nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒12‒01
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Buyer Power in International Markets By Horst Raff; Nicolas Schmitt
  2. What Model for Entry in First-Price Auctions? A Nonparametric Approach By Xu, Pai; Shneyerov, Artyom; Marmer, Vadim
  3. Resale and Bundling in Auctions By Marco Pagnozzi
  4. EU Competition Policy: Some Real Case Applications By Jalles, João Tovar
  5. Merger Policy and Tax Competition By Haufler, Andreas; Schulte, Christian
  6. Net Neutrality on the Internet: A Two-sided Market Analysis By Nicholas Economides; Joacim Tåg
  7. Subsidies and distorted markets: Do telecom subsidies affect competition? By Eric Chiang; Janice Hauge; Mark Jamison
  8. The role of screening and cross-selling in bank-firm relationships By Cosci Stefania; Meliciani Valentina
  10. Patents, Thickets, and the Financing of Early-Stage Firms: Evidence from the Software Industry By Iain M. Cockburn; Megan MacGarvie
  11. Competing on Standards? Entrepreneurship, Intellectual Property and the Platform Paradox By Timothy S. Simcoe; Stuart J.H. Graham; Maryann Feldman
  12. When is Seller Price Setting with Linear Fees Optimal for Intermediaries? By Simon Loertscher; Andras Niedermayer
  13. Securing Their Future? Entry And Survival In The Information Security Industry By Ashish Arora; Anand Nandkumar
  14. Pricing with Customer Recognition By Rosa Branca Esteves
  15. Pass-through of Exchange Rates and Competition Between Floaters and Fixers By Paul R. Bergin; Robert C. Feenstra
  16. The Stability-Concentration Relationship in the Brazilian Banking System By Benjamin Miranda Tabak; Solange Maria Guerra; Eduardo José Araújo Lima; Eui Jung Chang
  17. Firm Growth and R&D Expenditure By Alexander Coad; Rekha Rao

  1. By: Horst Raff (Christian-Albrechts-Universität zu Kiel); Nicolas Schmitt (Simon Fraser University)
    Abstract: This paper investigates the implications for international markets of the existence of retailers/wholesalers with market power. Two main results are shown. First, in the presence of buyer power trade liberalization may lead to retail market concentration. Due to this concentration retail prices may be higher and welfare may be lower in free trade than in autarky, thus reversing the standard e¤ects of trade liberalization. Second, the pro-competitive effects of trade liberalization are weaker under buyer power than under seller power.
    Keywords: buyer power, retailing, international trade.
    JEL: F12 F15 L13
    Date: 2007–10
  2. By: Xu, Pai; Shneyerov, Artyom; Marmer, Vadim
    Abstract: We develop a nonparametric approach that allows one to discriminate among alternative models of entry in first-price auctions. Three models of entry are considered: Levin and Smith (1994), Samuelson (1985), and a new model in which the information received at the entry stage is imperfectly correlated with valuations. We derive testable restrictions that these three models impose on the quantiles of active bidders' valuations, and develop nonparametric tests of these restrictions. We implement the tests on a dataset of highway procurement auctions in Oklahoma. Depending on the project size, we find no support for the Samuelson model, some support for the Levin and Smith model, and somewhat more support for the new model.
    JEL: C12 C14 D44
    Date: 2007–11–22
  3. By: Marco Pagnozzi (University of Napoli "Federico II" and CSEF)
    Abstract: Allowing resale in multi-object auctions increases bidders. incentives to jointly reduce demand, because resale increases low-value bidders’ willingness to pay and reduces high-value bidders’ willingness to pay. Therefore (unlike in single-object auctions), resale may reduce the seller’s revenue in multi-object auctions. However, we show that, under reasonable conditions, allowing resale and bundling the objects on sale are “complement strategies” for the seller – by bundling and allowing resale the seller earns a higher revenue than by selling the objects separately and/or not allowing resale. We also analyze how resale affects a bidder’s incentive to unilaterally reduce demand, and we show why allowing resale may reduce efficiency.
    Keywords: multi-object auctions, resale, bundling, demand reduction
    JEL: D44
    Date: 2007–11–01
  4. By: Jalles, João Tovar
    Abstract: European Union Antitrust Laws have been successfully applied to anti-competitive behaviour, which can take place abroad, but have an effect within the EU. Under Antitrust Laws, not only abuse of dominant position practices but also mergers that restrain competition are regarded as illegal and subject to severe remedies. This paper accesses both Microsoft-WMP and Volvo-Scania cases in the light of the EU Competition Policy and identifies the circumstances involved, final decisions made as well as the suggested remedies and the consequences from the consumers’ perspective. The issues considered are per se controversial and these are clear examples of the long path to go through, in order to make the competition law regime uniformly applicable in all member states. The lack of international consensus on competition law and enforcement requires huge efforts in co-operation between countries and organisations, because in combination with economic liberalisation, nations have come to recognise competition as a powerful instrument for stimulating innovation and economic growth. This paper focus on the past, i.e., already assessed anticompetitive cases; the present - the current EU Competition Policy rules - and finally on the future of Antitrust jurisdiction, in which part I will briefly describe the major actual concerns in the long course towards a common and homogeneously valid system of International Competition Policy.
    Date: 2007
  5. By: Haufler, Andreas; Schulte, Christian
    Abstract: In many situations governments have sector-specific tax and regulation policies at their disposal to influence the market outcome after a national or an international merger has taken place. In this paper we study the implications for merger policy when countries non-cooperatively deploy production-based taxes. We find that whether national or international mergers are more likely to be enacted in the presence of nationally optimal tax policies depends crucially on the ownership structure of firms. When all firms are owned domestically in the pre-merger situation, non-cooperative tax policies are more efficient in the national merger case and smaller synergy effects are needed for this type of merger to be proposed and cleared. These results are reversed when there is a high degree of foreign firm ownership prior to the merger.
    Keywords: merger regulation; tax competition
    JEL: H21 H77 L13 L50
    Date: 2007–11–21
  6. By: Nicholas Economides (Stern School of Business, New York University); Joacim Tåg (Swedish School of Economics and Business Administration, FDPE, and HECER)
    Abstract: We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers “on the other side” of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees “on the other side” of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees “on the other side” of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets.
    Keywords: net neutrality, two-sided markets, Internet, monopoly, duopoly, regulation, discrimination
    JEL: L1 D4 L12 L13 C63 D42 D43
    Date: 2007–09
  7. By: Eric Chiang (Department of Economics, College of Business, Florida Atlantic University); Janice Hauge (University of North Texas); Mark Jamison (University of Florida)
    Abstract: There is general concern that producer subsidies distort competition. We examine a telecommunications subsidy system that transfers money from low cost regions to high cost regions of the U.S. Even though the system is designed to be competitively neutral, we find evidence that the system, combined with carrier of last resort policies, promotes cream skimming by entrants in low cost areas and deters entry in high cost areas, where incumbents are more likely than entrants to receive subsidies. We are unable to rule out the possibility that state regulatory policies favor incumbents in states that are net beneficiaries of the subsidy system.
    Keywords: subsidies, Universal Service Fund, telecommunications, regulation
    JEL: L52 L96 O11
    Date: 2007–11
  8. By: Cosci Stefania; Meliciani Valentina
    Abstract: This paper presents a monopolistic competition model of a bank choosing the optimal level of the screening effort in the presence of cross-selling activities. We demonstrate that, in absence of informational synergies, the larger is the range of services that the bank produces, the lower is the optimal screening effort. The paper also analyses the impact of competition in the lending market on cross-selling activities and finds that, for sufficiently low levels of transportation costs, an increase in competition in the lending market increases the expected profitability of services, thus increasing banks’ incentives to engage in cross-selling activities.
    Date: 2007–11
  9. By: Santiago Carbó-Valverde (Department of Economic Theory and Economic History, University of Granada); José Manuel Liñares-Zegarra (Department of Economic Theory and Economic History, University of Granada); Francisco Rodríguez-Fernández (Department of Economic Theory and Economic History, University of Granada)
    Abstract: Theoretical contributions on network industries have been numerous. However, there is a lack of sufficient empirical evidence which would assist related policymaking. This is the case of payment cards markets. This paper employs a unique database to analyze changes in market power and consumers' willingness to pay resulting from the introduction of payment cards in a multiproduct banking technology. Our findings indicate that any rise in bank market power from payment cards is associated to a greater increase in consumers' willingness to pay. Any antitrust intervention which does not take into account such welfare effects could be misguided.
    Keywords: Card payments, bank market power, willingness to pay, multiproduct technology, network industries.
    JEL: D12 D21 G21
    Date: 2007–11–03
  10. By: Iain M. Cockburn; Megan MacGarvie
    Abstract: The impact of stronger intellectual property rights in the software industry is controversial. One means by which patents can affect technical change, industry dynamics, and ultimately welfare, is through their role in stimulating or stifling entry by new ventures. Patents can block entry, or raise entrants' costs in variety of ways, while at the same time they may stimulate entry by improving the bargaining position of entrants vis-à-vis incumbents, and supporting a "market for technology" which enables new ventures to license their way into the market, or realize value through trade in their intangible assets. One important impact of patents may be their influence on capital markets, and here we find evidence that the extraordinary growth in patenting of software during the 1990s is associated with significant effects on the financing of software companies. Start-up software companies operating in markets characterized by denser patent thickets see their initial acquisition of VC funding delayed relative to firms in markets less affected by patents. The relationship between patents and the probability of IPO or acquisition is more complex, but there is some evidence that firms without patents are less likely to go public if they operate in a market characterized by patent thickets.
    JEL: L1 O34
    Date: 2007–11
  11. By: Timothy S. Simcoe; Stuart J.H. Graham; Maryann Feldman
    Abstract: This paper studies the intellectual property strategy of firms that participate in the formal standards process. Specifically, we examine litigation rates in a sample of patents disclosed to thirteen voluntary Standard Setting Organizations (SSOs). We find that SSO patents have a relatively high litigation rate, and that SSO patents assigned to small firms are litigated more often than those of large publicly-traded firms. We also estimate a series of difference-in-differences models and find that small-firm litigation rates increase following a patent's disclosure to an SSO while those of large firms remain unchanged or decline. We interpret this result as evidence of a "platform paradox" -- while small entrepreneurial firms rely on open standards to lower the fixed cost of innovation, these firms are also more likely to pursue an aggressive IP strategy that may undermine the openness of a new standard.
    JEL: L0 L17 L26 O34
    Date: 2007–11
  12. By: Simon Loertscher; Andras Niedermayer
    Abstract: Mechanisms where sellers set the price and are charged a linear commission fee are widely used by real world intermediaries, e.g. by real estate brokers. Empiri- cally these commission fees exhibit very little variance, both across heterogeneous regional markets and over time. So far, there is no theoretical explanation why such seller price setting mechanisms are used and why the linear fees vary so little. In this paper, we first show that in a Bayesian setup seller price setting with linear fees is revenue equivalent to the intermediary optimal direct mechanism derived by Myerson and Satterthwaite (1983) if and only if the seller’s cost is drawn from a generalized power distribution. Whenever such a mechanism is optimal, the fee structure is independent of the distribution from which the buyer’s valuation is drawn. Second, we derive the intermediary optimal direct mechanism when there are many buyers and possibly many sellers and we show that with one seller any standard auction with linear fees and reserve price setting by the seller (which are used e.g. by eBay) implements this mechanism if the seller’s cost is drawn from a power distribution and if buyers’ valuations are identically distributed. Third, we show that when the number of buyers approaches infinity while there is still one seller, seller price setting and price setting by the intermediary are equivalent, intermediary optimal mechanisms.
    Keywords: Brokers; linear commission fees; optimal indirect mechanisms
    JEL: C72 C78 L13
    Date: 2007
  13. By: Ashish Arora; Anand Nandkumar
    Abstract: In this paper we study how the existence of a functioning market for technology differentially conditions the entry strategy and survival of different types of entrants, and the role of scale, marketing ability and technical assets. Markets for technology facilitate entry of firms that lack proprietary technology and increase vertical specialization. However, they also increase the relative advantage of downstream capabilities, which is reflected in the relatively improved performance of incumbent Information and Communication Technologies (ICT) firms compared to startups. We find that diversifying entrants perform better relative to startups. Contrary to earlier studies, we find that spin-offs do not perform any better than other startups. Moreover, firms founded by serious hobbyists and tinkerers, whom we call hackers, perform markedly better than other startups. These findings reflect the non-manufacturing setting of this study, as well as the distinctive nature of software technology.
    JEL: L24 L25 L26
    Date: 2007–11
  14. By: Rosa Branca Esteves (Universidade do Minho - NIPE)
    Abstract: This article studies the dynamic effects of behaviour-base price discrimination and customer recognition in a duopolistic market where the distribution of consumers' preferences is discrete. In the static and firs-period equilibrium firms choose prices with mixed strategies. When price discrimination is allowed, forward-looking firms have an incentive to avoid customer recognition, thus the probability that both will have positive first-period sales decreases as they become more patient. Furthermore, an asymmetric equilibrium sometimes exists, yielding a 100-0 division of the first-period sales. As a whole, price discrimination is bad for profits but good for consumer surplus and welfare.
    Date: 2007
  15. By: Paul R. Bergin; Robert C. Feenstra
    Abstract: This paper studies how a rise in China's share of U.S. imports could lower pass-through of exchange rates to U.S. import prices. We develop a theoretical model with variable markups showing that the presence of exports from a country with a fixed exchange rate could alter the competitive environment in the U.S. market. In particular, this encourages exporters from other countries to lower markups in response to a U.S. depreciation, thereby moderating the pass-through to import prices. Free entry is found to further moderate the pass-through, in that a U.S. depreciation encourages entry of exporters whose costs are shielded by the fixed exchange rate, which further intensifies the competitive pressure on other exporters. The model predicts that certain conditions are necessary to facilitate this 'China explanation' for falling pass-through, including a 'North America bias' in U.S. preferences. The model also produces a log-linear structural equation for pass-through regressions indicating how to include the China share. Panel regressions over 1993–1999 support the prediction that a high China share in imports lowers pass-through to U.S. import prices.
    JEL: F4
    Date: 2007–11
  16. By: Benjamin Miranda Tabak; Solange Maria Guerra; Eduardo José Araújo Lima; Eui Jung Chang
    Abstract: In this article the relation between non-performing loans (NPL) of the Brazilian banking system and macroeconomic factors, systemic risk and banking concentration is empirically tested. While evaluating this relation, we use a dynamic specification with fixed effects, using a panel data approach. The empirical results indicate that the banking concentration has a statistically significant impact on NPL, suggesting that more concentrated banking systems may improve financial stability. These results are important for the design of banking regulation policies.
    Date: 2007–10
  17. By: Alexander Coad; Rekha Rao
    Abstract: We apply a panel vector autoregression model to a firm-level longitudinal database to observe the co-evolution of sales growth, employment growth, profits growth and growth of R&D expenditure. Contrary to expectations, profit growth seems to have little detectable effect on R&D investment. Instead, firms appear to increase their total R&D expenditure following growth in sales and growth of employment. In a sense, firms behave ‘as if’ they aim for a roughly constant ratio of R&D to employment (or sales). We observe heterogeneous effects for growing or shrinking firms however, suggesting that firms are less willing to reduce their R&D levels following a negative growth shock than they are willing to increase R&D after a positive shock.
    Keywords: Firm Growth, Panel VAR, R&D expenditure, Industrial Dynamics Length 32 pages
    JEL: L10 L20 O32
    Date: 2007–11

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