nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒09‒26
23 papers chosen by
Russell Pittman
US Department of Justice

  1. Dynamic Competition with Consumer Inertia By Pot Erik; Flesch János; Peeters Ronald; Vermeulen Dries
  2. Price Competition and Consumer Confusion By Chioveanu, Ioana; Zhou, Jidong
  3. Ordered Search in Differentiated Markets By Jidong Zhou
  4. Trade, Competition, and Efficiency By Kristian Behrens; Yasusada Murata
  5. Reducing Efficiency through Communication in Competitive Coordination Games By Timothy N. Cason; Roman M. Sheremeta; Jingjing Zhang
  6. Quantity-setting games with a dominant firm By Attila Tasnádi
  7. Price-taking Strategy Versus Dynamic Programming in Oligopoly By HUANG Weihong
  8. Incomplete Contracts, Irreversible Investments and Entry Deterrence By Antonio Nicita; Massimiliano Vatiero
  9. Foreign Fast Seconds and Market Contestability in Emergin Economies: Implications for Domestic Welfare By Dan Richards; Puqing Sheng
  10. Empirical Evidence on the Role of Non Linear Wholesale Pricing and Vertical Restraints on Cost Pass-Through By BONNET, CéLine; DUBOIS, Pierre; VILLAS BOAS, Sofia B.
  11. Do agglomeration and technology affect vertical integration? Evidence from Italian business groups By Giulio Cainelli; Donato Iacobucci
  12. Buyer and Seller Concentration in Global Commodity Markets By Reza Oladi; John Gilbert
  13. Mergers in Imperfectly Segmented Markets By Pio Baake; Christian Wey
  14. Consumers Win-back as Exclusionary Conduct. Some Insights for Antitrust Law By Antonio Nicita
  15. Horizontal mergers, firm heterogeneity, and R&D investments By Noriaki Matsushima; Yasuhiro Sato; Kazuhiro Yamamoto
  16. Technology Shocks, Q, and the Propensity to Merge By Lihong Han; Peter L. Rousseau
  17. Mixed Source By Ramon Casadesus-Masanell; Gaston Llanes
  18. "Empirical Assessment of Merger and its Remedies: the Yawata-Fuji Case (1970)" " (in Japanese) By Hiroshi Ohashi; Tsuyoshi Nakamura; Satoshi Myojo
  19. How market power influences bank failures: Evidence from Russia By Fungacova, Zuzana; Weill, Laurent
  20. Efficiency of Individual Transferable Quotas (ITQ) Systems and Input and Stock Controls By HIGASHIDA Keisaku; TAKARADA Yasuhiro
  21. Price and promotion effects of supermarket mergers By Davis, David E.
  22. Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry By Horst Raff ,; Joachim Wagner
  23. Raising capital in an insurance oligopoly market By Julien Hardelin; Sabine Lemoyne De Forges

  1. By: Pot Erik; Flesch János; Peeters Ronald; Vermeulen Dries (METEOR)
    Abstract: We study a framework where two duopolists compete repeatedly in prices and where cho-sen prices potentially affect future market shares, but certainly do not affect current sales.This assumption of consumer inertia causes (noncooperative) coordination on high pricesonly to be possible as an equilibrium for low values of the discount factor. In particular,high discount factors increase opportunism and aggressiveness of competition to such anextent that high prices are no longer sustainable as an equilibrium outcome (not even intrigger strategies). In addition, we find that both monopolization and enduring marketshare and price fluctuations (price wars) can be equilibrium path phenomena withoutrequiring exogenous shocks in market or firm characteristics.
    Keywords: microeconomics ;
    Date: 2009
  2. By: Chioveanu, Ioana; Zhou, Jidong
    Abstract: This paper proposes a model in which identical sellers of a homogenous product compete in both prices and price frames (i.e., ways to present price information). We model price framing by assuming that firms’ frame choices affect the comparability of their price offers: consumers may fail to compare prices due to frame differentiation, and due to frame complexity. In the symmetric equilibrium the firms randomize over both price frames and prices, and make positive profits. This result is consistent with the observed coexistence of price and price frame dispersion in the market. We also show that (i) the nature of equilibrium depends on which source of consumer confusion dominates, and (ii) an increase in the number of firms can increase industry profits and harm consumers.
    Keywords: bounded rationality; framing; frame dispersion; incomplete preferences; price competition; price dispersion
    JEL: L13 D43
    Date: 2009–09–01
  3. By: Jidong Zhou
    Abstract: This note presents an ordered search model in which consumers search both for price and product fitness. We construct an equilibrium in which there is price dispersion and prices rise in the order of search. The top firms in consumer search process, though charge lower prices, earn higher profits due to their larger market shares.
    Keywords: Search, price dispersion, product differentiation.
    JEL: D43 D83 L13
    Date: 2009–09–28
  4. By: Kristian Behrens; Yasusada Murata
    Abstract: We present a general equilibrium model of monopolistic competition featuring pro-competitive effects and a competitive limit, and investigate the impact of trade on welfare and efficiency. Contrary to the constant elasticity case, in which all gains from trade are due to product diversity, our model allows for a welfare decomposition between gains from product diversity and gains from pro-competition effects. We then show that the market outcome is not efficient because too many firms operate at an inefficiently small scale by charging prices above marginal costs. Using pro-competitive effects and the competitive limit, we finally illustrate that trade raises efficiency by narrowing the gap between the equilibrium utility and the optimal utility.
    Keywords: Pro-competitive effects, competitive limit, excess entry, trade and efficiency, monopolistic competition
    JEL: D43 D51 F12
    Date: 2009
  5. By: Timothy N. Cason; Roman M. Sheremeta; Jingjing Zhang
    Abstract: Costless pre-play communication has been found to effectively facilitate coordination and enhance efficiency by increasing individual payoffs in games with Pareto-ranked equilibria. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. Allowing group members to communicate before choosing efforts leads to more aggressive competition and greater coordination, but also results in substantially lower payoffs than a control treatment without communication. Our experiment thus provides evidence that communication can reduce efficiency in competitive coordination games. This contrasts sharply with experimental findings from public goods and other coordination games, where communication enhances efficiency and often leads to socially optimal outcomes.
    Keywords: Contest; Between-group Competition; Within-group Competition; Cooperation; Coordination; Free-riding; Experiments
    JEL: C71 C72 C91 C92 D72 H41
    Date: 2009–09
  6. By: Attila Tasnádi
    Abstract: We consider a possible game-theoretic foundation of Forchheimer’s model of dominant-firm price leadership based on quantity-setting games with one large firm and many small firms. If the large firm is the exogenously given first mover, we obtain Forchheimer’s model. We also investigate whether the large firm can emerge as a first mover of a timing game. Keywords
    Keywords: Forchheimer; Dominant firm; Price leadership.
    JEL: D43 L13
    Date: 2009–09–25
  7. By: HUANG Weihong (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore; Nanyang Technological University, Singapore)
    Abstract: In a quantity-competed duopoly, one firm is a naive price-taker (who responses only to the last period’s price) while the other has all the market information so as be able to optimize its profit stream (either discounted or un-discounted) dynamically over a finite or infinite horizon. With a traditional linear economy, we are able to derive algebraically the optimal policies of all periods for the dynamic optimizer. A counter-intuitive phenomenon is then observed: regardless of the planning horizon and the discounted factor, there exists a relative profitability range of initial prices, starting with which the price-taker make higher profit than the dynamic optimizer. Furthermore, with the increase in the planning horizon, the price-taker’s relative profitability range increases accordingly and finally covers the entire economically meaningful range.
    Keywords: Economics; dynamic programming; Bellman’s optimality principle; applied OR; duopoly
    Date: 2009–04
  8. By: Antonio Nicita; Massimiliano Vatiero
    Abstract: When renegotiation under incomplete contracts follows the outside option principle, hold-up may occur as the ex-post degree of competition increases on investor’s side. However, under this framework, asset specificity may play the counterintuitive role of an entry deterrence device, thus decreasing the probability of hold-up. Our result contrasts with standard literature in three respects: i) an equilibrium with overinvestment may emerge; ii) the 'intimidating effect' of overinvestment acts as an endogenous enforcement device; iii) a pervasive trade-off may emerge between ex-post efficient entry and ex-ante efficient specific investments
    Keywords: strategic and specific investments, hold-up, outside options, entry deterrence
    JEL: D23 D85 L14
    Date: 2009–08
  9. By: Dan Richards; Puqing Sheng
    Abstract: Emerging markets economies often present profitable opportunities for entry by large mutinational firms domiciled in developed economies. Such entry has the potential to bring important gains to the emerging economy consumers as well. Yet at the same time, such foreign direct investment (FDI) also poses a risk in that it will typically induce exit by domestic firms. In turn, this can result in not only the loss of profit from such firms but also lead to increased concentration and less competition with additional adverse consequences for domestic consumers. Theoretical models that investigate this possibility include Ono (1990), Richardson (1998), and Bjorvatn (2000). The question has also motivated empirical work on specific non-tradable markets in which FDI has focused, most notably, the banking sector where the introduction of large scale FDI has typically been followed by domestic firm exit and substantially increased concentration in Latin America and Central Europe. These include studies by Clarke, Cull, and Martinez Peria (2001) and Gelos and Roldos (2002), and Mkrtchyan (2005). While these studies generally find that increased concentration has been associated with price-cost margins, this is not quite the same as a determination of the impact of such entry on domestic welfare.
    Date: 2009
  10. By: BONNET, CéLine; DUBOIS, Pierre; VILLAS BOAS, Sofia B.
    Date: 2009–06
  11. By: Giulio Cainelli (Dipartimento per lo Studio delle Società Mediterranee, Università degli Studi di Bari); Donato Iacobucci (Dipartimento di Ingegneria Informatica, Gestionale e dell’Automazione, Università Politecnica delle Marche)
    Abstract: The aim of this paper is to analyse the role of technology and spatial agglomeration in decisions about vertical integration. It starts from the hypotheses that the business group, defined as a set of firms under common ownership and control, is the appropriate unit to delimit the firm’s boundary. We use information drawn from input-output tables to detect the presence of positive inter-industry exchanges and whether or not activities in a group are vertically related. Accounting for endogeneity problems, we estimate Probit and Linear Probability models to empirically investigate the role of technology and spatial agglomeration on vertical integration decisions. Consistent with property rights theory, our results show that the technology intensity of acquirers matters for backward integration choices and moreover, that agglomeration plays a role in vertical integration only when it operates jointly with technology.
    Keywords: Business groups, spatial agglomeration, technology, vertical integration
    JEL: L22 R12
    Date: 2009–08
  12. By: Reza Oladi (Department of Applied Economics, Utah State University); John Gilbert (Department of Economics and Finance, Utah State University)
    Abstract: Commodity markets may be characterized by concentration on the buyer side, with a small number of transnational intermediary firms purchasing from supplying countries and distributing to the market. In many cases, developing economies may have little choice but to sell through these intermediaries, and recent work has suggested the export taxes may be an optimal policy to recapture some of the monopsony rent. However, in many commodity markets there are a limited number of large supplying countries. Even if the markets are competitive, this supply-side concentration suggests that economies have market power themselves, and that the governments of the countries may be engaged in a strategic game when selecting trade policies. We consider a situation where an oligopsonistic intermediary industry purchases from a small number of supplying countries, the governments of which act strategically in their policy choices both with respect to the intermediaries and any competing suppliers. In the resulting two-stage game, we show that an export subsidy may arise as the optimal intervention.
    Keywords: Strategic export subsidies, export taxes, global commodity markets
    JEL: F1
    Date: 2009–09–15
  13. By: Pio Baake; Christian Wey
    Abstract: We present a model with firms selling (homogeneous) products in two imperfectly segmented markets (a "high-demand" and a "low-demand" market). Buyers are mobile but restricted by transportation costs, so that imperfect arbitrage occurs when prices differ in both markets. We show that equilibria are distorted away from Cournot outcomes to prevent consumer arbitrage. Furthermore, a merger can lead to an equilibrium in which only the "high-demand" market is served. This is more likely (i) the lower consumers' transportation costs and (ii) the higher the concentration of the industry. Therefore, merger incentives are much larger than standard analysis suggests.
    Keywords: Imperfect Market Segmentation, Oligopoly, Price Discrimination, Consumer Arbitrage, Mergers
    JEL: D43 L13 L41
    Date: 2009
  14. By: Antonio Nicita
    Abstract: Incumbents' winback actions recently received a growing antitrust scrutiny in network industries. These actions refer to incumbents’ strategies aimed at regaining, through targeted marketing and selective discounts, former customers who switched to a new entrant. We analyze the impact of winback actions on competition and discuss pros and cons of a temporarily ban on incumbent's side, through the so-called 'winback rules'.
    Keywords: Entry Deterrence, Exit Inducement; Exclusionary Strategies; Winback, Blockaded Expansion, Holed Bucket Effect
    JEL: D43 K21 L41 L43
    Date: 2009–08
  15. By: Noriaki Matsushima; Yasuhiro Sato; Kazuhiro Yamamoto
    Abstract: We investigate the incentive and the welfare implications of a merger when heterogeneous oligopolists compete both in process R&D and on the product market. We examine how a merger affects the output, investment, and profits of firms, whether firms have merger incentives, and, if so, whether such mergers are desirable from the viewpoint of social welfare. We also derive equilibrium configurations and explore their welfare properties.
    Date: 2009–09
  16. By: Lihong Han (Department of Economics, Illinois College); Peter L. Rousseau (Department of Economics, Vanderbilt University)
    Abstract: Data on U.S. mergers and aquisitions from 1987 to 2006 indicate that firms with high market-to-book values (i.e., Tobin's Q) tend to merge with firms that have lower Q's, but that target Q's are on average higher than those of firms not involved in mergers at all. We capture this fact with a model in which the ratio of a bidder's Q to that of a prospective target has a non-monotone, inverted U-shaped effect on the probability of the two firms merging. Further, we find that the likelihood of a merger is positively and linearly related to the ratio of the growth potential of an acquirer and its prospective target. Using data from Compustat, a series of bootstrap logit regressions bear out these implications.
    Keywords: Total factor productivity, growth potential, bootstrap logit model
    JEL: G3 O3
    Date: 2009–09
  17. By: Ramon Casadesus-Masanell (Harvard Business School, Harvard University); Gaston Llanes (Harvard Business School, Harvard University)
    Abstract: We study competitive interaction between profit-maximizing firms that sell software and complementary goods or services. In addition to tactical price competition, we allow firms to compete through business model reconfigurations. We consider three business models: the proprietary model (where all software modules offered by the firm are proprietary), the open source model (where all modules are open source), and the mixed source model (where a few modules are open). When a firm opens one of its modules, users can access and improve the source code. At the same time, however, opening a module sets up an open source (free) competitor. This hampers the firm's ability to capture value. We analyze three competitive situations: monopoly, commercial firm vs. non-profit open source project, and duopoly. We show that: (i) firms may become "more closed" in response to competition from an outside open source project; (ii) firms are more likely to open substitute, rather than complementary, modules to existing open source projects; (iii) when the products of two competing firms are similar in quality, firms differentiate through choosing different business models; and (iv) low-quality firms are generally more prone to opening some of their technologies than firms with high-quality products.
    Keywords: Open Source, User Innovation, Business Models, Complementarity, Vertical Differentiation, Value Creation, Value Capture
    JEL: O31 L17 D43
    Date: 2009–09
  18. By: Hiroshi Ohashi (Faculty of Economics, University of Tokyo); Tsuyoshi Nakamura (Faculty of Economics, Tokyo Keizai University); Satoshi Myojo (National Institute of Science and Technology Policy (NISTEP))
    Abstract: This paper estimates a dynamic oligopoly model to assess the economic consequences of a horizontal merger that took place in 1970 to create the second largest global producer of steel. The paper solves a Markov perfect Nash equilibrium for the model and simulates the welfare effects of the horizontal merger. Estimates reveal that the merger enhanced the production efficiency of the merging party by a magnitude of 4.1 %, while the exercise of market power was restrained primarily by the presence of fringe competitors. Our simulation result also indicates that structural remedies endorsed by the competition authority failed to promote competition.
    Date: 2009–08
  19. By: Fungacova, Zuzana (BOFIT); Weill, Laurent (BOFIT)
    Abstract: There has been a notable debate in the banking literature on the impact of bank competition on financial stability. While the dominant view sees a detrimental impact of competition on the stability of banks, this view has recently been challenged by Boyd and De Nicolo (2005) who see the reverse effect. The aim of this paper is to contribute to this literature by providing the first empirical investigation of the role of bank competition on the occurrence of bank failures. We analyze this issue based on a large sample of Russian banks over the period 2001-2007 and employ the Lerner index as the metric of bank competition. The Russian banking industry is a unique example of an emerging market which has undergone a large number of bank failures during the last decade. Our findings clearly support the view that tighter bank competition is detrimental for financial stability. This result is robust to tests controlling for the measurement of market power, the definition of bank failure, the set of control variables, and the particular linear specification of the relationship. The normative implication of our findings is therefore that measures that increase bank competition could undermine financial stability.
    Keywords: bank competition; bank failure; Russia
    JEL: G21 P34
    Date: 2009–09–10
  20. By: HIGASHIDA Keisaku; TAKARADA Yasuhiro
    Abstract: This paper examines whether or not the number of fishers is optimal under an Individual Transferable Quotas (ITQ) program. We consider two cases on the structure of the quota market: (1) cases in which all fishers are price takers, and (2) cases in which large-scale fishers have market power. When all fishers are price takers in the quota market, the social optimum is likely to be achieved given the total allowable catch (TAC) level. On the other hand, when low-cost fishers have market power in the quota market, the inefficiency may be serious: excess entry of low-cost fishers and insufficient exit of high-cost fishers may take place. Moreover, we demonstrate that vessel controls and stock targeting may work for an ITQ program.
    Date: 2009–09
  21. By: Davis, David E. (Department of Economics, South Dakota State University)
    Abstract: I use a unique data set of retail food prices to analyze mergers between supermarket chains. The data allow for an examination of the effects of mergers on prices, the frequency of promotions, and the depth of promotions. I find that increases in a chain’s share of the total US food sales are associated with price decreases, suggesting that supermarkets enjoy economies of scale and/or benefit from an improved bargaining position relative to their suppliers after a merger. I also find that mergers are associated with decreases in the frequency and depth of price-promotions.
    Keywords: Food prices, supermarket, merger, price discrimination
    JEL: L11 L81 D4
    Date: 2009–09
  22. By: Horst Raff ,; Joachim Wagner
    Abstract: This paper uses an oligopoly model with heterogeneous firms to examine how an industry adjusts to rising import competition. The model predicts that in the short run the least efficient firms in the industry become inactive, surviving firms face a fall in output, mark-ups and profits, and the average productivity of survivors increases. These pro-competitive effects of import penetration on the domestic industry disappear in the long run. The predictions for the short run are confirmed in an empirical study of the German clothing industry
    Keywords: international trade, firm heterogeneity, productivity, clothing industry
    JEL: F12 F15
    Date: 2009–09
  23. By: Julien Hardelin (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, AgroParisTech ENGREF - (-)); Sabine Lemoyne De Forges (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, AgroParisTech ENGREF - (-))
    Abstract: We consider an oligopoly of firms that compete on price. Firms produce a non-stochastic output, insurance coverage, which is sold before the true cost is known. They behave as if they were risk-averse for a standard reason of costly external finance. The model consists in a two-stage game. At stage 1, each firm chooses its internal capital level. At stage 2, firms compete on price. We characterize the conditions for Nash equilibria and analyze the strategic impact of capital choice on the market. We discuss the model with regard to insurance industry specificity and regulation.
    Keywords: Price Competition; Risk-averse Firms; Insurance Market; Capital Choice.
    Date: 2009–09–16

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