nep-com New Economics Papers
on Industrial Competition
Issue of 2010‒12‒18
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Vertical Integration, Innovation and Foreclosure By Marie-Laure Allain; Claire Chambolle; Patrick Rey
  2. Endogenous Product Differentiation, Market Size and Prices By Ferguson, Shon
  3. Convexity of Bertrand oligopoly TU-games with differentiated products By Aymeric Lardon
  4. Cournot oligopoly interval games By Aymeric Lardon
  5. Central banks and competition authorities: institutional comparisons and new concerns By John Vickers
  6. Market Strucutre, Screening Activity and Bank Lending Behavior By Nikolaos Papanikolaou
  7. Characterising market power and its determinants in the Zambian banking indudstry By Simpasa, Anthony
  8. Why are some coalitions more successful than others in setting standards? Empirical evidence from the Blu-ray vs. HD-DVD standard war By Zouhaïer M'chirgui; Olivier Chanel; Didier Calcei
  9. Market Structure, Countervailing Power and Price Discrimination: The Case of Airports By Jonathan Haskel; Alberto Iozzi; Tommaso Valletti
  10. Buyer Power and Price Discrimination: The Case of the UK Care Homes Market By Hancock R; Hviid M
  11. Why Higher Price Sensitivity of Consumers May Increase Average Prices: An Analysis of the European Electricity Market By Paulun, Tobias; Feess, Eberhard; Madlener, Reinhard
  12. Green Leader or Green Liar ? Differentiation and the role of NGOs. By Mireille Chiroleu-Assouline

  1. By: Marie-Laure Allain (CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Claire Chambolle (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X, ALISS - Alimentation et sciences sociales - INRA : UR1303); Patrick Rey (Toulouse School of Economics - Toulouse School of Economics)
    Abstract: This paper studies the potential effects of vertical integration on downstream firms' incentives to innovate. Interacting efficiently with a supplier may require information exchanges, which raises the concern that sensitive information may be disclosed to rivals. This may be particularly harmful in case of innovative activities, as it increases the risk of imitation. We show that vertical integration exacerbates this threat of imitation, which de facto degrades the integrated supplier's ability to interact with unintegrated competitors. Vertical integration may thus lead to input foreclosure, thereby raising rivals' cost and limiting both upstream competition and downstream innovation. A similar concern of customer foreclosure arises in the case of downstream bottlenecks.
    Keywords: Vertical Integration, Foreclosure, Innovation, Imitation, Firewall.
    Date: 2010–12–08
  2. By: Ferguson, Shon (Dept. of Economics, Stockholm University)
    Abstract: Recent empirical evidence suggests that prices for many goods and services are higher in larger markets. This paper provides an explanation for this phenomenon when firms can choose how much to differentiate their products in a monopolistically competitive environment. The model proposes that consumers’ love of variety makes them more sensitive to product differentiation efforts by firms, which leads to higher prices in larger markets. Larger markets lead to greater variety and products that are more differentiated, which provides consumers with greater welfare despite the adverse effect of product differentiation on prices. The social planner does not charge a markup, which allows it to differentiate products more than is possible in the competitive equilibrium. The model also provides an explanation for why prices do not always fall when trade is liberalized.
    Keywords: Endogenous Technology; Market Size Effect; International Trade
    JEL: D43 F12 L13
    Date: 2010–12–09
  3. By: Aymeric Lardon (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this article we consider Bertrand oligopoly TU-games with differentiated products. We assume that the demand system is Shubik's (1980) and that firms operate at a constant and identical marginal and average cost. First, we show that the alpha and beta- characteristic functions (Aumann 1959) lead to the same class of Bertrand oligopoly TU-games and we prove that the convexity property holds for this class of games. Then, following Chander and Tulkens (1997) we consider the gamma-characteristic function where firms react to a deviating coalition by choosing individual best reply strategies. For this class of games, we show that the Equal Division Solution belongs to the core and we provide a sufficient condition under which such games are convex.
    Keywords: Bertrand oligopoly TU-games; Core; Convexity; Equal Division Solution
    Date: 2010
  4. By: Aymeric Lardon (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this paper we consider cooperative Cournot oligopoly games. Following Chander and Tulkens (1997) we assume that firms react to a deviating coalition by choosing individual best reply strategies. Lardon (2009) shows that if the inverse demand function is not differentiable, it is not always possible to define a Cournot oligopoly TU(Transferable Utility)-game. In this paper, we prove that we can always specify a Cournot oligopoly interval game. Furthermore, we deal with the problem of the non-emptiness of two induced cores: the interval gamma-core and the standard gamma-core. To this end, we use a decision theory criterion, the Hurwicz criterion (Hurwicz 1951), that consists in combining, for any coalition, the worst and the better worths that it can obtain in its worth interval. The first result states that the interval gamma-core is non-empty if and only if the oligopoly TU-game associated with the better worth of every coalition in its worth interval admits a non-empty gamma-core. However, we show that even for a very simple oligopoly situation, this condition fails to be satisfied. The second result states that the standard gamma-core is non-empty if and only if the oligopoly TU- game associated with the worst worth of every coalition in its worth interval admits a nonempty gamma-core. Moreover, we give some properties on every individual profit function and every cost function under which this condition always holds, what substantially extends the gamma-core existence results in Lardon (2009).
    Keywords: Cournot oligopoly interval game; Interval gamma-core; Standard gamma-core; Hurwicz criterion;
    Date: 2010
  5. By: John Vickers
    Abstract: The establishment of independent authorities for monetary policy and for competition policy was part of the institutional consensus of the Great Moderation. The paper contrasts how policy has operated in the two spheres, especially as regards the role of law. It then discusses the application of competition policy to banks before and during the crisis, and relationships between competition and financial stability. Finally, the paper considers whether the financial crisis - which has led, at least temporarily, to unorthodox and less independent monetary and competition policies - has undermined the long-term case for independence. The conclusion is that it has not. While regulation of the financial system clearly requires fundamental reform, sound money and markets free from threats to competition remain fundamental to long-run prosperity; those ends are best pursued by focused and independent monetary and competition policies.
    Keywords: central bank independence, monetary policy, competition law, merger policy, financial stability, banks
    Date: 2010–12
  6. By: Nikolaos Papanikolaou (Luxembourg School of Finance, University of Luxembourg)
    Abstract: In this paper we construct a theoretical model of spatial banking competition that considers the differential information among banks and potential borrowers in order to investigate how market structure affects the lending behavior of banks and their incentives to invest in screening technology. Consistent with the prevailing view in the relevant literature, our results reveal that competition reduces lending cost, which, in turn, encourages the entry of new customers in the loan market. Also, that the transportation cost that potential borrowers have to pay in order to reach the bank of their interest is decreased with the degree of competitiveness. Importantly, we demonstrate that market structure exerts a considerable positive effect on banks’ incentives to screen their loan applicants since banks are found to invest more in screening as competition in the market becomes higher. This is to say, banks resort to screening that serves as a buffer mechanism against bad credit which entails higher risk and which is more likely under competitive conditions. Overall, our findings provide support to a rather close link between the degree of competition, bank lending activity, and the investment of banks in screening technology.
    Keywords: banking; spatial competition; screening; credit risk
    JEL: G21 D41 D80
    Date: 2010
  7. By: Simpasa, Anthony
    Abstract: This article evaluates the intensity of competition by estimate a bank-specific and time varying Lerner Index as a measure of market power by Zambian banks in the post-reform period. Using a model of oligopolistic conduct, we show that Zambian banks exercised market power in setting prices. Furthermore, market concentration, efficiency performance, diversity in revenue sources and regulatory intensity accounted for much of the banks’ exercise of market power. However, the results indicate that credit risk and macroeconomic uncertainty had a weakening effect on the banks’ exercise of market power. The policy lesson from the analysis is that regulatory authorities should continue with the policy of opening up the financial sector to more players in order to foster contestability in the banking industry.
    Keywords: Banking; market power; competition
    JEL: D43 C33 G21
    Date: 2010–12–06
  8. By: Zouhaïer M'chirgui (CREM, LAREQUAD - Euromed Management - Euromed Management); Olivier Chanel (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579); Didier Calcei (Groupe ESC Troyes - ESC Troyes - ESC Troyes)
    Abstract: Standard-setting coalitions are increasingly composed of rival firms from different sectors and are characterized by simultaneous and/or sequential cooperation and competition among their members. This paper examines why firms choose to belong to two standard-setting coalitions instead of one and what determines the success of a standard coalition. We test empirically for network effect, experience effect, and coopetitive effect in the Blu-ray vs. HD-DVD standard war. We find that the higher the similarity of the members in the coalition, the greater the probability of standard coalition success. Furthermore, relatedness leads to a greater probability of joining both competing coalitions, but at a given degree of knowledge difference, an opposite effect exists.
    Keywords: Blu-ray; HD-DVD; coalition; coopetition; standard war
    Date: 2010–12–07
  9. By: Jonathan Haskel (Imperial College London and CEPR); Alberto Iozzi (Faculty of Economics, University of Rome "Tor Vergata"); Tommaso Valletti (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: We study bargained input prices where up and downstream firms can choose alternative vertical partners. We apply our model to bargained airport landing fees where a number of interesting policy questions have arisen. For example, what is the impact of joint ownership of airports? Does airline countervailing power stop airports raising fees? Should airports be prohibited, as an EU directive intends, from charging differential prices to airlines? Our major findings are (a) an increase in upstream concentration or in the substitutability between airports always increases the landing fee; (b) the effect of countervailing power, via an increase in downstream concentration, depends on the competition regime between airlines and whether airports can price discriminate: airline concentration reduces the landing fee when downstream competition is in quantities, but if downstream competition is in prices only where airports cannot discriminate. Furthermore, only in a specific case (Bertrand competition, uniform landing fees and undifferentiated goods) will lower fees pass through to consumers. (c) With Cournot competition, uniform landing fees are always higher than discriminatory fees, while the reverse is true with Bertrand competition. We also look at the incentives for airport expansion which raise quantities of passengers paying a given landing fee, but alters the nature of airline competition, which changes the landing fee.
    Keywords: Airports, airlines, landing fees, countervailing power
    JEL: D43 L13 L93 R48
    Date: 2010–12–09
  10. By: Hancock R (School of Medicine, Health Policy and Practice, University of East Anglia); Hviid M (UEA Law School and ESRC Centre for Competition Policy)
    Abstract: UK Local Authorities purchase care home places on behalf of a large group of people following a means test of their income and wealth. All other buyers of care home services are atomistic. The care home market is characterised by a large number of small providers. Local authorities may thus have buyer power. We show that any abuse of this buyer power may lead to some people, “the squeezed middle” not being served. We quantify the size of the squeezed middle and assess the implications of the form of the means test for local authorities' ability to exercise buyer power.
    Date: 2010–12–13
  11. By: Paulun, Tobias (Institute of Power Systems and Power Economics, RWTH Aachen University); Feess, Eberhard (Frankfurt School of Finance & Management); Madlener, Reinhard (E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN))
    Abstract: We develop a model of the European electricity market that allows analyzing the impact of consumers' price sensitivity, defined as the willingness to change energy providers, on equilibrium prices. The model is parameterized with publicly available data on total demand, marginal costs and capacity constraints of power generators. Comparably precise data on the price sensitivity is not available, so that we analyze its impact in a range of simulations. Contrary to apparently straightforward expectations, we find that a higher price sensitivity increases average prices under reasonable assumptions. The reason is that, when price sensitivity is high, the most efficient energy providers can attract sufficiently many consumers for operating at full capacity, even when price differences to their less efficient competitors are small. Hence, incentives to reduce prices are higher when the price sensitivity is low. We conclude that the widespread view that high electricity prices can (partially) be attributed to a low willingness of consumers to change their providers is flawed.
    Keywords: Electricity Market; Price Sensitivity; Heterogenous Oligopoly; Price Competition; Capacity Constraints
    Date: 2010–11
  12. By: Mireille Chiroleu-Assouline (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper addresses how corporate environmentalism can be a means of differentiation and of green-washing. Since consumers can seldom directly observe a firm's environmental quality (a problem not easily solved through eco-labeling), published environmental reports and advertising can mislead them. As a result, the role of the NGO becomes both crucial and ambiguous. On the one hand, by helping to increase consumer awareness, NGOs enlarge the market share of green differentiated firms. On the other hand, the risk that consumers will punish a firm perceived to be supplying inaccurate environmental information may bring about the paradoxical result of discouraging differentiation efforts.
    Keywords: Differentiation, environmental concern, imperfect competition, quality, advertising, NGO.
    JEL: L12 L15 L31 M37 Q50
    Date: 2010–12

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