nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒12‒11
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Endogenous quality choice under upstream market power By Borja Mesa Sánchez
  2. Negative and Positive Effects of Competition in a Preemption Game By Toru Suzuki
  3. Signaling with Performance and the Effect of Competition By Toru Suzuki
  4. Exclusionary Minimum Resale Price Maintenance By John Asker; Heski Bar-Isaac
  5. Loss Leading as an Exploitative Practice By Zhijun Chen; Patrick Rey
  6. Predation enforcement options: An evaluation using a Cournot framework By Hüschelrath, Kai; Weigand, Jürgen
  7. Fighting hard core cartels By Hüschelrath, Kai; Weigand, Jürgen
  8. Collusion and the Choice of Auction: An Experimental Study By Jeroen Hinloopen; Sander Onderstal
  9. A methodology for the evaluation of competition policy By Hüschelrath, Kai; Leheyda, Nina
  10. An Empirical Assessment of the 2004 EU Merger Policy Reform By Tomaso Duso; Klaus Guglery; Florian Szücs
  11. The end of the Bertrand Paradox ? By Marie-Laure Cabon-Dhersin; Nicolas Drouhin
  12. Inequality, Corruption, and Competition in the Presence of Market Imperfections By Indranil Dutta; Ajit Mishra
  13. Sales, Quantity Surcharge, and Consumer Inattention By Sofronis Clerides; Pascal Courty
  14. Do direct R&D subsidies lead to the monopolization of R&D in the economy? By Czarnitzki, Dirk; Ebersberger, Bernd
  15. When is Gibrat's Law a Law? By Daunfeldt, Sven-Olov; Elert, Niklas
  16. A Model for Recycling Target Policy under Imperfect Competition With and Without Cooperation Between Firms By Satoshi Honma; Ming-Chung Chang
  17. Public Options and Altruistic Firms - Antitrust Targets or Tools? The Welfare Impact of a Mixed Oligopoly With Managerial firms By Johan Willner
  18. Airline alliances, antitrust immunity and market foreclosure By Bilotkach, Volodymyr; Hüschelrath, Kai
  19. Gas Release and Transport Capacity Investment as Instruments to Foster Competition in Gas Markets By Chaton, Corinne; Gasmi, Farid; Guillerminet, Marie-Laure; Oviedo, Juan Daniel

  1. By: Borja Mesa Sánchez (Dpto. Fundamentos del Análisis Económico)
    Abstract: This paper analyzes how the existence of upstream market power affects endogenous quality choice in a setting where two downstream firms are locked in a bilateral monopoly with their own input suppliers. The main result is that the degree of product differentiation is reduced as upstream market power increases. This holds under Bertrand and Cournot competition, although differentiation is higher in the former. If competition takes place in a Cournot fashion and downstream firms have no bargaining power at all, they choose no differentiation. I also show the effects of an upstream and a downstream merger. When input suppliers merge to monopoly, the quality choice is not affected by the upstream market power and differentiation always emerges. When the downstream segment is shaped by a monopoly, goods become homogeneous unless input suppliers have weak bargaining power. If input prices are high enough before the downstream merger, a downstream monopoly leads to an increase in social welfare.
    Keywords: vertical differentiation, endogenous quality choice, horizontal mergers
    JEL: L11 L13 L15 L41
    Date: 2010–11
  2. By: Toru Suzuki (Max Planck Institute of Economics, Jena)
    Abstract: Agents compete to acquire a limited economic opportunity of uncertain profitability. Each agent decides how much he acquires public signals before making investment under fear of preemption. I show that equilibria have various levels of efficiency under mild competition. The eect of competition on the equilibrium strategy is dierent depending on which class of equilibrium we focus on. However, when competitive pressure is sufficiently high, there exists a unique equilibrium. Finally, I show that the eect of competition on efficiency is dierent between the common value and the private value setting. Strong competition leads to the least efficient equilibrium for the common value setting but efficiency can be improved by competition in the private value setting.
    Keywords: Competition, Preemption game, Strategic real option
    JEL: C73 D83
    Date: 2010–12–02
  3. By: Toru Suzuki (Max Planck Institute of Economics, Jena)
    Abstract: Candidates compete to persuade a decision maker. The decision maker wishes to select a candidate who possesses a certain ability. Then, as a signaling, each candidate decides whether to perform a task whose performance statistically reflects the ability. However, since the cost of the performance is the same across all candidates, the performance is a poor signaling device. This paper analyzes a "signaling game with performance" in which the standard single crossing condition is violated. It is shown that more competition makes the equilibrium signaling more informative when the level of competition is moderate. Moreover, the equilibrium signaling can perfectly reveal the ability under a certain level of competition. On the other hand, too much competition always makes the equilibrium signaling less informative.
    Keywords: Signaling, Competition
    JEL: D82 D83
    Date: 2010–12–02
  4. By: John Asker; Heski Bar-Isaac
    Abstract: An upstream manufacturer can use minimum retail price maintenance (RPM) to exclude potential competitors. RPM lets the incumbent manufacturer transfer profits to retailers. If entry is accommodated, upstream competition leads to fierce down- stream competition and the breakdown of RPM. Hence, via RPM, retailers internalize the effect of accommodating entry on the incumbent’s profits. Retailers may prefer not to accommodate entry; and, if entry requires downstream accommodation, entry can be deterred. We investigate when an incumbent would prefer to exclude, rather than collude with, the entrant and the effect of a retailer cartel. We also consider the effect of imperfect competition. Empirical and policy implications are discussed.
    JEL: D42 K21 L12 L42
    Date: 2010–12
  5. By: Zhijun Chen (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, Department of Computer Science [Auckland] - The University of Auckland); Patrick Rey (Toulouse School of Economics - Toulouse School of Economics)
    Abstract: Large retailers, enjoying substantial market power in some local markets, often compete with smaller retailers who carry a narrower range of products in a more efficient way. We find that these large retailers can exercise their market power by adopting a loss-leading pricing strategy, which consists of pricing below cost some of the products also offered by smaller rivals, and raising the prices on the other products. In this way, the large retailers can better discriminate multi-stop shoppers from one-stop shoppers — and may even earn more profit than in the absence of the more efficient rivals. Loss leading thus appears as an exploitative device, designed to extract additional surplus from multi-stop shoppers, rather than as an exclusionary instrument to foreclose the market, although the small rivals are hurt as a by-product of exploitation. We show further that banning below-cost pricing increases consumer surplus, small rivals' profits, and social welfare. Our insights apply generally to industries where a firm, enjoying substantial market power in one segment, competes with more efficient rivals in other segments, and procuring these products from the same supplier generates customer-specific benefits. They also apply to complementary products, such as platforms and applications. There as well, our analysis provides a rationale for below-cost pricing based on exploitation rather than exclusion.
    Keywords: loss leading, exploitative practice, retail power
    Date: 2010–11–29
  6. By: Hüschelrath, Kai; Weigand, Jürgen
    Abstract: The paper characterises the building blocks of a framework to enforce antipredation rules and subsequently evaluates selected enforcement options in a Cournot-type duopoly predation model. Differentiating between a no rule approach, an ex ante approach and two ex post approaches, it is shown that an ex post approach typically maximises overall welfare. However, an ex ante approach can be the preferred option in cases where the entrant has a large cost advantage over the incumbent. --
    Keywords: competition policy,monopolisation,predation,enforcement
    JEL: K21 L41
    Date: 2010
  7. By: Hüschelrath, Kai; Weigand, Jürgen
    Abstract: The paper provides a comprehensive survey of the economics behind the fight against hard core cartels. Differentiating between four subsequent stages - characterisation, welfare effects, enforcement and evaluation - the paper pays particular attention to cartel detection methods, the derivation of corporate fines, the quantification of private damages and possibilities to judge on the successfulness of cartel enforcement activities by competition authorities around the world. --
    Keywords: Competition Policy,Hard Core Cartels,Public Enforcement,Private Enforcement,Evaluation
    JEL: L41 K21
    Date: 2010
  8. By: Jeroen Hinloopen (University of Amsterdam); Sander Onderstal (University of Amsterdam)
    Abstract: We experimentally examine the collusive properties of two commonly used auctions: the English auction (EN) and the first-price sealed-bid auction (FPSB). In theory, both tacit and overt collusion are always incentive compatible in EN while both can be incentive compatible in FPSB if the auction is repeated and bidders are patient enough. We find that the auctions do not differ in subjects’ propensity to collude overtly and in the likelihood that subjects defect from a collusive agreement. Moreover, the average winning bid does not differ between the auctions unless subjects can collude overtly. Under overt collusion, stable cartels buy at a lower price in EN than in FPSB resulting in a lower average winning bid in EN.
    Keywords: Collusion; English auction; First-price sealed-bid auction; Laboratory experiments
    JEL: C92 D44 L41
    Date: 2010–11–30
  9. By: Hüschelrath, Kai; Leheyda, Nina
    Abstract: The paper develops a methodology for the evaluation of competition policy. Based on the existing literature and experiences with policy evaluations in other areas of economic activity, the three-step / nine-building-blocks methodology provides guidance for evaluation projects and also assists in the identification of avenues for further academic research. --
    Keywords: Competition Policy,Evaluation,Merger control,Cartel enforcement
    JEL: L41 K21
    Date: 2010
  10. By: Tomaso Duso (Humboldt University Berlin and WZB); Klaus Guglery (Vienna University of Economics and Business); Florian Szücs (University of Vienna)
    Abstract: Based on a database of 326 merger cases scrutinized by the European Commission between 1990 and 2007, we evaluate the economic impact of the change in European merger legislation in 2004. We first propose a general framework to assess merger policy effectiveness, which is based on standard oligopoly theory and makes use of stockmarket reactions as an external assessment of the merger and the merger control decision. We then focus on four different dimensions of effectiveness: 1) legal certainty; 2) frequency and determinants of type I and type II errors; 3) rent-reversion achieved by different merger policy tools; and 4) deterrence of anti- competitive mergers. To infer the economic impact of the merger policy reform, we compare the results of our four tests before and after its introduction. Our results suggest that the policy reform seems to have been only a modest improvement of European merger policy.
    Keywords: merger control, regulatory reform, EU Commission, event-study
    JEL: L4 K21 C13 D78
    Date: 2010–10
  11. By: Marie-Laure Cabon-Dhersin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Nicolas Drouhin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    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.
    Date: 2010–10
  12. By: Indranil Dutta; Ajit Mishra
    Abstract: In this paper they analyze the relation between inequality, corruption and competition in a developing economy context where markets are imperfect. They consider an economy where different types of households (efficient and inefficient) choose to undertake production activities. For production, households borrow capital from the credit market. They also incur non-input costs which they could avoid by bribing inspectors. Due to information asymmetry and wealth inequality, the credit market fails to screen out the inefficient types. In addition to the imperfect screening, the inefficient type’s entry is further facilitated by corruption. They analyze the market equilibrium and look at some of the implications. They show that a rise in inequality can lead to an increase in corruption along with greater competition. [Research Paper No. 2005/46]
    Keywords: corruption, competition, credit market, inequality, screening
    Date: 2010
  13. 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
  14. By: Czarnitzki, Dirk; Ebersberger, Bernd
    Abstract: This paper explores the impact of R&D subsidies on the concentration of R&D in an economy. First, governments are often criticized of subsidizing predominantly larger firms and thus contribute to persistence of leadership in markets and higher barriers to entry, and, hence, reduced competition eventually. Second, theoretical literature, such as endogenous growth literature, has also shown that governmental intervention in the market for R&D affects the distribution of R&D which finally affects product market concentration. We test the relationship between R&D subsidies and R&D concentration employing treatment effects models on data of German and Finnish manufacturing firms. The data and estimations allow calculating concentration indices for the population of firms for both the actual situation where some selected companies receive R&D subsidies and the counterfactual situation describing the absence of subsidies. We find that R&D subsidies do not lead to higher concentration of R&D. On the contrary, we even find that R&D concentration is significantly reduced because of subsidies. This result may be attributed to the fact that technology policy maintains special funding schemes for small and medium-sized companies. The fact that the larger companies benefit from a higher likelihood of a subsidy receipt is offset by the phenomenon that smaller firms may be completely deterred from any R&D activity if they would not receive governmental support. --
    Keywords: R&D Concentration,R&D Subsidies,Treatment Effects,Policy Evaluation
    JEL: O31 O32 O38
    Date: 2010
  15. By: Daunfeldt, Sven-Olov (The Ratio Institute); Elert, Niklas (The Ratio Institute)
    Abstract: The purpose of this paper is to investigate if the industry context matters for whether Gibrat's law is rejected or not using a dataset that consists of all limited firms in 5-digit NACE-industries in Sweden during 1998-2004. The results reject Gibrat's law on an aggregate level, since small firms grow faster than large firms. However, Gibrat's law is confirmed about as often as it is rejected when industry-specific regressions are estimated. It is also found that the industry context - e.g., minimum efficient scale, market concentration rate, and number of young firms in the industry - matters for whether Gibrat's law is rejected or not.
    Keywords: Firm growth; firm size; job creation; small firms
    JEL: L11 L25 L26
    Date: 2010–11–29
  16. By: Satoshi Honma (Faculty of Economics, Kyushu Sangyo University); Ming-Chung Chang (Department of Banking and Finance, Kainan University)
    Abstract: The purpose of this paper is to develop a general theoretical model that describes production and recycling in an n-firm oligopoly market in which firms can cooperate for recycling. We use a three-stage game to analyze a specific recycling issue. In stage 0, the government sets a target recycling rate as well as virgin material and final disposal tax rates. In stage 1, n identical firms simultaneously invest to reduce the cost of recycling given the recycling target. Here we treat this activity as a type of R&D. Furthermore, we consider three kinds of R&D activities depending on what firms maximize in stage 1, namely, industry-wide cooperation, within-group cooperation, and non-cooperation. In stage 2, firms engage in a Cournot competition. Surprisingly, positive virgin material taxes or positive final disposal taxes discourage firms from engaging in recycling R&D efforts in normal situations, regardless of whether R&D cooperation takes place. We compare second-best social welfare levels under the three regimes described above. We find that both non-cooperation and within-group cooperation are inferior from a welfare perspective to industry-wide cooperation. Furthermore, in the case of within-group cooperation, the symmetric division of firms induces the lowest welfare for all ranges of a given spillover parameter.
    Keywords: Recycling, Cooperation, Cournot Competition
    JEL: Q53 L13 O32
    Date: 2010–11
  17. By: Johan Willner
    Abstract: I analyse the welfare impact of a mixed market with a public or private firm with some degree of altruism, in the presence of an agency problem. Contrary to some earlier findings, the total surplus turns out to be increasing in the degree of altruism. This impact is stronger than if there is no agency problem, despite more stringent conditions for the market to remain mixed. The altruistic firm is more cost-efficient, and viable if the market can remain mixed. A competition policy that encourages entry may increase welfare, but its scope is reduced by higher altruism.
    Keywords: non-profit maximising firms, public firms, mixed oligopoly, competition policy
    JEL: L32 L33 L44 H42
    Date: 2010–09
  18. By: Bilotkach, Volodymyr; Hüschelrath, Kai
    Abstract: This paper examines the issue of market foreclosure by airline partnerships with antitrust immunity. Overlapping the data on frequency of service and passenger volumes on nonstop routes on the transatlantic airline market with the information on dynamics of airline partnerships, we find evidence consistent with the airlines operating under antitrust immunity refusing to accept connecting passengers from the carriers outside of the partnership at respective hub airports. When an airline partnership is granted antitrust immunity, airlines outside this partnership end up reducing their traffic to the partner airlines' hub airports by 2.6-8.5 percent (depending on the specification and estimation technique involved). Our results suggest ambiguous welfare effects of antitrust immunity on some markets, where previous studies indicated airline consolidation should benefit consumers. --
    Keywords: air transportation,alliances,antitrust immunity,foreclosure
    JEL: L41 L93 K21
    Date: 2010
  19. By: Chaton, Corinne (Laboratoire de Finance des Marchés d'Energies); Gasmi, Farid (Toulouse School of Economics (ARQADE & IDEI)); Guillerminet, Marie-Laure (Hamburg University (FNU)); Oviedo, Juan Daniel (Universidad del Rosario)
    Abstract: Motivated by recent policy events experienced by the European natural gas industry, this paper develops a simple model for analyzing the interaction between gas release and capacity investment programs as tools to improve the performance of imperfectly competitive markets. We consider a regional market in which a measure that has an incumbent release part of its gas to a marketer complements a program of investment in transport capacity dedicated to imports by the marketer, at a regulated transport charge, of competitively-priced gas. First, we examine the case where transport capacity is regulated while gas release is not, i.e., the volume of gas released is determined by the incumbent. We then analyze the effect of the "artifcial" duopoly created by the regulator when the latter regulates both gas release and transport capacity. Finally, using information on the French industry, we calibrate the basic demand and cost elements of the model and perform some simulations of these two scenarios. Besides allowing us to analyze the economic properties of these scenarios, a policy implication that comes out of the empirical analysis is that, when combined with network expansion investments, gas-release measures applied under regulatory control are indeed effective short-term policies for promoting gas-to-gas competition.
    Keywords: Natural gas, Gas release, Regulation, Competition
    JEL: L51 L95
    Date: 2010–11

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