nep-com New Economics Papers
on Industrial Competition
Issue of 2011‒11‒21
twenty-two papers chosen by
Russell Pittman
US Department of Justice

  1. Product Differentiation, the Volume of Trade and Profits under Cournot and Bertrand Duopoly By Collie, David R.; Le, Vo Phuong Mai
  2. Cross-Border Mergers and Market Segmentation (Replaces CentER DP 2010-096) By Ray Chaudhuri, A.
  3. Multimarket Competition and Welfare Effects of Price discrimination. By Iñaki Aguirre
  4. Welfare Effects of Third-Degree Price Discrimination: Ippolito Meets Schmalensee and . By Iñaki Aguirre
  5. Internal Organization of Firms and Cartel Formation. By Jerome Kuipers; Norma Olaizola
  6. Channels of Firm Adjustment: Theory and Empirical Evidence By Holger Breinlich; Stefan Niemann
  7. Relocation and Investment in R&D by Firms. By Juan Carlos Barcena-Ruiz; Maria Begoña Garzon
  8. Price Controls and Consumer Surplus By Bulow, Jeremy; Klemperer, Paul
  9. Insider Trading with Different Market Structures By Wassim Daher; Fida Karam; Leonard J. Mirman
  10. Economic models of consumer protection policies By Armstrong, Mark
  11. Experimentation in Two-Sided Markets By Martin Peitz; Sven Rady; Piers Treppers
  12. Retail sector concentration and price dynamics in the euro area: a regional analysis By Emanuela Ciapanna; Concetta Rondinelli
  13. Mergers and Innovation in the Pharmaceutical Market By Comanor, William S.; Scherer, F. M.
  14. Prices and Choices in the Swiss Health Care Insurance Market By Yves Ortiz
  15. Empirical Analysis of Countervailing Power in Business-to-Business Bargaining By Walter Beckert
  16. Buyer Alliances as Countervailing Power in WIC Infant-Formula Auctions By Davis, David E.
  17. Decomposing First Mover Advantages in the Mobile Telecommunications Industry By JP Eggers; Michal Grajek; Tobias Kretschmer
  18. Counting the Costs of Collective Rights Management of Music Copyright in Europe By Ghafele, Roya; Gibert, Benjamin
  19. How do your rivals' releasing dates affect your box office? By Fernanda Gutierrez-Navratil; Victor Fernandez-Blanco; Luis Orea; Juan Prieto-Rodriguez
  20. Welfare effects of public service broadcasting in a free-to-air TV market By Rothbauer, Julia; Sieg, Gernot
  21. Cross-Selling, Switching Costs and Imperfect Competition in British Banks By Zhao, Tianshu; Matthews, Kent; Murinde, Victor
  22. Competitive Conditions in the Jamaican Banking Market 1998-2009 By Daley, Jenifer; Matthews, Kent

  1. By: Collie, David R. (Cardiff Business School); Le, Vo Phuong Mai (Cardiff Business School)
    Abstract: This paper analyses how product differentiation affects the volume of trade under duopoly using Shubik-Levitan demand functions rather than the Bowley demand functions used by Bernhofen (2001). The Shubik-Levitan demand functions have the advantage that an increase in product differentiation does not increase the size of the market as happens with the Bowley demand functions. It is shown that the volume of trade in terms of quantities is decreasing in the degree of product differentiation when the trade cost is relatively low, but increasing in the degree of product differentiation when the trade cost is relatively high.
    Keywords: Product Differentiation; Cournot Oligopoly; Bertrand Oligopoly
    JEL: F12 F13
    Date: 2011–11
  2. By: Ray Chaudhuri, A. (Tilburg University, Center for Economic Research)
    Abstract: This paper shows that cross-border mergers are more likely to occur in industries which serve multiple segmented markets rather than a single integrated market, given that cost functions are strictly convex. The product price rises in the market where an acquisition is made but falls in the other, decreasing the acquisition price of other firms (in contrast to the results in the existing merger literature on integrated markets). Although the sum of consumer surplus across the countries may rise in response to a given acquisition, one of the countries gains at the expense of the other.
    Keywords: cross-border mergers;endogenous mergers;competition policy;Cournot competition;economic integration
    JEL: L12 L40 L41 F15 F23
    Date: 2011
  3. By: Iñaki Aguirre (UPV/EHU)
    Abstract: The paper investigates the effects on welfare of price discrimination when a multimarket seller faces competition in one of its two markets. Whit respect to uniform pricing, price discrimination changes competition in such a way, that even with linear demands, price discrimination can be welfare-improving, both under strategic substitutes and strategic complements.
    Keywords: Price discrimination, multimsarket competition, welfare analysis
    JEL: L13 L41
    Date: 2011–11–15
  4. By: Iñaki Aguirre (UPV/EHU)
    Abstract: Based on a pioneering work by Ippolito (1980) we construct a simple model wich allows the welfare effects of third-degree price discrimination to be well understood and explained. The decomposition of the change in welfare into a misallocation effect and an output effect has advantages over the well-established analysis by Schamalensee (1981) and Varian (1985). In particular, our approach provides a graphic analysis which clarifies the welfare analysis of third-degree price discrimination.
    JEL: D42 L12 L13
    Date: 2011–11–11
  5. By: Jerome Kuipers (Maastricht University); Norma Olaizola (UPV/EHU)
    Abstract: We study the endogenous formation of cartels in two contexts. Firt, we considere internal-external stability based models which, due to firms' free-riding incentives, lead to the formation of very small stable cartels (if any). Second, we introduce the dynamic aspect of coalition formation. That is, when considering a cartel we take into account also any other cartel that can be reached through a succesion of moves. We apply notions such as the generalized stable sets and the absorbing sets solutions which predict that collusion of the whole industry can occur with some regularity. Then we apply the two approaches to a Cournot game, and study the influence that the internal organization of firms has on the size of the cartels that form by means of a compariso between a situation where ownership and management are not separated and one in which they are.
    Keywords: Cartels, stability, absorving sets solution, strategic delegation
    JEL: L22 C72
    Date: 2011–11–15
  6. By: Holger Breinlich; Stefan Niemann
    Abstract: We provide a comprehensive analysis of how firms choose between different expansion and contraction forms, unifying existing approaches from the industrial organization and corporate finance literature. Using novel data covering almost the entire universe of UK firms, we document firms’ use of internal adjustment, greenfield investment and mergers and acquisitions (M&As). We describe frequency and aggregate importance of the different channels, and show that their use varies systematically with observable firm characteristics, in particular firm size and the magnitude of adjustment. We also demonstrate that there is positive assortative matching on the UK merger market. Based on these facts, we propose a theoretical framework which accommodates all three adjustment channels in a unified setting, and is able to replicate the adjustment and matching patterns found in the data.
    Date: 2011–09–23
  7. By: Juan Carlos Barcena-Ruiz (UPV/EHU); Maria Begoña Garzon (UPV/EHU)
    Abstract: The literature on foreign direct investment has analyzed firms' location decisions when they invest in R&D to reduce production costs. Such firms may set up new plants in other developed countries while maintaining their domestic plants. In contrast, here we considerer firms that close down their domestic operations and relocate to countries where wage costs are lower. Thus, we assume that firms may reduce their production costs by investing in R&D and also by moving their plants abroad. We show that these two mechanisms are complementary. When a firm relocates it invests more in R&D than when it does not change its location and, therefore, its production cost is lower in the first case. As a result, investment in R&D encourages firms to relocate. When firms do not invest in R&D on relocation, R&D discourages firms to relocate since the investment made by the firms that remain in the country partially offsets the labor cost advantage obtained by the firms that move their plants abroad.
    Keywords: Relocation, R&D, Trade Unions, Social welfare, Imperfect competition
    JEL: D6 F16 J51 L13
    Date: 2011–11–14
  8. By: Bulow, Jeremy (Stanford University); Klemperer, Paul (Oxford University)
    Abstract: Price controls lead to misallocation of goods and encourage rent-seeking. The misallocation effect alone is enough to ensure that consumer surplus is always reduced by a price control in an otherwise-competitive market with convex demand if supply is more elastic than demand; or when demand is log-convex (e.g., constant-elasticity) even if supply is inelastic. The same results apply both when rationed goods are allocated by costless lottery among interested consumers, and when costly rent-seeking and/or partial de-control mitigates the allocative inefficiency. The results are best understood using the fact that in any market, consumer surplus equals the area between the demand curve and the industry marginal revenue curve.
    JEL: D45 D60 D61
    Date: 2011–10
  9. By: Wassim Daher (Gulf University for Science and Technology (GUST) - Department of Mathematics and Natural Sciences, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Fida Karam (Gulf University for Science and Technology (GUST) - Department of Economics and Finance); Leonard J. Mirman (University of Virginia - Department of Economics)
    Abstract: We study an extension of Jain and Mirman (1999) with two insiders under three different market structures : (i) Cournot competition among the insiders, (ii) Stackelberg game between the insiders and (iii) monopoly in the real market and Stackelberg in the financial market. We show how the equilibrium outcomes are affected by each of the market structure. Finally we perform a comparative statics analysis between the models.
    Keywords: Insider trading, Cournot, Stackelberg, correlated signals, Kyle model.
    Date: 2011–08
  10. By: Armstrong, Mark
    Abstract: This paper summarizes some of my recent work on consumer protection. I present three theoretical models which illustrate the merits and drawbacks of a number of common consumer protection policies, namely: policies which prevent firms from setting unduly high prices; policies which prevent firms requiring on-the-spot decision making by prospective customers, and policies which prevent suppliers from paying commission payments to sales intermediaries.
    Keywords: Consumer protection; consumer search; marketing; commission sales
    JEL: D18 M31 D83
    Date: 2011–11
  11. By: Martin Peitz (Department of Economics, University of Mannheim); Sven Rady (Department of Economics, University of Bonn); Piers Treppers (Department of Economics, University of Munich)
    Abstract: We study optimal experimentation by a monopolistic platform in a two-sided market framework. The platform provider faces uncertainty about the strength of the exter- nality each side is exerting on the other. It maximizes the expected present value of its prot stream in a continuous-time infinite-horizon framework by setting participation fees or quantities on both sides. We show that a price-setting platform provider sets a fee lower than the myopically optimal level on at least one side of the market, and on both sides if the two externalities are of approximately equal strength. If the externality that one side exerts is suciently weaker than the externality it experiences, the opti- mal fee on this side exceeds the myopically optimal level. We obtain analogous results for expected prices when the platform provider chooses quantities. While the optimal policy does not admit closed-form representations in general, we identify special cases in which the undiscounted limit of the model can be solved in closed form.
    Keywords: Two-Sided Market, Network Eects, Monopoly Experimentation, Bayesian Learning, Optimal Control
    JEL: D42 D83 L12
    Date: 2011–11
  12. By: Emanuela Ciapanna (Banca d'Italia); Concetta Rondinelli (Banca d'Italia)
    Abstract: We conduct a regional analysis of the relationship between market concentration and price dynamics in the grocery retail sector, focusing on a sample of five categories of goods belonging to the 12 COICOP aggregation and on a panel of countries that includes Germany, Spain, Finland, Italy, Austria and Portugal. Using a unique census-type dataset on retailers, we construct Herfindahl-Hirschman indices of concentration at the buying group, parent company and individual shop level for a sample of 118,540 large grocery stores and we study the association between these measures and regional price changes. Our results point to a positive association between retail market concentration and price growth in food and beverages, alcohol and tobacco and miscellaneous goods in the time span 2003-2010 at the buying, parental group and store level for the pooled sample of countries. The relation reverses sign for clothing and footwear and household equipment. This evidence is robust to different specifications of concentration indices.
    Keywords: Market concentration, price dynamics, buying group, parent company, regional Herfindahl-Hirschman indices.
    JEL: L1 L4 L8 E31
    Date: 2011–10
  13. By: Comanor, William S. (UCLA and University of CA, Santa Barbara); Scherer, F. M. (Harvard University)
    Abstract: The U.S. pharmaceutical industry has experienced in recent years two dramatic changes: stagnation in the growth of new molecular entities approved for marketing, and a wave of mergers linking inter alia some of the largest companies. This paper explores possible links between these two phenomena and proposes alternative approach to merger policy. It points to the high degree of uncertainty encountered in the discovery and development of new pharmaceutical entities and shows how optimal strategies entail the pursue of parallel research and development paths. Uncertainties afflict both success rates and financial gains contingent upon success. A new model simulating optimal strategies given prevalent market uncertainties is presented. Parallelism can be sustained both within individual companies' R&D programs and across competing companies. The paper points to data showing little parallelism of programs within companies and argues that inter-company mergers jeopardize desirable parallelism across companies.
    Date: 2011–11
  14. By: Yves Ortiz (Study Center Gerzensee)
    Abstract: We describe three different extensive data sets on the Swiss market for basic health care insurance—a homogeneous product by construction. First, we provide descriptive statistics on market prices for period 2004 - 2010. Second, we present aggregated data on health plan choices made by Swiss residents in the same period. Third, we describe and analyze an extensive survey executed in 2009 which documents health care plan and insurer choices of enrollees as well as their switching behavior. Price data reveal an increase of the mean price level and substantial and persistent price level differences across regions. We also observe a steady increase of price dispersion; contemporaneously, enrollees face an increasing number of operating companies. Indeed, we find a strong positive relation between regional price dis- persion, the regional price level and the number of operating companies. Although enrollees have moved to less expensive health care plans, our aggregate and survey data point to insuf- ficient price optimization on the part of the enrollees. Aggregate data disclose an increasing gap between the premia paid by enrollees and the lowest premia available in the respective submarket. Moreover, Swiss residents could have paid less on average if they had chosen their insurer randomly. Our Survey data confirm this observation: Despite large potential monetary gains, only 20% of the enrollees did switch their insurance company by the end of November 2009. In addition, many enrollees switched to more expensive insurance companies, thereby incurring negative monetary benefits.
    Date: 2011–11
  15. By: Walter Beckert (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: This paper provides a comprehensive econometric framework for the empirical analysis of countervailing power. It encompasses the two main features of pricing schemes in business-to-business relationships: nonlinear price schedules and bargaining over rents. Disentangling them is critical to the empirical identification of countervailing power. Testable predictions from the theoretical analysis for a pragmatic reduced form empirical pricing model are delineated. This model is readily implementable on the basis of transaction data, routinely collected by antitrust authorities and illustrated using data from the UK brick industry. The paper emphasizes the importance of controlling for endogeneity of volumes and established supply chains and for heterogeneity across buyers and sellers due to intrinsically unobservable outside options.
    Keywords: countervailing power, bargaining, nonlinear prices, transaction panel data countervailing power, bargaining, nonlinear prices, transac¬tion panel data
    JEL: D43 L11 L12 L14 L42 C23 C78
    Date: 2011–10
  16. By: Davis, David E. (Department of Economics,South Dakota State University)
    Abstract: US government agencies in WIC infant-formula procurement auctions receive lower bids and final prices when they are in buyer’s alliances than when they are unallied. The Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) uses an auction to procure infant formula. Manufacturers bid on the right to be an agency’s sole supplier by offering a rebate on formula sold through WIC. This paper investigates whether bidders are more aggressive when buyers band together to jointly offer infant formula contracts. Results suggest that WIC agencies that band together to form an alliance receive stronger bids.
    Keywords: auctions, food assistance, countervailing power, buyer concentration, oligopoly, WIC
    JEL: L13 D43 D44 Q18 I18
    Date: 2011–11
  17. By: JP Eggers; Michal Grajek; Tobias Kretschmer
    Abstract: We study first-mover advantages and organizational pre-entry experience in a market with highly heterogeneous consumers – the global mobile telecoms industry. Specifically, we consider the fact that early consumers will be different from later ones. We suggest that early entrants will attract higher-value consumers, which results in first-mover advantages. This effect will be enhanced if these firms have acquired prior technical experience. Conversely, later, mass-market adopters are attracted by established (domestic) brand names. Our empirical results from the global telecommunications industry support our assertions and provide importation insight for the study of first-mover advantages in high-technology industries.
    Keywords: First-mover advantage; Mobile telecommunications; Consumer-centric; Pre-entry experience; Firm pre-entry experience
    Date: 2011
  18. By: Ghafele, Roya; Gibert, Benjamin
    Abstract: The identification and clearance of music copyright is a complex process that suffers from high transaction costs when managed by individual rightsholders. The pooling of music copyright in collective rights management organizations has historically reduced these costs, while providing a larger, and thus more attractive, repertoire to commercial users via the issuance of blanket licenses.However, the development of digital distribution channels and automated clearance technologies for music copyright across multiple borders presents a number of challenges to the current system. As music consumption increasingly takes digital forms, Europe must modernize its collective rights management system in response. The results of this study show there is a very large market for digital music in Europe. As broadband penetration increases and competition amongst Internet Service Providers (ISPs) in Europe enhances access to the Internet, this market will grow rapidly. The market is valued at over 2.6 billion Euro in France, Germany and the UK alone. This constitutes a potential royalty market of 212 million Euro. Yet, only 49 million Euro in royalty revenue from online sources was collected by SACEM, GEMA and PRS for Music. Moreover, the majority of this revenue was collected by PRS for Music in the UK, which is the smallest of the three markets but by far the most efficient CRMO for the collection of royalties from online sources. Other nations in Europe, though significantly smaller, still represent a valuable market opportunity. The disparity between potential and actual revenue for all of the European markets suggests there are problems with the current collective rights management system. The percentage of the royalty market captured in the USA was over 4% more than the European average. New solutions should be sought to capitalize on the market opportunity of digital music services in light of increasing broadband penetration and changing consumer patterns in Europe. This should help unlock the potential of digital music markets, consolidate the single European market, increase competition in the administration of collective rights, and provide better services to European consumers.
    Keywords: Transaction Cost Theory; Collective Rights Management; Digital Music Market; European Union; Royalty Distribution Efficiency
    JEL: L44 O34 Z11
    Date: 2011–10–17
  19. By: Fernanda Gutierrez-Navratil (Departamento de Economia, Facultad de Economia y Empresa, Universidad de Oviedo); Victor Fernandez-Blanco (Departamento de Economia, Facultad de Economia y Empresa, Universidad de Oviedo); Luis Orea (Departamento de Economia, Facultad de Economia y Empresa, Universidad de Oviedo); Juan Prieto-Rodriguez (Departamento de Economia, Facultad de Economia y Empresa, Universidad de Oviedo)
    Abstract: In this paper, we study to what extent a movie's box office receipts are affected by the temporal distribution of rival films. We propose a theoretical model that analyses the effects of past, present and future releases on a film's results. Using this model we can analyse how rivals' release dates impact on others' box office revenues. This theoretical model also allows us to carry out some comparative statics by changing some relevant parameters such as time depreciation, film quality or the timeline of exhibition. We have tested the empirical implications of this model using information on the films released in five countries: the USA, the United Kingdom, Germany, France and Spain. In order to maintain a degree of homogeneity, we have constructed an unbalanced panel consisting of films that were released in at least three of these countries. The geographical dimension of our data set allows us to use panel data techniques to control for unobserved heterogeneity among the films released. This allows us to control for one of the most relevant features of the movie market, namely the presence of highly differentiated products.
    Keywords: temporal competition, movie exhibition, film industry, panel data, unobserved heterogeneity, differentiated product
    JEL: Z10
    Date: 2011–11
  20. By: Rothbauer, Julia; Sieg, Gernot
    Abstract: Viewer's private information consumption generates external benefits for society, because information improves the ability of voters to control politicians. Our study compares two settings in a free-to-air TV market: a differentiated duopoly of private channels and an oligopoly with both private channels and a public service broadcaster broadcasting information as well as entertainment programs. We find that welfare effects of public service broadcasting depend on its program design and cost efficiency, the external benefits of voter's information, and the magnitude of lost rents from the advertising market. --
    Keywords: Media,two-sided TV market,information externalities
    JEL: L82 D72 L32
    Date: 2011
  21. By: Zhao, Tianshu; Matthews, Kent (Cardiff Business School); Murinde, Victor
    Abstract: This paper attempts to evaluate the competitiveness of British banking in the presence of cross-selling and switching costs during 1993-2008. It presents estimates of a model of banking behaviour that encompasses switching costs as well as cross-selling of loans and off-balance sheet transactions. The evidence from panel estimation of the model lends support to our theoretical priors on the cross-selling behaviour of British banks, which helps explain the rapid growth of non-interest income during the last two decades. We also find that the consumer faced high switching costs in the loan market in the latter part of the sample period, as a result of lower competitiveness.
    JEL: G21 L13
    Date: 2011–11
  22. By: Daley, Jenifer; Matthews, Kent (Cardiff Business School)
    Abstract: This paper presents an empirical assessment of the degree of competition within the Jamaican banking sector during the period 1998 to 2009. We employ a dynamic version of the Panzar-Rosse Model to estimate market power among the sample of banks that constitute over 90 percent of the banking market. Using the conventional statistical tests, we are unable to reject monopoly/perfect collusion for the merchant banking sector in Jamaica but find competitive conditions in the commercial banking sector. This contrasts with earlier findings using alternative estimators that find monopolistic competition in the market as a whole.
    Keywords: Competition; banking; Rosse-Panzar H statistic; dynamic panel estimation; Jamaica
    JEL: G21 G28
    Date: 2011–11

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