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on Industrial Competition |
| By: | Bruno Versaevel (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | This paper investigates the combined impact of a first-mover advantage and of firms' limited mobility on the equilibrium outcomes of a continuous-time model adapted from by Boyer, Lasserre, and Moreaux (2007). Two firms face market development uncertainty and may enter by investing in lumpy capacity units. With perfect mobility, when the first entrant plays as aStackelberg leader a Markov perfect preemption equilibrium obtains in which the leader invests earlier, and the follower later, than in the Cournot benchmark scenario. There is rent equalization, and the two firms' equilibrium value is lower. This result is not robust to the introduction of firm-specific limited mobility constraints. If one firm is sufficiently less able than its rival to mobilize resources at early stages of the market development process, there is less rent dissipation, and no equalization, in a constrained preemption equilibrium. The first-mover advantage on the product market then results in more value for the less constrained firm, and in less value for the follower than when they play `a la Cournot with perfect mobility. The leading firm maximizes value by entering immediately before its constrained rival, though later than made possible by its superior mobility. Greater uncertainty reduces the value differential to the benefit of thefollower. It also increases the distance between the firms' respective investment triggers. The specifications and results are discussed in light of recent developments in the market for music downloads. |
| Keywords: | Real options; Preemption; First-mover advantage; Mobility |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00371847_v1&r=com |
| By: | Rosa Branca Esteves (Universidade do Minho - NIPE) |
| Abstract: | Economists have long been interested in understanding the profit, consumer surplus and welfare effects of an ancient marketing strategy: Price Discrimination. While it is not new that firms try frequently to segment customers in order to price discriminate, what has dramatically changed, with recent advances in information technologies, is the quality of consumer-specific data now available in many markets and how this information has been used by firms for price discrimination purposes. Specifically, thanks to information technology it is nowadays increasingly feasible for sellers to segment customers on the basis of their purchasing histories and to price discriminate accordingly. This form of price discrimination has been named in the literature as Behaviour-Based Price Discrimination (BBPD). For a long time economists have been concerned in understanding the economic effects of price discrimination in monopolistic markets. However, because imperfect competition is undoubtedly the most common economic setting, recent research on the field has been concerned with the following issues. Firstly, how are profit, consumer surplus and welfare affected when firms practice some form of price discrimination in imperfectly competitive markets? Secondly, in which circumstances may competitive firms have an incentive to price discriminate or rather to avoid it? As we will see, conclusions regarding the profit and welfare effects of price discrimination are strongly dependent upon the form of price discrimination, which in turn depends upon the form of consumer heterogeneity and the different instruments available for price discrimination. Basically, the aim of this survey is to clarify the two aforementioned issues in imperfectly competitive markets. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:5/2009&r=com |
| By: | Jan Bena |
| Abstract: | Using a dynamic model of a step-by-step innovation race between financially constrained firms, I study how financial constraints affect innovation activity. The novel theoretical results derive from an analysis of the interaction between the incentive effect of competition on innovation and the effect competition has on the degree of credit rationing. I find that the negative effect of financial constraints on firm- and aggregate-level R&D investment is most pronounced at both high and low levels of competition. These predictions are supported by empirical evidence: The competition-innovation relationship has an inverted-U shape in less financially developed systems relative to the benchmark pattern observed in countries with highly developed financial systems. Innovation-enhancing policies implemented through competition reforms ought to be complemented by promoting financial development. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp629&r=com |
| By: | Donja Darai (Socioeconomic Institute, University of Zurich); Jens Grosser (Departments of Political Science and Economics, Florida State University); Nadja Trhal (Economics Department, University of Cologne) |
| Abstract: | This paper studies the effects of patents and subsidies on R&D investment decisions. The theoretical framework is a two-stage game consisting of an investment and a market stage. In equilibrium, both patents and subsidies induce the same amount of R&D investment, which is higher than the investment without governmental incentives. In the first stage, the firms can invest in a stochastic R&D project which might lead to a reduction of the marginal production costs and in the second stage, the firms face price competition. Both stages of the game are implemented in a laboratory experiment and the obtained results support the theoretical predictions. Patents and subsidies increase investment in R&D and the observed amounts of investment in the patent and subsidy treatment do not differ significantly across both instruments. However, we observe overinvestment in all three treatments. Observed prices in the market stage converge to equilibrium price levels. |
| Keywords: | R&D investment, oligopoly, patents, subsidies, experiment |
| JEL: | C90 L13 O31 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0905&r=com |
| By: | Geza Sapi; Irina Suleymanova |
| Abstract: | We propose a duopoly model of competition between internet search engines endowed with different technologies and study the effects of an agreement where the more advanced firm shares its technology with the inferior one. We show that the superior firm enters the agreement only if it results in a large enough increase in demand for advertising space at the competing .rm and a relatively small improvement of the competitor's search quality. Although the superior firm gains market share, the agreement is beneficial for the inferior firm, as the later firm's additional revenues from a higher advertising demand outweigh its losses due to a smaller user pool. The cooperation is likely to be in line with the advertisers' interests and to be detrimental to users' welfare. |
| Keywords: | Search Engine, Two-Sided Market, Advertising, Strategic Complements, Technology |
| JEL: | L13 L24 L86 M37 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp870&r=com |
| By: | Kiho Yoon (Department of Economics, Korea University, Seoul, South Korea) |
| Abstract: | This paper shows that the quality scores in keyword auctions can be strategically chosen to extract all the advertisers' surplus. The reason for the full extraction result is that the quality scores may e¢çectively set all the bidders' valuations equal to the highest valuation, which induces intense bidding competition. |
| Keywords: | Online advertising, Auctions, Quality scores, Full extraction |
| JEL: | D44 M37 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:iek:wpaper:0904&r=com |
| By: | Carlos, del Cacho |
| Abstract: | In this paper we examine pricing imperfections in software companies by analyzing the case of Microsoft, and we uncover the presence of pervasive dead-weight losses derived from the inability of the producer to achieve first degree price discrimination. Because the nature of software is such that it can be reproduced an infinite number of times at practically zero cost once the first copy is manufactured, the amount of these losses in terms of efficiency can be substantial, which opens the door for external intervention in the market. We finish by suggesting a simple policy rule in this direction, although the applicability may be limited to the theoretical realm, as it can distort the incentives of private enterprise as a provider of software products. |
| Keywords: | pricing; efficiency; software industry |
| JEL: | D23 D40 |
| Date: | 2009–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14343&r=com |
| By: | Nicola Cetorelli |
| Abstract: | Empirical studies show that competition in the credit markets has important effects on the entry and growth of firms in nonfinancial industries. This paper explores the hypothesis that the availability of credit at the time of a firm's founding has a profound effect on that firm's nature. I conjecture that in times when financial capital is difficult to obtain, firms will need to be built as relatively solid organizations. However, in an environment of easily available financial capital, firms can be constituted with an intrinsically weaker structure. To test this conjecture, I use confidential data from the U.S. Census Bureau on the entire universe of business establishments in existence over a thirty-year period; I follow the life cycles of those same establishments through a period of regulatory reform during which U.S. states were allowed to remove barriers to entry in the banking industry, a development that resulted in significantly improved credit competition. The evidence confirms my conjecture.Firms constituted in post-reform years are intrinsically frailer than those founded in a more financially constrained environment, while firms of pre-reform vintage do not seem to adapt their nature to an easier credit environment. Credit market competition does lead to more entry and growth of firms, but also to complex dynamics experienced by the population of business organizations. |
| Keywords: | Commercial credit ; Banking law ; Corporations - Finance ; Competition; firm dynamics, credit reform, imprinting |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:366&r=com |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14040&r=com |
| By: | Nikolaj Schmidt |
| Abstract: | Banks can enter new countries either through greenfield entry or by acquiring local banks. I model the effect of a foreign bank's mode of entry on the stability of the local financial sector. Banks exert costly effort when they extend credit. Limited liability creates an agency problem which leads to under provision of effort. I show that the diversification of the foreign bank.s loan portfolio mitigates the agency problem, and permits the foreign bank to extend credit during downturns where the local banks are forced to contract credit. The risk management framework employed by the foreign bank creates a divergence in the behaviour of a greenfield entrant and an acquirer. The greenfield entrant does not own a portfolio of local loans, and therefore, it has a greater risk taking capacity than the acquirer. Thus, competition, and thereby the distortion of the local banks' incentives to exert effort, is greater following greenfield entry than following entry through acquisition. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp623&r=com |
| By: | Sophocles N. Brissimis (Bank of Greece); Manthos D. Delis (University of Ioannina) |
| Abstract: | The aim of this study is to provide an empirical methodology for the estimation of market power of individual banks. The new method employs the well-known model of Panzar and Rosse (1987) and proposes its estimation using the local regression technique. Thus, a number of restrictive assumptions regarding the properties of the production function of banks are relaxed, while the method proves successful in providing reasonable estimates of bank-level market power when applied to a large panel of banks of transition countries. The empirical results suggest that many banks in the sample deviate significantly from competitive practices and that market power varies substantially across banks in each country. Country averages of the bank-level results exhibit a very close relationship with standard, industry-level Panzar-Rosse estimates. |
| Keywords: | Bank output; Market power; bank-level; local regression |
| JEL: | G21 L11 C14 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:93&r=com |
| By: | Gábor Pellényi; Tamás Borkó |
| Abstract: | We examine the impact of bank competition and institutional factors on net firm entry in a sample of European manufacturing industries over the 1995-2006 period. Taking into account industry differences in the need for external finance, we find that bank competition helps firm entry. In addition, better institutions - especially legal structure and property rights - also have a positive impact, particularly through a better functioning financial system. |
| Keywords: | market structure, banks, market entry, manufacturing, financial development |
| JEL: | D4 G21 L11 L60 O16 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin5010&r=com |
| By: | Daniel Huppmann; Franziska Holz |
| Abstract: | This paper proposes a partial equilibrium model to describe the global crude oil market. Pricing on the global crude oil market is strongly influenced by price indices such as WTI (USA) and Brent (Northwest Europe). Adapting an approach for pool-based electricity markets, the model captures the particularities of these benchmark price indices and their influence on the market of physical oil. This approach is compared to a model with bilateral trade relations as is traditionally used in models of energy markets. With these two model approaches, we compute the equilibrium solutions for several market power scenarios to investigate whether the multi-pool approach may be better suited than the bilateral trade model to describe the crude oil market. The pool-based approach yields, in general, results closer to observed quantities and prices, with the best fit obtained by the scenario of an OPEC oligopoly. We conclude that the price indices indeed are important on the global crude market in determining the prices and flows, and that OPEC effectively exerts market power, but in a non-cooperative way. |
| Keywords: | crude oil, market structure, cartel, pool market, simulation model |
| JEL: | L13 L71 Q41 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp869&r=com |
| By: | Mesnard, Louis de (LEG - CNRS UMR 5118 - Université de Bourgogne) |
| Abstract: | France Telecom (FT), SFR and Bouygues Telecom (BT) have been fined by France’s Conseil de la Concurrence (CC) for organizing a mobile phone cartel with stable market shares (one-half, one-third and one-sixth respectively) and for directly exchanging commercial information. While not contesting the legal decision, it is argued here that the economic reasoning is flawed. 1) As the CC made much of the firms’ stable market shares, we have first followed this line of reasoning by considering that the market shares are quotas under uniform costs. Even if there is a general incentive to form a monopolistic cartel, BT was too small for it to be worth its while to join it; it is not necessary to exchange information directly to coordinate market shares and prices effectively; all partial cartels are unlikely. 2) We then considered that the non-uniform market shares are explained by the costs in Cournot competition which can be deduced from the observed market shares by assuming that the costs are kept the same when switching from Cournot competition to any form of cartel. We deduced that market shares cannot be other than stable and non-uniform; any monopoly is unlikely to come about, because FT has negative incentives to form a monopolistic cartel; no partial cartels of two operators are viable because at least one member would lose out. The paper also shows that Stackelberg competition is unlikely as well as Bertrand-Edgeworth competition. In conclusion, Cournot competition is the only arrangement that guarantees no losses to all operators. |
| Keywords: | Cartel; Mobile phone; Mobile telephony; GSM; Conseil de la Concurrence;ARCEP ; Cournot ; Stackelberg |
| JEL: | L13 L41 L96 D43 K21 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lat:legeco:2009-02&r=com |
| By: | Mesnard, Louis de (LEG - CNRS UMR 5118 - Université de Bourgogne) |
| Abstract: | The French government plans to authorize a fourth operator to enter the country’s mobile phone market alongside Orange, SFR and Bouygues Telecom. While the French government sees this as a way to foster competition, this paper predicts the move will prove a disappointment. Three points are examined. 1) If the operators are in four-way Cournot competition, minimizing the total profit fails to maximize the consumer surplus and the total surplus; the most realistic price fall is only of 1.11% compared to three-way Cournot competition. 2) The overall incentives for forming a monopoly are positive; when the fourth operator’s costs are high, there will be no move from a three-way Cournot competition to a monopolistic cartel of four because Orange experiences negative incentives; there will be no move from a monopolistic cartel of three to a monopolistic cartel of four. 3) Moving from fourway Cournot competition to a partial cartel formed by Orange, SFR and Bouygues Telecom is unlikely; when the fourth operator enters a market dominated by the monopolistic cartel of Orange, SFR and Bouygues Telecom, these three operators will not continue forming a cartel; excluding the fourth operator from the monopolistic cartel of four is also losing; the cartel formed by SFR, Bouygues Telecom and the fourth operator is never credible either. |
| Keywords: | Cartel; Mobile phone; Mobile telephony; Fourth operator; GSM; 3G. |
| JEL: | L13 L41 L96 D43 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lat:legeco:2009-03&r=com |
| By: | Lei Fang |
| Abstract: | There are large differences in income per capita across countries. Growth accounting finds that a large part of the differences comes from the differences in total factor productivity (TFP). This paper explores whether barrier to entry is an important factor for the cross-country differences in TFP. The paper develops a new model to link entry barriers and technology adoption. In the model, higher barriers to entry effectively reduce entry threat, and lower entry threat leads to adoption of less productive technologies. The paper demonstrates that technology adopted in the economy with entry threats is at least as good as the technology adopted in the economy without entry threats. Moreover, the paper presents numerical simulations that suggest entry barriers could be a quantitatively important reason for cross-country differences in TFP and are more harmful to productivity in the countries with monopolists facing inelastic demand. incompl s |
| Keywords: | entry barriers, technology adoption, total factor productivity CL HG2567 A4A5 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2009-08&r=com |