nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒04‒09
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Ownership and Control in a Competitive Industry By Karle, H.; Klein, T.J.; Stahl, K.O.
  2. Non-Exclusive Competition under Adverse Selection By Andrea Attar; Thomas Mariotti; François Salanié
  3. Welfare, Competition, Specialization and Growth By Daria Onori
  4. Housing Do profits always decrease with decreasing product differentiation? A reversal result in a unionized duopoly By Luciano Fanti; Nicola Meccheri
  5. The Simple Diagrammatics of Price Signaling Quality By Leonard J. Mirman; Marc Santugini
  6. Overcoming Cournot's dilemma on increasing returns and competition By Mario Morroni
  7. Resource benefits and learning costs in strategic alliances By David H. Hsu; Simon Wakeman
  8. The Effects of Vertical Separation and Access Price Regulation on Investment Incentives By Paula Sarmento
  9. Evaluating Leniency and Modeling Cartel Durations: Time-Varying Policy Impacts and Sample Selection By Jun Zhou
  10. The Determination of Optimal Fines in Cartel Cases - The Myth of Underdeterrence By Marie-Laure Allain; Marcel Boyer; Rachidi Kotchoni; Jean-Pierre Ponssard
  11. The Econometrics of Cartel Overcharges By Marcel Boyer; Rachidi Kotchoni
  12. TV Revenue Sharing as a Coordination Device in Sports Leagues By Thomas Peeters
  13. The Institutional Framework for Doing Sports Business: Principles of EU Competition Policy in Sports Markets By Oliver Budzinski
  14. Organizational Differences between U.S. Major Leagues and European Leagues: Implications for Salary Caps By Helmut Dietl; Egon Franck; Markus Lang; Alexander Rathke
  15. The Sugar Daddy's Game: How Wealthy Investors Change Competition in Professional Team Sports By Markus Lang; Martin Grossmann; Philipp Theiler
  16. The Economics of Copyright Levies on Hardware By Patrick Legros; Victor Ginsburgh
  17. Does Banking Competition Alleviate or Worsen Credit Constraints Faced by Small and Medium Enterprises? Evidence from China By Chong, T.T.L.; Lu, L.; Ongena, S.
  18. Auctions versus Negotiations: Evidence from Public Procurement in the Italian Healthcare Sector By Mercedes Vellez
  19. Certification of Corporate Social Responsibility Activities in Oligopolistic Markets By Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis

  1. By: Karle, H.; Klein, T.J.; Stahl, K.O. (Tilburg University, Center for Economic Research)
    Abstract: We study a differentiated product market in which an investor initially owns a controlling stake in one of two competing firms and may acquire a non-controlling or a controlling stake in a competitor, either directly using her own assets, or indirectly via the controlled firm. While industry profits are maximized within a symmetric two product monopoly, the investor attains this only in exceptional cases. Instead, she sometimes acquires a noncontrolling stake. Or she invests asymmetrically rather than pursuing a full takeover if she acquires a controlling one. Generally, she invests indirectly if she only wants to affect the product market outcome, and directly if acquiring shares is profitable per se.
    Keywords: Differentiated products;separation of ownership and control;private benefits of control.
    JEL: L13 L41
    Date: 2011
  2. By: Andrea Attar (University of Rome "Tor Vergata"); Thomas Mariotti (Toulouse School of Economics); François Salanié (Toulouse School of Economics)
    Abstract: Consider a seller of a divisible good, facing several identical buyers. The quality of the good may be low or high, and is the seller's private information. The seller has strictly convex preferences that satisfy a single-crossing property. Buyers compete by posting arbitrary menus of contracts. Competition is non-exclusive in that the seller can simultaneously and secretly trade with several buyers. We fully characterize conditions for the existence of an equilibrium. Equilibrium aggregate allocations are unique. Any traded contract must yield zero profit. If a quality is indeed traded, then it is traded efficiently. Depending on parameters, both qualities may be traded, or only one of them, or the market may break down completely to a no-trade equilibrium.
    Keywords: Adverse Selection, Competing Mechanisms, Non-Exclusivity
    JEL: D43 D82 D86
    Date: 2011–03–31
  3. By: Daria Onori (IRES - Université Catholique de Louvain)
    Abstract: In this paper we consider a simple model of horizontal differentiation and derive the closed form solutions for the level of the variables in the decentralized economy and in the social planner case. This enables us to analyze consumers' welfare as a function of the parameter representing market power. We surprisingly find that, when the total labor force is greater than a certain level, the welfare function is an inverted-N shape in the decentralized economy and monotonically decreasing in the centralized economy. This suggests that there is another effect which interacts with market power: the degree of returns to specialization.
    Keywords: Closed form solutions; Welfare; Competition; Degree of returns to specialization
    Date: 2011–03–29
  4. By: Luciano Fanti; Nicola Meccheri
    Abstract: This paper aims at investigating if the conventional wisdom, that a decrease in the degree of product differentiation (which implies increasing competition) always reduces firms’ profits, remains true in a differentiated duopoly model with decentralized, or firm-specific, monopoly unions. In this context, when product differentiation decreases, an important effect, termed “endogenous” or “union wage effect”, adds to the standard competition effect in affecting profits. Moreover, the union wage effect operates against the competition effect and, provided that unions are sufficiently wage-oriented, that is, they sufficiently prefer wages to employment, can actually reverse the conventional result under both Cournot and Bertrand competition. However, this is more likely to occur under competition à la Cournot.
    Keywords: unionized duopoli, monopoly unions, product differentiation, profits
    JEL: J43 J50 L13
    Date: 2011–01–02
  5. By: Leonard J. Mirman; Marc Santugini (IEA, HEC Montréal)
    Abstract: We present diagrammatic analysis of price signaling quality. We first study the behavior of the monopoly when price conveys information about quality. We then show the effect of information flows on welfare, i.e., profit and consumer surplus.
    Keywords: Asymmetric information, learning, monopoly, quality, signaling
    JEL: D21 D42 D82 D83 D84 L12 L15
    Date: 2011–03
  6. By: Mario Morroni
    Abstract: This paper shows that the Cournot-Marshall dilemma on the incompatibility of increasing returns and competition may be overcome under an integrated theory of the firm that takes into account not only returns to scale but also knowledge and transaction cost considerations. Knowledge and transaction-based considerations help to understand why, contrary to predictions, the tendency towards an increased dimension and monopoly may not operate in spite of the presence of significant economies of scale. It is argued that the boundaries of the firm cannot be attributed solely to one single cause, but are instead the result of the interplay between knowledge-, scale-scope- and transaction-based considerations. This interaction favours the emergence of a variety of organisational structures and the coexistence of different sizes even in the same sector of activity.
    Keywords: Transaction costs, capabilities, economies of scale.
    JEL: D2 L2
    Date: 2010–12–10
  7. By: David H. Hsu (The Wharton School, University of Pennsylvania); Simon Wakeman (ESMT European School of Management and Technology)
    Abstract: Due to resource constraints, startup innovators often struggle to assemble complementary assets for successful product commercialization. Alliances are an important avenue for startups to access resources and learn commercialization skills. However, an alliance structure that enables startup learning imposes costs on the alliance partner. Moreover, alliance partner quality is likely co-determined with complementary-asset learning potential in shaping alliance product performance. Using data from biotechnology alliances, we separately estimate the importance of partner quality and learning effects in explaining the drug approval hazard. We find that higher quality partners have a positive impact on product development success while alliance structures enabling startup downstream commercialization capability development have a negative effect. Innovators with cumulated learning experience are more likely to self-commercialize in future product development.
    Keywords: entrepreneurship, strategic alliances, learning, alliance structure, complementary assets
    Date: 2011–03–29
  8. By: Paula Sarmento (CEF.UP and Faculty of Economics of University of Porto)
    Abstract: We study the impact of vertical separation between an upstream firm and its subsidiary, which competes in the retail market with an independent firm, with the incentive to invest in network upgrade. This question is discussed under two alternative regimes concerning the price of the vital input sold by the upstream firm: cost orientation regulation and absence of access price regulation. We show that the investment incentive decreases with vertical separation under both regimes. However, it is not always true that the investment incentive is higher without regulation.
    Keywords: access price regulation, vertical integration, investment incentives
    JEL: L51 L96
    Date: 2011–04
  9. By: Jun Zhou (University of Bonn)
    Abstract: The objective of this paper is to investigate the efficacy of the European Commission’s leniency in destabilizing and deterring cartels. I discuss a dynamic model of cartel formation and dissolution to illustrate how changes in antitrust policies and market and macroeconomic conditions might affect cartel duration. Comparative statics results are then corroborated with empirical estimates of a hazard function adjusted to account for both the heterogeneity of cartels and the non proportional time dependence suggested by theory. Statistical tests are consistent with the theoretic predictions that following a more efficacious leniency program, the average duration of discovered cartels rises in the short run and falls in the long-run.
    Keywords: Taxation, evaluation of antitrust policies, leniency, time-varying policy effcts, sample selection bias, appropriateness of proportional hazard assumption
    JEL: D43 K21 K42 L13
    Date: 2011–04
  10. By: Marie-Laure Allain; Marcel Boyer; Rachidi Kotchoni; Jean-Pierre Ponssard
    Abstract: The determination of optimal fines to deter the formation or continuation of cartels is a major objective of competition policy. We provide a game theoretic discussion of the restitution and deterrence properties of fines static and dynamic frameworks: cartel stability depends on their ability to prevent deviation by firms and the benefit of a deviation depends on the fines to be imposed in case of detection by the antitrust authority. We show that the proper consideration of the dynamics of competition has a major impact on the determination of optimal dissuasive fines: our results suggest that a clear majority of fines imposed by the European Commission in recent years meet the deterrence objective. <P>La détermination d’amendes optimales pour dissuader la formation ou la poursuite des cartels est au cœur des politiques de concurrence. Nous définissons un cadre stratégique pour caractériser le caractère restitutif et dissuasif des amendes dans des contextes statique et dynamique : la stabilité d’un cartel dépend de sa capacité à prévenir les déviations dont la profitabilité est fonction des amendes imposées lorsque le cartel est découvert. Nous montrons que la prise en compte appropriée de la dynamique de la concurrence a un impact majeur sur la détermination des amendes dissuasives optimales : nos résultats suggèrent qu’une nette majorité des amendes infligées par la Commission Européenne ces dernières années rencontrent l'objectif de dissuasion.
    Keywords: Optimal fines, cartels, Amendes optimales, cartels
    Date: 2011–03–01
  11. By: Marcel Boyer; Rachidi Kotchoni
    Abstract: Connor and Lande (2006) conducted a survey of cartel overcharge estimates and found an average in the range of 31% to 49%. By examining more sources, Connor (2010b) finds a median of 23.3% for all type of cartels and a mean of 50.4% for successful cartels. However, the data used in these studies are estimates rather than true observations, since the true illegal profits of cartels are rarely observable. Therefore, these data are subject to model error, estimation error and publication bias. A quick glance at the Connor database reveals that the universe of overcharge estimates is asymmetric, heterogenous and contains a number of influential observations. Beside the fact that overcharge estimates are potentially biased, fitting a linear OLS model to the data without providing a carefull treatment of the problems raised by the publication bias, outliers, asymmetry, and heterogeneity will necessarily produce distorted results. We conduct a meta-analysis of cartel overcharge estimates in the spirit of Connor and Bolotova (2006), but providing a sound treatment of the matters raised above. We find a mean bias-corrected overcharge estimate of 13.8% for all cartels, and of 13.6% for cartels with initial estimates lying between 0% and 50%. <P>Connor et Lande (2006) survolent la littérature sur les majorations de prix imposées par les cartels et concluent à une augmentation moyenne variant entre 31 % et 49 %. Considérant un échantillon plus grand, Connor (2010b) trouve une médiane de 23,3 % pour tous les types de cartel et une moyenne de 50,4 % pour les cartels dont les majorations de prix estimées sont positives. Cependant, les échantillons utilisés dans ces études sont constitués d’estimations et non pas d’observations directes. De ce fait, ces échantillons héritent possiblement d’erreurs de modélisation et d’estimation, ainsi que d’un biais de publication. Une analyse sommaire des majorations dans l’échantillon de Connor révèle une distribution asymétrique, de l’hétérogénéité et la présence d’observations aberrantes. Ainsi, au-delà du fait que les estimations d’augmentation de prix par les cartels sont potentiellement biaisées, l’estimation d’un modèle par MCO avec de telles données sans un traitement adéquat de l’asymétrie, de l’hétérogénéité et des données aberrantes produirait des résultats déformés. Nous réalisons une nouvelle méta-analyse dans le même esprit que celui de Connor et Bolotova (2006), mais en proposant une prise en compte adéquate des problèmes mentionnés ci-dessus. Après correction du biais d’estimation, nos résultats suggèrent que la moyenne des majorations de pris estimées est de l’ordre de 13,8 % pour tous les types de cartels et de 13,6 % pour les cartels dont les estimations de majoration de prix se situaient initialement entre 0 % et 50 %.
    Keywords: Cartels, overcharges, Cartels, majoration de prix.
    Date: 2011–03–01
  12. By: Thomas Peeters (University of Antwerp)
    Abstract: As sports clubs jointly produce contests, they cannot determine contest quality through their private talent investments. Sports leagues therefore try to coordinate talent investments towards the profit-maximizing contest quality. In this paper I analyze how revenue sharing mechanisms may serve this goal when demand comes from hard-core club and neutral sports fans. Performance-based sharing turns out to be an inefficient sharing rule for the cartel, although it is not harmful for social welfare. This inefficient cartel behavior can be rationalized as the result of bargaining with asymmetric outside options. Data from US and European sports leagues illustrate the theoretical findings.
    Keywords: cartel behavior, revenue sharing, sports leagues, TV rights
    JEL: L41 L83
    Date: 2011–03
  13. By: Oliver Budzinski (Markets & Competition Group, Department of Environmental and Business Economics, University of Southern Denmark)
    Abstract: The competition rules and policy framework of the European Union represents an important institutional restriction for doing sports business. Driven by the courts, the 2007 overhaul of the approach and methodology has increased the scope of competition policy towards sports associations and clubs. Nowadays, virtually all activities of sports associations that govern and organize a sports discipline with business elements are subject to antitrust rules. This includes genuine sporting rules that are essential for a league, championship or tournament to come into existence. Of course, „real? business or commercial activities like ticket selling, marketing of broadcasting rights, etc. also have to comply with competition rules. Regulatory activities of sports associations comply with European competition rules if they pursuit a legitimate objective, its restrictive effects are inherent to that objective and proportionate to it. This new approach offers important orientation for the strategy choice of sports associations, clubs and related enterprises. Since this assessment is done following a case-by-case approach, however, neither a blacklist of anticompetitive nor a whitelist of procompetitive sporting rules can be derived. Instead, conclusions can be drawn only from the existing case decisions – but, unfortunately, this leaves many aspects open. With respect to business activities, the focus of European competition policy is on centralized marketing arrangements bundling media rights. These constitute cartels and are viewed to be anticompetitive in nature. However, they may be exempted from the cartel prohibition on efficiency and consumer benefits considerations. Here, a detailed list of conditions exists that centralized marketing arrangements must comply with in order to be legal. Although this policy seems to be well-developed at first sight, a closer look at the decision practice reveals several open problems. Other areas of the buying and selling behavior of sports associations and related enterprises are considerably less well-developed and do not provide much orientation for business.
    Keywords: sports business, competition policy, sporting rules, centralized marketing, sports economics
    JEL: L83 L41 K21 D02 M21
    Date: 2011–03
  14. By: Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich); Egon Franck (Institute for Strategy and Business Economics, University of Zurich); Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Alexander Rathke (Institute for Empirical Research in Economics, University of Zurich)
    Abstract: This paper outlines and compares the organizational structure of major sports leagues, explores the reasoning behind their formation, and derives implications for salary caps in European football. To understand why sports leagues have developed a specific organizational structure, one must take the economic peculiarities of team sports leagues into consideration. For this purpose, we analyze the production process and illuminate its major peculiarities. For example, we present the difference between economic competition and competition on the pitch and discuss the consequences of this distinction for an attractive final product. Furthermore, we show that a hold-up problem exists between the two stages of the production process and demonstrate how these problems are overcome by the organizational structure chosen by sports leagues. We also outline the differences between the U.S. major leagues and European leagues and document recent developments in that context. Finally, based on this comparative institutional analysis, we derive implications for the introduction of salary caps into European football.
    Keywords: Sports leagues, organization, salary cap, hold-up problem
    JEL: L83
    Date: 2011–03
  15. By: Markus Lang (Institute for Strategy and Business Economics, University of Zurich); Martin Grossmann (Institute for Strategy and Business Economics, University of Zurich); Philipp Theiler (Institute for Strategy and Business Economics, University of Zurich)
    Abstract: Professional sports leagues have witnessed the appearance of so-called "sugar daddies" - people who invest enormous amounts of money into clubs and become their owners. This paper presents a contest model of a professional sports league that incorporates this phenomenon. We analyze how the appearance of a sugar daddy alters competitive balance and social welfare compared to a league with purely profit-maximizing club owners. We further show that the welfare effect of revenue sharing in a sugar daddy league is ambiguous and depends on the degree of redistribution and on whether the sugar daddy invests in a small or large club.
    Keywords: Competitive balance, contest model, social welfare, sports leagues, sugar daddy
    JEL: L83 L2 D43 C72
    Date: 2011–03
  16. By: Patrick Legros; Victor Ginsburgh
    Abstract: We provide an economic analysis of the static and dynamic effects of copyright levies on hardware. Contrary to copyright levies on supports such as tapes, CDs or DVDs, whose main use is to copy, levies on hardware do not modify the propensity of consumers to use 'illegal' content. They decrease both levels of 'legal' and 'shared' contents, leading to a decrease in the revenues from legal sales for copyright holders. The levies could compensate for the decrease but this would require copyright holders to receive a large share of the levies. Hence from a static perspective, levies on hardware are likely to fail achieving their goal of increasing the financial flow to copyright holders. We also consider a dynamic version of the model where artists are differentiated by reputation and where reputation and sales covary (more reputation leads to higher sales and higher sales to more reputation). Then, even if high reputation artists benefit from higher levies, lower reputation artists are hurt. Finally, we show that when content providers have market power and can choose between offering content at a unit price or through a subscription service, incentives to implement subscription models are decreasing in the level of levies on hardware, despite the fact that subscription services may eliminate piracy.
    Date: 2011–03
  17. By: Chong, T.T.L.; Lu, L.; Ongena, S. (Tilburg University, Center for Economic Research)
    Abstract: Banking competition may enhance or hinder the financing of small and medium enterprises (SMEs). Using a survey on the financing of China’s SMEs combined with detailed bank branch information, we investigate how concentration in the local banking market affects the availability of credit. It is found that lower market concentration alleviates financing constraints. The un-concentrated presence of joint stock banks has a larger effect on alleviating credit constraints, while the presence of state-owned banks has a smaller effect, than the presence of city commercial banks.
    Keywords: Banking Competition;SMEs Financing;Credit Constraints.
    JEL: D41 D43 G21
    Date: 2011
  18. By: Mercedes Vellez (University of Rome "Tor Vergata")
    Abstract: This paper contributes to the empirical literature on auctions and negotiations. Using healthcare facilities data on procurement contracts, I find evidence that auctions do not yield lower prices than negotiations. This result is robust to specifications tackling quality differences, endogenous participation, and the bilateral and multilateral nature of negotiated procedures. I also find evidence that late payments reduce competition and thus affect firms’ participation choices. A simple test based on Benford’s Law is used to rule out collusion among participants as a possible explanation of the results.
    Keywords: Auctions; negotiations; procurement; medical technology; competition; endogeneity; collusion.
    JEL: H57 I18
    Date: 2011–03–29
  19. By: Constantine Manasakis (Department of Economics, University of Crete, Greece); Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: We investigate the impact of alternative certifying institutions on firms' incentives to engage in costly Corporate Social Responsibility (CSR) activities as well as their relative market and societal implications. We find that the CSR certification standard is the lowest under a for-profit private certifier and the highest under a Non Governmental Organization (NGO), with the standard of a welfare maximizing public certifier lying in between. Yet, regarding industry output, this ranking is reversed. Certification of CSR activities is welfare enhancing for consumers and firms and thus should be encouraged. Finally, depending on whether certification takes place before or after firms' CSR activities, a public certifier and a NGO lead to different market and societal outcomes.
    Keywords: Corporate Social Responsibility, Oligopoly, Vertical Differentiation, Certification
    JEL: L13 L5 M14
    Date: 2011–03–29

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