nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒04‒17
23 papers chosen by
Russell Pittman
US Department of Justice

  1. How do market structures affect decisions on vertical integration/separation? By Noriaki Matsushima; Tomomichi Mizuno
  2. How Many Firms Should Be Leaders? Beneficial Concentration Revisited By Hiroaki Ino; Toshihiro Matsumura
  3. An Elasticity Measure of Welfare Loss in Symmetric Oligopoly By Tim James; Jolian McHardy
  4. Pricing and Information Disclosure in Markets with Loss-Averse Consumers By Heiko Karle; Martin Peitz
  5. Pioneer burnout: Radical product innovation and firm capabilities By Christina Guenther
  6. Heterogeneous Distributions of Firms Sustained by Innovation Dynamics – a model with an empirical application By Andersson, Martin; Johansson, Börje
  7. Competition as a Socially Desirable Dilemma. Theory vs. Experimental Evidence By Christoph Engel
  8. Beer - the ties that bind By Waterson, Michael
  9. Branching Deregulation and Merger Optimality By Ana Lozano-Vivas; Miguel A. Meléndez-Jímenez; Antonio J. Morales
  10. A revenue-based frontier measure of banking competition By Santiago Carbó; David Humphrey; Francisco Rodríguez
  11. Discriminatory fees, coordination and investment in shared ATM networks By Stijn FERRARI
  12. Whom to Merge with? A Tale of the Spanish Banking Deregulation Process By Ana Lozano-Vivas; Miguel A. Meléndez-Jímenez; Antonio J. Morales
  13. Selective contracting and foreclosure in health care markets By Michiel Bijlsma; Jan Boone; Gijsbert Zwart
  14. Recent developments in Dutch hospitals; How does competition impact on inpatient care? By Sylvia Meijer; Rudy Douven,; Bernard van den Berg
  15. Harmful competition in the insurance markets By Giuseppe De Feo; Jean Hindriks
  16. Spatial competition and cross-border shopping By Brian Knight; Nathan Schiff
  17. Competition in the Korean Internet Portal Market: Network Effects, Profit, and Market Efficiency By Junseok Hwang; Dongook Choi; Jongeun Oh; Yeonbae Kim
  18. Intra-Industry Adjustment to Import Competition: Theory and Application to the German Clothing Industry By Horst Raff; Joachim Wagner
  19. Product Quality, Product Price, and Share Dynamics in the German Compact Car Market By Uwe Cantner; Jens J. Krüger; Rene Söllner
  20. The Impact of Vertical Integration and Outsourcing on Firm Efficiency: Evidence from the Italian Machine Tool Industry. By Fabio Pieri; Enrico Zaninotto
  21. Testing for Asymmetric Pricing Behaviour in Irish and UK Petrol and Diesel Markets By Bermingham, Colin; O’ Brien, Derry
  22. Competition Policy and Productivity Growth: An Empirical Assessment By Paolo Buccirossi; Lorenzo Ciari; Tomaso Duso; Giancarlo Spagnolo; Cristiana Vitale
  23. International M&A: Evidence on Effects of Foreign Takeovers By Anselm Mattes

  1. By: Noriaki Matsushima; Tomomichi Mizuno
    Abstract: We provide a simple model to investigate decisions on vertical integration/separation. The key feature of this model is that more than one input is required for the final products of the local downstream monopolists. Depending on their cost structure, downstream firms' decisions on vertical separation can be both strategic complements and strategic substitutes. As a result, the equilibrium number of vertically integrated firms depends on the cost structure. When the local downstream monopolists merge, vertical separation tends to appear in equilibrium. When an upstream firm can price discriminate, the downstream firms vertically separate. When the downstream firms compete with each other, vertical integration tends to appear if the degree of product differentiation is lower.
    Date: 2010–02
  2. By: Hiroaki Ino (Kwansei Gakuin University); Toshihiro Matsumura (University of Tokyo)
    Abstract: We investigate the relationship between the Herfindahl-Hirschman Index (HHI) and welfare. First, we discuss the model wherein m leaders and N - m followers compete. Daughety (1990) finds that under linear demand and constant marginal cost, the Stackelberg model yields larger welfare and HHI than the Cournot model. Thus, he demonstrates that beneficial concentration occurs. We find that this always occurs under general cost and demand functions when m is sufficiently large, but does not always occur when m is small. Next, we consider the free entry of followers, and find that beneficial concentration always occurs regardless of m. In particular, the more persistent the leadership, the more likely it is to be beneficial.
    Keywords: HHI, beneficial concentration, leadership, free entry market
    JEL: L13 L40
    Date: 2009–10
  3. By: Tim James; Jolian McHardy (Department of Economics, The University of Sheffield Author-Person=pmc71)
    Abstract: We derive a measure of welfare loss as a proportion of the value of sales under quantity-setting symmetric oligopoly in terms of the equilibrium industry price elasticity of demand, the number of firms in the industry and a conjectural variation term in the context of the standard linear model. This generalises the monopoly measure in James and McHardy (1997).
    Keywords: Oligopoly, Welfare loss, Elasticity
    JEL: D60
    Date: 2009–06
  4. By: Heiko Karle (Université Libre de Bruxelles); Martin Peitz (University of Mannheim)
    Abstract: We develop a theory of imperfect competition with loss-averse consumers. All consumers are fully informed about match value and price at the time they make their purchasing decision. However, a share of consumers are initially uncertain about their tastes and form a reference point consisting of an expected match value and an expected price distribution, while other consumers are perfectly informed all the time. We derive pricing implications in duopoly with asymmetric firms. In particular, we show that a market may exhibit more price variation the larger the share of uninformed, loss-averse consumers. We also derive implications for firm strategy and public policy concerning firms’ incentives to inform consumers about their match value prior to forming their reference point.
    Keywords: Loss Aversion, Reference-Dependent Utility, Information Disclosure, Price Variation, Advertising, Behavioral Industrial Organization, Imperfect Compe- tition, Product Differentiation
    JEL: D83 L13 L41 M37
    Date: 2010–04
  5. By: Christina Guenther
    Abstract: The question of whether and when to enter a newly emerging product market has been the focus of practitioners as well as researchers. This paper contributes to the literature by investigating the order of entry as well as pre-entry experiences with a population-based approach for the radically new product market of multifunctional machine tools for the case of Germany between 1949 and 2002. Estimation results show, that later entrants outperform pioneers. Moreover, it turns out that industry and technology specific capabilities do not increase survival chances. But when decomposing the known positive age effect on survival, we see that particularly dynamic capabilities, i.e. the competence to integrate additional business activities into the current product portfolio, significantly lower the risk of failure in the new product market.
    Keywords: Length 20 pages
    Date: 2009–12
  6. 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)
    Abstract: This paper develops a framework to appreciate the observed heterogeneity of firm size distributions and the entry and exit of products and firms associated with it. It is based on a model where new products are introduced by innovating firms in a quasi-temporal setting of monopolistic competition. The rate at which a firm innovates, according to a firm-specific Poisson process, is assumed to be influenced by the firm’s past experience and cumulated knowledge assets. The model assigns a fundamental role to entrepreneurship of existing and potential firms. The empirical analysis is based on detailed firm-level export data, which describes firm size in terms of products and markets, and firm dynamics in terms of changes in the supply pattern (varieties and markets) of existing firms in combination with entry/exit of firms. The empirical results are consistent with the model. First, the modeled innovation process imply a persistent distribution of heterogeneous firms. Second, the invariant size distribution of firms is associated with significant micro-dynamics, where firms continuously add and subtract varieties from their product mix, and new firms may enter while some exit. Third, an econometric analysis where firms’ introduction of new varieties is explained by firm attributes provides support for the assumption of a firm-specific and state-dependent stochastic innovation process.
    Keywords: innovation; firm heterogeneity; size distribution; entry; exit; dynamics;
    JEL: F12 L11 L26 O31
    Date: 2010–02–11
  7. By: Christoph Engel (Max Planck Institute for Research on Collective Goods)
    Abstract: Cartels are inherently instable. Each cartelist is best off if it breaks the cartel, while the remain-ing firms remain loyal. If firms interact only once, if products are homogenous, if firms compete in price, and if marginal cost is constant, theory even predicts that strategic interaction forces firms to set the market clearing price. For society, this would be welcome news. Without antitrust intervention, the market outcome maximises welfare. The argument becomes even stronger if the opposite market side has a chance to defend itself; if imposing harm on the opposite market side is salient; if it is clear that cartels are at variance with normative expectations prevalent in society. There is an equally long list of reasons, though, why such optimism might be unwarranted: capacity is limited; interaction is repeated, and the end is uncertain; firms might be willing to run a limited risk of being exploited by their competitors, hoping that the investment pays. This paper explores the question both theoretically and experimentally. In the interest of capitalising on a rich body of experimental findings, and on the concept of conditional cooperation in particular, the paper offers a formal model that interprets oligopoly as a linear public good.
    Keywords: Cartel, Oligopoly, Bertrand, Cournot, Public Good, Externality, Experiment
    JEL: A13 C91 D43 D62 H23 H41 K21 L13
    Date: 2009–08
  8. By: Waterson, Michael (Department of Economics, University of Warwick)
    Abstract: It started with the Beer Orders (1989). A watershed decision was made by the Law Lords in July 2006. For one man, Bernie Crehan, this was the culmination of a 15 year episode in the pub trade, in which he has made legal history as the first UK case of damages for breach of competition law being awarded by a court. Possibly hundreds of other cases hung on their Lordships’ decision and Nomura, the Japanese bank that took over the chain called Inntrepreneur, had a total potential liability of £100m. And it all concerns Article 81, vertical agreements, and the price of a pint of beer. In 1989, the UK Monopolies and Mergers Commission published its lengthy and longawaited report on Beer. The Commission “…recommended measures that eventually led brewers to divest themselves of 14000 public houses. The MMC claimed that their recommendations would lower retail prices and increase consumer choice. There is considerable doubt, however, that their objectives were achieved.” (Slade, 1998, p565). In their report, the MMC noted rising real prices of beer and seized upon the power of the then big six brewers exercised through their considerable tied estates as being a prime motor. Consequently, they recommended that the ties be substantially cut. At that stage, the MMC (unlike the present day Competition Commission) did not determine remedies and it was left to the Department of Trade and Industry (DTI) to formulate the remedies (the Beer Orders) and the Office of Fair Trading (OFT) to supervise their implementation. Thus the OFT found itself implementing the Beer Orders in the face of a brewing industry determined to fight back.
    Date: 2010
  9. By: Ana Lozano-Vivas (Department of Economic Theory, Universidad de Málaga); Miguel A. Meléndez-Jímenez (Department of Economic Theory, Universidad de Málaga); Antonio J. Morales (Department of Economic Theory, Universidad de Málaga)
    Abstract: The U.S. banking industry has been characterized by intense merger activity in the absence of economies of scale and scope. We claim that the loosening of geographic constraints on U.S. banks is responsible for this consolidation process, irrespective of value-maximizing motives. We demonstrate this by putting forward a theoretical model of banking competition and studying banks’ strategic responses to geographic deregulation. We show that even in the absence of economies of scale and scope, bank mergers represent an optimal response. Also, we show that the consolidation process is characterized by merger waves and that some equilibrium mergers are not profitable per se -they yield losses- but become profitable as the waves of mergers unfold.
    Keywords: Banking Competition, Deregulation, Mergers
    JEL: C72 G21 G28 L13 L41 L51
    Date: 2010–03
  10. By: Santiago Carbó; David Humphrey; Francisco Rodríguez
    Abstract: Measuring banking competition using the HHI, Lerner index, or H-statistic can give conflicting results. Borrowing from frontier analysis, the authors provide an alternative approach and apply it to Spain over 1992-2005. Controlling for differences in asset composition, productivity, scale economies, risk, and business cycle influences, they find no differences in competition between commercial and savings banks nor between large and small institutions, but the authors conclude that competition weakened after 2000. This appears related to strong loan demand where real loan-deposit rate spreads rose and fees were stable for activities where scale economies should have been realized.
    Keywords: Bank competition
    Date: 2010
  11. By: Stijn FERRARI
    Abstract: This paper empirically examines the effects of discriminatory fees on ATM investment and welfare, and considers the role of coordination in ATM investment between banks. Our main findings are that foreign fees tend to reduce ATM availability and (consumer) welfare, whereas surcharges positively affect ATM availability and the different welfare components when the consumers’ price elasticity is not too large. Second, an organization of the ATM market that contains some degree of coordination between the banks may be desirable from a welfare perspective. Finally, ATM availability is always higher when a social planner decides on discriminatory fees and ATM investment to maximize total welfare. This implies that there is underinvestment in ATMs, even in the presence of discriminatory fees.
    Date: 2009–12
  12. By: Ana Lozano-Vivas (Department of Economic Theory, Universidad de Málaga); Miguel A. Meléndez-Jímenez (Department of Economic Theory, Universidad de Málaga); Antonio J. Morales (Department of Economic Theory, Universidad de Málaga)
    Abstract: We put forward a simple spatial competition model to study banks’ strategic responses to the Spanish asymmetric geographic deregulation. We find that once geographic deregulation process finishes, inter-regional mergers between the savings banks are optimal. We claim that the public good nature of the merging activities together with the incentives provided by the deregulation process are the driving factors behind the equilibrium merger of the savings banks. It seems that the economic crisis will finally force regional politicians to allow inter-regional caja mergers, letting the consequences of the removal of geographic barriers in the 80’s come to a fruition with a delay of thirty years.
    Keywords: Banking Competition, Deregulation, Mergers
    JEL: C72 G21 G28 L13 L41 L51
    Date: 2010–03
  13. By: Michiel Bijlsma; Jan Boone; Gijsbert Zwart
    Abstract: We analyze exclusive contracts between health care providers and insurers in a model where some consumers choose to stay uninsured. In case of a monopoly insurer, exclusion of a provider changes the distribution of consumers who choose not to insure. Although the foreclosed care provider remains active in the market for the non-insured, we show that exclusion leads to anti-competitive effects on this non-insured market. As a consequence exclusion can raise industry profits, and then occurs in equilibrium. Under competitive insurance markets, the anticompetitive exclusive equilibrium survives. Uninsured consumers, however, are now not better off without exclusion. Competition among insurers raises prices in equilibria without exclusion, as a result of a horizontal analogue to the double marginalization effect. Instead, under competitive insurance markets exclusion is desirable as long as no provider is excluded by all insurers.
    Keywords: health insurance; uninsured; selective contracting; exclusion; foreclosure; anti-competitive effects
    JEL: L42 I11 G22
    Date: 2010–02
  14. By: Sylvia Meijer; Rudy Douven,; Bernard van den Berg
    Abstract: The aim of this research was to explore the effect of the introduction of managed competition in Dutch inpatient hospital care. Firstly, we performed a literature study to determine competitive forces that have played a role in the US hospital market. Next, we discussed these forces with Dutch hospital board members to ascertain their relevance to the Dutch hospital market. The interviews revealed that Dutch insurers are cautiously initiating new initiatives such as selective contracting and united purchase combinations, and fiercely negotiate on price when buying hospital care. The board members suggested that the way to raise turnover is to increase hospital production. This resulted in growing quality competition between hospitals through the purchase of new technology and the launch of outpatient centres for specific treatments. Other forces that may have increased hospital production are the fee-for-service payment system of medical specialists and the practice of defensive medicine. As health insurers are apparently still unable to directly steer and control volume, this may result in more treatments by hospitals.
    Date: 2010–03
  15. By: Giuseppe De Feo (Department of Economics, University of Strathclyde); Jean Hindriks (Department of Economics and CORE, Universite catholique de Louvain, Belgium)
    Abstract: There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive constraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms from using implicit transfers. In effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance. Performing simulation for different distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive markets notwithstanding their performance is generally poorer than monopoly.
    Keywords: monopoly, competition, insurance, adverse selection.
    JEL: G22 H20
    Date: 2009–10
  16. By: Brian Knight; Nathan Schiff
    Abstract: This paper investigates competition between jurisdictions in the context of cross-border shopping for state lottery tickets. We first develop a simple theoretical model in which consumers choose between state lotteries and face a trade-off between travel costs and the price of a fair gamble, which is declining in the size of the jackpot and the odds of winning. Given this trade-off, the model predicts that per-resident sales should be more responsive to prices in small states with densely populated borders, relative to large states with sparsely populated borders. Our empirical analysis focuses on the multi-state games of Powerball and Mega Millions, and the identification strategy is based upon high-frequency variation in prices due to the rollover feature of lottery jackpots. The empirical results support the predictions of the model. The magnitude of these effects is large, suggesting that states do face competitive pressures from neighboring lotteries, but the effects vary significantly across states.
    Keywords: Gambling industry ; Consumer behavior
    Date: 2010
  17. By: Junseok Hwang; Dongook Choi; Jongeun Oh; Yeonbae Kim (Technology Management, Economics and Policy Program(TEMEP), Seoul National University)
    Abstract: Internet portals serve as platforms that coordinate advertising and user markets, and the portal market features network effects within and between both sides. We model the market structure in order to explain network effects and other factors of competition such as prices for advertisements, contents, and differentiated services offered. We empirically identify these effects with data from South Korea and analyze the role of the effects in terms of profit and market efficiency. The results indicate that a negative indirect network effect exists in the user market but is prevailed over by the direct network effect. This explains how Internet portals make profits by increasing user visits. Further, we show the existence of network effects causes consumer¡¯s surplus not to decrease with market concentration.
    Keywords: Internet Portal Industry, Network Effect, Two-sided Market, Market Efficiency
    JEL: D21 H25 H32 L11
    Date: 2009–10
  18. By: Horst Raff (Kiel Institute for the World Economy and Department of Economics, Christian-Albrechts-Universität zu Kiel); Joachim Wagner (Institute of Economics, Leuphana University of Lüneburg, Germany)
    Abstract: This paper uses an oligopoly model with heterogeneous firms to examine how an industry adjusts to rising import competition. The model predicts that in the short run the least efficient firms in the industry become inactive, surviving firms face a fall in output, mark-ups and profits, and the average productivity of survivors increases. These pro-competitive effects of import penetration on the domestic industry disappear in the long run. The predictions for the short run are confirmed in an empirical study of the German clothing industry.
    Keywords: international trade, firm heterogeneity, productivity, clothing industry
    JEL: F12 F15
    Date: 2009–09
  19. By: Uwe Cantner (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Jens J. Krüger (Technical University Darmstadt, Fachbereich Rechts- und Wirtschaftswissenschaften); Rene Söllner (Friedrich Schiller University Jena, DFG-RTG "The Economics of Innovative Change")
    Abstract: The present paper examines one of the central elements of evolutionary thinking - competition formalized by the replicator dynamics mechanism. Using data on product characteristics of automobiles sold on the German domestic market over the period 2001-2006, we construct a competitiveness or fitness variable for each car model applying non-parametric efficiency measurement techniques. The basic question we intend to answer is whether cars providing a higher quality-price ratio for consumers tend to increase their market share compared to variants with lower quality-price ratios. The relationship between a car models' fitness and its market performance is empirically tested in a regression framework. The results show that the principle of `growth of the fitter' is working as suggested by evolutionary theory. In particular, we find that car models with considerably lower fitness than the market average lose, whereas models with above-average fitness gain additional market shares.
    Keywords: Replicator Dynamics, Product Characteristics, Data Envelopment Analysis
    JEL: O33 D12 L15
    Date: 2010–04–07
  20. By: Fabio Pieri; Enrico Zaninotto (DISA, Faculty of Economics, Trento University)
    Abstract: In this paper we made use of an econometric approach to efficiency analysis in order to capture the role of vertical integration and outsourcing on firm's efficiency. Vertical integration is considered an indicator of structure, while outsourcing represents the process of its change. We consider inefficiency measures as indicators of organizational heterogeneity, related to the firm's choices regarding the phases of the production process that are under its control. We find support for the hypothesis of a relationship between vertical integration and efficiency. The results on outsourcing activity, and in particular the interaction between outsourcing and vertical structure, indicate that heterogeneous patterns, far from tending to cancel out each other as a consequence of common external changes, are reinforcing. Moreover, the sensitivity of inefficiency variance to the cycle, indicate that different firms may have different dynamic properties.
    Keywords: vertical integration; outsourcing; technical efficiency; double heteroskedastic model
    JEL: D24 L23 L25 L64
    Date: 2010–03
  21. By: Bermingham, Colin (Central Bank and Financial Services Authority of Ireland); O’ Brien, Derry (Central Bank and Financial Services Authority of Ireland)
    Abstract: This paper empirically tests whether Irish and UK petrol and diesel markets are characterised by asymmetric pricing behaviour. The econometric assessment uses threshold autoregressive models and a dataset of monthly refined oil and retail prices covering the period 1997 to mid-2009. A methodological note is included on the importance of the specification of the number of possible regimes. In particular, the possibility of conflicting price pressures arising from short-run dynamics in retail prices and responses to disequilibrium errors needs to be explicitly modelled. For both the Irish and UK liquid fuel markets at national levels, the paper concludes that there is no evidence to support the “rockets and feathers” hypothesis that retail prices rise faster than they fall in response to changes in oil prices. It is still possible that a lack of competition at a more local level may accommodate asymmetric pricing behaviour.
    Date: 2010–02
  22. By: Paolo Buccirossi (LEAR); Lorenzo Ciari (LEAR and EUI); Tomaso Duso (Humboldt University Berlin and WZB); Giancarlo Spagnolo (University of Rome Tor Vergata SITE, EIEF, CEPR); Cristiana Vitale (LEAR)
    Abstract: This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy asmeasured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional setup and antitrust activities (rather than merger control). The effect is strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.
    Keywords: Competition Policy, Productivity Growth, Institutions, Deterrence, OECD
    JEL: L4 K21 O4 C23
    Date: 2009–09
  23. By: Anselm Mattes
    Abstract: In this empirical paper I address the effects of international mergers and acquisitions (M&A) on the acquired firms. International direct investments in the home country are usually welcomed and considered to be beneficial for growth, employment, productivity and technological progress. This is mostly unquestioned for greenfield investments, i.e. the case when a foreign multinational firm sets up a new affiliate. But a majority of foreign direct investment (FDI) projects takes the form of mergers and acquisitions (M&A). This kind of inward FDI is much more critically debated. The focal point of this paper is the development of domestic German firms that are subject to a foreign takeover regarding employment and productivity. For this purpose, I use a comprehensive German micro-level dataset which includes all industries as well as firms from all size categories and all German regions. The sample covers the years from 2000 to 2007. A propensity score matching approach combined with a difference-indifference estimator is applied. Contrary to a naive comparison between foreign-owned firms and domestic firms or a comparison between firm characteristics before and after a foreign takeover, this econometric approach ensures that the causal effects are isolated. The main results are the following: Foreign owned firms are larger and more productive than domestic ones. Mostly firms with below average productivity (lemons) as well as rms with a relatively high productivity (cherries) are acquired. Market development motives seem to play an important role for foreign acquisitions. Concerning the effects of foreign takeovers, a descriptive analysis cannot find unambiguous effects of foreign takeovers. The propensity score matching estimator confirms this finding and detects neither positive nor negative significant effects of foreign takeovers.
    Keywords: M&A, inward FDI, foreign takeover, employment, productivtity
    JEL: F23 J23
    Date: 2010–02

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