nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒12‒11
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Market Potential and New Firm Formation By Grek, Jenny; Karlsson, Charlie; Klaesson, Johan
  2. Dynamics of Entry and Exit of Product Varieties – what evolution dynamics can account for the empirical regularities? By Andersson, Martin; Johansson, Börje; Månsson, Kristofer
  3. Supply Chain Control: A Theory of Vertical Integration By Giovanni Ursino
  4. A Nonparametric Analysis of the Cournot Model By Andrés Carvajal; John Quah
  5. Why Do Sellers (Usually) Prefer Auctions? By Jeremy Bulow; Paul Klemperer
  6. Price Controls and Consumer Surplus By Jeremy Bulow; Paul Klemperer
  7. Efficiency of EU Merger Control in the 1990-2008 Period By Goran Serdarevic; Petr Teply
  8. Private label introduction: Does it benefit the supply chain? By Sachon, Marc; Martinez de Albeniz, Victor
  9. Carve-Outs Under Airline Antitrust Immunity By Jan K. Brueckner; Stef Proost
  10. Testing Theories of Scarcity Pricing in the Airline Industry By Steven L. Puller; Anirban Sengupta; Steven N. Wiggins
  11. Monopolistische Konkurrenz und die Kosten im Gesundheitswesen By Ingmar Kumpmann
  12. Inferring market power from retail deposit interest rates in the euro area By Vajanne, Laura
  13. A theory of sharecropping: the role of price behavior and imperfect competition By Sen, Debapriya

  1. By: Grek, Jenny (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Karlsson, Charlie (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Klaesson, Johan (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: The purpose of the paper is to show how entrepreneurship conditions vary between regions of various sizes, and test the theoretical arguments on why large regions generally should generate more entrepreneurship. The paper empirically ana¬lyzes the role of regional size in explaining varia¬tions in total entrepreneurship. It also examines en¬trepreneurship in different sectors across functional regions, using data from Sweden for the period 1993 to 2004. Employing fixed effects vector decomposition (FEVD) regressions, we estimate how the conditions for entrepreneurship vary between re¬gions. The results show that the market potential as measured by local and external accessibility to gross regional product (GRP) has a strong significant impact on both entry of new firms and on firm exit. For the primary sector and the manufacturing sector this impact is negative and for the ordinary service sector and the advanced service sector its positive. A high employment rate implies that there is a strong negative impact on firm entry in all sectors. This is in line with what one could expect as there are weaker incentives for individuals starting own businesses in periods of low employment rate. Further, the presence of many small firms in different sectors has a strong positive significant impact on new firm formation.
    Keywords: Entrepreneurship; Entry; Exit; Net entry; Regions; Sweden
    JEL: L10 R11 R12
    Date: 2009–11–23
  2. By: Andersson, Martin (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Johansson, Börje (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology); Månsson, Kristofer (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)
    Abstract: Firm-level heterogeneity is substantial even in narrowly defined industries. This paper focuses on formulating evolution dynamics which can account for the observed heterogeneity and its maintenance. Based on examination of data on Swedish firm’ supply pattern to different markets over time, we present a parsimonious model that has the ambition to capture the picture of heterogeneous firms, while accommodating the simultaneous exit and entry of destination varieties in firms’ supply pattern. The model assumes both scale economies of firms and path-dependence, where the latter is manifested in such a way that the arrival rate of innovation ideas to an individual firm is a function of each firm’s stock of varieties at every given point in time. The path-dependence phenomenon is an “explosive” non-linearity, whereas conservation mechanisms include development of demand and exit of established varieties. The described path dependence explains the skewed distribution of varieties across firms, but the question of what keeps the “equilibrium” away from competitive exclusion where only few large firms remain. We make use of simulations to depict and assess the innovation dynamics of the proposed model.
    Keywords: innovation; path-dependence; firm-level; heterogeneity; evolution dynamics
    JEL: C16 F14 L25 O33
    Date: 2009–11–23
  3. By: Giovanni Ursino (DISCE, Università Cattolica)
    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: L1 L2
    Date: 2009–10
  4. By: Andrés Carvajal (CRETA and Department of Economics, University of Warwick); John Quah (Department of Economics, Oxford University, Oxford)
    Abstract: An observer makes a number of observations of an industry producing a homoge- neous good. Each observation consists of the market price, the output of individual firms and perhaps information on each firm's production cost. We provide vari- ous tests (typically, linear programs) with which the observer can determine if the data set is consistent with the hypothesis that firms in this industry are playing a Cournot game at each observation. When cost information is wholly or partially unavailable, these tests could potentially be used to derive cost information on the firms. This paper is a contribution to the literature that aims to characterize (in various contexts) the restrictions that a data set must satisfy for it to be consis- tent with Nash outcomes in a game. It is also inspired by the seminal result of Afriat (and the subsequent literature) which addresses similar issues in the context of consumer demand, though one important technical difference from most of these results is that the objective functions of firms in a Cournot game are not necessarily quasiconcave.
    Keywords: revealed preference, observable restrictions, linear programming, Cournot game, increasing marginal costs.
    Date: 2009–11–24
  5. By: Jeremy Bulow (Graduate School of Business, Stanford University, USA); Paul Klemperer (Nuffield College, University of Oxford, Oxford, UK)
    Abstract: We compare the most common methods for selling a company or other asset when participation is costly: a simple simultaneous auction, and a sequential process in which potential buyers decide in turn whether or not to enter the bidding. The sequential process is always more efficient. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry - precisely because of its inefficiency - it usually generates higher expected revenue. We also discuss the effects of lock-ups, matching rights, break-up fees (as in takeover battles), entry subsidies, etc.
    Keywords: Auctions, jump bidding, sequential sales, procurement, entry
    JEL: D44 G34 L13
    Date: 2009–06–01
  6. By: Jeremy Bulow (Graduate School of Business, Stanford University, Stanford, USA); Paul Klemperer (Nuffield College, University of Oxford, Oxford, UK)
    Abstract: The condition for when a price control increases consumer welfare in perfect competition is tighter than often realised. When demand is linear, a small restriction on price only increases consumer surplus if the elasticity of demand exceeds the elasticity of supply; with log-linear or constant-elasticity, demand consumers are always hurt by price controls. The results are best understood - and can be related to monopoly-theory results - using the fact that consumer surplus equals the area between the demand curve and the industry marginal-revenue curve.
    Keywords: Rationing, Allocative Efficiency, Microeconomic Theory, Marginal Revenue, Minimum Wage, Rent Control, Consumer Welfare
    JEL: D45 D61 D6
    Date: 2009–07–01
  7. By: Goran Serdarevic (EEIP, a.s; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Petr Teply (EEIP, a.s; Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The main goal of this paper is to provide an analysis of key regulatory changes in the European merger control and to evaluate their real impact on the efficiency of merger regulation. Our main contribution is an empirical analysis of a unique representative sample of 161 horizontal mergers covering the final regulatory assessments during the period from 1990 to 2008. We use stock market data to identify those cases where there are discrepancies between the Commission and market evaluation of the merger. The PROBIT model is then used to further investigate the sources of these discrepancies. Our results suggest that the Commission’s decisions are not purely explained by the motive of protecting consumer welfare and that other political and institutional factors do play a role in setting policy. We did not find evidence that the Commission protects competitors at the expense of consumers and foreign firms. Moreover, we conclude that the regulatory reform introduced in 2004 has significantly enhanced efficiency of the European merger control. To the authors’ best knowledge, this paper is the first study using stock market data to evaluate an impact of the recent EU merger control.
    Keywords: merger control, European Union, political economy, regulatory reform, PROBIT model
    JEL: L4 K21 C25 D78
    Date: 2009–12
  8. By: Sachon, Marc (IESE Business School); Martinez de Albeniz, Victor (IESE Business School)
    Abstract: Private labels, also called store brands or distributor brands, have changed the retail industry during the last three decades. Consumer data shows strong growth of private label market share, and in countries like Germany or Spain, the penetration of private labels is above 30% of total retail sales. This paper analyzes the channel dynamics in a category where a private label is introduced. We focus on the impact of private labels on retail and wholesale equilibrium prices, as well as on the profits of each firm of the supply chain. While private label introduction helps the retailer reduce manufacturer brand's prices, we find that it does not always improve the total profits of the supply chain. Generally, the supply chain benefits from this introduction only when cross-elasticities are small, i.e., competitive interactions are weak. With our model, we formulate the general conditions under which retailers should consider introducing private labels.
    Keywords: Private label; non-cooperative game theory; supply chain efficiency;
    Date: 2009–11–03
  9. By: Jan K. Brueckner (Department of Economics, University of California-Irvine); Stef Proost (Center for Economic Studies, KULeuven)
    Abstract: This paper offers the first formal economic analysis of carve-outs under airline antitrust immunity. Carve-outs are designed to limit the potential anticompetitive effects of cooperation by alliance partners in hub-to-hub markets, where they provide overlapping nonstop service. While the paper shows that carve-outs are beneficial when the alliance does not involve full integration of the partners' operations on the hub-to-hub route, its key point is that a carve-out may be harmful when imposed on a joint-venture alliance. A JV alliance involves full exploitation of economies of traffic density on the hub-to-hub route, and a carve-out prevents the realization of these benefits. While a carve-out may limit anticompetitive incentives on the hub-to-hub route, welfare may be reduced if the resulting gains are overshadowed by the efficiency loss generated by the carve-out.
    Keywords: Carve-out; Antitrust immunity; Airline alliances
    JEL: L4 L9
    Date: 2009–10
  10. By: Steven L. Puller; Anirban Sengupta; Steven N. Wiggins
    Abstract: This paper investigates why passengers pay substantially different fares for travel on the same airline between the same two airports. We investigate questions that are fundamentally different from those in the existing literature on airline price dispersion. We use a unique new dataset to test between two broad classes of theories regarding airline pricing. The first group of theories, as advanced by Dana (1999b) and Gale and Holmes (1993), postulates that airlines practice scarcity based pricing and predicts that variation in ticket prices is driven by differences between high demand and low demand periods. The second group of theories is that airlines practice price discrimination by using ticketing restrictions to segment customers by willingness to pay. We use a unique dataset, a census of ticket transactions from one of the major computer reservation systems, to study the relationships between fares, ticket characteristics, and flight load factors. The central advantage of our dataset is that it contains variables not previously available that permit a test of these theories. We find only mixed support for the scarcity pricing theories. Flights during high demand periods have slightly higher fares but exhibit no more fare dispersion than flights where demand is low. Moreover, the fraction of discounted advance purchase seats is only slightly higher on off-peak flights. However, ticket characteristics that are associated with second-degree price discrimination drive much of the variation in ticket pricing.
    JEL: L1 L93
    Date: 2009–12
  11. By: Ingmar Kumpmann
    Abstract: Competition among health insurers is widely considered to be a means of enhancing efficiency and containing costs in the health care system. In this paper, it is argued that this could be unsuccessful since health care providers hold a strong position on the market for health care services. Physicians exert a type of monopolistic power which can be described by Chamberlin’s model of monopolistic competition. If many health insurers compete with one another, they cannot counterbalance the strong bargaining position of the physicians. Thus, health care expenditure is higher, financing either extra profits for physicians or a higher number of them. In addition, health insurers do not have an incentive to contract selectively with health care providers as long as there are no price differences between physicians. A monopolistic health insurer is able to counterbalance the strong position of physicians and to achieve lower costs.
    Keywords: health care system, monopolistic competition, health insurance, costs
    JEL: I11 I18 H51 D43
    Date: 2009–11
  12. By: Vajanne, Laura (Bank of Finland Research)
    Abstract: This paper tests for the existence of market power in banking, using data on demand deposit rates of households and corresponding market rates in five euro area countries. An implicit measure for market power is based on a partial adjustment model that also allows for an asymmetric response of deposit rates to changes in market rates. The period covers the ten years since introduction of the euro. The analysis indicates that banks are exercising major market power within the euro area. In addition to general sluggishness, bank deposit rates’ reactions are clearly asymmetric: flexible when market rates are decreasing and rigid when rates are increasing. The degree of asymmetric behaviour can be interpreted as a further indication of the market power banks exercise. Despite country differences, a general pattern of interest rate adjustment in demand deposit pricing is observable.
    Keywords: competition; banking industry; retail interest rates
    JEL: G21 L11 L13
    Date: 2009–11–02
  13. By: Sen, Debapriya
    Abstract: This paper proposes a theory of sharecropping on the basis of price behavior in agriculture and imperfectly competitive nature of rural product markets. We consider a contractual setting between one landlord and one tenant with seasonal variation of price, where the tenant receives a low price for his output while the landlord can sell his output at a higher price, and show the superiority of sharecropping over fixed rental contracts. Then we consider more general interlinked contracts to show that there are multiple optimal interlinked contracts. Finally, proposing an equilibrium refinement that incorporates imperfect competition in the rural product market, it is shown that the unique contract that is robust to this refinement results in sharecropping.
    Keywords: Sharecropping; price variation; imperfect competition; interlinkage; the epsilon-agent
    JEL: D23 J43 O17 D02 Q15 O12
    Date: 2009–12–04

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