nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒06‒18
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Cross-ownership, R&D Spillovers, and Antitrust Policy By López, Ángel Luis; Vives, Xavier
  2. The effects of endogenous enforcement on strategic uncertainty and cartel deterrence By Carsten J. Crede; Liang Lu
  3. Returns to Consumer Search: Evidence from eBay By Thomas Blake; Chris Nosko; Steven Tadelis
  4. Competition Policy and Incentives for Innovation By Shastitko. Andrey; Komkova, Anastasia Andreevna; Kurdin, Alexander; Shastitko, Anastasia
  5. Leveraging Dominance with Credible Bundling By Hurkens, Sjaak; Jeon, Doh-Shin; Menicucci, Domenico
  6. Dynamic R&D Choice and the Impact of the Firm's Financial Strength By Peters, Bettina; Roberts, Mark J.; Vuong, Van Anh
  7. "Regulation versus Regulated Monopolization of a Cournot Oligopoly with Unknown Costs" By Ismail Saglam
  8. Reputational Concerns in Directed Search Markets with Adverse Selection By Elton Dusha
  9. When Can A Demand System Be Described By A Multinomial Logit With Income Effect? By Jacques-Francois Thisse; Philip Ushchev
  10. Analyzing the Factors for Creating Competition among Products By Alvi, Mohsin; Mirza, Mohammad Haris; Khan, M. Mubashir Q.; Aqeel, Beenish; Ikram, Midra
  11. On Specification and Inference in the Econometrics of Public Procurement By Sundström, David
  12. Analyzing the Impact of Electricity Market Structure Changes and Mergers: The Importance of Forward Commitments By Brown, David P.; Eckert, Andrew
  13. The Impact of Merger Legislation on Bank Mergers By Siedlarek, Jan-Peter; Carletti, Elena; Ongena, Steven; Spagnolo, Giancarlo
  14. Banking Competition and Economic Stability By Ronald Fischer; Nicolás Inostroza; Felipe J. Ramírez
  15. Expanding Airport Capacity: Competition, Connectivity and Welfare: Discussion of options for Gatwick and Heathrow By OECD
  16. Price Elasticities of Pharmaceuticals in a Value-Based-Formulary Setting By Kai Yeung; Anirban Basu; Ryan N. Hansen; Sean D. Sullivan

  1. By: López, Ángel Luis; Vives, Xavier
    Abstract: This paper considers cost-reducing R&D investment with spillovers in a Cournot oligopoly with minority shareholdings. We find that, with high market concentration and sufficiently convex demand, there is no scope for cross-ownership to improve welfare regardless of spillover levels. Otherwise, there is scope for cross-ownership provided that spillovers are sufficiently large. The socially optimal degree of cross-ownership increases with the number of firms, with the elasticity of demand and of the innovation function, and with the extent of spillover effects. In terms of consumer surplus standard, the scope for cross-ownership is greatly reduced even under low market concentration.
    Keywords: Collusion; competition policy; innovation; minority shareholdings; modified HHI; partial merger
    JEL: D43 L13 O32
    Date: 2016–06
  2. By: Carsten J. Crede (University of East Anglia); Liang Lu (University of East Anglia)
    Abstract: This study experimentally investigates the impact of antitrust enforcement on cartel price decisions when fines and detection probabilities depend on them. We impose expected punishments that create two payoff–equivalent collusive price equilibria, of which one features a lower riskiness of collusion. Subjects are found to behave strategically in that they choose the equilibrium with a lower riskiness of collusion. This suggests that competition authorities can exploit the effects of such endogenous enforcement on strategic uncertainty between cartelists, i.e. a priori uncertainty about the actions of the other cartel members, to lower cartel prices. However, frequency deterrence might be reduced such that the overall welfare effects may be ambiguous.
    Keywords: antitrust, cartels, experiment, deterrence
    JEL: C92 D43 L13 L41
    Date: 2016–05–30
  3. By: Thomas Blake; Chris Nosko; Steven Tadelis
    Abstract: A growing body of empirical literature finds that consumers are relatively limited in how much they search over product characteristics. We assemble a dataset of search and purchase behavior from eBay to quantify the returns, and thus implied costs, to consumer search on the internet. The extensive nature of the eBay data allows us to examine a rich and detailed set of questions related to search in a way that previous structural models cannot. In contrast to the literature, we find that consumers search a lot: on average 36 times per purchase over 3 (distinct) days, with most sessions ending in no purchase. We find that search costs are relatively low, in the region of 25 cents per search page. We pursue the analysis further by, i) examining how users refine their search, ii) how search behavior spans multiple search sessions, and iii) how the amount of search relates to finding lower prices.
    JEL: D43 D83 L13
    Date: 2016–06
  4. By: Shastitko. Andrey (Lomonossov Moscow State University, Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Komkova, Anastasia Andreevna (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Kurdin, Alexander (National Research University Higher School of Economics, Moscow State University, Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Shastitko, Anastasia (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The work is dedicated to the identification and study of the relationship between the intensity of competition, market structures, competition policy and innovation activity. Critical analysis of foreign research shows that a universal solution, this problem has not, and the effects of competition policy on innovation in practice depends on a number of specific national and sectoral factors. Impact of innovation activity in respect of competition policy instruments is comprehensive, taking into account their impact on several aspects of the activities of businesses and entrepreneurs' expectations, as well as the availability of related markets. The paper evaluates the effects of the complex. Built in the theoretical model shows that the "inhospitable" attitude antitrust authorities to potentially anti-competitive actions of enterprises can be deterrent to innovative activity, but the rejection of antitrust measures may be harmful to consumers. The best option of competition policy seems favorable attitude towards business initiatives in the case of a likely increase their innovation potential with the simultaneous implementation of compensatory measures or protective active competition policy.
    Keywords: intensity of competition, market structures, competition policy, innovation activity
    Date: 2016–04–14
  5. By: Hurkens, Sjaak; Jeon, Doh-Shin; Menicucci, Domenico
    Abstract: We contribute to the leverage theory of tying by studying bundling of a dominant firm instead of a monopolist. We show that, when one firm has symmetric dominance across all markets, bundling has a positive demand size effect on the dominant firm but affects both firms similarly through the demand elasticity effect. The demand size affect is hump-shaped in dominance level whereas the demand elasticity affect is increasing and negative (positive) for low (high) dominance levels. This makes bundling credible for sufficiently strong dominance. In the case of asymmetric dominance levels, we identify three different circumstances in which a firm can credibly leverage its dominance in some (tying) markets to foreclose a dominant rival in other (tied) markets. Our findings provide a justification for the use of contractual bundling for foreclosure.
    Keywords: Bundling; Dominance; Entry Barrier; leverage; Tying
    JEL: D43 L13 L41
    Date: 2016–05
  6. By: Peters, Bettina (Centre for European Economic Research (ZEW)); Roberts, Mark J. (Pennsylvania State University and NBER); Vuong, Van Anh (University of Cologne and Institute of Energy Economics)
    Abstract: This article investigates how a firm's financial strength affects its dynamic decision to invest in R&D. We estimate a dynamic model of R&D choice using data for German firms in high-tech manufacturing industries. The model incorporates a measure of the firm's financial strength, derived from its credit rating, which is shown to lead to substantial differences in estimates of the costs and expected long-run benefits from R&D investment. Financially strong firms have a higher probability of generating innovations from their R&D investment, and the innovations have a larger impact on productivity and profits. Averaging across all firms, the long run benefit of investing in R&D equals 6.6 percent of firm value. It ranges from 11.6 percent for firms in a strong financial position to 2.3 percent for firms in a weaker financial position.
    Keywords: R&D choice; financial strength; innovation; productivity; dynamic structural model
    JEL: G30 O31 O32
    Date: 2016–06–02
  7. By: Ismail Saglam (Department of Economics, Ipek University)
    Abstract: This paper studies whether a Cournot oligopoly with unknown costs should be left unregulated, or regulated according to the optimal mechanism of Gradstein (1995), or first monopolized and then regulated according to the optimal mechanism of Baron and Myerson (1982). We show that the answer to this question depends on the number o the oligopolistic firms and the size of their fixed costs, as well as on the weight of the producer welfare in the social objective function.
    Keywords: Monopoly, Oligopoly, Cournot Competition, Regulation, Asymmetric Information
    JEL: D82 L51
    Date: 2016–06
  8. By: Elton Dusha
    Abstract: This paper introduces reputation building in directed search with adverse selection. Seller types randomly determine the quality of the asset they hold, where both a seller's type and asset quality are private information. When an exchange occurs, the quality of the asset that a seller holds is revealed and the market updates its belief about a seller's type, which I refer to as reputation. Markets where sellers have a higher reputation have lower liquidity and higher prices. With reputational concerns, the downward liquidity distortions caused by adverse selection are exacerbated. Equilibrium selection is affected by the incentives sellers have to earn a higher reputation. Shocks to entry costs have larger effects when sellers can build a reputation through multiple matches with buyers. JEL classiffications: D82,G1. Key words: Keywords: directed search, adverse selection, reputation, liquidity.
    Date: 2015
  9. By: Jacques-Francois Thisse; Philip Ushchev (National Research University Higher School of Economics)
    Abstract: We show that a wide class of demand systems for dierentiated products, such as those generated by additive preferences, indirectly additive preferences, and Kimball-like homothetic preferences, can be given a multinomial logit foundation provided that the conditional indirect utility is nonlinear and varies with the whole price array.
    Keywords: discrete choice, multinomial logit, demand systems, additive preferences, homothetic preferences
    JEL: D43 L11 L13
    Date: 2016
  10. By: Alvi, Mohsin; Mirza, Mohammad Haris; Khan, M. Mubashir Q.; Aqeel, Beenish; Ikram, Midra
    Abstract: There are so many reasons of competition among products; the purpose of this study was to find different factors on which competition was dependent. Hypotheses were generated to find the impact of factors on competition. A cross-sectional design research study was conducts through a survey form where a total of 260 respondents participated. Result was derived with the help of statistical tool i.e. one sample T-test and mean value was assigned 4. The end result concluded that competition is dependent on all the factors (availability of goods, delivery on time, discounted pricing by suppliers, cost of products, quality of products, promotional activities and number of variations) except one factor (product support services). This study to some extend gave a view that product services created no difference for customers to buy but other factors related to cost and quality mattered.
    Keywords: Competition, Products, Customer, One Sample T-test,
    JEL: C1 D1 D2 D4 D7 M1 O1
    Date: 2016–03–20
  11. By: Sundström, David (Department of Economics, Umeå University)
    Abstract: In Paper [I] we use data on Swedish public procurement auctions for internal regular cleaning service contracts to provide novel empirical evidence regarding green public procurement (GPP) and its effect on the potential suppliers’ decision to submit a bid and their probability of being qualified for supplier selection. We find only a weak effect on supplier behavior which suggests that GPP does not live up to its political expectations. However, several environmental criteria appear to be associated with increased complexity, as indicated by the reduced probability of a bid being qualified in the postqualification process. As such, GPP appears to have limited or no potential to function as an environmental policy instrument. In Paper [II] the observation is made that empirical evaluations of the effect of policies transmitted through public procurements on bid sizes are made using linear regressions or by more involved non-linear structural models. The aspiration is typically to determine a marginal effect. Here, I compare marginal effects generated under both types of specifications. I study how a political initiative to make firms less environmentally damaging implemented through public procurement influences Swedish firms’ behavior. The collected evidence brings about a statistically as well as economically significant effect on firms’ bids and costs. Paper [III] embarks by noting that auction theory suggests that as the number of bidders (competition) increases, the sizes of the participants’ bids decrease. An issue in the empirical literature on auctions is which measurement(s) of competition to use. Utilizing a dataset on public procurements containing measurements on both the actual and potential number of bidders I find that a workhorse model of public procurements is best fitted to data using only actual bidders as measurement for competition. Acknowledging that all measurements of competition may be erroneous, I propose an instrumental variable estimator that (given my data) brings about a competition effect bounded by those generated by specifications using the actual and potential number of bidders, respectively. Also, some asymptotic results are provided for non-linear least squares estimators obtained from a dependent variable transformation model. Paper [VI] introduces a novel method to measure bidders’ costs (valuations) in descending (ascending) auctions. Based on two bounded rationality constraints bidders’ costs (valuations) are given an imperfect measurements interpretation robust to behavioral deviations from traditional rationality assumptions. Theory provides no guidance as to the shape of the cost (valuation) distributions while empirical evidence suggests them to be positively skew. Consequently, a flexible distribution is employed in an imperfect measurements framework. An illustration of the proposed method on Swedish public procurement data is provided along with a comparison to a traditional Bayesian Nash Equilibrium approach.
    Keywords: auctions; dependent variable transformation model; green public procurement; indirect inference; instrumental variable; latent variable; log-generalized gamma distribution; maximum likelihood; measurement error; non-linear least squares; objective effectiveness; orthogonal polynomial regression; prediction; simulation estimation; structural estimation
    JEL: C15 C24 C26 C51 C57 D22 D44 H57 Q01 Q28
    Date: 2016–06–08
  12. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics)
    Abstract: We investigate how the effects of market structure changes and mergers in restructured electricity markets depend on the level of forward contracting. Following Bushnell, Mansur, and Saravia (2008), we develop a Cournot model of Alberta's wholesale electricity market that incorporates firms' forward positions. Using data from 2013 - 2014, we estimate the monthly forward positions of the five largest firms in the market, and simulate the effects of different market structure changes, including variations of a hypothetical merger with asset divestitures. We examine the sensitivity of the simulated effects of mergers and other market structure changes to assumptions regarding firms' forward commitments. We demonstrate that the wholesale market impacts of mergers and market structure changes depend critically on firms' forward commitments in the post market structure change equilibrium. Our paper demonstrates the importance of establishing a clear understanding of the size and nature of forward commitments in forecasting the effects of mergers and other market structure changes in wholesale electricity markets.
    Keywords: Electricity; Mergers; Forward Contracts; Market Power
    JEL: D43 L40 L51 L94 Q40
    Date: 2016–06–13
  13. By: Siedlarek, Jan-Peter (Federal Reserve Bank of Cleveland); Carletti, Elena (Bocconi University, IGIER, and CEPR); Ongena, Steven (University of Zurich, the Swiss Finance Institute, and CEPR); Spagnolo, Giancarlo (Site-Stockholm School of Economics, the University of Rome Tor Vergata, EIEF, and CEPR)
    Abstract: We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points. Analyzing potential explanations for this result, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers, and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks, and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions.
    Keywords: banks; mergers and acquisitions; merger control; antitrust;
    JEL: G21 G34 K21 L40
    Date: 2016–06–01
  14. By: Ronald Fischer; Nicolás Inostroza; Felipe J. Ramírez
    Abstract: We study banking competition and stability in a 2-period economy. Firms need loans to operate, and in case of a real shock, a fraction of firms default. Banks bound by capital adequacy constraints lend less and amplify the initial shock. The magnification depends on the intensity of bank competition. The model admits prudent and imprudent equilibria, where banks collapse after shocks. We find existence conditions for a prudent equilibrium. Competition increases efficiency but leads to higher second period variance and makes imprudent equilibria more attractive. We examine the moderating effect of regulation and forbearance. JEL classiffications: E44, G18, L16. Key words: Keywords: Bank competition, stability, efficiency, forbearance.
    Date: 2015
  15. By: OECD
    Abstract: This report expands the quantitative assessment of airline responses to expansion at Gatwick and Heathrow. For this assessment the same methodology was used as in the second study and again the results are been broken down into impacts on scarcity rents, competition and connectivity.
    Date: 2015–06–01
  16. By: Kai Yeung; Anirban Basu; Ryan N. Hansen; Sean D. Sullivan
    Abstract: Ever since the seminal RAND Health insurance experiment (HIE) was conducted, most health care services, including pharmaceuticals, are deemed to be price inelastic with price elasticities of demand (PED) close to -0.20. However, most studies of PED exploit natural experiments that change demand prices for multiple components of health care. Consequently, these experiments usually do not produce estimates for the true own-price elasticities of demand but rather composite own-price elasticities that are driven by concomitant price changes to their substitutes and complements. Hence, an estimate of price elasticity is expected to vary based on the setting in which it was estimated, and likely not be applicable to other settings. In this work, exploiting a natural experiment of exogenous policy implementation of a value-based formulary (VBF) that was designed based on drug-specific incremental cost-effectiveness ratios, we estimate price elasticities of pharmaceuticals within a VBF design, formally accounting for the nature of composite elasticities that such a setting would generate. We also calculate welfare effects of such a policy using a consumer surplus approach. We show theoretically that VBF designs can increase dispersion of price elasticities of demand among pharmaceutical products compared to their true own-price elasticities and affect their magnitude based on direction of price change. Aligning these PEDs with value VBF is also likely to produce positive welfare effects. We estimate an overall PED for pharmaceuticals to be -0.16, close to the estimate of RAND HIE. However, we see substantial dispersion of PED across the VBF tiers ranging from -0.09 to -0.87 with trends aligned with the levels of value as reflected by the cost-effectiveness ratio (p
    JEL: C10 D61 I13 I18
    Date: 2016–06

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