nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒04‒29
25 papers chosen by
Russell Pittman
US Department of Justice

  1. Advertising, Entry Deterrence, and Industry Innovation By Shi Qi
  2. Strategic aspects of bundling By Marion PODESTA
  3. Aftermarket Power and Basic Market Competition By Cabral, Luís M B
  4. Net Neutrality on the Internet: A Two-sided Market Analysis By Economides , Nicholas; Tåg, Joacim
  5. Settlement in Merger Cases: Remedies and Litigation By Bertrand Chopard; Thomas Cortade; Andreea Cosnita
  6. Competition and Quality in Regulated Markets: a Differential-Game Approach By Brekke, Kurt Richard; Cellini, Roberto; Siciliani, Luigi; Straume, Odd Rune
  7. Privatization and competition in the delivery of local services: An empirical examination of the dual market hypothesis By Germà Bel; Xavier Fageda
  8. Competition and Regulation via Supply and Demand Functions in Oligopolistic-Oligopsonistic Markets By Bulut, Harun; Koray, Semih
  9. Cross-Border Mergers & Acquisitions Policy in Service Markets By Norbäck, Pehr-Johan; Persson, Lars
  10. Does Growth & Quality of Capital Markets drive Foreign Capital? The case of Cross-border Mergers & Acquisitions from leading Emerging Economies By Juan Piñeiro Chousa; Artur Tamazian; Krishna Chaitanya Vadlamannati
  11. Risk Taking in Winner-Take-All Competition By Matthias Kräkel; Petra Nieken; Judith Przemeck
  12. The Non-Linear Cournot Model as a Best-Response Potential Game By Davide Dragone; Luca Lambertini
  13. Genetic Codes of Mergers, Post Merger Technology Evolution and Why Mergers Fail By Alexander Cuntz
  14. Gasoline prices jump up on Mondays: An outcome of aggressive competition? By Foros, Øystein; Steen, Frode
  15. Accidents, Liability Obligations and Monopolized Markets for Spare Parts : Profits and Social Welfare By Pio Baake
  16. Bank mergers and the dynamics of deposit interest rates By Craig, Ben R.; Dinger, Valeriya
  17. Cross-border bank acquisitions: Is there a performance effect? By Ricardo Correa
  18. Globalization and inflation dynamics: the impact of increased competition By Argia M. Sbordone
  19. Optimal Nonlinear Pricing, Bundling Commodities and Contingent Services By Marion PODESTA; Jean-Christophe POUDOU
  20. Monopoly and the incentive to innovate when adoption involves switchover disruptions By Thomas J. Holmes; David K. Levine; James A. Schmitz, Jr.
  21. Pumping Water to Compete in Electricity Markets By CRAMPES Claude; MOREAUX Michel
  22. Lumpy Capacity Investment and Disinvestment Dynamics By Besanko, David; Doraszelski, Ulrich; Lu, Lauren Xiaoyuan; Satterthwaite, Mark
  23. Pass-Through in Retail and Wholesale By Emi Nakamura
  24. Business cycle evidence on firm entry By Lewis, Vivien
  25. The transition from imitation to innovation: An enquiry into China’s evolving institutions and firm capabilities By Wendy Dobson; A.E. Safarian

  1. By: Shi Qi
    Date: 2008–04–18
  2. By: Marion PODESTA
    Abstract: The increase of bundle supply has become widespread in several sectors (for instance in telecommunications and energy fields). This paper review relates strategic aspects of bundling. The main purpose of this paper is to analyze profitability of bundling strategies according to the degree of competition and the characteristics of goods. Moreover, bundling can be used as price discrimination tool, screening device or entry barriers. In monopoly case bundling strategy is efficient to sort consumers in different categories in order to capture a maximum of surplus. However, when competition increases, the profitability on bundling strategies depends on correlation of consumers reservations values.
    Keywords: Product bundling, foreclosure, price discrimination
    JEL: D21 D43 L13
    Date: 2008
  3. By: Cabral, Luís M B
    Abstract: I revisit the relation between aftermarket power and basic market competition. I consider an infinite period model with overlapping consumers: in each period, one consumer is born and joins one of the existing installed bases, then aftermarket payoffs are received by sellers and consumers, then finally one consumer dies. I derive the unique symmetric Markov equilibrium of this game and the resulting stationary distribution over states (each firm's installed base). I show that an increase in aftermarket power increases the extent of increasing dominance (i.e., a large firm is increasingly more likely to capture a new consumer than a small firm). This in turn leads to several implications of aftermarket power. First, the stationary distribution places greater weight on asymmetric states. Second, social welfare is greater. Third, under some conditions consumer welfare is also greater. Fourth, the value of a firm with zero installed base is lower, and so barriers to entry are higher.
    Keywords: aftermarkets; dynamic price competition; market power
    JEL: L1 L4
    Date: 2008–04
  4. By: Economides , Nicholas (Stern School of Business); Tåg, Joacim (Research Institute of Industrial Economics (IFN))
    Abstract: We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers "on the other side" of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees "on the other side" of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees "on the other side" of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets.
    Keywords: Net Neutrality; Two-sided Markets; Internet; Monopoly; Duopoly; Regulation; Discrimination
    JEL: C63 D40 D42 D43 L10 L12 L13
    Date: 2008–01–15
  5. By: Bertrand Chopard; Thomas Cortade; Andreea Cosnita
    Abstract: This paper performs a pre-trial settlement analysis for the negotiation of asset divestitures in merger control cases. Taking into account the asymmetric information between the competition agency and the merging firms concerning the true competition impact of the merger, we examine the impact on the likelihood of settlement divestiture and the divestiture amount in equilibrium of various factors, such as the transfer rate of the merger’s cost savings, the severity of the appeal court, as well as the bargaining power of the merging partners in the sale of the divested assets.
    Keywords: out-of-court settlement, merger control, divestitures, asymmetric information
    JEL: K21 L41 D82
    Date: 2008
  6. By: Brekke, Kurt Richard; Cellini, Roberto; Siciliani, Luigi; Straume, Odd Rune
    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 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 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: Competition; Quality; Regulated markets
    JEL: H42 I11 I18 L13
    Date: 2008–04
  7. By: Germà Bel (PPRE-IREA, Universitat de Barcelona (SPAIN).); Xavier Fageda (PPRE-IREA, Universitat de Barcelona (SPAIN).)
    Abstract: This paper empirically analyses the hypothesis of the existence of a dual market for contracts in local services. Large firms that operate on a national basis control the contracts for delivery in the most populated and/or urban municipalities, whereas small firms that operate at a local level have the contracts in the least populated and/or rural municipalities. The dual market implies the high concentration and dominance of major firms in large municipalities, and local monopolies in the smaller ones. This market structure is harmful to competition for the market as the effective number of competitors is low across all municipalities. Thus, it damages the likelihood of obtaining cost savings from privatization.
    Keywords: Competition, Concentration, Local Services, Privatization.
    Date: 2008–04
  8. By: Bulut, Harun; Koray, Semih
    Abstract: In this study, we regard the oligopolistic-oligopsonistic markets within the framework of a “double auction” in which both buyers and sellers make bids. To this end, we introduce games where declarations of supply and demand functions (which need not be true) are treated as strategic variables of producers and consumers, respectively, rather than just as “binding commitments” on the part of these parties. Existence of symmetric equilibria of each of these games is established. Most of them are shown to be unique. The equilibrium outcomes of these are compared with the standard Cournot outcome as well as among themselves regarding the market price, total quantity produced, individual consumer’s surplus, individual firms’ profit and social welfare they lead to. To allow the consumers to behave strategically along with the producers, naturally makes the former better off and the latter worse off, while the net effect of this on total social welfare turns out to be case-contingent.
    Keywords: buyer power, demand function equilibria, double auction, oligopoly, oligopsony, supply function equilibria
    JEL: C7 L1 L5
    Date: 2008–04–26
  9. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: We provide facts showing that in service markets: (i) restrictions on foreign direct investment (FDI) are under reform, (ii) cross-border Mergers & Acquisitions dominate as the entry mode of FDI, and (iii) there is often a high market concentration. Based on these facts, we present a model for analyzing cross-border M&A policy in liberalized service markets taking into account efficiency and market power effects. Our findings suggest that a merger policy, but not a discriminatory policy towards foreigners, seems warranted. Moreover, policies ensuring competition for domestic target firms seem warranted. In this vein, harmonization of the EU takeover regulations may particularly benefit assets owners in countries with many target firms.
    Keywords: Services; Mergers and Acquisitions; Investment Liberalization; Foreign Direct Investments; Ownership
    JEL: F23 K21 L13 O12
    Date: 2008–04–08
  10. By: Juan Piñeiro Chousa (University of Santiago de Compostela; Spain); Artur Tamazian (University of Santiago de Compostela; Spain); Krishna Chaitanya Vadlamannati (University of Santiago de Compostela; Spain)
    Abstract: Is there any interrelationship between firm level FDI in the form of cross border Mergers & Acquisitions and capital markets growth and quality? We addressed this question using panel data of cross border M&A for nine emerging economies. Our study period goes from 1987 to 2006. We find that the stock market variables, viz., capitalization and value addition encourage the number of deals and value of cross border Mergers & Acquisitions. However, the association with regulatory and financial reforms is much stronger and robust. We then interact both the stock market variables with financial and regulatory reforms variables only to find much stronger results. The coefficients proved to be higher than other variables, suggesting that higher reforms in capital markets could increase firm level FDI. Moreover, the results are found to be extremely robust when we replace stock market variables with squared values of the same, reiterating the fact that larger is the growth, greater is the inflow of firm level FDI in the form of cross border Mergers & Acquisitions.
    Keywords: Financial Markets, Cross border M&A & Emerging Economies
    JEL: E44 O53 O54 O55
    Date: 2008
  11. By: Matthias Kräkel (University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany, tel: +49 228 733914, fax: +49 228 739210, e-mail:; Petra Nieken (University of Cologne, Herbert-Lewin-Str. 2, D-50931 Köln, Germany, tel: +49 221 4706310, fax: +49 221 4705078, e-mail:; Judith Przemeck (University of Bonn, Adenauerallee 24-42, D-53113 Bonn, Germany, tel: +49 228 739213, fax: +49 228 739210, e-mail:
    Abstract: We analyze a two-stage game between two heterogeneous players. At stage one, common risk is chosen by one of the players. At stage two, both players observe the given level of risk and simultaneously invest in a winner-take-all competition. The game is solved theoretically and then tested by using laboratory experiments. We find three effects that determine risk taking at stage one - an effort effect, a likelihood effect and a reversed likelihood effect. For the likelihood effect, risk taking and investments are clearly in line with theory. Pairwise comparison shows that the effort effect seems to be more relevant than the reversed likelihood effect when taking risk.
    Keywords: Tournaments, Competition, Risk-Taking, Experiment
    JEL: M51 C91 D23
    Date: 2008–03
  12. By: Davide Dragone (Department of Economics, University of Bologna, Italy); Luca Lambertini (Department of Economics, University of Bologna and The Rimini Centre for Econonic Analisys, Italy)
    Abstract: WeshowthattheCournotoligopolygamewithnon -linearmarketdemandcanbereformulatedasab est-responsepotentialgamewherethebest-re sponsepotentialfunctionislinear-quadrati c.
    Keywords: potential function, potential game, Cournot oligopoly
    JEL: C72 L13
    Date: 2007–07
  13. By: Alexander Cuntz
    Abstract: This paper addresses the key determinants of merger failure, in par- ticular the role of innovation (post-merger performance) and technology (ex-ante selection) when rms decide to separate. After a brief review of the existing literature we introduce a model of process innovation where merged firms exibit intra-merger spillover of knowledge under different mar- ket regimes, depending on whether firms integrate vertically or horizontally. Secondly, we describe an ideal matching pattern for ex-ante selection cri- teria of technological partnering, abstracting from nancial market power issues. In a final section we test the model implications for merger failure for M&A data from the US biotechnology industry in the 90s. We find that post-merger innovation performance, in particular with large spillovers, in- creases the probability of survival, while we have no evidence that market power effects do so in long run. Additionally, we find extensive technology sourcing activity by firms (already in the 90s) which contradicts the notion of failure and suits well the open innovation paradigm.
    Keywords: merger failure, innovation performance, technology, matching, open innovation, biotechnology
    JEL: O30 L22 L25 C78 L65
    Date: 2008–04
  14. By: Foros, Øystein; Steen, Frode
    Abstract: This paper examines Norwegian gasoline pump prices using daily station-specific observations from March 2003 to March 2006. Whereas studies that have analyzed similar price cycles in other countries find support for the Edgeworth cycle theory (Maskin and Tirole, 1988), we demonstrate that Norwegian gasoline price cycles involve a form of coordinated behavior. We also show that gasoline prices follow a fixed weekly pattern, with prices increasing significantly every Monday at noon, and that gasoline companies appear to use the recommended price as a coordination device with a fixed link between the retail and recommended prices. Moreover, the weekly pattern changed in April 2004; whereas Thursday had been the high-price day, Monday now became the high-price day. The price–cost margin also increased significantly after the weekly pattern changed in April 2004.
    Keywords: gasoline; intertemporal price discrimination; price coordination
    JEL: D40 L11 L42
    Date: 2008–04
  15. By: Pio Baake
    Abstract: We analyze the effects of accidents and liability obligations on the incentives of car manufacturers to monopolize the markets for their spare parts. We show that monopolized markets for spare parts lead to higher overall expenditures for consumers. Furthermore, while the manufacturers invest more in order to offer cars with higher qualities, monopolization tends to reduce social welfare. Key for these results is the observation that high prices for spare parts entail a negative external effect inasmuch as liability obligations imply that consumers of competing products have to pay the high prices as well.
    Keywords: aftermarkets, monopolization, liability
    JEL: L13 L42 D43
    Date: 2008
  16. By: Craig, Ben R.; Dinger, Valeriya
    Abstract: Despite extensive research interest in the last decade, the banking literature has not reached a consensus on the impact of bank mergers on deposit rates. In particular, results on the dynamics of deposit rates surrounding bank mergers vary substantially across studies. In this paper, we aim for a comprehensive empirical analysis of a bank merger’s impact on deposit rate dynamics. We base the analysis on a unique dataset comprising deposit rates of 624 US banks with a monthly frequency for the time period 1997-2006. These data are matched with individual bank and local market characteristics and the complete list of bank mergers in the US. The data allow us to track the dynamics of bank mergers while controlling for the rigidity of the deposit rates and for a range of merger, bank and local market features. An innovation of our work is the introduction of an econometric approach of estimating the change of the deposit rates given their rigidity.
    Keywords: Deposit rate dynamics, bank mergers, deposit rate rigidity
    JEL: G21 L11
    Date: 2008
  17. By: Ricardo Correa
    Abstract: This paper uses a unique database that includes deal and bank balance sheet information for 220 cross-border acquisitions between 1994 and 2003 to analyze the characteristics and performance effects of international takeovers on target banks. A discrete choice estimation shows that banks are more likely to get acquired in a cross-border deal if they are large, bad performers, in a small country, and when the banking sector is concentrated. Post-acquisition performance for target banks does not improve in the first two years relative to domestically-owned financial institutions. This result is explained by a decrease in the banks' net interest margin in developed countries and an increase in overhead costs in emerging economies.
    Date: 2008
  18. By: Argia M. Sbordone
    Abstract: This paper analyzes the potential effect of global market competition on inflation dynamics. It does so through the lens of the Calvo model of staggered price setting, which implies that inflation depends on expected future inflation and a measure of marginal costs. I modify the assumption of a constant elasticity of demand, standard in this model, to provide a channel through which an increase in the number of traded goods may affect the degree of strategic complementarity in price setting and hence alter the dynamic response of inflation to marginal costs. I first discuss the behavior of the variables that drive the impact of trade openness on this response, and then I evaluate whether an increase in the variety of traded goods of the magnitude observed in the United States in the 1990s might have a significant quantitative impact. I find that it is difficult to argue that such an increase in trade would have generated a sufficiently large increase in U.S. market competition to reduce the slope of theinflation-marginal cost relation.
    Keywords: Price levels ; Inflation (Finance) ; Deflation (Finance) ; Competition
    Date: 2008
  19. By: Marion PODESTA; Jean-Christophe POUDOU
    Abstract: In this paper, we propose to analyze optimal nonlinear pricing when a firm offers in a bundle a commodity and a contingent service. The paper studies a mechanism design where all private information can be captured in a single scalar variable in a monopoly context. We show that to propose the package for commodity and service is less costly for the consumer, the firm has lower consumers rent than the situation where it sells their good and contingent service under an independent pricing strategy. In fact, the possibility to use price discrimination via the supply of package is dominated by the fact that it is costly for the consumer to sign two contracts. Bundling energy and a contingent service is a profitable strategy for a energetician monopoly practising optimal nonlinear tariff. We show that the rates of the energy and the contingent service depend to the optional character of the contingent service and depend to the degree of complementarity between commodities and services.
    Keywords: Bundling, Nonlinear pricing, Energy market
    JEL: D42 L12 Q4
    Date: 2008
  20. 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.
    Date: 2008
  21. By: CRAMPES Claude; MOREAUX Michel
    Date: 2008–04
  22. By: Besanko, David; Doraszelski, Ulrich; Lu, Lauren Xiaoyuan; Satterthwaite, Mark
    Abstract: Capacity addition and withdrawal decisions are among the most important strategic decisions made by firms in oligopolistic industries. In this paper, we develop and analyze a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment. We use our model to answer two questions. First, what economic factors facilitate preemption races? Second, what economic factors facilitate capacity coordination? We show that low product differentiation, low investment sunkness, and high depreciation promote preemption races. We also show that low product differentiation and low investment sunkness promote capacity coordination. Although depreciation removes capacity, it may impede capacity coordination. Finally, we show that, at least over some range of parameter values, firms' expectation plays a key role in determining whether or not industry dynamics are characterized by preemption races and capacity coordination. Taken together, our results suggest that preemption races and excess capacity in the short run often go hand-in-hand with capacity coordination in the long run.
    Keywords: industry dynamics; investment; lumpiness; oligopoly
    JEL: C73 D92 L13
    Date: 2008–04
  23. By: Emi Nakamura
    Abstract: This paper studies how prices comove across products, firms and locations to gauge the relative importance of retailer versus manufacturer-level shocks in determining prices. I make use of a large panel data set on prices for a cross-section of retailers in the U.S. I analyze prices at the barcode or "Universal Product Code'' (UPC) level for individual stores. I find that only 16% of the variation in prices is common across stores selling an identical product. 65% of the price variation is common to stores within a particular retail chain (but not across retail chains), while 17% is completely idiosyncratic to the store and product. Product categories with frequent temporary "sales'' exhibit a disproportionate amount of completely idiosyncratic price variation. My results suggest that most of the observed price variation arises from retail-level rather than manufacturer-level demand and supply shocks. However, the behavior of prices is difficult to relate to observed variation in costs and demand at the retail level. This suggests that retail prices may vary largely as a consequence of dynamic pricing strategies on the part of retailers or manufacturers, rather than static demand and supply shocks.
    JEL: E30 F40 L16 L81
    Date: 2008–04
  24. By: Lewis, Vivien
    Abstract: Business cycle models with sticky prices and endegenous firm entry make novel predictions on the transmission of shocks through the extensive margin of investment. This paper tests some of these predictions using a vector autoregression with model-based sign restrictions. We find a positive and significant response of firm entry to expansionary shocks to productivity, aggregate spending, monetary policy and entry costs. The estimated response to a monetary expansion does not support the monetary policy transmission mechanism proposed by the model. Insofar as firm startups require labour services, wage stickiness is needed to make the signs of the model responses consistent with the estimated ones. The shapes of the empirical responses suggest that congestion effects in entry make it harder for new firms to survive when the number of startups rises.
    Keywords: firm entry, business cycles, VAR
    JEL: E30 E32
    Date: 2008
  25. By: Wendy Dobson (Institute for International Business, Rotman School of Management); A.E. Safarian (Rotman School of Management)
    Abstract: How is the Chinese economy making the transition from imitation to innovation as the source of sustained long term growth? We address this question using the evolutionary approach to growth in which institutions support technical advance and enterprises develop capabilities to learn and innovate. Growth is seen as a series of disequilibria in which obstacles to innovation such as outdated institutions and weak incentive systems can cause growth to slow. We review existing literatures on institutions and firm behavior in China and compare these findings with those of our survey of Chinese firms in 2006. Industry and firm studies in the literature show how productivity is rising because of firm entry and exit rather than the adoption of new technologies. A striking feature both of the studies in the literature and our survey is the increasing competitive pressures on firms that encourage learning. Our survey of privately owned small and medium enterprises in five high tech industries in Zhejiang province found a market-based innovation system and evidence of much process and some product innovations. These enterprises respond to growing product competition and demanding customers with intensive internal learning, investment in R&D and a variety of international and research linkages.
    JEL: O23 H20
    Date: 2008–03

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