nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒09‒11
23 papers chosen by
Russell Pittman
US Department of Justice

  1. The Effects of Imbalanced Competition on Demonstration Strategies By Heiman, Amir; Ofir, Chezy
  2. TACTICS AND STIGLER FLEXIBILITY. PART I: linear differential model for a single-product firm By Francesco Dell'Isola
  3. Knowing Versus Telling Private Information About a Rival By Mark Bagnoli; Susan G. Watts
  4. On the Impact of Financial Structure on Product Selection By Christos Constantatos; Stylianos Perrakis
  5. Corporate governance structure and mergers By Elijah Brewer, III; William E. Jackson, III; Julapa Jagtiani
  6. On the Bertrand core and equilibrium of a market By Robert Routledge
  7. Revising the Horizontal Merger Guidelines: Lessons from the U.S. and the E.U. By Gilbert, Richard J; Rubinfeld, Daniel L.
  8. Exclusion Through Speculation By Argenton, C.; Willems, Bert
  9. Making Sense of Non-Binding Retail-Price Recommendations By Gärtner, Dennis L; Buehler, Stefan
  10. How Much Should You Own? Cross-ownership and Privatization By Rupayan Pal
  11. Unraveling the Shift to the Entrepreneurial Economy By D.B. Audretsch; A.R. Thurik
  12. Industry Concentration Dynamics and Structural Changes: The Case of Aerospace & Defence By Štefan Lyócsa; Svatopluk Svoboda; Tomáš Výrost
  13. Banking competition, monitoring incentives and financial stability By VO Thi Quynh Anh
  14. Every Viewer has a Price - On the Differentiation of TV Channels By Häckner, Jonas; Nyberg, Sten
  15. The Economics of Number Portability: Switching Costs and Two-Part Tariffs By Aoki, Reiko; Small, John
  16. Resale Price Maintenance by Japanese Newspapers By David Flath
  17. The Unexpected Impact of Information-Sharing on US Pharmaceutical Supply-Chains By Leroy B. Schwarz; Hui Zhao
  18. Regulation of Pharmaceutical Prices: Evidence from a Reference Price Reform in Denmark By Ulrich Kaiser; Susan J. Mendez; Thomas Rønde
  19. What is the cost of low participation in French Timber auctions? By Raphaële PRÉGET; Patrick WAELBROECK
  20. An Analytical Model of a Vertically Separated Railway Market By Markus Lang; Marc Laperrouza; Matthias Finger
  21. The impact of airport competition on technical efficiency: A Stochastic Frontier Analysis applied to Italian airports By Malighetti, Paolo; Martini, Gianmaria; Scotti, Davide; Volta, Nicola
  22. Potere di mercato e distribuzione dei profitti nella filiera del trasporto aereo By Martini, Gianmaria; Scotti, Davide
  23. Mass Media and Special Interest Groups By Maria Petrova

  1. By: Heiman, Amir; Ofir, Chezy
    Abstract: This paper analyzes the effect of competition on product demonstration decisions. Pre-purchase product demonstration enables marketers to differentiate products that are ex-post differentiated but are judged according to perceived fit, rather than actual fit, due to pre-purchase consumer uncertainty. Imbalanced competition accompanied by fit uncertainty motivates the follower to offer demonstrations to avoid a price war. This paper explores the conditions that lead the leader to retaliate. In addition to effects on quantity, competition may increase the quality of demonstrations offered by the leader. We analyze a business case, showing that competition may increase the demonstration intensity and that the leading manufacturerâs response to changes in competition is stronger than the responses of the followers. Our research has the potential to aid mangers in formulating demonstration strategies and in responding to competitorsâ demonstration efforts.
    Keywords: Imbalanced competition, product demonstration, differentiation, test-drive, price war, Political Economy, Production Economics,
    Date: 2010
  2. By: Francesco Dell'Isola (Dipartimento di Ingegneria Strutturale e Geotecnica - Universita di Roma "La Sapienza", Laboratorio Strutture e Materiali Intelligenti - Fondazione Tullio Levi-Civita - Cisterna di Latina)
    Abstract: A firm which sells its product in a free competition market where the exchange price remains stationary, determines the quantity of goods to be produced equaling marginal cost to marginal revenues. In this paper we consider the more general case of markets with price instabilities. To this aim we: i) propose a simple mathematical model for describing the structure of industrial organizations, ii) determine the mathematical concept which expresses the Stiglerian flexibility for an industrial organization. In this way we give a precise meaning to the classical definition of flexible industrial organizations which reads as follow: " a flexible industrial organization permit to approximate the best technology for any output, at the cost of not being able to use the best technology for any output " ( see [2] on pg. 315 ). In the framework of the aforementioned model it is possible to introduce the concept of tactics ( time dependent production regime ) chosen by a firm as a response to price instability and to prove that the presence of exchange price instability enriches the manifold of industrial organizations which are competitive. Indeed we characterize the manifolds of equally competitive industrial organizations as the level curves of the previously introduced profit function.
    Date: 2010–08–30
  3. By: Mark Bagnoli; Susan G. Watts
    Abstract: As part of a broad competitive intelligence strategy, firms expect to acquire information about their rivals’ customers and production processes. In this study, we examine the firms’ incentives to disclose this information. We find that firms adopt a policy of disclosing their information regardless of whether it concerns a rival’s customers or production costs or whether the firms are Cournot or Bertrand competitors. Firms that have private information about their rivals tell. Their willingness to disclose private information about their rivals contrasts with the results in the literature when the firm has information about itself. This literature shows that the chosen disclosure policy depends on whether information is about the firm’s own payoffs or industry demand and whether the firms’ strategies are substitutes or complements.
    Keywords: disclosure policy, voluntary disclosure, asymmetric information, Cournot competition, Bertrand competition
    JEL: G1 G14 M41
    Date: 2010–08
  4. By: Christos Constantatos (Department of Economics, University of Macedonia); Stylianos Perrakis (Department of Finance, the John Molson School of Business, Concordia University)
    Abstract: We examine the interaction between financial and microeconomic decisions in a differentiated duopoly under uncertainty as to consumer taste for quality. Financing is by equity and debt and product specification is endogenous. We consider two three-stage games, according to the order of moves: qualities-financial structure-prices and financial structure-qualities-prices. Once debt is contracted, the manager maximizes equity instead of total value. We find that in both games debt a) increases both prices and qualities but most likely reduces product differentiation due to rival quality response; b) reduces the value of the levered high quality firm because it increases the low quality. Moreover, c) the cost of debt is higher for the second game, implying that it is higher for projects using debt to finance a product’s development-cum-commercialization compared to those financing only the commercialization stage. The results turn out to be robust to alternative specifications of quality and market size uncertainty.
    Keywords: Vertical differentiation; uncertainty; financial structure; leverage; sequential quality choice.
    JEL: L00 G32
    Date: 2010–11
  5. By: Elijah Brewer, III; William E. Jackson, III; Julapa Jagtiani
    Abstract: Few transactions have the potential to generate revelations about the market value of corporate assets and liabilities as mergers and acquisitions (M&A). Corporate governance and control mechanisms such as independent directors, independent blockholders, and managerial share ownership are usually important predictors of the size and distribution of the incremental wealth generated by M&A transactions. The authors add to this literature by investigating these relationships using a sample of banking organization M&A transactions over the period 1990-2004. Unlike research on nonfinancial firms, the impact of independent directors, share ownership of the top five managers, and independent block holders on bank merger purchase premiums in this environment is likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. The authors model controls for risk characteristics of the target banks, the deal characteristics, and the economic environment. Their results are robust. They support the hypothesis that independent directors may provide an important internal governance mechanism for protecting shareholders' interests, especially in large-scale transactions such as mergers and takeovers. The authors also find the results to be consistent with the hypothesis that independent blockholders play an important role in the market for corporate control as does managerial share ownership. But these effects dampen the impact of independent directors on target shareholders' merger prices. Their overall findings would support policies that promote independent outside directors on the board of banking firms in order to provide protection for shareholders and investors at large.
    Keywords: Corporate governance ; Bank mergers
    Date: 2010
  6. By: Robert Routledge
    Date: 2010
  7. By: Gilbert, Richard J; Rubinfeld, Daniel L.
    Abstract: Recently, the U.S. Department of Justice and Federal Trade Commission have embarked on an effort to revise and update the U.S. Horizontal Merger Guidelines. There is substantial overlap between the U.S. and E.U. Guidelines, which makes a proposal for U.S. revisions immediately applicable to the E.U. and elsewhere. The U.S. Merger Guidelines can be revised in light of the learning of economists and lawyers in the past two decades to emphasize the importance of competitive effects analysis in merger evaluation and the forces that drive innovation. The Guidelines should also note that once a competitive effects analysis has been completed, it is possible to “back out†a relevant market (or markets) that is consistent with that competitive effects analysis.
    Keywords: mergers, antitrust, market competition
    Date: 2010–02–01
  8. By: Argenton, C.; Willems, Bert (Tilburg University, Center for Economic Research)
    Abstract: Many commodities are traded on both a spot market and a derivative market. We show that an incumbent producer may use financial derivatives to extract rent from a potential entrant. The incumbent can indeed sell insurance to a large buyer to commit himself to compete aggressively in the spot market and drive the price down for the entrant. It can do so by selling derivatives for more than his expected production level, i.e. by taking a speculative position. This comes at the cost of inefficiently deterring entry.
    Keywords: exclusion;monopolization;contracts;financial contracts;derivatives;risk aversion;speculation
    JEL: D43 D86 K21 L12 L42
    Date: 2010
  9. By: Gärtner, Dennis L; Buehler, Stefan
    Abstract: We model non-binding retail-price recommendations (RPRs) as a communication device facilitating coordination in vertical supply relations. Assuming both repeated vertical trade and asymmetric information about production costs, we show that RPRs may be part of a relational contract, communicating private information from manufacturer to retailer that is indispensable for maximizing joint surplus. We show that this contract is self-enforcing if the retailer’s profit is independent of production costs and punishment strategies are chosen appropriately. We also extend our analysis to settings where consumer demand is variable or depends directly on the manufacturer’s RPRs. Keywords: vertical relationships, relational contracts, asymmetric information, price recommendations. JEL Classification: D23; D43; L14; L15.
    Date: 2009–10–15
  10. By: Rupayan Pal
    Abstract: This paper examines the interdependence of cross-ownership and level of privatization in case of differentiated products mixed duopoly. It shows that it is optimal for the private firm not to own any (own the entire) portion of the privatized share of its rival firm, if the level of privatization is very low (very high). In equilibrium, the government makes sure that cross-ownership is not attracted. However, in most of the situations, the possibility of cross-ownership adversely affects the prospect of privatization. Results of this paper have strong implications to antitrust regulations and divestment policies. [Working paper No. 2010-015].
    Keywords: divestment, developing, transition econoies, firm, industry, consumenr, social welfare, competition, shareholder, Cross-ownership, mixed duopoly, partial privatization, product differentiation
    Date: 2010
  11. By: D.B. Audretsch (Institute for Development Strategies, Indiana University, U.S.A.); A.R. Thurik (Erasmus University Rotterdam and EIM, Zoetermeer, the Netherlands)
    Abstract: A recent literature has emerged providing compelling evidence that a major shift in the organization of the developed economies has been taking place: away from what has been characterized as the <I>managed economy</I> towards the <I>entrepreneurial economy</I>. In particular, the empirical evidence provides consistent support that (1) the role of entrepreneurship has significantly increased, and (2) a positive relationship exists between entrepreneurial activity and economic performance. However, the factors underlying this observed shift have not been identified in a systematic manner. The purpose of this paper is to suggest some of the factors leading to this shift and implications for public policy. In particular, we find that a fundamental catalyst underlying the shift from the managed to the entrepreneurial economy involved the role of technological change. However, we also find that it was not just technological change but rather involved a number of supporting factors, ranging from the demise of the communist system, increased globalization, new competition for multinational firms and higher levels of prosperity. Recognition of the causes of the shift from the managed to the entrepreneurial economy suggests a rethinking of the public policy approach. Rather than the focus of directly and exclusively on promoting startups and SMEs, it may be that the current approach to entrepreneurship policy is misguided. The priority should not be on entrepreneurship policy but rather a more pervasive and encompassing approach, policy consistent with an <I>entrepreneurial economy</I>.
    Keywords: entrepreneurship; economic regime switch; economic policy; new firms and startups; economic development; firm performance and market structure; globalization; new technologies
    JEL: E10 E60 H11 L1 L2 M13 O10
    Date: 2010–08–24
  12. By: Štefan Lyócsa (Department of Business Informatics and Mathematics,Faculty of Business Economics in Košice); Svatopluk Svoboda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Tomáš Výrost (Department of Finance and Accounting, University of Economics in Bratislava)
    Abstract: In this paper we present a general approach and methodology for modelling concentration dynamics on industrial level. The majority of research in this field has usually been focused on estimating adjustment models, where the speed of adjustment of actual level of concentration to the long-run concentration was considered to be responsible for concentration dynamics. The long-run concentration is usually modelled implicitly by the means of often complex industry characteristic variables. We model the changes in concentration through a) long-term structural changes in the specific industry, b) short-term structural changes, stemming from individual company conduct, and c) changes in number of companies constituting the industry. On the sample of quarterly data from 1999 to 2009 using total assets for the companies in Aerospace & Defence Industry in the U.S. we have confirmed the existence of short-term, but lacked evidence for the long-term structural changes.
    Keywords: Production, Pricing, Market Structure; Size Distribution of Firms
    JEL: L11 D40
    Date: 2010–08
  13. By: VO Thi Quynh Anh (Norges Bank (Central Bank of Norway))
    Abstract: This paper addresses the desirability of competition in banking industry. In a model where banks compete on both deposit and loan markets and where banks can use monitoring technology to control entrepreneurs' behavior, we investigate three questions: what are the effects of competition on banks' monitoring incentives? Does competition hurt banks' stability? What can be devices to correct potential negative effcts of competition vis à vis financial stability? We find that impacts of competition on banks' monitoring incentives can be decomposed into two effects: one on the attractiveness of monitoring and the other on the monitoring efficiency. The first effect operates through the link between competition and loan margin. The second effect comes from the fact that marginal effct of monitoring on entrepreneur's effort depends on loan rate. We characterize the sufficient condition under which competition will increase monitoring incentives as well as banks' stability. For the third question, we focus on the role of capital requirement and claim that with capital requirement, we can attain a weak correction but not strong correction.
    JEL: G21 G28 D43 D82
    Date: 2010–08–31
  14. By: Häckner, Jonas (Dept. of Economics, Stockholm University); Nyberg, Sten (Dept. of Economics, Stockholm University)
    Abstract: This study has three main objectives. First, we develop a realistic framework for studying the incentives to differentiate broadcasting in free-to-air TV markets. Consumers are allowed to vary the amount of time spent in front of the television set depending on preferences over program types (e.g., entertainment versus news), differences in the alternative cost of time and an Hotelling type dimension reflecting i.e., political positioning. Second, since empirical evidence suggest that different consumer segments are priced differently in the market for advertising, we analyze the implications of targeted advertising on the equilibrium level of differentiation. Third, we compare the equilibrium outcome with the socially optimal configuration. When consumers have no preferences over program types, standard Hotelling type results apply. Market forces minimize differentiation while the optimal degree is at an intermediate level. As preferences over program types get stronger the difference between optimal and market outcomes is initially reduced. However, when a large enough number of consumers start flipping between channels in order to avoid the least preferred program type, minimal differentiation suddenly becomes optimal while market forces leads to excessive differentiation. Hence, policies aimed at increasing diversity is beneficial only when viewers care little about program content.
    Keywords: Product Differentiation; TV Channels; Advertising
    JEL: L32 L82
    Date: 2010–09–03
  15. By: Aoki, Reiko; Small, John
    Abstract: This paper interprets number portability as a reduction of switching costs in a model of competition between telephone companies. We identify several cases by their cost and demand characteristics and show that social benefit of number portability are not guaranteed. Analysis using two-part tariff highlights the effect of how the technological cost of switching cost reduction effects the final market allocation.
    Date: 2010–08
  16. By: David Flath
    Abstract: In Japan, newspapers enjoy a special exemption from antimonopoly prohibitionsagainst resale price maintenance (suppliers’ stipulations that bar downstreamfirms from price discounting), but are each required to set uniform pricesthroughout Japan. In fact, the newspapers have rarely changed their subscriptionprices in recent years, and the three leading national dailies, together accountingfor about half the total industry circulation, and thirteen other papers accountingfor another one eighth of industry circulation, all have set exactly the same price(3,925 yen per month). The remaining local papers all set lower prices. Theauthorized resale price maintenance, and prohibition against prices thatvarygeographically, have allowed collusive price increases that I here estimate to bearound 500 yen per month, entailing economic waste of about 300;#45;billion yen($&;#45; billion) per year but adding only around 16#45;billion yen per year to newspaperprofit. The increased profit margin on subscriptions is much offset by reducedsale of ads.
    Date: 2010–08
  17. By: Leroy B. Schwarz; Hui Zhao
    Abstract: This paper examines the introduction of information-sharing into the supply chains for pharmaceutical products in the United States. This introduction was unusual for several reasons. First, it was catalyzed from outside the industry, by a Securities and Exchange Commission (SEC) investigation into improper financial reporting by a single manufacturer. Second, it was initiated by pharmaceutical manufacturers in order to keep distributor inventories low. Third, although its effect on pharmaceutical distributors has been profound, evidence indicates that information-sharing has had no impact on pharmaceutical manufacturers' own inventorymanagement practices.
    Date: 2010–07
  18. By: Ulrich Kaiser (University of Zurich); Susan J. Mendez (University of Zurich); Thomas Rønde (Copenhagen Business School)
    Abstract: On April 1, 2005, Denmark changed the way references prices, a main determinant of reimbursements for pharmaceutical purchases, are calculated. The previous reference prices, which were based on average EU prices, were substituted to minimum domestic prices. Novel to the literature, we estimate the joint effects of this reform on prices and quantities. Prices decreased more than 26 percent due to the reform, which reduced patient and government expenditures by 3.0 percent and 5.6 percent, respectively, and producer revenues by 5.0 percent. The prices of expensive products decreased more than their cheaper counterparts, resulting in large differences in patient benefits from the reform.
    Keywords: pharmaceutical markets; regulation; co-payments; reference pricing; asymmetric welfare effects
    JEL: I18 C23
    Date: 2010–08
  19. By: Raphaële PRÉGET; Patrick WAELBROECK
    Abstract: How much is the timber from public forests worth? How can the Public Forest Service define a fair market price for standing timber lots? What is the cost of low participation in French timber auctions? To estimate the value of a timber lot we adopt the transaction-evidence appraisal approach using data from timber auctions in Lorraine (Eastern France) accounting for the facts that: (i) the seller’s reserve prices are secret, (ii) there remain many unsold lots, and (iii) the number of bidders varies from one auction to another. Taking into account the endogenous participation in our hedonic price equation for the highest bid, we estimate that, compared to lots that receive two bids, the highest bid is 22% lower when there is only one bid and 37% higher when there are three or more bids.
    Date: 2010–09
  20. By: Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Marc Laperrouza (Management of Network Industries, Swiss Federal Institute of Technology Lausanne (EPFL)); Matthias Finger (Management of Network Industries, Swiss Federal Institute of Technology Lausanne (EPFL))
    Abstract: This paper presents a game-theoretic model of a liberalized railway market in which train operation and ownership of infrastructure are fully vertically separated. The objective of this paper is to analyze how the regulatory agency will socially optimally set the charges that operators have to pay to the infrastructure manager for access to the tracks and how these charges change with increased competition in the railway market. Our analysis shows that an increased number of competitors in the freight and/or passenger segment reduces prices per kilometer and increases total output in train kilometers. The regulatory agency reacts to more competition with a reduction in access charges in the corresponding segment. Consumers benefit through lower prices while the effect on the operators' profits is ambiguous and depends on the degree of competition. We further show that social welfare always increases through more competition in the freight and/or passenger segment. Finally, social welfare is higher under two-part tariffs than under one-part tariffs if rising public funds is costly to society.
    Keywords: Access charges, optimal pricing, railways, regulation, vertical integration
    JEL: D40 L22 L51 L92
    Date: 2010–09
  21. By: Malighetti, Paolo; Martini, Gianmaria; Scotti, Davide; Volta, Nicola
    Abstract: We investigate how the intensity of competition among airports affects their technical efficiency by computing airports’ markets on the basis of a potential demand approach. We find that the intensity of competition has a negative impact on airports’ efficiency in Italy during the 2005–2008 period. This implies that airports belonging to a local air transportation system where competition is strong exploit their inputs less intensively than do airports with local monopoly power. Furthermore, we find that public airports are more efficient than private and mixed ones. Since public airports take into account the positive externalities created by air transportation in the local economy, they are more willing to subsidize airlines in developing the airports’ connections. Hence, policy makers should provide incentives to implement airports’ specialization in local systems where competition is strong. Moreover, when regulating airport charges, they should take into account the impact of the above externalities.
    Keywords: Airport efficiency; stochastic distance function; airport competition
    JEL: L93 L11 L59
    Date: 2010–05
  22. By: Martini, Gianmaria; Scotti, Davide
    Abstract: We analyze the air transportation vertical channel and show the existence of an asymmetric distribution of profit margins between airlines and the firms operating in upstream stages. Higher margins are observed for leasing companies, engine manufacturers and GDS, while airlines exhibit a very low profitability. Two factors may explain this asymmetry: (1) in some stages of the value chain some firms (e.g. airlines and handling companies) have a low countervailing power both when acting as a buyer and as a seller, and (2) the liberalization policy implemented in the air transport sector so far is incomplete. The latter has increased the intensity of competition in some stages (e.g. airlines and handling companies), but has not faced and reduced the market power in other ones. We can draw some policy implications from this analysis. First, horizontal mergers between airlines should be positively evaluated by competition authorities, since they increase the airlines countervailing power in the vertical channel and this may, in turn, bring about a price reduction for consumers. Second, the degree of vertical integration in some stages should be reduced, because it is likely to be an instrument for increasing the market power in upstream stages and not to reach a higher efficiency.
    Keywords: air transportation; vertical channel; profits distribution
    JEL: L93 L42
    Date: 2010–04
  23. By: Maria Petrova (New Economic School)
    Abstract: Media revenues are an important determinant of media behavior. News coverage depends not only on the preferences of media consumers but also on the preferences of advertisers or subsidizing groups. We present a theoretical model of the interaction between special interest groups and media outlets in which the media face a trade-off between a larger audience and lower payments from special interest groups versus a smaller audience and more biased content. We focus on the relationship between the costs of production of media product and the level of distortion in news coverage that can be introduced by interest groups. Speciically, we look at the effect of falling marginal costs or the growing reliance on advertising revenues. We show that if people do not want to tolerate bias, or if special interest groups have budget constraint, then this effect is negative. If people do not pay attention to bias, or if the size of the audience is very important for the interest group, then this effect becomes positive. If markets are fully covered, and all consumers buy one unit of media product, then the effect disappears.
    Date: 2010–08

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