nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒07‒08
thirteen papers chosen by
Russell Pittman
US Department of Justice

  1. On the Welfare Effects of Exclusive Distribution Arrangements By Eichberger, Jürgen; Mueller-Langer, Frank
  2. Multimarket Contact, Bundling and Collusive Behavior By Juan-Pablo Montero; Esperanza Johnson
  3. Coerced Reciprocal Dealing and the Leverage Theory By Kalyn Coatney; Sherrill Shaffer
  4. Horizontal Agreements and R&D Complementarities: Merger versus RJV By Ben Ferrett; Joanna Poyago-Theotoky
  5. R&D Competition in an Asymmetric Cournot Duopoly: The Welfare Effects of Catch-Up by the Laggard Firm By Ben Ferrett
  6. Competition and Offshoring By Jose Antonio Rodriguez-Lopez
  7. An empirical assessment of the 2004 EU merger policy reform By Duso, Tomaso; Gugler, Klaus; Szücs, Florian
  8. Estimating damages from price-fixing: The value of transaction data By Hüschelrath, Kai; Müller, Kathrin; Veith, Tobias
  9. Concrete shoes for competition: The effect of the German cement cartel on market price By Hüschelrath, Kai; Müller, Kathrin; Veith, Tobias
  10. Market Structure and Market Performance in E-Commerce By Hackl, Franz; Kummer, Michael E.; Winter-Ebmer, Rudolf; Zulehner, Christine
  11. Price dispersion, search costs and consumers and sellers heterogeneity in retail food markets. By Anania, Giovanni; Nistico, Rosanna
  12. The competitive effects of firm exit: Evidence from the US airline industry By Hüschelrath, Kai; Müller, Kathrin
  13. Survey of Empirical Studies of Market Power in Food Industries By Perekhozhuk, Oleksandr; Glauben, Thomas; Teuber, Ramona; Grings, Michael

  1. By: Eichberger, Jürgen; Mueller-Langer, Frank
    Abstract: The regulation of vertical relationships between firms is the subject of persistent legal and academic controversy. The literature studying vertical trade relationships seems to assume that an upstream monopolist prefers downstream competition over exclusive distribution arrangements. We derive precise conditions for when an upstream monopolist prefers competing distribution systems over exclusive distribution in the downstream market. We also show that the welfare effects of downstream competition are ambiguous. A downstream oligopoly may have negative welfare properties compared to a downstream monopoly.
    Keywords: Exclusive distribution; Competing distribution; Vertical foreclosure; Cournot competition
    JEL: F10 L42 D4 L12
    Date: 2012–05–24
  2. By: Juan-Pablo Montero; Esperanza Johnson
    Abstract: We study the static and dynamic implications of non-linear pricing schemes (i.e., bundling) for otherwise unrelated products but for multimarket contact. Bundling is always present in competition but unlikely in a cartel agreement. Although it brings extra profits to the cartel –sometimes charging a premium rather than a discount for the bundle–, bundling makes deviation from the agreement far more attractive. Depending on the correlation of consumers’ preferences, this deviation effect is either reinforced with milder punishments (for positive correlations) or partially offset with harsher punishments (for negative correlations). The deviation effect is so strong that it even dominates a zero-profit (pure-bundling) punishment.
    Keywords: multimarket contact, conglomerate merger, bundling, collusion
    JEL: L13 L41
    Date: 2012
  3. By: Kalyn Coatney; Sherrill Shaffer
    Abstract: Recent international mergers have potentially revived interest in a long-standing concern of U.S. courts that, under certain conditions, a conglomerate that buys from and sells products to its intermediary supplier may be able to profitably leverage its downstream market power to restrict competition in the upstream market and harm welfare via coerced reciprocal dealing. Economists have debated the court precedent, invoking the leverage theory established from various models of tying arrangements, a cousin of coerced reciprocal dealing. We develop the first explicit model of coerced reciprocal dealings to investigate the validity of the leverage theory. Our results support the concerns.
    Date: 2012–06
  4. By: Ben Ferrett (School of Business and Economics, Loughborough University, UK); Joanna Poyago-Theotoky (School of Economics, La Trobe University, Australia)
    Abstract: We study the decision of two firms within an oligopoly concerning whether to enter into a horizontal agreement to exploit complementarities between their R&D activities and, if so, whether to merge or form a research joint venture (RJV). In contrast to horizontal merger, there is a probability that an RJV contract will fail to enforce R&D sharing. We find, first, that a horizontal agreement always arises. The insiders’ merger/RJV choice involves a trade-off. While merger offers certainty that R&D complementarities will be exploited, it leads to a profit-reducing reaction by outsiders on the product market, where competition is Cournot. Greater brand similarity and contract enforceability (“quality”) both favour RJV, while greater R&D complementarity favours merger. Interestingly, the insiders may choose to merge even when RJV contracts are always enforceable, and they may opt to form an RJV even when the likelihood of enforceability is negligible.
    Keywords: horizontal merger, research joint venture (RJV), contract enforceability, process R&D, R&D complementarity
    JEL: O30 L13 D43
    Date: 2012–04
  5. By: Ben Ferrett (School of Business and Economics, Loughborough University, UK)
    Abstract: The substantial within-industry variation in firm productivity typically observed in the data suggests that there is ample scope for catch-up by laggard firms. We analyse the normative effects of such catch-up. In the short run, where firms’ process technologies are fixed, catch-up can reduce social welfare if the initial unit-cost gap between firms is sufficiently large (the Lahiri/Ono effect). However, in the long run, where firms invest in process R&D to maximize profits, social welfare jumps upwards following catch-up if it causes the major firm’s R&D spending lead to grow. Both qualitative insights appear quite general.
    Keywords: asymmetric duopoly, catch-up, social welfare, process R&D.
    JEL: D61 L13 O33
    Date: 2012–04
  6. By: Jose Antonio Rodriguez-Lopez (Department of Economics, University of California-Irvine)
    Abstract: I present a model of offshoring decisions with heterogeneous firms, random adjustment costs, and endogenous markups. The model shows an inverted-U relationship between firm-level productivity and the probability of offshoring; hence, the most productive firms are less likely to offshore than some lower-productivity firms. A tougher competitive environment has two opposing effects on firm-level offshoring likelihood: a Schumpeterian effect--accounting for the negative effect of competition on offshoring profits--and an escape-competition effect--accounting for the effect of competition on the incremental profits from offshoring. A productivity level separates non-offshoring firms according to the dominant effect, with the Schumpeterian effect dominating for the least productive firms.
    Keywords: Competition; Offshoring; Heterogeneous firms; Endogenous markups; Adjustment costs
    JEL: F12 F23
    Date: 2012–06
  7. By: Duso, Tomaso; Gugler, Klaus; Szücs, Florian
    Abstract: We propose a general framework to assess merger policy effectiveness based on standard oligopoly theory and stock market reactions. We focus on four different dimensions of effectiveness: 1) legal certainty, 2) decision errors, 3) reversion of anti-competitive rents, and 4) deterrence. We apply this framework to 368 merger cases scrutinized by the European Commission (EC) between 1990 and 2007. To evaluate the economic impact of the change in European merger legislation, we compare the results of the four tests before and after its introduction in 2004. Our results suggest that the 'more economic approach' resulted in improved ex-ante predictability of decisions and a reduction of the frequency of type I errors. Merger policy enforcement deters anti-competitive mergers without over-deterring pro-competitive transactions. Yet, the policy shift away from prohibitions, which are effective as a policy tool and as a deterrent mechanism, does not seem to be well-grounded. --
    Keywords: merger control,regulatory reform,EU Commission,event-study
    JEL: L4 K21 C13 D78
    Date: 2012
  8. By: Hüschelrath, Kai; Müller, Kathrin; Veith, Tobias
    Abstract: We use a unique private data set of about 340,000 invoice positions from 36 smaller and larger customers of German cement producers to study the value of such transaction data for an estimation of cartel damages. In particular, we investigate, first, how structural break analysis can be used to identify the exact end of the cartel agreement and, second, how an application of before-and-after approaches to estimate the price overcharge can benefit from such rich data sets. We conclude that transaction data allows such a detailed assessment of the cartel and its impact on direct customers that its regular application in private antitrust cases is desired as long as data collection and preparation procedures are not prohibitively expensive. --
    Keywords: antitrust policy,private enforcement,cartels,overcharge,damages,cement
    Date: 2012
  9. By: Hüschelrath, Kai; Müller, Kathrin; Veith, Tobias
    Abstract: We use publicly available price data from the German cement industry to estimate the cartelinduced price increase. We apply two different comparator-based approaches - the 'before and-after' approach and the 'difference-in-differences' approach - and especially study the impact of various assumptions on the transition period from the cartel period to the non-cartel period on the overcharge estimate. We find that the cement cartel led to price overcharges in a range from 20.3 to 26.5 percent depending on model approach and model assumptions. --
    Keywords: antitrust policy,cartels,private enforcement,damages,overcharge
    Date: 2012
  10. By: Hackl, Franz (Department of Economics, University of Linz); Kummer, Michael E. (Department of Economics, University of Mannheim, and ZEW, Mannheim); Winter-Ebmer, Rudolf (Department of Economics, Johannes Kepler University, Linz, and Institute for Advanced Studies, Vienna, Austria); Zulehner, Christine (Department of Economics, University of Linz, and WIFO, Vienna)
    Abstract: We investigate the causal effect of market structure on market performance in the consumer electronics. We combine data from Austria’s largest online site for price comparisons with retail data on wholesale prices provided by a major hardware producer for consumer electronics. We observe input prices of firms, and all their moves in the entry and the pricing game over the whole product lifecycle. Using this information for 70 digital cameras, we generate instrumental variables for the number of firms in the market based on the shops’ entry decisions on other product markets in the past. We find that instrumenting is particularly important for estimating the effect of competition on the markup of the price leader.
    Keywords: Retailing, product lifecycle, market structure, market performance, markup, price dispersion
    JEL: L11 L13 L81 D43
    Date: 2012–06
  11. By: Anania, Giovanni; Nistico, Rosanna
    Abstract: Price dispersion, i.e. a homogeneous product being sold at different prices by different sellers, is among the most replicated findings in empirical economics. The paper assesses the extent and determinants of spatial price dispersion for 14 perfectly homogeneous food products in more than 400 retailers in a market characterized by the persistence of a large number of relatively small traditional food stores, side by side large supermarkets. The extent of observed price dispersion is quite high, suggesting that monopolistic competition prevails as a result of the heterogeneity of consumers and services offered. When prices in an urban area (where the spatial concentration of sellers is much higher and consumer search costs significantly lower) are compared with those in smaller towns and rural areas, differences in search costs and the potentially higher degree of competition do not yield lower prices; quite the contrary, they are, on average, higher in the urban area for 11 of the 14 products considered. Supermarkets proved to be often, but not always, less expensive than traditional retailers, although average savings from food shopping at supermarkets were extremely low. Finally, the results of the study suggest that retailers have different pricing strategies; these differences emerge both at the firm level and for supermarkets within the same chain. The results presented in the paper suggest that what is important in explaining price dispersion is the contemporaneous heterogeneity of retailers (in terms of services) and consumers (in terms of search and shopping preferences), which makes it possible for a monopolistic competition structure of the market to emerge and for small traditional food retailers to remain in business.
    Keywords: price dispersion, retail pricing, food markets., Agribusiness, Consumer/Household Economics, Demand and Price Analysis, Industrial Organization, L81, D83, D43, Q13.,
    Date: 2012
  12. By: Hüschelrath, Kai; Müller, Kathrin
    Abstract: We study the competitive effects of five liquidations and six mergers in the domestic U.S. airline industry between 1995 and 2010. Applying fixed effects regression models we find that route exits due to liquidation lead to substantially larger price increases than mergerrelated exits. Within the merger category, our analysis reveals significant price increases on all affected routes immediately after the exit events. In the medium and long-run, however, realized merger efficiencies and entry-inducing effects are found to be strong enough to drive prices down to pre-exit levels. --
    Keywords: airline industry,exit,liquidation,merger,efficiencies,entry-inducing effects
    Date: 2012
  13. By: Perekhozhuk, Oleksandr; Glauben, Thomas; Teuber, Ramona; Grings, Michael
    Abstract: The objective of this study is, based on the existing literature, to provide a general systematic characteristic of market structure models. We distinguish cost, production, profit, revenue functions, as well as the general identification approach as most plausible methods to measure the degree of market power. Using time-series data of the Ukrainian milk processing industry, as an example, we utilized the production approach to estimate the exercise of oligopsony power, test functional forms and verify estimation methods. The results of two-equation models did not produce any evidence suggesting the exercise of market power, whereas, the three-equation models revealed the presence of oligopsony.
    Keywords: New Empirical Industrial Organization (NEIO), Oligopsony power, Ukraine, Agribusiness, Demand and Price Analysis, Industrial Organization, L13, P23, R15,
    Date: 2012

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