nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒07‒05
eleven papers chosen by
Russell Pittman
US Department of Justice

  1. Noncooperative Collusion and Price Wars with Individual Demand Fluctuations By Pot Erik; Peeters Ronald; Peters Hans; Vermeulen Dries
  2. Reference Dependence and Market Competition By Zhou, Jidong
  3. The impact of horizontal mergers on rivals: Gains to being left outside a merger By Joseph Clougherty; Tomaso Duso
  4. A Political Economy Model of Merger Policy in International Markets By Motta, Massimo; Ruta, Michele
  5. Multinational Firms and New Protectionisms By Claudia M. Buch; Jörn Kleinert
  6. Natural concentration in industrial research collaboration By Bastian Westbrock
  7. On the Stability of Research Joint Ventures: Implications for Collusion By Jo Seldeslachts; Tomaso Duso; Enrico Pennings
  8. Seller Competition by Mechanism Design By Damianov, Damian
  9. Game-theoretical, Strategic forward Contracting in the Electricity Market By Holmberg, Pär
  10. Open Versus Closed Platforms By Tåg, Joakim
  11. Efficiency and the Provision of Open Platforms By Tåg, Joacim

  1. By: Pot Erik; Peeters Ronald; Peters Hans; Vermeulen Dries (METEOR)
    Abstract: We analyze whether noncooperative collusive equilibria are harder to sustain when individual demand levels are not fixed but are able to fluctuate. To do this, we extend a Bertrand type model of price competition to allow for fluctuating market shares when prices are equal. We find that, the larger the market share fluctuations may be, the higher the discount factor should be to sustain a collusive equilibrium in trigger strategies. The intuition behind this is fairly straightforward. When individual demand in the collusive state is suddenly low, the gains from collusion go down. Moreover, the firm with the low demand can capture a larger share of the market by deviating from the collusive strategy. The incentive to deviate therefore becomes larger when the individual market share decreases. We also look at the existence of a specific type of semi-collusive equilibrium when individual market shares are either common knowledge or private knowledge. We find that there exist equilibria in which competitive periods (price wars) occur with probability 1 and on the equilibrium path.
    Keywords: mathematical economics;
    Date: 2008
  2. By: Zhou, Jidong
    Abstract: This paper studies the implications of consumer reference dependence in market competition. If consumers take some product (e.g., the first product they have considered) as the reference point in evaluating others and exhibit loss aversion, then the more "prominent" firm whose product is taken as the reference point by more consumers will randomize its price over a high and a low one. All else equal, this firm will on average earn a larger market share and a higher profit than its rival. The welfare impact is that consumer reference dependence could harm firms and benefit consumers by intensifying price competition. Consumer reference dependence will also shape firms' advertising strategies and quality choices. If advertising increases product prominence, ex ante identical firms may differentiate their advertising intensities. If firms vary in their prominence, the less prominent firm might supply a lower-quality product even if improving quality is costless.
    JEL: D11 L13 M37 D43
    Date: 2008–05
  3. By: Joseph Clougherty (Wissenschaftszentrum Berlin (WZB) and CEPR-London MP Research Unit, Reichpietschufer 50, 10785 Berlin, Germany;; Tomaso Duso (Wissenschaftszentrum Berlin (WZB) and CEPR-London MP Research Unit, Reichpietschufer 50, 10785 Berlin, Germany;
    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: rivals, mergers, acquisitions, event-study
    JEL: G14 G34 L22 M20
    Date: 2008–06
  4. By: Motta, Massimo; Ruta, Michele
    Abstract: This paper looks at the political economy of merger policy under autarky and in international markets. We assume that merger policy is decided by antitrust authorities (whose objective is to maximize welfare) but can be influenced by governments, which are subject to lobbying by the firms (be they insiders or outsiders to the merger). We argue that political economy distortions may explain some of the recently observed merger policy conflicts between authorities and politicians, as well as between institutions belonging to different countries. We illustrate our analysis with applications motivated by recent merger cases, which have been widely debated in the international press.
    Keywords: Antitrust policy; European Union; Lobbying; Mergers
    JEL: D72 F59 H11 L40
    Date: 2008–06
  5. By: Claudia M. Buch; Jörn Kleinert
    Abstract: Recent initiatives to hold back cross-border mergers and acquisitions for ‘strategic’ reasons have made headline news. We discuss whether the initiatives may mark the start of a new protectionist era. We argue that standard globalization indicators show no such signs. However, an increasing divergence of incomes and increased insecurity might raise resistance against the globalization process. We discuss the benefits of globalization benefits in terms of lower prices for consumers, a greater variety of available products, lower risks, and higher economic growth. But we also outline the risks in terms of greater inequalities and greater need for flexibility. Protectionism is a double-edged sword. Many historic episodes show that the return to protectionism did significantly more harm in terms of reduced growth than generating benefits in terms of greater stability and smaller income differentials.
    Date: 2007–07
  6. By: Bastian Westbrock
    Abstract: Empirical work suggests that the network of research and development alliances is asymmetric, with a small number of firms involved in the majority of partnerships. This paper relates the structure of the collaboration network to a fundamental characteristic of the demand for research output: the benefits of knowledge accumulation create private and social incentives for a concentration of collaborative activities. I theoretically investigate the formation of bilateral collaborative links in two different industry settings, one socially managed, the other oligopolistic. I find that in both cases a concentrated network is the typical equilibrium structure as well as the socially efficient structure.
    Keywords: R&D collaboration, market structure, networks
    JEL: D43 D85 L13
    Date: 2008–06
  7. By: Jo Seldeslachts (Wissenschaftszentrum Berlin (WZB), Reichpietschufer 50, 10785 Berlin, Germany;; Tomaso Duso (Humboldt University and Wissenschaftszentrum Berlin (WZB), Reichpietschufer 50, 10785 Berlin, Germany;; Enrico Pennings (Dept. of Applied Economics, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands, E-mail:
    Abstract: Though there is a body of theoretical literature on research joint venture RJV) participation facilitating collusion, empirical tests are rare. Even more so, there are few empirical tests on the general theme of collusion. This note tries to fill this gap by assuming a correspondence between the stability of research joint ventures and collusion. By using data from the US National Cooperation Research Act, we show that large RJVs in concentrated industries are more stable and hence more suspect to collusion.
    Keywords: Research Joint Ventures, Product Market Collusion, Empirical Test
    JEL: L24 L44 L52
    Date: 2008–03
  8. By: Damianov, Damian
    Abstract: In the market game presented here, sellers offer trade mechanisms to buyers, and buyers randomize over the sellers they visit. The distribution of buyers across sellers is endogenous and depends on all of the transaction opportunities existing in the market. Sellers choose from a broad class of trade mechanisms; the only constraints imposed on mechanisms is that they are direct, incentive compatible, and anonymous. In the (subgame perfect) equilibrium of this market, sellers hold auctions with an efficient reserve price but charge an entry fee. The entry fee depends on the number of buyers and sellers, the distribution of buyer valuations, and the buyer cost of entering the market. As the size of the market increases, the entry fee decreases and vanishes in the limit. The model sheds light on the endogenous formation of trading institutions in decentralized markets.
    Keywords: competition; mechanism design; auctions
    JEL: D44 D82
    Date: 2008–06–23
  9. By: Holmberg, Pär (Research Institute of Industrial Economics (IFN))
    Abstract: Forward sales is a credible commitment to aggressive spot market bidding, and it mitigates producers’ market power in electricity markets. Still it can be profitable for a producer to make such a commitment if it results in a soft response from competitors in the spot market (strategies are substitutes). The optimal contracting level of a risk-neutral producer is determined by the extent to which strategies are substitutes and the slope of the residual demand in the forward market. Conditions under which strategies are substitutes are identified for a two-stage game with supply function competition and capacity constrained producers.
    Keywords: Supply Function Equilibrium; Forward Market; Strategic Contracting; Arbitrage; Strategic Substitutes; Oligopoly; Electricity Market
    JEL: C72 D43 D44 G13 L13 L94
    Date: 2008–06–24
  10. By: Tåg, Joakim (Research Institute of Industrial Economics (IFN))
    Abstract: This paper studies an industry in which firms can choose to provide open or closed platforms. Open platforms, as opposed to closed, are extendable so third-party producers can develop extensions for them. Building on a two-sided market model, I show that firms might prefer to commit to keeping their platforms closed despite the fact that opening the platform is costless and open platforms are more valuable to consumers. The reason is that opening the platform may lead to intensified competition for consumers.
    Keywords: Platforms; Software; Two-sided Markets
    JEL: D40 D42 D43 L10 L12 L13 L14
    Date: 2008–04–12
  11. By: Tåg, Joacim (Research Institute of Industrial Economics (IFN))
    Abstract: Private firms may not have efficient incentives to allow third-party producers to access their platform or develop extensions for their products. Based on a two-sided market model, I discuss two reasons for why. First, a private firm may not be able to internalize all benefits from cross-group externalities arising with third-party extensions. Second, firms may have strategic incentives to shut out third-parties because it relaxes competition.
    Keywords: Platforms; Two-sided Markets; Open versus Closed
    JEL: D40 L10
    Date: 2008–04–28

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