nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒02‒27
ten papers chosen by
Russell Pittman
US Department of Justice

  1. The effects of entry on incumbent innovation and productivity. By Aghion, P.; Blundell, R.; Griffith, R.; Howitt, P.; Prantl, S.
  2. Product differentiation on a platform: the informative and persuasive role of advertising. By De Smet, Dries; Van Cayseele, Patrick
  3. Essays in industrial organisation. By Fatemi Ardestani, S.F.
  4. Advance Production, Inventories and Market Power: An Experimental Investigation By Douglas D. Davis
  5. Economic Nationalism in Mergers and Acquisitions By Dinc, Serdar; Erel, Isil
  6. Maintaining New Markets: Determinants of Antitrust Enforcement in Central and Eastern Europe By Robert M. Feinberg; Mieke Meurs; Kara M. Reynolds
  7. Price Transmission in the Cocoa-Chocolate Chain By Catherine ARAUJO BONJEAN; Jean-François BRUN
  8. Reinvestment Decisions by Small Businesses in Emerging Economies By Sugato Chakravarty; Meifang Xiang
  9. Choosing the scope of trade secret law when secrets complement patents By Ottoz, Elisabetta; Cugno, Franco
  10. Employer Sanctions, Illegal Migration and Welfare By Munirul H Nabin; Pasquale M Sgro

  1. By: Aghion, P.; Blundell, R.; Griffith, R.; Howitt, P.; Prantl, S.
    Abstract: How does firm entry affect innovation incentives in incumbent firms? Microdata suggest that there is heterogeneity across industries. Specifically, incumbent productivity growth and patenting is positively correlated with lagged greenfield foreign firm entry in technologically advanced industries, but not in laggard industries. In this paper we provide evidence that these correlations arise from a causal effect predicted by Schumpeterian growth theory—the threat of technologically advanced entry spurs innovation incentives in sectors close to the technology frontier, where successful innovation allows incumbents to survive the threat, but discourages innovation in laggard sectors, where the threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro panel data for the United Kingdom. We control for the endogeneity of entry by exploiting major European and U.K. policy reforms, and allow for endogeneity of additional factors. We complement the analysis for foreign entry with evidence for domestic entry and entry through imports.
    Date: 2009–02
  2. By: De Smet, Dries; Van Cayseele, Patrick
    Abstract: Both sides of a two-sided market are usually modeled as markets without product differentiation. Often however, it will be profit maximizing to differentiate one or two sides in two or more types. In a simple theoretical model, inspired by Yellow Pages, we show that this decision crucially depends on the appreciation of these differentiated types by the other side. We argue that this consists of two parts: first, a preference for informative advertisement by users and second, the effect of persuasive advertisements on users. The relation between both effects drives the monopolist decision to engage in product differentiation. We test this conceptual framework in an empirical investigation of Yellow Pages. We find that Yellow Pages publishers offer large ads even though users don't value them at all. The economic rationale for this is that each advertisement type contributes directly (by the price paid for it) and indirectly (by increased usage) to revenues. Large ads are mainly set for this direct contribution, small ads for this indirect contribution. If a platform can choose the size, it will make the size difference between small and large ads as large as possible, in order to attract as much users as possible, but also to induce self selection among advertisers.
    Date: 2010
  3. By: Fatemi Ardestani, S.F.
    Abstract: This thesis consists of three independent chapters: In the first chapter, we consider a Hotelling model of price competition where firms may acquire information regarding the preferences (i.e. “location”) of customers. By purchasing additional information, a firm has a finer partition regarding customer preferences, and its pricing decisions must be measurable with respect to this partition. If information acquisition decisions are common knowledge at the point where firms compete via prices, we show that a pure strategy subgame perfect equilibrium exists, and that there is “excess information acquisition” from the point of view of the firms. If information acquisition decisions are private information, a pure strategy equilibrium fails to exist. We compute a mixed strategy equilibrium for a range of parameter values. The second chapter investigates a case of national versus regional pricing. Competition authorities frequently view price discrimination by firms as detrimental to consumers. In the case of the UK supermarket industry they suggested a move to uniform pricing. Yet theoretical predictions are ambiguous about whether third degree price discrimination is beneficial or detrimental to consumers, and in general there will be some consumers who benefit while other lose out. In this chapter, we estimate the impact that the move from regional to uniform pricing had on Tesco’s profits and consumer's surplus. We estimate an AIDS model of consumer expenditure in the eggs market in a multi-stage budgeting framework allowing for very flexible substitution patterns between products at the bottom level. We use data on farm gate prices to instrument price in the demand equation. Our results suggest that switching to a regional pricing policy can potentially increase Tesco’s profit on eggs by 37%. However, while there are winners and losers, the overall effect on consumer welfare is not significant. In the third chapter, we study the kidney market in Iran. The most effective treatment for end-stage renal disease is a kidney transplant. While the supply of cadaveric kidneys is limited, the debate has been focused on the effects of the existence of a free market for human organs. Economists as well as medical and legal researchers are divided over the issue. Iran has a unique kidney market which has been in place for over 20 years, frequently reporting surprising success in reducing the waiting list for kidneys. This paper demonstrates how the Iranian system works and estimates the welfare effect of this system.
    Date: 2009–06
  4. By: Douglas D. Davis (Department of Economics, VCU School of Business)
    Abstract: This paper reports an experiment conducted to assess the effects of alterations in production conditions and product durability on market power in Bertrand-Edgeworth duopolies. Experiment results indicate that advance production increases market power in the sense that mean transaction prices increase relative to static Nash equilibrium predictions for a baseline market. In a similar way, a simple inventory option reduces market power. We also find that both advance production and inventory carryover undermine a strong tendency toward tacit collusion observed in our baseline duopoly markets.
    Keywords: Experiments, Bertrand-Edgeworth Competition, Advance Production, Inventory Carryover
    JEL: C9 D4 L4
    Date: 2010–02
  5. By: Dinc, Serdar (Massachusetts Institute of Technology); Erel, Isil (Ohio State University)
    Abstract: This paper studies the government reaction to large corporate merger attempts in the European Union during 1997-2006 using hand-collected data. It documents widespread economic nationalism in which the government reaction depends on the nationality of the acquiring company. The nationalism takes place both as resistance to foreign acquirers and as support for domestic ones. This nationalism has both direct and indirect economic impact. The paper shows that government intervention is very effective in preventing foreign bidders from completing the merger and in helping domestic bidders succeed. The paper also demonstrates that nationalistic government reactions deter, indirectly, foreign companies from bidding for other companies in a country in the future.
    Date: 2009–09
  6. By: Robert M. Feinberg; Mieke Meurs; Kara M. Reynolds
    Abstract: While others have examined the implementation and/or the stringency of enforcement of antitrust laws in post-socialist economies, this paper is the first study that attempts to explain the determinants of antitrust enforcement activity across post-socialist countries using economic and political variables. Using a panel of ten European post-socialist countries over periods ranging from 4 to 11 years, we find a number of significant determinants of enforcement in these countries. For example, larger economies engage in more antitrust enforcement, and countries have tended to increase their enforcement efforts over time. Our results also suggest that countries characterized by more unionization and less corruption tend to engage in greater antitrust enforcement of all types. Countries more successful in privatizing have filed fewer cases, while more affluent or developed countries investigate fewer cases of all types, consistent with an income-shifting motivation for antitrust.
    Keywords: Antitrust Enforcement, Central and Eastern Europe, Competition Policy JEL classification: L4, P3
    Date: 2010–02
  7. By: Catherine ARAUJO BONJEAN (Centre d'Etudes et de Recherches sur le Développement International); Jean-François BRUN (Centre d'Etudes et de Recherches sur le Développement International)
    Abstract: There is a common perception among consumers that the retail prices respond faster to an increase in the price of raw material than to a decrease. This paper aims at testing the existence of such asymmetric price transmission in the cocoa-chocolate chain on the French market. Two types of asymmetry are suspected: asymmetry in the transmission of positive and negative shocks that may reflect non-competitive behaviour in the chocolate industry and asymmetry in the transmission of small and large shocks that may be due do adjustment costs. These hypotheses are tested using the two-step approach to cointegration of Engle and Granger extended to encompass possible asymmetric adjustment to disequilibrium. Estimates indicate that a three-regime error correction model is the most appropriate. On the one hand, the chocolate price does not adjust to small shocks in the cocoa market. On the other hand, the speed of adjustment is larger for negative deviations than for positive ones.<span lang="EN-GB" style=""><br /> <br /> </span>Les consommateurs ont souvent l&rsquo;impression que les prix de d&eacute;tail r&eacute;pondent plus vite aux augmentations du prix de la mati&egrave;re premi&egrave;re qu&rsquo;aux baisses. Aussi, l&rsquo;objectif de ce travail est de tester l&rsquo;existence d&rsquo;une transmission asym&eacute;trique des fluctuations de prix entre la mati&egrave;re premi&egrave;re, la f&egrave;ve de cacao, et le produit fini, la tablette de chocolat sur le march&eacute; fran&ccedil;ais. Deux formes d&rsquo;asym&eacute;trie, ayant chacune une origine diff&eacute;rente, sont recherch&eacute;es : d&rsquo;une part, une asym&eacute;trie dans la transmission des chocs positifs et n&eacute;gatifs, potentiellement li&eacute;e &agrave; l&rsquo;exercice d&rsquo;un pouvoir de march&eacute; des industriels, et d&rsquo;autre part, une asym&eacute;trie dans la transmission des grands et des petits chocs de prix li&eacute;e &agrave; la pr&eacute;sence de co&ucirc;ts d&rsquo;ajustement. Les r&eacute;sultats, obtenus &agrave; partir d&rsquo;une mod&eacute;lisation TAR du d&eacute;s&eacute;quilibre de prix par rapport &agrave; leur valeur de long terme, ne permettent pas de rejeter ces hypoth&egrave;ses. Sur la plus grande partie de la p&eacute;riode couverte (1960-2003) le prix de la f&egrave;ve et le prix de la tablette &eacute;voluent ind&eacute;pendamment l&rsquo;un de l&rsquo;autre. Toutefois, au moment du boom du cacao (fin 70) le prix de la tablette r&eacute;pond rapidement &agrave; la hausse des cours de la f&egrave;ve tandis qu&rsquo;&agrave; la fin des ann&eacute;es 80, alors que le prix de la f&egrave;ve est retomb&eacute; &agrave; un bas niveau, le prix de la tablette revient lentement vers l&rsquo;&eacute;quilibre. <meta http-equiv="Content-Type" content="text/html; charset=utf-8"> <meta name="ProgId" content="Word.Document"> <meta name="Generator" content="Microsoft Word 11"> <meta name="Originator" content="Microsoft Word 11"> <p class="MsoNormal" style="text-indent: 35.4pt;"><span lang="EN-GB" style=""><o:p> </o:p></span></p> <br /> </meta> </meta> </meta> </meta>
    Keywords: cacao, modèle TAR, transmission de prix asymétrique
  8. By: Sugato Chakravarty (Purdue University); Meifang Xiang (University of Wisconsin, Whitewater)
    Abstract: We investigate the cross-country determinants of profit reinvestment decisions, using data compiled by the World Bank from around 7,000 businesses in 34 countries. We find that, compared to the security of property rights, it is a firm’s access to external financing that plays a significant role in a firm’s reinvestment decision in emerging economies. The extent of private ownership and the level of competition faced by firms are additional significant factors correlated with the reinvestment decision. Furthermore, we uncover a firm size effect in that the above factors driving firm reinvestment decision appears to impact small firms more than the relatively larger firms. Our findings complement, as well as build on, those from China and a few Eastern European countries.
    Keywords: Reinvestment; investment; external financing; property rights; competition
    Date: 2010–01
  9. By: Ottoz, Elisabetta; Cugno, Franco
    Abstract: We present a model where an incumbent firm has a proprietary product whose technology consists of at least two components, one of which is patented while the other is kept secret. At the patent expiration date, an entrant firm will enter the market on the same technological footing as the incumbent if it is successful in duplicating, at certain costs, the secret component of the incumbent’s technology. Otherwise, it will enter the market with a production cost disadvantage. We show that under some conditions a broad scope of trade secret law is socially beneficial despite the innovator is over-rewarded.
    Keywords: knowledge spillovers; duplication costs; covenants not to compete; inevitable disclosure
    JEL: O34 O31
    Date: 2010–02–14
  10. By: Munirul H Nabin; Pasquale M Sgro
    Abstract: Despite border enforcement and penalties for firms that hire illegal migrants, the presence of illegal migrants in most economies still persists. This paper assumes a Ricardian economy and analyzes migration of illegal unskilled workers in a model of Cournot Duopoly where firms are producing homogenous and non-traded goods, and hiring illegal migrants. A two-stage simultaneous move game is set up: In stage 1, for a given technology and vigilance level, each individual firm will decide whether to hire illegal migrants. In stage 2, each firm will choose the Cournot output level. Using this structure, we demonstrate that hiring illegal migrants is not necessarily welfare-reducing for a given industry and furthermore the presence of illegal migrants creates more employment for domestic workers.
    Keywords: Illegal Migrants, Vigilance, Cournot Competition and Welfare
    JEL: F22 L10 O39
    Date: 2010–02–09

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