nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒11‒10
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. DOWNSTREAM MERGERS AND ENTRY By Ramón Faulí-Oller; Joel Sandonís
  2. Protecting the Domestic Market: Industrial Policy and Strategic Firm Behaviour By Jens Metge
  3. The relation between competition and innovation – Why is it such a mess? By Armin Schmutzler
  4. Competition and Innovation: An Experimental Investigation By Dario Sacco
  5. The Control of Porting in Two-Sided Markets By Pollock, R.
  6. Dynamic Advertising with Spillovers: Cartel vs Competitive Fringe By Luca Lambertini; Arsen Palestini
  7. On a foundation for Cournot equilibrium By Alex Dickson; Roger Hartley
  8. Time Series Econometrics in a Post-Acquisition Antitrust Analysis: The Brazilian Iron Ore Market By Eduardo P. S. Fiuza; Fabiana F.M. Tito
  9. Standards Competition In The Presence Of Digital Conversion Technology: An Empirical Analysis Of The Flash Memory Card Market By Charles Z. Liu; Chris F. Kemerer; Michael D. Smith
  10. Search Engine Advertising: Pricing Ads to Context By Avi Goldfarb; Catherine Tucker;
  11. Have we been Mugged? Market Power in the World Coffee Industry By Christopher L. Gilbert
  12. Understanding the Lack of Competition in Natural Gas Markets: The Impact of Storage Ownership and Upstream Competition By Michal Mravec
  13. Market Power Effects of Supply Control and Dairy Market Deregulation By Jonsson, Thomas
  14. Il ruolo dell’informazione nella relazione tra concorrenza ed inefficenza-x: ambiguità teoriche della "product market competition" By Alessandro Graffi
  15. International Competition in Vertically Differentiated Markets with Innovation and Imitation: Trade Policy versus Free Trade By Eugen Kovac; Kresimir Zigic
  16. The strategic Marshallian cross By Alex Dickson; Roger Hartley
  17. The Impact of Mergers and Acquisitions on Executive Pay in the United Kingdom By Paul Guest
  18. Mortgage Securitization — Lessons for Emerging Markets By HUD - PD&R
  19. Probalilistic duopoly with differentiation by attributes By Reynald-Alexandre Laurent

  1. By: Ramón Faulí-Oller (Universidad de Alicante); Joel Sandonís (Universidad de Alicante)
    Abstract: We consider an upstream firm selling an input to several downstream firms through observable two-part tariff contracts. Downstream firms can alternatively buy the input from a less efficient source of supply. We show that downstream mergers lead to lower wholesale prices. They translate into lower final prices only when the alternative supply is inefficient enough. Downstream mergers are very profitable in this setting and monopolization is the equilibrium outcome of a merger game even for unconcentrated markets. Finally, the expectation of monopolization stimulates wasteful entry of downstream firms in the industry, which calls for policy intervention.
    Keywords: downstream mergers, entry, two-part tariff contracts
    JEL: L11 L13 L14
    Date: 2007–11
  2. By: Jens Metge
    Abstract: Foreign firms to break into a new market commonly undercut domestic prices and, hence, subsidise the consumer's costs of switching in order to get a positive market share. However, this may constitute the act of dumping as drawn in Article VI of the General Agreement on Tariffs and Trade (GATT). Consequently, domestic firms trying to protect themselves against potential competitors often demand an anti-dumping (AD) investigation. In a two-period model of market entry with horizontally differentiated products and exogenous switching costs, it is demonstrated that the mere existence of switching costs and AD-rules may result in an anti-competition effect: the administratively set minimum-price rule protects the domestic firm and yields larger prices. Therefore, there are some consumers who will not buy either product in both periods although they would have done so in absence of AD. Consequently, competition policy should reassess the AD-regulation.
    Keywords: Industrial Policy; Anti-Dumping; Hotelling; Switching Costs; Market Entry
    Date: 2007–10
  3. By: Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: Using several simple examples, this paper shows that the effects of increasing competition on cost-reducing investments can be positive, negative or non-monotone. Also, competition is more likely to increase the investments of leaders than of laggards. To explain these findings, I use a reduced-form model. I identify four different transmission channels by which competition affects investments. Competition typically (i) reduces markups, but (ii) increases the sensitivity of equilibrium demand to marginal costs — this already implies countervailing effects on investment incentives. These difficulties are compounded because competition has ambiguous effects on (iii) the level of equilibrium demand and (iv) the extent to which efficiency gains are passed through to consumers as lower prices. Because of these ambiguities, there is not much hope of establishing a robust relation between competition and investment.
    Keywords: competition, investment, cost reduction
    JEL: L13 L20 L22
    Date: 2007–11
  4. By: Dario Sacco (Socioeconomic Institute, University of Zurich)
    Abstract: The paper analyzes the effects of competitive intensity on firms' incentives to invest in process innovations through an experiment based on two-stage games, where R&D investment choices are followed by product market competition. An increase in the intensity of competition is modeled as an increase in the number of Þrms or as a switch from Cournot to Bertrand. The theoretical prediction is that more intense competition is unfavorable to investments for both cases. In the experiment it turns out that the way of modeling the intensity of competition is essential. The theoretical prediction is confirmed for the number effects. On the other hand, the comparison of Cournot and Bertrand shows that more intense competition is beneÞcial for investments.
    Keywords: R&D investment, intensity of competition, experiment
    JEL: C92 L13 O31
    Date: 2007–10
  5. By: Pollock, R.
    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. Key words: Network Effects, Two-Sided Markets, Porting, Antitrust, Competition.
    JEL: L15 L12 L13
    Date: 2007–11
  6. By: Luca Lambertini (University of Bologna and The Rimini Centre for Economics Analysis, Italy.); Arsen Palestini (University of Bologna, Italy)
    Abstract: A differential oligopoly game with advertising is investigated, where different dynamics occur between two groups of agents, the former playing a competitive Nash game and the latter cooperating as a cartel. Sufficient conditions for stability and a qualitative analysis of the profit ratio and social welfare at equilibrium are provided. A threshold value for the size of the competitive fringe is pointed out by a suitable numerical simulation.
    Keywords: Advertising, Differential games, Oligopoly, Collusion
    JEL: C73 D43 D92 L13 M37
    Date: 2007–07
  7. By: Alex Dickson (Keele University, Centre for Economic Research and School of Economic and Management Studies); Roger Hartley (Department of Economics, University of Manchester)
    Abstract: We show in the context of a bilateral oligopoly where all agents are allowed to behave strategically the unexpected result that when the number of buyers becomes large the outcomes in a strategic market game do not converge to those at the Cournot equilibrium. However, convergence to Cournot outcomes is restored if the game is sequential: sellers move simultaneously as do buyers, but the former always move before the latter. This suggests that the ability to commit to supply decisions is an essential feature of Cournot equilibrium.
    Keywords: Cournot competition, strategic market game, strategic foundation.
    JEL: C72 D43 D51 L13
    Date: 2007–10
  8. By: Eduardo P. S. Fiuza; Fabiana F.M. Tito
    Abstract: In Brazil, mergers and acquisitions are usually analyzed by the Antitrust Authorities ex post, following a SCP framework close to the Merger Guidelines applied in the USA. However, this framework was unable to address a set of acquisitions of four mining companies by the newly privatized national champion CVRD. The present article reports an econometric exercise undertaken by the Brazilian Ministry of Justice, which came to reinforce the definition of the relevant geographic market and to test for structural breaks in the price series. Though international prices Grangercaused domestic prices in Brazil, they explain less than a third of the variance. A price surge on the acquired miners? series was observed above the export price increase not long after the acquisitions, such that a structural break could not be rejected.
    Date: 2007–10
  9. By: Charles Z. Liu (Katz Graduate School of Business, University of Pittsburgh); Chris F. Kemerer (Katz Graduate School of Business, University of Pittsburgh); Michael D. Smith (Heinz School of Public Policy and Management, Carnegie Mellon University)
    Abstract: Both theoretical and empirical evidence suggest that in markets with standards competition, strong network effects can make the strong grow stronger and, in some circumstances, even “tip” the market towards a single, winner-take-all standard. We theorize that in the presence of low cost conversion technologies and digital content, the tendency towards market dominance can be lessened to the point where multiple incompatible standards are viable. Our hypotheses are empirically examined in the context of the flash memory card market where both network effects and high quality conversion are present. The results show that the availability of digital converters reduces the price premium of the leading flash card formats more than of the minority formats. Therefore, producers of the non-dominant standards can be better off with the provision of conversion technology as this technology neutralizes the impact of network effects that would have otherwise been more potent. We discuss both the social and private implications of our findings.
    Keywords: network effects, standards competition, conversion technologies, flash memory, digital goods
    JEL: C12 C23 D62 L11 L15
    Date: 2007–09
  10. By: Avi Goldfarb (Rotman School of Management, University of Toronto); Catherine Tucker (Sloan School of Management, MIT);
    Abstract: Each search term put into a search engine produces a separate set of results. Correspondingly, each of the sets of ads displayed alongside these results is priced using a separate auction. Search engine advertising prices therefore reflect willingness to pay for context, unlike traditional ad prices that reflect willingness to pay for audience demographics. A growing policy debate asks if this marketing strategy merely makes advertising more informative, or whether it also effectively extracts rent from advertisers. To inform this debate and to better understand search engine advertising more generally, we examine advertising prices paid by lawyers for 174 Google search terms in 195 locations and exploit a natural experiment in “ambulance-chaser” regulations across states. Where contingency fee limits exist, the relative price of advertising is $2.27 lower. This suggests that context-based pricing allows prices to reflect heterogeneity in the profitability of customer leads. When lawyers cannot contact a client in writing, the relative price per ad click is $0.93 higher. This suggests that context-based pricing allows prices to reflect heterogeneity in advertisers’ other advertising options, even within a given local market. Thus, our results suggest that search engine advertising does give market power to the media platform; however, this market power is mitigated by substantial competition from offline marketing communications channels.
    Keywords: search engines, advertising, market power, advertising prices
    JEL: L86 M37
    Date: 2007–09
  11. By: Christopher L. Gilbert
    Abstract: The coffee industry is highly concentrated both at the retail and export stages. A number of recent commentaries have suggested that this concentration translates into monopolistic and monopsonistic pricing to the detriment of both consumers and farmers. Using time series data for eight major coffee-consuming countries and nine coffee exporters, we find that both retail and export markets have increased in competitiveness over recent decades. Retail markets in traditional coffee-consuming countries are close to being fully competitive but there is evidence of exercise of monopoly power in the non-traditional Japan and UK markets. On the export side, market liberalization has reduced the exercise of monopsony power in most, but not all, exporting countries.
    Date: 2007
  12. By: Michal Mravec
    Abstract: Motivated by the failure of competition to emerge after the natural gas market in the Czech Republic was liberalized, I explore the impact of natural gas storage ownership and upstream competition on the downstream level. I extend standard Cournot models to understand current and likely future developments, paying particular attention to the impact of market liberalization on a country characterized by a lack of domestic production, limited foreign upstream competition, and highly concentrated (and bundled) control over an essential input in the production of the final product: gas storage. I show that the upstream producer may practice his market power to capture some of the benefits of liberalization and increase the wholesale price, which hinders the desired decline of the end-user price in the long run. This pricing change in turn makes the entry of new players in the transition period more difficult. I furthermore analyze three prominent storage structure scenarios and conclude that higher consumer welfare can be reached only in the case of regulated storage access.
    Keywords: Natural gas, liberalization, deregulation, successive oligopoly, monopoly, Czech Republic, gas storage.
    JEL: D42 D43 L11 L12 L13 L51
    Date: 2007–09
  13. By: Jonsson, Thomas (Department of Economics, Umeå University)
    Abstract: This paper uses the Bresnahan-Lau framework to analyze whether policy reforms specifically affecting Swedish dairy cooperatives, i.e. the two-price system (an input quota, 1986-1991) and the general deregulation of dairy policy (1991-1994), had any market power effects on the Swedish butter market. It is hypothesized that the two-price system enhanced market power, while the deregulation, making exports of butter less profitable, led to a lower level of market power exercised by dairy cooperatives. To account for non-stationary variables, a dynamic error correction model is adopted. The results show that the null hypotheses of no market power effect, for either of the two reforms, cannot be rejected at any reasonable significance level.
    Keywords: agricultural policy; cooperatives; market power
    JEL: L22 L51 L66 Q11 Q18
    Date: 2007–11–02
  14. By: Alessandro Graffi (Cattaneo University (LIUC))
    Abstract: This work delves into the so far unsatisfactory attempt made by theory to provide formal proof of the thesis, which is widely shared and supported by empirical evidence, that a stronger product market competition reduces the degree of firm x-inefficiency. Both through an in-depth critical examination of existing literature and through the development of a simple but original theoretical analysis, this work tries to grasp and highlight the reasons for the ambiguous and contradictory results achieved in literature so far: faced with a problem of internal inefficiency arising from an information problem, theoretical research has not paradoxically taken into account the major information role which competition may play, acting as an “assessment standard”. Particularly, competition is not enabled to reduce the manager’s information advantage and hence has no direct impact on agency costs. In addition, it has been proved that in the main models defined in literature no economic mechanism actually exists through which product market competition can influence agency costs and accordingly the degree of corporate x-inefficiency. What ensues therefrom is that the ambiguous results attained by literature, showing the existence of a non monotonic relationship between competition and internal efficiency, exclusively stem from the effects of competition on direct and strategic profitability arising from a reduction of unit production costs: the marginal benefit engendered by cost reduction, beyond a certain degree of competition, decreases as competition increases (as the number of enterprises grows), so that the employer is induced to demand to his manager increasingly lower optimal (second best) levels of effort. This conclusion is supported by the fact that many of the models existing in literature feature an implicit hypothesis of increasing returns to scale.
    Date: 2006–12
  15. By: Eugen Kovac; Kresimir Zigic
    Abstract: The important characteristic of international competition between developed and less developed countries is vertical product differentiation, where firms' quality choices represent strategic decisions. Unlike the previous literature, we allow for a leadership in quality choice and the possibility of imitation and learning by the domestic firm. We compare both positive and normative aspects of this setup in the free trade and the strategic trade policy regime and show that the value of leadership may change dramatically when moving from free trade to trade policy. We also identify conditions under which trade policy can initiate the change in the quality ladders (known as quality reversal) and demonstrate that such a policy has a somewhat limited scope to achieve it. Thus, free trade can still be an optimal trade arrangement.
    Keywords: Vertical differentiation, free trade, strategic trade policy, quality rever-sal, leadership, imitation.
    JEL: D43 F12 F13 L13
    Date: 2007–08
  16. By: Alex Dickson (Keele University, Centre for Economic Research and School of Economic and Management Studies); Roger Hartley (Department of Economics, University of Manchester)
    Abstract: We prove existence and uniqueness of non-autarkic equilibria in bilateral oligopoly assuming only that preferences are binormal and satisfy a weakened version of gross substitutes. We permit complete heterogeneity of preferences and our analysis exploits the fact that payoffs depend only on own strategy and two universal aggregates. This allows us to define strategic versions of supply and demand curves such that non-autarkic Nash equilibria are in 1-1 correspondence with intersections of these curves. The same approach can be used to establish comparative statics under the assumptions above. As examples, we focus on adding players and changing endowments. This competitive approach also allows us to conclude that much of conventional Marshallian analysis is robust to strategic manipulation.
    Keywords: Strategic Marshallian cross, strategic manipulation, imperfect competition.
    JEL: C72 D43 D50
    Date: 2007–10
  17. By: Paul Guest
    Abstract: We examine the impact of acquisitions on executive pay in UK acquirers over 1984-2001. For the overall sample, which includes foreign, domestic, public and private targets, there is a significant transitory pay increase. Pay changes are not affected by target nationality or organizational form, although initial cross-border acquisitions do result in higher pay. Pay increases are higher following acquisitions of targets with high pay, but not of targets in high pay countries. CEOs are rewarded equally for bad and good acquisitions, and those well rewarded are more likely to reacquire. However, bad acquisitions do not on average increase CEO wealth because of an offsetting decline in CEO shareholding value. Pay impacts are not affected by the corporate governance characteristics of the acquiring firm.
    Keywords: Executive compensation; acquisitions; cross-border; private; corporate governance
    JEL: G34 J33
    Date: 2007–09
  18. By: HUD - PD&R
    Abstract: It is commonly accepted that a well-developed primary residential mortgage market promotes homeownership and that homeownership in turn promotes economic and political stability. Secondary mortgage markets (SMMs) serve to enhance primary mortgage markets by separating the mortgage investment and origination functions. This separation increases the number of mortgage investors and, ultimately, the amount of capital available in the market. Increased competition in the primary market leads to more choices and lowers costs for borrowers. The net effect is to expand the benefits accruing from a primary mortgage market: making homeownership cheaper and more affordable, and expanding the ability of citizens to become homeowners.
    JEL: G00
    Date: 2007–07
  19. By: Reynald-Alexandre Laurent
    Abstract: This paper proposes a discrete choice duopoly in which products are described and differentiated by their specific attributes. These attributes can be discrete characteristics or differences in continuous variables, such as prices or qualities. Consumers follow a probabilistic reasoning which is consistent with random decision rule models such as Tversky's "Elimination by Aspects" framework (1972a,b). This type of behavior is relevant for small everyday life purchases. The demand system provides a general structure of product differentiation in which special cases are given by classical models of horizontal and vertical differentiation. Existence and uniqueness of a price Nash equilibrium in pure strategies are established in the duopoly. When attributes' utilities vary, comparative statics properties of profits can be explained by "attractiveness" and "differentiation" effects. These effects are combined in a new way compared to the deterministic structures or to the logit duopoly. For example, an increase in the low utility index of attributes strengthens product differentiation.
    Date: 2007

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