nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒12‒19
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. Sequential Spatial Competition in Vertically Related industries with Different Product Varieties By Beladi, Hamid; Chakrabarti, Avik; Marjit, Sugata
  2. Relationship-Specificity, Spatial Clustering and Production to Order Choice By L. Casaburi; G. A. Minerva
  3. A Nonparametric Analysis of the Cournot Model By Andres Carvajal; John K.-H. Quah
  4. Competition, Reputation and Cheating By P. Vanin
  5. The design and efficiency of loyalty rewards By Caminal, Ramon
  6. Multi-Unit Auctions and Competition Stricture By Raphaële Préget; Sophie Thoyer
  7. Does a Seller Really Want Another Bidder? By Ronald M. Harstad
  8. Innovation, Fast Seconds, and Patent Policy By George Norman; Lynn Pepall; Dan Richards
  9. Two and a Half Theories of Trade By Neary, J. Peter
  10. Entrepreneurial Human Capital, Complementary Assets, and Takeover Probability By Thorsten V. Braun; Sebastian Krispin; Erik E. Lehmann
  11. Comparison of Post-Merger performance of Acquiring Firms (India) involved in Domestic and Cross-border acquisitions By Saboo, Sidharth; Gopi, Sunil
  12. The Impact of Non-constant Return and Market Power on the Determination of Farm Value Share By Xian Xin; Xiuqing Wang
  13. Strategic Under-utilization of Patents and Entry Deterrence: The Case of Pharmaceutical Industry By Marjit, Sugata; Kabiraj, Tarun; Dutta, Arijita
  14. Mobile network interconnection and investments By Veith, Tobias
  15. Bank competition, risk taking and productive efficiency: Evidence from Nigeria's banking reform experiments By Murinde, Victor; Zhao, Tianshu
  16. Price Dispersion, Search Externalities, and the Digital Divide By Manfred Nermuth; Giacomo Pasini; Paolo Pin; Simon Weidenholzer
  17. Out of many, dominance by a few? Market power in the Jamaican banking sector. By Daley, Jenifer; Matthews, Kent
  18. Promoting Competition to Strengthen Economic Growth in Belgium By Tomasz Kozluk

  1. By: Beladi, Hamid; Chakrabarti, Avik; Marjit, Sugata
    Abstract: We demonstrate the sensitivity of the location of downstream firms, engaged in sequential spatial competition, to the vertical structure of an industry where no downstream firm can produce all varieties demanded.
    Keywords: Product-differentiation; Price-discrimination; Spatial competition; Firm-location; Merger.
    JEL: L13 L42 R32 D43
    Date: 2009
  2. By: L. Casaburi; G. A. Minerva
    Abstract: We study the determinants of the firm-level choice to produce following an order placed by a downstream firm (production to order) or to produce in advance. We rationalize this choice through a simple theoretical model and apply it to a firm-level empirical analysis. Relying on a large dataset of Italian manufacturing firms, we show that two main variables affect this choice: the extent of spatial clustering of the industry, and the degree of product complexity and relationship-specificity of the goods that are traded. The sign of the impact of clustering on the choice of producing to order crucially depends on product complexity. If product complexity is high, production to order prevails when firms are clustered together. On the contrary, clustering is associated to production in advance for sectors where goods are standardized.
    JEL: D23 F10 L14 R30 R34
    Date: 2009–11
  3. By: Andres Carvajal; John K.-H. Quah
    Abstract: An observer makes a number of observations of an industry producing a homogeneous good. Each observation consists of the market price, the output of individual firms and perhaps information on each firm’s production cost. We provide various 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 consistent 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
    JEL: C14 C61 C72 D43
    Date: 2009
  4. By: P. Vanin
    Abstract: Under repeated market interaction, reputation and competition may drive out of the market those firms that do not comply with their quality promises. One may thus presume that competitive pressure improves average market quality. This paper shows that the opposite may be true in an endogenous entry, repeated interaction, linear demand oligopoly model, in which introductory prices may be used as quality signals. Cheating firms may enter the market, fool even rational consumers, and exit the market when discovered, implying a failure of the basic reputation mechanism and an increasing time path of prices. Markets for closer substitutes tend to have a lower initial average quality and less trusting consumers, whereas the number of competitors has no clear relationship with average quality.
    JEL: L13 L14 L15
    Date: 2009–11
  5. By: Caminal, Ramon
    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 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: Coasian dynamics; coupons; loyalty rewards; price commitment
    JEL: D42 D43 L12 L13
    Date: 2009–12
  6. By: Raphaële Préget; Sophie Thoyer
    Abstract: Is it better for a seller who wants to auction multiple units to face many small bidders or few large bidders? Since multi-unit auction models usually have many equilibria, there are no theoretical predictions on the impact of the competition structure on the performance of a multi-unit auction (in terms of expected revenue and allocation efficiency). Our experimental results with uniform-price auctions support that with a constant competition degree (identical aggregate demand and supply), when the number of bidders increases while individual demand decreases, there is less strategic bidding (demand reduction). It leads to higher expected revenue with a lower variance but allocation efficiency is not significantly different.
    Date: 2009–12
  7. By: Ronald M. Harstad (Department of Economics, University of Missouri-Columbia)
    Abstract: Several papers compare auctioning heterogeneous assets sequentially with sequentially selling the right to choose among assets not yet taken. Typically motivated by auctions of condos for owner occupation, these papers have assumed that each winning bidder exits, so each successive auction has less competition. In many heterogeneous-asset-sale situations, a winning bidder may still be interested in acquiring further assets. We build a simple model of persistent competition, in which the distribution of equilibrium revenue from separate sales is shown to be a mean-preserving spread of the distribution of revenue from selling rights to choose. Persistent competition reveals that a high bidder does not always select his most preferred asset, and that one asset being slightly more likely to be a favored asset discontinuously affects equilibrium bidding.
    Keywords: auction theory; rights-to-choose auctions; revenue comparisons; persistent competition; private information
    JEL: D44 D82
    Date: 2009–06–15
  8. By: George Norman; Lynn Pepall; Dan Richards
    Abstract: We develop a model of innovation in which entrepreneurs develop a new (differentiated) product market that is subsequently exploited by a well-established firm that "stretches" its brand to enter a new market as "fast second". In this setting, there is a positive externality to the pioneering efforts of the intitial entrants that may well increase with the number of such entrants. We develop a model that exhibits this externality and use it to evaluate the design of patent policy--specifically patent breadth--with a view to encouraging the optimal amount of initial entry.
    Keywords: fast second, product differentiation, contestability
    JEL: L5 O25
    Date: 2009
  9. By: Neary, J. Peter
    Abstract: This paper discusses the place of oligopoly in international trade theory, and argues that it is unsatisfactory to ignore firms altogether, as in perfectly competitive models, or to view large firms as more productive clones of small ones, as in monopolistically competitive models. Doing either fails to account for the "granularity" in the size distribution of firms and for the dominance of large firms in exporting. The paper outlines three ways of developing more convincing models of oligopoly, which allow for free entry but do not lose sight of the grains in "granularity": heterogeneous industries, natural oligopoly, and superstar firms.
    Keywords: GOLE (General Oligopolistic Equilibrium); granularity; heterogeneous firms; international trade and market structure
    JEL: F10 F12
    Date: 2009–12
  10. By: Thorsten V. Braun (University of Augsburg, Department of Economics); Sebastian Krispin (University of Augsburg, Department of Economics); Erik E. Lehmann (University of Augsburg, Department of Economics)
    Abstract: Gaining access to technologies, competencies, and knowledge is observed as one of the major motives for corporate mergers and acquisitions. In this paper we show that a knowledge-based firm’s probability of being a takeover target is influenced by whether relevant specific human capital aimed for in acquisitions is directly accumulated within a specific firm or is bound to its founder or manager owner. We analyze the incentive effects of different arrangements of ownership in a firm’s assets in the spirit of the Grossman-Hart-Moore incomplete contracts theory of the firm. This approach highlights the organizational significance of ownership of complementary assets. In a small theoretical model we assume that the entrepreneur’s specific human capital, as measured by the patents they own, and the physical assets of their firm are productive only when used together. Our results show that it is not worthwhile for an acquirer to purchase the alienable assets of this firm due to weakened incentives for the initial owner. Regression analysis using a hand collected dataset of all German IPOs in the period from 1997 to 2006 subsequently provides empirical support for this prediction. This paper adds to previous research in that it puts empirical evidence to the Grossman-Hart-Moore framework of incomplete contracts or property rights respectively. Secondly, we show that relevant specific human capital that is accumulated by a firm’s founder or manager owner significantly decreases that firm’s probability of being a takeover target.
    Keywords: ownership structure, property rights, mergers & acquisitions
    JEL: G32 D23 G34
    Date: 2009–12
  11. By: Saboo, Sidharth; Gopi, Sunil
    Abstract: Mergers and acquisitions are used for improving competitiveness of companies and gaining competitive advantage over other firms through gaining greater market share, broadening the portfolio to reduce business risk, entering new markets and geographies, and capitalising on economies of scale etc. India has emerged as one of the top countries with respect to merger and acquisition deals. Indian companies have been actively involved in mergers and acquisitions in India domestically as well as internationally. The value share of deals where India has been a target or an acquirer has risen sharply over the past decade, from $2.2 billion in 1998 to $62 billion in 2007. As India increases its participation in M&A deals, it is instructive to compare the domestic and cross-border acquisitions due to their distinctiveness. The distinction between them is a function of the change in market integration which changes the costs and benefit structure and also the difference in synergies – social, cultural and organisational. This research study was aimed to study the impact of mergers on the operating performance of acquiring firms by examining some pre- merger and post-merger financial ratios of these firms and to see the differences in the pre merger and post merger ratios of the firms that go for domestic acquisitions and the firms that go for the international/cross-border acquisitions. The results suggest that there are variations in terms of impact on performance following mergers, depending on the type of firm acquired – domestic or cross-border. In particular, mergers have had a positive effect on key financial ratios of firms acquiring domestic firms while a slightly negative impact on the firms acquiring cross-border firms.
    Keywords: Mergers and Acquisitions; Domestic Mergers; Cross-border Mergers; Operating performance
    JEL: G34 G3
    Date: 2009–12–10
  12. By: Xian Xin; Xiuqing Wang (College of Economics and Management, China Agricultural University)
    Abstract: This paper investigates the impacts of non-constant return to scale, oligopsony power, and oligopoly power on farm value share with the approach of equilibrium displacement model. Our paper contrasts to the current literature that non-constant return to scale, oligopoly power, and oligopsony power are all incorporated into one generalized model which enables us to investigate the impacts of these three factors on the determination and changes of farm value share systematically. Our results imply that non-constant return to scale and market power is central to the understanding of farm value share. These in turn indicate that overlooking the impacts of market power and degree of return to scale may overestimate or underestimate the impacts of exogenous shocks on the changes on farm value share.
    Keywords: Farm Value Share, Market Power, Non-constant Returns to Scale
    JEL: L11 Q13 Q10
    Date: 2009–05
  13. By: Marjit, Sugata; Kabiraj, Tarun; Dutta, Arijita
    Abstract: This paper seeks to explain why some pharmaceutical companies are observed to withdraw their products before patents are expired and simultaneously introduce new patented (competing) products. Given the specific nature of drug markets, the companies in fact increase the entry cost of the potential generic drug manufacturers and thereby lessen competition for new drugs. The paper determines the optimal date of withdrawing the product and studies comparative static effects of the change of parameters underlying the model.
    Keywords: Patent protection; patent expiry; pharmaceutical industries; generic drugs; entry cost.
    JEL: O3 L1
    Date: 2009–11
  14. By: Veith, Tobias
    Abstract: Abstract In markets with competing interconnected networks like mobile telecommunication markets investments affect the investor’s and also any competitors’ profits. In a theoretical model it is shown that cost-reducing investments reduce the investor’s termination rates and increase competitors’ termination rates under the callingparty- network-pays regime. Moreover, investments increase off-net traffic from the investor’s network but also from competitors’ networks. Regulation changes the effect on competitors’ termination rates but all other effects remain the same or are strengthened. Empirical results support the theoretical findings concerning the investor’s termination rates and the findings on off-net traffic. Competitors’ termination rates decrease. The negative termination rate effect even outweighs the quantity effect in the competitors’ profit functions. Testing for a common regulation-investment effect provides evidence that the negative investment externality is not due to regulation. --
    Keywords: regulation,mobile telecommunications,investments,interconnection
    JEL: L51 L52 L86 L96 O31 O33
    Date: 2009
  15. By: Murinde, Victor; Zhao, Tianshu
    Abstract: We propose a three-stage procedure for investigating the interrelationships among bank competition, risk taking and efficiency. The procedure is applied to Nigeria's banking reforms (1993-2008). Stage I measures bank productive efficiency, using Data Envelopment Analysis, and the evolution of bank competition, using Conjectural Variations (CV) methods. Stage II uses the CV estimates to test whether regulatory reforms influence bank competition. Stage III investigates the impact of the reforms and concomitant changes in competition on bank behaviour. The evidence suggests that deregulation and prudential re-regulation influence bank risk taking and bank productive efficiency directly (direct impact) and via their impact on competition (indirect impact). Further, it is found that as competition increases, excessive risk taking decreases and efficiency increases. Overall, the evidence affirms policies that foster bank competition, at least in the Nigerian context.
    Keywords: Nigeria; risk-taking; bank efficiency; bank competition
    Date: 2009–11
  16. By: Manfred Nermuth; Giacomo Pasini; Paolo Pin; Simon Weidenholzer
    Abstract: We propose a model of price competition where consumers exogenously differ in the number of prices they compare. Our model can be interpreted either as a non–sequential search model or as a network model of price competition. We show that i) if consumers who previously just sampled one firm start to compare more prices all types of consumers will expect to pay a lower price and ii) if consumers who already sampled more than one price sample (even) more prices then there exists a threshold –the digital divide– such that all consumers comparing fewer prices than this threshold will expect to pay a higher price whereas all consumers comparing more prices will expect to pay a lower price than before.
    JEL: D43 D85 L11
    Date: 2009–12
  17. By: Daley, Jenifer; Matthews, Kent (Cardiff Business School)
    Abstract: This paper presents an empirical assessment of the degree of competition within the Jamaican banking sector during the period 1998 to 2007. The popular H-statistic by Panzar and Rosse is utilised to estimate market power among the sample of banks. Using usual statistical tests, we are unable to reject monopoly/perfect collusion for the banking market in Jamaica. This contrasts with earlier findings using alternative estimators. Therefore, the use of a dynamic reformulation of the model with a dynamic estimator highlights some collusive behaviour among banks.
    Keywords: Competition; banking; Rosse-Panzar <em>H</em>-statistic; Dynamic panel estimation; Jamaica
    JEL: G21 G28
    Date: 2009–12
  18. By: Tomasz Kozluk
    Abstract: Prices for many goods and services in Belgium are higher than in other countries, reflecting generally weak competitive pressures. The government has recently introduced several reforms to strengthen the competition policy framework. Nevertheless, to reap the full benefits of competitive markets, past reforms should be complemented with a number of further measures. The powers of the Competition Authority can still be enhanced. Its effective degree of independence, substantially improved in the recent reform, and its accountability should be monitored in order to assess whether further measures in this direction are needed. In the retail sector competition-restricting regulations still protect existing companies against new entry and inhibit the diffusion of new business models and technologies. The reform efforts in the network sectors remain patchy. In the energy and telecommunication sectors the main issues are the dominant positions of the incumbents and the failure of network sector regulators to introduce a level playing field in order to allow new entry and expansion of competitors. In other sectors, such as postal services and rail transport, major steps towards liberalisation are still to come. Overall, sectoral regulators will need more independence and powers in order to tackle uncompetitive behaviour of the incumbents, while better communication between the regulatory authorities is necessary. These steps should help to secure the necessary basis for bringing productivity growth in line with best performance.<P>Promouvoir la concurrence afin d’affermir la croissance économique en Belgique<BR>Les prix d’un grand nombre de biens et de services en Belgique sont plus élevés que dans d’autres pays, signe de la faiblesse générale des pressions exercées par la concurrence. Le gouvernement a récemment introduit plusieurs réformes destinées à renforcer le cadre de la politique de concurrence. Néanmoins, pour tirer tout le profit de marchés concurrentiels, les réformes mises en oeuvre devraient être complétées par un certain nombre de mesures additionnelles. Les pouvoirs de l’Autorité de concurrence peuvent être encore renforcés. Son degré effectif d’indépendance (sensiblement rehaussé par la récente réforme) et son obligation de rendre compte devraient faire l’objet d’un suivi de manière à évaluer si de nouvelles mesures s’imposent à cet égard. Dans le commerce de détail, les réglementations restreignant la concurrence protègent toujours les entreprises en place contre l’arrivée de nouveaux concurrents et freinent la diffusion de nouveaux modèles économiques et de nouvelles technologies. Les efforts de réforme dans les industries de réseau demeurent parcellaires. Dans les secteurs de l’énergie et des télécommunications, les problèmes tiennent surtout aux positions dominantes des opérateurs historiques et à l’incapacité des autorités de régulation des industries de réseau à instaurer des conditions égales pour tous de manière à permettre l’arrivée de nouveaux concurrents et le développement de la concurrence. Dans d’autres secteurs, comme les services postaux et le transport ferroviaire, d’importantes mesures de libération sont toujours en attente. Globalement, les régulateurs sectoriels ont besoin de plus d’indépendance et de plus de pouvoirs pour contrer le comportement anticoncurrentiel des opérateurs historiques, et il est nécessaire d’améliorer la communication entre les autorités de régulation. Ces mesures devraient contribuer à assurer la base nécessaire pour porter la croissance de la productivité au meilleur niveau.
    Keywords: Belgium, competition policy, competition, economic growth, network industries, retail distribution, sectoral regulators, Belgique, commerce de détail, concurrence, croissance économique, industrie de réseau, politique de la concurrence, régulateurs sectoriels
    JEL: K23 L41 L43 L50
    Date: 2009–12–03

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