nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒06‒17
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Firm entry, product repositioning and welfare By Zacharias, Eleftherios
  2. On Quantity Competition With Switching Costs By Langus, Gregor; Lipatov, Vilen
  3. Asymmetric Price Effects of Competition By Lach, Saul; Moraga-González, José-Luis
  4. With a little help from my enemy: comparative advertising as a signal of quality By Francesca BARIGOZZI; Paolo Giorgio GARELLA; Martin PEITZ
  5. Successive Monopolies with Endogenous Quality By Zenger, Hans
  6. Comparing Cournot and Bertrand Competition in a Unionized Mixed Duopoly By Choi, Kangsik
  7. Outsourcing versus technology transfer: Hotelling meets Stackelberg By Pierce, Andrea; Sen, Debapriya
  8. A primer on the welfare effects of regulatory reforms in network industries By Lidia CERIANI; Massimo FLORIO
  9. Privatization, unbundling, and liberalization of network industries:a discussion of the dominant policy paradigm in the EU By Lidia CERIANI; Raffaele DORONZO; Massimo FLORIO
  10. Telecom prices, regulatory reforms, and consumers’ satisfaction: evidence for 15 EU countries By Emanuele BACCHIOCCHI; Massimo FLORIO; Marco GAMBARO
  11. A fundamental power price model with oligopolistic competition representation By Vazquez, Miguel; Barquín, Julián
  12. Is Google the next Microsoft? Competition, Welfare and Regulation in Internet Search By Pollock, R.
  13. Media policy: an economic contribution By Marco GAMBARO
  14. Financial Intermediation and the Role of Price Discrimination in a Two-Tier Market By Reitz, Stefan; Schmidt, Markus; Taylor , Mark P.
  15. Does Competition from Ambulatory Surgical Centers Affect Hospital Surgical Output and Hospital Profit? By Plotzke, Michael; Courtemanche, Charles
  16. Competition Policy, Corporate Saving and China's Current Account Surplus By Rod Tyers; Feng Lu

  1. By: Zacharias, Eleftherios
    Abstract: We show that the entry of a second firm in a horizontally differentiated market (ala Hotelling) may harm consumers as prices increase and consumer's surplus possibly decrease. We first derive the price and the consumer's surplus of a monopoly which is located at the center of the market. When a second firm enters the market the first firm repositions and the two firms locate at their equilibrium points. Although competition adds to variety and increases consumer's surplus, the post entry increase in price may outweight the gains from extra variety and make consumers worse off.
    Keywords: Horizontal differentiation; welfare analysis; product repositioning
    JEL: L13 D43 D60
    Date: 2009
  2. By: Langus, Gregor; Lipatov, Vilen
    Abstract: We build a simple model of quantity competition to analyze the effect of switching costs on equilibrium behavior of duopolists. We characterize the industry structure as a function of initial sales of two firms. Contrary to the literature, initial asymmetries persist in our model even though the firms are identical. When the disparity between initial sales is large, the smaller firm may become very aggressive and get more than half of the market in equilibrium. When the firms have similar initial positions, they tend to be locked in them.
    Keywords: quantity competition; switching costs
    JEL: L11 L13
    Date: 2008
  3. By: Lach, Saul; Moraga-González, José-Luis
    Abstract: This paper examines how the distribution of prices changes with the number of competitors in the market. Using gasoline price data from the Netherlands we find that as competition increases, the distribution of prices spreads out: the low prices go down while the high prices go up, on average. As a result, competition has an asymmetric effect on prices. These findings, which are consistent with a theoretical model where consumers differ in the information they have about prices, imply that consumers' gains from competition depend on their shopping behavior. In our data, all consumers, irrespective of the number of prices they observe, benefit from an increase in the number of gas stations. The magnitude of the welfare gain, however, is greater for those consumers that are aware of more prices. We conclude that an increase in the number of gas stations has a positive but unequal effect on the welfare of consumers in the Netherlands.
    Keywords: gasoline prices; imperfect information; number of firms; price distribution
    JEL: L1
    Date: 2009–06
  4. By: Francesca BARIGOZZI; Paolo Giorgio GARELLA; Martin PEITZ
    Abstract: We extend the theory of advertising as a quality signal, using a model where an entrant can choose to advertise by comparing its product to that of an established incumbent. Comparative advertising, comparing quality of one’s own product to that of a rival’s, empowers the latter to file for court intervention if it believes the comparison to be false or misleading. We show that comparative advertising can be a signal in instances where generic advertising is not viable.
    Keywords: Advertising, Quality, signaling, Entry, Competition
    JEL: L15 M37 L13
    Date: 2008–10–16
  5. By: Zenger, Hans
    Abstract: This paper analyzes the impact of vertical integration on product quality. Contrary to previous findings, it is shown that integration decreases quality in many natural situations. In general, the direction of the quality change is governed by three effects that are isolated in the model. This separation allows an analysis of important special cases like the manufacturer/retailer relationship, the intermediate/final good producer relationship, the deregulation of network infrastructure, and the provision of promotional services through independent distributors.
    Keywords: Vertical integration; double marginalization; quality
    JEL: L22 L12 L15 D4
    Date: 2009–05–03
  6. By: Choi, Kangsik
    Abstract: We investigate a differentiated mixed duopoly in which private and public firms can choose to strategically set prices or quantities by facing a union bargaining process. For the case of a unionized mixed duopoly, only the public firm is able to choose a type of contract irrespective of whether the goods are substitutes or complements in the equilibrium. Thus, we show that social welfare under Bertrand competition is always determined by the public firm's dominant strategy, wherein the Bertrand competition entails higher social welfare than the Cournot competition. Moreover, there are multiple Nash equilibria in the contract stage of the game. Finally, our main results hold irrespective of the nature of goods, with the exception of when a sufficiently large parameter of complements is employed, the ranking of private firm's profit is not reversed, which is contrast to the standard findings.
    Keywords: Wage Bargaining; Union; Cournot-Bertrand Competition; Mixed Duopoly.
    JEL: J51 L13 D43 C72 H44
    Date: 2008–09–25
  7. By: Pierce, Andrea; Sen, Debapriya
    Abstract: This paper considers a Hotelling duopoly with two firms A and B in the final good market. Both A and $B$ can produce the required intermediate good, firm B having a lower cost due to a superior technology. We compare two contracts: outsourcing (A orders the intermediate good from B) and technology transfer (B transfers its technology to A). First we show that an outsourcing order acts as a credible commitment on part of A to maintain a certain market share in the final good market. This generates an indirect Stackelberg leadership effect, which is absent in a technology transfer contract. We show that compared to the situation of no contracts, there are always Pareto improving outsourcing contracts but no Pareto improving technology transfer contracts. Finally, it is shown that whenever both firms prefer one of the two contracts, all consumers prefer the other contract.
    Keywords: Outsourcing; Technology transfer; Hotelling duopoly; Stackelberg effect; Pareto improving contracts
    JEL: L11 L13 D43
    Date: 2009–06–11
  8. By: Lidia CERIANI; Massimo FLORIO
    Abstract: Starting from an industry where production is provided by a public monopolist, we look at the effects on the consumers' surplus of a sequence of reforms in network industry. Using a simple comparative statics framework, we find indifference conditions in consumers' surplus between respectively public monopoly, unregulated private monopoly, regulated private monopoly, vertically disintegrated monopoly, duopoly and liberalized market. The results are determined by the relative size of the x-inefficiencies of the public monopolist, allocative inefficiencies of private monopoly, the cost of unbundling and costs related to establishing a competitive market.
    Keywords: Privatization, unbundling, liberalization, network industries
    JEL: D40 L51 L32 L33
    Date: 2008–07–08
  9. By: Lidia CERIANI; Raffaele DORONZO; Massimo FLORIO
    Abstract: In this paper we examine the emergence over the last two decades in the EU of a dominant policy paradigm on the reform of network industries. We consider the broad recommendations by the OECD and the European Commission, and the Directives adopted by the European Union on the reform of some public services, such as electricity, gas, and telecom. These recommendations, in their strongest form, advocate the divestiture of public ownership (openly by the OECD, but not by the EC), unbundling (by both organizations, but with differences across sectors), liberalization (again by both organization, but with variations in the role of market regulation). We contrast the predictions and prescriptions of the paradigm, with a theoretical discussion of the welfare impact of the reforms. This discussion, based on a review of some standard microeconomic assumptions on the role of ownership, economies of scale and scope, governance, and market forms, shows that the dominant policy paradigm oversimplifies a very complex story. We suggest that the actual success of the reform is conditional to a large number of economic and institutional factors, and that it is far from obvious that the adoption of the same policy pattern in any and all the EU countries is always welfare improving. Empirical analysis does not support the paradigm.
    Keywords: Privatization, unbundling, liberalization, network industries
    JEL: L10 L22 L32 L51
    Date: 2009–03–23
  10. By: Emanuele BACCHIOCCHI; Massimo FLORIO; Marco GAMBARO
    Abstract: We study the impact on consumers of privatization and liberalization in the telecommunication sector for 15 EU Countries. Policy reforms are summarized by the OECD regulatory indicators (REGREF), that considers the extent of privatization, vertical disintegration, and market entry. After controlling for other country variables, we first test the impact of ownership and regulatory changes on productivity and consumer prices. In a second step, we consider the Eurobarometer data on consumers’ satisfaction about quality and prices of the telecommunication service. The analysis confirms the importance of market entry regulation in reducing prices and increasing productivity performances, but minimize the role played by privatization per se. The latter and liberalization of the telecommunication market play a role in explaining the consumers’ satisfaction about prices and quality of the service, but country fixed effects are more important. Overall, our findings offer only mixed evidence, and somehow contradict, the hypothesis of welfare dominance of a unique reform paradigm in the telecom industry.
    Keywords: Telecom industry liberalization, privatization, impact on European consumers
    JEL: L32 L33 L96
    Date: 2008–04–14
  11. By: Vazquez, Miguel; Barquín, Julián
    Abstract: Most popular approaches for modeling electricity prices rely at present on microeconomics rationale. They aim to study the interaction between decisions of agents in the market, and usually represent the impact of uncertainty in such decisions in a simplified way. The usual methodology of microeconomics models is the study of the interaction between the profit-maximization problems faced by each of the firms. On the other hand, there is a growing literature that describes the power price dynamics from the financial standpoint, through the statement of a more or less complex stochastic process. However, this theoretical framework is based on the assumption of perfect competition, and therefore the stochastic process may not capture important features of price dynamics. In this paper, we suggest a mixed approach, in the sense that the price is thought of as the composition of a long-term component, where the strategic behavior is represented, and a short-term source of uncertainty that agents cannot take into account when deciding their strategies. The complex distributional implications of the oligopolistic behavior of market players are then given by the long-term-component dynamics, whereas the short-term component captures the uncertainty related to the operation of power systems. In addition, this modeling approach allows for a direct description of the long-term volatility of power markets, which is usually hard to estimate through statistical models.
    Keywords: power markets; pricing models; market power; long-term/short-term decomposition
    JEL: C32 L13 Q40 C15 G13 C72
    Date: 2009–06
  12. By: Pollock, R.
    Abstract: The rapid growth of online search and its centrality to the ecology of the Internet raise many questions for economists to answer: Why is the search engine market so concentrated and will it evolve towards monopoly? What implications does this concentration have for consumers, search engines, and advertisers? Does search require regulation and if so in what form? This paper supplies empirical and theoretical material with which to examine these questions. In particular, we (a) show that the already large levels of concentration are likely to continue (b) identify the consequences, negative and positive, of this outcome (c) discuss the regulatory interventions that policy-makers could use to address these.
    Keywords: Search Engine, Regulation, Competition, Antitrust, Technology
    JEL: L40 L10 L50
    Date: 2009–05–09
  13. By: Marco GAMBARO
    Abstract: Media policies encompass a large array of activities and interventions carried out by governments and institutions to coordinate, promote, address and sometimes to control media industries. In Europe, different media are subject to different degrees and different kind of regulations. While record industry is practically neglected by public authorities, television is strongly considered both in market structure and in firm conduct, entry is strictly regulated and in many countries the set of choices in programming and advertising market are restricted. Book publishing and film production are both supported with specific financing and a lot of attention but the former is much less considered and regulated than the latter. Newspapers attract more policies and more financing than magazines and professional press operate at the edge of public attention. The availability of adequate information is one of the most important conditions for making markets and political systems work efficiently. The power of influencing, enhancing or concealing information on certain events may have relevant consequences for consumers and citizens. There are multidimensional relationships between the quality of information supplied by mass media, the competition in information and good markets, and the making of public policies. Media are undergoing constant change in many countries and the convergence with telecommunication made possible by digitalization has resulted in a number of new offer and significant transformations. While in the past different media were pretty separate industries with own value chains and distribution channels, the convergence process enable new product, new substitution pattern and a different kind of competition. For instance, the informative web site of newspapers, television and search engines appear much more similar than the original media. Regulation and policy follow the same pattern, and need to become more horizontal and media independent. The control of concentration level become a problem since the reference market can be different for each product and the simple cross ownership rules risk to be inadequate. Evolving media landscape pose new problems that national and European institution need to address in order to maintain and promote social and economic functions vital for societies.
    Keywords: Information quality, information variety, pluralism, competition, media industries, regulation
    JEL: L82 L52
    Date: 2008–07–21
  14. By: Reitz, Stefan; Schmidt, Markus; Taylor , Mark P.
    Abstract: Though unambiguously outperforming all other financial markets in terms of liquidity, foreign exchange trading is still performed in opaque and decentralized markets. In particular, the two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We provide a theoretical foreign exchange pricing model that accounts for market power considerations and analyze a database of the trades of a German market maker and his cross section of end-user customers. We find that the market maker generally exerts low bargaining power vis-á-vis his customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information. From this perspective, it appears that market makers provide interdealer market liquidity to end-user customers with cross-sectionally differing spreads.
    Keywords: foreign exchange; market microstructure; pricing behavior
    JEL: F31
    Date: 2009–05–30
  15. By: Plotzke, Michael (Abt Associates, Inc.); Courtemanche, Charles (University of North Carolina at Greensboro, Department of Economics)
    Abstract: Hospital administrators have expressed concern that ambulatory surgical centers (ASCs) lower the profitability of hospitals' outpatient departments by reducing their volume and cherry picking their most profitable patients. This could lead to welfare losses by causing hospitals to reduce their provision of less profitable services such as uncompensated care. This paper estimates the effects of ASC prevalence on hospital surgical volume and profit margins using hospital and year fixed effects models with a variety of robustness checks. We show that ASC entry only appears to influence a hospital's outpatient volume if the facilities are within a few miles of each other. Even then, the average reduction in hospital volume is a modest 2-4%, although the effect is stronger for large ASCs and the first ASCs to enter the market. We find no evidence that entering ASCs reduce a hospital's outpatient profit margins, inpatient surgical volume, or inpatient profit margins. In most cases, our results suggest that competition from ASCs does not cause serious financial harm to hospitals.
    Keywords: Ambulatory Surgical Center; Hospital Competition; Physician Ownership; Hospital Profit
    JEL: I11
    Date: 2009–06–03
  16. By: Rod Tyers; Feng Lu
    Abstract: China's industrial reforms have left many key industries dominated by few, often state owned, firms. Until recently, these firms were not required to pay dividends to the state and the post-2000 surge in growth made them very profitable, with their economic profits adding corporate saving amounting to a fifth of GDP. This bolstered China's overall saving-investment gap and hence its controversial current account surplus. In other countries, oligopolistic industries tend to be taxed more heavily and they are commonly subjected to price regulation. This study offers an economy-wide analysis of approaches to oligopoly rents in China. The results suggest that, while policy changes targeting national saving, including increased corporate taxation, expansionary fiscal policy and SOE privatisation all help to control the external imbalance, they tend also to turn demand inward, inducing higher oligopoly rents and slower growth. Competition policy, embodying both price cap regulation and free entry, proves more effective both in controlling the external imbalance and in fostering continued growth.
    JEL: D43 D58 F32 L13 L43 L51
    Date: 2009–03

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