nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒09‒29
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. When Market Competition Benefits Firms By Junichiro Ishida; Toshihiro Matsumura; Noriaki Matsushima
  2. Nonparametric Identification of Dynamic Models with Unobserved State Variables By Iwan Bos; Joseph E. Harrington, Jr.
  3. Noncooperative Oligopoly in Markets with a Continuum of Traders By Busetto, Francesca; Codognato, Giulio; Ghosal, Sayantan
  4. Non-smooth Dynamics and Multiple Equilibria in a Cournot-Ramsey Model with Endogenous Markups By Brito, Paulo; Costa, Luís F.; Dixon, Huw
  5. Measuring changes in preferences and perception due to the entry of a new brand with choice data By Lutz Hildebrandt; Lea Kalweit
  6. The Efficiency and Evolution of R&D Networks By Michael D. König; S. Battiston; M. Napoletano; F. Schweitzer
  7. Testing Gibrat’s law: empirical evidence from panel unit root tests of turkish firms By Aslan, Alper
  8. Seemingly competitive food retail regulations : who do they really help ? By Larue, B.; Bonroy, O.
  9. Analysis of the World Market for Steam Coal Using a Complementarity Model By Clemens Haftendorn; Franziska Holz
  10. Concentration Levels in the U.S. Advertising and Marketing Services Industry: Myth vs. Reality By Alvin J. Silk; Charles King III
  11. Competition Law and Europe's Open Borders: The Case of Motor Vehicle Distribution in Switzerland By Simon J. Evenett; Michael Meier
  12. Bank mergers and lending relationships. By Judit Montoriol-Garriga
  13. Bank mergers and the dynamics of deposit interest rates By Ben R Craig; Valeriya Dinger
  14. Inherited or Earned? Performance of Foreign Banks in Central and Eastern Europe By Olena Havrylchyk; Emilia Jurzyk
  15. The Effect of Foreign Bank Entry on the Cost of Credit in Transition Economies. Which Borrowers Benefit the Most? By Hans Degryse; Olena Havrylchyk; Emilia Jurzyk; Sylwester Kozak
  16. Ownership Reform, Foreign Competition, and Efficiency of Chinese Commercial Banks: A Non-Parametric Approach By Yao, Shujie; Han, Zhongwei; Feng, Genfu
  17. General trends in competition policy and investment regulation in mandatory defined contribution markets in Latin America By Dayoub, Mariam; Lasagabaster, Esperanza
  18. Cross-Border Merger and Acquisitions (Causes, consequences and recent trends) By Pozzolo, Alberto Franco
  19. The Impact of FDI, Cross Border Mergers and Acquisitions and Greenfield Investments on Economic Growth By Paula Neto; António Brandão; António Cerqueira

  1. By: Junichiro Ishida (Osaka School of International Public Policy (OSIPP),Osaka University); Toshihiro Matsumura (Institute of Social Science, University of Tokyo); Noriaki Matsushima (Graduate School of Business Administration, Kobe University)
    Abstract: A conventional wisdom in economics posits that more intense market competition, measured in almost any way, reduces firm profit. In this paper, we challenge this conventional wisdom in a simple Cournot model with strategic R&D investments wherein an efficient firm (dominant firm) competes against less efficient firms (fringe firms). We find that an increase in the number of fringe firms can stimulate R&D by the dominant firm, while it always reduces R&D by each of the fringe firms. More importantly, this force can be strong enough to compensate for the loss that arises from more intense market competition: the dominant firm's profit may indeed increase with the number of fringe firms, quite contrary to the conventional wisdom. An implication of this result is far-reaching, as it gives dominant firms to help, rather than harm, fringe competitors. We relate this implication to a practice know as open knowledge disclosure, especially Ford's strategy of disclosing its know-how publicly and extensively at the beginning of the 20th century.
    Keywords: competition, oligopoly, R&D, heterogeneity, entry
    Date: 2008–09
  2. By: Iwan Bos; Joseph E. Harrington, Jr.
    Abstract: In the context of an in.nitely repeated capacity-constrained price game, we endogenize the composition of a cartel when firms are heterogeneous in their capacities. When firms are sufficiently patient, there is always a stable cartel involving the largest firms. A firm with sufficiently small capacity is not a member of any stable cartel. When a cartel is not all-inclusive, colluding firms set a price that serves as an umbrella with non-cartel members pricing below it and producing at capacity. Contrary to previous work, our results suggest that the most severe coordinated effects may come from mergers involving moderate-sized firms, rather than the largest or smallest firms.
    Date: 2008–09
  3. By: Busetto, Francesca (Dipartimento di Scienze Economiche, Universitµa degli Studi di Udine); Codognato, Giulio (Dipartimento di Scienze Economiche, Universitµa degli Studi di Udine); Ghosal, Sayantan (Department of Economics, University of Warwick)
    Abstract: In this paper, we study three prototypical models of noncooperative oligopoly in markets with a continuum of traders : the model of Cournot-Walras equilibrium of Codognato and Gabszewicz (1991), the model of Cournot-Nash equilibrium of Lloyd S. Shapley, and the model of Cournot-Walras equilibrium of Busetto et al. (2008). We argue that these models are all distinct and only the Shapley's model with a continuum of traders and atoms gives an endogenous explanation of the perfectly and imperfectly competitive behavior of agents in a one-stage setting. For this model, we prove a theorem of existence of a Cournot-Nash equilibrium.
    JEL: C72 D51
    Date: 2008
  4. By: Brito, Paulo; Costa, Luís F.; Dixon, Huw (Cardiff Business School)
    Abstract: We develop a simple Ramsey model with numerous Cournotian industries where entry generates an endogenous markup. The model produces two different regimes: a monopoly and an oligopoly one. We provide a rigorous study of non-smooth dynamics and we also analyse the global dynamics of the model, demonstrating the model exhibits robust heteroclinic orbits, either of the smooth or the non-smooth type. Similar economies may be in any of these regimes and they may change regime along its convergence path. Fixed costs and elasticities of demand, play a crucial role and changing their values may alter the dynamics in a radical way, either by inducing a discontinuous transition or a discontinuous hysteresis.
    Keywords: endogenous mark-ups; non-smooth dynamics; discontinuous induced bifurcations; heteroclinic orbits
    JEL: C62 D43 E32
    Date: 2008–09
  5. By: Lutz Hildebrandt; Lea Kalweit
    Abstract: Context effects can have a major influence on brand choice behavior after the introduction of a new product. Based on behavioral literature, several hypotheses about the effects of a new brand on perception, preferences and choice behavior can be derived, but studies with real choice data are still lacking. We employ an internal market structure analysis to measure context effects caused by a new product in scanner panel data, and to discriminate between alternative theoretical explanations. An empirical investigation reveals strong support for categorization effects and changes in perception, which affect customers in two out of five segments.
    Keywords: context effects, categorization, brand choice models, new brand introduction
    JEL: M31 C23 C51
    Date: 2008–08
  6. By: Michael D. König (Chair of Systems Design, ETH Zurich, Switzerland); S. Battiston (Chair of Systems Design, ETH Zurich, Switzerland); M. Napoletano (Chair of Systems Design, ETH Zurich and Observatoire Français des Conjonctures Economiques, Department for Research on Innovation and Competition, Valbonne, France); F. Schweitzer (Chair of Systems Design, ETH Zurich, Switzerland)
    Abstract: This work introduces a new model to investigate the efficiency and evolution of networks of firms exchanging knowledge in R&D partnerships. We first examine the efficiency of a given network structure in terms of the maximization of total profits in the industry. We show that the efficient network structure depends on the marginal cost of collaboration. When the marginal cost is low, the complete graph is efficient. However, a high marginal cost implies that the efficient network is sparser and has a core-periphery structure. Next, we examine the evolution of the network struc- ture when the decision on collaborating partners is decentralized. We show the existence of mul- tiple equilibrium structures which are in general inefficient. This is due to (i) the path dependent character of the partner selection process, (ii) the presence of knowledge externalities and (iii) the presence of severance costs involved in link deletion. Finally, we study the properties of the emerg- ing equilibrium networks and we show that they are coherent with the stylized facts of R&D net- works.
    Keywords: R&D networks, technology spillovers, network efficiency, network formation
    JEL: D85 L24 O33
    Date: 2008–09
  7. By: Aslan, Alper
    Abstract: The purpose of this paper is to use panel unit root tests to see if Gibrat’s law holds in Turkey. Gibrat's Law establishes that firm growth is a random walk, it means that the probability of a given proportional change in size during a specified period is the same for all firms in a given industry. In this paper, it is examined Gibrat law in Turkey empirically by using Chen & Lu (2003) methodology and use the panel unit root method to investigate the relation between firm size and firm growth. Since it has been observed that many panel unit root tests are invalid when cross-section correlation problem and also finds that conclusion is not the same.
    Keywords: Gibrat’s Law; Firm Growth; MADF Test
    JEL: L11 L20
    Date: 2008
  8. By: Larue, B.; Bonroy, O.
    Abstract: The food distribution and retail sectors in Quebec are highly concentrated and integrated as large food distributors are also involved in food retailing. As such, they are competing with small grocery and convenience stores they sell inputs to. A review of the industry suggests that there are important economies of size in distribution, but that smaller stores offering convenience face a more inelastic demand. Concerns over the survival of smaller stores in Quebec have motivated two types of regulations. The first type aims at reducing the cost advantage of dominant retailers by restricting the number of employees that they are allowed to use during specific time periods. The second type restricts retail prices. We develop a simple model capturing the main features of the industry to ascertain the impact of these regulations on retail and wholesale prices. Our results suggest that these regulations reduce welfare and may induce both tighter margins and lower surplus for small retailers.
    JEL: L22
    Date: 2008
  9. By: Clemens Haftendorn; Franziska Holz
    Abstract: With its resource availability and the prospect of climate friendly technology, coal continues to play an important role in the global energy sector. We develop a complementarity model of the international market for steam coal. We want to analyze the level of competition in this market which is strategic for the importers' security of energy supply. In a spatial equilibrium framework, we assume the steam coal exporters to maximize their profits by choosing the optimal quantity to sell to each importing country. We compare two possible scenarios: perfect competition and Cournot competition. The results, especially the price levels, indicate that the Cournot model is not realistic, suggesting that the producing countries do not exert market power. However, the trade flows and prices observed in reality suggests that there is some form of market power with price discrimination, possibly following a Bertrand model in a spatial setting.
    Keywords: Coal, energy, market structure, simulation model
    JEL: L11 L72 C69
    Date: 2008
  10. By: Alvin J. Silk (Harvard Business School); Charles King III (Greylock McKinnon Associates, Cambridge, MA)
    Abstract: This paper analyzes changes in concentration levels in the U.S. Advertising and Marketing Services (A&MS) industry using publicly released data that have been largely ignored in past discussions of the industrial organization of this industry, namely those available from the U.S. Census Bureau's quinquennial Economic Census and the Service Annual Survey. We define the A&MS industry in terms of nine sectors, each of which is represented by a separate 5 digit NAICS category. In so doing, we have sought to redress some of the measurement problems surrounding estimates found in the existing literature. Our main findings are threefold. First, in the case of the core and largest sector, Advertising Agencies, firm level concentration as measured by Herfindahl-Hirschman Index (HHI) increased slightly but remained relatively low from 1977 to 2002. All of the HHI estimates readily satisfied the standard widely used to characterize an industry as "unconcentrated." We find mixed support for the hypotheses that the ranks of mid-sized agencies were depleted by ongoing waves of mergers and acquisitions and resulted in a polarized size structure. The size distributions of agency revenue have become more polarized in the sense that over time they appear more skewed, more dispersed, and exhibit greater inequality. The share of total receipts realized by small agencies fell while that of large agencies rose. However, the position of mid-sized agencies appears to have changed little over the period 1977- 2002, as measured by the shares of agencies and receipts they represent. Second, concentration levels in 1997 and 2002 varied across the nine sectors comprising the A&MS industry, but all were within the range generally considered as indicative of a competitive industry. Third, we developed concentration ratios at the level of holding companies (HC's) and find that the four largest HC's captured between a fifth and a quarter of total revenue from the A&MS industry, a share that remained quite stable over the period, 2002-2006. These estimates are lower by an order of magnitude than estimates often cited in the trade press. Reasons for the discrepancy are discussed.
    Date: 2008–09
  11. By: Simon J. Evenett; Michael Meier
    Abstract: This paper contains an independent empirical analysis of the effect of a Notice, issued by the Swiss Competition Commission in 2002 concerning vertical agreements between manufacturers and distributors of motor vehicles, on the degree to which the subsequent prices of cars in Switzerland exceeded those charged on the same models in neighbouring countries. Evidence presented here implies a non-transitory reduction in the degree of price discrimination against Swiss customers of medium- and large-sized cars in the years after the Notice came into effect. The total gain to Swiss buyers of cars is very conservatively estimated to be six times the total cumulative budget of the Swiss Competition Commission during the years 2003-2006; the best estimate of those gains exceed a quarter of a billion Swiss Francs during the same period. By 2006 the cumulative price reduction of the Swiss Competition Commission's action resulted in average savings per medium- and large-sized car that are estimated to be 929 and 2113 Swiss Francs, respectively. Moreover, the recurring annual gain to Swiss consumers of this measure by the Swiss Competition Commission is conservatively estimated to exceed ten times the latter's current annual budget, providing some indication of the "value for money" that effective competition law can have, even in economies with ostensibly open borders.
    Keywords: competition law, vertical agreements, motor vehicle trade, Switzerland
    JEL: F13 F14 F23 L11 L62
    Date: 2008–09
  12. By: Judit Montoriol-Garriga (Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, MA 02210, USA.)
    Abstract: This paper analyzes the effects of bank mergers on bank-firm relationships. Using matched bank-firm level data, I find that mergers disrupt lending relationships, specially to small borrowers of target banks. However, I find significant positive effects of mergers for borrowers that continue the lending relationship with the consolidated bank. On average, consolidated banks reduce loan interest rates. The most beneficial mergers from the borrower point of view are those involving two large banks and commercial banks. While the reduction in interest rates is larger when the acquirer and the target have some market overlap, the decline is much smaller when there is a significant increase in local banking market concentration. JEL Classification: G21, G34.
    Keywords: Banking consolidation, Lending relationships, Small business lending.
    Date: 2008–09
  13. By: Ben R Craig; Valeriya Dinger
    Abstract: Despite extensive research interest in the last decade, the banking literature has not reached a consensus on the impact of bank mergers on deposit rates. In particular, results on the dynamics of deposit rates surrounding bank mergers vary substantially across studies. In this paper, we aim for a comprehensive empirical analysis of a bank merger’s impact on deposit rate dynamics. We base the analysis on a unique dataset comprising deposit rates of 624 U.S. banks with a monthly frequency for the time period 1997–2006. These data are matched with individual bank and local market characteristics and the complete list of bank mergers in the United States. The data allow us to track the dynamics of bank mergers while controlling for the rigidity of the deposit rates and for a range of merger, bank, and local market features. An innovation of our work is the introduction of an econometric approach for estimating the change of the deposit rates given their rigidity.
    Keywords: Bank mergers ; Bank deposits
    Date: 2008
  14. By: Olena Havrylchyk; Emilia Jurzyk
    Abstract: Using a combination of propensity score matching and difference-in-difference techniques we investigate the impact of foreign bank ownership on the performance and market power of acquired banks operating in Central and Eastern Europe. This approach allows us to control for selection bias as larger but less profitable banks were more likely to be acquired by foreign investors. We show that during three years after the takeover, banks have become more profitable due to cost minimization and better risk management. They have additionally gained market share, because they passed their lower cost of funds to borrowers in terms of lower lending rates. Previous studies failed to pick up the improvements in performance of takeover banks, because they did not account for the performance of financial institutions before acquisitions.
    Keywords: Foreign banks; foreign acquisition; propensity score matching
    JEL: G15 G21 G34 F36
    Date: 2008–09
  15. By: Hans Degryse; Olena Havrylchyk; Emilia Jurzyk; Sylwester Kozak
    Abstract: We employ a unique dataset to study the impact of foreign bank ownership and mode of entry on banks’ lending rates to transparent and opaque borrowers. We find that greenfield banks charge lower lending rates on average and we test for two hypotheses that can explain the lower cost of credit of these institutions: (1) superior performance or (2) different portfolio composition with a focus on more transparent borrowers. Our analysis shows that bank ownership and mode of entry have a large impact on banks’ portfolio composition in terms of borrowers, maturity, and currency. After controlling for these differences, we do not find any impact of foreign bank ownership and mode of entry on lending rates, which is in line with the "portfolio composition hypothesis".
    Keywords: Banks; ownership; loan pricing
    JEL: G21 G28 G34 L11
    Date: 2008–09
  16. By: Yao, Shujie; Han, Zhongwei; Feng, Genfu
    Abstract: Since China joined the WTO in 2001, the pressure for bank reforms has mounted as China ought to fully open up its financial market to foreign competition by 2006. Efficiency is key for domestic banks to survive in a liberalised environment, but it appears that the last hope for raising bank efficiency is through ownership reform. Whether ownership reform and foreign competition can solve China?s banking problem remains to be tested. This paper aims to answer this question through using a non-parametric approach to analyse the efficiency changes of 15 large commercial banks during 1998-2005. We find that ownership reform and foreign competition have forced the Chinese commercial banks to improve performance, as their total factor productivity rose by 5.6 per cent per annum. This coincides with the recent bullish Chinese stock markets led by three listed state-owned commercial banks. Despite such encouraging results, we remain cautious about the future of the Chinese banks, as the good results may have been artificially created with massive government support and the fundamentals of the banks may be still weak.
    Keywords: data envelopment analysis (DEA), efficiency, banking, China
    Date: 2008
  17. By: Dayoub, Mariam; Lasagabaster, Esperanza
    Abstract: Following Chile's pension reform in 1981, a wave of multi-pillar pension reforms took place in Latin America (LAC). Their implementation has revealed new policy challenges. To shed light on these issues, this paper reviews the structure and performance of mandatory DC pillars in LAC. The review highlights three important points. First, it suggests overall positive outcomes from reforms in the LAC countries that implemented multi-pillar pension systems. There is, however, scope for increasing efficiency. Second, management fees have declined but remain relatively high whereas decreases in operational costs have only been partially passed through to consumers reflecting inadequate competition. Limits on transfers and related measures have been ineffective in curtailing management fees but created new barriers to entry. In recent years, a few countries in LAC introduced or are in the process of introducing a combination of new measures that focus more directly on the two root causes of inadequate competition - the inelasticity of demand to fees and selective elimination of barriers to entry by facilitating unbundling of services. These new measures show some promise. Third, the paper's review indicates that a greater diversification of pension fund portfolios in LAC appears to be necessary. Portfolio concentration owes to the adoption of strict quantitative investment regulations, underdeveloped capital markets and volatile macroeconomic environments. A gradual relaxation of these restrictions is now in progress in several countries. Regulators have become more conscious of the costs imposed by such regulations and macroeconomic conditions have improved. Greater overseas diversification seems inevitable given the development stage of local capital markets.
    Keywords: Debt Markets,,Emerging Markets,Access to Finance,Investment and Investment Climate
    Date: 2008–09–01
  18. By: Pozzolo, Alberto Franco
    Abstract: In the past fifteen years, cross-border mergers and acquisitions had an ever increasing role in the process of bank internationalization. Although a consensus view has developed on the determinants of a bank’s decision to expand abroad and on the determinant of the patterns of expansion, the debate on the consequences of foreign bank presence is still open. The aim of this chapter is twofold. First, we discuss the major results of the literature studying the determinants and the patterns of bank foreign expansion. Second, we confront the available evidence with the most recent evolution in cross-border bank M&As. At the end we suggest some possible lines for future
    Keywords: international banking, foreign direct investment
    JEL: E30 G21 F21 F23
    Date: 2008–09–15
  19. By: Paula Neto (ISCA, Universidade de Aveiro); António Brandão (Faculdade de Economia, Universidade do Porto); António Cerqueira (Faculdade de Economia, Universidade do Porto)
    Abstract: This paper investigates whether aggregate foreign direct investment (FDI), cross border mergers and acquisitions (M&A) and greenfield investments affects economic growth based on a panel data of 53 countries over the period 1996-2006. Both causality tests and single growth equations are applied to examine this relationship. The evidence suggests that there is bidirectional causality between FDI, M&A and growth. We can also conclude that economic growth Granger causes greenfields, but the reverse is not true. The estimation of the growth equation leads us to conclude that FDI through greenfield investments exerts a positive impact on economic growth in both developed and developing countries. Oppositely, M&A has a negative effect on the economic growth of developing countries, but insignificant on developed countries.
    Keywords: Foreign Direct Investment, Cross Border Mergers and Acquisitions, Greenfield Investments, Economic Growth
    JEL: F23 F40 G34 O40
    Date: 2008–09

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