nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒10‒31
ten papers chosen by
Russell Pittman
US Department of Justice

  1. Merger Performance and Efficiencies in Horizontal Merger Policy in the US and the EU By Kamerbeek, S.P.
  2. Capacity Utilisation, Constraints and Price Adjustments under the Microscope By Sarah M. Lein; Eva Köberl
  3. The Effects of Leniency on Maximal Cartel Pricing By Harold Houba; Evgenia Motchenkova; Quan Wen
  4. Going Once, Going Twice, Reported! Cartel Activity And The Effectiveness Of Leniency Programs in Experimental Auctions By Jeroen Hinloopen; Sander Onderstal
  5. State aid and tacit collusion By Christoph Bertsch; Claudio Calcagno; Mark Le Quement
  6. Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry By Leemore Dafny; Mark Duggan; Subramaniam Ramanarayanan
  7. Market Structure, Welfare, and Banking Reform in China By Hoy, Chun-Yu
  8. The Effect of Mergers and Acquisitions on Bank Performance in Egypt By Ahmed Mohamed Badreldin; Christian Kalhoefer
  9. Evidence of Regulatory Arbitrage in Cross-Border Mergers of Banks in the EU By Santiago Carbo-Valverde; Edward J. Kane; Francisco Rodriguez-Fernandez
  10. Efficiency of commercial banks in Bulgaria in the wake of EU accession By Kiril Tochkov; Nikolay Nenovsky

  1. By: Kamerbeek, S.P.
    Abstract: In current horizontal merger policy in the US and the EU an explicit efficiency defense is allowed. On both sides of the Atlantic mergers are unconditionally approved if internal efficiencies are sufficient to reverse the mergers’ potential to harm consumers in the relevant market. Current merger policy is implicitly based on the assumption that rational managers will only propose privately profitable mergers. In this thesis I will show that the empirical evidence on merger performance suggests that this assumption can’t be sustained. Managers do propose uneconomic mergers, motivated by non-wealth maximizing behavior. To tackle this problem I argue that efficiencies should not only be used as an efficiency defense, but efficiencies should work both ways. To avoid type I and type II errors the competition authorities in the US and the EU should undertake a sequential efficiency test in their assessment of specific mergers.
    Keywords: Merger; competition policy; efficiencies; efficiency defence; merger performance; rational manager
    JEL: K0 K21 L4
    Date: 2009–07–01
  2. By: Sarah M. Lein (Swiss National Bank Zurich, Switzerland); Eva Köberl (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: This paper analyses the interplay of capacity utilisation, capacity constraints, demand constraints and price adjustments, employing a unique firm-level data set for Swiss manufacturing firms. Theoretically, capacity constraints limit the ability of forms to expand production in the short run and lead to increases in prices. Our results show that, on the one hand, price increases are more likely during periods when firms are faced with capacity constraints. Constraints due to the shortage of labour, in particular, lead to price increases. On the other hand, we also find evidence that firms are not reluctant to reduce prices in response to demand constraints. At the macro level, the implied capacity-utilisation Phillips curve has a convex shape during periods of excess demand and a concave shape during periods of excess supply. Our results are robust to the inclusion of proxies for changes in costs and the competitive position of firms.
    Keywords: price setting, capacity utilisation, capacity constraints, demand constraints, non-linear Phillips curve, Switzerland
    JEL: E31 E32 E52
    Date: 2009–10
  3. By: Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University)
    Abstract: We analyze maximal cartel prices in infinitely-repeated oligopoly models under leniency where fines are linked to illegal gains, as often outlined in existing antitrust regulation, and detection probabilities depend on the degree of collusion. We introduce cartel culture that describes how likely cartels persist after each conviction. Our analysis disentangles the effects of traditional antitrust regulation, leniency, and cartel strategies. Without rewards to the strictly-first reporter, leniency cannot reduce maximal cartel prices below those under traditional regulation. Moreover, in order to avoid adverse effects fine reductions should be moderate in case of multiple reporters. Our results extend the current literature and partially support existing leniency programs.
    Keywords: Cartel; Antitrust; Competition Policy; Leniency Program; Self-reporting; Repeated Game
    JEL: L41 K C72
    Date: 2009–09–25
  4. By: Jeroen Hinloopen (University of Amsterdam); Sander Onderstal (University of Amsterdam)
    Abstract: We experimentally examine the effectiveness of a leniency program against bidding rings in two
    Keywords: Leniency Programs; Auctions; Cartels; Laboratory Experiments
    JEL: C92 D44 L41
    Date: 2009–10–09
  5. By: Christoph Bertsch; Claudio Calcagno; Mark Le Quement
    Abstract: Both literature and policy debate on State aid or government subsidies have focused on the trade-off between the potential ine¢ ciencies caused by state intervention (inefficient allocation of resources, moral hazard) and the potential gains from intervention (whether related to the resolution of market failures or to the achievement of some dimension of social equity). The debate however has ignored another important negative e¤ect of State aid: governments, by setting up aid schemes to ailing firms, may increase the likelihood of (tacit) collusion in an industry characterised by idiosyncratic shocks. Indeed, in a repeated-game setting, a systematic bailout regime increases the expected profits of a firm from cooperation and simultaneously raises the probability that competitors will still be in business to carry out punishment against cheaters. Despite the generality of the model and of its key insight, we study this problem through an application to the banking sector, as it has recently been subject of much attention within the context of the ongoing economic crisis.
    Keywords: Subsidies, dynamic oligopoly, government policy, banking
    JEL: D43 G21 K21 L41
    Date: 2009
  6. By: Leemore Dafny; Mark Duggan; Subramaniam Ramanarayanan
    Abstract: We examine whether and to what extent consolidation in the U.S. health insurance industry is leading to higher employer-sponsored insurance premiums. We make use of a proprietary, panel dataset of employer-sponsored healthplans enrolling over 10 million Americans annually between 1998 and 2006 to explore the relationship between premium growth and changes in market concentration. We exploit the differential impact of a large national merger of two insurance firms across local markets to estimate the causal effect of concentration on market-level premiums. We estimate real premiums increased by 2 percentage points (in a typical market) due to the rise in concentration during our study period. We also find evidence that consolidation facilitates the exercise of monopsonistic power vis a vis physicians, whose absolute employment and relative earnings decline in its wake.
    JEL: I11 L1 L4
    Date: 2009–10
  7. By: Hoy, Chun-Yu (BOFIT)
    Abstract: This paper examines the effects of market deregulation on consumers and state commercial banks in China, a large developing country. I jointly estimate a system of differentiated product demand and pricing equations under alternative market structures. While China's banking reforms overall have achieved mixed results, the consumer surplus of the deposit market has increased. The welfare effects from reforms are unevenly distributed, with losses skewed toward inland provinces and certain consumer groups. There is no clear evidence that the pricing of banking services has become more competitive after the reform, and such pricing remains subject to government intervention. Encouragingly, the price-cost margins of some state commercial banks have fallen over time.
    Keywords: banking reform; banks in China; demand estimation; market structure
    JEL: G21 L11
    Date: 2009–10–21
  8. By: Ahmed Mohamed Badreldin (Faculty of Management Technology, The German University in Cairo); Christian Kalhoefer (Faculty of Business Administration, British University in Egypt)
    Abstract: Recent economic reforms in Egypt have significantly improved its macroeconomic indicators and financial sector. Banks have witnessed significant merger and acquisition activity as a result of these reforms in attempts to privatize and strengthen the banking sector. This study measures the performance of Egyptian banks that have undergone mergers or acquisitions during the period 2002-2007. This is done by calculating their return on equity using the Basic ROE Scheme in order to determine the degree of success of banking reforms in strengthening and consolidating the Egyptian banking sector. Our findings indicate that not all banks that have undergone deals of mergers or acquisitions have shown significant improvements in performance and return on equity when compared to their performance before the deals. Furthermore, extensive analysis was performed yielding the same results. It was concluded that mergers and acquisitions have not had a clear effect on the profitability of banks in the Egyptian banking sector. They were only found to have minor positive effects on the credit risk position. These findings do not support the current process of financial consolidation and banking reforms observed in Egypt, and provide weak evidence to support their constructive role in improved bank profitability and economic restructure.
    Keywords: Mergers and Acquisitions, Egypt, Banks, ROE, Performance Measurement, Reforms, ROA
    JEL: G21 G34
    Date: 2009–10
  9. By: Santiago Carbo-Valverde; Edward J. Kane; Francisco Rodriguez-Fernandez
    Abstract: Banks are in the business of taking calculated risks. Expanding the geographic footprint of an organization’s profit-making activities changes the geographic pattern of its exposure to loss in ways that are hard for regulators and supervisors to observe. This paper tests and confirms the hypothesis that differences in the character of safety-net benefits that are available to banks in individual EU countries help to explain the nature of cross-border merger activity. If they wish to protect taxpayers from potentially destabilizing regulatory arbitrage, central bankers need to develop statistical procedures for assessing supervisory strength and weakness in partner countries. We believe that the methods and models used here can help in this task.
    JEL: F3 G2 K2
    Date: 2009–10
  10. By: Kiril Tochkov; Nikolay Nenovsky
    Abstract: The paper examines the efficiency of Bulgarian banks and its determinants over the period 1999- 2007. The levels of technical, allocative, and cost efficiency are first estimated using a nonparametric methodology and then regressed upon a number of bank-specific, institutional, and EU-related factors. The findings indicate that foreign banks were more efficient than domestic private banks, although the gap between them narrowed over time. State-owned banks ranked last on average but their privatization resulted in efficiency gains. Capitalization, liquid ity, and enterprise restructuring enhanced bank efficiency, while banking reforms had an adverse effect. The Treaty of Accession and EU membership were associated with significant efficiency improvements.
    Keywords: Transition economies; Banking sector; Efficiency; EU accession
    JEL: C14 G21 P20
    Date: 2009–10

This nep-com issue is ©2009 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.