nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒03‒14
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. The Deep Pocket Effect of Internal Capital Markets By Boutin, Xavier; Cestone, Giacinta; Fumagalli, Chiara; Pica, Giovanni; Serrano-Velarde, Nicolas
  2. Herding versus Hotelling: Market Entry with Costly Information By David B. Ridley
  3. The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition By Uwe Dulleck; Rudolf Kerschbamer; Matthias Sutter
  4. Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model By James J. Anton; Gary Biglaiser
  5. A Price Theory of Vertical and Lateral Integration By Legros, Patrick; Newman, Andrew
  6. Making Sense of Non-Binding Retail-Price Recommendations By Stefan Bühler; Dennis L. Gärtner
  7. Collusion Sustainability with Multimarket Contacts: Revisiting HHI Tests By Edmond Baranes; Francois Mirabel; Jean-Christophe Poudou
  8. R&D Productivity and Intellectual Property Rights Protection Regimes By Joanna Poyago-Theotoky; Khemarat Talerngsri Teerasuwannajak
  9. Pros and Cons of ‘Backing Winners’ in Innovation Policy By Frank A.G. den Butter; Seung-gyu Jo
  10. The joint estimation of firm-level market power and efficiency By Delis, Manthos D; Tsionas, Efthymios
  11. "Assessing the Consequences of a Horizontal Merger and its Remedies in a Dynamic Environment" By Isao Ishida; Toshiaki Watanabe
  12. On the Relationship between Market Concentration and Bank Risk Taking By Kaniska Dam; Marc Escrihuela-Villar; Santiago Sánchez-Pagés
  13. Market Structure, Capital Regulation and Bank Risk Taking By Patrick Behr; Reinhard H. Schmidt; Ru Xie
  14. Competitive conditions in the Central and Eastern European banking systems By Delis, Manthos D
  15. Milk Marketing Order Winners and Losers By Hayley H. Chouinard; David E. Davis; Jeffrey LaFrance; Jeffrey M. Perloff
  16. Exchange-Rate Misalignments in Duopoly: The Case of Airbus and Boeing By Agnès Bénassy-Quéré; Lionel Fontagné; Horst Raff
  17. Improving competition in the non-tradable goods and labour markets: the Portuguese case By Mourinho Félix, Ricardo; Almeida, Vanda; Castro, Gabriela
  18. Changes in Industrial Concentration in the Croatian Economy (1995-2006) By Darko Tipurić; Mirjana Pejić Bach
  19. Estructura de Mercado, Condiciones de Entrada y Número Óptimo de Bancos en el Sistema Bancario Boliviano: Una Aproximación de Indicadores de Concentración y Movilidad Intra-industrial By Gonzales-Martínez, Rolando

  1. By: Boutin, Xavier; Cestone, Giacinta; Fumagalli, Chiara; Pica, Giovanni; Serrano-Velarde, Nicolas
    Abstract: This paper provides evidence that incumbents' access to group deep pockets has a negative impact on entry in product markets. Relying on a unique French data set on business groups, the paper presents three major findings. First, consistent with theoretical predictions, the amount of financial resources owned by incumbent-affiliated groups has a negative impact on entry in a market. This suggests that internal capital markets operate within corporate groups and that they have a potential anti-competitive effect. Second, the impact on entry of group financial strength is more important in markets where access to external funding is likely to be more difficult. Third, the more active are internal capital markets, the more pronounced the effect on entry of group deep pockets.
    Keywords: Business Groups; Deep-Pockets; Internal Capital Markets; Market Entry
    JEL: G30 L13 L40
    Date: 2009–02
  2. By: David B. Ridley
    Date: 2009–03–12
  3. By: Uwe Dulleck; Rudolf Kerschbamer; Matthias Sutter
    Abstract: Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated.
    Keywords: Credence goods, Experiment, Liability, Verifiability, Reputation, Competition
    JEL: C72 C91 D40 D82
    Date: 2009–02
  4. By: James J. Anton; Gary Biglaiser
    Date: 2009–03–12
  5. By: Legros, Patrick; Newman, Andrew
    Abstract: We construct a price-theoretic model of firms' integration decisions under perfect competition and study their interplay with consumer demand and welfare. Integration is costly to implement but is effective at coordinating production decisions. The price of output influences the ownership structure chosen: there is an inverted-U relation between the degree of integration and product price. Ownership in turn affects output: integration is more productive than non-integration at low prices, and less productive at high prices. If the managers deciding organizational design have full claim to firm revenues, market equilibrium ownership choices will be second-best efficient. When managers have less than a full claim on profits, however, total welfare may sometimes be increased by a social planner who could force some firms to reorganize. The price mechanism tends to correlate reorganizations across firms and generates external effects of technological shocks: productivity changes in some firms may have little effect on their own organization, while inducing changes of ownership in the rest of the industry. Terms of trade in supplier markets also affect ownership structure; entry of low-cost suppliers may induce reorganizations that raise prices. The model can generate coexistence of different ownership structures, even among ex-ante identical firms.
    Keywords: decision rights; incomplete contracts; integration; ownership; price theory
    JEL: D21 D41 D86
    Date: 2009–03
  6. By: Stefan Bühler; Dennis L. Gärtner
    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 surplusmaximizing 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
  7. By: Edmond Baranes; Francois Mirabel; Jean-Christophe Poudou
    Abstract: Our paper focuses on the relationship between market concentration and collusion sustainability in a framework of multimarket contacts. We consider two independent and symmetric markets in which a subset of firms are active in both markets. When firms are able to transfer market power from one market to another, firms have strong incentives to collude even in a highly competitive market. This result is relevant for competition policy since assessing market concentration using HHI index could be misleading in some situations.
    Date: 2009–03
  8. By: Joanna Poyago-Theotoky (Department of Economics, Loughborough University and RCEA); Khemarat Talerngsri Teerasuwannajak (Faculty of Economics, Chulalongkorn University)
    Abstract: We study firms' preferences towards intellectual property rights (IPR) regimes in a North-South context, using a simple duopoly model where a 'North' and a 'South' firm compete in a third market. Unlike other contributions in this field, we explicitly introduce the South's capability to undertake cost-reducing R&D, but maintain the South's inferiority in utilizing and managing its R&D. In contrast to traditional results, we show that the North may encourage lax IPR protection provided that its South rival's R&D productivity is sufficiently high, while the South may find it in its best interest to strictly enforce IPR protection if its R&D productivity is low. In this sense, our results do not support the idea of universal or uniform IPR protection regime. In addition, we find that if firms are allowed to agree on any level of information exchange when IPR protection is strictly enforced, such an exchange can always be established as long as each firm is ensured that what it gets to utilize in return is greater than a half of what it gives to its rival.
    Keywords: intellectural property rights (IPRs), cost-reducing R&D, R&D productivity, information exchange.
    JEL: O34 F13 O32 O38 L13 D43
    Date: 2009–03
  9. By: Frank A.G. den Butter (VU University Amsterdam); Seung-gyu Jo (VU University Amsterdam)
    Abstract: In the economics profession there is a fierce debate whether industrial and innovation policy should be targeted to specific sectors or firms. This paper discusses the welfare effects of such targeted policies from the perspective of strategic game theory of the firm. A theoretical case for picking winners through a preferential innovative policy is discussed in a third-market international trade model, which is shown to hold without evoking retaliation from foreign competitors. However, in practice information uncertainties remain a concern. The question whether in this case ‘backing winners’ is a wise policy option depends on the characteristics of the information asymmetries and on the extent the government is able to design selection procedures which minimize the transaction costs that may be caused from the market participants’ opportunistic behavior.
    Keywords: Innovation policy; R&D subsidies; strategic trade policy; asymmetric information; spill-over effects
    JEL: C73 F12 O24 O32
    Date: 2009–02–17
  10. By: Delis, Manthos D; Tsionas, Efthymios
    Abstract: The aim of this study is to provide a methodology for the joint estimation of efficiency and market power of individual banks. The proposed method utilizes the separate implications of the new empirical industrial organization and the stochastic frontier literatures and suggests identification using the local maximum likelihood (LML) technique. Through LML, estimation of market power of individual banks becomes feasible, while a number of restrictive theoretical and empirical assumptions are relaxed. The empirical analysis is carried out on the basis of EMU and US bank data and the results suggest small differences in the market power and efficiency levels of banks between the two samples. Market power estimates indicate fairly competitive conduct in general; however, heterogeneity in market power estimates is substantial across banks within each sample. The latter result suggests that while the banking industries examined are fairly competitive in general, the practice of some banks deviates from the average behavior, and this finding has important policy implications. Finally, efficiency and market power present a negative relationship, which is in line with the so-called “quiet life hypothesis”.
    Keywords: Efficiency; market power; local maximum likelihood
    JEL: L11 C14 G21
    Date: 2009–01–07
  11. By: Isao Ishida (Faculty of Economics and Graduate School of Public Policy, University of Tokyo); Toshiaki Watanabe (Institute of Economic Research, Hitotsubashi University)
    Abstract: This paper estimates a dynamic oligopoly model to assess the economic consequences of a horizontal merger that took place in 1970 to create the second largest global producer of steel. The paper solves a Markov perfect Nash equilibrium for the model and simulates the welfare effects of the horizontal merger. Estimates reveal that the merger enhanced the production efficiency of the merging party by a magnitude of 4.1 %, while the exercise of market power was restrained primarily by the presence of fringe competitors. Our simulation result also indicates that structural remedies endorsed by the competition authority failed to promote competition. model.
    Date: 2009–01
  12. By: Kaniska Dam (CIDE); Marc Escrihuela-Villar (Universitat de les Illes Balears); Santiago Sánchez-Pagés (Edinburgh School of Economics)
    Abstract: We analyse risk-taking behaviour of banks in the context of spatial competition. Banks mobilise unsecured deposits by offering deposit rates, which they invest either in a prudent or in a gambling asset. Limited liability along with high return of a successful gamble induce moral hazard at the bank level. We show that when the market concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, all banks choose the prudent asset to invest in. We further show that a merger of two neighboring banks increases the likelihood of prudent behaviour. Finally, introduction of a deposit insurance scheme exacerbates banks’ moral hazard problem.
    Keywords: Market concentration; Bank mergers; Risk-taking
    JEL: G21 L11 L13
    Date: 2009
  13. By: Patrick Behr; Reinhard H. Schmidt; Ru Xie
    Abstract: This paper discusses the effect of capital regulation on the risk taking behaviour of commercial banks. We first theoretically show that capital regulation works differently in different market structures of banking sectors. In lowly concentrated markets, capital regulation is effective in mitigating risk taking behavior because banks' franchise values are low and banks have incentives to pursue risky strategies in order to increase their franchise values. If franchise values are high, on the other hand, the effect of capital regulation on bank risk taking is ambiguous as banks lack those incentives. We then test the model predictions on a cross-country sample including 421 commercial banks from 61 countries. We find that capital regulation is effective in mitigating risk taking only in markets with a low degree of concentration. The results remain robust after accounting for financial sector development, legal system efficiency, and for other country and bank-specific characteristics.
    Keywords: Banks, market structure, risk shifting, franchise value, capital regulation
    JEL: G21 G28
    Date: 2008–06
  14. By: Delis, Manthos D
    Abstract: The aim of this study is to conduct a large-scale empirical analysis of the competitive conditions in the banking systems of Central and Eastern European countries. The well-known model of Panzar and Rosse (1987) is implemented on bank-level data over the period 1999-2006. The estimates based on the separate country panels suggest a wide variation in the competitive conditions of the banking systems examined, with some being characterized as (monopolistically) competitive and other as non-competitive. Finally, the results from the full sample indicate that bank revenue is substantially influenced by structural and macroeconomic conditions.
    Keywords: Market power; Central and Eastern European banks; Panzar-Rosse model
    JEL: D20 C33 G21
    Date: 2008–12–31
  15. By: Hayley H. Chouinard; David E. Davis; Jeffrey LaFrance; Jeffrey M. Perloff (School of Economic Sciences, Washington State University)
    Abstract: Determining the impacts on consumers of government policies affecting the demand for food products requires a theoretically consistent micro-level demand model. We estimate a system of demands for weekly city-level dairy product purchases by nonlinear three stage least squares to account for joint determination between quantities and prices. We analyze the distributional effects of federal milk marketing orders, and find results that vary substantially across demographic groups. Families with young children suffer, while wealthier childless couples benefit. We also find that households with lower incomes bear a greater regulatory burden due to marketing orders than those with higher income levels.
    Keywords: Milk, marketing orders, dairy industry regulation
    JEL: Q1 D12 E21
    Date: 2008–12
  16. By: Agnès Bénassy-Quéré; Lionel Fontagné; Horst Raff
    Abstract: We examine the effect of exchange-rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar-denominated prices while one of them, Airbus, incurs costs mostly in euros. We construct and calibrate a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment, and how this affects profit margins and volumes. We also explore the effects on the long-run dynamics of competition. We conclude that due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange-rate fluctuations on to customers through higher prices. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning-by-doing, even a temporary departure of the exchange rate from its long-run equilibrium level may have permanent effects on the industry
    Keywords: exchange rates, pass-through, oligopoly
    JEL: F31 L13
    Date: 2009–02
  17. By: Mourinho Félix, Ricardo; Almeida, Vanda; Castro, Gabriela
    Abstract: This study assesses the macroeconomic impacts of increasing competition in the non-tradable goods and labour markets in Portugal. We lean on evidence that the maintenance of low competition in these markets may have contributed to the recent poor performance of the Portuguese economy. The analysis is performed using PESSOA, a dynamic general equilibrium model for a small-open economy integrated in a monetary union, featuring Blanchard-Yaari households, a multi-sectoral production structure and a number of nominal and real rigidities. We conclude that measures aimed at increasing competition in the Portuguese non-tradable goods and labour markets could induce important international competitiveness gains and be valuable instruments in promoting necessary adjustments within the monetary union framework. However, in the short run, real interest rates are likely to increase temporarily, driving consumption and output temporarily downwards.
    Keywords: competition; competitiveness; DSGE; small-open economy; Portugal
    JEL: F16 E2 E6 F41
    Date: 2008–09–25
  18. By: Darko Tipurić (Faculty of Economics and Business, University of Zagreb); Mirjana Pejić Bach (Faculty of Economics and Business, University of Zagreb)
    Abstract: The aim of this paper is to obtain a better understanding of differences and dynamics of concentration across various industries in the Croatian economy in the period 1995-2006 in order to be able to foresee future trends. Shifts in concentration vary across industries in the Croatian economy. Concentration declines in approximately two fifths of the Croatian economy whereas one fifth of the Croatian economy shows a growing trend in concentration. In the remaining industries no changes in concentration occurred. The causes of concentration are as follows: (1) decline in concentration due to inadequate adjustments of leading firms to transition, (2) decline in concentration due to deregulation, (3) increase in concentration in industries targeted by multinational companies, and (4) increase in concentration in industries in which no significant new firms emerged following the unsuccessful privatization of leading firms.
    Keywords: concentration, industry, transition
    JEL: L12 L13 L16
    Date: 2009–02–22
  19. By: Gonzales-Martínez, Rolando
    Abstract: This paper calculates indicators of market structure: concentration ratio, Herfindahl index, Herfindahl-Hirschman index, inverse of the Herfindahl index and the stability indicator. These indicators are used: (1) to measure indirectly the competitiveness of the bank market, (2) to define conditions of entrance of new banks to the market, and (3) to establish a criterion to estimate the optimal number of banks in the market.
    Keywords: indicadores de concentración; estructura de mercado; número óptimo de bancos
    JEL: G38 L10 G21
    Date: 2008–11

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