nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒03‒15
twenty-two papers chosen by
Russell Pittman
US Government

  1. Branding and Collusion in Vertically Differentiated Industries By Garcia, Daniel
  2. Platform contents By Renault, Régis
  3. Did Robert Bork Understate the Competitive Impact of Mergers? Evidence from Consummated Mergers By Orley C. Ashenfelter; Daniel Hosken; Matthew C. Weinberg
  4. Uncertain Efficiency Gains and Merger Policy By Mariana Cunha; Paula Sarmento; Hélder Vasconcelos
  5. An "Image Theory" of RPM By Inderst, Roman; Pfeil, Sebastian
  6. A Note on Merger and Acquisition Evaluation By Furlan, Benjamin; Oberhofer, Harald; Winner , Hannes
  7. R&D for green technologies in a dynamic oligopoly: Schumpeter, Arrow and inverted-U’s By G. Feichtinger; L. Lambertini; G. Leitmann; S. Wrzaczek
  8. R&D networks: theory, empirics and policy implications By Michael D. König; Xiaodong Liu; Yves Zenou
  9. The Effect of Large-Scale Retailers on Price Level: Evidence from Japanese data for 1977-1992 By SHIMOTSU Katsumi
  10. Staggered Price Setting, Bertrand Competition and Optimal Monetary Policy By Federico Etro; Lorenza Rossi
  11. Vertical Structure and Forward Contract in Electricity Market By Yuanjing Li
  12. Real-time versus day-ahead market power in a hydro-based electricity market By Tangerås, Thomas P.; Mauritzen, Johannes
  13. The Russian gas industry : challenges to the "Gazprom model" By Catherine Locatelli
  14. OPEC's market power: An empirical dominant firm model for the oil marketorecasting recessions in real time By Rolf Golombek; Alfonso A. Irarrazabal; Lin Ma
  17. Foreign ownership and market power in banking: Evidence from a world sample By Delis, Manthos D; Kokas, Sotiris
  18. Quantity-setting Oligopolies in Complementary Input Markets - the Case of Iron Ore and Coking Coal By Hecking, Harald; Panke, Timo
  19. Market Power and Collusion on Interconnection Phone Market in Tunisia : What Lessons from International Experiences By Sami Debbichi; Walid Hichri
  22. The effectiveness of loyalty programs in the hospitality industry: the case of hotels in Slovakia By Lubica Hikkerova; Jean-Michel Sahut

  1. By: Garcia, Daniel
    Abstract: This paper presents a model of collusion in vertically differentiated industries where firms have the option to make their products distinguishable to consumers by attaching a brand. We show that if consumers’ preferences are linear in the quality dimension and their beliefs satisfy a standard refinement, collusion is facilitated in the absence of brands. More precisely, we show that if collusion is feasible with brands it is also feasible without them
    Keywords: Collusion; Branding; Vertical Differentiation
    JEL: D83 L13 L40
    Date: 2014–02–22
  2. By: Renault, Régis
    Abstract: A monopoly platform hosts advertisers who compete on a market for horizontally differentiated products. These products may be either mass market products that appeal broadly to the entire consumer population or niche products that are tailored to the tastes of some particular group. Consumers search sequentially through ads incurring a surfing cost of moving to the next ad. They may click on an ad at some cost, which provides all relevant information and the opportunity to buy. The platform chooses which information is in an ad and may be observed by consumers before they click. It also selects the level of sur ng costs and click costs and charges a per click ad price. Higher surfing and click costs and more mass market advertising reduces the platform's attractiveness but enhances advertisers' market power. If ads are uninformative, the platform optimally attracts only niche advertising. This is however not feasible if search costs cannot be made su ciently low, in which case both types of products are advertised. The platform benefits from requiring firms to advertise prices, only if it is unable to attract consumers with uninformative ads. The analysis is extended to allow advertising to include product information and allow the platform to provide non advertising content (e.g. entertainment or news).
    Keywords: Internet platforms; Internet; Consumers; Mass markets products; Advertising;
    JEL: L86 L81 M37
    Date: 2014–02
  3. By: Orley C. Ashenfelter; Daniel Hosken; Matthew C. Weinberg
    Abstract: In The Antitrust Paradox, Robert Bork viewed most mergers as either competitively neutral or efficiency enhancing. In his view, only mergers creating a dominant firm or monopoly were likely to harm consumers. Bork was especially skeptical of oligopoly concerns resulting from mergers. In this paper, we provide a critique of Bork’s views on merger policy from The Antitrust Paradox. Many of Bork’s recommendations have been implemented over time and have improved merger analysis. Bork’s proposed horizontal merger policy, however, was too permissive. In particular, the empirical record shows that mergers in oligopolistic markets can raise consumer prices.
    JEL: K21 L1 L4 L41
    Date: 2014–02
  4. By: Mariana Cunha (FEP-UP, School of Economics and Management, University of Porto); Paula Sarmento (FEP-UP, CEF-UP); Hélder Vasconcelos (FEP-UP, CEF-UP, CEPR)
    Abstract: This paper studies the role of uncertainty in merger control and in merger decisions. In a Cournot setting, we consider that mergers may give rise to uncertain endogenous efficiency gains and that every merger has to be submitted for approval to the Antitrust Authority (AA). We assume that both the AA and the firms in the industry face the same uncertainty about the future efficiency gains induced by the merger. It is shown that an increase in the degree of uncertainty benefits both insider and outsider firms but also the consumers. Further, when uncertainty is high, there is a greater likelihood that firms propose a merger to the AA and that the AA accepts it. Interestingly, however, although uncertainty enhances merger approval chances, it also decreases merger's stability, by increasing outsiders' incentives to free-ride on it.
    Keywords: Efficiency gains; Merger control; Uncertainty
    JEL: L13 D41 D81
    Date: 2014–03
  5. By: Inderst, Roman; Pfeil, Sebastian
    Abstract: We show how a brand manufacturer’s control over retail prices can lead to efficiencies when consumers rely on prices as a signal of quality. For this we first show how higher prices can be associated with both higher quality perception as well as higher actual quality. We next identify a conflict of interest between retailers and manufactures. Retailers do not internalize the ensuing reputation spill-over that higher prices have on demand at all outlets. And they have less incentives to support brand image through higher prices as this erodes their own position in negotiations while increasing that of the manufacturer. Our efficiency defence for RPM thus applies even when retailers need not be incentivized to undertake non-contractible activities, as in our model the key opportunism problem, with respect to quality provision, lies between the manufacturer and consumers.
    Keywords: Resale Price Maintenance; Quality Incentives; Quality Image
    JEL: L15 L42
    Date: 2014–01
  6. By: Furlan, Benjamin (University of Salzburg); Oberhofer, Harald (University of Salzburg); Winner , Hannes (University of Salzburg)
    Abstract: This note proposes the continuous treatment approach as a valuable alternative to propensity score matching for evaluating economic effects of merger and acquisitions (M&A). This framework allows to consider the variation in treatment intensities explicitly, and it does not call for the definition of cut-off values in traded ownership shares in order to construct a binary treatment indicator. We demonstrate the usefulness of this approach using data from European M&As and by relying on the example of post-M&A employment effects.
    Keywords: Merger and acquisition evaluation; continuous treatment models; generalized propensity score matching; employment effects
    JEL: C21 G34 L25
    Date: 2014–03–07
  7. By: G. Feichtinger; L. Lambertini; G. Leitmann; S. Wrzaczek
    Abstract: We extend a well known differential oligopoly game to encompass the possibility for production to generate a negative environmental externality, regulated through Pigouvian taxation and price caps. We show that, if the price cap is set so as to fix the tolerable maximum amount of emissions, the resulting equilibrium investment in green R&D is indeed concave in the structure of the industry. Our analysis appears to indicate that inverted-U-shaped investment curves are generated by regulatory measures instead of being a ‘natural’ feature of firms’ decisions.
    JEL: C73 L13 O31
    Date: 2014–03
  8. By: Michael D. König; Xiaodong Liu; Yves Zenou
    Abstract: We study a structural model of R&D alliance networks in which firms jointly form R&D collaborations to lower their production costs while competing on the product market. We derive the Nash equilibrium of this game, provide a welfare analysis and determine the optimal R&D subsidy program that maximizes total welfare. We also identify the key firms, i.e. the firms whose exit would reduce welfare the most. We then structurally estimate our model using a panel dataset of R&D collaborations and annual company reports. We use our estimates to identify the key firms and analyze the impact of R&D subsidy programs. Moreover, we analyze temporal changes in the rankings of key firms and how these changes affect the optimal R&D policy.
    Keywords: R&D networks, key firms, optimal subsidies
    JEL: D85 L24 O33
    Date: 2014–03
  9. By: SHIMOTSU Katsumi
    Abstract: Since its enactment in 1974 until its easing in the 1990s, the Large-Scale Retail Store Law ( Daikibo Kouri Tenpo Ho ) strictly regulated the entry of large-scale retailers in cities in Japan to protect local small and medium incumbent stores. This paper investigates the effect of large-scale retailers on the price level in Japan using city-level panel data from 1977 to 1992, the period when the Large-Scale Retail Store Law exercised strong entry restrictions. Using fixed effects estimation and instrumental variable estimation, we find that the presence of large-scale retailers, measured by their floor area relative to that of all of the retailers, has a negative effect on the price index of agricultural products, mass-produced food products, textiles, and durable goods. The estimation results suggest that a 10% increase in the relative floor area of large-scale retailers reduces the price level by around 0.3%-1.3%.
    Date: 2014–03
  10. By: Federico Etro (Department of Economics, University of Venice Ca' Foscari); Lorenza Rossi (Department of Economics and Management, University of Pavia)
    Abstract: We reconsider the New-Keynesian model with staggered price setting when each market is characterized by a small number of firms competing in prices à la Bertrand rather than a continuum of isolated monopolists. Price adjusters change their prices less when there are more firms that do not adjust, creating a natural and strong form of real rigidity. In a DSGE model with Calvo pricing and Bertrand competition, we obtain a modified New-Keynesian Phillips Curve with a lower slope. This reduces the level of nominal rigidities needed to obtain the estimated response of inflation to real marginal costs and to generate high reactions of output to monetary shocks. As a consequence, the determinacy region enlarges and the optimal monetary rule under cost push shocks, obtained through the linear quadratic approach, becomes less aggressive. Notably, the welfare gains from commitment decrease in more concentrated markets in reaction to inflationary shocks.
    Keywords: New Keynesian Phillips Curve, Real rigidities, Sticky prices, Optimal monetary policy, Infl?ation, Endogenous entry
    JEL: E3 E4 E5
    Date: 2014–03
  11. By: Yuanjing Li
    Abstract: The pro-competitive effects of forward contracts in electricity market can- not 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 con- tracts. 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' proffts could give rise to generators exercising market power in electricity spot market.
    JEL: L13 L42 L94
    Date: 2014–02–25
  12. By: Tangerås, Thomas P. (Research Institute of Industrial Economics); Mauritzen, Johannes (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: We analyse in a theoretical framework the link between real-time and day-ahead market performance in a hydro-based and imperfectly competitive wholesale electricity market. Theoretical predictions of the model are tested on data from the Nordic power exchange, Nord Pool Spot (NPS).We reject the hypothesis that prices at NPS were at their competitive levels throughout the period under examination. The empirical approach uses equilibrium prices and quantities and does not rely on bid data nor on estimation of demand or marginal cost functions.
    Keywords: Hydro power; market power; Nord Pool Spot
    JEL: D43 D92 L13 L94 Q41
    Date: 2014–02–28
  13. By: Catherine Locatelli (PACTE - Politiques publiques, ACtion politique, TErritoires - Institut d'Études Politiques [IEP] - Grenoble - CNRS : UMR5194 - Université Pierre-Mendès-France - Grenoble II - Université Joseph Fourier - Grenoble I)
    Abstract: The Russian gas sector is undergoing significant changes which is opening the way for an original reform. Because of the particular institutional and economic context of the country, this reorganisation is not taking place along the lines of the de-integrated model of the EU. It is characterised by increasingly significant competitive fringes. Gazprom remains the main actor of the Russian gas industry but the company is facing challenges on its main export market and an increasing competition at home with the arrival of new gas firms, independents and Russian oil companies. For Gazprom, the aim issue is to develop more flexible strategies for export markets but also on its internal market. These internal changes will not be without consequence on the country's export strategy and the implication for international markets could be considerable.
    Keywords: Russia ; reform of the gas organisational model ; institutional analysis ; Gazprom ; gas industry
    Date: 2014–03
  14. By: Rolf Golombek (Ragnar Frisch Centre for Economic Research); Alfonso A. Irarrazabal (Norges Bank (Central Bank of Norway)); Lin Ma (Norwegian University of Life Sciences (NMBU))
    Abstract: In this paper we estimate a dominant firm-competitive fringe model for the crude oil market using quarterly data on oil prices for the 1986-2009 period. All the estimated structural parameters have the expected sign and are significant at standard test levels. We find that OPEC exercised its market power during the sample period. Counterfactual experiments indicate that world GDP is the main driver of long-run oil prices, however, supply (depletion) factors have become more important in recent years.
    Keywords: Oil, Dominant firm, Market power, OPEC, Lerner index, Oil deman elasticity, oil supply elasticity
    JEL: L13 L22 Q31
    Date: 2014–02–24
    Date: 2014
    Date: 2014
  17. By: Delis, Manthos D; Kokas, Sotiris
    Abstract: Using a novel global data set with bank-year estimates of market power, we examine the impact of (i) the ownership status (foreign or domestic) of individual banks and (ii) the country-level trends in foreign bank presence on our market power estimates. We find that the ownership status of individual banks does not explain banks’ market power. In contrast, the country-level trends in foreign bank ownership have a positive and significant effect on banks’ market power that is primarily due to the fact that most foreign bank entry occurs through mergers and acquisitions and not through de novo penetration. We also find that the positive nexus between foreign bank presence and market power is considerably weaker in countries with well-capitalized banks.
    Keywords: Bank market power; competition; foreign banks; world sample
    JEL: D4 F23 G21
    Date: 2014–02–26
  18. By: Hecking, Harald (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Panke, Timo (Energiewirtschaftliches Institut an der Universitaet zu Koeln)
    Abstract: This paper investigates the benefits of a merger when goods are complements and firms behave in a Cournot manner both in a theoretical model as well as in a real-world application. In a setting of two complementary duopolies a merger between two firms each producing one of the goods always increases the firms’ total profit, whereas the remaining firms are worse off. However, allowing for a restriction on one of the merging firms’ output, we proof that there exists a critical capacity constraint (i) below which the merging firms are indifferent to the merger, (ii) above which the merger is always beneficial and (iii) the lower the demand elasticity is the smaller this critical capacity constraint becomes. Using a spatial multi-input equilibrium model of the iron ore and coking coal markets, we investigate whether our theoretical findings may hold true in a real market as well. The chosen industry example is particularly well suited since (a) goods are complements in pig iron production, (b) each of the inputs is of little use in alternative applications, (c) international trade of both commodities is highly concentrated and (d) a few (large) firms are active in both input markets. We find that due to limited capacity, these firms gain no substantial extra benefit from optimising their divisions simultaneously.
    Keywords: Cournot Oligopolies; Parallel Vertical Integration; Complementary Inputs; Applied Industrial Organisation; Mixed Complementarity Problem
    JEL: C61 D43 L22 Q31 Q41
    Date: 2014–02–16
  19. By: Sami Debbichi (AEDD, Faculty of Economics and Management of Tunis el Manar, Tunisia); Walid Hichri (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: We try in this paper to characterize the state of mobile phone market in Tunisia. Our study is based on a survey of foreign experience (Europe) in detecting collusive behavior and a comparison of the critical threshold of collusion between operators in developing countries like Tunisia. The market power is estimated based on the work of Parker Roller (1997) and the assumption of "Balanced Calling Pattern". We use then the model of Friedman (1971) to compare the critical threshold of collusion. We show that the “conduct parameter” measuring the intensity of competition is not null during the period 1993-2011. Results show also that collusion is easier on the Tunisian market that on the Algerian, Jordanian, or Moroccan one.
    Keywords: Termination rate, Market power, Competition, Mobile phone Market
    JEL: D41 L96 L71
    Date: 2014
    Date: 2014
    Date: 2014
  22. By: Lubica Hikkerova; Jean-Michel Sahut
    Abstract: This article deals with the issues of hotel loyalty programs implemented in the Slovak Republic. It analyzes the effectiveness of loyalty programs in relation to purchasing behaviour of Slovak customers. We propose a theoretical model of loyalty determinants, which we verify empirically. We try to explain the effectiveness of hotel loyalty programs in terms of value created and customer loyalty, due to the fact that building loyalty and the introduction of loyalty programs in the hotel requires substantial financial resources. The subjacent hypothesis is to determine if a loyalty program and its associated advantages manage to take precedence over other factors which influence choice and thus modify the probability of the hotel being chosen. More precisely, we seek to better understand the antecedents of commitment and trust and look at how these factors influence customer loyalty and thus determine the impact of loyalty schemes. Our empirical study, carried out on a sample group of consumers in Slovakia, enabled us to identify the four antecedents of loyalty (economic value of the exchange, reputation in terms of quality of the firm, communication, and shared values) so as to make managerial recommendations concerning the effectiveness of loyalty programs.
    Keywords: Loyalty, Price, Behaviour, Commitment, Trust, Hotel
    JEL: M1 M3
    Date: 2014–02–25

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