nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒06‒25
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Collusion and welfare in the case of a horizontally differentiated duopoly with network compatibility By Tsuyoshi Toshimitsu
  2. Merger and Innovation Incentives in a Differentiated Industry By Kesavayuth, Dusanee; Lee, Sang-Ho; Zikos, Vasileios
  3. The effect of network externalities on entry in a Spence-Dixit model By Domenico Buccella Author-Name: Luciano Fanti
  4. We study the welfare effects of input price discrimination when an upstream supplier that secretly contracts with two cost-asymmetric downstream firms undertakes R&D investments. We show that a ban on input price discrimination always increases the level of upstream R&D investments under linear contracts, however, it may well decrease R&D investments under two-part tariff contracts. Under linear contracting, a ban on input price discrimination always decreases welfare both in the short-run and the long-run. Under two-part tariff contracts, a ban on input price discrimination always decreases welfare in the short-run, however, it may well increase welfare in the long-run. By Ioannis N. Pinopoulos
  5. Entry by Successful Speculators in Auctions with Resale By Marco Pagnozzi; Krista J. Saral
  6. Econometric tests to detect bid-rigging cartels: does it work? By Imhof, David
  7. A game-theoretic approach to the choice of union-oligopoly baargaining agenda By Domenico Buccella; Luciano Fanti
  8. Corporate social responsibility and privatization policy in a mixed oligopoly By Kim, Seung-Leul; Lee, Sang-Ho; Matsumura, Toshihiro
  9. Partial Privatization and Subsidization in a Mixed Duopoly: R&D versus Output Subsidies By Lee, Sang-Ho; Muminov, Timur; Tomaru, Yoshihiro
  10. Corporate control market: stages, specific features, regulation By Radygin Alexandr; Apevalova Elena; Polezhaeva Natalia
  11. Reorganization or Liquidation: Bankruptcy Choice and Firm Dynamics By Dean Corbae; Pablo D'Erasmo
  12. Credit Rationing and Pass-Through in Supply Chains: Theory and Evidence from Bangladesh By Emran, M.Shahe; Mookherjee, Dilip; Shilpi, Forhad; Uddin, M. Helal
  13. Does Strategic Ability Affect Efficiency? Evidence from Electricity Markets By Ali Hortaçsu; Fernando Luco; Steven L. Puller; Dongni Zhu
  14. Potential impacts of liberalisation of the EU-Africa aviation market By Eric Tchouamou Njoya; Panayotis Christidis
  15. Quantifying the Benefits of Infrastructure Sharing By Matthew Andrews; Milan Bradonjic; Iraj Saniee
  16. Rural bank mergers/consolidations in the Philippines : a preliminary study By Kashiwabara, Chie

  1. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: Based on a horizontally differentiated duopoly model with network externalities, in which we focus on the role of compatibility between the products, we consider the effect of collusion on social welfare. We demonstrate that collusion improves social welfare, compared to the case of noncooperative Cournot competition, if the level of compatibility between the products under collusion is sufficiently large, given that a network externality is strong. In this case, the collusion is sustainable.
    Keywords: collusion, network externality, compatibility, horizontally differentiated duopoly, welfare
    JEL: D43 D62 L13 L14 L15 L41
    Date: 2017–06
  2. By: Kesavayuth, Dusanee; Lee, Sang-Ho; Zikos, Vasileios
    Abstract: In this paper, we consider a duopoly with product differentiation and examine the interaction between merger and innovation incentives. The analysis reveals that a merger tends to discourage innovation, unless the investment cost is sufficiently low. This result holds whether or not side payments between firms are allowed. When side payments are permitted, a bilateral merger-to-monopoly is always profitable, a standard result in the literature. When side payments are not permitted, however, we show that a merger is not profitable when the efficiency of the new technology is relatively high and the investment cost is below a particular level.
    Keywords: Merger, R&D, innovation, differentiated products
    JEL: D21 L13 L41 O31
    Date: 2017–06–21
  3. By: Domenico Buccella Author-Name: Luciano Fanti
    Abstract: This paper studies the effect of consumption externalities on entry decision in network industries in a Spence-Dixit entry model. It is shown that, when entry is considered, the presence of network externalities raises the sunk cost threshold that blocks the potential competitor’s entry. However, the difference between the thresholds to deter and accommodate entry enlarges: entry is relatively “less blockaded” but “more deterred” than in a standard goods industry..Creation-Date: 2016-01-01
    Keywords: Network externalities, Entry, Deterrence; Monopoly; Duopoly.
  4. By: Ioannis N. Pinopoulos (Department of Economics, University of Macedonia)
    Keywords: Input price discrimination; R&D investments; vertical contracting; welfare.
    JEL: D43 K21 L11 L42
    Date: 2017–06
  5. By: Marco Pagnozzi (Università di Napoli Federico II and CSEF); Krista J. Saral (Webster University Geneva)
    Abstract: We experimentally analyze the role of speculators, who have no use value for the objects on sale, in auctions. The environment is a uniform-price sealed-bid auction for 2 identical objects, followed by a free-form bargaining resale market, with one positive-value bidder, and either one or two speculators who may choose simultaneously whether to enter the auction. We show that the bidder accommodates speculators by reducing demand in the auction and subsequently purchasing in the resale market, which encourages entry by speculators. The presence of multiple speculators induces each speculator to enter less often, but increases competition in the auction and the auction price. Speculators earn positive profits on average, except when multiple speculators enter the auction.
    Keywords: speculators, entry, multi-object auctions, resale, economic experiments
    JEL: D44 C90
    Date: 2017–06–18
  6. By: Imhof, David
    Abstract: This paper tests how well the method proposed by Bajari and Ye (2003) performs to detect bidrigging cartels. In the case investigated in this paper, the bid-rigging cartel rigged all contracts during the collusive period, and all firms participated to the bid-rigging cartel. The two econometric tests constructed by Bajari and Ye (2003) produce a high number of false negative results: the tests do not reject the null hypothesis of competition, although they should have rejected it. A robustness analysis replicates the econometric tests on two different sub-samples, composed solely by cover bids. On the first sub-sample, both tests produce again a high number of false negative results. However, on the second sub-sample, one test performs better to detect the bidrigging cartel. The paper interprets these results, discusses alternative methods, and concludes with recommendations for competition agencies.
    Keywords: Bid rigging; Detection methods; Screens; Conditional independence test; Exchangeability test
    JEL: C00 C40 D22 D40 K40 L40
    Date: 2017–06–12
  7. By: Domenico Buccella; Luciano Fanti
    Abstract: This paper investigates the selection of the bargaining agenda in a unionized industry with decentralized negotiations for different competition modes. The firms choose the agenda (Right-to- Manage, RTM vs. Efficient Bargaining, EB), considering alternative timing of the bargaining game in the case of mixed duopoly. In fact, the EB (RTM) firm can be either Stackelberg wage follower (leader) or Stackelberg output leader (follower). It is developed a two-stage game in which the typology as well as the timing of the negotiations is endogenous. It is shown that, in pure strategies, no equilibria arise for a wide set of the parametersâ space while RTM appears as the unique equilibrium agenda for a different, large combination of the parameters; moreover, multiple, asymmetric equilibria emerge in a limited area of the parametersâ space. These results are in sharp contrast to the received literature in which EB can arise as an industry bargaining institution in equilibrium.
    Keywords: Efficient Bargaining; Right-to-Manage; Unionâoligopoly bargaining agenda.
    JEL: J51 L20
    Date: 2017–01–01
  8. By: Kim, Seung-Leul; Lee, Sang-Ho; Matsumura, Toshihiro
    Abstract: This article formulates a mixed oligopoly in which a public firm competes with two private firms that may adopt corporate social responsibility (CSR). We investigate the optimal privatization policy and find that, depending on the magnitude of CSR, the optimality of either nationalization or full privatization can hold. In particular, we show that the optimal degree of privatization is decreasing in the magnitude of CSR and thus nationalization can be optimal if they have homogeneous objectives. Under significant heterogeneity of the objectives among firms, however, the optimal degree of privatization is non-monotone with the magnitude of CSR, but full privatization can be optimal. This result suggests that the optimal privatization policy depends on both the magnitude of CSR and the heterogeneity of the objectives among private firms.
    Keywords: Corporate social responsibility; partial privatization; mixed oligopoly
    JEL: D43 L13 L22 L32
    Date: 2017–06–12
  9. By: Lee, Sang-Ho; Muminov, Timur; Tomaru, Yoshihiro
    Abstract: This study investigates R&D and output subsidies in a mixed duopoly with partial privatization. We show that an output subsidy is welfare-superior to an R&D subsidy policy, but the government has a higher incentive to privatize the public firm under the output subsidy than the R&D subsidy. However, when the government uses the policy mix of R&D and output subsidies together, it can achieve the first-best allocation, in which the degree of privatization does not influence output subsidies but influences R&D subsidies.
    Keywords: Mixed duopoly; Partial privatization; R&D subsidy; Output subsidy
    JEL: H2 L1 L3
    Date: 2017–06–19
  10. By: Radygin Alexandr (Gaidar Institute for Economic Policy); Apevalova Elena (RANEPA); Polezhaeva Natalia (RANEPA)
    Abstract: Russia’s market for mergers and acquisitions came into being in the early 1990s when mass privatization of state-owned property gained momentum. More specifically, it was not until after the Russian financial crisis of 1998 that mergers and friendly takeovers took place in Russia. Up until then there were ‘acquisitions through privatization’ that can be regarded as a primary manifestation of the initial stage of building a market for corporate control (from 1992 till the onset of the financial crisis of 1998). Reorganization proceeded privatization in 1/3 of cases, was coupled with privatization in 1/3 of cases and followed privatization in 1/3 of cases. Also, the practice of consolidating Russian assets through both M&A and outsider shareholding was adopted in the mid-1990s. In 1998, the equity of about 40% of surveyed enterprises was partially held by outside corporate shareholders, and more than 13% of those enterprises were integrated with suppliers or consumers.
    Keywords: Russian economy, bankruptcy, public enterprises
    JEL: G33 G38 P2 P31
    Date: 2017
  11. By: Dean Corbae; Pablo D'Erasmo
    Abstract: In this paper, we ask how bankruptcy law affects the financial decisions of corporations and its implications for firm dynamics. According to current U.S. law, firms have two bankruptcy options: Chapter 7 liquidation and Chapter 11 reorganization. Using Compustat data, we first document capital structure and investment decisions of non-bankrupt, Chapter 11, and Chapter 7 firms. Using those data moments, we then estimate parameters of a firm dynamics model with endogenous entry and exit to include both bankruptcy options in a general equilibrium environment. Finally, we evaluate a bankruptcy policy change recommended by the American Bankruptcy Institute that amounts to a “fresh start” for bankrupt firms. We find that changes to the law can have sizable consequences for borrowing costs and capital structure which via selection affects productivity (allocative efficiency rises by 2.58%) and welfare (rises by 0.54%).
    JEL: E22 G32 G33
    Date: 2017–06
  12. By: Emran, M.Shahe; Mookherjee, Dilip; Shilpi, Forhad; Uddin, M. Helal
    Abstract: We extend standard models of price pass-through across multiple layers of intermediaries in a supply chain with imperfect competition to incorporate credit rationing. To test against a standard model without credit rationing, we study the effects of a policy reform in Bangladesh's edible oils supply chain during 2011-12 which banned a layer of financing intermediaries. The standard model predicts higher pass-through of international prices to wholesale prices after the reform, while the credit rationing model predicts the opposite if the resulting credit contraction is strong enough. Evidence from a difference-in-difference estimation rejects the standard model. Our estimates imply that the regulatory effort to reduce market power of financing intermediaries ended up raising consumer prices by restricting access to credit of downstream traders.
    Keywords: Intermediary, Supply Chain, Market Power, Credit Rationing, Pass-through, Edible Oils, Bangladesh
    JEL: D4 L1 O1
    Date: 2017–06–20
  13. By: Ali Hortaçsu; Fernando Luco; Steven L. Puller; Dongni Zhu
    Abstract: Oligopoly models of short-run price competition predict that large firms can exercise market power and generate inefficiencies. Inefficiency, however, can arise from other sources as well, such as from heterogeneity in strategic sophistication. We study such a setting in the Texas electricity market, in which bidding behavior of some firms persistently and significantly deviates from Nash-equilibrium bidding. We use information on bids and valuations to estimate the level of strategic sophistication of specific firms in the market. We do this embedding a Cognitive Hierarchy model into a structural model of bidding into auctions. We show that strategic sophistication increases with the size of the firm and it is also related to managers' educational backgrounds. We then use our model to perform counterfactual calculations about market efficiency under different scenarios that increase strategic sophistication of low-type firms either exogenously or through mergers with more sophisticated firms.
    JEL: D03 D22 L1
    Date: 2017–06
  14. By: Eric Tchouamou Njoya (University of Huddersfield); Panayotis Christidis (European Commission – JRC)
    Abstract: Intercontinental air services between Europe and Africa are mainly governed by bilateral agreements negotiated between the individual countries of the EU and the various African governments. This paper provides an overview of the regulatory trends and development of air transport between EU and Africa, focussing on passenger traffic developments over the past five years and discusses the impact of liberalisation between Africa and the EU on the degree of concentration in airport traffic shares. Results indicate a growing role of Dubai and Istanbul and a decreasing role of European hubs as gateways to Africa. While Johannesburg, Cairo, Nairobi and Lagos remain the main international hubs in Africa, regional airport hubs have emerged in Algiers, Dar es Salaam and Casablanca. Liberalisation of EU-African aviation markets is likely to result in the emergence of further African regional hubs.
    Keywords: Transport economics, transport policy, aviation, air transport, EU, Africa
    JEL: R40 R41 R49
    Date: 2017–06
  15. By: Matthew Andrews; Milan Bradonjic; Iraj Saniee
    Abstract: We analyze the benefits of network sharing between telecommunications operators. Sharing is seen as one way to speed the roll out of expensive technologies such as 5G since it allows the service providers to divide the cost of providing ubiquitous coverage. Our theoretical analysis focuses on scenarios with two service providers and compares the system dynamics when they are competing with the dynamics when they are cooperating. We show that sharing can be beneficial to a service provider even when it has the power to drive the other service provider out of the market, a byproduct of a non-convex cost function. A key element of this study is an analysis of the competitive equilibria for both cooperative and non-cooperative 2-person games in the presence of (non-convex) cost functions that involve a fixed cost component.
    Date: 2017–06
  16. By: Kashiwabara, Chie
    Abstract: The central bank of the Philippines (Bangko Sentral ng Pilipinas, BSP) has encouraged the country’s rural banks to merger/consolidate for strengthening their financial soundness and competiveness, and extending branch networks with providing some incentive measures mainly financial supports. Overviewing the cases realized from January 2000 to December 2016, we found (1) the rural banks which are considered to have expansive business strategies spend about a decade to repeat bilateral mergers, unlike BSP’s intention to realize “at least five rural banks” in one merger case, (2) most of the mergers are bilateral and one-off cases, where surviving banks seem to increase some assets and branch(es). In order to further promote mergers/consolidations in the sector, BSP may need to consider modifying the incentive measures to answer actual cases, and/or allying them more closely to the on-going capital increase requirements.
    Keywords: Rural credit,Banks,Monetary policy,Mergers,Consolidations,Rural banks,The banking sector,The Philippines
    JEL: E42 E52 G38
    Date: 2017–03

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