nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒01‒10
eleven papers chosen by
Russell Pittman
US Department of Justice

  1. Stackelberg Leadership with Product Differentiation and Endogenous Entry: Some Comparative Static and Limiting Results By Kresimir Zigic
  2. Prominence and Consumer Search: The Case With Multiple Prominent Firms By Zhou, Jidong
  3. Horizontal market concentration: Theoretical insights from the spatial models By Andreea Cosnita-Langlais
  4. Spin-offs: theory and evidence By Luis Cabral; Zhu Wang
  5. Competition Policy and Market Leaders By Ilir Maçi; Kresimir Zigic
  6. The role of the competition policy in forging the European Common Market By Muşetescu, Radu; Dima, Alina; Cristian, Paun
  7. Product innovation and firm survival in a network industry By Fumiko Hayashi; Zhu Wang
  8. Determinants of domestic and cross-border bank acquisitions in the European Union By Ignacio Hernando; María J. Nieto; Larry D. Wall
  9. The economics of payment card fee structure: policy considerations of payment card rewards By Fumiko Hayashi
  10. The economics of payment card fee structure: what drives payment card rewards? By Fumiko Hayashi
  11. On Commercial Media Bias By Fabrizio Germano

  1. By: Kresimir Zigic
    Abstract: Allowing for endogenous entry in the traditional Stackelberg setup with product differentiation, leads to reverting of the standard comparative static and limiting results. Unlike in the standard Stackelberg setup with barriers to entry, the leader's profit increases when the differentiation becomes lower. The reason is that competition becomes tougher when products become more alike, and consequently, fewer firms enter in equilibrium. On the other hand, increasing product differentiation towards its limit results in number of entrants tending to infinity and for very large market, the profit of the leader approaches zero. Thus market structure approaches monopolistic competition, rather than the standard monopoly outcome that occurs with exogenous number of followers.
    Keywords: Stackelberg leadership, product differentiation, endogenous entry.
    JEL: L1 D43
    Date: 2008–10
  2. By: Zhou, Jidong
    Abstract: This paper extends Armstrong, Vickers, and Zhou (2007) to the case with multiple prominent firms. All consumers first search among prominent firms, and if their products are not satisfactory, they continue to search among non-prominent ones. Prominent firms will charge a lower price than their non-prominent rivals as in the case with a single prominent firm, but relative to the situation without any prominent firm, the presence of more than one prominent firm can induce all firms to raise their prices. We also characterize how market prices and welfare vary with the number of prominent firms.
    Keywords: consumer search; marketing; prominence; product differentiation
    JEL: L13 D83 D43
    Date: 2009–01–06
  3. By: Andreea Cosnita-Langlais
    Abstract: This paper aims to further advance the study of horizontal mergers by critically reviewing the theory on spatial models that may be used for the analysis of horizontal market concentration. We examine the incentives conveyed by locations for undertaking merger and merger-related strategies, as well as the impact of merger on strategic location choices. Thereby this paper highlights the two-way relationship between market concentration behavior and firm location.
    Keywords: geographic and product space, strategic location, horizontal market concentration, merger control
    JEL: D43 L41 R32
    Date: 2008
  4. By: Luis Cabral; Zhu Wang
    Abstract: We develop a “passive learning” model of firm entry by spin-off: firm employees leave their employer and create a new firm when (a) they learn they are good entrepreneurs (type I spin-offs) or (b) they learn their employer's prospects are bad (type II spin-offs). Our theory predicts a high correlation between spin-offs and parent exit, especially when the parent is a lowproductivity firm. This correlation may correspond to two types of causality: spin-off causes firm exit (type I spin-offs) and firm exit causes spin-off (type II spin-offs). We test and confirm this and other model predictions on a unique data set of the U.S. automobile industry. Finally, we discuss policy implications regarding “covenant not to compete” laws
    Date: 2008
  5. By: Ilir Maçi; Kresimir Zigic
    Abstract: We study the potential loss in social welfare and changes in incentives to invest in R&D that result when the market leading firm is deprived of its position. We show that under plausible assumptions like free entry or repeated market interactions there is a social value of market leadership and its mechanical removal by means of competition policy is likely to be harmful for society.
    Keywords: Market leaders, Competition policy, Innovation.
    JEL: F12 F13 L11 L13 L16 K21
    Date: 2008–11
  6. By: Muşetescu, Radu; Dima, Alina; Cristian, Paun
    Abstract: The forging of the Single Market represents the most important dimension of the first pillar of the European Union, which is the European Community. It can be argued that, as compared to the other two pillars (the Common Foreign and Security Policy and the Police and Judicial Cooperation in the Criminal Matters), it has the most powerful impact on the welfare of European citizens. The European policy makers define however the Internal Market as not only an economic area where there are no more state-imposed barriers in the path of the freedom of movement of goods and services at the borders of the member-states but also a single business environment where there are a single currency, coordinated economic policies as well as homogeneous business practices of private undertakings. In this process, despite a large set of common policies, the competition policy has reached the status of the building block of the Common Market.
    Keywords: market integration competition policy Common Market
    JEL: F15 D41 E61
    Date: 2008–12–15
  7. By: Fumiko Hayashi; Zhu Wang
    Abstract: This paper studies product innovation and firm survival in the U.S. ATM/debit card industry. The industry started with a few shared ATM networks in the early 1970s. The number of networks grew quickly up until the mid 1980s, but then declined sharply. We construct a theoretical model based on Jovanovic and MacDonald (1994). In contrast to their model focusing on cost-saving technological innovation, our model shows a major product innovation may also trigger the shakeout. The theoretical predictions are tested using a novel dataset on network entry, exit, size, location, ownership and product choices. The findings suggest introducing the point of sale debit function in the mid 1980s played an important role driving the network consolidation. Unlike previous studies, we find little advantage of being early industry entrants. Rather, due to network effects in the industry, large networks had better chance to adopt the product innovation and survive the shakeout.
    Date: 2008
  8. By: Ignacio Hernando; María J. Nieto; Larry D. Wall
    Abstract: This paper analyzes the determinants of bank acquisitions both within and across 25 members of the European Union (EU-25) during the period 1997–2004. Our results suggest that poorly managed banks (those with a high cost-to-income ratio) and larger banks are more likely to be acquired by other banks in the same country. The probability of being a target in a cross-border deal is larger for banks that are quoted in the stock market. Finally, banks operating in more concentrated markets are less likely to be acquired by other banks in the same country but are more likely to be acquired by banks in other EU-25 countries.
    Date: 2008
  9. By: Fumiko Hayashi
    Abstract: This paper considers possible public policies that could improve efficiency and welfare distribution in the U.S. retail payments industry. Mainly, four options, i) encouraging competition; ii) allowing merchants to surcharge; iii) regulating merchant fees; and iv) regulating payment card rewards, are discussed, but each option has advantages and disadvantages. Any single option may not achieve the policymakers' objective; rather, combining several policy options may be required.
    Date: 2008
  10. By: Fumiko Hayashi
    Abstract: This paper investigates potential market forces that cause payment card rewards even when providing payment card rewards is not the most efficient. Three factors-oligopolistic merchants, output-maximizing card networks, and the merchant's inability to set different prices across payment methods-may potentially explain the prevalence of payment card rewards programs in the United States today. The paper also points out that competition among card networks may potentially make payment rewards too generous, and thus deteriorate social welfare and its distribution. The situation may potentially warrant public policy interventions.
    Date: 2008
  11. By: Fabrizio Germano
    Abstract: Within the spokes model of Chen and Riordan (2007) that allows for non-localized competition among arbitrary numbers of media outlets, we quantify the effect of concentration of ownership on quality and bias of media content. A main result shows that too few commercial outlets, or better, too few separate owners of commercial outlets can lead to substantial bias in equilibrium. Increasing the number of outlets (commercial and non-commercial) tends to bring down this bias; but the strongest effect occurs when the number of owners is increased. Allowing for free entry provides lower bounds on fixed costs above which substantial commercial bias occurs in equilibrium.
    Keywords: Commercial media, concentration and consolidation, media bias, self-censorship, ownership structure
    JEL: L13 L82
    Date: 2008–12

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