nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒10‒15
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Competition, collusion and spatial sales patterns: Theory and evidence By Hunold, Matthias; Hüschelrath, Kai; Laitenberger, Ulrich; Muthers, Johannes
  2. Product Compatibility as an Strategy to Hinder Entry Deterrence By Guillem Roig
  3. The Law and Economics of List Price Collusion By Willem Boshoff; Johannes Paha
  4. Partial Cartels and Mergers with Heterogenous Firms: Experimental Evidence By Francisco Gomez-Martinez
  5. Strategic Inattention in Product Search By Adrian Hillenbrand; Svenja Hippel
  6. Minority share acquisitions and collusion: Evidence from the introduction of national leniency programs By Heim, Sven; Hüschelrath, Kai; Laitenberger, Ulrich; Spiegel, Yossi
  7. Efficiency in Large markets with Firm Heterogeneity By Swati Dhingra; John Morrow
  8. Entry and Merger Policy By Jaunaux, Laure; Lefouili, Yassine; Sand-Zantman, Wilfried
  9. Injunctions against false advertising By Baumann, Florian; Rasch, Alexander
  10. The application of competition policy vis-à-vis intellectual property rights: The evolution of thought underlying policy change By Anderson, Robert D.; Kovacic, William E.
  11. Markets Take Breaks: Dynamic Price Competition with Opening Hours By Eibelshäuser, Steffen; Wilhelm, Sascha
  12. Net effects of Net Neutrality: The case of Amazon’s Net neutrality encourages content provision but also creates congestion externalities from the increase in data traffic. I study the consequences of net neutrality in, a popular internet platform, by estimating a two-sided market model that considers the interactions between content provision, its consumption and congestion. The platform is non-neutral because it gives preference to the most popular content providers by compressing their data, which makes them accessible to more consumers. I use the estimated preferences and technological parameters to study the counterfactual where net neutrality is imposed in the platform. Consumer welfare would drop 3 percent. The platform would need to significantly increase its investment in its physical infrastructure to compensate consumers for the drop. The drop will be underestimated if congestion is ignored. Content provision does not increase but its quality drops. By José Tudón;
  13. Import Competition and Vertical Integration: Evidence from India By Vencappa, Dev; Stiebale, Joel
  14. Acquisitions, Markups, Efficiency, and Product Quality: Evidence from India By Stiebale, Joel; Vencappa, Dev
  15. Competition Policy Evaluation through Damage Estimation in Fuel Retail Cartel By Cuiabano, Simone
  16. Expert qualification in markets for expert services: A Sisyphean Task? By Schneider, Tim; Bizer, Kilian
  17. Does Multispecialty Practice Enhance Physician Market Power? By Laurence C. Baker; M. Kate Bundorf; Daniel P. Kessler
  18. No Crowding Out despite Kickbacks: Competition between Gatekeeping GPs By Felder, Stefan; Amann, Erwin
  19. What past U.S. agency actions say about complexity in merger remedies, with an application to generic drug divestitures By Emch, Eric; Jeitschko, Thomas D.; Zhou, Arthur
  20. Faster Payments : Market Structure and Policy Considerations By Aaron Rosenbaum; Garth Baughman; Mark D. Manuszak; Kylie Stewart; Fumiko Hayashi; Joanna Stavins
  21. ICT, Information Asymmetry and Market Power in the African Banking Industry By Asongu, Simplice; Biekpe, Nicholas

  1. By: Hunold, Matthias; Hüschelrath, Kai; Laitenberger, Ulrich; Muthers, Johannes
    Abstract: We study competition in markets with significant transport costs and capacity constraints. We compare the cases of price competition and coordination in a theoretical model and find that when firms compete, they more often serve more distant customers that are closer to plants of competitors. By means of a rich micro-level data set of the cement industry in Germany, we provide empirical evidence in support of this result. Controlling for other potentially confounding factors, such as the number of production plants and demand, we find that the transport distances between suppliers and customers were on average significantly lower in cartel years than in non-cartel years.
    Keywords: capacity constraints,cartel,cement,transport costs
    JEL: K21 L11 L41 L61
    Date: 2017
  2. By: Guillem Roig
    Abstract: In many markets, firms produce and sell complementary components that form a product system. This paper studies the effects of compatibility in product advertisement and entry decisions in a differentiated product market. While advertising enhances the ability of consumers to mix and match components closer to their preferences, more advertising does not always generate larger welfare. In my model, an incumbent uses advertising to increase the prospects of market competition with the objective to deter potential entry. However, under some parameters, entry deterrence does not occur when products are made compatible. With compatible products, the incumbent either obtains large benefits from accommodation or equilibria when all consumers are aware of the existence of the available products emerge. In this latter case, the amount of advertising cannot be further expanded to protect the incumbent’s monopolistic position. As a result, policies in favor of compatibility may encourage entry and generate larger levels of advertisement.
    Keywords: Product compatibility; Informative advertising; Entry deterrence; Market structure
    JEL: D21 D43 L13 L15
    Date: 2017–10–11
  3. By: Willem Boshoff (Stellenbosch University); Johannes Paha (Justus-Liebig-University Giessen)
    Abstract: Firms sometimes violate competition laws by agreeing on increases of list prices. The economic effects of such list price collusion are far from clear because the cartel firms might deviate secretly from the elevated prices by granting their customers discounts. This article presents case evidence suggesting that agreements on list prices are not infrequently observed in cartel cases. It also reviews theoretical, empirical, and experimental literature in economics showing under what conditions such list price collusion causes the discounted transaction prices to rise. This is relevant for competition authorities in developing a theory of harm when prosecuting cartels, and also for the customers of the cartel firms when suing the conspirators for the repayment of damages.
    JEL: D43 K21 L41
    Date: 2017
  4. By: Francisco Gomez-Martinez
    Abstract: A usual assumption in the theory of collusion is that cartels are all-inclusive. In contrast, most real-world collusive agreements do not include all firms that are active in the relevant industry. This paper studies both theoretically and experimentally the formation and behavior of partial cartels. The theoretical model is a variation of Bos and Harringtonâs (2010) model where firms are heterogeneous in terms of production capacities and individual cartel decisions are endogenized. The experimental study has two main objectives. The first goal is examine whether partial cartels emerge in the lab at all, and if so, which firms are part of it. The second aim of the experiment is to study the coordinated effects of a merger when partial cartels are likely to operate. The experimental results can be summarized as follows. We find that cartels are typically not all-inclusive and that various types of partial cartels emerge. We observe that market prices decrease by 20% on average after a merger. Our findings suggest that merger analysis that is based on the assumption that only full cartels forms produces misleading results. Our analysis also illustrates how merger simulations in the lab can be seen as a useful tool for competition authorities to back up merger decisions.
    JEL: C92 L13 L41 L44 G34
    Date: 2017–10–04
  5. By: Adrian Hillenbrand (Max Planck Institute for Research on Collective Goods); Svenja Hippel (Max Planck Institute for Research on Collective Goods)
    Abstract: Online platforms provide search tools that help consumers to get betterfitting product offers. But this technology makes consumer search behavior also easily traceable for the platform and allows for real-time price discrimination. Consumers face a trade-off: Search intensely and receive better fits at potentially higher prices or restrict search behavior – be strategically inattentive – and receive a worse fit, but maybe a better deal. We study the strategic buyer-seller interaction in such a situation theoretically as well as experimentally. The search technology we use in the laboratory leads by construction to better-fitting products, but we indeed find that only sellers profit from the buyers’ use of the offered search tools.
    Keywords: strategic inattention, price discrimination, information transmission, consumer choice, experiment
    JEL: D11 D42 D82 D83 L11
    Date: 2017–10
  6. By: Heim, Sven; Hüschelrath, Kai; Laitenberger, Ulrich; Spiegel, Yossi
    Abstract: There is a growing concern that minority shareholding (MS) in rival firms may facilitate collusion. To examine this concern, we exploit the fact that leniency programs (LPs) are generally recognized as a shock that destabilizes collusive agreements and study the effect that the introduction of an LP has on horizontal MS acquisitions. Using data from 63 countries over the period 1990-2013, we find a large increase in horizontal MS acquisitions in the year in which an LP is introduced, especially in large rivals. The effect is present however only in countries with an effective antitrust enforcement and low levels of corruption and only when the acquisitions involve stakes of 10%-20%. These results suggest that MS acquisitions may stabilize collusive agreements that were destabilized by the introduction of the LP.
    Keywords: minority shareholdings,collusion,leniency programs,cartel stability
    JEL: G34 K21 L41
    Date: 2017
  7. By: Swati Dhingra; John Morrow
    Abstract: Abstract Empirical work has drawn attention to the high degree of productivity differences within industries, and its role in resource allocation. In a benchmark monopolistically competitive economy, productivity differences introduce two new margins for allocational inefficiency. When markups vary across firms, laissez faire markets do not select the right distribution of firms and the market-determined quantities are inefficient. We show that these considerations determine when increased competition from market expansion takes the economy closer to the socially efficient allocation of resources. As market size grow large, differences in market power across firms converge and the market allocation approaches the efficient allocation of an economy with constant markups.
    Keywords: efficiency, productivity, limit theorem, market expansion, competition
    JEL: F1 L1 D6
    Date: 2017–10
  8. By: Jaunaux, Laure; Lefouili, Yassine; Sand-Zantman, Wilfried
    Abstract: This note examines the optimal merger policy when competition authorities take into account the e¤ects of their policy on firms'entry decisions. We consider a model featuring ex ante uncertainty about profits and consumer surplus, and derive a simple rule governing the optimal policy in that context. More specifically, we show that the ratio between the loss in ex post consumer surplus and the gain in an entrant's profit induced by an ex post anticompetitive merger is a sufficient statistic to determine when competition authorities should be more lenient. Our findings imply in particular that competition authorities may find it optimal to commit to being more lenient towards successful, rather than unsuccessful, entrants.
    Keywords: Merger Policy; Entry; Uncertainty
    JEL: K21 L13 L40
    Date: 2017–10
  9. By: Baumann, Florian; Rasch, Alexander
    Abstract: We consider a situation of duopolistic competition in which one firm may (falsely) advertise high product quality. Consumers are heterogeneous. One group forms rational beliefs about quality, whereas some consumers are naive and fully trust any advertisement. We compare two scenarios in which either the competitor or a government agency can file an injunction suit. From a welfare perspective, we show that it may be optimal either to have the competitor or the government agency as plaintiff.
    JEL: K41 K42 L13 L15
    Date: 2017
  10. By: Anderson, Robert D.; Kovacic, William E.
    Abstract: This paper examines the evolution of national competition (antitrust) policies and enforcement approaches vis-à-vis intellectual property rights (IPRs) and associated anti-competitive practices in major jurisdictions over the past several decades. It focuses especially on the underlying process of economic learning that has, the authors suggest, driven relevant policy changes. Part 2 of the paper outlines the breakthroughs in understanding that have underpinned the evolution of competition policy approaches toward intellectual property licensing arrangements in the US, Canada and the EU. Part 3 elaborates the foundational insights that have motivated competition policy interventions with respect to 'newer' issues such as anti-competitive patent settlements and hold-ups in relation to standard setting processes, in addition to the modern focus on mergers that potentially lessen incentives for innovation and on abuse of dominance/single firm exclusionary practices in IP-intensive network industries. Part 4 outlines some of the core policy concerns and insights driving the increased emphasis that leading competition authorities now devote to policy advocacy and research in relation to the scope and definition of IP rights. Overall, the analysis suggests, firstly, that competition policy applications in the intellectual property sphere are matters of fundamental importance for economic advancement and prosperity, having a direct bearing on innovation, growth and the diffusion of new technologies. Indeed, the roles of IP and competition policy are now sufficiently intertwined and interdependent that neither can be well understood or applied in an optimal fashion in the absence of the other. Secondly, the thought evolution described herein implies that successful policy applications require careful study of market structure and behaviour, not in the abstract but with reference to the particular markets affected. Thirdly, it augurs favourably for the prospects of continuing gradual and incremental convergence in national approaches in this area, even spanning developed and developing countries, on the basis of continual learning and informed self-interest.
    Keywords: intellectual property,patents,international trade and competition policy,antitrust,innovation,mergers,anti-competitive settlements,standards,network industries,competition advocacy
    JEL: K21 L4 L41 L43 O3 O34
    Date: 2017
  11. By: Eibelshäuser, Steffen; Wilhelm, Sascha
    Abstract: We study price cycles in the German retail gasoline market. We extend existing models of Bertrand competition by product differentiation, firm size and business hours. With sufficiently low product differentiation, there exists a unique subgame perfect equilibrium featuring Edgeworth price cycles. We test the model's predictions using an extensive data set. Last, we evaluate policy interventions and show that restrictions on price setting or increased market transparency harm consumer welfare.
    JEL: D43 L11 L13 L81
    Date: 2017
  12. By: José Tudón (Department of Economics, The University of Chicago, 1126 E. 59th St., Chicago, IL 60637, USA);
    Keywords: Net neutrality; Congestion externalities; Internet; Two-sided markets
    JEL: D22 D62 L13 L14 L82 L96
    Date: 2017–01
  13. By: Vencappa, Dev; Stiebale, Joel
    Abstract: This paper uses a rich firm-product panel data set of Indian manufacturing firms to analyze the relationship between import competition and vertical integration. Exploiting exogenous variations from changes in India's trade policy, we find that import competition induced by falling output tariffs increases vertical integration by domestic firms, with the effects concentrated in rather homogenous product categories, among firms that mainly operate on the domestic market and in larger firms.
    JEL: F23 G34 L25 D22 D24
    Date: 2017
  14. By: Stiebale, Joel; Vencappa, Dev
    Abstract: We use a rich firm-product panel data set to analyze the effects of domestic and foreign acquisitions on Indian manufacturing firms. Our results indicate that, on average, acquisitions are associated with increases in quantities and markups and lower marginal costs in target firms. We also provide evidence that the quality of products increases while quality-adjusted prices fall upon acquisitions. The effects are most pronounced if acquirers are located in technologically advanced countries.
    JEL: F23 G34 L25 D22 D24
    Date: 2017
  15. By: Cuiabano, Simone
    Abstract: I estimate the fuel retailer cartel damages in the south of Brazil using reduced and structural forms for supply and demand. Brazilian Competition Authority (CADE) documents help to characterize the ethanol and gasoline retailers involved in the collusion. The objective is to evaluate competition policy by comparing the amount of estimated damages with the amount of applied fines. This paper also adds an important result to gasoline substitution, as data shows that ethanol is perceived as a perfect substitute and it is price inelastic. Results show an overcharge of 4.6% to 6.6% in the gasoline market and up to 12% in the ethanol market during collusion. Fines should consider the deterrence effect and, giving the low probability of detection, CADE’s applied fines seemed to be in line with this objective.
    Date: 2017–09
  16. By: Schneider, Tim; Bizer, Kilian
    Abstract: Moral hazard in expert diagnoses is more complicated in credence goods markets because ex-post verification of service optimality is usually not possible. We provide an experimental framework to investigate expert and consumer behavior as well as market efficiency in a setting in which experts need to invest in costly but unobservable effort to identify consumer problems and consumers are able to visit multiple experts for diagnosis. We introduce heterogeneously-qualified experts, varying in their necessary effort to diagnose consumers. We examine how subjects react to expert qualification and the introduction of price competition. We find that our baseline market is more efficient and qualification is not necessarily the Sisyphean task, as theory predicted. Nevertheless, we observe high skilled experts investing significantly less effort in diagnoses than their low skilled counterparts. Qualifying experts increases efficiency with fixed prices but remains almost without influence in markets with price competition. Introducing price competition does not lead to the predicted market breakdown, but rather has negative effects on market efficiency. In sum, whether expert qualification should be pursued in credence goods markets depends on the market composition and existing institutions.
    Keywords: credence goods,expert market,laboratory experiment,expert qualification,second opinions,price competition
    JEL: D12 D82 C91
    Date: 2017
  17. By: Laurence C. Baker; M. Kate Bundorf; Daniel P. Kessler
    Abstract: In markets for health services, vertical integration – common ownership of producers of complementary services – may have both pro- and anti-competitive effects. Despite this, no empirical research has examined the consequences of multispecialty physician practice – a common and increasing form of vertical integration – for physician prices. We use data on 40 million commercially insured individuals from the Health Care Cost Institute to construct indices of the price of a standard office visit to general-practice and specialist physicians for the years 2008-2012. We match this to measures of the characteristics of physician practices and physician markets based on Medicare Part B claims, aggregating physicians into practices based on their receipt of payments under a common Taxpayer Identification Number. Holding fixed the degree of competition in their own specialty, we find that generalist physicians charge higher prices when they are integrated with specialist physicians, and that the effect of integration is larger in uncompetitive specialist markets. We find the same thing in the reciprocal setting – specialist prices are higher when they are integrated with generalists, and the effect is stronger in uncompetitive generalist markets. Our results suggest that multispecialty practice has anticompetitive effects.
    JEL: I11
    Date: 2017–09
  18. By: Felder, Stefan; Amann, Erwin
    Abstract: In health service markets, patients often rely on the advice of their general practitioner (GP) to decide which treatment best fits their needs. Hospitals, in turn, influence GPs referral decisions through kickbacks. We formulate a model with competitive heterogeneous GPs who differ in the degree to which they internalize the disutility that their patients suffer from inappropriate treatments. We prove that a separable equilibrium with referring and not referring GPs exist.
    JEL: D82 I11 I18 L50
    Date: 2017
  19. By: Emch, Eric; Jeitschko, Thomas D.; Zhou, Arthur
    Abstract: We consider merger remedies of the U.S. Department of Justice's Antitrust Division and the U.S. Federal Trade Commission between 2008 and 2017. Traditionally one distinguishes between structural and behavioral remedies' and structural remedies are generally considered to be more effective and easier to implement. Our analysis suggests that over time this distinction has become somewhat blurred and a better gradation of remedies may be tied to the complexity of the proposed remedy. Divestitures in the market for generic drugs, in particular, are particularly complex, even though the remedies are of a structural, and so their efficacy is hard to ascertain.
    Keywords: Antitrust,Mergers,Structural Remedies,Behavioral Remedies,U.S. Enforcement
    Date: 2017
  20. By: Aaron Rosenbaum; Garth Baughman; Mark D. Manuszak; Kylie Stewart; Fumiko Hayashi; Joanna Stavins
    Abstract: The U.S. payments industry is in the process of developing ubiquitous, safe, faster electronic solutions for making a broad variety of business and personal payments. How this market for faster payments will evolve will be shaped by a range of economic forces, such as economies of scale and scope, network effects, switching costs, and product differentiation. Emerging technologies could alter these forces and lead to new organizational arrangements or market structures that are different from those in legacy payment markets to date. In light of this uncertainty, this paper examines three hypothetical market structures that may emerge: a dominant-operator environment, a multi-operator environment, and a decentralized environment. Each of these market structures has different implications for the public policy objectives of efficiency, safety, and ubiquity. The paper also considers tools to promote positive outcomes in each market structure.
    Keywords: Faster payments ; Market structure and competition ; Payment system improvement ; Public policy ; Retail payments
    JEL: D4 G2 L1 E42
    Date: 2017–09–25
  21. By: Asongu, Simplice; Biekpe, Nicholas
    Abstract: This study assesses how market power in the African banking industry is affected by the complementarity between information sharing offices and information and communication technology (ICT). The empirical evidence is based on a panel of 162 banks consisting of 42 countries for the period 2001-2011. Three estimation techniques are employed, namely: (i) instrumental variable Fixed effects to control for the unobserved heterogeneity; (ii) Tobit regressions to control for the limited range in the dependent variable; and (iii) Instrumental Quantile Regressions (QR) to account for initial levels of market power. Whereas results from Fixed effects and Tobit regressions are not significant, with QR: (i) the interaction between internet penetration and public credit registries reduces market power in the 75th quartile and (ii) the interaction between mobile phone penetration and private credit bureaus increases market power in the top quintiles. Fortunately, the positive net effects are associated with negative marginal effects from the interaction between private credit bureaus and mobile phone penetration. This implies that mobile phones could complement private credit bureaus to decrease market power when certain thresholds of mobile phone penetration are attained. These thresholds are computed and discussed.
    Keywords: Financial access; Information asymmetry; ICT
    JEL: G20 G29 L96 O40 O55
    Date: 2017–05

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