nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒07‒27
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. Merger efficiency and welfare implications of buyer power By Özlem Bedre-Defolie; Stéphane Caprice
  2. Bankruptcy Risk, Product Market Competition and Horizontal Mergers By Bernard Franck; Nicolas Le Pape
  3. Cost-saving or Cost-enhancing Mergers: the Impact of the Distribution of Roles in Oligopoly By Nicolas Le Pape; Kai Zhao
  4. The Deterrence Effects of U.S. Merger Policy Instruments By Clougherty, Joseph A.; Seldeslachts, Jo
  5. Implicit Collusion in Non-Exclusive Contracting under Adverse Selection By Han, Seungjin
  6. Core stable bidding rings in independent private value auctions with externalities By Omer Biran
  7. Competitive Price Coordination in Technology Sharing Agreements By Gallini, Nancy
  8. When is Gibrat's Law a Law? By Daunfeldt, Sven-Olov; Elert, Niklas
  9. Does Gibrat’s Law Hold for Retailing? Evidence from Sweden By Daunfeldt, Sven-Olov; Elert, Niklas; Lang, Åsa
  10. Cross-National Evidence on Generic Pharmaceuticals: Pharmacy vs. Physician-Driven Markets By Patricia M. Danzon; Michael F. Furukawa
  11. Parallel Imports and Mandatory Substitution Reform - A Kick or A Muff for Price Competition in Pharmaceuticals? By Granlund, David; Köksal, Miyase Yesim
  12. Who Searches for Low Prices? Population Characteristics and Price Dispersion in the Market for Prescription Drugs By Adrienne M. Ohler
  13. Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices By Charles J. Courtemanche; Art Carden
  14. Defending Mail Markets against New Entrants: An Application of the Defender Model By Christian Jaag; Helmut Dietl; Urs Trinkner; Oliver Fürst
  15. Spillover and Competition Effects: Evidence from the Sub-Saharan African Banking Sector By Pohl, Birte
  16. Inverting the regulatory rules? Optimizing airport regulation to account for commercial revenues By Evangelinos, Christos; Püschel, Ronny; Goldhahn, Susan
  17. The Costs of Free Entry: An Empirical Study of Real Estate Agents in Greater Boston By Panle Jia Barwick; Parag A. Pathak
  18. Using Forward Contracts to Reduce Regulatory Capture By Felix Höffler; Sebastian Kranz

  1. By: Özlem Bedre-Defolie (ESMT European School of Management and Technology); Stéphane Caprice (Toulouse School of Economics)
    Abstract: This paper analyzes the welfare implications of buyer mergers, which are mergers between downstream firms from different markets. We focus on the interaction between the merger's effects on downstream efficiency and on buyer power in a setup where one manufacturer with a non-linear cost function sells to two locally competitive retail markets. We show that size discounts for the merged entity has no impact on consumer prices or on smaller retailers, unless the merger affects the downstream efficiency of the merging parties. When the upstream cost function is convex, we find that there are “waterbed effects,” that is, each small retailer pays a higher average tariff if a buyer merger improves downstream efficiency. We obtain the opposite results, “anti-waterbed effects,” if the merger is inefficient. When the cost function is concave, there are only anti-waterbed effects. In each retail market, the merger decreases the final price if and only if it improves the efficiency of the merging parties, regardless of its impact on the average tariff of small retailers.
    Keywords: buyer mergers, non-linear supply contracts, merger efficiencies, size discounts, waterbed effects
    JEL: D43 K21 L42
    Date: 2011–07–14
  2. By: Bernard Franck; Nicolas Le Pape
    Keywords: Debt, Bankruptcy, Horizontal Merger, Competition Policy, Oligopoly.
    JEL: G33 G34 L13 L41
    Date: 2010–12–19
  3. By: Nicolas Le Pape; Kai Zhao
    Keywords: Horizontal Merger, Efficiency gains, Efficiency losses, Stackelberg oligopoly, Market power
    JEL: D43 L11 L13 L41
    Date: 2010–12–18
  4. By: Clougherty, Joseph A.; Seldeslachts, Jo
    Abstract: We estimate the deterrence effects of U.S. merger policy instruments with respect to the composition and frequency of future merger notifications. Data from the Annual Reports by the U.S. DOJ and FTC allow industry based measures over the 1986-1999 period of the conditional probabilities for eliciting investigations, challenges, prohibitions, court-wins and court-losses: deterrence variables akin to the traditional conditional probabilities from the economics of crime literature. We find the challenge-rate to robustly deter future horizontal (both relative and absolute) merger activity; the investigation-rate to slightly deter relative-horizontal merger activity; the court-loss-rate to moderately affect absolute-horizontal merger activity; and the prohibition-rate and court-win-rate to not significantly deter future horizontal mergers. Accordingly, the conditional probability of eliciting an antitrust challenge (i.e., remedies and prohibitions) involves the strongest deterrence effect from amongst the different merger policy instruments.
    Keywords: antitrust; deterrence; merger policy
    JEL: K21 L40 L49
    Date: 2011–07
  5. By: Han, Seungjin
    Abstract: This paper studies how implicit collusion may take place in non-exclusive contracting under adverse selection when multiple agents (e.g., entrepreneurs with risky projects) non-exclusively trade with multiple firms (e.g., banks). It introduces the notion of the dual-additive price schedule, which makes agents non-exclusively trade with firms in the market without arbitrage opportunities. It then shows that any dual-additive price schedule can be supported as equilibrium terms of trade in the market if each firm's expected profit is no less than its reservation profit. Firms sustain collusive outcomes through triggering trading mechanisms in which they change their terms of trade contingent only on agents' reports on the lowest average price that the deviating firm's trading mechanism would induce.
    Keywords: collusion, non-exclusive contracting, competing mechanisms
    JEL: D43 D82 D86
    Date: 2011–05–26
  6. By: Omer Biran (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)
    Abstract: We consider a second price auction between bidders with independently and identically distributed valuations, where a losing bidder suffers a negative direct externality. Considering ex-ante commitments to form bidding rings we study the question of core stability of the grand coalition, namely: is there a subset of bidders that prefers forming a small bidding ring rather than participating in the grand cartel? We show that in the presence of direct externalities between bidders the grand coalition is not necessarily core stable, as opposed to the zero externality case, where the stability of the grand coalition is a known result. Finally, we study collusion in auctions as a mechanism design problem, insisting on the difficulty to compare ex-ante and interim commitments. In particular, we show that there are situations in which bidders prefer colluding before privately learning their types.
    Keywords: Auctions;collusion;externalities;Bayesian games;core; partition function game;mechanism design
    Date: 2011–07–11
  7. By: Gallini, Nancy
    Abstract: This paper examines technology-sharing arrangements, the incentives to join them and the type of products that develop when they are anticipated. Particular attention is given to patent pools that admit members with overlapping ownership; that is, patentees with a stake in both complementary pooled inputs and downstream products that do not depend on the pool but compete with products that do. We ask whether this ownership structure under which pool members are vertically and horizontally related, facilitates anticompetitive price collusion. In a Bertrand framework it is shown that if the downstream products inside and outside the pool are strategic complements, then technology-sharing agreements are both privately and socially efficient in making the market more competitive, although prices increase in the degree to which pool members are involved in competing products. For strong substitutes and asymmetric outside ownership, efficient patent pools may not be profitable in which case allowing full coordination in which the pool sets the prices of both inside and outside products owned by its members will encourage the formation of efficient pools and, possibly, the selection of more complementary products. In analyzing the efficiencies of cooperative agreements for sharing technologies, this paper makes a case for incorporating private incentives to cooperate, as well as to innovate and litigate, into the debate on effective systems for encouraging innovation and its diffusion.
    Keywords: Patent Pools, Intellectual Property, Antitrust Policy
    JEL: L2 L44
    Date: 2011–07–14
  8. By: Daunfeldt, Sven-Olov (The Ratio Institute (RATIO)); Elert, Niklas (The Ratio Institute (RATIO))
    Abstract: The purpose of this paper is to investigate if the industry context matters for whether Gibrat's law is rejected or not using a dataset that consists of all limited firms in 5-digit NACE-industries in Sweden during 1998-2004. The results reject Gibrat's law on an aggregate level, since small firms grow faster than large firms. However, Gibrat's law is confirmed about as often as it is rejected when industry-specific regressions are estimated. It is also found that the industry context - e.g., minimum e¢ cient scale, market concentration rate, and number of young firms in the industry - matters for whether Gibrat's law is rejected or not.
    Keywords: Firm growth; firm size; job creation; small firms
    JEL: L11 L25 L26
    Date: 2010–11–26
  9. By: Daunfeldt, Sven-Olov (The Ratio Institute (RATIO)); Elert, Niklas (The Ratio Institute (RATIO)); Lang, Åsa (School of Technology and Business Studies)
    Abstract: Gibrat’s Law predicts that firm growth is a purely random effect and therefore should be independent of firm size. The purpose of this paper is to test Gibrat’s law within the retail industry, using a novel data-set comprising all Swedish limited liability companies active at some point between 1998 and 2004. Very few studies have previously investigated whether Gibrat’s Law seems to hold for retailing, and they are based on highly aggregated data. Our results indicate that Gibrat´s Law can be rejected for a large majority of five-digit retail industries in Sweden, since small retail firms tend to grow faster than large ones.
    Keywords: firm dynamics; firm size; firm growth; retail industry
    JEL: L11 L25 L81
    Date: 2011–01–01
  10. By: Patricia M. Danzon; Michael F. Furukawa
    Abstract: This paper examines the role of regulation and competition in generic markets. Generics offer large potential savings to payers and consumers of pharmaceuticals. Whether the potential savings are realized depends on the extent of generic entry and uptake and the level of generic prices. In the U.S., the regulatory, legal and incentive structures encourage prompt entry, aggressive price competition and patient switching to generics. Key features are that pharmacists are authorized and incentivized to switch patients to cheap generics. By contrast, in many other high and middle income countries, generics traditionally competed on brand rather than price because physicians rather than pharmacies are the decision-makers. Physician-driven generic markets tend to have higher generic prices and may have lower generic uptake, depending on regulations and incentives. Using IMS data to analyze generic markets in the U.S., Canada, France, Germany, U.K., Italy, Spain, Japan, Australia, Mexico, Chile, Brazil over the period 1998-2009, we estimate a three-equation model for number of generic entrants, generic prices and generic volume shares. We find little effect of originator defense strategies, significant differences between unbranded and unbranded generics, variation across countries in volume response to prices. Policy changes adopted to stimulate generic uptake and reduce generic prices have been successful in some E.U. countries.
    JEL: I11 I18 K2 L5 L65
    Date: 2011–07
  11. By: Granlund, David (The Swedish Retail Institute (HUI)); Köksal, Miyase Yesim (University of Gothenburg)
    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%.
    Keywords: parallel imports; pharmaceutical drugs; price competition; reference pricing; therapeutic competition
    JEL: I11 L51 L65
    Date: 2011–04–01
  12. By: Adrienne M. Ohler (Department of Economics, Illinois State University; Montana State University)
    Abstract: We examine the relationship between population characteristics and price dispersion for 75 prescription drugs in five markets. Based on models of price dispersion, we consider that search costs are likely lower for the elderly, who are repeat purchasers. Expected benefits from search are likely higher for low income households, who lack insurance. Our results are consistent with the hypothesis that for communities with a large percentage of elderly and poor population, search effort is greater for pharmaceutical drugs, causing lower price dispersion. By understanding the characteristics of who searches for low drug prices, we begin to identify the motives of consumers that might also lead to search for the lowest cost healthcare provider or lowest cost insurance. The results suggest that the 2004 Medicare legislation that closed the pharmaceutical donut hole may have reduced search by the elderly, increased price dispersion, and potentially increased the average price of prescription drugs.
    Keywords: search cost; price dispersion; prescription drugs
    JEL: D12 D83 I1
    Date: 2011–07
  13. By: Charles J. Courtemanche; Art Carden
    Abstract: Prior research shows grocery stores reduce prices to compete with Walmart Supercenters. This study finds evidence that the competitive effects of two other big box retailers – Costco and Walmart-owned Sam's Club – are quite different. Using city-level panel grocery price data matched with a unique data set on Walmart and warehouse club locations, we find that Costco entry is associated with higher grocery prices at incumbent retailers, and that the effect is strongest in cities with small populations and high grocery store densities. This is consistent with incumbents competing with Costco along non-price dimensions such as product quality or quality of the shopping experience. We find no evidence that Sam’s Club entry affects grocery stores’ prices, consistent with Sam’s Club’s focus on small businesses instead of consumers.
    JEL: L11 L13 L81 R10
    Date: 2011–07
  14. By: Christian Jaag; Helmut Dietl; Urs Trinkner; Oliver Fürst
    Abstract: In this paper we analyzed the strategic competition between incumbent postal operators and market entrants in liberalized letter markets based on the “defender consumer model” pioneered by Hauser and Shugan (1983) and derived qualitative normative implications on how an established firm should defend its profits when facing an attack by a new competitive product. Our results extend the literature on competition in liberalized mail markets by combining pricing and positioning strategies from a marketing perspective. Our analysis highlights that incumbent postal operators can defend their market shares by differentiating their services along one or more quality dimensions. Postal services are not necessarily homogenous. If postal operators focus solely on pricing strategies they will run into the more serious problems than if they compete on quality too.
    Keywords: Defender model, mail market, competition, postal sector
    JEL: L50 L87
    Date: 2011–07
  15. By: Pohl, Birte
    Abstract: This paper examines the efficiency effects of foreign bank entry on domestic banks in sub-Saharan Africa during the period 1999-2006. Using a recently compiled dataset on foreign bank presence, the competition and spillover effects of North-South, regional and nonregional South-South banks are distinguished. The results show that the competitive pressure on domestic banks' net interest margins emanates only from regional South-South banks. There is evidence of spillover effects from North-South and regional South-South banks on domestic banks. As domestic banks invest in foreign technologies, their overhead costs increase in the short-run. Non-regional South-South banks seem to have little effect on the efficiency of domestic banks. --
    Keywords: Sub-Saharan Africa,efficiency,South-South banks,spillover
    JEL: F21 F23 F36
    Date: 2011
  16. By: Evangelinos, Christos; Püschel, Ronny; Goldhahn, Susan
    Abstract: This paper analyzes the role of commercial revenues in today's airport regulatory system. We find that the current regulatory regime only partially achieves core aims such as welfare maximization. After highlighting instances in which airport price regulation is not economically justified, we explore the potential for airports to exercise market power in the commercial sector. In certain circumstances, we advocate the introduction of an 'inverted' dual till system under which commercial as opposed to aviation revenues are the focus of price regulation. The suitability of such a system varies from airport to airport, however, depending on various factors, such as the airport's competitive environment and the presence of capacity constraints. --
    Keywords: Airport regulation,non-aviation revenues,price differentiation,single till,dual till
    Date: 2011
  17. By: Panle Jia Barwick; Parag A. Pathak
    Abstract: This paper studies the real estate brokerage industry in Greater Boston, an industry with low entry barriers and substantial turnover. Using a comprehensive dataset of agents and transactions from 1998-2007, we find that entry does not increase sales probabilities or reduce the time it takes for properties to sell, decreases the market share of experienced agents, and leads to a reduction in average service quality. These empirical patterns motivate an econometric model of the dynamic optimizing behavior of agents that serves as the foundation for simulating counterfactual market structures. A one-half reduction in the commission rate leads to a 73% increase in the number of houses each agent sells and benefits consumers by about $2 billion. House price appreciation in the first half of the 2000s accounts for 24% of overall entry and a 31% decline in the number of houses sold by each agent. Low cost programs that provide information about past agent performance have the potential to increase overall productivity and generate significant social savings.
    JEL: L0 L00 L1 L5 L8 L85 R0 R00
    Date: 2011–07
  18. By: Felix Höffler (Max Planck Institute for Research on Collective Goods, Bonn); Sebastian Kranz (University of Bonn, Department of Economics)
    Abstract: A fully unbundled, regulated network fi?rm of unknown efficiency level can undertake unobservable effort to increase the likelihood of low downstream prices, e.g., by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the ?firm contingent on realized downstream prices. Alternatively, the regulator can propose to the ?firm to sell the following forward contracts: the fi?rm pays the downstream price to the owners of a contract, but receives the expected value of the contracts when selling them to a competitive fi?nancial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic probability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.
    Keywords: Incentive regulation, regulatory capture, virtual power plants
    JEL: K23 L94 L43 L51
    Date: 2011–05

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