nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒11‒13
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Transparency, price-dependent demand and product variety By Gu, Yiquan; Wenzel, Tobias
  2. Countervailing power and dynamic efficiency By Inderst, Roman; Wey, Christian
  3. Private benefits and market competition By Jacques Thépot
  4. Downstream mergers in a vertically differentiated unionized oligopoly By Borja Mesa Sánchez
  5. Vertical mergers, foreclosure and raising rivals' costs: Experimental evidence By Normann, Hans-Theo
  6. Price competition between subsidized organizations By Bouckaert J.; De Borger B.
  7. Legal and illegal cartels in Germany between 1958 and 2004 By Haucap, Justus; Heimeshoff, Ulrich; Schultz, Luis Manuel
  8. Network Neutrality or Internet Innovation? By Yoo, Christopher S.
  9. Access regulation, competition, and broadband penetration: an international study By Bouckaert J.; van Dijk Th.; Verboven F.
  10. Wettbewerb im deutschen Mobilfunkmarkt By Haucap, Justus; Heimeshoff, Ulrich; Stühmeier, Torben
  11. Deregulation of shopping hours: The impact on independent retailers and chain stores By Wenzel, Tobias
  12. Consumers and sellers heterogeneity, search costs and spatial price dispersion in retail food markets By Anania, Giovanni; Nistico, R
  13. First filter test of market power in Finnish food retailing sector By Niemi, Jyrki; Xing, Liu
  14. Detecting Market Power Along Food Supply Chains: Evidence From the Fluid Milk Sector in Italy By Cavicchioli, D.
  15. Do banks benefit from internationalization? Revisiting the market power-risk nexus By Buch, Claudia M.; Koch, Cathérine Tahmee; Koetter, Michael
  16. What do foreigners want? Evidence from;targets in bank cross-border M&As By Stafano Caiazza; Andrew Clare; Alberto Franco Pozzolo
  17. Regulation of pharmaceutical prices: Evidence from a reference price reform in Denmark By Kaiser, Ulrich; Mendez, Susan J.; Rønde, Thomas
  18. The Effects of Increased Competition in a Vertically Separated Railway Market By Markus Lang; Marc Laperrouza; Matthias Finger
  19. Quality and welfare in a mixed duopoly with regulated prices: The case of a public and a private hospital By Herr, Annika
  20. The Effect of Market Entry on Innovation: Evidence from UK University Incubators By Christian Helmers
  21. Initial Allocation Effects in Permit Markets with Bertrand Output Oligopoly By Calford, Evan M.; Heinzel, Christoph; Betz, Regina

  1. By: Gu, Yiquan; Wenzel, Tobias
    Abstract: This paper revisits the relationship between transparency on the consumer side and product variety as analyzed in Schultz (2009). We identify two welfare effects of transparency. More transparency decreases price-cost margins which is beneficial forwelfare. On the other hand, more transparency reduces variety which can be positive or negative for welfare. Overall, more transparency is always welfareimproving. --
    Keywords: Market Transparency,Product Variety,Salop Model
    JEL: L13 L15 L40
    Date: 2010
  2. By: Inderst, Roman; Wey, Christian
    Abstract: This paper studies the impact of buyer power on dynamic efficiency. We consider a bargaining model in which buyer power arises endogenously from size and may impact on a supplier's incentives to invest in lower marginal cost. We challenge the view frequently expressed in policy circles that the exercise of buyer power stifles suppliers' incentives. Instead, we find that the presence of larger buyers keeps a supplier 'more on his toes' and induces him to improve the competitiveness of his offering, in terms of both price and quality, relative to buyers' alternative options. --
    Keywords: Buyer Power,Countervailing Power,Dynamic Efficiency
    Date: 2010
  3. By: Jacques Thépot (LaRGE Research Center, Université de Strasbourg)
    Abstract: This paper deals with corporate governance issues and competition policy. The impact of private benefits extraction on the values of oligopolistic firms is analyzed. Private benefits are assumed to generate costs which create price distortion on the product market. For a wide range of industry concentrations, we prove that this may affect the profit (i.e. the value) of the firms in a positive sense since the intensity of rivalry is reduced by the price distortion. Antitrust implications are discussed. In oligopoly, private benefits extraction may enhance the profits while still generating a welfare loss: this suggests that corporate governance cannot be divorced from competiton policy in industries where managerial opportunism generates operating costs.
    Date: 2010
  4. By: Borja Mesa Sánchez (Dpto. Fundamentos del Análisis Económico)
    Abstract: In the context of an international unionized oligopoly, with vertical differentiation and downstream and upstream firms locked in a bilateral monopoly, the pattern of downstream mergers is investigated. In such a setting, a downstream merger leads to a reduction in the price of the inputs. Such reduction is greater the more homogeneous the participants’ products are. However, it turns out that most of the market structure equilibria consist of mergers among differentiated producers. I find that firms’ strategic behaviour impedes mergers between similar producers, avoiding that input prices fall to their marginal costs. Given that firms can be harmed by rivals’ mergers, through the important reduction in input prices that those trigger, an scenario of preemptive mergers emerges. A brief social welfare analysis is also presented. It is shown that the market structure outcome is never socially optimal, neither in terms of consumer surplus nor social welfare. Nevertheless, the optimum could be achieved if antitrust authorities block some strategic mergers, precisely those involving more than two firms.
    Keywords: mergers, vertical differentiation, unionized oligopoly
    JEL: J51 L13 L15 L41 L44
    Date: 2010–10
  5. By: Normann, Hans-Theo
    Abstract: The hypothesis that vertically integrated firms have an incentive to foreclose the input market because foreclosure raises its downstream rivals' costs is the subject of much controversy in the theoretical industrial organization literature. A powerful argument against this hypothesis is that, absent commitment, such foreclosure cannot occur in Nash equilibrium. The laboratory data reported in this paper provide experimental evidence in favor of the hypothesis. Markets with a vertically integrated firm are signifiantly less competitive than those where firms are separate. While the experimental results violate the standard equilibrium notion, they are consistent with the quantalresponse generalization of Nash equilibrium. --
    Keywords: experimental economics,foreclosure,quantal response equilibrium,raising rival's costs,vertical integration
    JEL: C72 C90 D43
    Date: 2010
  6. By: Bouckaert J.; De Borger B.
    Abstract: Many firms and organizations compete for customers while at the same time receiving substantial funding from outside sources, such as government subsidies. In this paper, we study the effects of two commonly observed, alternative subsidy systems on the behavior of price-competing firms. Specifically, we compare an open-ended per-unit price subsidy with a closed-ended subsidy, allocated according to the firms’ market shares. We find that, holding the total subsidy budget constant, the open-ended subsidy results in fiercer price competition, lower prices, higher output, and lower profits than the closed-ended, market-share based alternative. Second, the open system yields higher overall welfare for relatively modest subsidies and limited substitutability between goods; the closed system performs better at relatively high subsidy levels and when goods are closer substitutes. Third, a market-share based subsidy makes collusive behavior between firms much harder. Our results, therefore, suggest a potential trade-off between short-run and long-run objectives: subsidies designed to widen participation may stimulate collusive behavior. These findings may have important
    Date: 2010–08
  7. By: Haucap, Justus; Heimeshoff, Ulrich; Schultz, Luis Manuel
    Abstract: This paper offers a new and broad insight into the landscape of German cartels, utilizing a unique dataset of all illegal horizontal cartels detected by the German Federal Cartel Office (FCO) between 1958 and 2004 and all legal cartels authorized during the same time period. We also provide the first comparison of legal and illegal cartels in Germany. Legal cartels tend to last longer and to have more members than illegal cartels, while there are little differences with respect to the industries involved. The construction industries are the most cartelized sectors in Germany (29.8% of all legal cartels, 43.2% of all illegal cartels) followed by manufacture of metals and machinery (21.9% of all legal cartels, 30.6% of all illegal cartels). How the number of cartel members affects the duration of cartels is ambiguous. Cartels with no more than 12 members tend to last longer than cartels with more than 12 members. However, cartels with 5 to 12 members also tend to last longer than cartels with less than 5 members. --
    Date: 2010
  8. By: Yoo, Christopher S.
    Abstract: Over the past two decades, the Internet has undergone an extensive re-ordering of its topology that has resulted in increased variation in the price and quality of its services. Innovations such as private peering, multihoming, secondary peering, server farms, and content delivery networks have caused the Internet’s traditionally hierarchical architecture to be replaced by one that is more heterogeneous. Relatedly, network providers have begun to employ an increasingly varied array of business arrangements and pricing. This variation has been interpreted by some as network providers attempting to promote their self interest at the expense of the public. In fact, these changes reflect network providers’ attempts to reduce cost, manage congestion, and maintain quality of service. Current policy proposals to constrain this variation risk harming these beneficial developments.
    Date: 2010–04
  9. By: Bouckaert J.; van Dijk Th.; Verboven F.
    Abstract: The evolution of broadband penetration has shown substantial differences between OECD countries. This paper empirically investigates to what extent different forms of regulated competition explain these international differences. Three modes of competition are distinguished between broadband internet access providers that result from regulatory policies: (1) inter-platform competition; (2) facilities-based intra-platform competition; and (3) service-based intra-platform competition. In most countries these forms of competition co-exist although their intensity varies from country to country. Intra-platform competition may differ among countries depending on the degree of mandatory access obligations imposed by the regulator on the dominant network firm. Based on a sample of OECD countries, inter-platform competition has been a main driver of broadband penetration. The two types of intra-platform competition have a considerably smaller effect on broadband penetration. Linking these findings back to access regulation suggests that the “stepping stone” or “ladder of investment” theories might not provide the justification to impose extensive mandatory access obligations on DSL incumbents.
    Date: 2010–08
  10. By: Haucap, Justus; Heimeshoff, Ulrich; Stühmeier, Torben
    Abstract: This paper studies competition in the German market for mobile telecommunications, motivated by recent suggestions that T-Mobile and Vodafone possess a position of collective dominance. Allegedly, their position of joint dominance is secured through a combination of first-mover advantages and discrimination between on-net and off-net prices. While our qualitative analysis remains inconclusive, as some factors tend to favour collusion while others make collusion more difficult to sustain, our empirical analysis suggests that T-Mobile and Vodafone cannot act independently of their smaller rivals, but that they are disciplined by their smaller competitors' offerings. --
    Keywords: Wettbewerb,Mobilfunk,Telekommunikation,kollektive Marktbeherrschung
    JEL: L13 L41 L96
    Date: 2010
  11. By: Wenzel, Tobias
    Abstract: This paper studies shopping hour decisions by retail chains and independent competitors. We use a Salop-type model where retailers compete in prices and shopping hours. Our results depend significantly on efficiency differences between retail chain and independent retailer. If the efficiency difference is small, the independent retailer may choose longer shopping hours than the retail chain and may gain from deregulation at the expense of the retail chain. The opposite result emerges when the efficiency difference is large. Then, the retail chain may benefit whereas the independent retailer loses from deregulation. --
    Keywords: business hours,retailing,deregulation
    JEL: L13 L51 L81
    Date: 2010
  12. By: Anania, Giovanni; Nistico, R
    Abstract: â Price dispersion, i.e. a homogeneous product sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, side by side with large supermarkets. The extent of observed price dispersion is quite high, suggesting that, despite their large number, monopolistic competition prevails among sellers as a result of the heterogeneity of services offered. When prices in an urban area (where the spatial concentration of sellers is much higher and consumer search costs significantly lower) have been compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition did not yield lower prices; quite the contrary, they were, on average, higher for 11 of the 14 products considered. Supermarkets proved to be often, but not always, less expensive than traditional retailers, although average savings associated to food shopping at supermarkets were extremely low. Finally, the results of the study suggest that sellers behave differently in their pricing decision strategies; these differences emerge both at the firm level and, for supermarkets, within the same chain. The fact that products considered were homogeneous, purchases frequently repeated, the number of sellers large, and search costs relatively low, did not suffice to keep price dispersion low. Based on the results presented in the paper, it is clear that more important in explaining price dispersion is the contemporaneous heterogeneity of retailers (in terms of services rendered) and consumers (in terms of their propensity to search and shopping preferences), which makes it possible for a monopolistic competition structure of the market to emerge and for small traditional food retail stores to remain in business.
    Keywords: Price dispersion, retail pricing, food markets., Agribusiness, Agricultural and Food Policy, Community/Rural/Urban Development, Food Consumption/Nutrition/Food Safety, Labor and Human Capital,
    Date: 2010–10–27
  13. By: Niemi, Jyrki; Xing, Liu
    Abstract: Buyer power and competition policy in food supply chains has emerged as an important economic issue and a highly sensitive item on the policy agenda all around the world. Claims that large retailers and food companies are depressing farm prices because of their market power have been made in many countries around the world (Swinnen and Vandeplas, 2009). Arising concentration of retailer sector increases the concern of existence and gradual growth of buyer power in this sector. The key reason is that the growing buyer power may have the effect of considerably distorting both retail and producer competition, and eventually it may damage economic welfare. In Finland, the increased concentration of the retail sector, with fewer outlets and the growth of the large supermarket chains, has been particularly fast. The two leading Finnish retail chains of food and daily goods increased their market share from 55 per cent in 1990 to nearly 75 per cent in 2008 (Niemi and Ahlstedt 2009).. The purpose of this paper is to investigate the possible existence of buyer power in Finnish food retail food industry. In details, we follow an approach used by Lloyd et al (2009) to measures oligopoly and oligopsony market power in the Finnish food retail industry. This offers a âfirst-filterâ test of price data that may be used as part of the preliminary analyses into the presence of buyer power in food markets. In practice, we apply a vector error correction mechanism (VECM) to perform two-stage tests: First is to test the hypothesis of cointegration between the supply and demand price indices with expected signs for the coefficients irrespective of the degree of retail competition; second is to test the null hypothesis of the perfect competition. The model also serves as a useful device for characterising how prices are transmitted in food market, albeit in simplified form.
    Keywords: concentration, market power, VECM, Agribusiness, Agricultural and Food Policy, Community/Rural/Urban Development, Food Consumption/Nutrition/Food Safety, Labor and Human Capital,
    Date: 2010–10–27
  14. By: Cavicchioli, D.
    Abstract: This paper applies to Italian milk supply chain a theoretically grounded methodology able to detect for the presence of market power along the supply chain itself using easily available data. The model, developed by Lloyd et al. brings to estimate a quasi-reduced form equation in which consumer price is regressed against producer price, marketing costs and demand and supply shifters. When market power is exerted along the supply chain both of the shifters are statistically significant and signed accordingly to model prescriptions, while with perfect competition none of the shifters is significant. 29 time series have been used in the analysis, within three different dataset covering partially or totally overlapped time periods. Variables having the same order of integration have been used within an Error Correction Model framework. Among all the variables having one cointegrating vector, only those with statistically significant parameters and signed according to model prescriptions have brought to conclusive results, detecting market power exertion along the Italian milk supply chain during two over the three periods examined. The present methodology may be useful in competition policy analysis as a preliminary âfastâ test on food supply chain conduct. For this purpose theoretical model validation is however necessary using Monte Carlo simulations. In this line, further improvements relates to explicitly modeling food processing-retailing relationships in order to detect for market power on each segment of the supply chain.
    Keywords: market power, cointegration, supply chain., Agribusiness, Agricultural and Food Policy, Community/Rural/Urban Development, Food Consumption/Nutrition/Food Safety, Labor and Human Capital,
    Date: 2010–10–27
  15. By: Buch, Claudia M.; Koch, Cathérine Tahmee; Koetter, Michael
    Abstract: Recent developments on international financial markets have called the benefits of bank globalization into question. Large, internationally active banks have acquired substantial market power, and international activities have not necessarily made banks less risky. Yet, surprisingly little is known about the actual link between bank internationalization, bank risk, and market power. Analyzing this link is the purpose of this paper. We jointly estimate the determinants of risk and market power of banks, and we analyze the effects of changes in terms of the number of foreign countries (the extensive margin) and the volume of foreign assets (the intensive margin). Our paper has four main findings. First, there is a strong negative feedback effect between risk and market power. Second, banks with higher shares of foreign assets, in particular those held through foreign branches, have higher market power at home. Third, holding assets in a large number of foreign countries tends to increase bank risk. Fourth, the impact of internationalization differs across banks from different banking groups and of different size. --
    Keywords: market power-risk nexus,international banking,micro-data,Germany
    JEL: F3 G21
    Date: 2010
  16. By: Stafano Caiazza (Universit… Tor Vergata di Roma); Andrew Clare (Cass Business School, London); Alberto Franco Pozzolo (University of Molise, Centro Studi Luca d'Agliano)
    Abstract: Given the recent traumatic events in the world?s banking industry it is important to understand what drives bankers to create larger and larger, often multinational, banking groups. In this paper we investigate whether the targets in cross-border bank M&As are materially different from those banks targeted in domestic M&A deals. To address this question we use a sample of over 24,000 banks from more than 100 countries. We begin by estimating the probability that a bank will be a M&A target; this probability is based upon both bank specific and country specific characteristics. The sample also naturally includes banks that were not involved in any M&A deal, this set of banks acts as a control sample for the study. We then estimate a multinomial model that distinguishes between (i) targets in domestic operations, (ii) targets in cross-border operations and (iii) non-targets. The main message of the paper is that, with few exceptions, domestic and foreign investors target similar banks. In particular, contrary to what one might expect, bank size does not affect differently the probability of being a domestic or a cross-border target, but it has a positive and highly significant effect in both cases. What differs between national and international M&As are the characteristics of the countries where banks operate. On average, banking systems characterized by lower leverage, higher cost inefficiency and lower liquidity are more likely to be targets of cross-border acquisitions, while none of this characteristics affects the likelihood of being acquired domestically.
    Keywords: M&As, bank, bank internationalisation
    JEL: G15 G21 G34
    Date: 2010–11
  17. By: Kaiser, Ulrich; Mendez, Susan J.; Rønde, Thomas
    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
  18. By: Markus Lang; Marc Laperrouza; Matthias Finger
    Abstract: This paper presents a game-theoretic model of a liberalized railway market, in which train operation and ownership of infrastructure are vertically separated. We analyze how the regulatory agency will 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 raising public funds is costly to society.
    Keywords: Access charge, optimal pricing, railways, regulation, vertical integration
    JEL: D40 L22 L51 L92
    Date: 2010–10
  19. By: Herr, Annika
    Abstract: Hospital markets are often characterised by price regulation and the existence of different ownership types. Using a Hotelling framework, this paper analyses the effect of heterogeneous objectives of the hospitals on quality differentiation, profits, and overall welfare in a price regulated duopoly with exogenous symmetric locations. In contrast to other studies on mixed duopolies, this paper shows that in this framework privatisation of the public hospital may increase overall welfare. This holds if the public hospital is similar to the private hospital or less efficient and competition is low. The main driving force is the single regulated price which induces under-(over-)provision of quality of the more (less) efficient hospital compared to the first-best. However, if the public hospital is sufficiently more efficient and competition is fierce, a mixed duopoly outperforms both a private and a public duopoly due to an equilibrium price below (above) the price of the private (public) duopoly. This medium price discourages overprovision of quality of the less efficient hospital and - together with the non-profit objective - encourages an increase in quality of the more efficient public hospital. --
    Keywords: mixed oligopoly,price regulation,quality,hospital competition
    JEL: L13 I18 H42
    Date: 2010
  20. By: Christian Helmers
    Abstract: This paper investigates the effect of market entry of new firms on incumbent firms'innovative activity measured as patent applications. The basic assumption is that the effect ofentry varies by geographical distance between entrants and incumbents due to the presence oflocalized unobserved spillovers. In order to avoid endogeneity problems commonlyassociated with the timing of entry and entrants' location choice, I analyze entry induced bythe establishment of university business incubators, which are usefully exogenous in time andspace. The results show that entry has a statistically and economically significantly positivestrategic effect on incumbent patenting which is attenuated by the geographical distancebetween entrant and incumbent.
    Keywords: Patents, market entry, incubators, spillover
    JEL: L22 L26 O34
    Date: 2010–09
  21. By: Calford, Evan M.; Heinzel, Christoph; Betz, Regina
    Abstract: We analyse the eciency eects of the initial permit allocation given to rms with market power in both permit and output market. We examine two models: a long- run model with endogenous technology and capacity choice, and a short-run model with xed technology and capacity. In the long run, quantity pre-commitment with Bertrand competition can yield Cournot outcomes also under emissions trading. In the short run, Bertrand output competition reproduces the eects derived under Cournot competition, but displays higher pass-through prots. In a second-best setting of overallocation, a tighter emissions target tends to improve permit-market eciency in the short run.
    Keywords: Emissions trading, Initial permit allocation, Bertrand competition, EU ETS, Endogenous technology choice, Kreps and Scheinkman, Resource /Energy Economics and Policy, L13, Q28, D43,
    Date: 2010–03

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