nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒10‒02
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Entry Deterrence in the Presence of Learning-by-Doing By Ana Espinola-Arredondo; Felix Munoz-Garcia
  2. Exclusivity and Exclusion on Platform Markets By Subhasish M. Chowdhury; Steven Martin
  3. Discounts For Qualied Buyers Only By David McAdams
  4. A Dynamic Duopoly Investment Game under Uncertain Market Growth By Boyer, Marcel; Lasserre, Pierre; Moreaux, Michel
  5. Timing Vertical Relationships By Ruble, Richard; Versaevel, Bruno; de Villemeur, Étienne
  6. Price and Brand Competition between Differentiated Retailers: A Structural Econometric Model By Dubois, Pierre; Jodar-Rosell, Sandra
  7. Ambiguous Information and Market Entry: An Experimental Study By Brandts, Jordi; Yao, Lan
  8. Competition and growth: reinterpreting their relationship By ONORI, Daria
  9. Leniency programs for multimarket firms: The effect of Amnesty Plus on cartel formation By LEFOUILI, Yassine; ROUX, Catherine
  10. Prosecution and Leniency Programs: a Fool's Game By Sauvagnat, Julien
  11. Détecter et prévenir la collusion dans les marchés publics en construction: Meilleures pratiques favorisant la concurrence By Youri Chassin; Marcelin Joanis
  12. Health Care Network Formation and Policyholders' Welfare By Bardey, David; Bourgeon, Jean Marc
  13. Health Care Providers Payments Regulation when Horizontal and Vertical Differentiation Matter By Bardey, David; Canta, Chiara; Lozachmeur, Jean-Marie
  14. The effect of competition on process and outcome quality of hospital care; An empirical analysis for the Netherlands By Michiel Bijlsma; Pierre Koning; Victoria Shestalova; Ali Aouragh
  15. The Impact of Mergers on the Degree of Competition in the Banking Industry By Vittoria Cerasi; Barbara Chizzolini; Marc Ivaldi
  16. ATM Direct Charging Reform: the Effect of Independent Deployers on Welfare By Donze, Jocelyn; Dubec, Isabelle
  17. Does market concentration of downstream buyers squeeze upstream suppliers’ market power? By Carlos F. Alves; Cristina Barbot

  1. By: Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University)
    Abstract: TThis paper investigates a signaling entry deterrence model under learning-by-doing. We show that a monopolist’s practice of entry deterrence imposes smaller welfare losses (or larger welfare gains) when learning effects are present than when they are absent, making the intervention of antitrust authorities less urgent. If, however, the welfare loss associated to entry deterrence is still significant, and thus intervention is needed, our paper demonstrates that the incumbent’s practice of entry deterrence is easier to detect by a regulator who does not have access to accurate information about the incumbent’s profit function. Learning-by-doing hence facilitates the regulator’s ability to detect entry deterrence, thus suggesting its role as an “ally” of antitrust authorities.
    Keywords: Learning-by-doing, Entry deterrence, Incomplete information, Spillovers
    JEL: L12 D82 D83
    Date: 2010–06
  2. By: Subhasish M. Chowdhury (School of Economics, University of East Anglia); Steven Martin (Purdue University)
    Abstract: We examine conditions under which a platform firm can exclude rivals by bundling a product that some on one side of the market regard as essential with its platform, and pursue implications for market performance. We show that the impact of an exclusive dealing contract between the upstream firm and one of the downstream firms on market performance depends on the strength of consumer preferences for the products of the two downstream firms and the relative size of the market segment for which the complementary consumption good is essential. In some cases this may reduce the net social welfare.
    Keywords: exclusion, essential components, exclusive contract, platform market.
    JEL: L12 L13 L22 L42
    Date: 2010–09–21
  3. By: David McAdams
    Date: 2010–09–22
  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: 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 firm 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 firm decisions is characterized by a Lerner index, which is related to the parameters of a stochastic downstream demand. When feasible, vertical restraints restore efficiency. For instance, the upstream firm 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 firms are engaged in a preemption race downstream, the upstream firm sells the input to the first 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
  6. 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
  7. By: Brandts, Jordi; Yao, Lan
    Abstract: We study experimentally how entry into a market with uncertain capacity is affected by the type of information potential entrants have available. Our focus is on behavior in a two-market entry game. In the risky information market there are two possible market capacities, both known to occur with probability 1/2. In the ambiguous information market the two possible market capacities effectively occur with probability 1/2 but participants are only told that there is uncertainty about capacities. We find that average entry is higher under ambiguous information than under risky information. To control for comparison effects and the effects of strategic interaction in the two market environment we also study a two-lottery individual decision problem and one market entry games with ambiguous and risky information. For these two cases the experimental results show no difference between information conditions. Our results are consistent with the notion that complex strategic interaction leads to higher market entry under ambiguous information.
    Keywords: Market entry games; Experiment; Risk; Ambiguity.
    JEL: D81 C92 M2 L1 C72
    Date: 2010–08–14
  8. By: ONORI, Daria (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium; University of Rome "La Sapienza", Faculty of Economics, I-00161 Rome, Italy)
    Abstract: In this paper we modify a standard quality ladder model by assuming that R&D is driven by outsider firms and the winners of the race sell licenses over their patents, instead of entering directly the inter- mediate good sector. As a reward they get the aggregate profit of the industry. Moreover, in the intermediate good sector firms compete à la Cournot and it is assumed that there are spillovers represented by strategic complementarities on costs. Our goal is to prove that there exists an interval of values of the spillover parameter such that the relationship between competition and growth is an inverted-U-shape.
    Keywords: quality ladder, Cournot oligopoly, strategic complementarities, competition and growth
    JEL: L13 L16 O31 O52
    Date: 2010–07–01
  9. By: LEFOUILI, Yassine (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium); ROUX, Catherine (University of Lausanne, Faculty of Business and Economics, CH-1015 Lausanne-Dorigny, Switzerland)
    Abstract: We examine the effect of the Amnesty Plus policy on the incentives of firms to engage in cartel activities. Amnesty Plus is aimed at attracting amnesty applications by encouraging firms, convicted in one market, to report their collusive agreements in other markets. It has been vigorously advertised that Amnesty Plus weakens cartel stability. We show to the contrary that Amnesty Plus may not have this desirable effect, and, if improperly designed, may even stabilize a cartel. We suggest a simple discount-setting rule to avoid this anticompetitive effect.
    Keywords: Amnesty Plus, Leniency program, multimarket contact, antitrust policy
    JEL: K21 K42 L41
    Date: 2010–05–01
  10. By: Sauvagnat, Julien
    Abstract: We present a model where the Antitrust Authority is privately informed about the strength of the case against a given cartel. In this context, the Antitrust Authority may obtain cartel members' confessions even when it opens an investigation knowing that it has no chance to find hard evidence. More generally, we show that offering leniency allows to raise the conviction rate, which in turn enhances cartel desistance and cartel deterrence. A second contribution of the paper is to show that the optimal leniency scheme involves a single informant rule. That is, amnesty should be given only if a unique cartel member reports information.
    Keywords: Antitrust law and policy; Cartels; Collusion; Self-reporting
    JEL: K21 K42 L41
    Date: 2010–09–16
  11. By: Youri Chassin; Marcelin Joanis
    Abstract: With assertion of collusive behavior in public construction projects, this report looks at the best practices meant to detect and to deter collusion in procurement. Based on regulatory frameworks, an overview of actual processes in public procurement and of construction industry regulation is explored. The economic analysis of tender as a bidding process, and of a cartel's internal logic, helps understand the impact of collusive behavior in public procurement. Also, drawing on best practices, this report suggests the means to detect and to deter collusion with improvements to the Québec's public procurement framework. <P>Dans la foulée d'allégations de collusion dans les contrats publics en construction, le présent rapport s'intéresse aux meilleures pratiques visant à détecter et prévenir la collusion dans les marchés publics. Sur la base des cadres réglementaires spécifiques, un survol des pratiques actuelles dans les marchés publics et de l'organisation du secteur de la construction est proposé. L'analyse économique de l'appel d'offres comme forme d'enchère, et du fonctionnement d'un cartel, permet aussi de mieux comprendre l'impact de la collusion dans les marchés publics. Ce rapport propose finalement, à partir d'un ensemble de pratiques reconnues, les moyens de détecter et de prévenir la collusion et des pistes d'action à mettre en place dans le cadre des marchés publics québécois.
    Keywords: Collusion, cartel, construction, contracts, public bodies, public procurement, tenders, bidding, competition, best practices, bid-rigging, formation., Collusion, cartel, construction, contrats, organismes publics, marchés publics, appel d'offres, enchère, concurrence, meilleures pratiques, truquage d'offres, soumissions concertées, formation
    Date: 2010–09–01
  12. By: Bardey, David; Bourgeon, Jean Marc
    Abstract: We develop a model in which two insurers and two health care providers compete for a fixed mass of policyholders. Insurers compete in premium and offer coverage against financial consequences of health risk. They have the possibility to sign agreements with providers to establish a health care network. Providers, partially altruistic, are horizontally differentiated with respect to their physical address. They choose the health care quality and compete in price. First, we show that policyholders are better off under a competition between conventional insurance rather than under a competition between integrated insurers (Managed Care Organizations). Second, we reveal that the competition between a conventional insurer and a Managed Care Organization (MCO) leads to a similar equilibrium than the competition between two MCOs characterized by a different objective i.e. private versus mutual. Third, we point out that the ex ante providers' horizontal differentiation leads to an exclusionary equilibrium in which both insurers select one distinct provider. This result is in sharp contrast with frameworks that introduce the concept of option value to model the (ex post) horizontal differentiation between providers.
    Keywords: Health care network; horizontal differentiation; health care quality
    JEL: I11 L11 L14 L42
    Date: 2010–08–11
  13. By: Bardey, David; Canta, Chiara; Lozachmeur, Jean-Marie
    Abstract: This paper analyzes the regulation of payment schemes for health care providers competing in both quality and product differentiation of their services. The regulator uses two instruments: a prospective payment per patient and a cost reimbursement rate. When the regulator can only use a prospective payment, the optimal price involves a trade-off between the level of quality provision and the level of horizontal differentiation. If this pure prospective payment leads to underprovision of quality and overdifferentiation, a mixed reimbursement scheme allows the regulator to improve the allocation efficiency. This is true for a relatively low level of patients’transportation costs. We also show that if the regulator cannot commit to the level of the cost reimbursement rate, the resulting allocation can dominate the one with full commitment. In particular, some cost reimbursement might be optimal even for higher levels of transportation costs.
    JEL: I18 L51
    Date: 2010–03
  14. By: Michiel Bijlsma; Pierre Koning; Victoria Shestalova; Ali Aouragh
    Abstract: The paper focuses on the relationship between competition and quality in the Dutch hospital sector. We analyse the period of 2004-2008, in which a healthcare reform took place in the Netherlands, introducing competition in the healthcare sector. The increased attention to hospital quality and its growing importance in a new institutional environment have resulted in a gradual increase of the voluntary disclosure of quality indicators by Dutch hospitals. We use panel data on Dutch general and academic hospitals in 2004-2008, including both process indicators (e.g., share of operation cancellations on short notice and share of diagnoses within 5 days) and outcome indicators (e.g., mortality rates) of hospital quality. We take the correlation between the disclosure decision and the level of the disclosed quality indicators explicitly into account by estimating a bivariate model. We find that competition explains differences in performance on process indicators, but not on outcome indicators.
    Keywords: competition in healthcare; quality; voluntary disclosure
    JEL: I1 L8 H4
    Date: 2010–09
  15. By: Vittoria Cerasi (Bicocca University); Barbara Chizzolini (Bocconi University); Marc Ivaldi (Toulouse School of Economics and EHESS, Toulouse University)
    Abstract: This paper analyses the relation between competition and concentration in the banking sector. The empirical answer is given by testing a monopolistic competition model of bank branching behaviour on individual bank data at county level (départements and provinces) in France and Italy. We propose a measure of the degree of competiveness in each local market that is function also of market structure indicators. We then use the econometric model to evaluate the impact of horizontal mergers among incumbent banks on competition and discuss when, depending on the pre-merger structure of the market and geographic distribution of branches, the merger is anti-competitive. The paper has implications for competition policy as it suggests an applied tool to evaluate the potential anti-competitive impact of mergers.
    Keywords: Banking Industry, Competition and Market Structure, Merger Policy
    JEL: G21 L13 L59
    Date: 2010–07
  16. By: Donze, Jocelyn; Dubec, Isabelle
    Abstract: In Australia, on the 3rd of March 2009, the interchange fees on shared ATM transactions were removed and replaced by fees directly set and received by the ATM owners. We develop a model to study how the entry of independent ATM deployers (IADs) aspects welfare under this direct charging scheme. Paradoxically, we show that the IAD entry benefits banks. It may be good for consumers if they sufficiently value the associated growth of the ATM network.
    JEL: G2 L1
    Date: 2010–06–09
  17. By: Carlos F. Alves (CEF.UP, Faculdade de Economia, Universidade do Porto); Cristina Barbot (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: Using a theoretical model, we examine both the relationship between a downstream dominant firm’s market share and an upstream monopoly’s Lerner index and the relationship between upstream and downstream price elasticities of demand, in a regulated industry context. We undertake an empirical study that confirms our theoretical predictions, namely that the market share of a leader downstream firm is significant in explaining the upstream producers’ Lerner indexes. Also in accordance with the results of the theoretical model, the Lerner index is negatively influenced by the competition that suppliers face and by the level of economies of density, amongst other variables.
    Keywords: vertical relations, buyers’ market power
    Date: 2010–09

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