nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒03‒25
25 papers chosen by
Russell Pittman
US Department of Justice

  1. The Effect of Mergers on Consumer Prices: Evidence from Five Selected Case Studies By Orley Ashenfelter; Daniel Hosken
  2. Some Economics of Abuse of Dominance By John Vickers
  3. Multi-product Firms and Product Variety By Ramon Caminal; Lluís M. Granero
  4. Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly By Dimitra Petropoulou
  5. The welfare effects of third-degree price discrimination with non-linear demand functions By Simon Cowan
  6. Prominence and Consumer Search By Mark Armstrong; John Vickers; Jidong Zhou
  7. Competition and quality in regulated markets: a differential-game approach By Kurt R. Brekke; Roberto Cellini; Luigi Siciliani; Odd Rune Straume
  8. R&D and market structure in a horizontal differentiation framework By Davide Fantino
  9. The Relationship between Knowledge Intensity and Market Concentration in European Industries: An inverted U-Shape By Niels Krap; Johannes Stephan
  10. Competition for Scarce Resources By Peter Eso; Volker Nocke; Lucy White
  11. Bargaining Between Retailers and their Suppliers By Howard Smith; John Thanassoulis
  12. Monopoly and the Incentive to Innovate When Adoption Involves Switchover Disruptions By Thomas J. Holmes; David K. Levine; James A. Schmitz, Jr.
  13. Efficiency Gain from Ownership Deregulation: Estimates for the Radio Industry By Howard Smith; Catherine O'Gorman
  14. Media Competition and Information Disclosure By Ascensión Andina-Díaz
  15. Policy Coordination in an Oligopolistic Housing Market. By Ana I. Saracho; José M. Usategui
  16. Weitzman revisited: Emission standards vs. taxes with uncertain control costs and market power of polluting firms By Clemens Heuson
  17. Competing Communications Networks and International Trade By Fukushima, Marcelo; Kikuchi, Toru
  18. An Empirical Analysis of the Relationship Between Inequality and Innovation in a Schumpeterian Framework By Hatipoglu, Ozan
  19. Concentration in the Belgian brewing industry and the Breakthrough of Lager in the interwar years By Peter Van Der Hallen
  20. Diversification strategies and scope economies evidence from a sample of Italian bus transport providers By Ottoz Elisabetta; Di Giacomo Marina
  21. Less fighting than expected - experiments with wars of attrition and all-pay auctions By Hannah Hörisch; Oliver Kirchkamp
  22. The Role of the Local Business Environment in Banking Consolidation By Luca Colombo; Gilberto Turati
  23. Innovation in Business Groups By Sharon Belenzon; Tomer Berkovitz
  24. Monopoly Behaviour with Speculative Storage By Mitraille, S.; Thille, H.
  25. Managing the radio spectrum : framework for reform in developing countries By Neto, Isabel; Wellenius, Bjorn

  1. By: Orley Ashenfelter; Daniel Hosken
    Abstract: In this paper we propose a method to evaluate the effectiveness of U.S. horizontal merger policy and apply it to the study of five recent consumer product mergers. We selected the mergers from those that, from the public record, seemed to be most problematic for the antitrust agencies. Thus we estimate an upper bound on the likely price effect of completed mergers. Our study employs retail scanner data and uses familiar panel data program evaluation procedures to measure price changes. Our results indicate that four of the five mergers resulted in some increases in consumer prices, while the fifth merger had little effect.
    JEL: L1 L41 L66 L71 L73
    Date: 2008–03
  2. By: John Vickers
    Abstract: The paper offers an economic appraisal of selected aspects of EC law and policy towards abuse of dominance (Article 82). After a brief discussion of thresholds for dominance, five theories of exclusionary harm to compeptition are outlined, concerning: predatory pricing, partial exclusion to exploit rivals, divide-and-rule exclusion, leverage of market power, and maintenance of market power. Issues arising in three EC cases on which judgment was given in 2007 are then discussed in the light of these theories: Wanadoo (predatory pricing), British Airways (discounts and rebates), and Microsoft (refusal to supply, tying and bundling). Implications and prospects for the development of better economics-grounded EC law and policy towards abuse of dominance are discussed in conclusion.
    Keywords: Monopolization, Abuse of Dominance, Predatory Pricing, Tying, Refusal to Supply
    JEL: L12 L41
    Date: 2007
  3. By: Ramon Caminal; Lluís M. Granero
    Abstract: The goal of this paper is to study the role of multi-product firms in the market provision of product variety. The analysis is conducted using the spokes model of non-localized competition proposed by Chen and Riordan (2007). Firstly, we show that multi-product firms are at a competitive disadvantage vis-a-vis single-product firms and can only emerge if economies of scope are sufficiently strong. Secondly, under duopoly product variety may be higher or lower with respect to both the first best and the monopolistically competitive equilibrium. However, within a relevant range of parameter values duopolists drastically restrict their product range in order to relax price competition, and as a result product variety is far below the efficient level.
    Keywords: product variety, multiproduct firms, monopolistic
    JEL: D43 L12 L13
    Date: 2008–03–10
  4. By: Dimitra Petropoulou
    Abstract: A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolist service providers to some contacts but duopolists over contacts they share in their network overlap. The intermediaries` inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.
    Keywords: International Trade, Pairwise Matching, Information Cost, Intermediation, Networks
    JEL: F10 C78 D43 D82 D83 L10
    Date: 2007
  5. By: Simon Cowan
    Abstract: The welfare effects of third-degree price discrimination are analyzed when demand in one market is an additively shifted version of demand in the other market and both markets are served with uniform pricing. Social welfare is lower with discrimination if the slope of demand is log-concave or the convexity of demand is non-decreasing in the price. The demand functions commonly used in models of imperfect competition satisfy at least one of these sufficient conditions.
    Keywords: Price Discrimination, Monopoly
    JEL: D42 L12 L13
    Date: 2007
  6. By: Mark Armstrong; John Vickers; Jidong Zhou
    Abstract: This paper examines the implications of "prominence" in search markets. We model prominence by supposing that the prominent firm will be sampled first by all consumers. If there are no systematic quality differences among firms, we find that the prominent firm will charge a lower price than its non-prominent rivals. The impact of making a firm prominent is that it will typically lead to higher industry profit but lower consumer surplus and welfare. The model is extended by introducing heterogeneous product qualities, in which case the firm with the highest-quality product has the greatest incentive to become prominent, and making it prominent will boost industry profit, consumer surplus and welfare.
    Keywords: Consumer Search, Marketing, Prominent Display, Product Differentiation
    JEL: D43 D83 L13
    Date: 2008
  7. By: Kurt R. Brekke (Department of Economics, Norwegian School of Economics and Business Administration, and Health Economics Bergen); Roberto Cellini (Department of Economics, University of Catania); 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 investigate the effect of competition on quality in regulated markets (e.g., health care, higher education, public utilities) taking a differential game approach, in which quality is a stock variable. Using a Hotelling framework, we derive the open-loop solution (providers commit to an optimal investment plan at the initial period) and the closed-loop solution (providers move investments in response to the dynamics of the states). If the marginal provision cost is constant, the open-loop and closed-loop solutions coincide, implying that static models are robust to a dynamic specification. If the marginal provision cost is increasing, investment and quality are lower in the closed-loop solution: in fact, quality drops to the minimum level in steady state, implying that quality competition is effectively eliminated. In this case, static models tend to exaggerate the positive effect of competition on quality. Our results can explain the mixed empirical evidence on competition and quality for regulated markets.
    Keywords: Regulated markets; Competition; Quality.
    JEL: H42 I11 I18 L13
    Date: 2008
  8. By: Davide Fantino (Bank of Italy, branch of Turin)
    Abstract: This paper examines the dynamic interaction between R&D and market structure in a horizontally differentiated market framework. Firms invest in R&D to modify the level of differentiation of their products, increasing their specialization and their market power. The invested resources in research are declining over time because of decreasing returns from further specialization. Prices, output and short-run profits of the firms producing differentiated products increase and move towards the higher steady state values, while production of the non-differentiated good falls; the number of firms is constant in all periods. The increasing specialization of varieties improves the overall utility of consumers. The comparison with the socially optimal solution shows that firms underinvest in R&D. Firms do not internalize the effects of their research effort on the overall level of substitutability of the other varieties and on the profits of the other firms.
    Keywords: R&D, market power, horizontal differentiation
    JEL: O3
    Date: 2008–01
  9. By: Niels Krap; Johannes Stephan
    Abstract: This paper is motivated by the European Union strategy to secure competitiveness for Europe in the globalising world by focussing on technological supremacy (the Lisbon - agenda). Parallel to that, the EU Commission is trying to take a more economic approach to competition policy in general and anti-trust policy in particular. Our analysis tries to establish the relationship between increasing knowledge intensity and the resulting market concentration: if the European Union economy is gradually shifting to a pattern of sectoral specialisation that features a bias on knowledge intensive sectors, then this may well have some influence on market concentration and competition policy would have to adjust not to counterfeit the Lisbon-agenda. Following a review of the available theoretical and empirical literature on the relationship between knowledge intensity and market structure, we use a larger Eurostat database to test the shape of this relationship. Assuming a causality that runs from knowledge to concentration, we show that the relationship between knowledge intensity and market structures is in fact different for knowledge intensive industries and we establish a non-linear, inverted U-curve shape.
    Keywords: market structure, knowledge intensity, competition policy
    JEL: L16 L40 O33
    Date: 2008–03
  10. By: Peter Eso; Volker Nocke; Lucy White
    Abstract: We show that the efficient allocation of production capacity can turn a competitive industry and downstream market into an imperfectly competitive one. Even though downstream firms have symmetric production technologies, the downstream industry structure will be symmmetric only if capacity is sufficiently scarce. Otherwise it will be asymmetric, with one large "fat" capacity-hoarding firm and a fringe of smaller "lean and fit" firms, so that Tobin`s Q varies inversely with firm size. This is so even if the number of firms is infinitely large. As demand or input quantity varies, the industry may switch between symmetric and asymmetric phases, generating predictions for firm size and costs across the business cycle. Surprisingly, an increase in available capacity resulting in such a switch can cause a reduction in total output and consumer surplus.
    Keywords: Multiproduct Firms, Firm Size Distribution, Trade Liberalization, Size Discount, Firm heterogeneity, Productivity
    JEL: F12 F15 L11 L25
    Date: 2007
  11. By: Howard Smith; John Thanassoulis
    Abstract: This paper surveys new research concerning bargaining within supply chains and its implications for buyer power. The paper explores the implications of the research on supermarket supply chains for primary, secondary and private-label branded goods. The empirical base in support of the theories is also discussed. This paper is an initial draft of a chapter for the book "Private Labels, Brands and Competition Policy" (OUP) edited by Ariel Ezrachi and Ulf Bernitz.
    Keywords: Bargaining, Supply Chains, Supermarkets, Branded Goods, Private Label Goods, Buyer Power, Waterbed Effects
    JEL: L13 L14
    Date: 2008
  12. By: Thomas J. Holmes; David K. Levine; James A. Schmitz, Jr.
    Abstract: When considering the incentive of a monopolist to adopt an innovation, the textbook model assumes that it can instantaneously and seamlessly introduce the new technology. In fact, firms often face major problems in integrating new technologies. In some cases, firms have to (temporarily) produce at levels substantially below capacity upon adoption. We call such phenomena switchover disruptions, and present extensive evidence on them. If firms face switchover disruptions, then they may temporarily lose some unit sales upon adoption. If the firm loses unit sales, then a cost of adoption is the foregone rents on the sales of those units. Hence, greater market power will mean higher prices on those lost units of output, and hence a reduced incentive to innovate. We introduce switchover disruptions into some standard models in the literature, show they can overturn some famous results, and then show they can help explain evidence that firms in more competitive environments are more likely to adopt technologies and increase productivity.
    JEL: L10 L12
    Date: 2008–03
  13. By: Howard Smith; Catherine O'Gorman
    Abstract: Reducing fixed cost duplication - a common justification for concentrated market structure - motivated the US government to relax the number of radio stations a firm could operate in any local market. After deregulation the number of firms per market decreased. The implied cost saving depends on the per market fixed costs incurred by each firm. Using data from 140 markets we estimate upper and lower bounds to fixed costs using (i) an empirical model of gross profit and (ii) the assumption that the observed post-deregulation market structure is a Nash equilibrium. The estimates suggest that the efficiency savings were significant.
    Keywords: Moment Inequalities, Deregulation
    JEL: L10 L40 L82
    Date: 2008
  14. By: Ascensión Andina-Díaz (Department of Economic Theory, Universidad de Málaga)
    Abstract: This paper analyzes an election game where self-interested politicians can exploit the lack of information that voters have about candidates' preferred policies in order to pursue their own agendas. In such a setup, we study the incentives of newspapers to acquire costly information, and how competition among the media affect such incentives. We show that the higher the number of potential readers and/or the lower the cost or investigating, the more the newspapers investigate. We also show that the readers' purchasing habits play a crucial role in the model. More specifically, we show that if the readers always buy a newspaper, media competition favors information disclosure; whereas if they just buy a newspaper in the case news are uncovered, competition is not so desirable.
    Keywords: Media competition, Political accountability, Information
    JEL: D72 D82
    Date: 2008–03
  15. By: Ana I. Saracho (The University of the Basque Country); José M. Usategui (The University of the Basque Country)
    Abstract: This paper analyzes the consequences of the interaction between two different levels of government (regulators) in the development of housing policy when their decisions determine the level of competition in the housing market. The analysis discusses the implications derived from a lack of coordination between a local regulator who controls the supply of land for housing development and a central regulator who decides on housing subsidies. The results suggest that lack of coordination has significant effects on prices and supply of houses, housing developers' profits, and buyers' surplus.
    Keywords: Imperfect competition, housing policy coordination
    JEL: L L
    Date: 2008–03–14
  16. By: Clemens Heuson (University of Augsburg, Department of Economics)
    Abstract: It is well known that uncertainty concerning firms’ costs as well as market power of the latter have to be taken into account in order to design and choose environmental policy instruments in an optimal way. As a matter of fact, in most actual regulation settings the policy maker has to face both of these complications simultaneously. However, hitherto environmental economic theory has restricted to either of them when submitting conventional policy instruments to a comparative analysis. The article at hand takes a first step in closing this gap. It investigates the welfare effects of emission standards and taxes against the background of uncertain emission control costs and various degrees of the polluting firms’ market power.
    Keywords: Cournot oligopoly, external diseconomies of pollution, cost uncertainty, emission standard, emission tax
    JEL: D62 D89 L13 Q58
    Date: 2008–03
  17. By: Fukushima, Marcelo; Kikuchi, Toru
    Abstract: This paper investigates the effects of competing communication networks on trade patterns in a Chamberlinian-Ricardian model of monopolistically competitive firms with a continuum of industries that require communication services in production. We conclude that intraindustry trade between different networks is determined by the relative size of networks and technological differences, and that a network will not have an incentive to expand indefi- nitely, despite network externalities.
    JEL: F12
    Date: 2008
  18. By: Hatipoglu, Ozan
    Abstract: I empirically investigate the non-linear relationship between inequality and innovation in a Schumpeterian setup where growth is expressed by the rate of innovations. In this framework income distribution plays a role in determining the dynamic market sizes for innovators and therefore is a major determinant of growth. By using two new cross-country inequality data sets, I find support for an inverted U-shaped relationship between inequality and innovative activities. This result is robust to two common inequality definitions and several parametric and non-parametric estimation procedures.
    Keywords: inequality; innovation; patents
    JEL: O15 O31
    Date: 2008–03–20
  19. By: Peter Van Der Hallen
    Date: 2008–03
  20. By: Ottoz Elisabetta (University of Turin); Di Giacomo Marina (University of Turin)
    Abstract: A growing number of local public transport (LPT) companies diversify their production lines by providing a large set of services. We investigate the cost structure of a sample of LPT companies operating in Italy in order to assess the presence and the magnitude of scope economies. We split thewhole sample of firms according to the diversification strategy: private firms, mainly diversifying in competitive transport-related services and public firms providing non-transport services in regulated markets. Regardless of the functional form and the method used, scope economies appear sizeable for both groups but higher for firms pursuing a transport related strategy, suggesting it should be preferable to the multi-utility development pursued by public LPT firms.
    Date: 2008–02
  21. By: Hannah Hörisch (University of Munich); Oliver Kirchkamp (University of Jena, School of Economics)
    Abstract: We use experiments to compare dynamic and static wars of attrition (i.e. second-price all-pay auctions) and first-price all-pay auctions. Many other studies find overbidding in first-price all-pay auctions. We can replicate this property. In wars of attrition, however, we find systematic underbidding. We study bids and revenue in different experimental frames and matching procedures and draw a link to the literature on stepwise linear bidding functions.
    Keywords: War of attrition, dynamic bidding, all-pay auction, stabilisation, volunteer's dilemma, experiment
    JEL: C72 C92 D44 E62 H30
    Date: 2008–03–18
  22. By: Luca Colombo (DISCE, Università Cattolica); Gilberto Turati (DISCE, Università Cattolica)
    Abstract: We study whether local economic conditions in different areas have an impact on the magnitude and direction of the concentration process of a banking industry. By using probit and count data (ZIP) models to study the consolidation of the Italian banking sector in the second half of the 1990s, we document a significant direct impact of the local ‘business environment’ on the concentration of the industry at the regional level. This effect complements the well known indirect effect of macroeconomic characteristics on the profitability and efficiency of banks. We also show that institutional and organizational variables affect the likelihood and number of M&A deals, and help explaining differences in performance. Our results appear to be robust to different specifications, and to a number of robustness checks, including alternative sets of variables defining local ‘business environment conditions’.
    Keywords: Banking M&As, local business environment, profitability, efficiency, credit policies, count data models
    JEL: G21 G34 L16
    Date: 2007–11
  23. By: Sharon Belenzon; Tomer Berkovitz
    Abstract: Using novel data on European firms, this paper examines the effect of business group affiliation on innovation. We find that business groups foster the scale and novelty of corporate innovation. Group affiliation is particularly important in industries that rely more on external finance and have a higher degree of information asymmetry. We also find that the innovation of affiliates is less sensitive to operating cash flows. We interpret our results as supporting the `bright side` of business group internal capital markets and explain how legal boundaries between group affiliates mitigate the inefficiencies found in internal capital markets of US conglomerates.
    Keywords: Business Groups, Innovation, Internal Capital Markets
    JEL: G34 L22 L26 O32
    Date: 2007
  24. By: Mitraille, S.; Thille, H.
    Date: 2008
  25. By: Neto, Isabel; Wellenius, Bjorn
    Abstract: Bringing management of the radio spectrum closer to markets is long overdue. The radio spectrum is a major component of the infrastructure that underpins the information society. Spectrum management, however, has not kept up with major changes in technology, business practice, and economic policy that have taken place worldwide during the last two decades. For many years traditional government administration of the spectrum worked reasonably well, but more recently it has led to growing technical and economic inefficiencies as well as obstacles to technological innovation. Two alternative approaches to spectrum management are being tried in several countries, one driven by the market (tradable spectrum rights) and another driven by technology innovation (spectrum commons). This paper discusses the basic features, advantages and limitations, scope of application, and requirements for implementation of these three approaches. The paper then discusses how these approaches can be made to work under conditions that typically prevail in developing countries, including weak rule of law, li mited markets, and constrained fiscal space. Although spectrum reform strategies for individual countries must be developed case by case, several broadly applicable strategic options are outlined. The paper proposes a phased approach to addressing spectrum reform in a country. It ends by discussing aspects of institutional design, managing the transition, and addressing high-level changes such as the transition to digital television, the path to third-generation mobile services, launching of wireless fixed broadband services, and releasing military spectrum. The paper is extensively annotated and referenced.
    Keywords: E-Business,Roads & Highways,Telecommunications Infrastructure,Climate Change,ICT Policy and Strategies
    Date: 2008–03–01

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