nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒10‒06
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Asymmetric Collusion and Merger Policy By Mattias Ganslandt; Lars Persson; Helder Vasconcelos
  2. On the Anticompetitive Effect of Exclusive Dealing when Entry by Merger is Possible By Fumagalli, Chiara; Motta, Massimo; Persson, Lars
  3. Output and Welfare Effects in the Classic Monopoly Price Discrimination Problem By Simon Cowan; John Vickers
  4. Product Differentiation and Relative Performance Evaluation in an Asymmetric Duopoly By Aditi Sengupta
  5. Quality Uncertainty and Time Inconsistency in a Durable Good Market By Evrim Dener
  6. Experts vs. Discounters: Consumer Free Riding and Experts Withholding Advice in Markets for Credence Goods By Uwe Dulleck; Rudolf Kerschbamer
  7. Prices and Market Shares in a Menu Cost Model By Ariel Burstein; Christian Hellwig
  8. The Unilateral Incentives for Technology Transfers: Predation by Proxy By Anthony Creane; Hideo Konishi
  9. How Airline Markets Work...Or Do They? Regulatory Reform in the Airline Industry By Severin Borenstein; Nancy L. Rose
  10. The Effect of Salary Caps in Professional Team Sports on Social Welfare By Helmut Dietl; Markus Lang; Alexander Rathke
  11. When and Why Does It Pay To Be Green? By Stefan Ambec; Paul Lanoie
  12. Trade Liberalization, Competition and Growth By Licandro, Omar; Navas-Ruiz, Antonio
  13. Strategic Divisionalization, Product Differentiation and International Competition By Iwasa, Kazumichi; Kikuchi, Toru
  14. Imperfect competition, technical progress and capital accumulation. By Biancamaria d'Onofrio; Bertrand Wigniolle
  15. The Direct Effect of China on Canadian Consumer Prices: An Empirical Assessment By Louis Morel
  16. The Antebellum U.S. Iron Industry: Domestic Production and Foreign Competition By Joseph H. Davis; Douglas A. Irwin

  1. By: Mattias Ganslandt (Research Institute of Industrial Economics (IFN)); Lars Persson (Research Institute of Industrial Economics (IFN) and CEPR); Helder Vasconcelos (Universidade Católica Portuguesa (Porto) and CEPR)
    Abstract: In their merger control, EU and the US have considered symmetric size distribution (cost structure) of firms to be a factor potentially leading to collusion. We show that forbidding mergers leading to symmetric market structures can induce mergers leading to asymmetric market structures with higher risk of collusion, when firms face indivisible costs of collusion. In particular, we show that if the rule determining the collusive outcome has the property that the large (efficient) firm benefits sufficiently more from collusion when industry asymmetries increase, collusion can become more likely when firms are moderately asymmetric.
    Keywords: Collusion; Cost Asymmetries; Merger Policy
    JEL: D43 L41
    Date: 2007–08
  2. By: Fumagalli, Chiara (Università Bocconi); Motta, Massimo (European University Institute); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: We extend the literature on exclusive dealing, which assumes that entry can occur only by installing new capacity, by allowing the incumbent and the potential entrant to merge. This uncovers new effects. First, exclusive deals can be used to improve the incumbent's bargaining position in the merger negotiation. Second, the incumbent finds it easier to elicit the buyer's acceptance. Third, exclusive dealing, despite allowing the more efficient technology to find its way into the industry, reduces welfare because (i) it may trigger entry through merger whereas independent entry would be socially optimal, (ii) it leads to a sub-optimal contractual price when the exclusive dealing include a price commitment, (iii) it may deter entry altogether.
    Keywords: Technology Transfer; Inefficient Entry; Antitrust; Authority's Behavior
    JEL: L24 L42
    Date: 2007–09–20
  3. By: Simon Cowan; John Vickers
    Abstract: This paper uses convexity arguments to determine the effects of monopolistic third-degree price discrimination on total output and welfare. We focus on benchmark cases, including constant demand elasticities, with constant curvature of inverse demand ?. We show how the effects of price discrimination depend on (a) the degree of curvature ? relative to zero (for output) and one (for welfare), and (b) whether low-price markets have greater curvature than high-price markets.
    Keywords: Price Discrimination, Monopoly
    JEL: D42 L12 L13
    Date: 2007
  4. By: Aditi Sengupta (Southern Methodist University)
    Abstract: In a model of managerial delegation in a duopoly with asymmetric costs, I show that an increase in the intensity of market competition (product differentiation) increases the absolute weight placed on rival's profit (relative performance) in the managerial compensation scheme for both firms and also increases market concentration. The relatively efficient (larger) firm always places higher weight on rival's performance and obtains higher market share.
    Keywords: Strategic Delegation, Relative Performance, Managerial Compensation, Oligopoly
    JEL: D43 L13 M52 M21
    Date: 2007–09
  5. By: Evrim Dener (SMU)
    Abstract: In a durable good monopoly where consumers cannot observe quality prior to purchase and product improvement occurs exogenously over time, we show that uncertainty in quality may resolve the time inconsistency problem (even for low levels of product improvement). Higher dispersion in quality creates greater demand for future product by increasing the incentive of buyers with inferior quality realizations to repurchase and this, in turn, reduces the incentive of the seller to cut future price. For various levels of product improvement, we characterize the range of quality uncertainty for which the market equilibrium is identical to one where the monopolist can credibly precommit to future prices. We also show that the presence of quality uncertainty can lead to no trading in the primary good market.
    Keywords: durable goods, dynamic inconsistency, quality uncertainty
    JEL: L15 L12 D42 D81
    Date: 2007–09
  6. By: Uwe Dulleck; Rudolf Kerschbamer
    Abstract: This paper studies the incentives for credence goods experts to invest effort in diagnosis if effort is both costly and unobservable, and if they face competition by discounters who are not able to perform a diagnosis. The unobservability of diagnosis effort and the credence characteristic of the good induces experts to choose incentive compatible tariff structures. This makes them vulnerable to competition by discounters. We explore the conditions under which honestly diagnosing experts survive competition by discounters; we identify situations in which experts misdiagnose consumers in order to prevent them from free riding on experts' advice; and we discuss policy options to solve the free-rider problem.
    Keywords: Experts, Discounters, Credence Goods, Advice, Free Riding
    JEL: L15 D82 D40
    Date: 2007–09
  7. By: Ariel Burstein; Christian Hellwig
    Abstract: Pricing complementarities play a key role in determining the propagation of monetary disturbances in sticky price models. We propose a procedure to infer the degree of firm-level pricing complementarities in the context of a menu cost model of price adjustment using data on prices and market shares at the level of individual varieties. We then apply this procedure by calibrating our model (in which pricing complementarities are based on decreasing returns to scale at the variety level) using scanner data from a large grocery chain. Our data is consistent with moderately strong levels of firm-level pricing complementarities, but they appear too weak to generate much larger aggregate real effects from nominal shocks than a model without these complementarities.
    JEL: E3
    Date: 2007–09
  8. By: Anthony Creane (Michigan State University); Hideo Konishi (Boston College)
    Abstract: In 1984 GM and Toyota began the joint production of automobiles to much controversy over its anti-competitive effects. The argument for the joint production was the considerable efficiency gains GM would obtain. Since then, the anti-trust controversy has died, but a question remains: why would the most efficient manufacturer (Toyota) transfer to its largest rival the knowledge to transform itself into a very efficient rival? We examine when such transfers could be unilaterally profitable, finding that it can serve as a credible way to make the market more competitive, forcing high cost firms to exit (or preventing future entry). This is not without a cost to Toyota since such a transfer also makes the remaining rivals more efficient. Despite this, we find a sufficient (but not necessary) condition for it to be profitable to predate "by proxy": the market satisfies an entry equilibrium condition. Further, we find that it is then optimal to predate on every firm that is vulnerable and so a market with many firms can become a duopoly. Profitable predation implies higher prices, to the detriment of consumers. Yet the improved production efficiency outweighs this loss, resulting enhanced social welfare. In contrast, profitable non-predatory joint production (or technology transfers) may reduce welfare. Paradoxically, the potential for predation could encourage entry ex ante.
    Keywords: Predation, Technology Transfers
    JEL: D4 L1 L41
    Date: 2007–09–29
  9. By: Severin Borenstein; Nancy L. Rose
    Abstract: Following a brief review of the U.S. domestic airline industry under regulation (1938-1978), we study the changes that have occurred in pricing, service, and competition in the 28 years since deregulation. We then examine some of the major public policy issues facing the industry: (a) the sustainability of competition and volatility of airline profits, (b) possible market power of dominant airlines, and (c) congestion and investment shortfall in the airport and air traffic infrastructure.
    JEL: L1 L13 L51 L93
    Date: 2007–09
  10. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Alexander Rathke (Institute for Empirical Research in Economics, University of Zurich)
    Abstract: Increasing financial disparity and spiralling wages in European football have triggered a debate about the introduction of salary caps. This paper provides a theoretical model of a team sports leagues and studies the welfare effect of salary caps. It shows that salary caps will increase competitive balance and decrease overall salary payments within the league. The resulting effect on social welfare is counter-intuitive and depends on the preference of fans for aggregate talent and for competitive balance. A salary cap that binds only for large market clubs will increase social welfare if fans prefer aggregate talent despite the fact that the salary cap will result in lower aggregate talent. If fans prefer competitive balance, on the other hand, any binding salary cap will reduce social welfare.
    Keywords: Salary Caps, Social Welfare, Competitive Balance, Team Sports League
    JEL: L83
    Date: 2007–08
  11. By: Stefan Ambec; Paul Lanoie
    Abstract: The conventional wisdom about environmental protection is that it comes at an additional cost on firms imposed by the government, which may erode their global competitiveness. However, during the last decade, this paradigm has been challenged by a number of analysts. In particular, Porter (Porter, 1991; Porter and van der Linde, 1995) argues that pollution is often associated with a waste of resources (material, energy, etc.), and that more stringent environmental policies can stimulate innovations that may compensate for the costs of complying with these policies. This is known as the Porter hypothesis. In fact, there are many ways through which improving the environmental performance of a company can lead to a better economic or financial performance, and not necessarily to an increase in cost. To be systematic, it is important to look at both sides of the balance sheet. <p> First, a better environmental performance can lead to an increase in revenues through the following channels: i) a better access to certain markets; ii) the possibility to differentiate products and iii) the possibility to sell pollution-control technology. Second, a better environmental performance can lead to cost reductions in the following categories: iv) regulatory cost; v) cost of material, energy and services (this refers mainly to the Porter hypothesis); vi) cost of capital, and vii) cost of labour. <p> Although these different possibilities have been identified from a conceptual or theoretical point of view for some time (Reinhardt, 2000; Lankoski, 2000, 2006), to our knowledge, there was no systematic effort to provide empirical evidences supporting the existence of these opportunities and assessing their “magnitude”. This is the objective of this paper. For each of the seven possibilities identified above [i) through vii)], we present the mechanisms involved, a systematic view of the empirical evidence available, and a discussion of the gaps in the empirical literature. The objective of the paper is not to show that a reduction of pollution is always accompanied by a better financial performance, it is rather to argue that the expenses incurred to reduce pollution can sometime be partly or completely compensated by gains made elsewhere. Through a systematic examination of all the possibilities, we also want to identify the circumstances most likely to lead to a “win-win” situation, i.e., better environmental and financial performance. <P>La vision traditionnelle au sujet de la réglementation de l’environnement est qu'elle représente un coût additionnel pour des firmes, ce qui peut éroder leur compétitivité globale. Cependant, pendant la dernière décennie, ce paradigme a été remis en cause par un certain nombre d'analystes. En particulier, Porter (Porter, 1991, Porter et van der Linde, 1995) argue du fait que la pollution est souvent associée à un gaspillage des ressources (matériel, énergie, etc.), et que des politiques environnementales plus strictes peuvent stimuler les innovations, ce qui peut compenser les coûts entraînés par ces politiques. Ceci est connu comme l’hypothèse de Porter. En fait, il existe plusieurs raisons pour lesquelles l'amélioration de la performance environnementale d'une firme peut s’accompagner d’une meilleure performance économique ou financière, et pas nécessairement d’une augmentation de coût. Pour être systématique, il est important de regarder les deux côtés de l’état des produits et des charges. <p> Tout d’abord, une meilleure performance environnementale peut mener à une augmentation des revenus par les canaux suivants : i) un meilleur accès à certains marchés, ii) la possibilité de différencier des produits et iii) la possibilité de vendre la technologie de dépollution. En second lieu, une meilleure performance environnementale peut mener à des réductions de coûts dans les catégories suivantes : iv) coût réglementaire, v) coût en ressources, énergie et services (ceci se réfère principalement à l'hypothèse de Porter), vi) coût en capitaux, et vii) coût du travail. <p> Bien que ces différentes possibilités aient été identifiées d'un point de vue conceptuel ou théorique depuis un certain temps (Reinhardt, 2000 ; Lankoski, 2000, 2006), à notre connaissance, aucun effort systématique n’a été fait pour fournir des évidences empiriques soutenant l'existence de ces opportunités et évaluant leur importance. C'est l'objectif de cet article. Pour chacune des sept possibilités identifiées ci-dessus [de i) à vii)], nous présentons les mécanismes impliqués, une description des évidences empiriques disponibles, et une discussion des lacunes de la littérature empirique. L'objectif du texte n'est pas de prouver qu'une réduction de pollution est toujours accompagnée d'une meilleure performance financière, il est plutôt de montrer que les coûts encourus pour réduire la pollution peuvent parfois être compensés, en partie ou complètement, par des gains effectués ailleurs. Par un examen systématique de toutes possibilités, nous voulons également identifier les circonstances pouvant mener à une situation « gagnant-gagnant », c’est-à-dire, une meilleure performance environnementale et financière.
    Keywords: environmental performance, environmental regulation, environmental innovation, capital cost, Porter hypothesis., performance environnementale, réglementation environnementale, innovation environnementale, coût du capital, hypothèse de Porter.
    Date: 2007–09–01
  12. By: Licandro, Omar; Navas-Ruiz, Antonio
    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 two-country 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.
    Keywords: Competition and growth; R&D; Trade openness
    JEL: F13 F43 O3
    Date: 2007–09
  13. By: Iwasa, Kazumichi; Kikuchi, Toru
    Abstract: In this note we construct a simple international differentiated duopoly model that involves a divisionalization decision. It will be shown that the number of third market divisions of a parent firm with a cost advantage is relatively large. The results imply that the cost competitiveness of one country’s firm will be magnified through divisionalization decisions.
    Keywords: divisionalization; product differentiation; cost competitiveness
    JEL: F12
    Date: 2007
  14. By: Biancamaria d'Onofrio (Universita di Roma); Bertrand Wigniolle (Centre d'Economie de la Sorbonne)
    Abstract: This paper explores the consequences of imperfect competition on capital accumulation. The framework is an OLG growth model with altruistic agents. Two types of long run equilibria exist : egoistic or altruistic.We assume both competitive and non-competitive firms exist, the latter being endowed with more productive technology. They behave strategically on the labor market : they take into account the impact of their demand for labor on the equilibrium wage and on their profit. The effect of technical progress for a non-competitive firm depends on the initial productivity of the firm and on the type of steady state (egoistic or altruistic). An increase in the productivity of the most productive firm has a negative impact on capital accumulation in an egoistic steady state, and a positive one in an altruistic steady state. An increase in the productivity of the competitive sector can have various effects on capital accumulation. If the productivity levels of the non-competitive firms are close enough, capital accumulation increases in an egoistic steady state and decreases in an altruistic one. But, the impact of increasing productivity in the competitive sector can be reversed if the productivity of the less productive non-competitive firm is low enough.
    Keywords: Imperfect competition, capital accumulation, technical progress.
    JEL: D43 D9 O3
    Date: 2006–05
  15. By: Louis Morel
    Abstract: The author investigates the direct effect of Chinese imported goods on consumer prices in Canada. On average, over the 2001-06 period, the direct effect of consumer goods imported from China is estimated to have reduced the inflation rate by about 0.1 percentage points per year. This disinflationary effect is due to two causes: first, the Chinese share of Canadian imports of consumer goods has been increasing rapidly in recent years, and second, the price of these goods is much lower in China than it is among Canada's other import sources, as well as domestic producers. Chinese goods will continue to have a disinflationary impact on Canadian prices as long as the price of these goods remains lower than what can be produced in Canada, or by other trading partners, and as long as the Chinese share of Canadian imports continues to increase.
    Keywords: Inflation and prices
    JEL: E31
    Date: 2007
  16. By: Joseph H. Davis; Douglas A. Irwin
    Abstract: This paper presents new annual estimates of U.S. production of pig iron and imports of pig iron products dating back to 1827. These estimates are used to assess the vulnerability of the antebellum iron industry to foreign competition and the role of the tariff in fostering the industry's early development. Domestic pig iron production is found to be highly sensitive to changes in import prices. Although import price fluctuations had a much greater impact on U.S. production than changes in import duties, our estimates suggest that the tariff permitted domestic output to be about thirty to forty percent larger than it would have been without protection.
    JEL: F13 F17 N11 N61
    Date: 2007–09

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