nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒06‒27
eleven papers chosen by
Russell Pittman
US Department of Justice

  1. Naked Exclusion: An Experimental Study of Contracts with Externalities By Claudia M. Landeo; Kathryn E. Spier
  2. Globalisation and firm exit: differences between small and large firms By Colantone, I.; Coucke, K.; Sleuwaegen, L.
  3. Market Power in Power Markets: Evidence from Forward Prices of Electricity By Bent Jesper Christensen; Thomas Elgaard Jensen; Rune Mølgaard
  4. Collusion in the Private Health Insurance Market: Empirical Evidence for Chile By Claudio Agostini; Eduardo Saavedra; Manuel Willington
  5. Consumer Loyalty in the Swedish Pharmaceuticals Market By Granlund, David; Rudholm, Niklas
  6. Degree of Competition of Consumer Loan Industry By Kohei Kubota; Yoshiro Tsutsui
  7. Parsimonious Lenders: Bank Concentration and Credit Availability to Small Businesses By Yongjin, Park
  8. Banking Globalization: International Consolidation and Mergers in Banking By Claudia M. Buch; Gayle L. DeLong
  9. Corporate performance, board structure, and their determinants in the banking industry By Renée B. Adams; Hamid Mehran
  10. Vertical Disintegration in Marshallian Industrial Districts By Octávio Figueiredo; Paulo Guimarães; Douglas Woodward
  11. Competition, Takeovers and Gender Discrimination By Heyman, Fredrik; Svaleryd, Helena; Vlachos, Jonas

  1. By: Claudia M. Landeo; Kathryn E. Spier
    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.
    JEL: C72 C90 K21 K41 L12 L40
    Date: 2008–06
  2. By: Colantone, I.; Coucke, K.; Sleuwaegen, L. (Vlerick Leuven Gent Management School)
    Abstract: The effects of increasing import competition on output displacement and exit of heterogeneousdomestic firms are investigated within the context of an oligopolistic rivalry model.The displacement effect is found to be stronger for large "output flexible" firms, while small"cost flexible" ones are less affected by increasing import pressure. Extending the model to allow for product heterogeneity between domestic and foreign firms, we also find that product differentiation lowers the displacement effect. The theoretical findings are supported at the empirical level by the analysis of firm exit dynamics for 12 manufacturing sectors in 8 European countries, from 1997 to 2003. In particular, we find that the exit of large firms is sensitive to the shock of increasing import penetration from low-wage countries. Small firms in the same industries are instead only affected by marginal trade integration with respect to neighbouring EU countries and other relatively wealthy trading partners. Hence this paper shows, for the first time, that firms of different size might be affected differently by diverse sources of import competition. Implications on firms’ strategic planning and public policy are discussed.
    Keywords: oligopolistic competition, low-wage country import competition, firm exit
    JEL: F12 F14 L11 L25 L60
    Date: 2008–06–18
  3. By: Bent Jesper Christensen; Thomas Elgaard Jensen; Rune Mølgaard (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: We examine the forward market for electricity for indications of misuse of market power, using a unique data set on OTC price indications posted by Elsam A/S, the dominant producer in Western Denmark, which is one of the price areas under the Nordic power exchange Nord Pool. The Danish Competition Council (the regulatory government agency) has ruled that Elsam has used its dominant position to obtain excessive spot prices over a period from July 2003 through December 2006. We show that significant forward premia exist, and that they are related both to spot market volatility and misuse of market power in the spot market, indicating that misuse of market power in the forward market accompanied that which took place in the spot market, according to this ruling. This is consistent with the hypothesis that Elsam used the forward market to disguise its spot market manipulation. The findings are consistent across forward premium regressions and structural forward pricing models.
    Keywords: Electricity, forward prices, market power
    JEL: G13 L12
    Date: 2007–10–26
  4. By: Claudio Agostini (ILADES-Georgetown University, Universidad Alberto Hurtado); Eduardo Saavedra (ILADES-Georgetown University, Universidad Alberto Hurtado); Manuel Willington (ILADES-Georgetown University, Universidad Alberto Hurtado)
    Abstract: In September 2005, the Chilean Competition Authority filed a complaint against the 5 largest private health insurance providers for violation of antitrust laws. The 5 providers were accused of colluding to reduce the coverage of the plans offered to customers between March 2002 and March 2003. The main fact is that during that period these 5 providers reduced the coverage offered from 100% for hospitalization and 80% for ambulatory care to 90% and 70% respectively. As usual the observation of parallel conduct is not enough to infer collusion and it is required to observe additional factors that allow us to reject the hypothesis of providers behaving competitively. In this paper, we show that some specific characteristics of the health insurance markets generate barriers to entry and switching costs that allow the possibility of a collusive agreement. Then, we adapt an imperfect competition model of product differentiation to derive some testable propositions that allow us to distinguish between competition and collusion outcomes in the health insurance market in Chile. Finally, we show econometric evidence consistent with a collusive agreement among the 5 largest providers and inconsistent with a competitive equilibrium. . In particular, by comparing the prosecuted and non-prosecuted open Isapres before and during the collusive period, we show that sales efforts of the accused Isapres were reduced during the transition period toward lower-quality plans, that the profitability of the two groups of Isapres increased, and that the rate of transfers within the group of accused Isapres fell during the transition period.
    Keywords: Tacit Collusion, Isapres, Health Insurance, Conscious Parallelism, Plus Factors.
    JEL: L41 D43 I11
    Date: 2008–06
  5. By: Granlund, David (Department of Economics, Umeå University); Rudholm, Niklas (Department of Economics, Dalarna University)
    Abstract: The purpose of this paper is to test if consumer loyalty is stronger toward brand name pharmaceutical products and branded generics as compared to "true" generics in the Swedish pharmaceuticals 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: 2008–06–17
  6. By: Kohei Kubota (Graduate School of Economics, Osaka University); Yoshiro Tsutsui (Osaka School of International Public Policy, Osaka University)
    Abstract: The purpose of this paper is to estimate the degree of competition of consumer loan industry in Japan utilizing responses to a questionnaire survey conducted by Japan Consumer Finance Association. Estimating the cost function, we found that the industry is characterized by large scale economies. Estimation of Lerner index, H-statistics, degree of noncompetition, and degree of collusion reveals that consumer loan market is highly monopolistic. Consumer loan companies answered to a question that they commit neither interest rate competition nor quantity competition through extending branch-networks. We further investigated the reason why consumer loan market is monopolistic. Market for new customers is characterized by informational asymmetry, usury law, and hyperbolic discounting of borrowers, which makes the market monopolistic. Meanwhile, market for incumbent customers is monopolistic because they would not search for new lenders to avoid switching costs. These findings may be useful to draft new regulations on the industry.
    Keywords: consumer loans, degree of competition, scale economy, degree of collusion, H-statistics
    JEL: G21 L13
    Date: 2008–06
  7. By: Yongjin, Park
    Abstract: This paper examines how bank competition affects the amount of credit provided to small businesses using both the loan turndown rate and the size of granted loans and L/Cs. Using 2003 National Survey of Small Business Finance data, we show that commercial banking in concentrated banking markets are more likely to reject loan applications. Moreover, the size of granted loans is found to be significantly smaller in concentrated markets. Finally, we show that the total limit of L/Cs that a firm has is also significantly smaller for firms in concentrated banking markets. Our finding challenges a notion that credit market competition may be inimical to the formation of mutually beneficial relationships between firms and specific creditors. We do not find any evidence that bank concentration is instrumental in building relationship banking and our results suggest the opposite.
    Keywords: Bank Competition; Credit Availability; Small Business; Relationship Banking
    JEL: G28 G21
    Date: 2008–04
  8. By: Claudia M. Buch; Gayle L. DeLong
    Abstract: This paper surveys recent literature on international mergers and acquisitions in banking. We focus on three main questions. First, what are the determinants of cross-border mergers of commercial banks? Second, do cross-border mergers affect the efficiency of banks? Third, what are the risk effects of international bank mergers? We begin with a brief summary of the stylized facts, and we conclude with implications for policymakers.
    Keywords: mergers and acquisition, international banking, survey
    JEL: F23 G21
    Date: 2008–01
  9. By: Renée B. Adams; Hamid Mehran
    Abstract: The subprime crisis highlights how little we know about the governance of banks. This paper addresses a long-standing gap in the literature by analyzing board governance using a sample of banking firm data that spans forty years. We examine the relationship between board structure (size and composition) and bank performance, as well as some determinants of board structure. We document that mergers and acquisitions activity influences bank board composition, and we provide new evidence that organizational structure is significantly related to bank board size. We argue that these factors may explain why banking firms with larger boards do not underperform their peers in terms of Tobin's Q. Our findings suggest caution in applying regulations motivated by research on the governance of nonfinancial firms to banking firms. Since organizational structure is not specific to banks, our results suggest that it may be an important determinant for the boards of nonfinancial firms with complex organizational structures such as business groups.
    Keywords: Bank management ; Bank mergers ; Corporate governance ; Bank directors ; Competition
    Date: 2008
  10. By: Octávio Figueiredo (Universidade do Porto and CEMPRE); Paulo Guimarães (University of South Carolina and CEMPRE); Douglas Woodward (University of South Carolina)
    Abstract: This paper uses a novel measure and detailed plant-level Portuguese data to reexamine the Marshallian hypothesis that specialization and the vertical disintegration of firms should be greater in areas where an industry concentrates. Our measure of firm specialization and vertical disintegration employs a Herfindhal index constructed with occupational shares for all workers within the firm. Controlling for firm size and sector of activity, we find that vertical disintegration is around three percent higher in areas where industries agglomerate. Sensitivity tests reveal that this positive relation is remarkably robust across different specifications.
    Keywords: Vertical Disintegration of Firms; Agglomeration; Localization Economies
    JEL: R12 R39 L25
    Date: 2008–06
  11. By: Heyman, Fredrik; Svaleryd, Helena; Vlachos, Jonas
    Abstract: Theories of taste-based discrimination predict that competitive pressures will drive discriminatory behaviour out of the market. Using detailed matched employer-employee data, we analyze how firm takeovers and product market competition are related to the gender composition of the firm’s workforce and the gender wage gap. Using a difference-in-difference framework and dealing with several endogeneity concerns, we find that the share of female employees increases as a result of an ownership change, in particular when product market competition is weak. Further, increased competition reduces the gender wage gap, especially among highly educated employees. While the estimated wage effect is quite small, the results support the main theoretical predictions.
    Keywords: Competition; Discrimination; Takeovers; Wages
    JEL: J2 J31 J7
    Date: 2008–06

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