nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒08‒02
twenty-one papers chosen by
Russell Pittman
US Department of Justice

  1. One-stop shopping behavior, buyer power, and upstream merger incentives By Schlippenbach, Vanessa von; Wey, Christian
  2. Customer recognition and competition By Oz Shy; Rune Stenbacka
  3. Vertical coordination through renegotiation By Özlem Bedre-Defolie
  4. Using rival effects to identify synergies and improve merger typologies By Clougherty, Joseph A.; Duso, Tomaso
  5. Winning by Losing: Evidence on Overbidding in Mergers By Ulrike Malmendier; Enrico Moretti; Florian Peters
  6. How Do Firm Financial Conditions Affect Product Quality and Pricing? By Gordon M. Phillips; Giorgo Sertsios
  7. Computational Results on Membership in R&D Cooperation Networks: To Be or Not To Be in a Research Joint Venture By Duarte Leite; Pedro Campos; Isabel Mota
  8. Competition among Spatially Differentiated Firms: An Estimator with an Application to Cement By Matthew J Osborne; Nathan H. Miller
  9. Comparison Sites By Jose Luis Moraga-Gonzalez; Matthijs R. Wildenbeest
  10. Technology licensing by advertising supported media platforms: An application to internet search engines By Sapi, Geza; Suleymanova, Irina
  11. Competition in Health Care Markets By Martin Gaynor; Robert J. Town
  12. Drug Innovations and Welfare Measures Computed from Market Demand: The Case of Anti-Cholesterol Drugs By Abe Dunn
  13. An economic analysis of the 2010 proposed settlement between the Department of Justice and credit card networks By Scott Schuh; Oz Shy; Joanna Stavins; Robert Triest
  14. Bank Competition and Stability: Cross-country Heterogeneity By Beck, T.H.L.; De Jonghe, O.G.; Schepens, G.
  15. Competition and Industry Structure for International Rail Transportation By Friebel, Guido; Ivaldi, Marc; Pouyet, Jérôme
  16. Paying Positive to Go Negative: Advertisers' Competition and Media Reports By A. Blasco; P. Pin; F. Sobbrio
  17. Access regulation with asymmetric termination costs By Stühmeier, Torben
  18. On file sharing with indirect Network effects between concert ticket sales and music recordings By Dewenter, Ralf; Haucap, Justus; Wenzel, Tobias
  19. Stackelberg oligopoly TU-games: characterization of the core and 1-concavity of the dual game By Theo Driessen; Dongshuang Hou; Aymeric Lardon
  20. Convexity and the Shapley value in Bertrand oligopoly TU-games with Shubik's demand functions By Dongshuang Hou; Theo Driessen; Aymeric Lardon
  21. Competition policy and productivity growth: An empirical assessment By Buccirossi, Paolo; Ciari, Lorenzo; Duso, Tomaso; Spagnolo, Giancarlo; Vitale, Cristiana

  1. By: Schlippenbach, Vanessa von; Wey, Christian
    Abstract: We analyze how consumer preferences for one-stop shopping affect the bargaining relationship between a retailer and its suppliers. One-stop shopping preferences create demand complementarities among otherwise independent products which lead to two opposing effects on upstream merger incentives: first a standard double mark-up problem and second a bargaining effect. The former creates merger incentives while the later induce suppliers to bargain separately. When buyer power becomes large enough, then suppliers stay separated which raises final good prices. Such an outcome is more likely when one-stop shopping is pronounced. --
    Keywords: One-stop shopping,buyer power,supplier merger
    JEL: L22 L42 Q13
    Date: 2011
  2. By: Oz Shy; Rune Stenbacka
    Abstract: We introduce three types of consumer recognition: identity recognition, asymmetric preference recognition, and symmetric preference recognition. We characterize price equilibria and compare profits, consumer surplus, and total welfare. Asymmetric preference recognition enhances profits compared with identity recognition, but firms have no incentive to exchange information regarding customer-specific preferences (symmetric preference recognition). Consumers would benefit from a policy panning information exchange regarding individual consumer preferences. Our welfare analysis shows that the gains to firms from uniform pricing (no recognition) are larger than the associated harm to consumers, regardless of which regime of customer recognition serves as the basis for comparison.
    Keywords: Consumers' preferences
    Date: 2011
  3. By: Özlem Bedre-Defolie (ESMT European School of Management and Technology)
    Abstract: This paper analyzes the strategic use of bilateral supply contracts in sequential negotiations between one manufacturer and two differentiated retailers. Allowing for general contracts and retail bargaining power, I show that the first contracting parties have incentives to manipulate their contract to shift rent from the second contracting retailer and these incentives distort the industry profit away from the fully integrated monopoly outcome. To avoid such distortion, the first contracting parties may prefer to sign a contract which has no commitment power and can be renegotiated from scratch should the manufacturer fail in its subsequent negotiation with the second retailer. Renegotiation from scratch induces the first contracting parties to implement the monopoly prices and might enable them to capture the maximized industry profit. A slotting fee, an up-front fee paid by the manufacturer to the first retailer, and a menu of tariff-quantity pairs are sufficient contracts to implement the monopoly outcome. These results do not depend on the type of retail competition, the level of differentiation between the retailers, the order of sequential negotiations, the level of asymmetry between the retailers in terms of their bargaining power vis-à-vis the manufacturer or their profitability in exclusive dealing.
    Keywords: vertical contracts, rent shifting, renegotiation, buyer power
    Date: 2011–07–25
  4. By: Clougherty, Joseph A.; Duso, Tomaso
    Abstract: The strategy literature has found it difficult to differentiate between collusive and efficiencybased synergies in horizontal merger activity. We propose a theoretically-backed methodological approach to classify mergers that yields more information on merger types and merger effects, and that can, moreover, distinguish between mergers characterized largely by collusion-based synergies and mergers characterized largely by efficiency-based synergies. Crucial to the proposed measurement approach is that it encompasses the impact of merger events not only on merging firms (custom in the literature), but also on non-merging rival firms (novel in the literature). Employing the event-study procedure with stock-market data on samples of large horizontal mergers drawn from the US and UK (an Anglo-American sub-sample) and from the European continent, we demonstrate how the proposed schematic can better clarify the nature of merger activity. --
    Keywords: acquisitions,event-study,mergers,research methods,rivals,synergy
    Date: 2011
  5. By: Ulrike Malmendier (UC Berkeley, and NBER); Enrico Moretti (UC Berkeley, and NBER); Florian Peters (Duisenberg school of finance, and University of Amsterdam)
    Abstract: Do shareholders of acquiring companies profit from acquisitions, or do acquiring CEOs overbid and destroy shareholder value? Answering this question is difficult since the hypothetical counterfactual is hard to determine. We exploit merger contests to address the identification issue. In those cases where, ex ante, at least two bidders had a significant chance at winning the contest, the post-merger performance of the loser allows calculating the counterfactual performance of the winner without the merger. In a novel data set of merger contests since 1985, we find that the returns of bidders are closely aligned before the merger contest, but diverge afterwards. In the sample where the loser had a significant chance to win, winners underperform losers by 48 percent over the following three years. Our results also imply that announcement returns fail to provide an informative estimate of the causal effect of mergers in our sample. Existing measures of long-run abnormal returns tend to underestimate the negative return implications.
    Keywords: Mergers; Acquisitions; Misvaluation; Counterfactual
    JEL: G34 G14
    Date: 2011–07–25
  6. By: Gordon M. Phillips; Giorgo Sertsios
    Abstract: We analyze the interaction of firm product quality and pricing decisions with financial distress and bankruptcy in the airline industry. We consider an airline's choices of quality and price as dynamic decisions that trade off current cash flows for future revenue. We examine how airline mishandled baggage, on-time performance and pricing are related to financial distress and bankruptcy, controlling for the endogeneity of financial distress and bankruptcy. We find that an airline's quality decisions are differentially affected by financial distress and bankruptcy. Product quality decreases when airlines are in financial distress, consistent with financial distress reducing a firm's incentive to invest in quality. In contrast, in bankruptcy product quality increases relative to financial distress. In addition, we find that firms price more aggressively when in financial distress consistent with firms trying to increase short-term market share and revenues.
    JEL: G33 L1 L21 L22 L93
    Date: 2011–07
  7. By: Duarte Leite (LIAAD – INESC, LA, Faculdade de Economia do Porto, Universidade do Porto); Pedro Campos (LIAAD – INESC, LA, Faculdade de Economia do Porto, Universidade do Porto); Isabel Mota (CEF.UP, Faculdade de Economia do Porto, Universidade do Porto)
    Abstract: In this study, we analyze firms’ membership in R&D (Research and Development) cooperation networks. Our main research hypothesis is that the membership in cooperation networks is related to the degree of the knowledge spillover. The approach focus on both cost symmetry and cost asymmetry. For that purpose, our work is developed in two tasks: we first develop an analytical model with three stages: in the first, firms decide whether to participate in a cooperative research network; in the second they simultaneously choose the level of R&D output, and finally firms choose the level of output through Cournot competition under both cost symmetry and cost asymmetry. Then we proceed with computational simulations in order to verify our hypothesis. From our results, we were able to conclude that cooperation leads to an improvement on RJV firms’ position in the market as it allows them to produce more than others with the same production conditions. Additionally, cooperating firms have to spend fewer resources on research, which turns the network a tremendous success on the productive efficiency level.
    Keywords: R&D, networks, spillover, simulation, RJV
    JEL: D85 L24 C63
    Date: 2011–07
  8. By: Matthew J Osborne; Nathan H. Miller (Bureau of Economic Analysis)
    Abstract: We develop an estimator for models of competition among spatially differentiated firms. In contrast to existing methods (e.g., Houde (2009)), the estimator has flexible data requirements and is implementable with data that are observed at any level of aggregation. Further, the estimator is the first to be applicable to models in which firms price discriminate among consumers based on location. We apply the estimator to the portland cement industry in the U.S. Southwest over 1983-2003. We estimate transportation costs to be $0.30 per tonne-mile and show that, given the topology of the U.S. Southwest, these transportation costs permit more geographically isolated plants to discriminate among consumers. We conduct a counterfactual experiment and determine that disallowing this spatial price discrimination would increase consumer surplus by $12 million annually, relative to a volume of commerce of $1.3 billion. Heretofore it has not been possible examine the surplus implications of spatial price discrimination in specific, real-world settings; these implications have been known to be ambiguous theoretically since at least Gronberg and Meyer (1982) and Katz (1984). Additionally, our methodology can be used to construct transportation margins, which are an important component of input-output tables.
    JEL: E60 C51 L11 L40 L61
    Date: 2011–04
  9. By: Jose Luis Moraga-Gonzalez (ICREA, IESE Business School, and University of Groningen); Matthijs R. Wildenbeest (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: Web search technologies are fundamental tools to easily navigate through the huge amount of information available in the Internet. One particular type of search technologies are the so- called shopbots, or comparison sites. The emergence of Internet shopbots and their implications for price competition and market efficiency are the focus of this chapter. We develop a simple model where a price comparison site tries to attract (possibly vertically and horizontally differentiated) online retailers on the one hand, and consumers on the other hand. The analysis of the model reveals that differentiation among the products of the retailers as well as their ability to price discriminate between on- and off-comparison-site consumers play a critical role. When products are homogeneous, if online retailers cannot charge different on- and off-the-comparison- site prices, then the comparison site has incentives to charge fees so high that some firms are excluded, which generates price dispersion and an inefficient outcome. By contrast, when on- and off-comparison-site prices can be different, the comparison site attracts all the players to the platform and the allocation is efficient. A similar result obtains when products are horizontally differentiated. In that case, the comparison site becomes an aggregator of product information and no matter whether firms can price discriminate or not, the comparison site attracts all the players to the platform and an efficient outcome ensues. We argue that the lack of vertical product differentiation may also be critical for this efficiency result. In fact, we show that when quality differences are large, the comparison site may find it profitable to charge fees such that low quality producers are excluded, thereby inducing an inefficient outcome.
    JEL: L0
    Date: 2011–05
  10. By: Sapi, Geza; Suleymanova, Irina
    Abstract: We develop a duopoly model with advertising supported platforms and analyze incentives of a superior firm to license its advanced technologies to an inferior rival. We highlight the role of two technologies characteristic for media platforms: The technology to produce content and to place advertisements. Licensing incentives are driven solely by indirect network effects arising fromthe aversion of users to advertising. We establish a relationship between licensing incentives and the nature of technology, the decision variable on the advertiser side, and the structure of platforms' revenues. Only the technology to place advertisements is licensed. If users are charged for access, licensing incentives vanish. Licensing increases the advertising intensity, benefits advertisers and harms users. Our model provides a rationale for technology-based cooperations between competing platforms, such as the planned Yahoo-Google advertising agreement in 2008. --
    Keywords: Technology Licensing,Two-Sided Market,Advertising
    JEL: L13 L24 L86 M37
    Date: 2011
  11. By: Martin Gaynor; Robert J. Town
    Abstract: This paper reviews the literature devoted to studying markets for health care services and health insurance. There has been tremendous growth and progress in this field. A tremendous amount of new research has been done in this area over the last 10 years. In addition, there has been increasing development and use of frontier industrial organization methods. We begin by examining research on the determinants of market structure, considering both static and dynamic models. We then model the strategic determination of prices between health insurers and providers where insurers market their products to consumers based, in part, on the quality and breadth of their provider network. We then review the large empirical literature on the strategic determination of hospital prices through the lens of this model. Variation in the quality of health care clearly can have large welfare consequences. We therefore also describe the theoretical and empirical literature on the impact of market structure on quality of health care. The paper then moves on to consider competition in health insurance markets and physician services markets. We conclude by considering vertical restraints and monopsony power.
    JEL: I11 I18 L10 L13 L30 L40
    Date: 2011–07
  12. By: Abe Dunn (Bureau of Economic Analysis)
    Abstract: The pharmaceutical industry is characterized as having substantial investment in R&D and a large number of new product introductions, which poses special problems for price measurement caused by the quality of drug products changing over time. This paper applies recent demand estimation techniques to construct a constant- quality price index for anti-cholesterol drugs. Demand is estimated using a nationally representative sample of individuals over the period 1996 to 2007 that includes detailed information on individual health conditions, demographics, insurance, and prescription drug choices. Although the average price for anti-cholesterol drugs does not change over the sample period, I .nd that the constant-quality price index drops by 22 percent, a pace more in line with our expectations in such a dynamic segment of the industry. This result is robust to a number of alternative assumptions, highlighting the importance of controlling for quality in markets with signi.cant innovation. The demand estimates also reveal that the bene.ts from new innovations depend on the health conditions of individuals which may impact quality-adjusted prices for di¤erent populations.
    JEL: E60
    Date: 2010–10
  13. By: Scott Schuh; Oz Shy; Joanna Stavins; Robert Triest
    Abstract: In 2010, the Department of Justice (DOJ) filed a lawsuit against the credit card networks American Express, MasterCard, and Visa for alleged antitrust violations. We evaluate the extent to which the recently proposed settlement between the DOJ and Visa and MasterCard (henceforth, "Proposed Settlement") is likely to achieve its central objective: "…to allow Merchants to attempt to influence the General Purpose [Credit] Card or Form of Payment Customers select by providing choices and information in a competitive market." In word and spirit, the Proposed Settlement represents a significant step toward promoting competition in the credit card market. However, we find that merchants are unlikely to be able to take full advantage of the Proposed Settlement's new freedoms because they currently lack comprehensible and complete information on the full and exact merchant discount fees for their customers' credit cards. We analyze the likely consequences of this information problem, and consider ways in which it could be remedied. We also evaluate the probable welfare consequences of allowing merchants to impose surcharges to reflect the fees associated with the use of payment cards.
    Keywords: Credit cards
    Date: 2011
  14. By: Beck, T.H.L.; De Jonghe, O.G.; Schepens, G. (Tilburg University, Center for Economic Research)
    Abstract: This paper documents a large cross-country variation in the relationship between bank competition and stability and explores market, regulatory and institutional features that can explain this heterogeneity. Combining insights from the competition-stability and regulation-stability literatures, we develop a unified framework to assess how regulation, supervision and other institutional factors may make it more likely that the data favor the charter-value paradigm or the risk-shifting paradigm. We show that an increase in competition will have a larger impact on banks’ risk taking incentives in countries with stricter activity restrictions, more homogenous market structures, more generous deposit insurance and more effective systems of credit information sharing.
    Keywords: Competition;Stability;Banking;Herding;Deposit Insurance;Information Sharing;Risk Shifting.
    JEL: G21 G28 L51
    Date: 2011
  15. By: Friebel, Guido; Ivaldi, Marc; Pouyet, Jérôme
    Abstract: This paper investigates various options for the organization of the railway industry when network operators require the access to multiple national networks to provide international (freight or passenger) transport services. The EU rail system provides a framework for our analysis. Returns-to-scale and the intensity of competition are key to understanding the impact of vertical integration or separation between infrastructure and operation services within each country in the presence of international transport services. We also consider an option in which a transnational infrastructure manager is in charge of offering a coordinated access to the national networks. In our model, it turns out to be an optimal industry structure.
    Keywords: Network access; Transport economics; Vertical Separation
    JEL: L14 L42 L51 L92
    Date: 2011–07
  16. By: A. Blasco; P. Pin; F. Sobbrio
    Abstract: This paper analyzes a two-sided market for news where advertisers may pay a media outlet to conceal negative information about the quality of their own product (paying positive to avoid negative) and/or to disclose negative information about the quality of their competitors' products (paying positive to go negative). We show that whether advertisers have negative consequences on the accuracy of news reports or not ultimately depends on the extent of correlation among advertisers' products. Specifically, the lower the correlation among the qualities of the advertisers' products, the (weakly) higher the accuracy of the media outlet' reports. Moreover, when advertisers' products are correlated, a higher degree of competition in the market of the advertisers' products may decrease the accuracy of the media outlet's reports.
    JEL: L82 D82
    Date: 2011–07
  17. By: Stühmeier, Torben
    Abstract: In many telecommunications markets incumbent providers enjoy a demand-side advantage over any entrant. However, market entrants may enjoy a supply-side advantage over the incumbent, since they are more efficient or operate on innovative technologies. Considering both a supply-side and a demand-side asymmetry, the present model analyzes the effect of two regulatory regimes: An access markup for a low cost network and reciprocal charges below the costs of a high cost network. Both regimes may have adverse effects on subscribers, market shares, and profits. It can be shown that an access markup is not generally beneficial and an access deficit not generally detrimental for the respective networks. However, if providers discriminate between on-net and off-net prices a markup on the entrant's termination cost is generally to its benefit and to the incumbent's detriment. --
    Keywords: Termination charges,Interconnection,Asymmetric Regulation,Price Discrimination
    JEL: L13 L51 L96
    Date: 2011
  18. By: Dewenter, Ralf; Haucap, Justus; Wenzel, Tobias
    Abstract: This paper analyses the interdependency between the market for music recordings and concert tickets, assuming that there are positive indirect network effects both from the record market to ticket sales for live performances and vice versa. In a model with two interrelated Hotelling lines prices in both markets are corrected downwards when compared to the standard Hotelling model. Also, file sharing has ambiguous effects on firms' profitability. As file sharing can indirectly increase demand for live performances overall profits can either increase or decrease, depending on the strength of indirect network effects. Finally, file sharing may induce firms to switch from the traditional business model with two separate firms to an integrated business model where one agency markets both records and concerts (so-called 360 degree deals). --
    JEL: L13 L82 Z10
    Date: 2011
  19. By: Theo Driessen (Department of Applied Mathematics [Twente] - University of Twente); Dongshuang Hou (Department of Applied Mathematics [Twente] - University of Twente); Aymeric Lardon (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)
    Abstract: In this article we consider Stackelberg oligopoly TU-games in gamma-characteristic function form (Chander and Tulkens 1997) in which any deviating coalition produces an output at a first period as a leader and outsiders simultaneously and independently play a quantity at a second period as followers. We assume that the inverse demand function is linear and that firms operate at constant but possibly distinct marginal costs. Generally speaking, for any TU-game we show that the 1-concavity property of its dual game is a necessary and sufficient condition under which the core of the initial game is non-empty and coincides with the set of imputations. The dual game of a Stackelberg oligopoly TU-game is of great interest since it describes the marginal contribution of followers to join the grand coalition by turning leaders. The aim is to provide a necessary and sufficient condition which ensures that the dual game of a Stackelberg oligopoly TU-game satisfies the 1-concavity property. Moreover, we prove that this condition depends on the heterogeneity of firms' marginal costs, i.e., the dual game is 1-concave if and only if firms' marginal costs are not too heterogeneous. This last result extends Marini and Currarini's core non-emptiness result (2003) for oligopoly situations.
    Keywords: Stackelberg oligopoly TU-game; Dual game; 1-concavity
    Date: 2011
  20. By: Dongshuang Hou (Department of Applied Mathematics [Twente] - University of Twente); Theo Driessen (Department of Applied Mathematics [Twente] - University of Twente); Aymeric Lardon (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)
    Abstract: The Bertrand Oligopoly situation with Shubik's demand functions is modelled as a cooperative TU game. For that purpose two optimization problems are solved to arrive at the description of the worth of any coalition in the so-called Bertrand Oligopoly Game. Under certain circumstances, this Bertrand oligopoly game has clear affinities with the well-known notion in statistics called variance with respect to the distinct marginal costs. This Bertrand Oligopoly Game is shown to be totally balanced, but fails to be convex unless all the firms have the same marginal costs. Under the complementary circumstances, the Bertrand Oligopoly Game is shown to be convex and in addition, its Shapley value is fully determined on the basis of linearity applied to an appealing decomposition of the Bertrand Oligopoly Game into the difference between two convex games, besides two nonessential games. One of these two essential games concerns the square of one non- essential game.
    Keywords: Bertrand Oligopoly situation, Bertrand Oligopoly Game, Convexity, Shapley Value, Total Balancedness.
    Date: 2011
  21. By: Buccirossi, Paolo; Ciari, Lorenzo; Duso, Tomaso; Spagnolo, Giancarlo; Vitale, Cristiana
    Abstract: This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy as measured by newly created indexes. We provide several arguments and results based on instrumental variables estimators and non-linearities to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional set up and antitrust activities (rather than merger control). The effect is strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions. --
    Keywords: Competition Policy,Productivity Growth,TFP,Institutions,Deterrence,OECD
    JEL: L4 K21 O4 C23
    Date: 2011

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