nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒02‒12
twelve papers chosen by
Russell Pittman
United States Department of Justice

  1. A general model of price competition with soft capacity constraints By Cabon-Dhersin Marie-Laure; Drouhin Nicolas
  2. Bargaining over Collusion Profits under Cost Asymmetry and Demand Uncertainty By Saglam, Ismail
  3. Efficiency in large markets with firm heterogeneity By Dhingra, Swati; Morrow, John
  4. Vertical Integration, Supplier Behavior, and Quality Upgrading among Exporters By Hansman, Christopher; Hjort, Jonas; Le�n, Gianmarco; Teachout, Matthieu
  5. Declining Competition and Investment in the U.S. By Gutierrez, German; Philippon, Thomas
  6. The fall and rise of market power in Europe By John P. Weche; Achim Wambach
  7. The Anchoring Effect in Mergers and Acquisitions: Evidence from an Emerging Market By Anastasia Stepanova; Vladislav Savelyev; Malika Shaikhutdinova
  8. Markups, Markets Imperfections, and Trade Openness: Evidence from Ghana By Kaku Attah Damoah
  9. Market Structure and Investment in the Mobile Industry By François Jeanjean; Georges Vivien Houngbonon
  10. Can Competition Extend the Golden Age of Antibiotics? By Eswaran, Mukesh; Gallini, Nancy
  11. Competition and the public interest in the digital market for information By Lombardi, Claudio
  12. Modal choice between rail and road transportation : evidence from Tanzania By Iimi,Atsushi; Humphreys,Richard Martin; Mchomvu,Yonas Eliesikia

  1. By: Cabon-Dhersin Marie-Laure (Université de Rouen Normandie ; CREAM); Drouhin Nicolas (Ecole Normale Supérieure Paris-Saclay)
    Abstract: We propose a general model of oligopoly with firms relying on a two factor production function. In a first stage, firms choose a certain fixed factor level (capacity). In the second stage, firms compete on price, and adjust the variable factor to satisfy all the demand. When the factors are substitutable, the capacity constraint is "soft", implying a convex cost function in the second stage. We show that there is a unique equilibrium prediction in pure strategies, whatever the returns to scale, characterized by a price that increases with the number of firms up to a threshold. The main propositions are established under the general assumption that the production function is quasi-concave but the paper provides a general methodology allowing the model to be solved numerically for special parametrical forms.
    Keywords: price competition, tacit collusion, convex cost, capacity constraint, limit pricing strategy, returns to scale
    JEL: L13 D43
    Date: 2017–12–13
  2. By: Saglam, Ismail
    Abstract: In this paper we borrow from Ciarreta and Gutierrez-Hita (2012) a duopolistic industry structure with cost asymmetry and demand uncertainty, and using this structure we build a bargaining model to study the division of collusion profits -obtained from the joint selection of supply functions- under the possibility of side payments. In our model, we consider potential disagreement points obtained from the non-cooperative equilibrium of either the quantity competition or the supply function competition, and potential bargaining solutions splitting the gains from agreement either equally or proportionally according to the relative disagreement payoffs of the duopolists. Given any of these disagreement points and any of these bargaining solutions, we find that each duopolist has always incentive to join a collusive agreement. On the other hand, irrespective of whether the bargaining solution splits the gains from agreement equally or proportionally respecting the relative disagreement payoffs, the more efficient firm (the less efficient firm) in the cartel always obtains a higher agreement payoff when the disagreement point is obtained from the equilibrium of supply function competition (quantity competition). Given the studied disagreement points and bargaining solutions, we also find that bargaining over collusion profits always makes the more efficient firm worse off and the less efficient firm better off in comparison to a collusive agreement equalizing the marginal costs of these two firms.
    Keywords: Duopoly; collusion; bargaining; Cournot competition; supply function competition; uncertainty
    JEL: D43 L13
    Date: 2018–01–21
  3. By: Dhingra, Swati; Morrow, John
    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 marketdetermined 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: D6 L1
    Date: 2017–10–01
  4. By: Hansman, Christopher; Hjort, Jonas; Le�n, Gianmarco; Teachout, Matthieu
    Abstract: We study the relationship between exporters' organizational structure and output quality. If only input quantity is observable, theory predicts that vertical integration may be necessary to incentivize suppliers to increase input quality. Using data on suppliers' behavior, supplier ownership, supply transactions, and manufacturers' output by quality grade and exports from the Peruvian fishmeal industry, we show the following. After integrating with the plant being supplied and losing access to alternative pay-per-kilo buyers, suppliers take more quality-increasing and less quantity-increasing actions. Integration consequently causally increases output quality, and manufacturers integrate suppliers when facing high relative demand for high quality grades.
    JEL: D2 O1
    Date: 2017–12
  5. By: Gutierrez, German; Philippon, Thomas
    Abstract: We argue that the increasing concentration of US industries is not an efficient response to changes in technology and reflects instead decreasing domestic competition. Concentration has risen in the U.S. but not in Europe; concentration and productivity are negatively related; and industry leaders cut investment when concentration increases. We then establish the causal impact of competition on investment using Chinese competition in manufacturing, noisy entry in the late 1990s, and discrete jumps in concentration following large M&As. We find that more (less) competition causes more (less) investment, particularly in intangible assets and by industry leaders.
    Keywords: Concentration; investment; Markups
    Date: 2017–12
  6. By: John P. Weche (Leuphana University Lueneburg, Germany; Monopolies Commission, Bonn, Germany); Achim Wambach (Monopolies Commission, Bonn, Germany; Centre for European Economic Research (ZEW), Mannheim, Germany)
    Abstract: This paper presents an analysis of the recent developments of average market power in Europe by using a broad firm-level database for EU member states. To indicate competitive pressure at the firm-level, markups are estimated following De Loecker (2011), and De Loecker and Warzynski (2012). The analysis reveals a sharp drop in markups during the crisis, followed by a post-crisis increase. The European average has not yet reached its pre-crisis level, which is in contrast to results for the US, where average markups have climbed to pre-crisis levels already in 2011. There is significant heterogeneity among European economies and the pre-crisis levels do have been exceeded in some countries.
    Keywords: Market Power, Markups, Europe, Crisis
    JEL: E2 D2 D4 L1
    Date: 2018–01
  7. By: Anastasia Stepanova (National Research University Higher School of Economics); Vladislav Savelyev (National Research University Higher School of Economics); Malika Shaikhutdinova (National Research University Higher School of Economics)
    Abstract: This article examines the presence of the reference price effect in mergers and acquisitions in Russia, which can act as a distortion in investor perception of the influence a deal has on a company. In this study we use the Russian market as a laboratory for the investigation of behavioral effects in a relatively inefficient market. We find a relationship between the acquirer’s announcement period return and the proximity of its pre-announcement share price to the 52-week high. The 52-week high serves as a salient anchor even though it is economically irrelevant for valuation purposes. This effect appears to be stronger for deals associated with higher levels of uncertainty. The findings confirm the presence of the anchoring bias in evaluating the effect of a merger or acquisition announcement by Russian investors. We demonstrate a significant anchoring effect even for deals with a blocking (>10%) or a controlling stake (>25%) in an emerging market with a highly concentrated ownership.
    Keywords: Mergers; Acquisitions; Anchoring; Reference point; Behavioral corporate finance
    JEL: G34
    Date: 2018
  8. By: Kaku Attah Damoah (Dipartimento di Scienze per l'Economia e l'Impresa)
    Abstract: This paper investigates the impact of Ghana’s WTO accession on firm-level product and labour market imperfections. We exploit a rich dataset of firm-level information to estimate both markups and the degree of monopsony power enjoyed by manufacturing firms. Results suggest that price-cost margins declined, while the degree of monopsony power increased in the wake of WTO accession. These diverging dynamics suggests that firms compress real wages to offset loss of market power in the product market due to increased international competition. This results in an increase of the market imperfection gap, which gradually erodes the pro-competitive gains from trade. The paper contributes to the literature by identifying channels through which allocative inefficiencies and misallocation can persist even after trade liberalisation.
    Keywords: Markups, Market Imperfections, Trade Openness, Africa, Ghana
    JEL: F13 L11 O14 O24
    Date: 2017
  9. By: François Jeanjean (Orange Labs - Orange Labs [Belfort] - France Télécom); Georges Vivien Houngbonon (LGI - Laboratoire de Genie Industriel - CentraleSupélec)
    Abstract: The impact of market structure, that is the number of firms and asymmetry , on investment is an important topic in the mobile industry. However, previous literature remains ambiguous about the direction of the relationship. This paper provides an empirical evidence of the impact of market structure on investment in the European mobile industry. The empirical assessment is based on a Salop model with vertical differentiation. Consistently with the prediction of this model, we find that both the number of operators and market share asymmetry have significant effects on investment. In symmetric markets, investment per operator falls with the number of operators, with larger effects for operators that lose market share more than the average. The industry investment rises with the number of operators in the short run, but eventually falls in the long run due to significant adjustment costs of investment in the mobile industry. These findings suggest that investment should be taken into account when analysing the welfare effects of market structure in the mobile industry.
    Keywords: Mobile Telecommunications,Market structure,Investment
    Date: 2017
  10. By: Eswaran, Mukesh; Gallini, Nancy
    Abstract: Countries world wide face an imminent global health crisis. As resistant bacteria render the current stock of antibiotics ine¤ective and the pipeline of back-up drugs runs dry, pharmaceutical companies are abandoning their research in antibiotics. In this paper we ask: Why are pharmaceutical companies closing antibiotic research labs when the stakes are so high? Implementing a simple dynamic framework, we show that the environment for new antibiotics is relatively hostile, compared to other medicines, due to market failures that result in excessive use and acceleration of natural selection. The analysis reveals, however, that increased competition between drugs can actually slow down the rate of resistance without, in some cases, diluting research incentives. This result, which is bolstered by scientific evidence, arises from a fundamental interplay between economic and biological externalities. We propose a patent-antitrust regime for aligning drug research and usage with those of the social planner, which implies an alternative justification of the patent system.
    Keywords: antibiotic resistence, market competition, R&D incentives, patents
    JEL: I11 I12 I13 O31 O38
    Date: 2018–01–29
  11. By: Lombardi, Claudio
    Abstract: Our behaviour on the internet is continuously monitored and processed through the elaboration of big data. Complex algorithms categorize our choices and personalise our online environment, which is used to propose, inter alia, bespoke news and information. It is in this context, that the competition between sources of information in the "market for ideas", takes place. While these mechanisms bring efficiency benefits, they also have severe downsides that only very recently we have begun to uncover. These drawbacks regard not only deadweight losses caused by market distortions, but also public policy issues, in particular in case of politically relevant news. What are the public and private interest concerns impacted by this practice? Can this algorithm-driven selection of news be captured by competition laws? The digital news market, as constructed around online advertising, presents peculiarities which necessitate a reframing of standard approaches to traditional information markets, and of the creation and distribution of ideas.
    Keywords: competition law,antitrust,marketplace of ideas,online behavioural targeting,public interest,post-truth society,fake news,online environment
    Date: 2017
  12. By: Iimi,Atsushi; Humphreys,Richard Martin; Mchomvu,Yonas Eliesikia
    Abstract: Rail transport generally has the advantage for large-volume long-haul freight operations. The literature generally shows that shipping distance, costs, and reliability are among the most important determinants of people's modal choice among road, rail, air, and coastal shipping transport. However, there is little evidence in Africa, although the region historically possesses significant rail assets. Currently, Africa's rail transport faces intense competition against truck transportation. With firm-level data, this paper examines shippers'modal choice in Tanzania. The traditional multinomial logit and McFadden?s choice models were estimated. The paper shows that rail prices and shipping distance and volume are important determinants of firms'mode choice. The analysis also finds that the firms'modal choice depends on the type of transactions. Rail transport is more often used for international trading purposes. Exporters and importers are key customers for restoring rail freight operations. Rail operating speed does not seem to have an unambiguous effect on firms'modal selection.
    Keywords: Transport Economics Policy&Planning
    Date: 2017–08–29

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