nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒12‒15
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Tacit Collusion. The Neglected Experimental Evidence By Christoph Engel
  2. Transparency and Product Variety By Christian Schultz
  3. Review of the Literature on the Impact of Mergers on Innovation By Schulz, Norbert
  4. Collusion or Sniping in simultaneous ascending Auctions By Sascha Füllbrunn
  5. Opt In versus Opt Out: A Free-Entry Analysis of Privacy Policies By Bouckaert J.; Degryse H.
  6. Competition and Growth in an Endogenous Growth Model with Expanding Product Variety without Scale Effects By Bianco, Dominique
  8. Testing the "Waterbed" Effect in Mobile Telephony By Christos Genakos; Tommaso Valletti
  9. Innovation and Market Concentration in Europe's Mobile Phone Industries. Evidence from the Transition from 2G to 3G By Klaus S. Friesenbichler
  10. Competition in TV-Distribution - A framework and applications to Sweden By Bergman, Mats; Stennek, Johan
  11. Arbitrage in Energy Markets: Competing in the Incumbent’s Shadow By Kupper Gerd; Willems Bert
  12. Insurance Markets When Firms Are Asymmetrically Informed: A Note By Jason Strauss; Aidan Michael Hollis
  13. Competition and Survival of Stock Exchanges: Lessons From Canada By Cécile Carpentier; Jean-François L'Her; Jean-Marc Suret
  14. Competition in Soccer Leagues By Bodil Olai Hansen; Mich Tvede
  15. Further Evidence on Auditor Selection Bias and The Big 4 Premium By Clatworthy, Mark A; Makepeace, Gerald H; Peel, Michael J.

  1. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Both in the US and in Europe, antitrust authorities prohibit merger not only if the merged entity, in and of itself, is no longer sufficiently controlled by competition. The authorities also intervene if, post merger, the market structure has changed such that "tacit collusion" becomes disturbingly more likely. It seems that antitrust neglects the fact that, for more than 50 years, economists have been doing experiments on this very question. Almost any conceivable determinant of higher or lower collusion has been tested. This paper standardises the evidence by way of a meta-study, and relates experimental findings as closely as possible to antitrust doctrine.
    Keywords: Oligopoly, Coordinated Effects, Tacit Collusion, Merger Guidelines, Airtours, Experimental Markets
    JEL: D21 D43 K21 L13 L41
    Date: 2007–09
  2. By: Christian Schultz (Department of Economics, University of Copenhagen)
    Abstract: We study the long run e¤ects of transparency in a circular town model of a differentiated market. The market is not fully transparent on the consumer side: A fraction of consumers are uninformed about prices. Increasing transparency reduces the equilibrium price, profit and entry of firms. This improves welfare. If consumers' transportation cost is high, it also improves the average utility of consumers. When transportation costs are very small, the fully transparent market features cut throat competition if there are several firms in the market, and if firms choose pure entry strategies only one firm enters and acts like a monopolist. Consumers therefore prefer that market transparency is as high as possible under the restriction that the market should allow entry for two firms. If firms choose mixed entry strategies, consumers prefer full transparency.
    Keywords: market transparency; product differentiation; product variety; competition policy
    JEL: L13 L15 L40
    Date: 2007–11
  3. By: Schulz, Norbert
    Abstract: Both M&A and innovation are instruments for growth and competitive advantage. Therefore they are fundamental to each firm’s competitive strategy. Usually, both instruments have been studied separately, but much less in conjunction. This is unfortunate as both processes - the process of innovation and the process of mergers and acquisitions - are intimately connected. The impact of mergers on innovation can only be rigorously assessed, if the converse direction of influence - mergers caused by innovation - is accounted for. Therefore this review tries to take a balanced view on both processes and to point out links between them. Nevertheless, the focus is on the impact of mergers on innovation. This discussion paper is identical with an older version with the title ‘Review on the Literature of Mergers on Innovation’.
    Keywords: innovation incentives, market structure, merger incentives
    JEL: L10 L25 O31
    Date: 2007
  4. By: Sascha Füllbrunn (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: In simultaneous ascending price auctions with heterogeneous goods Brusco and Lopomo (2002) derive collusive equilibria where bidders divide objects among themselves, while keeping the prices low. Considering a simultaneous ascending price auction with a fixed deadline, i.e. the Hard Close auction format, a prisoner’s dilemma situation results and collusive equilibria no longer exists, even for only two bidders. Hence, we introduce a further reason for sniping behavior in Hard Close auctions.
    Keywords: collusion, sniping, multi unit auctions, prisoner’s dilemma
    JEL: D44
    Date: 2007–11
  5. By: Bouckaert J.; Degryse H.
    Abstract: There is much debate on how the how of information between firms should be organized, and whether existing privacy laws should be amended. We offer a welfare comparison of the three main current policies towards consumer privacy - anonymity, opt in, and opt out - within a two-period model of localized competition. We show that when consumers find it too costly to opt in or opt out - such that the default is the policy that rules, privacy policies shape firms’ ability to collect and use customer information, and affect their pricing strategy and entry decision differently. The free-entry analysis reveals that social welfare is non-monotonic in the degree of privacy protection. Opt out is the socially preferred privacy policy while opt in socially underperforms anonymity. Consumers never opt out and choose to opt in only when its cost is sufficiently low. Only when opting in is cost-free do the opt-in and opt-out privacy policies coincide.
    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 effect. 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; Technological Change; Imperfect Competition
    JEL: O41 O31
    Date: 2007–11–10
  7. By: Gantumur, Tseveen (European University Viadrina); Stephan, Andreas (JIBS and CESIS)
    Abstract: The telecommunications in the 1990s witnessed an enormous worldwide round of Mergers & Acquisitions (M&A). This paper examines the innovation determinants of M&A activity and the consequences of M&A transactions on the technological potential and the innovation performance. We examine the telecommunications equipment industry over the period 1988-2002 using a newly constructed data set with firm-level data describing M&A and innovation activity as well as financial characteristics. Based on a matching propensity score procedure, the study provides evidence that M&A realize significantly positive changes to the firm’s postmerger innovation performance.
    Keywords: Mergers & Acquisitions; Innovation Performance; Telecommunications Equipment Industry
    JEL: L10 L63 O30
    Date: 2007–12–11
  8. By: Christos Genakos; Tommaso Valletti
    Abstract: This paper examines the impact of regulatory intervention to cut termination rates of callsfrom fixed lines to mobile phones. Under quite general conditions of competition, theorysuggests that lower termination charges will result in higher prices for mobile subscribers, aphenomenon known as the "waterbed" effect. The waterbed effect has long beenhypothesized as a feature of many two-sided markets and especially the mobile networkindustry. Using a uniquely constructed panel of mobile operators' prices and profit marginsacross more than twenty countries over six years, we document empirically the existence andmagnitude of this effect. Our results suggest that the waterbed effect is strong, but not full.We also provide evidence that both competition and market saturation, but most importantlytheir interaction, affect the overall impact of the waterbed effect on prices.
    Keywords: telecommunications, regulation, "Waterbed" effect, two-sided markets
    JEL: D21 L51 L96
    Date: 2007–10
  9. By: Klaus S. Friesenbichler (WIFO)
    Abstract: Aiming at both low prices and innovation, policy makers and economists have long argued about the optimal intensity of competition. While the current discussion in telecommunication regulation points out that competition can be detrimental to innovation due to the low appropriability of rents established economic approaches advocate competition to be conducive to innovation. This reflects the dispute in economics between Schumpeterian and neoclassical theories. Aghion et al. (2005) offered reconciliation by modelling an inverted U relationship, which in this paper I test for European mobile phone providers. Innovation is measured by a service launch indicator and R&D investments, and competition is approximated by market concentration. As markets are clearly defined, problems of market definition which usually blur concentration indices are avoided. I find robust and statistically significant support for the tested quadratic relationship for both innovation indicators. The innovation optimising Herfindahl-Hirschman laid around 5,500 between 2001 and 2003, but may however vary over time. This finding points at a conflict in the realisation of the regulatory objectives of low prices and innovation at the same time.
    Keywords: Innovation, R&D, market concentration, inverted U, mobile telecommunication research and Development
    Date: 2007–11–20
  10. By: Bergman, Mats (Uppsala University); Stennek, Johan (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: The purpose of this report is to investigate how well competition in the TV-industry works, primarily focusing on distribution. For this purpose we suggest a framework of analysis and, at the same time, we apply this framework to the Swedish market. Even if our focus will be distribution services, we will need to paint a broader picture, including contents providers, channels, pay-TV operators, advertisers, viewers and other market participants. While our assessment is primarily based on economic analysis of the market, we also aim to integrate the economic analysis with the traditional methodology of competition law. We will therefore go into some details of how the relevant markets should be defined. The report concludes with an in-depth investigation of three current issues in the Swedish market.<p>
    Keywords: television; distribution; cable; satellite; IPTV; terrestrial; telecommunications; competition; oligopoly; competition policy; regulation
    JEL: L00 L40
    Date: 2007–12–11
  11. By: Kupper Gerd (K.U.Leuven-Center for Economic Studies); Willems Bert (Tilburg University, TILEC and K.U.Leuven-Center for Economic Studies)
    Abstract: This paper studies the welfare implications of using market mechanisms to allocate transmission capacity in recently liberalized electricity markets. It questions whether access to this essential facility should be traded on a market, or whether the incumbent should retain exclusive usage rights. We show that granting exclusive use to the incumbent might be optimal, if the capacity of the essential facility is small and the incumbent can reduce production costs by taking advantage of interregional production-cost di?erences. This result counters the intuition that arbitrage will improve the social surplus when there is no output contraction. The reason is that when competition is imperfect, arbitrage might reduce production e?ciency. We advise policymakers to introduce market mechanisms for the allocation of transmission capacity only if su?cient investment in the network is ensured or if the market power of the incumbent is broken in at least one of the markets in which it is active.
    Keywords: Arbitrage, electricity sector, price discrimination
    JEL: D40 L10 L50 Q48
    Date: 2007–11
  12. By: Jason Strauss; Aidan Michael Hollis
    Abstract: We examine welfare effects of the entry of a single well-informed insurance firm into a competitive insurance market. We show that the effect depends on the structure of the market. If competitive insurers rely on the standard self-selection mechanism of a menu of contracts, then the entry of a single well-informed firm which can discriminate costlessly between consumer risk types will increase welfare. In contrast, if consumers do not know their own risk type, then the introduction of a well-informed insurer may reduce welfare.
    JEL: G22 L15
    Date: 2007–11–30
  13. By: Cécile Carpentier; Jean-François L'Her; Jean-Marc Suret
    Abstract: We analyze the competition between two developed stock exchanges. Their development rests mainly on their capacity to attract securities and trades. The U.S. market is attracting a growing number of Canadian companies, and is capturing a growing portion of their traded value. This slide of trading toward the U.S. market is a huge challenge for Canadian policy makers, while the efforts to compete with the U.S. market seem to be having only limited effects. We analyze the implications of this situation for policy makers in Asia-Pacific, where several markets and financial centers are attempting to emerge. <P>Nous étudions la concurrence entre deux marchés boursiers développés, ceux du Canada et des États-Unis. Le développement des Bourses repose en grande partie sur leur capacité à attirer et retenir les inscriptions et les transactions. Le marché américain attire un nombre important de sociétés canadiennes, et capture une proportion croissante des échanges de titres de ces sociétés. Ce glissement des transactions représente un défi important pour le Canada dont les efforts pour contrer cette évolution semblent avoir eu des effets limités. Nous analysons les implications de cette situation en ce qui concerne la région Asie-Pacifique, où une concurrence importante existe entre les divers centres financiers en émergence.
    Keywords: securities exchange, competition, cross-listed securities, Marché Boursier, concurrence, titres interlistés
    JEL: G12 G18 F36
    Date: 2007–11–01
  14. By: Bodil Olai Hansen (Copenhagen Business School); Mich Tvede (Department of Economics, University of Copenhagen)
    Abstract: In the present paper a model of competition between sports clubs in a sports league is presented. Clubs are endowed with initial players but at a cost clubs are able to sell their initial players and buy new players. The results are that: if the quality of players is one-dimensional, then equilibria in pure strategies exist, and; if the quality of players is multi-dimensional, then there need not exist equilibria in pure strategies, but equilibria in mixed strategies exist. Equilibria in mixed strategies resemblance signings on deadline day in european soccer.
    Keywords: competition between sports clubs; dimension of quality of players; equilibrium in pure strategies; equilibrium in mixed strategies
    JEL: C72 D21 L83
    Date: 2007–11
  15. By: Clatworthy, Mark A (Cardiff Business School); Makepeace, Gerald H (Cardiff Business School); Peel, Michael J. (Cardiff Business School)
    Abstract: In recent years, the competitiveness of the corporate audit market has received a great deal of attention from policy makers and academic researchers alike. Among the main issues of concern is whether large auditors command a premium when setting fees for statutory audit services, and whether this is symptomatic of a lack of competition in the market for audit services or results from differences in the quality of the product offered by the big 4. A large number of academic studies based on independent data sets find a positive OLS coefficient on a large auditor binary variable in audit fee regressions and interpret this as evidence of a premium. However, recent research on UK private companies suggests that the large auditor premium is explained by auditor self-selection bias and that when this is controlled for using a two-stage Heckman procedure, the premium vanishes. In this paper we examine some of the difficulties in properly specifying the audit fee equation and discuss potential sensitivity of the estimates provided by the two-step model. We re-estimate audit fee equations for over 36,000 UK private companies employing a relatively new development in the applied econometrics literature - propensity score matching. In addition, we employ formal decomposition methods, which have not been used in the audit literature to date, to provide a more comprehensive analysis of big 4 premiums. Our results suggest that evidence of the large auditor premium vanishing when selection bias is controlled for do not seem to generalise and that the Heckman two-step procedure is highly sensitive to model specification. Matching results suggest that auditees of similar size, risk and complexity pay significantly higher fees to big 4 auditors.
    Keywords: Audit fees; large auditor premium; propensity score matching; decomposition methods; selection bias
    Date: 2007–10

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