date: 2007–07

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