nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒12‒08
eleven papers chosen by
Russell Pittman
US Department of Justice

  1. Endogenous Market Structure and the Business Cycle By Andrea Colciago; Federico Etro
  2. Optimal Collusion-Proof Auctions By Che, Yeon-Koo; Kim, Jinwoo
  3. Spurious Complexity and Common Standards in Markets for Consumer Goods By Alexia Gaudeul; Robert Sugden
  4. Determinants of the Acquisition of Smaller Firms by Larger Incumbents in High-Tech Industries: Are they related to Innovation and Technology Sourcing? By Marcus Wagner
  5. Passing-On Defense and Indirect Purchaser Standing in Actions for Damages against the Violations of Competition Law: what can the EC learn from the US? By Firat Cengiz
  6. Bank Consolidation and Loan Pricing. By Lili Xie
  7. Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations By Jaag, Christian
  8. Estimating Level Effects In Diffusion Of A New Technology: Barcode Scanning At The Checkout Counter By Jonathan Beck; Michal Grajek; Christian Wey
  9. Collusion Helps Abate Environmental Pollution: A Dynamic Approach.  By L. Lambertini; A. Mantovani; E. Scorcu
  10. The gas chain : influence of its specificities on the liberalisation process By Carine Swartenbroekx
  11. Stock market performance and pension fund investment policy: rebalancing, free float, or market timing? By Jacob A. Bikker; Laura Spierdijk; Paul Finniez

  1. By: Andrea Colciago; Federico Etro
    Abstract: We introduce endogenous strategic interactions under competition in quantities and in prices together with endogenous entry in a dynamic stochastic general equilibrium model with ?exible prices. The endogenous mark ups depend on the form of competition and on the degree of substitutability between goods, and they vary countercylically while pro?ts are procyclical. Positive temporary shocks to productivity and government spending attract entry. Entry strengthens competition between ?rms, which temporary reduces mark ups and prices: this creates an intertemporal substitution e¤ect which provides an extra boost to consumption. The model outperforms the standard RBC framework in matching impulse response functions and second moments for US data.
    Keywords: Endogenous Market Structure, Firms?Entry, Business Cycle
    JEL: L11 E32
    Date: 2007–11
  2. By: Che, Yeon-Koo; Kim, Jinwoo
    Abstract: We study an optimal collusion-proof auction in an environment where subsets of bidders may collude not just on their bids but also on their participation. Despite their ability to collude on participation, informational asymmetry facing the potential colluders can be exploited significantly to weaken their collusive power. The second-best auction --- i.e., the optimal auction in a collusion-free environment --- can be made collusion-proof, if at least one bidder is not collusive, or there are multiple bidding cartels, or the second-best outcome involves a nontrivial probability of the object not being sold. In case the second-best outcome is not weak collusion-proof implementable, we characterize an optimal collusion-proof auction. This auction involves nontrivial exclusion of collusive bidders --- i.e., the object is not sold to any collusive bidder with positive probability.
    JEL: D8 D4
    Date: 2007–09–06
  3. By: Alexia Gaudeul (School of Economics and Centre for Competition Policy, University of East Anglia); Robert Sugden (School of Economics and Centre for Competition Policy, University of East Anglia)
    Abstract: Behavioural and industrial economists have argued that, because of cognitive limitations, consumers are liable to make sub-optimal choices in complex decision problems. Firms can exploit these limitations by introducing spurious complexity into tariff structures, weakening price competition. This paper models a countervailing force. Consumers’ choice problems are simplified if competing firms follow common conventions about tariff structures. Because such a ‘common standard’ promotes price competition, a firm’s use of it signals that its products offer value for money. If consumers recognize this effect, there can be a stable equilibrium in which firms use common standards and set competitive prices.
    Keywords: decision-making, naïve consumers, savvy consumers, price competition, common standard effect, cognitive limitations.
    JEL: D83 L13 L15 L51
    Date: 2007–11
  4. By: Marcus Wagner
    Abstract: Innovation activities in high tech industries provide considerable challenges for technology and innovation management. In particular, firms frequently face significant technological challenges since these industries has a long history of radical innovations which are taking place through distinct industry cycles of higher and lower demand. The paper investigates these issues for three high-tech industries, namely semiconductor manufacturing, biotechnology and electronic design automation which is a specific sub-segment of the semiconductor industry. It analyses the association of firm characteristics with different aspects of acquisition behaviour. Particular focus is put on innovation-related firm characteristics. The paper finds that the determinants for acquisitions are mostly related to firm size, financial conditions and geographical origin of the firm. Only for biotechnology, a substitutive relationship is identified between acquisitions and own research activities.
    Keywords: acquisition, innovation, semiconductor, design, automation, biotechnology
    JEL: L10 L86 M20
    Date: 2007–11
  5. By: Firat Cengiz (School of Law and Centre for Competition Policy, University of East Anglia)
    Abstract: This paper analyses the raison d’être of the current initiative for the federal policy change in the US regarding the issues of passing-on defense and indirect purchaser standing in order to draw policy lessons for the EC in the light of the Commission’s Green Paper on private enforcement of Community competition law. The paper finds that transatlantic policy learning in the substantive sense does not seem plausible due to the dramatic difference between the American rationale regarding the goals of private enforcement and the European doctrine of direct effect. Nevertheless, the paper argues that the US experience contains important policy lessons regarding the risks brought forward by private enforcement under diverse standards in the lack of effective judicial cooperation mechanisms in a multi-level polity. After analysing the current positions of the Community and national laws from this perspective, the paper finds that there is substantial room for diversity amongst the national standards. In addition, although existing Community measures provide solid ground for judicial cooperation, those measures should be strengthened in order to avert the litigation chaos which forced a policy change in the US. Consequently, the paper suggests that the Commission gives substantial weight to the procedural aspects of private enforcement in its forthcoming White Paper which the Green Paper largely overlooked.
    Keywords: Private enforcement, indirect purchasers, Passing-on defense, Illinois Brick, Hanover Shoe, Antitrust Modernization Commission, European Commission Green Paper on actions for breach of the EC Antitrust Rules, Brussels I Regulation, Rome II Regulation
    JEL: K21 K41
    Date: 2007–11
  6. By: Lili Xie (Department of Economics, Ball State University)
    Abstract: This paper examines the e®ects of bank mergers on loan pricing. Using a sample of U.S. commercial and industrial loans, I ¯nd that banks reduce loan interest rates after they acquire target banks with small market shares, suggesting that the e±ciency gains e®ect dominates the market power e®ect in such mergers. This merger e®ect is largest in the ¯rst year and almost disappears by the third year after the merger. Ex-ante conditions such as the concentration of the banking market and the market overlap of merging banks signi¯cantly a®ect merger e®ects in ways consistent with theory predictions. Merger e®ects are also found to vary across ¯rms: mergers lead to larger rate reductions for informationally opaque ¯rms than for informationally transparent ¯rms. This provides counter evidence for the concern that bank mergers will particularly hurt ¯rms lacking high-quality quantitative information. Although merging banks reduce their loan interest rates, rival banks, i.e., banks located in the same markets as the merging banks, leave their loan interest rates unchanged after mergers occur. This can be attributed to the fact that rival banks do not get e±ciency gains as merging banks do and thus do not ¯nd it pro¯table to follow the pricing change of merging banks.
    Keywords: Bank Merger, Economies of Scale, Economies of Scope, and Market Power.
    JEL: G21 L40
    Date: 2007–11
  7. By: Jaag, Christian
    Abstract: We discuss the ongoing liberalization process in the market for addressed letter mail in Switzerland. The core of the paper is an assessment of the liberalization's impact on the financial viability of various universal service obligations with and without access to the incumbent's downstream delivery network for customers and competitors. We propose a simple calibrated model of the Swiss letter market offering theoretical insights into the mechanics of market opening along with quantitative conclusions bearing direct policy relevance. The extent of the entrants' market coverage and the equilibrium in the resulting price competition are endogenously determined. Our simulations suggest caution in introducing full market opening. For the scenarios considered, the model shows that either the burden of the USO must be reduced (e.g. with respect to the frequency and the coverage of delivery and / or through price differentiation). Alternatively, other means of assuring financial stability of Swiss Post must be sought, be it through external funds or demand stimulation through new producs, possibly in the worksharing domain.
    Keywords: Liberalization; Mail; Universal Service Obligation
    JEL: H4 L52 H44
    Date: 2007–10–06
  8. By: Jonathan Beck (Humboldt Universität zu Berlin); Michal Grajek (ESMT European School of Management and Technology); Christian Wey (Technische Universität Berlin)
    Abstract: Cross-country or cross-industry studies of technology diffusion typically estimate how independent factors affect diffusion speed or timing, often based on a two-stage approach. In many applications, however, countries (industries) differ most in the saturation level of diffusion. In a novel, single-stage econometric approach to a standard diffusion model, we therefore estimate how the saturation level covaries with independent factors. In our application to diffusion of an important retail information technology, we focus on the competitive effect of hypermarkets (superstores). We also find standard scale, income and labor substitution effects.
    Keywords: diffusion; information technology; retail competition
    JEL: L5 L81 O33
    Date: 2007–09–27
  9. By: L. Lambertini; A. Mantovani; E. Scorcu
    Date: 2007–11
  10. By: Carine Swartenbroekx (National Bank of Belgium, Microeconomic Information Department)
    Abstract: Like other network industries, the European gas supply industry has been liberalised, along the lines of what has been done in the United Kingdom and the United States, by opening up to competition the upstream and downstream segments of essential transmission infrastructure. The aim of this first working paper is to draw attention to some of the stakes in the liberalisation of the gas market whose functioning cannot disregard the network infrastructure required to bring this fuel to the consumer, a feature it shares with the electricity market. However, gas also has the specific feature of being a primary energy source that must be transported from its point of extraction. Consequently, opening the upstream supply segment of the market to competition is not so obvious in the European context, because, contrary to the examples of the North American and British gas markets, these supply channels are largely in the hands of external suppliers and thus fall outside the scope of EU legislation on the liberalisation and organisation of the internal market in gas. Competition on the downstream gas supply segment must also adapt to the constraints imposed by access to the grid infrastructure, which, in the case of gas in Europe, goes hand in hand with the constraint of dependence on external suppliers. Hence the opening to competition of upstream and downstream markets is not "synchronous", a discrepancy which can weaken the impact of liberalisation. Moreover, the separation of activities necessary for ensuring free competition in some segments of the market is coupled with major changes in the way the gas chain operates, with the appearance of new markets, new price mechanisms and new intermediaries. Starting out from a situation where gas supply was in the hands of vertically-integrated operators, the new regulatory framework that has been set up must, on the one hand, ensure that competitive forces can be given free rein, and, on the other hand, that free and fair competition helps the gas chain to operate coherently, at lower cost and in the interests of consumers, for whom the stakes are high as natural gas is an important input for many industrial manufacturing processes, even a "commodity" almost of basic necessity.
    Keywords: network industries, gas industry, gas utility, liberalisation, regulation, deregulation, market structure, European gas supply, oligopoly, OPEG.
    JEL: D23 D43 L13 L43 L95 L97
    Date: 2007–11
  11. By: Jacob A. Bikker; Laura Spierdijk; Paul Finniez
    Abstract: Using a measure of competition based on the Panzar-Rosse model, this paper explains bank competition across 76 countries on the basis of various determinants. Studies explaining banking competition are rare and typically insuffciently robust as they are based on a limited number of countries only. Traditionally, market structure indicators, such as the number of banks and banking concentration, have been considered the major determinants of competition in the banking sector. However, we find that these variables have no signiffcant impact on market power. Instead, we show that a country's institutional framework is a key factor in explaining banking competition. Extensive regulation, particularly antitrust policies, improves the competitive environment. The foreign investment climate, a proxy of contestability, also plays an important role. The fewer restrictions on foreign investments exist, the more competitive the banking sector becomes. In addition, activity restrictions make large banks less competitive and collusion markups are procyclical. Finally, competition is substantially weaker in countries with a socialist past, such as Central- and Eastern Europe.
    Keywords: banking competition; market structure; concentration; contestability; interindustry competition.
    Date: 2007–11

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