nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒01‒30
twenty-two papers chosen by
Russell Pittman
US Department of Justice

  1. Competitive mixed bundling of vertically differentiated products By Illtae Ahn; Kiho Yoon
  2. Strategic Advertising for Entry Deterrence Purposes By COCCORESE, Paolo
  3. Endogenous Market Structures and Contract Theory. Delegation, principal-agent contracts, screening, franchising and tying By Etro Federico
  4. Endogenous Market Structures and Innovation By Federico Etro
  5. Endogenous Market Structures and International Trade By Etro Federico
  6. Oligopolistic Screening and Two-way Distortion By Michela Cella; Federico Etro
  7. Rigid Pricing and Rationally Inattentive Consumer By Filip Matejka
  8. Sunk costs, market contestability, and the size distribution of firms By Kessides, Ioannis N.; Tang, Li
  9. Globalization and FDIs: determinants and competition effects in Central and Eastern European Countries By Natalia VECHIU
  10. Networks of Collaboration in Multi-market Oligopolies By Billand, Pascal; Bravard, Christophe; Chakrabarti, Subhadip; Sarangi, Sudipta
  11. Corporate Leniency with Private Information: The Push of Prosecution and the Pull of Pre-emption By Joseph E. Harrington, Jr.
  12. Posted Pricing as a Plus Factor By Przemyslaw Jeziorski and Ilya Segal
  13. The Role of Publicity Requirements on Entry and Auctions Outcomes By Decio Coviello; Mario Mariniello
  14. The Rise of European Competition Policy, 1950-1991: A Cross-Disciplinary Survey of a Contested Policy Sphere By Laurent Warlouzet
  15. Trust, Salience and Deterrence: Evidence from an Antitrust Experiment By Bigoni, Maria; Fridolfsson, Sven-Olof; Le Coq, Chloe; Spagnolo, Giancarlo
  16. Modeling Processor Market Power and the Incidence of Agricultural Policy: A Non-parametric Approach By Rachael E. Goodhue; Carlo Russo
  17. Imperfect Competition, Consumer Behavior, and the Provision of Fuel Efficiency in Light-Duty Vehicles By Fischer, Carolyn
  18. Merger enforcement in two-sided markets By Przemyslaw Jeziorski
  19. Estimation of cost synergies from mergers without cost data: Application to U.S. radio By Przemyslaw Jeziorski
  20. Information Sharing and Cross-border Entry in European Banking By Caterina Giannetti; Nicola Jentzsch; Giancarlo Spagnolo
  21. Concentration and self-censorship in commercial media By Fabrizio Germano; Martin Meier
  22. Price Coordination in Two-Sided Markets: Competition in the TV Industry By Jarle Kind, Hans; Nilssen, Tore; Sørgard, Lars

  1. By: Illtae Ahn (Department of Economics, Chung-Ang University, Seoul, Republic of Korea); Kiho Yoon (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We examine mixed bundling in a competitive environment that incorporates vertical product differentiation. We show that, compared to the equilibrium without bundling, (i) prices, profits and social welfare are lower, whereas (ii) consumer surplus is higher in the equilibrium with mixed bundling. In addition, the population of consumers who purchase both products from the same firm is larger in the equilibrium with mixed bundling. Further, when the quality gap between brands narrows under no bundling and symmetric mixed bundling, prices and profits decrease but social welfare and consumer surplus increase. When quality differentiation is asymmetric across products, however, complicated effects occur on prices and profits due to strategic interdependence that mixed bundling creates.
    Keywords: mixed bundling, vertical differentiation, quality advantage, competitive bundling
    JEL: D43 L13
    Date: 2011
  2. By: COCCORESE, Paolo (CELPE (Centre of Labour Economics and Economic Policy), University of Salerno, Italy)
    Abstract: This paper evaluates the possible effects of advertising on conditions of entry in a market with one incumbent and one potential entrant. Through a game-theoretic framework, it is shown that the use of pre-entry advertising expenditures (which are supposed to exhibit diminishing returns) may discourage entry even when firms behave rationally and face the same conditions of cost and demand.
    Keywords: market structure; advertising
    JEL: L10
    Date: 2011–01–18
  3. By: Etro Federico (Department of Economics, University Of Venice Cà Foscari)
    Abstract: I study the role of unilateral strategic contracts for firms active in markets with price competition and endogenous entry. Traditional results change substantially when the market structure is endogenous rather than exogenous. They concern 1) contracts of managerial delegation to non-profit maximizers, 2) incentive principal-agent contracts in the presence of moral hazard on cost reducing activities, 3) screening contracts in case of asymmetric information on the productivity of the managers, 4) vertical contracts of franchising in case of hold-up problems and 5) tying contracts by monopolists competing also in secondary markets. Firms use always these contracts to strengthen price competition and manage to obtain positive profits in spite of free entry.
    Keywords: Strategic delegation, Incentive contracts, Screening contracts, Franchising, Tying, Endogenous market structures
    JEL: L11 L13 L22 L43
    Date: 2010
  4. By: Federico Etro (Department of Economics, University Of Venice, Ca’ Foscari)
    Abstract: One of the pioneering works on endogenous market structures, by Tandon (1984), has extended the standard Cournot model with linear demand to endogenous entry and sunk R&D costs to show that the endogenous number of firms is independent from the size of the market. I generalize the model in many directions and show that, as long as the exogenous fixed costs are positive, the endogenous market structure is naturally characterized by an inverted-U relation between market size and number of firms, in line with the celebrated hypothesis of Sutton (1991).
    Keywords: Oligopoly, Endogenous entry, Sunk costs, RD investment
    JEL: L1
    Date: 2010
  5. By: Etro Federico (Department of Economics, University Of Venice Cà Foscari)
    Abstract: I extend the endogenous market structures approach to international trade theory and policy. When markets are characterized by strategic interactions and endogenous entry, opening up to trade decreases the price level, and increases concentration and the production of each firm, with a positive competition effect on welfare. With endogenous entry of foreign firms in the domestic market it is optimal to set a positive import tariff decreasing in the ratio between entry costs and market size. With endogenous entry of international firms in an integrated market, the optimal subsidy to domestic production is always positive and independent from the relative size of the domestic market. Implications for multinationals engaged in FDIs, indirect trade promotion and the lobbying are also analyzed.
    Keywords: Endogenous entry, gains from trade, import tariff, production subsidy
    JEL: F12 F13
    Date: 2010
  6. By: Michela Cella (Department of Economics, University Of Milan, Bicocca); Federico Etro (Department of Economics, University Of Venice, Ca’ Foscari)
    Abstract: We analyze the choice of incentive contracts by oligopolistic firms that compete on the product market. Managers have private information and in the first stage they exert cost reducing effort. In equilibrium the standard "no distortion at the top" property disappears and two way distortions are optimal. We extend our analysis to other informational, contractual and competitive settings.
    Keywords: Oligopoly, screening, two way distortion, incentives, RD investment
    JEL: D21 D82 D86 L13 L22
    Date: 2010
  7. By: Filip Matejka
    Abstract: This paper proposes a mechanism leading to rigid pricing as an optimal strategy. It applies a framework of rational inattention to study the pricing strategies of a monopolistic seller facing a consumer with limited information capacity. The consumer needs to process information about prices, while the seller is perfectly attentive. It turns out that the seller chooses to price discretely even for a continuous range of unit input costs, i.e. charges a finite set of different prices only. The price usually stays constant when unit input cost changes only a little. The seller does so to provide the consumer with easily observable prices and thus stimulate her to consume more. In the model's dynamic version, this mechanism implies that prices respond to cost shocks with a delay.
    Keywords: Rational inattention; nominal rigidity
    JEL: D8 E3
    Date: 2010–04
  8. By: Kessides, Ioannis N.; Tang, Li
    Abstract: This paper offers a new economic explanation for the observed inter-industry differences in the size distribution of firms. The empirical estimates--based on three temporal (1982, 1987, and 1992) cross-sections of the four-digit United States manufacturing industries--indicate that increased market contestability, as signified by low sunk costs, tends to reduce the dispersion of firm sizes. These findings provide support for one of the key predictions of the theory of contestable markets: that market forces under contestability would tend to render any inefficient organization of the industry unsustainable and, consequently, tighten the distribution of firms around the optimum.
    Keywords: Markets and Market Access,Economic Theory&Research,Water and Industry,Access to Markets,Debt Markets
    Date: 2011–01–01
  9. By: Natalia VECHIU
    Abstract: Globalization and FDIs: determinants and competition effects in Central and Eastern European Countries
    Date: 2010–11
  10. By: Billand, Pascal; Bravard, Christophe; Chakrabarti, Subhadip; Sarangi, Sudipta
    Abstract: The result that firms competing in a Cournot oligopoly with pairwise collaboration form a complete network under zero or negligible link formation costs provided by Goyal and Joshi (2003) no longer hold in multi-market oligopolies. Link formation in one market affects a firm’s profitability in another market in a possibly negative way resulting in the fact that it is no longer always profitable in an unambiguous manner. With non-negative link formation costs, the stable networks have a dominant group architecture and efficient networks are charecterized by at most one non-singleton component with a geodesic distance between players that is less than three.
    Keywords: networks; collaboration; R & D
    JEL: L13 L20 C70
    Date: 2010–11–01
  11. By: Joseph E. Harrington, Jr.
    Abstract: A corporate leniency program provides relief from government penalties to the first member of a cartel to come forward and cooperate with the authorities. This study explores the incentives to apply for leniency when each cartel member has private information as to the likelihood that the competition authority will be able to convict them without a cooperating firm. A firm may apply for leniency because it fears being convicted or because it fears another firm will apply. Policies by the competition authority to magnify concerns about pre-emption - and thereby induce greater use of the leniency program - are explored.
    Date: 2011–01
  12. By: Przemyslaw Jeziorski and Ilya Segal
    Abstract: We study users' response to sponsored-search advertising using data from Microsoft's Live AdCenter distributed in the "Beyond Search" initiative. We estimate a structural model of utility maximizing users, which quantifies "user experience" based on their "revealed preferences," and predicts user responses to counterfactual ad placements. In the model, each user chooses clicks sequentially to maximize his expected utility under incomplete information about the relevance of ads. We estimate the substitutability of ads in users' utility function, the fixed effects of different ads and positions, user uncertainty about ads' relevance, and user heterogeneity. We find substantial substitutability of ads, which generates large negative externalities: 40% more clicks would occur in a hypothetical world in which each ad faces no competition. As for counterfactual ad placements, our simulations indicate that CTR-optimal matching increases CTR by 10.1% while user-optimal matching increases user welfare by 13.3%. Moreover, targeting ad placement to specific users could raise user welfare by 59%. Here, we find a significant suboptimality (up to 16% of total welfare) in case the search engine tries to implement a sophisticated matching policy using a misspecified model that does not account for externalities. Finally, user welfare could be raised by 14% if they had full information about the relevance of ads to them.
    Date: 2010–08
  13. By: Decio Coviello (Faculty of Economics, University of Rome "Tor Vergata"); Mario Mariniello (European University Institute)
    Abstract: Using a regression discontinuity design, we document the effect of publicizing a procurement auction on entry and outcomes. We collect a large sample of procurement auctions, which by Italian law are assigned different publicity levels on the basis of their reserve price. We find that auctions publicized at the regional level have more bidders and higher winning rebates compared to auctions that are publicized on the notice board of the public administration managing the auction. Regionally-publicized auctions are also more likely to be won by bidders from outside the region, less likely to be won by small companies, and the same firm is more likely to win repeated auctions. Taken together, our results suggest that publicity informs more bidders and reduces search and preparation costs, which encourages entry and “improves” procurement.
    Keywords: Publicity, Entry, Auctions, Regression Discontinuity
    JEL: D02 D44 C31 L11
    Date: 2010–12–21
  14. By: Laurent Warlouzet
    Abstract: Abstract: Competition policy is perhaps the field in which the European Commission has the most extensive powers. Born institutionally in 1950, European competition policy now has a sixty year-long history. This paper argues that its history has not been peaceful, and that it has been characterized by heated debates. In a first methodological part, an assessment is made of the growing multidisciplinary academic debates relating to this topic. A claim for a methodology combining historical sources (archives) and a focus on the relationship between ideas and institutions. Then the paper turns to an empirical application of the methodology just described. In particular, it examines the history of European competition policy, using new archival findings in three steps: the institutional basis in 1950-62 (part II); the failure of the neo-functionalist momentum in 1962-81 (part III); and the rise of a powerful policy in 1981-91 (part IV).
    Keywords: competition policy; European Commission; European Court of Justice
    Date: 2010–10–15
  15. By: Bigoni, Maria (University of Bologna); Fridolfsson, Sven-Olof (Research Institute of Industrial Economics (IFN)); Le Coq, Chloe (Stockholm School of Economics); Spagnolo, Giancarlo (University of Rome)
    Abstract: We present results from a laboratory experiment identifying the main channels through which different law enforcement strategies deter organized economic crime. The absolute level of a fine has a strong deterrence effect, even when the exogenous probability of apprehension is zero. This effect appears to be driven by distrust or fear of betrayal, as it increases significantly when the incentives to betray partners are strengthened by policies offering amnesty to “turncoat whistleblowers”. We also document a strong deterrence effect of the sum of fines paid in the past, which suggests a significant role for salience or availability heuristic in law enforcement.
    Keywords: Betrayal; Collusion; Corruption; Distrust; Fraud; Organized Crime; Whistleblowers
    JEL: C92 D80 K21 K42 L41
    Date: 2011–01–17
  16. By: Rachael E. Goodhue; Carlo Russo
    Abstract: This paper examines interactions between market power and agricultural policy in the U.S. wheat flour milling industry using a non-parametric approach. The analysis focuses on marketing loan and pre-1986 deficiency payment programs; farmers’ payments from these programs are dependent on whether or not the market price exceeds a “policy” price. It assesses if the payments trigger a change in the underlying economic behavior of the milling industry, and any resulting change in the flour-wheat price margin. The analysis compares the outcomes of using constrained and unconstrained sliced inverse regressions in order to identify the significant factors affecting millers' pricing behavior. In both cases, the link functions are then estimated using a non-parametric regression of prices on these factors. Constraining the factors in the sliced inverse regression in order to generate coefficients that are easily interpreted using economic theory does not affect the results. Based on the SIR factors, millers were able to extract an additional $0.24/cwt. of flour by increasing their marketing margins in years farmers received program payments. Based on the CIR factors, the increase in the marketing margin was $0.23/cwt. In both cases the increase was approximately 10 percent of the estimated marketing margin in years farmers received program payments.
    JEL: C14 Q18
    Date: 2011–01
  17. By: Fischer, Carolyn (Resources for the Future)
    Abstract: This study explores the role of market power on the cost-effectiveness of policies to address fuel consumption. Market power gives manufacturers an incentive to under- (over-) provide fuel economy in classes whose consumers, on average, value it less (more) than in others. Adding a second market failure in consumer valuation of fuel economy, a policy trade-off emerges. Minimum standards can address distortions from price discrimination but, unlike average standards, do not provide broad-based incentives for improving fuel economy. Increasing fuel prices raises demand for fuel economy but exacerbates undervaluation and incentives for price discrimination. A combination policy may be preferred. For modelers of fuel economy policy, failure to capture consumer heterogeneity in preferences for fuel economy can lead to significant errors in predicting the distribution of effort in complying with regulation, as well as the calculation and distribution of the benefits.
    Keywords: fuel economy, regulation, imperfect competition, price discrimination
    JEL: D4 L62 Q5
    Date: 2010–12–01
  18. By: Przemyslaw Jeziorski
    Abstract: This paper studies mergers in two-sided markets by estimating a structural supply and demand model and performing counterfactual experiments. The analysis is performed on data for a merger wave in U.S. radio that occurred between 1996 and 2006. The paper makes two main contributions. First, I identify the conflicting incentives of merged firms to exercise market power on both sides of the market (listeners and advertisers in the case of radio). Second, I disaggregate the effects of mergers on consumers into changes in product variety and changes in supplied ad quantity. I find that firms have moderate market power over listeners in all markets, extensive market power over advertisers in small markets and no market power over advertisers in large markets. Counterfactuals reveal that extra product variety created by post-merger repositioning increased listeners' welfare by 1.3% and decreased advertisers' welfare by about $160m per-year. However, subsequent changes in supplied ad quantity decreased listener welfare by 0.4% (for a total impact of +0.9%) and advertiser welfare by an additional $140m (for a total impact of -$300m).
    Date: 2010–07
  19. By: Przemyslaw Jeziorski
    Abstract: This paper develops a new way to estimate cost synergies from mergers without using actual data on cost. The estimator uses a structural model in which companies play a dynamic game with endogenous mergers and product repositioning decisions. Such a formulation has several benefits over the widespread static merger analysis. In particular, it corrects for sample selection of more profitable mergers and captures follow-up mergers and post-merger product repositioning. The framework is applied to estimate cost efficiencies after the deregulation of U.S. radio in 1996. The procedure uses the data on radio station characteristics and numerous acquisitions, without explicit need for cost data. It turns out that between 1996 and 2006 additional ownership concentration generated $2.5b per-year cost savings, which is about 10% of total industry revenue.
    Date: 2010–07
  20. By: Caterina Giannetti (GSBC Jena, University of Siena, ECRI); Nicola Jentzsch (DIW Berlin); Giancarlo Spagnolo (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: Information asymmetries can severely limit cross-border border expansion of banks. When a bank enters a new market, it has incomplete information about potential new clients. Such asymmetries are reduced by credit registers, which distribute financial data on bank clients. We investigate the interaction of credit registers and bank entry modes (in form of branching and M&A) by using a new set of time series cross-section data for the EU-27 countries. We study how the presence of public and private credit registers and the type of information exchanged affect bank entry modes during the period 1990-2007. Our analysis shows that the existence of both types of registers increases the share of branching in the overall entries. Additionally, the establishment of public registers reduces concentration ratios, and some banking competition indicators (such as overhead costs/assets). The introduction of a private credit bureau, on the other hand, has no effect on concentration ratios, but positively contributes to competition (by decreasing interest rate margins). This suggests that credit registers facilitate direct entry through a reduction of information asymmetries, which in turn intensifies competition.
    Keywords: credit registries, foreign entry, asymmetric information
    JEL: F37 G21 G34 L13 O16
    Date: 2010–12–21
  21. By: Fabrizio Germano; Martin Meier
    Abstract: Within a simple model of non-localized, Hotelling-type competition among arbitrary numbers of media outlets we characterize quality and content of media under different ownership structures. Assuming advertising-sponsored, profit-maximizing outlets, we show that (i) topics sensitive to advertisers can be underreported (self-censored) by all outlets in the market, (ii) self-censorship increases with the concentration of ownership, (iii) adding outlets, while keeping the number of owners fixed, may even increase self-censorship; the latter result relies on consumers' most preferred outlets being potentially owned by the same media companies. We argue that externalities resulting from self-censorship could be empirically large.
    Keywords: Media economics; media consolidation; media markets; advertising and commercial media bias JEL Classification Numbers: L13; L82
    Date: 2010–12
  22. By: Jarle Kind, Hans (NHH); Nilssen, Tore (Dept. of Economics, University of Oslo); Sørgard, Lars (NHH)
    Abstract: Under the current market structure in the TV industry advertising prices are typically set by TV channels while viewer prices are set by distributors (e.g., cable operators). The latter implies that the distributors partly internalize the competition between the TV channels, since they take into account the fact that a lower viewer price at one channel will reduce the willingness to pay for rival channels. We …find that a shift to a market structure where advertising prices as well as viewer prices are set competitively by the TV channels might increase joint industry pro…ts. The reason is that this market structure, in contrast to the one we observe today, directly addresses the two-sidedness of the market. We also show that this is to the bene…t of the viewers.
    Keywords: Two-sided markets; advertising; media economics
    JEL: L13 L22 L82
    Date: 2010–11–22

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