nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒06‒11
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Pricing Policy and Partial Collusion By Stefano Colombo
  2. Tacit Collusion in an Infinitely Repeated Prisoners’ Dilemma By Joseph E. Harrington, Jr. and Wei Zhao
  3. Second Mover Advantage and Bertrand Dynamic Competition: An Experiment By S.N. O'Higgins; Arturo Palomba; Patrizia Sbriglia
  4. Mixed oligopoly, vertical product differentiation and fixed quality-dependent costs By Stefan Lutz; Mario Pezzino
  5. A micro-econometric approach to geographic market definition in local retail markets: Demand side considerations By Beckert, Walter
  6. Quality Competition or Quality Cooperation? License-Type and the Strategic Nature of Open Source vs. Closed Source Business Models By Sebastian von Engelhardt
  7. Growth strategies and value creation: what works best for stock exchanges? By Iftekhar Hasan; Heiko Schmiedel; Liang Song
  8. Foreign Bank Presence and its Effect on Firm Entry and Exit in Transition Economies By Olena Havrylchyk
  9. 99 cent: Price points in e-commerce By Hackl, Franz; Kummer, Michael E.; Winter-Ebmer, Rudolf
  10. The impact of mergers and acquisitions on the performance of Greek Banking Sector By Panagiotis Liargovas; Spyridon Repousis
  11. Exposure to FDI and New Plant Survival: Evidence in Canada By Yanling Wang
  12. The Impact of FDI on Firm’s Performance Across Sectors: Evidence from Ukraine By Maryia Akulava; Ganna Vakhitova

  1. By: Stefano Colombo (DISCE, Università Cattolica)
    Abstract: We study the pricing policy equilibria emerging in a partial collusion duopolistic framework where firms in the first stage of the game choose non-cooperatively whether to price discriminate or not, and from the second stage onward collude on prices.When the discount factor is particularly high or particularly low both firms price discriminate in equilibrium. For intermediate discount factors and high firms'asymmetry, the unique equilibrium is characterized by only the smaller firm choosing price discrimination.In the case of intermediate discount factors and low firms'asymmetry, there are two possible equilibria: both firms price discriminate or no firm price discriminates.
    Keywords: Partial Collusion, Pricing policy, Price discrimination
    JEL: D43 L13 L40
    Date: 2009–10
  2. By: Joseph E. Harrington, Jr. and Wei Zhao
    Abstract: In the context of an infinitely repeated Prisoners’ Dilemma, we explore how cooperation is initiated when players communicate and coordinate through their actions. There are two types of players - patient and impatient - which are private information. An impatient type is incapable of cooperative play, while if both players are patient types - and this is common knowledge - then they can cooperate with a grim trigger strategy. We find that the longer that players have gone without cooperating, the lower is the probability that they’ll cooperate in the next period. While the probability of cooperation emerging is always positive, there is a positive probability that cooperation never occurs.
    Date: 2010–06
  3. By: S.N. O'Higgins; Arturo Palomba; Patrizia Sbriglia
    Abstract: In this paper we provide an experimental test of a dynamic Bertrand duopolistic model, where firms move sequentially and their informational setting varies across different designs. Our experiment is composed of three treatments. In the first treatment, subjects receive information only on the costs and demand parameters and on the price’ choices of their opponent in the market in which they are positioned (matching is fixed); in the second and third treatments, subjects are also informed on the behaviour of players who are not directly operating in their market. Our aim is to study whether the individual behaviour and the process of equilibrium convergence are affected by the specific informational setting adopted. In all treatments we selected students who had previously studied market games and industrial organization, conjecturing that the specific participants’ expertise decreased the chances of imitation in treatment II and III. However, our results prove the opposite: the extra information provided in treatment II and III strongly affects the long run convergence to the market equilibrium. In fact, whilst in the first session, a high proportion of markets converge to the Nash-Bertrand symmetric solution, we observe that a high proportion of markets converge to more collusive outcomes in treatment II and more competitive outcomes in treatment III. By the same token, players’ profits significantly differ in three settings. An interesting point of our analysis relates to the assessment of the individual behavioural rules in the second and third treatments. When information on the behaviour of participants on uncorrelated markets is provided, players begin to adopt mixed behavioural rules, in the sense that they follow myopic best reply rules as long as their profits are in line with the average profits on all markets, and , when their gains fall below that threshold, they start imitating successful strategies adopted on other markets.
    Keywords: price competition, learning, strategic information.
    JEL: C90 C91
    Date: 2010–05
  4. By: Stefan Lutz; Mario Pezzino
    Abstract: A private and a public firm face fixed quality-dependent costs of production and compete first in quality and then either in prices or in quantities. In the long run the public firm targets welfare maximization whereas the private firm maximizes profits. In the short run both firms compete in prices or quantities to maximize profits. Mixed competition is always socially desirable compared to a private duopoly regardless of the type of competition in the short run and the equilibrium quality ranking. In addition, mixed competition seems to be a more efficient regulatory instrument than the adoption of a minimum quality standard.
    Keywords: vertical product differentiation, mixed oligopoly, quality, price and quantity competition
    JEL: L13 L33 L50 H44
    Date: 2010–05
  5. By: Beckert, Walter
    Abstract: This paper formalizes an empirically implementable framework for the definition of local antitrust markets in retail markets. This framework rests on a demand model that captures the trade-off between distance and pecuniary cost across alternative shopping destinations within local markets. The paper develops, and presents estimation results for, an empirical demand model at the store level for groceries in the UK. --
    Keywords: Geographic antitrust market definition,discrete choice
    JEL: L11 L13 L41 L81 C35 C73
    Date: 2010
  6. By: Sebastian von Engelhardt (School of Economics and Business Administration, Friedrich-Schiller-University Jena)
    Abstract: In the ICT sector, product-software is an important factor for the quality of the products (e.g. cell phones). In this context, open source software enables firms to avoid quality competition as they can cooperate on quality without an explicit contract. The economics of open source (OS) versus closed source (CS) business models are analyzed in a general two- stage model that combines aspects of non-cooperative R&D with the theory of differentiated oligopolies: In stage one, firms develop software, either as OS or CS, or as a an OS-CS-mix if the license allows. In stage two, firms bundle this with complementary products and compete à la Cournot. The model allows for horizontal product differentiation in stage two. The finding are: 1.) While CS-decisions are always strategic substitutes, OS-decisions can be strategic complements. Furthermore, CS is a strategic substitute to OS and vice versa. 2.) The type of OS-license plays a crucial role: only if the license prohibits a direct OS-CS code mix (like the GPL), then Nash-equilibria with firms producing OS code exist for all parameters. 3.) In the equilibrium of a mixed industry with restricted licenses, OS-firms offer lower quality than their CS-rivals.
    Keywords: open source, commercial open source, Cournot, R&D
    JEL: D43 L17 O34
    Date: 2010–06–03
  7. By: Iftekhar Hasan (Lally School of Management and Technology of Rensselaer Polytechnic Institute, 110 8th Street - Pittsburgh Building, Troy, NY, U.S.A., 12180.); Heiko Schmiedel (European Central Bank, Payments and Market Infrastructure, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Liang Song (Lally School of Management and Technology of Rensselaer Polytechnic Institute, 110 8th Street - Pittsburgh Building, Troy, NY, U.S.A., 12180.)
    Abstract: In recent years, demutualized stock exchanges have been increasingly engaging in M&A and alliance activities. To examine the effect of these growth strategies on exchange shareholders’ value creation, we focus on 14 public stock exchanges and investigate their short-run share price responses to the formation of 110 M&As and alliances all over the world spanning the period 2000-2008. Our findings show that the average stock price responses for M&As and alliances are positive. M&As create more value than alliances. For alliances, joint ventures generate more value than non-equity alliances. More value accrues when the integration is horizontal (cross-border) than when it is vertical (domestic). Additionally, there is evidence of learning-by-doing effects in stock exchange integration activities. Finally, we find that the better the shareholder protection, accounting standards and capital market development in the partner exchange’s country, the higher the merger and alliance premium for our sample exchange. These patterns are consistent when we examine the exchanges’ long-run performance. JEL Classification: L22, G32, D23.
    Keywords: exchanges, mergers and acquisitions, strategic alliances, joint ventures, network organization.
    Date: 2010–06
  8. By: Olena Havrylchyk
    Abstract: This study investigates the impact of foreign bank penetration in Central and Eastern Europe on firm entry. We demonstrate that the acquisition of domestic banks by foreign investors has led to reduced firm creation, smaller average size of entrants and increased firm exit in opaque industries compared to transparent ones. At the same time, the entry of greenfield foreign banks spurred firm creation and exit. Unlike previous studies, which use interchangeably the notions of opacity and size, we define opacity in terms of technological process and show that economic significance of foreign bank entry is larger for opaque industries than for industries with large shares of small firms. Our findings can be interpreted as evidence of increased credit constraints and are consistent with theories that argue that foreign bank presence exacerbates informational asymmetries.
    Keywords: Entrepreneurship; foreign bank entry; asymmetric information; credit constraints
    JEL: E51 G21 M13
    Date: 2010–06
  9. By: Hackl, Franz; Kummer, Michael E.; Winter-Ebmer, Rudolf
    Abstract: Basu (2006) argues that the prevalence of 99 cent prices in shops can be explained with rational consumers who disregard the rightmost digits of the price. This bounded rational behaviour leads to a Bertrand equilibrium with positive markups. We use data from an Austrian price comparison site and find results highly compatible with Basu's theory. We can show that price points - in particular prices ending in 9 - are prevalent and have significant impact on consumer demand. Moreover, these price points are sticky; neither the price-setter itself wants to change them neither the rivals do underbid these prices, if they represent the cheapest price on the market. --
    Keywords: Competitive Behaviour,Pricing Behaviour,E-Commerce,Pricing in the Nines,Focal Pricing
    JEL: L11 D41 C41
    Date: 2010
  10. By: Panagiotis Liargovas; Spyridon Repousis
    Abstract: The Greek banking landscape has experienced substantial changes and restructuring since the mid 1990s. This paper examines the financial performance and the implications of Greek banks’ mergers and acquisitions that took place during the period 1996-2009. With the use of event study methodology, we reject the “semi-strong form” of Efficient Market Hypothesis (EMH) of the Athens Stock Exchange, possibly reflecting leakage of information. We find that ten days prior to the announcement of a merger and acquisition, shareholders receive considerable and significant positive cumulative average abnormal returns (CAARs), which are more significant in the case of cash deals compared to stock deals. Also the results show that significant positive CAARs are gained upon the announcement of horizontal and diversifying bank deals. The overall results (the weighted average of gains to the bidder and to the target bank) indicate that bank mergers and acquisitions have no impact and do not create wealth. We also examine operating performance by estimating twenty financial ratios. Findings show that operating performance does not improve, following mergers and acquisitions. There are also controversial results when comparing merged to non-merged banks. index.
    Keywords: Banks, M&As, Event Study, Operating Performance
    Date: 2010
  11. By: Yanling Wang (Norman Paterson School of International Affairs, Carleton University)
    Abstract: This paper examines how exposure to FDI affects Canadian indigenous plants‘ survival, through their economic linkages with FDI affiliates as competitors, input suppliers and customers. One unique feature of the paper is that it studies a country with extensive exposure to FDI, and relies on a dataset including hundreds of thousands of manufacturing plants born to Canadian domestic firms, covering a long time period from 1973 to 1997. The study finds that indigenous plants tend to have shorter lives (more deaths) due to competition with FDI affiliates operating in the same industry, but benefit from FDI affiliates operating in upstream and downstream industries as input suppliers and customers. The positive benefits of FDI outweigh the negative competition effects, resulting in net positive impact on the survival of indigenous Canadian-owned plants. For those plants in cohorts which have survived long enough to become exporters, access to foreign markets generates additional significant benefits for their survival.
    Keywords: FDI, Survival, economic linkages
    JEL: F2 L1
    Date: 2010–05–28
  12. By: Maryia Akulava (Belarusian Economic Research and Outreach Center); Ganna Vakhitova (Kyiv School of Economics, Kyiv Economic Institute)
    Abstract: There are evidences in the literature that FDI impact on enterprises’ performance across three large sectors, i.e. primary, secondary and services, differs substantially. We suggest that these disparities may be due to two factors. First, the weak inter- and intra-sectoral links may prevent the FDI spillovers. Second, sector entry restraints can limit the foreign technology diffusion. Using firm-level data that covers 80% of population in all three sectors we provide some evidence supporting these hypotheses. In particular, horizontal and vertical spillovers a found to have very different impact on firms by sectors. There is an overall positive horizontal spillover effect which is mostly driven by impact in the manufacturing due to the level of competitiveness of that sector. Vertical spillovers are working in the opposite direction and their influence is pronounced for domestic companies in the service sector and for foreign enterprises in the primary sector. Most importantly, the direct FDI effect is the largest in the most restricted primary sector and falls with time in services where substantial liberalization has been undertaken.
    Keywords: Foreign Direct Investment, horizontal spillovers, vertical spillovers, cross-sectoral difference, Ukraine
    JEL: F21 F23 C33
    Date: 2010–06

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