nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒07‒28
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Modern Industrial Economics and Competition Policy: Open Problems and Possible Limits By Oliver Budzinski
  2. Cournot Competition on a Network of Markets and Firms By Rahmi Ilkiliç
  3. First mover advantage in a dynamic duopoly with spillover By Gianluca Femminis; Gianmaria Martini
  4. "Exclusive Dealing and Large Distributors" By Ryoko Oki; Noriyuki Yanagawa
  5. Optimal Collusion with Limited Severity Constraint By Etienne Billette de Villemeur; Laurent Flochel; Bruno Versaevel
  6. On the Effects of Selective Below-Cost Pricing in a Vertical Differentiation Model By Colombo, Stefano
  7. On Regulation and Competition: Pros and Cons of a Diversified Monopolist By Carlo Scarpa; Giacomo Calzolari
  8. Do Foreign Mergers and Acquisitions Boost Firm Productivity? By Marc Schiffbauer; Iulia Siedschlag; Frances Ruane
  9. Competition, imitation, and technical change : quality vs. variety By Cusolito, Ana
  10. Endogenous Technology Sharing in R&D Intensive Industries By Clark, Derek J.; Sand, Jan Yngve
  11. Innovative Sales, R&D and Total Innovation Expenditures: Panel Evidence on their Dynamics By Raymond Wladimir; Mohnen Pierre; Palm Franz; Schim van der Loeff Sybrand
  12. Innovation and productivity in SMEs. Empirical evidence for Italy By Bronwyn H. Hall; Francesca Lotti; Jacques Mairesse
  13. Pass-Through in United States Beef Cattle Prices By Huan Zhao; Xiaodong Du; David A. Hennessy

  1. By: Oliver Budzinski (Department of Environmental and Business Economics, University of Southern Denmark)
    Abstract: Naturally, competition policy is based on competition economics made applicable in terms of law and its enforcement. Within the different branches of competition economics, modern industrial economics, or more precisely game-theoretic oligopoly theory, has become the dominating paradigm both in the U.S. (since the 1990s Post-Chicago movement) and in the EU (so-called more economic approach in the 2000s). This contribution reviews the state of the art in antitrust-oriented modern industrial economics and, in particular, critically discusses open questions and possible limits of basing antitrust on modern industrial economics. In doing so, it provides some hints how to escape current enforcement problems in industrial economics-based competition policy on both sides of the Atlantic. In particular, the paper advocates a change of the way modern industrial economics is used in competition policy: instead of more and more case-by-cases analyses, the insights from modern industrial economics should be used to design better competition rules. I like to thank the co-panelists Laurence Idot, Michele Polo and Daniel Rubin-feld as well as all the participants of the conference “Foundations and Limita-tions of an Economic Approach to Competition Law” (Max-Planck-Institute for Intellectual Property, Competition and Tax Law; Munich 12th / 13th March 2009), Arndt Christiansen and Nadine Lindstädt for very valuable and helpful comments.
    Keywords: competition policy, antitrust, modern industrial economics, more economic approach, merger control
    JEL: L40 K21 L00 M21 B52
    Date: 2009–06
  2. By: Rahmi Ilkiliç (Maastricht University)
    Abstract: Suppose markets and firms are connected in a bi-partite network, where firms can only supply to the markets they are connected to. Firms compete a la Cournot and decide how much to supply to each market they have a link with. We assume that markets have linear demand functions and firms have convex quadratic cost functions. We show there exists a unique equilibrium in any given network of firms and markets. We provide a formula which expresses the quantities at an equilibrium as a function of a network centrality measure.
    Keywords: Cournot Markets, Networks, Nash Equilibrium, Centrality Measures
    JEL: C62 C72 D85 L11
    Date: 2009–05
  3. By: Gianluca Femminis (DISCE, Università Cattolica); Gianmaria Martini (Università di Bergamo)
    Abstract: We present a dynamic duopoly model of technical innovation where R&D costs decrease exogenously with time, and inter-firm knowledge spillover lowers the second comer's R&D cost. The spillover effect only becomes available after a disclosure lag. These features allow us to identify a new type of equilibrium: the leader delays investment until the R&D cost is low enough that the follower finds it optimal to invest as soon as he can benefit from the spillover. This equilibrium is subgame perfect over a wide range of parameters, and raises several interesting implications. First, in our new equilibrium the time delay between the two R&D investments is realistically short. Second, while the presence of a spillover favors the second mover, this benefit is not enough to rule out a first mover advantage. Indeed, the first mover advantage survives whenever technical progress is sufficiently fast and the disclosure lag is relatively long. Third, in case of a major innovation our equilibrium implies under--investment, which requires a substantial public intervention in favour of the investment activity.
    Keywords: R&D, knowledge spillover, dynamic oligopoly
    JEL: L13 L41 O33
    Date: 2009–07
  4. By: Ryoko Oki (Graduate School of Economics, University of Tokyo); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo)
    Abstract: A seminal work by Fumagalli and Motta (2006) explored that an incumbent manufacturer cannot deter an entry by exclusive dealing contract with distributors. This paper extends the flamework of Fumagalli and Motta and examines a situation in which an incumbent distributor tries to deter an entry of efficient distributor by exclusive dealing contracts with manufacturers. The result of this paper is quite opposite to that of Fumagalli and Motta. The exclusion can be successful. It is an unique equilibrium. In this sence, the effects of exclusive dealing depends on the mareket stiructure. Moreover, we extend our model with an entrant even in upstream. It may decrease the possibility of exclusion but may promote the inefficient vertical relation between the entrants.
    Date: 2009–07
  5. By: Etienne Billette de Villemeur (Toulouse School of Economics, IDEI & GREMAQ, 21 allée de Brienne, 31000 Toulouse, France); Laurent Flochel (Charles River Associates International, 27 Avenue de l’opéra, 75001 Paris, France); Bruno Versaevel (EMLYON Business School & CNRS, GATE, 69134 Ecully cedex France)
    Abstract: Collusion sustainability depends on ï¬rms' aptitude to impose suffciently severe punishments in case of deviation from the collusive rule. We characterize the ability of oligopolistic ï¬rms to implement a collusive strategy when their ability to punish deviations over one or several periods is limited by a severity constraint. It captures all situations in which either structural conditions (the form of payoff functions), institutional circumstances (a regulation), or ï¬nancial consider- ations (proï¬tability requirements) set a lower bound to ï¬rms' losses. The model speciï¬cations encompass the structural assumptions (A1-A3) in Abreu (1986) [Journal of Economic Theory, 39, 191-225]. The optimal punishment scheme is characterized, and the expression of the lowest discount factor for which collusion can be sustained is computed, that both depend on the status of the severity constraint. This extends received results from the literature to a large class of models that include a severity constraint, and uncovers the role of structural parameters that facilitate collusion by relaxing the constraint.
    Keywords: Collusion, Oligopoly, Penal codes
    JEL: C72 D43 L13
    Date: 2009
  6. By: Colombo, Stefano
    Abstract: We analyse the effects of predation in a vertical differentiation model, where the highquality incumbent is able to price discriminate while the low-quality entrant sets a uniform price. The incumbent may act as a predator, that is, it may price below its marginal costs on a subset of consumers to induce the rival’s exit. We show that the entrant may adopt an aggressive attitude to make predation unprofitable for the incumbent. In this case predation does not occur and the equilibrium prices are lower than the equilibrium prices which would emerge in a contest of explicitly forbidden predation. Moreover, we show that when the incumbent may choose whether to price discriminate or not before the game starts, if the quality cost function is sufficiently convex, there always exists a parameter space on which the incumbent prefers to commit not to price discriminate.
    Keywords: Vertical differentiation, selective below-cost pricing, predation, price discrimination
    JEL: D43 L12 L41
    Date: 2009
  7. By: Carlo Scarpa (University of Brescia); Giacomo Calzolari (University of Bologna)
    Abstract: We study the regulation of a firm which supplies a regulated service while also operating in a competitive, unregulated sector. If the firm conducts its activities in the two markets jointly, it enjoys economies of scope whose size is the firm’s private information, unknown either to the regulator or to the rival firms. We characterize the unregulated market outcome (with price and quantity competition) and optimal regulation that involves an informational externality to the competitors. Although joint conduct of the activities generates scope economies, it also entails private information, so that regulation is less efficient and the unregulated market too may be adversely affected. Nevertheless, we show that allowing the firm to integrate productions is (socially) desirable, unless joint production is characterized by dis-economies of scope.
    Keywords: Regulation, Competition, Asymmetric Information, Conglomerate Firms, Multiutility, Scope Economies, Informational Externality
    JEL: L51 L43 L52
    Date: 2009–07
  8. By: Marc Schiffbauer (ESRI); Iulia Siedschlag (ESRI); Frances Ruane (ESRI)
    Abstract: This paper examines the causal relationship between foreign mergers and acquisitions and firm productivity in the UK over the period 1999-2007. Our results raise questions about the existence of aggregate effects of foreign ownership on TFP in the longer-run. However, we find significant heterogeneity in the TFP effects of foreign M&A at the industry level. Overall, we uncover a systematic pattern of post-acquisition TFP effects that is consistent with the most recent theoretical models of firm heterogeneity and cross-border mergers and acquisitions as mode of foreign entry. Furthermore, we find positive aggregate effects on labor productivity due to capital deepening but not due to changes in TFP.
    Date: 2009–07
  9. By: Cusolito, Ana
    Abstract: Some researchers have documented that the path of development is remarkably related to the pattern of sectoral diversification. Others have highlighted the relation between productive specialization and economic progress. This paper explores the role of product market competition and intellectual property rights protection in the pattern of sectoral diversification. The paper confirms the insight of the innovation literature, that competition induces firms to specialize and upgrade the quality of existing goods. However, it reveals a new force, called the imitation effect, through which competition biases technical change toward product diversification. The paper shows that if knowledge spillovers increase with imitation, or the degree of product substitution is high, weak protection of property rights encourages firms to create low-quality goods, thereby directing technical change toward diversification. The predictions are tested with data on Italian firms'innovation activity. They are found to be consistent with observed behavior.
    Keywords: Education for Development (superceded),Economic Theory&Research,E-Business,Markets and Market Access,Labor Policies
    Date: 2009–07–01
  10. By: Clark, Derek J.; Sand, Jan Yngve
    Abstract: This paper analyses the endogenous formation of technology sharing coalitions with asymmetric firms. Coalition partners produce complementary technology advancements, although each firm determines its R&D investment level non-cooperatively and there is no co-operation in the product market. We show that the equilibrium coalition outcome is either one between the two most efficient firms, or a coalition with all three firms. The two-firm coalition is the preferred outcome of a welfare maximising authority if ex ante marginal cost is sufficiently high, and the three-firm coalition is preferred otherwise. Furthermore, we show that the equilibrium outcomes result in the lowest total R&D investment of all possible outcomes. Aircraft engine manufacturing provides a case study, and indicates the importance of anti-trust issues as an addition to the theory.
    Keywords: R&D, endogenous coalitions, asymmetric firms
    JEL: L11 L13
    Date: 2009
  11. By: Raymond Wladimir; Mohnen Pierre; Palm Franz; Schim van der Loeff Sybrand (METEOR)
    Abstract: This paper studies the dynamic relationship between input and output of innovation inDutch manufacturing using an unbalanced panel of enterprise data from five waves of the Community Innovation Survey during 1994-2004. We estimate by maximum likelihood a dynamic panel data bivariate tobit with double-index sample selection accounting for individual effects.We find persistence of innovation input and innovation output, a lag effect of the former onthe latter and a feedback effect of the latter on the former. The lag effect remains significantin the high-tech sector even after four years. Firm and industry effects are also important.
    Keywords: Economics (Jel: A)
    Date: 2009
  12. By: Bronwyn H. Hall (Department of Economics, University of California at Berkeley); Francesca Lotti (Bank of Italy); Jacques Mairesse (CREST (ENSAE, Paris))
    Abstract: Innovation in SMEs exhibits some peculiar features that most traditional indicators of innovation activity do not capture. Therefore, in this paper, we develop a structural model of innovation which incorporates information on innovation success from firm surveys along with the usual R&D expenditures and productivity measures. We then apply the model to data on Italian SMEs from the “Survey on Manufacturing Firms” conducted by Mediocredito-Capitalia covering the period 1995-2003. The model is estimated in steps, following the logic of firms’ decisions and outcomes. We find that international competition fosters R&D intensity, especially for high-tech firms. Firm size, R&D intensity, along with investment in equipment enhances the likelihood of having both process and product innovation. Both these kinds of innovation have a positive impact on firm’s productivity, especially process innovation. Among SMEs, larger and older firms seem to be less productive.
    Keywords: R&D, innovation, productivity, SMEs, Italy
    JEL: L60 O31 O33
    Date: 2009–06
  13. By: Huan Zhao; Xiaodong Du (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI)); David A. Hennessy (Center for Agricultural and Rural Development (CARD))
    Abstract: Feeder cattle are fattened to become fed live cattle six months later. The U.S. feeder cattle industry is intensively competitive, so that market efficiency suggests feeder cattle prices should fully reflect feed prices and information on future fed cattle prices. Employing a long time series (1979-2004) of feeder cattle futures, live cattle futures, and local corn prices, we test whether complete pass-through occurs. The results indicate that an increase of a dollar per hundred pounds in the live cattle price leads to an increase of approximately $1.48 per hundred pounds in the feeder cattle price in one month, about 93% of complete pass-through. The corresponding negative effect of a corn price increase is about 87% of complete pass-through. By contrast with agricultural land markets, the results support the hypothesis of Ricardian rent extraction by the scarce asset owner in feeder cattle markets. The results also provide evidence in favor of informational efficiency in futures markets.
    Keywords: feeder cattle, futures market efficiency, live cattle, structural change. JEL Classification: D4; Q13.
    Date: 2009–07

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