nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒09‒30
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Informative Advertising and Consumer Search in a Differentiated-Products Duopoly By Levent Celik
  2. The Control of Porting in Two-Sided Markets By Pollock, Rufus
  3. Price Stackelberg game with quantity precommitment By Pedro Jara-Moroni
  4. Patents and Antitrust: Application to Adjacent Markets By Nicholas Economides
  5. Product Market Competition in the OECD Countries: Taking Stock and Moving Forward By Jens Høj; Miguel Jimenez; Maria Maher; Giuseppe Nicoletti; Michael Wise
  6. Environmental innovation under Cournot competition By Maria Eugenia, SANIN; Skerdilajda, ZANAJ
  7. The Unbundling Regime for Electricity Utilities in the EU: A Case of Legislative and Regulatory Capture? By Silvester van Koten; Andreas Ortmann
  8. Are Public Banks pro-Competitive? Evidence from Concentrated Local Markets in Brazil By Christiano A. Coelho; João Manoel Pinho de Mello; Leonardo Rezende
  9. The Effect of Bank Competition on the Bank’s Incentive to Collateralize By Christa Hainz
  10. Nonbanks in the Payments System: Vertical Integration Issues By Nicholas Economides
  11. COMPETITIVE EFFECTS OF IT INNOVATION ON BANK STRATEGY, 1985-1995 By batiz-lazo, bernardo
  12. Does Corporate Governance Matter in Competitive Industries? By Giroud, Xavier; Mueller, Holger M
  13. Innovation and Imitation with and without Intellectual Property Rights By Pollock, Rufus
  14. Persistence of Monopoly, Innovation, and R&D Spillovers: Static versus Dynamic Analysis By Eugen Kovac; Viatcheslav Vinogradov; Kresimir Zigic
  15. R&D Outsourcing Contract with Information Leakage By Shirley J. , HO
  16. Vertical Product Differentiation, Minimum Quality Standards and International Trade By Dimitra Petropoulou
  17. Did US Safeguards Affect Mark-ups of EU Steel Producers? By Vandenbussche, Hylke; Zarnic, Ziga
  18. Antidumping Protection and Productivity of Domestic Firms : A firm level analysis By Josef, KONINGS; Hylke, VANDENBUSSCHE
  19. Cumulative Innovation, Sampling and the Hold-Up Problem By Pollock, Rufus

  1. By: Levent Celik
    Abstract: This paper analyzes informative advertising in a duopoly market with differentiated products when consumer search is costless. If consumers are fully rational, exposure to a single advertisement is sufficient for them to obtain complete market information. In this case, firms undersupply advertising compared to the social optimum because of free-riding. If consumers are not fully rational, they may ignore the existence of another firm when the only advertisement they receive quotes the monopoly price. In this case, both firms advertise the monopoly price, and the market may produce too much or too little advertising compared to the social optimum.
    Keywords: Search, Duopoly, Informative Advertising, Product Differentiation.
    JEL: L13 M37
    Date: 2007–07
  2. By: Pollock, Rufus
    Abstract: A sizable literature has grown up in recent years focusing on two-sided markets in which economies of scale combined with complementarities between a platform and its associated `software' or `services' can generate indirect network effects (that is positive feedback between the number of consumers using that platform and the utility of an individual consumer). In this paper we introduce a model of `porting' in such markets where porting denotes the conversion of `software' or `services' developed for one platform to run on another. Focusing on the case where a dominant platform exists we investigate the impact on equilibrium and the consequences for welfare of the ability to control porting. Specifically, we show that the welfare costs associated with the `control of porting' may be more significant than those arising from pricing alone. This model and its associated results are of particular relevance because of the light they shed on debates about the motivations and effects of actions by a dominant platform owner. Recent examples of such debates include those about Microsoft's behaviour both in relation to its operating system and its media player, Apple's behaviour in relation to its DRM and iTunes platform, and Ebay's use of the cyber-trespass doctrine to prevent access to its site.
    Keywords: Network Effects; Two-Sided Markets; Porting; Antitrust; Competition
    JEL: L13 L15 L12
    Date: 2005–07
  3. By: Pedro Jara-Moroni
    Abstract: In a homogeneous product duopoly with concave demand and convex costs we study a two stage game in which, first, firms engage simultaneously in capacity (production) and, after production levels are made public, there is price Stackelberg competition in the second stage. We justify the special demand rationing on tied prices. Randomizing price leadership in the second stage game, we can find a pure strategy subgame perfect Nash equilibrium (SPNE) of the whole game, in which firms produce strictly more than in the Cournot outcome, which is as well a SPNE.
    Date: 2007
  4. By: Nicholas Economides
    Date: 2007
  5. By: Jens Høj; Miguel Jimenez; Maria Maher; Giuseppe Nicoletti; Michael Wise
    Abstract: Based on 18 country reviews performed over the 2003-2005 period, this paper examines, the cross-country differences in policy approaches to product market competition and their consequences for product market rents. Against this background, the paper summarises OECD recommendations to further strengthen competition in various sectors and areas. These include: removing remaining barriers to trade and inward foreign direct investments; better securing deterrence of cartels through effective sanctions; facilitate market access to inherently competitive industries by easing zoning laws (the retail sector), abolishing reserved monopolies (sales of tobacco and alcohol), limiting the scope of trade associations’ self-regulation and easing residency or nationality requirements (professional services); meet competition challenges in network industries by facilitating the effective separation of monopoly components from competitive activities, reducing public ownership, clearly separating the government’s ownership and regulatory functions and creating the right incentives for investing in infrastructures. <P>Concurrence dans les marchés des produits des pays de l’OCDE : bilan et perspectives <BR>Ce document est basé sur 18 études économiques de l’OCDE menées entre 2003 et 2005. Il examine les différences entre pays dans les politiques de la concurrence ainsi que leur conséquences sur les caractéristiques des marchés de produits. Sur cette base, le document propose une synthèse des recommandations de l’OCDE pour renforcer la concurrence dans différents domaines et secteurs économiques. Celles-ci comprennent: la suppression des barrières commerciales et aux investissements directs étrangers encore en place; une meilleure dissuasion des stratégies de cartel à l’aide de sanctions plus efficaces; un accès plus aisé aux activités concurrentielles en assouplissant les régulations concernant l’aménagement du territoire (commerce de détail), la suppression de certains monopoles (vente de tabac et d’alcool), la limitation des prérogatives des associations professionnelles dans le domaine règlementaire ainsi que l’assouplissement des obligations de résidence ou de nationalité (professions libérales) ; et un meilleur essor de la concurrence dans les industries de réseau par la séparation des activités en situation de monopole des activités concurrentielles, la réduction du degré de contrôle public, notamment en distinguant clairement les fonctions de tutelle des fonctions de régulation sectorielle et en mettant en place les bonnes incitations à l’investissement en infrastructures.
    Keywords: network industries, industrie de réseau, trade policy, politique commerciale, competition law, droit de la concurrence, OECD countries, market imperfections, antitrust issues and policies, inherently competitive sectors, pays membres de l'OCDE, défaillances de marché, régulations anti-trust, secteurs concurrentiels
    JEL: D43 F13 K21 L4 L8 L9
    Date: 2007–09–17
  6. By: Maria Eugenia, SANIN (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Skerdilajda, ZANAJ (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE) and Universita di Siena)
    Abstract: In this paper, we address the incentives to invest in environmental innovation of enterprises that exercise market power in the output market and also buy and sell pollution permits. Differently from the existing literature, using a market approach we explicitly model the interaction between the output market, where firms play ˆ la Cournot, and the permits market. We find that, in the new equilibrium firms behave symmetrically, that is, they either both innovate to protect their market share in the output market or they both choose not to innovate. Whether the innovation equilibrium arises or not depends on the output demand and on the productivity enhancement and not on the distribution of permits among firms. Finally, we show that, under this market configuration, collusion can be welfare enhancing.
    Keywords: environmental innovation, tradable permits, interaction ˆ la Cournot
    JEL: D43 L13 Q55
    Date: 2007–09–17
  7. By: Silvester van Koten; Andreas Ortmann
    Abstract: Theory and empirics suggest that by curbing competition, incumbent electricity companies which used to be and here are referred to as Vertically Integrated Utilities (VIUs), can increase their profitability through combined ownership of generation and transmission and/or distribution networks. Because curbing competition is generally believed to be welfare-reducing, EU law requires unbundling (separation) of the VIU networks. However, the EU allows its member states the choice between incomplete (legal) and complete (ownership) unbundling. There is tantalizing anecdotal evidence that VIUs have tried to influence this choice through questionable means of persuasion. Such means of persuasion should be more readily available in countries with a more corrupted political culture. This paper shows that among the old EU member states (EU-15), countries which are perceived as more corrupt are indeed more likely to apply weaker forms of unbundling. Somewhat surprisingly, we do not obtain a similar finding for the new EU member states that acceded in 2004 (NMS-10). We provide a conjecture for this observation.
    Keywords: Electricity markets; regulation; vertical integration; corruption.
    JEL: K49 L43 L51 L94 L98
    Date: 2007–05
  8. By: Christiano A. Coelho (Central Bank of Brasil); João Manoel Pinho de Mello (Department of Economics, PUC-Rio); Leonardo Rezende (Department of Economics, PUC-Rio)
    Abstract: We measure the competitive effect of public ownership of banks in concentrated local banking markets in Brazil by extending Bresnahan and Reiss’s [1991] framework to measure the effects of entry in concentrated markets. We use variation in market size, the number of competitors and their identity to infer how conduct is affected by the entry of a private vis-à-vis a public bank. We find that, while local markets whose structure is private bank duopoly are 100% larger than private monopolies, duopolies with one public and one private bank and private monopolies are no different with respect to market size. These results suggest that, while the presence of private banks toughens competition, public banks do not affect conduct.
    Keywords: banking industry; public versus private ownership; effect of entry.
    JEL: L10 L13 L33
    Date: 2007–08
  9. By: Christa Hainz (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Tel.:+49 89 2180 3232, Fax.: +49 89 2180 2767,
    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: 2007–09
  10. By: Nicholas Economides
    Date: 2007
  11. By: batiz-lazo, bernardo
    Abstract: Through case study research this paper illustrates opportunities presented by IT-based technological change in British retail bank markets (1985-1995). For the managers of the Royal Bank of Scotland IT appeared to lower entry barriers, exit barriers and deliver high sustainability of competitive advantage. The strategic intent behind diversification patterns of the Royal Bank of Scotland suggested competitive considerations were at a premium because unsolicited take-over bids in the early 1980s put pressure on managers to create growth opportunities. Direct Line Insurance was a subsidiary from the Royal Bank of Scotland. Direct Line was also the first retail finance institution to establish a clear competitive advantage based on information technology. The success of Direct Line enabled an increase in the market share of British retail financial services of The Royal Bank of Scotland. Direct Line is a case of planned success that questions the extent to which banks’ competencies must change to master alternative delivery channels. The success of Direct Line also suggested more effective execution than other activities explored by managers of the Royal Bank of Scotland.
    Keywords: Financial institutions; technological change; corporate strategy.
    JEL: N24 L10
    Date: 2007–09
  12. By: Giroud, Xavier; Mueller, Holger M
    Abstract: By reducing the fear of a hostile takeover, business combination (BC) laws weaken corporate governance and create more opportunity for managerial slack. Using the passage of BC laws as a source of identifying variation, we examine if such laws have a different effect on firms in competitive and non-competitive industries. We find that while firms in non-competitive industries experience a substantial drop in performance, firms in competitive industries experience virtually no effect. Though consistent with the general notion that competition mitigates managerial agency problems, our results are, in particular, supportive of the stronger view expressed by A. Alchian, M. Friedman, and G. Stigler that managerial slack cannot survive in competitive industries. When we examine which agency problem competition mitigates, we find evidence consistent with a “quiet-life” hypothesis. While capital expenditures are unaffected by the passage of BC laws, input costs, wages, and overhead costs all increase, and only so in non-competitive industries. We also conduct event studies around the dates of the first newspaper reports about the BC laws. We find that while firms in non-competitive industries experience a significant decline in their stock prices, the stock price impact is small and insignificant in competitive industries.
    Keywords: corporate governance; product market competition
    JEL: G34 L1
    Date: 2007–09
  13. By: Pollock, Rufus
    Abstract: An extensive empirical literature indicates that returns from innovation are appropriated primarily via mechanisms other than formal intellectual property rights -- and that `imitation' is itself a costly activity. However most theory assumes the pure nonrivalry of `ideas' with its implication that, in the absence of intellectual property, innovation (and welfare) is zero. This paper introduces a formal model of innovation based on imperfect competition in which imitation is costly and an innovator has a first-mover advantage. Without intellectual property, a significant amount of innovation still occurs and welfare may actually be higher than with intellectual property.
    Keywords: Innovation; Imperfect Competition; Intellectual Property; Imitation
    JEL: L5 O3 K3
    Date: 2006–09
  14. By: Eugen Kovac; Viatcheslav Vinogradov; Kresimir Zigic
    Abstract: We build a dynamic duopoly model that accounts for the empirical observation of monopoly persistence in the long run. More specifically, we analyze the conditions under which it is optimal for the market leader in an initially duopoly setup to undertake pre-emptive R&D investment ("strategic preda- tion") that eventually leads to the exit of the follower firm. The follower is assumed to benefit from the innovative activities of the leader through R&D spillovers. The novel feature of our approach is that we introduce an explicit dynamic model and contrast it with its static counterpart. Contrary to the predictions of the static model, strategic predation that leads to the persis- tence of monopoly is in general the optimal strategy to pursue in a dynamic framework when spillovers are not large.
    Keywords: Dynamic duopoly, R&D spillovers, persistence of monopoly, strate- gic predation, accommodation.
    JEL: L12 L13 L41
    Date: 2007–01
  15. By: Shirley J. , HO (National Chengchi University, Taiwan)
    Abstract: This paper studies an R&D outsourcing contract between a firm and a contractor, considereing the possibility that in the interim stage, the contractor might sell the innovation to the rival firm. Our result points out that due to the competition in the interim stage, the reward needed to prevent leakage will be pushed up to the extent that a profitable leakage free contract does not exist. This result will also apply to cases considering revenue-sharing schemes and a disclosure punishment for commercial theft. Then, we demonstrate that in a competitive mechanism where the R&D firm hires two contractors together with a relative performance scheme, the disclosure punishment might help and there exists a perfect Bayesian Nash equilibrium where the probability of information leakage is lower and the equilibrium reward is also cheaper than hiring one contractor.
    Keywords: R&D outsourcing, Contract, Information leakage, Collusion, Multiple agents
    JEL: D82 Z
    Date: 2007–09–17
  16. By: Dimitra Petropoulou
    Abstract: This paper extends a well-established vertical product differentiation model to an international duopoly with two segmented countries, where firms compete in quality and price. The framework is used to analyse governments` incentives for unilateral minimum standard-setting as well as the scope and effects of cooperative agreements in minimum standards. Endogenous national standards result from a standard-setting game between governments whose objective function is to maximise national welfare. Cross-country externalities can be are either positive or negative, depending on the quality of traded goods. Four unregulated Nash equilibria in minimum standards are shown to exist, two symmetric and two asymmetric, which correspond to the four different combinations of externalities that may arise between the two countries: symmetric positive externalities, symmetric negative externalities, or asymmetric positive and negative externalities. Unilateral minimum standards can be inefficiently high or low relative to world optimum symmetric standards and operate as non-tariff barriers to trade. Harmonisation of minimum quality standards through cooperation is both feasible and mutually beneficial in the symmetric case, but the scope for mutually beneficial cooperation is significantly restricted when countries are asymmetric and lump-sum transfers are not possible. The resulting cooperative standards are asymmetric and do not maximise world welfare.
    Keywords: Vertical Product Differentiation, Quality Reversal, International Trade, Minimum Quality Standards
    JEL: F13 L13 L52
    Date: 2007
  17. By: Vandenbussche, Hylke; Zarnic, Ziga
    Abstract: This paper empirically investigates the effects of the US safeguard protection on steel imports in 2002 on the mark-ups of EU steel producers. We identify a large panel of EU steel producers between 1995 and 2005 affected by the safeguards. Using the Roeger methodology, our results show that the protection signifcantly reduced the EU firms' mark-ups. Single-product firms suffered relatively more from the safeguards than multi-product firms. Our evidence further suggests that the US protection resulted in some diverting of the EU steel especially towards China, aggravating the situation on the Chinese steel market and ultimately resulting in the Chinese trade protection of steel imports.
    Keywords: firm data; price-cost margins; safeguard measures; steel industry; trade diversion
    JEL: F13 L13 L61
    Date: 2007–09
  18. By: Josef, KONINGS (KULeuven Department of Economics); Hylke, VANDENBUSSCHE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: We analyze the relationship between Antidumping (AD) Protection and the productivity of EU domestic firms in import-competing industries. For this purpose we identify a panel of domestic firms between 1993 and 2003 that a some point during this period are affected by AD initiations. Using a difference-in-difference approach, we find that AD measures result in improvements of measured productivity for domestic firms. Total Factor Productivity (TFP) of protected firms increases by 2% in the short-run and by 5% to 13% in the long-run. However, there is substantial heterogeneity across firms. The effect of protection depends on the initial Òdistance-to-the-frontier firmÓ in the industry. While protection raises TFP of ÒlaggardÓ domestic firms, it lowers TFP for ÒefficientÓ firms that operate close to the efficiency frontier. These results are consistent with recent theoretical work supporting the view that trade policy, under certain conditions, can induce technological catching-up. While this paper evaluates the effectiveness of AD policy it does not engage in a welfare analysis.
    Date: 2007–09–17
  19. By: Pollock, Rufus
    Abstract: With cumulative innovation and imperfect information about the value of innovations, intellectual property rights can result in hold-up and therefore it may be better not to have them. Extending the basic cumulative innovation model to include `sampling' by second-stage firms, we find that the lower the cost of sampling, or the larger the differential between high and low value second-stage innovations, the more likely it is that a regime without intellectual property rights will be preferable. Thus, technological change which reduces the cost of encountering and trialling new `ideas' implies a reduction in the socially optimal level of rights such as patent and copyright.
    Keywords: Cumulative Innovation; Hold-Up; Sampling; Intellectual Property
    JEL: L5 O3 K3
    Date: 2006–01–24

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