nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒04‒03
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Entry and competition in differentiated products markets By Catherine SCHAUMANS; Frank VERBOVEN
  2. Can competition reduce quality? By Kurt R. Brekke; Luigi Siciliani; Odd Rune Straume
  3. Cournot and Bertrand competition with asymmetric costs in a mixed duopoly revisited By Kangsik , Choi
  4. Backwards integration and strategic delegation By Hunold, Matthias; Röller, Lars-Hendrik; Stahl, Konrad
  5. Price Setting with menu cost for Multi-product firms By Fernando E. Alvarez; Francesco Lippi
  6. Platform pricing in matching markets By Maarten GOOS; Patrick VAN CAYSEELE; Bert WILLEKENS
  7. Information and Competition Entry By Ewers, Mara
  8. The Arm’s Length Principle and Tacit Collusion By Chongwoo Choe; Noriaki Matsushima
  9. Nested logit or random coefficients logit? A comparison of alternative discete models of product differentiation By Laura GRIGOLON; Frank VERBOVEN
  10. Cartel Stability, Mark-Up Cyclicality and Government Spending Multipliers By L. Lambertini; L. Marattin
  11. Researching Mergers & Acquisitions with the Case Study Method: Idiographic Understanding of Longitudinal Integration Processes By Bengtsson, Lars; Larsson, Rikard
  12. Collusion and the Political Differentiation of Newspapers By Marco Antonielli; Lapo Filistrucchi
  13. Exclusive dealing as a barrier to entry? Evidence from automobiles By Laura NURSKI; Frank VERBOVEN
  14. The relationship between market structure and innovation in industry equilibrium: a case study of the global automobile industry By Aamir Rafique HASHMI; Johannes VAN BIESEBROECK
  15. How does obtaining intellectual property rights impact technology commercialization strategy? Reconciling the competing effects on licensing vs. financing By Simon Wakeman
  16. IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence By Thomas J. Chemmanur; Jie He
  17. Financial Sector Competition in West African Economic and Monetary Union By Florian LEON

  1. By: Catherine SCHAUMANS; Frank VERBOVEN
    Abstract: We propose a methodology for estimating the competition effects from entry when firms sell differentiated products. We first derive precise conditions under which Bresnahan and Reiss’entry threshold ratios (ETRs) can be used to test for the presence and to measure the magnitude of competition effects. We then show how to augment the traditional entry model with a revenue equation. This revenue equation serves to adjust the ETRs by the extent of market expansion from entry, and leads to unbiased estimates of the competition effects from entry. We apply our approach to seven different local service sectors. We find that entry typically leads to significant market expansion, implying that traditional ETRs may substantially underestimate the competition effects from entry. In most sectors, the second entrant reduces markups by at least 30%, whereas the third or subsequent entrants have smaller or insignificant effects. In one sector, we find that even the second entrant does not reduce markups, consistent with a recent decision by the competition authority.
    Date: 2011–09
  2. By: Kurt R. Brekke (Department of Economics and Centre and Health Economics Bergen, Norwegian School of Economics); Luigi Siciliani (Department of Economics and Centre for Health Economics, University of York, Heslington); Odd Rune Straume (Department of Economics, University of Minho)
    Abstract: We study the effect of competition on quality in markets such as health care, long-term care and education, when providers choose both prices and quality in a setting of spatial competition. We offer a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and riskaverse. Our proposed mechanism can help explain several empirical findings of a negative effect of competition on quality.
    Keywords: Quality and price competition; Motivated providers; Risk-averse providers
    JEL: D21 D43 L13 L30
    Date: 2012
  3. By: Kangsik , Choi
    Abstract: We investigate a differentiated mixed duopoly in which private and public firms can choose to strategically set prices or quantities when the public firm is less efficient than the private firm. Thus, if the Singh and Vives assumption of positive primary outputs holds, (i) Bertrand competition or quantity-price competition can occur depending on the degree of public firm's inefficiency when the goods are substitutes. (ii) regardless of its inefficiency, there can be always sustained Bertrand competition when the goods are complements. (iii) the ranking of a private firm's profit is not reversed. However if we relax the parameter restriction imposed implicitly by Singh and Vives (i.e., we adopt Zanchettin (2006) assumption) to allow for a wider range of cost asymmetry, there can be always sustained multiple subgame Nash perfect equilibria in the contract stage by each critical value of the public firm's inefficiency. In particular, Cournot and Bertrand competition coexist if its inefficiency is sufficiently small or large.
    Keywords: Inefficiency; Cournot-Bertrand Competition; Mixed Duopoly
    JEL: L13 D43 H44
    Date: 2012–03–28
  4. By: Hunold, Matthias; Röller, Lars-Hendrik; Stahl, Konrad
    Abstract: We analyze the effects of downstream firms' acquisition of pure cash flow rights in an efficient upstream supplier when all firms compete in prices. With an acquisition, downstream firms internalize the effects of their actions on their rivals' sales. Double marginalization is enhanced. Whereas full vertical integration would lead to decreasing, passive backwards ownership leads to increasing downstream prices and is more profitable, as long as competition is sufficiently intensive. Downstream acquirers strategically abstain from vertical control, inducing the efficient supplier to commit to high prices. All results are sustained when upstream suppliers are allowed to charge two part tariffs. --
    Keywords: double marginalization,strategic delegation,vertical integration,partial ownership,common agency
    JEL: L22 L40
    Date: 2012
  5. By: Fernando E. Alvarez; Francesco Lippi
    Abstract: We model the decisions of a multi-product firm that faces a fixed “menu” cost: once it is paid, the firm can adjust the price of all its products. We characterize analytically the steady state firm’s decisions in terms of the structural parameters: the variability of the flexible prices, the curvature of the profit function, the size of the menu cost, and the number of products sold. We provide expressions for the steady state frequency of adjustment, the hazard rate of price adjustments, and the size distribution of price changes, all in terms of the structural parameters. We study analytically the impulse response of aggregate prices and output to a monetary shock. The size of the output response and its duration increase with the number of products, they more than double as the number of products goes from 1 to ten, quickly converging to the ones of Taylor’s staggered price model.
    JEL: E31 E4 E52 E60
    Date: 2012–03
  6. By: Maarten GOOS; Patrick VAN CAYSEELE; Bert WILLEKENS
    Abstract: This paper develops a simple model of monopoly platform pricing accounting for two pertinent features of matching markets. 1) The trading process is characterized by search and matching frictions implying limits to positive cross-side network effects and the presence of own-side congestion. 2)Matched agents bargain over the division of the match surplus depending on the qualitative characteristics of both parties. We find that, compared to the frictionless benchmark typically analyzed in the classic platform pricing literature, the harms of monopoly market power are mitigated by frictions. However, when the platform is allowed to make investments in the reduction of frictions, a private platform is likely to under-invest compared to a Pigouvian platform. In addition, accounting for user quality differentiation further reduces classic harms of monopoly market power when user quality types are complements in creation of the match surplus. In this case it is socially desirable to attract smaller groups of users with higher average quality to maximize the aggregate match surplus, resulting in a downward price distortion. This result is reversed when quality types are substitutes and the distortion disappears when they are strategically independent.
    Date: 2011–12
  7. By: Ewers, Mara (University of Bonn)
    Abstract: This paper studies the influence of information on entry choices in a competition with a controlled laboratory experiment. We investigate whether information provision attracts mainly high productivity individuals and reduces competition failure, where competition failure occurs when a subject loses the competition because the opponent holds a higher productivity. Information on the opponent is a promising nudge to raise individuals' awareness towards the complexity of the decision problem and to update beliefs about success. In the experiment, subjects face the choice between a competition game and a safe outside option. We analyze subjects' entry behavior with a benchmark treatment without information and three treatments, where we exogenously manipulate the information on the opponents. Our results are, (1) information on the productivity distribution of all potential opponents reduces competition failures by more than 50%, (2) information on the distribution is sufficient, i.e. precise information on the matched opponent's type does not further diminish failure rates.
    Keywords: competition, experiment, information, overconfidence, self-assessment, self-selection, tournament
    JEL: C91 D03 D61 D81 D82 M13 M51
    Date: 2012–03
  8. By: Chongwoo Choe; Noriaki Matsushima
    Abstract: The arm’s length principle states that the transfer price between two associated enterprises should be the price that would be paid for similar goods in similar circumstances by unrelated parties dealing at arm’s length with each other. This paper examines the effect of the arm’s length principle on dynamic competition in imperfectly competitive markets. It is shown that the arm’s length principle renders tacit collusion more stable. This is true whether firms have exclusive dealings with unrelated parties or compete for the demand from unrelated parties.
    Keywords: Transfer price, arm’s length principle, tacit collusion, stability of collusion.
    JEL: D43 L13 L41
    Date: 2012–03
  9. By: Laura GRIGOLON; Frank VERBOVEN
    Abstract: We start from an aggregate random coefficients nested logit (RCNL) model to provide a systematic comparison between the tractable logit and nested logit (NL) models with the computationally more complex random coefficients logit (RC) model. We first use simulated data to assess possible parameter biases when the true model is a RCNL model. We then use data on the automobile market to estimate the different models, and as an illustration assess what they imply for competition policy analysis. As expected, the simple logit model is rejected against the NL and RC model, but both of these models are in turn rejected against the more general RCNL model. While the NL and RC models result in quite different substitution patterns, they give robust policy conclusions on the predicted price effects from mergers. In contrast, the conclusions for market definition are not robust across different demand models. In general, our findings suggest that it is important to account for sources of market segmentation that are not captured by continuous characteristics in the RC model.
    Date: 2011–09
  10. By: L. Lambertini; L. Marattin
    Abstract: Mark-up cyclical behaviour is relevant in determining the size of government spending multiplier on output. While theoretical literature priviliged the counteryclical hypothesis, empirical evidence is far from being conclusive. Based on seminal Rotemberg and Saloner (1986) contribution, we build a theoretical framework based on Bertrand duopoly, stochastic demand and product differentiation, where the analysis of cartel stability under partial collusion points towards procyclical pricing. According to the intensity of marginal cost cyclicality, this can produce a procyclical mark up or - at least - render it less countercyclical than expected, with relevant effects on the transmission mechanism of government spending stimuli.
    JEL: C73 L13
    Date: 2012–03
  11. By: Bengtsson, Lars (CSIR, Blekinge Inst of Technology); Larsson, Rikard (Lund University)
    Abstract: The purpose with this paper is to highlight the comparative advantages of using case study research to contribute to the Mergers and Acquisitions (M&A) field and provide some recommendations how this can be done well. Based on three reviews of the case study methodological literature, influential M&A case studies, and the methodological case survey of 55 M&A cases, we conclude that the case study method is a powerful, yet much underutilized method in M&A research. Even though there seem to be perhaps more than 20 times as many M&A surveys as case studies (Haleblian at al, 2009), we find that especially influential M&A case studies contribute unique value to M&A research in terms of the rich idiographic understanding of the complex combination and especially integration processes where the longitudinal, multi-aspect, and multi-level strengths of the case study method excel.
    Keywords: Mergers and acquisitions; idiographic research; case studies; integration process
    JEL: L20 M10
    Date: 2012–03–16
  12. By: Marco Antonielli; Lapo Filistrucchi (Università degli Studi di Firenze)
    Abstract: We analyse a newspaper market where two editors first choose the political position of their newspaper, then set cover prices and advertising tariffs. We build on the work of Gabszewicz, Laussel and Sonnac (2001, 2002), whose model of competition among newspaper publishers we take as the stage game of an infinitely repeated game, and investigate the incentives to collude and the properties of the collusive agreements in terms of welfare and pluralism. We analyse and compare two forms of collusion: in the first, publishers cooperatively select both prices and political position; in the second, publishers cooperatively select prices only. We show that collusion on prices reinforces the tendency towards a Pensée Unique discussed in Gabszewicz, Laussel and Sonnac (2001), while collusion on both prices and the political line would tend to mitigate it. Our findings question the rationale for Joint Operating Agreements among US newspapers, which allow publishers to cooperate in setting cover prices and advertising tariffs but not the editorial line. We also show that, whatever the form of collusion, incentives to collude first increase, then decrease as advertising revenues per reader increase.
    Keywords: collusion, newspapers, two-sided markets, indirect network effects, pluralism, spatial competition
    JEL: L41 L82 D43 K21
    Date: 2012
  13. By: Laura NURSKI; Frank VERBOVEN
    Abstract: Exclusive dealing contracts between manufacturers and retailers force new entrants to set up their own costly dealer networks to enter the market. We ask whether such contracts may act as an entry barrier, and provide an empirical analysis of the European car market. We first estimate a demand model with product and spatial differentiation, and quantify the role of a dense distribution network in explaining the car manufacturers’ market shares. We then perform policy counterfactuals to assess the pro.t incentives and entry-deterring effects of exclusive dealing. We find that there are no individual incentives to maintain exclusive dealing, but there can be a collective incentive by the industry as a whole, even absent efficiencies. Furthermore, a ban on exclusive dealing would shift market shares from the larger European firms to the smaller entrants. More importantly, consumers would gain substantially, mainly because of the increased spatial availability and less so because of intensified price competition. Our findings suggest that the European Commission’s recent decision to facilitate exclusive dealing in the car market may not have been warranted.
    Date: 2011–12
  14. By: Aamir Rafique HASHMI; Johannes VAN BIESEBROECK
    Abstract: We first estimate a dynamic game for the global automobile industry and then compute a Markov Perfect equilibrium to study the equilibrium relationship between market structure and innovation. The key state variable in the model is the efficiency level of each firm and the market structure is characterized by the vector of efficiency levels across all firms. Efficiency is estimated to be stochastically increasing in the dynamic control-innovation-which is proxied by patenting behavior. Equilibrium innovation is a function of all state variables in the industry and the cost of R&D which includes a privately observed cost shock. We find that it exhibits the following patterns: 1) innovation by the industry leader is decreasing in the efficiency of other firms; 2) innovation is decreasing in the efficiency dispersion; 3) innovation is more concentrated that efficiency; 4) innovation is declining in the number of active firms; 5) the innovation gap between the leader and other firms increases with competition.
    Date: 2012–01
  15. By: Simon Wakeman (ESMT European School of Management and Technology)
    Abstract: The importance of obtaining intellectual property (IP) rights for commercializing innovation is well established. Separate streams of literature have shown a positive relationship between IP rights and both product licensing and third-party (especially VC) financing. However, since raising third-party finance enables an innovating firm to continue commercializing its innovation alone, product licensing and raising third-party finance may be considered substitutes and the impact of obtaining IP rights on commercialization mode is unclear. This paper attempts to reconcile these two competing effects of obtaining IP rights. The paper empirically examines the relationship between the status of the primary patent covering an innovation and whether the innovating firm’s licenses its innovation or raises external finance. The results show that patent filing significantly increases the likelihood of raising finance, while patent allowance has a positive effect on licensing. These results suggest that patent filings may act signals to financial investors but when it comes to licensing IP rights matter most as appropriability mechanisms.
    Keywords: intellectual property, licensing, financing, innovation, strategy
    Date: 2012–03–22
  16. By: Thomas J. Chemmanur; Jie He
    Abstract: We develop a new rationale for IPO waves based on product market considerations. Two firms, with differing productivity levels, compete in an industry with a significant probability of a positive productivity shock. Going public, though costly, not only allows a firm to raise external capital cheaply, but also enables it to grab market share from its private competitors. We solve for the decision of each firm to go public versus remain private, and the optimal timing of going public. In equilibrium, even firms with sufficient internal capital to fund their new investment may go public, driven by the possibility of their product market competitors going public. IPO waves may arise in equilibrium even in industries which do not experience a productivity shock. Our model predicts that firms going public during an IPO wave will have lower productivity and post-IPO profitability but larger cash holdings than those going public off the wave; it makes similar predictions for firms going public later versus earlier in an IPO wave. We empirically test and find support for these predictions.
    Keywords: CES,economic,research,micro,data,microdata,IPO waves, external capital, market share
    Date: 2012–03
  17. By: Florian LEON (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: This paper investigates the degree of competition in the WAEMU financial industry over the period 2002-2007 using firm-level data (591 year-firm observations). Market structure analysis, the Panzar-Rosse model and conjectural variation are applied to assess the level of competition. The results show that the prevailing market structure in the WAEMU financial industry is concentrated and financial intermediaries operate under imperfect competition. Although competition was fierce during the mid-2000s, the level of competition has remained limited. Moreover, apart from Benin and Mali, the structural and non-structural approaches are closely related, contrary to previous findings, which have some implications for the empirical studies. Finally, a common regulatory framework does not imply similar level of competition. The presence of non-legal barriers is the most plausible explanation of these large differences between WAEMU members.
    Keywords: Banking competition;Market structure;Panzar-Rosse model;Conjectural variation model;WAEMU
    Date: 2012–03–21

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