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

  1. Competitive Effects of Vertical Integration with Downstream Oligopsony and Oligopoly By Simon Loertscher; Markus Reisinger
  2. Foreclosing Competition through Access Charges and Price Discrimination By LOPEZ, Angel; REY, Patrick
  3. On production costs in vertical differentiation models By Dorothée Brécard
  4. Price Discrimination under Customer Recognition and Mergers By Rosa Branca Esteves; Hélder Vasconcelos
  5. Subsidizing Firm Entry in Open Economies By Pflüger, Michael P.; Suedekum, Jens
  6. Complementary Patents and Market Structure By Klaus Schmidt
  7. Do research joint ventures serve a collusive function? By Michelle S. Goeree; Eric Helland
  8. Estimating the intensity of price and non-price competition in banking By Carbo Valverde, Santiago; Fernández de Guevara y Rodoselovics, Juan; Humphrey, David; Maudos, Joaquin
  9. Bank Competition, Risk and Asset Allocations By Gianni De Nicoló; John H. Boyd; Abu M. Jalal
  10. Technology, Competition and the Time of Entry: Diversification Patterns in the Development of New Drugs By Tatiana Plotnikova
  11. Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry By Raff, Horst; Wagner, Joachim

  1. By: Simon Loertscher (University of Melbourne); Markus Reisinger (University of Munich)
    Abstract: We analyze the competitive effects of backward vertical integration by a partially vertically integrated firm that competes with non-integrated firms both upstream and downstream. We show that vertical integration is procompetitive under fairly general conditions. It can be anticompetitive only if the ex ante degree of integration is relatively large. Interestingly, vertical integration is more likely to be anticompetitive if the industry is less concentrated. These results are in line with recent empirical evidence. In addition, we show that even when vertical integration is procompetitive, it is not necessarily welfare enhancing.
    Keywords: Vertical Integration, Downstream Oligopsony, Downstream Oligopoly, Competition Policy, Capacity Choice
    JEL: D43 L41 L42
    Date: 2009–10
  2. By: LOPEZ, Angel; REY, Patrick
    Date: 2009–06
  3. By: Dorothée Brécard (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272)
    Abstract: In this paper, we analyse the effects of the introduction of a unit production cost beside a fixed cost of quality improvement in a duopoly model of vertical product differentiation. Thanks to an original methodology, we show that a low unit cost tends to reduce product differentiation and thus prices, whereas a high unit cost leads to widen product differentiation and to increase prices
    Date: 2009
  4. By: Rosa Branca Esteves (Universidade do Minho - NIPE); Hélder Vasconcelos (Univ. Católica Portuguesa (CEGE) - CEPR)
    Abstract: This paper studies the interaction between horizontal mergers and price discrimination by endogenizing the merger formation process in the context of a repeated purchase model with two periods and three firms wherein firms may engage in Behaviour-Based Price Discrimination (BBPD). From a merger policy perspective, this paper's main contribution is two-fold. First, it shows that when firms are allowed to price discriminate, the (unique) equilibrium merger gives rise to significant increases in profits for the merging firms (the ones with information to price-discriminate), but has no effect on the outsider firm's profitability, thereby eliminating the so called "free-riding problem". Second, this equilibrium merger is shown to increase industry profits at the expense of consumers' surplus, leaving total welfare unaffected and, therefore, suggesting that competition authorities should scrutinize with greater zeal mergers in industries where firms are expected to engage in BBPD.
    Keywords: Behaviour-Based Price Discrimination, Customer Poaching, Horizontal Mergers
    JEL: L13 L15 L41 D43
    Date: 2009
  5. By: Pflüger, Michael P. (University of Passau); Suedekum, Jens (University of Duisburg-Essen)
    Abstract: Entrepreneurs who decide to enter an industry are faced with different levels of effective entry costs in different countries. These costs are heavily influenced by economic policy. What is not well understood is how international trade affects the government incentive to impact on entry costs, and how entry subsidies can be used strategically in open economies. We present a general equilibrium model of monopolistic competition with two (potentially) asymmetric countries and heterogeneous firms where government subsidizes entry of domestic entrepreneurs. Under autarky the entry subsidy indirectly corrects for the monopoly pricing distortion. In the autarky equilibrium these subsidies trigger entry, but they eventually do not lead to more but to better firms in the market. In the open economy there is another, strategic motive for entry subsidies as the tightening of domestic market selection also affects exporting decisions for domestic and foreign firms. Our analysis shows that entry subsidies in the Nash-equilibrium are first increasing, then decreasing in the level of trade openness. This implies a U-shaped relationship between openness and effective entry costs. Merging cross-country data on entry costs with international trade openness indices we empirically confirm this theoretical prediction.
    Keywords: firm entry, subsidies, heterogeneous firms, international trade, monopolistic competition, entry regulation, strategic trade policy
    JEL: F12 F13 H25 L11
    Date: 2009–08
  6. By: Klaus Schmidt (University of Munich)
    Abstract: Many high technology goods are based on standards that require several essential patents owned by different IP holders. This gives rise to a complements and a double mark-up problem. We compare the welfare effects of two different business strategies dealing with these problems. Vertical integration of an IP holder and a downstream producer solves the double mark-up problem between these firms. Nevertheless, it may raise royalty rates and reduce output as compared to non-integration. Horizontal integration of IP holders solves the complements problem but not the double mark-up problem. Vertical integration discourages entry and reduces innovation incentives, while horizontal integration always benefits from entry and innovation
    Keywords: IP rights, complementary patents, standards, licensing, patent pool, vertical integration
    JEL: L1 L4
    Date: 2009–08
  7. By: Michelle S. Goeree; Eric Helland
    Abstract: Every year thousands of firms are engaged in research joint ventures (RJV), where all knowledge gained through R&D is shared among members. Most of the empirical literature assumes members are non-cooperative in the product market. But many RJV members are rivals leaving open the possibility that firms may form RJVs to facilitate collusion. We exploit variation in RJV formation generated by a policy change that affects the collusive benefits but not the research synergies associated with an RJV. We estimate an RJV participation equation and find the decision to join is impacted by the policy change. Our results are consistent with research joint ventures serving a collusive function.
    Keywords: Research and development, research joint ventures, antitrust policy, collusion
    JEL: L24 L44 K21 O32
    Date: 2009–09
  8. By: Carbo Valverde, Santiago; Fernández de Guevara y Rodoselovics, Juan; Humphrey, David; Maudos, Joaquin
    Abstract: We model bank oligopoly behaviour using price and non-price competition as strategic variables in an expanded conjectural variations framework. Rivals can respond to changes in both loan and deposit market prices as well as (non-price) branch market shares. The model is illustrated using data for Spain which, over 1986-2002, eliminated interest rate and branching restrictions and set off a competitive race to lock-in expanded market shares. Banks use both interest rates and branches as strategic variables and both have changed over time. We illustrate the results using a regional vs. a national specification for the relevant markets.
    Keywords: non-price competition; banking; market shares
    JEL: L13 D43 G21
    Date: 2009
  9. By: Gianni De Nicoló; John H. Boyd; Abu M. Jalal
    Abstract: We study a banking model in which banks invest in a riskless asset and compete in both deposit and risky loan markets. The model predicts that as competition increases, both loans and assets increase; however, the effect on the loans-to-assets ratio is ambiguous. Similarly, as competition increases, the probability of bank failure can either increase or decrease. We explore these predictions empirically using a cross-sectional sample of 2,500 U.S. banks in 2003, and a panel data set of about 2600 banks in 134 non-industrialized countries for the period 1993-2004. With both samples, we find that banks' probability of failure is negatively and significantly related to measures of competition, and that the loan-to-asset ratio is positively and significantly related to measures of competition. Furthermore, several loan loss measures commonly employed in the literature are negatively and significantly related to measures of bank competition. Thus, there is no evidence of a trade-off between bank competition and stability, and bank competition seems to foster banks' willingness to lend.
    Keywords: Asset management , Banking , Bankruptcy , Banks , Competition , Credit risk , Cross country analysis , Depositories , Economic models , Financial crisis , Time series , United States ,
    Date: 2009–07–10
  10. By: Tatiana Plotnikova (DFG Research Training Program "The Economics of Innovative Change", Friedrich-Schiller-University Jena)
    Abstract: This paper empirically investigates the determinants of R&D diversification strategies in the drug industry. It enriches the existing literature by proposing to look at diversification factors, which reflect market and technological proximity of an R&D project towards other projects within a firm's portfolio as well as R&D competition factors. Additionally, the characteristics of R&D in the market where a new potential product is developed affiect future product choice. The analysis is performed for products-in-development data, merged with firms' patents, which allows us to separate project proximity in market niches from technological proximity. The results of empirical estimation support an idea that R&D diversification is governed by the economies of scope as well as the escape competition motive. Moreover, it is found that competition rather than spillovers in the niche where an R&D project is developed defines firms' decisions to diversify.
    Keywords: diversification, technological diversity, relatedness, competition, R&D
    JEL: O32 L25 L65
    Date: 2009–09–29
  11. By: Raff, Horst (Kiel Institute for the World Economy); Wagner, Joachim (Leuphana University Lüneburg)
    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

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