nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒01‒05
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Hawks and doves in segmented markets : a formal approach to competitive aggressiveness By Claude, DASPREMONT; Rodolphe, DOS SANTOS FERREIRA; Jacques, THEPOT
  2. Competition with asymmetric switching costs By Sebátian Infante; Nicolás Figueroa; Ronald Fischer
  3. Optimal Choice of Product Scope for Multiproduct Firms under Monopolistic Competition By Robert Feenstra; Hong Ma
  5. On the consistent use of linear demand systems if not all varieties are available By Höffler, Felix
  6. A note on successive oligopolies and vertical mergers By Jean J., GABSZEWICZ; Skerdilajda, ZANAJ
  7. Tie-Breaking Rules and Divisibility in Experimental Duopoly Markets By Puzzello, Daniela
  8. Applications Barriers to Entry and Exclusive Vertical Contracts in Platform Markets By James E. Prieger; Wei-Min Hu
  9. The Elusive Antitrust Standard on Bundling in Europe and in the United States at the Aftermath of the Microsoft Cases By Nicholas Economides; Ioannis Lianos
  10. The Power of Integrality: Linkages between Product Architecture, Innovation, and Industry Structure By Fixson, Sebastian K.; Park, Jin-Kyu
  11. LIBERALIZATION AND REGULATION IN THE EU ENERGY MARKET By Ilie, Livia; Horobet , Alexandra; Popescu , Corina
  12. The gas chain : influence of its specificities on the liberalisation process By Carine Swartenbroekx
  13. Regulation versus Competition on European Financial Markets By Horobet , Alexandra; Ilie, Livia
  14. Geographical Indications and the Competitive Provision of Quality in Agricultural Markets By GianCarlo Moschini; Luisa Menapace; Daniel Pick
  15. Risk, Concentration and Market Power in the Banking Industry: Evidence from the Colombian System (1997-2006) By Jorge Tovar; Christian Jaramillo; Carlos Hernández
  16. International Schumpeterian Competition and Optimal R&D subsidies By Giammario Impullitti

    Abstract: Competitive aggressiveness is analyzed in a simple spatial oligopolistic competition model, where each one of two firms supplies two connected markets segments, one captive the other contested. To begin with, firms are simply assumed to maximize profit subject to two constraints, one related to competitiveness, the other to market feasibility. The competitive aggressiveness of each firm, measured by the relative implicit price of the former constraint, is then endogenous and may be taken as a parameter to characterize the set of equilibria. A further step consists in supposing that competitive aggressiveness is controlled by each firm through its manager hiring decision, in a preliminary stage of a delegation game. When competition is exogenously intensified, through higher product substitutability or through larger relative size of the contested market segment, competitive aggressiveness is decreased at the subgame perfect equiibrium. This decrease partially compensates for the negative effect on profitability of more intense competition
    Date: 2007–12–06
  2. By: Sebátian Infante; Nicolás Figueroa; Ronald Fischer
    Abstract: We analyze the effects of asymmetric switching costs on two identical firms that produce an homogeneous good and compete in prices. Both firms inherit a fraction of themarket which is “locked-in” by the switching costs. When switching costs are low, firms face a tradeoff between charging a high price to their locked in customers, or pricing aggressively in order to attract the rival’s market share. We characterize the (pure and mixed) equilibrium strategies and the associated payoffs for any pair of switching costs in the unit square.
    Date: 2007
  3. By: Robert Feenstra; Hong Ma
    Abstract: In this paper we develop a monopolistic competition model where firms exercise their market power across multiple products. Even with CES preferences, markups are endogenous. Firms choose their optimal product scope by balancing the net profits from a new variety against the costs of "cannibalizing" their own sales. With identical costs across firms, opening trade leads to fewer firms surviving in each country but more varieties produced by each of those firms. With heterogeneous costs, the number of firms surviving in equilibrium is quite insensitive to the market size. When trade is opened, more firms initially enter, but the larger market size reduces the cannibalization effect and expands the optimal scope of products. As a result, the less efficient firms exit, and the larger market is accommodated by more efficient firms that produce more varieties per firm on average.
    JEL: F12 L1
    Date: 2007–12
  4. By: Xu, Jin
    Abstract: We consider a Stackelberg model under demand slope uncertainty in an environment where the follower owns information advantage. Specifically, we show that the second mover obtains higher expected profit than the first mover when the leader only knows the prior beliefs and the follower gains the posterior probabilities. This result tells us that the leadership advantage is dominated by the information advantage when demand fluctuation is important.
    JEL: L13 L15 D43
    Date: 2007–12–20
  5. By: Höffler, Felix
    Abstract: Linear demand formulations for price competition in horizontally differentiated products are sometimes used to compare situations where additional varieties become available, e. g. due to market entry of new firms. We derive a consistent demand system to analyze such situations.
    Keywords: Horizontal product differentiation; preferences for variety; market entry
    JEL: D1 L1
    Date: 2007–10–27
  6. By: Jean J., GABSZEWICZ; Skerdilajda, ZANAJ
    Abstract: In this paper we analyze how the technology used by downstream firms can influence input and output market prices. We show via an example that both these prices increase under a decreasing returns technology while the countrary holds when the technology is constant.
    Keywords: successive oligopolies, vertical integration, technology, foreclosure
    JEL: D43 L1 L22 L42
    Date: 2007–12–06
  7. By: Puzzello, Daniela
    Abstract: This experimental study investigates pricing behavior of sellers in duopoly markets with posted prices and market power. The two treatment variables are given by tie breaking rules and divisibility of the price space. The first treatment variable deals with the rule under which demanded units are allocated between sellers in case of a price tie. A change in divisibility is modeled by making the sellers' price space finer or coarser. The main finding is that the incidence of perfect collusion is significantly higher under the sharing tie breaking rule than under the random (coin-toss) one, especially when the price space is less divisible.
    Keywords: Collusion; Tie Breaking Rules; Divisibility; Bertrand model.
    JEL: C9 L1
    Date: 2007
  8. By: James E. Prieger (Pepperdine University School of Public Policy); Wei-Min Hu (Peking University Shenzhen Graduate School of Business)
    Abstract: Our study extends the empirical literature on whether vertical restraints are anticompetitive. We focus on exclusive contracting in platform markets, which feature indirect network effects and thus are susceptible to applications barriers to entry. Theory suggests that exclusive contracts in vertical relationships between the platform provider and software supplier can heighten the entry barriers. We test these theories in the home video game market. We measure the impact on hardware demand of the indirect network effects from software. We find that although network effects are present, the marginal exclusive game contributes virtually nothing to console demand. Thus, allowing exclusive vertical contracts in platform markets need not lead to a market structure dominated by one system protected by a hedge of complementary software. Our investigation suggests that bargaining power enjoyed by the best software providers and the skewed distribution of game revenue prevents the foreclosure of rivals through exclusive contracting.
    Keywords: antitrust, vertical restrictions, exclusive contracts, platform markets, home video game industry, software and hardware markets, two-sided markets
    JEL: L14 K21 L42
    Date: 2007–11
  9. By: Nicholas Economides (Stern School of Business, New York University); Ioannis Lianos (University College London, Faculty of Laws)
    Abstract: We analyze and contrast the US and EU antitrust standards on mixed bundling and tying. We apply our analysis to the US and EU cases against Microsoft on the issue of tying new products (Internet Explorer in the US, and Windows Media Player in the EU) with Windows as well as to cases brought in Europe and in the United States on bundling discounts. We conclude that there are differences between the EC and US antitrust law on the choice of the relevant analogy for bundled rebates (predatory price standard or foreclosure standard) and the implementation of the distinct product and coercion test for tying practices. The second important difference between the two jurisdictions concerns the interpretation of the requirement of anticompetitive foreclosure. It seems to us that in Europe, consumer detriment is found easily and it is not always a requirement for the application of Article 82, or at least that the standard of proof of a consumer detriment for tying cases is lower than in the US.
    Keywords: tying, bundling, foreclosure, requirement contracts, monopolization, Microsoft, predatory pricing
    JEL: K12 L12 L13 L41 L42 L63
    Date: 2007–12
  10. By: Fixson, Sebastian K.; Park, Jin-Kyu
    Abstract: A substantial literature stream suggests that many products are becoming more modular over time, and that this development is often associated with a change in industry structure towards higher degrees of specialization. These developments can have strong implications for an industry€ٳ competition as the history of the PC industry illustrates. To add to our understanding of the linkages between product architecture, innovation, and industry structure we study an unusual case in which a firm €Ӡthrough decreasing its product modularity €Ӡturned its formerly competitive industry into a near-monopoly. Using this case study we explore how existing theories on modularity explain the observed phenomenon, and show that most consider in their analysis technological change in rather long-term dimensions, and tend to focus on efficiencyrelated arguments to explain the resulting forces on competition. Expanding on these theories we add three critical aspects to the theory construct that connects technological change and industry dynamics. First, we suggest re-integating as a new design operator to explain product architecture genesis. Second, we argue that a finer-grained analysis of the product architecture shows the existence of multiple linkages between product architecture and industry structure, and that these different linkages help explain the observed intra-industry heterogeneity across firms. Third, we propose that the firm boundary choice can also be a pre-condition of the origin of architectural innovation, not only an outcome of efficiency considerations.
    Keywords: Product Architecture, Integrality, Modularity, Technological Change, Intra-industry Heterogeneity, Industry Structure, Competition, Strategy,
    Date: 2007–04–13
  11. By: Ilie, Livia; Horobet , Alexandra; Popescu , Corina
    Abstract: Competition ensures competitive prices. In this respect, the liberalisation of the EU energy markets is a must. The regulatory framework for the energy markets should be properly designed and implemented by the member states in order to ensure enough competition. This paper aims to analyse the status quo of the EU energy markets in terms of regulatory framework and degree of competition and to recommend improvements of the system in order to balance the issues of competition, energy security and environment protection in the EU energy markets.
    Keywords: Energy market; regulation; competition; energy security; climate change
    JEL: K2 L5 Q4
    Date: 2007–10
  12. 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
  13. By: Horobet , Alexandra; Ilie, Livia
    Abstract: Competition is the mechanism that helps companies, institutions and markets to become more productive and efficient. one of the main obstacles to economic growth is represented by the policies that hinder competition. Excessive protection may create a handicap for the European economic system which will have not all the necessary instruments to face the increasing competition between companies, countries, economic regions.The paper aims at analyzing the relationship between regulation, competition and economic performances applied to European capital markets, as opposed to US capital markets.
    Keywords: regulation; competition; capital market; integration
    JEL: G1 D0
    Date: 2007–12–19
  14. By: GianCarlo Moschini (Center for Agricultural and Rural Development (CARD)); Luisa Menapace; Daniel Pick
    Abstract: The economics of geographical indications (GIs) is assessed within a vertical product differentiation framework that is consistent with the competitive structure of the agricultural sector with free entry/exit. It is assumed that certification costs are needed for GIs to serve as (collective) credible quality certification devices, and production of high-quality product is endogenously determined. We find that GIs can support a competitive provision of quality that partly overcomes the market failure and leads to clear welfare gains, although they fall short of delivering the (constrained) first-best level of the high-quality good. The main beneficiaries of the welfare gains are consumers. Producers may also accrue some benefit if the production of high-quality products draws on scarce factors that they own.
    Keywords: competitive industry; free entry/exit; geographical indications; Marshallian stability; quality certification; trademarks; welfare.
    Date: 2008–01
  15. By: Jorge Tovar; Christian Jaramillo; Carlos Hernández
    Abstract: This paper examines the relationship between risk, concentration and the exercise of market power by banking institutions. We use monthly balance-sheet and interest rate data for the Colombian banking system from 1997 to 2006. The evidence shows that, in the face of high risk, banks transfer a larger share of risk to customers through higher intermediation margins. The result suggests that systemic risk acts as a “collusion” device for banks: while high concentration is not enough to have collusion, the true effects of high market concentration on interest rates’ mark-ups emerge when the system is under stress.
    Date: 2007–11–14
  16. By: Giammario Impullitti
    Abstract: This paper studies the welfare effects of international competition in the market for innovations, and analyzes how competition affects the costs and the benefits of cooperative and non-cooperative R&D subsidies. I set up a two-country quality-ladder growth model where the leader, the home country, has R&D firms innovating in all sectors of the economy, and the follower, the foreign country, shows innovating firms only in a subset of industries. The measure of the set of sectors where R&D workers from both countries compete for innovation determines the scale of international Schumpeterian competition. Both governments engage in a strategic R&D subsidy game and respond optimally to changes in competition. For a given level of subsidies, increases in foreign competition raise the quality of goods available (growth effect) and lowers domestic profits (business-stealing effect); the overall effect of competition on domestic welfare depends on the relative strength of these two counteracting forces. When governments play a strategic subsidy game, increases in foreign competition trigger a defensive innovation policy mechanism that raises the optimal domestic R&D subsidy. Cooperation in subsidies leads both countries to set higher subsidies. Finally, while cooperation is beneficial for the global economy, there exists a threshold level of competition below which the home country experiences welfare losses under cooperation.
    Keywords: international competition, endogenous technical change, growth theory, strategic R&D subsidies, international policy cooperation
    JEL: O41 O31 O38 F12 F43
    Date: 2007

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