nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒09‒13
twenty-two papers chosen by
Russell Pittman
US Department of Justice

  1. Aftermarket Power and Basic Market Competition By Luis Cabral
  2. Brand popularity, endogenous leadership, and product introduction in industries with word of mouth communication By Christian Dahl Winther
  3. "Exclusive Dealing Contract and Inefficient Entry Threat" By Noriyuki Yanagawa; Ryoko Oki
  4. Vertical Integration and Operational Flexibility By M. Moretto; G. Rossini
  5. Quality competition versus price competition goods: An empirical classification By Richard E. Baldwin; Tadashi Ito
  6. Analyzing Mergers under Asymmetric Information: A Simple Reduced-Form Approach By Thomas Borek; Stefan Bühler; Armin Schmutzler
  7. A Statistical Equilibrium Model of Competitive Firms By Alfarano, Simone; Milakovic, Mishael; Irle, Albrecht; Kauschke, Jonas
  8. A Network Model of Price Dispersion By Giacomo Pasini; Paolo Pin; Simon Weidenholzer
  9. A note on collusion sustainability with optimal punishments and detection lags. By Aitor Ciarreta; Carlos Gutiérrez-Hita
  10. Product Market Competition, Incentives and Fraudulent Behavior By R. Andergassen
  11. Supersize It: The Growth of Retail Chains and the Rise of the "Big Box" Retail Format By Emek Basker; Shawn Klimek; Pham Hoang Van
  12. Bank competition - When is it Goog? By Christa Hainz;
  13. Bank competition and financial stability By Berger, Allen N.; Klapper, Leora F.; Turk-Ariss, Rima
  14. Insurers : too many, too few, or"just right"? initial observations on a cross-country dataset of concentration and competition measures By Thorburn, Craig
  15. Measuring Welfare and the Effects of Regulation in a Government-Created Market: The Case of Medicare Part D Plans By Claudio Lucarelli; Jeffrey Prince; Kosali Simon
  16. Demand Distribution Dynamics in Creative Industries: the Market for Books in Italy By E. Gaffeo; A. E. Scorcu; L. Vici
  17. You Won the Battle. What about the War? A Model of Competition between Proprietary and Open Source Software By Riccardo Leoncini; Francesco Rentocchini; Giuseppe Vittucci Marzetti
  18. Internationalising to create Firm Specific Advantages: Leapfrogging strategies of U.S. Pharmaceutical firms in the 1930s and 1940s & Indian Pharmaceutical firms in the 1990s and 2000s By Athreye, Suma; Godley, Andrew
  19. Joint bidding in infrastructure procurement By Estache, Antonio; Iimi, Atsushi
  20. Can planners control competitive generators? By Contreras, Javier; Krawczyk, Jacek; Zuccollo, James
  21. The Role of Competition Policy in the Promotion of Economic Growth By Lawrence J. White
  22. Entrepreneurial Competition and Its Impact on the Aggregate Economy By Katsuya Takii

  1. By: Luis Cabral
    Date: 2008
  2. By: Christian Dahl Winther (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: This paper considers the impact of popularity on duopolists’ entry strategies into an emerging industry, where each consumer holds a preference for one of two competing brands. Brand popularity is influenced by word of mouth communication, as early adopters recommend the brand they have bought to later buyers. Early introduction is, however, a costly strategy. The timing of product introduction is therefore of strategic importance to firms. I investigate the equilibria of the game when firms choose their time to market strategies sequentially, and observe how they relate to the popularity of the Stackelberg leader’s brand. This analysis reveals firms’ individual incentives for leader and follower roles, and the market structure that would result in this noncooperative game. As von Stackelberg showed a leader’s commitment to a strategy can preempt the follower. The present model shows that this situation, where both firms prefer the leader role, most likely occurs when brands hold equal levels of popularity. On the other hand it is interesting to observe that in certain markets, in particular where popularity is highly asymmetric, it is optimal for the dominant firm to become follower, and for the inferior firm to lead, because this facilitates soft competition. Still, the market structure may be insensitive to the order of moves. This warrants investigation of the connection between leadership and brand popularity, and the effect on market structure.
    Keywords: Endogenous leadership, product differentiation, product introduction, technological change, word of mouth communication
    JEL: D83 L11 O33
    Date: 2008–09–03
  3. By: Noriyuki Yanagawa (Faculty of Economics, University of Tokyo); Ryoko Oki (Graduate School of Economics, University of Tokyo)
    Abstract: This paper examines the effects of exclusive dealing contracts in a simple model with manufacturers-distributors relations. We consider entrants in both manufacturing and distribution sectors. It is well-known that a potential entry threat is welfare increasing under homogenous price competition, even though the potential entrant is less productive. This paper reexamines this intuition by employing the above model. We show that the entry threat of a less-productive manufacturer is welfare decreasing when there is an exclusive dealing contract between the incumbent manufacturer and distributor. This result is in contrast to the view of the contestable markets literature.
    Date: 2008–09
  4. By: M. Moretto; G. Rossini
    Date: 2008–03
  5. By: Richard E. Baldwin; Tadashi Ito
    Abstract: Based on the recent trade models of the Heterogeneous Firms Trade (HFT) model and the Quality Heterogeneous Firms Trade (QHFT) model, we classify export goods (at the HS 6-digit level of disaggregation) by quality and price competition. We find a high proportions of quality-competition goods for the major EU countries and lower proportions for Canada, Australia and China. However, the overlap of these quality-competition goods is not large, which suggests that characteristics of export goods are substantially different across countries at the same HS 6-digit code.
    JEL: F14
    Date: 2008–09
  6. By: Thomas Borek; Stefan Bühler; Armin Schmutzler
    Abstract: This paper provides a simple reduced-form framework for analyzing merger decisions in the presence of asymmetric information about firm types, building on Shapiro's (1986) oligopoly model with asymmetric information about marginal costs. We employ this framework to examine what types of firms are likely to be involved in mergers. While we give sufficient conditions under which only low-type firms merge, as a lemons rationale would suggest, we also argue that these conditions will often be violated in practice. Finally, our analysis shows how signaling considerations affect merger decisions.
    Keywords: merger, asymmetric information, oligopoly
    JEL: D43 D82 L13 L33
    Date: 2008–06
  7. By: Alfarano, Simone; Milakovic, Mishael; Irle, Albrecht; Kauschke, Jonas
    Abstract: We argue that the complex interactions of competitive heterogeneous firms lead to a statistical equilibrium distribution of firms’ profit rates, which turns out to be an exponential power (or Subbotin) distribution. Moreover, we construct a diffusion process that has the Subbotin distribution as its stationary probability density, leading to a phenomenologically inspired interpretation of variations in the shape parameter of the statistical equilibrium distribution. Our main finding is that firms’ idiosyncratic efforts and the tendency for competition to equalize profit rates are two sides of the same coin.
    Keywords: Statistical equilibrium, maximum entropy principle, diffusion process, stochastic differential equation, competition, profit rate
    JEL: C16 D21 E10 L10
    Date: 2008
  8. By: Giacomo Pasini (Ca' Foscari University in Venice); Paolo Pin (Abdus Salam Internazional Centre for Theoretical Physics); Simon Weidenholzer (Institut für Volkswirtschaftslehre, Universität Wien)
    Abstract: We analyze a model of price competition ? la Bertrand in a network environment. Firms only have a limited information on the structure of network: they know the number of potential customers they can attract and the degree distribution of customers. This incomplete information framework stimulates the use of Bayesian-Nash equilibrium. We find that, if there are customers only linked to one firm, but not all of them are, then an equilibrium in randomized strategies fails to exist. Instead, we find a symmetric equilibrium in randomized strategies. Finally, we test our results on US gasoline data. We find empirical evidence consistent with firms playing random strategies.
    Keywords: Bertrand Competition, Bayesian- Nash Equilibrium, Mobility Index
    JEL: D43 D85 L11
    Date: 2008–03
  9. By: Aitor Ciarreta (The University of the Basque Country); Carlos Gutiérrez-Hita (Universitas Miguel Hernández)
    Abstract: In this note we characterize optimal punishments with detection lags when the market consists of n oligopolistic firms. We extend a previous note by Colombo and Labrecciosa (2006) [Colombo, L., and Labrecciosa, P., 2006. Optimal punishments with detection lags. Economic Letters 92, 198-201] to show how in the presence of detection lags optimal punish- ments fail to restore cooperation also in markets with a low number of firms.
    Keywords: Optimal punishments; Detection lags; Collusion sustainability
    JEL: C73 D43
    Date: 2008–09–05
  10. By: R. Andergassen
    Date: 2008–06
  11. By: Emek Basker (Department of Economics, University of Missouri-Columbia); Shawn Klimek; Pham Hoang Van
    Abstract: We offer a theory for the complementarity between the size of a retail chain and the scope of its business to explain the growth of general-merchandise firms and the expansion of the "superstore" format. The complementarity results from an interaction of the retailer's economies of scale and consumer gains from "one-stop shopping." We find support for our model in micro data from the Census of Retail Trade for 1977-2002. Retail chains with more stores carry more distinct product lines and as retail chains grow they add both stores and product lines. On average, we find that a chain adds one product line, such as shoes, computers, or jewelry, to an existing store with every new store it opens. For the average large chain, adding a new product line throughout the chain is correlated with adding 400 new stores, competing in over 8,000 new markets and increasing its competitive pressure in more than 10,000 additional markets.
    Keywords: Retail, Chain, Big Box, Superstore, Economies of Scale, General Merchandise, One Stop Shopping
    JEL: L11 L25
    Date: 2008–08–20
  12. By: Christa Hainz; (University of Munich, Akademiestr. 1/III, 80799 Munich, Germany; )
    Abstract: The effects of bank competition and institutions on credit markets are usually studied separately although both factors are interdependent. We study the effect of bank competition on the choice of contracts (screening versus collateralized credit contract) and explicitly capture the impact of the institutional environment. Most importantly, we show that the effects of bank competition on collateralization, access to finance, and social welfare depend on the institutional environment. We predict that firms’ access to credit increases in bank competition if institutions are weak but bank competition does not matter if they are well-developed.
    Keywords: Strategic Experimentation, Two-Armed Bandit, Exponential Distribution, Poisson Process, Bayesian Learning, Markov Perfect Equilibrium
    JEL: D82 G21 K00
    Date: 2008–09
  13. By: Berger, Allen N.; Klapper, Leora F.; Turk-Ariss, Rima
    Abstract: Under the traditional"competition-fragility"view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative"competition-stability"view, more market power in the loan market may result in greater bank risk as the higher interest rates charged to loan customers make it more difficult to repay loans and exacerbate moral hazard and adverse selection problems. But even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. The authors test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. The results suggest that - consistent with the traditional"competition-fragility"view - banks with a greater degree of market power also have less overall risk exposure. The data also provide some support for one element of the"competition-stability"view - that market power increases loan portfolio risk. The authors show that this risk may be offset in part by higher equity capital ratios.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,,Markets and Market Access
    Date: 2008–08–01
  14. By: Thorburn, Craig
    Abstract: In many markets, industry and policymakers agree that there may be too many insurers. In others, the consensus is that there could be benefit from more competition. But this broad consensus is often supported by evidence that is more qualitative, anecdotal, or judgmental despite being unanimous. What is less clear, however, is how far consolidation or liberalization will go, how fast, and when it will end. This paper presents some initial observations from a cross-country data set and proposes that individual country results can be interpreted against this data set to inform expectations regarding trends in competition, concentration and consolidation, to inform analysis of the sector, for individual firm strategic planning and wider market risk assessments. A"natural level"for measures is suggested as a starting hypothesis. Further consideration is then made of the role of absolute market size, stage of market development, and differentials between life and non life segments. Analysis of the natural level, adjusted for market conditions, can then be used to develop preliminary views on current and expected market dynamics, strategic planning, and to inform policy, regulatory and supervisory priorities.
    Keywords: Debt Markets,Markets and Market Access,Emerging Markets,Microfinance,Insurance&Risk Mitigation
    Date: 2008–03–01
  15. By: Claudio Lucarelli; Jeffrey Prince; Kosali Simon
    Abstract: Medicare's prescription drug benefit (Part D) has been its largest expansion of benefits since 1965. Since the implementation of Part D, many regulatory proposals have been advanced to improve this government-created market. Among the most debated are proposals to limit the number of options, in response to concerns that there are "too many" plans. In this paper we study the welfare impacts of limiting the number of Part D plans. To do this, we first provide evidence that consumers view Medicare Part D plans as differentiated products. In doing so, we determine how much Medicare beneficiaries value the plans' various features -- an important measurement not only for our analysis, but also because these features are heavily dictated by policy. Second, using our demand- and supply-side estimates, we conduct several policy experiments to understand the implications of reducing the number of plans. Specifically, we assess the effects on equilibrium premia and welfare from removing plans that cover "the gap," reducing the maximum number of plans each firm can offer per region, and, for validation purposes, the impact of a recent major merger. Our counterfactuals regarding removal of plans provide an important assessment of the losses to consumers (and producers) resulting from government limitations on choice. These costs must be weighed against the widely discussed expected gains from limiting options (due to expected reductions in consumer search costs) when considering new restrictions on the number of plans that can be offered. We find that the search costs should be at least two thirds of the average monthly premium in order to justify a regulation that allows only two plans per firm, and that this number would be substantially lower if the limitation in the number of plans is coupled with a decrease in product differentiation (e.g., by removing plans that cover "the gap").
    JEL: H42 H51 I11 I18 L13 L51 L88
    Date: 2008–09
  16. By: E. Gaffeo; A. E. Scorcu; L. Vici
    Date: 2008–03
  17. By: Riccardo Leoncini; Francesco Rentocchini; Giuseppe Vittucci Marzetti
    Abstract: Although open source software has recently attracted a relevant body of economic literature, a formal treatment of the process of com- petition with its proprietary counterpart is still missing. Starting from an epidemic model of innovation di?usion, we try to ?ll this gap. We propose a model where the two competing technologies depend on dif- ferent factors, each one speci?c to its own mode of production (prof- its and developers’ motivations respectively), together with network e?ects and switching costs. As the speed of di?usion of these tech- nologies is crucial for the ?nal outcome, we endogenize the parame- ter in?uencing it across the population of adopters. We ?nd that an asymptotically stable equilibrium where both technologies coexist can always be present and, when the propagation coe?cient is endogenous, it coexists with winner–take–all solutions. Furthermore, an increase in the level of the switching costs for one technology increases the num- ber of its adopters, while reducing the number of the other one. If the negative network e?ects increase for one of the two technologies, then the equilibrium level of users of that technology decrease.
    Keywords: Increasing returns; Open-source software; Technological competition; Technology di?usion
    JEL: L17 L86 O33
    Date: 2008
  18. By: Athreye, Suma (UNU-MERIT, Brunel Business School, Brunel University); Godley, Andrew (Department of Management, University of Reading Business School)
    Abstract: Internationalisation is a useful strategy to gain firm specific advantages during periods of technological discontinuity. The pharmaceutical industry offers us two such episodes as examples: when the antibiotics revolution was beginning and when the possibilities of genetic routes to new drug discovery were realised. This paper compares the strategies adopted by laggard U.S. firms scrambling to gain capabilities in antibiotics, and Indian firms equally eager to acquire positions in new biotechnology based drugs and shows that both groups used internationalisation strategies to gain technological advantages and build up their firm specific advantages.
    Keywords: Technological leapfrogging, Internationalisation Strategies, Indian Pharmaceutical industry, Antibiotics revolution, US Pharmaceuticals
    JEL: F23 L22 L25 L65 N80 O33
    Date: 2008
  19. By: Estache, Antonio; Iimi, Atsushi
    Abstract: To utilize public resources efficiently, it is required to take full advantage of competition in public procurement auctions. Joint bidding practices are one of the possible ways of facilitating auction competition. In theory, there are pros and cons. It may enable firms to pool their financial and experiential resources and remove barriers to entry. On the other hand, it may reduce the degree of competition and can be used as a cover for collusive behavior. The paper empirically addresses whether joint bidding is pro- or anti-competitive in Official Development Assistance procurement auctions for infrastructure projects. It reveals the possible risk of relying too much on a foreign bidding coalition and may suggest the necessity of overseeing it. The data reveal no strong evidence that joint bidding practices are compatible with competition policy, except for a few cases. In road procurements, coalitional bidding involving both local and foreign firms has been found pro-competitive. In the water and sewage sector, local joint bidding may be useful to draw out better offers from potential contractors. Joint bidding composed of only foreign companies is mostly considered anti-competitive.
    Keywords: Investment and Investment Climate,ICT Policy and Strategies,Markets and Market Access,Public Sector Corruption&Anticorruption Measures,Access to Markets
    Date: 2008–07–01
  20. By: Contreras, Javier; Krawczyk, Jacek; Zuccollo, James
    Abstract: Consider an electricity market populated by competitive agents using thermal generating units. Generation often emits pollution which a planner may wish to constrain through regulation. Furthermore, generators’ ability to transmit energy may be naturally restricted by the grid’s facilities. The existence of both pollution standards and transmission constraints can impose several restrictions upon the joint strategy space of the agents. We propose a dynamic, game-theoretic model capable of analysing coupled constraints equilibria (also known as generalised Nash equilibria). Our equilibria arise as solutions to the planner’s problem of avoiding both network congestion and excessive pollution. The planner can use the coupled constraints’ Lagrange multipliers to compute the charges the players would pay if the constraints were violated. Once the players allow for the charges in their objective functions they will feel compelled to obey the constraints in equilibrium. However, a coupled constraints equilibrium needs to exist and be unique for this modification of the players’ objective functions ..[there was a “to” here, incorrect?].. induce the required behaviour. We extend the three-node dc model with transmission line constraints described in [10] and [2] to utilise a two-period load duration curve, and impose multi-period pollution constraints. We discuss the economic and environmental implications of the game’s solutions as we vary the planner’s preferences.
    JEL: C63 C72
    Date: 2008–08–30
  21. By: Lawrence J. White
    Date: 2008
  22. By: Katsuya Takii (Associate Professor, Osaka School of International Public Policy, Osaka University)
    Abstract: This paper models entrepreneurship as the entrepreneur's information processing activity in order to predict changes in demand and reallocate resources. The results show that allocative efficiency---and therefore aggregate productivity---increases through intensified competition by entrepreneurs grasping at opportunities. This fierce competition leads to price reductions that result in the improvement of measured aggregate productivity. The price reduction also forces relatively less able entrepreneurs to become workers. As resources are then dealt with only by relatively talented entrepreneurs, this selection effect also increases aggregate productivity. The paper also discusses how the selection effect influences the distribution of firm size.
    JEL: D21 D61 D83 L25 L26
    Date: 2008–09

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