nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒11‒21
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. A dynamic entry and price game with capacity indivisibility By Massimo A. De Francesco
  2. Divesting power By Federico, Giulio; Lopez, Angel L.
  3. Price distributions and competition By Ken Burdett; Eric Smith
  4. Information Advantage in Cournot Oligopoly with Separable Information, or Nondifferentiable By Haimanko, Ori
  5. Preferences and Equilibrium in Monopoly and Duopoly By Yongmin Chen; Michael H. Riordan
  6. Competition and Quality Upgrading By Mary Amiti; Amit K. Khandelwal
  7. Iceberg transport technologies in spatial competition. Hotelling reborn By Xavier Martinez-Giralt; José María Usategui
  8. Firm Heterogeneity, Contract Enforcement, and the Industry Dynamics of Offshoring By Alireza Naghavi; Gianmarco I. P. Ottaviano
  9. Misinformative advertising By Ruiz-Aliseda, Francisco
  10. Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium By Jacob Bikker; Sherrill Shaffer; Laura Spierdijk
  11. Banking Deregulations, Financing Constraints, and Firm Entry Size By William Kerr; Ramana Nanda
  12. Mobile termination and mobile penetration By Hurkens, Sjaak; Jeon, Doh-Shin
  13. Creditor-Focused Corporate Governance: Evidence from Mergers and Acquisitions in Japan By Mehrotra, Vikas; Schaik, Dimitri van; Spronk, Jaap; Steenbeek, Onno

  1. By: Massimo A. De Francesco
    Abstract: Strategic market interaction is here modelled as a two-stage game in which potential entrants choose capacities and active firms compete in prices. Due to capital indivisibility, the capacity choice is made from a finite grid and there are substantial economies of scale. In the simplest version of the model assuming a single production technique, the equilibrium of the game is shown to depend on the market size - namely, on total demand at a price equal to the minimum average cost -relative to the firm minimum efficient scale: if the market is sufficiently large, then the competitive price (the minimum of average cost) emerges at a subgame-perfect equilibrium of the game; if the market is not that large, then the firms randomize in prices on the equilibrium path of the game. The role of the market size for the competitive outcome is even more important for the case of two production techniques
    Keywords: Bertrand-Edgeworth, oligopoly, price game, mixed strategy equilibrium, capacity indivisibility
    JEL: D43 D44 L13
    Date: 2009–10
  2. By: Federico, Giulio (IESE Business School); Lopez, Angel L. (IESE Business School)
    Abstract: We study alternative market power mitigation measures in a model where a dominant producer faces a competitive fringe with the same cost structure. We characterise the asset divestment by the dominant firm which achieves the greatest reduction in prices. This divestment entails the sale of marginal assets whose cost range encompasses the post-divestment price. A divestment of this type can be several times more effective in reducing prices than divestments of baseload (or low-cost) assets. We also establish that financial contracts (modeled as Virtual Power Plant schemes) are at best equivalent to baseload divestments in terms of consumer welfare.
    Keywords: Divestments; Virtual power plants; contracts; market power; electricity; antitrust remedies;
    JEL: D42 L13 L40 L94
    Date: 2009–08–01
  3. By: Ken Burdett; Eric Smith
    Abstract: Considerable evidence demonstrates that significant dispersion exists in the prices charged for seemingly homogeneous goods. This paper adopts a simple, flexible equilibrium model of search to investigate the way the market structure influences price dispersion. Using the noisy search approach, the paper demonstrates the effects of having a single large, price-leading firm with multiple outlets and a competitive fringe of small firms with one retail outlet each.
    Date: 2009
  4. By: Haimanko, Ori
    Abstract: Einy et al (2002) showed that information advantage of a firm is rewarded in any equilibrium of an incomplete information Cournot oligopoly, provided the inverse demand function is differentiable and monotonically decreasing, and costs are affine. We extend this result in two directions. We show first that a firm receives not less than its rival even if that firm's information advantage is only regarding payoff-relevant data, and not necessarily payoff-irrelevant "sunspots". We then show that there is at least one equilibrium which rewards firm's information advantage even with non-differentiable, but concave, inverse demand function. Under certain conditions, these results hold even with always non-negative inverse demand functions.
    Keywords: Oligopoly, Incomplete Information, Information advantage, Bayesian Cournot, Equilibrium, Sunspots, Non-differentiability, Inverse demand
    JEL: C72 D43 L13
    Date: 2009–09
  5. By: Yongmin Chen (University of Colorado at Boulder - Department of Economics); Michael H. Riordan (Columbia University - Department of Economics)
    Abstract: This paper takes the new approach of using a copula to characterize consumer preferences in a discrete choice model of product differentiation, and applies it to the economics of monopoly and duopoly. The comparative statics of demand strength and preference diversity, both properties of the marginal distribution of values for each product variety, are strikingly similar across market structures. Preference dependence, a property of the copula and an indicator of product differentiation, is a key determinant of whether prices are higher in multiproduct industries compared to single-product monopoly. Furthermore, the effects of preference on prices and profits influence equilibrium product selection. Remarkably, a horizontally-differentiated duopoly sometimes can foreclose a higher-quality monopoly to the detriment of consumer and social welfare.
    Date: 2009
  6. By: Mary Amiti; Amit K. Khandelwal
    Abstract: How does competition affect innovation? We address this question by using a novel approach to measure quality -- an important component of innovation -- using highly disaggregated product data for a large set of countries. Constructing an internationally comparable measure of quality enables us to separate the effect of reducing import tariffs, our measure of competition, on quality upgrading from other country level differences in competitive environments, and product demand shocks. We base our analysis on recent theoretical frameworks that predict that the effect of competition on innovation depends on firms' proximity to the world technological frontier. As predicted by theory, we find that lower tariffs are associated with quality upgrading for products close to the world frontier; whereas lower tariffs discourage quality upgrading for varieties distant from the frontier.
    JEL: F1
    Date: 2009–11
  7. By: Xavier Martinez-Giralt; José María Usategui
    Abstract: Transport costs in address models of differentiation are usually modeled as separable of the consumption commodity and with a parametric price. However, there are many sectors in an economy where such modeling is not satisfactory either because transportation is supplied under oligopolistic conditions or because there is a difference (loss) between the amount delivered at the point of production and the amount received at the point of consumption. This paper is a first attempt to tackle these issues proposing to study competition in spatial models using an iceberg-like transport cost technology allowing for concave and convex melting functions.
    Keywords: Spatial Competition, Iceberg transport costs
    JEL: L12 D42 R32
    Date: 2009–11–11
  8. By: Alireza Naghavi (University of Bologna); Gianmarco I. P. Ottaviano (Bocconi University)
    Abstract: We develop an endogenous growth model with R&D spillovers to study the long run consequences of offshoring with firm heterogeneity and incomplete contracts. In so doing, we model offshoring as the geographical fragmentation of a firm’s production chain between a home upstream division and a foreign downstream one. While there is always a positive correlation between upstream bargaining weight and offshoring activities, there is an inverted U-shaped relationship between these and growth. Whether offshoring with incomplete contracts also increases consumption depends on firm heterogeneity. As for welfare, whereas with complete contracts an R&D subsidy is enough to solve the inefficiency due to R&D spillovers, with incomplete contracts a production subsidy is also needed.
    Keywords: o¤shoring, heterogeneous …rms, incomplete contracts, industry dynamics
    JEL: D23 F23 L23 O31 O43
    Date: 2009–11–17
  9. By: Ruiz-Aliseda, Francisco (IESE Business School)
    Abstract: This paper analyzes how advertising can be used to mislead rivals in an oligopoly environment with demand uncertainty. In particular, we examine a two-period game in which two firms each sell a differentiated product whose attractiveness vis-à-vis the competitor's product is unknown. In each period, a firm sets prices for its product and exerts an advertising effort that is imperfectly observed by the rival later on. Advertising is persuasive in that it enhances willingness to pay, but it can also be used to manipulate rivals' beliefs about initially unobservable differences in consumers' quality perceptions. In equilibrium, each firm uses advertising to persuade consumers and to interfere with the rival's learning about this unknown dimension of demand. This can be done because the effect of imperfectly observed advertising cannot be separated out of the effect of the unknown quality differential, which creates a signal extraction problem for the competitor. There always exists acontinuum of (symmetric) equilibria, but refining the equilibrium set selects out a unique one in which firms price in the first-period as in the static equilibrium, whereas the misinformative usage of advertising makes firms under advertise if and only if the marginal cost of advertising is high enough.
    Keywords: Firms; Productivity; Catalonia; Innovation;
    Date: 2009–07–15
  10. By: Jacob Bikker; Sherrill Shaffer; Laura Spierdijk
    Abstract: The Panzar-Rosse test has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample covering more than 110,000 bank-year observations on almost 18,000 banks in 67 countries during 1986-2004.
    Keywords: Panzar-Rosse test; competition; firm size
    JEL: D40 L11
    Date: 2009–11
  11. By: William Kerr; Ramana Nanda
    Abstract: We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, among firms that survived at least four years, a greater proportion of firms entered either at their maximum size or closer to the maximum size in the first year. The magnitude of these effects were small compared to the much larger changes in entry rates of small firms following the reforms. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
    JEL: E44 G21 L26 L43 M13
    Date: 2009–11
  12. By: Hurkens, Sjaak (Institute for Economic Analysis); Jeon, Doh-Shin (Toulouse School of Economics)
    Abstract: In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two oppos- ing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms al- ways prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008)that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes.
    Keywords: Mobile Penetration; Termination Charge; Access Pricing; Networks; Interconnection; Regulation; Telecommunications;
    JEL: K23 L51 L96
    Date: 2009–09–01
  13. By: Mehrotra, Vikas; Schaik, Dimitri van; Spronk, Jaap; Steenbeek, Onno
    Abstract: Mergers in Japan have the dubious distinction of not creating wealth for shareholders of target firms, in sharp contrast to much of the rest of the world. Using a sample of 91 mergers from 1982 through 2003 we document several distinctive features of the merger market in Japan: mergers tend to be countercyclical and often orchestrated by a common main bank. Overall our results point to a market for corporate control that is distinctly less shareholder-focused than that in the U.S., and one where creditors play an important, perhaps dominant, role in corporate governance.
    Keywords: Japanese mergers, Japanese corporate governance
    JEL: G30 G34
    Date: 2009–08

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