nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒09‒18
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Monopolization Through Acquisitions in Multimarket Oligopolies By Ray Chaudhuri, A.
  2. A Dynamic Duopoly Investment Game under Uncertain Market Growth By Boyer, Marcel; Lasserre, Pierre; Moreaux, Michel
  3. Exclusive Dealing and the Market Power of Buyers By Ryoko Oki; Noriyuki Yanagawa
  4. Exploding offers and buy-now discounts By Armstrong, Mark; Zhou, Jidong
  5. The Joint Effect of Technological Distance and Market Distance on Strategic Alliances. By Muge Ozman
  6. Information sharing in contests By Dan Kovenock; Florian Morath; Johannes Münster
  7. Nonsequential Search Equilibrium with Search Cost Heterogeneity By Jose Luis Moraga-Gonzalez; Zsolt Sandor; Matthijs R. Wildenbeest
  8. The Arm’s Length Principle, Transfer Pricing and Foreclosure under Imperfect Competition By Wenli Cheng; Dingsheng Zhang
  9. Does Multimarket Contact Facilitate Tacit Collusion? Inference on Conjectural Parameters in the Airline Industry By Ciliberto, Federico; Williams, Jonathan
  10. Do Incumbents Improve Service Quality in Response to Entry? Evidence from Airlines’ On-Time Performance By Jeffrey T. Prince; Daniel H. Simon
  11. Size Metrics and Dynamics of Firms Expansion in the European Pharmaceutical Industry By Franco Mariuzzo; Xiaoheng Zhang
  12. Public Policy and Market Competition: How the Master Settlement Agreement Changed the Cigarette Industry By Ciliberto, Federico; Kuminoff, Nicolai
  13. Market concentration in the banking sector: Evidence from Albania By Tushaj, Arjan

  1. By: Ray Chaudhuri, A. (Tilburg University, Center for Economic Research)
    Abstract: This paper shows that, under Cournot competition, monopolization through acquisitions is more likely to occur in industries where firms serve multiple segmented markets rather than a single integrated market, given that cost functions are strictly convex. Under segmented markets, within a two-country model, the paper shows that if a multinational firm acquires a local …rm in one of the markets, the product price in that market rises but the product price in the other falls. This decreases the profit that each local firm would obtain if it unilaterally remained outside a merger to monopoly, making it cheaper to acquire. This reverses the well established result in the existing merger literature, which focuses on the case where an industry serves a single integrated market. Moreover, the paper shows that the sum of consumer surplus across the countries may rise in response to an acquisition despite the absence of any synergies, which existing literature shows is not possible in a single integrated market.
    Keywords: monopolization;horizontal mergers;competition policy;Cournot competition;economic integration
    JEL: L12 L40 L41 F15 F23
    Date: 2010
  2. By: Boyer, Marcel; Lasserre, Pierre; Moreaux, Michel
    Date: 2010–07
  3. 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 differrent 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
  4. By: Armstrong, Mark; Zhou, Jidong
    Abstract: A common sales tactic is for a seller to encourage a potential customer to make her purchase decision quickly. We consider a market with sequential consumer search in which firms often encourage first-time visitors to buy immediately, either by making an "exploding offer" (which permits no return once the consumer leaves) or by offering a "buy-now discount" (which makes the price paid for immediate purchase lower than the regular price). Prices often increase when these policies are used. If firms cannot commit to their sales policy, the outcome depends on whether consumer incur an intrinsic cost of returning to a firm: if there is no such return cost, it is often an equilibrium for firms to offer a uniform price to both first-time and returning visitors; if the return cost is positive, however, firms are forced to make exploding offers.
    Keywords: Consumer search; oligopoly; price discrimination; high-pressure selling; exploding offers; costly recall
    JEL: D18 D83 D43
    Date: 2010–09
  5. By: Muge Ozman
    Abstract: The literature on strategic alliances has deepened our understanding of the mechanisms behind their formation. This literature has given a central role to complementarities between firms, whereby complementarities are usually measured by technological overlap. An established result tells us that, there is an inverted-u relationship between technological distance and learning by firms. In this paper, we argue that technological distance is only one aspect of complementarities. Equally important is the market distance, which we define as the extent to which the value generated by the alliance depends on the synergies between firms’ products. These synergies may occur because of the complementarities between products, or the possibilities to apply similar knowledge fields in different product domains. Through an agent based simulation study, we show that when firms consider both distances jointly, an alliance strategy which favours being close in at least one dimension yields the highest payoff, rather than being at the intermediate distance in both dimensions.
    Date: 2010
  6. By: Dan Kovenock (University of Iowa); Florian Morath (Max Planck Institute of Intellectual Property, Competition and Tax Law); Johannes Münster (Free University of Berlin)
    Abstract: We study the incentives to share private information ahead of contests, such as markets with promotional competition, procurement contests, or R&D. We consider the cases where firms have (i) independent values and (ii) common values of winning the contest. In both cases, when decisions to share information are made independently, sharing information is strictly dominated. With independent values, an industry-wide agreement to share information can arise in equilbrium. Expected effort is lower with than without information sharing. With common values, an industry-wide agreement to share information never arises in equilibrium. Expected effort is higher with than without information sharing.
    Keywords: information sharing; contest; all-pay auction
    JEL: D82 D43 D44 L13 D74
    Date: 2010–09
  7. By: Jose Luis Moraga-Gonzalez (University of Groningen and CESifo); Zsolt Sandor (Universidad Carlos III de Madrid); Matthijs R. Wildenbeest (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: We generalize the model of Burdett and Judd (1983) to the case where an arbitrary finite number of firms sells a homogeneous good to buyers who have heterogeneous search costs. We show that a price dispersed symmetric Nash equilibrium always exists. Numerical results show that the behavior of prices with respect to the number of firms hinges upon the shape of the search cost distribution: when search costs are relatively concentrated (dispersed), entry of firms leads to higher (lower) average prices.
    Keywords: nonsequential search, oligopoly, arbitrary search cost distributions
    JEL: D43 L13 C72
    Date: 2010–06
  8. By: Wenli Cheng; Dingsheng Zhang
    Abstract: Abstract: This paper studies a multinational firm’s transfer price decisions in imperfectly competitive market settings. It investigates whether the firm’s optimal transfer price coincides with the arm’s length price and examines how the firm might respond if it is compelled to follow the arm’s length principle. The main findings are: (1) in the absence of tax transfer incentives, the firm’s optimal transfer price does not coincide with the arm’s length price. If the firm is compelled to follow the arm’s length principle, it has an incentive to circumvent the arm’s length principle by keeping two sets of books, one for internal management, and another for tax reporting purposes; (2) the arm’s length principle can affect the MNF’s decision on whether or not to foreclose its competitor. Absent profit shifting incentives, the firm will foreclose its downstream competitor. Imposing the arm’s length principle induces the firm to supply its competitor, but the firm can revert to its foreclosure decision by keeping two sets of books. If the firm’s upstream and downstream divisions face different tax rates, the firm’s foreclosure decision will be reversed if the arm’s length principle is enforced.
    Keywords: Crime Victimisation, Institutions, Happiness, Ordered Probit, Rule of Law.
    Date: 2010–05
  9. By: Ciliberto, Federico; Williams, Jonathan
    Abstract: We nest conjectural parameters into a standard oligopoly model. The conjectural parameters are modeled as functions of multimarket contact. Using data from the US airline industry, we find: i) carriers with little multimarket contact do not cooperate in setting fares, while carriers serving many markets simultaneously sustain almost perfect coordination; ii) cross-price elasticities play a crucial role in determining the impact of multimarket contact on collusive behavior and equilibrium fares; iii) marginal changes in multimarket contact matter only at low or moderate levels of contact; iv) assuming that firms behave as Bertrand-Nash competitors leads to biased estimates of marginal costs.
    Keywords: Multimarket Contact; Collusion; Differentiated Products; Airport Facilities; Airline Industry
    JEL: L13
    Date: 2010–08–01
  10. By: Jeffrey T. Prince (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Daniel H. Simon (School of Public and Economic Affairs, Indiana University)
    Abstract: We examine if and how incumbent firms respond to entry, and entry threats, using non-price modes of competition. Our analysis focuses on service quality within the airline industry. We find that incumbent on-time performance actually worsens in response to entry, and even entry threats, by Southwest Airlines. Given Southwest’s general superiority in on-time performance, this result is consistent with equilibria of theoretical models of quality and price competition, which generally predict differentiation along quality. We corroborate this intuition with further analysis, showing there is no notable response by incumbents when an airline with average on-time performance (Continental) threatens to enter or enters a route.
    JEL: L0
    Date: 2010–09
  11. By: Franco Mariuzzo (Geary Institute, University College Dublin, Ireland); Xiaoheng Zhang (Economic and Social Research Institute, Dublin, Ireland)
    Abstract: We generalize the growth-of-firm literature by linking alternative metrics of size via a Copula approach. We look at the result of the fitted Copula and justify the metric we base our analysis upon. We employ the Amadeus dataset and investigate the growth dynamics of the European pharmaceutical industry in the Single Market Programme era, 1990–2004. Relying on a set of dynamic panel Probit methods that deal with unobserved heterogeneity and initial conditions, we analyze how our units of investigation, multinationals, capture opportunities over time. We find strong evidence of state dependence and mean reversion, as predicated by the theory of maturation — firms face a period of rapid growth, followed by a slow down, or even a stop, in growth. We finish off our exercise by conditioning the fitted Copula on the predicted measure of size and simulate the remaining measures.
    Keywords: Copula, Dynamic Nonlinear Panel Data Models, Entry, Firms Growth, Lower Bound, Pharmaceutical Industry, Single Market Programme, Unobserved Heterogeneity
    JEL: C10 C11 C23 L11 L65
    Date: 2010–09–07
  12. By: Ciliberto, Federico; Kuminoff, Nicolai
    Abstract: This paper investigates the large and unexpected increase in cigarette prices that followed the 1997 Master Settlement Agreement (MSA). We integrate key features of rational addiction theory into a discrete-choice model of the demand for a differentiated product. We find that following the MSA firms set prices on a more elastic region of their demand curves. Using these estimates, we predict prices that would be charged under a variety of industry structures and pricing rules. Under the assumptions of firms’ perfect foresight and constant marginal costs, we fail to reject the hypothesis that firms collude on a dynamic pricing strategy.
    Keywords: Cigarettes; Master Settlement Agreement; Demand; Collusion; Rational Addiction.
    JEL: L13 L41 H32
    Date: 2010–07–17
  13. By: Tushaj, Arjan
    Abstract: The market structure can be described by concentration ratios based on the oligopoly theory or the structure - conduct - performance paradigm. Measures of concentration and also competition are essential for banks conduction in the banking industry. Several researchers have proved concentration level to be major determinants of banking system efficiency. Theoretical characteristics of market concentration measures are illustrated with empirical evidence. The market structure of the Albanian Banking Sector has changed dramatically in recent years. On 1990s, our country has experienced deregulation, foreign bank penetration, and an accelerated process of consolidation and competition in the banking sector. Particularly, the working paper examines the nature and the extent of changes in market concentration of Albanian banking sector. It focused primarily on a descriptive and dynamic analysis of change in the concentration indices in banking sector from year to year. Also it examines how the inherited structure of the banking system affects the way of the distribution of market shares amongst the different banks that comprise on the banking sector. --
    Keywords: Bank Concentration,Concentration ratios,HHI index,Market Structure
    JEL: A20
    Date: 2010

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