nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒11‒07
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Supply Chain Control: A Theory of Vertical Integration By Ursino, Giovanni
  2. Goldilocks and the Licensing Firm: Choosing a Partner when Rivals are Heterogeneous By Anthony Creane; Hideo Konishi
  3. The design and efficiency of loyalty rewards By Ramon Caminal
  4. Procurement Auctions with Pre-award Subcontracting By Jun Nakabayashi
  5. Conformity based behavior and the dynamics of price competition: a new rational for fashion shifts By Filomena Garcia; Joana Resende
  6. Deterrence in Competition Law By Paolo Buccirossi; Lorenzo Ciari; Tomaso Duso; Giancarlo Spagnolo; Cristiana Vitale
  7. How to Measure the Deterrence Effects of Merger Policy: Frequency or Composition? By Pedro P. Barros; Joseph A. Clougherty; Jo Seldeslachts
  8. A Dynamic Game of Airline Network Competition: Hub-and-Spoke Networks and Entry Deterrence By Victor Aguirregabiria; Chun-Yu Ho
  9. Competition between TV Platforms By Laia Domènech Campmajó
  10. Staying, dropping, or switching : the impacts of bank mergers on small firms By Hans Degryse; Nancy Masschelein; Janet Mitchell
  11. On the Use of Information in Repeated Insurance Markets By Iris Kesternich; Heiner Schumacher
  12. Sole-Source Contracts in WIC Infant-Formula Rebate Auctions and their Effect on Manufacturers’ Markups By David E. Davis
  13. Monopoly Pricing of an Antibiotic Subject to Bacterial Resistance By Markus Herrmann
  14. Optimal monetary policy and firm entry By Vivien Lewis

  1. By: Ursino, Giovanni
    Abstract: Improving a company's bargaining position is often cited as a chief motivation to vertically integrate with suppliers. This paper expands on that view in building a new theory of vertical integration. In my model firms integrate to gain bargaining power against other suppliers in the production process. The cost of integration is a loss of flexibility in choosing the most suitable suppliers for a particular final product. I show that the firms who make the most specific investments in the production process have the greatest incentive to integrate. The theory provides novel insights to the understanding of numerous stylized facts such as the effect of financial development on the vertical structure of firms, the observed pattern from FDI to outsourcing in international trade, the effect of technological obsolescence on organizations, etc.
    Keywords: vertical integration; supply chain; bargaining; outside options
    JEL: L2 L1
    Date: 2009–10–01
  2. By: Anthony Creane (Michigan State University); Hideo Konishi (Boston College)
    Abstract: Markets are often characterized with firms of differing capabilities with more efficient firms licensing their technology to lesser firms.  We  examine the effects that the amount of the technology transferred, and the characteristics of the partner have on this licensing.  We find that a partial technology transfer can be the joint-profit minimizing transfer; no such transfer then is superior. However, under weakly concave demand, a complete transfer always increases joint profits so long as there are at least three firms in the industry.  We also establish a "Goldilocks" condition in partner selection: it is neither too efficient nor too inefficient.  Unfortunately, profitable transfers between sufficiently inefficient firms reduce welfare, while transfers from relatively efficient firms increase welfare.  However, an efficient firm might not select the least efficient partner, though it is the social-welfare-maximizing partner.
    Keywords: licensing, technology transfers
    JEL: D4 L24 L4
    Date: 2009–11–01
  3. By: Ramon Caminal
    Abstract: The goal of this paper is to reexamine the optimal design and efficiency of loyalty rewards in markets for final consumption goods. While the literature has emphasized the role of loyalty rewards as endogenous switching costs (which distort the efficient allocation of consumers), in this paper I analyze the ability of alternative designs to foster consumer participation and increase total surplus. First, the efficiency of loyalty rewards depend on their specific design. A commitment to the price of repeat purchases can involve substantial efficiency gains by reducing price-cost margins. However, discount policies imply higher future regular prices and are likely to reduce total surplus. Second, firms may prefer to set up inefficient rewards (discounts), especially in those circumstances where a commitment to the price of repeat purchases triggers Coasian dynamics.
    Keywords: Loyalty rewards, Coasian dynamics, Price commitment, Coupons
    JEL: D42 D43 L12 L13
    Date: 2009–10–26
  4. By: Jun Nakabayashi
    Abstract: To be the lowest bidder in procurement auctions, prime contractors commonly solicit subcontract bids at the bid preparation stage. A remarkable feature of the subcontract competition is that "winning is not everything"; the lowest subcontractor gets a job conditional on his prime contractor's successful bid. This paper makes the first attempt to establish a model for such pre-award subcontract competitions included in procurement auctions. I find that subcontractors strategically provide larger discounts on their bids in response to increasing competition among prime contractors. I thus clarify that the behavior results in an endogenous downward shift in the distribution of bidders' private information in the downstream auction as the number of rivals increases, or the reservation price drops. The result has a striking impact on the analysis of optimal reservation price and empirical identification of the bidder's cost distribution in procurement auctions.
    Date: 2009
  5. By: Filomena Garcia (ISEG - Technical University of Lisbon and UECE); Joana Resende (CEF.UP and Faculdade de Economia, Universidade do Porto and CORE, Université catholique de Louvain)
    Abstract: This paper deals with dynamic price competition in markets in which the perception of consumers regarding the value of goods depends on the choices of other consumers in the market. In particular, we consider the case in which consumers tend to imitate their peers, generating a conformity effect. In the context of a finite horizon model, we show that conformity based behavior creates new channels of dynamic interaction between firms, changing the nature of price competition. As time evolves, both price strategic complementarity and substitutability may arise along the equilibrium trajectory. This leads to V-shaped equilibrium price paths and oscillating trajectories of market shares. We provide also a new rational for the inversion of fashion trends.
    Keywords: dynamic price competition, consumer behavior, conformity, fashion shift
    JEL: D11 L13 C61
    Date: 2009–10
  6. By: Paolo Buccirossi; Lorenzo Ciari; Tomaso Duso; Giancarlo Spagnolo; Cristiana Vitale
    Abstract: This paper provides a comprehensive discussion of the deterrence properties of a competition policy regime. On the basis of the economic theory of law enforcement we identify several factors that are likely to affect its degree of deterrence: 1) sanctions and damages; 2) financial and human resources; 3) powers during the investigation; 4) quality of the law; 5) independence and 6) separation of power. We then discuss how to measure deterrence. We review the literature that uses surveys to solicit direct information on changes in the behavior of firms due to the threats posed by the enforcement of antitrust rules, and the literature based on the analysis of hard data. We finally argue that the most challenging task, both theoretically and empirically, is how to distinguish between “good” deterrence and “bad” deterrence. <br> <br> <i>ZUSAMMENFASSUNG - (Abschreckung im Wettbewerbsrecht) <br>Dieser Beitrag bietet eine umfassende Diskussion über die Abschreckungseigenschaften eines wettbewerbspolitischen Systems. Auf der Grundlage der ökonomischen Theorie der Rechtsdurchsetzung werden mehrere Faktoren identifizier, welche den Abschreckungsgrad des Systems am ehesten beeinflussen können. Diese sind: 1) Sanktionen und Schadensersatzforderungen, 2) finanzielle Ressourcen und Personal der Wettbewerbsbehörde, 3) die Befugnisse der wettbewerbspolitischen Autorität im Rahmen der Untersuchung, 4) die Qualität des Rechtsrahmens, 5) die Unabhängigkeit der Behörde und 6) die Gewaltenteilung. Anschließend wird diskutiert, wie man den Abschreckungsgrad eines wettbewerbspolitischen Systems empirisch messen kann. Zuerst wird die Literatur besprochen, die auf Befragungen beruht. Die Befragungen sollten Aufschluss darüber geben, wie sich das Unternehmensverhalten angesichts der Durchsetzung von wettbewerbspolitischen Maßnahmen ändert. Dem gegenüber wird die Literatur dargestellt, die "harte" Daten nutzt. Schließlich wird argumentiert, dass die anspruchsvollste Aufgabe sowohl theoretisch als auch empirisch darin bestehen wird, zwischen "guter" und "schlechter" Abschreckung durch Wettbewerbspolitik zu unterscheiden.<i>
    Keywords: Competition Policy, Law Enforcement, Deterrence
    JEL: K21 K42 L4
    Date: 2009–10
  7. By: Pedro P. Barros; Joseph A. Clougherty; Jo Seldeslachts
    Abstract: We show that the number of merger proposals (frequency-based deterrence) is a more appropriate indicator of underlying changes in merger policy than the relative anti-competitiveness of merger proposals (composition-based deterrence). This has strong implications for the empirical analysis of the deterrence effects of merger policy enforcement, and potential implications regarding how to reduce anti-competitive merger proposals. <br> <br> <i>ZUSAMMENFASSUNG <br>IDiese Studie vergleicht zwei Indikatoren zur Messung der Abschreckungswirkung von wettbewerbspolitischen Maßnahmen. Untersucht wird, welcher Indikator sich besser eignet, Veränderungen in der Strenge oder Laxheit von wettbewerbspolitischen Regimes abzubilden. Es lässt sich feststellen, dass der häufigkeitsbasierte Indikator, der die Anzahl von offiziellen Fusionsankündigungen misst, dazu besser geeignet ist als der zusammengesetzte Abschreckungsindikator, der die angekündigten Unternehmensfusionen im Hinblick auf ihre relative Wettbewerbsbeschränkung im Vergleich zu möglichen anderen Fusionen bewertet. Dieses Ergebnis hat Folgen für die empirische Analyse der Abschreckungseffekte, die eine effektive Fusionskontrolle haben sollte. Außerdem kann es Implikationen haben für die Frage, wie die offizielle Ankündigung von wettbewerbsreduzierenden Fusionen verhindert werden können.<i>
    Keywords: antitrust, deterrence, merger policy
    JEL: L4 K21 O4 C23
    Date: 2009–10
  8. By: Victor Aguirregabiria; Chun-Yu Ho
    Abstract: In a hub-and-spoke network, the total profit function of an airline is supermodular with respect to its entry decisions at different city-pairs. This source of complementarity implies that a hub-and-spoke network can be an effective strategy to deter entry of competitors. This paper presents a dynamic game of airlines network competition that incorporates this entry deterrence motive for using hub-and-spoke networks. We summarize the results of the estimation of the model, with particular attention to empirical evidence on the entry deterrence motive.
    Keywords: Airline networks; Hub-and-spoke; Entry deterrence; Dynamic games; Supermodularity
    JEL: C73 L13 L41 L93
    Date: 2009–10–28
  9. By: Laia Domènech Campmajó (PPRE-IREA, University of Barcelona, Spain)
    Abstract: The aim of this paper is to identify the factors that affect the market penetration of pay television by studying the competition that exists between three types of technology (satellite, cable and ADSL). We distinguish three groups of factors: the level of market competition, the level of competition in the industry and the quality of the product being offered. Our results seem to indicate that as market concentration increases, the television service can achieve greater penetration. This relationship is specifically captured by the level of intra- and inter-platform competition. We also examine the relationship between free television channels and pay television and find that as the amount of time dedicated to the broadcasting of advertising by the former increases, the number of subscribers to pay TV rises. Finally, we examine product quality by introducing the effect of holding the rights to broadcast Professional Football League matches and an HBO or Showtime produced series. Our results suggest that these variables are critical for the penetration of pay television.
    Keywords: pay TV, competition between platforms, telecommunications.
    JEL: L82 L96
    Date: 2009–10
  10. By: Hans Degryse (CentER, EBC, TILEC, Tilburg University); Nancy Masschelein (National Bank of Belgium, Financial Department; Financial Architects); Janet Mitchell (National Bank of Belgium, Financial Department; CEPR)
    Abstract: Assessing the impacts of bank mergers on small firms requires separating borrowers with single versus multiple banking relationships and distinguishing the three alternatives of "staying," "dropping," and "switching" of relationship. Single-relationship borrowers who "switch" to another bank following a merger will be less harmed than those whose relationship is "dropped" and not replaced. Using Belgian data, we find that single-relationship borrowers of target banks are more likely than other borrowers to be dropped. We track post-merger performance and show that many dropped target-bank borrowers are harmed by the merger. Multiple-relationship borrowers are less harmed, as they can better hedge against relationship discontinuations
    Keywords: Bank mergers, bank lending relationships, SME loans
    JEL: G21 G28 G34
    Date: 2009–10
  11. By: Iris Kesternich (Ludwig Maximilian Universität München); Heiner Schumacher (Goethe Universität Frankfurt)
    Abstract: We analyze the use of information in a repeated oligopolistic insurance market. To sustain collusion, insurance companies might refrain from changing their pricing schedules even if new information about risks becomes available. We therefore provide an explanation for the existence of "unused observables" that is information which a) insurance companies collect or could collect, b) is correlated with the risk experience, but c) is not used by companies to set prices. Furthermore, the existence of bulk discounts becomes rationalizable. These results also obtain if we include communication among companies and market entry to our framework.
    Keywords: repeated games, insurance markets, oligopoly, unused observables
    JEL: C72 G22 L13
    Date: 2009–09
  12. By: David E. Davis (Department of Economics,South Dakota State University)
    Abstract: The WIC program uses an auction to procure infant formula. Manufacturers bid on the right to be an agency’s sole supplier of formula by offering a rebate on formula sold through WIC. Rebates reduce costs, averaging about 90 percent of wholesale prices. However, because rebates are so large, some question the industry’s competitiveness. This paper develops a model for optimal rebates and shows that marginal cost can be estimated from model coefficients and program characteristics. Marginal cost estimates suggest large markups, and elasticities consistent with these markups suggest manufactures price on the demand curve where demand is nearly unit elastic.
    Keywords: Price cost margins, WIC, Oligopoly, Food Assistance, Infant Formula, auctions, contracts
    JEL: L11 L13 I18 D12
    Date: 2009–10
  13. By: Markus Herrmann
    Abstract: We develop a dynamic bio-economic model of bacterial resistance and disease transmission in which we characterize the pricing policy of a monopolist who is protected by a patent. After expiration, the monopolist behaves competitively in a generic industry having open access to the common pool of antibiotic efficacy and infection. The monopolist manages endogenously the levels of antibiotic efficacy as well as the infected population, which represent quality and market size respectively and achieves, at least temporarily, higher such levels than a hypothetically myopic monopolist who does not take into account the dynamic externalities. The pricing policy and the biological system are characterized by the turnpike property. Before the patent vanishes, the monopolist behaves more and more myopically, leading to a continuous decrease in the price of the antibiotic. Once the generic industry takes over, a discontinuous fall in price occurs. Whether a prolongation of the patent is socially desirable depends on the relative levels of antibiotic efficacy and infection.
    Keywords: Antibiotic efficacy, public health, monopoly pricing, renewable resource, optimal control, turnpike, patent length
    JEL: I18 L12 Q21
    Date: 2009
  14. By: Vivien Lewis (National Bank of Belgium, Research Department; Ghent University, Department of Financial Economics)
    Abstract: This paper describes optimal monetary policy in an economy with monopolistic competition, endogenous firm entry, a cash-in-advance constraint and pre-set wages. Firms must make profits in order to cover entry costs; thus a mark-up on goods prices is necessary. Without this mark-up, profits would be zero and no firm would enter the market, resulting in zero production. Therefore, the mark-up should not be removed. In this economy with market entrants, goods are more expensive than in a competitive economy with marginal cost pricing. This leads to a misallocation of resources, because leisure is not sold at a mark-up. Goods and leisure are two sources of utility that households trade off against each other. Thus, they may buy too much leisure instead of consumption goods. The consequence is that labour supply and production are sub-optimally low. Due to the labour requirement at market entry stage, insufficient labour supply also implies too little entry and too few firms in equilibrium. In the absence of fiscal instruments such as labour income subsidies, the optimal monetary policy under sticky wages achieves higher welfare than under flexible wages. The policy-maker uses the money supply instrument to raise the real wage - the cost of leisure - above its flexible-wage level, in response to expansionary shocks. This induces a rise in labour supply, more production of goods and more new firms
    Keywords: entry, optimal policy
    JEL: E52 E63
    Date: 2009–10

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