nep-com New Economics Papers
on Industrial Competition
Issue of 2014‒07‒13
twelve papers chosen by
Russell Pittman
US Government

  1. A General Theory of Endogenous Market Structures By Paolo Bertoletti; Federico Etro
  2. Markovian Equilibrium in a Model of Investment Under Imperfect Competition. By Thomas Fagart
  3. Multi-Product Firms, Endogenous Sunk Costs, and Gains from Trade through Intra-Firm Adjustments By Irlacher, Michael
  4. Product versus Process: Innovation Strategies of Multi-Product Firms By Flach, Lisandra; Irlacher, Michael
  5. Spatial interactions in location decisions: Empirical evidence from a Bayesian spatial probit model By Adriana Nikolic; Christoph Weiss
  6. Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy By Mermelstein, Ben; Nocke, Volker; Satterthwaite, Mark A.; Whinston, Michael D.
  7. Incentives and optimal antitrust policy By Jellal, Mohamed; Souam, Said
  8. Lead jurisdiction concepts: Towards rationalizing multiple competition policy enforcement procedures By Budzinski, Oliver
  9. Designing a Cooperation Framework for Philippine Competition and Regulatory Agencies By Aldaba, Rafaelita M.; Sy, Geronimo S.
  10. Cross-Border M&As and Innovative Activity of Acquiring and Target Firms By Joel Stiebale
  11. Assessing access problems in online media platforms By Graef, Inge; Wahyuningtyas, Sih Yuliana; Valcke, Peggy
  12. Does Competition make Banks more Risk-seeking? By Stefan Arping

  1. By: Paolo Bertoletti (Department of Economics and Management, University of Pavia); Federico Etro (Department of Economics, University of Venice Ca' Foscari)
    Abstract: We provide a unified approach to imperfect (monopolistic, Bertrand and Cournot) competition equilibria with demand functions derived from symmetric preferences over a large but finite number of goods. The equilibrium markups depend on the Morishima Elasticity of Substitution/Complementarity between goods, and can be derived directly from the utility functions and ranked unambiguously. We characterize the endogenous market structures, their dependence on market size, income and firms’ productivity and compare them with the optimal allocations. Finally, we apply our results to the case of preferences such as Generalized Leontief, Generalized linear and Generalized quadratic that we introduce in the literature on imperfect competition.
    Keywords: Monopolistic Competition, Imperfect Competition, Elasticity of Substitution, Free Entry
    JEL: D11 D43 L11
    Date: 2014–06
  2. By: Thomas Fagart (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper develops and analyzes a dynamic model of partially irreversible investment under cournot competition and stochastic evolution of demand. In this framework, I characterize the markov perfect equilibrium in which player's strategies are continuous in the state variable. There exists a zone in the space of capacities, named the no-move zone, such that if firms capacity belongs to this area, no firm invest nor disinvest at the equilibrium. Thereby, initial asymmetry between firms capacity can be preserved. If firms are outside this area, they invest in order to reached the no-move zone. The equilibrium as an efficiency property: the point of this area which is reached by the firms minimizes the investment cost of the all industry.
    Keywords: Capacity investment and disinvestment, dynamic stochastic games, Markov perfect equilibrium, real option games.
    JEL: D43 L13 L25
    Date: 2014–05
  3. By: Irlacher, Michael
    Abstract: In this paper, I investigate welfare gains associated with trade induced intra-firm adjustments of multi-product firms. To disentangle the welfare gains, I split up the R&D portfolio of a multi-product firm into three different channels: i) product innovation, ii) investments in the degree of product differentiation, and iii) process innovation. Trade integration enables firms to exploit economies of scale as innovation requires upfront development costs and encourages firms to spend more on R&D. I derive the indirect utility function and show that consumers bene.t from this behavior through a larger product range (love of variety) which is also more differentiated (love of diversity). Furthermore, a larger market is associated with technology upgrading. The resulting cost savings are passed on to consumers, leading to welfare gains from lower prices.
    Keywords: International Trade; Multi-Product Firms; Gains from Trade; R&D; Cannibalization Effect; Product Differentiation
    JEL: F12 L25
    Date: 2014–06–25
  4. By: Flach, Lisandra; Irlacher, Michael
    Abstract: This paper studies the innovation strategies of multi-product firms in industries with different scope for product differentiation. In a simple model of multi-product firms, we show that returns to product versus process innovation are industry-specific. Demand and cost linkages induce a natural distinction between the returns to product and process innovation. In highly differentiated industries, the cannibalization effect is lower and, therefore, firms invest more in product innovation. In homogeneous industries, firms internalize intra-firm spillover effects and invest more in process innovation. We test the predictions from the model using Brazilian firm-level data, with information on investment efforts over time. Following a major exchange rate devaluation, firms have better access to foreign markets and exploit economies of scale in innovation. However, detailed information on product and process innovation allows us to evaluate differential effects across industries. We con.rm the predictions from the theoretical model and show that the type of innovation depends on the industry scope for differentiation.
    Keywords: Multi-Product Firms; Innovation; Product Differentiation; Cannibalization Effect; Spillovers; Globalization
    JEL: F12 F14 L25
    Date: 2014–06–25
  5. By: Adriana Nikolic (Department of Economics, Vienna University of Economics and Business); Christoph Weiss (Department of Economics, Vienna University of Economics and Business)
    Abstract: In the past few decades spatial econometric models have become a standard tool in empirical research. Nevertheless applications in binary-choice models remain scarce. This paper makes use of Bayesian Spatial Probit Models to model and estimate spatial interactions in location decisions. For this purpose, we focus on the Austrian retail gasoline market, which is going through a process of remarkable structural changes. A short analysis shows that, during the last decade 10.9% of the stations had left the market and a percentage of 29.6% had either left the market or had changed the brand. This paper aims at investigating this process. A special characteristic of this market is the local competition structure which is characterized by spatial dependencies along local competitors. To capture these spatial dependencies and since the dependent variable is binary in nature (an exit had taken place or not), we apply a Bayesian spatial probit model using MCMC estimation on station level data for the whole Austrian retail gasoline market. Our results suggest, that the decision to leave the market, does not only depend on own characteristics, but also on competitors. In particular, we find the exit decisions to exhibit a negative spatial correlation. Moreover, our model allows to quantify spatial spillover effects of this market.
    Keywords: Bayesian Spatial Probit Model, Exit, Gasoline retailing, Spatial competition
    JEL: L13 L81 C21
    Date: 2014–07
  6. By: Mermelstein, Ben; Nocke, Volker; Satterthwaite, Mark A.; Whinston, Michael D.
    Abstract: We study optimal merger policy in a dynamic model in which the presence of scale economies implies that firms can reduce costs through either internal investment in build- ing capital or through mergers. The model, which we solve computationally, allows firms to invest or propose mergers according to the relative profitability of these strategies. An antitrust authority is able to block mergers at some cost. We examine the optimal policy when the antitrust authority can commit to a policy rule and when it cannot commit, and consider both consumer value and aggregate value as possible objectives of the antitrust authority. We find that optimal policy can differ substantially from what would be best considering only welfare in the period the merger is proposed. We also find that the abil- ity to commit can lead to a significant welfare improvement. In general, antitrust policy can greatly affect firms` optimal investment behavior, and firms` investment behavior can in turn greatly affect the antitrust authority`s optimal policy.
    Keywords: Merger Policy , Antitrust , Investment , Entry , Commitment
    JEL: L41 L13
    Date: 2014
  7. By: Jellal, Mohamed; Souam, Said
    Abstract: We analyze a model where an antitrust authority delegates to an audit inspector the mission of gathering the sufficient information to condemn a cartel. The authority has two instruments at her disposal: rewarding the inspector with a proportion of the collected fine or providing him with information which enhances the probability of the success of the prosecution. More precisely, we explore the efficiency consequences of a contest between the audit inspector and the cartel. Both of them bid to win the contest by expending efforts. We show that the race issue depends positively on the financial incentives proposed to the inspector but the impact of an increase of the level of the fine, to be paid once an illegal agreement is detected, is ambiguous. Moreover, we show that the optimal combination of the two instruments consists in two regimes. When the marginal cost of providing the relevant information is relatively high, the antitrust authority equally shares the collected fine and does not provide the inspector with any information. Conversely, when this marginal cost is relatively small, the authority uses the two instruments. She has to provide him with the maximum level of information consistent with winning the contest with certainty.
    Keywords: Antitrust Enforcement, Incentives, Collusion, Moral Hazard, Contest
    JEL: K2 K21 K42 L4 L44
    Date: 2014–07–10
  8. By: Budzinski, Oliver
    Abstract: Lead jurisdiction models represent one option how to extend and enhance contemporary interagency cooperation among competition policy regimes. They constitute a multilateral, case-related form of cooperation that is suited to effectively create a one-stop-shop for the prosecution of international cartels, the handling of cross-border mergers and acquisitions and the governance of international antitrust cases. Thus, lead jurisdiction models offer considerable economic benefits. However, they also entail several caveats. Three possible working problems and downside effects of lead jurisdiction models in international competition policy enforcement are discussed in this paper. --
    Keywords: international competition policy,lead jurisdiction models,international governance,interjurisdictional cooperation,interagency cooperation,competition economics,antitrust
    JEL: F02 F53 F55 K21 L40 D02
    Date: 2014
  9. By: Aldaba, Rafaelita M.; Sy, Geronimo S.
    Abstract: As the Philippines move toward the legislation of its comprehensive competition law, one important issue that has emerged is the interaction between the competition agency and sector regulators. Based on a review of different approaches that different countries have adopted, the paper develops a framework for the interplay between regulatory agencies and competition authority in the Philippines. Taking into account the country`s stages of institutional development and market and policy reforms, the paper proposes an approach that would leave competition enforcement exclusively in the hands of the competition authority while technical and economic regulation would be performed by the sector regulator. At the same time, the sector regulator may be given competition law enforcement functions to be performed in coordination with the competition authority. The proposed approach would be based on a cooperation mechanism with sector regulators taking the leading role in economic and technical issues while the competition authority will be the lead in competition issues like abuse of dominance, anticompetitive agreements, cartels and merger review. It is important that the two coordinate and consult with each other to ensure that the policies or remedial measures taken by one would not be against the mandate of the other. The competition functions of the authority such as assuring nondiscriminatory access to essential networks and controlling other forms of anticompetitive conduct and merger review may be shared with sector regulators.
    Keywords: Philippines, regulation, competition law and policy
    Date: 2014
  10. By: Joel Stiebale
    Abstract: This paper analyzes the effects of cross-border mergers and acquisitions (M&As) on the innovation of European firms. The results indicate a considerable increase in post-acquisition innovation in the merged entity. This is mainly driven by inventors based in the acquirer's country, while innovation in the target's country tends to decline. The asymmetry of effects between acquiring and target firms increases with pre-acquisition differences in knowledge stocks, indicating a relocation of innovative activities to more efficient usage within multinational firms. Instrumental variable techniques as well as a propensity-score matching approach indicate that the effect of cross-border M&As on innovation is causal.
    Keywords: Multinational Enterprises, Mergers and Acquisitions, Innovation
    Date: 2014
  11. By: Graef, Inge; Wahyuningtyas, Sih Yuliana; Valcke, Peggy
    Abstract: Online media platforms have the characteristics of a particular type of market known as 'multi-sided'. These businesses create value by bringing advertisers and users together. Access to user data is critical to this process. On the basis of economic literature, the features of multi-sided platforms will be discussed. It will be argued that the characteristics of multi-sided platforms increase the likelihood that successful companies become dominant due to the existence of indirect network effects. In these circumstances, dominant platforms may foreclose competition by raising barriers to entry in the large collections of user data. This may give rise to access problems for competitors and new entrants that need access to data gathered by dominant platforms in order to provide competing or complementary services. A comparative legal analysis will be used to assess the standards that apply in the United States (US) and the European Union (EU) for finding liability for refusals to deal under antitrust or competition law. The private antitrust cases that have already occurred regarding access to user data in the US show that the scope of applicability of the essential facilities doctrine is very limited after the judgment of the Supreme Court in Trinko. Although the European Commission and the Court of Justice seem to be willing to accept liability for a refusal to deal more easily than their US counterparts, high legal hurdles still have to be met under the essential facilities doctrine in the EU. Nevertheless, there are scenarios in which liability for refusals to give access to data will likely be accepted in the EU. --
    Keywords: Multi-sided platforms,access regulation,user data,essential facilities,search engines,online social networks,e-commerce platforms
    Date: 2014
  12. By: Stefan Arping (University of Amsterdam)
    Abstract: This article presents a model in which, contrary to conventional wisdom, competi- tion can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet, at the same time, banks become riskier. This is because the direct, destabilizing effect of lower margins outweighs the disciplining effect of competition; moreover, a substantial rise in competition reduces banks’ incentive to build precautionary capital buffers. A key implication is that the effects of competition on risk-taking and on failure risk can move in opposite directions.
    Keywords: Charter Value Hypothesis, Bank Franchise Value, Bank Competition, Financial Stability, Capital Requirements
    JEL: G2 G3
    Date: 2014–05–12

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