nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒12‒14
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Dynamic Merger Review By Volker Nocke; Michael D. Whinston
  2. Existence Advertising, Price Competition, and Asymmetric Market Structure By Curtis B. Eaton; Ian A. MacDonald; Laura Meriluoto
  3. Successive oligopolies and decreasing returns By Jean J., GABSZEWICZ; Skerdilajda, ZANAJ
  4. Market Price Mechanisms and Stackelberg General Equilibria By Ludovic A. Julien; Fabrice Tricou
  5. 'Consumer' versus 'Customer': the Devil in the Detail By Pinar Akman
  6. The UK Cartel Offence: Lame Duck or Black Mamba? By Andreas Stephan
  7. Green consumerism and collective action By CHANDER, Parkash; MUTHUKRISHNAN, Subhashini
  8. Bank competition and collateral: theory and evidence By Hainz , Christa; Weill , Laurent; Godlewski, Christophe
  9. Duopoly Competition in Supermarket Industry: The Case of Seattle-Tacoma Milk Market By Chidmi, Benaissa; Murova, Olga
  10. High-Speed Rail & Air Transport Competition By Nicole Adler; Chris Nash; Eric Pels
  11. Price Competition with Particle Swarm Optimization: An Agent-Based Artificial Model By Zhang, Tong; Brorsen, B. Wade
  12. How to Price Imperfect Certification By Jan Myslivecek
  13. Firm Entry and Exit in Iowa, 1992 - 2004 By Yu, Li; Jolly, Robert W.; Orazem, Peter
  14. Intellectual Property Disclosure as 'Threat' By Baker, Scott; Lee, Pak Yee; Mezzetti, Claudio
  15. Did Mergers Help Japanese Mega-Banks Avoid Failure? Analysis of the Distance to Default of Banks By Kimie Harada; Takatoshi Ito
  16. Are Health Insurance Markets Competitive? By Leemore Dafny
  17. Innovation, Imitation and Open Source By Rufus Pollock

  1. By: Volker Nocke; Michael D. Whinston
    Abstract: We analyze the optimal dynamic policy of an antitrust authority towards horizontal mergers when merger proposals are endogenous and occur over time. Approving a currently proposed merger will affect the profitability and welfare effects of potential future mergers, the characteristics of which may not yet be known to the antitrust authority. We show that, in many cases, this apparently difficult problem has a simple resolution: an antitrust authority can maximize discounted consumer surplus by using a completely myopic merger review policy that approves a merger today if and only if it does not lower consumer surplus given the current market structure.
    JEL: L0 L4
    Date: 2008–12
  2. By: Curtis B. Eaton; Ian A. MacDonald; Laura Meriluoto (University of Canterbury)
    Abstract: We examine a two stage duopoly game in which firms advertise their existence to consumers in stage 1 and compete in prices in stage 2. Whenever the advertising technology generates positive overlap in customer bases the equilib- rium for the stage 1 game is asymmetric in that one firm chooses to remain small in comparison to its competitor. For a specific random advertising technology we show that one firm will always be half as large as the other. No equilibrium in pure price strategies exists in the stage 2 game and as long as there is some overlap in customer bases the mixed strategy equilibrium is far from the Bertrand equilibrium.
    Keywords: Existence advertising; price dispersion; Bertrand paradox; information; duopoly
    JEL: D43 D80
    Date: 2008–10–15
  3. By: Jean J., GABSZEWICZ; Skerdilajda, ZANAJ (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: In this paper we propose an example of successive oligopolies where the downstream firms share the same decreasing returns technology of the Cobb-Douglas type. We stress the differences between the conclusions obtained under this assumption and those resulting from the traditional example considered in the literature, namely, a constant returns technology
    Keywords: successive oligopolies, vertical integration, technology
    JEL: D43 L1 L22 L42
    Date: 2008–12–02
  4. By: Ludovic A. Julien; Fabrice Tricou
    Abstract: This paper considers Stackelberg competition in a general equilibrium framework with production. The working of market power and the confi…gurations of strategic interactions are complexi…ed by the presence of an active leader. Two market price mechanisms are here studied: one is associated with the Stackelberg-Walras equilibrium, the other is linked to the Stackelberg-Cournot equilibrium. In the context of an exchange economy with a production sector, several results are obtained about equilibria mergings and about welfare comparisons.
    Date: 2008
  5. By: Pinar Akman (Centre for Competition Policy, University of East Anglia)
    Abstract: The ultimate objective of EC competition rules is arguably the enhancement of ‘consumer welfare’. In EC competition law, however, ‘consumer’ merely means ‘customer’. Not being limited to final consumers, the concept also encompasses intermediate customers. Moreover, according to the EC Commission, under Article 82EC, harm to intermediate customers is generally presumed to create harm to consumers and where intermediate customers are not competitors of the dominant undertaking, there is no requisite to assess the effects of conduct on users further downstream. This paper questions the appropriateness of this presumption in light of recent advances in economics, specifically that of vertical restraints and in particular non-linear pricing. It uses this literature to show that there are many instances where an increase (decrease) in ‘customer welfare’ does not cause an increase (decrease) in ‘consumer welfare’. In these cases, the presumption is devoid of economic justification and likely to lead to decisional errors. The paper concludes that if the law is to serve the interests of ‘real’ consumers, the EC Commission should reconsider this presumption and its interpretation of the ‘consumer’ in ‘consumer welfare’. Until then, it remains questionable and objectionable whose interests EC competition law and in particular, Article 82EC, serve.
    Keywords: Article 82EC, abuse of dominance, consumer welfare, customer welfare, final consumers, intermediate customers
    JEL: K21
    Date: 2008–11
  6. By: Andreas Stephan (Centre for Competition Policy, University of East Anglia)
    Abstract: A criminal offence requiring Ghosh dishonesty was introduced in the UK by the Enterprise Act 2002, primarily to enhance cartel deterrence as a complement to corporate fines. Yet the first convictions resulted from a US plea bargain in 2008. This paper identifies three obstacles to enhancing deterrence through the cartel offence. First, Norris v USA and a public survey suggest relatively weak perceptions of cartels persist in the UK. It was envisaged that convictions would remedy this, but prosecutors will continue to be very selective about the cases they bring to trial if there are doubts as to whether price fixing alone is viewed as objectively dishonest. Secondly, any increase in criminal enforcement risks discouraging leniency applications to the European Commission, because corporate immunity granted on the Community level does not automatically protect employees from criminal prosecution in national courts. There is also no conclusive mechanism for direct settlement, as there is in the US. Thirdly, sizeable benefits and purportedly low detection rates mean deterrence may be weak if custodial sentences do not become the norm. Further sanctions such as Director Disqualification Orders can play an important role in ensuring cartelists do not seek immediate reemployment at a high level.
    Keywords: cartel offence, deterrence, dishonesty, Enterprise Act 2002, Norris v USA
    JEL: K14 K21 L40 L41
    Date: 2008–11
  7. By: CHANDER, Parkash; MUTHUKRISHNAN, Subhashini
    Abstract: We analyze the effect of collective action by green/environmentally aware consumers on ambient environmental quality and market equilibrium. We consider a model with two types of consumers who differ in their willingness-to-pay for a good available in two different environmental qualities, and two competing firms: one selling the good of high environmental quality and the other of low environmental quality. We show that collective action by green consumers reduces competition and leads to higher prices for the good of both qualities. Though it improves the ambient environmental quality, it may reduce the welfare of both types of consumers.
    Keywords: green consumers, collective action, environmental quality, differentiated duopoly, firm profitability
    JEL: H23 Q20 L13
    Date: 2007–08
  8. By: Hainz , Christa (University of Munich); Weill , Laurent (Université Robert Schuman, Strasbourg); Godlewski, Christophe (University of Strasbourg)
    Abstract: We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking for collateral. We show that presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We estimate logit models where the presence of collateral is regressed on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the use of collateral. These findings survive several robustness checks.
    Keywords: collateral; bank competition; asymmetric information
    JEL: D43 D82 G21
    Date: 2008–12–02
  9. By: Chidmi, Benaissa; Murova, Olga
    Abstract: The Seattle-Tacoma consumers have been paying higher prices for fresh milk than consumers in other Western states of United States. For instance, the retail price for whole milk averaged $3.27/gallon during the period of April 1999- April 2003 in Seattle-Tacoma, while it did not go beyond $2.86/gallon in most of the large metropolitan areas in Western U.S, during the same period (Carman and Sexton, 2006). In addition, retail prices in Seattle-Tacoma do not respond similarly to farm price increases and decreases. Supermarkets are prompt to pass on to consumers any increase in farm price, while they do not pass or lag behind when farm price decreases. The present study attempts to analyze the pricing conduct of supermarket chains in a duopoly setting using a structural model of consumers and firms behavior. In this paper, we examine the pricing conduct of two supermarket chains using retail supermarket-level data on sales and prices from Seattle-Tacoma market area.
    Keywords: Agribusiness, Demand and Price Analysis,
    Date: 2008
  10. By: Nicole Adler (Hebrew University of Jerusalem, Israel); Chris Nash (Institute for Transport Studies, Leeds, England); Eric Pels (VU University Amsterdam)
    Abstract: This paper develops a methodology to assess transport infrastructure investments and their effects on a Nash equilibria taking into account competition between multiple privatized transport operator types. The operators, including high-speed rail, hub and spoke legacy airlines and low cost carriers, maximize profit functions via prices, frequency and train/plane sizes, given infrastructure provision and costs and environmental charges. The methodology is subsequently applied to all 27 European Union countries, specifically analyzing four of the prioritized Trans-European Networks.
    Keywords: airlines; high-speed rail; networks; applied game theory; infrastructure pricing
    JEL: R40 L92 L93
    Date: 2008–10–31
  11. By: Zhang, Tong; Brorsen, B. Wade
    Abstract: This study instructs an artificial price competition market to examine the impact of capacity constraints on the behavior of packers. Results show when there are cattle left for the lowest bidder after all other packers finishing their procurement, the capacity constraints make the price lower than the perfect competition level.
    Keywords: fed cattle market, agent-based model, particle swarm optimization, oligopsony, Livestock Production/Industries, Research Methods/ Statistical Methods, D43,
    Date: 2008
  12. By: Jan Myslivecek
    Abstract: This paper analyzes markets in which consumers do not directly observe the quality of the products but form their expectations about the quality based on the outcome of voluntary imperfect certification. I analyze how the certification fee impacts the decisions of the producers to apply for a certificate and whether to supply goods of required quality. I find that there are both separating (only high quality producers apply and obtain the certificate) and pooling (both high and low-quality producers apply and obtain) equilibria. I show that the pooling equilibrium exists when the certification fee is low, while the separating equilibrium requires high certification fees. Since the pooling equilibrium is not welfare optimal, excessive competition between certifiers, which lowers the certification fee, is not beneficial. This result complements Strausz (2005) who shows that high certification fees are required to prevent the corruption of the certifier.
    Keywords: Certification, Imperfect Testing, Competition,Adverse Selection
    JEL: D43 D45 D82
    Date: 2008–09
  13. By: Yu, Li; Jolly, Robert W.; Orazem, Peter
    Abstract: This paper uses the pattern of firm entry and exit to develop a classification system for industries. The classifications include urban-rural bias; long-term growth; and firm survival patterns. The first captures the fact that sector-specific economic growth may be favored in urban areas for some industries and may benefit from low population density for others. Some industries have experienced long-term expansion in firm numbers while others have experienced a decline. Finally, some industries are characterized by high rates of both entry and exit while others have low rates of both. A taxonomy classifying industries according to those three criteria is developed in this paper. The taxonomy is applied to the Iowa subset of the National Establishment Time-Series (NETS) database over the period from 1992 to 2004. County level entry and exit rates are shown to be positively correlated across nearly all 2 digit NAICS code industries. Industry growth is found to be biased against rural areas. Not all of the industries experienced expansion or have a positive net entry rate. Entry of new firms replaces old incumbent firms in each industry but to different degrees. Understanding firm entry - exit pattern can help design customized policies of fostering expansion of specific industries in Iowa according to their location bias, industry growth patterns and development dynamics.
    Keywords: Entry – Exit Pattern, Taxonomy, Location Bias, Expansion, Churning, Entrepreneurship, Economic Development
    Date: 2008–12–05
  14. By: Baker, Scott (University of North Carolina, School of Law); Lee, Pak Yee (University of Leicester,Department of Economics); Mezzetti, Claudio (University of Warwick,Department of Economics)
    Abstract: This paper models the disclosure of knowledge via licensing to outsiders or fringe firms as a threat, useful in ensuring firms keep their commitments. We show that firms holding intellectual property are better able to enforce agreements than firms that don't. In markets requiring innovation to make a product, IP disclosure presents a more powerful threat than entry by the punishing firm alone. Occasionally, a punishing firm won't be able to translate its intellectual property into a full-blown product, making it impossible for it to enter the cheating firm's market and punish. Even if it can't make a product itself, the punishing firm can always credibly threaten to license the intellectual property it has on hand to someone else. With this intellectual property as a springboard, chances are at least one fringe firm will be able to do the translation, make the product and enter the cheating firm's market. In short, the potential for licensing increases the likelihood of punishment for uncooperative behavior.In the model, firms contract explicitly to ex-change knowledge and tacitly to coordinate the introduction of innovations to the marketplace. We find conditions under which firms can self-enforce both agreements. The enforcement conditions are weaker when (1) firms possess knowledge and (2) knowledge is easily transferable to other firms. The disclosure threat has implications for antitrust law generally, which are considered.
    Date: 2008
  15. By: Kimie Harada; Takatoshi Ito
    Abstract: In the late 1990s, several large Japanese banks failed for the first time in its postwar history. As the financial environment was deteriorating further, several remaining banks decided to merge among themselves, presumably, to make their operations more efficient to avoid failures. This paper defines, calculates and analyzes the distance to default (DD), a concept of credit risk in corporate finance, of Japanese large banks. The DD helps us to answer a question whether mergers in the late 1990s and 2000s made the merged banks financially more robust as intended. The novelty of the paper is to develop a method of analyzing the DD for banks that experience a merger, and to apply the method to the Japanese banking data. Our findings include: (1) A merged bank fundamentally inherits financial soundness of pre-merged banks, without adding special value from the merger. A merger of sound (unsound) banks produced a sound (unsound, respectively) merged financial institution; and (2) In some cases, a merged bank experienced a negative DD right after the merger. The findings are consistent with a view that a primary objective of a merger was to take advantage of the perceived too-big-to-fail policy, rather than to pursue a radical reform. Another interpretation is that mergers with intention of enhancing efficiency resulted in failed implementation of true operational efficiency, such as quick integration of computer operation systems and elimination of duplicating branches.
    JEL: G19 G21
    Date: 2008–12
  16. By: Leemore Dafny
    Abstract: Although the vast majority of Americans have private health insurance, researchers focus almost exclusively on public provision. Data on the private insurance sector is extremely difficult to obtain because health insurance contracts are complex, renegotiated annually, and not subject to reporting requirements. This study makes use of a privately-gathered national database of insurance contracts agreed upon by a sample of large, multisite employers between 1998 and 2005. To gauge the competitiveness of the group health insurance industry, I investigate whether health insurers charge higher premiums, ceteris paribus, to more profitable firms. I find they do, and this result is not driven by cross-sectional differences across firms or plans: firms with positive profit shocks subsequently face higher premium growth, even for the same healthplans. Moreover, this relationship is strongest in geographic markets served by a small number of insurance carriers. Further analysis suggests profits act to increase employers' switching costs, and insurers exploit this inelasticity where they have sufficient bargaining power. Given the rapid industry consolidation during the study period, these findings suggest healthcare insurers possess and exercise market power in an increasing number of geographic markets.
    JEL: I1 L1
    Date: 2008–12
  17. By: Rufus Pollock
    Abstract: An extensive empirical literature indicates that, even without formal intellectual property rights, innovators enjoy a variety of first-mover advantages and that `imitation' is itself a costly activity. There is also accumulating evidence that an `open' approach to knowledge production can deliver substantial efficiency advantages. This paper introduces a formal framework incorporating all of these factors. We examine the relative performance of an `open' versus a `closed' (proprietary) regime, and explicitly characterise the circumstances in which an open approach, despite its effect on facilitating imitation, results in a higher level of innovation.
    Keywords: Innovation, Imitation, Intellectual Property, Openness, Open Source
    JEL: L17 L5 O3
    Date: 2008–11–20

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