nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒07‒20
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Is Bundling Anticompetitive? By Ioana Chioveanu
  2. Abuse of Dominance and Licensing of Intellectual Property By Rey, Patrick; Salant, David
  3. Private and public incentives for mergers in the face of foreign entry By Martin Richardson; Ryan Fang
  4. Are Antitrust Fines Friendly to Competition? An Endogenous Coalition Formation Approach to Collusive Cartels By Alberto ZAZZARO; David BARTOLINI
  5. Capacity restriction by retailers By Ramón Faulí-Oller
  6. Buyer Power and the “Waterbed Effect” By Roman Inderst; Tommaso M. Valletti
  7. Information Sharing Networks in Oligopoly By Sergio Currarni; Francesco Feri
  8. A Note on Competing Merger Simulation Models in Antitrust Cases: Can the Best Be Identified? By Oliver Budzinski
  9. The success of bank mergers revisited : an assessment based on a matching strategy By Behr, Andreas; Heid, Frank
  10. The role of the interchange fee on the effect of forbidding price discrimination of ATM services By Ramón Faulí-Oller
  11. The Effects of Liberalization and Deregulation on the Performance of Financial Institutions: The Case of the German Life Insurance Market By Lucinda Trigo Gamarra
  12. The implications of latent technology regimes for competition and efficiency in banking By Koetter, Michael; Poghosyan, Tigran
  13. Regulation of inter-capitalist competente. The case of supermarkets By Viego, Valentina
  14. On Bundling in Insurance Markets By Maarten C. W. Janssen; Vladimir A. Karamychev
  15. Big retaling facilities´ impact on traditional retail and regulatory laws By Viego, Valentina
  16. Competition Policy, Corporate Saving and China's Current Account Surplus By Rod Tyers
  17. Competition Within a Cartel: Correction By Scott A. Brave; Donald G. Ferguson; Kenneth G. Stewart

  1. By: Ioana Chioveanu (Universidad de Alicante)
    Abstract: I analyze the implications of bundling on price competition in a market with complementary products. Using a model of imperfect competition with product differentiation, I identify the incentives to bundle for two types of demand functions and study how they change with the size of the bundle. With an inelastic demand, bundling creates an advantage over uncoordinated rivals who cannot improve by bundling. I show that this no longer holds with an elastic demand. The incentives to bundle are stronger and the market outcome is symmetric bundling, the most competitive one. Profits are lowest and consumer surplus is maximized.
    Keywords: Bundling, complementary goods, product differentiation
    JEL: L11 L13
    Date: 2008–03
  2. By: Rey, Patrick; Salant, David
    Abstract: Patent thickets, layers of licenses a firm needs to be able to offer products that embody technologies owned by multiple firms, and licensing policies have drawn increasing scrutiny from policy makers. Patent thickets involve complementary products, which gives rise to double marginalization -- the so-called royalty stacking problem -- and has the potential to retard diffusion of new technologies and reduce consumer welfare. This paper examines the impact of licensing policies of one or more upstream owners essential} intellectual property (IP) on the downstream firms that require access to that IP. The terms under which downstream firms can access this IP affects entry decisions, product diversity, prices and welfare. We consider both the case in which a single party controls the essential IP and the case in which different parties control complementary pieces of essential IP. We compare the outcome of several alternative standard licensing arrangements, such as flat rate access fees, royalty percentages, per unit fees, patent pools and cross-licensing arrangements, with or without vertical integration. We first consider the case where there is a single upstream owner of essential IP. Increasing the number of licenses enhances product variety, which creates added value, but it also intensifies downstream competition, which dissipates profits. We derive conditions under which the upstream IP monopoly will then want to provide an excessive or insufficient number of licenses, relative to the number that maximizes consumer surplus or social welfare. When there are multiple owners of essential IP, royalty stacking can reduce the number of the downstream licensees, but also the downstream equilibrium prices the consumers face. The paper derives conditions determining whether this reduction in downstream price and variety is beneficial to consumers or society. Finally, the paper explores the impact of alternative licensing policies. With fixed license fees or royalties expressed as a percentage of the price, an upstream IP owner cannot control the intensity of downstream competition. In contrast, volume-based license fees (i.e., per-unit access fees), do permit an upstream owner to control downstream competition and to replicate the outcome of complete integration. The paper also shows that vertical integration can have little impact on downstream competition and licensing terms when IP owners charge fixed or volume-based access fees.
    Keywords: Patents; Vertical Integration
    JEL: D43 L22 L40
    Date: 2008
  3. By: Martin Richardson; Ryan Fang
    Abstract: This paper considers the private and public incentives for firms to merge in the face of foreign entry. We set up a standard linear Cournot model of competition within a country and consider the gains to two merging firms and to national welfare in a series of scenarios: homogeneous and heterogeneous firms with and without synergies from mergers. We look first at optimal domestic firm numbers from a social welfare perspective and then consider private and social incentives for mergers. With heterogeneous firms and when synergies can occur, greater foreign entry tends to enhance both private and public incentives for domestic mergers. These results suggest that policymakers have no cause to doubt the intentions of firms seeking to merge: when it is in the firms’ interests then it is also in the public interest. However, we also show that, at least for certain parameterisations, private gains from merger become positive at a lower level of foreign entry than do public gains. This suggests that private firms may have an incentive to overstate the degree of foreign competition they anticipate facing – for example, after liberalising foreign investment rules – to persuade policymakers that a proposed domestic merger is in the national interest.
    Date: 2008–07
  4. By: Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia); David BARTOLINI ([n.a.])
    Abstract: A well-established result of the theory of antitrust policy is that it might be optimal to tolerate some degree of collusion among firms if the Authority in charge is constrained by limited resources and imperfect information. However, few doubts are cast on the common opinion by which stricter enforcement of antitrust laws definitely makes market structure more competitive and prices lower. In this paper we challenge this presumption of effectiveness and show that the introduction of a positive (expected) antitrust fine may drive firms from partial cartels to a monopolistic cartel. Moreover, introducing uncertainty on market demand, we show that the social optimal competition policy can call for a finite or even zero antitrust penalty even if there are no enforcement costs. We first show our results in a Cournot industry with five symmetric firms and equilibrium binding agreements. Then we extend the analysis to the case of n symmetric firms and a generic rule of coalition formation. Finally, we consider the case of asymmetric firms and show that our results still hold for an industry populated by one Stackelberg leader and two followers.
    Keywords: antitrust policy, coalition formation, collusive cartels
    JEL: C70 L40 L41
    Date: 2008–07
  5. By: Ramón Faulí-Oller (Universidad de Alicante)
    Abstract: A monopolist retailer facing two suppliers producing two symmetric and independent goods improves its bargaining position by commiting to sell only one good. We analyze if this advantage extends to the case where there are two undierentiated retailers competing in the same market. With linear supply contracts, we have partial capacity restriction in the sense that only one retailer commits to sell only one good. Then, we have that if retailers were to merge, welfare would decrease because the merger reduces the variety of goods available to consumers.
    Keywords: Retailing, mergers, variety
    JEL: L13 L41 L42
    Date: 2008–03
  6. By: Roman Inderst (University of Frankfurt); Tommaso M. Valletti (University of Rome "Tor Vergata")
    Abstract: We present a simple model where the growth of one downstream firm generates lower wholesale prices for this firm but higher wholesale prices for its competitors (the “waterbed effect”). We derive conditions for when, even though firms compete in strategic complements, this harms consumers. This is more likely if larger firms already obtain substantial discounts compared to their smaller competitors. Furthermore, the identified “waterbed effect” holds irrespective of whether a firm grows by acquisition or “organically” by becoming more efficient.
    Date: 2008–07–10
  7. By: Sergio Currarni (Department of Economics, University Of Venice Cà Foscari); Francesco Feri (University of Innsbruck)
    Abstract: We study the incentives of oligopolistic firms to share private information on demand parameters. Differently from previous studies, we consider bilateral sharing agreements, by which firms commit at the ex-ante stage to truthfully share information. We show that if signals are i.i.d., then pairwise stable networks of sharing agreements are either empty or made of fully connected components of increasing size. When linking is costly, non complete components may emerge, and components with larger size are less densly connected than components with smaller size. When signals have different variances, incomplete and irregular network can be stable, with firms observing high variance signals acting as "critical nodes". Finally, when signals are correlated, the empty network may not be pairwise stable when the number of firms and/or correlation are large enough.
    Keywords: Information sharing, oligopoly, networks, Bayesian equilibrium
    JEL: D43 D82 D85 L13
    Date: 2008
  8. By: Oliver Budzinski (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: Advanced economic instruments like simulation models are enjoying an increased popularity in practical antitrust. There is hope that they – being quantitative predictive economic evidence – can substitute for qualitative structural analysis and lead to unambiguous results. This paper demonstrates that it can be theoretically impossible to identify the most appropriate simulation model for any given merger proposal. Due to the inevitable necessity to reduce real-world complexity and multi-parameter character of merger cases, the comparative fit of proposed merger simulation models with mutually incompatible predictions can be the same. This is valid even if an ideal antitrust procedure is assumed. This insight is important regarding two aspects. First, the scope for partisan economic evidence cannot be completely eroded in merger control. Second, simulation cannot eliminate or substitute for qualitative reasoning and economically informed common sense.
    Keywords: merger simulation, merger control, antitrust, economic evidence
    JEL: L40 C15 K21 A11
    Date: 2008
  9. By: Behr, Andreas; Heid, Frank
    Abstract: The question of whether or not mergers and acquisitions have helped to enhance banks’ efficiency and profitability has not yet been conclusively resolved in the literature. We argue that this is partly due to the severe methodological problems involved. In this study, we analyze the effect of German bank mergers in the period 1995-2000 on banks’ profitability and cost efficiency. We suggest a new matching strategy to control for the selection effects arising from the fact that predominantly under-performing banks engage in mergers. Our results indicate a neutral effect of mergers on profitability and a positive effect on cost efficiency. Comparing our results with those obtained from a naive performance comparison of merging and non-merging banks indicates a severe negative selection bias with regard to the former.
    Keywords: Bank mergers, performance measurement, propensity score matching
    JEL: G21 G34
    Date: 2008
  10. By: Ramón Faulí-Oller (Universidad de Alicante)
    Abstract: We consider whether banks should be allowed to set different ATM prices to their customers depending on whether they hold an account on the bank. In Massoud and Bernhardt (2002), without considering an interchange fee, a ban on price discrimination on ATM services increases total surplus. In the present model that considers an interchange fee, the effect of a ban on price discrimination depends on the way the interchange is fixed. If it is fixed to maximize the profits of banks, forbidding price discrimination reduces total surplus. However, if the interchange is fixed to maximize total surplus, banning price discrimination increases total surplus.
    Keywords: ATM, surcharge, foreign fee, interchange fee, collusion.
    JEL: L13 G21
    Date: 2008–03
  11. By: Lucinda Trigo Gamarra (University of Rostock)
    Abstract: The German insurance market was liberalized in 1994 by the introduction of the ‘single passport’ allowing European insurers to operate throughout the entire European Union. The European directive put also an end to price and insurance contract terms regulation. These measures were meant for removing the obstacles to competition within and between the insurance markets of the member states aiming at an increased efficiency of the European insurance markets. We analyze to which extent this aim has been achieved in the German life insurance market. The development of market performance is measured by changes in technical cost and profit efficiency levels since the liberalization, as well as a measurement of technological change. Technical cost efficiency levels are estimated by applying a stochastic “true” fixed effects distance frontier (Greene, 2005). Non-standard profit efficiency is derived in a second step following Kumbakhar (2006). According to our results, the industry experienced positive total factor productivity (TFP) growth during the observation period, which is mainly driven by substantial positive technological change. Technical cost efficiency and profit efficiency remained stable on average, but significant positive scale efficiency change can be found indicating that market consolidation in the presence of increasing returns to scale led to efficiency gains of the firms.
    Keywords: Insurance markets, Total factor productivity growth, Stochastic Frontier Analysis
    JEL: D24 G22 G28
    Date: 2008
  12. By: Koetter, Michael; Poghosyan, Tigran
    Abstract: Banks continue to differ in many ways, for instance with respect to business models, growth strategies, or nancial health. Neglecting these differences confuses inefficiency with heterogeneity while sub-sample estimation prohibits efficiency comparisons across different samples. We use a latent class stochastic frontier model to estimate simultaneously multiple technology regimes and group membership probabilities. The latter are conditioned on six bank traits of German banks and we identify four signifficantly different technology regimes. Only small, retail focused banks exhibit cost inefficiencies, which are 5.4% on average and thus substantially lower compared to previous studies. We use technology regime specific cost parameters to measure competition with Lerner indices. Large, national universal banks and the smallest, most specialized banks exhibit the lowest level of competition. In turn, medium sized universal banks are both efficient and exhibit the lowest Lerner margins between 1994 and 2004. Das deutsche Bankwesen wird oft als Drei-Säulen-System bezeichnet, welches aus Sparkassen, Geschäfts-, und Genossenschaftsbanken besteht. Diese Systematik wird oft als geradezu natürliche Marktsegmentierung verstanden. Banken können sich jedoch auch zwischen und innerhalb der drei Säulen hinsichtlich anderer Kriterien unterscheiden, zum BeispielWachstumsstrategien, Stabilitätseigenschaften oder Geschäftsmodellen. Viele vergleichenden Studien definieren oftmals vorab Teilstichproben, um diese Unterschiede zu berücksichtigen. Jede Bildung von Bankengruppen beinhaltet jedoch unweigerlich eine zum Teil willkürliche Komponente und verhindert außerdem den Vergleich relativer Effizienzmaße zwischen Teilstichproben. In dieser Studie benutzen wir ein latent class frontier model (LCFM), um unterschiedliche Technologiegruppen empirisch zu schätzen anstatt sie zu definieren. Wir ermitteln die Wahrscheinlichkeit der Gruppenzugehörigkeit (GZW) je Bank in Abhängigkeit von sechs individuellen Charakteristika. Für jede Technologiegruppe leiten wir Wettbewerbsmaÿe ab und untersuchen deren Entwicklung zwischen 1994 und 2004.
    Keywords: Banks, competition, efficiency, latent class frontier, strategy
    JEL: G21 L1
    Date: 2008
  13. By: Viego, Valentina
    Abstract: The growing portion of total sales in retailing sector (food and beverage, electronics, home appliances, etc.) gained by big companies was subject of concern between politicians, scholars and population. In food market, some studies estimated that between 1984-1993 supermarkets created 1 of each 6 employments destroyed in traditional segment. By late 90s the fraction of smaller retailers claimed for the adoption of laws restricting big capital expansion in the sector. Buenos Aires province was pioneer in such regulatory movement. This paper analyses competence phase in retailing sector, regulatory effectiveness and other impacts of big commercial establishments not considered in competence laws.
    Keywords: competence regulation- supermarkets- firm concentration
    JEL: G18 D43
    Date: 2008–06–25
  14. By: Maarten C. W. Janssen; Vladimir A. Karamychev
    Abstract: This paper analyzes the welfare consequences of bundling different risks in one insurance contract in markets where adverse selection is important. This question is addressed in the context of a competitive insurance model a la Rothschild and Stiglitz (1976) with two sources of risk. Accordingly, there are four possible types of individuals and many incentive compatibility constraints to be considered. We show that the effect of bundling on these incentive compatibility constraints is such that bundling always yields a welfare improvement, and this result only holds when all four types have strictly positive shares in the population. Due to the competition between insurance companies, these benefits accrue to consumers who potentially have fewer contracts to choose from, but benefit from the better sorting possibilities due to bundling.
    JEL: G22 D82
    Date: 2008–07
  15. By: Viego, Valentina
    Abstract: In Argentina, big firms in retailing (some of them of foreign capital) established during the 90s fed concerns between authorities, intellectuals and population in general, about their impact upon the traditional segment, both in terms of number of establishments and employment. By late 90s, regulatory measures setting restrictions on public authorisation for new big retailing facilities were adopted in various provinces. A new wave of sets up is taking place since 2003, in parallel with consumption recovery. Our goal here is directed to evaluate both the effectiveness of regulation and the impact of big commercial establishments recently installed.
    Keywords: regulatory laws- supermarkets- retail sector
    JEL: K22 D43
    Date: 2008–05
  16. By: Rod Tyers
    Abstract: China’s industrial reforms have left many key industries dominated by single or small numbers of firms, most of which remain state owned. Until recently, these firms have not been required to pay dividends to the state and the recent surge in China’s growth has made them very profitable, with their economic profits adding 20% of GDP to corporate saving. This bolsters the overall saving-investment gap and hence China’s controversial current account surplus. In other countries, oligopolistic industries tend to be taxed more heavily and they are commonly subjected to price regulation. This study offers an economy-wide analysis of approaches to oligopoly rents in China. The results suggest that, while policy changes targeting national saving, including increased corporate taxation, expansionary fiscal policy and SOE privatisation all help to control the external imbalance, they tend also to turn demand inward, inducing higher oligopoly rents and slower growth. Competition policy, embodying both price cap regulation and free entry, proves more effective both in controlling the external imbalance and in fostering continued growth.
    JEL: D43 D58 F32 L13 L43 L51
    Date: 2008–07
  17. By: Scott A. Brave (Graduate School of Business, University of Chicago); Donald G. Ferguson (Department of Economics, University of Victoria); Kenneth G. Stewart (Department of Economics, University of Victoria)
    Abstract: The model of league conduct formulated by Ferguson, Jones, and Stewart (2000) contains an algebraic error. This note provides the relevant correction and shows that the empirical results given in their article are robust to it.
    JEL: D43 L83
    Date: 2008–07–04

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