nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒07‒11
sixteen papers chosen by
Russell Pittman
US Department of Justice

  1. Bilateral oligopoly and quantity competition By Alex Dickson; Roger Hartley
  2. Non-Exclusive Competition in the Market for Lemons By ATTAR, Andrea; MARIOTTI, Thomas; SALANIÉ, François
  3. Exclusionary Bundling: The Motive for Mergers By Sue Mialon
  4. Do markup dynamics reflect fundamentals or changes in conduct? By Juselius , Mikael; Kim, Moshe; Ringbom, Staffan
  5. Competition and Innovation: Evidence from Financial Services By Jaap W.B. Bos; Ryan C.R. van Lamoen; James W. Kolari
  6. Credit quantity and credit quality: bank competition and capital accumulation By Nicola Cetorelli; Pietro F. Peretto
  7. Predicting Market Power in Wholesale Electricity Markets By David Newbery
  8. Long-term Energy Supply Contracts in European Competition Policy: Fuzzy not Crazy By Jean-Michel Glachant; Adrien de Hauteclocque
  9. Market liberalization in the European Natural Gas Market The importance of capacity constraints and efficiency differences By Steven Brakman; Charles van Marrewijk; Arjen van Witteloostuijn
  11. Industry Equilibrium with Open Source and Proprietary Firms By Gastón Llanes; Ramiro de Elejalde
  12. Superstars and the Long Tail: The impact of technology on market structure in media industries By Helen Weeds
  13. Hospital Competition, Technical Efficiency, and Quality By C. L. Chua; Alfons Palangkaraya; Jongsay Yong
  14. Designing Competition in Health Care Markets By Dalen, Dag Morten; Moen, Espen R; Riis, Christian
  15. Imperfect Quality Information in a Quality-Competitive Hospital Market By Hugh Gravelle; Peter Sivey
  16. World Markets for Mergers and Acquisitions By Isil Erel; Rose C. Liao; Michael S. Weisbach

  1. By: Alex Dickson; Roger Hartley
    Date: 2009
  2. By: ATTAR, Andrea; MARIOTTI, Thomas; SALANIÉ, François
    Date: 2009–06
  3. By: Sue Mialon
    Abstract: This paper models how exclusionary bundling motivates mergers. Firms in two unrelated markets may want to merge only to bundle, even though bundling is possible without a merger. This is because merger is necessary in order to use bundling for an exclusionary purpose. Independently of a merger, firms can always improve their profits from pure bundling. In contrast, a merger is never profitable if not combined with bundling. Moreover, it is more profitable to bundle through strategic alliance than through merger in the short run. Thus, firms choose to merge only if the merger can lead to foreclosure. Although the merger results in losses to a rival in only one of the two markets, foreclosure occurs in both markets, since the other rival firm alone cannot compete against a bundle. In this framework, all mergers are ex ante anti-competitive. Blocking a merger is never welfare-reducing.
    Date: 2009–06
  4. By: Juselius , Mikael (Universtiy of Helsnki RUSEG and Hanken School of Economics and HECER); Kim, Moshe (Universitat Pompeu Fabra); Ringbom, Staffan (Hanken School of Economicsn and HECER)
    Abstract: Persistent shifts in equilibria are likely to arise in oligopolistic markets and may be detrimental to the measurement of conduct, related markups and intensity of competition. We develop a cointegrated VAR (vector autoregression) based approach to detect long-run changes in conduct when data are difference stationary. Importantly, we separate the components in markups which are exclusively related to long-run changes in conduct from those explained solely by fundamentals. Our approach does not require estimation of markups and conduct directly, thereby avoiding complex problems in existing methodologies related to multiple and changing equilibria. Results from applying the model to US and five major European banking sectors indicate substantially different behavior of conventional raw markups and conduct-induced markups.
    Keywords: markups; cointegration; VAR; macroeconomic fundamentals; competition; banking
    JEL: C32 C51 G20 L13 L16
    Date: 2009–04–22
  5. By: Jaap W.B. Bos; Ryan C.R. van Lamoen; James W. Kolari
    Abstract: In this paper we seek to contribute to the literature on competition and innovation by focusing on individual firms within the U.S. banking industry in the period 1984-2004. We measure innovation by estimating technology gaps and find evidence of an inverted-U relationship between competition and the technology gaps in banking. This finding is robust over several different specifications and is consistent with theoretical and empirical work by Aghion, Bloom, Blundell, Griffith, and Howitt (2005b). The optimal amount of innovation requires a slightly positive mark up. Also, we find that the U.S. banking industry as a whole has consolidated beyond this optimal innovation level and that state-level interstate banking deregulation has lowered innovation.
    Keywords: competition, innovation, stochastic frontier analysis, technology gap ratio, banking
    JEL: D21 G21 L10 O30
    Date: 2009–06
  6. By: Nicola Cetorelli; Pietro F. Peretto
    Abstract: This paper shows that bank competition has an intrinsically ambiguous effect on capital accumulation and economic growth. We further demonstrate that banking market structure can be responsible for the emergence of development traps in economies that would otherwise be characterized by unique steady-state equilibria. These predictions explain the conflicting evidence gathered from recent empirical studies of how bank competition affects the real economy. Our results were obtained by developing a dynamic general-equilibrium model of capital accumulation in which banks operate in a Cournot oligopoly. The presence of more banks leads to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to screen loan applicants and thus to poorer capital allocation. We also show that conditioning on economic parameters describing the quality of the entrepreneurial population resolves the theoretical ambiguity. In economies where the average prospective entrepreneur is of low credit quality and where screening would therefore be especially beneficial, less competition leads to higher capital accumulation. The opposite is true when entrepreneurs are innately of higher credit quality.
    Keywords: Bank competition ; Banking structure
    Date: 2009
  7. By: David Newbery
    Abstract: The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.
    Keywords: energy policy; electricity; electricity
    Date: 2009–02–15
  8. By: Jean-Michel Glachant; Adrien de Hauteclocque
    Abstract: Long-term supply contracts often have ambiguous effects on the competitive structure, investment and consumer welfare in the long term. In a context of market building, these effects are likely to be worsened and thus even harder to assess. Since liberalization and especially since the release of the Energy Sector Enquiry in early 2007, the portfolio of long-term supply contracts of the former incumbents have become a priority for review by the European Commission and the national competition authorities. It is widely believed that European Competition authorities take a dogmatic view on these contracts and systemically emphasize the risk of foreclosure over their positive effects on investment and operation. This paper depicts the methodology that has emerged in the recent line of cases and argues that this interpretation is largely misguided. It shows that a multiple-step approach is used to reduce regulation costs and balance anti-competitive effects with potential efficiency gains. However, if an economic approach is now clearly implemented, competition policy is constrained by the procedural aspect of the legal process and the remedies imposed remain open for discussion.
    Keywords: energy policy; competition policy
    Date: 2009–02–15
  9. By: Steven Brakman; Charles van Marrewijk; Arjen van Witteloostuijn
    Abstract: In the European Union, energy markets are increasingly being liberalized. A case in point is the European natural gas industry. The general expectation is that more competition will lead to lower prices and higher volumes, and hence higher welfare. This paper indicates that this might not happen for at least two reasons. First, energy markets, including the market for natural gas, are characterized by imperfect competition and increasing costs to develop new energy sources. As a result, new entrants in the market are less efficient than incumbent firms. Second, energy markets, again including the market for natural gas, are associated with capacity constraints. Prices are determined in residual markets where the least efficient firms are active. This is likely to lead to price increases, rather than decreases.
    Keywords: natural gas, capacity constraints, efficiency, market liberalization
    JEL: Q4 L1 L7
    Date: 2009–07
  10. By: Germà Bel; Xavier Fageda
    Abstract: This paper examines factors determining prices that airports charge to airlines. Using data for 100 large airports in Europe, we find that they charge higher prices when they move more passengers. Additionally, competition from other transport modes and other nearby airports imposes some discipline on the pricing behavior of airports. Low-cost carriers and airlines with a high market share seem to have a stronger countervailing power. Finally, we find that private airports not regulated charge higher prices than public or regulated airports. From our analysis, we can infer that market power of each airport is dependent upon its specific characteristics.
    Keywords: Privatization; regulation, pricing; air transportation; airports
    Date: 2009–06–09
  11. By: Gastón Llanes (Harvard Business School, Entrepreneurial Management Unit); Ramiro de Elejalde (Universidad Carlos III de Madrid)
    Abstract: We present a model of industry equilibrium to study the coexistence of Open Source (OS) and Proprietary (P) firms. Two novel aspects of the model are: (1) participation in OS arises as the optimal decision of profit-maximizing firms, and (2) OS and P firms may (or may not) coexist in equilibrium. Firms decide their type and investment in R&D, and sell packages composed of a primary good (like software) and a complementary private good. The only difference between both kinds of firms is that OS share their technological advances on the primary good, while P keep their innovations private. The main contribution of the paper is to determine conditions under which OS and P coexist in equilibrium. Interestingly, this equilibrium is characterized by an asymmetric market structure, with a few large P firms and many small OS firms.
    Keywords: Industry Equilibrium, Open Source, Innovation, Complementarity, Technology Sharing, Cooperation in R&D
    JEL: O31 L17 D43
    Date: 2009–06
  12. By: Helen Weeds
    Abstract: Technological change is transforming media industries. Digitization lowers the cost of recording, storage, reproduction and distribution, while computer-based editing facilitates higher quality and special effects. With electronic distribution, a vast range of content can be made available to consumers at little cost. Meanwhile, the distribution of industry production and sales appears to be shifting: the late 20th century was the era of the “hit parade”, but in the 21st attention has shifted to the “long tail”. This paper develops a free entry model of differentiated products with endogenous quality and heterogeneous types to examine the implications of technological change for market structure, quality, and the distribution of firms in media industries. This framework can be used to assess current and future trends in media industries.
    Date: 2009–06–29
  13. By: C. L. Chua (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Alfons Palangkaraya (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Jongsay Yong (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper studies the link between competition and technical efficiency of public hospitals in the State of Victoria, Australia by accounting both quantity and quality of hospital output using a two-stage semi-parametric model of hospital production and Data Envelopment Analysis. On the one hand, it finds a positive relationship between efficiency and competition measured by the Hirschman-Herfindahl Index (HHI). On the other, it finds that efficiency and the number of competing hospitals, in particular the number of competing private hospitals, to be negatively correlated. More importantly, it finds that whether or not quality is treated as an endogenous output variable, as opposed to as an exogenous control variable, may impact on the statistical estimates of the link between efficiency and competition. Also, how the effect of competition on efficiency is modelled empirically may matter, though the impact of the treatment of quality as described above appears to be more important. Overall, the results highlight the importance of quality consideration in assessing the effects of competition on efficiency and points to possibly undesirable resource allocation effects when public hospitals are made to compete with a large number of private hospitals.
    Keywords: hospital competition; technical efficiency; Hirschman-Herfindahl Index; data envelopment analysis; hospital quality
    JEL: I11 D24 D40
    Date: 2009–06
  14. By: Dalen, Dag Morten (BI Norwegian School of Management); Moen, Espen R (BI Norwegian School of Management); Riis, Christian (BI Norwegian School of Management)
    Abstract: In this paper we propose a simple, market based mechanism to set prices in health care markets, namely a system where the patients are auctioned out to the hospitals. Our aim is to characterize principles as to how such an auction should be designed. In the case of elective treatment, health authorities thus organize a competition between hospitals. The hospital with the lowest price signs a contracts with authority (or the insurer) that commits him to treat a given number of patients within a predetermined period. However, this is not a simple mechanism that identi…es the hospital with the lowest treatment cost. Due to potentially rapid and unpredictable shifts in demand, treatment capacity may be hard to know in advance. There is always a risk that treatment must be canceled due to arrival of patients that require acute treatment. This calls for a market design that accounts for the risk of default. Our main result is that the expected cost for the government is reduced if the government chooses to ”subsidize” default. This could be thought of as a system in which the government buys treatment in the spot market in the case of default, and let the hospital pay a default fee that is lower than the spot price. The reason why this reduces expected costs for the government is that the e¤ect on the bids is asymmetric: The second lowest bid is on average reduced more than the winning bid. Hence, the winner’s profit tends to shrink. This is due to what we characterize an endogenous correlation. Since the cost of treatment increases in the default risk (as the hospital must pay a penalty if it defaults), high cost hospitals typically have larger default risks than low costs hospitals.
    Keywords: Health care markets; health care; hospitals; competition
    JEL: I11 I12
    Date: 2009–06–30
  15. By: Hugh Gravelle (National Primary Care Research and Development Centre, Centre for Health Economics, University of York); Peter Sivey (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: We examine the implications of policies to improve information about the qualities of profit seeking duopoly hospitals which face the same regulated price and compete on quality. We show that if the hospital costs of quality are similar then better information increases the quality of both hospitals. However if the costs are sufficiently different improved information will reduce the quality of both hospitals.
    Date: 2009–03
  16. By: Isil Erel; Rose C. Liao; Michael S. Weisbach
    Abstract: Despite the fact that one-third of worldwide mergers involve firms from different countries, the vast majority of the academic literature on mergers studies domestic mergers. What little has been written about cross-border mergers has focused on public firms, usually from the United States. Yet, the vast majority of cross-border mergers involve private firms that are not from the United States. We provide an analysis of a sample of 56,978 cross-border mergers occurring between 1990 and 2007. We first characterize the patterns of who buys whom: Geography matters, with firms being much more likely to purchase firms in nearby countries than in countries far away. Purchasers are usually but not always from developed countries and they tend to purchase firms in countries with lower investor protection and accounting standards. A significant factor in determining acquisition patterns is currency movements; firms tend to purchase firms from countries relative to which the acquirer’s currency has appreciated. In addition economy-wide factors reflected in the country’s stock market returns lead to acquisitions as well. Both the currency and stock market effect could reflect either misvaluation or wealth explanations. Our evidence is more consistent with the wealth explanation than the misvaluation explanation.
    JEL: F3 G34
    Date: 2009–07

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