nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒01‒17
twenty papers chosen by
Russell Pittman
US Department of Justice

  1. Maximal Cartel Pricing and Leniency Programs By Harold Houba; Evgenia Motchenkova; Quan Wen
  2. Non-comparative versus Comparative Advertising as a Quality Signal By Winand Emons; Claude Fluet
  3. Do Auctions and Forced Divestitures increase Competition? By Adriaan R. Soetevent; Marco A. Haan; Pim Heijnen
  4. Auctions with Positive Synergies: Experimental Evidence By Chow, YuenLeng; Yavas, Abdullah
  5. Imports as Product and Labour Market Discipline By Hervé Boulhol; Sabien Dobbelaere; Sara Maioli
  6. Multinational enterprises, cross-border acquisitions, and government policy By Gautam Bose; Sudipto Dasgupta; Arghya Ghosh
  7. Conflict in Cross Broader Merges Effect of Firm and Market Size By Poonam Mehra
  8. Location of Upstream and Downstream Industries By José Pedro Pontes
  9. Comparing Bertrand and Cournot Outcomes in the Presence of Public Firms By Arghya Ghosh; Manipushpak Mitra
  10. Convergence in Institutions and Market Outcomes : Cross-Country and Time-Series Evidence from the BEEPS Surveys in Transition Economies By Pradeep Mitra; Alexander Muravyev; Mark E. Schaffer
  11. On the Effects of Suggested Prices in Gasoline Markets By Riemer P. Faber; Maarten C.W. Janssen
  12. Bidding for Complex Projects: Evidence From the Acquisitions of IT Services By Gian Luigi Albano; Federico Dini; Roberto Zampino
  13. The Boone-indicator: Identifying different regimes of competition for the American Sugar Refining Company 1890-1914 By Michiel van Leuvensteijn
  14. The model of the linear city under a triangular distribution of consumers: an empirical analysis on price and location of beverage kiosks in Catania By Torrisi, Gianpiero
  15. Prices and Market Structure: An Empirical Analysis of the Supermarket Industry in Chile By Loreto Lira; Magdalena Ugarte; Rodrigo Vergara.
  16. Vertical Contracts between Airports and Airlines: is there a Trade-off between Welfare and Competitiveness? By Cristina Barbot
  17. Competition among Health Plans: A Two-Sided Market Approach By David Bardey; Jean-Charles Rochet
  18. Banking competition, housing prices and macroeconomic stability By Javier Andrés; Óscar J. Arce
  19. White Knights and the Corporate Governance of Hostile Takeovers By Riccardo Calcagno; Sonia Falconieri

  1. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University, Nashville (TN), USA)
    Abstract: For a general class of oligopoly models with price competition, we analyze the impact of ex-ante leniency programs in antitrust regulation on the endogenous maximal-sustainable cartel price. This impact depends upon industry characteristics including its cartel culture. Our analysis disentangles the effects of traditional antitrust regulation and the leniency program. Ex-ante leniency programs are effective if and only if these offer substantial rewards to the self-reporting firm. This is in contrast to currently employed programs that are therefore ineffective.
    Keywords: Cartel; Antitrust Policy; Antitrust Law; Antitrust regulation; Leniency program; Self-reporting; repeated game
    JEL: L41 K21 C72
    Date: 2008–12–17
  2. By: Winand Emons; Claude Fluet
    Abstract: Two firms produce a product with a horizontal and a vertical characteristic. We call the vertical characteristic quality. The difference in the quality levels determines how the firms share the market. Firms know the quality levels, consumers do not. Under non-comparative advertising a firm may signal its own quality. Under comparative advertising firms may signal the quality differential. In both scenarios the firms may attempt to mislead at a cost. If firms advertise, in both scenarios equilibria are revealing. Under comparative advertising the firms never advertise together which they may do under non-comparative advertising.
    Keywords: advertising; costly state falsification; signalling
    JEL: D82 K41 K42
    Date: 2008–12
  3. By: Adriaan R. Soetevent (Amsterdam School of Economics, University of Amsterdam); Marco A. Haan (University of Groningen); Pim Heijnen (Amsterdam School of Economics, University of Amsterdam)
    Abstract: Where markets are insufficiently competitive, governments can intervene by auctioning licenses to operate or by forcing divestitures. The Dutch government has done exactly that, organizing auctions to redistribute tenancy rights for high- way gasoline stations and forcing the divestiture of outlets of four majors. We evaluate this policy experiment using panel data containing detailed price information. Accounting for non-randomness of the sites are auctioned, we find that an obligation to divest lowers prices by over 2% while the auctioning of licenses without such an obligation has no discernible effect. We find no evidence for price effects on nearby competitors.
    Keywords: Divestitures; Auctions; Entry; Policy Evaluation
    JEL: D43 D44 L11
    Date: 2008–12–08
  4. By: Chow, YuenLeng; Yavas, Abdullah
    Abstract: In a standard auction, bidders bid more aggressively when the number of bidders increases. However, Krishna and Rosenthal (1996, Games and Economic Behavior) show that when bidders have multiple-unit demand that generates positive synergies, bidders bid less aggressively as the number of bidders increases. The first objective of this paper is to offer experimental evidence on this seemingly counter-intuitive theoretical prediction. Following the model of Krishna and Rosenthal, we design a simultaneous second-price sealed-bid auction for two objects with two types of bidders: single-object and multiple-object demand bidders. Our results show that bidders bid less aggressively with increased competition. The second objective is to investigate the effect of offering global bidders the option of bidding for both objects as a package as well as submitting individual bids for each object. Controlling for bidders' valuations, we find that offering this option to global bidders increases allocative efficiency and sellers' revenue.
    Keywords: Auction; Positive Synergies; Increased Competition; Package Bids
    JEL: D44 C91
    Date: 2008–12
  5. By: Hervé Boulhol (Université Paris-Panthéon Sorbonne, OECD); Sabien Dobbelaere (VU University Amsterdam, Ghent University, IZA Bonn); Sara Maioli (Newcastle University Business School)
    Abstract: This paper tests the pro-competitive effect of trade in the product and labour markets of UK manufacturing sectors between 1988 and 2003 using a two-stage estimation procedure. In the first stage, we use data on 9820 firms from twenty manufacturing sectors to simultaneously estimate mark-up and workers’ bargaining power parameters according to sector, firm size and period. We find a significant drop in both the mark-up and the workers’ bargaining power in the mid-nineties. In the second stage, we relate our parameters of interest to trade variables. Our results show that imports from developed countries have significantly contributed to the decrease in both mark-ups and workers’ bargaining power.
    Keywords: Workers’ bargaining power; mark-ups; pro-competitive effect
    JEL: C23 F16 J51 L13
    Date: 2009–01–07
  6. By: Gautam Bose (School of Economics, The University of New South Wales); Sudipto Dasgupta (Department of Finance, Hong Kong University of Science and Technology); Arghya Ghosh (School of Economics, The University of New South Wales)
    Abstract: This paper analyzes the optimality of policy specifications used to regulate the acquisition and operation of local firms by multinational enterprises (MNE). We emphasize the consequence of such regulation on the price of the domestic firm in the market for corporate control. We show that it is optimal to impose ceilings on foreign ownership of domestic firms when the government's objective is to maximize domestic shareholder profits. While the optimal ceiling is high enough for the MNE to gain control of the domestic firm, it nevertheless influences the price that the MNE must pay for the domestic firm's shares to the advantage of the domestic shareholders. Restrictions on transfer pricing are either irrelevant or strictly suboptimal. The consequences of alternative specifications of the government's objective function are also analyzed.
    Keywords: Acquisition; Control; Multinational Enterprises; Transfer pricing
    JEL: F23
    Date: 2008–10
  7. By: Poonam Mehra
    Abstract: This paper tries to analyze the interrelationship between possibilities of conflict in cross border mergers and acquisitions and firm and market characteristics in a two country three firm model. The interaction of asymmetry in firm and market size with the distribution of firms across countries and its effect on the possibilities of conflict is also analysed.
    Keywords: mergers, economy, domestic, conflict, cross broader, model, asymmetry, market size, countries, distribution, firms, market size
    Date: 2009
  8. By: José Pedro Pontes
    Abstract: This paper studies the issue of agglomeration versus fragmentation of vertically related industries. While the downstream industry works under perfect competition, the upstream industry is a duopoly where each firm supplies a differentiated input to the competitive firms. These process the inputs under a quadratic production function entailing decreasing returns as in PENG, THISSE and WANG (2006). It is found that fragmentation occurs if the transport cost of final goods is medium to high, while the transport cost of inputs is low. Otherwise, agglomeration prevails. Multiple agglomerated equilibria are possible if the transport cost of intermediate goods is either medium or high.
    Keywords: Oligopoly; Vertically-Linked Firms; Location; Spatial Fragmentation.
    JEL: L13 R10
    Date: 2008–03
  9. By: Arghya Ghosh (School of Economics, The University of New South Wales); Manipushpak Mitra (Indian Statistical Institute)
    Abstract: We revisit the classic comparison between Bertrand and Cournot outcomes in a mixed market with private and public firms. A departure from the standard setting, i.e., one where all firms maximize profits, provides new insights. A welfare-maximizing public firm's price is strictly lower while its output is strictly higher in Cournot competition. And whereas the private firm's quantity is strictly lower in Cournot (as in the standard setting), its price can be higher or lower. Despite this ambiguity, both firms, public and private, earn strictly lower profits in Cournot. The consumer surplus is strictly higher in Cournot under a linear demand structure. All these results also hold with more than two firms under a wide range of parameterizations. The ranking reversals also hold in a richer setting with a partially privatized public firm, where the extent of privatization is endogenously determined by a welfare-maximizing government. As a by-product of our analysis, we find that in a differentiated duopoly setting, partial privatization always improves welfare in Cournot but not necessarily in Bertrand competition.
    Keywords: Bertrand; Cournot; public firms; partial privatization
    JEL: L13 H42
    Date: 2008–10
  10. By: Pradeep Mitra; Alexander Muravyev; Mark E. Schaffer
    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
  11. By: Riemer P. Faber (Erasmus School of Economics, Erasmus University Rotterdam); Maarten C.W. Janssen (University of Vienna, and Erasmus School of Economics, Erasmus University Rotterdam)
    Abstract: This article analyzes the role of suggested prices in the Dutch retail market for gasoline. Suggested prices are announced by large oil companies with the suggestion that retailers follow them. There are at least two competing rationales for the existence of suggested prices: they may either help retailers translate changes in international gasoline spot market prices into retail prices, or they may coordinate retail prices. We show that there is, next to the international spot market prices, additional information in suggested prices that explains retail prices. Therefore, we conclude that suggested prices help to coordinate retail prices.
    Keywords: gasoline markets; collusion; price setting; suggested prices
    JEL: L11 L42 L65
    Date: 2008–12–01
  12. By: Gian Luigi Albano (Italian Public Procurement Agency (Consip S.p.A.)); Federico Dini (Italian Public Procurement Agency (Consip S.p.A.)); Roberto Zampino (Italian Public Procurement Agency (Consip S.p.A.))
    Abstract: Competitive bidding (as auctions) is commonly used to procure goods and services. Public buyers are often mandated by law to adopt competitive procedures to ensure transparency and promote full competition. Recent theoretical literature, however, suggests that open competition can perform poorly in allocating complex projects. In exploring the determinants of suppliers’ bidding behavior in procurement auctions for complex IT services, we find results that are consistent with theory. We find that price and quality do not exhibit the classical tradeoff one would expect: quite surprisingly, high quality is associated to low prices. Furthermore, while quality is mainly driven by suppliers’ experience, price is affected more by the scoring rule and by the level of expected competition. These results might suggest that (scoring) auctions fail to appropriately incorporate buyers’ complex price/quality preferences in the tender design.
    Keywords: Procurement Auctions, Scoring Rules, IT Contracts, Price/Quality Ratio
    JEL: D44 D86 H51 H57
    Date: 2008–10
  13. By: Michiel van Leuvensteijn
    Abstract: Boone (2008) introduces a new theory based measure of competition, the so-called Boone-indicator. The indicator is based on the relationship between performance, in terms of profits, and efficiency, measured as marginal costs. Whether the indicator is able to correctly measure competition in practice is an unanswered question yet. In this paper, I provide empirical evidence that the Boone-indicator appropriately is measuring levels of competition. To this purpose, I follow a seminal paper by Genesove and Mullin (1998) where they show that the elasticity-adjusted Lerner index is able to identify regimes of price wars from nonprice wars by comparing the outcomes of this index with independent reports on the regimes of competition for the American sugar industry for the period 1890-1914. Using their data, I construct a proxy for profits. I calculate both the elasticity-adjusted Lerner index as the Boone-indicator for a single firm, the American Sugar Refining Company. Using the same data, I am able to demonstrate empirically that the Boone-indicator is better able to identify the different regimes of competition than the elasticity-adjusted Lerner index. The Boone-indicator, therefore, adds value to the insights provided by the elasticity-adjusted Lerner index. Several robustness checks are performed that show that the results are insensitive for alterations in the profit proxy.
    Keywords: competition, measures of competition, sugar industry
    JEL: D43 L13
    Date: 2008–12
  14. By: Torrisi, Gianpiero
    Abstract: This paper presents a model of oligopolistic competition under horizontal differentiation of products and a triangular distribution of consumers. The triangular distribution aims to represent a case of concentration of consumers around the central location. The main result is that a good deal of differentiation among products is achieved also under such assumption concerning the consumers’ distribution. This means that the incentive to differentiate – to some extent - prevails on the incentive to the central location, although consumers are concentrated in the central location. The analysis on an original empirical case-study is presented, concerning the choice of beverage retails in a town. The empirical evidence is consistent with the theoretical model.
    Keywords: product differentiation; Hotelling; consumers distribution; empirical analysis.
    JEL: L13 D43 C72
    Date: 2008–01
  15. By: Loreto Lira; Magdalena Ugarte; Rodrigo Vergara. (Instituto de Economía. Pontificia Universidad Católica de Chile.)
    Abstract: This paper investigates empirically the relationship between market structure and consumer prices in the supermarket industry in Chile. A panel of monthly data from 16 cities in the period January 1998–September 2006 was used. It was found that the more concentrated the industry is in a city, the higher the prices, while the participation of major national chains in cities tends to lower prices. Moreover, the dominant local chain was found to behave differently depending on whether or not one of the national chains was present in the city. <br><br>Finally, we find that prices rise when a national chain acquires another chain and both were previously in a city (inmerge) while if only one of the two was present (outmerge), prices fall.
    Keywords: Prices, retail, market structure.
    JEL: L11 L81
    Date: 2008
  16. By: Cristina Barbot (CETE, Faculdade de Economia, Universidade do Porto)
    Abstract: Airports and airlines have been increasingly establishing vertical contracts, which have a wide variety of forms. These contracts have important implications for policy issues, namely for regulation and price discrimination legislation. In this paper we develop a model to analyse the effects of three types of vertical contracts, in what regards welfare, pro-competitiveness and the scope for regulation. We find that two types of contracts are anti-competitive, and that in all of them consumers are better-off, though in one of them within conditions regarding operational efficiency. We also conclude that regulation may (or may not) improve welfare depending on the type of contract and that price capping has different effects according to the facility the price of which is capped. Moreover, we find that these agreement’s effects exhibit a trade-off between pro-competitiveness and welfare and between price discrimination and welfare.
    Keywords: vertical contracts, regulation, airports, airlines.
    JEL: R48 L93
    Date: 2009–01
  17. By: David Bardey; Jean-Charles Rochet
    Abstract: Classical analysis of health insurance markets often focuses on adverse selection, which creates a direct externality between the enrollees of the same health plan: under an imperfect risk adjustment, the higher the risks of my co-enrollees, the higher my cost of insurance. This has lead to the view that restricting the diversity of accessible physicians may be good for policyholders, in a context where competition between health plans can lead to a "death spiral" for the less restrictive plan. This paper defends the opposite view that diversity might pay, because of the indirect externality between policyholders and physicians. By attracting higher risks, the less restrictive plan may also guarantee a higher level of activity to its physicians, and therefore negotiate with them a lower fee-for-service rate. By explicitly modeling the two sides of the market for health (policyholders and physicians), we are able to …find examples in which competition between health plans gives a higher pro…fit to the less restrictive plan.
    Date: 2009–01–08
  18. By: Javier Andrés (Universidad de Valencia); Óscar J. Arce (Banco de España)
    Abstract: We develop a dynamic general equilibrium model with an imperfectly competitive bank-loans market and collateral constraints that tie investors credit capacity to the value of their real estate holdings. Banks set optimal lending rates taking into account the effects of their price policies on their market share and on the volume of funds demanded by each customer. Lending margins have a significant effect on aggregate variables. Over the long run, fostering banking competition increases total consumption and output by triggering a reallocation of available collateral towards investors. However, as regards the short-run dynamics, we find that most macroeconomic variables are more responsive to exogenous shocks in an environment of highly competitive banks. Key to this last result is the reaction of housing prices and their effect on borrowers' net worth. The response of housing prices is more pronounced when competition among banks is stronger, thus making borrowers' net worth more vulnerable to adverse shocks and, specially, to monetary contractions. Thus, regarding changes in the degree of banking competition, the model generates a trade-off between the long run level of economic activity and its stability at the business cycle frequency.
    Keywords: banking competition, collateral constraints, housing prices
    JEL: E32 E43 E44 G21
    Date: 2009–01
  19. By: Riccardo Calcagno (VU University Amsterdam); Sonia Falconieri (Brunel University)
    Abstract: We analyze the dynamics of takeover contests where hostile raiders compete against white knights involved by a lead blockholder of the target firm (the incumbent). We assume that the incumbent has the power to bargain with the potential bidders to set a minimum takeover price. We characterize the conditions under which a white knight wins the takeover contest despite the smaller value of its synergies as compared to those of the hostile bidder. The paper provides a new explanation for the reason why we observe so few hostile takeovers in reality; moreover, it sheds some light on the effectiveness of white knights as an anti-takeover device and the role played by leading minority blockholders in the market for corporate control.
    Keywords: Hostile takeovers; white knights; Nash bargaining
    JEL: D44 G34
    Date: 2008–12–15
  20. By: Andrés Álvarez; Diana Guevara; Juan Pablo García; Edwin López
    Abstract: This paper is part of a larger research project on the evolution of the Perfect Competition concept in a historical perspective. We try to follow the changes this concept has gone through from the different alternative views during the so–called “Marginal Revolution” towards the consolidation of the price–taker hypothesis. Some recent theoretical developments have underlined the importance of giving up the hypothesis of price taking agents.1 These developments plead for a different conception of the theoretical functioning of the market. This implies to model a perfectly competitive market based on strategic behaviour rather than using the traditional Walrasian conception of agents. These works intend avoiding the common trend in economic theory where imperfect competition is ncreasingly taking the place of perfect competition as the general framework because of, as has been stated by Arrow (1959), if we accept the price–taker hypothesis as the equivalent of perfect competition we have no other alternative than to introduce the Walrasian auctioneer. This ’pessimistic view’ on perfect competition pushes Arrow to postulate that in order to give a more realistic interpretation of economic reality (without the fiction of the centralizing auctioneer) we need to build imperfect competition models. The only difference with the basic Walrasian competitive model being the abandonment of the hypothesis of price–taker agents.
    Date: 2009–01–13

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