nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒05‒30
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. Search Costs and Risky Investment in Quality By Arthur Fishman; Nadav Levy
  2. Does timing of decisions in a mixed duopoly matter? By Balogh, Tamás L.; Tasnádi, Attila
  3. Remanufacturing By Sophie Bernard
  4. Monopolistic Competition in General Equilibrium: Beyond the CES By Evgeny Zhelobodko; Sergey Kokovin; Mathieu Parenti; Jacques-François Thisse
  5. Quality distortions in vertical relations By Baake, Pio; von Schlippenbach, Vanessa
  6. Low-Quality Leadership in a Vertically Differentiated Duopoly with Cournot Competition By L. Lambertini; A. Tampieri
  7. Strategic delegation and collusion: Do incentive schemes matter? By Jean-Daniel Guigou; Patrick De Lamirande; Bruno Lovat
  8. Merger negotiations with stock market feedback By Betton, Sandra; Eckbo, B. Espen; Thompson, Rex; Thorburn, Karin S.
  9. Legal Investor Protection and Takeovers By Burkart, Mike; Gromb, Denis; Mueller, Holger M; Panunzi, Fausto
  10. Wage bargaining and quality competition By Bhattacharyya, Ranajoy; Saha, Bibhas
  11. Endogenous market structures and labour market dynamics By Colciago , Andrea; Rossi, Lorenza
  12. Does intellectual monopoly stimulate or stifle innovation? By Chu, Angus C.; Cozzi, Guido; Galli, Silvia
  13. The duration of research joint ventures: theory and evidence from the Eureka program By Kaz Miyagiwa; Aminata Sissoko
  14. Exclusive dealing: investment promotion may facilitate inefficient foreclosure By Chiara Fumagalli; Massimo Motta; Thomas Ronde
  15. Ex-post assessment of merger effects: the case of Pfizer and Pharmacia (2003) By Leheyda, Nina; Beschorner, Patrick; Hüschelrath, Kai
  16. Parallel Imports and Mandatory Substitution Reform: A kick or a muff for price competition in pharmaceuticals By Granlund, David; Yesim Köksal, Miyase
  17. Mergers & Acquisitions in European Banking Higher productivity or better synergy among business lines? By Rym Ayadi; Jean-Philippe Boussemart; Hervé Leleu; Dhafer Saidane
  18. Banks as ‘fat cats’: Branching and Price Decisions in a Two-Stage Model of Competition By COCCORESE, Paolo
  19. The effects of the block exemption regulation reform on the Swiss car market By Leheyda, Nina; Beschorner, Patrick; Hüschelrath, Kai
  20. Economic effects of vertical disintegration: the American motion picture industry, 1945 to 1955 By Silver, Gregory Mead
  21. Merger Control in Ireland: Too Many Unnecessary Merger Notifications? By Gorecki, Paul K.

  1. By: Arthur Fishman (Bar-Ilan University); Nadav Levy (IDC Herzliya)
    Abstract: One striking development associated with the explosion of e-commerce is the increased transparency of sellers' quality history. In this paper we analyze how this affects fi…rms' incentives to invest in quality when the outcome of investment is uncertain. We identify two conflicting effects. On the one hand, reducing the consumer's cost of search for quality exacerbates the negative effects of past poor performance. This increases incentives to invest, leading to higher quality. On the other hand, the fact that a fi…rm, despite its best efforts, may fail to live up to consumers' more demanding expectations, makes investment less attractive. This discourages investment, leading to lower quality. We show that reducing the search cost leads to higher quality if the initial level of the search cost is sufficiently high but may lead to lower quality if the initial level of the search cost is sufficiently low.
    Keywords: search, internet search, quality, risky investment
    JEL: D83 L15
    Date: 2011–03
  2. By: Balogh, Tamás L.; Tasnádi, Attila
    Abstract: We determine the endogenous order of moves in a mixed price-setting duopoly. In contrast to the existing literature on mixed oligopolies we establish the payoff equivalence of the games with an exogenously given order of moves. Hence, it does not matter whether one becomes a leader or a follower. We also establish that replacing a private firm by a public firm in the standard Bertrand-Edgeworth game with capacity constraints increases social welfare and that a pure-strategy equilibrium always exists.
    Keywords: Bertrand-Edgeworth; mixed duopoly; timing games
    JEL: L13 D43
    Date: 2011–05–19
  3. By: Sophie Bernard (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 presents a theoretical model of remanufacturing where a duopoly of original manufacturers produces a component of a final good. The specific component that needs to be replaced during the lifetime of the final good creates a secondary market where independent remanufacturers enter the competition. An environmental regulation imposing a minimum level of remanufacturability is also introduced. The main results establish that, while collusion of the firms on the level of remanufacturability increases both profit and consumer surplus, a social planner could use collusion as a substitute for an environmental regulation. However, if an environmental regulation is to be implemented, collusion should be repressed since competition supports the public intervention better. Under certain circumstances, the environmental regulation can increase both profit and consumer surplus. Part of this result supports the Porter Hypothesis, which stipulates that industries respecting environmental regulations can see their profits increase.
    Keywords: Remanufacturing, competition, environmental regulation, Porter hypothesis.
    Date: 2011–04
  4. By: Evgeny Zhelobodko (Novosibirsk State University (Russia)); Sergey Kokovin (Novosibirsk State University and Sobolev Institute of Mathematics (Russia)); Mathieu Parenti (Université de Paris 1 and PSE (France)); Jacques-François Thisse (CORE-UCLouvain (Belgium), CREA, Université du Luxembourg, and CEPR.)
    Abstract: We propose a general model of monopolistic competition and derive a complete characterization of the market equilibrium using the concept of Relative Love for Variety. When the RLV increases with individual consumption, the market generates pro-competitive effects. When it decreases, the market mimics anti-competitive behavior. The CES is a borderline case. We extend our setting to heterogeneous firms and show that the cutoff cost decreases (increases) when the RLV increases (decreases). Last, we study how combining vertical, horizontal and cost heterogeneity affects our results.
    Keywords: monopolistic competition, additive preferences, love for variety, heterogeneous firms
    JEL: D43 F12 L13
    Date: 2011
  5. By: Baake, Pio; von Schlippenbach, Vanessa
    Abstract: This paper examines how delivery tariffs and private quality standards are determined in vertical relations that are subject to asymmetric information. We consider an infinitely repeated game where an upstream firm sells a product to a downstream firm. In each period, the firms negotiate a delivery contract comprising the quality of the good as well as a nonlinear tariff. Assuming asymmetric information about the actual quality of the product and focusing on incentive compatible contracts, we show that from the firms' perspective delivery contracts lead to more efficient contracts and thus higher overall profits the lower the firms' outside options, i.e. the higher their mutual dependency. Buyer power driven by a reduced outside option of the upstream firm enhances the efficiency of vertical relations, while buyer power due to an improved outside option of the downstream firm implies less effcient outcomes. --
    Keywords: Quality Uncertainty,Private Standards,Vertical Relations,Buyer Power
    JEL: D82 L14 L15
    Date: 2011
  6. By: L. Lambertini; A. Tampieri
    Abstract: We model a vertically differentiated duopoly with quantity-setting firms as an extended game in which firms noncooperatively choose the timing of moves at the quality stage, to show that at the subgame perfect equilibrium sequential play obtains, with the low-quality firm taking the leader's role.
    JEL: C73 L13
    Date: 2011–05
  7. By: Jean-Daniel Guigou (Luxembourg School of Finance, University of Luxembourg); Patrick De Lamirande (Shannon School of Business, Canada); Bruno Lovat (University of Nancy)
    Abstract: This paper introduces delegation decisions and contracts based on relative performance evaluation (RPE) in the analysis of cartel stability. We follow the approach developed by Lambertini and Trombetta [12], where manager's compensation combines pro_ts and sales (CPS) instead. Some of our results are similar while others are distinct from those of Lambertini and Trombetta. In particular, we show that collusion under RPE is always harder to sustain than under CPS.
    Keywords: Cartel Stability, Delegation, Relative Performance Evaluation
    JEL: D43 L13 L21
    Date: 2011
  8. By: Betton, Sandra (John Molson School of Business, Concordia University); Eckbo, B. Espen (Tuck School of Business, Dartmouth College); Thompson, Rex (Cox School of Business, Southern Methodist University); Thorburn, Karin S. (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Merger negotiations routinely occur amidst economically significant a target stock price runups. Since the source of the runup is unobservable (is it a target stand-alone value change and/or deal anticipation?), feeding the runup back into the offer price risks "paying twice" for the target shares. We present a novel structural empirical analysis of this runup feedback hypothesis. We show that rational deal anticipation implies a nonlinear relationship between the runup and the offer price markup (offer price minus runup). Our large-sample tests confirm the existence of this nonlinearity and reject the feedback hypothesis for the portion of the runup not driven by the market return over the runup period. Also, rational bidding implies that bidder takeover gains are increasing in target runups, which our evidence supports. Bidder toehold acquisitions in the runup period are shown to fuel target runups, but lower rather than raise offer premiums. We conclude that the parties to merger negotiations interpret market-adjusted target runups as reflecting deal anticipation.
    Keywords: Merger negotiations; stock market feedback
    JEL: G00
    Date: 2011–05–10
  9. By: Burkart, Mike; Gromb, Denis; Mueller, Holger M; Panunzi, Fausto
    Abstract: We study the role of legal investor protection for the efficiency of the market for corporate control. Stronger legal investor protection limits the ease with which an acquirer, once in control, can extract private benefits at the expense of non-controlling investors. This, in turn, increases the acquirer’s capacity to raise outside funds to finance the takeover. Absent effective competition for the target, the increased outside funding capacity does not make efficient takeovers more likely, however, because the bid price, and thus the acquirer’s need for funds, increase in lockstep with his pledgeable income. In contrast, under effective competition, the increased outside funding capacity makes it less likely that the takeover outcome is determined by the bidders’ financing constraints--and thus by their internal funds--and more likely that it is determined by their ability to create value. Accordingly, stronger legal investor protection can improve the efficiency of the takeover outcome. Taking into account the interaction between legal investor protection and financing constraints also provides new insights into the optimal allocation of voting rights, sales of controlling blocks, and the role of legal investor protection in cross-border mergers and acquisitions.
    Keywords: corporate control; efficiency; investor protection; takeovers
    JEL: G32 G34
    Date: 2011–05
  10. By: Bhattacharyya, Ranajoy; Saha, Bibhas
    Abstract: In a standard model of vertical differentiation, wage is assumed to determine the quality. Wage is also subject to bargaining. Increased bargaining power of the worker in the low quality firm reduces quality differential, and increases price competitiveness. The Opposite happens from a similar change in the high quality firm.
    Keywords: Wage bargaining; Quality competition
    JEL: C7
    Date: 2011–05–20
  11. By: Colciago , Andrea (University of Milano-Bicocca, Department of Economics); Rossi, Lorenza (University of Pavia, Department of Economics)
    Abstract: We propose a flexible prices model where endogenous market structures and search and matching frictions in the labour market interact endogenously. The interplay between firms’ endogenous entry, strategic interactions among producers and labour market frictions represents a strong amplification channel for technology shocks on labour market variables and helps in addressing the unemployment- volatility puzzle. Consistently with US evidence, new firms create a large fraction of new jobs and grow faster than more mature firms, net entry of firms is procyclical and the price mark-up is countercyclical.
    Keywords: endogenous market structures; firms’ entry; search and matching; friction
    JEL: E24 E32 L11
    Date: 2011–05–19
  12. By: Chu, Angus C.; Cozzi, Guido; Galli, Silvia
    Abstract: This study develops an R&D-based growth model with vertical and horizontal innovation to shed some light on the current debate on whether patent protection stimulates or stifles innovation. We analyze the effects of patent protection in the form of blocking patents. We show that patent protection changes the direction of innovation by having asymmetric effects on vertical innovation (i.e., quality improvement) and horizontal innovation (i.e., variety expansion). Calibrating the model and simulating the transition dynamics, we find that strengthening the effect of blocking patents stifles vertical innovation and decreases economic growth but increases social welfare due to an increase in horizontal innovation. In light of this finding, we argue that in order to properly analyze the growth and welfare implications of patents, it is important to consider their often neglected compositional effects on vertical and horizontal innovation.
    Keywords: economic growth; innovation; intellectual property rights
    JEL: O34 O31 O40
    Date: 2010–11
  13. By: Kaz Miyagiwa; Aminata Sissoko
    Abstract: In this paper we empirically investigate the factors determining the durations of research joint ventures (RJVs). Our theoretical model predicts that greater innovation values allow the partners to cooperate in R&D for longer durations. We test this hypothesis using data from the European Eureka program. Applying proportional hazards models and using RJV costs as a proxy for unobservable innovation values, we find support for the theory's main prediction. It is also found that RJVs with more partners tend to have longer durations and that firm-initiated RJVs have shorter durations than non-firm initiated RJVs.
    Date: 2011–05
  14. By: Chiara Fumagalli; Massimo Motta; Thomas Ronde
    Abstract: This paper studies a model where exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. While investment promotion is usually regarded as a pro-competitive effect of ED, our paper shows that it may be the very reason why a contract that forecloses a more effcient supplier is signed. Absent the effect on investment, the contract would not be signed and foreclosure would not be a concern. For this reason, considering potential foreclosure and investment promotion in isolation and then summing them up may not be a suitable approach to assess the net effect of ED. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ED.
    Date: 2011
  15. By: Leheyda, Nina; Beschorner, Patrick; Hüschelrath, Kai
    Abstract: The paper studies the effects of the Pfizer and Pharmacia (2003) merger on competition in the Swiss pharmaceutical market and compares the assessment of the Swiss Competition Commission (COMCO) with the post-merger market developments. We find that the merger has had a miniscule impact on the Swiss pharmaceutical market. This has primarily to do with the fact that the product portfolios of both companies have shown no or only slight overlaps. In both cases of potential anticompetitive effects, the companies successfully proposed to divest some of their assets in order to prevent a further strengthening of their dominant position. The remedies included products in the development phase which were not available on the market at the time of the decision. In other markets in which either an overlapping of businesses of both companies existed or in which one of the merging entities held a dominant market position, no significant effects of the merger were noticed. This might have to do with both, existing price regulation in the Swiss drug industry and changes in Pfizer's product portfolio following the merger. Furthermore, with respect to other potentially interesting market characteristics such as investment behaviour, R&D, sales or employment, available data on global company level does not allow an isolation of the possible effects of the merger. --
    Keywords: mergers,ex-post evaluation,pharmaceutical markets
    JEL: K21 L42 L62
    Date: 2011
  16. By: Granlund, David (The Swedish Retail Institute and Umeå University); Yesim Köksal, Miyase (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: What has been the effect of competition from parallel imports on prices of locally-sourced onpatent 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%. <p>
    Keywords: parallel imports; pharmaceutical drugs; price competition; reference pricing; therapeutic competition
    JEL: I11 L51 L65
    Date: 2011–04–18
  17. By: Rym Ayadi (Centre for European Policy Studies (CEPS)); Jean-Philippe Boussemart (LEM-CNRS (UMR 8179), IESEG School of Management and University of Lille III); Hervé Leleu (CNRS-LEM (UMR 8179), IESEG School of Management); Dhafer Saidane (LSMRC/SKEMA and EQUIPPE, University of Lille III)
    Keywords: Efficiency, Free Aggregation Hull, Catching-up, Convergence, Mergers & Acquisitions, Banking Industry
    JEL: D24 G21 G34 L25
    Date: 2010–11
  18. By: COCCORESE, Paolo (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy)
    Abstract: In this paper we develop an empirical two-stage model of competition for the banking industry that incorporates the choice of capacity in the form of new branches. It is estimated using data on Italian banks for the years 1995-2009. The results show that the conduct of banks is significantly more competitive than a Bertrand-Nash equilibrium, and support the rejection of the simple one-stage specification, which underestimates the degree of competition. In the Fudenberg and Tirole (1984)’s taxonomy, banks are found to behave as ‘fat cats’, overinvesting in the branch network so as to keep prices high and accommodate entry.
    Keywords: bank branch network; competition; market structure; conduct
    JEL: G21 L10 L13
    Date: 2011–05–23
  19. By: Leheyda, Nina; Beschorner, Patrick; Hüschelrath, Kai
    Abstract: In 2002, the Swiss Competition Commission (COMCO) introduced a Notice on the Competitive Treatment of Vertical Restraints in Automobile Trade ('Car Notice'). The objective of the Car Notice has been to strengthen competition in the Swiss car market, in particular by avoiding price-fixing practices and market foreclosure and stimulating intrabrand competition in the market for new car sales and competition in the service market. Based on a survey conducted among Swiss car market players, we find that the Car Notice only had a slight impact on competition in the Swiss car market. Although some changes have been identified, they typically cannot solely be explained by the impact of the Car Notice but rather result from general market developments that have led to stronger competition in Switzerland. --
    Keywords: vertical agreements,automobile market,multibranding,intrabrand competition,interbrand competition,ex-post evaluation of competition policy
    JEL: K21 L42 L62
    Date: 2011
  20. By: Silver, Gregory Mead
    Abstract: In 1948, the United States Supreme Court declared the operations of eight of the nation’s largest motion picture studios in violation of the 1890 Sherman Antitrust Act. The decision ordered them to disintegrate their producer-distributor roles from cinemas. The Court believed this would promote competitive practices in a hitherto uncompetitive industry. However, these desired benefits were not entirely reached. Instead, by leading the Hollywood studio system to collapse, the Court also distorted the supplychain for motion pictures. This work utilizes Coasian analyses of transaction costs to show that institutional integration was an efficient structure for the motion picture industry. It explores the motives to integrate and the benefits it garnered. Having laid this groundwork, it then assesses the effects theatre divorcement had on the industry and offers plausible counterfactuals had the studios remained intact after 1948.
    JEL: N0 L82
    Date: 2010–11
  21. By: Gorecki, Paul K.
    Abstract: The market for corporate control plays an important role in ensuring that assets are deployed in an efficient and effective manner. However, on occasion, mergers might lead to a reduction in competition and a consequent rise in prices and/or other anticompetitive effects. The Competition Act 2002 provides that all mergers that meet certain financial thresholds must be notified to the Competition Authority in order that they are subject to a competitive effects assessment. However, there are concerns that the notification thresholds result in many mergers with little or no nexus to Ireland being notified. While it is the case that the vast majority of merger notifications do not raise competition concerns, Ireland is not out of line with other jurisdictions which have mandatory notification thresholds such as the EU and the US. Nevertheless, that should not lead to complacency. The paper quantifies the impact of reforms made in 2006 and 2007 by the Competition Authority and the Minister of Enterprise, Trade and Employment to the merger notification thresholds. The evidence suggests that these tighter better specified thresholds led to a reduction of at least 40-50 per cent in the number of merger notifications. However, more could be done, albeit probably to a lesser extent than the earlier reforms. Applying the International Competition Network's Recommended Practices for Merger Notification Procedures, a series of proposals are made in the paper for revising the merger notification thresholds to better select mergers with a nexus to Ireland. Such moves should facilitate a more effective and efficient market for merger control by reducing transaction costs involved in the merger process as well as allowing Competition Authority resources to be deployed elsewhere, a not inconsiderable advantage in a period of austerity.
    Keywords: Ireland/MERGERS/competition/competition act/US/employment/cost
    Date: 2011–04

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