nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒06‒03
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Competition Policy and Property Rights By John Vickers
  2. Advertising for attention in a consumer search model By Haan, Marco A.; Moraga-Gonzalez, Jose L.
  3. The Neglected Effects of Demand Characteristics on the Sustainability of Collusion By Andrea Gallice
  4. Optimal Collusion with Limited Severity Constraint By DE VILLEMEUR, Etienne; FLOCHEL, Laurent; VERSAEVEL, Bruno
  5. Tacit Collusion over Foreign Direct Investment under Oligopoly By Collie, David R.
  6. Estado de uma Nação: Textos de Apoio - Defesa da Concorrência no Brasil: Aspectos Institucionais, Desempenho Recente e Perspectivas de Reforma By Lucia Helena Salgado
  7. Plant Divestitures and Acquisitions in the Canadian Manufacturing Sector By Baldwin, John R.; Gibson, Bob; Wang, Yanling
  8. The selection effect of two-way trade in the Melitz model: an alternative approach By Potin, Jacques
  9. Pricing Structure Optimization in mixed restricted/unrestricted Fare Environments By Joern Meissner; Arne Strauss
  10. Price regulation and generic competition in the pharmaceutical market By Dalen, Dag Morten; Habeth, Tonje; Strøm, Steinar
  11. Comparison of Long-Term Contracts and Vertical Integration in Decentralised Electricity Markets By Richard Meade; Seini O'Connor
  12. Innovation and market dynamics in the EPO market By Sorisio, Enrico; Strøm, Steinar
  13. Market Power versus Efficient-Structure in Arab GCC Banking By Al-Muharrami, Saeed; Matthews, Kent
  14. Competing Auction Houses By Alexander Matros; Andriy Zapechelnyuk
  15. The BCS, Antitrust and Public Policy By Andrew Zimbalist

  1. By: John Vickers
    Abstract: One of the most controversial questions in current competition policy is when, if ever, should competition law require a firm with market power to share its property, notably intellectual property, with its rivals? And if supply is required, on what terms? These questions are discussed with reference to recent law cases including the EC Microsoft judgment of 2007 and the US linkLine case of 2009. The analysis focuses on whether competition law and regulation are complements or substitutes, and on incentives for investment and (sequential) innovation.
    Keywords: Property rights, refusal to supply, price squeeze, Intellectual property, Sequential innovation, Antitrust
    JEL: K21 L41 O31 O34
    Date: 2009
  2. By: Haan, Marco A. (University of Groningen); Moraga-Gonzalez, Jose L. (University of Groningen)
    Abstract: We model the idea that when consumers search for products, they first visit the firm whose advertising is more salient. The gains a firm derives from being visited early increase in search costs, so equilibrium advertising increases as search costs rise. This may result in lower firm profits when search costs increase. We extend the basic model by allowing for firm heterogeneity in advertising costs. Firms whose advertising is more salient and therefore raise attention more easily charge lower prices in equilibrium and obtain higher profits. As advertising cost asymmetries increase, aggregate profits increase, advertising falls and welfare increases.
    Keywords: Advertising; attention; consumer search; saliency;
    JEL: D83 L13 M37
    Date: 2009–05–03
  3. By: Andrea Gallice
    Abstract: According to traditional IO models, the characteristics of market demand (intercept, slope, elasticity) and of technology (level of symmetric marginal costs) do not play any role in defining the sustainability of collusive behaviors in Bertrand oligopolies. The paper modifies this counterintuitive result by showing that all the above mentioned factors do a¤ect the sustainability of collusion when prices are assumed to be discrete rather than continuous. The sign of these effects is unambiguous. Their magnitude varies greatly: in some cases it is totally negligible, in others it becomes extremely relevant.
    Keywords: collusion, market demand, Bertrand supergames.
    JEL: L13 L41
    Date: 2008–06
  4. By: DE VILLEMEUR, Etienne; FLOCHEL, Laurent; VERSAEVEL, Bruno
    JEL: C72 D43 L13
    Date: 2009–03
  5. By: Collie, David R. (Cardiff Business School)
    Abstract: A two-country model of the FDI versus export decisions of firms is analysed. The analysis considers both the Cournot duopoly and the Bertrand duopoly models with differentiated products. It is shown that the static game is often a prisoners' dilemma where both firms are worse off when they both undertake FDI. To avoid the prisoners' dilemma, in an infinitely-repeated game, the firms can collude over their FDI versus export decisions. Then, a reduction in trade costs may lead firms to switch from exporting to undertaking FDI when trade costs are relatively high. Also, collusion over FDI may increase welfare.
    Keywords: Collusion; Trade Liberalisation; Foreign Direct Investment; Cournot Oligopoly; Bertrand Oligopoly; Infinitely-Repeated Game
    JEL: F12 F23 L13 L41
    Date: 2009–06
  6. By: Lucia Helena Salgado
    Abstract: O objetivo do trabalho é analisar a defesa da concorrência no Brasil após doze anos de aplicação da Lei no 8.884/1994, que efetivamente a inaugurou. Para isso, inicia-se com uma abordagem histórica, expondo as principais premissas que norteiam o exercício dessa política pública. Busca-se identificar, utilizando dados do Conselho Administrativo de Defesa Econômica (Cade) – como as condenações por setor econômico e decisões em atos de concentração e processos administrativos –, os principais obstáculos ao exercício eficaz da defesa da concorrência. Por fim, é ressaltado o momento oportuno de revisão do marco regulatório e explanados os principais pontos do Substitutivo ao Projeto de Lei no 3.937/2004 com essa finalidade. The essay intends to analyze the competition policy in Brazil after twelve years of the Law n. 8.884/1994, which has effectively inaugurated it. Thus, it initiates with a historical approach, exposing the principal premises that guide this public policy exercise. Utilizing data from the Administrative Council for Economic Defense (Cade), such as condemnations per economic sector and decisions regarding merger and administrative proceedings, attempts to identify the principal obstacles to the effective competition exercise. Finally, is emphasized the convenient moment to review the regulatory framework and expounded the principal points of the Project of Law n. 3.937/2004, with this purpose.
    Date: 2009–02
  7. By: Baldwin, John R.; Gibson, Bob; Wang, Yanling
    Abstract: This paper examines the characteristics of plants in the manufacturing sector undergoing changes in ownership to further our understanding of the underlying causes of mergers and acquisitions. Previous Canadian studies (Baldwin 1995; Baldwin and Caves 1991) compare the performance of merged plants at the beginning and the end of the 1970s. This paper examines annual changes that occurred over the 1970s, 1980s, and 1990s to provide a longer-run perspective. In doing so, it outlines the amount of change taking place (both the number of plants affected and the share of employment) and the characteristics of plants that led to their takeover. Differences between foreign and domestic takeovers are also examined.
    Keywords: Manufacturing, Business performance and ownership, Entry, exit, mergers and growth, Small and medium-sized businesses
    Date: 2009–06–04
  8. By: Potin, Jacques (ESSEC Business School)
    Abstract: This paper studies the influential Melitz model of trade with heterogeneous firms using an alternative, intuitive approach. Contrary to what is often argued, it is an increase in product market competition that drives the bad firms out: with two-way trade, entry by foreign firms is not compensated by a “sufficient” reduction in the mass of surviving firms. To illustrate this, we decompose the total effect of trade in two partial effects: a domestic-profit-reducing effect due to foreign market penetration by the most productive firms; an average-profit-reducing effect due to the payment of the fixed export costs. We also provide the new prediction that trade generally leads to (weakly) less entry in the industry. This clarifies key interpretation issues in a prolific literature.
    Keywords: Firm Heterogeneity; Intra-industry Trade; Selection
    JEL: F10 F12
    Date: 2009–04
  9. By: Joern Meissner (Department of Management Science, Lancaster University Management School); Arne Strauss (Department of Management Science, Lancaster University Management School)
    Abstract: In recent years, many traditional practitioners of revenue management such as airlines or hotels were confronted with aggressive low-cost competition. In order to stay competitive, these firms responded by cutting down fare restrictions that were originally meant to fence off customer segments, that is to prevent highyield customers from buying down. For the corresponding markets, unrestricted fares were introduced whose essentially only distinctive feature is its price. Some markets, however, were unaffected and here restrictions could be maintained as it was the case for long-haul flights, for example. We develop choice-based network revenue management approaches for such a mixed fare environment that can handle both the traditional opening or closing of restricted fare classes as well as handling pricing of the unrestricted fares simultaneously. For any such unrestricted fare, we assume a fixed number of price points to choose from. It is natural to ask then how these price points shall be chosen. To that end, we formulate the problem as a dynamic program and approximate it with an efficient mixed integer linear program (MIP) that selects the best n, say, price points out of a potentially large set of price candidates for each unrestricted fare. We show both theoretically and practically that it is advantageous to recompute price points later in the booking horizon using our approach. Furthermore, additional insight is gained from the fact that the dual values associated with MIP provide an upper bound on the value of having an additional price point. Numerical experiments illustrate the quality of the obtained price structure and that computational effort is relatively low given that we need to tackle the large-scale MIP with column generation techniques where each column pricing problem itself is NP-hard.
    Keywords: revenue management, restriction-free pricing, network, pricing structure
    JEL: C61
    Date: 2009–06
  10. By: Dalen, Dag Morten (Handelshøyskolen BI); Habeth, Tonje (Handelshøyskolen BI); Strøm, Steinar (Department of Economics, University of Oslo)
    Abstract: In March 2003 the Norwegian government implemented yardstick based price regulation schemes on a selection of drugs experiencing generic competition. The retail price cap, termed “index price”, on a drug (chemical substance) was set equal to the average of the three lowest producer prices on that drug, plus a fixed wholesale and retail margin. This is supposed to lower barriers of entry for generic drugs and to trigger price competition. Using monthly data over the period 1998-2004 for the 6 drugs (chemical entities) included in the index price system, we estimate a structural model enabling us to examine the impact of the reform on both demand and market power. Our results suggest that the index price helped to increase the market shares of generic drugs and succeeded in triggering price competition.
    Keywords: Discrete choice; demand for pharmaceuticals; monopolistic competition; evaluation of yardstick based price regulation
    JEL: C35 D43 I18 L11
    Date: 2009–06–04
  11. By: Richard Meade; Seini O'Connor
    Abstract: Decentralised electricity systems require effective price and quantity risk management mechanisms, but the nature of such systems poses particular problems for satisfying those requirements. Among these problems are investment hold-up risks rooted in the competition facing both electricity retailers and large industrial firms. Additional problems include those of load profile, information and bargaining mismatches between generators and customers. Significantly, hold-up risks exist not only between retailers and generators, but also affect (e.g. fuel) suppliers upstream of generators. Contracts are one means of addressing such problems, and represent a particular improvement on spot market trading alone. However, we argue that market contracting in electricity systems is a costly approach to addressing hold-up and related problems, and that internal organisation (i.e. vertical integration) is a more efficient alternative, minimising the overall costs of market contracting and ownership. Not only does integration internalise wholesale market risks and market power costs to the integrated firm, thereby reducing their importance, it also reduces the need for and efficacy of regulation to constrain generator market power. It furthermore thins contract markets, reducing the threat of generator hold-up from competitive retail entry, and otherwise supports generation investment and hence supply security. While the reinstatement or retention of retail franchise areas is one possible solution to the problems of contracting, it is arguably unnecessary if there are other system features (such as transmission constraints) impeding retail entry. This is particularly so in systems involving vertical integration, although even then policy makers are confronted with a trade-off between promoting retail competition and facilitating generation investment and supply security, requiring judgement as to the optimal degree of retail market power. While vertical integration is a more natural and self-sustaining solution to electricity sector problems, it too is only a partial solution, leaving complementary roles for spot and long-term contract markets.
    Keywords: electricity, electricity markets, market contracting, spot market trading, vertical integration
    Date: 2009–02–25
  12. By: Sorisio, Enrico (PharmaNess scarl; University of Turin); Strøm, Steinar (University of Oslo; The Frisch Centre, Oslo; University of Turin)
    Abstract: In this paper we study the demand and supply of erythropoietin in four Nordic countries, using an econometric model based on discrete choice and a random utility model. It measures the effect of price changes as well as the loyalty of patients and physicians to a drug. Our main aims are to estimate demand for EPO and to determine the degree of competition in this Nordic market. The main motivation for this paper is to analyze the impact of product innovation on market power and welfare, e.g. on consumer and producer surplus. The product innovation is the entry of Aranesp in the Nordic market.
    Keywords: Discrete choice; demand for pharmaceuticals; monopolistic competition; EPO
    JEL: C35 D43 I18 L11
    Date: 2009–06–04
  13. By: Al-Muharrami, Saeed; Matthews, Kent (Cardiff Business School)
    Abstract: This paper evaluates the performance of the Arab GCC banking industry in the context of the Structure-Conduct-Performance hypothesis in the period 1993-2002. The paper uses panel estimation differentiating between bank fixed effects and country fixed effects. It examines the Relative-Market-Power and the Efficient-Structure hypotheses differentiating between the two by employing a non-parametric measure of technical efficiency, and finds that the banking industry in the Arab GCC countries is best explained by the mainstream SCP hypothesis. The empirical results do not find any support for the Hicks (1935) "Quiet Life" version of the market power hypothesis.
    Keywords: GCC Banking; Structure Conduct Performance
    JEL: G2 L1
    Date: 2009–06
  14. By: Alexander Matros (University of Pittsburgh); Andriy Zapechelnyuk (University of Bonn and Kyiv School of Economics)
    Abstract: We consider a model where sellers make repeated attempts to sell an object via two competing auction houses. An auction house that attracts a seller runs a Vickrey auction among a random sample of buyers and collects two fees: a listing fee and, if the object is sold, a closing fee. We characterize equilibria and show that two equilibrium outcomes are possible: a (contestable) monopoly, and a market segmentation between the two competitors.
    Keywords: Competing auctions, mediator, listing fee, closing fee
    JEL: C73 D44 D82
    Date: 2009–04
  15. By: Andrew Zimbalist (Department of Economics, Smith College)
    Abstract: This paper examines the history and the economics of the Bowl Championship Series, in the context of all college bowl games. The evidence suggests that the BCS restricts entry to the FBS conferences that are outside the BCS cartel and that the revenue distribution from the bowl games is highly skewed in favor of the six BCS conferences. The resulting revenue advantage enables the BCS conferences to perpetuate their historical predominance. The BCS selection process is based on a conceptually confused and biased system. The paper discusses the rationale proffered by the BCS for its system and then considers the antitrust arguments against the BCS. It concludes that the outcome of any antitrust claim would be uncertain, which together with the involved expense and time render problematic any antitrust strategy to break up the BCS cartel. Instead, the paper concludes with a call for a legislative solution that would open up the national championship to all FBS conferences, increase output, redistribute revenues more evenly throughout Division I and the rest of the NCAA, and provide more opportunities to college athletes.
    JEL: K21 L11 L12 L44 L83

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