nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒12‒10
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Multiproduct Mergers and Quality Competition By Johnson, Justin Pappas; Rhodes, Andrew
  2. Heterogeneous Consumer Expectations and Monopoly Pricing for Durables with Network Externalities By Hattori, Keisuke; Zennyo, Yusuke
  3. On bundling and entry deterrence By Andrea Greppi; Domenico Menicucci
  4. Fixed Costs Matter By Jurjen (J.J.A.) Kamphorst; Ewa (E.) Mendys-Kamphorst; Bastian (B.) Westbrock
  5. M&A Advisory and the Merger Review Process By Michele Bisceglia; Salvatore Piccolo; Emanuele Tarantino
  6. Inventory Behavior, Demand, and Productivity in Retail By Maican, Florin; Orth, Matilda
  7. Minority share acquisitions and collusion: evidence from the introduction of national leniency programs By Heim, Sven; Hueschelrath, Kai; Laitenberger, Ulrich; Spiegel, Yossi
  8. The Effectiveness of Leniency Programs when Firms choose the Degree of Collusion By Winand Emons
  9. Kartele i patenty a nakłady badawczo-rozwojowe przedsiębiorstw By Karbowski, Adam; Prokop, Jacek
  10. Using Empirical Marginal Cost to Measure Market Power in the US Economy By Robert E. Hall
  11. Competition policy issues in mobile network sharing: a European perspective By Zoltan Papai; Gergely Csorba; Peter Nagy; Aliz McLean
  12. Cobb-Douglas preferences and pollution in a bilateral oligopoly market By Anicet Kabre
  13. Increase-Decrease Game under Imperfect Competition in Two-stage Zonal Power Markets –​ Part I: Concept Analysis By Sarfati, Mahir; Hesamzadeh, Mohammad Reza; Holmberg, Pär
  14. Increase-Decrease Game under Imperfect Competition in Two-stage Zonal Power Markets –​ Part II: Solution Algorithm By Sarfati, Mahir; Hesamzadeh, Mohammad Reza; Holmberg, Pär
  15. Testing the Quiet Life Hypothesis in the African Banking Industry By Simplice A. Asongu; Nicholas M. Odhiambo
  16. Complements and Substitutes in Sequential Auctions: The Case of Water Auctions By Donna, Javier; Espin-Sanchez, Jose
  17. Fading Choice: Transport Costs and Variety in Consumer Goods By Jan Willem Gunning; Pramila Krishnan; Andualem T Mengistu
  18. Examination of the international market power for Iranian pistachios By Farajzadeh, Z.; Amiraslany, A.
  19. Structure and Concentration of The Brazilian Sugarcane Market By Scalco, P.; Bastos, A.
  20. Political Discretion and Antitrust Policy: Evidence from the Assassination of President McKinley By Richard B. Baker; Carola Frydman; Eric Hilt

  1. By: Johnson, Justin Pappas; Rhodes, Andrew
    Abstract: We investigate mergers in markets where quality differences between products are central. In our model, firms may sell multiple products, and merging and non-merging firms may reposition their product lines by adding or removing products following a merger. We find that such mergers are materially different from those studied in the existing literature. Mergers without synergies may raise consumer surplus, but only when the pre-merger industry structure satisfies certain observable features. Synergies may lower consumer surplus. Mergers are more readily profitable when an industry exhibits multiple qualities, and mergers between small numbers of firms with small market shares may be profitable. Some nonmerging firms may benefit while others lose following a merger. We also provide a new measure of industry concentration: the Quality-adjusted Herfindahl-Hirschman Index extends the standard Herfindahl-Hirschman Index to markets in which quality differences are central.
    Date: 2018–11
  2. By: Hattori, Keisuke; Zennyo, Yusuke
    Abstract: This paper studies the optimal pricing and diffusion of durable goods that exhibit positive network externalities, when consumers are heterogeneous in their expectations about future network sizes. We consider the existence of naive consumers, as well as of sophisticated consumers having fulfilled expectations. We find that the firm charges the sequential-diffusion pricing that makes sophisticated consumers function as early adopters, unless consumers quickly become bored with using the goods and/or unless the firm heavily discounts its future profits. We also compare the profitability of three possible pricing strategies with different commitment powers: fixed, responsive, and pre-announced pricing.
    Keywords: durable goods; network externalities; diffusion process; consumer naivete; dynamic pricing
    JEL: D21 D42 L12 L14
    Date: 2018–04–15
  3. By: Andrea Greppi; Domenico Menicucci
    Abstract: A multiproduct dominant firm faces the threat of entry from another multiproduct firm or from single-product firms. We inquire whether the possibility of bundling by the dominant firm is more effective in deterring entry in one setting or the other. We extend the analysis of a model in Hurkens et al. (2018) to explore how the dominance level affects the comparison. For instance, for intermediate dominance levels an integrated firm is more vulnerable to bundling than separate firms, but bundling is a credible action for the dominant firm more often when it faces separate rivals than an integrated rival.
    Keywords: Competitive Bundling, Entry deterrence.
    JEL: D43 L13 L41
    Date: 2018
  4. By: Jurjen (J.J.A.) Kamphorst (Erasmus University Rotterdam); Ewa (E.) Mendys-Kamphorst (CEG); Bastian (B.) Westbrock (Utrecht University)
    Abstract: According to standard economic wisdom, fixed costs should not matter for pricing decisions. However, outside economics, it is widely accepted that firms need to increase their prices after a fixed cost rise. In this note, we show that a liquidity-constrained firm that maximizes lifetime profits should increase its price after a fixed cost increase, if future profits depend positively on current sales. The reason is that then the optimal price is lower than the one that maximizes the current profit. Because the higher cost necessitates higher current profits to avoid bankruptcy, the firm needs to increase its price.
    Keywords: fixed costs; sunk costs; brand loyalty; switching costs; pricing
    JEL: D42 L11
    Date: 2018–11–28
  5. By: Michele Bisceglia (Università di Bergamo); Salvatore Piccolo (Università di Bergamo and CSEF); Emanuele Tarantino (University of Mannheim, MaCCI and CEPR)
    Abstract: Two firms propose a merger to the antitrust authority. They are uninformed about the efficiencies generated by the merger, but can hire an expert to gather information on their behalf. The authority is also uninformed about the merger's efficiencies, but can run a costly internal investigation to learn them. We analyze the effect of the disclosure of the expert's contract on consumer welfare, and show that consumers are not necessarily better off with disclosure. This negative effect hinges on a free-riding problem between expert and authority in the information acquisition game, and is more relevant in highly competitive industries.
    Keywords: Advice, Competition Policy, Mergers, Advisory Contract, Disclosure.
    JEL: D43 L11 L42 L81
    Date: 2018–11–26
  6. By: Maican, Florin (Department of Economics); Orth, Matilda (Research Institute of Industrial Economics (IFN))
    Abstract: This paper studies the factors underlying the heterogeneity in inventory behavior and performance across retail stores. We use a dynamic model of multi-product retailers and local competition to estimate store productivity and consumers’ perceived quality of the shopping experience, and we analyze their relationship with inventory behavior and product variety. Using novel and detailed data on Swedish stores and their products, we find that stores learn from demand to improve future productivity. Store productivity is the main primitive that increases inventory turnover and product variety, and this increase is larger for stores with already high inventory turnover. Stores in small markets with intense competition from rivals have higher inventory turnover. Consumers in large markets and markets with large investments in technology benefit from a broader product variety. Counterfactual experiments show that the increase in inventory turnover due to innovations in productivity is three times greater when uncertainty in demand is reduced by 30 percent. Our analysis highlights important trade-offs between productivity and demand that allow retailers to reach high levels of inventory turnover and offer a broad product variety to consumers.
    Keywords: Productivity; Inventory performance; Supply chain management; Product variety
    JEL: L11 L13 L25 L81 M21
    Date: 2018–11–08
  7. By: Heim, Sven; Hueschelrath, 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: cartel stability; Collusion; Leniency Programs; minority shareholdings
    JEL: G34 K21 L4
    Date: 2018–11
  8. By: Winand Emons
    Abstract: An antitrust authority deters collusion using nes and a leniency program. It chooses the probability of an investigation. Firms pick the degree of collusion: The more they collude, the higher are pro ts, but so is the probability of detection. Firms thus trade-o higher pro ts against higher expected nes. If rms are suciently patient, leniency is ine ective; it may even increase collusion. Increasing the probability of an investigation at low levels does not increase deterrence. Increasing the probability of an investigation at high levels reduces collusion, yet never completely.
    Keywords: antitrust, cartels, deterrence, leniency
    JEL: D43 K21 K42 L40
    Date: 2018–10
  9. By: Karbowski, Adam; Prokop, Jacek
    Abstract: The aim of this paper is to assess the impact of R&D cartel, full industry cartel, and patents on process innovation of companies, and consumer surplus, and total welfare. The reference scenario is here the Cournot rivalry without patent protection of inventions. In this paper, the quadratic costs of production of goods and R&D investments are assumed. The results of modelling and numerical analyses allowed to state that R&D cooperation (in the form of R&D cartel) is more effective and socially preferred instrument to stimulate innovation in the industry than interfirm rivalry motivated by patents. However, in industries characterized by relatively weak or medium knowledge spillovers, the most effective tool to enhance innovation is interfirm rivalry without patents. The latter constitutes one more argument against patents.
    Keywords: research and development; patents; cartels; Cournot competition; quadratic costs
    JEL: L1 O3
    Date: 2018
  10. By: Robert E. Hall
    Abstract: Market power arises in the case where a seller is aware that raising output will depress price. In the profit-maximizing equilibrium with market power, price exceeds marginal cost. The Lerner index---the ratio of price less marginal cost to the price---is a widely accepted measure of market power. Measuring marginal cost is a challenge. This paper develops and applies a direct empirical approach---marginal cost is measured as the ratio of the observed change in cost to the observed change in output. Because marginal cost is a partial derivative, both changes need to be adjusted for other sources of change. Thus marginal cost is the ratio of (1) the change in cost not associated with changes in input prices to (2) the change in output not associated with productivity change. I develop data for the 60 KLEMS industries for this measure. I find a typical Lerner index of 0.15. Lerner indexes grew moderately between 1988 and 2015.
    JEL: D24 L1
    Date: 2018–11
  11. By: Zoltan Papai (Infrapont Economic Consulting, Hungary); Gergely Csorba (Center of Economics and Regional Sciences – Institute of Economics Hungarian Academy of Sciences and Infrapont Economic Consulting); Peter Nagy (Infrapont Economic Consulting); Aliz McLean (Infrapont Economic Consulting)
    Abstract: Network sharing agreements have become increasingly widespread in mobile telecommunications markets. They carry undeniable advantages to operators and consumers alike, but also the potential for consumer harm. We emphasize that not all NSAs are created equal: the assessment of harms and counterweighing benefits to customers due to an NSA is a complex endeavour. In this paper, we present a framework for the competitive assessment of NSAs, detailing the possible concerns that may arise, the main factors that influence their seriousness, ways to mitigate the concerns and the principles of assessing efficiency benefits.
    Keywords: mobile markets, network sharing, competition, competition assessment
    JEL: K21 L13 L41
    Date: 2018–10
  12. By: Anicet Kabre
    Abstract: In this note, we introduce pollution and examine its effects in a finite bilateral oligopoly model where agents have asymmetric Cobb-Douglas preferences. We define two strategic equilibria: the Stackelberg-Cournot equilibrium with pollution (SCEP) and the Cournot equilibrium with pollution (CEP). While the supplied quantities of the polluting and the non-polluting good depend on the preferences of all economic agents in the case of symmetric preferences, we show that when preferences are asymmetric, i) at both equilibria, each polluter’s equilibrium supply depends only on the non-polluters’ preferences for the non-polluting good; ii) at the CEP and the SCEP, the elasticity of the polluters emissions is greater when nonpolluters preferences for the non-polluting good increase, compared to an increase in their own preferences for this good; iii) firm’s emissions’elasticity decreases with the market power if their marginal cost is lower than their competitor.
    Keywords: Bilateral oligopoly; Pollution; Cobb-Douglas preferences
    JEL: D43 D51 Q52
    Date: 2018
  13. By: Sarfati, Mahir (Research Institute of Industrial Economics (IFN)); Hesamzadeh, Mohammad Reza (Royal Institute of Technology (KTH)); Holmberg, Pär (Research Institute of Industrial Economics (IFN))
    Abstract: This paper is part I of a two-part paper. It proposes a two-stage game to analyze imperfect competition of producers in zonal power markets with a day-ahead and a real-time market. We consider strategic producers in both markets. They need to take both markets into account when deciding what to bid in each market. The demand shocks between these markets are modeled by several scenarios. The two-stage game is formulated as a Twostage Stochastic Equilibrium Problem with Equilibrium Constraints (TS-EPEC). Then it is further reformulated as a two-stage stochastic Mixed-Integer Linear Program (MILP). The solution of this MILP gives the Subgame Perfect Nash Equilibrium (SPNE). To tackle multiple SPNE, we design a procedure which finds all SPNE with different total dispatch costs. The proposed MILP model is solved using Benders decomposition embedded in the CPLEX solver. The proposed MILP model is demonstrated on the 6-node and the IEEE 30-node example systems.
    Keywords: Two-stage game; Zonal pricing; Two-stage equilibrium problem with equilibrium constraints; Wholesale electricity market
    JEL: C61 C63 C72 D43 L13 L94
    Date: 2018–11–27
  14. By: Sarfati, Mahir (Research Institute of Industrial Economics (IFN)); Hesamzadeh, Mohammad Reza (Royal Institute of Technology (KTH)); Holmberg, Pär (Research Institute of Industrial Economics (IFN))
    Abstract: In part I of this paper, we proposed a Mixed-Integer Linear Program (MILP) to analyze imperfect competition of oligopoly producers in two-stage zonal power markets. In part II of this paper, we propose a solution algorithm which decomposes the proposed MILP model into several subproblems and solve them in parallel and iteratively. Our solution algorithm reduces the solution time of the MILP model and it allows us to analyze largescale examples. To tackle the multiple Subgame Perfect Nash Equilibria (SPNE) situation, we propose a SPNE-band approach. The SPNE band is split into several subintervals and the proposed solution algorithm finds a representative SPNE in each subinterval. Each subinterval is independent from each other, so this structure enables us to use parallel computing. We also design a pre-feasibility test to identify the subintervals without SPNE. Our proposed solution algorithm and our SPNE-band approach are demonstrated on the 6-node and the modified IEEE 30-node example systems. The computational tractability of our solution algorithm is illustrated for the IEEE 118-node and 300-node systems.
    Keywords: Modied Benders decomposition; Multiple Subgame Perfect Nash equilibria; Parallel computing; Wholesale electricity market; Zonal pricing
    JEL: C61 C63 C72 D43 L13 L94
    Date: 2018–11–27
  15. By: Simplice A. Asongu (Yaoundé/Cameroon); Nicholas M. Odhiambo (University of South Africa, Pretoria, South Africa)
    Abstract: The Quiet Life Hypothesis (QLH) is the pursuit of less efficiency by firms. In this study, we assess if powerful banks in the African banking industry are increasing financial access. The QLH is therefore consistent with the pursuit of financial intermediation inefficiency by large banks. To investigate the hypothesis, we first estimate the Lerner index. Then, using Two Stage Least Squares, we assess the effect of the Lerner index on financial access proxied by loan price and loan quantity. The empirical evidence is based on a panel of 162 banks from 42 African countries for the period 2001-2011. The findings support the QLH, although quiet life is driven by the below-median Lerner index sub-sample. Policy implications are discussed.
    Keywords: Financial access; Bank performance; Africa
    JEL: D40 G20 G29 L10 O55
    Date: 2018–01
  16. By: Donna, Javier; Espin-Sanchez, Jose
    Abstract: We use data on sequential water auctions to estimate demand when units are complements or substitutes. A sequential English auction model determines the estimating structural equations. When units are complements, one bidder wins all units by paying a high price for the first unit, thus deterring others from bidding on subsequent units. When units are substitutes, different bidders win the units with positive probability, paying prices similar in magnitude. We recover individual demand consistent with this stark pattern of outcomes and confirm it is not collusive but consistent with noncooperative behavior. Demand estimates are biased if one ignores these features.
    Keywords: Auctions, Structural Demand Estimation, Market Structure, Competition, Collusion
    JEL: C13 D44 L10 L40
    Date: 2018–02–18
  17. By: Jan Willem Gunning; Pramila Krishnan; Andualem T Mengistu
    Abstract: We examine the spatial variation in variety of manufactured goods to study how choice fades with distance. We model monopolistically-competitive trade between market town and village and show how transport costs reduce consumer welfare through reduced variety. We use data from a purpose-designed survey of shops and consumers in villages in Ethiopia and prices of matched source and destination goods to estimate similar tastes for variety across space. Our estimates suggest an average mark-up of 10-15% and welfare costs of falling variety at 19% on average of expenditures on manufactures, in contrast to the e?ect of prices at an average of 1.75%. The cost of lower variety in remote places is substantial.
    Date: 2018
  18. By: Farajzadeh, Z.; Amiraslany, A.
    Abstract: Abstract Iran accounts for more than 50 percent of the world pistachios market and thus has a leading role in price formation of pistachios. The objective of this study is to determine the price transmission pattern between domestic and world markets of pistachio and to investigate the link between market power and asymmetric adjustment. An innovative specification of asymmetric autoregressive model of Pricing to Market (PTM) employed to study the export-domestic price relationship by incorporating the exchange rate in increasing and decreasing components of the PTM model. Results indicate that PTM analysis-based specification is preferable to a simple model that does not cover the exchange rate effect. Also, the empirical findings suggest that export prices are more responding to the exchange rate increases than decrease in the exchange rates. The asymmetric transmission effect of the exchange rate also indicates a possible source of market power exerted by Iranian exporters Acknowledgement :
    Keywords: Marketing
    Date: 2018–07
  19. By: Scalco, P.; Bastos, A.
    Abstract: The aim of this study was to analyze the structure and concentration indexes of the sugarcane market in the South-Central region of Brazil. Based on the concept of relevant or antitrust market, used by leading competition defense agencies worldwide, we were able to reach the conclusion that the sugarcane buyers' market is much more restricted in comparison with the market defined in the empirical literature, thus underestimating the actual market concentration indexes. Our results indicate that the sugarcane markets are restricted to local markets and, in general, these markets are structured in two ways: monopsonies or oligopsonies. All the concentration indexes found were not only high, but also much higher than the results of other empirical studies. The results however do not indicate that such indexes are decreasing over time as unarguably as exposed in the literature. Acknowledgement : The authors would like to thank the financial support of the Research Foundation of the State of Goias (FAPEG) and the National Council for Scientific and Technological Development (CNPq)
    Keywords: Marketing
    Date: 2018–07
  20. By: Richard B. Baker; Carola Frydman; Eric Hilt
    Abstract: We study the importance of discretion in antitrust enforcement by analyzing the response of asset prices to the sudden accession of Theodore Roosevelt to the presidency. During McKinley’s term in office the largest wave of merger activity in American history occurred, and his administration did not attempt to use antitrust laws to restrain any of those mergers. His vice president, Theodore Roosevelt, was known to be a Progressive reformer and much more interested in controlling anticompetitive behavior. We find that firms with greater vulnerability to antitrust enforcement saw greater declines in their abnormal returns following McKinley’s assassination. The transition from McKinley to Roosevelt caused one of the most significant changes in antitrust enforcement of the Gilded Age—not from new legislation, but from a change in the approach taken to the enforcement of existing law. Our results highlight the importance of enforcement efforts in antitrust.
    JEL: N11 N21 N31 N41 N81
    Date: 2018–11

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