nep-com New Economics Papers
on Industrial Competition
Issue of 2013‒11‒14
eight papers chosen by
Russell Pittman
US Government

  1. Mergers and Product Quality: Evidence from the Airline Industry By Chen, Yongmin; Gayle, Philip
  2. Regulatory Versus Natural Endogenous Sunk Costs: Observational Equivalence In Rationalizing Lower Bounds On Industry Concentration By Pham Hoang Van; David D. VanHoose
  3. Selling Cookies By Bergemann, Dirk; Alessandro Bonatti
  4. A Multi-attribute Yardstick Auction without Prior Scoring By Jens Leth Hougaard; Kurt Nielsen; Athanasios Papakonstantinou
  5. Unionized Mixed Oligopoly and Privatization with Excess Burden of Taxation By Choi, Kangsik
  6. Sorting out patent reform proposals in the 113th Congress By Guro Ekrann; Marshall Watkins
  7. Synergies or overpayment in European corporate M&A By Díaz Díaz, Belén; Sanfilippo Azofra, Sergio; López Gutiérrez, Carlos
  8. Effects of Physician-Directed Pharmaceutical Promotion on Prescription Behaviors: Longitudinal Evidence By Anusua Datta; Dhaval M. Dave

  1. By: Chen, Yongmin; Gayle, Philip
    Abstract: Retrospective studies of horizontal mergers have focused on their price effects, leaving the important question of how mergers affect product quality largely unanswered. This paper empirically investigates this issue for two recent airline mergers: Delta/Northwest and Continental/United. Consistent with the theoretical premise that mergers improve coordination but diminish competitive pressure for quality provision, we find: (i) each merger is associated with a quality increase in markets where the merging firms did not compete pre-merger, but with a quality decrease in markets where they did; and (ii) the quality change can be a U-shaped function of the pre-merger competition intensity.
    Keywords: Mergers; Product Quality; Airlines
    JEL: L13 L93
    Date: 2013–11–04
  2. By: Pham Hoang Van (Associate Professor of Economics, Hankamer School of Business, Baylor University); David D. VanHoose (Professor of Economics and Herman Lay Professor of Private Enterprise, Hankamer School of Business, Baylor University)
    Abstract: We propose a theory of 'regulatory endogenous sunk costs'(RESC), in which a captured regulator raises minimum quality standards when market size increases in order to protect incumbent firms. Our RESC theory's predictions that market size is unrelated to industry concentration and positively related to product quality are observationally equivalent to those of Sutton's theory of `natural endogenous sunk costs' (NESC), in which incumbents increase qualityinvestments to compete for a share of a growing market. The NESC theory suggests that, with higher entry costs, incumbents jockey for increased market shares by increasing quality investments. The RESC theory, however, predicts that product quality should be lower with higher entry costs. Entry costs and minimum quality standards each provide incumbents with protection from prot erosions that entry otherwise would produce. A key implication of our analysis is the possibility that some industries might be misclassied as natural oligopolies. We provide a few examples of candidate RESC industries.
    Keywords: Regulatory compliance costs, endogenous sunk costs
    JEL: L13 L51
    Date: 2013
  3. By: Bergemann, Dirk (Cowles Foundation, Yale University); Alessandro Bonatti (Sloan School of Management, MIT)
    Abstract: We analyze data pricing and targeted advertising. Advertisers seek to tailor their spending to the value of each consumer. A monopolistic data provider sells cookies. informative signals about individual consumers' preferences. We characterize the set of consumers targeted by the advertisers and the optimal monopoly price of cookies. The ability to influence the composition of the targeted set provides incentives to lower prices. Thus, the price of data decreases with the reach of the database and increases with the fragmentation of data sales. We characterize the optimal policy for selling information and its implementation through nonlinear pricing of cookies.
    Keywords: Data providers, Information sales, Targeting, Online advertising, Media markets
    JEL: D44 D82 D83
    Date: 2013–10
  4. By: Jens Leth Hougaard (Department of Food and Resource Economics, University of Copenhagen); Kurt Nielsen (Department of Food and Resource Economics, University of Copenhagen); Athanasios Papakonstantinou (Department of Food and Resource Economics, University of Copenhagen)
    Abstract: We analyze a simple multi-attribute procurement auction that uses yardstick competition to settle prices. Upon receiving the submitted bids, a mediator computes the yardstick prices (bids) by a linear weighting of the other participants’ bids. The auction simplifies the procurement process by reducing the principal’s articulation of his preferences to simply choosing the most preferred offer as if it was a market with posted prices. Although truthful reporting does not constitute a Nash equilibrium, we demonstrate by simulations that truth-telling may indeed be some kind of focal point. By focusing on the initial winner in case everyone tells the truth, we show that even if the other bidders are allowed to misreport by as much as 20% of their true cost, the initial winner remains the winner in 80% of all simulated auctions in the case of 3 competing bidders. Furthermore, as it takes aggressive bidding to become the new winner of the auction, we show that the new winners typically win with a loss. Combining the two results we have that, almost independently of the number of competing bidders and the degree of misreporting, approximately 90% of all simulations will either have the same initial winner or a new winner who wins the auction with a loss in its utility.
    Keywords: Multi-attribute auction, yardstick competition, articulation of preferences, simulation
    Date: 2013–05
  5. By: Choi, Kangsik
    Abstract: By introducing the excess burden of taxation into unionized mixed and privatized oligopolies, we show that (i) if the government that maximizes social welfare values with a small weight of excess burden of taxation, privatization matters regardless of the number of firms; however, (ii) when the degree of excess burden of taxation lies within a relatively large range, the results of both desirable privatization and nationalization materialize depending on the critical value of the excess burden of taxation. In contrast to the existing works on mixed oligopoly, we find privatization can enhance social welfare regardless of the number of firms, under mild conditions.
    Keywords: Excess Burden of Taxation, Mixed Oligopoly, Privatization, Union.
    JEL: H44 J51 L13
    Date: 2013–11–02
  6. By: Guro Ekrann; Marshall Watkins
    Abstract: Given the broad agreement on the need to reduce unwarranted patent litigation, Congress is considering several major proposals. This analysis summarizes their main provisions.
    Keywords: patents,patent reform,CICT-Internet,cict
    JEL: A O
    Date: 2013–10
  7. By: Díaz Díaz, Belén; Sanfilippo Azofra, Sergio; López Gutiérrez, Carlos
    Abstract: The purpose of this research is to test whether the price paid for corporate takeovers in Europe is related to the synergies expected or whether bidders are overpaying for acquisitions. We analyzed the relationship between the premium paid in 147 mergers and acquisitions, and the bidders’ abnormal returns around the date of the transaction from 1995 to 2004. A quadratic relationship between the premiums and returns was found. When the amount paid in a transaction does not exceed the value of the target organization by more than 39.69–40.03%, the premium becomes a sign of the future synergy and will have a positive effect on the bidders’ returns. However, when the premium exceeds these values, the relationship between premiums and returns become negative and therefore the market considers bidders are overpaying. This paper show the importance of the correct valuation of the targets and of the premiums paid to ensure value creation in M&A.
    Keywords: Corporate takeovers; premium; overpayment hypothesis; synergy hypothesis
    JEL: G34
    Date: 2013
  8. By: Anusua Datta; Dhaval M. Dave
    Abstract: Spending on prescription drugs (Rx) represents one of the fastest growing components of U.S. healthcare spending, and has coincided with an expansion of pharmaceutical promotional spending. Most (83%) of Rx promotion is directed at physicians in the form of visits by pharmaceutical representatives (known as detailing) and drug samples provided to physicians’ offices. Such promotion has come under increased public scrutiny, with critics contending that physician-directed promotion may play a role in raising healthcare costs and may unduly affect physicians’ prescribing habits towards more expensive, and possibly less cost-effective, drugs. In this study, we bring longitudinal evidence to bear upon the question of how detailing impacts physicians’ prescribing behaviors. Specifically, we examine prescriptions and promotion for a particular drug class based on a nationally-representative sample of 150,000 physicians spanning 24 months. The use of longitudinal physician-level data allows us to tackle some of the empirical concerns in the extant literature, virtually all of which has relied on aggregate national data. We estimate fixed-effects specifications that bypass stable unobserved physician-specific heterogeneity and address potential targeting bias. In addition, we also assess differential effects at both the extensive and intensive margins of prescribing behaviors, and differential effects across physician- and market-level characteristics, questions which have not been explored in prior work. The estimates suggest that detailing has a significant and positive effect on the number of new scripts written for the detailed drug, with an elasticity magnitude of 0.06. This effect is substantially smaller than those in the literature based on aggregate information, suggesting that most of the observed relationship between physician-directed promotion and drug sales is driven by selection bias. Qualitatively consistent with the literature, we find that detailing impacts selective brand-specific demand but does not have any substantial effects on class-level demand. Results also indicate that most of the detailing response may operate at the extensive margin; detailing affects the probability of prescribing the drug more than it affects the number of prescriptions conditional on any prescribing. We draw some implications from these estimates with respect to effects on healthcare costs and public health.
    JEL: D22 I0 M3
    Date: 2013–11

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