nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒03‒15
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Dynamic Price Competition with Network Effects By Luis Cabral
  2. Bertrand and Price-Taking Equilibria in Markets with Product Differentiation By Germán Coloma
  3. Monopoly, Diversification through Adjacent Technologies, and Market Structure By Karaaslan, Mehmet E.
  4. Knowledge Spillovers, Competition, and R&D Incentive Contracts By N. Lacetera; L. Zirulia
  5. Efficiency gains and mergres By Giuseppe, DE FEO
  6. 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
  7. Giving the German Cartel Office the Power of Divestiture. The Conformity of the Reform with Constitutional Law By Christoph Engel
  8. Income Distribution, Market Structure, and Individual Welfare By Tarasov, Alexander
  9. Privatization and policy competition for FDI By Oscar, AMERIGHI; Giuseppe, DE FEO
  10. Does product market competition improve the labour market performance ? By Gabriele, CARDULLO
  11. Real Business Cycles with Cournot Competition and Endogenous Entry By Andrea Colciago; Federico Etro
  12. Should One Sell Domestic Firms to Foreign Ones? A Tale of Delegation, Acquisition and Collusion. By D. Dragone
  13. Product variety and price strategy in the ski manufacturing industry By Nicoletta Corrocher; Marco Guerzoni
  14. Electricity Markets and Energy Security: Friends or Foes? By Brennan, Timothy J.
  15. Legally Separated Joint Ownership of Bidder and Auctioneer: Illustrated by the Partial Deregulation of the EU Electricity Markets By Silvester van Koten
  16. Price Setting in a Decentralized Market and the Competitive Outcome By Stephan Lauermann
  17. Intellectual Property Rights and Entry Choices By Thitima Puttitanun
  18. Antitrust Policy and Industrial Policy: A View from the U.S. By Lawrence J. White
  19. The Growing Influence of Economics and Economists on Antitrust: An Extended Discussion By Lawrence J. White
  20. Some Policy Issues on Open Source and Proprietary Software By Graziella Marzi
  21. Disentangling non-linearities in the long- and short-run price relationships: An application to the U.S. hog/Pork supply chain By Gervais, Jean-Philippe

  1. By: Luis Cabral
    Date: 2008
  2. By: Germán Coloma
    Abstract: In this paper we show that a homogeneous-product market with multiple Bertrand equilibria becomes a market with a single Bertrand equilibrium when we introduce a small degree of product differentiation. When differentiation tends to zero, that Bertrand equilibrium converges to the unique price-taking equilibrium of the homogeneous-product market, which is in turn one of the multiple Bertrand equilibria for that market.
    Keywords: Bertrand equilibrium, price-taking equilibrium, product differentiation
    JEL: D43 L13
    Date: 2008–02
  3. By: Karaaslan, Mehmet E.
    Abstract: The theoretical literature on technological competition has been mostly concerned with various aspects of innovative activity in a single market. By contrast, this paper studies the adoption of a sequence of product innovations in two markets characterized by a common technology base, and illustrates the effects of technological rivalry and preemption. Under a perfect information scenario, it is shown in a two incumbent model that if the innovation is drastic (total replacement of the old product), under certain conditions the fear of being preempted by the entrant forces the firms to diversify their product lines by adopting the innovations across each other's markets. On the other hand, with non-drastic innovation (partial replacement of the old product), it is more likely for the firms to diversify in their own product lines. Out of a class of equilibria characterized under non-drastic innovation, one is optimal in which innovations are adopted in the firms' own markets. In the Pareto inferior equilibria, the firms either adopt innovations in each other's market so that incumbency changes hands or jointly adopt both innovations in two separate product lines. Perfect Bayesian equilibria are characterized under an asymmetric information scenario where one of the firms is assumed to have complete information about the relevant costs of adopting an innovation in a separate product line. If the priors are based on pessimism, it is more often subject to exploitation by the informed firm leading to pooling equilibrium, while optimistism more often leads to diversification and to a competitive market structure in both product lines under a separating equilibrium. In all the cases considered, both innovations are adopted, and in most cases they are adopted by the high cost entrant. The former is socially desirable, but the latter is not. More competitiveness necessarily implies wasteful expenditure by the high cost firm. Lack of competitiveness and technological rivalry, on the other hand, imply that maximum product diversity may not be achieved.
    Keywords: tehnological rivalry; preemption; adoption of innovations; upgrading
    JEL: L10 O31
    Date: 2007–10–01
  4. By: N. Lacetera; L. Zirulia
    Date: 2008–01
  5. By: Giuseppe, DE FEO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: In the theoretical literature, strong arguments have been provided in support of the efficiency defense in antitrust merger policy. One of the most often cited results is due to Williamson (1968) that shows how relatively small reduction in cost could offset the deadweight loss of a large price increase. Furthermore, Salant et al. (1983) demonstrate that (not for monopoly) mergers are unprofitable absent efficiency gains. The general result, drawn in a Cournot framework by Farrel and Shapiro (1990), is that (not too large) mergers that are profitable are always welfare improving. In the present work we challenge the conclusions of this literature in two aspects. First, we show that Williamson’s results underestimate the welfare loss due to a price increase and overestimate the effect of efficiency gains. Then, we prove that the conditions for welfare improving mergers defined by Farrel and Shapiro (1990) hold true only when consumers are adversely affected. This seems an argument to disregard their policy prescriptions when antitrust authorities are more “consumers-priented”. In this respect, we provide a necessary and sufficient condition for a consumer surplus improving merger : in a two firm merger, efficiency gains must be larger than the pre-merger average markup.
    Keywords: mergers, efficiency gains, Cournot oligopoly
    JEL: D43 L11 L22
    Date: 2008–02–15
  6. By: Nicholas Economides; Ioannis Lianos
    Date: 2008
  7. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Triggered by the concentration process in the electricity and gas markets, the land of Hesse proposes to give the German cartel office power to divest dominant firms or oligopolies if this is necessary to restore competition. The paper shows that the reform would be in line with constitutional law, and with freedom of property in particular. Depending on how divestiture is brought about, it would interfere with this basic freedom. It would however not amount to taking. In practice, the main effect would be through bargaining between the divested company and the cartel office. This poses problems under rule of law, but these problems are not insurmountable. The main justification for the reform is the almost total failure of interventions to combat the abuse of dominant positions. In the US, divestiture has not always been successful. But close scrutiny of the American experiences demonstrates that the tool is sufficiently effective to meet the constitutional standard. If divestiture is brought about by forcing the firm to sell entities or assets, the necessary compensation comes from the price it receives from the buyer.
    Keywords: divestiture, freedom of property
    JEL: D42 D43 K21 L12 L13 L41 L44
    Date: 2007–12
  8. By: Tarasov, Alexander
    Abstract: This paper explores how income distribution influences market structure and affects the economic well-being of different groups. It shows that inequality may be good for the poor via a trickle-down effect operating through entry. I consider a general equilibrium model of monopolistic competition with free entry, heterogenous firms and consumers that share identical but non-homothetic preferences. The general model is solved. The case of two types of consumers, rich and poor, is considered in detail. I show that higher income inequality in the economy can benefit the poor. An increase in the personal income of the rich raises welfare of the poor, while an increase in the fraction of the rich has an ambiguous impact on the poor: welfare of the poor has an inverted U shape as a function of the fraction of the rich. At the same time, an increase in the personal income of the rich together with a decrease in the fraction of the rich keeping the aggregate income in the economy fixed raises the well-being of the poor. I also analyze the effect of changes in market size and entry cost. I show that the rich gain more from an increase in market size and lose more from an increase in the cost of entry than the poor.
    JEL: L11 D31 L13 D43
    Date: 2007–03
  9. By: Oscar, AMERIGHI (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Giuseppe, DE FEO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: In this paper, we provide an explanation of why privatization may attract foreign investors interested in entering a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit-maximizing output is lower than the welfare-maximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI before and after privatization. We show that policy competition is irrelevant in the presence of a public firm serving just its domestic market. By contrast, following privatization, it endows the big country with an instrument which can be used either to reduce the negative impact on welfare of an FDI-attracting privatization or to protect the domestic industry from foreign competitors.
    Keywords: foreign direct investment, tax competition, public firm, privatization
    JEL: F12 F23 H25 H73 L13 L33
    Date: 2008–02–15
  10. By: Gabriele, CARDULLO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: In this paper, I construct a general equilibrium model in which the labour market exhibits search frictions, whereas Cournot competition is assumed in the goods market. The properties of the long run free-entry equiibrium show that a more competitive product market raises employment, but it has ambiguous effects both on the real wage and on the utility of the employees. Moreover, from a normative viewpoint, the level of employment and the degree of competition may be inefficiently high. Numerical results based on Belgian data are finally performed.
    Keywords: product market competition, search matching equilibrium, barriers to entry
    JEL: E24 J64 L16
    Date: 2008–02–20
  11. By: Andrea Colciago; Federico Etro
    Abstract: We introduce Cournot competition and endogenous entry in an oth- erwise neoclassical macroeconomic framework. First, we develop a model with exogenous savings à la Solow describing the dynamic path of busi- ness 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 pro?ts 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.
    Date: 2007–09
  12. By: D. Dragone
    Date: 2008–01
  13. By: Nicoletta Corrocher (Cespri, Bocconi University and Department of Economics, NFH, University of Tromso); Marco Guerzoni (GSBC-EIC, Friedrich Schiller Universität, Jena, Germany)
    Abstract: The present paper aims at examining the role of variety in the ski manufacturing industry and its relevance in firms' price setting strategies. In particular, it intends to investigate and empirically test two hypotheses concerning the relation between variety and prices. The first concerns the relationship between product quality/complexity and prices. The second refers to the existence of two kinds of varieties having opposite effects on price formation: market-related variety and production-related variety. We are able to empirically disentangle these two effects, by using variety in service characteristics as a proxy for market-related variety and variety in technical characteristics for production-related variety. Our empirical investigation confirms that prices are positively affected by product complexity and quality and positively affected by variety at the level of service characteristics. This means that a high degree of product variety allows firms to charge a premium price on consumers, who are able to find the product that best meet their needs and are therefore willing to pay a higher price. On the contrary, variety at the level of technical characteristics negatively impact on prices, because in a context where a dominant design emerges and new varieties are not radically different, gains in economies of scale and scope outweigh the cost of the increased flexibility in the equipment required to produce variety. The resulting decrease in marginal costs negatively impinges upon prices.
    Keywords: variety, product and service characteristics, ski manufacturing sector
    JEL: L15 L23 O31
    Date: 2008–03–03
  14. By: Brennan, Timothy J. (Resources for the Future)
    Abstract: For a host of economic, geopolitical, and environmental reasons, the security of energy supplies has moved to the forefront of U.S. policy concerns. Here, I address the extent to which the U.S. electricity sector is affected by these factors and, in turn, whether increased electricity competition exacerbates them. After defining four dimensions of energy security that might pertain to electricity, I examine the role of global energy markets on that sector. Oil is currently used to generate only a small fraction of U.S. electricity supplies, although as recently as the late 1970s it generated about one-sixth of the total. Oil markets can affect electricity indirectly via substitution with natural gas. Competition in electricity markets should improve energy security by adding redundancy, but competition is threatened by unanticipated price increases, peak-load management, and risks associated with separating competitive generation from regulated transmission and distribution. Other complications include residential aversion to competition, residual market power, and the aspiration to reduce demand through conservation policies. The central security issue has been and remains the degree of conflict between competition and central control necessary to maintain reliability of the grid.
    Keywords: electricity markets, electricity market restructuring, energy policy, energy security
    JEL: L94 Q48 L51
    Date: 2007–11–12
  15. By: Silvester van Koten
    Abstract: In the EU electricity industry, many Vertically Integrated Utilities (VIUs) have ownership both of electricity generators and of transmission, hence VIU-owned or allied generators often are bidders in auctions for VIU-owned transmission. In Van Koten (2006) I show that welfare suffers and the holding company benefits – through increased auction revenue – from more aggressive bidding by the allied bidder and that it does not make a difference whether transmission is legally separated from the VIU or not. Here I analyze the regulatory measure of also legally separating the allied generator from the VIU; this measure effectively transforms the VIU into a holding company and prevents the “VIU” from influencing day-to-day decision-making of the “VIU”-owned generator and bans cross-subsidization between divisions. I show that such a measure may not improve welfare; the holding company can formulate a simple compensation scheme that does not violate the restrictions imposed by legal separation but induces the manager of the allied generator to bid more aggressively, thereby increasing the profits of the holding company and decreasing welfare, as in Van Koten (2006).
    Keywords: Asymmetric auctions, bidding behavior, electricity markets, strategic delegation, regulation, vertical integration.
    JEL: L22 L43 L51 L94 L98
    Date: 2007–12
  16. By: Stephan Lauermann (University of Bonn)
    Abstract: This paper studies a decentralized, dynamic matching and bargaining market: buyers and sellers are matched into pairs. Traders exit the market at a constant rate, inducing search costs (frictions). All price offers are made by sellers. Despite the fact that sellers have all the bargaining power we show that they set competitive prices in the limit when frictions become small. Previous literature has restricted the sellers' bargaining power. We dispense with this restriction and show that the convergence result does not depend on the distribution of bargaining power. Our model allows us to isolate basic market clearing forces that ensure the competitive outcome in the frictionless limit. For the particular case of homogeneous sellers we characterize the equilibrium price by the familiar Lerner formula. We use this formula to provide comparative static results of the decentralized trading outcome with respect to the level of the search frictions.
    Keywords: Dynamic Matching and Bargaining Games, Decentralized Markets, Non-cooperative Foundations of Competitive Equilibrium, Search Frictions, Rationing
    Date: 2008–01
  17. By: Thitima Puttitanun (Department of Economics, San Diego State University)
    Abstract: This paper studies the relationship between intellectual property rights (IPR) and the entry modes decision by multinational firms. When considering exports, foreign direct investment (FDI), and licensing as technology transfer channels, the empirical analysis of the 1995 U.S. data show that unlike the findings in the literature, strong IPR has a larger positive impact on FDI than on licensing.
    Date: 2007–05
  18. By: Lawrence J. White
    Date: 2008
  19. By: Lawrence J. White
    Date: 2008
  20. By: Graziella Marzi
    Abstract: Software industry is a fast growing sector of the economy which is undergoing significant changes both for the presence of the open source mode of production and for the challenges of globalization and convergence with other industries. This paper analyses the role of open source software (OSS) on competition and innovation in the software industry and debates the economic rationales for promoting the adoption of OSS by national and local governments.
    Keywords: software industry, open source software, patent system
    JEL: L17 L
    Date: 2007–12
  21. By: Gervais, Jean-Philippe
    Abstract: Increased concentration at the retail, food processing and farm input manufacturing levels has brought increased attention to patterns in retail-to-farm price spreads. Most studies documenting asymmetric price transmission focus on non-linear error correction processes, as opposed to the current study which analyzes potential non-linearities in the long-run relationship between the farm and retail prices. The null hypothesis of non-linearity in the long-run relationship between farm and retail prices in the U.S. hog/pork supply chain is rejected in favor of a Smooth Transition Cointegration (STC) framework. The STC framework predicts downward price stickiness in retail prices. The predicted residuals of the non-linear model are used to investigate whether it is possible to disentangle non-linearity in the long-run price relationship from non-linearity in the adjustment towards the long-run equilibrium. The results underline the importance of testing for linearity in the long-run price relationship before modeling non-linearity in short-run dynamics.
    Keywords: Smooth transition cointegration; farm to retail price transmission; linear cointegration.
    JEL: Q11 C22
    Date: 2007–04–10

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