nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒04‒02
twelve papers chosen by
Russell Pittman
United States Department of Justice

  1. Product versus Process: Innovation Strategies of Multi-Product Firms By Flach, Lisandra; Irlacher, Michael
  2. Prizes versus Contracts as Incentives for Innovation By Che, Yeon-Koo; Iossa, Elisabetta; Rey, Patrick
  3. Tariffs, Vertical Oligopoly, and Market Structure By ARA Tomohiro; Arghya GHOSH
  4. Growth Policy, Agglomeration and (the Lack of) Competition By Wyatt J. Brooks; Joseph Kaboski; Yao Amber Li
  5. Współpraca badawczo-rozwojowa przedsiębiorstw: przegląd prac empirycznych By Karbowski, Adam
  6. Collusion, Managerial incentives and antitrust fines. By Florence THEPOT; Jacques THEPOT
  7. Product Market Deregulation's Winners and Losers: US Railroads between 1981 and 2001 By Guido Friebel; Gerard McCullough; Laura Padilla
  8. Competition in Retail Electricity Markets : An Assessment of Ten Years Dutch Experience By Mulder, M.; Willems, Bert
  9. Risk hedging and competition : the case of electricity markets By Raphaël Homayoun Boroumand; Georg Zachmann
  10. Is Competition Among Cooperative Banks a Negative Sum Game? By Paolo Coccorese; Giovanni Ferri
  11. Are mergers among cooperative banks worth a dime? Evidence on post-M&A efficiency in Italy By Paolo Coccorese; Giovanni Ferri; Fabiola Spiniello
  12. Global Banking: Risk Taking and Competition By Ester Faia; Gianmarco Ottaviano

  1. By: Flach, Lisandra; Irlacher, Michael
    Abstract: We investigate the effects of better access to foreign markets on innovation strategies of multi-product firms in industries with different scope for product differentiation. Industry-specific demand and cost linkages induce a distinction between the returns to innovation. In differentiated industries, cannibalization is lower and firms invest more in product innovation. In homogeneous industries, firms internalize intra-firm spillovers and invest more in process innovation. Using firm-level data and large exchange rate devaluations, we show that better access to foreign markets increases the incentive to innovate. However, we exploit differential effects across industries and show that the innovation strategies depend on the scope of differentiation.
    Keywords: Cannibalization Effect; innovation; Market Size Effect.; multi-product firms; product differentiation; Spillovers
    JEL: F12 F14 L25
    Date: 2017–03
  2. By: Che, Yeon-Koo; Iossa, Elisabetta; Rey, Patrick
    Abstract: Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea effciently. If research efforts are unverifiable and implementation costs are private information, a trade-ooff arises between the two objectives. The optimal mechanism resolves the tradeoff via two instruments: a monetary prize and a contract to implement the project. The optimal mechanism favors the innovator in contract allocation when the value of innovation is above a certain threshold, and handicaps the innovator in contract allocation when the value of innovation is below that threshold. A monetary prize is employed as an additional incentive but only when the value of innovation is suffciently high.
    Keywords: Contract rights; Inducement Prizes; innovation; Procurement and R&D.
    JEL: D44 D82 H57 O31 O38 O39
    Date: 2017–03
  3. By: ARA Tomohiro; Arghya GHOSH
    Abstract: We study the impact of market thickness on the optimal tariff in vertical specialization. We show that, in the exogenous market structure where the extensive margin is fixed and only the intensive margin responds to trade policy, when the Home optimal tariff is higher, the thicker is the Home final-good market (relative to the Foreign intermediate-good market). In the endogenous market structure where both extensive and intensive margins respond to trade policy, this relationship is overturned and as the Home optimal tariff is higher, the thinner is the Home final-good market. We also show that our analysis has an advantage of separately deriving the impact of tariffs on the extensive and intensive margins of homogeneous goods.
    Date: 2017–03
  4. By: Wyatt J. Brooks (University of Notre Dame); Joseph Kaboski (University of Notre Dame); Yao Amber Li (Hong Kong University of Science and Technology)
    Abstract: Industrial clusters are promoted by policy and generally viewed as good for growth and development, but both clusters and policies may also enable non- competitive behavior. This paper studies the presence of non-competitive pricing in geographic industrial clusters. We develop, validate, and apply a novel test for collusive behavior. We derive the test from the solution to a partial cartel of perfectly colluding firms in an industry. Outside of a cartel, a firm’s markup depends on its market share, but in the cartel, markups across firms converge and depend instead on the total market share of the cartel. Empirically, we validate the test using plants with common owners, and then test for collusion using data from Chinese manufacturing firms (1999-2009). We find strong evidence for non-competitive pricing within a subset of industrial clusters, and we find the level of non-competitive pricing is about four times higher in Chinese special economic zones than outside those zones.
    JEL: L11 O10 O25 R11
    Date: 2017–03
  5. By: Karbowski, Adam
    Abstract: In this work empirical studies (published in the time period 2001-2015) on R&D cooperation of firms are reviewed. In the empirical literature on R&D cooperation of firms the following research strands can be distinguished: (1) research on impact of R&D cooperation of firms on enterprise innovation, (2) research on characteristics of firms and markets conducive to formation of R&D cooperation in industry, (3) research on impact of knowledge spillovers on R&D cooperation of firms, and (4) research on impact of R&D cooperation on enterprise profitability. Empirical studies revealed a positive relationship between R&D cooperation and enterprise innovation, though the existence and strength of the indicated relationship depend heavily on the enterprise innovation measure selected by the authors of the research. The impact of (i) firm’s size, (ii) degree of market concentration, (iii) R&D intensity, and (iv) type of research performed by the enterprise on the probability of forming R&D cooperation is ambiguous. The analysis of relevant empirical studies indicates that knowledge spillovers incentivize firms to form R&D cooperation in the industry. The empirical literature further suggests that firms cooperating in R&D attain on average lower profit margins than firms competing in R&D.
    Keywords: R&D cooperation of firms, empirical studies
    JEL: O3 O31 O32
    Date: 2016–12
  6. By: Florence THEPOT (School of Law, University of Glasgow); Jacques THEPOT (LARGE Research Center, Université de Strasbourg)
    Abstract: Based on a duopoly price competition model, this paper argues that collusion on managerial incentive compensations may have the equivalent effects to collusion on prices. This paper also provides an analysis of the effect of different antitrust fines regimes in the context of a game between two companies each composed of two-level of decision making (the board of directors and the sales manager). The contribution of this paper is two-fold: it identifies" backstage arrangements" that may be used by companies in order to achieve monopoly pricing outcome without entering into explicit price-fixing practices. It also highlights the inefficiency of fining regimes based on sales when companies have a multi-layer decision-making structure
    Keywords: duopoly, antitrust law, governance. JEL classification : K21, L13, L41
    Date: 2017
  7. By: Guido Friebel (Goethe University Frankfurt, CEPR and IZA); Gerard McCullough (University of Minnesota); Laura Padilla (Universidad Loyola Andalucía)
    Abstract: To properly account for labor effects of deregulation, one needs data sets that account for workers and firm heterogeneity. We investigate a comprehensive data set on US railroads. It contains detailed finance, output, employment and wage information for six different skill groups. We identify the effect of product market strategies and mergers on employment and earnings of workers. Railroads have downsized and they have restructured the composition of their human resources. The majority of employee groups have benefitted in terms of compensation. Low-skilled workers blue collars and administrative staff have been the main losers following deregulation, in terms of employment. The main winners are managers and locomotive drivers. The right-to-manage model we use has a good fit, except for executives, which indicates relevance of other types of personnel practices, for instance incentive contracts.
    Keywords: matched worker/firm data, downsizing, rent-sharing, panel data, right-to-manage model
    JEL: C23 J21 J30 L43
    Date: 2016–04
  8. By: Mulder, M.; Willems, Bert (Tilburg University, TILEC)
    Abstract: This paper examines a decade of retail competition in the Dutch electricity market and discusses market structure, regulation, and market performance. We find a proliferation of product variety, in particular by the introduction of quality-differentiated green-energy products. Product innovation could be a sign of a well-functioning market that caters to customer’s preferences, but it can also indicate a strategic product differentiation to soften price competition. Although slightly downward trending, gross retail margins remain relatively high, especially for green products. Price dispersion across retailers for identical products remains high, as also across products for a single retailer. We do not find evidence of asymmetric pass-through of wholesale costs. Overall, the retail market matured as evidenced by fewer consumer complaints and higher switching rates. A fairly intensive regulation of mature energy retail markets appears to be needed to create benefits for consumers.
    Keywords: retail electricity market; competition; regulation; ex-post assessment
    Date: 2016
  9. By: Raphaël Homayoun Boroumand; Georg Zachmann
    Abstract: The advent of retail competition in the energy industry was concomitant with the explicit emergence of energy suppliers.The latter buys electricity on the wholesale market or contractually from producers and resells it to its customers. The “textbook model” of competitive decentralized energy markets required the vertical separation of generation, retail, as well as network activities (transmission and distribution). Introducing competition at the retail level was thought to imply the emergence and development of “asset-light suppliers” who neither own generating nor distribution assets. By offering innovative retail contracts with attractive prices to electricity consumers, those suppliers were expected to generate a fierce price-competition (Hunt 2002; Hunt and Schuttleworth, 1997). However, in stark contrast to this theoretical vision, asset-light retail entry has never eventuated as expected. Asset-light suppliers bankrupted, left the market, were taken over, or evolved towards an integration into production in all retail markets. Departing from this unexpected market outcome, the paper compares hourly risk hedging portfolios for three European markets relying on hourly electricity volumes and price data. The paper is organized as follows: in section 2 we put forward the market risks faced by energy suppliers. Section 3 demonstrates the limits of financial hedging in liberalized electricity markets. Section 4 is devoted to comparing from numerical simulations the risk profiles of different hourly hedging portfolios’ made exclusively (or conjointly) of forwards, financial options, and/ or physical assets. The last section concludes and provides regulatory and policy recommendations. We demonstrate through a Monte Carlo simulation based on 6000 hourly electricity volume and price data, how portfolios can be optimized to reduce suppliers net revenue exposure. We use the Value at Risk (95%) and the CVAR to compare the risk profiles of the portfolios. Through the presented numerical simulations we provide evidence, that energy suppliers can hedge the market risks originating from their retail contracts by either a combination of forwards and options on the spot price or by a combination of forwards and physical assets. In all observed electricity markets, however, liquid derivatives on the spot market are absent (Geman, 2005; Hull, 2005). Thus, the only real choice for suppliers is to hedge their retail obligations through physical hedging (investing in electricity plants). These, however, might help to significantly reduce a supplier’s risk exposure. Consequently, as long as derivatives markets are not sufficiently liquid, suppliers will strive to vertically integrate to hedge their risk exposure. We also propose portfolio optimization based on intraday hedging of electricity intermediaries. Indeed, our results clearly demonstrate that the optimal hedging portfolio varies in relation with the hours of the day. First, our model demonstrates that the average of the cumulated hourly losses [as measured by the average VaR(95%)]of the seven homogeneous group of hours is lower than the VaR (95%) of a single daily optimal portfolio. Therefore, we propose several optimal hedging portfolios per day. Secondly, for any group of hours, we demonstrate that the optimal portfolio is specific. Conclusions and policy recommendations Our paper demonstrates that physical hedging, supported to some degree by forward contracting and spot transactions is an efficient and sustainable approach to risk management in decentralized electricity markets. In contrast to the theoretical premises, financial contracts are imperfect substitutes to vertical integration in the current market environment. The failure of asset-light electricity suppliers is indicative of the intrinsic incapacity of this organizational model to manage efficiently the combination of sourcing and selling risks. Vertically integrated, suppliers will maximize profits by relying on tacit price collusion in an oligopoly setting, which radically constrasts with the expected price competition envisioned in the reference market model of electricity liberalization. The role of competition auhthorities will therefore consist in stimulating competition between vertically integrated suppliers.
    Keywords: France, UK, Energy and environmental policy, Finance
    Date: 2015–07–01
  10. By: Paolo Coccorese (University of Salerno); Giovanni Ferri (LUMSA University)
    Abstract: Does ‘inner’ competition – rivalry among network members – worsen performance in a network of cooperative banks? Inner competition might, in fact, endanger network-dependent scale economies. We test our hypothesis on Banche di Credito Cooperativo (BCCs), Italy’s network of mutual cooperative banks. We find a worsening of performance both at incumbent and (even more) at aggressor BCCs when they compete among themselves. Instead, the worsening is mild when BCCs compete with non-BCC comparable banks. We conclude that inner competition among cooperative banks is a negative sum game and, thus, limiting it would be desirable to preserve the stability of cooperative banking networks.
    Keywords: Cooperative Banks, Rivalry Among Network Members, Strategic Interactions, Negative Sum Game, Banking Network
    JEL: D47 G21 G34
    Date: 2017–03
  11. By: Paolo Coccorese (University of Salerno); Giovanni Ferri (LUMSA University); Fabiola Spiniello (University of Salerno)
    Abstract: In this paper we study the intense wave of mergers among Italian mutual cooperative banks (Banche di Credito Cooperativo, BCCs) and try to assess whether those mergers were efficiency-enhancing. For the purpose, we employ a two-step procedure: we first estimate bank-level cost efficiency scores for a large sample of Italian banks in the period 1993-2013 by means of a stochastic frontier approach, then we try to explain the estimated BCCs’ cost efficiency with a set of merger status dummy variables (never merged, before the first merger, merged once, merged twice, etc.) as well as with a vector of control variables. We find that mergers increase mutual banks’ cost efficiency only after a BCC has merged at least three successive times with other BCCs, hence after reaching a remarkably large size. However, we conjecture that this growth in size could harm especially marginal borrowers (i.e. those who are likely to be served by smaller banks but neglected by bigger ones), with a strong and adverse impact on development and inequality and in contrast with BCCs’ ethics and mission.
    Keywords: Banking; Cooperative banks; Mergers; Efficiency
    JEL: D40 G21 G34
    Date: 2017–03
  12. By: Ester Faia; Gianmarco Ottaviano
    Abstract: Direct involvement of global banks in local retail activities can reduce risk-taking by promoting local competition. We develop this argument through a model in which multinational banks operate simultaneously in different countries with direct involvement in imperfectly competitive local deposit and loan markets. The model generates predictions that are consistent with the foregoing argument as long as the expansionary impact of competition on multinational banks' aggregate profits through larger scale is strong enough to offset its parallel contractionary impact through lower loan-deposit return margin (a result valid with both perfectly and imperfectly correlated loans' risk). When this is the case, banking globalization also moderates the credit crunch following a deterioration in the investment climate. Compared with multinational banking, the beneficial effect of cross-border lending on risk-taking is weaker.
    Keywords: global bank, oligopoly, oligopsony, endogenous risk taking,expectation of rents extraction, appetitefor leverage
    JEL: G21 G32 L13
    Date: 2017–03

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