nep-com New Economics Papers
on Industrial Competition
Issue of 2015‒12‒08
twenty-two papers chosen by
Russell Pittman
United States Department of Justice

  1. Rationalizability and Efficiency in an Asymmetric Cournot Oligopoly By Gabriel Desgranges; Stéphane Gauthier
  2. Imperfect Certification under Cournot Duopoly By Charu Grover; Sangeeta Bansal
  3. Price Instability in Multi-Unit Auctions By Anderson, Edward; Holmberg, Pär
  4. Conglomerate Mergers: Comparison with Vertical Foreclosure By Proctor, Adrian
  5. Neutralising the Advantages of State-Owned Enterprises for a Fair Playing Field By NGUYEN Anh Tuan
  6. Identifying Competition Neutrality of SOEs in China By WATANABE Mariko
  7. Can the Organised and Unorganised Sectors Co-exits: A Theoretical Study By Manoj Pant; Shobha Bagai
  8. Development of Competition Laws in Korea By Hwang LEE
  9. Effective European Antitrust: Does EC Merger Policy Generate Deterrence By Clougherty, Joseph A.; Duso, Tomaso; Lee, Miyu; Seldeslachts, Jo
  10. Using spatial econometrics to test for collusive behavior in procurement auction data By Bergman, Mats A.; Lundberg, Johan; Lundberg, Sofia; Stake, Johan Y.
  11. Subsidies, financial constraints and firm innovative activities in developing economies By Simona Mateut
  12. Agency and incentives: vertical integration in the mortgage foreclosure industry By Lambie-Hanson, Lauren; Lambie-Hanson, Timothy
  13. Strategic behavior between a bank and a microfinance institution: The role of psychological distance and education level By Fall, François; Nguyen-Huu, Thanh Tam
  14. Quantity versus Price Bank Competition and Macroeconomic Performance given Bank Concentration By Erotokritos Varelas
  15. Foreign competition and banking industry dynamics: an application to Mexico By Corbae, Dean; D'Erasmo, Pablo
  16. The effects of global bank competition and presence on local business cycles: The Goldilocks principle does not apply to global banking By Uluc Aysun
  17. Patents Rights and Innovation by Small and Large Firms By Galasso, Alberto; Schankerman, Mark
  18. Intellectual Property and Innovation in Information and Communication Technology (ICT) By Stefano Comino; Fabio Maria Manenti
  19. Optimal Acquisition Strategies in Unknown Territories By Koska, Onur A.; Staehler, Frank
  20. Intervenção Regulatória nos Setores de Telecomunicações e Elétrico em 2012: um estudo de eventos com modelo de precificação multifatorial By Gabriel G. Fiuza de Bragança; Marcelo de Sales Pessoa; Katia Rocha
  21. Heterogeneity of markups at the firm level and changes during the great recession: the case of spain By Cristina Fernández; Aitor Lacuesta; José Manuel Montero; Alberto Urtasun
  22. Firm and Market Response to Saving Constraints: Evidence from the Kenyan Dairy Industry By Casaburi, Lorenzo; Macchiavello, Rocco

  1. By: Gabriel Desgranges (THEMA - Université de Cergy); Stéphane Gauthier (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper studies rationalizability in a linear asymmetric Cournot oligopoly with a unique Nash equilibrium. It shows that mergers favors uniqueness of the rationalizable outcome. When requires uniqueness of the rationalizable outcome maximization of consumers' surplus may involve a symmetric oligopoly with few firms. We interpret uniqueness of the rationalizable outcome as favoring a dampening of strategic ‘coordination’ uncertainty. An illustration to the merger between Delta Air Lines and Northwest shows that a reallocation of 1% of market share from a small carrier to a larger one has implied a lower production volatility over time, yielding a 1.5% decrease in the coefficient of variation of number of passengers
    Keywords: Competition policy; Cournot oligopoly; dominance solvability; efficiency; rationalizability; stability; airline industry
    JEL: D43 D84 L40
    Date: 2014–03
  2. By: Charu Grover (Centre for International Trade and Development,Jawaharlal Nehru University); Sangeeta Bansal (Centre for International Trade and Development,Jawaharlal Nehru University)
    Abstract: Environmental quality is often a credence good and consumers are unable to distinguish between green and brown products. The paper aims to investigate the role of certification in providing information about product quality and reducing market inefficiencies when the certification process is imperfect. We consider a duopoly in a vertically differentiated product model where firms compete in quantities. The papers shows that in the absence of labelling, the brown firm drives out the green firm if the cost of producing green product is sufficiently high. If both firms produce positive quantities in the market, the green firm covers a higher market share and obtains larger revenue. We then characterise pooling and separating equilibrium under imperfect certification contingent on certification fee. The paper shows that under imperfect certification, it is not optimal to subsidize certification.
  3. By: Anderson, Edward (University of Sydney); Holmberg, Pär (Research Institute of Industrial Economics (IFN))
    Abstract: We consider a procurement auction, where each supplier has private costs and submits a stepped supply function. We solve for a Bayesian Nash equilibrium and show that the equilibrium has a price instability in the sense that a minor change in a supplier.s cost sometimes result in a major change in the market price. In wholesale electricity markets, we predict that the bid price of the most expensive production unit can change by 1-10% due to price instability. The price instability is reduced when suppliers have more steps in their supply functions for a given production technology. In the limit, as the number of steps increases and the cost uncertainty decreases, the Bayesian equilibrium converges to a pure-strategy NE without price instability, the Supply Function Equilibrium (SFE).
    Keywords: Multi-unit auctions; indivisible unit; price instability; Bayesian Nash equilibria; supply function equilibria; convergence of Nash equilibria; whole-sale electricity markets
    JEL: C62 C72 D43 D44 L94
    Date: 2015–11–27
  4. By: Proctor, Adrian
    Abstract: This article compares and contrasts the approach to merger issues in vertical and conglomerate cases including likely efficiencies, useful data, and the approach to looking at each of ability, incentive, and effect in turn. The paper considers when conglomerate mergers are more likely to mirror vertical cases and result in static price rises. The article considers the relationship between conglomerate foreclosure and predatory pricing to determine whether merger analysis is the most suitable place to intervene and stop short-term benefits that may harm competition in the longer term. Finally, potential amendments to the existing framework are discussed.
    Keywords: Conglomerate merger vertical foreclosure competition price discrimination
    JEL: L4 L44
    Date: 2015–12–01
  5. By: NGUYEN Anh Tuan (LNT & Partners, Viet Nam)
    Abstract: Despite Vietnamese competition authorities’ attempts to control state monopolies in domestic markets during the last 10 year of establishment, this appears to be the key challenge of Vietnamese competition regime. In the process of transitioning from a centrally planned economy to a market economy, the State-owned enterprises (SOEs) sector is perceived as a means to ensure the socialist orientation of the economy as well as preserve national economic goals. For these purposes, SOEs have been offered several advantages ranging from tangible incentives to latent conveniences over the privately owned enterprises. In this context, competition laws and policies should be able to neutralise the advantages of SOEs to level the playing field or else it would be used a shield to protect SOEs from their private rivals. This paper looks into the issues with the SOE sector in the context of Viet Nam’s political economy and identifies the factors inhibiting the country’s effort to control State monopolies in the last 10 years of competition law enforcement. It provides commentaries on the implementation of competition laws and policies in Viet Nam from the perspective of economic integration, particularly the on-going negotiation Trans-Pacific Partnership.
    Keywords: antitrust, competition law, competition policy, competitive neutrality, developing countries, public enterprises, political economy, industrial policy, SOEs, State monopoly, TPP, Viet Nam.
    JEL: K21 L12 L32 L44 L52 L93 L96
    Date: 2015–11
  6. By: WATANABE Mariko
    Abstract: This paper attempts to identify competition neutrality of state-owned enterprises (SOEs) in three consumer electronics industries in China. First, I draw a benefit-price indifference curve at the mode of consumer surplus for each year, and a benefit-price supply curve by manufacturers and ownership types based on the demand estimates for the color TV (CTV), mobile phone, and air conditioning industries in the 2000s. These exercises indicate heterogeneous situations of market neutrality of SOEs in the Chinese consumer electronics industries. The air conditioning market shows a clear positive relationship between benefit and price for all ownership types. At the same time, no clear correlation between ownership and strategies focusing on price or benefit is observed. On the other hand, SOEs and privately-owned enterprises (POEs) in CTV and mobile phone markets concentrate their products based on lower prices and lower benefit area, namely, cost advantage strategies. Ownership type and strategies appear to have a correlation. Furthermore, prices become independent to the level of benefit for local firms. These tendencies are clearly observed in the price-benefit supply curve of the two markets. A simple model of differentiated competition with one agent committing predatory pricing in expropriating soft financial constraint shows that the price set by the rivals of a soft constrained firm is independent to the benefit.
    Date: 2015–11
  7. By: Manoj Pant (Centre for International Trade and Development,Jawaharlal Nehru University); Shobha Bagai (Cluster Innovation Centre, Delhi)
    Abstract: In the past debates around protection are usual couched in terms of protection of the manufacturing sector from imports and are centered around the so called “ infant industry” argument. However, while this argument is difficult to apply in a post WTO world, the more pressing issue today seems to be in the realm of services where the unorganised sector is a major employer. Despite the usual efficiency arguments many developing and developed countries continue to restrict competition via zoning and other local restrictions. Yet there seems no analytical study to determine whether organised and unorganized sectors can co-exist in the absence of such restrictions. In this paper we have tried to model a scenario where organised and unorganised sectors compete and where the organised sector is only restricted by statutory rules of setting up business. The model indicates that coexistence of the two sectors is a knife-edge problem and generally unlikely. It is seen that while low growth rates of demand would eliminate the organised sectors, high growth rates and product competition will eliminate the unorganised sector. The political need to ensure coexistence for some time would require some market segmentation via regulatory restriction like zoning.
  8. By: Hwang LEE (Professor of Law, Korea University School of Law/ICR Law Center, Korea)
    Abstract: Economic development policies that were export-focused and biased toward unbalanced growth were initially implemented through government-led initiatives in Korea since the 1960s. These resulted in many problems as well as a big success. Korean competition policies were born and developed to take the role of correcting and complementing economic development policies. Today competition policies have become a major force in Korea’s economic policy. Many parts of industrial policies were replaced by sectoral competition policy in substance. After the 2008 global financial crisis, Korea is faced with new challenges. Recent economic difficulties seem to ask for a bigger role to protect SMEs and fairness in society to address so-called bipolarisation. The economic policy to improve productivity in the name of so-called ‘creative economy’, designed to overcome limits of existing growth strategy, requires proper regulations against abuse of IPRs to supplement strengthened protection of intellectual property rights. All in all, Korea’s antitrust policy remains generally very active in building sound market competition
    Keywords: Competition Policy, Competition Law, Korea
    JEL: K21 L40 L43
    Date: 2015–11
  9. By: Clougherty, Joseph A.; Duso, Tomaso; Lee, Miyu; Seldeslachts, Jo
    Abstract: We estimate the deterrence effects of European Commission (EC) merger policy instruments over the 1990-2009 period. Our empirical results suggest that phase-1 remedies uniquely generate robust deterrence as – unlike phase-1 withdrawals, phase-2 remedies, and preventions – phase-1 remedies lead to fewer merger notifications in subsequent years. Furthermore, the deterrence effects of phase-1 remedies work best in high-concentration industries; i.e., industries where the HHI is above the 0.2 cut-off level employed by the EC. Additionally, we find that phase-1 remedies do not deter clearly pro-competitive mergers, but do deter potentially anti-competitive mergers in high-concentration industries.
    Keywords: competition policy; deterrence; European Commission; merger policy
    JEL: K21 K40 L40
    Date: 2015–11
  10. By: Bergman, Mats A. (Department of Economics, Södertörn University); Lundberg, Johan (Department of Economics, Umeå University); Lundberg, Sofia (Department of Economics, Umeå University); Stake, Johan Y. (Department of Economics, Södertörn University)
    Abstract: In this paper we evaluate whether spatial econometric techniques can be used to test for collusive bidder behavior in public procurement auctions, using the submitted bids and procurement characteristics. The proposed method is applied to the so-called Swedish asphalt cartel, which was discovered in 2001. As our dataset covers the period 1995-2009, we are able to test for conditional independence between complementary cartel bids before and after the detection. Our estimates show a significant positive correlation between complementary cartel bids during the cartel period, whereas a non-significant (and negative) correlation is shown during the later period. The parameter estimate of interest also differs in magnitude between periods. Hence, we argue that the method suggested can be used to verify or possibly screen for collusive bidding behavior. The main advantage of this method is its relatively small data requirements.
    Keywords: Antitrust; Auction; Cartel; Collusion; Complementary bidding; Public procurement; Spatial econometrics; Road re-pavement
    JEL: D44 H57 L10 L40
    Date: 2015–11–26
  11. By: Simona Mateut
    Abstract: This paper extends the investigation on the relationship between public subsidies and innovation to firms in developing economies. The analysis merges the innovation subsidy literature with the stream focusing on financial constraints for innovation. Innovation is defined broadly to include the introduction of new products or services and the upgrade of existing ones, which is relevant for developing economies. The results obtained using a range of econometric techniques and alternative measures of financial constraints suggest a positive correlation between public subsidies and the innovative activities of 11,998 firms across thirty Eastern Europe and Central Asia countries.
    Keywords: innovation, subsidies, financial constraints
    Date: 2015
  12. By: Lambie-Hanson, Lauren (Federal Reserve Bank of Philadelphia); Lambie-Hanson, Timothy (Haverford College)
    Abstract: In many U.S. states, the law firms that represent lenders in foreclosure proceedings must hire auctioneers to carry out the foreclosure auctions. The authors empirically test whether processing times differ for law firms that integrate the mortgage foreclosure auction process compared with law firms that contract with independent auction companies. They find that independent firms are able to initially schedule auctions more quickly, but when postponements occur, they are no faster to adapt. Since firms schedule the initial auction before contracting, independent auction companies have an incentive to conform to the law firms’ schedules in order to secure the contracts. The authors argue that this is evidence of a cost of integration stemming from poorly aligned incentives within the firm.
    Keywords: Vertical integration; Mortgage foreclosure
    JEL: D23 G21 G28 L22 L85
    Date: 2015–10–17
  13. By: Fall, François; Nguyen-Huu, Thanh Tam
    Abstract: In Hotelling's fundamental model (1929), the geographical distance and high transportation costs grant firms present in a market a certain power over local buyers in their neighborhoods. Starting from his model, this study shows that in the competition between a bank and a microfinance institution (MFI), geographical distance and transportation costs alone are no longer sufficient for attributing market power to the firms present. In fact, the introduction of psychological distance and education level in the model alter the Hotelling's results. Psychological proximity (trust) and the educational level of the client play determinant roles in dividing the credit market between a bank and an MFI.
    Keywords: spatial competition,bank,microfinance,market power
    JEL: G21 O17 C72 D43
    Date: 2015
  14. By: Erotokritos Varelas (Department of Economics, University of Macedonia)
    Abstract: This paper elaborates upon the following three theses: First, given bank sector concentration, the other aspect of this sector that matters for the overall economy is that of price vs. quantity competition by itself. Second, the macroeconomic performance of price competition is superior, enhancing the tax base and bank profit, capitalizing additionally the banks upon public debt induced instability, which the policymaker can minimize through Taylor rule. And, third, the ultimate link between banking competition and macroeconomic performance is the bank regulation shaping bank operation in accordance with the financial needs of fiscal policy.
    Keywords: Bank competition, Bank concentration, Public debt, Macroeconomic stability, Monetary policy.
    JEL: G21 L11 E32 E44 E63
    Date: 2015–12
  15. By: Corbae, Dean (University of Wisconsin‒Madison); D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia)
    Abstract: The authors develop a simple general equilibrium framework to study the effects of global competition on banking industry dynamics and welfare. They apply the framework to the Mexican banking industry, which underwent a major structural change in the 1990s as a consequence of both government policy and external shocks. Given the high concentration in the Mexican banking industry, domestic and foreign banks act strategically in the authors’ framework. After calibrating the model to Mexican data, the authors examine the welfare consequences of government policies that promote global competition. They find relatively high economy-wide welfare gains from allowing foreign bank entry.
    Keywords: Global banks; Foreign bank competition; Bank industry dynamics
    JEL: E60 F30 F41 G01 G21
    Date: 2015–09–18
  16. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: I solve a two-country real business cycle model that includes Cournot competitive global and local banks to investigate the impact of banking competition and global bank presence on local business cycles. Simulations reveal an inverted U-shaped relationship between the two factors and the volatility of output when global banks face portfolio adjustment costs. This relationship is determined by the asymmetric degree of diminishing returns to lending that global banks face in each economy. Specifcally, when global banks have a larger presence or are less competitive in one of the economies than the other, the cross-country mobility of loanable funds and the local responses to domestic shocks are smaller compared those obtained when the two economies are more symmetric.
    Keywords: Global banks, Cournot competition, real business cycles, bank size
    JEL: E32 E44 F33 F44
    Date: 2015–08
  17. By: Galasso, Alberto; Schankerman, Mark
    Abstract: This paper studies the causal impact of patents on subsequent innovation by the patent holder. The analysis is based on court invalidation of patents by the U.S. Court of Appeals for the Federal Circuit, and exploits the random allocation of judges to control for the endogeneity of the judicial decision. Patent invalidation leads to a 50 percent decrease in patenting by the patent holder, on average, but the impact depends critically on characteristics of the patentee and the competitive environment. The effect is entirely driven by small innovative firms in technology fields where they face many large incumbents. Invalidation of patents held by large firms does not change the intensity of their innovation but shifts the technological direction of their subsequent patenting.
    Keywords: courts; innovation; patents
    JEL: K41 L24 O31 O32 O34
    Date: 2015–11
  18. By: Stefano Comino (University of Udine); Fabio Maria Manenti (University of Padua)
    Abstract: The aim of this study is to provide a structured review of the role of IPR in fostering innovation and economic growth in the European ICT sector. Typically IPR analysis of industries focuses on patents. In practice, however, IPR strategies are developed combining the use of different IP rights. The scope of analysis considers this and looks at the joint use of patents, trademarks and industrial designs, each protecting a different type of knowledge-based asset. Based on these characteristics, the focus of the research is to provide an overview of the mechanisms typically employed in order to appropriate the returns from R&D investments. For each formal IPR, we briefly review the main contributions to the economic literature, both theoretical and empirical, on the rationale for its existence and the effects it generates on firms’ behaviour and market outcomes. We then highlight the most important emerging issues. In the final section of the study, we focus on the software industry.
    Keywords: Patents, copyright, trademarks, information and communication technologies, patent thickets, open source, software, mobile applications
    JEL: L11 L24 L96 O25 O31 O32 O34 O38 O52
    Date: 2015–11
  19. By: Koska, Onur A.; Staehler, Frank
    Abstract: This paper investigates the optimal acquisition strategy of a foreign investor, who wants to acquire one out of two local firms, under incomplete information. The response to acquisition offers is also a signal on firm productivity, affecting future competition. We identify a competition effect (firms compete for acquisition) and a revelation effect (firms reveal their productivities). These effects reduce the rejection profits and increase the acceptance probability. If the investor makes simultaneous offers, the revelation effect is a potential threat because a firm may signal low productivity, but may not be acquired. If, however, the investor makes offers sequentially, this threat does not exist, making sequential offers the optimal acquisition strategy.
    Keywords: Multinational Firms; Acquisition; Incomplete Information
    JEL: F23 G34
    Date: 2014–04–14
  20. By: Gabriel G. Fiuza de Bragança; Marcelo de Sales Pessoa; Katia Rocha
    Abstract: Verificamos os efeitos de intervenções regulatórias nos setores de telecomunicação e elétrico no Brasil em 2012. A primeira, ocorrida em 18 de julho, trata-se do anúncio de proibições de vendas de novas linhas pelas concessionárias de serviços de telefonia. A segunda, em 11 de setembro, uma medida provisória (MP no 579) que afetou a renovação dos contratos das empresas do setor elétrico e suas taxas de remuneração. Em estudos de eventos que se aplica um modelo de precificação multifatorial à metodologia de MacKinlay (1997), encontramos efeitos negativos das duas intervenções sobre seus respectivos setores. Na segunda intervenção, notamos uma reação eficiente do mercado, derrubando abruptamente o preço dos ativos. Essa queda rápida pode estar ligada tanto à natureza da medida em si, quanto à prior do mercado obtida com a primeira intervenção apenas dois meses antes. We analyze the effect of two 2012’s regulatory measures in the Brazilian telecommunications and electricity markets. The first intervention was undertaken by the telecommunications regulatory agency (Anatel) in 18th of July and refers to the interruption of the sales of important telecommunications mobile companies due to the poor quality of their services. The second one was undertaken by the Brazil Electricity regulatory agency (Aneel) in 11th of September and consists of the definition of the rules governing the renovation of generation and transmission concessions (MP579). We apply a multifactorial pricing model and event studies techniques and we find negative effects of both regulatory interventions in their respective markets. However, the market reaction to the second one seems to be efficient since the prices fell abruptly afterwards. This quick response might be either related to the particular characteristics of the MP579 or to a market perception towards an increase of regulatory intervention due the previous measure in telecommunications.
    Date: 2015–11
  21. By: Cristina Fernández (Banco de España); Aitor Lacuesta (Banco de España); José Manuel Montero (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: We broaden the conceptual framework of estimating markups at the sectoral level developed by Roeger (1995), and extended by Crépon et al. (2005) with labour market imperfections, to account for firm-level heterogeneity derived from differences in productivity. We estimate this model with a comprehensive panel of Spanish non-financial corporations for the period 2001-2007 to find that perfect competition is widely rejected in the data. More interestingly, within each sector, firms with higher productivity present higher markups. Further, we use this empirical setting to estimate changes in firm-level markups over the course of the crisis (2008/2012). Our results indicate that for around 50% of sectors average markups increased, following a decrease in the number of firms, while for around 35% of industries the relevance of within-sector markup heterogeneity decreased at the same time that the variance of within-sector TFP increased. This last result suggests that the simple changes in the number and composition of competing firms cannot explain within-sector markups and we require additional factors to account for recent developments. For instance, we provide evidence that both an increase in consumer product substitutability and in fixed entry costs during the crisis might be a good explanation.
    Keywords: markups, production function, market power, heterogeneity
    JEL: C23 C26 D24 E31 L11 L16
    Date: 2015–12
  22. By: Casaburi, Lorenzo; Macchiavello, Rocco
    Abstract: This paper documents how saving constraints can spill over into other markets. When producers value saving devices, trustworthy buyers can offer them infrequent payments - a commitment tool - and purchase at a lower price. This affects the nature of competition in the output market. We present a model of this interlinked saving-output market for the case of the Kenyan dairy industry. Multiple data sources, experiments, and a calibration exercise support its microfoundations and predictions concerning: i) producers' demand for infrequent payments; ii) an asymmetry across buyers in the ability to credibly commit to low frequency payments; iii) a segmented market equilibrium where buyers compete by providing either liquidity or saving services to producers; iv) low supply response to price increases. We discuss additional evidence from other contexts, including labor markets, and derive policy implications concerning contract enforcement, financial access, and market structure.
    Keywords: Agricultural Markets; Competition; Imperfect Contract Enforcement; Interlinked Transactions; Saving Constraints; Trust
    JEL: L22 O12 O16 Q13
    Date: 2015–11

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