nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒01‒31
23 papers chosen by
Russell Pittman
US Department of Justice

  1. Waiting to Merge By Fumagalli, Eileen; Nilssen, Tore
  2. Enhancing Market Power by Reducing Switching Costs By Bouckaert, J.M.C.; Degryse, H.A.; Provoost, T.
  3. Last-In First-Out Oligopoly Dynamics By Jaap H. Abbring; Jeffrey R. Campbell
  4. Managing Strategic Buyers By Johannes Horner; Larry Samuelson
  5. Competition, innovation and distance to frontier. By Bruno Amable; Lilas Demmou; Ivan Ledezma
  6. On the Tacit Collusion Equilibria of an Investment Timing Game By Richard Ruble; Bruno Versaevel
  7. Property Rights and Invention By Katharine Rockett
  8. Experimentation, Patents, and Innovation By Daron Acemoglu; Kostas Bimpikis; Asuman E. Ozdaglar
  9. The European Microsoft case at the crossroads of competition policy and innovation By Larouche, P.
  10. On Optimal Legal Standards for Competition Policy: A General Welfare-Based Analysis By Yannis Katsoulacos; David Ulph
  11. The Distribution of Harm in Price-Fixing Cases By Boone, J.; Müller, W.
  12. Sense and nonsense of rules on proof in cartel cases By Parret, L.Y.J.M.
  13. Market Power and Vertical and Horizontal Integration in the Maritime Shipping and Port Industry By Eddy van de Voorde; Thierry Vanelslander
  14. Bank Competition Efficiency in Europe: A Frontier Approach By Wilko Bolt; David Humphrey
  15. Economics of Payment Cards: A Status Report By Wilko Bolt; Sujit Chakravorti
  16. Generic Substitution By Furu, Kari; Dalen, Dag Morten; Locatelli, Marilena; Strøm, Steinar
  17. An Economic Justification for Open Access to Essential Medicine Patents in Developing Countries By Sean Flynn; Aidan Michael Hollis; Mike Palmedo
  18. Research universities and regional high-tech firm start-ups and exit By De Silva, Dakshina G.; McComb, Robert P.
  19. Sustainability in a multiproduct and multiple agent contestable market By Iehlé, Vincent
  20. Prices over the Product Life Cycle: An Empirical Analysis By Iqbal Syed; Daniel Melser
  21. Product Differentiation and Profitability in German Manufacturing Firms By Nils Braakmann; Joachim Wagner
  22. Collusion Inducing Taxation of a Polluting Oligopoly By Benchekroun, H.; Ray Chaudhuri, A.
  23. Tariff-Jumping and the Form of FDI: Firm Level Evidence By Tekin-Koru, Ayca

  1. By: Fumagalli, Eileen (IEFE, Università Bocconi, Milan); Nilssen, Tore (Dept. of Economics, University of Oslo)
    Abstract: We set up a sequential merger to study a firm's incentives to pass up on an opportunity to merge with another firm. We find that such incentives may exist when there are efficiency gains from a merger, firms are of different sizes, there is an anthitrust authority present to approve mergers, and there is sufficient alignment of interests between the antitrust authority and the firms. We point out three dstinctive motives for not merging: the external-effect motive, the bargaining-power motive, and the pill-sweetening motive.
    Keywords: Mergers; merger incentives;
    JEL: G34 L11 L13 L41
    Date: 2008–06–30
  2. By: Bouckaert, J.M.C.; Degryse, H.A.; Provoost, T. (Tilburg University, Center for Economic Research)
    JEL: D43 G28
    Date: 2008
  3. By: Jaap H. Abbring; Jeffrey R. Campbell
    Abstract: This paper extends the static analysis of oligopoly structure into an infinite-horizon setting with sunk costs and demand uncertainty. The observation that exit rates decline with firm age motivates the assumption of last-in first-out dynamics: An entrant expects to produce no longer than any incumbent. This selects an essentially unique Markov-perfect equilibrium. With mild restrictions on the demand shocks, sequences of thresholds describe firms' equilibrium entry and survival decisions. Bresnahan and Reiss's (1993) empirical analysis of oligopolists' entry and exit assumes that such thresholds govern the evolution of the number of competitors. Our analysis provides an infinite-horizon game-theoretic foundation for that structure.
    JEL: L13
    Date: 2009–01
  4. By: Johannes Horner; Larry Samuelson
    Date: 2009–01–15
  5. By: Bruno Amable (Centre d'Economie de la Sorbonne); Lilas Demmou (Ministère des Fiances - DGTPE); Ivan Ledezma (Centre d'Economie de la Sorbonne)
    Abstract: According to a recent literature, the positive effect of competition is supposed to be growing with the proximity to the technological frontier. Using a variety of indicators, the paper tests the effect of competition and regulation on innovative activity measured by patenting. The sample consists of a panel of 15 industries for 17 OECD countries over the period 1979-2003. Results show no evidence of a positive effect of competition growing with the proximity to the frontier. Two main configurations emerge. First, regulation has a positive effect whatever the distance to the frontier and the magnitude of its impact is higher the closer the industry is to the frontier. Second, the effect of regulation is negative far from the frontier and becomes positive (or non significant) when the technology gap decreases. These results contradict the belief in the innovation-boosting effect of product market deregulation such as taken into account in the Lisbon Strategy.
    Keywords: Innovation, competition, distance to frontier.
    JEL: O30 L16
    Date: 2008–07
  6. By: Richard Ruble (EMLYON Business School, Ecully, F-69134, France); Bruno Versaevel (EMLYON Business School, Ecully, F-69134, France; and GATE, CNRS, Ecully, F-69130)
    Abstract: This note further characterizes the tacit collusion equilibria in the investment timing game of Boyer, Lasserre and Moreaux [1]. Tacit collusion equilibria may or may not exist, and when they do may involve either finite time investments (type 1) or infinite delay (type 2). The relationship between equilibria and common demand forms is not immediately apparent. We provide the full necessary and sufficient conditions for existence. A simple condition on demand primitives is derived that determines the type of equilibria. Common demand forms are then shown to illustrate both finite-time and infinite-delay tacit collusion.
    Keywords: Real options; Duopoly; Collusion; Investment
    JEL: C73 D43 D92 L13
    Date: 2008
  7. By: Katharine Rockett
    Abstract: We survey the economics literature on optimal patent design. We first outline the patent right and the basic economic effects of the patent on innovation. Models that use frictions instead of patents to generate rewards to innovation and models of trade secrecy are considered briefly. The patent design papers are divided into those that model a single innovation, those dealing with cumulative innovation, and more recent papers focussing on complementary innovations. Disclosure issues are presented in a separate section. Finally, enforcement of patents and the interactions between patents and competition policy are considered.
    Date: 2009–01–21
  8. By: Daron Acemoglu; Kostas Bimpikis; Asuman E. Ozdaglar
    Date: 2009–01–15
  9. By: Larouche, P. (Tilburg University, Tilburg Law and Economics Center)
    Date: 2008
  10. By: Yannis Katsoulacos; David Ulph
    Abstract: We present a new welfare-based framework for optimally choosing legal standards in a variety of regulatory contexts. We formalise the decision-theoretic considerations widely discussed in the existing literature by capturing the quality of the underlying analysis and information available to a regulatory authority, and we obtain a precise set of conditions for determining when a Rule of Reason approach would be able to effectively discriminate between benign and harmful actions and consequently dominate Per Se as a decision-making procedure. We then show that in a welfare-based approach the choice between legal standards must additionally take into account (i) indirect (deterrence) effects of the choice of standard on the behaviour of all firms when deciding whether or not to adopt a particular practice; and (ii) procedural effects of certain features of the administrative process in particular delays in reaching decisions; and the coverage rate of the actions taking place. We therefore derive necessary and sufficient conditions for adopting discriminating rules (such as Rule of Reason). We also examine what type of discriminating rule will be optimal under different conditions that characterise different business practices. We apply our framework to two recent landmark decisions – Microsoft vs. EU Commission (2007) and Leegin Vs. PSKS (2007) – in which a change in legal standards has been proposed, and show that it can powerfully clarify and enhance the arguments deployed in these cases.
    Keywords: Legal standards, decision theoretic approach, Per Se, Rule of Reason, Competition Policy, discriminating decision rules.
    JEL: K0 K2 K4 L4 L5
    Date: 2008–10
  11. By: Boone, J.; Müller, W. (Tilburg University, Center for Economic Research)
    Keywords: cartel;abuse of a dominant position;pass on defence;apportionment of harm;supply curve;tax incidence
    JEL: D43 L42 L13
    Date: 2008
  12. By: Parret, L.Y.J.M. (Tilburg University, Tilburg Law and Economics Center)
    Date: 2008
  13. By: Eddy van de Voorde; Thierry Vanelslander
    Abstract: The maritime sector is undergoing constant change, as is particularly apparent in the shift in competition that has unfolded in recent years. Whereas in the past shipowners and ports used to compete with one another, the competitive struggle is now increasingly unfolding at the level of logistics chains. Today, market players are selected not so much for their stand-alone competitiveness, but on the basis of whether or not they belong to a successful maritime logistics chain. This explains why certain market players are continuously trying to gain greater control over these chains, including through vertical and horizontal alliances, mergers and acquisitions. This contribution considers in greater detail these concerted efforts to increase market power through extensive integration. First, we deal with the competitive shifts that have occurred in the port and maritime arena. Subsequently, we look at the strategic behaviour exhibited by the main market players (shipowners, terminal operating companies, port authorities, logistics service providers, etc) and analyse their objectives. Finally, we assess the consequences of the strategies pursued in the context of the anticipated future scenarios.
    Date: 2009–01
  14. By: Wilko Bolt; David Humphrey
    Abstract: There are numerous ways to indicate the degree of banking competition across countries. Antitrust authorities rely on the structure-conduct-performance paradigm while academics prefer price mark-ups (Lerner index) or correlations of input costs with output prices (H-statistic). These measures are not always strongly correlated when contrasted across countries or positively correlated within countries over time. Frontier efficiency analysis is used to devise an alternative indicator of competition and rank European countries by their dispersion from a \competition frontier". The frontier is determined by how well payment and other costs explain variations in loan-deposit rate spread and non-interestactivity revenues.
    Keywords: Banking competition; frontier analysis; European banks
    JEL: C31 F21 F23 F43 O47
    Date: 2009–01
  15. By: Wilko Bolt; Sujit Chakravorti
    Abstract: In this article, we survey the recent theoretical literature on payment cards and study their implications for public policy. Payment card networks have faced regulatory scrutiny in several countries regarding the setting of various fees including interchange fees – fees paid by the merchant's financial institution to the cardholder's financial institution. In addition, other common payment practices such as no-surcharge rules have also been challenged in several jurisdictions. Unlike other types of markets, card payment services are network goods where two distinct end-users (i.e. consumers and merchants) must participate for the good to be consumed.
    Keywords: retail financial services; payment card networks; pricing; competition
    JEL: L11 G21 D53
    Date: 2008–12
  16. By: Furu, Kari (Ragnar Frisch Centre for Economic Research); Dalen, Dag Morten (Ragnar Frisch Centre for Economic Research); Locatelli, Marilena (University of Turin); Strøm, Steinar (University of Turin)
    Abstract: We examine the importance of prices, doctor and patient characteristics, and market institutions for the likelihood of choosing generic drugs instead of the more expensive original brand-name version. Using an extensive dataset extracted from The Norwegian Prescription Database (NorPD) containing all prescriptions written in March 2004 and 2006 on 23 different drugs (chemical substances) in Norway, we find strong evidence for the importance of both doctor and patient characteristics for the choice probabilities. The price difference between brand and generic versions and insurance coverage both affect generic substitution. Moreover, controlling for the retail chain affiliation of the dispensing pharmacy, we find that pharmacies play an important role for patients’ willingness to substitute. In markets with more recent entry of generic drugs, the brand-name loyalty proves to be much stronger, giving less explanatory power to our demand model.
    Keywords: Generics; substitution; microdata; random utility model
    JEL: C35 I18 L65
    Date: 2008–06–17
  17. By: Sean Flynn; Aidan Michael Hollis; Mike Palmedo
    Abstract: This paper offers an economic rationale for compulsory licensing of needed medicines in developing countries. The patent system is based on a trade-off between the “deadweight losses†caused by market power and the incentive to innovate created by increased profits from monopoly pricing during the period of the patent. However, markets for essential medicines under patent in developing countries with high income inequality are characterized by highly convex demand curves, producing large deadweight losses relative to potential profits when monopoly firms exercise profit-maximizing pricing strategies. As a result, these markets are systematically ill-suited to exclusive marketing rights, a problem which can be corrected through compulsory licensing. Open licenses that permit any qualified firm to supply the market on the same terms, such as may be available under licenses of right or essential facility legal standards, can be used to mitigate the negative effects of government-granted patents, thereby increasing overall social welfare.
    Date: 2009–01–15
  18. By: De Silva, Dakshina G.; McComb, Robert P.
    Abstract: If localized knowledge spillovers are present in the university setting, higher rates of both start-ups and/or survival than in the broader economy would be observed in areas that are geographically proximate to the university. Using a fully-disclosed Quarterly Census of Employment and Wages for Texas for the years 1999:3-2006:2, this paper analyzes start-ups and exit rates for high-tech firms in Texas. We find that there is evidence that the presence of a research institution will affect the likelihood of technology start-ups. However, results suggest that geographic proximity to knowledge centers does not reduce hazard rates.
    Keywords: Entry and Survival; R & D; Regional; Urban; and Rural Analyses.
    JEL: R53 O18 R12
    Date: 2009–01–26
  19. By: Iehlé, Vincent
    Abstract: We prove that a natural monopoly can set subsidy free pricing and sustainable pricing schedules in general economic environment. The setting is a multiproduct and multiple agent contestable market where demands are elastic and where rivals can enter the sub-markets composed by a set of the products line and a set of agents. Our results suggest that the existence results of the extant literature admit analogues even in an environment where rivals have enlarged possibilities to enter the market and where demands react to prices. The approach makes use of cooperative games to deduce the main results under conditions of fair sharing cost, threshold in the consumption and regularity of the profit function.
    Keywords: cooperative game; existence result; natural monopoly; subsidy free pricing; sustainability.
    JEL: L11 C71 L12
    Date: 2008–10–01
  20. By: Iqbal Syed (School of Economics, University of New South Wales); Daniel Melser (Department of Economics, Monash University)
    Abstract: This paper explores the extent to which goods follow systematic pricing patterns over their life cycle. The theoretical literature, and anecdotal evidence, suggests that new products are often introduced at high prices which decline as the good ages while, older goods exit the market at a discount. We outline and apply a smoothing-spline approach to the estimation of life cycle pricing effects using data on two different types of goods; supermarket products (beer, canned soup and cereals) and high-tech goods (desktop and laptop computers, and personal digital assistants). We interpret these results within a simple conceptual framework and find evidence for the existence of significant life cycle pricing effects. This implies that hedonic pricing functions which exclude age are misspecified. Furthermore, in order to eliminate bias price index samples must be constructed carefully. Using a simulation we show that the bias introduced by the traditional match-model method may be non-trivial.
    Keywords: Product life cycle; Hedonic regression; Price index; Spline smoothing
    JEL: C43 C50 D00 E31
    Date: 2008–11
  21. By: Nils Braakmann (Institute of Economics, University of Lüneburg); Joachim Wagner (Institute of Economics, University of Lüneburg)
    Abstract: We use a unique rich newly built data set for German manufacturing enterprises to investigate the product differentiation – firm performance relationship. We find that an increase in the degree of product diversification has a negative impact on profitability when observed and unobserved firm characteristics are controlled for. The effects are statistically significant and large from an economic point of view. This helps to understand the – at least, at a first glance – surprising fact that nearly 40 percent of all manufacturing enterprises with at least 20 employees in Germany are singleproduct firms according to a detailed classification of products, and that multi-product enterprises with a large number of goods are a rare species.
    Keywords: Product differentiation, profitability. Germany
    JEL: D21 L60
    Date: 2009–01
  22. By: Benchekroun, H.; Ray Chaudhuri, A. (Tilburg University, Center for Economic Research)
    Abstract: We show that an environmental regulation such as a tax on pollution can act as a collusive device and induce stable cartelization in an oligopolistic polluting industry. We consider a dynamic game where pollution is allowed to accumulate into a stock over time and a cartel that includes all the firms in the industry. We show that a tax on pollution emissions can make it unprofitable for any firm to leave the cartel. Moreover the cartel formation can diminish the welfare gain from environmental regulation. We provide an example where social welfare under environmental regulation and collusion of firms is below social welfare under a laisser-faire policy.
    Keywords: pollution tax;oligopoly;cartel formation;coalition formation;differential game
    JEL: H41 L51 Q58
    Date: 2008
  23. By: Tekin-Koru, Ayca
    Abstract: This paper carries out an empirical analysis with rich, firm-level data on the activities of Swedish multinationals around the globe in manufacturing sectors from 1987 to 1998 to test the main conjectures of traditional trade and recent views of the effects of trade costs on foreign entry. The results of the empirical analysis show almost no evidence of tariff-jumping foreign entry. On the contrary, high tariffs reduce the likelihood of cross-border M&As as conjectured by recent studies. At best, tariff-jumping is a possibility in the case of greenfield FDI or for large, multiple affiliate firms doing business in low-tech industries.
    Keywords: foreign direct investment; entry modes; and tariff-jumping
    JEL: F23 F21
    Date: 2009–01

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