nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒09‒03
ten papers chosen by
Russell Pittman
US Department of Justice

  1. Entry and Incumbent Innovation By Philipp Weinscheink
  2. The Impact of Firm Entry Regulation on Long-living Entrants By Susanne Prantl
  3. Firm Entry, Trade, and Welfare in Zipf's World By Julian di Giovanni; Andrei A. Levchenko
  4. Analyzing the Welfare Impacts of Full-line Forcing Contracts By Justin Ho; Katherine Ho; Julie Holland Mortimer
  5. “Assessing market dominance”: a comment and an extension By Vasilis Droucopoulos; Panagiotis Chronis
  6. Multiproduct Firms and Price-Setting: Theory and Evidence from U.S. Producer Prices By Saroj Bhattarai; Raphael Schoenle
  7. Vertically Related Markets of Collective Licensing of Differentiated Copyrights with Indirect Network Effects By Tim Paul Thomes
  8. Bundling Among Rivals: A Case of Pharmaceutical Cocktails By Claudio Lucarelli; Sean Nicholson; Minjae Song
  9. Market Performance Implications of the Transfer Price Rule By Stephen Martin; Jan Vandekerckhove
  10. Do Fairness Opinion Valuations Contain Useful Information? By Matthew D. Cain; David J. Denis

  1. By: Philipp Weinscheink (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We explore how the threat of entry influences the innovation activity of an incumbent. We show that the incumbent’s investment is hump-shaped in the entry threat. When the entry threat is small and increases, the incumbent invests more to deter entry, or to make it unlikely. This is due to the entry deterrence effect. However, when the threat becomes huge, entry can no longer profitably be deterred or made unlikely and the investment becomes small. Then the Schumpeterian effect dominates. These results turn out to be very robust.
    Date: 2010–05
  2. By: Susanne Prantl (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: What is the impact of firm entry regulation on sustained entry into self-employment? How does firm entry regulation influence the performance of long-living entrants? In this paper, I address these questions by exploiting a natural experiment in firm entry regulation. After German reunification, East and West Germany faced different economic conditions, but fell under the same law that imposes a substantial mandatory standard on entrepreneurs who want to start a legally independent firm in one of the regulated occupations. The empirical results suggest that the entry regulation suppresses long-living entrants, not only entrants in general or transient, short-lived entrants. This effect on the number of long-living entrants is not accompanied by a counteracting effect on the performance of long-living entrants, as measured by firm size several years after entry.
    Keywords: Firm entry regulation, sustained entry, self-employment, firm size
    JEL: K20 L25 L26 L50 M13 P52
    Date: 2010–07
  3. By: Julian di Giovanni; Andrei A. Levchenko
    Abstract: Firm size follows Zipf's Law, a very fat-tailed distribution that implies a few large firms account for a disproportionate share of overall economic activity. This distribution of firm size is crucial for evaluating the welfare impact of economic policies such as barriers to entry or trade liberalization. Using a multi-country model of production and trade calibrated to the observed distribution of firm size, we show that the welfare impact of high entry costs is small. In the sample of the largest 50 economies in the world, a reduction in entry costs all the way to the U.S. level leads to an average increase in welfare of only 3.25%. In addition, when the firm size distribution follows Zipf's Law, the welfare impact of the extensive margin of trade -- newly imported goods -- is negligible. The extensive margin of imports accounts for only about 5.2% of the total gains from a 10% reduction in trade barriers in our model. This is because under Zipf's Law, the large, infra-marginal firms have a far greater welfare impact than the much smaller firms that comprise the extensive margin in these policy experiments. The distribution of firm size matters for these results: in a counterfactual model economy that does not exhibit Zipf's Law the gains from a reduction in fixed entry barriers are an order of magnitude larger, while the gains from a reduction in variable trade costs are an order of magnitude smaller.
    JEL: F12 F15
    Date: 2010–08
  4. By: Justin Ho; Katherine Ho; Julie Holland Mortimer
    Abstract: Theoretical investigations have examined both anti-competitive and efficiency-inducing rationales for vertical bundling, making empirical evidence important to understanding its welfare implications. We use an extensive dataset on full-line forcing contracts between movie distributors and video retailers to empirically measure the impact of vertical bundling on welfare. We identify and measure three primary effects of fullline forcing contracts: market coverage, leverage, and efficiency. We find that bundling increases market coverage and efficiency, but has little impact on one distributor gaining leverage over another. As a result, we estimate that full-line forcing contracts increased consumer and producer surplus in this application.
    JEL: L0 L1 L4
    Date: 2010–08
  5. By: Vasilis Droucopoulos (University of Athens); Panagiotis Chronis (Bank of Greece)
    Abstract: Melnik et al. [Melnik, A., Shy, Oz, Stenbacka, R., 2008. Assessing market dominance. Journal of Economic Behavior and Organization 68, 63-72] have proposed a new statistic to assess market dominance. In this comment we expand their discussion of certain mathematical properties in their analysis and link their methodology to some previous approaches.
    Keywords: Firm’s dominance; Dominant position; Measure of dominance
    JEL: K21 L11 L41
    Date: 2010–01
  6. By: Saroj Bhattarai (Pennsylvania State University); Raphael Schoenle (Brandeis University)
    Abstract: In this paper, we establish three new facts about price-setting by multi-product firms and contribute a model that can match our findings. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchro- nization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multi-product firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend in ation, the model matches the empiricalfindings.
    Keywords: Multi-product firms; Number of Goods; State-dependent pricing; U.S. Producer prices
    JEL: E30 E31 L11
    Date: 2010–07
  7. By: Tim Paul Thomes (School of Economics and Business Administration, Friedrich Schiller University Jena)
    Abstract: This paper presents a theory of vertically interrelated markets of identical fixed size under implementation of positive indirect network effects. By introducing two Salop circles, a two-sided market model is provided, where intermediaries of differentiated copyrights for intellectual property, like performing rights organizations or publishers, compete as oligopsonists for owners of the intellectual property and as oligopolists for the users of their blanket licenses. We demonstrate, that an increase in competition benefits either license users or copyright owners or harms both groups. Moreover, if license users gain from an increased market entry, the owners of the intellectual property have to incur losses and vice versa.
    Keywords: Vertical restraints, Indirect network effects, Copyright enforcement, Performing rights organizations, Music industry
    JEL: D43 L13 L44 L82
    Date: 2010–08–24
  8. By: Claudio Lucarelli; Sean Nicholson; Minjae Song
    Abstract: We empirically analyze the welfare effects of cross-firm bundling in the pharmaceutical industry. Physicians often treat patients with "cocktail" regimens that combine two or more drugs. Firms cannot price discriminate because each drug is produced by a different firm and a physician creates the bundle in her office from the component drugs. We show that a less competitive equilibrium arises with cocktail products because firms can internalize partially the externality their pricing decisions impose on competitors. The incremental profits from creating a bundle are sometimes as large as the incremental profits from a merger of the same two firms.
    JEL: I11 L1 L11
    Date: 2010–08
  9. By: Stephen Martin; Jan Vandekerckhove
    Abstract: We model the impact of the transfer price rule (a constraint that re- quires the downstream division of a vertically-integrated ?rm to earn at least a normal rate of return on investment in the counterfactual case that it pays the same price as a nonintegrated ?rm for the essential input), re- jected by the U.S. Supreme Court in Linkline, for the performance of markets in which an upstream ?rm provides an essential input to a down- stream ?rm with which it may compete in the retail market by vertical integration. We allow for horizontal and vertical product di¤erentiation in the ?nal good market. The upstream ?rm?s equilibrium distribution choice (between exclusion, dual distribution, or nonintegration) depends on relative product qualities. We characterize conditions under which the transfer price rule alters the upstream ?rm?s equilibrium distribution choice, and develop conditions for the transfer price rule to improve mar- ket performance.
    Keywords: price squeeze; transfer price rule; vertical relations; an- titrust
    JEL: L12 L41 L44
    Date: 2010–08
  10. By: Matthew D. Cain; David J. Denis
    Abstract: We analyze target firm valuations disclosed in the fairness opinions of negotiated mergers between 1998 and 2005. On average, acquirer advisors exhibit a greater degree of valuation optimism than do target advisors. Top-tier advisors produce more accurate valuations than lower-tier advisors, but valuation accuracy is unrelated to the contingency structure of advisory fees. The stock price reactions to merger announcements and to the public disclosure of fairness opinions are positively related to the difference between target firm valuations contained in the fairness opinion and the merger offer price. We conclude that fairness opinions contain information not previously available to market participants.
    Date: 2010–07

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