nep-com New Economics Papers
on Industrial Competition
Issue of 2012‒12‒06
23 papers chosen by
Russell Pittman
US Government

  1. Do buyer groups facilitate collusion? By Normann, Hans-Theo; Rösch, Jürgen; Schultz, Luis Manuel
  2. Relaxing Competition through Speculation: Committing to a Negative Supply Slope By Holmberg, P.; Willems, Bert
  3. Cartel and Monopoly Policy By Hugues Bouthinon-Dumas; Frédéric Marty
  4. Cartel enforcement in the European Union: Determinants of the duration of investigations By Hüschelrath, Kai; Laitenberger, Ulrich; Smuda, Florian
  5. The Origin of the Sylos Postulate: Modigliani’s and Sylos Labini’s Contributions to Oligopoly Theory By Rancan, Antonella
  6. Denial, Rationalization, and the Administered Price Thesis By Gu, Gyun Cheol
  7. Intellectual Property Rights and Efficient Firm Organization By Ponzetto, Giacomo AM
  8. Monopoly R&D and Compatibility Decisions in Network Industries By Jong-Hee Hahn; Jin-Hyuk Kim
  9. Internet Interconnection and Network Neutrality By Choi, Jay; Jeon, Doh-Shin; Kim, Byung-Cheol
  10. Value Creation in IT Service Platforms through Two-Sided Network Effects By Netsanet Haile; Jorn Altmann
  11. Games with Strategic Heterogeneity By Andrew Monaco; Tarun Sabarwal
  12. Search engine competition with network externalities. By Argenton, C.; Prüfer, J.
  13. Price Reveal Auctions By Andrea Gallice
  14. Market power, efficiencies, and entry: Evidence from an airline merger By Hüschelrath, Kai; Müller, Kathrin
  15. The value of bluer skies: How much do consumers gain from entry by JetBlue Airways in long-haul US Airline Markets? By Hüschelrath, Kai; Müller, Kathrin
  16. Market Liberalization and Market Integration - Essays on the Nordic Electricity Market By Lundgren, Jens
  17. Hotelling Models with Price-Sensitive Demand and Asymmetric Transport Costs: An Application to Public Transport Scheduling By Adriaan Hendrik van der Weijde; Erik T. Verhoef; Vincent A. C. van den Berg
  18. Performance of the life insurance industry under pressure: efficiency, competition and consolidation By Jacob Bikker
  19. Competition, Gatekeeping, and Health Care Access By Godager, Geir; Iversen, Tor; Albert Ma, Ching-to
  20. Economies of Scale and Merger Efficiencies: Empirical Evidence from the Chilean Pension Funds Market By Claudio A Agostini
  21. Who's afraid of big bad banks? Bank competition, SME, and industry growth By Inklaar, Robert; Koetter, Michael; Noth, Felix
  22. Empirical essays on ex post evaluations of competition and regulatory authorities decisions and policy reforms. By Ozbugday, F.C.
  23. Infrastructure policy : basic design options By Klein, Michael

  1. By: Normann, Hans-Theo; Rösch, Jürgen; Schultz, Luis Manuel
    Abstract: We explore whether buyer groups, in which firms legally purchase inputs jointly, facilitate collusion in the product market. In a repeated game, abandoning the buyer group altogether or excluding single firms from them constitute more severe credible threats, hence, in theory buyer groups facilitate collusion. We run several experimental treatments in a three-firm Cournot framework to test these predictions, and we also explore the impact communication has on buyer groups. The experimental results show that buyer groups lead to lower outputs when groups can exclude single firms. Communication is identified as a main factor causing collusive product markets. --
    Keywords: buyer groups,cartels,collusion,communication,experiments,repeated games
    JEL: C7 C9 L4 L41
    Date: 2012
  2. By: Holmberg, P.; Willems, Bert (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We demonstrate how suppliers can take strategic speculative positions in derivatives markets to soften competition in the spot market. In our game, suppliers first choose a portfolio of call options and then compete with supply functions. In equilibrium firms sell forward contracts and buy call options to commit to downward sloping supply functions. Although this strategy is risky, it reduces the elasticity of the residual demand of competitors, who increase their mark-ups in response. We show that this type of strategic speculation increases the level and volatility of commodity prices and decreases welfare.
    Keywords: Supply function equilibrium;Option contracts;Strategic commitment;Speculation.
    JEL: C73 D43 D44 G13 L13 L94
    Date: 2012
  3. By: Hugues Bouthinon-Dumas (ESSEC Business School - ESSEC Business School); Frédéric Marty (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR7321 - Université Nice Sophia Antipolis (UNS))
    Abstract: Firm strategies are deeply affected by the legal framework which rules the relationships between the economic agents regarding monopoly and cartel policy. Undertakings have to manoeuvre through a complex universe. Not only must they master the rules of the economic game of competition but also the legal rules of competition law which are characteristic of competition and add up to the aforementioned. Monopoly and cartel policy presents itself as an important limitation to the freedom of action of firms and as a source of risks because some of their behaviours or choices are likely to be challenged, even punished by the competition authorities for the sake of the market preservation. Yet, firms can be strongly tempted to be harmful to competition insomuch as cartel and monopolies or taking advantage of a dominant position are means generally efficient for reaching the goals companies are aiming at in a capitalistic economy: the increase of profits thanks to the growth of margins and the "quiet life" thanks to a better control of their environment. First we will present the bases of monopoly and cartel policy (1) then the rules that result from it (2) before taking into account the competition authority decisional practices and their consequences on the firms' strategies (3).
    Keywords: Politique de concurrence, abus de position dominante, cartel, insécurité juridique, approche par les effets
    Date: 2012–09–01
  4. By: Hüschelrath, Kai; Laitenberger, Ulrich; Smuda, Florian
    Abstract: We provide an empirical assessment of EC cartel enforcement decisions between 2000 and 2011. Following an initial characterisation of our dataset, we especially investigate the determinants of the duration of cartel investigations. We are able to identify several key drivers of investigation length such as the Commission's speed of cartel detection, the type of cartel agreement, the affected industry or the existence of a chief witness. --
    Keywords: Competition Policy,Empirical Analysis,Cartels,European Union,Fines,Leniency,Duration of Investigation
    Date: 2012
  5. By: Rancan, Antonella
    Abstract: Paolo Sylos Labini’s Oligopoly Theory and Technical Progress (1957) is considered one of the major contributions to entry-prevention models, especially after Franco Modigliani’s famous formalization. Nonetheless, Modigliani neglected Labini’s major aim when reviewing his work (JPE, 1958), particularly his demonstration of the dynamic relation between industrial concentration and economic development. Modigliani addressed only Sylos’ microeconomic analysis and the determination of the long-run equilibrium price and output, concentrating on the role played by firms’ anticipations. By doing so he shifted attention from Sylos' objective analysis to a subjective approach to oligopoly problem. This paper discusses Sylos’ and Modigliani’s differing approaches, derives the origin of the Sylos postulate and sets Modigliani’s interpretation of Sylos’ oligopoly theory in the context of his 1950s research into firms’ behaviour under uncertainty.
    Keywords: Modigliani, Sylos Labini, Sylos Postulate, Oligopoly Theory
    JEL: B13 B21 B31
    Date: 2012–11–19
  6. By: Gu, Gyun Cheol
    Abstract: This paper analyzes neoclassical reactions to Gardiner Means's administered price thesis during 1980-2000. It shows that his original idea has been continuously denied by mainstream economists. At the same time, it has been transformed through a multiplicity of rationalization processes into one or another bastardized form. However, their attempts to deny and/or rationalize the thesis are unsuccessful as their sanitized versions of Means’s theory turn out to be self-contradictory in the neoclassical framework.
    Keywords: Gardinar Means; Price rigidity; Administered price
    JEL: B21 B50 D43
    Date: 2012–05–01
  7. By: Ponzetto, Giacomo AM
    Abstract: This paper shows that intellectual property rights yield static efficiency gains, irrespective of their dynamic role in fostering innovation. I develop a property-rights model of firm organization with two dimensions of non-contractible investment: how much cost-minimizing effort to exert, and whether to direct it towards partnership or defection. In equilibrium, the first best can be attained if and only if property rights are as strong for intangible as for tangible assets. When IP rights are weaker, the structure of the firm is distorted and efficiency declines. An entrepreneur must either integrate her suppliers, which induces a fall in their investment; or else risk their defection, which entails a waste of her human capital. My model predicts greater prevalence of vertical integration in response to weaker IP rights. It also predicts a switch from integration to outsourcing over the product cycle. Both empirical predictions are consistent with evidence on the organization of multinational companies. As a normative implication, I find that IP rights should be strong but narrowly defined, to protect one business opportunity without holding up its potential spin-offs.
    Keywords: Hold-up problem; Intellectual property; Licensing; Organization; Outsourcing; Product cycle; Property rights; Spin-off; Vertical integration
    JEL: D23 D86 K11 L22 L24 O34
    Date: 2012–11
  8. By: Jong-Hee Hahn (School of Economics, Yonsei University); Jin-Hyuk Kim
    Abstract: In network industries, we often observe frequent upgrades of existing products as well as delayed introductions of new products. In order to explain these contrasting phenomena, this paper examines a durable-good monopolist's incentive for R&D in- vestment in new product development in a market with network effects. We show that if the network effect is strong the monopolist underinvests in R&D compared to the commitment level, whereas overinvestment occurs when the network effect is weak. The monopolist also chooses full intergenerational compatibility between products. We then extend the analysis to the cases of potential entry and successive innovations, and examine how the results change in these extensions.
    Keywords: Planned Obsolescence, Network Effects, Vaporware
    JEL: L12 L15 M21
    Date: 2012–10
  9. By: Choi, Jay; Jeon, Doh-Shin; Kim, Byung-Cheol
    Abstract: We analyze competition between interconnected networks when content is heterogeneous in its sensitivity to delivery quality. In a two-sided market framework, we characterize the equilibrium in a neutral network constrained to offer the same quality and assess the impact of such a constraint vis-à-vis a non-neutral network where Internet service providers (ISPs) are allowed to engage in second degree price discrimination with a menu of quality-price pairs. We find that the merit of net neutrality regulation depends crucially on content providers' business models. More generally, our analysis can be considered as a contribution to the literature on second-degree price discrimination in two-sided platform markets.
    Keywords: Net neutrality, Internet interconnection, Two-sided markets, Second-degree price discrimination, Access (Termination) charges, CPs' business models
    JEL: D4 L1 L5
    Date: 2012–11
  10. By: Netsanet Haile (Technology Management, Economics, and Policy Program, College of Engineering, Seoul National University); Jorn Altmann (Technology Management, Economics, and Policy Program, College of Engineering, Seoul National University)
    Abstract: IT service businesses can achieve economies of scale and scope faster than in traditional product businesses. In particular, as IT service platforms will become the founding infrastructure of our economies, the analysis and understanding of the value that a service platform can generate is of great importance. IT service platforms provide all involved market participants with different values. For this paper, we consider application service users, service developers and service platform providers as market participants and analyze the interrelationship between the value creations of these market participants. The basis for the description of the values and their interrelationship is the identification of parameters. Based on these parameters, a simulation model has been developed. It helps inferring the relative impact of these parameters on the evolution of the IT service platform stakeholder values. The results imply that there is a two-sided network effect. All stakeholders of a service platform mainly benefit from a growing installed base of application users. The benefit of a large service variety, however, mainly benefits the service platform provider. Therefore, we can state that a large fraction of the value from two-sided network effects goes to the platform provider.
    Keywords: IT Service Platform, Value Creation, System Dynamics, Two-Sided Network Effect, Business Modeling, IT Business, SaaS, Cloud Computing.
    JEL: C15 D02 D11 D46 D85 L14 L86 M15 M21 O31 O33
    Date: 2012–11
  11. By: Andrew Monaco (Department of Economics, Colgate University); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: This paper studies games with both strategic substitutes and strategic complements, and more generally, games with strategic heterogeneity (GSH). Such games may behave differ- ently from either games with strategic complements or games with strategic substitutes. Under mild assumptions (on one or two players only), the equilibrium set in a GSH is totally unordered (no two equilibria are comparable in the standard product order). Moreover, under mild assumptions (on one player only), parameterized GSH do not allow decreasing equilibrium selections. In general, this cannot be strengthened to conclude in- creasing selections. Monotone comparative statics results are presented for games in which some players exhibit strategic substitutes and others exhibit strategic complements. For two-player games with linearly ordered strategy spaces, there is a characterization. More generally, there are sufficient conditions. The conditions apply only to players exhibiting strategic substitutes; no conditions are needed for players with strategic complements. Several examples highlight the results.
    Keywords: Lattice games, strategic complements, strategic substitutes, strategic hetergeneity, equilibrium set, monotone comparative statics
    JEL: C70 C72
    Date: 2012–11
  12. By: Argenton, C. (Tilburg University); Prüfer, J. (Tilburg University)
    Date: 2012
  13. By: Andrea Gallice (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)
    Abstract: A price reveal auction is a Dutch auction in which the current price of the item on sale remains hidden. Bidders can privately observe the price only by paying a fee, and every time a bidder does so, the price falls by a predetermined amount. We solve for the perfect Bayesian equilibria of the game. If the number of participants n is common knowledge, then in equilibrium at most one bidder observes the price and the profits that the mechanism raises, if any, are only marginally higher than those that would stem from a normal sale. If instead n is a random variable then multiple entry can occur and profitability is enhanced.
    Keywords: pay-per-bid auctions, endogenous price decrease
    JEL: C72 D44
    Date: 2012–11
  14. By: Hüschelrath, Kai; Müller, Kathrin
    Abstract: We investigate the competitive effects of the merger between Delta Air Lines and Northwest Airlines (2009) in the domestic U.S. airline industry. Applying fixed effects regression models we find that the transaction led to short term price increases of about 11 percent on overlapping routes and about 10 percent on routes which experienced a merger-induced switch of the operating carrier. Over a longer period, however, our analysis reveals that both merger efficiencies and post-merger entry by competitors initiated a downward trend in prices leaving consumers with a small net price increase of about 3 percent on the affected routes. --
    Keywords: airline industry,merger,market power,efficiencies,entry-inducing effects
    JEL: L40 L93
    Date: 2012
  15. By: Hüschelrath, Kai; Müller, Kathrin
    Abstract: The paper estimates the effects of entry by low-cost carrier JetBlue Airways in long-haul domestic U.S. airline markets. For the period from 2000 to 2009, we find that non-stop fares were on average about 21 percent lower post-entry; however, the magnitude of the price effect depends on the pre-entry market structure. While entry into monopoly markets triggered an average price decrease of about 25 percent, the respective average price drop for entries into oligopoly markets lied at about 15 percent. Based on additional estimates of the price and income elasticities for long-haul domestic U.S. flights, we conclude that JetBlue's long-haul entries alone led to an increase in consumer welfare of about USD 661 million. --
    Keywords: airline industry,entry,low-cost carrier,consumer welfare effects
    JEL: L40 L93
    Date: 2012
  16. By: Lundgren, Jens (Department of Economics, Umeå School of Business and Economics)
    Abstract: This thesis consists of four self-contained papers related to the Nordic electricity market. Paper [I] examine how the reform of the Nordic electricity markets has affected competition in the electric power supply market, Nord Pool. The question is if the common power market has been competitive or if electric power generators have had market power during the period 1996 -2004. Moreover, since there was a stepwise evolution from national markets to a multinational power market, we also ask how the degree of market power has evolved during this integration process. The results show that electric power generators have had a small, but statistically significant, degree of market power during the whole period. However, studying the integration effect, i.e. how the market power has been affected by additional countries joining Nord Pool, it show that the degree of market power has been reduced and finally vanished as the market has expanded and more countries joined the collaboration. Paper [II] analyse how the deregulation of the Swedish electricity market has affected the price of electric power and how the change in electric power price, in turn, has affected consumers’ welfare. The result shows that the change in pricing principle of electric power following the deregulation has increased consumer welfare over the period studied (1996-2006), with welfare gains about 100 SEK per customer per year, indicating a three per cent welfare gain for the average customer. Paper [III] study whether (and to what extent) the multinational electricity market integration has affected the price dynamics at the Nordic power exchange. The results shows that a larger electricity market seems to reduce the probability of sudden price jumps, but also that the effect on volatility seem to depend on the characteristics, i.e. production structure, of the integrated markets. In Paper [IV] a two-stage study is conducted to investigate the extent to which shocks in the demand and supply for electricity translate into price jumps, and the extent to which this process is affected by the prevailing market structure. The main findings from the study is that whether demand and supply shocks translate into price jumps largely depends on the prevailing market structure, i.e. on how far the market works from capacity constraints. A notable feature of the empirical analysis is also that the marginal effects from positive demand and negative supply shocks on the jump probabilities are mostly insignificant and of small magnitude.
    Keywords: Consumer welfare; Electricity price; Market integration; Market power; Price jump
    JEL: C22 C32 D43 D60 L10 L13 L43 L69
    Date: 2012–11–20
  17. By: Adriaan Hendrik van der Weijde (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam); Vincent A. C. van den Berg (VU University Amsterdam)
    Abstract: We formulate a horizontal differentiation model with price-sensitive demand and asymmetric transport costs, in the context of transport scheduling. Two competitors choose fares and departure times in a fixed time interval. Consumers are distributed uniformly along the interval; their location indicates their desired departure time. In a standard Hotelling model, locations are chosen before prices. In our context, the opposite order is also conceivable, but we show that it does not result in a Nash equilibrium; the same is true for a game in both variables are chosen simultaneously. We also discuss Stackelberg game structures and second-best regulation. We conclude that the addition of price-sensitive demand results in equilibria in the traditional Hotelling model with price setting; there, services are scheduled closer together than optimal. We also show that it is possible to include asymmetric schedule delay functions. Our results show that departure times can be strategic instruments. Optimal regulatory strategies depend on the value of schedule delay, and on whether the regulator can commit.
    Keywords: horizontal differentiation; scheduling; transport
    JEL: L11 L51 L91 R40
    Date: 2012–11–08
  18. By: Jacob Bikker
    Abstract: A well-performing life insurance industry benefits consumers, producers and insurance firm stockholders alike. Unfavourable market conditions stress the need for life insurers to perform well in order to remain solvent. Using a unique supervisory data set, this paper investigates competition and efficiency in the Dutch life insurance market by estimating unused scale economies and measuring efficiency-market share dynamics during 1995-2010. Large unused scale economies exist for small and medium-sized life insurers, indicating that further consolidation would reduce costs. Over time average scale economies decrease but substantial differences between small and large insurers remain. A direct measure of competition confirms that competitive pressures are at a lower level than in other markets. We do not observe any impact of increased competition from banks, the so-called investment policy crisis or the credit crisis, apart from lower returns in 2008. Investigation of product submarkets reveals that competition is higher on the collective policy market, while the opposite is true for the unit-linked market, where the role of intermediary agents is largest.
    Keywords: Life insurance; competition; efficiency; Performance-Conduct-Structure model; Boone indicator; concentration; economies of scale
    JEL: G22 L1
    Date: 2012–11
  19. By: Godager, Geir (Department of Health Management and Health Economics); Iversen, Tor (Department of Health Management and Health Economics); Albert Ma, Ching-to (Department of Economics, Boston University and University of Oslo)
    Abstract: We study the impact of competition on primary care physicians’specialty referrals. Our data come from a Norwegian survey in 2008-9 and Statistics Norway. From the data we construct three measures of competition the number of open primary physician practices with and without population adjustment, and the Her…ndahl-Hirschman Index. We build a theoretical model, and derive two opposing e¤ects of competition on gatekeeping physicians’ specialty referrals. The empirical results suggest that competition has negligible or small positive e¤ects on referrals. Our results do not support the policy claim that increasing the number of primary care physicians reduces secondary care.
    Keywords: primary; care; physicians
    JEL: H51
    Date: 2012–08–01
  20. By: Claudio A Agostini (Escuela de Gobierno, Universidad Adolfo Ibáñez)
    Date: 2012–10
  21. By: Inklaar, Robert; Koetter, Michael; Noth, Felix
    Abstract: We test how bank market power influences technical change and resource allocation of informationally opaque firms. We use a dataset with approximately 700,000 firm-year observations of German small and medium-sized enterprises (SME) to identify the effect of bank market power using the dependence on external finance per industry and the regional demarcation of the German banking market. Market power generally spurs aggregate SME growth. Banks need to realize sufficient margins to generate useful private information. Bank market power spurs both technical change and reallocation of resources, but it reduces SME growth in industries that depend heavily on external finance. --
    Keywords: growth decomposition,reallocation,banking,market power
    JEL: E22 G21 O16 O41
    Date: 2012
  22. By: Ozbugday, F.C. (Tilburg University)
    Abstract: Abstract: Fatih Cemil’s main specialization field is competition and regulatory economics. In this dissertation, he conducts several empirical analyses on various regulatory experiments in different industries such as health care, manufacturing and electricity distribution. These experiments take place in different countries such as the Netherlands, Germany and New Zealand. The dissertation consists of 4 parts including 6 chapters. The first part contains two empirical studies on the analysis of the confidential exemption requests in the Netherlands, which were allowed under the new Competition Act. The second part contains two short empirical letters on the analysis of the change in the competition law in the Netherlands. The main purpose of the third part is to test whether clinical quality in German hospitals increases with the publication of quality results by an external authority. The fourth and final part consists of a study that examines the operational cost efficiency and pricing behavior of regulation-exempt consumer-owned electricity suppliers in New Zealand. Each part has important conclusions and policy implications for similar regulatory decisions, experiments and policies to be designed in the future.
    Date: 2012
  23. By: Klein, Michael
    Abstract: The paper lays out basic design options for infrastructure policy. It first sketches mechanisms to asses demand. Then it sets out a hierarchy of issues starting with choice of market structure followed by conduct regulation. Ownership options are largely a function of market structure choices. The implications for finance -- the topic of much day-to-day discussion in infrastructure policy-making -- follow from these various prior choices. The discussion naturally circumscribes the role for so-called public-private partnerships -- their uses and pitfalls. Annexes provide checklists for choices of market structure and for diagnosing and benchmarking policies.
    Keywords: Markets and Market Access,Economic Theory&Research,Emerging Markets,Infrastructure Economics,Debt Markets
    Date: 2012–11–01

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