nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒11‒20
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Multimarket Contact in Vertically Related Markets By Talat S. Genc; Sencer Ecer
  2. The Inefficiency of Market Transparency – A Model with Endogenous Entry By Yiquan Gu; Burkhard Hehenkamp
  3. Advance-Purchase Discounts as a Price Discrimination Device. . By Nocke, Volker; Peitz, Martin; Rosar, Frank
  4. Sales, Quantity Surcharge, and Consumer Inattention By Sofronis Clerides; Pascal Courty
  5. Collusion through Joint R&D: An Empirical Assessment By Tomaso Duso; Lars-Hendrik Roeller; Jo Seldeslachts
  6. Too Much Information Sharing? Welfare Effects of Sharing Acquired Cost Information in Oligopoly By Juan José Ganuza; Jos Jansen
  7. Pre-play communication in Cournot competition: An experiment with students and managers By Waichman, Israel; Requate, Till; Siang, Ch'ng Kean
  8. Community Structure and Market Outcomes: A Repeated Games in Networks Approach By Itay Fainmesser
  9. Cherry Picking or Driving Out Bad Management: Foreign Acquisitions in Turkish Banking By Canan Yildirim
  10. Does Hospital Competition Save Lives? Evidence from the English NHS Patient Choice Reforms By Zack Cooper; Steve Gibbons; Simon Jones; Alistair McGuire
  11. Supply Function Equilibria with Capacity Constraints and Pivotal Suppliers By Talat S. Genc; Stanley S. Reynolds
  12. Trade Liberalisation, Market Power abd Scale Efficiency in Indian Industry By Pulapre Balakrishnan; K. Pushpangadan; M. Suresh Babu

  1. By: Talat S. Genc (Department of Economics,University of Guelph); Sencer Ecer (Department of Economics, Istanbul Technical University)
    Abstract: We analyze collusion in two comparable market structures. In the first market structure only one firm is vertically integrated; there is one more independent firm in the upstream industry and another independent firm in the downstream industry. In the second market structure, there are only two vertically integrated firms that can trade among themselves in the intermediate good market. The second market structure mimics markets like the California gasoline market where firms vertically integrated through refinery, and retail markets. We rank these two market structures in terms of ease of collusion and show that while under some circumstances collusion is not possible in the market with one vertically integrated firm, collusion is possible in the market structure with two vertically integrated firms. We conclude that vertical (multimarket) contact facilitates collusion and vertical mergers suspected to lead to subsequent vertical mergers in an industry should receive higher antitrust scrutiny relative to single isolated vertical mergers.
    Keywords: Multimarket; collusion; vertical integration; gasoline markets
    JEL: D43 L11 L94
    Date: 2010
  2. By: Yiquan Gu; Burkhard Hehenkamp
    Abstract: Including the entry decision in a Bertrand model with imperfectly informed consumers, we introduce a trade-off at the level of social welfare. On the one hand, market transparency is beneficial when the number of firms is exogenously given. On the other, a higher degree of market transparency implies lower profits and hence makes it less attractive to enter the market in the first place. It turns out that the second effect dominates: too much market transparency has a detrimental effect on consumer surplus and on social welfare.
    Keywords: Market transparency; endogenous entry; homogenous products
    JEL: D43 L13 L15
    Date: 2010–11
  3. By: Nocke, Volker; Peitz, Martin; Rosar, Frank
    Abstract: In an intertemporal setting in which individual uncertainty is resolved over time, advancepurchase discounts can serve to price discriminate between consumers with different expected valuations for the product. Consumers with a high expected valuation purchase the product before learning their actual valuation at the offered advance-purchase discount; consumers with a low expected valuation will wait and purchase the good at the regular price only in the event where their realized valuation is high. We characterize the profitmaximizing pricing strategy of the monopolist. Furthermore, adopting a mechanism design perspective, we provide a necessary and sufficient condition under which advance-purchase discounts implement the monopolist’s optimal mechanism.
    JEL: D42 L12
    Date: 2010
  4. By: Sofronis Clerides; Pascal Courty
    Abstract: Quantity surcharges occur when firms market a product in two sizes and offer a promotion on the small size: the large size then costs more per unit than the small one. When quantity surcharges occur the sales of the large size decrease only slightly despite the fact that the small size is a cheaper option - a clear arbitrage opportunity. This behavior is consistent with the notion of rationally inattentive consumers that has been developed in models of information frictions. We discuss implications for consumer decision making, demand estimation, and firm pricing.
    Keywords: quantity surcharge, sales, promotions, consumer inattention, quantity discounts, nonlinear pricing.
    Date: 2010–11
  5. By: Tomaso Duso (Humboldt University Berlin and Wissenschaftszentrum Berlin (WZB)); Lars-Hendrik Roeller (European School of Management and Technology (ESMT) and Humboldt University Berlin); Jo Seldeslachts (University of Amsterdam)
    Abstract: This paper tests whether upstream R&D cooperation leads to downstream collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the US National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors -created through firms being members in several RJVs at the same time- are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing.
    Keywords: Research Joint Ventures; Innovation; Collusion; NCRA
    JEL: K21 L24 L44 O32
    Date: 2010–11–08
  6. By: Juan José Ganuza (Universitat Pompeu Fabra, Department of Economics and Business); Jos Jansen (Max Planck Institute for Research on Collective Goods)
    Abstract: By using general information structures and precision criteria based on the dispersion of conditional expectations, we study how oligopolists’ information acquisition decisions may change the effects of information sharing on the consumer surplus. Sharing information about individual cost parameters gives the following trade-off in Cournot oligopoly. On the one hand, it decreases the expected consumer surplus for a given information precision, as the literature shows. On the other hand, information sharing increases the firms’ incentives to acquire information, and the consumer surplus increases in the precision of the firms’ information. Interestingly, the latter effect may dominate the former effect.
    Keywords: Oligopoly, information acquisition, information sharing, Information structures, Consumer surplus
    JEL: D82 L13 L40 D83
    Date: 2010–09
  7. By: Waichman, Israel; Requate, Till; Siang, Ch'ng Kean
    Abstract: This study investigates the impact of pre-play communication on the outcomes in Cournot duopoly and triopoly experiments, using both students and managers as subjects. Communication is implemented by two different devices, a 'standardized-communication' and a free-communication device. We find that the effect of communication on collusion is larger in duopoly than in triopoly. Moreover, managers behave in a similar way under the two communication devices, while students are more influenced by the free-communication than by the standardized-communication device. In addition, managers select lower aggregate quantities than students, and communication enhances the difference between the subject pools in duopoly but reduces this difference in triopoly. Inspecting individual behavior, in all treatments the output adjustment is significantly correlated with the previous round's best response strategy. In the treatments with communication, the effect of imitation becomes larger and crowds out the effect of myopic best response. Finally, in all treatments duopoly results in more collusion than triopoly. --
    Keywords: artefactual field experiment,subject pools,Cournot oligopoly,managers,cheap talk
    JEL: L13 C93 C72 D43 D21
    Date: 2010
  8. By: Itay Fainmesser
    Abstract: Consider a large market with asymmetric information, in which sellers choose whether to cooperate or deviate and ?cheat?their buyers, and buyers decide whether to re-purchase from di¤erent sellers. We model active trade relationships as links in a buyer-seller network and suggest a framework for studying repeated games in such networks. In our framework, buyers and sellers have rich yet incomplete knowledge of the network structure; allowing us to derive meaningful conditions that determine whether a network is consistent with trade and cooperation between every buyer and seller that are connected. We show that three network features reduce the minimal discount factor necessary for sustaining cooperation: moderate competition, sparseness, and segregation. We ? nd that the incentive constraints rule out networks that maximize the volume of trade and that the constrained trade maximizing networks are in between ?old world? segregated and sparse networks, and a ?global market?
    Keywords: Buyer-Seller networks; repeated games; moral hazard;asymmetric information; trust; cooperation; institutions
    Date: 2010
  9. By: Canan Yildirim (Department of International Finance, Kadir Has University)
    Abstract: This paper analyzes the determinants of cross-border acquisitions and the impact of foreign acquisitions on performance in the Turkish banking sector. The results suggest that foreign banks target relatively better performing banks to acquire, and that post-acquisition performance of the targets does not improve. There is some evidence that both established and newly acquired foreign banks focus on expanding their market shares. Concerning static-ownership effects, the results also show that, in general, foreign-owned and state-owned banks perform as well as private-owned domestic banks. The only exception is with respect to non-performing loans, in that state-owned banks seem to suffer from asset quality problems.
    Date: 2010–11
  10. By: Zack Cooper; Steve Gibbons; Simon Jones; Alistair McGuire
    Abstract: This paper examines whether or not hospital competition in a market with fixedreimbursement prices can prompt improvements in clinical quality. In January 2006, theBritish Government introduced a major extension of their market-based reforms to theEnglish National Health Service. From January 2006 onwards, every patient in England couldchoose their hospital for secondary care and hospitals had to compete with each other toattract patients to secure their revenue. One of the central aims of this policy was to createfinancial incentives for providers to improve their clinical performance. This paper assesseswhether this aim has been achieved and competition led to improvements in quality. For ourestimation, we exploit the fact that choice-based reforms will create sharper financialincentives for hospitals in markets where choice is geographically feasible and that prior to2006, in the absence of patient choice, hospitals had no direct financial incentive to improveperformance in order to attract more patients. We use a modified difference-in-differenceestimator to analyze whether quality improved more quickly in more competitive marketsafter the government introduced its new wave of market-based reforms. Using AMI mortalityas a quality indicator, we find that mortality fell more quickly (i.e. quality improved) forpatients living in more competitive markets after the introduction of hospital competition inJanuary 2006. Our results suggest that hospital competition in markets with fixed prices canlead to improvements in clinical quality.
    Keywords: Health Care, Quality, Competition, Choice, Incentives, Reimbursement
    JEL: I1 L1 R0
    Date: 2010–01
  11. By: Talat S. Genc (Department of Economics,University of Guelph); Stanley S. Reynolds (Department of Economics,University of Arizona)
    Abstract: The concept of a supply function equilibrium (SFE) has been widely used to model generators’ bidding behavior and market power issues in wholesale electricity markets. Observers of electricity markets have noted how generation capacity constraints may contribute to market power of generation firms. If a generation firm’s rivals are capacity constrained then the firm may be pivotal; that is, the firm could substantially raise the market price by unilaterally withholding output. However the SFE literature has not properly analyzed the impact of capacity constraints and pivotal firms on equilibrium predictions. We characterize the set of symmetric supply function equilibria for uniform price auctions when firms are capacity constrained and show that this set is increasing as capacity per firm rises. We provide conditions under which asymmetric equilibria exist and characterize these equilibria. In addition, we compare results for uniform price auctions to those for discriminatory auctions, and we compare our SFE predictions to equilibrium predictions of models in which bidders are constrained to bid on discrete units of output.
    Keywords: supply function equilibrium, pivotal firm, wholesale electricity market
    JEL: D43 L11 L94
    Date: 2010
  12. By: Pulapre Balakrishnan; K. Pushpangadan; M. Suresh Babu
    Abstract: Using information on listed firms in each of the industry groups at the two-digit level within Manufacturing this study investigates whether the radical shift in trade policy in India in 1991 resulted in a reduction in market power and/or an improvement in scale efficiency. They estimate a group-wise production function allowing for firm-specific effects. A plausible estimate of market power is obtained and the assumption of constant returns to scale is mostly rejected. As regards the effects of the trade-policy shock of 1991, evidence of a move to a more competitive market structure or of an improvement in scale efficiency is not widespread across Indian manufacturing. [Working Paper No. 336]
    Keywords: Trade liberalisation; Market power; Scale Economies
    Date: 2010

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