nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒05‒16
23 papers chosen by
Russell Pittman
US Department of Justice

  1. Oligopsony Power: Evidence from the U.S. Beef Packing Industry By Cai, Xiaowei; Stiegert, Kyle W.; Koontz, Stephen R.
  2. The Role of Market Power in Agricultural Contracts By Cordero Salas, Paula
  3. Do prices fall faster when Wal-Mart is around? The effect of competition and reputation on cost pass-through and price adjustment By Martens, M. Andrea
  4. Mergers, Price Competition for the U.S. Carbonated Soft Drink Industry By Lai, Pei-Chun; Bessler, David
  5. Supermarket Competition through Price Promotions: A Cross Category Analysis By Volpe, Richard James III
  6. Retail and Wholesale Market Power in Organic Foods By Richards, Timothy J.; Acharya, Ram; Molina, Ignacio
  7. Does Generic Advertising Help or Hurt Brand Advertising? By Suh, Daeseok; Chung, Chanjin
  8. Exclusive dealing, entry, and mergers By Chiara Fumagalli; Massimo Motta; Thomas Roende
  9. Relation entry, exit and productivity By Viktoria Kocsis; Ruslan Lukach; Bert Minne; Victoria Shestalova; Nick Zubanov; Henry van der Wiel
  10. Market Concentration and Business Survival in Static v Dynamic Industries By Andrew Burke; Aoife Hanley
  11. R&D-hindering collusion. By E. Bacchiega; L. Lambertini; A. Mantovani
  12. Costly Search and Design By Heski Bar-Isaac; Guillermo Caruana; Vicente Cuñat
  13. Bidimensional quality competition and scope economies By P. G. Garella; L. Lambertini
  14. Optional linear input prices in vertical relations By Claudia Salim
  15. The Impact of Horizontal Mergers on Rivals: Gains to Being Left Outside a Merger By Joseph A. Clougherty; Tomaso Duso
  16. “Matching Auctions” for Hostile Takeovers: A Model with Endogenous Target By Rosato, Antonio
  17. Generating Evidence to Guide Merger Enforcement By Orley C. Ashenfelter; Daniel Hosken; Matthew Weinberg
  18. Competition for Access: Spectrum Rights and Downstream Access in Wireless Telecommunications By Michiel J. Bijlsma; Gijsbert T.J. Zwart
  19. Market Structure and Property Rights in Open Source By Michele Boldrin; David K Levine
  20. Competition, innovation and intellectual property rights in software markets By Michiel Bijlsma; Paul de Bijl; Viktoria Kocsis
  21. Banking Sector Performance in Latin America: Market Power versus Efficiency By Georgios E. Chortareas; Jesus G. Garza-Garcia; Claudia Girardone
  22. Influence of integration of Czech Republic into EU on form and protection of economic competition By Pellešová, Pavlína
  23. Institutional Determinants of New Firm Entry in Russia: A Cross Regional Analysis By R. L. Bruno; M. Bytchkova; S. Estrin

  1. By: Cai, Xiaowei; Stiegert, Kyle W.; Koontz, Stephen R.
    Abstract: Based on Green and Porter's (GP) noncooperative game theoretic model, oligopsonists are hypothesized to follow a discontinuous pricing strategy in equilibrium. The model allows for low procurement prices during cooperative phases and high procurement prices (i.e. aggressive purchasing) during noncooperative phases. In this paper, the GP model is applied to the U.S. beef packing industry. Anecdotal evidence of beef packer margins and relevant processing costs suggest part of the margin variability could be attributed breakdowns and returns to cooperative phases. To operationalize the GP framework, we applied Hamilton's regime switching model assuming first order Markov process to test for the cooperative/noncooperative behavior of beef packers in three main fed cattle markets in the central United States and the whole U.S. market. We found that the evidence of cooperative/noncooperative conduct among the beef packers is present in all the markets examined, but the conduct varies across markets.
    Keywords: Margin, Beef Packing, Fed Cattle Prices, Markov Regime Switching, Industrial Organization,
    Date: 2009
  2. By: Cordero Salas, Paula
    Abstract: I study the economic consequences of shifting bargaining power in relational contracts through interventions such as the formation of a Bargaining Group (BG) for the side of sellers in a market where buyers traditionally hold significant market power. Existing theories of relational contracts predict that such a power transfer will have no impact on market efficiency. In contexts where enforcement institutions are weak, a standard assumption from existing theories of relational contracts - the existence of an enforceable base payment - may not hold. In this case, I show that a transfer of bargaining power can erode market efficiency in a dynamic relational contracting environment, which contradicts findings from existing models of relational contracting. When buyers hold significant market power, they forgo short-term opportunistic behavior by honoring promised performance bonuses in order to keep sellers engaged in trade over time and to accumulate surplus over many periods. With market power eroded by interventions such as the BG, buyersâ long-run gains to trade shirk. When this is coupled with the absence of an enforceable base payment, short-term opportunistic behavior becomes more appealing and trade is more likely to break down. The results here provide policy-makers insight into the economic consequences of enacting policies attempting to balance market power within a framework of fully informal contract enforcement.
    Keywords: contracts, incomplete enforcement, bargaining group, distribution, institutions, Agribusiness, Agricultural and Food Policy, Industrial Organization, Institutional and Behavioral Economics, International Development, D86, K12, L14, O12, Q13.,
    Date: 2009
  3. By: Martens, M. Andrea
    Abstract: This study analyzes Wal-Martâs pricing practices and its inï¬uence on competitorsâ input cost transmission. Previous attempts to analyze Wal-Martâs pricing strategy in the United States have been limited by the companyâs refusal to provide scanner data to third party research ï¬rms such as AC Nielsen. This is the ï¬rst study to observe Wal-Martâs prices over an extended period of time. Using weekly-store level price data between 2001 and 2006 that government oï¬cials collected in 12 Mexican cities, I ï¬nd that Wal-Mart adjusts its prices 1/3-3 times slower to wholesale price increases than other retailers and responds 5-7 times faster to wholesale price decreases than its competitors. This evidence is robust to the comparison of Wal-Mart to other hypermarkets that oï¬er âevery day low pricesâ and to potential endogeneity of Wal-Martâs location choices. All retailers respond asymmetrically to wholesale cost changes. However, retailers other than Wal-Mart respond twice as fast to wholesale price increases than to decreases, while Wal-Mart behaves in the opposite way. I ï¬nd no evidence that proximity to a Wal-Mart supercenter or the level of competition aï¬ects the speed of price adjustment of retailers.
    Keywords: Wal-Mart, cost pass-through, competition, Agribusiness, Industrial Organization,
    Date: 2009
  4. By: Lai, Pei-Chun; Bessler, David
    Abstract: We consider the performance of distance-metrics method applied in demand estimation of carbonated soft drink products. Based on preliminary OLS outcome, the estimated coefficients are satisfied our prior expectations and results are consistent with previous research. Brand loyalty and strong substitution between products of the same group is found in our study, as also found in Rojas and others. Our tentative conclusion is that distance metrics method is worthy of further consideration in demand estimation and offers the potential for study of merger simulations.
    Keywords: distance metrics, demand, merger simulation, Agribusiness, Industrial Organization, Marketing, L13, C14,
    Date: 2009
  5. By: Volpe, Richard James III
    Abstract: This study takes an important first step at quantifying the nature of competition between major supermarket chains through price promotions. Using data that covers virtually the entire product menus of supermarkets representing two major chains in 18 cities, I examine both the effect of direct competition on promotional intensity and the nature of promotional competition itself. In a counterintuitive finding, there appears to slightly less promotional activity in cities in which both chains compete directly, as compared to cities in which only one chain operates. Moreover, most promotional activity tends to be retaliatory, rather than accommodating, in nature.This study takes an important first step at quantifying the nature of competition between major supermarket chains through price promotions. Using data that covers virtually the entire product menus of supermarkets representing two major chains in 18 cities, I examine both the effect of direct competition on promotional intensity and the nature of promotional competition itself. In a counterintuitive finding, there appears to slightly less promotional activity in cities in which both chains compete directly, as compared to cities in which only one chain operates. Moreover, most promotional activity tends to be retaliatory, rather than accommodating, in nature.
    Keywords: Agribusiness, Demand and Price Analysis,
    Date: 2009
  6. By: Richards, Timothy J.; Acharya, Ram; Molina, Ignacio
    Abstract: The demand for organic fresh fruits and vegetable continues to grow at a rate far higher than the rest of the produce industry. The cost of meeting organic certification standards, however, has meant that supply has been slow to adjust. With limited supply, we hypothesize that organic suppliers enjoy more market power in bargaining over their share of the retail-production cost margin for fresh apples. We test this hypothesis using a random parameters, generalized extreme value demand model (mixed logit) combined with a structural model of retail and wholesale pricing that allows conduct to vary by product attributes (organic or non-organic) and time. We find that organic growers do indeed earn a larger share of the total margin than non-organic growers, but this vertical market power is eroding over time as market supply adjusts.
    Keywords: organics, market power, mixed logit, game theory, non-linear pricing., Industrial Organization, C35, D12, D43, L13, L41, Q13.,
    Date: 2009
  7. By: Suh, Daeseok; Chung, Chanjin
    Abstract: The purpose of this study is to investigate whether the generic advertising helps or hurts the brand advertising within the differentiated product environments. We develop an analytical model that includes both generic and brand advertising expenditures considering vertical product differentiation. Then the analysis is devoted to examine how marginal effects of expenditure affect each other under product differentiation. To help examine the relationship, we also include a new variable, the degree of product differentiation. Analytical results show that when the generic advertising increases the product differentiation, the high quality brand tends to take benefits while the low quality brand loses. When generic advertising includes messages that do not differentiate quality attributes, the high quality brand loses while the low quality brand takes benefits.
    Keywords: check off, generic advertising, brand advertising, vertical product differentiation, Marketing,
    Date: 2009
  8. By: Chiara Fumagalli (Università Luigi Bocconi, CSEF and CEPR); Massimo Motta (Università di Bologna and CEPR); Thomas Roende (Copenhagen Business School and CEPR)
    Abstract: This paper studies a model where exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. While investment promotion is usually regarded as a pro-competitive effect of ED, our paper shows that it may be the very reason why a contract that forecloses a more efficient supplier is signed. Absent the effect on investment, the contract would not be signed and foreclosure would not be a concern. For this reason, considering potential foreclosure and investment promotion in isolation and then summing them up may not be a suitable approach to assess the net effect of ED. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defence for ED.
    Date: 2009–05–01
  9. By: Viktoria Kocsis; Ruslan Lukach; Bert Minne; Victoria Shestalova; Nick Zubanov; Henry van der Wiel
    Abstract: This document provides a review of recent theoretical and empirical literature on the relationship between entry, exit and productivity. Decomposition methods show that entry and exit considerably contribute to productivity growth, but are unable to shed any light on the ultimate sources of productivity growth. However, the theories discussed do provide options for effective policy instruments. We argue that productivity or welfare should be the aim of policy and not the number of entrants, the intensity of competition or the amount of innovation expenditures. Taking a welfare approach, we address market failures with respect to entry. The most eminent market failure is market power of dominant incumbents. Lowering institutional entry barriers economy-wide is a promising policy option for further consideration. Whether such a policy measure actually improves social welfare depends also on the extent of other failures. Therefore, an ex ante cost-benefit analysis needs to precede intervention.
    Keywords: entry; exit; productivity
    JEL: B41 O30
    Date: 2009–03
  10. By: Andrew Burke; Aoife Hanley
    Abstract: We propose that the effect of market concentration on firm survival is different according to whether an industry is static (low entry and exit) or dynamic. In our empirical analysis we find support for this hypothesis. Industry concentration rates reduce the survival of new plants but only in markets marked by low entry and exit rates. Specifically, a 10 percent increase in the 5-firm concentration ratio in a dynamic market raises the survival rate of new ventures by approximately 2 percent. Our results have implications for the antitrust/competition law indicating less need for regulation of dominant firms in dynamic industries characterized by high entry and exit rates. We use a unique dataset comprising the population of new ventures that enter the UK market in 1998
    Keywords: new firms, start-ups, survival, dynamism, competition policy, industry concentration
    JEL: L11 L25 M13 M40
    Date: 2009–05
  11. By: E. Bacchiega; L. Lambertini; A. Mantovani
    Date: 2008–11
  12. By: Heski Bar-Isaac; Guillermo Caruana; Vicente Cuñat
    Abstract: Firms compete by choosing both a price and a design from a family of designs that can be represented as demand rotations. Consumers engage in costly sequential search among firms. Each time a consumer pays a search cost he observes a new offering. An offering consists of a price quote and a new good, where goods might vary in the extent to which they are good matches for the consumer. In equilibrium, only two design- styles arise: either the most niche where consumers are likely to either love or loathe the product, or the broadest where consumers are likely to have similar valuations. In equilibrium, different firms may simultaneously offer both design-styles. We perform comparative statics on the equilibrium and show that a fall in search costs can lead to higher industry prices and profits and lower consumer surplus. Our analysis is related to discussions of how the internet has led to the prevalence of niche goods and the "long tail" phenomenon.
    Keywords: Product design, search costs, long tail
    JEL: L10 D83 M31
    Date: 2009–04
  13. By: P. G. Garella; L. Lambertini
    Date: 2008–11
  14. By: Claudia Salim (Free University of Berlin)
    Abstract: This paper examines how the option of a regulated linear input price affects vertical contracting, where a monopolistic upstream supplier sequentially offers supply contracts to two symmetric downstream firms. We find that equilibrium contracts vary with production cost and regulated price level: If the regulated price is not too high, the option allows for price discrimination, but prevents foreclosure in the intermediary market. Indeed, if both cost and optional price are rather low, non-discriminatory input prices below cost may arise. Optional input prices are socially more desirable than a flat ban on price discrimination, as consumers benefit from more intense downstream competition.
    Keywords: price discrimination, vertical contracting, exclusion, regulatory outside option
    JEL: D42 L11 L42
    Date: 2009–04
  15. By: Joseph A. Clougherty; Tomaso Duso
    Abstract: It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert-identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, ‘future acquisition probability’ does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type. <br> <br> <i>ZUSAMMENFASSUNG - (Die Wirkung von horizontalen Zusammenschlüssen auf Wettbewerber: Der Nutzen einer Außenseiterposition bei Fusionen) <br>Es ist gemeinhin bekannt, dass Unternehmen nicht Außenseiter einer Fusion zwischen eigenen Wettbewerbern sein wollen. In dieser Arbeit zeigen wir, dass es für Unternehmen durchaus vorteilhaft sein kann, sich an einem großen horizontalen Zusammenschluss nicht zu beteiligen. Anhand einer Datenbank von großen Fusionen, in denen die relevanten Wettbewerber der fusionierenden Unternehmen von Experten der Europäischen Kommission identifiziert worden sind, und Mithilfe einer Ereignisstudienmethode, bestätigen wir empirisch, dass Wettbewerber durchschnittlich positive abnormale Gewinne bei der Ankündigung eines Zusammenschlusses erzielen. Darüber hinaus stellen wir fest, dass die Reaktion der Aktienkurse von Konkurrenten bei der Ankündigung eines Zusammenschlusses nicht anfällig für Fusionswellen ist, und dass die abnormalen Gewinne nicht von der "künftigen Firmenübernahmewahrscheinlichkeit" getrieben sind. Schließlich wird in der Studie ein konzeptioneller Rahmen entwickelt, der die Auswirkungen der Fusion sowohl auf die fusionierenden Unternehmen und als auch auf die Wettbewerber zusammenfasst, um die Art des Zusammenschlusses besser identifizieren zu können.<i>
    Keywords: Rivals, Mergers, Acquisitions, Event-Study
    JEL: G34 G14 M20 L22
    Date: 2008–05
  16. By: Rosato, Antonio
    Abstract: In this paper we analyze incentives for a potential entrant to get into an oligopolistic Cournot-like market by taking over one of the incumbents and we derive the conditions under which the hostile merger is possible and profitable. The key-feature is that the target of the takeover is endogenously determined and this is also the main difference with respect to the previous literature on this topic. Actually, the main objective of our analysis is that of determining why and how the buyer chooses as target this firm rather than that one. The takeover game is modeled as a “matching auction” in which the potential entrant has to make a first and final offer and the other bidders are asked to match this offer. We find different types of SPNE depending upon the values of the parameters. Whenever entry takes place it reduces incumbents' profits and raises consumers' welfare at the same time.
    Keywords: Takeovers; Matching Auctions; Mergers; SPNE
    JEL: D21 D44 D43 C72
    Date: 2008–06–26
  17. By: Orley C. Ashenfelter (Princeton University); Daniel Hosken (Federal Trade Commission); Matthew Weinberg (Federal Trade Commission)
    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.
    Date: 2009–03
  18. By: Michiel J. Bijlsma; Gijsbert T.J. Zwart
    Abstract: In the market for wireless telecommunications, radio spectrum is an essential input. We study downstream entry and capacity choice in this market, where licenses to use radio spectrum are owned by vertically integrated duopolists. Prior to network construction, these incumbents may offer contracts for capacity to an entrant, granting service-based access on the network they will construct. Alternatively, when spectrum trading is allowed, they may sell part of their license, allowing the entrant to build its own network and enter as an infrastructure player. We find that in this Cournot setting, access is generally provided, as incumbents compete to appropriate the profits of serving a differentiated market through the entrant. Although selling spectrum rights instead of network capacity leads to a loss of economies of scale in infrastructure construction, infrastructure-based entry may dominate as a result of a strategic effect. By delegating capacity choice to the entrant, the access providing incumbent can commit to compete more aggressively, causing its rival incumbent to reduce capacity. A lower aggregate capacity will increase prices and thereby profits.
    Keywords: Telecommunications; Vertical Integration; Vertical Foreclosure; Strategic Delegation
    JEL: L13 L42 L96
    Date: 2009–03
  19. By: Michele Boldrin; David K Levine
    Date: 2009–05–06
  20. By: Michiel Bijlsma; Paul de Bijl; Viktoria Kocsis
    Abstract: This study analyzes under which circumstances it may be desirable for the government to stimulate open source software as a response to market failures in software markets. To consider whether policy intervention can increase dynamic efficiency, we discuss the differences between proprietary software and open source software with respect to the incentives to innovate and market failures that may occur. The document proposes guidelines to determine which types of policy intervention may be suitable. Our most important finding is that directly stimulating open source software, e.g. by acting as a lead customer, can improve dynamic efficiency if (i) there is a serious customer lock-in problem, while (ii) to develop the software, there is no need to purchase specific, complementary inputs at a substantial cost, and (iii) follow-on innovations are socially valuable but there are impediments to contractual agreements between developers that aim at realizing such innovations.
    Keywords: Software markets; Intellectual property rights; Open source software; Public policy
    JEL: L17 L52 L86 O34
    Date: 2009–03
  21. By: Georgios E. Chortareas (University of Athens); Jesus G. Garza-Garcia (UWE, Bristol); Claudia Girardone (University of Essex)
    Abstract: TSince the mid-1990s the banking sector in the Latin American emerging markets has experienced profound changes due to financial liberalisation, a significant increase in foreign investments and greater mergers activities often occurring following financial crises. The wave of consolidation and the rapid increase in market concentration that took place in most countries has generated concerns about the rise in banks’ market power and its potential effects on consumers. This paper advances the existing literature by testing the market power (Structure-Conduct-Performance and Relative Market Power) and efficient structure (X- and scale efficiency) hypotheses for a sample of over 2,500 bank observations in nine Latin American countries over 1997-2005. We use the Data Envelopment Analysis technique to obtain reliable efficiency measures. We produce evidence supporting the efficient structure hypotheses. The findings are particularly robust for the largest banking markets in the region, namely Brazil, Argentina and Chile. Finally, capital ratios and bank size seem to be among the most important factors in explaining higher than normal profits for Latin American banks.
    Keywords: Structure-Conduct-Performance; Efficient Structure; Latin American banking; Data Envelopment Analysis (DEA).
    JEL: G21 D24
    Date: 2009–04
  22. By: Pellešová, Pavlína
    Abstract: The article is focused on area of economic competition. The basic pre-requisite of economic competition is assuring of freedom of entrepreneurship, freedom of partners choice, possibility to enter in and secede from branches, functional value system which ensures transparency of market and informed ness of subjects. Policy of protection of economic competition is actively executed policy which contributes to maintenance of competitive environment, which eliminates obstacles that weaken competition. Within the frame of EU it is a coordinated policy. In Czech Republic economic competition is modified by economic competition law which is asserted by Board of protection of economic competition as central administrative authority. Authoress adverts to problems connected with protection of economic competition, e.g. in connection with verification of fusions, unfair competition, exploitation of dominating position in the market.
    Keywords: Economic competition; competition law; competition; competitive advantage; limitation of competition; market power; dominating position; fusion; unfair competition; Board of protection of economic competition.
    JEL: O11 O12
    Date: 2008–05–05
  23. By: R. L. Bruno; M. Bytchkova; S. Estrin
    Date: 2008–10

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