nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒09‒24
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Welfare Enhancing Mergers under Product Differentiation By Tina Kao & Flavio Menezes
  2. Do Mergers of Potentially Dominant Firms foster Innovation? An Empirical Analysis for the Manufacturing Sector By Elena Cefis; Anna Sabidussi; Hans Schenk
  3. Remedy for Now but Prohibit for Tomorrow: The Deterrence Effects of Merger Policy Tools By Barros, Pedro Pita; Clougherty, Joseph A; Seldeslachts, Jo
  4. The Role of Innovation in Merger Policy: Europe’s Efficiency Defence versus America’s Innovation Markets Approach By Elena Cefis; Mark Grondsma; Anna Sabidussi; Hans Schenk
  5. The Comparative Features and Economic Role of Mergers and Acquisitions in Japan By MIYAJIMA Hideaki
  6. Differentiated Networks: Equilibrium and Efficiency By Rossella Argenziano
  7. Cooperative R&D under Uncertainty with Free Entry By Nisvan Erkal:Daniel Piccinin
  8. Trade liberalization, competition and growth By Omar Licandro; Antonio Navas-Ruiz
  9. The Evolving Food Chain: Competitive Effects of Wal-Mart's Entry Into The Supermarket Industry By Michael Noel; Emek Basker
  10. First versus Second-Mover Advantage with Information Asymmetry about the Size of New Markets By Eric Rasmusen; Young-Ro Yoon
  11. The Diversification Discount Puzzle: Empirical Evidence for a Transactions Cost Resolution By Raj Aggarwal; Shelly Zhao
  12. Partnerships vs. Firms Entry Strategies By Michele Moretto; Gianpaolo Rossini
  13. Do Gasoline Prices Resond Asymmetrically to Cost Shocks? The Confounding Effect of Edgeworth Cycles By Michael Noel
  14. Pricing and Signaling with Frictions By Alain Delacroix; Shouyong Shi
  15. Financing unemployment benefits by goods market competition: fiscal policy and deregulation with market imperfections By Antonio Scialà; Riccardo Tilli
  16. The Diculty to Behave as a (regulated) Natural Monopolist – The Dynamics of Electricity Network Access Charges in Germany 2002 to 2005 By Thomas Wein; Heike Wetzel

  1. By: Tina Kao & Flavio Menezes (School of Economics, The University of Queensland)
    Abstract: We follow the duopoly framework with differentiated products as in Singh and Vives (1984) and Zanchettin (2006) and examine the welfare effects of a merger between two asymmetric firms. We find that for quantity competition, the merger increases total welfare if the cost asymmetry falls into a specific range. Furthermore, this parameter range widens if the products are closer substitutes. On the other hand, mergers are never welfare enhancing in this setting when firms compete in prices.
  2. By: Elena Cefis; Anna Sabidussi; Hans Schenk
    Abstract: We investigate the effects of M&A on innovation in the specific context of potential or realized market dominance. Authorities are challenged by balancing both detrimental and beneficial effects of mergers on innovation, especially when a merger threatens to result in market dominance, while firms would wish to uncover all the potential benefits arising from M&A. The effects of M&As on innovation have been tested on a panel dataset, constructed from the Dutch Community Innovation Survey and the Dutch Business Register, including around 1000 manufacturing companies. We have adopted a comprehensive approach, taking into consideration three dimensions of innovation: innovation inputs, innovation outputs and efficiency. The results show that M&As performed in the previous 3-5 years have a positive and significant effect on innovation except R&D expenses and innovation efficiencies. The results also suggest that technological regimes are critical to understanding the patterns of innovation.
    Keywords: Mergers and Acquisitions, Innovation, Market Dominance
    JEL: C14 D21 L11 L25
    Date: 2007–09
  3. By: Barros, Pedro Pita; Clougherty, Joseph A; Seldeslachts, Jo
    Abstract: Antitrust policy involves not just the regulation of anti-competitive behavior, but also an important deterrence effect. Neither scholars nor policymakers have fully researched the deterrence effects of merger policy tools, as they have been unable to empirically measure these effects. We consider the ability of different antitrust actions – Prohibitions, Remedies, and Monitorings – to deter firms from engaging in mergers. We employ cross-jurisdiction/pan-time data on merger policy to empirically estimate the impact of antitrust actions on future merger frequencies. We find merger prohibitions to lead to decreased merger notifications in subsequent periods, and remedies to weakly increase future merger notifications: in other words, prohibitions involve a deterrence effect but remedies do not.
    Keywords: antitrust; deterrence; merger policy; remedies
    JEL: K21 L40 L49
    Date: 2007–08
  4. By: Elena Cefis; Mark Grondsma; Anna Sabidussi; Hans Schenk
    Abstract: Changes in the world’s economies and discussions in the literature about the growing importance of innovation to firms have given rise to a demand for expanding the analysis of merger policy. The present study focuses on the different criteria used to assess the impact of M&A activities on innovation. The analysis is both theoretical and empirical. From a theoretical perspective, two main approaches are discussed: the efficiency defence approach, adopted in Europe, and the innovation markets doctrine as developed in the United States. The present paper contributes to the literature by suggesting that an integration of the two approaches would significantly improve M&A assessment. On the empirical side, two cases that have been scrutinised by both the European Commission and the U.S. Federal Trade Commission are discussed. The results show the relevance of the different approaches used when dealing with innovation in the assessment of mergers.
    Keywords: Mergers and Acquisitions, Innovation, Efficiency Defence
    JEL: C14 D21 L11 L25
    Date: 2007–09
  5. By: MIYAJIMA Hideaki
    Abstract: The Japanese economy is in the midst of a major merger and acquisition (M&A) wave for the first time in the postwar period. This paper puts a spotlight on Japan's M&A activity, which has surged since the end of 1999, and takes a look at the factors that have contributed to the surge, and its various economic dimensions. The paper places Japan's M&As in an international context, and identify the causes of the wave and its structural characteristics (sections 2 and 3). It also examines the economic role of M&A and its pros and cons. We contend that M&As contribute to raising the efficiency of resource allocation and organizations (sections 4 and 5). The last section addresses policy implications and contains concluding remarks.
    Date: 2007–09
  6. By: Rossella Argenziano
    Abstract: We consider a model of price competition in a duopoly with product differentiation and network effects. The value of a good for a consumer is the sum of a common and an idiosyncratic component. The first captures the vertical dimension of quality, the second captures horizontal differentiation. Each consumer privately observes his own value for each good, but cannot separate the common and the idiosyncratic component. Therefore, he has incomplete information about the value of the goods for the other consumers. After firms announce prices, consumers choose simultaneously which network to join, facing a coordination problem. In the efficient allocation, both networks are active and the firm with the highest expected quality has the largest market share. To characterize the equilibrium allocation, we derive necessary and sufficient conditions for uniqueness of the equilibrium of the coordination game played by consumers for given prices. The equilibrium allocation differs from the efficient one for two reasons. First, the equilibrium allocation of consumers to the networks is too balanced, since consumers fail to internalize network externalities. Second, if access to the networks is priced by strategic firms, then the product with the highest expected quality is also the most expensive. This further reduces the asymmetry between market shares and therefore social welfare.
    Date: 2007–09–18
  7. By: Nisvan Erkal:Daniel Piccinin
    Abstract: In the last few decades, the effects of cooperative R&D arrangements on innovation and welfare have played an important role in policy making. The goal of this paper is to analyze the effects of cooperative R&D arrangements in a model with a stochastic R&D process and output spillovers. Our main innovation is to allow for free entry in both the R&D race and the product market. To determine the desirability of cooperation in R&D environments, we compare three different ways of organizing R&D activities: R&D competition, R&D cartels, and RJV cartels. In contrast with the literature, we assume that cooperative R&D arrangements do not have to include all of the firms in the industry. We show that sharing of research outcomes is a necessary condition for the profitability of cooperative R&D arrangements with free entry. The profitability of RJV cartels depends on their size. The impact of cooperative R&D arrangements on the aggregate level of innovation depends on whether there are participants in the R&D race who are a part of the cooperative R&D arrangement. If some outsiders choose to participate in the R&D race, the aggregate rate of innovation remains unaffected by the formation of a cooperative R&D arrangement. Otherwise, it increases. R&D cartels may be welfare-improving in cases when they cause the aggregate rate of innovation to increase. In such cases, it may be desirable to subsidize them. Since sharing of R&D outcomes affects the equilibrium number of firms in the product market after the R&D race, the consumer welfare effects of RJV cartels are sensitive to the specification of consumer preferences. Subsidies may be desirable in cases of larger RJVs since they are the ones which are less likely to be profitable.
    Keywords: Cooperative R&D; Research joint ventures; Free entry; Uncertain R&D; Technology spillovers.
    JEL: L1 L4 O3
    Date: 2007
  8. By: Omar Licandro; Antonio Navas-Ruiz
    Abstract: The aim of this paper is to understand whether international trade may enhance innovation and growth through an increase in competition. We develop a twocountry endogenous growth model, both countries producing the same set of goods, with firm specific R&D and a continuum of oligopolistic sectors under Cournot competition. Since countries produce the same set of goods, trade openness makes markets more competitive, reducing prices and raising the incentives to innovate. More general, a reduction on trade barriers enhances growth by reducing domestic firms`market power.
    Date: 2007–09
  9. By: Michael Noel (Department of Economics, University of California - San Diego); Emek Basker (University of Missouri)
    Abstract: We analyze the effect of Wal-Mart's entry into the grocery market using a unique stor-level price panel data set. We use OLS and two IV specifications to estimate the effect of Wal-Mart's entry on competitors' prices of 24 grocery items across several categories. Wal-Mart's price advantage over competitors for these products averages approximately 10%. On average, competitors' response to Wal-Mart's entry is a price reduction of 1-1.2%, mostly due to smaller-scale competitors: the response of the "big three" supermarket chains (Alberson's, Safeway, and Kroger) is less than half that size. We confirm our results using a falsification exercises, in which we test for Wal-Mart's effect on prices of services that it does not provide, such as movie tickets and dry cleaning services.
    Keywords: Wal-Mart, Retail Prices, Supermarkets, Price Competition,
    Date: 2007–06–01
  10. By: Eric Rasmusen (Indiana University Bloomington); Young-Ro Yoon (Indiana University Bloomington)
    Abstract: Is it better to move first, or second--- to innovate, or to imitate? Suppose one player has superior information about which of two new markets is better. If he enters first, he might be able to secure a natural monopoly. (The less-informed player also has this motive.) If he enters second, he can prevent the other player from imitating him. We find, predictably, that the more accurate the informed player's information the more he wants to delay in order to prevent the spillover of his information. Also, the less accurate the informed player's information the more he wants to move first in order to foreclose a market. In addition, the bigger the difference in markets, the more likely the two players will make the same choice. More surprisingly, if the informed player's information becomes more accurate that can hurt both industry profits and consumer welfare by inducing both players to choose what they hope is the bigger market, leaving the other market not served.
    Keywords: Market Entry, First- and Second Mover Advantage, Payoff Externalities, Informational Externalities, Endogenous Timing
    JEL: D81 D82 L13
    Date: 2007–09
  11. By: Raj Aggarwal; Shelly Zhao
    Abstract: Prior literature on the diversification discount and the relative efficiency of internal versus external capital markets provides decidedly mixed results. We argue that transactions cost economics are useful in understanding this puzzle. According to transactions cost economics, diversified firms should outperform single-segment firms in industries with higher external transaction costs (e.g., emergent industries). Similarly, single-segment firms should outperform diversified firms in industries with low external transactions costs and high agency and other internal costs (e.g., some mature industries). This paper provides empirical evidence supporting these contentions.
    Keywords: Diversification, transaction cost economics, internal markets
    Date: 2007–06–06
  12. By: Michele Moretto (Università di Padova); Gianpaolo Rossini (Università di Bologna)
    Abstract: From 1997 to 2001 we observe a faster growth in the number of Nonemployer businesses (mostly Partnerships) vis-à-vis Firms in the USA, a country with the mildest asymmetries between the two types of enterprise with respect to taxation, administrative entry barriers and other institutional aspects. The different speed of net entry may be due to the internal organisation of the two types of enterprise and its relation to some market features. In a continuous time stochastic environment, with sunk costs, we model entry as a growth option. Partnerships and Firms display speci…c entry patterns in terms of output price and size since they react in diverse fashions to market uncertainty. In most cases, the Partnership is less risky and better suited to enter under conditions of high volatility, as during the years between 1997 and 2001.
    Keywords: Entry Strategies, Uncertainty, Partnership, Firm
    JEL: L21 L3 J54 G13
    Date: 2007–09
  13. By: Michael Noel (Department of Economics, University of California - San Diego)
    Abstract: Asymmetric price cycles which look similar to Edgeworth Cycles are appearing in increasingly many retail gasoline markets in the U.S. and worldwide. The cycles can give the appearance of asymmetric prices responses to cost shocks under traditional methodologies. This article shows how to remove the confounding effect of the cycles and test for any true underlying asymmetry in price responses. Designing the correct counterfactual is key. The methodology is demonstrated for one strongly cycling market and some asymmetry to cost shocks is found. Covert collusion is unlikely, but the ability to coordinate cyclical price increases may play a role. Consumers can still reduce xpenditures on gasoline up to 7.7% with simple timing rules of thumb.
    Keywords: Price cycles,
    Date: 2007–06–05
  14. By: Alain Delacroix; Shouyong Shi
    Abstract: In this paper, we introduce private information into a market with search frictions and evaluate the relative efficiency of two pricing mechanisms, price posting and bargaining. Each seller chooses investment that determines the quality of the good. This quality is the seller's private information before matching and it will be observed in a match. Sellers enter a search market competitively and can choose either to post prices or to bargain. In this environment, a pricing mechanism affects efficiency through the choice of quality and the number of trades. Bargaining induces the efficient choice of quality but an inefficient number of trades because the division of the match surplus is generically inefficient. By directing buyers' search, posted prices internalize search externalities and induce the constrained efficient outcome in the case of public information. However, when the quality is private information, this role of posted prices in directing search can conflict with their role in signaling quality. Focusing on this conflict, we find that bargaining could yield higher efficiency than price posting. We characterize the parameter regions in which each of the two mechanisms dominates in efficiency.
    Keywords: Directed search; Signaling; Bargaining; Efficiency
    JEL: D8 C78 E24
    Date: 2007–09–12
  15. By: Antonio Scialà (Università di Padova); Riccardo Tilli (Università di Roma)
    Abstract: We consider a model in which the labor market is characterized by search frictions and there is monopolistic competition in the goods market. We introduce proportional income taxation and unemployment benefits with Government balanced budget constraint. Then, we evaluate the effects of both more competition in the goods market and higher unemployment benefits on labor market equilibrium and equilibrium tax rate. We show that more competition has a positive effect on equilibrium unemployment and the Government budget. Higher unemployment benefits can be financed either by higher tax rate or increasing goods market competition. Liberalization policies could permit: a) to avoid an increase in unemployment if we allow some rise in the tax rate; b) to decrease unemployment if they are incisive enough to keep the tax rate unchanged.
    Keywords: Matching Models, Monopolistic Competition, Fiscal Policy, Unemployment Insurance
    JEL: H20 J64 J65
    Date: 2007–09
  16. By: Thomas Wein (Institute of Economics, Leuphana University of Lüneburg); Heike Wetzel (Institute of Economics, Leuphana University of Lüneburg)
    Abstract: Reviewing the development of network access charges in the German electricity market since 2002 reveals significant variation. While some firms continually increased or decreased their access charges, a variety of firms exhibited discontinuousn behavior with price changes in both directions. From an economic viewpoint this price setting turbulence is astonishing because grid operators are non-contestable natural monopolists, which in this time period were regulated by Negotiated Third Party Access (NTPA). Depending on the eectiveness or ineectiveness of NTPA,expected behavior would be either regulated average cost prices or monopoly prices, but not the observed turbulence. Although in 2005 NTPA scheme was replaced by a Regulated Third Party Access (RTPA) scheme with a regulator, an analysis of the factors influencing the price setting behavior within this period oers valuable information for the new regulator and the still discussed new incentive regulation, which is expected to start in 2009. Using multivariate estimations based on firm data covering the years 2000-2005, we test the hypotheses that asymmetric influence of regulatory threat, dierent cost and price calculation knowledge, strategic use of structural features and the obligation to publish specific access charges have influenced the electricity network access charges in Germany.
    Keywords: Keywords: deregulation, natural monopoly, power industry
    JEL: D42 L43 L94
    Date: 2007–09–18

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