nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒10‒28
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Loyalty inducing programs and competition with homogeneous goods By Nicolás Figueroa; Ronald Fischer; Sebastian Infante
  2. Do Strategic Substitutes Make Better Markets? A Comparison of Bertrand and Cournot Markets By Douglas D. Davis
  3. Do Menu Costs Make Prices Sticky? By Thomas A. Eife
  4. Competition, bargaining power and pricing in two-sided markets By Wilko Bolt; Kimmo Soramäki
  5. Intense Network Competition By Johan Stennek; Thomas TangerŒs
  6. Network Externalities, Mutuality, and Compatibility By Matthew G. Nagler
  7. Concurrence dans les réseaux et incompatibilité technologique (Competition in networks and technological incompatibility) By Jacques Kiambu
  8. Impacts of Airports on Airline Competition: Focus on Airport Performance and Airport-Airline Vertical Relations By Tae H. Oum; Xiaowen Fu
  9. The Airport Industry in a Competitive Environment: A United Kingdom Perspective By David Starkie
  10. The Impact of Climate Change Policy on Competition in the Air Transport Industry By Peter Forsyth
  11. The Impact of Hinterland Access Conditions on Rivalry between Ports By Anming Zhang
  12. Port Competition and Hinterland Connections By OECD
  13. Market Dominance and Barriers to Competition in Financial Trading Venues By Ricardo Ribeiro
  14. Firms' contribution to open source software and the dominant skilled user By Nicolas Jullien; Jean-Benoît Zimmermann
  15. Searching for Innovations ? The Technological Determinants of Acquisitions in the Pharmaceutical Industry By Gautier Duflos; Etienne Pfister
  16. Auction Design and Tacit Collusion in FCC Spectrum Auctions By Patrick Bajari; Jungwon Yeo
  17. Budget-Constrained Sequential Auctions with Incomplete Information By Carolyn Pitchik
  18. Globalization Drives Strategic Product Switching By Marialuz Moreno Badia; Veerle Slootmaekers; Ilke Van Beveren
  19. FDI in Post-Production Services and Product Market Competition By Jota Ishikawa; Hodaka Morita; Hiroshi Mukunoki
  20. Are Product and Labour Market Reforms Mutually Reinforcing? By Paul Cavelaars
  21. Destabilizing competition and institutional stabilizersThe contribution of J.M. Keynes By Angel Asensio

  1. By: Nicolás Figueroa; Ronald Fischer; Sebastian Infante
    Abstract: We analyze a market where two firms producing a homogenous good compete by means of two mechanisms: prices and a loyalty bonus. We assume that firms act simultaneously when posting their loyalty bonus and prices. Consumers who purchase from a firmin the first period must return the bonus in case they switch providers in the second period. They fully anticipate the effects on future prices of accepting the bonus and maximize their total surplus over both periods. We first show that there is no equilibrium with prices and bonuses equal to zero. We then show the existence of a SPNE where firms are able to obtain half the monopoly profits using large bonuses in the first period and high prices in the second period. We completely characterize all the symmetric equilibria of the game and show that, in general, firms obtain positive profits even when they compete in prices, the good is homogenous, and consumers are forward-looking. Finally we show that if firms are allowed to discriminate between old and new customers, the standard zero price equilibria reappear. JEL Classification: L13.
    Date: 2008
  2. By: Douglas D. Davis (Department of Economics, VCU School of Business)
    Abstract: Recent experiments suggest that games where actions are strategic substitutes rather than strategic complements exhibit some desirable performance characteristics. This paper reports an experiment conducted to test whether these characteristics extend to differentiated product Cournot and Bertrand markets. We find that Cournot markets do not generally outperform Bertrand markets, and that the opposite is often true. Bertrand markets exhibit comparatively higher convergence levels and speeds, particularly when products are close substitutes. Bertrand sellers do engage in more signaling activity than Cournot sellers. Such efforts, however, affect market outcomes only occasionally, and only when products are differentiated. Analysis of individual decisions suggests that the observed differences in convergence levels and speeds are driven by a propensity for sellers to use forecast and inertia anchors as bases for action choices in addition to best replies. Given these propensities, Bertrand markets converge more rapidly and more completely to static Nash predictions, particularly when products are close substitutes, because the differences between the various anchors is smaller in Bertrand markets.
    Keywords: Experiments, Market Concentration, Market Power
    JEL: C9 D4 L4
    Date: 2008–10
  3. By: Thomas A. Eife (University of Heidelberg, Department of Economics)
    Abstract: This paper studies whether menu costs are large enough to explain why firms are so reluctant to change their prices. Without actually estimating menu costs, we can infer their relevance for firms' price setting decisions from observed pricing behavior around a currency changeover. At a currency changeover, firms have to reprint their price tags (menus) independently of whether or not they want to change prices. And if this is costly, firms' price setting behavior is altered in the months around the changeover. Using data from the Euro-changeover, the paper estimates that menu costs can explain a stickiness of around 30 days which is considerably less than the 7 to 24-month stickiness we observe in retailing and in the service sector. The reluctance of firms to adjust prices more frequently appears to be caused by factors other than menu costs.
    Keywords: menu costs, price stickiness
    JEL: E30
    Date: 2008–10
  4. By: Wilko Bolt; Kimmo Soramäki
    Abstract: We develop a model of two-sided markets that illustrates the role of bargaining power between the two sides of the market. We are interested in the profit maximizing usage fees set by identical duopolistic platforms which engage in homogeneous, Bertrand-type competition. We find that for a sufficiently low marginal cost duopolistic two-sided competition reduces to a “grab-the-dollar” game with two asymmetric (pure) Nash equilibria. These equilibria are characterized by highly skewed prices, in which the side with all the bargaining power pays a minimum price. The other side of the market is used for cross-subsidization and is charged a high price. Compared to the monopoly outcome, competition lowers the total price charged to both sides, although the seller's equilibrium price may exceed the monopoly price. Both platforms enjoy excess profits.Key Words: platform competition, bargaining power, asymmetric equilibria, skewed pricing
    Keywords: platform competition; bargaining power; asymmetric equilibria; skewed pricing
    JEL: E24 E52 J50
    Date: 2008–09
  5. By: Johan Stennek (Gothenburg University); Thomas TangerŒs (Research Institute of Industrial Economics)
    Abstract: First, we demonstrate how unregulated price setting in mobile telecommunications may lead to monopolization, even when networks are highly substitutable. Second, we demonstrate that a menu of structural rules, including (i) mandatory interconnection, (ii) reciprocal access prices and (iii) a ban on price discrimination of calls to other networks, may restore competition. This regulation requires neither demand data nor information about call costs.
    Keywords: network competition; two-way access; mobile termination rates; network substitutability; entry deterrence
    JEL: L12 L14 L51 L96
    Date: 2008–09
  6. By: Matthew G. Nagler (The City College of New York)
    Abstract: Positive network externalities can arise when consumers benefit from the consumption of compatible products by other consumers (user-positive consumption externalities) or, alternatively, when they incur costs from the consumption of incompatible products by other consumers (nonuser-negative consumption externalities). But whereas user-positive externalities are typically mutually imposed and imply mutual benefit because they relate to interoperability, with nonuser-negative externalities the costs of incompatibility may be imposed unilaterally and borne asymmetrically. For example, increased risks of death and injury on the roads due to the co-existence of large and small vehicles are imposed exclusively by the owners of the large vehicles and borne exclusively by the occupants of the small vehicles. This paper compares the social optimality of incentives for compatibility under regimes involving user-positive and nonuser-negative externalities. Earlier work with respect to user-positive externalities (e.g., Katz and Shapiro, 1985) suggests that firms with relatively small networks or weak reputations tend to be biased in favor of compatibility, while individual firms’ incentives for compatibility are suboptimal when their networks are closely matched in size. Meanwhile, intuition suggests that with nonuser-negative externalities incentives for incompatibility should always be excessive, reflecting the notion that activities involving unilaterally imposed negative externalities will always be overprovided by the market (in the absence of regulation or Coaseian mitigation). Using a “location” model of differentiated products, we find that, under both regimes, incentives for compatibility tend to be suboptimal when firms’ networks are close in size, and excessive for the small firm when the networks differ greatly in size. Surprising public policy implications with respect to externalities are discussed.
    Keywords: network effects, negative externalities, differentiated products, competition, welfare
    JEL: L13 L14 D62 D11
    Date: 2008–10
  7. By: Jacques Kiambu (Department of Economics, Grandiose University)
    Abstract: Nous proposons dans cet article un modèle théorique pour analyser les conséquences de la concurrence dans les réseaux dotés des systèmes technologiques différents. Nous nous inspirons du modèle de Demange-Ponssard (1986), en mettant l’accent sur l'incompatibilité des technologies utilisées par les protagonistes pour analyser la dynamique concurrentielle sur le marché. Dans ce contexte, nous montrons que le marché livré à lui-même sans aucune régulation étatique a pour conséquence l’inefficacité concurrentielle et la dégradation de bien-être collectif. We propose in this paper a theoretical model to analyse the consequences of competition in networks characterised by different technological systems. We draw inspiration from the model of Demange-Ponssard (1986), by putting the emphasis on the incompatibility of technologies used by the protagonists to analyse competitive dynamics on the market. In this context, we show that the functioning of market without any state regulation results in ineffective competition and in the deterioration of the collective welfare.
    Keywords: competition, networks, technological incompatibility, model Demarge Ponssard
    JEL: O14 C50
    Date: 2008–04
  8. By: Tae H. Oum; Xiaowen Fu
    Abstract: This paper examines revenue structure, regulation, and market power of airports, and how they affect airport’s services to airlines and influence the form of vertical relationship between airport and airlines, and thus, eventually on competition in airline markets. In addition, we also examine the competitive consequences of common ownership, coordination or alliance among multiple airports in a region. The key findings are: Concession revenues are of increasing importance to airports. The positive externality of air traffic on the demand for non-aeronautical services, along with competition among both airlines and airports, induces a vertical cooperation between airports and the dominant carrier at the airport. Airports have substantial market power due to the low price elasticity of their aeronautical services. However, such airports’ market power is moderated by competition in both the airline and airport markets. There are benefits for both airports and airlines from entering into long term relationships.
    Date: 2008–09
  9. By: David Starkie
    Abstract: The paper provides an overview of UK airports from the perspective of a business enterprise. Its object is to show, through the medium of the UK industry, that effective competition between airports is possible and that a competitive industry can be financially viable. In the UK case viability is achieved at all levels of output, thus refuting the suggestion that high fixed costs are a significant barrier to positive returns, particularly for airports of limited output. This viable industry operates for the most part in the private sector of the economy and it has evolved without the imposition of a strategic plan. It is competition that has driven the dynamics of the industry, an industry that in its symbiotic relationship with the airline industry has been an economic success story helping to produce strong economic growth in the service sector of the UK economy.
    Date: 2008–07
  10. By: Peter Forsyth
    Abstract: This paper examines how climate change policy can impact on competition, prices and profitability in the air transport industry. It begins with an outline of the climate change policies that have been suggested, and it gives particular attention to the inclusion of air transport in an emissions trading scheme (ETS).This is likely to prove an important policy direction, with the EU, Australia and New Zealand all planning to include air transport in their ETSs. The scope for airlines to reduce their emissions intensity in the short run and long run is examined- it is concluded that the scope in the short run is quite limited. After this, the application of the emissions trading schemes of the EU, Australia and New Zealand to air transport is discussed, and the possible impacts on air fares are assessed. Allowance is made for the cost of permits for both direct and indirect emissions. The impacts of climate change policies, such as carbon taxes or requirements to purchase emissions permits, on airline competition, prices and profitability are analysed next. Impacts differ according to market structure- whether airline city pair markets are competitive, monopolistic or oligopolistic. They also depend on the time scale- airlines are unlikely to be able to pass on the full cost of their permits to their passengers in the short run, though in the long run, it is likely that airlines will exit from some city pairs, and this will enable to remaining airlines to raise their fares and restore their profitability. This may not occur in markets constrained by airport slots or capacity limits imposed in air services agreements on international routes, though the airlines’ problems are not likely to be as severe as has been suggested.
    Date: 2008–09
  11. By: Anming Zhang
    Abstract: This paper examines the interaction between hinterland access conditions and port competition. Competition between ports is treated as competition between alternate intermodal transportation chains, while the hinterland access conditions are represented by both the corridor facilities and the inland roads. We find that when ports compete in quantities, an increase in corridor capacity will increase own port’s output, reduce the rival port’s output, and increase own port’s profit. On the other hand, an increase in inland road capacity may or may not increase own port’s output and profit, owing to various offsetting effects. Essentially, while more road capacity reduces local delays and moderates the negative impact of own output expansion, it induces greater local commuter traffic and may moderate the reduction by local commuter traffic in response to a rise in cargo traffic, both of which reduces own output and profit. Similarly, inland road pricing may or may not increase own port’s output and profit. Finally, case examples for selected ports and regions are discussed.
    Keywords: investment, competition
    Date: 2008–02
  12. By: OECD
    Abstract: Maritime freight transport has experienced strong growth and profound change over recent decades. Freight volumes and container traffic in particular have grown with the intensification of global trade and the geographical dispersion of production. The industrial organization of the sector has evolved rapidly. These changes have rendered the ports business environment more challenging. Many agents along the supply chain have engaged in horizontal and vertical integration of activities. This has lead to more efficiency in the movement of cargo, but has reduced the number of players, with an attendant risk of abuse of market power. The market power of the ports vis-à-vis shippers and shipping companies has become correspondingly weaker. The rapid expansion of trade has led to fast growth of throughput in many ports. As a result, in many large gateway ports, local communities are increasingly concerned about the negative impacts of port activity, including local pollution and congestion. The greenhouse gas emissions generated by freight traffic are also a growing policy concern. This paper explores the economic framework in which potential regulatory intervention to address the issues of competition, air pollution, congestion, greenhouse gas emissions, and financing and provision of infrastructure should be considered.
    Date: 2008–10
  13. By: Ricardo Ribeiro (STICERD, The London School of Economics and Political Science)
    Abstract: The Market in Financial Instruments Directive (MiFID) aims to increase competition and to foster client protection in the European financial market. Among other provisions, it abolishes the concentration rule and challenges the market power of existing trading venues. The directive introduces venue competition in order to achieve better execution and ultimately lower trading costs. In this paper I address the question of whether fostering competition between alternative trading venues alone may or not be able to impact actual competition in the market. I consider two reasons for why it may not: direct network effects together with increasing returns to scale, and post-trading constraints. In particular, I (a) evaluate the actual degree of competition between trading venues, (b) measure the impact of network effects on competition, and lastly (c) assess the barriers to competition induced by post-trading constraints. The results imply that financial intermediaries tend to value liquidity more (than total fees) when deciding where to route a given order for execution - implying that being the incumbent venue translates into a competitive advantage. Furthermore, eliminating the mentioned barriers to competition seems to be associated with a significant decrease (of a similar magnitude) in the asymmetry of the industry.
    Keywords: Market Dominance, Network Effects, Financial Trading, Demand, Barriers to Competition
    JEL: C13 G10 L11 L84
    Date: 2008–10
  14. By: Nicolas Jullien (Marsouin - Telecom Bretagne); Jean-Benoît Zimmermann (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: : Free/libre or open-source software (FLOSS) is nowadays produced not only by individual benevolent developers but, in a growing proportion, by firms that hire programmers for their own objectives of development in open source or for contributing to open-source projects in the context of dedicated communities. A recent literature has focused on the question of the business models explaining how and why firms may draw benefits from such involvement and their connected activities. They can be considered as the building blocks of a new modus operandi of an industry, built on an alternative approach to intellectual property management. Its prospects will depend on both the firms' willingness to rally and its ability to compete with the traditional “proprietary” approach. As a matter of fact, firms' involvement in FLOSS, while growing, remains very contrasting, depending on the nature of the products and the characteristics of the markets. The aim of this paper is to emphasize that, beside factors like the importance of software as a core competence of the firm, the role of users on the related markets - and more precisely their level of skills - may provide a major explanation of such diversity. We introduce the concept of the dominant skilled user and we set up a theoretical model to better understand how it may condition the nature and outcome of the competition between a FLOSS firm and a proprietary firm. We discuss these results in the light of empirical stylized facts drawn from the recent trends in the software industry
    Keywords: Software ; Open Source ; Intellectual Property ; Competition ; Users
    Date: 2008–10–20
  15. By: Gautier Duflos (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole des Hautes Etudes en Sciences Sociales - Ecole Normale Supérieure de Paris - ENPC - Université Panthéon-Sorbonne - Paris I - INRA - CNRS); Etienne Pfister (BETA-Règles - Université de Nancy II)
    Abstract: This article analyzes the individual determinants of acquisition activity and target choices in the pharmaceutical industry over the period 1978-2002. The "innovation gap" hypothesis states that acquiring firms lack promising drug compounds and acquire firms with more promising drug prospects. A duration model implemented over a panel of more than 400 firms relates the probabilities of being an purchaser or a target to financial, R&D ant patent data to investigate this explanation more deeply. Results show that purchasers are firms with a lower Tobin's Q and decreasing sales, which could indicate that acquisitions are used to compensate for low internal growth prospects. Firms with a higher proportion of radical patents in their portfolio, especially in pharmaceutical and biothechnological patent classes, face a higher probability of being targeted, indicating that acquiring firms are indeed searching for innovative competencies. However, acquiring firms also present a significant absorptive capacity : their R&D investment increases in the year preceding the operation and their patent stock is larger and more diversified than for non-acquiring firms. Finally, we observe that over the last ten years of the sample period, firms have paid a greater attention to the size of the target's portfolio.
    Keywords: M&A, pharmaceutical, innovations, patent citations.
    Date: 2008–09
  16. By: Patrick Bajari; Jungwon Yeo
    Abstract: The Federal Communications Commission (FCC) has used auctions to award spectrum since 1994. During this time period, the FCC has experimented with a variety of auctions rules including click box bidding and anonymous bidding. These rule changes make the actions of bidders less visible during the auction and also limit the set of bids which can be submitted by a bidder during a particular round. Economic theory suggests that tacit collusion may be more difficult as a result. We examine this proposition using data from 4 auctions: the PCS C Block, Auction 35, the Advanced Wireless Service auction and the 700 Mhz auction. We examine the frequency of jump bids, retaliatory bids and straightforward bids across these auctions. While this simple descriptive exercise has a number of limitations, the data suggests that these rule changes did limit firms' ability to tacitly collude.
    JEL: L0 L4 L51
    Date: 2008–10
  17. By: Carolyn Pitchik
    Abstract: I study a budget-constrained, private-valuation, sealed-bid sequential auction with two incompletely-informed, risk-neutral bidders in which the valuations and income may be non-monotonic functions of a bidder's type. Multiple equilibrium symmetric bidding functions may exist that differ in allocation, efficiency and revenue. The sequence of sale affects the competition for a good and therefore also affects revenue and the prices of each good in a systematic way that depends on the relationship among the valuations and incomes of bidders. The sequence of sale may affect prices and revenue even when the number of bidders is large relative to the number of goods. If a particular good, say α, is allocated to a strong bidder independent of the sequence of sale, then auction revenue and the price of good α are higher when good α is sold first.
    Keywords: sequential auctions, budget constraints, efficiency, revenue, price, sequence
    JEL: C7 C72 L1
    Date: 2008–10–22
  18. By: Marialuz Moreno Badia; Veerle Slootmaekers; Ilke Van Beveren
    Abstract: Using firm-level data for Estonia for the years 1997-2005, we analyze the impact of international competition on firm dynamics, considering both firm closedown and product switching. We contribute to the literature in two important ways: (1) this is the first paper to study the determinants of exit and product switching in an emerging market; and (2) we consider explicitly the role of export opportunities. Our results indicate that globalization does not affect firm exit significantly but it is an important factor explaining product switching. Previous studies on industrial countries have shown that product switching has been a defensive strategy against low-cost imports. In contrast, our results suggest that Estonian firms have switched products as an offensive strategy to take advantage of the export opportunities created by trade liberalization.
    Date: 2008–10–11
  19. By: Jota Ishikawa; Hodaka Morita; Hiroshi Mukunoki
    Abstract: Post-production services, such as sales, distribution, and maintenance, comprise a crucial element of business activity. A foreign firm faces a higher cost to perform such services than its domestic rival because of the lack of proximity to customers. We explore an international duopoly model in which a foreign firm can reduce its cost for post-production services by foreign direct investment (FDI), or alternatively can outsource such services to its domestic rival. Trade liberalization, if not accompanied by liberalization of service FDI, can hurt domestic consumers and decrease world welfare, but the negative welfare impacts can be mitigated and eventually turned into positive ones as service FDI is also liberalized. This finding yields important policy implications, given the reality that the progress of liberalization in service sectors is limited compared to the substantial progress already made in trade liberalization.
    Keywords: post-production services, trade liberalization, FDI, outsourcing, international oligopoly
    JEL: F12 F13 F21 F23
    Date: 2008–10
  20. By: Paul Cavelaars
    Abstract: This paper analyses the relationship between product market competition and labour market institutions in a general equilibrium context. It concludes that an increase in product market competition, enhanced .exibility of labour supply, social security reform and a reduction in union bargaining power are mutually re-inforcing (in terms of their employment impact) in some, but not all cases. This stresses the need for an extremely careful design of such reforms.
    Keywords: labour market regulation; wage bargaining.
    JEL: E24 E52 J50
    Date: 2008–09
  21. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Orthodox economics rests on the belief that if markets were fully competitive, there would be general efficiency. The current financial malfunctions, accordingly, would not result from free competition, but rather from insufficient competition. This statement is strong, for it rests on a sophisticated conceptual framework within which there is no dysfunction when perfect competition prevails. But it is also strongly unrealistic, for it rejects public interventions even when markets obviously lost there bearings in the storm. In fact much of those who referred to the orthodox approach before the financial crisis, are now, inconsistently, claiming for public interventions. This short paper argues that there is a consistent way of thinking about necessary public interventions. Indeed, John Maynard Keynes focus on fundamental uncertainty consequences questioned the supposed virtues of competition and offered the most elaborated alternative as for thinking about the current turnmoils and designing the necessary stabilizers.
    Keywords: Equilibrium, competition, stability, institutional stabilizers
    Date: 2008–10–20

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