nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒07‒17
fifteen papers chosen by
Russell Pittman
US Department of Justice

  1. Advertising Competition in Retail Markets By Kyle Bagwell; Gea M. Lee
  2. Advertising Collusion in Retail Markets By Kyle Bagwell; Gea M. Lee
  3. Mixed oligopoly, vertical product differentiation and fixed qualitydependent costs By Stefan Lutz; Mario Pezzino
  4. Testing Forbearance Experimentally - Duopolistic Competition of Conglomerate Firms By Werner Güth; Kirtsen Häger; Oliver Kirchkamp; Joachim Schwalbach
  5. Competition Policy and Property Rights.. By Vickers, John
  6. "Exclusive Dealing and the Market Power of Buyers" By Ryoko Oki; Noriyuki Yanagawa
  7. A Simple Theory of Predation By Chiara Fumagalli; Massimo Motta
  8. Innovation, competition and incentives for R&D By Wörter, Martin; Rammer, Christian; Arvanitis, Spyros
  9. Competition and innovation: does the distance to the technology frontier matter? By Simon Alder
  10. The role of central banks and competition policies in the rescue and recapitalisation of financial institutions during (and in the aftermath of) the Financial Crisis By Ojo, Marianne
  11. Measuring the effect of virtual mergers on banks’ efficiency levels:A non parametric analysis By Halkos, George; Tzeremes, Nickolaos
  12. Hospital competition when patients have different willingness to pay for quality By Mario Pezzino
  13. Margins and Market Shares:Pharmacy Incentives for Generic Substitution By Kurt R. Brekke; Tor Helge Holmås; Odd Rune Straume
  15. Optimal Attorney Advertising By Michael P. Stone

  1. By: Kyle Bagwell (Stanford University); Gea M. Lee (School of Economics, Singapore Management University)
    Abstract: We consider non-price advertising by retail firms that are privately informed as to their respective production costs. We construct an advertising equilibrium, in which informed consumers use an advertising search rule whereby they buy from the highest-advertising firm. Consumers are rational in using the advertising search rule, since the lowest-cost firm advertises the most and also selects the lowest price. Even though the advertising equilibrium facilitates productive efficiency, we establish conditions under which firms enjoy higher expected profit when advertising is banned. Consumer welfare falls in this case, however. Under free entry, social surplus is higher when advertising is allowed. In addition, we consider a benchmark model of price competition; we provide comparative-statics results with respect to the number of informed consumers, the number of firms and the distribution of costs; and we consider the possibility of sequential search.
    Date: 2009–12
  2. By: Kyle Bagwell (Stanford University); Gea M. Lee (School of Economics, Singapore Management University)
    Abstract: We analyze non-price advertising by retail firms, when the firms are privately informed about their respective costs of production. In a static advertising game, an advertising equilibrium exists in which lower-cost firms select higher advertising levels. In this equilibrium, informed consumers rationally employ an advertising search rule in which they buy from the highest- advertising firm, since lower-cost firms also select lower prices. In a repeated advertising game, colluding fims face a tradeoff: the use of advertising can promote productive efficiency but only if sufficient current or future advertising expenses are incurred. At one extreme, if firms pool at zero advertising, they sacrifice productive efficiency but also eliminate current and future advertising expenses. Focusing on symmetric perfect public equilibria for the repeated advertising game, we establish conditions under which optimal collusion entails pooling at zero advertising. More generally, full or partial pooling is observed in optimal collusion. Such collusive agreements reduce consumer welfare, since they restrict informed consumers' ability to locate the lowest available price in the market.
    Date: 2009–12
  3. By: Stefan Lutz; Mario Pezzino
    Date: 2010
  4. By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group); Kirtsen Häger (Universität Jena); Oliver Kirchkamp (School of Economics and Business Administration, Friedrich-Schiller-University Jena); Joachim Schwalbach (Humboldt-Universität zu Berlin, Institute of Management)
    Abstract: Like Feinberg and Sherman (1985) and Phillips and Mason (1992) we test experimentally whether conglomerate firms, i.e., firms competing on multiple structurally unrelated markets, can effectively limit competition. Our more general analysis assumes differentiated rather than homogeneous products and distinguishes strategic substitutes as well as complements to test this forbearance hypothesis. Rather than only a partners design we also explore a random strangers design to disentangle effects of forbearance and repeated interaction. Surprisingly, conglomerate firms do not limit competition, they rather foster it. More in line with our expectations we find more cooperation in complement markets than in substitute markets and also more cooperation in a partners than in a strangers matching.
    Keywords: Experiment, Forbearance, Competition
    JEL: C91 D43 L41
    Date: 2010–07–01
  5. By: Vickers, John
    Abstract: One of the most controversial questions in current competition policy is when, if ever, should competition law require a firm with market power to share its property, notably intellectual property, with its rivals? And if supply is required, on what terms? These questions are discussed with reference to recent law cases including the EC Microsoft judgment of 2007 and the US linkLine case of 2009. The analysis focuses on whether competition law and regulation are complements or substitutes and on incentives for investment and (sequential) innovation.
    JEL: O34 L41 O31 K21
    Date: 2010–05
  6. By: Ryoko Oki (Graduate School of Economics, University of Tokyo); Noriyuki Yanagawa (Faculty of Economics, University of Tokyo)
    Abstract: This paper examines the effects of exclusive dealing contracts offered by an incumbent distributor. The effectiveness of exclusive dealing contracts offered by distributors is quite different from those offered by incumbent manufacturers. The traditional literature has focused solely on exclusive dealing contracts made by incumbent manufacturers and has derived multiple equilibria within homogeneous price competition models. In contrast, this paper asserts that exclusive dealing contracts made by a distributor generate a unique equilibrium and that an efficient entrant must be excluded under the equilibrium as long as distributors have sufficient bargaining power.
    Date: 2010–07
  7. By: Chiara Fumagalli (Università Luigi Bocconi, CSEF and CEPR); Massimo Motta (ICREA-Universitat Pompeu Fabra and BarcelonaGSE)
    Abstract: We propose a simple theory of predatory pricing, based on incumbency advantages, scale economies and sequential buyers (or markets). The prey needs to reach a critical scale to be successful. The incumbent (or predator) has an initial advantage and is ready to make losses on earlier buyers so as to deprive the prey of the scale the latter needs, thus making monopoly profits on later buyers. Several extensions are considered, including cases where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterized by common costs. Conditions under which predation may take place in actual cases are also discussed.
    Date: 2010–07–03
  8. By: Wörter, Martin; Rammer, Christian; Arvanitis, Spyros
    Abstract: This paper analyses the relationship between past innovation output, competition, and future innovation input in a dynamic econometric setting. We distinguish two dimensions of competition that correspond to the concepts of product substitutability and entry barriers due to fixed costs. Based on firm-level panel data for Germany and Switzerland we obtain consistent results for both countries. Innovation output in t-1 as measured by the sales share of innovative products is positively related to the degree of product obsolescence in t, and negatively to the degree of substitutability in t in both countries. Further, we find that rapid product obsolescence provides positive incentives for higher - primarily product-oriented - R&D investments in t+1, while high substitutability exerts negative incentives for future R&D investment. --
    Keywords: Innovation,R&D,Competition
    JEL: O3
    Date: 2010
  9. By: Simon Alder
    Abstract: This paper provides new evidence on the relationship between innovation, competition and distance to the technology frontier, using enterprise surveys from 40 developing and transition countries. Different from previous empirical studies, the distance to frontier is measured by a firm's technology level relative to its main competitor. This self-reported comparison allows to capture a crucial determinant of a firm's business strategy and its response to competition. The findings from the empirical analysis are as follows. Firstly, firms with more advanced technology compared to their main competitors have more product innovations. Secondly, there is evidence that innovation and competition are more positively correlated at low levels of competition than at high levels. With some measures of competition, the correlation is highest at intermediate levels of competition, which suggests an inverted-U relationship. Thirdly, in certain specifications, competition is most positively correlated with product innovation when a firm is more advanced than its main competitor. In other cases, this correlation is strongest for firms that are at the same technology level as their competitors. However, the differences in the correlations between more and less advanced firms are not always significant.
    Keywords: Market structure, competition, innovation, technology adaption, growth
    JEL: O16 O31 O33 O38 O40 L16
    Date: 2010–07
  10. By: Ojo, Marianne
    Abstract: Recent years have witnessed a change in focus from considerations of factors which could impede competition, for example over-regulation, to the need to strike a balance between over-regulation and insufficient regulation – in order to provide the right level of safety for consumers (such that they are protected from risky investments). A driving force behind the need for deregulation over the past two decades has been the objective and desire to foster competition. Re-regulation thereafter assumed centre stage in some jurisdictions in response to the need to manage cross sector services' risks more efficiently. Rescue cases involving guarantees (contrasted with restructuring cases) during the recent Financial Crisis, have illustrated the prominent position which the goal of promoting financial stability has assumed over that of the prevention or limitation of possible distortions of competition which may arise when granting State aid. The importance attached to maintaining and promoting financial stability - as well as the need to facilitate rescue and restructuring measures aimed at preventing systemically relevant financial institutions from failure, demonstrate how far authorities are willing to overlook certain competition policies. However increased government and central bank intervention also simultaneously trigger the usual concerns – which include moral hazard and the danger of serving as long term substitutes for market discipline. An interesting observation derives from the relationship between State aid grants, competition, and the potential to induce higher risk taking levels. Whilst the need to promote and maintain financial stability is paramount, safeguards need to be implemented and enforced to ensure that measures geared towards the aim of sustaining system stability (measures such as lender of last resort arrangements and State rescues) do not unduly distort competition as well as induce higher risk taking levels. This paper will draw attention to safeguards which have been provided by the Commission where approval is considered for the grant of State aid to financial institutions whose problems are attributable to inefficiencies, poor asset liability management or risky strategies. Whether the distinction drawn by the Commission – with regards to the preferential grant of recapitalisation packages to fundamentally sound banks (which require less restructuring measures)is justified, will also be considered. How far central banks and governments should intervene and how far distortions of competition should be permitted ultimately depends on how systemically relevant a financial institution is.
    Keywords: Competition; central banks; recapitalisation; stability; regulation; financial crises; fundamentally sound financial institutions
    JEL: K2 E58 G18
    Date: 2010–07–06
  11. By: Halkos, George; Tzeremes, Nickolaos
    Abstract: This study illustrates how the recent developments in efficiency analysis and statistical inference can be applied when evaluating banks’ performance issues from a potential merger. By using a sample of 29 Greek commercial banks the paper provides a six step procedure in order to evaluate whether a potential bank merger can exhibit economies of scale and characterized as favorable.
    Keywords: Data Envelopment Analysis; Bootstrap techniques; Virtual Mergers; Bank efficiency.
    JEL: C14 C61 C67 G21 C60
    Date: 2010–03–13
  12. By: Mario Pezzino
    Date: 2010
  13. By: Kurt R. Brekke (Department of Economics and Helth Economics Bergen, Norwegian School of Economics and Business Administration); Tor Helge Holmås (Health Economics Bergen (HEB), University of Bergen); Odd Rune Straume (Universidade do Minho - NIPE)
    Abstract: We study the impact of product margins on pharmacies. incentive to promote generics instead of brand-names. First, we construct a theoretical model where phar-macies can persuade patients with a brand-name prescription to purchase a generic version instead. We show that pharmacies.substitution incentives are determined by relative margins and relative patient copayments. Second, we exploit a unique product level panel data set, which contains information on sales and prices at both producer and retail level. In the empirical analysis, we .nd a strong relationship between the margins of brand-names and generics and their market shares. In terms of policy implications, our results suggest that pharmacy incentives are crucial for promoting generic sales.
    Keywords: Pharmaceuticals; Pharmacies; Generic Substitution
    JEL: I11 I18 L13 L65
    Date: 2010
  14. By: Isabel Soares (CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal); Paula Sarmento (CEF.UP, Faculdade de Economia, Universidade do Porto, Portugal)
    Abstract: In this paper we discuss the European regulation policy regarding vertical separation in communications and electricity industries. In the electricity sector the discussion concerns ownership unbundling while in communications the regulatory debate is about functional separation. We conclude that for electricity, ownership unbundling seems to be the best option to achieve competition in wholesale markets although there is still some risks concerning investment. Instead, for the communication sector the regulatory options are deeply dependent on the intensity of network competition between operators that combine different technological platforms. Technology also seems to be a key driver for diverse regulatory approaches concerning the unbundling requirement.
    Keywords: unbundling, communications, electricity, next generation networks
    Date: 2010–07
  15. By: Michael P. Stone (University of Connecticut)
    Abstract: Attorney advertising routinely targets tort victims. In this paper, a theoretical model is developed which incorporates advertising intensity, litigation costs, and an endogenous number of lawsuits. Since advertising induces victims to bring suit, it increases the level of injurer care. However, litigation costs are incurred. At the optimum, the marginal benefit of deterrence equals the sum the marginal costs of litigation and advertising. It is shown that even though blanket prohibitions on attorney advertising are suboptimal, ethical regulations which increase the marginal cost of advertising may be justified. Nevertheless, despite the widespread use of legal services advertising, it is unclear whether law firms are currently advertising excessively or inefficiently low. Whether firms are advertising excessively from a social standpoint is a purely empirical question.
    Keywords: Tort, Liability, Advertising, Attorneys, Lawyer, Legal Services
    JEL: K13 L84
    Date: 2010–07

This nep-com issue is ©2010 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.