nep-com New Economics Papers
on Industrial Competition
Issue of 2017‒11‒12
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Forward Contracts, Market Structure, and the Welfare Effects of Mergers By Nathan Miller; Joseph Podwol
  2. A Simple Model of Mergers and Innovation By Giulio Federico; Gregor Langus; Tommaso M. Valletti
  3. Vertical Licensing, Input Pricing, and Entry By Elpiniki Bakaouka; Chrysovalantou Milliou
  4. Negative consumer value and loss leading By Caprice, Stéphane; Shekhar, Shiva
  5. Upstream Partnerships among Competitors when Size Matters By Øystein Foros; Hans Jarle Kind
  6. Spatial models of heterogeneous switching costs By Siciliani, Paolo; Beckert, Walter
  7. Common Ownership, Competition, and Top Management Incentives By Miguel Antón; Florian Ederer; Mireia Giné; Martin Schmalz
  8. Multiproduct Intermediaries and Optimal Product Range By Rhodes, Andrew; Watanabe, Makoto; Zhou, Jidong
  9. Worker Training and Quality Competition By Bilanakosa, Christos; Heywood, John S.; Sessions, John; Theodoropoulos, Nikolaos
  10. Patterns of entry and exit in the deregulated German interurban bus industry By Dürr, Niklas S.; Hüschelrath, Kai
  11. Sorting on the Used-Car Market After the Volkswagen Emission Scandal By Anthony Strittmatter; Michael Lechner
  12. Branding and Performance in the Global Beer Market By Erik Strøjer Madsen
  13. Competition in the International Niobium Market: An Econometric Study By Jáilison W. Silveira; Marcelo Resende
  14. Asymmetric Information and Imperfect Competition in Lending Markets By Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi
  15. Assessing Competition With the Panzar-Rosse Model: An empirical analysis of European Union banking industry By Suzana Cristina Silva Andrade
  16. Competition and credit procyclicality in European banking By Aurélien Leroy; Yannick Lucotte
  17. Faster payments: market structure and policy considerations By Rosenbaum, Aaron; Baughman, Garth; Manuszak, Mark D.; Stewart, Kylie; Hayashi, Fumiko; Stavins, Joanna
  18. Effect of Banking Sector Resolution on Competition and Stability By Anna Kruglova; Yulia Ushakova
  19. Competition and Physician Behaviour: Does the Competitive Environment Affect the Propensity to Issue Sickness Certificates? By Kurt R. Brekke; Tor Helge Holmås; Karin Monstad; Odd Rune Straume
  20. Dark web: the economics of online drugs markets By V. Bhaskar; Robin Linacre; Stephen Machin
  21. An Analysis of Factors that Determine firm Survival during Economic Crises: The Case of Zimbabwe Manufacturing Firms By Dr. Albert Makochekanwa

  1. By: Nathan Miller (Georgetown University); Joseph Podwol (U.S. Department of Justice)
    Abstract: We examine how forward contracts affect economic outcomes under generalized market structures. In the model, forward contracts discipline the exercise of market power by making profit less sensitive to changes in output. This impact is greatest in markets with intermediate levels of concentration. Mergers reduce the use of forward contracts in equilibrium and, in markets that are sufficiently concentrated, this ampli-fies the adverse effects on consumer surplus. Additional analyses of merger profitability and collusion are provided. Throughout, we illustrate and extend the theoretical re-sults using Monte Carlo simulations. The results have practical relevance for antitrust enforcement.
    Date: 2017–10
  2. By: Giulio Federico; Gregor Langus; Tommaso M. Valletti
    Abstract: We analyze the impact of a merger on firms’ incentives to innovate. We show that the merging parties always decrease their innovation efforts post-merger while the outsiders to the merger respond by increasing their effort. A merger tends to reduce overall innovation. Consumers are always worse off after a merger. Our model calls into question the applicability of the “inverted-U†relationship between innovation and competition to a merger setting.
    Keywords: innovation, R&D, mergers
    JEL: D43 G34 L40 O30
    Date: 2017
  3. By: Elpiniki Bakaouka; Chrysovalantou Milliou
    Abstract: We explore the incentives of a vertically integrated incumbent firm to license the production technology of its core input to an external firm, transforming the licensee into its input supplier. We find that the incumbent opts for licensing even when licensing also transforms the licensee into one of its direct competitors in the final products market. In fact, the licensee's entry into the final products market, although increases the competition and the cost that the licensor faces, it reinforces, instead of weakens, the licensing incentives. Furthermore, the licensee's entry augments the positive welfare implications of vertical licensing.
    Keywords: licensing, vertical relations, entry, two-part tariffs, outsourcing
    JEL: L22 L24 L13 L42 D45
    Date: 2017
  4. By: Caprice, Stéphane; Shekhar, Shiva
    Abstract: Large retailers, competing with smaller stores that carry a narrower range, can exercise market power by pricing below cost some of their products. Below-cost pricing arises as an exploitative device rather than a predatory device (e.g., Chen and Rey, 2012). Unlike standard textbook models, we show that positive consumer value is not required in these frameworks. Large retailers can sell products offering consumers a negative value. We use our insight to revisit some classic issues in vertical relations.
    Keywords: multiproduct retailers,loss-leading,negative consumer value
    JEL: L13 L81
    Date: 2017
  5. By: Øystein Foros; Hans Jarle Kind
    Abstract: In several industries downstream competitors form upstream partnerships. An important rationale is that higher aggregate upstream volume might generate efficiencies that reduce both fixed and marginal costs. Our focus is on the latter. We show that if upstream marginal costs are decreasing in sales volume, then a partnership between downstream rivals will make them less aggressive. However, a partnership might nonetheless induce both partners and non-partners to charge lower prices. We also show that it might be better for two firms to form a partnership and compete downstream than to merge. Somewhat paradoxically, this is true if they compete fiercely in the downstream market with a third firm. The reason is that a merger is de facto a commitment to set higher prices. Under aggressive competition from the third firm, the members will not want to make such a commitment when upstream marginal costs are decreasing in output.
    Keywords: upstream partnership, imperfect competition, endogenous marginal costs
    JEL: D01
    Date: 2017
  6. By: Siciliani, Paolo (Bank of England); Beckert, Walter (University of London)
    Abstract: The presence of sticky, often labelled ‘unengaged’, consumers is arguably one of the most intractable issues faced by competition regulators, in that it entrenches incumbency advantage. We develop a spatial linear model of heterogeneous switching costs that allows for asymmetric distributions of heterogeneous switching costs. We not only model uniform pricing and history-based price discrimination, but also the impact of regulatory intervention aimed at making it easier for customers to be upgraded to a better tariff from their current service provider, something we call ‘leakage’. Finally, we analyse firms’ incentive to adopt history-based price discrimination and voluntarily permit ‘leakage’.
    Keywords: Switching costs; unengaged ‘sticky’ customers; spatial linear model; uniform pricing; history-based price discrimination; ‘leakage’
    JEL: D43 L11 L44
    Date: 2017–11–03
  7. By: Miguel Antón (IESE Business School, Universidad de Navarra); Florian Ederer (Cowles Foundation, Yale University); Mireia Giné (IESE Business School, Universidad de Navarra); Martin Schmalz (University of Michigan)
    Abstract: We show theoretically and empirically that managers have steeper financial incentives to expend effort and reduce costs when an industry’s firms tend to be controlled by shareholders with concentrated stakes in the firm, and relatively few holdings in competitors. A side effect of steep incentives is more aggressive competition. These findings inform a debate about the objective function of the firm.
    JEL: D21 G30 G32 J31 J41
    Date: 2016–07
  8. By: Rhodes, Andrew; Watanabe, Makoto; Zhou, Jidong
    Abstract: This paper develops a framework for studying the optimal product range choice of a multiproduct intermediary when consumers demand multiple products. In the optimal product selection, the intermediary uses exclusively stocked high-value products to increase store traffic, and at the same time earns profit mainly from non-exclusively stocked products which are relatively cheap to buy from upstream suppliers. By doing this the intermediary can earn strictly positive profit, including in situations where it does not improve efficiency in selling products. A linkage between product selection and product demand features such as size and shape is established. It is also shown that relative to the social optimum, the intermediary tends to be too big and stock too many products exclusively.
    Keywords: intermediaries, product range, multiproduct demand, search, exclusive contracts
    JEL: D83 L42 L81
    Date: 2017–10
  9. By: Bilanakosa, Christos; Heywood, John S.; Sessions, John; Theodoropoulos, Nikolaos
    Abstract: We uniquely examine the relationship between firm-sponsored training and product quality competition. Using an oligopolistic model of both price and quality competition, we show that an increase in the sensitivity of demand to product quality will strengthen firms’ incentives to train their workforce. Cross section, panel and instrumental variable estimations confirm that British establishments provide more intensive training when their competitive position is more sensitive to product quality. A variety of robustness checks and changes in variable definitions leave this confirmation in place.
    Keywords: Training,Product Quality,Demand Sensitivity,Competition
    JEL: L13 L15 M53
    Date: 2017
  10. By: Dürr, Niklas S.; Hüschelrath, Kai
    Abstract: We study patterns of entry and exit in the German interurban bus industry in the first three years after its deregulation in January 2013. Using a comprehensive data set of all firm and route entries and exits, we find that the industry grew much quicker than originally expected - with particularly a few new entrants being most successful in quickly extending their route networks from regional to national coverage. Although the clear majority of routes is operated on a monopoly basis, competition does play a key role on routes with a sufficiently large base of (potential) customers. From a spatial perspective, three years after deregulation, the entire interurban bus network connects 60 percent of all 644 larger German cities - with the intensity of entry being dependent on the number of inhabitants, average income, the share of under 24 years old and the presence of intermodal competition by intercity railway services.
    Keywords: deregulation,interurban bus services,entry,exit,competition
    JEL: L11 L41 L43 L92 K21 K23
    Date: 2017
  11. By: Anthony Strittmatter; Michael Lechner
    Abstract: The disclosure of the VW emission manipulation scandal caused a quasi-experimental market shock in the observable quality of VW diesel vehicles. We consider a classical model for adverse selection and sorting to derive an empirically testable hypothesis about the impact of observable quality on the supply of used cars. We test the hypothesis with data collected from an online car selling platform which reflects about 50% of the German used-car market. The empirical approach is based on a conditional difference-in-differences method. We find that the supply of used VW diesel vehicles increases after the VW emission scandal. This finding is consistent with the predictions of the theoretical model. Furthermore, we find the positive supply effects increase with the probability of manipulation.
    Keywords: supply of used cars, quality of durable goods, sorting, difference-in-differences, management fraud
    JEL: D82 L15 L62
    Date: 2017
  12. By: Erik Strøjer Madsen (Department of Economics and Business Economics, Aarhus University, Denmark)
    Abstract: The mass market for beers is served by a few global breweries in an oligopoly structure covering most of the world market. The homogeneity of their main lager beers are very high and produced at large scaled plants at low costs. However, the breweries spend large amounts of money to promote some of the lager beers as premium beers and at a high and increasing price premium. Based on a database with prices for standard and premium lager, the paper study the development in the consumption of different types of beers on the global market in recent years. We estimate the price premium on premium beers and relate it to the rapid change in the oligopoly structure of the market through the merger and acquisition activities.
    Keywords: Branding, brewing industry, income elasticities of beer
    JEL: L11 L66 M37
    Date: 2017–10–30
  13. By: Jáilison W. Silveira; Marcelo Resende
    Abstract: Niobium is a highly strategic mineral, in which Brazil holds almost all of the world’s reserves followed by Canada. Niobium has an important role in steel alloys for the aerospace industry and future potential for the industry’s superconductors. The present paper investigates the prevailing market power in niobium at the country level by referencing the residual demand approach advanced by Goldberg and Knetter (1999). The empirical evidence for the American destination market indicates a significant market power for Brazil. However, despite Brazil’s strong dominance in the supply of ferroniobium in comparison to Canada, it has moderate market power, which may suggest that other metals can have a relevant role in composing high performance alloys in terms of complementarity or substitution relationships.
    Keywords: Niobium, residual demand, market power
    JEL: F14 L13 L61
    Date: 2017
  14. By: Gregory S. Crawford (University of Zürich, CEPR and CAGE); Nicola Pavanini (Tilburg University and CEPR); Fabiano Schivardi (LUISS University, EIEF and CEPR)
    Abstract: We study the effects of asymmetric information and imperfect competition in the market for small business lines of credit. We estimate a structural model of credit demand, loan use, pricing, and firm default using matched firm-bank data from Italy. We find evidence of adverse selection in the form of a positive correlation between the unobserved determinants of demand for credit and default. Our counterfactual experiments show that while increases in adverse selection increase prices and defaults on average, reducing credit supply, banks’ market power can mitigate these negative effects.
    Date: 2017
  15. By: Suzana Cristina Silva Andrade
    Abstract: The purpose of the present article is to assess the degree of competition within the enlarged European Union (EU) commercial banking system during the period ranging from 2004 to 2011 using the non-structural test developed by Panzar and Rosse (1987). Their procedure measures the competitive environment in which financial intermediaries operate employing the sum of the elasticities of the reduced-form interest revenue with respect to factor prices. The main conclusion to retain from this study is that banking industry in the region does not seem to have operated either under perfect competition or under perfect monopoly, but rather consistently with long-run monopolistic competition. Further, we also find empirical evidence of efficiency hypothesis posted by Demestz (1973) and Peltzman (1977), as opposed to conventional view that concentration impairs price competitiveness. Finally, we underline the importance of trade off between the costs and benefits of competition to support financial stability objectives.
    Keywords: Competition, Concentration, Banking industry, Panzar and Rosse Model
    JEL: G21 G28
    Date: 2017–10
  16. By: Aurélien Leroy; Yannick Lucotte
    Abstract: This paper empirically assesses the effects of competition in the financial sector on credit procyclicality by estimating both an interacted panel VAR (IPVAR) model using macroeconomic data and a single-equation model with bank-level European banking data. The findings of these two empirical approaches highlight that an exogenous deviation of actual GDP from potential GDP leads to greater credit fluctuation in economies where both competition among banks and competition from non-bank financial institutions or direct finance (proxied by the fi- nancial structure) are weak. According to the financial accelerator theory, if lower competition strengthens the cyclical behavior of financial intermediaries, it follows that these "endogenous developments in credit markets work to amplify and propagate shocks to the macroeconomy" (Bernanke et al., 1999). Furthermore, since credit booms are closely associated with future financial crises (Laeven and Valencia, 2012), our results can also be read as evidence that greater competition in the financial sphere reduces financial instability, which is in line with the competition-stability view denying the existence of a trade-off between competition and stability
    Keywords: credit cycle, business cycle, bank competition, interacted panel VAR
    JEL: E32 E51 G20 D40 C33
    Date: 2017–11–09
  17. By: Rosenbaum, Aaron (Board of Governors of the Federal Reserve System); Baughman, Garth (Board of Governors of the Federal Reserve System); Manuszak, Mark D. (Board of Governors of the Federal Reserve System); Stewart, Kylie (Board of Governors of the Federal Reserve System); Hayashi, Fumiko (Federal Reserve Bank of Kansas City); Stavins, Joanna (Federal Reserve Bank of Boston)
    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; competition; payment system improvement; public policy; retail payments
    JEL: D4 E42 G2 L1
    Date: 2017–09–21
  18. By: Anna Kruglova (Bank of Russia, Russian Federation); Yulia Ushakova (Bank of Russia, Russian Federation)
    Abstract: We assess the effect of the banking sector resolution policy conducted by the Bank of Russia on competition and stability in the banking sector. We use the rate spread to measure competition and volatility in loan portfolio growth, set against volatility in growth of the banking sector’s aggregate loan portfolio, to measure the system’s stability. Our findings are as follows: After the launch of the banking sector resolution, a significant break in competition, as measured by the rate spread, was observed only in household deposits maturing in one to three years and household and corporate loans maturing in more than three years. This kind of structural break, however, is associated with macroeconomic factors rather than the Bank of Russia’s banking sector resolution. Other banking markets failed to see any significant change in competition after the launch of the banking sector resolution. After the launch of the Bank of Russia’s banking sector resolution, growth in corporate and retail lending showed a decline in volatility. This decline was observed both in a cluster of banks characterised by relatively low overdue debt, and in banks characterised by relatively high levels. Thereby, the reduction in the number of banks resulting from the Bank of Russia’s banking sector resolution had no considerable negative effect of competition in the period under review. At the same time, lower volatility in lending growth boosted banking system stability. We estimate that banking sector stability has grown by 4% in retail lending and 41% in corporate lending
    Keywords: Russian banking sector, banking licence, banking sector resolution, competition, banking sector stability
    JEL: G28 G21 E43
    Date: 2017–07
  19. By: Kurt R. Brekke; Tor Helge Holmås; Karin Monstad; Odd Rune Straume
    Abstract: Competition among physicians is widespread, but compelling empirical evidence on the impact on service provision is limited, mainly due to lack of exogenous variation in the degree of competition. In this paper we exploit that many GPs, in addition to own practice, work in local emergency centres, where the matching of patients to GPs is random. This allows us to observe the same GP in two different competitive environments; with competition (own practice) and without competition (emergency centre). Using rich administrative patient- level data from Norway for 2006-14, which allow us to estimate high-dimensional fixed-effect models to control for time-invariant patient and GP heterogeneity, we find that GPs with a fee-for-service (fixed-salary) contract are 12 (7.5) percentage points more likely to certify sick leave at own practice than at the emergency centre. Thus, competition has a positive impact on GPs’ sick listing that is strongly reinforced by financial incentives.
    Keywords: physicians, competition, sickness certification
    JEL: I11 I18 L13
    Date: 2017
  20. By: V. Bhaskar; Robin Linacre; Stephen Machin
    Abstract: The online market for buying and selling drugs is resilient and seems to bounce back rapidly after the exit of a large platform like Silk Road. That is one of the findings of research by Stephen Machin and colleagues, who have collected and analysed information on around 1.5 million drugs transactions on the so-called 'dark web' to understand the economic functioning of these markets. The researchers also find that only a small minority of online drugs deals receive bad ratings from buyers; and sellers that do receive bad ratings typically experience significant sales reductions. The study concludes that in the 'war on drugs', law enforcement needs more resources and better means to tackle drug buying and selling in the cyber domain.
    Keywords: dark web, drugs
    Date: 2017–10
  21. By: Dr. Albert Makochekanwa
    Abstract: The study analysed the various factors which contributed to the survival of manufacturing firms in Zimbabwe during the country’s crisis of the 1990s and the one between 2000 and 2008. The study employed both descriptive statistics using firm level data from World Bank Enterprise Survey, and a logistic econometric model. The findings from descriptive analysis indicate that survival of manufacturing firms in the 1990s was, among others, determined by such factors as access to finance (whether from bank loans, informal sources, or a company’s retained profits) to fund its operations including input procurement. Secondly, exportation was an important determinant which positively enhanced a given firm’s survival. Third, availability of electricity power to support manufacturing activities was a positive enhancement for firm survival. Findings from the 2011survey shows that the problem of foreign currency shortages were so severe that some firms were forced to exit the manufacturing business as they could not be able to source some of their vital inputs from the international market. Secondly, given that by 2011 corruption was a major problem for manufacturing firms, this implies that these gifts (bribes) increased the operational costs of these firms, and as such reduced their profit margins, thus negatively affecting their manufacturing business. Third, a number of firms interviewed said that they had been incurring losses on an annual basis due to electricity outages. At national level, firms lost around 6.9% of their total annual sales due to electricity power blackouts. Lastly, access to finance, especially from formal sources like banks, was also a major challenge as most banks were not providing loans to companies due to severe liquidity constraints. Turning to the exit (survival) logistic model which was estimated using the survey from 2011, the results showed availability of credit was an important factor affecting survival of manufacturing firms in the Zimbabwean context given that most firms’ balance sheets and net profits were rendered valueless, and as such firms found themselves looking for loans to finance working capital or make new investments that would ensure continuity and growth. The study also found that competition from both formal and informal competitors increased the probability of firms exiting the manufacturing sector. With regards to foreign ownership (or the extent to which a firm is a subsidiary of a multinational corporation), results indicate that foreign firms’ subsidiaries in Zimbabwe were more likely to stay in the economy comparable to domestic firms during economic crisis. The square of firm size (size2) was found to be negative and significant, implying that very large firms were assumed to be more established and expected to weather the common problems that bedevil small firms, and as such, they (very large firms) are less likely to exit. The impact of older firm (age2) on the probability of exit was negative and significant. As such, very old firms were assumed to be established and have more years of experience in conducting their line of business, thus less likely to exit from manufacturing activities.
    Date: 2017–03

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