nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒02‒21
sixteen papers chosen by
Russell Pittman
US Government

  1. Horizontal Mergers and Product Quality- By Brekke, Kurt R.; Siciliani, Luigi; Straume, Odd Rune
  2. Signaling quality in vertical relationships By Bontems, Philippe; Mahenc, Philippe
  3. Non-reservation price equilibria and Consumer search By Maarten Janssen; Alexei Parakhonyak; Anastasia Parakhonyak
  4. Relative profit maximization and Bertrand equilibrium with convex cost functions By Satoh, Atsuhiro; Tanaka, Yasuhito
  5. Search Frictions and Market Power in Negotiated Price Markets By Jason Allen; Robert Clark; Jean-François Houde
  6. How Much Do Cartels Overcharge? By Boyer, Marcel; Kotchoni, Rachidi
  7. Economic Rationales of Exclusive Dealing ; Empirical Evidence from the French Distribution Networks By Muriel Fadairo; Jianyu Yu
  8. Foreign Bidders Going Once, Going Twice... Protection in Government Procurement Auctions By Matthew T Cole; Ronald B Davies
  9. Collusion in markets characterized by one large buyer: lessons learned from an antitrust case in Russia By Andrei Y. Shastitko; Svetlana V. Golovanova
  10. Net Neutrality with Competing Internet Platforms By Marc Bourreau; Frago Kourandi; Tommaso Valletti
  11. Vertical Structure and Forward Contract in Electricity Markets By Yuanjing LI
  12. Environmental Technology Transfer in a Cournot Duopoly: The Case of Fixed-Fee Licensing By Akira Miyaoka
  13. Asymmetric and nonlinear passthrough of energy prices to CO2 emission allowance prices By Shawkat Hammoudeh; Amine Lahiani; Duc Khuong Nguyen; Ricardo M. Sousa
  14. Banks competition, managerial efficiency and the interest rate pass-through in India By Jugnu Ansari; Ashima Goyal
  15. Are Chinese Markets for Manufactured Products More Competitive than in the US?: A Comparison of China –US Industrial Concentration Ratios By Jun Wang; John Whalley
  16. Compulsory disclosure of private information theoretical and experimental results for the "acquiring-a-company" game By Güth, Werner; Pull, Kerstin; Stadler, Manfred; Zaby, Alexandra

  1. By: Brekke, Kurt R. (Dept. of Economics, Norwegian School of Economics and Business Administration); Siciliani, Luigi (University of York); Straume, Odd Rune (University of Minho)
    Abstract: Using a spatial competition framework with three ex ante identical firms, we study the effects of a horizontal merger on quality, price and welfare. The merging firms always reduce quality. They also increase prices if demand responsiveness to quality is sufficiently low. The non-merging firm, on the other hand, always responds by increasing both quality and prices. Overall, a merger leads to higher average prices and quality in the market. The welfare implications of a merger are not clear-cut. If the demand responsiveness to quality is sufficiently high, some consumers benefit from the merger and social welfare might also increase.
    Keywords: Horizontal mergers; Quality; Spatial Competition.
    JEL: L13 L15 L41
    Date: 2014–02–10
  2. By: Bontems, Philippe; Mahenc, Philippe
    Abstract: This paper addresses the issue of price signaling in a model of vertical relationship between a manufacturer and a retailer who share the same information about quality, unlike consumers who do not observe it a priori. We show that delegating the price setting task to a retailer and controlling it through a vertical contract (two-part tari¤) helps drastically reduce the number of price signaling equilibria available to the retailer. The outcome of a unique price charged to consumers obtains without invoking the consumer sophistication usually required by selection criterions. The vertical contract turns to be the most e¢ cient way for the vertical chain to tie its hands on a unique ?nal price. This price may disclose or not information to consumers depending on their initial optimism about quality. We prove that there also exists circumstances where consumers prefer ex ante not to learn the true quality through price.
    Keywords: quality signalling, vertical relationship, information disclosure.
    JEL: D82 L12 L15
    Date: 2014–01
  3. By: Maarten Janssen (National Research University Higher School of Economics); Alexei Parakhonyak (National Research University Higher School of Economics); Anastasia Parakhonyak (Toulouse School of Economics.)
    Abstract: When consumers do not know the prices at which different firms sell, they often also do not know production costs. Consumer search models which take asymmetric information about production costs into account continue focusing on reservation price equilibria (RPE) and their properties. We argue that RPE assume specific out-of-equilibrium beliefs that are not consistent with the logic of the D1 refinement criterion. Moreover, RPE suffer from a non-existence problem as they typically do not exist when cost uncertainty is large. We characterize an alternative class of socalled non-RPE. We show these equilibria always exist and do not rely on specific out-of-equilibrium beliefs. Non-reservation equilibria are characterized by active consumer search among consumers. As cost uncertainty facilitates search, more consumers make price comparisons resulting in stronger price competition between firms and higher consumer surplus.
    Keywords: Sequential Search, Non-Reservation Price Equilibria, Asymmetric Information
    JEL: D40 D83 L13
    Date: 2014
  4. By: Satoh, Atsuhiro; Tanaka, Yasuhito
    Abstract: The authors study pure strategy Bertrand equilibria in a duopoly in which two firms produce a homogeneous good with convex cost functions, and they seek to maximize the weighted sum of their absolute and relative profits. They show that there exists a range of the equilibrium price in duopolistic equilibria. This range of the equilibrium price is narrower and lower than the range of the equilibrium price in duopolistic equilibria under pure absolute profit maximization, and the larger the weight on the relative profit, the narrower and lower the range of the equilibrium price. In this sense relative profit maximization is more aggressive than absolute profit maximization. --
    Keywords: Bertrand equilibrium,convex cost function,relative profit maximization
    JEL: D43 L13
    Date: 2014
  5. By: Jason Allen; Robert Clark; Jean-François Houde
    Abstract: This paper develops and estimates a search and bargaining model designed to measure the welfare loss associated with frictions in oligopoly markets with negotiated prices. We use the model to quantify the consumer surplus loss induced by the presence of search frictions in the Canadian mortgage market, and evaluate the relative importance of market power, inefficient allocation, and direct search costs in explaining the loss. Our results suggest that search frictions reduce consumer surplus by almost $20 per month on a $100, 000 loan, and that 17% of this reduction can be associated with discrimination, 30% with inefficient matching, and the remainder with the search cost. In addition, we find that product differentiation attenuates the effect of search frictions by reducing the cost of gathering quotes and improving efficiency, while posted prices do so through the ability of the first-mover to price discriminate. In contrast, competition amplifies the welfare effect of search frictions. Despite this, the overall effect of competition is to increase aggregate consumer surplus and drive prices down, but these effects are not spread equally across consumers: those with low search costs benefit more from competition.
    JEL: L13 L41 L81
    Date: 2014–02
  6. By: Boyer, Marcel; Kotchoni, Rachidi
    Abstract: The estimation of cartel overcharges lies at the heart of antitrust policy on cartel prosecution as it constitutes a key element in the determination of fines. Connor and Lande (2008) conducted a survey of cartels and found a mean overcharge estimate in the range of 31% to 49%. By examining more sources, Connor (2010) finds a mean of 50.4% for successful cartels. However, the data used in those studies are estimates obtained from different methodologies, sources and contexts rather than by direct observations. Therefore, these data are subject to model error, estimation error and publication bias. A quick examination of the Connor database reveals that the universe of overcharge estimate is asymmetric, heterogenous and contains a number of influential observations. Beside the fact that overcharge estimate are potentially biased, fitting a linear regression model to the data without providing a carefull treatment of the problems raised above may produce distorted results. We conduct a meta-analysis of cartel overcharge estimate in the spirit of Connor and Bolotova (2006) while providing a sound treatment of these matters. We find a bias-corrected mean and median overcharge estimate of 15.76% and 16.43%. Clearly, our results have significant antitrust policy implications.
    Keywords: Antitrust, Cartel overcharges, Heckman, Meta-analysis
    Date: 2014–01–31
  7. By: Muriel Fadairo (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure (ENS) - Lyon - PRES Université de Lyon - Université Jean Monnet - Saint-Etienne - Université Claude Bernard - Lyon I); Jianyu Yu (Southwestern University of Finance and Economics - Southwest University of Economics and Finance)
    Abstract: This paper investigates the rationales of exclusive dealing (ED), which is one of the most common forms of vertical restraint and attracts intense policy debates in anti-trust regulations. Based on a survey of the theoretical literature, we derive several hypotheses relative to the anti- and pro-competitive motivations of ED. These hypotheses are submitted to French data regarding several types of distribution networks in a wide range of sectors. Considering the industry features, our empirical analysis indicates that in the French distribution system, ED contracts tend to be procompetitive. The evidence suggests that the motivation of ED mainly lies in its positive role to foster the investment of upstream firms.
    Keywords: Exclusive dealing; Vertical restraints ; Competition policy
    Date: 2014–02–12
  8. By: Matthew T Cole (Florida International University); Ronald B Davies (University College Dublin)
    Abstract: Until recently, government procurement bidding processes have generally favored domestic firms by awarding the contract to a domestic firm even if a foreign firm tenders a lower bid, so long as the difference between the two is sufficiently small. This has been replaced by an agreement abolishing this practice. However, the presence of other trade barriers, such as tariffs, can continue to disadvantage foreign firms. We analyze the bidding strategies in such a game and show that when domestic profits are valued, tariffs will be used to discriminate against foreign firms. Furthermore, we find that optimal tariffs can be more protectionist than the optimal price preference, resulting in lower expected domestic welfare and total surplus.
    Keywords: Government Procurement; Tariffs; Price Preference
    JEL: F13 H57 F12
    Date: 2014–02–10
  9. By: Andrei Y. Shastitko (National Research University Higher School of Economics); Svetlana V. Golovanova (National Research University Higher School of Economics)
    Abstract: This paper demonstrates that even established and verified facts of agreements among producers are not a sufficient condition for cartel identification and, as a consequence, prosecution of agreement participants. Such requires looking at institutional details and the wider context of these and similar appearances or occurrences of documents and actions when qualifying the actions of market participants and their effects. This paper discusses a recent antitrust case brought against Russian manufacturers of large diameter pipes (LDPs) that examined supposedly abusive practices by these firms that were contrary to the law on the Protection of Competition, which prohibits market division. The case under consideration illustrates the importance of investigating institutional details when qualifying the actions of market participants and their effects. An analysis of the materials in this case using modern economic theory indicates that the presence of collusion is inconsistent with the active participation of the main consumer of LDPs in that agreement. The chosen format for the cooperation between pipe manufacturing companies and OJSC Gazprom, namely indicative planning, may be explained from the perspective of reducing contract risk in an environment characterized by large-scale private investments.
    Keywords: collusion, antitrust policy, credible commitments, indicative planning, contract risk
    JEL: K21 B52
    Date: 2014
  10. By: Marc Bourreau (Telecom ParisTech and CREST-LEI); Frago Kourandi (Athens University of Economics and Business); Tommaso Valletti (University of Rome Tor Vergata and Imperial College London)
    Abstract: We propose a two-sided model with two competing Internet platforms, and a continuum of Content Providers (CPs). We study the effect of a net neutrality regulation on capacity investments in the market for Internet access, and on innovation in the market for content. Under the alternative discriminatory regime, platforms charge a priority fee to those CPs which are willing to deliver their content on a fast lane. We find that under discrimination investments in broadband capacity and content innovation are both higher than under net neutrality. Total welfare increases, though the discriminatory regime is not always beneficial to the platforms as it can intensify competition for subscribers. As platforms have a unilateral incentive to switch to the discriminatory regime, a prisoner's dilemma can arise. We also consider the possibility of sabotage, and show that it can only emerge, with adverse welfare effects, under discrimination.
    Keywords: Net neutrality; Two-sided markets; Platform competition; Investment; Innovation.
    JEL: L13 L51 L52 L96
    Date: 2014–02–14
  11. By: Yuanjing LI
    Abstract: The pro-competitive effects of forward contracts in electricity market cannot be regarded alone without examining the market structure. In this paper, we show that under retail competition, spot market demand uncertainty and risk aversion, partially or fully integrated electricity generators and retailers have less incentives to be involved in trading electricity under forward contracts. Therefore, the effect of market power mitigation of forward contracts is countered by this vertical relationship between retailers and generators since it provides a natural hedging device as a substitute of forward contracts to the retailers. Both analytic framework and numerical simulation suggest that the optimal quantity of forward sales decreases and spot price increases with the degree of vertical control of retailers over generators' assets. We thus conclude that the retailers' ownership over generators' profits could give rise to generators exercising market power in electricity spot market.
    Keywords: Electricity, forward contracts, vertical integration
    Date: 2013–07–01
  12. By: Akira Miyaoka (Graduate School of Economics, Osaka University)
    Abstract: This study considers a Cournot duopoly market in which a clean firm can transfer its less polluting technology to a dirty firm through a fixed-fee licensing contract. We analyze the impacts of emissions taxes on the incentives of firms to transfer technology as well as on the total pollution level, and examine the properties of the optimal emissions tax policy. We first show that higher emissions taxes weaken incentives for technology transfer and that this can lead to a perverse increase in the level of total pollution. We then compare the optimal emissions tax when technology licensing is possible with that when licensing is infeasible and show that the relationship between the optimal tax rate and the degree of the initial technology gap between firms when licensing is possible can be the opposite of that when licensing is infeasible.
    Keywords: Technology transfer; Cournot duopoly; Pollution; Emissions tax
    JEL: L13 L24 Q58
    Date: 2014–02
  13. By: Shawkat Hammoudeh; Amine Lahiani; Duc Khuong Nguyen; Ricardo M. Sousa
    Abstract: We use the recently developed nonlinear autoregressive distributed lags (NARDL) model to examine the pass-through of changes in crude oil prices, natural gas prices, coal prices and electricity prices to the CO2 emission allowance prices. This approach allows one to simultaneously test the short- and long-run nonlinearities through the positive and negative partial sum decompositions of the predetermined explanatory variables. It also offers the possibility to quantify the respective responses of the CO2 emission prices to positive and negative shocks to the prices of their determinants from the asymmetric dynamic multipliers. We find that: (i) the crude oil prices have a long-run negative and asymmetric effect on the CO2 allowance prices; (ii) the falls in the coal prices have a stronger impact on the carbon prices in the short-run than the increases; (iii) the natural gas prices and electricity prices have a symmetric effect on the carbon prices, but this effect is negative for the former and positive for the latter. Policy implications are provided.
    Keywords: CO2 allowance price, energy prices, NARDL model, asymmetric passthrough
    JEL: Q47
    Date: 2014–02–07
  14. By: Jugnu Ansari (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: If banks solve an inter-temporal problem under adverse selection and moral hazard, then bank specific factors, regulatory and supervisory features, market structure, and macroeconomic factors affect banks loan interest rates and their spread over deposit interest rates. To examine post financial-reform interest rate pass through for Indian banks after controlling for all these factors, we estimate the determinants of commercial banks loan pricing decisions, using dynamic panel methods. The several factors commercial banks consider, apart from the policy rate, limit policy pass through. More competition reduces policy pass-through but it can improve monetary transmission provided it improves managerial efficiency.
    Keywords: Banks, panel data, interest rates, net interest income, operating cost
    JEL: G20 G21 C23 E43 L10
    Date: 2014–01
  15. By: Jun Wang; John Whalley
    Abstract: We present estimates of 4 and 8 firm concentration ratios by industry and in weighted aggregate form for the manufacturing sector for Chinese enterprises for 2002 and 2007. These are then compared to available estimates for the same years and industrial classification for the US. These comparisons clearly point in the direction of China having sharply lower concentration ratios, in the order of one half of the US for 4 firm ratios. One possible implication is that markets for Chinese manufactured products are considerably more competitive than in the US.
    JEL: L16
    Date: 2014–02
  16. By: Güth, Werner; Pull, Kerstin; Stadler, Manfred; Zaby, Alexandra
    Abstract: Based on the acquiring-a-company game of Samuelson and Bazerman (1985), we theoretically and experimentally analyze the acquisition of a firm. Thereby we compare cases of symmetrically and asymmetrically informed buyers and sellers. This setting allows us to predict and test the effects of information disclosure as prescribed by two recently implemented directives of the European Union, the Transparency and the Takeover-Bid Directive. Our theoretical and experimental results suggest a welfare-enhancing effect of compulsory information disclosure. Hence, the EU Transparency and the EU Takeover-Bid Directive should both be welfare enhancing. --
    Keywords: acquisition of firms,disclosure of private information,experimental economics
    JEL: C91 D61 D82
    Date: 2014

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