nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒02‒14
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Non-comparative versus Comparative Advertising as a Quality Signal By Winand Emons; Claude Fluet
  2. Intra-firm Conflicts and Interfirm Competition By Werner Güth; Kerstin Pull; Manfred Stadler
  3. Patent Protection, Takeovers, and Startup Innovation: A Dynamic Approach By Andreas Panagopoulos; In-Uck Park
  4. Patent Thickets, Licensing and Innovative Performance By Cockburn, Iain; MacGarvie, Megan; Müller, Elisabeth
  5. Do Shorter Product Cycles Induce Patent Thickets? By Beschorner, Patrick Frank Ernst
  6. Innovation and Institutional Ownership By Philippe Aghion; John Van Reenen; Luigi Zingales
  7. Measuring and explaining competition in the financial sector By Jacob A. Bikker; Laura Spierdijk
  8. Bank cross-border mergers and acquisitions (Causes, consequences and recent trends) By Alberto Franco Pozzolo
  9. Competition and Relationship Lending: Friends or Foes? By Andrea Filippo Presbitero; Alberto Zazzaro
  10. Drivers and Obstacles to Banking SMEs: The Role of Competition and the Institutional Framework By de la Torre, Augusto; Soledad Martinez Peria, Maria; Schmukler, Sergio L.
  11. A New Metric for Banking Integration in Europe By Gropp, Reint Eberhard; Kashyap, Anil K.
  12. Banking in Brazil: Structure, Performance, Drivers, and Policy Implications By Urdapilleta, Eduardo; Stephanou, Constantinos
  13. Do Islamic Banks Have Greater Market Power ? By Laurent Weill
  14. Strategic Storage and Competition in European Gas Markets By Edmond Baranes; François Mirabel; Jean-Christophe Poudou
  15. Supply Function Equilibria: Step Functions and Continuous Representations By Holmberg, P.; Newbery, D; Ralph, D.
  16. Ex Post Regulation Facilitates Collusion By Beschorner, Patrick Frank Ernst
  18. Globalization and Innovation in Emerging Markets By Gorodnichenko, Yuriy; Svejnar, Jan; Terrell, Katherine
  19. Price setting and competition with search frictions By Kudoh, Noritaka

  1. By: Winand Emons; Claude Fluet
    Abstract: Two firms produce a product with a horizontal and a vertical characteristic. We call the vertical characteristics 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: 2009
  2. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Kerstin Pull (University of Tübingen, Department of Economics and Business Administration); Manfred Stadler (University of Tübingen, Department of Economics and Business Administration)
    Abstract: We study interaction effects between intra-firm conflicts and interfirm competition on a duopolistic market with seller firms employing one or more agents and implementing tournament incentives. We show that inter-firm competition leads to higher incentive intensity, higher efforts and output levels but lower profits.
    Keywords: Tournament, Worker compensation, Strategic competition
    JEL: C72 L22 M52
    Date: 2009–01–30
  3. By: Andreas Panagopoulos; In-Uck Park
    Abstract: The impact of IP protection on the innovation incentives of startup firms is examined in a dynamic model where an incumbent faces a sequence of potential startups and the incumbent's chance of winning an infringement lawsuit increases with the size of its patent portfolio. It is shown that takeover deals generate extra benefits for the incumbent via its enhanced future bargaining positions, a part of which accrues to the current startup as an increased bargaining share. This increased bargaining share can be large enough to justify the startup's innovation activity that would not have taken place otherwise. This effect may be greatest under moderate levels of IP protection, because the increase in the bargaining share, being proportional to the marginal benefits brought by the last patent added to the portfolio, would be too small if the protection was too weak while it would taper off too quickly if the protection was excessive.
    Keywords: Patent litigation, takeovers, patent portfolios
    JEL: O31 O34 L21 L24 K0
    Date: 2008–05
  4. By: Cockburn, Iain; MacGarvie, Megan; Müller, Elisabeth
    Abstract: We examine the relationship between fragmented intellectual property (IP) rights and innovative performance, taking into consideration the role played by in-licensing of IP. Controlling for a variety of firm and market characteristics, we find that firms facing more fragmented IP landscapes are more likely to report expenditures on in-licensing and for those firms that do incur license costs we find a weak positive association between licensing expenditure and fragmented IP rights in the relevant technology. We also observe a negative relationship between IP fragmentation and innovative performance, but only for firms that engage in in-licensing and only for product innovation. The relationship between fragmentation and innovative performance also depends on the size of a firm’s patent portfolio, which suggests an important strategic role for defensive patenting in the context of fragmented property rights.
    Keywords: patent thickets, licensing, innovative performance
    JEL: O31 O34
    Date: 2008
  5. By: Beschorner, Patrick Frank Ernst
    Abstract: The traditional argument that shorter product cycles favor trade secret over patenting is reviewed. A game theoretic model provides an argument that shorter product cycles can induce firms to file more patent applications. The firms may be trapped in a prisoners' dilemma where all firms would jointly prefer to patent less and to not have a patent thicket. If firms start applying for patents on technologies which are not yet mature in order to cover ideas that may eventually turn successful, this may create a patent thicket. The transition into a situation where firms start patenting many ideas instead of single mature technologies is initiated and accelerated when network effects are present or patents exhibit a blocking property.
    Keywords: patent thicket, product cycles, licensing, network effects
    JEL: K2 L1 L2 O31
    Date: 2008
  6. By: Philippe Aghion; John Van Reenen; Luigi Zingales
    Abstract: We find that institutional ownership in publicly traded companies is associated with more innovation(measured by cite-weighted patents). To explore the mechanism through which this link arises, webuild a model that nests the lazy-manager hypothesis with career-concerns, where institutional ownersincrease managerial incentives to innovate by reducing the career risk of risky projects. The datasupports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitutioneffect between institutional ownership and product market competition (and managerial entrenchmentgenerally), the career-concern model allows for complementarity. Empirically, we reject substitutioneffects. Second, CEOs are less likely to be fired in the face of profit downturns when institutionalownership is higher. Finally, using instrumental variables, policy changes and disaggregating by typeof owner we find that the effect of institutions on innovation does not appear to be due to endogenousselection.
    Keywords: Innovation, institutional ownership, career concerns, R&D, productivity
    JEL: O31 O32 O33 G20 G32
    Date: 2009–02
  7. By: Jacob A. Bikker; Laura Spierdijk
    Abstract: The first part of this paper provides a systematic discussion of the structural problems of competition on financial markets as observed from the demand and from the supply side, using a diagnostic framework. Potential impediments to competition are concentration, entry barriers, lack of transparency, product complexity, switching and search costs, financial illiteracy, lack of consumer power and weak intermediaries. In response to such financial market failures, we suggest a number of possible policy reactions. The second part of the paper investigates ways to measure competition and provides empirical figures on banking competition in 101 separate countries and assesses the market structure as monopolistic (or a perfect cartel), perfectly competitive or monopolistic competitive. Also, banking competition is explained, using explanatory variables of market structure, contestability, inter-industry competition, and institutional and macro economic conditions. This analysis provides possible instruments for reform in order to help promote competition. Next, the impact of banking consolidation is examined. Finally, developments in competition are observed over time, generally pointing to a downward trend.
    Keywords: competition, concentration, entry barriers, transparency, consolidation, contestability, institutional conditions, restrictions on activities or investment, regulation, Panzar-Rosse model.
    JEL: G21 G28 L1
    Date: 2009–02
  8. By: Alberto Franco Pozzolo (Universit… degli Studi del Moliste)
    Abstract: In the past fifteen years, cross-border mergers and acquisitions have had an ever increasing role in the process of bank internationalization. Although a consensus view has developed on the determinants of a bank’s decision to expand abroad and on the determinants of the patterns of expansion, the debate on the consequences of foreign bank presence is still open. The aim of this chapter is twofold. Firstly, it discusses the major results of the empirical literature studying the determinants, the patterns, and the consequences of bank foreign expansion. Secondly, it studies whether the determinants of bank foreign expansions have changed through time, estimating an econometric model of the patterns of cross-border bank M&As between 1990 and 2006.
    Keywords: Foreign direct investment, International banking
    JEL: E30 F21 F23 G21
    Date: 2008–11
  9. By: Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR)
    Abstract: Recent empirical findings by Elsas (2005) and Degryse and Ongena (2007) document a U-shaped effect of market concentration on relationship lending whichvcannot be easily accommodated to the investment and strategic theory of relationship lending. In this paper, we show that this non-monotonicity can be explained by looking at the organisational structure of local credit markets. We provide evidence that marginal increases in interbank competition are detrimental (favourable) to relationship lending in markets where transaction-based loans are a primary (limited) product offered by a vast (tiny) group of large, outside headquartered banks. On the contrary, where relational-based lending technologies are already widely in;use in the market, an increase in competition may drive banks to further cultivate their extensive ties with customers. Finally, we show that when competition comes from functionally distant banks, local intermediaries increase their engagement in relationship lending with local firms, consistent with the flight-to-captivity mechanism introduced by Boot and Thakor (2000) and further discussed by Dell'Ariccia and Marquez (2004) and Hauswald and Marquez (2006).
    Keywords: interbank competition, market organisational structure, relationship lending
    JEL: G21 L11
    Date: 2009–01
  10. By: de la Torre, Augusto (The World Bank); Soledad Martinez Peria, Maria (The World Bank); Schmukler, Sergio L. (The World Bank)
    Abstract: This paper studies the factors banks perceive as drivers and obstacles to financing small and medium enterprises (SMEs), focusing on the role of competition and the institutional framework. Using a survey of banks in Argentina and Chile, the paper shows that, despite alleged differences in the countries' environments regarding rules, regulations, and ease of doing business, SMEs have become a strategic segment for most banks in both countries. In particular, banks have begun to target SMEs due to the significant competition in the corporate and retail sectors. They perceive the SMEs market as highly profitable, large, and with good prospects. Moreover, banks are developing coping mechanisms to overcome the particular institutional obstacles present in each country and to compete for SMEs. Banks' interest in SMEs is not based on government programs, yet policy action might help reduce the cost of providing financing, especially long-term lending.
    Keywords: small and medium enterprises; bank finance; financial constraints; banking market structure; institutional factors; regulation; competition
    JEL: G21 G28 L25 O12 O16
    Date: 2008–12–01
  11. By: Gropp, Reint Eberhard; Kashyap, Anil K.
    Abstract: Most observers have concluded that while money markets and government bond markets are rapidly integrating following the introduction of the common currency in the euro area, there is little evidence that a similar integration process is taking place for retail banking. Data on cross-border retail bank flows, cross-border bank mergers and the law of one price reveal no evidence of integration in retail banking. This paper shows that the previous tests of bank integration are weak in that they are not based on an equilibrium concept and are neither necessary nor sufficient statistics for bank integration. The paper proposes a new test of integration based on convergence in banks’ profitability. The new test emphasises the role of an active market for corporate control and of competition in banking integration. European listed banks profitability appears to converge to a common level. There is weak evidence that competition eliminates high profits for these banks, and underperforming banks tend to show improved profitability. Unlisted European banks differ markedly. Their profits show no tendency to revert to a common target rate of profitability. Overall, the banking market in Europe appears far from being integrated. In contrast, in the U.S. both listed and unlisted commercial banks profits converge to the same target, and high profit banks see their profits driven down quickly.
    Date: 2008
  12. By: Urdapilleta, Eduardo (The World Bank); Stephanou, Constantinos (The World Bank)
    Abstract: he objective of this paper is to analyze the industry structure of banking services in Brazil in order to shed light on financial performance and its drivers at a disaggregated level. The study illustrates how differences across market segments -- which tend to be averaged out in aggregate analysis -- need to be taken into account when analyzing performance and designing public policy for the banking sector. In particular, retail banking is found to be less sensitive to price competition and to exhibit considerably higher returns than corporate banking. The authors identify and discuss the factors underlying revenues, costs, and risks in each market segment, and conclude with policy implications.
    Keywords: Brazil; banking; competition; industry structure; performance
    Date: 2009–01–01
  13. By: Laurent Weill (Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg)
    Abstract: The aim of this paper is to investigate whether Islamic banks have greater market power than conventional banks. Indeed Islamic banks may benefit from a captive clientele, owing to religious principles, which would be charged greater prices. To measure market power, we compute Lerner indices on a sample of banks from 17 countries in which Islamic and conventional banks coexist over the period 2000-2007. Comparison of Lerner indices shows no significant difference between Islamic banks and conventional banks. When including control variables, regression of Lerner indices even suggests that Islamic banks have a lower market power than conventional banks. A robustness check with the Rosse-Panzar model confirms that Islamic banks are not less competitive than conventional banks. The lower market power of Islamic banks can be explained by their different norms and their different incentives.
    Keywords: Islamic banks, Lerner index, Bank Competition.
    JEL: G21 D43 D82
    Date: 2009
  14. By: Edmond Baranes; François Mirabel; Jean-Christophe Poudou
    Abstract: In this paper, we study how competition on downstream gas markets is influenced by sourcing decisions in the supply chain. We analyze the sequential relationships between storage decisions and intermediate pricing in spot markets. We show that an upstream leadership in the access to storage facilities leads a dominant firm to adopt strategic storage decision. This strategy consists in stockpiling more than supplied in the downstream market. This behavior is a part of a raising rival's cost strategy for the leader. Furthermore in some cases, optimal regulation of gas storage access may not prevent such a behavior.
    Keywords: Storage, spot market, gas markets, regulation
    Date: 2008
  15. By: Holmberg, P.; Newbery, D; Ralph, D.
    Abstract: In most wholesale electricity markets generators must submit stepfunction offers of supply to a uniform price auction, and the market is cleared at the price of the most expensive offer needed to meet realised demand. Such markets can most elegantly be modelled as the purestrategy, Nash Equilibrium of continuous supply functions, in which each supplier has a unique profit maximising choice of supply function given the choices of other suppliers. Critics argue that the discreteness and discontinuity of the required steps can rule out pure-strategy equilibria and may result in price instability. This paper argues that if prices must be selected from a finite set the resulting step function converges to the continuous supply function as the number of steps increases, reconciling the apparently very disparate approaches to modelling electricity markets.
    Keywords: Auctions, supply function equilibria, convergence of stepfunctions, electricity markets.
    JEL: D43 D44 C62 L94
    Date: 2008–12
  16. By: Beschorner, Patrick Frank Ernst
    Abstract: Under ex ante access regulation entrants often claim that access fees are excessive. I show that this is only the case if further entry is admitted. If the entrant is protected from further entry it would agree with the incumbent upon a strictly positive access fee which may exceed the efficient level. Ex post regulation facilitates this type of collusion and should be abandoned.
    Keywords: entry deterrence, access regulation, network infrastructure, vertical differentiation
    JEL: K21 K23 L42 L51
    Date: 2008
  17. By: Pellešová, Pavlína
    Abstract: Article is concerned with the position of the ÚpKHS (Office for Economic Competition), which is the central administrative body for support and protection of trade competition against non-permissible limitation. An effective competition is a decisive factor for increasing competitive strength and economic growth of the particular country. The author targets the analysis of interferences of the office whose basic aim is to remove negative influences on the economic competition (in the context of coordinated EU policy).
    Keywords: Office for Economic Competition; effective competition; analysis of interferences of the office.
    JEL: K23 H76
    Date: 2008
  18. By: Gorodnichenko, Yuriy (University of Michigan); Svejnar, Jan (University of Michigan); Terrell, Katherine (University of Michigan)
    Abstract: Globalization brings opportunities and pressures for domestic firms in emerging markets to innovate and improve their competitive position. Using data on firms in 27 transition economies, the authors test for the effects of globalization through the impact of increased competition and foreign direct investment on domestic firms's efforts to innovate (raise their capability) by upgrading their technology, improving the quality of their product or service, or acquiring certification. They find that competition has a negative effect on innovation, especially for firms further from the efficiency frontier, and we do not find support for an inverted U effect of competition on innovation. The authors show that the supply chain of multinational enterprises and international trade are important channels for domestic firms' innovation. They detect no evidence that firms in a more pro-business environment are more likely to display a positive or inverted U relationship between competition and innovation, or that they are more sensitive to foreign presence.
    Keywords: competition; innovation; emerging markets; spillovers
    JEL: F23 O16 P23
    Date: 2009–01–01
  19. By: Kudoh, Noritaka
    Abstract: This paper investigates price determination in a decentralized economy in which buyers' valuations are stochastic and unobservable. In such a market, each buyer's reservation utility depends both on the prevailing price and on the price he actually encounters. The buyer's willingness to trade is shown to be decreasing in the price, and this creates the trade-off for the sellers' price setting. Even though the sellers have incentives to manipulate the buyer's willingness to trade, the economy is not fully competitive; it does not converge to the Walrasian outcome as search frictions disappear. The model is used to study various market structures to explore the nature of market power in search equilibrium. It is shown that price dispersion arises as a result of search frictions and oligopolistic price setting.
    Keywords: random search, price setting, competition, oligopoly,
    JEL: C78 D40
    Date: 2009–02

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