nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒11‒01
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. Bundling Revisited: Substitute Products and Inter-Firm Discounts By Mark Armstrong
  2. Exploding Offers and Buy-Now Discounts By Mark Armstrong; Jidong Zhou
  3. Do Exclusivity Arrangments Harm Consumers? By Jihui Chen
  4. Verti-zontal differentiation in monopolistic competition By Francesco Di Comite; Jacques-François Thisse; Hylke Vandenbussche
  5. Endogenous Bid Rotation in Repeated Auctions By Rachmilevitch, Shiran
  6. EU Competition Policy Revisited: Economic Doctrines Within European Political Work By Matthieu MONTALBAN (GREThA, CNRS, UMR 5113); Sigfrido RAMIREZ-PEREZ (Università Bocconi); Andy SMITH (Centre Emile Durkheim - IEP-Bordeaux)
  7. Optimal Legal Standards in Antitrust: Traditional v. Innovative Industries By Giovanni Immordino; Michele Polo
  8. Assessing Unilateral Merger Effects in a Two-Sided Market: An Application to the Dutch Daily Newspaper Market By Lapo Filistrucchi; Tobias J. Klein; Thomas Michielsen
  9. The Social Cost of a Credit Monopoly By Andreas Madestam
  10. Competition between Exchanges: A research Agenda By Estelle Cantillon; Pai-Ling Yin
  11. Entry and Exit of Physicians in a two-tiered public/private Health Care System By Martin Gächter; Peter Schwazer; Engelbert Theurl
  12. Postal and Regulatory Reform in Intermodal Competition By Christian Jaag; Helmut Dietl
  13. Development of competition indicators in the Norwegian general practice: Constructing a postal code-specific Herfindahl-Hirschman index applying STATA software By Chen, Xing; Godager, Geir

  1. By: Mark Armstrong
    Abstract: This paper extends the standard model of bundling to allow products to be substitutes and for products to be supplied by separate sellers. Whether integrated or separate, firms have an incentive to introduce a bundling discount when demand for the bundle is elastic relative to demand for stand-alone products. When products are partial substitutes, this typically gives an integrated firm a greater incentive to offer a bundle discount (relative to the standard model with additive preferences), while product substitutability is often the sole reason why separate sellers wish to offer inter-firm discounts. When separate sellers negotiate their inter-firm discount, they can use the discount to relax competition.
    Keywords: Bundling, Price discrimination, Oligopoly, Collusion
    JEL: L11 L13 L42
    Date: 2011
  2. By: Mark Armstrong; Jidong Zhou
    Abstract: A common sales tactic is for a seller to encourage a potential customer to make her purchase decision quickly, before she can investigate rival deals in the market. We consider a market with sequential consumer search in which firms can achieve this either by making an exploding offer (which permits no return once the consumer leaves) or by offering a buy-now discount (which makes the price paid for immediate purchase lower than the regular price). We show that firms often have an incentive to use these sales techniques, regardless of their ability to commit to their selling policy. We examine the impact of these sales techniques on market performance. Inducing consumers to buy quickly not only reduces the quality of the match between consumers and products, but may also raise market prices.
    Keywords: Consumer search, Oligopoly, Price discrimination, High-presure selling, Exploding offers, Buy-now discounts, Costly recall
    JEL: D18 D83 L13
    Date: 2011
  3. By: Jihui Chen (Department of Economics, Illinois State University; Department of Strategy and Policy, National University of Singapore)
    Abstract: This paper explores welfare implications of exclusivity arrangements, e.g. iPhone?s part- nership with wireless carriers. Two ?rms compete in a primary good market, while a monop- olistic ?rm o¤ers a value-adding good. The primary good can be consumed alone, while the value-adding good must be consumed with the primary good. The monopolistic ?rm forms an exclusivity partnership with one of the primary good providers. Buyers are able to consume the value-adding good only if they patronize the monopolistic ?rm?s exclusive partner. This practice allows the monopolistic ?rm to extract surplus from the primary good market. Sur- prisingly, consumers bene?t from the exclusivity arrangement. However, overall social welfare declines, despite improvements to consumer welfare.
    Keywords: exclusivity, consumer welfare, market efficiency, hotelling
    JEL: L1 L2 L4 L5
    Date: 2011–10
  4. By: Francesco Di Comite (Department of Economics (IRES), Université Catholique de Louvain; European Commission, Directorate-General Economic and Financial Affairs); Jacques-François Thisse (CORE, Université Catholique de Louvain); Hylke Vandenbussche (National Bank of Belgium, Research Department; CORE, Université Catholique de Louvain; Department of Economics (IRES), Université Catholique de Louvain)
    Abstract: The recent availability of trade data at a firm-product-country level calls for a new generation of models able to exploit the large variability detected across observations. By developing a model of monopolistic competition in which varieties enter preferences non-symmetrically, we show how consumer taste heterogeneity interacts with quality and cost heterogeneity to generate a new set of predictions. Applying our model to a unique micro-level dataset on Belgian exporters with product and destination market information, we find that heterogeneity in consumer tastes is the missing ingredient of existing monopolistic competition models necessary to account for observed data patterns.
    Keywords: Heterogeneous firms, Product Differentiation, Monopolistic Competition, Nonsymmetric varieties
    JEL: D43 F12 F14 L16
    Date: 2011–10
  5. By: Rachmilevitch, Shiran (Department of Economics, University of Haifa)
    Abstract: I study collusion between two bidders in a general symmetric IPV repeated auction, without communication, side transfers, or public randomization. I construct a collusive scheme, endogenous bid rotation, that generates a payoff larger than the bid rotation payoff.
    Keywords: Auctions; Bid rotation; Collusion; Repeated games
    JEL: D44 D82
    Date: 2011–10–09
  6. By: Matthieu MONTALBAN (GREThA, CNRS, UMR 5113); Sigfrido RAMIREZ-PEREZ (Università Bocconi); Andy SMITH (Centre Emile Durkheim - IEP-Bordeaux)
    Abstract: European Union competition policy is often described as neoliberal, without this leading to more investigation. This paper highlights how the European Competition policy doctrine has been shaped, how the ordoliberal movement and the Chicago school ideas have been implemented and supported by the political work of some key actors. We show that, contrary to what is sometimes said in literature, ordoliberal actors were neither hegemonic nor leaders between Rome Treaty and the eighties, even if some neoliberal principles were introduced in antitrust law. These laws are much more a compromise between French and German representatives, and between neo-mercantilists and ordoliberals. However, things have dramatically changed since the eighties, when both (1) new political work from members of the Commission introduced in the European competition policy elements of Chicago School doctrine to complete the European market and (2) some decisions from the ECJ clarified the doctrine of EU Competition law. Nowadays, European competition policy is a mix between an ordoliberal spirit and some Chicago School doctrinal elements.
    Keywords: competition, policy, European Union, neoliberalism, ordoliberalism, political work
    JEL: L4 N4
    Date: 2011
  7. By: Giovanni Immordino; Michele Polo
    Abstract: A dominant firm undertakes a given business practice that is regulated by an antitrust enforcer by the choice of a legal standard, fines and accuracy. In traditional industries the incumbent and technology are already established, while in innovative industries the successful innovator becomes dominant. In the former case, marginal deterrence is key to enforcement, and discriminating rules are always dominant when fines are unbounded, or they are replaced with per-se illegality when fines are capped and the practice is likely to be socially harmful. In innovative industries marginal deterrence interacts with average deterrence (the impact of enforcement on innovation effort). Then, per-se legality is preferred when the practice is likely to be welfare beneficial, moving to a discriminating rule when social harm becomes more likely. When fines are capped, per se-legality, discriminating rule and per-se illegality are alternatively chosen when the practice is more and more likely to be socially harmful.
    Date: 2011
  8. By: Lapo Filistrucchi (Università degli Studi di Firenze,); Tobias J. Klein (Tilburg University); Thomas Michielsen (Tilburg University)
    Abstract: We compare different methods to assess unilateral merger effects in a two-sided market by applying them to a hypothetical merger in the Dutch newspaper industry. For this, we first specify and estimate a structural model of demand for differentiated products on both the readership and the advertising side of the market. This allows us to recover price elasticities and indirect network effects. Following Filistrucchi, Klein, and Michielsen (2010) marginal costs are then recovered from an oligopoly model of the supply side. We use these estimates of price elasticities, network effects and marginal costs to compare different methods that can be used to evaluate merger effects: We perform a concentration analysis based on the Herfindahl Hirschmann Index, a Small Significant Non-Transitory Increase in Price test, measure Upward Pricing Pressure, and conduct a full merger simulation.
    Keywords: Two-sided markets, newspapers, advertising, network effects, merger simulation, SSNIP, UPP, HHI.
    JEL: L13 L40 L82
    Date: 2011
  9. By: Andreas Madestam
    Abstract: Banks provide credit and take deposits. Whereas a high price in the credit market increases banks’ retained earnings and attracts more deposits, it reduces lending if borrowers are sufficiently poor to be tempted by diversion. Thus optimal bank market structure trades off the benefits of monopoly banking in attracting deposits against losses due to tighter credit. The model shows that market structure is irrelevant if both banks and borrowers lack resources. Monopoly banking induces tighter credit rationing if borrowers are poor and banks are wealthy, and increases lending if borrowers are wealthy and banks lack resources. The results indicate that improved legal protection of creditors is a more efficient policy choice than legal protection of depositors, and that subsidies to firms lead to better outcomes than subsidies to banks. There are also likely to be sizable gains from promoting bank competition in developing countries.
    Date: 2011
  10. By: Estelle Cantillon; Pai-Ling Yin
    Abstract: This paper describes open research questions related to the competition and market structure of financial exchanges and argues that only a combination of industrial organization and finance can satisfactorily attack these questions. Two examples are discussed to illustrate how the combination of these two approaches can significantly enrich the analysis: the “network externality puzzle”, which refers to the question of why trading for the same security is often split across trading venues, and the impact of the multi-sided character of financial exchanges on pricing and profitability.
    Keywords: network effects; two-sided market; tipping; competition; market structure; market microstructure
    JEL: G29 L13 L40 L15
    Date: 2011–05
  11. By: Martin Gächter (University of Innsbruck / Institute for Public Economics); Peter Schwazer (University of Innsbruck / Institute for Management and Economics in the Health Sector); Engelbert Theurl
    Abstract: Firm turnover has recently attracted increased interest in economic research. The entry of new firms increases competition and promises efficiency gains. Moreover, changes in the market structure influence productivity growth, because firm entry usually leads to increased innovation. The health care market exhibits important differences as compared to other markets, including various forms of market failure and, as a consequence, extensive market regulation. Thus, the economic effects of entries and exits in health care markets are less obvious. The following paper studies the determinants of entry and exit decisions of physicians in the private sector of the outpatient part of the Austrian health care system. We apply a Poisson panel estimation to a data set of 2,379 local communities and 121 districts in Austria in the time period 2002 - 2008. We are particularly interested in the question how public physicians (GPs/specialists) and their private counterparts influence the entrance and exit of private physicians. We find a significantly negative effect of existing capacities, measured by both private and public physician density of the same specialty, on the entry of new private physicians. On the contrary, we find a significantly positive effect of private GPs on the entry of private specialists. Interestingly, this cooperation/network effect also works in the other direction, as a higher density of private specialists increases the probability of the market entry of private GPs. Based on the results of previous literature, we thus conclude that private physicians establish networks to cooperate in terms of mutual referrals etc. Our estimations for market exits basically confirm the entry results, as higher competitive forces positively influence the market exit of private physicians.
    Keywords: Entry, Exit, Health Care, Physician location
    JEL: I11 I18 L14
    Date: 2011–01
  12. By: Christian Jaag; Helmut Dietl
    Abstract: This paper argues that transforming the postal business model goes hand in hand with a transformation in the definition of universal service obligation. Whilst postal operators need to fully embrace the unique competitive space created by electronic substitution, at the intersection between the physical and digital, regulatory frameworks also must be adapted towards a technology-neutral definition of universal service.
    Keywords: Regulation, Postal market, Substitution, Intermodal competition
    JEL: L50 L87
    Date: 2011–10
  13. By: Chen, Xing (Department of Health Management and Health Economics); Godager, Geir (Department of Health Management and Health Economics)
    Abstract: The purpose of this text is to describe a procedure that can be used to construct a Herfindahl-Hirschman index of market concentration based on the following two pieces of information: <p> <p> a) An output measure of individual producers located in areas identified with a postal code. <p> b) A matrix containing information about the distances between the (centers of) the areas defined by postal codes. <p> <p> The examples presented in this text are from the market for general practitioners’ services in Norway, but applying the suggested procedures to other output measures should be straight forward. The STATA commands necessary to construct the index are provided. <p>
    Keywords: Herfindahl-Hirschman index; General practitioner; primary health care; market concentration; Norway
    JEL: I18 J14
    Date: 2011–10–25

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