nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒11‒27
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Cumulative Innovation and Competition Policy By Alexander Raskovich; Nathan H. Miller
  2. Bundling revisited: substitute products and inter-firm discounts By Armstrong, Mark
  3. The end of the Bertrand Paradox ?. By Marie-Laure Cabon-Dhersin; Nicolas Drouhin
  4. Sales, Quantity Surcharge, and Consumer Inattention By Sofronis Clerides; Pascal Courty
  5. Regular prices and sales By Paul Heidhues; Botond Koszegi
  6. Heterogeneous Exits: Evidence from New Firms By Masatoshi Kato; Yuji Honjo
  7. Collusion through Joint R&D: An Empirical Assessment By Tomaso Duso; Lars-Hendrik Röller; Jo Seldeslachts
  8. Economic Arguments in U.S. Antitrust and EU Competition Policy: Two Roads Diverged By Stephen Martin
  9. Private Agreements for Coordinating Patent Rights: The Case of Patent Pools By Gallini, Nancy
  10. Horizontal Mergers of Online Firms: Structural Estimation and Competitive Effects By Yonghong An; Michael R Baye; Yingyao Hu; John Morgan
  11. Evaluating Merger Effects in Cable TV Industry in a Difference in Difference Method By Jung, Hyun-Joon and Nahm, Jae
  12. Predation in Off-Patent Drug Markets By Laurent Granier; Sébastien Trinquard
  13. An empirical analysis of the counterfactual: a merger and divestiture in the Australian cigarette industry By Pham, Vivienne; Prentice, David
  14. Europe integrates less than you think: Evidence from the market for corporate control in Europe and the US By Umber, Marc P.; Grote, Michael H.; Frey, Rainer

  1. By: Alexander Raskovich (Economic Analysis Group, Antitrust Division, U.S. Department of Justice); Nathan H. Miller
    Abstract: We model a “new economy” industry where innovation is sequential and monopoly is persistent but the incumbent turns over periodically. In this setting we analyze the effects of “extraction” (e.g., price discrimination that captures greater surplus) and “extension” (conduct that simply delays entry of the next incumbent) on steady-state equilibrium innovation, welfare and growth. We find that extraction invariably increases innovation and welfare growth rates, but extension causes harm under plausible conditions. This provides a rationale for the divergent treatment of single-firm conduct under U.S. law. Our analysis also suggests a rule-of-thumb, consistent with antitrust practice, that innovation proxies welfare.
    Date: 2010–09
  2. By: Armstrong, Mark
    Abstract: This paper extends the standard model of bundling to allow products to be substitutes and for products to be supplied by separate sellers. Whether integrated or separate, firms have an incentive to introduce bundling discounts when demand for the bundle is elastic relative to demand for stand-alone products. Separate firms often have a unilateral incentive to offer inter-firm bundle discounts, although this depends on the detailed form of substitutability. Bundle discounts mitigate the innate substitutability of products, which can relax competition between firms and induce an integrated firm to lower all of its prices when it follows a bundling strategy.
    Keywords: Price discrimination; bundling; oligopoly; loyalty pricing
    JEL: M31 L42 D43
    Date: 2010–11
  3. By: Marie-Laure Cabon-Dhersin (Centre d'Economie de la Sorbonne - Paris School of Economics & Ecole normale supérieure de Cachan); Nicolas Drouhin (Centre d'Economie de la Sorbonne - Paris School of Economics & Ecole normale supérieure de Cachan)
    Abstract: This paper analyzes price competition in the case of two firms operating under constant returns to scale with more than one production factor. Factors are chosen sequentially in a two-stage game implying a convex short term cost function in the second stage of the game. We show that the collusive outcome is the only predictable issue of the whole game i.e. the unique non Pareto-dominated pure strategy Nash Equilibrium. Technically, this paper bridges the capacity constraint literature on price competition with the one of convex cost function, solving the Bertrand Paradox in the line of Edgeworth's research program.
    Keywords: Price competition, collusion, convex cost, Bertrand Paradox, capacity constraint, constant returns-to-scale.
    JEL: L13 D43
    Date: 2010–09
  4. By: Sofronis Clerides (University of Cyprus; CEPR; RCEA); Pascal Courty (University of Victoria; CEPR)
    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
    JEL: L12 L13 D4
    Date: 2010–01
  5. By: Paul Heidhues (ESMT European School of Management and Technology); Botond Koszegi (University of California, Berkeley)
    Abstract: We study the properties of a profit-maximizing monopolist's optimal price distribution when selling to a loss-averse consumer, where (following Koszegi and Rabin (2006)) we assume that the consumer's reference point is her recent rational expectations about the purchase. If it is close to costless for the consumer to observe the realized price of the product, then – in a pattern consistent with several recently documented facts regarding supermarket pricing – the monopolist chooses low and variable “sale” prices with some probability and a high and sticky “regular” price with the complementary probability. Realizing that she will buy at the sale prices and hence that she will purchase with positive probability, the consumer chooses to avoid the painful uncertainty in whether she will get the product by buying also at the regular price. If it is more costly for the consumer to observe the realized price, then – in a pattern consistent with the pricing behavior of some other retailers (e.g. movie theaters) – the monopolist chooses a sticky price and holds no sales. In this case, a sale is less tempting and hence less effective in generating an expectation to purchase with positive probability. We also show that ex-ante competition for loyal consumers leads to sticky pricing while ex-post competition leads to marginal-cost pricing, and discuss several other extensions of the model.
    Keywords: reference-dependent utility, gain-loss utility, loss aversion, sticky prices, sales, supermarket pricing
    JEL: D11 D43 D81 L13
    Date: 2010–11–22
  6. By: Masatoshi Kato (School of Economics, Kwansei Gakuin University); Yuji Honjo (Institute of Economic Research, Hitotsubashi University)
    Abstract: This paper explores heterogeneous exits—bankruptcy, voluntary liquidation, and merger—by focusing on new firms. Using a sample of approximately 16,000 firms founded in Japan during 1997–2004, we examine the determinants of new-firm exit according to forms of exit. Regarding industry-specific characteristics, our findings indicate that new firms in capital-intensive and R&D-intensive industries are less likely to go bankrupt. In industries characterized by large amounts of capital and low price–cost margins, new firms are more likely to exit through voluntary liquidation and merger. Region-specific characteristics, such as regional agglomeration and unemployment rate, have significant effects on the hazards of exit, and their effects vary across different forms of exit. Moreover, we provide evidence that firm-specific characteristics, such as the number of employees, and entrepreneur-specific characteristics, such as educational background and age, play significantly different roles in determining each form of exit.
    Keywords: New firm; exit; bankruptcy; voluntary liquidation; merger; competing risks proportional hazards model.
    Date: 2010–11
  7. By: Tomaso Duso (Humboldt University and Wissenschaftszentrum Berlin (WZB)); Lars-Hendrik Röller (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
  8. By: Stephen Martin
    Abstract: In this paper, I compare economic arguments in U.S. Supreme Court antitrust and EU Court of Justice competition policy decisions on four topics: refusal to deal, predation, vertical contracts, and hor- izontal interfirm relations.
    Date: 2010–10
  9. By: Gallini, Nancy
    Abstract: Inventors and users of technology often enter into cooperative agreements for sharing their intellectual property in order to implement a standard or to avoid costly infringement litigation. Over the past two decades, U.S. antitrust authorities have viewed pooling arrangements that integrate complementary, valid and essential patents to have “pro-competitive benefits†in reducing prices, transactions costs, and the incidence of costly infringement suits. Since patent pools are cooperative agreements, they also have the potential of suppressing competition if, for example, they harbor weak or invalid patents, dampen incentives to conduct research on innovations that compete with the pooled patents, foreclose competition from downstream product or upstream innovation markets, or raise prices on goods that compete with the pooled patents. In synthesizing the ideas advanced in the economic literature, this paper explores whether these antitrust concerns apply to pools with complementary patents. Special attention is given to the U.S. Department of Justice-Federal Trade Commission Guidelines for the Licensing of Intellectual Property (1995) and its application to recent patent pool cases.
    Keywords: Patent pools, intellectual property, antitrust economics
    Date: 2010–11–17
  10. By: Yonghong An (Johns Hopkins University); Michael R Baye (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Yingyao Hu (Johns Hopkins University); John Morgan (University of California - Berkeley)
    Abstract: This paper (1) presents a general model of online price competition, (2) shows how to structurally estimate the underlying parameters of the model when the number of competing firms is unknown or in dispute, (3) estimates these parameters based on UK data for personal digital assistants, and (4) uses these estimates to simulate the competitive effects of horizontal mergers. Our results suggest that competitive effects in this online market are more closely aligned with the simple homogeneous product Bertrand model than might be expected given the observed price dispersion and number of firms. Our estimates indicate that so long as two firms remain in the market post merger, the average transaction price is roughly unaffected by horizontal mergers. However, there are potential distributional effects; our estimates indicate that a three-to-two merger raises the average transaction price paid by price sensitive "shoppers" by 2.88 percent, while lowering the average transaction price paid by consumers "loyal" to a particular firm by 1.37 percent.
    JEL: L0
    Date: 2010–07
  11. By: Jung, Hyun-Joon and Nahm, Jae (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: Between 2005 and 2008, there had been active mergers between cable system operators in Korean. By analyzing subscription fees changes between 2004 and 2008 in a panel data set, we evaluate the merger effects. We find that mergers had occurred in relatively low prices areas; the price increase was much higher in areas where merger had occurred than in areas where competition between multiple SO had remained.
    Keywords: Merger effects, Difference in Difference, Cable Industry
    JEL: C21 L41 L52
    Date: 2010
  12. By: Laurent Granier (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Sébastien Trinquard (UNOCAM - Union nationale des organismes d'assurance maladie complémentaire - UNOCAM)
    Abstract: In 2009, Sanofi-Aventis, whose generic subsidiary is Winthrop, merges with the generic firm, Zentiva. This paper fills the gap in the theoretical literature concerning mergers in pharmaceutical markets. To prevent generic firms from increasing their market share, some brand-name firms produce generics themselves, called pseudo- generics. We develop a Cournot duopoly model by considering the pseudo-generics production as a mergers' catalyst. We show that a brand-name company always has an incentive to purchase its competitor. The key insight of this paper is that the brand-name laboratory can increase its merger gain by producing pseudo-generics beforehand. In some cases, pseudo-generics would not otherwise be produced and this production is then a predatory strategy.
    Keywords: Mergers; Pharmaceutical Market; Predation; Pseudo-Generics
    Date: 2010
  13. By: Pham, Vivienne; Prentice, David
    Abstract: In this paper we empirically analyse two counterfactual situations facing an anti-trust authority following the merger of two of the largest international cigarette companies. First we estimate a nested logit model of demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are both broadly consistent with the limited independent estimates available. We then use the model to simulate the proposed merger and the partial divestiture that was accepted by the Australian anti-trust authority. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows the model successfully anticipated the behaviour of the divested brands. This suggests structural econometric analysis using a nested logit may be usefully utilised by anti-trust authorities to assess the welfare implications of proposed mergers and partial divestitures.
    Keywords: mergers; divestitures; simulation; cigarettes; anti-trust policy; competition policy
    JEL: L13 L41 L66
    Date: 2010–11–15
  14. By: Umber, Marc P.; Grote, Michael H.; Frey, Rainer
    Abstract: National borders are still strong barriers for mergers and acquisitions in Europe. We estimate a gravity equation model based on NUTS 2-regions and find that the restraining impact of national borders decreased by about a third between 1990 and 2007. However, there has been no significant change since 1997, i.e., two years before the introduction of the Euro. To benchmark our results we run a corresponding analysis within the United States using the ten federal OMB regions as country equivalents. The 'quasi border'-effect in the US is weaker than in the EU and even declines more during the same time period. We conclude that European integration policy has little effect on fostering cross-border transactions. --
    Keywords: European integration,corporate control,border effects
    JEL: F21 G34
    Date: 2010

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