nep-com New Economics Papers
on Industrial Competition
Issue of 2008‒12‒21
ten papers chosen by
Russell Pittman
US Department of Justice

  1. The Quiet Life of a Monopolist: The Efficiency Losses of Monopoly Reconsidered By Jun Chen; Zhiqi Chen
  2. Convergence in Institutions and Market Outcomes: Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition Economies By Mitra, Pradeep; Muravyev, Alexander; Schaffer, Mark
  3. Imperfect Competition in Financial Markets and Capital Controls: A Model and a Test. By Pasricha, Gurnain Kaur
  4. Entry Mode Choice of Multinational Banks By Lehner, Maria
  5. On Several Economic Consequences of the Full Market Opening in the Postal Service in the European Union By Damien Broussolle
  6. Econometric Evidence on the Impacts of Privatization, New Entry, and Independent Industry Regulator on Mobile Network Penetration and Expansion By Yan Li
  7. Pharmaceutical Industry, Drug Quality and Regulation: Evidence from US and Italy By Vincenzo Atella; Jay Bhattacharya; Lorenzo Carbonari
  8. Gas industry reforms and consumers' prices in the European Union: An Empirical Analysis By Rinaldo Brau; Raffaele Doronzo; Carlo V. Fiorio; Massimo Florio
  9. Firm Turnover and Productivity Growth in the Canadian Retail Trade Sector By Baldwin, John R.; Gu, Wulong
  10. Enhancing the productivity of the service sector in Japan By Randall Jones; Taesik Yoon

  1. By: Jun Chen (Department of Economics, Carleton University); Zhiqi Chen (Department of Economics, Carleton University)
    Abstract: In this paper we study the efficiency losses of monopoly by analyzing a model where a firm's total costs of production decrease with the manager's effort to control costs. We consider two separate cases with regard to ownership and control: (1) the owner of the firm manages the firm himself; and (2) the owner hires a manager to operate the firm. We demonstrate that even in the case where the owner manages the firm, the level of effort exerted by the owner-manager of a monopoly is not first-best. Interestingly, the productive inefficiency of monopoly in this case may be caused by too much rather than too little effort. In such a situation, moreover, the separation of ownership and control can mitigate the productive inefficiency of monopoly, thus raising the intriguing possibility that managerial slack can actually improve the efficiency of monopoly equilibrium. To phrase our results in Hicks'(1935) terminology, a monopolist does not necessarily live a quiet life, and a quiet life is not necessarily a bad thing from the perspective of economic efficiency.
    Keywords: Monopoly, Efficiency losses, Principal-agent problem
    JEL: L12 D82
    Date: 2008–06–02
  2. By: Mitra, Pradeep (World Bank); Muravyev, Alexander (IZA); Schaffer, Mark (Heriot-Watt University, Edinburgh)
    Abstract: This paper uses the BEEPS firm-level data to study the process of convergence of transition countries with developed market economies. The primary focus of the study is on competition and market structure, finance and the structure of lending to firms, and how firms respond to the economic environment by restructuring; we are able to do this because the BEEPS cover thousands of firms from virtually all transition countries over a long time period (1996-99 through 2002-05), as well firms from developed market economies, thus providing a set of natural benchmarks. We find substantial evidence of convergence of transition countries with developed market economies in a number of dimensions. The pattern of growth at the country, sectoral and firm level shows rapid growth of the new private sector and of the micro- and small-firm sectors, with the size distribution of firms moving towards the pattern observed in the BEEPS surveys of developed market economies. Our interpretation of the evidence on competition is that there is an initial move by firms into niches to exploit local market power, and later in transition entry and domestic competitive pressure increases. In finance, the increasing reliance on retained earnings in transition countries reflects a maturation of the sector as new firms come to rely less on informal and family sources of finance. The scale of restructuring and innovation activity is as high or higher in transition economies as in developed market economies. Interestingly, we find evidence of an inverse-U shape pattern, with the peak of restructuring activity taking place in 2002, the middle of the period analyzed. Throughout, the regional patterns suggest greater convergence in the transition countries that joined the European Union in 2004 than in the other, lower-income transition economies.
    Keywords: transition, convergence, market structure, competition, enterprise finance, enterprise restructuring
    JEL: G32 L11 O12 P31
    Date: 2008–12
  3. By: Pasricha, Gurnain Kaur
    Abstract: This paper explores the implications of financial repression, specifically, imperfect competition in the financial sector and capital controls for equilibrium interest rates and current account imbalances; and the implications of liberalization. I find that (1) interest differentials between home and foreign markets exist and are higher the fewer the number of domestic financial institutions (2) liberalization of the domestic financial sector - i.e. increasing the number of players - exacerbates current account imbalances in growing economies and reduces revenues from repression (3) revenues from financial repression decline when capital controls become porous (which may be a consequnce of trade liberalization), making liberalization of domestic financial sector more palatable to the domestic governments. An empirical exercise validates several predictions of the model.
    Keywords: Financial Repression; Capital Controls; Imperfect Competition in Financial Markets; Domestic Financial Liberalization; Interest Differentials
    JEL: F4 F32 D43
    Date: 2008–12–11
  4. By: Lehner, Maria
    Abstract: When expanding abroad, a multinational bank faces a trade-off between accessing a foreign country via cross border lending or a financial foreign direct investment, i.e. greenfield or acquisition entry. We analyze the entry mode choice of multinational banks and explicitly derive the entry mode pattern in the banking industry. Moreover, we show that in less developed banking markets, a trend towards cross border lending and acquisition entry exists. Greenfield entry prevails in more developed markets. Furthermore, we identify a tendency towards acquisition entry in small and towards greenfield entry in larger host countries.
    Keywords: foreign bank entry; multinational bank; cross border lending; greenfield entry; acquisition entry
    JEL: F37 G21 G34 L13 O16
    Date: 2008–12–08
  5. By: Damien Broussolle (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)
    Abstract: The paper focuses on the impact of the Full Market Opening in postal services especially on prices. The paper first summons up the specificities of the sector and the deregulation implemented so far. The paper then studies the consequences on separated prices and the survival of the historical operator of market opening. It seems that after a first period of effective competition, with a change in the price structure, the market could reach a new steady equilibrium.
    Keywords: Postal services, deregulation.
    JEL: L87 R11 L43
    Date: 2008
  6. By: Yan Li (Centre for Competition Policy, University of East Anglia)
    Abstract: This study examines the impacts of reforms – privatization, new entry and independent regulatory authority – on mobile network penetration and expansion using a new and hitherto unused panel dataset for 30 national mobile markets (i.e. 29 OECD countries and China) over the time period 1991-2006 under a 3-equation econometric framework. The estimation results confirm that introducing new entry is, in general, positively correlated with mobile network penetration and expansion; and in particular, the third entry brings many more benefits than the second one. The results also highlight the crucial role of an independent regulator in privatized mobile markets. Especially, the dynamic estimation results suggest that without an independent regulator, privatization is, on average, negatively correlated with mobile network expansion, even in certain competitive market environments.
    Keywords: New entry, privatization, independent regulator, mobile network, econometric analysis
    JEL: L10 L51 L96 K23
    Date: 2008–12
  7. By: Vincenzo Atella; Jay Bhattacharya; Lorenzo Carbonari
    Abstract: The aim of this article is to analyze the relationship between drug price and drug quality and how it varies across two of the most common regulatory regimes in the pharmaceutical market: Minimum Efficacy Standards (MES) and Price Controls (PC). We develop a model of adverse selection where a pharmaceutical company can charge different prices to a heterogeneous group of buyers for its (innovative) drug, and we evaluate the properties of the equilibria under the two regimes. We model consumer heterogeneity stemming from differences in the willingness-to-pay for drug quality, measured through ex-post efficacy. The theoretical analysis provides two main results. First, the average drug quality delivered is higher under the MES regime than in the PC regime or a in combination of the two. Second, PC regulation reduces the difference in terms of high-low quality drug prices. The empirical analysis based on Italian and US data corroborates these results.
    JEL: I1 L51 L65
    Date: 2008–12
  8. By: Rinaldo Brau; Raffaele Doronzo; Carlo V. Fiorio; Massimo Florio
    Abstract: The paper offers an exploratory empirical analysis of the impact on consumers’ welfare of the reforms of the gas industry in EU-15 area. After considering the key features of the natural gas industry and of its reform in selected countries, we study the relationship between regulatory reform indicators and price dynamics by means of panel data techniques. We find that none of the relationships between price dynamics and regulatory reform indicators is robust to different econometric specifications. Our findings suggest that until now there is limited evidence of beneficial effects of a standard package gas industry reforms for the European consumers. Country specific factors and price inertia seem to be more important than the reforms as determinants of consumers’ prices.
    Keywords: Natural gas industry, privatization, liberalization, regulatory reform.
    JEL: L32 L33 L95
    Date: 2008
  9. By: Baldwin, John R.; Gu, Wulong
    Abstract: This paper examines firm turnover and productivity growth in the Canadian retail trade sector. Firm turnover occurs as the competitive process shifts market share from exiting firms and existing firms that contracted to entering firms and existing firms that expanded. There is considerably more firm turnover in the retail sector than in the manufacturing sector and more of it comes from entry and exit. Moreover, contrary to the manufacturing sector where only part of overall productivity growth comes from firm turnover and the re-allocation of resources from the less to the more productive, all of the aggregate productivity growth comes from this source in the retail sector. This suggests that the much-discussed Wal-Mart effect on retail sector productivity mainly comes from the Wal-Mart-created competitive pressure that shifts market share from exitors and declining incumbents to entrants and growing incumbents. Foreign-controlled firms contributed 30% of labour productivity growth and 45% of multifactor productivity growth in the retail trade sector in the period from 1984 to 1996, which are mainly due to the entry of foreign-controlled firms and expansion of more productive foreign-controlled existing firms.
    Keywords: Manufacturing, Retail and wholesale, Economic accounts, Productivity accounts
    Date: 2008–12–08
  10. By: Randall Jones; Taesik Yoon
    Abstract: Labour productivity growth in the service sector, which accounts for 70% of Japan’s economic output and employment, has slowed markedly in recent years in contrast to manufacturing. The disappointing performance is associated with weak competition in the service sector resulting from strict product market regulation and the low level of import penetration and inflows of foreign direct investment (FDI). Reversing the deceleration in productivity growth in the service sector is essential to raise Japan’s growth potential. The key is to eliminate entry barriers, accelerate regulatory reform, upgrade competition policy and reduce barriers to trade and inflows of FDI. Special attention should be given to factors limiting productivity growth in services characterised by either low productivity or high growth potential, such as retail, transport, energy and business services. Finally, it is essential to increase competition in public services, such as health and education, where market forces have been weak. <P>Améliorer la productivité dans le secteur des services au Japon <BR>La croissance de la productivité du travail dans le secteur des services, qui représente 70 % de la production économique et de l’emploi au Japon, s’est sensiblement ralentie ces dernières années contrairement à l’évolution observée dans le secteur manufacturier. Ces résultats décevants sont associés à la faiblesse de la concurrence dans les services imputable à la rigueur de la réglementation des marchés de produits, au faible niveau de pénétration des importations et au manque de dynamisme des investissements directs de l’étranger (IDE). Le ralentissement de la croissance de la productivité dans le secteur des services doit absolument être inversé pour accroître le potentiel de croissance du Japon. Il est indispensable d’éliminer les obstacles à l’entrée, d’accélérer la réforme de la réglementation, de renforcer la politique de concurrence et de réduire les obstacles au commerce et aux entrées d’IDE. Une attention particulière devrait être accordée aux facteurs limitant la croissance de la productivité dans les services caractérisés soit par une faible productivité, soit par un potentiel de croissance élevé, comme le commerce de détail, les transports, l’énergie et les services aux entreprises. Enfin, il est essentiel d’accroître la concurrence dans les services publics, comme la santé et l’éducation, où les forces du marché ont peu joué.
    Keywords: competition policy, politique de la concurrence, air transport, transport aérien, croissance de la productivité, Japan, Japon, regulatory reforms, réforme réglementaire, foreign direct investment, investissement direct étranger, productivity and growth, retail sector, electricity, gas, électricité, gaz, distribution de détail, public services, service sector, services trade, Business service
    JEL: R11 R21 R31
    Date: 2008–12–01

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