nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒10‒03
eleven papers chosen by
Russell Pittman
US Department of Justice

  1. Efficient organization of production: nested versus horizontal outsourcing By Oz Shy; Rune Stenbacka
  2. Cournot Oligopoly and Concavo-Concave Demand By Christian Ewerhart
  3. Demand reduction and preemptive bidding in multi-unit license auctions By Jacob K. Goeree; Theo Offerman; Randolph Sloof
  4. Distributive and Regional Effects of Monopoly Power By Urzúa, Carlos M.
  5. Article 82 EC – The Problems and The Solution By John Temple Lang
  6. Optional linear input prices in vertical relations By Salim, Claudia
  7. Indirect network effects with two Salop circles: the example of the music industry By Dewenter, Ralf; Haucap, Justus; Wenzel, Tobias
  8. When "more" is not better. By CARMELO CENNAMO; JUAN SANTALO
  9. Price-increasing competition: the curious case of overdraft versus deferred deposit credit By Brian T. Melzer; Donald P. Morgan
  10. Size, Efficiency and Financial Reforms in Indian Banking By Pradeep Srivastava
  11. Privatization and liberalization in vertically linked markets By Stähler, Frank; Traub, Stefan

  1. By: Oz Shy; Rune Stenbacka
    Abstract: The authors characterize equilibrium and efficient modes of production by comparing nested (vertical) outsourcing with horizontal outsourcing. Nested outsourcing is found to be inefficient unless the cost of monitoring outsourced production lines increases sharply with the number of subcontractors and not only with the number of outsourced components. They characterize a market failure in which nested outsourcing is selected when the case dictates that horizontal outsourcing is the efficient outsourcing mode. This failure occurs at an intermediate range of the costs of monitoring outsourcing to several subcontractors.
    Keywords: Contracting out
    Date: 2009
  2. By: Christian Ewerhart
    Abstract: The N-firm Cournot model with general technologies is reviewed to derive generalized and unified conditions for existence of a pure strategy Nash equilibrium. Tight conditions are formulated alternatively (i) in terms of concavity of two-sided transforms of inverse demand, or (ii) as linear constraints on the elasticities of inverse demand and its first derivative. These conditions hold, in particular, if a firm’s marginal revenue decreases in other firms’ aggregate output, or if inverse demand is logconcave. The analysis relies on lattice-theoretic methods, engaging both cardinal and ordinal notions of supermodularity. As a byproduct, a powerful test for strict quasiconcavity is obtained.
    Keywords: Cournot competition, existence of Nash equilibrium, concavity of demand, supermodular games, strict quasiconcavity
    JEL: L13 C72 C62
    Date: 2009–09
  3. By: Jacob K. Goeree; Theo Offerman; Randolph Sloof
    Abstract: Multi-unit ascending auctions allow for equilibria in which bidders strategically reduce their demand and split the market at low prices. At the same time, they allow for preemptive bidding by incumbent bidders in a coordinated attempt to exclude entrants from the market. We consider an environment where both demand reduction and preemptive bidding are supported as equilibrium phenomena of the ascending auction. In a series of experiments, we compare its performance to that of the discriminatory auction. Strategic demand reduction is quite prevalent in the ascending auction even when entry imposes a (large) negative externality on incumbents. As a result, the ascending auction performs worse than the discriminatory auction both in terms of revenue and efficiency, while entrants chances are similar across the two formats.
    Keywords: Multi-license auctions, demand reduction, external effects, preemption
    JEL: D44 D45 C91
    Date: 2009–09
  4. By: Urzúa, Carlos M. (Tecnológico de Monterrey, Campus Ciudad de México)
    Abstract: This paper estimates the distributive and regional effects of firms with market power in the case of Mexico. It presents evidence that the welfare losses due to the exercise of monopoly power are not only significant, but also regressive. Moreover, the losses are different for the urban and rural sectors, as well as for each of the states of Mexico, being the inhabitants of the poorest ones the most affected by firms with market power.
    Keywords: monopoly, Cournot oligopoly, distributive effects, regional effects, income distribution, goods markets, Mexico
    JEL: L10 L40 L66 I31 O14 R20
    Date: 2009–04
  5. By: John Temple Lang (Cleary Gottlieb Steen & Hamilton LLP, Trinity College and Senior Visiting Research Fellow)
    Abstract: The Commission's Guidance paper on exclusionary abuse under Article 82 EC is open to three fundamental criticisms. First, it leads to less legal certainty, because the rules suggested are vague and imprecise, because dominant companies will not have the information needed to apply them, and because the Commission is trying to change the law, which it has no power to do. Second, it would lead to some anticompetitive effects, because in practice it discourages price competition, by discouraging individualised price negotiations and retroactive rebates, and by suggesting that the Commission will protect not-yet-as-efficient competitors from price competition. Third, it leads to too many "false positives", i.e., findings of exclusionary abuse that are not justified in economics or law. The solution is to return to the test in the Treaty as interpreted by the Court of Justice: an exclusionary abuse must involve limiting the production, marketing or technical development of competitors of the dominant company, if harm is caused to consumers.
    Keywords: Article 82EC, Competition, Abuse
    JEL: K21
    Date: 2009–08
  6. By: Salim, Claudia
    Abstract: This paper examines how the option of a regulated linear input price affects vertical contracting, where a monopolistic upstream supplier sequentially offers supply contracts to two symmetric downstream firms. We find that equilibrium contracts vary with production cost and regulated price level: If the regulated price is not too high, the option allows for price discrimination, but prevents foreclosure in the intermediary market. Indeed, if both cost and optional price are rather low, non-discriminatory input prices below cost may arise. Optional input prices are socially more desirable than a flat ban on price discrimination, as consumers benefit from more intense downstream competition.
    Keywords: Price discrimination,vertical contracting,exclusion,regulatory outside option
    JEL: D42 L11 L42
    Date: 2009
  7. By: Dewenter, Ralf; Haucap, Justus; Wenzel, Tobias
    Abstract: This paper analyses the interdependency between the market for music recordings and concert tickets, assuming that there are positive indirect network effects both from the record market to ticket sales for live performances and vice versa. Using a model with two interrelated Salop circles we show that prices in both markets are corrected down- wards when compared to the standard Salop model. Furthermore, we show that the effects of file sharing on firms' profitability and on variety are ambiguous. File sharing can increase profits through increased concert ticket demand and thereby also lead to additional market entry and additional variety.
    Keywords: Music Industry,Indirect Network Effects,Salop Model,File Sharing
    JEL: L13 L82 Z10
    Date: 2009
  8. By: CARMELO CENNAMO (Instituto de Empresa); JUAN SANTALO (Instituto de Empresa)
    Abstract: This article examines the value-creation capacity of intra-platform competition (IPC) and exclusivity; two main strategies platforms use to incentivize, accumulate and extract rent from complementary content resources - complementors. Building on the concept of ´resource functionality´ we show that, for enhanced levels of IPC, exclusive complementors have limited functional value and rareness, failing to bring differentiation capacity to the platform´s system. Also, in line with the logic of ´capability equivalence´, we show that platform´s differentiation in terms of the composition of complementors´ portfolio has a U-shaped relationship with platform performance.
    Keywords: Complementary resources, Intra-platform competition, Platform markets, Resource functionatility, Multi-sided markets
    Date: 2009–07
  9. By: Brian T. Melzer; Donald P. Morgan
    Abstract: We find that banks charge more for overdraft credit when depositors have access to a potential substitute: deferred deposit ("payday") credit. We attribute this rise in prices partly to adverse selection created by banks' practice of charging a flat fee regardless of the overdraft amount--pricing that favors depositors prone to large overdrafts. When deferred deposit credit priced per dollar borrowed is available, depositors prone to small overdrafts switch to that option. That selection works against banks; large overdrafts cost more to supply and, if depositors default, banks lose more, so prices rise. Consistent with this adverse-selection hypothesis, we document that the average dollar amount per returned check at banks and other depository institutions increases when depositors have access to deferred deposit credit. Beyond documenting another case of price-increasing competition, our findings bear on theories of adverse selection in credit markets and contribute to the debate over the pros and cons of payday credit.
    Keywords: Overdrafts ; Bank competition ; Banks and banking - Service charges ; Bank deposits
    Date: 2009
  10. By: Pradeep Srivastava
    Abstract: The study seeks to answer two very basic questions in the Indian context: first, are there economies of scale and scope in Indian banking? In other words, are bigger banks better for India? And, second, to what extent has the domestic impetus, i.e., financial-sector policy reforms during the nineties, made banks in India more efficient? [WP no. 49].
    Keywords: banks, Cost Structure, indian banking, Econometric,Economies, mergers, financial services, trade liberalization, Indian, acquisitions
    Date: 2009
  11. By: Stähler, Frank; Traub, Stefan
    Abstract: State-owned enterprises (SOEs) are often vertically integrated firms which operate in key industries like transport, telecommunication and power generation. They provide an infrastructure and invest in its quality. We discuss the effects of liberalization and their privatization which can be complete or partial such that upstream production is still run by an SOE. We show that granting a downstream rival access to the infrastructure of a vertically integrated private firm is welfare improving in most cases even if a holdup problem exists. For any vertically separated structure we find that privatization through multi-product firms welfare dominates privatization through single-product firms. ; Öffentliche Unternehmen (SOEs) sind häufig als vertikal integrierte Unternehmen in bedeutenden Industrien wie Transportwesen, Telekommunikation und Stromversorgung tätig. Sie stellen eine Infrastruktur bereit und investieren in deren Qualität. Wir diskutieren die Effekte von Liberalisierung und Privatisierung, wobei die Privatisierung vollständig oder nur partiell vorgenommen werden kann, so dass die vorgelagerte Produktionsstufe weiterhin durch ein SOE betrieben wird. Wir zeigen, dass es die Wohlfahrt steigernd ist, wenn auf der nachgelagerten Stufe Konkurrenten eines privatisierten vertikal integrierten Unternehmen der Zugriff auf die Infrastruktur gestattet wird. Dies gilt in den meisten Fällen auch trotz eines Holdup-Problems für den Betreiber der Infrastruktur. Im Falle vertikaler Trennung ergibt sich, dass die Privatisierung in Mehr-Produkt-Unternehmen der Privatisierung in Ein-Produkt-Unternehmen wohlfahrtsmäßig überlegen ist.
    Keywords: Privatization,vertical integration,state-owned enterprises
    JEL: L33 L23 H54
    Date: 2009

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