nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒03‒12
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Does the Potential to Merge Reduce Competition? By Hackbarth, Dirk; Taub, Bart
  2. Collusion in Two-Sided Markets By Lefouili, Yassine; Pinho, Joana
  3. Naked exclusion under exclusive-offer competition By Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
  4. Common Ownership, Concentration and Corporate Conduct By Martin C. Schmalz
  5. The Multiplier Effect in Two-Sided Markets with Bilateral Investments By Deniz Dizdar; Benny Moldovanu; Nora Szech
  6. Differentiated Durable Goods Monopoly: A Robust Coase Conjecture By Nava, Francesco; Schiraldi, Pasquale
  7. Existence and Optimality of Cournot-Nash Equilibria in a Bilateral Oligopoly with Atoms and an Atomless Part By Francesca Busetto; Giulio Codognato; Sayantan Ghosal; Ludovic A. Julien; Simone Tonin
  8. Patent Protection and Threat of Litigation in Oligopoly By Capuano, Carlo; Grassi, Iacopo
  9. Horizontal Mergers and Innovation By Jullien, Bruno; Lefouili, Yassine
  10. Multimarket Linkages, Cartel Discipline and Trade Costs By Delina Agnosteva; Constantinos Syropoulos; Yoto V. Yotov
  11. Gains from Multinational Competition for Cross-Border Firm Acquisition By Onur A. Koska
  12. Public Communication and Collusion in the Airline Industry By Aryal, Gaurab; Ciliberto, Federico; Leyden, Benjamin
  13. Effect of Utility Deregulation and Mergers on Consumer Welfare By Ralph Sonenshine
  14. A Primer on Capacity Mechanisms By Fabra, N.
  15. Strategic Bidding of Electric Power Generating Companies: Evidence from the Australian National Energy Market By Mardi Dungey; Ali Ghahremanlou; Ngo Van Long
  16. Information and Transparency in Wholesale Electricity Markets: Evidence from Alberta By Brown, David P.; Eckert, Andrew; Lin, James
  17. Restructuring the Chinese Electricity Supply Sector: An assessment of the market pilot in Guangdong Province By Pollitt, M.; Yang, C.; Chen, H.
  18. Bank capital buffers around the world: Cyclical patterns and the effect of market power By Carvallo Valencia, Oscar Alfonso; Ortiz Bolaños, Alberto

  1. By: Hackbarth, Dirk; Taub, Bart
    Abstract: We study anti-competitive mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge, which trades off benefits of avoiding price wars against the costs of merging. There are three results. First, mergers are optimal when collusion fails (i.e., firms sufficiently deviate from a collusive regime). Second, long periods of collusion are likely, because colluding is dynamically stable. Therefore, mergers are rare. Third, mergers (and, in particular, lower merger costs) decrease pre-merger collusion, as punishments by price wars are weakened. Thus, although anti-competitive mergers harm competition ex-post, barriers and costs of merging due to regulation should be reduced to promote competition ex-ante.
    Keywords: Competition; Horizontal mergers; imperfect information; Industry Structure; market power
    JEL: D43 G34 L12 L13
    Date: 2018–02
  2. By: Lefouili, Yassine; Pinho, Joana
    Abstract: This paper explores the incentives for, and the effects of, collusion in prices between two-sided platforms. We characterize the most profitable sustainable agreement when platforms collude on both sides of the market and when they collude on a single side of the market. Under two-sided collusion, prices on both sides are higher than competitive prices, implying that agents on both sides become worse off as compared to the competitive outcome. An increase in cross-group externalities makes two-sided collusion harder to sustain, and reduces the harm from collusion suffered by the agents on a given side as long as the collusive price on that side is lower than the monopoly price. When platforms collude on a single side of the market, the price on the collusive side is lower (higher) than the competitive price if the magnitude of the cross-group externalities exerted on that side is sufficiently large (small). As a result, one-sided collusion may benefit the agents on the collusive side and harm the agents on the competitive side.
    Keywords: Collusion; Two-sided markets; Cross-group externalities
    JEL: D43 L41
    Date: 2018–02
  3. By: Hiroshi Kitamura; Noriaki Matsushima; Misato Sato
    Abstract: This study constructs a model of anticompetitive exclusive-offer competition between two existing upstream firms. Under exclusive-offer competition, the upstream firm's profit depends on the rival's exclusive offer. If the rival makes an exclusive offer acceptable for the downstream firm, the upstream firm is excluded unless it succeeds in exclusion. Consequently, the upper bound of exclusive offers becomes higher than when one of the upstream firms is a potential entrant that cannot make any exclusive offer. Thus, the exclusion of the existing upstream firm can be an equilibrium outcome even in the case where the potential entrant is never excluded.
    Date: 2018–03
  4. By: Martin C. Schmalz
    Abstract: The question of whether and how partial common-ownership links between strategically interacting firms affect firm behavior has been the subject of theoretical inquiry for decades. Since then, consolidation and increasing concentration in the asset-management industry has led to more pronounced common ownership concentration (CoOCo). Moreover, recent empirical research has provided evidence consistent with the literature’s key predictions. The resulting antitrust concerns have received much attention from policy makers worldwide. However, the implications are more general: CoOCo affects the objective function of the firm, and therefore has implications for all subfields of economics studying corporate conduct - including corporate governance, strategy, industrial organization, and all of financial economics. This article connects the papers establishing the theoretical foundations, reviews the empirical and legal literatures, and discusses challenges and opportunities for future research.
    Keywords: ownership, control, network, industry concentration, antitrust, objective of the firm, shareholder unanimity
    Date: 2018
  5. By: Deniz Dizdar; Benny Moldovanu; Nora Szech
    Abstract: Agents in a finite two-sided market are matched assortatively, based on costly investments. Besides signaling private, complementary types, investments generate direct benefits for partners. We explore quantitative properties of the equilibrium investment behavior. The bilateral external benefits induce an investment multiplier effect. This multiplier effect depends in a complex way on agents’ uncertainty about their own rank and about the types and investments of potential partners. We characterize how the multiplier effect hinges on market size, and how it interacts with other important factors such as the costs of investment and the signaling incentives induced by competition.
    Keywords: matching, signaling, investment, multiplier effect
    JEL: C78 D44 D82
    Date: 2017
  6. By: Nava, Francesco; Schiraldi, Pasquale
    Abstract: The paper analyzes a durable good monopoly problem in which multiple varieties can be produced and sold. A robust Coase conjecture establishes that the market eventually clears, that profits exceed static optimal market-clearing profits, and that profits converge to this lower bound in all stationary equilibria when prices can be revised instantaneously. In contrast to the one-variety case though, equilibrium pricing is neither efficient nor minimal (that is, equal to the maximum between marginal cost an the minimal value). Conclusions apply even when products can be scrapped albeit at possibly smaller mark-ups. If so, a novel motive for selling high cost products naturally emerges. Moreover, with positive marginal costs, cross-subsidization arises as a result of equilibrium pricing. The online appendix delivers insights on product design.
    Date: 2018–02
  7. By: Francesca Busetto; Giulio Codognato; Sayantan Ghosal; Ludovic A. Julien; Simone Tonin
    Abstract: We consider a bilateral oligopoly version of the Shapley window model with large traders, represented as atoms, and small traders, represented by an atomless part. For this model, we provide a general existence proof of a Cournot-Nash equilibrium that allows one of the two commodities to be held only by atoms. Then, we show, using a corollary proved by Shitovitz (1973), that a Cournot-Nash allocation is Pareto optimal if and only if it is a Walras allocation.
    Keywords: Shapley window model; Atoms; Atomless part; Cournot–Nash equilibrium; Optimality
    JEL: C72 D51
    Date: 2018
  8. By: Capuano, Carlo; Grassi, Iacopo
    Abstract: In recent years, the increasing awarding of patents has captured the attention of scholars operating in different fields. The economic literature has studied the causes of this proliferation; we propose an entry game focusing on one of the consequences, showing how an incumbent may create a patent portfolio in order to control market entry and to collude. The incumbent fixes the level of patent protection and the threat of denunciation reduces the entrant's expected profits; moreover, if the entrant deviates from collusion, the incumbent can strengthen punishment suing the competitor for patent infringement, reducing her incentive to deviate. Our analysis suggests that antitrust authorities should pay attention to the level of patent protection implemented by the incumbent and note whether the holder of a patent reacts to entry by either suing or not suing the competitor. In the model, we use completely general functional forms in analyzing the issues, and this allows us to obtain general results not depending on the assumptions about the kind of oligopolistic competition.
    Keywords: patents,litigation,collusion,entry game
    JEL: D43 K21 L13
    Date: 2018
  9. By: Jullien, Bruno; Lefouili, Yassine
    Abstract: This paper discusses the effects of horizontal mergers on innovation. We rely on the existing academic literature and our own research work to present the various positive and negative effects of mergers on innovation. Our analysis shows that, even in the absence of technological spillovers and R&D complementarities, the overall impact of a merger on innovation may be positive. We derive a number of policy implications regarding the way innovation effects should be handled by competition authorities in merger control and highlight the differences with the analysis of price effects.
    Keywords: Merger Policy; Innovation; R&D Investments
    JEL: K21 L13 L40
    Date: 2018–02
  10. By: Delina Agnosteva; Constantinos Syropoulos; Yoto V. Yotov
    Abstract: We build a model of tacit collusion between firms that operate in multiple markets to study the effects of trade costs. A key feature of the model is that cartel discipline is endogenous. Thus, markets that appear segmented are strategically linked via the incentive compatibility constraint. Importantly, trade costs affect cartel shipments and welfare not only directly but also indirectly through discipline. Using extensive data on international cartels, we find that trade costs exert a negative and significant effect on cartel discipline. In turn, cartel discipline has a negative and significant impact on trade flows, in line with the model.
    Keywords: endogenous cartel discipline, competitiveness, multimarket contact, welfare, trade flows, trade costs, trade policy, gravity
    JEL: D43 F10 F12 F13 F15 F42 L12 L13 L41
    Date: 2017
  11. By: Onur A. Koska (Department of Economics, Middle East Technical University, Ankara, Turkey)
    Abstract: This study shows that when there is multinational competition for foreign acquisition, the strategic use of a consumer welfare argument in regulating foreign market entry leads to a preemptive foreign acquisition. Even under fierce competition, foreign acquisition will emerge as part of a non-cooperative equilibrium (although multinationals would have gained more had they been able to credibly commit to a cooperative equilibrium of independent foreign sales, either via greenfield investment or trade under complete liberalization) which increases local welfare by more than both the case without foreign market entry and the case with foreign market entry via independent foreign sales.
    Keywords: Cross-Border Firm Acquisitions; Foreign Market Entry Regulations; Greenfield Investment; Trade; Consumer Welfare
    JEL: F23
    Date: 2018–01
  12. By: Aryal, Gaurab; Ciliberto, Federico; Leyden, Benjamin
    Abstract: We investigate whether the top management of all legacy U.S. airlines used their quarterly earnings calls as a mode of communication with other airlines to coordinate output reduction (fewer passenger seats) on competitive routes. We build an original and novel dataset on the public communication content from the earnings calls, and use Natural Language Processing techniques from computational linguistics to parse and code the text from earnings calls by airline executives to measure communication. Then we determine if mentioning terms associated with ``capacity discipline'' is a way to sustain collusion on capacity. The estimates show that when all legacy carriers in a market communicate ``capacity discipline,'' it leads to a substantial reduction in the number of seats offered in the market. We find that the effect is driven entirely by legacy carriers, and also that the reduction is larger in smaller markets. Finally, we leverage our high-dimensional text data to develop novel approaches to implement falsification tests and check conditional exogeneity, and confirm that our finding ---legacy airlines use public communication regarding capacity discipline to collude ---is not spurious.
    Keywords: Airlines; Capacity Discipline; Collusion; communication; Text Data
    JEL: D22 L12 L41 L68
    Date: 2018–02
  13. By: Ralph Sonenshine
    Abstract: In the late 1990s, many U.S. states deregulated electric utilities, allowing for competition among power generators. Deregulated states then adopted a retail choice program, allowing customers to choose their power provider. In addition, a significant merger wave among large utility companies ensued after deregulation. What was the impact of these changes on consumer welfare? While this issue has been widely studied, the results remain ambiguous. This study examines the effects of these events, by analyzing electricity price and output changes among deregulated and regulated states from 2001 through 2014. The study finds that deregulation may have had a positive effect when states adopted certain measures, such as retail choice or fuel changes, that enhanced competition and lowered costs
    Keywords: Deregulation, Mergers, Regulated Industries, natural
    JEL: L94 L98 G34 G14
    Date: 2017
  14. By: Fabra, N.
    Abstract: A simple model is built up to capture the key drivers of investment and pricing incentives in electricity markets. The focus is put on the interaction between market power and investment incentives, and the trade-o_ it introduces when designing the optimal regulatory instruments. In contrast to the energy-only market paradigm that assumes perfect competition, our model demonstrates that in the presence of market power scarcity prices do not promote efficient investments, even among risk-neutral investors. Combining price caps and capacity payments allows to disentangle the two-fold objective of inducing the right investment incentives while mitigating market power. Bundling capacity payments with financial obligations further mitigates market power as long as strike prices are set sufficiently close to marginal costs.
    Keywords: scarcity pricing, market power, capacity markets, reliability options
    JEL: L13 L51 L94
    Date: 2018–02–13
  15. By: Mardi Dungey; Ali Ghahremanlou; Ngo Van Long
    Abstract: We extend existing theoretical frameworks describing electricity markets where each generator provides a Market Operator (MO) with a supply schedule in advance. The MO combines these with demand forecasts to produce equilibrium prices and instructs firms on their dispatch. We incorporate the possibility that generating firms may rebid (or revise) their supply schedule prior to dispatch - an important feature of markets in many countries which has not previously been included in theoretical models. We show that a dominant firm can gain substantially by manipulating its bids, and take advantage of the opportunity to submit rebids. In the Australian National Energy Market (NEM) where settlement prices are an average of six dispatch prices, it can, for example, withhold capacity at lower prices for the first bid in a period, creating a price hike, and then add capacity at lower prices to ensure dispatch. Using data from the Australian NEM we provide the first empirical evidence consistent with the hypothesized theoretical behaviour in the observed data.
    Keywords: electricity markets, Australia, rebidding
    JEL: Q41 D43 D23
    Date: 2017
  16. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics); Lin, James (Alberta Department of Energy, Government of Alberta)
    Abstract: We examine the role of information transparency in Alberta's wholesale electricity market. Using data on firms' bidding behavior, we analyze whether firms utilize information revealed in near real-time through the Historical Trading Report (HTR), which is released 10 minutes after each hour and contains a complete (de-identified) list of every firms' bids into the wholesale market from the previous hour. We demonstrate that firms are often able to identify the offers of specific rivals by offer patterns adopted by those firms. For one of these firms, these patterns are associated with higher offer prices. This is consistent with allegations by Alberta's Market Surveillance Administrator that firms may be utilizing unique bidding patterns to reveal their identities to their rivals to elevate market prices. We show that certain firms respond to rival offer changes with a lag consistent with responding to information revealed through the HTR, and that they respond differently to different firms, suggesting that they are able to infer identification.
    Keywords: Electricity; Market Power; Information; Regulation; Antitrust
    JEL: D43 L40 L51 L94 Q48
    Date: 2018–02–28
  17. By: Pollitt, M.; Yang, C.; Chen, H.
    Abstract: This paper examines power sector reform in China's largest province, Guangdong, following the publication of the No.9 document of the China State Council on 'Deepening Reform of the Power Sector' in March 2015. We look at the operation of the pilot wholesale power market in Guangdong in the light of international experience. We discuss how the power market pilot is working in Guangdong and the extent to which the current market design is in line with successful power markets we see elsewhere. We examine the evidence on whether the market reform has successfully brought new players into the electricity system in Guangdong. We consider the effects of the reform on the operational and investment decisions of firms in the sector. We conclude with several lessons for the Chinese government's ongoing power sector reform programme.
    Keywords: power market reform, international experience, Guangdong, China, industrial electricity price
    JEL: L94
    Date: 2018–02–26
  18. By: Carvallo Valencia, Oscar Alfonso; Ortiz Bolaños, Alberto
    Abstract: We examine the effect of competition and business cycles on bank capital buffers around the world. We use a dataset of 3,461 banks from 25 developed and 54 developing countries over the 2001-2013 period. Banks tend on average to exhibit pro-cyclical behavior. But capital buffers seem to be more pro-cyclical in developing countries. Our results show that more competition leads to higher buffers in developed countries but to lower buffers in developing ones. This evidence suggests that the “competition-stability” thesis adheres in developed economies, whereas “competition-fragility” makes more sense in developing countries. This asymmetric result may have important policy implications, particularly with regard to new, globally-negotiated capital adequacy standards.
    Keywords: Bank capital buffers; Business cycle; Regulation; Market power
    JEL: G21 L1 L5
    Date: 2018–02–18

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