nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒03‒22
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Market Sharing and Price Leadership By Farm, Ante
  2. Pricing, Investments and Mergers with Intertemporal Capacity Constraints By Charalambos Christou; Rossitsa Kotseva; Nikolaos Vettas
  3. Product Variety, Price Elasticity of Demand and Fixed Cost in Spatial Models By Yiquan Gu; Tobias Wenzel
  4. Strategic Information Disclosure and Competition for an Imperfectly Protected Innovation By Jos Jansen
  5. The Deep-Pocket Effect of Internal Capital Markets By Xavier Boutin; Giacinta Cestone; Chiara Fumagalli; Giovanni Pica; Nicolas Serrano-Velarde
  6. The Economics of Credence Goods: On the Role of Liability, Verifiability, Reputation and Competition By Uwe Dulleck; Rudolf Kerschbamer; Matthias Sutter
  7. The Entrepreneurial Adjustment Process in Disequilibrium: Entry and Exit when Markets Under and Over Shoot By Andrew Burke; Andre van Stel
  8. Generating Evidence to Guide Merger Enforcement By Orley C. Ashenfelter; Daniel Hosken; Matthew Weinberg
  9. Competition Law, Cartel Enforcement & Leniency Program By Samà, Danilo
  10. "When Should Manufacturers Want Fair Trade?": New Insights from Asymmetric Information By Jakub Kastl; David Martimort; Salvatore Piccolo
  11. Fair Trade Contracts for Some, an Insurance for Others By Claire Chambolle; Sylvaine Poret
  12. Anti-Competitive Effects of resale-Below-Cost Laws By Marie-Laure Allain; Claire Chambolle
  13. The Effects of Retail Regulations on Prices: Evidence from the Loi Galland By Pierre Biscourp; Xavier Boutin; Thibaud Vergé
  14. On the measurement of market power in the banking industry By Delis, Manthos D; Staikouras, Christos; Varlagas, Panagiotis
  15. Platform Standards, Collusin and Quality Incentives By Claudia Salim
  16. The Impact of Firm Size and Market Size Asymmetries on National Mergers in a Three-Country Model By Luís Santos-Pinto
  17. A Theory of Corporate Social Responsibility in Oligopolistic Markets By Claudia Alves; Luís Santos-Pinto

  1. By: Farm, Ante (Swedish Institute for Social Research, Stockholm University)
    Abstract: This paper proposes an alternative to the traditional model of supply and demand in markets where consumers take prices as given. Within the framework of “no side payments and partial preplay communication” firms are assumed to decide non-cooperatively on production and marketing while the market price is set by a competitive price leader, i.e. a firm preferring the lowest market price. Predictions include excess supply and a revenuemaximizing market price in markets where production precedes sales. In markets where sales precede production competitive price leadership predicts monopoly pricing but not necessarily monopoly profits if firms are “sufficiently similar”, while the presence of firms with high costs or low capacities will make it possible for the price leader, in some circumstances, to increase its market share and also its profits by reducing its price. And the threat of costly competition for market shares may reduce the market price even for identical firms.
    Keywords: Pricing; oligopoly; price leadership; market sharing
    JEL: L13
    Date: 2009–03–12
  2. By: Charalambos Christou (Department of Economics, University of Macedonia); Rossitsa Kotseva (Department of Economics, University of Cyprus); Nikolaos Vettas (Department of Economics, Athens University of Economics and Business)
    Abstract: On tWe set up a duopoly model with dynamic capacity constraints under demand uncertainty. We endogenize the investment decisions of the ?rms, examine their intertemporal pricing behavior, their incentives to merge, as well as the welfare implications of a merger. Whereas under known and constant demand the high capacity ?rm lets its low capacity rival sell out, under demand uncertainty we obtain a rich set of sales patterns. Each unit of available capacity has an option value (or opportunity cost), which depends on both ?rms? capacities, the current demand and the remaining horizon. This option value may be higher when the ?rms act non-cooperatively compared to the case when they merge to form a monopoly. Trade surplus may be higher when a merger takes place, as capacity is more e? ciently managed over time. The prospect of a merger also leads to higher investment levels, as each ?rm wishes to appropriate a higher share of the total surplus. For some levels of the capacity installment cost, a merger that turns the duopoly into a monopoly is welfare improving.
    Keywords: dynamic oligopoly, price competition, capacity constraints, inventories, mergers.
    JEL: D43 L13 L22
    Date: 2009–03
  3. By: Yiquan Gu; Tobias Wenzel
    Abstract: This paper explores the implications of price-dependent demand in spatial models of product differentiation.We introduce consumers with a quasi-linear utility function in the framework of the Salop (1979) model.We show that the so-called excess entry theorem relies critically on the assumption of completely inelastic demand. Our model is able to produce excessive, insufficient, or optimal product variety.A proof for the existence and uniqueness of symmetric equilibrium when price elasticity of demand is increasing in price is also provided.
    Keywords: Demand elasticity, spatial models, excess entry theorem
    JEL: L11 L13
    Date: 2009–03
  4. By: Jos Jansen (Max Planck Institute for Research on Collective Goods)
    Abstract: The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free-rider effect in the competition for the innovation that countervails the familiar business-stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms.profits and the probability of innovation.
    Keywords: R&D competition, innovation, spillovers, information disclosure, strategic substitutes, free-rider effect, externality
    JEL: D82 D83 L23 O31 O32
    Date: 2009–02
  5. By: Xavier Boutin (CREST(LEI) and European Commission (DG Competition - Chief Economist Team); Giacinta Cestone (Queen Mary University of London, CSEF, CEPR and ECGI); Chiara Fumagalli (Università Bocconi, CSEF and CEPR); Giovanni Pica (Università di Salerno and CSEF); Nicolas Serrano-Velarde (European University Institute, Florence)
    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, Internal Capital Markets, Deep-Pockets, Market Entry
    Date: 2009–03–10
  6. By: Uwe Dulleck (QUT); Rudolf Kerschbamer (University of Innsbruck); Matthias Sutter (University of Innsbruck and University of Gothenburg)
    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.
    Date: 2009–03–02
  7. By: Andrew Burke; Andre van Stel
    Abstract: The main contribution of entrepreneurship theory to economics is to provide an account of market performance in disequilibrium but little empirical research has examined firm entry and exit in this context. We redress this by modelling the interrelationship between firm entry and exit in disequilibrium. Introducing a new methodology we investigate whether this interrelationship differs between market ‘undershooting’ (the actual number of firms is below the equilibrium number) and ‘overshooting’ (vice versa). We find that equilibrium-restoring mechanisms are faster in over than in undershoots. The results imply that in undershoots a lack of competition between incumbent firms contributes to restoration of equilibrium (creating room for new-firm entry) while in overshoots competition induced by new firms (in particular strong displacement) helps restore equilibrium.
    Keywords: entry, exit, equilibrium, industrial organization, undershooting, overshooting
    JEL: B50 J01 L00 L1 L26
    Date: 2009–01
  8. By: Orley C. Ashenfelter; Daniel Hosken; Matthew Weinberg
    Abstract: The challenge of effective merger enforcement is tremendous. U.S. antitrust agencies must, by statute, quickly forecast the competitive effects of mergers that occur in virtually every sector of the economy to determine if mergers can proceed. Surprisingly, given the complexity of the regulators task, there is remarkably little empirical evidence on the effects of mergers to guide regulators. This paper describes the necessity of retrospective analysis of past mergers in building an empirical basis for antitrust enforcement, and provides guidance on the key measurement issues researchers confront in estimating the price effects of mergers. We also describe how evidence from merger retrospectives can be used to evaluate the economic models used to predict the competitive effects of mergers.
    JEL: K21 L1 L4
    Date: 2009–03
  9. By: Samà, Danilo
    Abstract: The present assessment focuses the attention on the antitrust action in detecting and fighting oligopolistic collusion, analyzing the development of the innovative and modern leniency policy. Following the examination of the main conditions and reasons for cartel stability and sustainability, our attempt is to comprehend under which circumstances leniency program represents a functional and successful tool for preventing the formation of anti-competitive agreements. The problem statement that follows is therefore: how can Law&Economics approach help competition authorities to achieve and realize this form of enforcement?
    Keywords: Antitrust Cartels Enforcement Game Theory Leniency Program Oligopolistic Markets
    JEL: L5 L16 C7 K21 L1
    Date: 2008–12–01
  10. By: Jakub Kastl (Stanford University); David Martimort (Toulouse School of Economics); Salvatore Piccolo (University of Naples "Federico II", CSEF and Toulouse School of Economics,)
    Abstract: We revisit the Chicago School argument, advocating for the lawfulness of resale price restrictions, in a setting of competing manufacturer-retailer pairs with both adverse selection and moral hazard. A "laissez-faire" approach towards vertical price control might harm consumers when privately informed retailers impose non-market externalities on each other. We show that letting manufacturers free to control retail prices harms consumers as long as retailers impose positive non-market externalities on each other, and that the converse is true otherwise. In contrast to previous work, we show that, in these instances, consumers' and suppliers' preferences over contractual choices are not always aligned. These results underscore the scarce appeal of per se rules and predict circumstances where retail price restrictions should be forbidden.
    Keywords: Competing hierarchies, resale price maintenance, retail externalities
    JEL: D2 D23 D82 K21
    Date: 2009–03–12
  11. By: Claire Chambolle (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, INRA - ALISS); Sylvaine Poret (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, INRA - ALISS)
    Abstract: This article analyzes the impact of Fair Trade contracts between sub-groups of farmers and a Fair Trade organization on the spot market price. We analyze a three level vertical chain gathering perfectly competitive farmers upstream who offer their raw product on a spot market to manufacturers who then sell finished products to a downstream retailer. Absent Fair Trade, the entire raw product is sold on the spot market. When a Fair Trade organization offers a Fair Trade contract to a sub-group of farmers, it gathers a Guaranteed Minimum Price clause and a straight relationship between the sub-group of farmers and the retailer. This article highlights several conditions such that a snowball effect exists, i.e farmers outside of the Fair Trade contract also benefit from a higher spot market price.
    Keywords: Guaranteed Minimum Price Contracts, Disintermediation, Fair Trade, Vertical Chain, Two-part Tariff Contracts
    Date: 2009–03–11
  12. By: Marie-Laure Allain (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Claire Chambolle (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, INRA - LORIA)
    Abstract: We show that resale-below-cost laws enable producers to impose industry-wide price-floors to retailers. This mechanism suppresses downstream competition but also and more surprisingly dampens upstream competition, leading to higher prices and lower welfare. Price-floor may be more profitable for producers than resale price maintenance contracts and, when a resale price maintenance restraint may have ambiguous effect on welfare, price-floors are always welfare damaging. Retailers' buyer power appears as a key for a price-floor to work out.
    Keywords: Price-floor, Resale Price Maintenance, Buyer Power, Competition
    Date: 2009–03–11
  13. By: Pierre Biscourp (ENSAE); Xavier Boutin (INSEE (D3E-MSE) and CREST-LEI); Thibaud Vergé (CREST-LEI)
    Abstract: In 1997, a new legislation banning below-invoice retail prices came into force in France. Individually negotiated discounts could no longer be passed on to consumers, which is equivalent to allowing industry-wide price floors. The anti-competitive effects of such practices are well-known. The elimination of intra-brand competition is expected to lead to a sharp increase in the retail prices. Using CPI raw data, we find evidence supporting this claim. The modification or revocation of the existing legislation (as it has been done in Ireland in December 2005) would then be expected to reduce retail prices.
    Keywords: retail prices, pricing regulations, resale price maintenance
    JEL: L42 L81 K23
    Date: 2008–05
  14. By: Delis, Manthos D; Staikouras, Christos; Varlagas, Panagiotis
    Abstract: This paper compares the estimates of the two most widely used non-structural models for market power measurement in banking, namely the conduct parameter method and the revenue test, as applied to a panel of Greek banks over the period 1993-2004. We also propose a dynamic reformulation of these models within a panel data context, in order to address possible statistical problems associated with the dynamic nature of bank-level data. The results suggest that both static methods provide lower estimates of market power relative to their dynamic counterparts. Therefore, the inclusion of some dynamics in the models, even though it increased estimation complexity, helped to reveal some collusive behavior of banks.
    Keywords: Market power estimation; Conduct parameter method; Revenue test; Greek banking sector
    JEL: L10 P20 G21
    Date: 2008–06–12
  15. By: Claudia Salim (Free University of Berlin)
    Abstract: This paper examines how quality incentives are related to the interoperability of competing plat- forms. Platforms choose whether to operate standardised or exclusively, prior to quality and subsequent price competition. We find that platforms choose a common standard if they can coordinate their quality provision. The actual investment then depends on the cost of quality provision: If rather high, platforms refrain from investment; if rather low, platforms maintain vertically differentiated platforms. The latter case is socially more desirable than exclusivity where platforms do not invest. Nevertheless, quality competition of standardised platforms in- duces the highest investment and maximum welfare.
    Keywords: two-sided markets, standards, investment in transaction quality
    JEL: D43 D62 L13
    Date: 2009–02
  16. By: Luís Santos-Pinto
    Abstract: This paper studies the impact of firm and market size asymmetries on merger decisions. To do that I consider a model where a small and a large country compete in a third (world) market. Each of the two countries has two firms (with potentially different costs) that supply the domestic market and export to the third market. Merger decisions in the two countries are modeled as a simultaneously move game. The paper finds that firms in the large country have more incentives to merge than firms in the small country. In contrast, the government of the large country has more incentives to block a merger than the government of the small country. Thus, the model predicts that conflicts of interest between governments and firms concerning national mergers are more likely in large countries than in small ones.
    Keywords: mergers; international trade; merger policy; size asymmetry
    JEL: F13 H77 L11 L41
    Date: 2009–02
  17. By: Claudia Alves; Luís Santos-Pinto
    Abstract: This paper provides a theory of corporate social responsibility in imperfectly competitive markets. We consider a two-stage game where consumers have a preference from buying goods from firms that do CSR and where firms first decide simultaneously the amount per unit sold to give to social causes and then choose quantities. We find that firms will do CSR when products are complements but might not do it when products are substitutes. We characterize how contributions to social causes depend on costs of production and on the degree of product differentiation. Finally, we show that CSR increases quantities, prices and profits.
    Keywords: corporate social responsibility; oligopoly; market outcomes
    JEL: D21 D43 D64 M14
    Date: 2008–10

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