nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒07‒31
eleven papers chosen by
Russell Pittman
US Department of Justice

  1. Price and Brand Competition between Differentiated Retailers: A Structural Econometric Model By Dubois, Pierre; Jodar-Rosell, Sandra
  2. Timing Vertical Relationships By Ruble, Richard; Versaevel, Bruno; de Villemeur, Étienne
  3. Pitfalls in vertical arrangements By G. Rossini; C. Vergari
  4. A Dynamic Duopoly Investment Game under Uncertain Market Growth By Boyer, Marcel; Lasserre, Pierre; Moreaux, Michel
  5. R&D Subsidies, Spillovers and Privatization in Mixed Markets By Maria José Gil Moltó; Joanna Poyago.Theotoky; Vasileios Zikos
  6. Cartel deterrence and settlements: the brazilian experience By Furquim de Azevedo, Paulo; Lauri Henriksen, Alexandre
  7. Restrições verticais e defesa da concorrência: a experiência brasileira By Furquim de Azevedo, Paulo
  8. Counterfactual Analysis of Bank Mergers By Pedro Pita Barros; Diana Bonfim; Moshe Kim; Nuno C. Martins
  9. Success in Pharmaceutical Research: The Changing Role of Scale and Scope Economies, Spillovers and Competition By Tatiana Plotnikova
  10. Competition and Collusion in Grain Markets: Basmati Auctions in North India By J.V. Meenakshi; A Banerji
  11. Exchange Rate Fluctuations, Plant Turnover and Productivity By Ben Tomlin

  1. By: Dubois, Pierre; Jodar-Rosell, Sandra
    Abstract: We develop a model of competition between retailer chains with a structural estimation of the demand and supply in the supermarket industry in France. In the model, supermarkets compete in price and brand offer over all food products to attract consumers, in particular through the share of private labels versus national brands across all their products. Private labels can serve as a differentiation tool for the retailers in order to soften price competition. They may affect the marginal costs of all products for the retailer because of eventual quality differences and also by helping retailers to obtain better conditions from their manufacturers. Differentiation is taken into account by estimating a discrete-continuous choice model of demand where outlet choice and total expenditures are determined endogenously. On the supply side, we consider a simultaneous competition game in brand offer and price between retailers to identify marginal costs. After estimation by simulated maximum likelihood, the structural estimates allow to simulate the effect on the equilibrium behavior of retailer chains of a demand shock through an increase in transportation costs for consumers and a merger between two retailer chains.
    JEL: L13 L22 L81
    Date: 2010–04
  2. By: Ruble, Richard (EMLYON & CNRS, GATE); Versaevel, Bruno (EMLYON & CNRS, GATE); de Villemeur, Étienne (Toulouse School of Economics (IDEI & GREMAQ))
    Abstract: We show that the standard analysis of vertical relationships transposes directly to investment timing. Thus, when a rm undertaking a project requires an outside supplier (e.g. an equipment manufacturer) to provide it with a discrete input, and if the supplier has market power, investment occurs too late from an industry standpoint. The distortion in rm decisions is characterized by a Lerner index, which is related to the parameters of a stochastic downstream demand. When feasible, vertical restraints restore eciency. For instance, the upstream rm can induce entry at the correct investment threshold by selling a call option on the input. Otherwise, competition may substitute for vertical restraints. In particular, if two rms are engaged in a preemption race downstream, the upstream rm sells the input to the rst investor at a discount that is chosen in such a way that the race to preempt exactly osets the vertical externality, and this leader invests at the optimal market threshold.
    JEL: C73 D43 D92 L13
    Date: 2010–06–23
  3. By: G. Rossini; C. Vergari
    Abstract: A popular way of obtaining essential inputs requires the establishment of an input production joint venture (IPJV) in the upstream (U) section of the vertical chain of production by firms competing and selling final goods in the downstream (D) section of the vertical chain. In spite of the apparently simple arrangement there are many possible governances for the management of the IPJV according to the ownership structure and to the degree of delegation granted to the IPJV by parent firms. We explore the best sustainable governance arrangement for the IPJV. We address this question in a duopoly framwork and we find a large area of impossible vertical arrangements associated with technological asymmtery. The most likely governance of the vertical arrangment associated to the IPJV is total independence.
    JEL: L24 L42
    Date: 2010–07
  4. By: Boyer, Marcel (Université de Montréal); Lasserre, Pierre (Université du Québec à Montréal); Moreaux, Michel (Toulouse School of Economics (IDEI and LERNA))
    Abstract: We model investments in capacity in a homogeneous product duopoly facing uncertain demand growth. Capacity building is achieved through adding production units that are durable and lumpy and whose cost is irreversible. There is no exogenous order of moves, no first-mover or second-mover advantage, no commitment, and no finite horizon; while building their capacity over time, firms compete `a la Cournot in the product market. We investigate Markov Perfect Equilibrium (MPE) paths of the investment game, which may include preemption episodes and tacit collusion episodes. However, when firms have not yet invested in capacity, the sole pattern that is MPEcompatible is a preemption episode with firms investing at different times, but both have equal value. The first such investment may occur earlier, and therefore be riskier, than socially optimal. When both firms hold capacity, tacit collusion episodes may be MPE-compatible with firms investing simultaneously at a postponed time (generating an investment wave in the industry). We show that the emergence of such episodes is favored by higher demand volatility, faster market growth, and lower discount rate (cost of capital).
    JEL: C73 D43 D92 L13
    Date: 2010–07–06
  5. By: Maria José Gil Moltó; Joanna Poyago.Theotoky; Vasileios Zikos
    Abstract: We examine the use of subsidies to R&D in a mixed and a private duopoly market. We show that the socially optimal R&D subsidy is increasing in the degree of spillovers but it is lower in the private duopoly. The optimal R&D subsidy leads to an increase in total R&D and production, however, it does not lead to the equalisation of per firm output and therefore to an efficient distribution of production costs. We also find that privatization of the public firm reduces R&D activity and welfare in the duopoly market. This result stands even when optimal R&D subsidies are provided.
    Keywords: mixed duopoly; process innovation; R&D subsidies; privatization; spillovers.
    JEL: L31 L32 O38 L13 L50
    Date: 2010–07
  6. By: Furquim de Azevedo, Paulo; Lauri Henriksen, Alexandre
    Abstract: Settlements are an important part of a program of cartel deterrence, particularly when the likelihood ofconviction and the litigation costs are higher. This type of negotiated procedure to reach finality is inessence complementary to the fully adversarial procedures associated to the trial by the administrative orjudicial courts, and to other investigative instruments, such as the leniency agreement. The Brazilianexperience provides some insights about the different models of direct settlement in cartel cases and thecomplex interaction among settlements, leniency agreements, and trial outcome. First, there is leeway forthe complementary models of settlements, the first oriented mainly to increasing the likelihood ofdetection, and the second oriented to saving social costs of litigation. Second, the concern with thepreservation of the demand for leniency agreements led the competition authority to restrict the use ofsettlements, which are effectively designed for the defendants that are likely guilty and give higher valueto finality. The recent experience illustrates that the current settlement policy has not caused any adverseeffect on leniency agreements, while reducing litigation costs and granting finality in some cases.
    Date: 2010–07–22
  7. By: Furquim de Azevedo, Paulo
    Abstract: This article reviews the Brazilian competition policy with regard to vertical restraints. Although relativelyshort, the Brazilian experience is surprisingly rich and consistent, particularly in comparison with the quitevolatile U.S. enforcement towards vertical restraints, which ranged from severe interventions to an absolutelylenient approach. A significant number of the most important antitrust cases in Brazil are related to verticalrestraints, and one of them resulted in the highest fine ever applied to a company by Brazilian authorities.Moreover, the necessary conditions to characterize an antitrust offence are relatively well set, comprisingthree main steps of investigation: a) the existence of dominant position, b) the feasibility and economicrationality of market foreclosure and raising the costs of rivals, and c) the efficiencies related to verticalcontrol. The article comprises a summary of the economic controversy regarding vertical restraints, and asummary of the main cases decided by the Brazilian Commission (Cade).
    Date: 2010–07–19
  8. By: Pedro Pita Barros; Diana Bonfim; Moshe Kim; Nuno C. Martins
    Abstract: Estimating the impact of bank mergers on credit granted and on interest rates requires a framework that allows to disentangle the effect of changes in market structure generated by mergers from the effects arising from changes in banks’ operating environment. However, most of the literature on the impact of bank mergers relies on a simple differential analysis of the relevant variables. We propose a new methodology. It relies on the estimation of a structural model of the credit market. Using this model we are able to derive a counterfactual scenario, considering the pre-merger market equilibrium together with the post-merger environment. The counterfactual analysis makes possible to take into account changes in market structure and conduct, which could affect the results if neglected. We analyze separately two segments of the credit market (households and firms) and take into account two groups of institutions (those that were directly involved in mergers and those that were not). We find that mergers increased the total amount of credit granted to the corporate sector, but had negative impacts on households’ access to credit. Moreover, we find that mergers led to a widespread decrease in interest rates.
    JEL: G21 G34 L10
    Date: 2010
  9. By: Tatiana Plotnikova (DFG Research Training Program "The Economics of Innovative Change", Friedrich-Schiller-University Jena, Germany)
    Abstract: This paper investigates the determinants of success in the development of new drugs. In specific, it explores the factors of success in drug development programs at different stages of innovation process. We use economies of scale, scope, R&D competition and technological spillovers as explanatory variables and test whether the effect of these variables on the success of a project differs in relation to the discovery and development stages of innovation, respectively. Our main finding is that spillovers, including spillovers from collaboration, are important in explaining the success of projects during the discovery stage of innovation, while in the later development stage, the effects of competition outweigh any benefits from spillovers.
    Keywords: economies of scale and scope, spillovers, competition, R&D, innovation process
    JEL: O32 L25 L65
    Date: 2010–07–26
  10. By: J.V. Meenakshi; A Banerji
    Abstract: Many small wholesale grain markets in India are characterized by large numbers of sellers and a relatively small number of buyers, thereby lending the price formation process open to manipulation through collusion. Government intervention limits the extent of such manipulation through the institution of regulated markets, where the rules of exchange are clearly spelled out and the price formation process is transparent. Unfortunately, recent studies that document how agricultural markets operate—especially in Northern India—and the extent to which they hinder or serve farmers, are rare. In this paper we attempt to fill this gap by studying the functioning of a regulated basmati paddy market in the state of Haryana in North India. [Working Paper No. 91]
    Keywords: Wholesale, grain markets, manipulation, price formation, transparent, agricultural markets, basmati, paddy markets
    Date: 2010
  11. By: Ben Tomlin
    Abstract: In a small open economy fluctuations in the real exchange rate can affect plant turnover, and thus aggregate productivity, by altering the makeup of plants that populate the market. An appreciation of the local currency increases the level of competition in the domestic market as import competition intensifies and export opportunities shrink, forcing less productive plants from the market and compelling new entrants to be more competitive than they otherwise would have been. Depreciations have the opposite effect, as import competition weakens and new export opportunities arise, less competitive plants are able to continue to operate in the market and crowd out new, more productive entrants. This paper develops a dynamic structural model that captures the effect of plantlevel productivity and real exchange rate fluctuations on plant entry and exit decisions in the Canadian agricultural implements industry, and how this, in turn, affects aggregate productivity. The model's dynamic parameters are estimated in two stages. Variable profit parameters and the per-period fixed cost of operation are estimated first using the Nested Pseudo Likelihood (NPL) algorithm, and then the parameters characterizing the distribution of unobserved potential entrant productivity, along with the cost of entry, are estimated in a second stage using the Method of Simulated Moments (MSM). Finally, simulations of the model are used to investigate the effects of shocks to the exchange rate process on aggregate industry productivity.
    Keywords: Productivity; Exchange rates; Market structure and pricing
    JEL: D21 D24 L11
    Date: 2010

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