nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒05‒02
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. The strategic interplay between bundling and merging in complementary markets By Andrea Mantovani; Jan Vandekerckhove
  2. Retail Price Stickiness, Market Structure and Distribution Channels By Matsuoka, Takayasu
  3. Informative Advertising in Directed Search. By Pedro Gomis-Porqueras; Benoit Julien; Chengsi Wang
  4. On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints By Dixon, Huw; Pourpourides, Panayiotis M.
  5. A theory of antitrust enforcement game By Jellal , Mohamed; Souam, Said
  6. Bank diversification, market structure and bank risk taking: theory and evidence from U.S. commercial banks By Martin Goetz
  7. The Effects of a Megabank Merger on Firm-Bank Relationships and Borrowing Costs By UCHINO Taisuke; UESUGI Iichiro
  8. Competition between clearing houses on the European market By Marie-Noëlle Calès; Laurent Granier; Nadège Marchand
  9. The role of the interchange fee in card payment systems By Éva Keszy-Harmath; Gergely Kóczán; Surd Kováts; Boris Martinovic; Kristóf Takács
  10. Patent Oppositions as Competitive Tools: An Analysis of the Major Players in the European Market of White Goods By Alessandro STERLACCHINI
  11. Estimating a Model of Strategic Network Choice: The Convenience-Store Industry in Okinawa By Mitsukuni Nishida
  12. Pharmaceutical prices under regulation: Tiered co-payments and reference pricing in Germany By Herr, Annika; Suppliet, Moritz
  13. How Consumer Information Curtails Market Power in the Funeral Industry By Thierry BLAYAC; Patrice BOUGETTE; Christian MONTET

  1. By: Andrea Mantovani (University of Bologna & IEB); Jan Vandekerckhove (Maastricht University)
    Abstract: In this paper, two pairs of complementors have to decide whether to merge and eventually bundle their products. Depending on the degree of competitive pressure in the market, either both pairs decide to merge (with or without bundling), or only one pair merges and bundles, while rivals remain independent. The latter case can very harmful for consumers as it brings surge in prices. We also consider the case in which one pair moves first. Interestingly, we find a parametric region where first movers merge but refrain from bundling, to not induce rivals to merge as well.
    Keywords: Bundling, merger, strategic interaction, antitrust
    JEL: D43 L13 L41
    Date: 2012
  2. By: Matsuoka, Takayasu
    Abstract: Using Japanese scanner data of transaction prices and sales for more than 1,600 commodity groups from 1988 to 2008, we find a statistically significant negative correlation between the frequency of price changes and the degree of market concentration. We also find that structural factors of a distribution channel are significantly correlated with rigidity in retail prices. Decomposing the frequency of price changes into the frequency of intraday, sale, and regular price changes, we find that both inter- and intra-brand competition positively affect the frequency of sales. Inter-brand competition among manufacturers has a significant and positive effect on the frequency of regular price changes, whereas intra-brand competition among retailers has no such significant effect. We also document that the term of contracts between manufacturers and retailers has a significant and positive effect on price stickiness.
    Keywords: Market structure, Distribution channels, Sticky prices
    JEL: L11 E31 C41
    Date: 2012–03
  3. By: Pedro Gomis-Porqueras (Department of Economics, Monash University); Benoit Julien (School of Economics, University of New South Wales); Chengsi Wang (School of Economics, University of New South Wales)
    Abstract: We consider a directed search environment where capacity constrained sellers reach uncoordinated buyers through costly advertising while buyers observed all prices probabilistically. We show that: (i) the equilibrium advertising intensity has an inverted U-shape in market tightness, (ii) the equilibrium advertising intensity is higher under an auction mechanism than under posted pricing, and (iii) the equilibrium price and measure of informed buyers may be positively correlated even in large markets.
    Keywords: costly advertising, directed search, imperfect observability, sales mechanism.
    JEL: E52 E63
    Date: 2012–04
  4. By: Dixon, Huw (Cardiff Business School); Pourpourides, Panayiotis M. (Cardiff Business School)
    Abstract: We depart from the assumption of perfect competition in the final goods sector, commonly used in cash-in-advance (CIA) models, providing extensive theoretical analysis of the general equilibrium of an economy with imperfect competition, endogenous production and fully flexible prices in the presence of occasionally binding CIA constraints, under general assumptions about the velocity of money. Homothetic preferences generate Marshallian demands which are linear in own price allowing for any combination of equilibrium number of firms and demand elasticity. Whether the CIA constraint binds or not depends, among others, on the degree of imperfect competition. As the market becomes more competitive it is certainly no less likely that the CIA constraint will bind. The degree of imperfect competition directly affects the distribution of consumption and indirectly the level of output and work effort via the CIA constraint. With perfect foresight, there is an optimal negative steady-state inflation rate. We also consider how the introduction of capital and bonds would fit into the framework.
    Date: 2012–01
  5. By: Jellal , Mohamed; Souam, Said
    Abstract: We analyze a situation where an antitrust authority delegates to an audit inspector the mission of gathering the sufficient information to condemn a cartel. The authority has two instruments at her disposal: rewarding the inspector with a proportion of the collected fine or providing him with information which enhances the probability of the success of the prosecution. More precisely, we explore the efficiency consequences of a contest between the audit inspector and the cartel. Both of them bid to win the contest by expending efforts. We show that the race issue depends positively on the financial incentives proposed to the inspector but the impact of an increase of the level of the fine, to be paid once an illegal agreement is detected, is ambiguous. Moreover, we show that the optimal combination of the two instruments consists in two regimes. When the marginal cost of providing the relevant information is relatively high, the antitrust authority equally shares the collected fine and does not provide the inspector with any information. Conversely, when this marginal cost is relatively small, the authority uses the two instruments. She has to provide him with the maximum level of information consistent with winning the contest with certainty
    Keywords: Antitrust Enforcement; Collusion; Moral Hazard; Contest
    JEL: K42 K21 L4
    Date: 2012
  6. By: Martin Goetz
    Abstract: This paper studies how a bank’s diversification affects its own risk taking behavior and the risk taking of competing, nondiversified banks. By combining theories of bank organization, market structure and risk taking, I show that greater geographic diversification of banks changes a bank’s lending behavior and market interest rates, which also has ramifications for nondiversified competitors due to interactions in the banking market. Empirical results obtained from the U.S. commercial banking sector support this relationship as they indicate that a bank’s risk taking is lower when its competitors have a more diversified branch network. By utilizing the state-specific timing of a removal of intrastate branching restrictions in two identification strategies, I further pin down a causal relationship between the diversification of competitors and a bank’s risk taking behavior. These findings indicate that a bank’s diversification also impacts the risk taking of competitors, even if these banks are not diversifying their activities.
    Keywords: Risk ; Banks and banking ; Bank competition
    Date: 2012
  7. By: UCHINO Taisuke; UESUGI Iichiro
    Abstract: Using a unique dataset of non-listed firms that identifies the banks with which firms transact, we examine the effects of the largest-ever bank merger in Japan—that between Bank of Tokyo-Mitsubishi (BTM) and UFJ Bank (UFJ) in 2005. We focus on how the merger affected firms through their firm-bank relationships. Specifically, we examine whether there are any differences in how the availability of loans evolved over time for firms that, prior to the merger, either transacted with both of the merged banks, with one of them, or with none. We find the following: (1) Firms that had transacted with both BTM and UFJ saw their borrowing costs increase by 40bp relative to those that had transacted with neither. (2) Firms that transacted with one of the two banks saw their borrowing costs increase by a smaller but still significant margin of 20bp relative to those that had transacted with neither. And (3) we do not find a significant difference in the extent that borrowing costs increased between firms that transacted with the acquiring bank (BTM) and those that transacted with the acquired bank (UFJ). These results suggest that the bank merger increased firms' borrowing costs partly through an exogenous decrease in the number of firm-bank relationships and partly through changes in the organizational structure of the merged bank, including a consolidation of the branch network.
    Date: 2012–04
  8. By: Marie-Noëlle Calès (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Laurent Granier (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Nadège Marchand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: For several years, European financial markets have been the place of important mutations. These mutations have hit both stock markets themselves as well as the infrastructures including all necessary services for the transactions on financial securities. Among the market services to which the investors appeal, is the clearing of the orders, the service which allows reducing exchanged flows while guaranteeing their safety. The market of clearing became strongly competitive with the arrival of new Pan European clearing houses. Confronted with aggressive pricing policies, “incumbent” clearing houses have to adopt new strategies : merger, simple or mutual links of interoperability. We develop a model of industrial organization to appreciate the consequences of these various strategies in terms of price and social welfare. The strategic incentives of clearing houses and their effects on their customers, i.e. investors, are observed by means of a sequential game. We show that the interoperability agreements are never reached at the equilibrium in spite of the fact that the "European code of good practice" of postmarkets incites them to accept this type of agreements. On the other hand, a merger between incumbent clearing houses can occur under some conditions. The merger is beneficial to these last ones as well as to the investors, but it is unfavourable to the Pan European clearing houses.
    Keywords: bundling, clearing house, interoperability, merger, post-market organization
    JEL: L10 G15 G20 G34
    Date: 2012
  9. By: Éva Keszy-Harmath (Magyar Nemzeti Bank (central bank of Hungary)); Gergely Kóczán (Magyar Nemzeti Bank (central bank of Hungary)); Surd Kováts (Hungarian Competition Authority (GVH)); Boris Martinovic (Hungarian Competition Authority (GVH)); Kristóf Takács (Magyar Nemzeti Bank (central bank of Hungary))
    Abstract: The interchange fee applied in four-party card systems transfers incomes in the payment card business from merchants to cardholders. Assessment of the interchange fee and the interpretation of its role have prompted serious professional debate in recent years. Beyond the professional debate, competition proceedings were also launched in connection with interbank agreements related to the interchange fee and the setting of the fee, but so far specific regulation has been adopted only in a few countries. The first part of the study describes the function of the interchange fee and the related economic theories, followed by a discussion of issues arising in connection with the interchange fee from the point of view of competition authorities and regulators. The second part of the study presents the results of analyses relating to the Hungarian payment card market and interchange fees. On the basis of these results, we conclude that prudent regulatory intervention, taking into account both primary and secondary market effects, may be justified in relation to the interchange fee, due to the structure and level of development of the Hungarian market.
    Keywords: interchange fee, merchant fee, payment card, merchant, cardholder, acquirer, issuer, competition law, competition authority, restrictive agreement, four-party card system
    JEL: D04 D23 D43 D52
    Date: 2012
  10. By: Alessandro STERLACCHINI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)
    Abstract: This paper examines the role and determinants of patent oppositions between the main competitors in a given industry. Differently from previous studies, it is not concerned with high-tech firms but considers the major players in the European market of white goods. Thus, we are dealing with a medium-tech, scale intensive industry which, during the last two decades, has been characterised by a stagnating demand and decreasing unit values. As a result, the level of competition has increased, especially in terms of product quality and innovations. Among the consequences of that, the leading companies in Europe have not only intensified their patenting activities but also the usage of oppositions against the patents of direct competitors. By considering 961 patents granted by the EPO to the above companies over the period 2000-2005, the paper shows, among other things, that the probability of receiving an opposition from industry rivals does not depend on the patent quality or value. Accordingly, it contends that, at least in the industries of this kind, the extent and direction of patent oppositions are mainly associated with idiosyncratic corporate characteristics and strategies.
    Keywords: Patent oppositions, Strategic patenting, White good industry
    JEL: L68 O34
    Date: 2012–04
  11. By: Mitsukuni Nishida
    Abstract: Spatial competition among multi-store firms is ubiquitous in a wide range of retail industries. However, little is known about how those firms optimize their networks of stores after a merger due to the computational burden of solving for an equilibrium in store networks. This paper proposes an empirical framework for estimating a game of network choice by two multi-store firms, which allows us to examine the impact of a hypothetical merger on store configurations, costs, and profits. The model explicitly incorporates a fundamental determinant of location choice for multi-store firms: the trade-off between the business-stealing effect and the cost- saving effect from clustering their own stores. The method integrates the static entry game of complete information with post-entry outcome data while using simulations to correct for the selection of entrants. I use lattice-theoretical results to deal with the huge number of possible network choices. Using unique cross-sectional data on store networks and revenues from the convenience-store industry in the Okinawa Island, Japan, I estimate the firms. revenue and cost functions. Parameter estimates suggest a retailer's trade-off between cost savings and lost revenues from clustering its stores is positive across markets and negative within a market. I find an acquirer of a hypothetical horizontal merger of two multi-store firms would decrease its number of stores in suburbs but increase its number in the city center, affecting consumers in different locations differently. The trade-off from clustering plays a central role in explaining this result.
    Date: 2012–04
  12. By: Herr, Annika; Suppliet, Moritz
    Abstract: Many countries with national health care providers and health insurances regulate the market for pharmaceuticals to steer drug demand and to control expenses. For example, they introduce reference pricing or tiered co-payments to enhance drug substitution and competition. Since 2006, Germany follows an innovative approach by differentiating drug co-payments by the drug's price relative to its reference price. In this two-tier system, prescription drugs are completely exempted from co-payments if their prices undercut a certain price level relative to the reference price. We identify the effect of the policy on the prices of all affected prescription drugs and differentiate the analysis by firm types (innovative, generic, branded generic or importing firms). To identify a causal effect, we use a differences-in-differences approach and additionally exploit the fact that the exemption policy had been introduced successively in the different clusters. We use quarterly data from 2007 to 2010 and find empirical evidence for differentiated price setting strategies by firm types, ranging from price decreases of -13.1% (branded generics firms) to increases of +2.0% (innovators) following the introduction of potential reductions in co-payments. We refer to the latter result as the co-payment exemption paradox. Our competition proxy (no. of firms) suggests a significant but small negative correlation with prices. --
    Keywords: pharmaceuticals,prices,co-payments,reference pricing,regulation,firm behavior
    JEL: D22 D40 I18 I11 L11
    Date: 2012
  13. By: Thierry BLAYAC; Patrice BOUGETTE; Christian MONTET
    Abstract: The purpose of this article is to show, based on the case of the French market, that consumer perception of different funeral service offers, along with new entry in a special storing facility service (“chambre funéraire”), can be sufficient to impose competitive pressures on the various suppliers, including the former monopolist. With a discrete choice experiment implemented in Lyon, France, we find evidence that, contrary to widely shared beliefs about this specific market, demand for funeral services seems characterized by relatively high price elasticities, at least as soon as consumers are fully informed about the opportunities open to them in this market. Consumer behavior has actually changed in favor of a better assessment of the different possibilities of services supplied and of their relative price. We then implement simulations in local markets and show that, with good consumer information, the market power of the supposedly dominant firm is much less important than it is generally believed. Furthermore, simulations stress the procompetitive effects of setting up a new storing facility by any businesses. We finally show that, if some improvements can still be brought to the functioning of this market, they should come from a better regulation of consumer information and of the entry of firms.
    Date: 2012–04

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