nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒01‒19
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Price Discrimination Bans on Dominant Firms By Bouckaert, J.M.C.; Degryse, H.A.; Dijk, T. van
  2. The Paradox of the Exclusion of Exploitative Abuse By Bruce Lyons
  3. On the use of labels in credence goods markets By Bonroy, O.; Constantatos, C.
  4. The Impact of Market Structure, Contestability and Institutional Environment on Banking Competition By Jacob A. Bikker; Laura Spierdijk; Paul Finnie
  5. Foreign bank acquisitions and outreach : evidence from Mexico By Soledad Martinez Peria, Maria; Beck, Thorsten
  6. Investment and Usage of New Techologies: Evidence from a Shared ATM Network By Ferrari, S.; Verboven, F.L.; Degryse, H.A.
  7. Performance of the Dutch non-life insurance industry: competition, efficiency and focus By Jacob Bikker; Janko Gorter
  8. Innovations from SMEs or Large Firms? Sector Structure and Dynamics By Wilfred Dolfsma; Gerben van der Panne
  9. Gains and Pains from Contract Research: A Transaction and Firm-level Perspective By Christoph Grimpe; Ulrich Kaiser
  10. Location and R&D alliances in the European ICT industry By Rajneesh Narula; Grazia D. Santangelo
  11. Acquisition Values and Optimal Financial (In)Flexibility By Hege, Ulrich; Hennessy, Christopher
  12. Competition on Common Value Markets with Naive Traders - A Theoretical and Experimental Analysis By Nadine Chlaß; Werner Güth
  13. Firm Acquisitions and Technology Strategy: Corporate versus Private Equity Investors By Grimpe, Christoph; Hussinger, Katrin
  14. Goodwill, excess returns, and determinants of value creation and overpayment By Maaike Lycklama a Nijeholt; Yolanda Grift

  1. By: Bouckaert, J.M.C.; Degryse, H.A.; Dijk, T. van (Tilburg University, Center for Economic Research)
    Abstract: Competition authorities and regulatory agencies sometimes impose pricing restrictions on firms with substantial market power ? the ?dominant? firms. We analyze the welfare effects of a ban on behaviour-based price discrimination in a two-period setting where the market displays a competitive and a sheltered segment. A ban on ?higher-prices-to-shelteredconsumers? decreases prices in the sheltered segment, relaxes competition in the competitive segment, increases the rival?s profits, and may harm the dominant firm?s profits. We show that a ban on ?higher-prices-to-sheltered-consumers? increases the dominant firm?s share of the first-period market. A ban on ?lower-prices-to-rival?s-customers? decreases prices in the competitive segment, lowers the rival?s profits, and augments the consumer surplus. In particular, while second-period competition is relaxed by a ban on ?lower-prices-to-rival?scustomers?, first-period competition is intensified substantially, which leads to lower prices ?on-average? over the two periods. Our findings indicate that a dynamic two-period analysis may lead to conclusions opposite to those drawn from a static one-period analysis.
    Keywords: dominant firms;price discrimination;competition policy;regulation.
    JEL: D11
    Date: 2008
  2. By: Bruce Lyons (School of Economics and Centre for Competition Policy, University of East Anglia)
    Abstract: Monopoly pricing is a textbook market failure that is taught in the first year of any economics course. The implied welfare loss (or ‘exploitative abuse’) justifies a whole range of competition policy towards cartels, mergers and regulated industries. Yet there is widespread hostility to prosecuting the same exploitative abuse in the textbook monopoly case (i.e. under Article 82EC)! This paper seeks to understand this paradox. I conclude that, while there are important problems with prosecuting Article 82 exploitation cases (because of problems relating to measurement, market dynamics, multi-sided markets and remedy issues), it is important to keep open the possibility of prosecution; for example, in the forthcoming Article 82 Guidelines.
    Keywords: exclusionary abuse, exploitative abuse, monopoly pricing, welfare loss
    JEL: D42 I38 L41
    Date: 2007–12
  3. By: Bonroy, O.; Constantatos, C.
    Abstract: We analyze credence goods markets in the case of two firms. Consumers know that the quality of the good varies but do not know which firm is of high quality. First, we show that the high quality producer may be unable to monopolize the market, or even to survive in some cases, in situations where it is efficient and trusted by all consumers. Second, although a label restoring full information improves welfare, it may also reduce both firms? profits by intensifying competition. Since even the high quality producer may not wish to label its product, in such cases the label must be mandatory. Third, an imperfect label which moves everybody?s beliefs closer to the truth without restoring full information may produce adverse results on market structure and welfare, either by increasing or by reducing the variance of beliefs.
    JEL: D82 L15
    Date: 2007
  4. By: Jacob A. Bikker; Laura Spierdijk; Paul Finnie
    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 significant 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
    JEL: D4 G21 L11 L13
    Date: 2007–12
  5. By: Soledad Martinez Peria, Maria; Beck, Thorsten
    Abstract: Between 1995 and 2005, foreign bank participation in Mexico rose from 2 percent of bank assets to 83 percent, as the top five largest banks were acquired by foreigners. Th is paper examines the link between foreign bank acquisitions and banking outreach. Using quarterly country, bank, and bank-municipality-level data, the authors find some contrasting patterns. As foreign bank participation rose due to foreign acquisitions, the number of municipalities with bank presence increased but the number of loan and deposit accounts fell for the country as a whole and for banks after they became foreign. The drop in the number of loans, however, was partially off-set by an increase in domestic bank loans. Further, the decline in loan and deposit accounts was more pronounced in more rural and poorer areas. Finally, only very rich and urban areas experienced an increase in branches after foreign acquisition.
    Keywords: Banks & Banking Reform,Access to Finance,,Debt Markets,Corporate Law
    Date: 2008–01–01
  6. By: Ferrari, S.; Verboven, F.L.; Degryse, H.A. (Tilburg University, Center for Economic Research)
    Abstract: When new technologies become available, it is not only essential that firms have the correct investment incentives, but often also that consumers make the proper usage decisions. This paper studies investment and usage in a shared ATM network. Be- cause all banks coordinate their ATM investment decisions, there is no strategic but only a pure cost-saving incentive to invest. At the same time, because retail fees for cash withdrawals are regulated to zero at both branches and ATMs, consumers may not have the proper incentives to substitute their transactions from branches to the available ATMs. We develop an empirical model of coordinated investment and cash withdrawal demand, where banks choose the number of ATMs and consumers decide whether to withdraw cash at ATMs or branches. We find that banks substantially underinvested in the shared ATM network and thus provided too little geographic coverage. This contrasts with earlier findings of strategic overinvestment in networks with partial incompatibility. Furthermore, we find that consumer usage of the avail- able ATM network is too low because of the zero retail fees for cash withdrawals at branches. A direct promotion of investment (through subsidies or other means) can improve welfare, but the introduction of retail fees on cash withdrawals at branches would be more effective, even if this does not encourage investment per se.
    Keywords: technology investment;usage;efficiency;ATM;empirical industrial or- ganisation and structural econometric models
    JEL: L10 L89 G21 L50
    Date: 2008
  7. By: Jacob Bikker; Janko Gorter
    Abstract: This paper investigates competition in the Dutch non-life insurance industry indirectly by measuring scale economies and X-inefficiency, assuming that strong competition would force insurance firms to exploit unused scale economies and to push down inefficiencies. We observe substantial economies of scale (on average 11%) that are larger for smaller firms. Despite considerable consolidation in the industry over the last decade, scale economies have increased, as the optimal scale has outgrown the actual one. Comparing estimates across aggregation levels, we find that scale economies are smaller for groups and lines of business than they are for firms. Besides scale, focus and organizational form are important cost determinants as well: generally, specialized insurers have lower costs and face greater economies of scale. Estimates of thick frontier efficiency point to huge cost differences across firms and within lines of business.Overall, our results suggest that there is a lack of competitive pressure in the Dutch non-life insurance industry.
    Keywords: Non-life insurance; economies of scale; market structure; concentration; competition; X-efficiency; total cost function; aggregation: insurance groups; firms and lines of business;
    JEL: D4 D61 G22 L1
    Date: 2008–01
  8. By: Wilfred Dolfsma; Gerben van der Panne
    Abstract: In this paper we investigate which elements in both an industry’s structure and in an industry’s dynamics affect innovativeness. We use the most appropriate measure for innovativeness –new product announcements- to find specifically that dominance of large firms consistently affect industry innovativeness negatively. Other industry structure characteristics are surprisingly consistent across different model specifications. Our findings for indicators of industry dynamics are noteworthy for instance as they contrast with the ILC predication that firm entry will boost innovativeness.
    Keywords: Innovation, small vs large firms, industry structure, industry dynamics, Industry Life Cycle
    JEL: L1 O1 O3
    Date: 2007–12
  9. By: Christoph Grimpe (Centre for European Economic Research (ZEW), Mannheim); Ulrich Kaiser (University of Southern Denmark)
    Abstract: Determining the research and development (R&D) boundaries of the firm as the choice between internal, collaborative and external technology acquisition has since long been a major challenge for firms to secure a continuous stream of innovative products or processes. While research on R&D cooperation or strategic alliances is abundant, little is known about the outsourcing of R&D activities to contract research organizations and its implications for innovation performance. This paper investigates the driving forces of external technology sourcing through contract research based on arguments from transaction cost theory and the resource-based view of the firm. Using a large and comprehensive data set of innovating firms from Germany our findings suggest that technological uncertainty, contractual experience and openness to external knowledge sources motivate the choice for engaging in contract research activities. Moreover, we show that internal and external R&D sourcing are complements: the marginal contribution of internal (external) R&D is the larger the more firms spend on external (internal) R&D.
    Keywords: contract research, innovation; transaction cost theory; firm capabilities
    JEL: O32 C24
    Date: 2008–01
  10. By: Rajneesh Narula (Department of Economics, University of Reading Business School); Grazia D. Santangelo (Facoltà di Scienze Politiche, Università degli Studi di Catania)
    Abstract: This paper shows empirically that in an intra-industry oligopolistic scenario the location of a firm’s innovative activities plays an important role in determining its partner selection in R&D alliances. Such a role is mainly attributed to a strategic use of R&D alliances as a means to limit knowledge flows and protect competences, rather than to promote knowledge flows. By drawing on a novel dataset matching alliances and patent data for the European ICT industry, the econometric analysis shows that partners’ prior co-location (at both national and sub-national regional level), previous ties and technological overlap matter in the choice of partner, while common nationality has a negative impact on alliance formation.
    Keywords: Alliances, R&D location, strategy, co-location, knowledge flows
    JEL: D23 F23 O18 O32 R3
    Date: 2007
  11. By: Hege, Ulrich; Hennessy, Christopher
    Abstract: In this paper, the authors analyze optimal financial structure for an incumbent and potential entrant accounting for feedback effects in secondary asset markets.
    Keywords: Financial Flexibility; Market Entry; Acquisition; Exit Values; Predation; Financial Contracting; Product Market Competition
    JEL: G32 G34
    Date: 2007–10–01
  12. By: Nadine Chlaß (Max Planck Institute of Economics, Jena, Germany); Werner Güth (Max Planck Institute of Economics, Jena, Germany.)
    Abstract: Theoretically and experimentally, we generalize the analysis of acquiring a company (Samuelson and Bazerman 1985) by allowing for competition of both, buyers and sellers. Naivety of both is related to the idea that higher prices exclude worse qualities. While competition of naive buyers increases prices, competition of naive sellers promotes effciency enhancing trade. Our predictions are tested experimentally.
    Keywords: incomplete information, common value auction, experiment
    JEL: D01 D42 D43 D44 D61 D82 L13 L15
    Date: 2007–12–20
  13. By: Grimpe, Christoph; Hussinger, Katrin
    Abstract: Over the last few years, worldwide mergers and acquisitions (M&A) have increased sharply both in terms of value and volume. This development has not only been driven by corporate acquirers but also to an increasing extent by private equity investors. In this paper, we analyze differences in acquisition motives for corporate and private equity investors. We pay particular attention to the importance of technological assets in M&A transactions and distinguish between the technological value of patents and their potential to block competitors in technology markets. Our empirical results for European firm acquisitions in the period from 1999 to 2003 show that both corporate and private equity investors pay a higher price for target firms with valuable patents. However, patents with a potential to block technology competitors seem to be only of interest to corporate investors, especially if these are closely related to the patent portfolio of the acquirer.
    Keywords: M&A, technology, patents, corporate and private equity investors
    JEL: G34 L20 O34
    Date: 2007
  14. By: Maaike Lycklama a Nijeholt; Yolanda Grift
    Abstract: In this article we have investigated whether the determinants of excess returns (especially of target excess returns) are valid for purchased goodwill as well. Among them are acquirer’s and target’s Tobin’s q, and debt assets ratio, that explain value creation of acquisitions, and relative size, source of financing of the acquisition, number of bidders, and relatedness of businesses of acquiror and target, that explain overpayment or overvaluation of acquisitions. The study is confined to mergers and acquisitions between US publicly quoted companies announced and effective in between January 2002 and December 2005. Databases used are SDC Platinum, CRSP and Compustat industrial annual file. Goodwill amounts are derived from acquirer’s 10-K forms in Edgar database of SEC. Results show that in line with our expectations, the correlation coefficient for target excess return amounts and goodwill is positive, whereas it is negative for acquirer and combined excess returns. Further it turns out that goodwill is significant positively influenced by acquisitions of high Tobin’s q targets by either low or high Tobin’s q acquirers, compared to acquisitions of low Tobin’s q targets by low Tobin’s q acquirers. Also the method of payment matters: payments other than cash or stock negatively influence goodwill. Moreover, a higher leverage of the target positively influences purchased goodwill. Although some of the determinants of excess return have a significant influence on goodwill, the pattern is sometimes different. Therefore, further research needs to take into account both the nature of goodwill and its unique determinants.
    Keywords: Goodwill, overpayment, value creation
    JEL: G34 M41
    Date: 2007–12

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