nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒03‒01
ten papers chosen by
Russell Pittman
US Department of Justice

  1. Hospital competition and quality with regulated prices By Kurt R. Brekke; Luigi Siciliani; Odd Rune Straume
  2. Chain-Store Competition: Customized vs. Uniform Pricing By Dobson, Paul W.; Waterson, Michael
  3. The Effects of Concentration on Competition and Efficiency : Some Evidence from the French Audit Market By Géraldine Broye; Laurent Weill
  4. Market power and merger simulation in retail banking By Molnár, József
  5. Life-cycle patterns of interest rate markups in small firm finance By Moshe Kim; Eirik Gaard Kristiansen; Bent Vale
  6. An empirical analysis of Mexican merger policy By De Hoyos, Rafael E.; Avalos, Marcos
  7. Strategic Price Discounting and Rationing in Uniform Price Auctions By Bourjade, Sylvain
  8. Coopetition in a Mixed Oligopoly Market By Duc-De Ngo; Mahito Okura
  9. Relative and individual regulation: An investigation of investment incentives under a cost-plus approach By Ebel, Nikos; Lefouili, Yassine
  10. Real Business Cycles with Cournot Competition and Endogenous Entry By Colciago, Andrea; Etro, Federico

  1. By: Kurt R. Brekke (Department of Economics, Norwegian School of Economics and Business Administration, and Health Economics Bergen); Luigi Siciliani (Department of Economics and Related Studies, and Centre for Health Economics, University of York); Odd Rune Straume (Universidade do Minho - NIPE)
    Abstract: We analyse the effect of competition on quality in hospital market with regulated prices, considering both the effect of free patient choice (monopoly versus competition) and increased competition through lower transportation costs (increased substitutability). With partially altruistic providers and a convex cost function that is non-separable in activity and quality, we show - in both cases - that the effect is generally ambiguous. In contrast to the received theoretical literature, this is consistent with, and potentially explains, the mixed empirical evidence.
    Keywords: Hospital, Competition, Quality.
    JEL: H42 I11 I18 L13
    Date: 2008
  2. By: Dobson, Paul W. (Loughborough University Business School); Waterson, Michael (University of Warwick)
    Abstract: Retail chains essentially practice one of two broad strategies in setting prices across their stores. The more straightforward is to set a chain- or country- wide price. Alternatively, managers of retail chains may customize prices to the store level according to local demand and competitive conditions. For example, a chain may price lower in a location with lower demand and/or more competition. However, despite having the ability to customize prices to local market conditions, some choose instead to commit to uniform pricing with a “one price policy” across their entire store network. As an illustration, we focus on UK supermarket chains. Is there an advantage to be gained from deliberately choosing not to price discriminate across locations? We show generally and illustrate through means of a specific model that there exists a strategic incentive to soften competition in competitive markets by committing not to customize prices at the store level and instead adopt uniform pricing across the store network, and to raise overall profits thereby. Furthermore, we characterize quite precisely the circumstances under which uniform pricing is, and is not, profitable and illustrate that under a range of circumstances uniform pricing may be the preferable strategy.
    Keywords: Chain-store retailers ; price discrimination ; uniform pricing ; local pricing ; commitment
    Date: 2008
  3. By: Géraldine Broye; Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)
    Abstract: This paper aims at investigating the effects of concentration on competition and cost efficiency of the French audit market. Competition is measured with the Rosse-Panzar model, while cost efficiency is estimated with stochastic frontier approach. Cost efficiency levels are estimated at around 75% with greater efficiency for Big-Four firms, while the nature of competition appears to be monopolistic competition. Dynamic analysis shows a reduction in competition, and a decrease in cost efficiency for Big-Four and non-Big-Four firms between 1999 and 2003. We therefore provide support to a negative impact of concentration on competition and cost efficiency.
    Keywords: Auditing, audit market, competition, efficiency.
    JEL: L1 M4
    Date: 2008
  4. By: Molnár, József (Bank of Finland Research)
    Abstract: This paper tests market power in the banking industry. Price-cost margins predicted by different oligopoly models are calculated using discrete-choice demand estimates of own-price and cross-price elasticities. These predicted price-cost margins are then compared with price-cost margins computed using observed interest rates and estimates of marginal costs. This paper is among the first to apply this methodology on a detailed, bank-level dataset from the retail banking sector. It extends on previous papers and illustrates the advantages of structural modelling by simulating a counterfactual merger experiment with a number of mergers, each of which involves two major banks, and studying the unilateral effect of the mergers on interest rates. This provides more evidence that concentration measures (such as the Herfindahl index) could be very misleading indicators of market power.
    Keywords: demand; discrete choice; product differentiation; banking; market power; merger simulation
    JEL: G21 L11 L13
    Date: 2008–02–27
  5. By: Moshe Kim (University of Haifa and Universitat Pompeu Fabra); Eirik Gaard Kristiansen (Norwegian School of Economics and Business Administration); Bent Vale (Norges Bank (Central Bank of Norway))
    Abstract: We derive empirical implications from a stylized theoretical model of bankborrower relationships. Banks’ interest rate markups are predicted to follow a life-cycle pattern over the borrowing firms’ age. Due to endogenous bank monitoring by competing banks, borrowing firms initially face a low markup, thereafter an increasing markup due to informatonal lock-in until it falls for older firms when lock-in is resolved. By applying a large sample of small unlisted firms and a new measure of asymmetric information, we find that firms with significant asymmetric information problems have a more pronounced life-cycle pattern of interest rate markups. Additionally, we examine the effects of concentrated banking markets on interest markups. Results indicate that markups are mainly driven by asymmetric information problems and not by concentration. However, we find weak evidence that bank market concentration matters for old firms.
    Keywords: Banking, loan-pricing, lock-in, asymmetric information, competition
    JEL: G21 L15
    Date: 2007–09–11
  6. By: De Hoyos, Rafael E.; Avalos, Marcos
    Abstract: A newly created dataset including 239 decisions made by the Mexican Federal Competition Commission on horizontal mergers between 1997 and 2001 is used to estimate the different factors affecting the Commission ' s resolution. The paper approximates the decision making process using two different discrete choice models. The results indicate that, contrary to the Commission ' s objective, the presence of efficiency gains increases the probability of a case being issued. The findings also show that factors different from the ones explici tly mentioned by the Commission have a significant effect on the Commission ' s final decision. In particular, the presence of a foreign company among the would-be merger firms significantly increases the likelihood of observing an allowed merger.
    Keywords: Microfinance,Economic Theory & Research,Labor Policies,Bankruptcy and Resolution of Financial Distress,Corporate Law
    Date: 2008–02–01
  7. By: Bourjade, Sylvain
    Abstract: Uniform price auctions admit a continuum of collusive seeming equilibria due to bidders' market power. In this paper, I modify the auction rules in allowing the seller to ration strategic bidders in order to ensure small bidders' participation. I show that many of these "bad" equilibria disappear when strategic bidders do not know small bidders' willingness to pay. Moreover, when the seller is unconstrained in the quantity she can allocate to small bidders, the unique equilibrium price is the highest that the seller could get.
    Keywords: Uniform price Auctions; Treasury Auctions; IPO; Rationing
    JEL: D44 G32
    Date: 2003–03
  8. By: Duc-De Ngo (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans); Mahito Okura
    Abstract: In this study, we aim to investigate the impact of privatization on the degree of cooperation and competition in a mixed oligopoly market. We consider a duopoly market that comprises one semipublic firm and one private firm. Each firm is assumed to determine the level of two types of effort: the cooperative effort made to enlarge the total market size and the competitive effort made to increase market share. <br />In a contest framework, our results show that the competitive effort level of the semipublic firm is smaller than that of the private firm. The more the semipublic firm is concerned for social welfare, the less it competes. On the basis of average costs, we then analyze the case in which only the semipublic firm undertakes cooperative effort. In this case, the private firm behaves as a free rider. Furthermore, we find that the semipublic firm expends more cooperative effort than does the private firm.
    Keywords: Coopetition, Mixed oligopoly, Contests, Free rider
    Date: 2007
  9. By: Ebel, Nikos; Lefouili, Yassine
    Abstract: We analyze the effects of a modified Yardstick competition on firms’ cost-reduction efforts. Departing from the existing literature, we use a relative cost-plus approach: firms are regulated on the basis of other firms’ performances, but they are granted a mark-up and not a lump-sum transfer in order to be compensated for their investments. We show that the cost-reduction effort of a regulated firm is decreasing in the mark-up under relative regulation while it is increasing in the mark-up under individual regulation. Hence, the trade-off between encouraging cost reduction and minimizing prices that the regulator faces under individual cost-plus regulation does not exist under relative cost-plus regulation. We extend our model by including technical spillovers and we investigate their effects on firms’ cost reduction efforts and on the efficiency of the whole industry. Finally, we allow for quality-enhancing investments and study the interplay between them and cost reduction investments under relative cost-plus regulation.
    Keywords: Yardstick Competition; Cost Reduction; Cost-Plus Regulation.
    JEL: L90 L50 D49
    Date: 2008–02
  10. By: Colciago, Andrea; Etro, Federico
    Abstract: We introduce Cournot competition and endogenous entry in an otherwise neoclassical macroeconomic framework. First, we develop a model with exogenous savings à la Solow describing the dynamic path of business creation. Then, we develop a model à la Ramsey describing the dynamic interaction of consumption and business creation. Our models are able to explain why markups vary countercylically and profits are procyclical. The analysis of permanent and temporary technology and preference shocks and of the second moments suggests that our model can outperform the Real Business Cycle framework in many dimensions.
    Keywords: Business Cycle; Cournot Competition; Endogenous Entry
    JEL: E32 L13
    Date: 2007–09–30

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