nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒10‒06
eighteen papers chosen by
Russell Pittman
US Government

  1. Quality Differentiation and Trade Intermediation By Heiwai Tang; Yifan Zhang
  2. Supply chain configuration under information sharing By Kashefi, Mohammad Ali
  3. Privatization in a mixed oligopoly: Productivity, market concentration, and the optimal degree of privatization By Shinjiro Miyazawa
  4. A primer on R&D cooperation among firms By Marco Marinucci
  5. Negative Effects of Intellectual Property Protection: The unusual suspects? By TAKECHI Kazutaka
  6. Standards and Intellectual Property Management Strategy and Policy (Japanese) By AOKI Reiko; ARAI Yasuhiro; TAMURA Suguru
  7. Impacts of Patent Expiry and Regulatory Policies on Daily Cost of Pharmaceutical Treatments: OECD Countries, 2004-2010 By Berndt, Ernst R; Dubois, Pierre
  8. International Mergers with Financially Constrained Owners By Berg, Aron; Norbäck, Pehr-Johan; Persson, Lars
  9. Antidumping and Market Competition: Implications for Emerging Economies By Chad P. Bown; Rachel McCulloch
  10. Access pricing, infrastructure investment and intermodal competition By Ginés de Rus; M. Pilar Socorro
  11. On the (In) Effectiveness of Policies to Promote Broadband Diffusion in Europe (2003-2010): An Econometric Assessment By Michele Cincera; Antonio Estache; Lauriane Dewulf
  12. Jules Dupuit and the railroads: what is the role of the State? By Philippe Poinsot
  13. Bank Competition Through The Credit Cycle: Implications For SME Financing By McCann, Fergal; McIndoe-Calder
  14. Financial Intermediation and the Role of Price Discrimination in a Two-Tier Market By Stefan Reitz; Markus A. Schmidt; Mark P. Taylor
  15. Directed Search and the Bertrand Paradox By Athanasios Geromichalos
  16. Language, Internet and Platform Competition: the case of Search Engine By Jeon, Doh-Shin; Jullien, Bruno; Klimenko, Mikhail M.
  17. Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market By Jason Allen; Robert Clark; Jean-François Houde
  18. Trade-offs between environmental regulation and market competition: airlines, emission trading systems and entry deterrence By Cristina Barbot; Ofelia Betancor; M. Pilar Socorro; M. Fernanda Viecens

  1. By: Heiwai Tang; Yifan Zhang
    Abstract: Existing studies show that intermediaries can help verify or screen product quality for buyers. This paper examines this claim both theoretically and empirically in the context of international trade. We develop a heterogeneous-firm model that features vertical and horizontal differentiations of products, a coexistence of direct exporting and indirect exporting through intermediaries, and firms' investment in quality signaling. When complete contracts are not available, intermediaries underinvest in quality signaling from the perspective of the producer. For products that are more horizontally differentiated, competition is less intense and even low-quality firms export via intermediaries. These two mechanisms yield a negative (positive) cross-product relation between vertical (horizontal) differentiation and the prevalence of trade intermediation. Intermediation is more prevalent in the more (both physically and culturally) distant destinations, more so for the more vertically and horizontally differentiated products. Using detailed product-level data from China, we find supporting evidence for these predications.
    Keywords: Trade intermediation, vertical differentiation, product differentiation
    JEL: F12 L15
    Date: 2012
  2. By: Kashefi, Mohammad Ali
    Abstract: This paper examines the effect of information sharing on supply chain configuration where the market characterized by demand uncertainty. A dynamic multi-stage game theoretic model with incomplete information is employed to capture the sequence of events. Our supply chain consists of two suppliers with exogenous wholesale prices and two retailers, the incumbent and the entrant, with asymmetric demand information. Informed incumbent prefers to conceal its private information from the entrant in order to reap more profits in the market. The channel of information flows is only through the first supplier and the incumbent can supply just from him, but the entrant is free to choose its proper supplier considering the point that the second supplier is uninformed. Our analytical model demonstrates that how the mean demand of the market, wherein our retailers compete, and its relation with the relative wholesale price of the suppliers play crucial role in equilibrium determination. Our results show under which circumstances separation and pooling equilibrium could occur in some range of demand variation. It is also shown that the entrant sometimes prefers to avoid information acquisition by choosing the second supplier and playing Cournot instead of Stackelberg which is more profitable for him in some occasions.
    Keywords: Information Sharing; Asymmetric Information; Supply Chain; Dynamic Game; Signaling Game; Demand Uncertainty; Strategic Information Management
    JEL: M11 Y40 L13 L81 C61 D82 C72
    Date: 2012–09–20
  3. By: Shinjiro Miyazawa (Graduate School of Economics, Kobe University)
    Abstract: This paper investigates the optimal degree of privatization for a public firm in a homogeneous mixed oligopoly. I show that full privatization is optimal when a public firm has a severe productivity disadvantage or competes with many private firms. The optimal degree of partial privatization is increasing in the degree of productivity disadvantage and the number of private firms. I further show that partial privatization can be optimal for a public firm even when full privatization would completely remove any productivity disadvantages.
    Keywords: quantity-setting competition, partial privatization, mixed oligopoly
    JEL: L13 L32 L33
    Date: 2012–10
  4. By: Marco Marinucci (Banca d'Italia)
    Abstract: This paper provides an introduction to the economic analysis of R&D cooperation among firms. Basing on some stylized facts, we survey the relevant theoretical literature in order to discuss the benefits and the costs that firms face when they cooperate in R&D. We then analyze the pros and the cons of R&D cooperation from a policy-making perspective. We find that R&D cooperation is usually considered welfare improving and can be promoted by several policies. Finally, we discuss paths of research not yet taken in the theoretical literature.
    Keywords: R&D Cooperation, R&D spillovers, Welfare, Innovation
    JEL: O30 L40 L24
    Date: 2012–09
  5. By: TAKECHI Kazutaka
    Abstract: The negative effects of intellectual property protection (IPP) on trade volume were found in previous research findings in which market power effects dominate market expansion effects. Because both effects increase profits, IPP induces entry without ambiguity. However, using product-level entry data, negative effects on market supply are found after controlling for country-specific effects. An examination of entry mode choice (direct supply vs. licensing) reveals that while the direct supply mode is negatively related to IPP, licensing is not, implying that firms facing infringement risk or intense competition may avoid direct supply in IPP-stringent countries.
    Date: 2012–09
  6. By: AOKI Reiko; ARAI Yasuhiro; TAMURA Suguru
    Abstract: Strategic technology standardization and management of related intellectual property have become a worldwide phenomenon. Japan is no exception as stressed in policy documents such as the "Industrial Structure Vision 2010" and the "Intellectual Property Promotion Plan 2011". In the first part of this paper, we construct a framework to analyze strategic standard and intellectual property management, focusing on network effects, switching costs and multi-tasking. We categorize several examples according to conditions such as the position in the vertical market structure (upstream, downstream) and the existence and ownership of complementary goods or technologies. Using the framework, we characterize the economic implications of strategic decisions such as open-closed and pricing. In the second half of the paper, we use a survey of standard and patent lengths to understand the relationship between the length of patent protection and standard longevity. While patent length is legally determined, the life of a standard is determined endogenously by firm strategy and industry interaction. We present a framework to measure the two on a common technology lifetime line and derive policy implications.
    Date: 2012–09
  7. By: Berndt, Ernst R; Dubois, Pierre
    Abstract: Cross-country variability in regulatory frameworks, industrial policy, physician/pharmacy autonomy, brand/generic distinctions, and in the practice of medicine contributes to ambiguous interpretations of pharmaceutical cost comparisons. Here we report cross-country comparisons that: (i) focus on 11 therapeutic classes experiencing patent expiration and loss of exclusivity 2004-2010 in eight industrialized countries; (ii) convert revenues and unit sales to cost per day of treatment and number patient days treated using the World Health Organizations’ Defined Daily Dosage metrics; (iii) compare patterns in costs per day of treatment with price index measures based on average price per day of treatment for each molecule computed over all molecule versions; (iv) utilizing econometric methods, model and quantify various factors affecting variations in daily treatment price indexes such as national regulatory and reimbursement policy changes, physician/pharmacy autonomy, and other factors; and (v) simulate changes in expenditures by country and therapeutic class had counterfactual policies been implemented.
    Keywords: cross-country comparisons; generic drugs; pharmaceutical costs
    JEL: D4 I11 I18 L11 L65 O34
    Date: 2012–09
  8. By: Berg, Aron (Research Institute of Industrial Economics (IFN)); Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN))
    Abstract: This paper proposes a cross-border M&A model with financially constrained owners in which the identity of the buyer and seller can be determined. We show that policies blocking foreign acquisitions to protect the domestic industry can be counterproductive. Foreign acquisition can increase the domestic owner’s investment in growth industries by reducing their financial restrictions. This calls for a ”financial” efficiency defense in the merger law. We also show that cross-border M&As are not only driven by effects on the merged entity, but also driven by the seller’s alternative investment opportunities.
    Keywords: Investment Liberalization; Mergers & Acquisitions; Corporate Governance; Ownership
    JEL: F23 K21 L13 O12
    Date: 2012–09–24
  9. By: Chad P. Bown (The World Bank); Rachel McCulloch (Department of Economics, Brandeis University)
    Abstract: While the original justification of the antidumping laws in the industrial economies was to protect domestic consumers against predation by foreign suppliers, by the early 1990s the laws and their use had evolved so much that the opposite concern arose. Rather than attacking anti-competitive behavior, dumping complaints by domestic firms were being used to facilitate collusion among suppliers and enforce cartel arrangements. This paper examines the predation and anti-competitiveness issues from the perspective of the “new users” of antidumping—the major emerging economies for which antidumping is now a major tool in the trade policy arsenal. We examine these concerns in light of important ways in which the world economy and international trading system have been changing since the early 1990s, including more firms and more countries participating in international trade, but also more extensive links among suppliers and consumers through multinational firm activity and vertical specialization.
    Keywords: Antidumping, Temporary trade barriers, Competition, Antitrust, WTO
    JEL: F13
    Date: 2012–08
  10. By: Ginés de Rus; M. Pilar Socorro
    Abstract: In this paper we analyze the consequences of access pricing on infrastructure investment and intermodal competition. First, we analyze the optimal access prices to be charged to private operators. We find that the optimal access price to be charged for the use of a particular infrastructure depends on the existence of intermodal substitution or complementarity with other transport modes and infrastructures. Second, we analyze under which circumstances the investment in rail infrastructure is socially desirable both in a context with and without budget constraints. The positive net present value of the investment is not a sufficient condition. The necessary and sufficient condition implies a positive difference in social welfare for the cases in which the new infrastructure is and is not constructed.
    Date: 2012–09
  11. By: Michele Cincera; Antonio Estache; Lauriane Dewulf
    Abstract: This paper presents an updated empirical assessment of the relative effectiveness of intra-platform and inter-platform competition in terms of broadband diffusion in Europe between 2003 and 2010. It relies on an econometric analysis of 18 European countries. To approximate two forms of competition within a same platform, we distinguish between service-based access and facility-based access. The first type requires less investment from entrants than the second which allows entrants to differentiate their product. Our results update and validate earlier studies. We show that service-based intra-platform competition brought by access regulation is still not an accelerating factor of broadband diffusion (or investment) in Europe. In contrast, we find that both facility-based intra-platform competition brought by access regulation and inter-platform competition brought by the deployment of non-DSL technologies effectively fuels broadband diffusion. In sum, many EU countries may have underestimated the potential payoff of stimulating product differentiation through inter-platform and service-based intra-platform competition for the diffusion of broadband in Europe.
    Keywords: ICT; broadband diffusion; competition
    JEL: D43 L43 L63
    Date: 2012–09
  12. By: Philippe Poinsot (PHARE - Pôle d'Histoire de l'Analyse et des Représentations Economiques - CNRS : FRE2541 - Université Paris I - Panthéon Sorbonne - Université Paris X - Paris Ouest Nanterre La Défense)
    Abstract: In the nineteenth century, the emergence of railroads in France resulted in new analytical issues, as they are natural monopolies. Jules Dupuit examined the issue of the operations of the railroad sector on several occasions (1853, 1861 and 1862). He would seem to have defended two contrasting positions, opening the way for debate among commentators. In this communication, I attempt to restore the consistency of Dupuit's positions on the railroads. In the first section, I distinguish between competition as an ideal and the feasibility of competition in the railroad sector; this distinction is implicit in Dupuit's work, but it helps us to grasp that, in his opinion, unlimited competition is not possible in the railroads and that it is not necessarily beneficial to the welfare of society. The State should therefore regulate the railroad sector either by State management or through concessions. In the second section, I specify the conditions under which he believed the State should manage the railroads sector instead of offering concessions to private companies.
    Keywords: railroads; Jules Dupuit; natural monopoly; regulation; competition
    Date: 2012–04–04
  13. By: McCann, Fergal (Central Bank of Ireland); McIndoe-Calder (Central Bank of Ireland)
    Abstract: In this letter a series of stylized facts are presented on competition in Irish private sector lending markets across periods of both significant economic expansion and decline. Firstly, concentration of lending to the private sector is shown to have fallen during the boom period of 2004-2008, and to have steadily risen since the onset of the crisis. Secondly, we document that the lending market for Small and Medium Enterprises (SMEs) is significantly more concentrated than that for the private sector in total. Thirdly, we observe a degree of heterogeneity in the concentration of lending to different sectors of economic activity. Fourthly, concentration of new lending flows to SMEs in 2010 and 2011 is shown to be significantly higher than concentration of the stock of credit across all sectors, suggesting that the trend is towards even higher concentration in the SME market. Finally, it is apparent that the share of foreign banks in private sector credit stock reached its peak just as the crisis began, and has been falling since, indicating that in times of crisis foreign market participants react by more aggressively reducing exposure than domestic banks. The likely effect on Irish firms’ access to finance is discussed by placing these findings in the context of the literature on the link between banking competition and credit conditions. Our results suggest that firms, and particularly SMEs, will experience increasingly difficult credit conditions as a result of increased concentration in the lending market. In this light, policy measures aimed at alleviating credit constraints are of particular importance.
    Keywords: Competition, Herfindahl Index, Private Sector Credit, SMEs, Foreign Banks, Access to Finance, Financial Stability
    Date: 2012–04
  14. By: Stefan Reitz; Markus A. Schmidt; Mark P. Taylor
    Abstract: Though unambiguously outperforming all other financial markets in terms of liquidity, foreign exchange trading is still performed in opaque and decentralized markets. In particular, the two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We provide a theoretical foreign exchange pricing model that accounts for market power considerations and analyze a database of the trades of a German market maker and his cross section of end-user customers. We find that the market maker generally exerts low bargaining power vis-á-vis his customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information. From this perspective, it appears that market makers provide interdealer market liquidity to end-user customers with cross-sectionally differing spreads
    Keywords: Foreign Exchange, Market Mictrostructure, Pricing Behavior
    JEL: F31 F41
    Date: 2012–09
  15. By: Athanasios Geromichalos (Department of Economics, University of California Davis)
    Abstract: I study a directed search model of oligopolistic competition, extended to incorporate general capacity constraints, congestion effects, and pricing based on ex-post realized demand. I show that as long as any one of these ingredients is present, the Bertrand paradox will fail to hold. Hence, I argue that, despite the emphasis that has been placed by the literature on sellers’ capacity constraints as a resolution to the paradox, the existence of such constraints is only a subcase of a general class of environments where the paradox fails. More precisely, Bertrand’s paradox will not arise whenever the buyers’ expected utility from visiting a specific seller is decreasing in that seller’s realized demand.
    Keywords: Directed Search, Bertrand Paradox, Capacity Constraints, Congestion Effects, State-contingent Pricing
    JEL: C78 D43 L13
    Date: 2012–09–25
  16. By: Jeon, Doh-Shin; Jullien, Bruno; Klimenko, Mikhail M.
    Abstract: The World Wide Web was originally a totally English-based medium due to its US origin. Although the presence of other languages has steadily risen, content in English is still dominant, which raises a natural question of how bilingualism of consumers of a home country affects production of web content in the home language and domestic welfare? In this paper, we address this question by studying how bilingualism affects competition between a foreign search engine and a domestic one within a small country and thereby production of home language content. We find that bilingualism unambiguously softens platform competition, which in turn can induce a reduction in home language content and in home country's welfare. In particular, it is possible that content in the foreign language crowds out so much content in the home language that consumers enjoy less content when they are bilingual than when they are monolingual.
    Keywords: bilingualism; international trade; language; platform; search engine; two-sided market
    JEL: D21 D43 F12 L13 L86
    Date: 2012–09
  17. By: Jason Allen; Robert Clark; Jean-François Houde
    Abstract: This paper measures market power in a decentralized market where contracts are determined through a search and negotiation process. The mortgage industry has many institutional features which suggest competitiveness: homogeneous contracts, negotiable rates, and, for a given consumer, common lending costs across lenders. As a result, even with a small number of lenders, informed borrowers can gather multiple quotes. However, there is important heterogeneity in the ability of consumers to understand the subtleties of financial contracts, in their ability or willingness to search and negotiate for quotes, and also in their degree of loyalty to their main financial institution. We propose and estimate a model to disentangle the different channels through which market power can arise for a given transaction in this environment. There are two main sources of market power. The first is search frictions. We find that over the five year period of the contract the average search cost corresponds to an upfront sunk cost of between $1,047 and $1,590. The second main source of market power is switching costs. We estimate that consumers are willing to pay between $759 and $1,617 upfront to avoid having to switch banks.
    Keywords: Financial institutions; Financial services; Market structure and pricing
    JEL: G21 L22 D4
    Date: 2012
  18. By: Cristina Barbot; Ofelia Betancor; M. Pilar Socorro; M. Fernanda Viecens
    Abstract: Emission trading systems (ETS) are being applied worldwide and in different economic sectors as an environmental regulatory tool that induces reductions of CO2 emissions. In Europe such a system is in place since 2005 for energy intensive installations and, since 1st January 2012, for airlines with flights arriving and departing from Community airports. The efficiency of the system should consider not only how it allows reaching an environmental goal, but also it should take into account its implications for market competition. In this work we develop a theoretical model that analyses the European ETS’s main features as devised for airlines, focusing on its effects on potential competition and entry deterrence. Contrary to other economic activities under ETS, potential competition is usual in most airline markets. Our results indicate that the share of capped allowances allocated initially for free to air operators may be a key element in deterring or allowing entry into the market. This result may be in collision with the general European principle of promoting competition and may represent a step backwards in the construction of a single European air transport market.
    Date: 2012–09

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