nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒06‒07
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Mergers, cartels and leniency programs : the role of production capacities By Emilie Dargaud
  2. Defensive strategies in the quality ladders By Ivan Ledezma
  3. Competition and Innovation: An Experimental Investigation By Dario Sacco; Armin Schmutzler
  4. Optimal Patent Length By James Bergin
  5. Perfect Competition in an Oligoply (including Bilateral Monopoly) By Pradeep Dubey und Dieter Sondermann
  6. Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model By James J Anton; Gary Biglaiser
  7. Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly By Dimitra Petropoulou
  8. Monopolistic Competition, International Trade and Firm Heterogeneity - a Life Cycle Perspective By Hansen, Jørgen Drud; Kvedaras, Virmantas; Nielsen, Jørgen Ulff-Møller
  9. Cost Pass Through in a Competitive Model of Pricing-to-Market By Auer, Raphael; Chaney, Thomas
  10. A dynamic model of renewable resource harvesting with Bertrand competition By Beard, Rodney
  11. Intensity of Competition and Market Structure in the Italian Banking Industry By Giannetti, C.
  12. Unit Roots and the Dynamics of Market Shares: An Analysis Using Italian Banking Micro-Panel By Giannetti, C.
  13. Compétition pour les paiements : une titanomachie revisitée par la modélisation multi-agents By Sandra Deungoue
  14. Effects of Regulation on Drug Launch and Pricing in Interdependent Markets By Patricia M. Danzon; Andrew J. Epstein
  15. The Economic Properties of Software By Sebastian von Engelhardt
  16. Competition Clauses in Bilateral Trade Treaties: Analysing the Issues in the Context of India's Future Negotiating Strategy By Sanghamitra Sahu; Neha Gupta

  1. By: Emilie Dargaud (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France)
    Abstract: In this paper, we study the impact of a merger on collusion depending on the endowment of capital asset among firms. We show that the merger makes the collusion easier to sustain when asymmetric capital stock combines with less efficient insiders because of more symmetric conditions and closer incentive constraints. Moreover, this model allows us to determine an optimal threshold of asymmetry among insiders and outsiders such as a merger has pro-competitive effects and we compare this value with the value which would restore perfect symmetry between firms after the merger.
    Keywords: leniency programs, merger, oligopoly supergame
    JEL: K42 L11 L41
    Date: 2008
  2. By: Ivan Ledezma
    Abstract: This paper studies theoretically and empirically the consequences of defensive strategies in R&D races. Using a quality ladders model we allow for endogeneous incumbent R&D advantages explained by strategies seeking to limit knowledge diffusion. Market institutions appear to be crucial to foster aggregate R&D intensity and to determine who innovates. Regulatory provisions reducing the possibilites of defensive strategies in the process of production may indeed increase the incentives to carry out R&D. This effect is more likely to be observed when the size of innovation is high. Using time-series cross-section data of manufacturing industries among 17 OECD countries we test the relationship between regulation and R&D expenditure over value added. We allow for a differentiated effect of regulation for industries producing and using ICT. The evidence is consistent with the model's predictions.
    Date: 2008
  3. By: Dario Sacco (Socioeconomic Institute, University of Zurich); Armin Schmutzler (Socioeconomic Institute, University of Zurich)
    Abstract: The paper analyzes the effects of more intense competition on firms’ incentives to invest in process innovations. We carry out experiments based on two-stage games, where R&D investment choices are followed by product market competition. As predicted by theory, an increase in the number of firms from two to four reduces investments. However, a positive effect is observed for a switch from Cournot to Bertrand, even though theory predicts a negative effect in the four-player case.
    Keywords: R&D investment, intensity of competition, experiment
    JEL: C92 L13 O31
    Date: 2008–05
  4. By: James Bergin (Geary Institute & School of Economics, University College Dublin)
    Abstract: The intent of the patent system is to encourage innovation by granting the innovator exclusive rights to a discovery for a limited period of time: with monopoly power, the innovator can recover the costs of creating the innovation which otherwise might not have existed. And, over time, the resulting innovation makes everyone better off. This presumption of improved social welfare is considered here. The paper examines the impact of patents on welfare in an environment where there are large numbers of (small) innovators — such as the software industry. With patents, because there is monopoly for a limited time the outcome is necessarily not socially optimal, although social welfare may be higher than in the no-patent state. Patent acquisition and ownership creates two opposing incentives at the same time: the incentive to acquire monopoly rights conferred by the patent spurs innovation, but subsequent ownership of those rights inhibits innovation (both own innovation and that of others). On balance, which effect will dominate? In the framework of this paper separate circumstances are identified under which patents are either beneficial or detrimental to innovation and welfare; and comparisons are drawn with the socially optimal level of investment in innovation.
    Date: 2008–03–18
  5. By: Pradeep Dubey und Dieter Sondermann
    Abstract: We show that if limit orders are required to vary smoothly, then strategic (Nash) equilibria of the double auction mechanism yield competitive (Walras) allocations. It is not necessary to have competitors on any side of any market: smooth trading is a substitute for price wars. In particular, Nash equilibria are Walrasian even in a bilateral monopoly.
    Keywords: Limit orders, double auction, Nash equilibria, Walras equilibria, mechanism design
    JEL: C72 D41 D44 D61
  6. By: James J Anton; Gary Biglaiser
    Date: 2008–06–01
  7. 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 monopolistic 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: 2008–02
  8. By: Hansen, Jørgen Drud (Department of Economics, Aarhus School of Business); Kvedaras, Virmantas (Department of Econometric Analysis); Nielsen, Jørgen Ulff-Møller (Department of Economics, Aarhus School of Business)
    Abstract: This paper presents a dynamic international trade model based on monopolistic competition, where observed intra-industry differences at a given point in time reflect different stages of the firm’s life cycle. New product varieties of still higher quality enter the market every period rendering old varieties obsolescent in a process of creative destruction. For given technology (variety) production costs decrease after an infant period due to learning. It is shown that several patterns of exports may arise depending primarily on the size of fixed trade costs. At a given point in time firms therefore differ due to different age, although all firms are symmetric in a life cycle perspective. The paper thus offers an alternative view on firm heterogeneity compared with other recent papers, where productivity differences appear as an outcome of a stochastic process.
    Keywords: Product innovations; learning; creative destruction; firm heterogeneity; export performance
    JEL: F12 F13
    Date: 2008–05–01
  9. By: Auer, Raphael (Swiss National Bank); Chaney, Thomas (Department of Economics University of Chicago)
    Abstract: This paper builds up an extension to the Mussa and Rosen (1978) model of quality pricing under perfect competition. Our model incorporates decreasing returns to scale. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods. We test those predictions using highly disaggregated price and quantity US import data. We find that the prices of high quality goods, proxied as high unit price goods, are more sensitive to exchange rate movements. Moreover, we find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods.
    Keywords: Pricing-to-Market; Exchange Rate Pass Through; Local Distribution
    JEL: F11 F31 F41
    Date: 2008–05–15
  10. By: Beard, Rodney
    Abstract: In this paper a dierential game model of renewable resource ex- ploitation is considered in which rms compete in exploiting a com- mon resource in a Bertrand price-setting game. The model character- izes a situation in which rms extract a common renewable resource which after harvesting may be considered a dierentiated product. Firms then choose prices rather than harvest quantities. Quantities extracted are determined by consumer demand. Optimal price and harvest policies are determined in a linear state dierential game for whichr open-loop and feedback strategies are known to be equuiva- lent. Furthermore, the case of search costs and capacity constraints is analysed and the role they play in determining the dynamics of the resource stock is considered. The results are compared to those of Cournot competition which has been analysed extensively in the literature. Previous studies of dierential games applied to renewable resource harvesting have concentrated on quantity competition (see for example [12]) and the case of price competition has been largely ignored. the exceptions to this have been in the more empirical litera- ture where evidence for price competition versus quantity competition for renewable resources such as sheries is mounting [1]. Consequently the results presented here are not only new, but possibly of greater empirical relevance than existing results on quantity competition.
    Keywords: linear-state differential game; Bertrand competition; renewable resources; fisheries
    JEL: L13 C02 C61 Q22 D43 Q20 C72
    Date: 2008–05–29
  11. By: Giannetti, C. (Tilburg University, Center for Economic Research)
    Abstract: This work tests the predictions of Sutton?s model of independent submarkets for the Italian retail banking industry. In the first part of this paper, I develop a model of endogenous mergers to evidence the relationship between firms? conduct, market entry and market structure. In the second part, I identify the submarket dimension and estimate the relationship between market size and market structure using data on bank branches. The size of the submarkets turned out to be at most provincial whereas the limiting concentration index - as argued by Sutton for industries with exogenous sunk costs - goes to zero as the market becomes larger.
    Keywords: Concentration;Truncated Poisson and Negative Binomial models;quantile regressions
    JEL: C24 D43 L11 L89
    Date: 2008
  12. By: Giannetti, C. (Tilburg University, Center for Economic Research)
    Abstract: The paper proposes the use of panel data unit root tests to assess market share instability in order to have (preliminary) indications of the industry dynamic. The idea is to consider the movements in market shares not only as element of the market structure but rather reflecting conduct that arise from that market. If shares are mean-reverting, the firm actions only have a temporary effect on shares. On the other hand, if they are evolving, as signaled by the presence of unit roots, the gain in shares respect with the competitors could be long-term. To illustrate the potential of unit roots tests, I consider an application to the Italian retail banking industry.
    Keywords: Turbulence;cross-section dependence.
    JEL: C23 D40
    Date: 2008
  13. By: Sandra Deungoue (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France)
    Abstract: The main purpose of this paper is to study the economics of interchange fee in payment card association. The different arrangements for interchange fees and the nosurcharge rule lower the level of competition intensity that would otherwise have occurred and push interchange fees up. In many countries, competition regulators carried out investigations on the lack of transparency and competition in these card-based payment systems, and took measurements for an optimal determination of interchange fees. To help understand and predict the evolution of payment markets, we use an agent-based model that simulates strategic behaviours for different levels of interchange fee. We thus observe the social welfare and the intensity of competition on both the buyer and seller sides of intermediate markets.
    Keywords: agent-based models, payment systems, two-sided markets
    JEL: E47 G21 L16
    Date: 2008
  14. By: Patricia M. Danzon; Andrew J. Epstein
    Abstract: This study examines the effect of price regulation and competition on launch timing and pricing of new drugs. Our data cover launch experience in 15 countries for drugs in 12 therapeutic classes that experienced significant innovation over the decade 1992-2003. We use prices of established products as a measure of the direct effect of a country's own regulatory system, and find that launch timing and prices of innovative drugs are influenced by prices of established products. Thus, if price regulation reduces drug prices, it contributes to launch delay in the home country. New drug launch hazards and launch prices in low-price countries are also affected by referencing by other, high-price countries, especially within the EU, as expected if manufacturers delay launch in low-price markets to avoid undermining higher prices in other countries. Thus, referencing policies adopted in high-price countries can impose welfare loss on low-price countries. Prices of new drugs are influenced mainly by prices of other drugs within the same subclass; however, dynamic competition from new subclasses undermines new drug launch in older subclasses. Association with a local firm accelerates launch only in certain regulated markets. These findings have implications for US proposals to constrain pharmaceutical prices in the US through external referencing and drug importation.
    JEL: I11 I18 K2 L5 L65
    Date: 2008–05
  15. By: Sebastian von Engelhardt (Friedrich Schiller University Jena, School of Economics and Business Administration)
    Abstract: Software is a good with very special economic characteristics. Taking a general deï¬nition of software as its starting-point, this article systematically elaborates the central qualities of the commodity which have implications for its production and cost structure, the demand, the contestability of software-markets, and the allocative efï¬ciency. In this context it appears to be reasonable to subsume the various characteristics under the following generic terms: software as a means of data-processing, software as a system of commands or instructions, software as a recombinant system, software as a good which can only be used in discrete units, software as a complex system, and software as an intangible good. Evidently, software is characterized by a considerable number of economically relevant qualities—ranging from network effects to a subadditive cost function to nonrivalry. Particularly to emphasise is the fact that software fundamentally differs from other information goods: First, from a consumer's perspective the readability and other aspects concerning how the information is presented, is irrelevant. Second, the average consumer/user is interested only in the funtionality of the algorithms but not in the underlying information.
    Keywords: digital goods, compatibility, information good, network effects, nonrivalry, open source, recombinability, software
    JEL: D82 D83 D62 D85 K11 L17
    Date: 2008–06–04
  16. By: Sanghamitra Sahu (Indian Council for Research on International Economic Rela); Neha Gupta (Indian Council for Research on International Economic Rela)
    Abstract: There is a recent trend towards trade agreements that include trade related competition provisions. However there are large differences across these trade agreements in terms of how the competition provisions are addressed. In this context, this research report tries to analyse the competition provisions in few selected FTAs and draw lessons for India, which is also following the path of entering into trade agreements. The analysis suggests that cooperation in implementing competition laws is immensely helpful. However, at this moment, India can follow the EU style of agreements with competition provisions such as cooperation, exchange of non-confidential information, technical assistance and consultation.
    Date: 2008–02

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