nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒05‒17
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Entrepreneurial Innovations, Competition and Competition Policy By Norbäck, Pehr-Johan; Persson, Lars
  2. Does entry improve welfare? A general equilibrium approach to competition policy By Bertrand Crettez; Marie-Cécile Fagart
  3. Bertrand-Edgeworth games under oligopoly with a complete characterization for the triopoly By De Francesco, Massimo A.; Salvadori, Neri
  4. Discriminatory prices, endogenous locations and the Prisoner Dilemma problem By Stefano Colombo
  5. How does FDI inflow affect productivity of domestic firms? The role of horizontal and vertical spillovers, absorptive capacity and competition By Kolasa, Marcin
  6. Complementarities, Below-Cost Pricing, and Welfare Losses By Vanessa von Schlippenbach
  7. Complementary Assets, Start-Ups and Incentives to Innovate By Luca Colombo; Herbert Dawid
  8. Emerging Issues in Promoting Competition Policy under Regional Frameworks By Aldaba, Rafaelita Mercado
  9. A laboratory study of Demand Reduction and Collusion in Uniform- and Discriminatory-Price Auctions By Alexander Elbittar; Andrei Gomberg
  10. Can Imports Discipline Collusive Firms? The Case of the Philippine Cement Industry By Aldaba, Rafaelita Mercado
  11. Measuring market power in the Iberian electricity wholesale market through the residual demand curve By Vitor Marques; Isabel Soares; Adelino Fortunato
  12. Cartels, managerial incentives, and productive efficiency in German coal mining, 1881-1913 By Carsten Burhop; Thorsten Luebbers
  13. Uniform Price Auctions and Fixed Price Offerings in IPOs: An Experimental Comparison By Ping Zhang
  14. A Model of Tiered Settlement Networks By James Chapman; Jonathan Chiu; Miguel Molico

  1. By: Norbäck, Pehr-Johan; Persson, Lars
    Abstract: We construct a model where an entrepreneur could either innovate for entry or for sale. It is shown that increased product competition tends to increase the relative profitability of innovation for sale relative to entry. Increased competition reduces entrants' and acquirers' profits in a similar fashion, but also reduces the profit of non-acquirers. Therefore, incumbents' valuations of innovations are less negatively affected by increased competition than entrants' profits. This, in turn, implies that the incentive for innovation for sale can increase with increased competition. Finally, we show that a stricter, but not too strict, merger policy tends to increase the incentive for innovations for sale by ensuring the bidding competition for the innovation, without reducing the total rents for innovations too much.
    Keywords: Antitrust; Competition; Competition Policy; Entrepreneurs; Innovations
    JEL: L13 L40 O31
    Date: 2008–05
  2. By: Bertrand Crettez; Marie-Cécile Fagart
    Abstract: We consider a simple general equilibrium model with imperfect competition. Firms are price taker in the input market and compete à la Cournot in some or all of the product markets (their technology displays constant returns to scale). We show that an increase in the number of firms does not always improve welfare. We also provide a characterization in terms of mark-up rates of the sectors for which entry is welfare enhancing. Thus, this paper challenges the common idea that mergers with no cost synergy are not desirable for consumers.
    Keywords: Cournot competition, competition policy, general equilibrium and imperfect competition, effciency
    JEL: D50 L13 L40
    Date: 2008
  3. By: De Francesco, Massimo A.; Salvadori, Neri
    Abstract: The paper extends the analysis of price competition among capacity-constrained sellers beyond the cases of duopoly and symmetric oligopoly. We first provide some general results for the oligopoly and then focus on the triopoly, providing a complete characterization of the mixed strategy equilibrium of the price game. The region of the capacity space where the equilibrium is mixed is partitioned according to the features of the mixed strategy equilibrium arising in each subregion. Then computing the mixed strategy equilibrium becomes a quite simple task. The analysis reveals features of the mixed strategy equilibrium which do not arise in the duopoly (some of them have also been discovered by Hirata (2008)).
    Keywords: Bertrand-Edgeworth; Price game; Oligopoly; Triopoly; Mixed strategy equilibrium
    JEL: L13 D43 C72
    Date: 2008–05–07
  4. By: Stefano Colombo (DISCE, Università Cattolica, Milan)
    Abstract: In the Hotelling framework, the equilibrium first-degree discriminatory prices are all lower than the equilibrium uniform price. When firms’ locations are fixed, price discrimination emerges as the unique equilibrium in a game in which every firm may commit not to discriminate before setting the price schedule. This paper assumes endogenous locations and shows that uniform pricing emerges as the unique equilibrium in a game in which every firm may commit not to discriminate before choosing where to locate in the market. Price discrimination still is the unique equilibrium outcome when firms may commit only after the location choice.
    Keywords: Price discrimination; Commitment; Location
    JEL: D43 L11
    Date: 2008–04
  5. By: Kolasa, Marcin
    Abstract: This paper examines the existence of externalities associated with FDI in a host country by exploiting firm-level panel data covering the Polish corporate sector. The main findings are as follows. Local firms benefit from foreign presence in the same industry and in downstream industries. Absorptive capacity of domestic firms is highly relevant to the size of spillovers. Competitive pressure facilitates backward spillovers, while market power increases the extent of forward spillovers. Host country equity participation in foreign firms is consistent with higher unconditional productivity spillovers to domestic firms.
    Keywords: foreign investment; spillovers; productivity; firm-level data
    JEL: F23 O33
    Date: 2007–03
  6. By: Vanessa von Schlippenbach
    Abstract: We analyze below-cost pricing in retail markets and examine its impact on social welfare as well as on suppliers' incentives to invest in quality. Considering negotiations about a linear wholesale price between the retailer and her suppliers, we find that below-cost pricing aggravates the double marginalization problem and causes welfare losses compared to a regime where below-cost pricing is banned. Furthermore, suppliers have stronger incentives to invest in high quality products if a ban of below-cost pricing is enforced.
    Keywords: Complementarities, Retailing, Below-Cost Pricing
    JEL: L22 L42
    Date: 2008
  7. By: Luca Colombo (DISCE, Università Cattolica); Herbert Dawid (Universität Bielefeld)
    Abstract: In this paper we examine in a game theoretic framework in how far market conditions facilitating start-up formation positively affect technical change and firms' profits. We consider a model in which R&D efforts of an incumbent firm generate technological know-how embodied in key R&D employees, who might use this know-how to form a start-up. Market conditions, in particular the availability of complementary assets, influence whether new firms are created and determine expected profits for start-up-founders. Easy availability of complementary assets has the direct effect that the generation of start-ups, which leads to the diffusion and duplication of know-how, is fostered. However, incentives of incumbent firms to invest in R&D might be reduced because of the increased danger of knowledge loss through spin-out formation. We fully characterize the effects of an increase in the availability of complementary assets, demonstrating that under certain market conditions the effects on innovative activities and industry profits can be negative.
    Keywords: Complementary Assets, Technical Change, R&D Effort, Startup
    JEL: L20 M13 O30
    Date: 2008–04
  8. By: Aldaba, Rafaelita Mercado
    Abstract: This paper looks at the emerging issues and problems in promoting competition policy and coordinating its implementation under regional arrangements, particularly the APEC and the ASEAN. Implementing competition policy is a big challenge. As the review of country experiences shows, administrative, legal, political, and economic factors are important in the design and implementation of competition law and policy. The APEC experience illustrates that with the wide differences in the countries’ stage of socioeconomic development as well as in their legal institutions, countries have differed in their approaches to competition. In the ASEAN, difficulties in the development of competition policy are encountered due to the lack of a culture of competition and weak legal and regulatory infrastructures.
    Keywords: competition policy
    Date: 2008
  9. By: Alexander Elbittar (Centro de Investigacion y Docencia Economica (CIDE)); Andrei Gomberg (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
    Abstract: We report results of an experimental study of multi-object uniform and discriminatory-price auctions in an environment of publicly known common values, concentrating on an environment where theory predicts sharply different results of the two auction formats. We find that the bidding behavior in the uniform case exhibits two clear regularities: agents consistently play weakly dominated strategies by overbidding on the first unit and have moderate difficulty coordinating on the high payoff (low auction revenue) equilibrium predicted by theory. However, subjects with experience in the same environment are better at reducing demand to achieve higher payoff. Bidders in discriminatory auctions, as predicted, tend to submit bids close to value for all units and are not generally successful in attempts at collusion.
    Keywords: Experimental economics, Second price auctions
    Date: 2008–02
  10. By: Aldaba, Rafaelita Mercado
    Abstract: <p>Applying a conjectural variations (CV) model introduced by Haskel and Scaramozzino (H&S model 1997), the paper examines the impact of trade liberalization on the Philippine cement industry where alleged cartel activities have taken place after the entry of the world’s Big Three cement firms: Holcim, Cemex, and Lafarge. In the H&S model, the relationship between firm behavior and competition is estimated with price cost margin (price minus marginal costs over price) as indicator of competition and profitability. The model is extended to assess the impact of imports on competition using import penetration ratio as proxy for trade policy.</p> <p>The paper focuses on the following questions: did the removal of import restriction and reduction of tariffs affect competition in the cement industry? Are imports effective in disciplining domestic firms and reducing their market power? The results imply that imports do not seem to affect profitability and competition in the industry. Given the ability of firms to engage in anticompetitive behavior and the absence of an effective competition policy in the Philippines, the gains from trade liberalization are nullified. The country’s experience in the cement industry illustrates that trade liberalization is not a substitute for competition policy. For imports to effectively discipline the market, trade liberalization must be accompanied by strict competition policy.</p>
    Keywords: trade liberalization, competition, cartel, cement industry, conjectural variations
    Date: 2008
  11. By: Vitor Marques (Entidade Reguladora dos Serviços Energéticos, Lisboa); Isabel Soares (CETE, Faculdade de Economia, Universidade do Porto); Adelino Fortunato (Faculdade de Economia da Universidade de Coimbra)
    Abstract: The existence of market power in the electricity market is a recurrent issue. Measuring and understanding market power practices in the Iberian electricity market turn out to be interesting: though a liberalized market, two integrated firms control 80% of total demand and there is a strong - often direct - intervention of government in the market. For various reasons, among which the difficulty in obtaining reliable, extensive data stands out, market power in the Iberian electricity market has rarely been measured. This work aims to contribute to a better knowledge of the way market power occurs. We calculate the elasticity of residual demand to evaluate the two dominant firm’s market power, using hourly bides in the Spanish spot market for the period July-August 2004 to 2006. Although our approach was highlighted by Frank Wolak work on the electricity sector, we extend it and discuss its constraints. We discuss the results obtained in the light of the evolution of the electricity sector during that period.
    Keywords: Market power, wholesale market, residual demand curve elasticity, government intervention
    JEL: L13
    Date: 2008–05
  12. By: Carsten Burhop (Max Planck Institute for Research on Collective Goods); Thorsten Luebbers (Max Planck Institute for Research on Collective Goods)
    Abstract: In this paper, we evaluate the impact of cartelisation and managerial incentives on the productive efficiency of German coal mining corporations. We focus on coal mining in the Ruhr district, Germany’s main mining area. We use stochastic frontier analysis and an unbalanced dynamic panel data set for up to 28 firms for the years 1881-1913 to measure productive efficiency. We show that coal was mined with decreasing returns to scale. Moreover, it turns out that cartelisation did not affect productive efficiency. Controlling for corporate governance variables shows that stronger managerial incentives were significantly correlated with productive efficiency, whereas the debt-equity ratio did not influence it.
    Keywords: Economic history; Germany pre-1913; Cartel; Productive efficiency; Corporate Governance
    JEL: N53 L41 L71
    Date: 2008–04
  13. By: Ping Zhang (School of Economics, University of Nottingham)
    Abstract: We compare uniform price auctions with fixed price offerings in Initial Public Offerings (IPO) using laboratory experiments. The experimental environment is based on the Biais and Faugeron-Grouzet (2002) model. Standard predictions based on tacit collusion equilibria (TCE) suggest lower revenues in uniform price auctions, although alternative equilibria allow for higher revenues. In our experiment, there is no evidence that TCE are played. The experiment suggests that the uniform price auctions are superior to fixed price offerings in terms of raising revenues.
    Keywords: Experiment, IPO, Uniform price auction, Fixed price offering, Share auction
    JEL: D44 G12 C91
    Date: 2008–04
  14. By: James Chapman; Jonathan Chiu; Miguel Molico
    Abstract: This paper develops a model of settlement system to study the endogenous structure of settlement networks, and the welfare consequences of clearing agent failure. The equilibrium degree of tiering is endogenously determined by the cost structure and the information structure. The degree of tiering is decreasing in the fixed cost of operating the second-tier network and the availability of public credit history. Furthermore, the welfare effects of clearing agent failure can be decomposed into operational inefficiency and the loss of private information.
    Keywords: Payment, clearing, and settlement systems
    JEL: E42 E58 G21
    Date: 2008

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