nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒01‒26
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. The Dynamics of Price and Advertising as Signals of Quality By Musa Ayar
  2. Remedy for Now but Prohibit for Tomorrow: The Deterrence Effects of Merger Policy Tools By Jo Seldeslachts; Joseph A. Clougherty; Pedro Pita Barros
  3. Competition and innovative intentions: A study of Dutch SMEs By Jeroen de Jong
  4. Entry and exit of firms in a global economy: a cross-country and industry analysis By Colantone, Italo; Sleuwaegen, Leo
  5. Export prices and increasing world competition: evidence from French, German, and Italian pricing behavior By Sarah Guillou; Stefano Schiavo
  6. A contribution of experimental economics toward characterization of the use of market power in oligopolisitc markets By Fabien Petit; Yannick Phulpin; Marcelo Saguan; Philippe Dessante
  7. EU Regulation and Competition Policy among the Energy Utilities By Richard Green
  8. Regulation, generic competition and pharmaceutical prices: Theory and evidence from a natural experiment By Kurt R. Brekke; Tor Helge Holmås; Odd Rune Straume
  10. Target's corporate governance and bank merger payoffs By Elijah Brewer, III; William E. Jackson, III; Julapa A. Jagtiani
  11. Do Public Banks have a Competitive Advantage? By Astrid Matthey
  12. Size, growth and bank dynamics By Enrique Benito
  13. Product Innovation and Survival in a High-Tech Industry By Roberto Fontana; Lionel Nesta

  1. By: Musa Ayar (University of Western Ontario)
    Abstract: A monopolist introduces a new product of either low or high quality. It advertises to make consumers aware of the product and signals product quality using both price and advertising. When consumption does not re- veal product quality, price is higher and advertising is lower than they would be if product quality is observable. Price rises and advertising falls as the fraction of aware consumers increases. When consumption reveals product quality, price is higher and advertising is lower than they would be if prod- uct quality is observable. Price declines as the fraction of aware consumers increases and advertising follows an inverted U shape. We ¯nd support for these empirical predictions from a data set on Direct-to-Consumer advertis- ing on pharmaceutical drugs.
    Keywords: quality; signaling; pricing; advertising
    JEL: D82 L15 M37
    Date: 2007
  2. By: Jo Seldeslachts (Wissenschaftszentrum Berlin (WZB), Reichpietschufer 50, 10785 Berlin, Germany; Joseph A. Clougherty (Wissenschaftszentrum Berlin (WZB), Reichpietschufer 50, 10785 Berlin, Germany; Pedro Pita Barros (Universade Nova de Lisboa and CEPR FEUNL, Campus de Campolide, 1099-032 Lisboa, Portugal
    Abstract: Antitrust policy involves not just the regulation of anti-competitive behavior, but also an important deterrence effect. Neither scholars nor policymakers have fully researched the deterrence effects of merger policy tools, as they have been unable to empirically measure these effects. We consider the ability of different antitrust actions – Prohibitions, Remedies, and Monitorings – to deter firms from engaging in mergers. We employ cross-jurisdiction/pan-time data on merger policy to empirically estimate the impact of antitrust actions on future merger frequencies. We find merger prohibitions to lead to decreased merger notifications in subsequent periods, and remedies to weakly increase future merger notifications: in other words, prohibitions involve a deterrence effect but remedies do not.
    JEL: L40 L49 K21
    Date: 2007–09
  3. By: Jeroen de Jong
    Abstract: This paper explores the complex relationship between competition and innovation. Traditional measures of competition using industry statistics are often challenged andfound wanting. This paper distinguishes between three types of competitive forces: internal rivalry among incumbent firms in an industry, bargaining power of suppliers,and bargaining power of buyers. Using survey data from 2,281 Dutch firms, we apply new perception-based measures for these competitive forces to explore how competition relates to firms innovative intentions. We also investigate the influence of innovation strategy as a contingency variable. Results show that specific innovative intentions, i.e. to invest in product and process innovation, are related to different competitive forces. Process innovation is correlated with the bargaining power of suppliers, while intentions to invest in product innovation are associated with buyer power. Finally, intended product innovation is related to internal rivalry, but only when firms have no innovation strategy.
    Date: 2007–05–30
  4. By: Colantone, Italo; Sleuwaegen, Leo (Vlerick Leuven Gent Management School)
    Abstract: This paper examines the impact of international trade on firm entry and exit in Europe. The results point to strong displacement exit and less creative replacement entry in industries characterized by increasing import competition Moreover, the evidence suggests strong selection and higher entry barriers in industries characterized by higher openness through the export channel. The negative effects of trade openness lose importance if the increasing trade exposure concerns intra-industry trade, mainly coupled with international sourcing within the industry.
    Keywords: Globalization, Exit, Entry
    Date: 2008–01–11
  5. By: Sarah Guillou (Observatoire Français des Conjonctures Économiques); Stefano Schiavo (Observatoire Français des Conjonctures Économiques)
    Date: 2007
  6. By: Fabien Petit (SUPELEC-Campus Gif - SUPELEC); Yannick Phulpin (SUPELEC-Campus Gif - SUPELEC); Marcelo Saguan (SUPELEC-Campus Gif - SUPELEC); Philippe Dessante (SUPELEC-Campus Gif - SUPELEC)
    Abstract: Despite the numerous researches about imperfect competition, the market power remains difficult to quantify using traditional economics methods. In this paper, we propose an experimental economics design and outline some ways of analysis of its results toward characterization of the use of market power. A simple system with two regions and a limited interconnection transfer capacity allocated by an implicit auction is studied. Depending on the experiments two or three subjects share equitably the production capacity in one region, while the production capacity is equitably shared among 5 subjects leading to a more competitive situation in the second one. In both regions, we observe a market price that is different from the theoretical results allowing a quantification of the use of market power. Results are also analyzed based on a characterization of the subjects’ behaviour. Further the impact of subjects’ behaviour on the market price evolution is described.
    Keywords: experimental economics, market power, electricity markets, oligopolistic markets
    Date: 2007–06–13
  7. By: Richard Green
    Abstract: The energy utilities – gas and electricity companies – were traditionally regulated monopolies, but once the EU decided to liberalise them, competition policy became applicable. The EU has used a series of Directives to set out the framework for a market-led energy sector, with third party access to the transmission and distribution networks, and a choice of retailer for all customers, although these depend upon the agreement of Member States. The Commission has been able to take action directly when ruling on mergers in the sector, and in several cases has obtained concessions that should increase the level of competition as a condition for allowing a merger. This is a reactive approach, however, and problems remain in the sector, as shown by the 2005-7 sector enquiry. The proposed third energy package may remove some of the barriers to effective liberalisation.
    Keywords: Competition Policy, mergers, electricity, gas, liberalisation
    JEL: L43 L94 L95
    Date: 2007–12
  8. By: Kurt R. Brekke (Department of Economics, Norwegian School of Economics and Business Administration, and Health Economics Bergen); Tor Helge Holmås (Institute for Research in Economics and Business Administration, and Health Economics Bergen); Odd Rune Straume (Universidade do Minho - NIPE)
    Abstract: We study the impact of regulatory regimes on generic competition and pharmaceutical pricing using a unique policy experiment in Norway, where reference pricing (RP) replaced price cap regulation in 2003 for a sub-sample of off-patent products. We exploit a detailed panel dataset at product level covering a wide set of off-patent drugs before and after the policy reform. Off-patent drugs not subject to reference pricing serve as our control group. We find that RP leads to lower relative prices, with the effect being driven by strong brand-name price reductions, and not increases in generic prices. We also find that RP increases generic competition, resulting in lower brand-name market shares. Finally, we show that RP has a strong negative effect on average prices at molecule level, suggesting significant cost-savings.
    Keywords: Pharmaceuticals, Regulation, Generic Competition.
    JEL: I11 I18 L13 L65
    Date: 2008
  9. By: Liliana Solís (Universitat de València); Joaquín Maudos Villarroya (Instituto Valenciano de Investigaciones Económicas)
    Abstract: This paper analyses the evolution of competition in the Mexican banking system in the period 1993-2005, a period of deregulation, liberalization and consolidation of the sector. For this purpose we use two indicators of competition from the theory of industrial organization (the Lerner index and the Panzar and Rosse´s H-statistic). The empirical evidence does not permit us to reject the existence of monopolistic competition. The Lerner index shows a decrease in competitive rivalry in the deposit market and an increase in the loan market, a cross subsidization strategy being observed. The results obtained call into question the effectiveness of the measures implemented hitherto, aimed at increasing the competitiveness of the Mexican banking system. Este artículo analiza la evolución de la competencia en el sistema bancario Mexicano en el periodo 1993-2005, periodo de desregulación, liberalización y consolidación del sector. Para ello se utilizan dos medidas de competencia derivadas de la teoría de la Organización Industrial: el índice de Lerner y el estadístico H de Panzar y Rosse. La evidencia empírica no permite rechazar la existencia de competencia monopolística. El índice de Lerner muestra una disminución en la rivalidad competitiva en el mercado de los depósitos y un incremento en el mercado de los préstamos, observándose una estrategia de subsidiación cruzada entre ambos mercados. Los resultados obtenidos cuestionan la efectividad de las medidas hasta ahora implementadas dirigidas a incrementar la competencia en la banca Mexicana.
    Keywords: banca, competencia, desregulación banking, competition, deregulation
    JEL: G21 L10
    Date: 2007–12
  10. By: Elijah Brewer, III; William E. Jackson, III; Julapa A. Jagtiani
    Abstract: Commercial bank merger and acquisition (M&A) transactions are especially informative for analyzing the impact of differing corporate governance structures on the balance of corporate control between managers and shareholders. We exploit these special characteristics to investigate the balance of control between top-tier managers and shareholders using data from bank M&A transactions over the period 1990-2004. Unlike research on non-financial firms, the impacts of independent directors, managerial share ownership, and independent blockholders on bank merger purchase premiums in this environment are likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. Our model controls for risk characteristics of the target and the acquiring banks, the deal characteristics, and the economic environment. The results are robust. Our results are consistent with those found for non-financial firms, and are consistent with the hypothesis that independent directors could provide an important internal governance mechanism for protecting shareholders’ interests especially in large scale transactions such as mergers and takeovers. We also find results consistent with the conflict of interest argument, where top-tier managers tend to trade potential takeover gains in return for their own personal benefits, such as job security and other employment related perquisites. Our overall findings would support policies that promote independent outside directors on the board of commercial banking firms in order to provide protection for shareholders and investors at large.
    Date: 2007
  11. By: Astrid Matthey
    Abstract: Private banks often blame state guarantees to distort competition by giv- ing public banks the advantage of lower funding costs. In this paper I show that if borrowers perceive the public bank as supporting economic develop- ment, private banks may be able to separate firms by self selection, enter the market, and obtain profits in equilibrium despite their cost disadvantage. The public bank's competitive advantage may be offset, independently of what its true objective function is. Even perfect competition between private banks does not lead to zero profits.
    Keywords: public banks, state guarantee, self-selection
    JEL: G21
    Date: 2008–01
  12. By: Enrique Benito (Banco de España)
    Abstract: This paper investigates the size distribution of the whole population of Spanish commercial, savings and cooperative banks from a dynamic perspective over the 1970 2006 period. To investigate the evolution of the size distribution, we determine whether the data satisfies the Law of Proportionate Effect (LPE) using panel unit root tests. We find that the size-growth relationship is not stable over time but changes depending on the competitive environment of banks (liberalization, deregulation and integration). When Spanish banking was highly regulated, we find that smaller banks grew faster than their larger counterparts. In recent years, however, we find that larger banks grow at the same rate or faster than smaller banks, a result that lends towards LPE acceptance. Thus, our study corroborates the conditioned nature of the size-growth relationship and the size distribution of banks, as emphasized by recent studies for the US banking system. Results imply that the size distribution of Spanish banks will become more skewed in next years, and concentration will tend to increase.
    Keywords: Size distribution, Law of proportionate effect, Panel unit root tests
    JEL: G21 L11 C23
    Date: 2008–01
  13. By: Roberto Fontana; Lionel Nesta
    Date: 2007

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