nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒08‒31
twenty-two papers chosen by
Russell Pittman
US Department of Justice

  1. Beyond Plain Vanilla: Modeling Joint Product Assortment and Pricing Decisions By Draganska, Michaela; Seim, Katja; Mazzeo, Michael
  2. Building and Blocking: The Two Faces of Technology Acquisition By Grimpe, Christoph; Hussinger, Katrin
  3. Technological Innovation and Monopolization By Scherer, F. M.
  4. Strategic Disclosure of Valuable Information within Competitive Environments By Young-Ro Yoon
  5. Retail Competition and the Dynamics of Consumer Demand for Tied Goods By Hartmann, Wesley R.; Nair, Harikesh S.
  6. Why Does Popcorn Cost So Much at the Movies? An Empirical Analysis of Metering Price Discrimination By Gil, Ricard; Hartmann, Wesley R.
  7. The Effect of Bank Mergers on Loan Prices: Evidence from the U.S. By Erel, Isil
  8. Markets and Uncertainty in Pharmaceutical Development By Scherer, F. M.
  9. Buying Online: Sequential Decision Making by Shopbot Visitors By Bernhard Weiss; Uwe Dulleck; Franz Hackl; Rudolf Winter-Ebmer
  10. Confessions of an Internet Monopolist: Demand Estimation for a Versioned Information Good By Chappell, Henry; Guimaraes, Paulo; Ozturk, Orgul
  11. Reaping the Benefits of Stronger Competition in Network Industries in Germany By Nicola Brandt
  12. Promoting renewable electricity generation in imperfect markets: price vs. quantity policies By Reinhard Madlener; Weiyu Gao; Ilja Neustadt; Peter Zweifel
  13. The importance of market size in the consumer service professional football: the Belgian case By Trudo Dejonghe
  14. Revenue Sharing and Competitive Balance in an Infinite Period Contest Model By Martin Grossmann; Helmut Dietl; Markus Lang
  15. The Effect of Mixed Leagues on Aggregated Investments and Competitive Balance By Helmut Dietl; Markus Lang; Stephan Werner
  16. Racial Discrimination and Competition By Ross Levine; Alexey Levkov; Yona Rubinstein
  17. Product Market Deregulation and the U.S. Employment Miracle By Monique Ebell; Christian Haefke
  18. Foreign Currency Exposure and Hedging: Evidence from Foreign Acquisitions By Bartram, Söhnke M.; Burns, Natasha; Helwege, Jean
  19. Re-thinking Argentina's labour and social security reform in the 1990s : agreement on competitive corporatism By Usami, Koichi
  20. Fairness Opinions in Mergers and Acquisitions By Makhija, Anil K.; Narayanan, Rajesh P.
  21. Creative Destruction and Regional Productivity Growth: Evidence from the Dutch Manufacturing and Services Industries By Niels Bosma; Erik Stam; Veronique Schutjens
  22. Real Origins of the Great Depression: Monopoly Power, Unions and the American Business Cycle in the 1920s By Monique Ebell; Albrecht Ritschl

  1. By: Draganska, Michaela (Stanford U); Seim, Katja (Northwestern U); Mazzeo, Michael (U of Pennsylvania)
    Abstract: In this paper, we take a first step toward exploring empirically the product assortment strategies of oligopolistic firms. Our starting point is a discrete- choice demand model for differentiated products. We incorporate the demand model into an equilibrium supply model, in which firms compete by first choosing which products to offer and then by setting prices. We show how modeling joint product assortment and pricing decisions enriches standard product choice models by allowing insights into how demand characteristics affect firms' product offerings in a competitive environment. We furthermore demonstrate that incorporating endogenous product choice into demand models is essential for policy simulations (e.g., mergers) as it entails at times dramatically different welfare assessments than the common assumption that product assortments are exogenous.
    Date: 2007–10
  2. By: Grimpe, Christoph; Hussinger, Katrin
    Abstract: Gaining access to technological assets and patents, in particular, has long been a major motive and objective for firm acquisitions. On the one hand, patents are used as a building instrument for the acquirer’s technology portfolio. On the other hand, patents can be attractive because of their strategic value as a bargaining chip, e.g. in licensing negotiations. This is especially the case if patents have the potential to block competitors. Drawing on transaction cost economics and the resource-based view of the firm, we analyze the importance of these two faces of technology acquisition for the valuation of a target firm. Empirical evidence for European firm acquisitions in the period from 1999 to 2003 indicates that the price paid by an acquirer for a target increases with the patent stock, the relatedness, the value and the blocking potential of the target’s patents, especially if blocking patents are in technology fields related to the acquiring firm’s patent portfolio. Our results have implications for competition authorities, in that M&A transactions may considerably impact technology markets. This would also need to be reflected in the management’s technology strategy.
    Keywords: Firm acquisitions, technology, patents, blocking patents
    JEL: G34 L20 O34
    Date: 2008
  3. By: Scherer, F. M. (Harvard U)
    Abstract: This paper, written for an American Bar Association compendium on competition policy, reviews seven of the most important U.S. antitrust cases charging firms in high-technology industries with violations of Sherman Act Section II -- i.e., with monopolization. The principal target firms were Standard Oil of New Jersey, General Electric (in lamps), AT&T, du Pont (for cellophane), Xerox, IBM, and Microsoft (both in the United States and Europe). From an analysis of the historical records, it is clear that in most instances, the legal system took far too long to deal with the contested issues. In the interim, firms that had achieved dominant positions through innovation often embraced new technologies slowly, sometimes pursuing an explicit "fast second" strategy -- that is, waiting to innovate until their positions were threatened by outsiders. The stimulating effect of outside challenges suggests that entry should be kept open, among other things by combating the extension over time of blocking patent positions. Procedural reforms for accelerating the adjudication of complaints are proposed.
    Date: 2007–10
  4. By: Young-Ro Yoon (Indiana University Bloomington)
    Abstract: Can valuable information be disclosed intentionally by the informed agent even within a competitive environment? In this article, we bring our interest into the asymmetry in reward and penalty in the payoff structure and explore its effects on the strategic disclosure of valuable information. According to our results, the asymmetry in reward and penalty is a necessary condition for the disclosure of valuable information. This asymmetry also decides which quality of information is revealed for which incentive; if the penalty is larger than the reward or the reward is weakly larger than the penalty, there exists an equilibrium in which only a low quality type of information is revealed, in order to induce imitation. On the other hand, if the reward is sufficiently larger than the penalty, there exist equilibria in which either all types or only high quality type of information is revealed, in order to induce deviation. The evaluation of the equilibrium in terms of expected payoff yields that the equilibrium where valuable information is disclosed strategically dominates the equilibrium where it is concealed.
    JEL: D82 M52
    Date: 2008–08
  5. By: Hartmann, Wesley R. (Stanford U); Nair, Harikesh S.
    Abstract: We empirically investigate the demand for tied goods sold through competing retail channels. Tied good pricing strategies commonly involve a low price on the initial purchase (i.e. the primary good) to drive adoption, and a substantial markup on aftermarket goods to capture value. However, if the goods are sold through downstream channels, retail market power and a misalignment of incentives could distort the relative prices of primary and aftermarket goods. To evaluate whether retail competition is strong enough to prevent such distortions, we explore the commonly noted example of razors and blades, which are sold through drug, grocery, mass merchandising, and club stores. We specify a forward-looking demand model that incorporates dynamics arising from the tied good nature of the products and the stockpiling and durability aspects of razors and blades. Furthermore, we allow intertemporal substitution in the purchase of both razors and blades to occur across channels as well as time. This modeling feature enables a novel approach to measuring retail competition in single category demand analyses. Our estimates indicate that there is substantial cross-channel substitution in razors, but some retail market power in blades. However, the channel with the most market power in blades, club stores, specializes in high volume customers that would adopt a razor even if blade prices are higher. This suggests that the manufacturer can achieve its desired level of razor adoption without vertical restraints, though blade sales may be slightly reduced by double marginalization.
    Date: 2007–12
  6. By: Gil, Ricard (U of California, Santa Cruz); Hartmann, Wesley R. (Stanford U)
    Abstract: Prices for goods such as blades for razors, ink for printers and concessions at movies are often set well above cost. This paper empirically analyzes concession sales data from a chain of Spanish theaters to demonstrate that high prices on concessions reflect a profitable price discrimination strategy often referred to as “metering price discrimination.” Concessions are found to be purchased in greater amounts by customers that place greater value on attending the theater. In other words, the intensity of demand for admission is “metered” by concession sales. This implies that while some consumers’ surplus may be reduced by the high concession prices, surplus of other consumers on the margin of attending may increase from theaters’ decisions to shift their margins away from movies and toward concessions.
    Date: 2008–01
  7. By: Erel, Isil (Ohio State U)
    Abstract: Bank mergers will increase or decrease loan spreads, depending on whether the increased market power outweighs gains in operating efficiency. Using a proprietary loan-level data set for U.S. commercial banks, I find that, on average, mergers reduce loan spreads, and that the reduction is greater for acquirers with larger declines in operating costs post merger. Market overlap between the acquirer and the target leads to more potential for cost savings, which push spreads down. However, if the overlap is significant, the enhanced market power dominates the cost savings and, therefore, spreads increase. The findings are robust to using variation in dates of intrastate banking deregulation as an exogenous instrument for the timing of the in-market mergers. Furthermore, contrary to what might be expected, bigger acquirers do not impose less favorable terms on small businesses. Indeed, the average reduction in spreads is significant for small loans, showing that small borrowers typically pay lower interest rates to banks that have expanded during the previous few years through mergers.
    JEL: G21
    Date: 2007–12
  8. By: Scherer, F. M. (Harvard U)
    Abstract: This paper, written for a conference on biomedical innovation at the University of Kiel, examines the theory of induced innovation, with science-push and demand-pull variants, in the context of pharmaceutical R&D. It explores how the theory applies under varying market structure, uncertainty, and behavioral (i.e., rent-seeking vs. secure profit maximization) conditions. The paradox of high gross margins but only mildly supra-normal returns on investment in the pharmaceutical industry is consistent with the pursuit of parallel research paths under uncertainty, rent-seeking, and cannibalization hypotheses. Parallel paths strategies carried implicitly to near-zero profit equilibria by firms competing for monopoly positions may approach social optimality, given plausible differences between private and social returns. But evidence on whether this outcome is actually approximated remains scarce.
    Date: 2007–09
  9. By: Bernhard Weiss (Department of Economics, Johannes Kepler University Linz, Austria); Uwe Dulleck (Department of Economics, Johannes Kepler University Linz, Austria); Franz Hackl (Department of Economics, Johannes Kepler University Linz, Austria); Rudolf Winter-Ebmer (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: In this article we propose a two stage procedure to model demand decisions by customers who are balancing several dimensions of a product. We then test our procedure by analyzing the behavior of buyers from an Austrian price comparison site. Although in such a market a consumer will typically search for the cheapest price for a given product, reliability and service of the supplier are other important characteristics of a retailer. In our data, consumers follow such a two stage procedure: they select a shortlist of suppliers by using the price variable only; finally, they trade off reliability and price among these shortlisted suppliers.
    Keywords: e-commerce, price comparison, decision theory, heuristics, seller reputation
    JEL: L81 D83
    Date: 2008–08
  10. By: Chappell, Henry; Guimaraes, Paulo; Ozturk, Orgul
    Abstract: We investigate profit-maximizing versioning plans for an information goods monopolist. The analysis employs data obtained from a web-based field experiment in which potential buyers were offered information goods in varied price-quality configurations. Maximum simulated likelihood (MSL) methods are used to estimate parameters describing the distribution of utility function parameters across potential buyers of the good. The resulting estimates are used to examine the impact of versioning on seller profits and market efficiency.
    Keywords: Versioning; price discrimination; field experiment; maximum simulated likelihood
    JEL: D12 C81 D83 D42 C93
    Date: 2006
  11. By: Nicola Brandt
    Abstract: The potential to strengthen productivity growth and enhance consumer welfare through more competition is large in the energy and railway sectors. Establishing stronger vertical separation between network access provision and potentially competitive services will be the main challenge for Germany going forward. In particular, it will be a crucial point in designing the envisaged privatisation of state stakes in the railway sector market incumbent Deutsche Bahn AG. In the energy sector, concentration in the wholesale market is another crucial issue that Germany will need to tackle, including by fostering market integration with neighbouring countries as well as market entry of newcomers. A more systematic approach to tendering unprofitable transport services will be key in the railway sector. This Working Paper relates to the 2008 Economic Survey of Germany ( <P>Récolter les fruits de l'accroissement de la concurrence dans les industries de réseau <BR>L'accroissement de la concurrence présente dans les secteurs énergétique et ferroviaire un fort potentiel de croissance accrue de la productivité et du bien-être des consommateurs. Le principal défi que doit relever l'Allemagne dans un proche avenir est l'affirmation plus marquée d'une séparation verticale entre les services d'accès aux réseaux et les services potentiellement concurrentiels. Il sera en particulier crucial de préparer la privatisation envisagée par l'État des participations qu'il détient dans Deutsche Bahn AG, opérateur historique du secteur ferroviaire. Dans le secteur de l'énergie, la concentration du marché de gros est un autre point essentiel que l'Allemagne devra traiter, notamment en favorisant l'intégration du marché avec les pays voisins et l'entrée de nouveaux acteurs. Dans le rail, il sera essentiel d'opter pour le recours plus systématique à des appels d'offres en matière de services de transport non rentables. Ce document de travail se rapporte à l’Étude économique de l’Allemagne 2008 (
    Keywords: network industries, industrie de réseau, Germany, Allemagne, consumption tax, corporate tax, electricity and gas markets, railways, tax expenditures, tax progressivity, marché de l’électricité et du gaz, chemins de fer
    JEL: L92 L94 L95
    Date: 2008–08–05
  12. By: Reinhard Madlener (Institute for Future Energy Consumer Needs and Behavior (FCN), RWTH Aachen University); Weiyu Gao (Shanghai Development Research Center); Ilja Neustadt (Socioeconomic Institute, University of Zurich); Peter Zweifel (Socioeconomic Institute, University of Zurich)
    Abstract: The search for economically e±cient policy instruments designed to promote the diffusion of renewable energy technologies in liberalized markets has led to the introduction of quota-based tradable `green' certificate (TGC) schemes for renewable electricity. However, there is a debate about the pros and cons of TGC, a quantity control policy, compared to guaranteed feed-in tariffs, a price control policy. In this paper we contrast these two alternatives in terms of cost effectiveness and social welfare, taking into account that electricity markets are not perfectly competitive.
    Keywords: Tradable green certificates, Renewable portfolio standard, Quota target, Feed-in tariff, Cournot duopoly
    JEL: Q42 Q48
    Date: 2008–07
  13. By: Trudo Dejonghe (Lessius Hogeschool (KULeuven), Belgium)
    Abstract: The problem with Belgian football competition is that in the long run, and as reality shows us in the short term, the contemporary situation will lead to market failures and the elimination of some of the clubs. The solution proposed in this paper is the creation of a new professional competition with fewer teams combined with territorial exclusivity in a centre with a potential number of consumers that reach a certain absolute or relative threshold.
    Keywords: sports economics, soccer
    JEL: L83
    Date: 2008–08
  14. By: Martin Grossmann (Institute for Strategy and Business Economics, University of Zurich); Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: This paper presents a dynamic model of talent investments where two clubs compete in each period with respect to a contest prize. We show that aggregate talent stocks of both clubs converge to an identical level such that competitive balance is assured in the steady state as long as league prizes are identical for clubs. In the transition the dynamics are mainly influenced by the elasticity of marginal costs. Finally, we generalize the static results of Szymanski and Kesenne (2004): It is possible to have a persistent inequality in team qualities and revenue sharing decreases competitive balance if clubs have different market potentials.
    Keywords: Contest, Sports Economics, Competitive Balance, Revenue Sharing
    JEL: L83 D92
    Date: 2008–08
  15. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Stephan Werner (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: A wide range of literature which discusses the impact of the chosen objective function on competitive balance and revenue sharing. Some authors argued that sports clubs (or the owners of the sports clubs) behave like profit maximizers. This assumption of profit maximization coincides with the standard microeconomic theory of firms. On the other hand, some researchers pronounced that European football clubs behave like utility maximizers having a utility function that incorporates variables other than (only) club profits. Also, this assumption is well-known in standard microeconomic theory, since households maximize their utility with respect to a given budget constrain. In this paper, we want give a formal framework for the so called mixed leagues, i.e. professional sports leagues, where some club owners maximize clubs’ profits and the rest of the clubs are interested in maximizing their winning probability. This paper fills the gap in the existing literature since mixed leagues have not (formally) discussed, and therefore, no policy implications exist.
    Keywords: Mixed League, objective function, competitive balance, aggregated investments
    JEL: L83 M21 D02
    Date: 2008–08
  16. By: Ross Levine; Alexey Levkov; Yona Rubinstein
    Abstract: This paper assesses the impact of competition on racial discrimination. The dismantling of inter- and intrastate bank restrictions by U.S. states from the mid-1970s to the mid-1990s reduced financial market imperfections and lowered entry barriers facing nonfinancial firms. We use bank deregulation to identify an exogenous intensification of competition in the nonfinancial sector, and evaluate its impact on the racial wage gap, which is that component of the black-white wage differential unexplained by Mincerian characteristics. We find that bank deregulation reduced the racial wage gap by spurring the entry of nonfinancial firms. Consistent with theory, the impact of competition on the wage gap is particularly large in states with a comparatively high degree of racial bias, where competition-enhancing bank deregulation eliminated between 20 and 30 percent of the racial wage gap.
    JEL: D3 D43 G21 G28 J31 J7
    Date: 2008–08
  17. By: Monique Ebell; Christian Haefke
    Abstract: We consider the dynamic relationship between product market entry regulation andequilibrium unemployment. The main theoretical contribution is combining a job matchingmodel with monopolistic competition in the goods market and individual bargaining. Wecalibrate the model to US data and perform a policy experiment to assess whether thedecrease in trend unemployment during the 1980's and 1990's could be attributed to productmarket deregulation. Under a traditional calibration, our results suggest that a decrease of lessthan two-tenths of a percentage point of unemployment rates can be attributed to productmarket deregulation, a surprisingly small amount. Under a small surplus calibration,however, product market deregulation can account for the entire decline in US trendunemployment over the 1980's and 1990's.
    Keywords: Product market competition, barriers to entry, wage bargaining
    JEL: E24 J63 L16 O00
    Date: 2008–06
  18. By: Bartram, Söhnke M.; Burns, Natasha; Helwege, Jean
    Abstract: Previous research on the impact of currency risk on stock returns has failed to find a significant role for foreign exchange rates. This paper addresses several explanations of this finding with a unique dataset of U.S. firms that acquire targets in other countries. The dataset allows estimation of the impact of exchange rates using firm-specific bilateral exchange rates and a time period over which underlying exposure is known to significantly change. We also relate the change in exposure from before to after the acquisition to various characteristics of the acquirer, such as its presence in the target country prior to the deal and its hedging activities, and characteristics of the target, such as the exposure of the target prior to the deal. The results suggest that identifying a relevant exchange rate can be an important consideration in studying the impact of exchange rate risk on stock returns, but identifying financial hedging information is not. Further, foreign targets often provide operational hedging benefits to the U.S. acquirers, as exposure estimates are significantly affected by the acquisition.
    Keywords: Exchange rates; exposure; hedging; derivatives; mergers; acquisitions
    JEL: F4 F3 G3
    Date: 2007–04–01
  19. By: Usami, Koichi
    Abstract: This paper will analyze the Menem administration's social policy reforms during the 1990s. Neo-liberal reforms in Argentina are well-known both in the economy and in the social arena, but in the latter we can discern the presence of tripartite negotiations. The form of such negotiations, the type of agreements reached as a result, and the background to those agreements will be discussed. We also pay attention to the concept of competitive corporatism, which was established under the increase in market competition brought about by globalization.
    Keywords: Argentina, Social policy, Social security, Labor policy, Labor market, Neo-liberal reform, Competitive corporatism
    JEL: H55 I18 I30 J38 J68
    Date: 2008–07
  20. By: Makhija, Anil K. (Ohio State U); Narayanan, Rajesh P. (U of Georgia)
    Abstract: Fairness opinions provided by investment banks advising on mergers and acquisitions have been criticized for being conflicted in aiding bankers further their goal of completing the deal as opposed to aiding boards (and shareholders) by providing an honest appraisal of deal value. We find empirical support for this criticism. We find that shareholders on both sides of the deal, aware of the conflict of interest facing advisors, rationally discount deals where advisors provide fairness opinions. The reputation of the advisor serves to mitigate this discount, while the contingent nature of advisory fees appears to have no impact. Furthermore, consistent with the criticism of fairness opinions, we find evidence suggesting that fairness opinions are sought by boards for the legal cover they provide against shareholders unhappy with the deal’s terms. Thus, altogether our findings suggest that investment bankers and boards may be complicit in using fairness opinions to further their own interests at an expense to shareholders.
    JEL: G24
    Date: 2007–10
  21. By: Niels Bosma; Erik Stam; Veronique Schutjens
    Abstract: Do processes of firm entry and exit improve the competitiveness of regions? If so, is this a universal mechanism or is it contingent on the type of industry or region in which creative destruction takes place? This paper analyses the effect of firm entry and exit on the competitiveness of regions, measured by Total Factor Productivity (TFP) growth. Based on a study across 40 regions in the Netherlands over the period 1988-2002, we find that firm entry is related to productivity growth in services, but not in manufacturing. The positive impact found in services does not necessarily imply that new firms are more efficient than incumbent firms; high degrees of creative destruction may also improve the efficiency of incumbent firms. We also find that the impact of firm dynamics on regional productivity in services is higher in regions exhibiting diverse but related economic activities.
    Keywords: entrepreneurship, entry & exit, turbulence, creative destruction, regional competitiveness, total factor productivity
    JEL: L10 M13 O18 R11
    Date: 2008–08
  22. By: Monique Ebell; Albrecht Ritschl
    Abstract: We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into theGreat Depression after 1929 in a unified framework. The model combines monopolistic productmarket competition with search frictions in the labor market, allowing for both individual andcollective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility ofthis period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly powerin the economy. A shift from individual to collective bargaining presents as a recession, involvingdeclines in output and asset values, and increases in unemployment and real wages. The pro-unionprovisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I,leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Courtdecisions in late 1921 induced a shift back to individual bargaining, leading the economy out of therecession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hooveradministrations enabled a major rise in corporate profits and stock market valuations throughout the1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms toadopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributingsubstantially to the stock market crash. We model the onset of the Great Depression as an equilibriumswitch from individual wage bargaining to (actual or mimicked) collective wage bargaining. Thegeneral equilibrium effects of this regime change are consistent with large decreases in output,employment, and stock prices and moderate increases in real wages.
    Keywords: Trade unions, collective bargaining, Great Depression
    JEL: E24 E27 J51 J64 N12 N22
    Date: 2008–06

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