nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒11‒17
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Strategic Debt: Evidence from Bertrand and Cournot Competition By Jong, A. de; Nguyen, T.T.; Dijk, M.A. van
  2. The Effectiveness of Competition Policy and the Price-Cost Margin: Evidence from Panel Data By Patrick McCloughan; Seán Lyons; William Batt
  3. Cost Hetrogeneity and Strategic Divisionalization By Kazumichi, Iwasa; Toru , Kikuchi
  4. Endogenous Mechanisms and Nash Equilibrium in Competitive Contracting By Frank H. Page, Jr.; Paulo K. Monteiro
  5. Sequential Location under one-sided Demand Uncertainty By Aurélie Bonein; Stéphane Turolla
  6. Competition and Growth in an Endogenous Growth model with Expanding Product Variety without Scale Effects By Bianco, Dominique
  7. Intermediation, Compensation and Collusion in Insurance Markets By Focht, Uwe; Richter, Andreas; Schiller, Jörg
  8. Platform Competition in Pay-TV Market By Kasuga, Norihro; Manabu, Shishikura; Masanori, Kondo
  9. Dynamic games in the wholesale electricity market By DAKHLAOUI Ahlem;
  10. Liberalisation and Regulation in Electricity Systems: How can we get the balance right? By Pollitt, M
  11. Banking competition and financial fragility: Evidence from panel-data By Ruiz-Porras, Antonio
  12. The Cost of Banking Regulation By Luigi Guiso; Paola Sapienza; Luigi Zingales
  13. Markets for Influence By Flavio Menezes; John Quiggin
  14. Impacts of Competitive Position on Export Propensity and Intensity: An Empirical Study of Manufacturing Firms in China By Fung, Hung-gay; Gao, Gerald Yong; Lu, Jiangyong; Mano, Haim
  15. An experimental investigation of collusion in hard-close auctions: partners and friends By Sascha Füllbrunn; Tibor Neugebauer
  16. Executive Compensation and Competition in the Banking and Financial Sectors By Vicente Cuñat; Maria Guadalupe

  1. By: Jong, A. de; Nguyen, T.T.; Dijk, M.A. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We investigate how competitive behavior affects the capital structure of a firm. Theory predicts that the impact of different types of output market uncertainty (in particular, unanticipated shocks in demand and costs) on a firm?s leverage depends on the type of competition in an industry. We test these predictions in a sample of U.S. manufacturing firms by classifying firms into Cournot competition (strategic substitutes), and Bertrand competition (strategic complements). We show that demand uncertainty is positively related to leverage for firms in both the Cournot and the Bertrand sample. Cost uncertainty has a significantly positive impact on the leverage of Cournot firms, but plays a negligible role for Bertrand firms. Our results support the strategic use of debt and highlight the role of firms? competitive behavior in the product market in their capital structure decisions.
    Keywords: Strategic debt;Cournot competition;Bertrand competition;demand and cost uncertainty;leverage;
    Date: 2007–09–11
  2. By: Patrick McCloughan (Indecon International Economic Consultants); Seán Lyons (Economic and Social Research Institute (ESRI)); William Batt (London Economics)
    Abstract: This paper presents robust panel data econometric evidence suggesting that more effective competition policy curtails the exercise of market power because countries in which competition policy is judged to be more effective are characterised by lower market price-cost margins, controlling for other factors, including market growth, import penetration and spare capacity. The measure of competition policy effectiveness incorporated into our analysis is the annual survey-based ratings of national competition authorities (NCAs) produced by Global Competition Review (GCR). Our findings imply a role for competition in enhancing economic competitiveness and that government should continue to support NCAs in enforcing competition policy.
    Date: 2007–09
  3. By: Kazumichi, Iwasa; Toru , Kikuchi
    Abstract: In this note, we consider a simple duopoly environment in which two parent firms compete in a market. We assume that there are cost differentials between these two parent firms. The parent firms' choices of divisionalization are modeled as a two-stage game. It will be shown that the number of divisions of a parent firm with a cost advantage (i.e., lower marginal costs) is relatively large. The results imply that the cost advantage of one parent firm will be magnified through divisionalization decisions.
    JEL: L11
    Date: 2007
  4. By: Frank H. Page, Jr. (Indiana University Bloomington); Paulo K. Monteiro (EPGE/FGV)
    Abstract: We model strategic competition in a market with asymmetric information as a noncooperative game in which each firm competes for the business of a buyer of unknown type by offering the buyer a catalog of products and prices. The timing in our model is Stackelberg: in the first stage, given the distribution of buyer types known to all firms and the deducible, type-dependent best responses of the agent, firms simultaneously and noncooperatively choose their catalog offers. In the second stage the buyer, knowing his type, chooses a single firm and product-price pair from that firm's catalog. By backward induction, this Stackelberg game with asymmetric information reduces to a game over catalogs with payoff indeterminacies. In particular, due to ties within catalogs and/or across catalogs, corresponding to any catalog profile offered by firms there may be multiple possible expected firm payoffs, all consistent with the rational optimizing behavior of the agent for each of his types. The resolution of these indeterminacies depends on the tie-breaking mechanism which emerges in the market. Because each tie-breaking mechanism induces a particular game over catalogs, a reasonable candidate would be a tie-breaking mechanism which supports a Nash equilibrium in the corresponding catalog game. We call such a mechanism an endogenous Nash mechanism. The fundamental question we address in this paper is, does there exist an endogenous Nash mechanism - and therefore, does there exist a Nash equilibrium for the catalog game? We show under fairly mild conditions on primitives that catalog games naturally possess tie-breaking mechanisms which support Nash equilibria.
    Keywords: common agency with adverse selection, endogenous contracting mechanisms, discontinuous games, catalog games, existence of Nash equilibrium, competitive contracting
    JEL: C6 C7 D4
    Date: 2007–11
  5. By: Aurélie Bonein; Stéphane Turolla
    Abstract: By entering new market, firms face uncertainty about their potential demand. We depart from the usual Hotelling duopoly model with sequential entry. Firms can locate outside the city and market conditions are common knowledge. Then we introduce one-sided demand uncertainty. It results that demand uncertainty can be seen as a diferentiation force when the first entrant faces demand uncertainty and as an agglomeration force when it is the second entrant. Finally, firm 2's imperfect information implies higher welfare losses.
    Date: 2007–11
  6. By: Bianco, Dominique
    Abstract: The aim of this paper is to analyse the relationship between competition and growth in an endogenous growth model with expanding product variety without scale effects. In order to do this, we develop an extension of the Bucci (2005) model in which we eliminate the scale effects. We find that the relationship between competition and growth is always inverted U shaped. We explain this result by the composition of two effects on growth : resource allocation and profit incentive effects. For low values of product market competition, an increase of competition has an positive effect on growth. For large values of competition, we have a negative relationship between competition and growth.
    Keywords: Endogenous Growth; Horizontal Differentiation; Technolo- gical Change; Imperfect Competition
    JEL: O41 O31
    Date: 2007–11–10
  7. By: Focht, Uwe; Richter, Andreas; Schiller, Jörg
    Abstract: Recent events involving major insurance companies and insurance brokerage firms highlight substantial incentive problems in commercial and reinsurance markets where intermediation takes place. We show that in markets with informed as well as uninformed consumers and heterogeneous risk profiles intermediation has the potential to improve social welfare. However, since intermediation reduces insurers’ market power, incentives for tacit collusion are higher compared to markets without intermediation. A controversial matter in the discussion concerning insurance intermediation is the issue of compensation customs. Our analysis provides explanations for the counterintuitive observation that brokers are usually compensated by insurance companies. The rationale for the latter is the fact that a fee paid by uninformed consumers limits the insurers’ ability to extract rents from informed consumers.
    Keywords: insurance; brokerage; collusion; compensation; information
    JEL: D83 G22 J33
    Date: 2007
  8. By: Kasuga, Norihro; Manabu, Shishikura; Masanori, Kondo
    Abstract: In this paper, we undertake an empirical analysis of the current Japanese pay-TV market, where cable TV carriers and CS digital satellite carriers are the main players. After examining the factors for subscribing to pay-TV and the competitive situation in the market, we have the following findings; (1) Cable TV carriers promote high value-added service provision, such as bundling internet access, and these activities result in competitive superiority over CS carriers. (2) Cable TV carriers receiving bigger investment from local governments tend to gain higher rates of subscription, although they provide smaller numbers of channels with a low charge. (3) The number of terrestrial broadcasting channels which are transmitted via pay-TV carriers can have a large impact on competitive advantage when getting subscribers in the pay-TV market.
    Keywords: Platform Competition; Cable Television; Communication Satellite; Pay-TV; subscriber penetration; high-value added service
    JEL: L82 R22 L51
    Date: 2007–11–10
  9. By: DAKHLAOUI Ahlem;
    Date: 2007–11
  10. By: Pollitt, M
    Abstract: This paper explores the issue of the balance between liberalisation and regulation in electricity systems, which is the essence of much of the detailed policies which are implemented in the sector. By liberalisation I take to mean the use of market or quasi-market mechanisms as part of a reform of the sector, by regulation I take to mean regulatory intervention to restrain the operation of market signals which would otherwise have operated in the absence of regulation. The paper takes an international perspective to look at the case for liberalisation, the case for regulation and the evidence on the effects of liberalisation. It concludes with an assessment on the future for electricity liberalisation. This paper forms the foreward to Sioshansi, F.P. (2008) (ed.), Competitive Electricity Markets: Design, Implementation, Performance, Oxford: Elsevier and makes reference to the papers in that volume. Key words: Electricity liberalisation, electricity regulation.
    JEL: L94
    Date: 2007–09
  11. By: Ruiz-Porras, Antonio
    Abstract: We study how banking competition may affect the stability of banking systems. We develop our study by expanding the failure-determinant methodology to include panel-data techniques and by controlling the effects of financial structure and development. We use indicators for 47 countries between 1990 and 1997. The main findings show that banking concentration and foreign ownership are associated to bank-based financial systems and financial underdevelopment. They also show that banking credit and bank-based financial systems enhance banking fragility. Banking concentration is not a significant determinant. Furthermore our findings suggest that financial structure and, maybe, the property regime matter to assess fragility.
    Keywords: Banks; competition; fragility; financial systems
    JEL: L16 D40 G10 G21
    Date: 2007–10–29
  12. By: Luigi Guiso; Paola Sapienza; Luigi Zingales
    Abstract: We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations - access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rate spreads and an increased access to credit at the cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalization
    Keywords: banking regulation, financial development, finance
    JEL: G0 G2 K2
    Date: 2007
  13. By: Flavio Menezes (Australian National University); John Quiggin (Risk & Sustainable Management Group, School of Economics, University of Queensland)
    Abstract: We specify an oligopoly game, where firms choose quantity in order to maximise profits, that is strategically equivalent to a standard Tullock rent-seeking game. We then show that the Tullock game may be interpreted as an oligopsonistic market for influence.Alternative specifications of the strategic variable give rise to a range of Nash equilibria with varying levels of rent dissipation.
    Keywords: Tullock contests, oligopoly
    JEL: C7 D72
    Date: 2007–08
  14. By: Fung, Hung-gay; Gao, Gerald Yong; Lu, Jiangyong; Mano, Haim
    Abstract: We examine the impacts of competitive industry position on firms’ export propensity and intensity in China. Drawing on the resource-based view and the structure-conduct-performance paradigm of firm behavior, we investigate whether firms with competitive industry position through cost leadership or differentiation strategy have different export behaviors. We use a longitudinal data of 213,662 manufacturing firms in China from 1998 to 2005 to show that firms that have developed competitive advantages in the domestic market are more likely to export and have higher levels of export intensity. Indigenous and foreign manufacturing firms exhibit different patterns of export behaviors. Foreign firms with differentiation advantages focus on local market expansion instead of seeking opportunity in export markets.
    JEL: F18
    Date: 2007–07
  15. By: Sascha Füllbrunn (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Tibor Neugebauer (Leibniz University of Hanover)
    Abstract: We study collusion in the finitely repeated, hard-close auction experiment. Three subjects, identified by their bidder name, simultaneously compete in three auction markets. Due to the experimental design, subjects are enabled to the sharing of the benefits of cooperation by coordinating their individual demands. Similar collusive behavior has been suggested to play an important role in empirical markets (Klemperer 2002). We consider two treatments. In the first one, the partners treatment, subjects who are identified by bidder-names interact repeatedly but anonymously with each other. In the second one, the friends treatment, groups of three subjects who participate together in the experiment, interact repeatedly with another. In the experiment, we do not observe tacit collusion in the partners treatment; the outcome is efficient and prices converge quickly to the rational equilibrium prediction. Only in the friends treatment, cooperation gains can be realized, but much less cooperation is observed than one would imagine. We conclude that in the laboratory, cooperation is difficult to achieve in the hard-close auction market if anonymity prevails.
    Keywords: multi unit auctions, collusion, experimental economics
    JEL: D44 C92
    Date: 2007–11
  16. By: Vicente Cuñat; Maria Guadalupe
    Abstract: This paper studies the effect of deregulation and increased product market competition on the compensation packages that firms offer to their executives. We use a panel of US executives in the nineties and exploit the deregulation episodes in the banking and financial sectors as quasi-natural experiments. We provide difference-in-differences estimates of their effect on (1) total pay, (2) estimated fixed pay and performance-pay sensitivities and (3) on the sensitivity of stock option grants. Our results indicate that the deregulations substantially changed the level and structure of compensation: the variable components of pay increased, performance-pay sensitivities grew and, at the same time, the fixed component of pay fell. The overall effect on total pay was small.JEL codes: M52, L1, J31Keywords: Executive compensation; performance related pay; incentives; product market competition; deregulation.
    Date: 2007–10

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