nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒07‒05
seventeen papers chosen by
Russell Pittman
US Government

  1. Progressive entry and the incentives to invest in alternative infrastructures By Marc Bourreau; Joeffrey Drouard
  2. Network Expansion to Mitigate Market Power: How Increased Integration Fosters Welfare By Alexander Zerrahn; Daniel Huppmann
  3. Market Power in a Power Market with Transmission Constraints By Bjørndal, Mette; Gribkovskaia, Victoria; Jörnsten, Kurt
  4. Measuring competition in banking: A critical review of methods By Florian LEON
  5. Bank Competition, Borrower Competition and Interest Rates By Carlos Bellón
  6. Bank Competition and Credit Constraints in Developing Countries: New Evidence By Florian LEON
  7. Does Bank Market Power Affect SME Financing Constraints? By O'Toole, Conor; Ryan, Robert; McCann, Fergal
  8. Propensity to patent, R&D and market competition : dynamic spillovers of innovation leaders and followers By Szabolcs Blazsek; Álvaro Escribano
  9. Patent litigants, patent quality, and software: lessons from the smartphone wars By Ronald A. Cass
  10. Conflict Resolution, Public Goods and Patent Thickets By Dietmar Harhoff; Georg von Graevenitz; Stefan Wagner
  11. Effectiveness of Intellectual Property Regimes: 2006-2011 By Noemí Pulido Pavón; Luis Palma Martos
  12. Hospital Mergers with Regulated Prices. By Brekke, Kurt R.; Siciliani, Luigi; Straume, Odd Rune
  13. The Quasi-Markets Of Social Services: The Competitiveness Of Russian Nonprofit Organizations Against For-Profit Organizations And Public Providers By Svetlana Suslova
  14. Margin Rate Rule : A New Drug Pricing Policy in Japan By Tamura, Masaoki
  15. Experimenting with Behavior Based Pricing By Zuzana Brokesova; Cary Deck; Jana Peliova
  16. Cournot Competition and “Green” Innovation: An Inverted-U Relationship By L. Lambertini; J. Poyago-Theotoky; A. Tampieri
  17. ENFORCING COVENANTS NOT TO COMPETE: THE LIFE-CYCLE IMPACT ON NEW FIRMS By Evan Starr; Natarajan Balasubramanian; Mariko Sakakibara

  1. By: Marc Bourreau (Institut Télécom - Télécom ParisTech - Télécom ParisTech, CREST - Centre de Recherche en Économie et Statistique - INSEE - École Nationale de la Statistique et de l'Administration Économique); Joeffrey Drouard (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie)
    Abstract: In this paper we study an entrant's incentives to build a network infrastructure, when there is an initial phase of service-based competition where it leases access to the incumbent's infrastructure. We build a model in which the phase of service-based competition allows the entrant to step into the market by progressively acquiring market experience. We show that the acquisition of experience in the phase of service-based competition delays the entrant's investment when the prospects for infrastructure investment are good, and accelerates investment otherwise. We also show that when the acquisition of experience depends on the entrant's current customer base and facility-based entry is a long-term possibility, setting a low access price can accelerate the entrant's investment.
    Keywords: Entry; Infrastructure investment; Access pricing; Telecommunications
    Date: 2014–06
  2. By: Alexander Zerrahn; Daniel Huppmann
    Abstract: Lack of transmission capacity hampers the integration of the European electricity market, and thereby precludes reaping the full benefits of competition. We investigate the extent to which transmission grid expansion promotes competition, efficiency and welfare. This work proposes a three-stage model for grid investment: a benevolent planner decides on network upgrades, considering welfare benefits of investments through a reduction of market power exertion by strategic generators. These firms anticipate their impact on market clearing, in particular when lines are congested. To this end, we provide the first model effectively endogenizing the trade-off between costs of grid investment and benefits by reduced market power potential. In a three-node network, we illustrate three distinct strategic effects: firstly, by reducing market power exertion, network expansion can promote welfare beyond pure efficiency gains: optimally accounting for strategic generator behavior can push welfare close to a first-best competitive benchmark. Secondly, network upgrades entail a relative shift of rents from producers to consumers, and thirdly, they may yield suboptimal or even disequilibrium outcomes when strategic behavior is neglected.
    Keywords: Market power, electricity transmission, network expansion, Generalized Nash equilibrium (GNE), mixed-integer equilibrium problem under equilibrium constraints (MIEPEC)
    JEL: L13 L51 C61
    Date: 2014
  3. By: Bjørndal, Mette (Dept. of Business and Management Science, Norwegian School of Economics); Gribkovskaia, Victoria (Dept. of Business and Management Science, Norwegian School of Economics); Jörnsten, Kurt (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: In this paper we present a model for analysing the strategic behaviour of a generator and its short run implications on an electricity network with transmission constraints. The problem is formulated as a Stackelberg leader-follower game. The upper level problem is generator’s profit maximisation subject to the solution of the lower level problem of optimal power flow (OPF) solved by system operator. Strategic bidding is modelled as an iterative procedure where the supply functions of the competitive fringe are fixed while the strategic player’s bids are changed in a successive order until the bid giving maximum profit is found. This application rests on the assumption of supply function Nash equilibrium when the supplier believes that changes in his bids will not influence other actors to alter their bid functions. Numerical examples are presented on a simple triangular network.
    Keywords: Electric power market; Supply function equilibria; Bilevel games; Strategic energy bidding; Irrelevant constraints
    JEL: Q00
    Date: 2014–06–26
  4. By: Florian LEON (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: Many studies have attempted to investigate the determinants and implications of competition in the banking industry. The literature on the measurement of competition can be divided between the structural and non-structural approaches. The structural approach infers the degree of competition from the structure of the market. The non-structural approach, based on the New Empirical Industrial Organization, assesses the degree of competition directly by observing behavior of firms in the market. This paper reviews the most frequently-used structural and non structural measures of competition in banking. It highlights their strengths and weaknesses, especially for studies based on a limited number of observations.
    Keywords: Boone indicator;Panzar-Rosse model;Conjectural variation model;Lerner index;HHI;Bank;competition
    Date: 2014–06–27
  5. By: Carlos Bellón
    Abstract: The effect bank competition has on interest rates should depend on the fact that borrowers compete against each other. The borrowing rate of a firm affects its ability to compete in the industrial marketplace, and ultimately, its ability to repay its loans. Thus, competition amongst borrowers acts as a limit to the amount of rents financial oligopolists can extract. I find evidence that firms that operate within areas of limited bank competition face higher rates than their peers. I also identify an innovative control group that can be used in tests of bank market structure.
    Keywords: Bank competition, Small business lending
    JEL: D43 E43 G21
    Date: 2014–06
  6. By: Florian LEON (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: Whether competition helps or hinders small firms' access to finance is in itself a much debated question in the economic literature and in policy circles, especially in the developing world. Economic theory offers conflicting predictions and empirical contributions provide mixed results. This paper considers the consequences of interbank competition on credit constraints using firm level data covering 70 developing and emerging countries. In addition to the classical concentration measures, competition is assessed by computing three non-structural measures (Lerner index, Boone indicator, and H-statistics). The results show that bank competition alleviates credit constraints, while bank concentration measures are not robust predictors of a firm's access to finance. Findings highlight that bank competition not only leads to less severe loan approval decisions but also reduces borrowers' discouragement. In addition, a secondary result of this paper documents that banking competition enhances credit availability more by reducing prices than by increasing relationship lending.
    Keywords: discouraged borrower;developing countries;access to credit;Bank competition
    Date: 2014–06–27
  7. By: O'Toole, Conor; Ryan, Robert; McCann, Fergal
    Date: 2014–03
  8. By: Szabolcs Blazsek; Álvaro Escribano
    Abstract: Dynamic interactions among stock return, Research and Development (R&D) expenses, patent applications based on R&D investment, and the propensity to patent are studied in this work for a panel of firms from the United States. The panel includes technologically similar firms, neck-to-neck, mostly from the drugs product-market sector. Firms’ propensity to patent is modeled by a dynamic latent-factor patent count data model that separates patented and non patented R&D. Patent innovation leader and follower firms are identified according to their knowledge stock. Significant and positive dynamic spillover effects are obtained among patent application leaders and followers. We observe that neck-to-neck firms in patent innovation activity produce an inverted-U relationship between market competition and innovation. Furthermore, firms’ propensity to patent is positively correlated with market competition and there is a positive feedback in both directions. Increasing the degree of competition in the market enhances innovation and patent applications, in order to help firms to appropriate part of the benefits of their R&D investments. On the other hand, firms by increasing their patent applications defend themselves from competitors, trying to improve their market share. However, due to the diffusion of knowledge through patent applications, knowledge spills over to competitors therefore, the degree of competition and innovation increases in the market.
    Keywords: propensity to patent, competition, technological proximity, patent innovation leaders and followers, latent factor patent count data model, panel vector autoregression, simulated quasi maximum likelihood, efficient importance sampling
    JEL: C15 C31 C32 C33 C41
    Date: 2014–06
  9. By: Ronald A. Cass
    Abstract: Commentators, public officials, and scholars have sounded alarms over the smartphone patent wars — hundreds of cases asserting infringement of patents by makers of smartphones and tablet computers—often suggesting broad, categorical “fixes” to problems this litigation reveals. In general, these recommendations sweep too broadly, throwing out good claims as well as bad and needed remedies as well as questionable ones. However, calls for attention along two margins promise improvements. One factor, the identity of the enterprise asserting patent rights, already is being used by courts in considering appropriate patent infringement remedies but its use needs to be refined. The other factor, patent quality—especially in software patents, where the existence of parallel schemes of intellectual property protection exacerbates quality problems—is even more critical to the way the system operates. Addressing the patent quality issue (which is distinct from patent clarity or patent notice) can do more than other reforms to reduce costs without reducing innovation incentives.
    Date: 2014–06
  10. By: Dietmar Harhoff; Georg von Graevenitz; Stefan Wagner
    Abstract: Post-grant validity challenges at patent offices rely on the private initiative of third parties to correct mistakes made by patent offices. We hypothesize that incentives to bring post-grant validity challenges are reduced when many firms benefit from revocation of a patent and when firms are caught up in patent thickets. Using data on opposition against patents at the European Patent Office we show that opposition decreases in fields in which many others profit from patent revocations. Moreover, in fields with a large number of mutually blocking patents the incidence of opposition is sharply reduced, particularly among large firms and firms that are caught up directly in patent thickets. These findings indicate that post-grant patent review may not constitute an effective correction device for erroneous patent grants in technologies affected by either patent thickets or highly dispersed patent ownership.
    Date: 2014–06
  11. By: Noemí Pulido Pavón (University of Seville, Spain); Luis Palma Martos (University of Seville, Spain)
    Abstract: The analysis and implications of copyright provide the foundation for copyright economics, where an array of different streams of thought coexist feeding a number of controversies that at the same time both hinder and enrich the research agenda. One of the keenest debates concerns the relation between copyright and competition policy. The goal of the current work is to explore to what extent competition policy determines the level of protection afforded to copyright. The paper also analyses the effect of other variables such as education, innovation, culture and national wealth. Panel data techniques are applied for a sample of eight countries over the period 2006 to 2011. Findings show that copyright protection is more intense in countries which have more effective competition policy laws, and which perform better in education, innovation and wealth. The link with regard to spending on culture does not prove significant, opening up a range of hypotheses for formulating cultural policy goals and instruments. In terms of countries, those in the Mediterranean area display the weakest regimes for protecting intellectual property.
    Keywords: Intellectual Property Rights, Copyright Economics, Competition Policy, Panel Data Techniques.
    JEL: D4 L5 Z1
    Date: 2014–06
  12. 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: We study the effects of a hospital merger using a spatial competition framework with semialtruistic hospitals that invest in quality and expend cost-containment effort facing regulated prices. We find that the merging hospitals always reduce quality, whereas non-merging hospitals respond by increasing (reducing) quality if qualities are strategic substitutes (complements). A merger leads to higher average treatment cost efficiency and, if qualities are strategic substitutes, might also increase average quality in the market. If a merger leads to hospital closure, the resulting effect on quality is positive (negative) for all hospitals in the market if qualities are strategic substitutes (complements). Whether qualities are strategic substitutes or complements depends on the degree of altruism, the effectiveness of cost-containment effort, and the degree of cost substitutability between quality and treatment volume.
    Keywords: Hospital mergers; Quality competition; Cost efficiency; Antitrust.
    JEL: I11 I18 L13 L44
    Date: 2014–06–30
  13. By: Svetlana Suslova (National Research University Higher School of Economics)
    Abstract: This paper explores the competitive bidding process in eight regions of Russia where local governments entered into. The bidding documents have been analyzed in terms of the type of provider ownership, public or private, levels of nonprofit activity, and nonprofit competitiveness. The findings indicate considerable discrepancies between the numbers of competitive tenders for social services in the regions in question. The types of social services that local governments procure vary significantly from region to region. It is suggested that these differences are an essential factor in nonprofit participation. The most active nonprofit involvement is found in regions where procured services are that which the nonprofits usually produce. The results reveal a substantial lack of competition in Russian social service quasi-markets. In many cases, nonprofit organizations can be competitive in terms of competitive bidding in Russia; however, this result raises questions about the quality of social services procured by local and regional authorities
    Keywords: social service delivery, nonprofit organizations, social services quasi-markets, nonprofit competitiveness
    JEL: H57 L31 L33
    Date: 2014
  14. By: Tamura, Masaoki
    Abstract: This article theoretically evaluates the drug pricing policy in Japan and suggest an alternative more efficient policy. The Japanese current pricing rule “R2 rule” causes high drug price and social inefficiency that is similar to the well-known double marginalisation problem. To solve this problem, we derive an alternative pricing rule that we name “margin rate rule”. We show that the margin rate rule improves Pareto efficiency: the rule leads to both lower drug price and higher profit of the firms. There are three notable advantages in the margin rate rule. First, the government does not have to estimate the demand function, though it has the target price. The pharmaceutical firms, not the government, estimate drug efficacy, competition, and other demand information in pricing drugs. In this sense, the margin rate rule is a decentralised rule, and easy to manage. Second, the government can control the profit share between the firms and pharmacies in order to encourage pharmaceutical innovation. Third, the government can also control the drug-price margins so that meditations are not biased.
    Keywords: Japanese Pharmaceutical Market, Drug Price, Drug Pricing Policy, Double Marginalisation
    JEL: I11 L10 L42
    Date: 2014–06
  15. By: Zuzana Brokesova (University of Economics in Bratislava); Cary Deck (Sam M. Walton College of Business, University of Arkansas and Economic Science Institute, Chapman University); Jana Peliova (University of Economics in Bratislava)
    Abstract: Many purchases of differentiated goods are repeated, giving sellers the opportunity to engage in price discrimination based upon the shopper’s previous behavior by either offering loyalty discounts to repeat buyers or introductory rates to new customers. Recent theoretical work suggests that loyalty discounts are likely to be implemented when customer preferences are not stationary and sellers can pre-commit to prices for repeat buyers, but otherwise repeat buyers can be expected to pay the same or more than new buyers. This paper reports the results of a series of controlled laboratory experiments designed to empirically test the impact of these factors on pricing strategies, seller profit and total cost to consumers. Absent price pre-commitments, sellers in the lab engage in poaching when it is optimal to do so, but the ability to pre-commit leads to prices being relatively more favorable to loyal customers. Customer poaching increases seller profit and increases total consumer costs in the case of stable consumer preferences without price pre-commitment.
    Keywords: Strategic Behavior, Time Discounting, Experiments.
    JEL: C71 C91 D41
    Date: 2014
  16. By: L. Lambertini; J. Poyago-Theotoky; A. Tampieri
    Abstract: We evaluate the relationship between competition and innovation in an industry where production is polluting and R&D has the aim to reduce emissions. We build up an oligopoly model where n firms compete in quantities and decide their investment in green R&D. When environmental taxation is exogenous, the investment in green R&D always increases with the number of firms in the industry. We analyse next the case where taxation is endougenously determined by a regulator with the aim to maximise social welfare. An inverted-U relationship exists under reasonable conditions, and it is driven by the presence of spillovers.
    JEL: Q55 Q56 O30 L13
    Date: 2014–06
  17. By: Evan Starr; Natarajan Balasubramanian; Mariko Sakakibara
    Abstract: We examine the impact of enforcing non-compete covenants (CNC) on the formation and performance of new firms using matched employer-employee data on 30 US states. To identify the impact of CNC, we exploit the inter-state variation in CNC enforcement along with the fact that courts do not enforce such covenants between law firms and departing lawyers in any state. Using a difference-in-difference-in-difference specification with law firms and firms that are not withinindustry spinouts as the baseline, we find states with stricter CNC enforcement have fewer, but larger within-industry spinouts that are more likely to survive their nascent years, and conditional on survival, grow faster during those years. These results are consistent with CNC enforcement having a selection effect on within-industry spinouts. Particularly, with stricter enforcement, only founders with higher-quality ideas and resources choose to overcome CNC-related barriers, which reduces entry rate but increases observed short-term performance of these spinouts.
    Keywords: Covenants Not to Compete, Entrepreneurship, Spinouts
    JEL: L25 L26 L41 L5 K2 K3 J6 M2 M5
    Date: 2014–06

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