nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒02‒22
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Strategic Choice between Process and Product Innovation under Different Competitive Regimes By Luigi Filippini; Gianmaria Martini
  2. Compatibility with Firm Dominance By María Fernanda Viecens
  3. Making Sense of Non-Binding Retail-Price Recommendations By Stefan Bühler; Dennis L. Gärtner
  4. When does variety increase with quality? By Basov, Suren; Danilkina, Svetlana; Prentice, David
  5. Technology adoption in a differentiated duopoly: Cournot versus bertrand By Rupayan Pal
  6. Ordered Search in Differentiated Markets By Zhou, Jidong
  7. Strategic supply function competition with private information By Vives, Xavier
  8. Pricing strategies in two-sided platforms: The role of sellers’ competition By María Fernanda Viecens
  9. Horizontal Mergers, Involuntary Unemployment, and Welfare By Oliver Budzinski; Jürgen-Peter Kretschmer
  10. Conflict in cross border mergers: Effect of firm and market size By Poonam Mehra
  11. The European M&A industry: Trends, patterns and shortcomings By Campa, Jose M.; Moschieri, Caterina
  12. Why We Need to Measure the Effect of Merger Policy and How to Do It By Dennis W. Carlton
  13. Compulsory or Voluntary Pre-merger Notification? Theory and Some Evidence By Chongwoo, Choe; Shekhar, Chander
  14. Do Target CEOs Sell Out Their Shareholders to Keep Their Job in a Merger? By Leonce L. Bargeron; Frederik P. Schlingemann; René M. Stulz; Chad J. Zutter
  15. European natural gas markets: resource constraints and market power By Gijsbert Zwart
  16. Long-term Energy Supply Contracts in European Competition Policy: Fuzzy not Crazy By Adrien de Hauteclocque; Jean-Michel Glachant
  17. An Empirical Model of Imperfect Dynamic Competition and Application to Hydroelectricity Storage By Olli Kauppi; Matti Liski
  18. Mergers and Business Model Assimilation: Evidence from Low-Cost Airlines Takeovers By Paul W. Dobson; Claudio A. Piga
  19. Reforms to Open Sheltered Sectors to Competition in Switzerland By Andrés Fuentes

  1. By: Luigi Filippini (DISCE, Università Cattolica di Milano); Gianmaria Martini (Università di Bergamo)
    Abstract: This paper investigates the strategic choice between introducing a process or a product innovation in a duopoly model with vertical differentiation, comparing the outcomes in case of Bertrand and Cournot competition. It is shown that under both competitive regimes three equilibria in innovation adoption may arise: two symmetric equilibria, where firms select the same innovation type, and one asymmetric equilibrium. The competitive regime has an impact on the features of the asymmetric equilibrium, since in case of Bertrand competition, the high (low) quality firm chooses a product (process) innovation, while firms make the opposite choices in case of Cournot competition. The presence of a leapfrogging effect (only in the Cournot competitors tend to favor the introduction of a new product in comparison with the Bertrand competitors.
    Keywords: vertical differentiation, innovation adoption, process and product innovation, competitive regime.
    JEL: D43 L15 O33
    Date: 2009–01
  2. By: María Fernanda Viecens
    Abstract: This paper analyzes the effect of firm dominance on the incentives to become compatible and how compatibility decisions affect investment incentives. We will consider compatibility in two dimensions: compatibility of the complementary good and inter-network compatibility. We show that if products are substitutes, compatibility tends to be welfare decreasing with the potential negative consequences of increasing compatibility being more likely when asymmetries are strong. We also find that in many instances the dominant firm’s interests regarding compatibility are in line with those of users, and are opposite to those of the weak firm, which will always demand more compatibility to be enforced. Finally we show that compatibility may harm innovation, particularly for the dominant firm.
    Date: 2009–02
  3. By: Stefan Bühler (University of St.Gallen); Dennis L. Gärtner (Socioeconomic Institute, University of Zurich)
    Abstract: This paper provides a theoretical rationale for non-binding retail price recommendations (RPRs) in vertical supply relations. Analyzing a bilateral manufacturer-retailer relationship with repeated trade, we show that linear relational contracts can implement the surplus-maximizing outcome. If the manufacturer has private information about production costs or consumer demand, RPRs may serve as a communication device from manufacturer to retailer. We characterize the properties of efficient bilateral relational contracts with RPRs and discuss extensions to settings where consumer demand is affected by RPRs, and where there are multiple retailers or competing supply chains.
    Keywords: vertical relationships, relational contracts, asymmetric information, price recommendations
    JEL: D23 D43 L14 L15
    Date: 2009–02
  4. By: Basov, Suren; Danilkina, Svetlana; Prentice, David
    Abstract: Casual empiricism suggests higher quality is associated with greater variety. However, recent theoretical and empirical research has either not considered this link, or has been unable to establish unambiguous predictions about the relationship between quality and variety. In this paper we develop a simple model, which predicts that for low qualities variety should be positively correlated with quality and we establish conditions under which variety will either increase or decrease with quality at higher quality levels. The monopolist uses variety to increase the profitability of price discrimination across product lines of different qualities, by increasing the likelihood consumers choose high price products among products yielding the same utility. We show that the number of varieties offered by the monopolist is greater than the social optimum. The predictions of the model are supported by an analysis of the market for cars. A wide range of car manufacturers are found to offer a hump-shaped distribution of varieties.
    Keywords: Price discrimination; product variety; bounded rationality; cars.
    JEL: L11 L62 D8 L15 D4
    Date: 2009–02–02
  5. By: Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: This paper compares equilibrium technology adoption in a differentiated duopoly under two alternative modes of product market competition, Cournot and Bertrand. It shows that the cost of technology has differential impact on technology adoption, that is, on cost-efficiency of the industry, under two alternative modes of product market competition. The possibility of ex post cost asymmetry between firms is higher under Bertrand competition than under Cournot competition. If the cost of technology is high, Bertrand competition leads to higher cost-efficiency than Cournot competition provided that the cost reducing effect of the technology is high. On the other hand, if the technology reduces the marginal cost of production by a very low amount, Cournot competition may lead to higher cost-efficiency than Bertrand competition.
    Keywords: Differentiated duopoly, limit-pricing, price effect, selection effect, technology adoption
    JEL: L13 L11 O31 D43
    Date: 2009–01
  6. By: Zhou, Jidong
    Abstract: This paper presents an ordered search model in which consumers search both for price and product fitness. We show that there is price dispersion in equilibrium and prices rise in the order of search. The top firms in consumer search order, though charge lower prices, earn higher profits due to their larger market shares.
    Keywords: non-random search; price dispersion; product differentiation
    JEL: L13 D83 D43
    Date: 2009–02–13
  7. By: Vives, Xavier (IESE Business School)
    Abstract: A Bayesian supply function equilibrium is characterized in a market where firms have private information about their uncertain costs. It is found that with supply function competition, and in contrast to Bayesian Cournot competition, competitiveness is affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Furthermore, competition in supply functions aggregates the dispersed information of firms (the equilibrium is privately revealing) while Cournot competition does not. The implication is that with the former the only source of deadweight loss is market power while with the latter we have to add private information. As the market grows large the equilibrium becomes competitive and we obtain an approximation to how many competitors are needed to have a certain degree of competitiveness.
    Keywords: imperfect competition; adverse selection; competitiveness; rational expectations; collusion; welfare;
    JEL: D44 D82 L13 L94
    Date: 2008–11–09
  8. By: María Fernanda Viecens
    Abstract: This paper offers a model of a two-sided platform to inspect how competition and prices in the seller side affect the platform’s behavior, incentives and profits. When setting prices, sellers may be constrained by one of two margins: the demand margin and the competition margin. According to the competition margin a seller sets its price equal to the marginal contribution to the users utility. However, a seller may set a lower price because it also has to take into account the demand margin: a higher price reduces the overall demand for the platform and the sellers. This central result is used to compare the efficiency of vertical integration and the private incentives to partially integrate. Several interesting insights are obtained; in particular, the model can explain the tendency of firms which operate software platforms to integrate with so-called killer applications. The paper also shows that the platform has an instrument to profitable affect sellers’ prices and to induce the margin that will bind. It is proved that the degree of competition among sellers is a crucial factor determining profitability of the platform.
    Date: 2009–02
  9. By: Oliver Budzinski (Department of Environmental and Business Economics, University of Southern Denmark, Campus Esbjerg); Jürgen-Peter Kretschmer (Economic Policy Unit, Philipps-University of Marburg)
    Abstract: Standard welfare analysis of horizontal mergers usually refers to two effects: the anticompetitive market power effect reduces welfare by enabling firms to charge prices above marginal costs, whereas the procompetitive efficiency effect increases welfare by reducing the costs of production (synergies). However, demand-side effects of synergies are usually neglected. We introduce them into a standard oligopoly model of horizontal merger by assuming an (empirically supported) decrease in labour demand due to merger-specific synergies and derive welfare effects. We find that efficiency benefits from horizontal mergers are substantially decreased, if involuntary unemployment exists. However, in full employment economies, demand-side effects remain negligible. Eventually, policy conclusions for merger control are discussed.
    Keywords: horizontal mergers, involuntary unemployment, efficiency defense, oligopoly, competition
    JEL: L13 L41 J01 L16
    Date: 2009
  10. By: Poonam Mehra (Indira Gandhi Institute of Development Research; Indira Gandhi Institute of Development Research)
    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. We show that in general an increase in asymmetry across firms reduces the possibility of conflict between jurisdictions over merger review decisions. We also show that possibility of conflict increase with the increase in market asymmetries across countries. We also discuss interaction of asymmetry in firm and market size with the distribution of firms across countries and its effect on the possibilities of conflict.
    Keywords: Conflict, Cross border mergers, Firm size, Market Size
    JEL: F51 L11 L40
    Date: 2008–12
  11. By: Campa, Jose M. (IESE Business School); Moschieri, Caterina (IESE Business School)
    Abstract: This paper provides a comprehensive overview of the process of European mergers and acquisitions. We characterize the main features of M&A activity in Europe in the period 2001-2007. We review the process of M&A regulatory integration and patterns of activity. Most European M&As still take place among domestic firms, although cross-border transactions are larger in value and have been slightly increasing, especially in regulated industries. Transactions are likely to be friendly, partially negotiated via public tender offers and private deals, and paid in cash, especially for smaller deals. Competing bids are still fairly rare and less likely to be completed. Target shareholders obtain an average premium of around 20% and this premium is slightly declining with deal size. Regulatory differences are large, particularly in the application of takeover regulations, and uncertainty persists in the predictability of the national regulatory agencies.
    Keywords: European cross-border; domestic merger; acquisitions; M&A trends;
    Date: 2008–09–03
  12. By: Dennis W. Carlton
    Abstract: In this article, I explain the inadequacy of our current state of knowledge regarding the effectiveness of antitrust policy towards mergers. I then discuss the types of data that one must collect in order to be able to perform an analysis of the effectiveness of antitrust policy. There are two types of data one requires in order to perform such an analysis. One is data on the relevant market pre and post merger. The second is data on the specific predictions of the government agencies about the market post-merger. A key point of this article is to stress how weak an analysis of only the first type of data is. The frequent call for retrospective studies typically envisions relying on just this type of data, but the limitations on the analysis are not well understood. As I explain below, retrospective studies that ask whether prices went up post merger are surprisingly poor guides for analyzing merger policy. It is only when the second type of data is combined with the first type that a reliable analysis of antitrust policy can be carried out. There is a need both to collect the necessary data and to analyze it correctly.
    JEL: C01 K21 L10 L4 L41
    Date: 2009–02
  13. By: Chongwoo, Choe; Shekhar, Chander
    Abstract: We compare the prevailing system of compulsory pre-merger notification with the Australian system of voluntary pre-merger notification. It is shown that, for a non-trivial set of parameter values, a perfect Bayesian equilibrium exists in mixed strategies in which the regulator investigates un-notified mergers with probability less than one and the parties choose notification with probability less than one. Thanks to the signaling opportunity that arises when notification is voluntary, voluntary notification leads to lower enforcement costs for the regulator and lower notification costs for the merging parties. Some of the theoretical predictions are supported by exploratory empirical tests using merger data from Australia. Overall, our results suggest that voluntary merger notification may achieve objectives similar to those achieved by compulsory systems at lower costs to the merging parties as well as to the regulator.
    Keywords: Merger regulation; pre-merger notification; abnormal returns
    JEL: D21 G34 K21 L40
    Date: 2009–02
  14. By: Leonce L. Bargeron; Frederik P. Schlingemann; René M. Stulz; Chad J. Zutter
    Abstract: CEOs have a potential conflict of interest when their company is acquired: they can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. We investigate the determinants of target CEO retention by the acquirer and whether target CEO retention affects the premium paid by the acquirer. The probability that a CEO is retained increases with a private bidder, the performance of the target, and with the fraction of target shares held by insiders. Regardless of the bidder type, we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for management buyouts.
    JEL: G30 G34
    Date: 2009–02
  15. By: Gijsbert Zwart
    Abstract: The European natural gas market is characterized by declining indigenous resources, particularly in the UK and the Netherlands, and a growing dependence on a small number of large exporters who, as a consequence, see their market power increasing.<br> In this paper we analyze long-run scenarios for the European natural gas markets in a model, NATGAS, that explicitly includes both factors, resource constraints and producers’ market power. <br> We analyze the impact of conditions on the global LNG market on market shares of pipeline gas suppliers, as well as on the speed of depletion of indigenous European resources. We focus on how shadow prices of resource constraints affect substitution patterns in the various scenarios.
    Keywords: European natural gas market; complementarity model; market power; resource rent
    JEL: C61 L13 Q31
    Date: 2008–12
  16. By: Adrien de Hauteclocque; Jean-Michel Glachant
    Abstract: Long-term supply contracts often have ambiguous effects on the competitive structure, investment and consumer welfare in the long term. In a context of market building, these effects are likely to be worsened and thus even harder to assess. Since liberalization and especially since the release of the Energy Sector Enquiry in early 2007, the portfolio of long-term supply contracts of the former incumbents have become a priority for review by the European Commission and the national competition authorities. It is widely believed that European Competition authorities take a dogmatic view on these contracts and systemically emphasize the risk of foreclosure over their positive effects on investment and operation. This paper depicts the methodology that has emerged in the recent line of cases and argues that this interpretation is largely misguided. It shows that a multiple-step approach is used to reduce regulation costs and balance anti-competitive effects with potential efficiency gains. However, if an economic approach is now clearly implemented, competition policy is constrained by the procedural aspect of the legal process and the remedies imposed remain open for discussion.
    Date: 2008–11
  17. By: Olli Kauppi; Matti Liski
    Abstract: The Nordic power market presents a unique opportunity for testing the nature and degree of market power in storage behavior due to preciseness of data on market fundamentals determining hydro resource use. We develop an explicit model of dynamic imperfect competition mapping the primitive distributions to market outcomes as a function of the market structure. We estimate the market structure that best explains the main behavioral patterns in pricing, storage, and production in years 2000-05. Exceptional events in the data allow us to identify a pattern for market power. We simulate the expected effiency loss from the pattern and limited scope for social losses. Market power however increases expected reservoir and price levels, and also implies an increase in price risk.
    Date: 2008–09
  18. By: Paul W. Dobson (Business School, Loughborough University.); Claudio A. Piga (Department of Economics, Loughborough University)
    Abstract: This paper examines mergers that lead to an almost immediate replacement of the target firm’s business model in favor of that of the acquiring firm. We examine the post-merger behavior of the two leading European dedicated low-cost airlines, EasyJet and Ryanair, each acquiring another low-cost airline, respectively Go Fly and Buzz. We find that both takeovers had an immediate and sustained impact on both the pricing structures and the extent of inter-temporal price schedules used on the acquired routes, with early booking fares noticeably reduced and only very late booking fares increased. The analysis suggests that the takeovers had a net beneficial effect as a consequence of the introduction of the acquiring firms’ business models and associated yield management pricing systems. .
    Keywords: merger policy; Business model; Low-cost airline; Price discrimination; Yield management .
    JEL: L11 L13 L93
    Date: 2009–02
  19. By: Andrés Fuentes
    Abstract: Measures to make the regulation of product markets more conducive to competition play a prominent role in the governments “growth package” of measures to stimulate economic growth which are in the process of being implemented. This paper discusses these measures and suggests further improvements. Notwithstanding significant reforms in recent years, competition law and its enforcement are still weaker than in other OECD countries. Scope for making regulation of product markets more competition-friendly is large in the network industries. While sector-specific regulators have been introduced, their independence needs to be strengthened. The reform of the electricity supply law provides the main building block opening the industry to competition, but vertical separation requirements of the electricity grid from electricity generation and trading activities need to be strengthened. In telecommunications, restrictions in access of competitors to the local loop limit the scope for lowering prices and improving quality of service in broadband connections. Measures still need to be taken to prevent discrimination against market entrants in the railway passenger services market and much scope exists to widen competition in postal services. Progress in lowering the degree of protection in the proposed legislation on agricultural policy 2007-11 is modest. Trade barriers can also be lowered for manufactured goods through the adoption of the Cassis de Dijon principle.<P>Réformes pour ouvrir à la concurrence les secteurs abrités en Suisse<BR>Les mesures visant à rendre la réglementation des marchés de produits plus propice à la concurrence occupent une place de premier plan dans le « programme de croissance » destiné à stimuler l'expansion économique, dont la mise en oeuvre a commencé. Le présent chapitre examine les mesures figurant dans ce programme et propose de nouvelles améliorations. Malgré les importantes réformes opérées ces dernières années, la Suisse est encore à la traîne des autres pays de l'OCDE du point de vue du droit de la concurrence et de son application. Beaucoup reste à faire dans les industries de réseau pour rendre la réglementation des marchés de produits plus favorable à la concurrence. Des autorités de régulation sectorielles ont été mises en place mais elles ont besoin d'une plus grande indépendance. La réforme de la législation relative à la fourniture d'électricité jette les bases de l'ouverture de ce secteur à la concurrence, mais séparation verticale plus stricte est nécessaire entre le réseau de transport et les activités de production et de commercialisation. Dans le secteur des télécommunications, les restrictions d'accès des concurrents à la boucle locale limitent les possibilités de baisse des prix et d'amélioration de la qualité du service dans le haut débit. Il y a encore des mesures à prendre afin d'éviter la discrimination à l'encontre des entrants sur le marché des services de transport ferroviaire de passagers et beaucoup reste à faire pour élargir la concurrence dans les services postaux. La législation sur la politique agricole proposée pour la période 2007-11 ne marque qu'un léger progrès en matière de réduction de la protection. L'adoption du principe « Cassis de Dijon » pourrait aussi contribuer à abaisser les obstacles au commerce des produits manufacturés.
    Keywords: Suisse, network industries, industrie de réseau, competition, privatisation, concurrence, privatisation, competition law, productivity and growth, droit de la concurrence, productivité globale et croissance, agriculture, agriculture, regulatory policies, politique de régulation
    JEL: K21 K23 L16 L40 L43 L51 L53 O52 Q3
    Date: 2009–02–17

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