nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒04‒18
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Upstream Competition and Downstream Buyer Power By Howard Smith; John Thanassoulis
  2. An Empirical Model of Search with Vertically Differentiated Products By Matthijs R Wildenbeest
  3. Next Generation Access Networks: The Effects of Vertical Spillovers on Access and Innovation By Paula Sarmento; António Brandão
  4. Collective Rights Organizations and Investment in Upstream R&D By Rieko Aoki; Aaron Schiff
  5. Persistence of Monopoly and Research Specialization By Philipp Weinschenk
  6. Asset Specificity and Vertical Integration: Williamson’s Hypothesis Reconsidered By Christian A. Ruzzier
  7. Measurement of the Consumer Benefit of Competition in Retail Outlets By MATSUURA Toshiyuki; SUNADA Mitsuru
  8. Competition Between Payment Systems By George Gardner; Andrew Stone
  9. Competition Between Payment Systems: Results By George Gardner; Andrew Stone
  10. Confirmatory News By Elena Panova
  11. Gasoline prices jump up on Mondays: An outcome of aggressive competition? By Foros, Øystein; Steen, Frode
  12. Is Cartelisation Profitable? A Case Study of the Rhenish Westphalian Coal Syndicate, 1893-1913 By Thorsten Lübbers
  13. FDI in Post-Production Services and Product Market Competition By Ishikawa, Jota; Morita, Hodaka; Mukunoki, Hiroshi
  14. Financial market pressures, tacit collusion and oil price formation By Aune, Finn Roar; Mohn, Klaus; Osmundsen, Petter; Rosendahl, Knut Einar

  1. By: Howard Smith; John Thanassoulis
    Abstract: It is often claimed that large buyers wield buyer power. Existing theories of this effect generally assume upstream monopoly. Yet the evidence is strongest with upstream competition. We show that upstream competition can yield buyer power for large buyers by generating supplier-level volume uncertainty - a feature that emerges from case study evidence of upstream competition - so the negotiated price depends on the seller’s cost expectation. By analyzing the effect of market structure changes on seller cost expectations the paper gives insights on three key policy-relevant questions around buyer power: (i) who wields it and under what circumstances (ii) does a downstream merger alter the buyer power of other buyers (so-called waterbed effects); and (iii) how are the incentives to invest in upstream technology altered by the creation of large downstream firms?
    Keywords: Buyer power, Waterbed effects, Bargaining in the supply chain, Milk, Private-label, Supermarkets
    JEL: L13 L42 L66
    Date: 2009
  2. By: Matthijs R Wildenbeest (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: This paper presents a non-sequential search model that allows for vertical product differentiation. In the unique symmetric equilibrium firms with different characteristics draw utilities from a common utility distribution, resulting in asymmetric price distributions. The model therefore provides a theoretical rationale for explaining price dispersion as a result of quality differences and search frictions together. More specifically, the model can explain the frequent and asymmetric price changes reported in several empirical papers, but also why some firms have persistently higher prices than others. Using the equilibrium conditions derived from the model, we show how to estimate search costs by maximum likelihood using only prices. The method is applied to a data set of prices for grocery items from supermarkets in the UK. Estimates reveal that most of the observed price variation can be explained by supermarket heterogeneity and that the estimated amount of search is low in this market. We show that ignoring vertical product differentiation results in an overestimation of search costs. Moreover, estimated search costs using a basket of organic items are on average higher than that of a similar non-organic basket. We also simulate how changes in search costs will affect behavior of stores and consumers.
    Keywords: consumer search, product differentiation, price dispersion, structural estimation
    JEL: C14 D83 L13
    Date: 2009–04
  3. By: Paula Sarmento (CEF.UP, Faculdade de Economia, Universidade do Porto); António Brandão (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: The model that we develop here considers that an upstream firm sells a vital input to downstream firms. There are vertical spillovers and two different regulatory policies of the input price: cost oriented regulation and no-regulation. We also admit two alternative market structures: vertical integration and vertical separation. With this setting we study the effects of the spillovers on foreclosure and on the investment of the upstream firm with and without access price regulation in the two market structures. We conclude that in this setting foreclosure is not a necessary outcome and that the investment of the upstream firm depends on the values of the spillovers of each firm. The increase of the investment with regulation is more likely with vertical separation but it can also happen with vertical integration although this is not a typical result.
    Keywords: access price regulation, vertical integration
    JEL: L51 L96
    Date: 2009–04
  4. By: Rieko Aoki; Aaron Schiff
    Abstract: We examine third-party collective rights organisations (CROs) such as clearinghouses that license innovations on behalf of inventors when downstream uses require licenses to multiple complementary innovations. We consider two simple royalty redistribution schemes, two different innovation environments and two different antitrust rules. We show that in most cases CROs increase incentives to invest in R&D as they increase profits from licensing. However, incentives to invest of inventors who have the unique ability to develop a crucial component may be weakened. We also show that CROs may increase or decrease expected welfare, and are more likely to be beneficial when R&D costs are relatively high, and/or the probability of success for inventors is relatively low.
    Keywords: Intellectual property, licensing, collective rights organizations, anticommons
    JEL: L24 O31 O34
    Date: 2009–03
  5. By: Philipp Weinschenk (Max Planck Institute for Research on Collective Goods)
    Abstract: We examine the persistence of monopolies in markets with innovations when the outcome of research is uncertain. We show that for low success probabilities of research, the incumbent can seldom preempt the potential entrant. Then the efficiency effect outweighs the replacement effect. It is vice versa for high probabilities. Moreover, the incumbent specializes in “safe” research and the potential entrant in “risky” research. We also show that the probability of entry has an inverted U-shape in the success probability. Since even at the peak entry is rather unlikely, the persistence of the monopoly is high.
    Keywords: Persistence of Monopoly, Efficiency Effect, Replacement Effect, Stochastic Innovations
    JEL: L12 O31
    Date: 2009–04
  6. By: Christian A. Ruzzier (Harvard Business School)
    Abstract: A point repeatedly stressed by transaction cost economics is that the more specific the asset, the more likely is vertical integration to be optimal. In spite of the profusion of empirical papers supporting this prediction, recent surveys and casual observation suggest that higher levels of asset specificity need not always lead to vertical integration. The purpose of this paper is to uncover some of the factors driving firms to (sometimes) choose to remain separated, rather than integrate, in the presence of high specificity. Its main economic message is that in a world where outside options matter and investments are multidimensional, high levels of asset specificity can foster nonintegration: a low level of specificity provides the most misdirected incentives when transacting in a market (because the outside option of external trade becomes so tempting), thus making a stronger case for nonintegration when specificity is high.
    Keywords: relational contracts, asset specificity, property rights, vertical integration, outsourcing
    JEL: L14 D23 L24
    Date: 2009–04
  7. By: MATSUURA Toshiyuki; SUNADA Mitsuru
    Abstract: In this paper, we estimate the consumer benefits of competition in the retail industry. In our analysis, we incorporated the service quality of retail outlets as outputs. In Japan, in the process of the deregulation of entry restriction on large-scale retail stores, specialty supermarkets have increased their market share with a low price strategy. At the same time, despite their high prices, convenience stores have increased their market share through 1990s. We demonstrate changes in market share for each retail format are explained by the changes in each formats respective service quality.
    Date: 2009–04
  8. By: George Gardner (Reserve Bank of Australia); Andrew Stone (Reserve Bank of Australia)
    Abstract: This paper is the first of two companion pieces examining competition between payment systems. Here we develop a model of competing platforms which generalises that considered by Chakravorti and Roson (2006). In particular, our model allows for fully endogenous multi-homing on both the merchant and consumer sides of the market. We develop geometric frameworks for understanding the aggregate decisions of consumers to hold, and merchants to accept, different payment instruments, and how these decisions will be influenced by the pricing choices of the platforms. We also illustrate a new potential source of non-uniqueness in the aggregate behaviour of consumers and merchants which is distinct from the well-known ‘chicken and egg’ phenomenon – and indeed can only arise in the context of multiple competing platforms. Finally, we briefly discuss how this new source of non-uniqueness may nevertheless shed light on the ‘chicken and egg’ debate in relation to the development of new payment systems.
    Keywords: payments policy; two-sided markets; interchange fees
    JEL: D40 E42 L14
    Date: 2009–04
  9. By: George Gardner (Reserve Bank of Australia); Andrew Stone (Reserve Bank of Australia)
    Abstract: This paper is the second of two companion pieces. In the first we developed a model of competition between payment systems which extends that of Chakravorti and Roson (2006). Here we turn to the results which can be obtained from the Chakravorti and Roson model, from our extension of it, and from a third family of models which we develop in this paper. We obtain two main sets of findings. First, we shed further light on how competing platforms will set their price level and pricing structure when endogenous multi-homing is allowed on both sides of the market. Our results challenge the general finding in the literature that the greater the propensity of one side of the market to single-home, the more attractive will be the pricing offered to its members by competing platforms. Our results confirm that while this finding generally holds when platforms charge both consumers and merchants on a purely per-transaction basis, it need not hold in the more realistic situation where platforms instead levy flat fees on consumers. Second, we extend findings of Hermalin and Katz (2006) showing that, in certain circumstances, platforms may offer less attractive pricing to the side of the market which holds the choice of payment instrument at the moment of sale.
    Keywords: payments policy; two-sided markets
    JEL: D43 E42 L13 L14
    Date: 2009–04
  10. By: Elena Panova
    Abstract: This paper investigates how competition in the media affects the quality of news. In our model, demand for news depends on the market perception of the media's ability to receive correct information: it is positive if and only if news is potentially useful for the voting decision. When the media receives information which contradics commonly shared priors, it either reports this information or it confirms the priors: "most likely, my information is correct, but my potential buyers may be unable to assess the quality of news and attribute it according to common priors". We ask whether competition may help to elicit information from the media. Our answer is positive when news covers issues on which the priors are sufficiently precise, or the follow-up quality assessment is a likely event. However, when news concerns controversial issues and it is hardly possible to asses its quality, competitive pressures induce confirmatory reporting.
    Keywords: Competition in the media, quality of news, common priors, reputational cheap-talk
    JEL: L82 L10 D82
    Date: 2009
  11. By: Foros, Øystein (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration); Steen, Frode (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This paper examines Norwegian gasoline pump prices using daily station-specific observations from March 2003 to March 2006. Whereas studies that have analyzed similar price cycles in other countries find support for the Edgeworth cycle theory (Maskin and Tirole, 1988), we demonstrate that Norwegian gasoline price cycles involve a form of coordinated behavior. Retail gasoline prices follow a fixed weekly pattern, where retail outlets all over Norway simultaneously increase their prices to the same level every Monday at noon. Consequently, the sharp price increase is tied to time rather than the current price level. The gasoline companies’ headquarters publish a recommended price that de facto is a RPM arrangement towards the retail outlets. The vertical arrangement is industry-wide adopted, and is used to coordinate the time and the level for retail price increases among the big four gasoline companies. Monday changed from being the low-price day to becoming the high-price day almost ‘overnight’ in April 2004, and we empirically establish that the change corresponds to a significant jump in the gross margin.
    Keywords: Gasoline Prices; Resale Price Maintenance
    JEL: E30 E32
    Date: 2009–04–14
  12. By: Thorsten Lübbers (Max Planck Institute for Research on Collective Goods)
    Abstract: We examine the effect of one of the presumably most powerful cartels ever on the profitability of its members. More precisely, we consider the Rhenish-Westphalian Coal Syndicate, a coal cartel that operated in Imperial Germany in the late 19th and early 20th century, using a newly constructed dataset and two different methodological approaches. At first, we employ event study methodology to asses the reaction of the stock market to the foundation of the cartel and two major revisions of its original contract. Furthermore, we look at different performance measures calculated from accounting and financial data in a dynamic panel data framework. Overall, our results suggest that the investigated cartel had no significant effect on the profitabil-ity of its members. However, we also find that it was able to stabilise coal prices and powerful enough to ensure that on average, prices were set high enough to avert negative repercussions on company performance.
    Keywords: Cartel, Economic history, Event study, Germany pre-1913
    JEL: L41 L71 N53
    Date: 2009–03
  13. By: Ishikawa, Jota; Morita, Hodaka; Mukunoki, Hiroshi
    Abstract: Post-production services, such as sales, distribution, and maintenance, comprise a crucial element of business activity. A foreign firm faces a higher cost to perform such services than its domestic rival because of the lack of proximity to customers. We explore an international duopoly model in which a foreign firm can reduce its cost for post-production services by foreign direct investment (FDI), or alternatively can outsource such services to its domestic rival. Trade liberalization, if not accompanied by liberalization of service FDI, can hurt domestic consumers and decrease world welfare, but the negative welfare impacts can be mitigated and eventually turned into positive ones as service FDI is also liberalized. This finding yields important policy implications, given the reality that the progress of liberalization in service sectors is limited compared to the substantial progress already made in trade liberalization.
    Keywords: post-production services, trade liberalization, FDI, outsourcing, international oligopoly
    JEL: F12 F13 F21 F23
    Date: 2008–11
  14. By: Aune, Finn Roar; Mohn, Klaus (University of Stavanger); Osmundsen, Petter (University of Stavanger); Rosendahl, Knut Einar
    Abstract: ,
    Keywords: Oil Market; Investment behaviour; market power; collusion; equilibrium model
    JEL: G31 L13 Q41
    Date: 2009–10–01

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