nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒04‒24
six papers chosen by
Russell Pittman
US Department of Justice

  1. Dynamic Bertrand Oligopoly By Andrew Ledvina; Ronnie Sircar
  2. Vertical Integration and Patent Licensing in Upstream and Downstream Markets By Bouguezzi, Fehmi; EL ELJ, Moez
  3. Building New Plants or Entering by Acquisition? Estimation of an Entry Model for the U.S. Cement Industry By Hector Perez-Saiz
  4. Competition and horizontal integration in maritime freight transport By Rafael Moner; José J. Sempere; Pedro Cantos; Oscar Álvarez
  5. Competition in Health Care By Baranov, Igor N.
  6. The Role of Executives in Hostile Takeover Attempts By Mohd, Irfan

  1. By: Andrew Ledvina; Ronnie Sircar
    Abstract: We study continuous time Bertrand oligopolies in which a small number of firms producing similar goods compete with one another by setting prices. We first analyze a static version of this game in order to better understand the strategies played in the dynamic setting. Within the static game, we characterize the Nash equilibrium when there are $N$ players with heterogeneous costs. In the dynamic game with uncertain market demand, firms of different sizes have different lifetime capacities which deplete over time according to the market demand for their good. We setup the nonzero-sum stochastic differential game and its associated system of HJB partial differential equations in the case of linear demand functions. We characterize certain qualitative features of the game using an asymptotic approximation in the limit of small competition. The equilibrium of the game is further studied using numerical solutions. We find that consumers benefit the most when a market is structured with many firms of the same relative size producing highly substitutable goods. However, a large degree of substitutability does not always lead to large drops in price, for example when two firms have a large difference in their size.
    Date: 2010–04
  2. By: Bouguezzi, Fehmi; EL ELJ, Moez
    Abstract: The present paper studies and compares different vertical integration structures on consumers and total surplus with licensing by mean of a fixed fee in two successive homogeneous-good Cournot duopolies where one of the firms in each market has a different cost-reducing innovation. The key difference between the present model and models in the existing literature is that here we suppose the existence of two different patents in upstream and downstream markets. In each market we find two firms: the patent holding firm and a non innovative firm. In upstream market, the innovative firm owns an innovation allowing to reduce the input marginal production cost. In downstream market the innovative firm owns an innovation allowing to reduce marginal cost of transforming the input into output. We discuss different structures of vertical integration and we show that consumer surplus and total surplus are depending of cost-reducing innovation in upstream and downstream markets and the structure of vertical integration.
    Keywords: Cournot successive markets; Fee licensing; Vertical integration; process innovation
    JEL: D23 O32 O31 L22 L24
    Date: 2009–06–03
  3. By: Hector Perez-Saiz
    Abstract: In many industries, firms usually have two choices when expanding into new markets: They can either build a new plant (greenfield entry) or they can acquire an existing incumbent. The U.S. cement industry is a clear example. For this industry, I study the effect of two policies on the entry behavior and industry equilibrium: An asymmetric environmental policy that creates barriers to greenfield entry and a policy that creates barriers to entry by acquisition (like an antitrust policy). In the U.S. cement industry, the comparative advantage (e.g., TFP or size) of entrants versus incumbents and the regulatory entry barriers are important factors that determine the means of expansion. To model this industry, I use a perfect information static entry game. To estimate the supply and demand primitives of my model, I apply a recent estimator of discrete games to a rich database of the U.S. Census of Manufactures for the years 1963-2002. In my counterfactual analyses, I find that a less favorable environment for mergers during the Reagan-Bush administration would decrease the acquired plants by 70% and increase the new plants by 20%. Also, I find that the Clean Air Act Amendments of 1990 increased the number of acquisitions by 7.8%. Furthermore, my simulations suggest that regulations that create barriers to greenfield entry are less favorable in terms of welfare than regulations that create barriers to entry by acquisition. Finally, I demonstrate how my parameter estimates change when I apply the traditional approach in the entry literature where entry by acquisition is not considered, and when using a simple OLS estimation.
    Date: 2010–04
  4. By: Rafael Moner; José J. Sempere; Pedro Cantos; Oscar Álvarez
    Abstract: This paper develops a theoretical model for freight transport characterized by competition between means of transport (the road and maritime sectors), where modes are perceived as differentiated products. Competitive behavior is assumed in the road freight sector, and there are constant returns to scale. In contrast, the freight maritime sector is characterized by oligopolistic behavior, where shipping lines enjoy economies of scale. The market equilibrium where the shipping lines behave as profit maximizers, provides a first approximation to the determinants of market shares, profits, and user welfare. We then characterize the equilibrium when horizontal integration of shipping lines occurs, with and without further economies of scale. An empirical application to the routes Valencia-Antwerp and Valencia-Genoa uncovers that the joint profit of the merged firms and social welfare always increase. However, user surplus only increases when economies of scale are significantly exploited.
    Date: 2010–03
  5. By: Baranov, Igor N.
    Abstract: This policy paper highlights key theoretical issues related to the possibility of competition in provision of health care services and provides their illustrations for Russian health care system. Executive summary is available at pp. 48.
    Keywords: competition, health care,
    Date: 2010
  6. By: Mohd, Irfan
    Abstract: This paper proposes a two-stage game theoretic model in which the discretionary power of executives acts as an implicit defense against hostile takeovers. Following managerial enterprise models, this paper analyzes the effects of target’s executives’ discretionary power over R&D and advertising in defeating hostile takeover attempts. It is shown that in vertically differentiated industries, in equilibrium, target’s executive keep low level of R&D and advertising to make their firm an unattractive target for hostile takeovers. The model reveals that the executives are influenced by their self-interest of monetary and non-monetary benefits and this self-interest behavior makes the industry less differentiated. Additionally, the firm’s takeover (hostile or friendly) is endogenously determined by the executives.
    Keywords: Executives Discretion; Hostile Takeovers; Vertical Differentiation; R&D; Advertising
    JEL: G34 L15
    Date: 2010–01–20

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