nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒03‒08
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. A Model of Vertical Oligopolistic Competition By Markus Reisinger; Monika Schnitzer
  2. Endogenous Mergers under Multi-Market Competition By Tina Kao; Flavio Menezes
  3. Durable Goods, Innovation and Network Externalities By Cerquera Dussán, Daniel
  4. Cournot Duopoly with Capacity Limit Plants By Fabio TRAMONTANA; Laura GARDINI; Puu TONU
  5. Collective Reputation, Entry and Minimum Quality Standard By Raphaël Soubeyran; Elodie Rouvière
  6. Does Classical Competition Explain the Statistical Features of Firm Growth? By Alfarano, Simone; Milakovic, Mishael
  7. ‘Make-or-Buy’ in International Oligopoly and the Role of Competitive Pressure By Dermot, Leahy; Catia , Montagna
  8. Regulation and the Option to Delay By Fernando T. Camacho; Flavio Menezes
  9. Collusion in a One-Period Insurance Market with Adverse Selection By Alexander Alegria; Manuel Willington
  10. Entry Deterrence in Postal Service Markets By Beschorner, Patrick Frank Ernst
  11. Latin versus European Power: A Tale of Two Market Reforms By Mennel, Tim; Viecens, Maria Fernanda
  12. Operationalizing and Measuring Competition: Determinants of Competition in Private Banking Industry in India By KV, BHANU MURTHY; Deb, Ashis Taru
  13. Theoretical Framework Of Competition As Applied To Banking Industry By KV, Bhanu Murthy; Deb, Ashis Taru
  14. Merger Control as Barrier to EU Banking Market Integration By Koehler, Matthias
  15. Firm Productivity and the Foreign-Market Entry Decision By Raff, Horst; Ryan, Michael; Stähler, Frank
  16. Market structure in the distribution sector and merchandise trade By Hildegunn Kyvik Nordas; Massimo Geloso Grosso; Enrico Pinali

  1. By: Markus Reisinger (Department of Economics, University of Munich, Kaulbachstr. 45, 80539 Munich, Germany, e-mail:; Monika Schnitzer (Department of Economics, University of Munich, Akademiestr. 1/III, 80799 Munich, Germany, e-mail:
    Abstract: This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall proï¬tability of the two-tier structure while the upstream conditions mainly affect the distribution of proï¬ts. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing.
    Keywords: Deregulation, Free Entry, Price Competition, Product Differentiation, Successive Oligopolies, Two-Part Tariffs, Vertical Restraints
    JEL: L13 D43 L40 L50
    Date: 2008–02
  2. By: Tina Kao (Australian National University); Flavio Menezes (School of Economics, The University of Queensland)
    Abstract: This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play themselves out. The first is the selection effect, which works towards increasing welfare as shutting down the more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works towards increasing prices and, therefore, decreasing consumer surplus (but increasing producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.
    Date: 2008
  3. By: Cerquera Dussán, Daniel
    Abstract: We develop a model of R&D competition between an incumbent and a potential entrant with network externalities and durable goods. We show that the threat of entry eliminates the commitment problem that an incumbent may face in its R&D decision due to the goods’ durability. Moreover, a potential entrant over-invests in R&D and an established incumbent might exhibit higher, equal or lower R&D investments in comparison with the social optimum. In our model, the incumbent’s commitment problem and the efficiency of its R&D level are determined by the extent of the network externalities.
    Keywords: Network externalities, Durable Goods, Innovation, Imperfect Competition
    JEL: D21 D85 L13 O31
    Date: 2007
  4. By: Fabio TRAMONTANA (Universita' Politecnica delle Marche, Dipartimento di Economia); Laura GARDINI (Universit… degli Studi di Urbino, Istituto di Scienze Economiche); Puu TONU (CERUM, Umea University, Sweden)
    Abstract: This article considers a Cournot duopoly under an isoelastic demand function and cost functions with built-in capacity limits. The special feature is that each firm is assumed to operate multiple plants, which can be run alone or in combination. Each firm has two plants with different capacity limits, so it has three cost options, the third being to run both plants, dividing the load according to the principle of equal marginal costs. As a consequence, the marginal cost functions come in three disjoint pieces, so the reaction functions, derived on basis of global profit maximization, as well can consist of disjoint pieces. We first analyze the case in which the firms are taken as identical, and then the generic case. It is shown that stable Cournot equilibria may coexist with several other stable cycles. Then we compare the coexistent periodic attractors in terms of the resulting profits. The main property is the non-existence of unstable cycles. This is reflected in a particular bifurcation structure, due to border collision bifurcations, and to particular basin frontiers, related to the discontinuities.
    Keywords: Border Collision Bifurcations, Capacity Limits, Cournot, Discontinuous Reaction Functions, Duopoly, Nonlinear Dynamics
    JEL: C61 C62 C72 C73 D21 D24 L13
    Date: 2008–02
  5. By: Raphaël Soubeyran (INRA-MOISA); Elodie Rouvière (INRA-MOISA)
    Abstract: This article deals with the issue of entry into an industry where firms share a collective reputation. First, we show that free entry is not socially optimal; there is a need for regulation through the imposition of a minimum quality standard. Second, we argue that a minimum quality standard can induce firms to enter the market. Contrary to conventional wisdom, a minimum quality standard should not always be considered as a barrier to entry.
    Keywords: Collective Reputation, Entry, Minimum Quality Standard
    JEL: L11 H41 I18 Q18
    Date: 2008–01
  6. By: Alfarano, Simone; Milakovic, Mishael
    Abstract: We express the idea of classical competition in a statistical equilibrium model, where the tendency for competition to equalize profit rates results in an exponential power (or Subbotin) distribution. The model supports and extends recent evidence on the Laplace distribution of growth rates in firm size. We also find tent-shaped distributions in the size growth rates of Forbes Global 2000 companies, which we interpret as preliminary evidence in favor of the hypothesis that classical competition is a globally operating mechanism.
    Keywords: Statistical equilibrium, classical competition, maximum entropy, profit rates, firm growth rates, Subbotin distribution, Laplace distribution
    JEL: C16 D21 E10 F01 L10
    Date: 2008
  7. By: Dermot, Leahy; Catia , Montagna
    Abstract: We study how competitive pressure influences the make-or-buy decision that oligopolistic firms face between producing an intermediate component in-house or purchasing it from a domestic supplier. We model outsourcing as a bilateral relationship in which the supplier undertakes relationship specific investments. A home and foreign firm compete in the home market. Firms’ mode of operation decision depends on cost and strategic considerations. Competitive pressure increases firms’ incentive to outsource. Consumer gains from trade liberalisation are enhanced when it leads to less outsourcing.
    Keywords: Outsourcing; Vertical Integration; Trade Liberalisation; Oligopoly
    JEL: L2 F2 F1 L1
    Date: 2007
  8. By: Fernando T. Camacho; Flavio Menezes (School of Economics, The University of Queensland)
    Abstract: This paper examines a simple two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the minimum price that an unregulated monopolist demands to bear the demand uncertainty and invest early, that is, the price that incorporates the value of the option to delay. In a regulated environment, we show that in the absence of downstream competition and when the regulator cannot commit to ex-post demand contingent prices, a regulated price that incorporates the option to delay is the minimum price that ensures early investment. Furthermore, when the regulator has a preference for early investment, the option to delay price generates higher welfare than other forms of price regulation. We also show that when the vertically integrated network provider is required to provide access to downstream competitors, and the potential entrant is less efficient than the incumbent, an access price that incorporates the option to delay generates the same investment level output as and higher overall welfare than an unregulated industry that is not required to provide access. By contrast, under the same market conditions an ECPR-based access price generates the same overall welfare than an unregulated industry. Moreover, when the potential entrant is more efficient than the incumbent, an Option to Delay Pricing Rule generates the same investment level output as and (weakly) higher overall welfare than the Efficient Component Pricing Rule (ECPR). In addition, the option-to-delay-based access price is (weakly) lower than the ECPR-based access price.
    Date: 2008
  9. By: Alexander Alegria (Facultad de Ciencias Económicas y Administrativas, Ponti?cia Universidad Javeriana de Cali, Colombia); Manuel Willington (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Abstract: We show how collusive outcomes may arise as equilibrium in a one-period competitive insurance market characterized by adverse selection. We build on Inderst and Wambach (2001) model ?they show that the Rothschild and Stiglitz separating equilibrium always exists when there are capacity constraints? and assume that insurees must pay a minimum premium; which is a common feature on many health systems. In this setup, we show that there is a range of equilibria from the zero profit one in which low-risks implicitly subsidize high risks to one where firms obtain profits with both types of consumers. Moreover, we show that rents only partially dissipate if we assume free entry. Along these equilibria, high risks always obtain full insurance while low risks’ coverage decrease as the firms profits increase. Recently the Chilean antitrust authority (Fiscalía Nacional Económica) accused five of the largest private health insurers of collusion after they reduced the coverage offered to their customers and significantly raised their profits. Our model is consistent with this accusation.
    Keywords: adverse selection, collusion, insurance, capacity constraints
    JEL: L41 I11
    Date: 2007–12
  10. By: Beschorner, Patrick Frank Ernst
    Abstract: In this paper we analyze the incentive of the German postal service (Deutsche Post AG, DPAG) to increase quality in the light of the upcoming liberalization of the postal services market. Currently, there would be no incentive for DPAG to increase its quality if the market were not to be liberalized in six months. Therefore, we suggest that the current changes in market regulation have motivated this quality improvement. In particular we show that this rise in quality is only protable to DPAG because it renders entry less profitable or even impossible. However, consumers benefit from higher quality, whether entry is deterred or accommodated.
    Keywords: regulation, liberalization, postal services
    JEL: L12 L41 L51
    Date: 2007
  11. By: Mennel, Tim; Viecens, Maria Fernanda
    Abstract: This paper compares electricity market reforms in the European Union with reforms in Chile and Brazil. The paradigm of competitive market structures for the electricity sector, as developed in the economics literature, is outlined: competitive markets in generation and retailing and an independent regulator of the natural monopoly in transmission and generation. We present the institutional framework as well as the development of electricity markets in the European Union, Chile and Brazil and discuss in how far they comply with the textbook paradigm. Considerable differences emerge: While the European Union follows a path of full liberalization, facing, however, great difficulties in achieving unbundling of vertically integrated electricity companies and transnational competition, Chile and Brazil have only partially liberalized their electricity sector, enacting regulation to ensure household consumer protection and security of supply.
    Date: 2007
  12. By: KV, BHANU MURTHY; Deb, Ashis Taru
    Abstract: Using an appropriate theoretical framework and econometric methodology, the study has sought to measure and model competition in private banking industry in India in an attempt to analyse the process of market dynamics in the industry. The changing scenario of private banking consequent to deregulation provided the motivation behind the study. It used the concept of competition proposed by Stigler (1961) and measured it by Bodenhorn’s (1990) measure of mobility. The study provides a critique of the mechanism of inducing competition, which is implicit in the Narasimham Committee (1991). It then provides the theoretical background of an alternative mechanism based on Structure-Conduct-Performance paradigm, which incorporates basic conditions and strategic groups, apart from including entry, economies of scale, product differentiation and price cost margin, One basic contention of the study is that competition goes beyond “conduct” and encompasses all the four components of S-C-P paradigm: basic conditions, structure, conduct and performance. Accordingly, a three equation simultaneous equation model is used to ultimately estimate the equation of competition through Tobit technique. The result demonstrates that variables related to basic conditions, structure, and conduct and performance influence competition. The study has found evidence against the simplistic relationship between concentration and competition, which remained implicit in the literature. The study also developed a methodology to arrive at market form from an analysis of three aspects of a market and concludes that private banking industry in India is characterized by monopolistic competition.
    Keywords: Competition;Structure-Conduct-Performance;Banking reform;Tobit model.
    JEL: D21 E58 D41 D40 C25 D49
    Date: 2008–01
  13. By: KV, Bhanu Murthy; Deb, Ashis Taru
    Abstract: Concepts evolve through time and over time they assume different meanings. The concept of competition is no exception. This paper discusses the evolution of the concept of competition in general with a view to derive a theoretical framework for analyzing competition in banking industry. Starting from the classical notions of competition it proceeds to some of the latest approaches (Northcott (2004), Neuberger (1998), Toolsema (2003), Bolt and Tieman (2001)). The ordinary Structure-Conduct-Performance approach does not involve any analysis of market dynamics. Our approach introduces various aspects of industry dynamics and growth. It provides a methodology to arrive at the market form in banking industry through an analysis of all the aspects of basic conditions, structure, conduct and performance. It is argued that sustained growth and dynamics of the industry is not price led. Growth arises out of changing basic conditions and dynamics arises out of sharing the new market created by basic conditions. Hence the prime mover of competition is rivalry among firms to control market share and to internalize externalities rather than adjustments brought about by the price mechanism.
    Keywords: Structure-Conduct-Performance;Competition theory;Banking competition;Basic Conditions;Entry facilitator.
    JEL: D21 B19 E58 D41 D40 B29 D49
    Date: 2008–01
  14. By: Koehler, Matthias
    Abstract: In 2005, the President of the Bank of Italy blocked the cross-border acquisition of two Italian banks for ‘prudential reasons and formal errors’. Following these events, the EU Commission brought actions against Italy for infringement of the principle of the free movement of capital. Although there is anecdotal evidence that prudential control may constitute a barrier to cross-border M&A in the banking sector, empirical evidence is missing until now. The main problem is the lack of data on the scope for politicians and supervisors to block M&A in the banking sector. The main contribution of this paper is to measure this scope for interference by constructing indices on the political independence and the transparency and strength of the supervisory review process of bank M&A. The main source of information to construct these indices is a questionnaire on banking regulation that was sent to the supervisory authorities in the 25 EU member countries between October 2006 and March 2007.
    Date: 2007
  15. By: Raff, Horst; Ryan, Michael; Stähler, Frank
    Abstract: We use Japanese firm-level data to examine how a firm’s productivity affects its choice of foreign-market entry strategy. We study a sequence of decisions, starting with the choice between exporting and foreign direct investment (FDI). In the case of FDI, the firm faces two options: greenfield investment or merger and acquisition (M&A). If it selects greenfield investment, it has two ownership choices: whole ownership or a joint venture. Controlling for industry- and country-specific characteristics, we find that the more productive a firm is, the more likely it is to choose FDI rather than exporting, greenfield investment rather than M&A, and whole ownership rather than a joint venture. We also find that the assumed sequence of decisions fits the data better than alternative specifications.
    Keywords: Foreign direct investment, merger and acquisition, joint venture, greenfield investment, firm heterogeneity, productivity
    JEL: F12 F15
    Date: 2008
  16. By: Hildegunn Kyvik Nordas; Massimo Geloso Grosso; Enrico Pinali
    Abstract: This study aims at exploring how recent developments in the retail sector affect trade in consumer goods. It focuses on three areas of development: i) internationalisation; ii) market structure; and iii) the growing market share of retailers? private labels. It distinguishes between food and non-food products as there are significant differences between the sourcing patterns of these two product categories. The gravity model is extended by integrating a retail intermediary sector, and a novel estimation technique (zero inflated Poisson) is proposed. It is found that the foreign operations of a retailer are positively related to imports from the host to the home country of the retailer. The rate of market concentration and the market share of private labels are both found to be negatively related to imports of food and positively related to imports of non-food consumer goods, but private labels tend to shift sourcing towards low-income countries. Lower tariffs yield a stronger import response in countries with a less concentrated retail sector, particularly for food items suggesting that competition policy and trade policy are complementary. In developing countries the entry of international retailers can have a positive impact on exports and product quality.
    Keywords: retail sector, gravity model
    JEL: F12
    Date: 2008–02–01

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