nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒06‒11
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. An experimental study on multi-dimensional spatial product differentiation By Przemysław Kusztelak
  2. Follower payoffs in symmetric duopoly games. By von Stengel, Bernhard
  3. Leadership games with convex strategy sets. By von Stengel, Bernhard; Zamir, Shmuel
  4. Learning From a Piece of Pie By Pierre-Andre Chiappori; Olivier Donni; Ivana Komunje
  5. The Spatial Organization of Multinational Firms By Fabrice Defever
  6. Corruption as an Alternative to Limit Pricing By Raluca Elena Buia
  7. Does Competition Raise Productivity Through Improving Management Quality? By John Van Reenen
  8. Enhancing the Efficiency of Water Supply – Product Market Competition versus Trade By Foellmi, Reto; Meister, Urs
  9. SP Betting as a Self-Enforcing Implicit Cartel By Adi Schnytzer; Avichai Snir
  10. Evaluation of the Risks of Collective Dominance in the Audit Industry in France By Billard, Olivier; Ivaldi, Marc; Mitraille, Sebastien
  11. Mergers and Acquisitions: A pre-post analysis for the Indian financial services sector By Sinha, Pankaj; Gupta, Sushant
  12. Competition as an Ambiguous Discovery Procedure: A Reappraisal of Hayek's Epistemic Market Liberalism By Ulrich Witt

  1. By: Przemysław Kusztelak (Faculty of Economic Sciences, University of Warsaw)
    Abstract: This study presents the results of an experiment on spatial differentiation of products in Hotelling-type models with different grades of complexity for companies’ choices of space. Three models were compared, including models with a single decision variable (single-dimensional space with automatically calculated prices), two decision variables (single-dimensional space with prices assigned by the participants) and three decision variables (bi-dimensional space with prices assigned by the participants). The research revealed that in more complex conditions, the product differentiation was smaller and that the prices were lower than in a simple environment when the Nash equilibrium was confirmed. Companies that function in complex conditions do not take advantage of the opportunity to make high profits based on product differentiation. This has a greater impact on price rigidity with respect to product variety than could be theoretically predicted. Strategies based on product differentiation are, therefore, less profitable than expected based on theoretical predictions.
    Keywords: spatial competition; product differentiation; laboratory experiments
    JEL: C72 C92 D43
    Date: 2011
  2. By: von Stengel, Bernhard
    Abstract: This paper compares the leader and follower payoff in a duopoly game, as they arise in sequential play, with the Nash payoff in simultaneous play. If the game is symmetric, has a unique symmetric Nash equilibrium, and players' payoffs are monotonic in the opponent's choice along their own best reply function, then the follower payoff is either higher than the leader payoff, or even lower than in the simultaneous game. This gap for the possible follower payoff had not been observed in earlier duopoly models of endogenous timing.
    Date: 2010–07
  3. By: von Stengel, Bernhard; Zamir, Shmuel
    Abstract: A basic model of commitment is to convert a two-player game in strategic form to a “leadership game” with the same payoffs, where one player, the leader, commits to a strategy, to which the second player always chooses a best reply. This paper studies such leadership games for games with convex strategy sets. We apply them to mixed extensions of finite games, which we analyze completely, including nongeneric games. The main result is that leadership is advantageous in the sense that, as a set, the leader's payoffs in equilibrium are at least as high as his Nash and correlated equilibrium payoffs in the simultaneous game. We also consider leadership games with three or more players, where most conclusions no longer hold.
    Date: 2010–07
  4. By: Pierre-Andre Chiappori (Columbia University - Department of Economics); Olivier Donni (Universitie de Cergy-Pontoise - Department of Economics); Ivana Komunje (University of California San Diego - Department of Economics)
    Abstract: We investigate the empirical content of the Nash solution to two-player bar-gaining games. The bargaining environment is described by a set of variables that may affect agents' preferences over the agreement sharing, the status quo outcome, or both. The outcomes (i.e., whether an agreement is reached, and if so the individual shares) and the environment (including the size of the pie) are known, but neither are the agents' utilities nor their threat points. We consider both a deterministic version of the model in which the econometrician observes the shares as deterministic functions of the variables under consideration, and a stochastic one in which because of latent disturbances only the joint distribution of incomes and outcomes is recorded. We show that in the most general framework any outcome can be rationalized as a Nash solution. However, even mild exclusion restrictions generate strong implications that can be used to test the Nash bargaining assumption. Stronger conditions further allow to recover the underlying structure of the bargaining, and in particular, the cardinal representation of individual preferences in the absence of uncertainty. An implication of this finding is that empirical works entailing Nash bargaining could (and should) use much more general and robust versions than they usually do.
    Date: 2011
  5. By: Fabrice Defever
    Abstract: Using six years of firm-level data covering 224 regions of the enlarged European Union, we evaluate the importance to a firm of locating its activities (production, headquarters, R&D, logistics and sales) close together. We find that, after controlling for regional characteristics, being closely located to a previous investment positively affects firm location choice. However, the impact of distance is dependent on the type of investment (production or service). While within-firm co-location is important for both service and production activities, only production plants are likely to be located close to prior production investments. In this latter case, national borders have a surprisingly positive effect, increasing the probability of choosing a nearby location, but on the other side of the border.
    Keywords: Functional fragmentation, vertical linkages, location choice
    JEL: F23 L22 R3
    Date: 2010–12
  6. By: Raluca Elena Buia (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We explore to what extent bribery can be an alternative way of fighting rivals’ entry on the market when there is uncertainty about the degree of corruption in the public sector. For high levels of corruption, “covert” fight through bribery is the optimal choice of an incumbent. For low degree of corruption, instead, the incumbent prefers to act strategically but overtly by playing a limit pricing game.
    Keywords: Corruption, Bribery, Production licence, Moral cost, Covert/overt fight
    JEL: D21 D73 H40
    Date: 2011
  7. By: John Van Reenen
    Abstract: A classic question in industrial organization is whether competition raises productivity and if so, through what mechanism? I discuss recent empirical evidence from both large-scale databases and specific industries which suggests that tougher competition does indeed raise productivity and one of the main mechanisms is through improving management practices. To establish this, I report on new research seeking to quantify management. I relate this to theoretical perspectives on the economics of competition and management, arguing that management should be seen at least in part as a transferable technology. A range of recent econometric studies suggest that (i) competition increases management quality and (ii) improved management quality boosts productivity.
    Keywords: management, productivity, organization
    JEL: L2 M2 O32 O33
    Date: 2010–12
  8. By: Foellmi, Reto; Meister, Urs
    Abstract: In most developed countries, the provision of water is organized at a local level. The costs and tariffs vary significantly, even between adjacent water utilities. Such heterogeneity is an obvious indication of the sector’s overall inefficiency and stresses a need for institutional adjustments. We show that cooperation by water trade and the introduction of competition by common carriage between adjacent utilities are valuable alternatives to improve the industry’s efficiency, even when mergers are not feasible. Because both approaches require the physical connection of neighboring networks, they may have similar effects. This paper analyzes and compares the relevant welfare gains and shows that production efficiency and retail prices may differ depending on the initial cost differential, the application of regulations and the distribution of bargaining power. Using a theoretical model, we show that at higher initial production cost differentials, welfare is higher under competitive conditions, even in a lower-bound benchmark case without any regulation.
    Keywords: Bargaining; Networks; Product-Market Competition; Trade; Water
    JEL: D21 L43 L95 Q25
    Date: 2011–06
  9. By: Adi Schnytzer (Bar-Ilan University); Avichai Snir (Bar-Ilan University)
    Abstract: A large share of the UK off-course horse racing betting market involves winning payouts determined at Starting Prices (SP). This implies that gamblers can bet with off-course bookies on any horse before a race at the final pre-race odds as set by on-course bookies for that horse. Given the oligopolistic structure of the off-course gambling market in the UK, a market that is dominated by a small number of large bookmaking firms, we study the phenomenon of SP as a type of self-enforcing implicit collusion. We show that given the uncertainty about a race outcome, and their ability to influence the prices set by on-course bookies, agreeing to lay bets at SP is superior for off-course bookies as compared with offering fixed odds. We thus extend the results of Rotemberg and Saloner (1990) to markets with uncertainty about both demand and outcomes, We test our model by studying the predicted effects of SP betting on the behavior of on-course bookies. Using data drawn from both the UK and Australian on-course betting markets, we show that the differences between these markets are consistent with the predicted effects of SP betting in the UK off-course market and its absence from the Australian market.
    Date: 2011–03
  10. By: Billard, Olivier; Ivaldi, Marc; Mitraille, Sebastien
    Abstract: The financial crisis drew attention to the crucial role of transparency and the independence of financial certification intermediaries, in particular, statutory auditors. Now any anticompetitive practice involving coordinated increases in prices or concomitant changes in quality that impacts financial information affects the effectiveness of this intermediation. It is therefore not surprising that the competitive analysis of the audit market is a critical factor in regulating financial systems, all the more so as this market is marked by various barriers to entry, such as the incompatibility of certification tasks with the preparation of financial statements or consulting, the expertise on (and the ability to apply) international standards for the presentation of financial information, the need to attract top young graduates, the prohibition of advertising, or the two-sided nature of this market where the quality of financial information results from the interaction between the reputation of auditors and audited firms. Against this backdrop, we propose a legal and economic study of the risks of collective dominance in the statutory audit market in France using the criteria set by Airtours case and, in particular, by analyzing how regulatory obligations incumbent on statutory auditors may favour the appearance of tacit collusion. Our analysis suggests that nothing prevents collective dominance of the auditors of the Big Four group in France to exist, which is potentially detrimental to the economy as a whole as the audit industry may fail to provide the optimal level of financial information.
    Keywords: Airtours criteria; audit industry; collective dominance
    JEL: D43 M42
    Date: 2011–06
  11. By: Sinha, Pankaj; Gupta, Sushant
    Abstract: This paper examines the Mergers & Acquisitions scenario of the Indian Financial Services Sector. The data for eighty cases of M&A in the period from March 1993- Feb 2010 is collected for a set of ten financial parameters representing the various characteristics of a firm. All the cases have been analyzed individually and collectively to determine the overall effects of M&A in the industry. The results of the study indicate that PAT and PBDITA have been positively affected after the merger but the liquidity condition represented by Current Ratio has deteriorated. Also Cost Efficiency and Interest Coverage have improved and deteriorated in equal number of cases. Interest Coverage remains an important factor in determining the return on shareholders’ funds both before and after the merger but Profit Margin also becomes important after the merger. And looking at the diversification effects of merger, in two out of the three cases there has been a reduction in total and systematic risk.
    Keywords: Mergers & Acquisitions;Financial Services Sector;liquidity
    JEL: C12 G20 C01 G21
    Date: 2011–04–10
  12. By: Ulrich Witt
    Abstract: Epistemic arguments play a significant role in Hayek's defense of market liberalism. His claim that market competition is a discovery procedure that serves the common good is a case in point. The hypothesis of the markets' efficient use of existing knowledge is supplemented by the idea that markets are also most effectively creating new knowledge. However, in his assessment Hayek neglects the role of new technological knowledge. He ignores that the discovery procedure induces not only price and cost competition but also competition by innovations. Thence he overlooks the ambiguity that follows from the unpredictability of the consequences of innovations. This fact is shown to challenge the epistemic foundations and the stringency of Hayek's version of market liberalism.
    Keywords: competition, innovation, liberalism, knowledge, self-organization, Hayek Length 15 pages
    JEL: B25 D80 O33 P16 Q55
    Date: 2011–05

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