nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒04‒23
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Strategic Separation from Suppliers of Vital Complementary Inputs: A Dynamic Markovian Approach By Didier Laussel; Ngo Van Long
  2. On the timing of vertical relationships By Etienne Billette de Villemeur; Richard Ruble; Bruno Versaevel
  3. How Effective is European Merger Control? By Tomaso Duso; Klaus Gugler; Burcin B. Yurtoglu
  4. Post-Merger Restructuring and the Boundaries of the Firm By Vojislav Maksimovic; Gordon Phillips; Nagpurnanand Prabhala
  5. Revising Merger Guidelines: Lessons from the Irish Experience By Gorecki, Paul K.
  6. Market Size, Competition, and the Product Mix of Exporters By Thierry Mayer; Marc J. Melitz; Gianmarco I.P. Ottaviano
  7. A Simple Model of Foreign Brand Penetration with Multi-Product Firms: Non-Monotone Responses to Trade Liberalization By Toru Kikuchi; Ngo Van Long
  8. Parallel Imports and Mandatory Substitution Reform - A Kick or A Muff for Price Competition in Pharmaceuticals? By Granlund, David; Köksal , Miyase Yesim
  9. Efficiency or Competition? A Structural Analysis of Canada's AWS Auction and the Set-Aside Provision By Kyle Hyndman; Christopher F. Parmeter
  10. Competition and Stability in Banking By Xavier Vives
  11. The Institutional Framework for Doing Sports Business: Principles of EU Competition Policy in Sports Markets By Oliver Budzinski
  12. Product Market Competition and Inflation Dynamics: Evidence from a Panel of OECD Countries By Monica Correa Lopez; Agustin Garcia Serrador; Ana Cristina Mingorance

  1. By: Didier Laussel; Ngo Van Long
    Abstract: In a model where a monopolistic downstream firm (assembler) negotiates simultaneously with each of its intermediate-input suppliers the prices of the complementary components which enter its product, we analyze the process by which the assembler separates from its suppliers as a Markov Perfect equilibrium. Due to a negative strategic effect (the prices and profits of independent suppliers decrease when their number increases), the assembler's marginal return from keeping an upstream subsidiary is lower than its market value as an independent supplier. Separation is immediate when the downstream firm's initial number of upstream subsidiaries is below a critical level. It is progressive in the reverse case and eventually leads to a mixed strategy whereby it keeps all the remaining subsidiaries with some probability, and sells all them off in one go with the complementary probability. <P>Nous étudions le processus de séparation entre une firme à l’aval et des firmes à l’amont qui lui fournissent des inputs complémentaires. À cause d’un effet stratégique négatif, le profit marginal de la firme à l’aval de garder une firme à l’amont comme filiale est moins élevé que la valeur de cette dernière au marché des bourses. La séparation est immédiate si le nombre de filiales à l’amont est inférieur à un certain niveau critique. La séparation est graduelle dans le cas inverse et demande une stratégie mixte éventuelle.
    Keywords: Vertical disintegration, vertical structure, Markov perfect equilibrium, dynamic games. , Séparation verticale, structure verticale, équilibre Markov-parfait, jeux dynamiques
    Date: 2011–04–01
  2. By: Etienne Billette de Villemeur (Toulouse School of Economics, IDEI & GREMAQ, 21 allée de Brienne, 31000 Toulouse, France); Richard Ruble (EMLYON Business School, Ecully, F-69134, France); Bruno Versaevel (EMLYON Business School & CNRS, GATE, 69134 Ecully cedex France)
    Abstract: In a real option model, we show that the standard analysis of vertical relationships transposes directly to investment timing. Thus, when a firm undertaking a project requires an outside supplier (e.g., an equipment manufacturer) to provide it with a discrete input to serve a growing but incertain demand, and if the supplier has market power, investment occurs too late from an industry standpoint. The distortion in firm decisions is characterized by a lerner-type index, and we show how market growth rate and volatility affect the extent of the distortion. If the initial market demand is high, greater volatility increases the effective investment cost and results in lower value for both firms. Vertical restraints can restore efficiency. For instance, the upstream firm can induce entry at the correct investment threshold by selling a call option on the input. Otherwise, if two downstream firms are engaged in a preemption race, the upstream firm sells the input to the first investor at a discount which is chosen in such a way that the race to preempt exactly offsets the vertical distortion, and this leader invests at the optimal time.
    Keywords: investment timing – preemption – real options – vertical relations
    JEL: C73 D43 D92 L13
    Date: 2011
  3. By: Tomaso Duso (Duesseldorf Institute for Competition Economics (DICE)); Klaus Gugler (Vienna University of Economics and Business); Burcin B. Yurtoglu (WHU - Otto Beisheim School of Management)
    Abstract: This paper applies an intuitive approach based on stock market data to a unique dataset of large concentrations during the period 1990-2002 to assess the effectiveness of European merger control. The basic idea is to relate announcement and decision abnormal returns. Under a set of four maintained assumptions, merger control might be interpreted to be effective if rents accruing due to the increased market power observed around the merger announcement are reversed by the antitrust decision, i.e. if there is a negative relation between announcement and decision abnormal returns. To clearly identify the events’ competitive effects, we explicitly control for the market expectation about the outcome of the merger control procedure and run several robustness checks to assess the role of our maintained assumptions. We find that only outright prohibitions completely reverse the rents measured around a merger’s announcement. On average, remedies seem to be only partially capable of reverting announcement abnormal returns. Yet they seem to be more effective when applied during the first rather than the second investigation phase and in subsamples where our assumptions are more likely to hold. Moreover, the European Commission appears to learn over time.
    Keywords: Merger Control, Remedies, European Commission, Event Studies
    JEL: L4 K21 G34 C2 L2
    Date: 2011–04
  4. By: Vojislav Maksimovic; Gordon Phillips; Nagpurnanand Prabhala
    Abstract: We examine how firms redraw their boundaries after acquisitions using plant-level data. We find that there is extensive restructuring in a short period following mergers and full-firm acquisitions. Acquirers of full firms sell 27% and close 19% of the plants of target firms within three years of the acquisition. Acquirers with skill in running their peripheral divisions tend to retain more acquired plants. Retained plants increase in productivity whereas sold plants do not. These results suggest that acquirers restructure targets in ways that exploit their comparative advantage.
    Date: 2011–04
  5. By: Gorecki, Paul K.
    Abstract: Competition authorities typically issue Merger Guidelines setting out the framework within which merger assessment is conducted. Ireland is no exception. The Competition Authority is currently in the process of revising its 2002 Guidelines. In this paper we not only comment on the procedure that is being used to revise these Guidelines as well as the substance of the proposed revisions to the Guidelines, but also draw some wider lessons that might be of assistance to other competition authorities, particularly smaller competition authorities, in revising their Guidelines. The lessons include: carefully distinguishing between proposals for revising the Guidelines that incorporate existing merger assessment custom and proposals that mark a significant departure from current Guidelines as well as existing custom and practice. Proposals for revising the Guidelines, particularly when referring to existing custom and practice, should be specific rather than general; and, if multijurisdictional mergers are important particular attention should be paid to the Guidelines in jurisdictions that are commonly included in such multijurisdictional mergers.
    Keywords: competition/Ireland/MERGERS
    Date: 2011–03
  6. By: Thierry Mayer; Marc J. Melitz; Gianmarco I.P. Ottaviano
    Abstract: We build a theoretical model of multi-product firms that highlights how market size and geography (the market sizes of and bilateral economic distances to trading partners) affect both a firm's exported product range and its exported product mix across market destinations (the distribution of sales across products for a given product range). We show how tougher competition in an export market induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Trade models based on exogenous markups cannot explain this strong significant link between destination market characteristics and the within-firm skewness of export sales (after controlling for bilateral trade costs). Theoretically, this within firm change in product mix driven by the trading environment has important repercussions on firm productivity and how it responds to changes in that trading environment.
    JEL: F12
    Date: 2011–04
  7. By: Toru Kikuchi; Ngo Van Long
    Abstract: The purpose of this study is to illustrate, using a simple model of monopolistic competition with multi-product firms, how trade liberalization affects the degree of foreign brand penetration. We model this in terms of the profit incentives for domestic entrepreneurs to choose to offer domestic brands or foreign (imported) brands, and to determine the range of varieties within each brand. As trade costs decrease, in the medium run the provider of each foreign brand will widen its range of varieties, while the provider of each domestic brand will narrow down its range of varieties. However, in the long run, more domestic entrepreneurs choose to become foreign brand providers and the range of each foreign brand becomes narrower, relative to the initial equilibrium. <P>Nous étudions l’effet de la libéralisation du commerce international sur la prolifération des marques étrangères sur le marché du pays domestique. Les entrepreneurs du pays domestique font leur choix entre la production des produits locaux et la distribution des produits étrangers. Suite à la baisse des coûts d’importation, les importateurs élargissent l’éventail des variétés de produits importés. La croissance de la proportion des entrepreneurs qui se contentent d’importer entraine la croissance des marques étrangères sur le marché local, ce qui finalement réduit la taille de firmes importatrices.
    Keywords: Foreign brand penetration, multiproduct firms, entrepreneurs, trade liberalization, inverted J-curve effect, Marques étrangères, firmes aux produits multiples, entrepreneurs, libéralisation du commerce international
    Date: 2011–04–01
  8. By: Granlund, David (Department of Economics, Umeå University); Köksal , Miyase Yesim (Department of Economics, School of Business, Economics and Law)
    Abstract: What has been the effect of competition from parallel imports on prices of locally-sourced on-patent drugs? Did the 2002 Swedish mandatory substitution reform increase this competition? To answer these questions, we carried out difference-in-differences estimation on monthly data for a panel of all on-patent prescription drugs sold in Sweden during the 40 months from January 2001 through April 2004. On average, facing competition from parallel imports caused a 15-17% fall in price. While the reform increased the effect of competition from parallel imports, it was only by 0.9%. The reform, however, did increase the effect of therapeutic competition by 1.6%.
    Keywords: parallel imports; pharmaceutical drugs; price competition; reference pricing; therapeutic competition
    JEL: I11 L51 L65
    Date: 2011–04–13
  9. By: Kyle Hyndman (Southern Methodist University); Christopher F. Parmeter (University of Miami)
    Abstract: In 2008 Industry Canada auctioned 105MHz of spectrum to a group of bidders that included incumbents and potential new entrants into the Canadian mobile phone market, raising $4.25 billion. In an effort to promote new entry, 40MHz of spectrum was set-aside for new entrants. We adapt the methodology of Bajari and Fox (2009) to the Canadian auction setting in an effort to estimate the implicit cost (in terms of lower auction efficiency) of this policy. Our results indicate that revenue would have been approximately 10% higher without the set-aside.
    Keywords: Spectrum Auction, Set-Aside, Efficiency
    JEL: C10 D44
    Date: 2011–02
  10. By: Xavier Vives
    Abstract: I review the state of the art of the academic theoretical and empirical literature on the potential trade-off between competition and stability in banking. There are two basic channels through which competition may increase instability: by exacerbating the coordination problem of depositors/investors on the liability side and fostering runs/panics, and by increasing incentives to take risk and raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition.
    Date: 2010–05
  11. By: Oliver Budzinski (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 tourna-ment 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. The author would like to thank Arne Feddersen and the participants of the 2nd European Conference on Sports Economics (German Sports University Co-logne, 2010) for valuable comments on earlier versions of this paper.
    Keywords: Sports business, competition policy, sporting rules, centralized marketing, sports economics
    JEL: L83 L41 K21 D02 M21
    Date: 2011–03
  12. By: Monica Correa Lopez; Agustin Garcia Serrador; Ana Cristina Mingorance
    Abstract: We analyse the impact of product market competition on the responsiveness of inflation to macroeconomic imbalances. Results based on a 20-country OECD panel estimated for the period 1961-2006 show that if product market competition is high the response of inflation to lagged inflation and unemployment is reduced, while inflation is more responsive to changes in productivity growth in countries in which competition is above the OECD average. When product market competition is measured by barriers to firms’ entry, we also find that low entry barriers dampen the effect on inflation of movements in import prices. These results are attributed to temporary mark-up changes after demand- and supplyside shocks.
    Keywords: Inflation dynamics; Product market competition; Labour market coordination; Trade union density.
    JEL: E31 J51
    Date: 2010–10

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