nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒02‒05
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Pricing in Matching Markets By George J. Mailath; Andrew Postlewaite; Larry Samuelson
  2. Dominance and Innovation By Velu, C.; Iyer, S.
  3. Quality Distortions in Vertical Relations By Pio Baake; Vanessa von Schlippenbach
  4. Equilibria in Asymmetric Auctions with Entry By Jun Nakabayashi
  5. Are There Any Cournot Industries? By David Flath
  6. Quantum Model of Bertrand Duopoly By Salman Khan; M. Ramzan; M. K. Khan
  7. On the sustainability of collusion in Bertrand supergames with discrete pricing and nonlinear demand By Zimmerman, Paul R.
  8. Price-concentration analysis in merger cases with differentiated products By Beckert, Walter; Mazzarotto, Nicola
  9. Critical loss analysis in market definition and merger control By Hüschelrath, Kai
  10. A framework to enforce anti-predation rules By Hüschelrath, Kai; Weigand, Jürgen
  11. Transparency of regulation and cross-border bank mergers By Köhler, Matthias
  12. Merger control as barrier to EU banking market integration By Köhler, Matthias
  13. The competitive impact of hypermarket retailers on gasoline prices By Zimmerman, Paul R.
  14. Spatial competition between health care providers: effects of standardization By Kuchinke, Björn A.; Zerth, Jürgen; Wiese, Nadine
  15. Assessing the effects of a road surfacing cartel in Switzerland By Hüschelrath, Kai; Leheyda,, Nina; Beschorner, Patrick

  1. By: George J. Mailath (University of Pennsylvania); Andrew Postlewaite (University of Pennsylvania); Larry Samuelson (Cowles Foundation, Yale University)
    Abstract: Different markets are cleared by different types of prices -- a universal price for all buyers and sellers in some markets, seller-specific prices that are uniform across buyers in others, and personalized prices tailored to both the buyer and the seller in yet others. We introduce the notion of premuneration values -- the values in the absence of any muneration (payments) -- created by the buyer-seller match. We characterize the premuneration values under which uniform-price and personalized-price equilibria agree. In this case, we have efficient allocations, including pre-match investment decisions, without the costs of personalized pricing. We then examine the inefficiencies that arise when the premuneration values preclude the agreement of uniform-price and personalized-price equilibria. We view premuneration values as an important consideration in market design.
    Keywords: Directed search, Matching, Premuneration value, Prematch investments, Search
    JEL: C78 D40 D41 D50 D83
    Date: 2010–01
  2. By: Velu, C.; Iyer, S.
    Abstract: Do dominant or less dominant firms innovate more? Theoretically it has been shown that within an asymmetric mixed strategy game of a patent race, the less dominant firm invests more than the dominant firm. But the empirical data on patent races is divided. In this paper, we argue that the decisions that concern strategic choice in innovation may be influenced by expected relative returns. Our approach, which we call the returns-based beliefs approach, is based upon subjective probabilities. It combines a decision analytic solution concept and Luce’s (1959) probabilistic choice model. In particular, we show how the use of the returns-based beliefs approach provides support for the thesis that dominant firms invest more in R&D within an asymmetric mixed strategy game. Consequently, we argue that the returns-based beliefs approach is more in line with recent empirical studies of innovation. We also provide empirical evidence using UK R&D data across a range of industries from 2001-2006 that shows that firms’ spending on R&D is related more to their own profitability than that of their competitors, which is consistent with the returns-based beliefs approach. We discuss the managerial implications of our theoretical approach and the empirical findings.
    Date: 2010–01–27
  3. By: Pio Baake; Vanessa von Schlippenbach
    Abstract: This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a non-linear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that delivery contracts are more efficient the lower the firms' outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less efficient outcomes.
    Keywords: Quality Uncertainty, Private Standards, Vertical Relations, Buyer Power
    JEL: D82 L14 L15
    Date: 2010
  4. By: Jun Nakabayashi
    Abstract: Regarding optimal design in the private value environment, there is an unsolved discrepancy in the literature regarding asymmetric auctions and auctions with endogenous participation; Literature on the former suggests that well-designed distortive mechanisms are optimal (revenue maximizing) assuming the bidding costs are negligible, while that on the latter insists that the mechanisms with free entry and no distortion are optimal provided that the potential bidders are ex ante symmetric.This paper is the first attempt to reconcile the two views by establishing a model for asymmetric auctions with costly participation. The main findings are threefold; First, an optimal outcome is possible if and only if the mechanism is ex post efficient. Second, without any participation control, a coordination problem is likely in which only the weak bidders participate and the strong bidders stay out. Finally, there is an entry fee/subsidization scheme which, together with an ex post efficient mechanism, induces the optimal outcome as a unique equilibrium.
    Date: 2010–01
  5. By: David Flath
    Abstract: For 70 Japanese manufacturing industries, I test the simple Cournot hypothesis of proportionality between industry price-cost margin and Herfindahl index against the non-nested alternative that the industry price-cost margin remains constant in the face of varying Herfindahl index, as it would under a simple product differentiated Bertrand framework. I then test each of these against the alternative hybrid specification that nests both of them, and from the pairwise tests, compute likelihoods of each specification. The simple Cournot specification is the most likely for five of the industries, the simple Bertrand specification for 35, and the hybrid specification for 30.
    Date: 2010–01
  6. By: Salman Khan; M. Ramzan; M. K. Khan
    Abstract: We present the quantum model of Bertrand duopoly and study the entanglement behaviour on the profit functions of the firms. Using the concept of optimal response of each firm to the price of the opponent, we found four Nash equilibria for maximally entangled initial state. We have shown that only one point among the four Nash equilibria has valid physical meaning. The very presence of quantum entanglement in the initial state gives payoffs higher to the firms than the classical payoffs at the physically valid point for higher values of substitution parameter.
    Date: 2010–01
  7. By: Zimmerman, Paul R.
    Abstract: In traditional industrial organization models of Bertrand supergames, the critical discount factor governing the sustainability of collusion is independent of key demand and supply parameters. Recent research has demonstrated that these counterintuitive results stem from the assumption that firms can change prices in infinitesimally small increments (i.e., continuously). This note considers the effects of demand curvature in the context of a model of collusion where, as in Gallice (2008), Bertrand competitors can deviate only by lowering prices by some small, discrete amount. Two alternative demand specifications that capture the influence of demand curvature are considered. In either case, it is shown that with discrete price changes the critical discount factor is determined by the key demand parameters, including demand curvature. However, the direct effects of increased concavity (or convexity) in market demand on the sustainability of collusion runs in opposite directions across the two models. This discrepancy is shown to arise from the way in which the respective demand curves rotate in response to a change in the demand curvature parameter. The results support the conclusion of earlier research that determining the potential for collusion in homogenous goods industries likely requires careful case-by-case investigation.
    Keywords: Bertrand supergames; cartels; collusion sustainability; discrete pricing; nonlinear demand
    JEL: L13 L41
    Date: 2010–01–25
  8. By: Beckert, Walter; Mazzarotto, Nicola
    Abstract: This paper considers the empirical assessment of the relationship between prices and number of firms in local markets in geographic or, more generally, characteristic space and its use as evidence in merger cases. It outlines a structural, semi-nonparametric econometric model of competition in such markets, examines its testable implications in terms of price-concentration relationships, and demonstrates that the model is non-parametrically identified. This general approach to priceconcentration analysis in differentiated product markets is illustrated in a small-scale application to cinemas in the UK. The application highlights the main decision points faced by an authority when assessing the weight that can be attached to this type of analysis as evidence. --
    Keywords: Differentiated products,local competition,non-parametric identification
    JEL: L11 C31
    Date: 2010
  9. By: Hüschelrath, Kai
    Abstract: The last couple of years have seen an increasing interest in critical loss analysis, both, in academia and in practice. This development is documented by various research papers, high-level exchanges between antitrust experts as well as an increasing number of case decisions which make use of some form of critical loss analysis. In this context, it is the aim of this article to describe the general method of critical loss analysis, to assess important properties of the concept, to show how critical loss analysis has to differ between market definition exercises and the evaluation of the competitive effects of horizontal mergers and to discuss applications of critical loss analysis in recent cases. The results suggest that the application of critical loss analysis in practice is often not as straightforward as the rather simple theoretical concept might suggest. In fact, the method has to be applied with great care in order to receive meaningful results. --
    Keywords: Antitrust,competition policy,market power,market definition,merger control,unilateral effects
    JEL: L40 L41 L50 K21
    Date: 2009
  10. By: Hüschelrath, Kai; Weigand, Jürgen
    Abstract: The paper develops a framework to enforce anti-predation rules that explicitly takes the intervention stage into account. In particular, it is proposed to improve predation enforcement by focusing on two channels: refining the current regime, and amending it. With respect to the refinement of the current predation enforcement regime, criteria for the imposition of optimal gain- or harm-based fines are derived in order to sharpen the deterrent effect of predation enforcement. However, given the very low probability of conviction for predators a policy proposal solely based on an increase in the fines for detected and convicted predators might be too weak to significantly amplify the deterrence effect in particular and to improve predation enforcement in general. As a consequence, the introduction of a pre-screening approach is proposed, which aims at identifying industries in which entry is difficult but desirable and a predation strategy might be a suitable instrument for an incumbent to fight such occasional entry attempts. In those industries, it is advisable to reduce the high standard of proof in predation enforcement, as its basic justification - the danger to create a negative deterrence effect - is significantly reduced. --
    Keywords: Competition policy,monopolisation,predation,enforcement,sanctions,screening
    JEL: K21 L41
    Date: 2009
  11. By: Köhler, Matthias
    Abstract: There is ample anecdotal evidence that political influence constitutes a barrier to the integration of the EU banking market. Based on a dataset on the transparency on the supervisory review process of bank mergers in the EU, I estimate the probability that a bank is taken over as a function of bank and country characteristics and the transparency of merger control. The results indicate that banks are systematically more likely to be taken over by foreign credit institutions if the regulatory process is transparent. Particularly large banks seem to be less likely to be taken over by foreign banks if merger control lacks transparency. --
    Keywords: Mergers and acquisitions,banks,barriers to consolidation,political interference
    Date: 2010
  12. By: Köhler, Matthias
    Abstract: In 2005, the President of the Bank of Italy blocked the cross-border acquisition of two Italian banks for prudential reasons and formal errors. Because it became later public that both deals were not blocked for prudential reasons, but to protect domestic banks from foreign investors. A survey of the EU Commission indicates that the misuse of supervisory powers and political interference is not only a barrier to cross-border consolidation in Italy, but in other EU countries as well. Systematic empirical evidence on the role of merger control as barrier to M&A is, however, still missing. The main problem is the lack of data on the scope for politicians and supervisors to block M&A during merger control. The main contribution of this paper is to collect this data and to construct indices on the political independence of the supervisory authorities and the transparency of merger control. The main source of information is a questionnaire that was sent to the supervisors in the 25 EU member countries between October 2006 and March 2007. --
    Date: 2009
  13. By: Zimmerman, Paul R.
    Abstract: Hypermarkets are large retail suppliers of general merchandise or grocery items that also sell gasoline, often at very low margins. Using panel data for 1998-2002, this paper estimates the impact of hypermarkets on average state-level retail gasoline prices. The empirical results suggest a robust, economically (and statistically) significant effect of increased competition from hypermarkets. Furthermore, the results also suggest that refiners’ lower the delivered wholesale prices charged to their affiliated lessee-dealer and open-dealer stations in response to increased hypermarket competition, which in turn translates to lower retail (street) prices. The presence of a state motor fuel sales-below-cost (SBC) law may lessen the price-reducing effects from hypermarket competition by 40-67 percent while independently imparting no other offsetting price reductions. Finally, using recently published estimates of the short-run own price elasticity of demand for gasoline, consumer welfare is estimated to have increased in the neighborhood of $488 million over the sample period.
    Keywords: Dealer tank wagon; Hypermarkets; Motor fuel SBC laws; Petroleum; Vertical integration
    JEL: L11 L71 L22
    Date: 2009–06–18
  14. By: Kuchinke, Björn A.; Zerth, Jürgen; Wiese, Nadine
    Abstract: In the international health care literature there is a broad discussion on impacts of competition in health care markets. But aspects of standardization in regional health care markets with no price competition received comparatively little attention. We use a typical Hotelling-framework (reference case) to analyze a regional health care market with two health care providers competing in (vertical) quality after the scope of medical treatment is set (horizontal quality). We conclude, that in the reference case both health care provider will use vertical quality to separate from each other. In the next step (standardization case) we introduce one health care provider to be the standard leader in vertical quality. In the standardization case a more homogeneous supply can be expected. But, there is a higher possibility that the standard follower has to leave the regional health care market. --
    Date: 2009
  15. By: Hüschelrath, Kai; Leheyda,, Nina; Beschorner, Patrick
    Abstract: The paper assesses the impact of the detection of a hard-core cartel in the Swiss market for road surfacing on post-cartel competition. In addition to an investigation of supply-side factors, demand-side factors, and market prices, the paper also derives estimates of the economic effects of the decision. The results indicate that the detection of the cartel may have led to short-term price reductions; however, the persistent collusion-friendly industry structure forecloses larger and durable gains for the customers. --
    Keywords: Competition Policy,Evaluation,Cartels,Switzerland
    JEL: L41 K21
    Date: 2009

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