nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒06‒21
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Horizontal Mergers and Acquisitions with Endogenous Efficiency Gains By Christos Cabolis; Constantine Manasakis; Emmanuel Petrakis
  2. Bertrand Competition with Non-rigid Capacity Constraints By Prabal, Roy Chowdhury
  3. The Impact of Horizontal Mergers on Rivals: Gains to Being Left Outside a Merger By Clougherty, Joseph A; Duso, Tomaso
  4. Impact of Japanese Mergers on Shareholder Wealth: An Analysis of Bidder and Target Companies By Mehrotra, V.; Schaik, D. van; Spronk, J.; Steenbeek, O.W.
  5. Sustaining Collusion in Growing Markets By Vasconcelos, Helder
  6. Platform Intermediation in a Market for Differentiated Products By Andrea Galeotti; José Luis Moraga-González
  7. Post Merger Innovative Patterns in Small and Medium Firms By Elena Cefis; Mihaela-Livia Ghita
  8. Naked Exclusion: An Experimental Study of Contracts with Externalities By Landeo, Claudia M.; Spier, Kathryn E.
  9. From Overt to Tacit Collusion By Jeroen Hinloopen; Adriaan Soetevent
  10. How Demand Information Can Destabilize a Cartel By Liliane Karlinger
  11. Optimal ownership in joint ventures with contributions of asymmetric partners By Marinucci, Marco
  12. Keeping Both Eyes Wide Open: The Life of a Competition Authority Among Sectoral Regulators By Hoernig, Steffen; Nilssen, Tore; Pita Barros, Pedro Luis
  13. The Interaction amongst Trade, Investment and Competition Policies By Csilla Bartók; Sébastien Miroudot
  14. Computing welfare losses from data under imperfect competition with heterogeneous goods By Luis C. Corchon; Galina Zudenkova
  15. Preventing Innovative Cooperations: The Legal Exemptions Unintended Side Effect By Christian Growitsch; Nicole Nulsch; Margarethe Rammerstorfer
  16. Consumer Loyalty in the Swedish Pharmaceuticals Market By Granlund, David; Rudholm, Niklas
  17. Estimating the Productivity Selection and Technology Spillover Effects of Imports By Acharya, Ram C.; Keller, Wolfgang
  18. Does the Quality of Store Brands Affect the Number of National Brand Suppliers? By Daunfeldt, Sven-Olov; Orth, Matilda; Rudholm, Niklas
  19. Competing to Invest in the Foreign Market By Laixun Zhao; Makoto Okamura
  20. Globalizing Tax Evasion: How Competition Affects the Size of the Underground Economy By Liliane Karlinger
  21. Competition and the Gender Wage Gap: New Evidence from Linked Employer-Employee Data in Hungary 1986-2003 By Anna Lovasz

  1. By: Christos Cabolis (ALBA Graduate Business School); Constantine Manasakis (Department of Economics, University of Crete, Greece); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: We examine how the strategic long-run decisions, such as cost-reducing R&D investments, prior to the decision for integration; create endogenous efficiency gains that make a horizontal integration profitable. The "merger" and the "acquisition" are distinguished as different modes of horizontal integration, with respect to both incentives and equilibrium outcomes. We show that firms' incentives for integration depend on the magnitude of the cost efficiencies that R&D investments give rise to and the rule of sharing of the integrated entity's profits across participants. The welfare effects of horizontal integrations are also discussed.
    Keywords: Horizontal mergers and acquisitions; Processes Innovations; Endogenous efficiency gains.
    JEL: C72 G34 O31
    Date: 2008–06–18
  2. By: Prabal, Roy Chowdhury
    Abstract: We examine a model of Bertrand competition with non-rigid capacity constraints, so that by incurring an additional cost, firms can produce beyond capacity. We find that there is an interval of prices such that a price can be sustained as a pure strategy Nash equilibrium if and only if it lies in this interval. We then examine the properties of this set as (a) the number of firms becomes large and (b) the capacity cost increases.
    JEL: D5 L2
    Date: 2008–06
  3. By: Clougherty, Joseph A; Duso, Tomaso
    Abstract: It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert-identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, ‘future acquisition probability’ does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type.
    Keywords: Acquisitions; Event-Study; Mergers; Rivals
    JEL: G14 G34 L22 M20
    Date: 2008–06
  4. By: Mehrotra, V.; Schaik, D. van; Spronk, J.; Steenbeek, O.W. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: The market for corporate control in the second largest economy in the world behaves very different from that in the U.S. Using a sample of 91 mergers in the period 1982-2003 we document several distinctive features of this market in Japan. First, we show that in stark contrast to the pro-cyclical U.S. merger waves, mergers in Japan tend to be counter-cyclical, both with respect to the general economy as well as with respect to stock market valuations. Second, and again in contrast to the U.S. experience, we find that a significant fraction of Japanese mergers are orchestrated by the main banks; in such cases, mergers are not between two weak companies, but at least one of the merging companies is financially strong. Other distinctive features of Japanese mergers are the positive pre-announcement returns accruing to both bidders and targets, with bidders capturing approximately half the gains that accrue to target firms. We also find differential shareholder wealth effects in the bubble period (1982-1989), the early 1990s, and the post-financial regulation regime (1997-2003). Overall our results point to a market for corporate control that is distinctly less shareholder-centered than that in the U.S. and one where creditors play an important, perhaps dominant, role.
    Keywords: Japanse mergers;corporate control;mergers;take-over
    Date: 2008–06–02
  5. By: Vasconcelos, Helder
    Abstract: The impact of demand growth on the collusion possibilities is investigated in a Cournot supergame where market growth may trigger future entry and the collusive agreement is enforced by the most profitable 'grim trigger strategies' available. It is shown that even in situations where perfect collusion can be sustained after entry, coping with a potential entrant in a market which is growing over time may completely undermine any pre-entry collusive plans of the incumbent firms. This is because, before entry, a deviation and the following punishment phase may become more attractive thanks to their additional effect in terms of delaying entry.
    Keywords: Collusion; Demand Growth; Entry
    JEL: D43 L13 L41
    Date: 2008–06
  6. By: Andrea Galeotti (University of Essex, U.K.); José Luis Moraga-González (University of Groningen, Groningen, the Netherlands, and CESifo)
    Abstract: We study a two-sided market where a platform attracts firms selling differentiated products and buyers interested in those products. In the unique subgame perfect equilibrium of the game, the platform fully internalizes the network externalities present in the market and firms and consumers all participate in the platform with probability one. The monopolist intermediary extracts all the economic rents generated in the market, except when firms and consumers can trade outside the platform, in which case consumers retain part of the economic rents. The market allocation is constraint efficient in the sense that the monopoly platform does not introduce distortions over and above those arising from the market power of the differentiated product sellers. An increase in the number of retailers increases the amount of variety in the platform but at the same time increases competition. As a result, the platform lowers the firm fees and raises the consumer charges. In contrast, an increase in the extent of product differentiation raises the value of the platform for the consumers but weakens competition. In this case, the platform raises both the charge to the consumers and the fee for the firms.
    Keywords: Two-sided markets; network externalities; intermediation; advertising
    JEL: L12 L13 D42 D43
    Date: 2008–02–25
  7. By: Elena Cefis; Mihaela-Livia Ghita
    Abstract: This paper investigates whether involvement in mergers and acquisitions (M&As) triggers distinct patterns of innovative behaviour across firms situated at different points on the firm size distribution. Firms use more and more M&As as mechanisms to bridge the gap between where they are and what they want to achieve in terms of innovation and performance. We explore the different impact of M&A activity on the likelihood that firms begin to innovate using an unique dataset combining innovation and economic firm-level data from two different sources: the 4 waves of Community Innovation Survey and the Business Register, for the Dutch manufacturing sector. The analysis is carried out at different size classes. The results show that both new entry and persistence in innovative activities are fostered by M&A involvement. Medium firms are the ones showing the highest probabilities of entering /persisting in innovative activities after M&As. For small firms, M&As do not ease the overcome of “the innovative threshold”; on the contrary they seem to increase the probability of exiting innovative status in the post-merger period.
    Keywords: Mergers and acquisitions; innovation; small and medium enterprises; transition probabilities; probit models
    JEL: L11 L25 D21 C14
    Date: 2008–05
  8. By: Landeo, Claudia M.; Spier, Kathryn E.
    Abstract: This paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts. We use the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000) where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent. When discrimination is impossible, the game resembles a stag-hunt (coordination) game in which the buyers' payoffs are endogenously chosen by the incumbent seller. Exclusion occurs when the buyers fail to coordinate on their preferred equilibrium. Two-way non-binding pre-play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller. When discrimination and communication are possible, the exclusion rate rises. Divide-and-conquer strategies are observed more frequently when buyers can communicate with each other. Exclusion rates are significantly higher when the buyers' payoffs are endogenously chosen rather than exogenously given. Finally, secret offers are shown to decrease the incumbent's power to profitably exclude.
    Keywords: Bargaining with Externalities; Contracting with Externalities; Experiments; Exclusive Dealing; Antitrust; Discrimination; Endogenous Payoffs; Communication; Coordination Games; Equilibrium Selection
    JEL: D86 C9 L0 K0 K21 D4 L1 L4 C72
    Date: 2007–12–11
  9. By: Jeroen Hinloopen (University of Amsterdam); Adriaan Soetevent (University of Amsterdam)
    Abstract: Recent laboratory experiments support the popular view that the introduction of corporate leniency programs has significantly decreased cartel activity. The design of these repeated game experiments however is such that engaging in illegal price discussions is the only way for subjects to avoid the one-shot competitive equilibrium. Subjects in the experiment of this paper have multiple feasible Nash equilibrium strategies to avoid the competitive equilibrium. These strategies differ in the difficulty of the coordination problem they have to solve. The experimental results show that if the efforts of the antitrust authority and the leniency program are directed exclusively to the most straightforward collusive scheme, subjects manage to switch to a more intricate form of coordination. This shift from overt collusion to tacit collusion questions the acclaimed success of corporate leniency programs.
    Keywords: overt collusion; tacit collusion; corporate leniency program; antitrust policy
    JEL: C72 C92 L41
    Date: 2008–06–09
  10. By: Liliane Karlinger
    Abstract: This paper studies a symmetric Bertrand duopoly with imperfect mon- itoring where rms receive noisy public signals about the state of demand. These signals have two opposite eects on the incentive to collude: avoid- ing punishment after a low-demand period increases collusive prots, mak- ing collusion more attractive, but it also softens the threat of punishment, which increases the temptation to undercut the rival. There are cases where the latter eect dominates, and so the collusive equilibrium does not always exist when it does absent demand information. These ndings are related to the Sugar Institute Case studied by Genesove and Mullin (2001).
    JEL: L13 L41
    Date: 2008–02
  11. By: Marinucci, Marco
    Abstract: This paper faces two questions concerning Joint Ventures (JV) agreements. First, we study how the partners contribution affect the creation and the profit sharing of a JV when partners' effort is not observable. Then, we see whether such agreements are easier to enforce when the decision on JV profit sharing among partners is either delegated to the independent JV management (Management Sharing) or jointly taken by partners (Coordinated Sharing). We find that the firm whose effort has a higher impact on the JV's profits should have a larger profit shares. Moreover, a Management sharing ensures, at least in some cases, a wider range of self-enforceable JV agreements.
    Keywords: D43; L13; L14; L22
    JEL: L14 L13 D43 L22
    Date: 2008–04
  12. By: Hoernig, Steffen; Nilssen, Tore; Pita Barros, Pedro Luis
    Abstract: Competition authorities must pay attention to many industries simultaneously. Sectoral regulators concentrate on their own industry. Often both types of authority may intervene in specific industries and there is an overlap of jurisdictions. We show how a competition authority’s resource allocation is affected by its relationships with sectoral regulators and their biases. If agencies collaborate (compete), the competition authority spends more effort on the industry with the more (less) consumer-biased sectoral regulator. The competition authority spends budget increases on the industry whose regulator reacts less to more effort. The socially optimal budget corrects for distortions due to regulatory bias, but only downwards.
    Keywords: Competition authority; Regulatory bias; Sectoral regulators
    JEL: H11 L40 L51
    Date: 2008–06
  13. By: Csilla Bartók; Sébastien Miroudot
    Abstract: The report focuses on the complementarities between trade, investment and competition policies and analyses how policy coherence can be promoted in these three important areas that shape incentives for firms and individuals to be more productive and for markets to be more competitive. It also deals with the potential inconsistencies or tensions that may arise between trade, investment and competition reforms and how to ease them. It shows that specific policy goals can be achieved while maintaining an open and procompetitive environment. Overall, the analysis highlights the role of governments in providing the right incentives to facilitate the adjustment to the internationalisation of production and the important synergies between policies that can be exploited to promote growth. It is not only the case in contestable markets but also in the context of market failures where pro-competitive policies can address specific distortions and mitigate the adverse effects of reforms. The report includes the results of a survey collecting the experience of policymakers on complementarities between trade, investment and competition policies.
    Keywords: investment, competition, trade, reforms, market failure
    JEL: F1 F2 L5
    Date: 2008–02–22
  14. By: Luis C. Corchon; Galina Zudenkova
    Abstract: We study the percentage of welfare losses (PWL) yielded by imperfect competition under product differentiation. When demand is linear and firms are identical, if prices, outputs, costs and the number of firms can be observed, PWL is arbitrary in both Cournot and Bertrand equilibria. However, if the elasticity of demand can be estimated, under a Cournot equilibrium, PWL is a function of the elasticity of demand, the number of firms and the price-marginal cost margin. In a Bertrand equilibrium, PWL is a function of the cross elasticity of demand, the number of firms and the price-marginal cost margin. When firms are not identical, we provide conditions under which PWL increases with concentration. When demand is isoelastic and there are many firms, PWL can be computed from prices, outputs, costs and the number of firms. In all these cases we find that price-marginal cost margins and demand elasticities may influence PWL in quite a counterintuitive way.
    Date: 2008–05
  15. By: Christian Growitsch; Nicole Nulsch; Margarethe Rammerstorfer
    Abstract: In 2004, European competition law had been faced with considerable changes due to the introduction of the new Council Regulation No. 1/2003. One of the major renewals was the replacement of the centralized notification system for inter-company cooperations in favor of a so-called legal exemption system. We analyze the implications of this reform on the agreements firms implement. In contrast to previous research we focus on the reform’s impact on especially welfare enhancing, namely innovative agreements. We show that the law’s intention to reduce the incentive to establish illegal cartels will be reached. However, by the same mechanism, also highly innovative cooperations might be prevented. To avoid this unintended effect, we conclude that only fines but not the monitoring activities should be increased in order to deter illegal but not innovative agreements.
    Keywords: Competition policy, competition law enforcement, legal exemption system
    JEL: K42 L40
    Date: 2008–06
  16. By: Granlund, David (Department of Economics); Rudholm, Niklas (Department of Economics)
    Abstract: The purpose of this paper is to test if consumer loyalty is stronger toward brand name prharmaceutical products and branded generics as compared to "true" generics in the Swedish pharmaceutical market. The results show that consumers are equally loyal toward brand name pharmaceuticals and branded generics, while substantially less loyal toward generics. The results thus seem to give support to the idea that brand name recognition is important in creating consumer loyalty toward pharmaceutical products.
    Keywords: Brand loyalty; Branded generics; Parallel import; Generic competition
    JEL: D12 I11
    Date: 2008–06–09
  17. By: Acharya, Ram C.; Keller, Wolfgang
    Abstract: In the wake of falling trade costs, two central consequences in the importing economy are, first, that stronger competition through increased imports can lead to market share reallocations among domestic firms with different productivity levels (selection). Second, the increase in imports might improve domestic technologies through learning externalities (spillovers). Each of these channels may have a major impact on aggregate productivity. This paper presents comparative evidence from a sample of OECD countries. We find that the average long run effect of an increase in imports on domestic productivity is close to zero. If the scope for technological learning is limited, the selection effect dominates and imports lead to lower productivity. If, however, imports are relatively technology-intensive, imports also generate learning that can on net raise domestic productivity. Moreover, there is somewhat less selection when the typical domestic firm is large. The results support models in which trade triggers both substantial selection and technological learning.
    Keywords: market shares; R&D; Technology investments
    JEL: F1 O3 O33
    Date: 2008–06
  18. By: Daunfeldt, Sven-Olov (The Swedish Retail Institute (HUI)); Orth, Matilda (Department of Economics); Rudholm, Niklas (The Swedish Retail Institute (HUI))
    Abstract: This paper examines how the increased market shares of the store brands affect the entry and survival of national brand suppliers. The analysis is performed on monthly scanner data for a number of household- and personal-care products covering June 2001 through May 2004. An increased market share of medium-priced store brands was found to decrease the number of suppliers of national brands. However, no statistically significant impact was found of low-priced store brand market shares on the numer of national brand suppliers. It thus seems that it is mainly medium-priced store brands that compete with national brands.
    Keywords: Scanner data; household products; count data; private labels
    JEL: L13 L81
    Date: 2008–06–09
  19. By: Laixun Zhao (Research Institute for Economics and Business Administration, Kobe University); Makoto Okamura (Department of Economics, Hiroshima University)
    Abstract: This paper analyzes foreign-direct-investment (FDI) competition in a three-country framework: two Northern countries and one Southern country. We have in mind the competition of Airbus and Boeing (or GM and Volkswagen) in a developing country. The host-country government endogeneizes tariffs, while Airbus and Boeing choose domestic output and FDI. Wages and employment in the home countries are bargained over between labor and management. We find that in the unique equilibrium, both Airbus and Boeing compete to undertake FDI in the developing country. This arises because the host country can play off the multinational corporations, which in turn stems from three factors: (a) Oligopolistic rivalry; (b) Quid prod quo FDI, which reduces tariffs; (c) Strategic outsourcing—FDI drives down the union wages at home if the host-country wage is sufficiently low. However, if the host-country wage is sufficiently high, then the union wage increases under FDI. In such cases, FDI competition benefits the multinationals, the labor unions as well as the host country. If Boeing undertakes FDI while Airbus does not, then: (i) Boeing's market share and profits are higher than Airbus's; (ii) the tariff facing Boeing is lower than that facing Airbus.
    Keywords: FDI Competition, Quid Pro Quo FDI, Labor Union, Political Economy, Emerging Markets
    JEL: F21 F23 F16
    Date: 2008–03
  20. By: Liliane Karlinger
    Abstract: The underground economy expanded substantially during the late 1990s, both in the industrialized and the developing world. I argue that this development is a response to the sharp increase in market competition worldwide. I develop a parsimonious oligopoly model of free entry and free sector choice, where the intensity of competition is captured by the degree of (exogenous) product differentiation. Operating in the underground economy reduces variable costs, but comes at the risk of being detected and fined. The keener is competition, the higher is the pressure to reduce costs, and the more pervasive is the underground economy.
    JEL: H26 L11
    Date: 2008–05
  21. By: Anna Lovasz (Labor Project, Central European University)
    Abstract: The overall gender wage gap fell from .31 to .15 between 1986 and 2003 following the transition to a free market in Hungary. During the same time period, firms faced increased competition from both new domestic and foreign firms due to the rapid liberalization measures implemented by the government. Becker's (1957) model of employer taste discrimination implies that employers that discriminate against women may be forced out of the market by competition in the long run, leading to a fall in the gender wage gap. I test this implication using data from the Hungarian Wage and Earnings Survey covering 1986-2003. I estimate the effect of variation in various measures of product market competition, including trade variables, on the within-firm endowment-adjusted gender wage gap, making use of the fact that I am able to follow firms over time. The estimates show a significant negative relationship between product market competition and the within-firm gender wage gap.
    Keywords: Transitional labor market, wage differentials, gender discrimination
    JEL: J31 J71 P20
    Date: 2008–06

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