nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒04‒21
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. A Model of Vertical Oligopolistic Competition By Reisinger, Markus; Schnitzer, Monika
  2. Product Differentiation and the Equilibrium Structure of the Manufacturer-Retailer Relationship By Jerzy Mycielski; Yohanes Riyanto; Filip Wuyts
  3. Input Pricing in a Model with Upstream and Downstream Product Innovation By EL ELJ, Moez
  4. Price Skewness and Competition in Multi-Sided Markets By JULLIEN, Bruno
  5. Cartel Organization and Antitrust Enforcement By Zhijun
  6. Access Regulation under Asymmetric Information about Demand By João Vareda
  7. Unbundling and Incumbent Investment in Quality Upgrades and Cost Reduction By João Vareda
  8. The race for telecoms infrastructure investment with bypass: Can access regulation achieve the ?first best? By João Vareda; Steffen Hoernig
  9. Competition and quality in regulated markets: a di¤erential-game approach By Kurt R. Brekke; Roberto Cellini; Luigi Siciliani; Odd Rune Straume
  10. Impact of bank competition on the interest rate pass-through in the euro area By M. van Leuvensteijn; C. Kok Sørensen; J.A. Bikker; A.A.R.J.M. van Rixtel
  11. M&A and post merger integration in banking industry: the missing link of corporate culture By Carretta, Alessandro; Farina, Vincenzo; Schwizer, Paola
  12. Globalization and the effects of national versus international competition on the labour market. Theory and evidence from Belgian firm level data By Hilde Vandenbussche; Jozef Konings
  13. Efficiency Enhancing Taxation in Two-sided Markets By Kind, Hans Jarle; Koethenbuerger, Marko; Schjelderup, Guttorm
  14. Price transmission and market power analysis in the Spanish seafood market chain By Jordi Guillen; Ramon Franquesa
  15. Circular Aspects of Exchange Rates and Market Structure By Yunus Aksoy; Hanno Lustig
  16. Firm heterogeneity within industries: How important is “industry” to innovation? By Tommy Clausen
  17. Improving urban transport performances by tendering lots: an econometric estimation of natural monopoly frontiers By William Roy; Yves Croissant
  18. "Bayesian Estimation of Entry Games with Application to Japanese Airline Data" By Sugawara, Shinya; Yasuhiro Omori

  1. By: Reisinger, Markus; Schnitzer, Monika
    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 profitability of the two-tier structure while the upstream conditions mainly affect the distribution of profits. 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: 2008–04–09
  2. By: Jerzy Mycielski; Yohanes Riyanto; Filip Wuyts
    Abstract: In this paper, we analyse the manufacturers' choice of vertical arrangement with retailers. We focus on two types of vertical arrangements namely exclusive dealing and exclusive territory. Both are used by manufacturers as instruments to dampen manufacturer competition. Exclusive dealing is used to avoid a head-to-head competition with other brands within a retail outlet. Thus, it restricts interbrand competition. Exclusive territory is used to eliminate intrabrand competition. Our results show that the choice of vertical arrangement depends on the degree of product substitution. When products are less subsitutable, in other words the interbrand rivalry is weak, manufacturers prefer to sell the products to a large number of competitive retailers. When the interbrand rivalry is strong, exclusive territory with exclusive dealing might be adopted by manufacturers. We derive welfare and antitrust policy implications.
    Date: 2008–03
  3. By: EL ELJ, Moez
    Abstract: In this paper, we analyze the incentives for improving-quality R&D in a two-tier marketstructure where the quality of a differentiated good depends on the specific R&D of a downstream oligopoly and the R&D of an upstream monopoly. We show that input pricing is determining for the incentives for innovation in upstream and downstream industry. Fixed price agreements promote innovation in downstream and upstream industry by eliminating the opportunistic behaviour of the input supplier and are welfare enhancing. Theses agreements are all the more effective as the weight of the quality of the input in the consumer’s perception of the total quality of the final good is significant and as the goods are strongly differentiated.
    Keywords: Product Innovation; Vertical Market - Technological Spillovers - Input pricing
    JEL: L13 D43 O31
    Date: 2008–04–11
  4. By: JULLIEN, Bruno
    Date: 2008–03
  5. By: Zhijun (ESRC Centre for Competition Policy, University of East Anglia)
    Abstract: This paper incorporates the economic theory of organizations into the framework of public law enforcement, and characterizes the dual-coalition structure of cartel organization that allows us to highlight the strategic interactions between cartel participants under different antitrust policies. We show that delegation of authorities over collusive decisions from top executives to subordinates can mitigate the temptation of renege on collusive relationships and thus contributes to facilitating collusion. This result parallels the insights in Baker, Gibbons and Murphy (2002, 2006) which find that the optimal allocation of decision rights is to minimize the maximum temptation to renege on relational contracts. Moreover, the efficiency gains of delegation in facilitating collusion can be mitigated when the corporate leniency program is introduced, in particular whenever it is unlikely to detect cartels absent leniency and the corporate liability is muc more significant than individual liability.
    Keywords: cartel organization, antitrust enforcement, leniency programs
    JEL: D23 K21 L41
    Date: 2008–04
  6. By: João Vareda (Autoridade da Concorrência)
    Abstract: We study the impact of access regulation in a telecommunications market on an entrant?s decision whether to invest in a network or ask for access when the regulator cannot observe its potential demand. Since the entrant has incentives to not compete vigorously right after entry in order to convince the regulator that it needs cheap access in the future, the regulator must set access prices which tend to be distorted (lower or higher) as compared to fi?rst best. Still, this is better than committing to ignore ex post demand information. Consulting the entrant earlier about its expectations improves welfare and may help to achieve the ?first best.
    Keywords: Access Pricing, Asymmetric Information, Signaling, Revelation principle
    JEL: D82 D92 L51 L96
    Date: 2007–11
  7. By: João Vareda (Autoridade da Concorrência)
    Abstract: We study the investment of a telecommunications incumbent in quality and in cost reduction when an entrant can use its network through unbundling of the local loop. We fi?nd that unbundling may lower incentives for quality improvements, but raises incentives for cost reduction. Therefore, it is not true that all types of investment are crowded out with unbundling. If the regulator can commit to a socially optimal unbundling price before investment, the incumbent makes both types of investment. In the absence of commitment, the incumbent will not invest, so that unbundling regulation may lower welfare as compared to no regulation.
    Keywords: Access Pricing, Telecommunications Regulation; Unbundling; Investments; Quality upgrades; Cost reduction; Commitment
    JEL: D92 L43 L51 L96
    Date: 2007–11
  8. By: João Vareda (Autoridade da Concorrência); Steffen Hoernig (FEUNL)
    Abstract: We analyze the impact of mandatory access on the infrastructure investments of two competing communications networks, and show that for low (high) access charges fi?rms wait (preempt each other). Contrary to previous results, under preemption a higher access charge can delay fi?rst investment. While fi?rst-best investment cannot be achieved with a fi?xed access tariff, simple instruments such as banning access in the future, or granting access holidays right after investment, can improve efficiency. The former forces investment when it would happen too late, while the latter allows for lower access charges in order to delay the second investment when it would happen too early.
    Keywords: Access pricing, Investments, Preemption, Access ban, Access holidays
    JEL: D92 L43 L51 L96
    Date: 2007–11
  9. By: Kurt R. Brekke; Roberto Cellini; Luigi Siciliani; Odd Rune Straume
    Abstract: We investigate the e¤ect of competition on quality in regulated markets (e.g., health care, higher education, public utilities) taking a di¤erential 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 feedback 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, and the results are similar to the ones obtained by static models. 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 e¤ectively eliminated. In this case, static models tend to exaggerate the positive e¤ect 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: 2008–04
  10. By: M. van Leuvensteijn; C. Kok Sørensen; J.A. Bikker; A.A.R.J.M. van Rixtel
    Abstract: This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective.
    Keywords: Monetary transmission, banks, retail rates, competition, panel data
    JEL: D4 E50 G21 L10
    Date: 2008–03
  11. By: Carretta, Alessandro; Farina, Vincenzo; Schwizer, Paola
    Abstract: The intense concentration process taking place in the financial systems of the major countries has attracted substantial attention from stakeholders and academics. The impact of M&A on value creation and efficiency / effectiveness improvements of banks involved appears, on the whole, disappointing and still hard to create benefits for customers. The reason seems to lie in the difficulty of governing a post-merger integration process, which generally requires good governance and management practices, significant experience and attention to cultural profiles and individuals’ behavior. More in detail, management literature recognizes the importance of corporate culture, considered as the set of values and decisions that drive individuals’ behaviors within organizations, for explaining alliance success in M&A operations. In fact cultural clashes could determine conflicts and negative effects, on one hand, on the timing and the effectiveness of the post-merger integration process and, on the other hand, on motivation and turnover of individuals. Set in Italian banking industry, this paper proposes a framework, applied to a representative sample of cases (about 78,2% of market share, based on total assets), for assessing cultural similarity of actors involved in M&A operations. Corporate culture is measured using an ethnographic approach focusing on language as its special artifact. The assessment is based on the definition of some key concepts that are relevant for the banking industry (e.g., competencies, competition, customer, disclosure, human resources, innovation, risk) and on a text-analysis model applied to a corpus of reference texts produced by the surveyed banks three years before M&A. The elaboration of data uses Wordsmith 4, a text analysis software developed by Oxford University. The paper is organized as follows: at first, we analyze and explain how low levels of cultural compatibility before M&A could limit the success of post-merger integration processes of banks. After, we propose and describe the measurement procedure of the cultural fit among bidder and target banks, based on text analysis. Lastly, we conclude with the discussion of the results obtained for each couple of banks involved in M&A and with suggestions for future applications of our framework.
    Keywords: Banks; Merger & Acquisitions; Post-merger Integration; Corporate Culture
    JEL: M14 G34 G21
    Date: 2007
  12. By: Hilde Vandenbussche; Jozef Konings
    Abstract: In this paper we first develop a simple theoretical framework which shows that important differences exist between national and international competition and their effect on national labour markets. National competition refers to a reduction of monopoly power in the product market through improved market contestability and market access, which is the responsibility of competition authorities. International competition refers to a reduction in product market competition as a result of trade liberalization. We show that when the domestic market is unionized, national entry (FDI or domestic entry) has very different effects on the national labour market than international entry (imports in the relevant product market). One result we obtain is that national competition need not increase domestic employment while trade competition need not lower domestic employment. Our analysis has at least two important implications. First, geographic location of competitors matters when institutional settings like trade unions are country specific. Second, a change in competition policy is likely to affect labour markets differently than a change in trade policy. The results also indicate that apart from location, market structure and the level at which wages are bargained over (firm or sector level) matter. In a further step the theoretical predictions we derive, are tested on Belgian company accounts data supplemented with data from a postal survey.
    Date: 2008–03
  13. By: Kind, Hans Jarle (Department of Economics, Norwegian School of Economics and Business Administration (NHH)); Koethenbuerger, Marko (Center for Economic Studies, Ludwig-Maximilians-Universität); Schjelderup, Guttorm (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: This paper examines the efficient provision of goods in two-sided markets and characterizes optimal specific and ad-valorem taxes. We show that (i) a monopoly may have too high output compared to the social optimum; (ii) output may be reduced by imposing negative value-added taxes (subsidy) or positive specific taxes.
    Keywords: Market Structure and Pricing; Efficiency; Optimal Taxation; Incidence
    JEL: D40 D43 H21 H22 L13
    Date: 2008–01–25
  14. By: Jordi Guillen; Ramon Franquesa (Universitat de Barcelona)
    Abstract: Spain is one of the largest seafood markets in Europe and the world. Seafood consumption has traditionally been very high in Spain; in 2005, for instance, around 36.7 kg per capita were consumed (MAPA, several years). However, little attention has been paid to the market and how the different levels of the market chain interact. This paper uses weekly data to analyse the price transmission elasticity of the main twelve seafood products in the Spanish market chain (Ex-vessel, Wholesale and Retail stages). We then investigate the price transmission asymmetry in these market stages. The results have significant implications for demand analysis, market power and margins in the seafood value chain.
    Keywords: asymmetry, price transmission, seafood products, market power
    JEL: Q22 Q11 L11
    Date: 2008
  15. By: Yunus Aksoy; Hanno Lustig
    Abstract: This modified version of Salop's (1979) spatial competition model yields clear-cut predictions about the effects of exchange rate shocks on market structure and pass-through. Shocks within the band of inaction do not affect market structure. The upper bound of this range rises as the industry ratio of sunk to fixed costs increases. As fixed costs and product heterogeneity jointly increase, the lower bound drops. Outside of the range, depreciations cause one or several of those foreign brands closest to the home brand to leave. This decreases the overall responsiveness of prices to exchange rate shocks. Large appreciations induce entry and increase the elasticity of prices. This asymmetry implies larger positive than negative PPP deviations. When accounting for price changes in foreign markets, strategic pricing behavior is no longer sufficient to generate real exchange rate variability. Incomplete pass-through obtains if and only if the domestic firms have a smaller market share abroad. With large nominal exchange rate shocks hysteresis result obtains if and only if sunk costs are non-zero.
    Date: 2008–03
  16. By: Tommy Clausen (Nordland Research Institute, Bodø)
    Abstract: In this paper we assess how important “industry” is to innovation. Our empirical estimates suggest that “industry factors” matter little to how firms’ search for new innovations. These results offer empirical support to recent evolutionary theory where firms have heterogeneous capabilities and pursue different approaches to innovation. Structural variables at the industry level do however have a substantial influence on the firm level propensity to innovate. This result supports “sectoral innovation system” approaches where firms are “constrained” by technological regimes underlying industry evolution. Hence, the driving forces behind technological evolution are found at both the firm and industry level.
    Date: 2008–04
  17. By: William Roy (LET - Laboratoire d'économie des transports - CNRS : UMR5593 - Université Lumière - Lyon II - Ecole Nationale des Travaux Publics de l'Etat); Yves Croissant (LET - Laboratoire d'économie des transports - CNRS : UMR5593 - Université Lumière - Lyon II - Ecole Nationale des Travaux Publics de l'Etat)
    Abstract: Recently, some cities decided to divide their transport network into several attractive and accessible parts (this procedure is called allotment) in order to reduce urban transit costs. Gains obtained by introducing more competition for the market should be compared with costs associated with cutting the network into several parts, and this question is crucially linked with the measure of returns to scale. In this paper, we estimate a translog cost function on a panel of French urban transit networks. Our main conclusion is that scale economies are exhausted for a production corresponding to a city of about 200,000 inhabitants and that allotment, in terms of scale economies, would reduce costs for the seven biggest cities of our sample.
    Keywords: urban public transport industry, panel data, natural monopoly, allotment
    Date: 2008–05–29
  18. By: Sugawara, Shinya (Graduate School of Economics, University of Tokyo); Yasuhiro Omori (Faculty of Economics, University of Tokyo)
    Abstract: This paper proposes a Bayesian estimation of the payoff functions in entry games using Markov chain Monte Carlo simulation. In order to deal with the multiple Nash equilibria, we describe the econometric model with a latent variable that represents the player's choice of an equilibrium among the multiple equilibria. The statistical incoherency problem considered in previous studies is also discussed for our entry game model, and we provide an alternative justification for the previous estimation procedures. Our proposed methodology is applied to Japanese airline data, and model selection based on the marginal likelihood is conducted to investigate the nature of the strategic interaction between two major Japanese airline companies. Finally, we predict the entry probabilities of two airline companies for the Shizuoka airport that is currently under construction.
    Date: 2008–04

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