nep-ind New Economics Papers
on Industrial Organization
Issue of 2006‒01‒24
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. U.S. Antitrust and EU Competition Policy: Where has the Former Been, Where is the Latter Going? By Stephen Martin
  2. Competition Policy and EU Governance By Annette Bongardt
  3. EU Merger Remedies: A Preliminary Empirical Assessment By Tomaso Duso; Klaus Gugler; Burcin Yurtoglu
  4. An Economic Approach to Article 82 - Report by the European Advisory Group on Competition Policy By Jordi Gual; Martin Hellwig; Anne Perrot; Michele Polo; Patrick Rey; Klaus Schmidt; Rune Stenbacka
  5. Do mergers improve information? Evidence from the loan market By Fabio Panetta; Fabiano Schivardi; Matthew Shum
  6. Network Competition and Entry Deterrence By Calzada, Joan; Valletti, Tommaso
  7. The market for melons: Cournot competition with unobservable qualities By Argenton, Cédric
  8. "Free Entry and Exit" from the Market: Simplifying or Substantive Assumption? By Robert E. Prasch
  9. Exclusive dealing, entry, and mergers By Chiara Fumagalli; Massimo Motta; Lars Persson
  10. Product Market Competition and Economic Performance in France By Jens Høj; Michael Wise
  11. Competitiveness, market power and price stickiness: A paradox and a resolution. By Jean-Pascal Bénassy
  12. Preventing Monopoly or Discouraging Competition? The Perils of Price-Cost Tests for Market Power in Electricity By Brennan, Timothy
  13. From regulation to free market: the experience of the European motor insurance market By Domenico SCALERA; Alberto ZAZZARO

  1. By: Stephen Martin (Department of Economics, Krannert School of Management, Purdue University)
    Abstract: The earliest U.S. antitrust laws were adopted after technological changes — most importantly, the development of a national railway network — made the U.S. political union a single economic market. They were adopted with the stated, and no doubt largely sincere, purposes of preventing collusion and strategic entry-deterring behavior. Early application of the antitrust laws relied on a rule of competition to determine whether business conduct was or was not permitted. This has evolved into an explicit evaluation of the impact of businesses practices on consumer welfare, conceived of and measured in an economic sense. EU competition policy was adopted in advance of economic integration. It differed sharply from the traditional policies of the original EC6 member states toward business behavior. It was adopted with the stated, and most likely sincere, purpose of furthering economic integration, and to this end prohibited practices that were seen as distorting competition. Early applications of competition policy, particularly in the European Coal and Steel Community, may have had perverse effects. There are indications of an evolution towards an economic performance standard in the European Union as well.
    Keywords: US antitrust policy, EU competition policy, European Union, Economic governance, regulation
    JEL: L40 L41 L42 L51 L97 L98
    Date: 2005–12
  2. By: Annette Bongardt (DEGEI, Universidade de Aveiro)
    Abstract: This paper focuses on competition policy in the European Union from an economic, micro-governance point of view. It analyses recent developments in economic governance in the field of the common competition policy, which had for a long time been the exclusive competence of the European Commission (Community method), notably the nature and governance implications of recent developments associated with single market integration, the 5th EU enlargement, and the workload backlog of the Commission. The common competition policy has been subject to various changes against the background of increasing market integration and the expansion of the single market (for instance, the European merger regulation and the liberalisation of network industries, regulated at the national level), most recently by the new institutional framework (EC regulation 1/2003 by the EU Council) which entered into force on the day of the EU’s fifth enlargement on 1 May 2004 and which implies the direct and parallel application of EU anti-trust laws by national competition authorities (NCA).These developments in terms of the economic governance of competition policy render it important to analyse the competences of NCAs with respect to the European Commission but also in regard to each other and to sectoral national regulators. The paper concludes that although the single market and competition policy had looked profoundly Europeanised in the Community sphere, single market integration has not led to parallel centralisation at the Community level but to decentralisation and that challenges as to legal uncertainty and consistency of application remain to be resolved.
    Keywords: EU Competition Policy, European Union, Economic Governance, Regulation, European Union, Portugal
    JEL: L41 L42 L97 L98
    Date: 2005–12
  3. By: Tomaso Duso (Social Science Research Center Berlin (WZB), Reichpietschufer 50, D10785 Berlin, Germany. Tel: +49 30 25491 403, Fax: +49 30 25491 444.; Klaus Gugler (University of Vienna.; Burcin Yurtoglu (University of Vienna.
    Abstract: Mergers that substantially lessen competition are challenged by antitrust authorities. Instead of blocking anticompetitive transitions straight away, authorities might choose to negotiate with the merging parties and allow the transactions to proceed with modifications that restore or preserve the competition in the involved markets. We study a sample of 167 mergers that were under the European Commission’s scrutiny from 1990 to 2002. We use an event study methodology to identify the potential anticompetitive effects of mergers as well as the remedial provisions on these transactions. Stock market reactions around the day of the merger’s announcement provide information on the first question, whereas the stock market reactions around the commission’s final decision day convey information about the outcome of the bargaining process between the authority and the merging parties. We first classify mergers according to their effects on competition and then we develop hypotheses on the effects that remedies are supposed to achieve depending on the merger’s competitive outcome. We isolate several stylized facts. First, we find that remedies were not always appropriately imposed. Second, the market seems to be able to predict remedies’ effectiveness when applied in phase I. Third, the market also seems able to produce a good prior to phase II’s clearances and prohibitions, but not to remedies. This can be due either to a measurement problem or related to the increased merging firms’ bargaining power during the second phase of the merger review.
    Keywords: Merger Control, Remedies, European Commission, Event Studies
    JEL: L4 K21 C12 C13
    Date: 2006–01
  4. By: Jordi Gual (IESE Business School, University of Navarra, Avenida Pearson 21, 08034 Barcelona, Spain,; Martin Hellwig (Max Planck Institute on Collective Goods, Kurt Schumacher Str. 10, 53110 Bonn, Germany,; Anne Perrot (Conseil de la concurrence, 11 rue de l'Echelle, 75 001 Paris, France,; Michele Polo (IGIER, Università Bocconi, Via Salasco 5, 20136 Milan, Italy,; Patrick Rey (IDEI, University of Toulouse I, 31042 Toulouse Cedex, France,; Klaus Schmidt (Department of Economics, University of Munich, Ludwigstr. 28, 80539 München, Germany,; Rune Stenbacka (Department of Economics, Swedish School of Economics, P.O. Box 479, 00101 Helsinki, Finland,
    Abstract: This report argues in favour of an economics-based approach to Article 82, in a way similar to the reform of Article 81 and merger control. In particular, we support an effects-based rather than a form-based approach to competition policy. Such an approach focuses on the presence of anti-competitive effects that harm consumers, and is based on the examination of each specific case, based on sound economics and grounded on facts.
    Keywords: Competition Policy, Abuse of Market Power, Article 82
    JEL: D4
    Date: 2005–07
  5. By: Fabio Panetta (Banca d'Italia); Fabiano Schivardi (Banca d'Italia); Matthew Shum (Johns Hopkins University)
    Abstract: We examine the informational effects of M&As by investigating whether bank mergers improve banks’ ability to screen borrowers. By exploiting a dataset in which we observe a measure of a borrower’s default risk that the lenders observe only imperfectly, we find evidence of these informational improvements. Mergers lead to a closer correspondence between interest rates and individual default risk: after a merger, risky borrowers experience an increase in the interest rate, while non-risky borrowers enjoy lower interest rates. This finding is robust with respect to a series of alternative explanations. Further results suggest that these information benets derive from improvements in information processing resulting from the merger, rather than from explicit information sharing on individual customers among the merging parties.
    Keywords: Mergers, asymmetric information, banking
    JEL: G21 L15
    Date: 2004–10
  6. By: Calzada, Joan; Valletti, Tommaso
    Abstract: We develop a model of logit demand that extends to a multi-firm industry the traditional duopoly framework of network competition with access charges. Firstly, we show that, when incumbents do not face the threat of entry and compete in prices, they inefficiently establish the reciprocal access charge below cost. This inefficiency disappears if incumbents compete in utilities instead of prices. Secondly, we study how incumbents change their choices under the threat of entry when they determine an industry-wide (non-discriminatory) access charge. We show how incumbents may accommodate all possible entrants, only a group of them, or may completely deter entry. When entry deterrence is the preferred option, incumbents distort upwards the access charges.
    Keywords: entry deterrence; interconnection; telecommunications
    JEL: L41
    Date: 2005–12
  7. By: Argenton, Cédric (Dept. of Economics, Stockholm School of Economics)
    Abstract: We study a model of asymmetric information in which two firms produce given qualities of the same good at possibly different, constant marginal costs. They compete in quantities on a market where buyers only observe the average quality supplied. The model is a generalization of the standard Cournot duopoly, which corresponds to the special case where the two qualities are equal. When deciding on its own output, each firm has to take into account its effect not only on market supply but also on the average quality. When the quality differential is large, the firms’ output levels are not always strategic substitutes, and there can be no, one, or two pure-strategy equilibria. When both firms are active in equilibrium, the high-cost firm's market share is bigger than the low-cost firm's if the quality differential is sufficiently large to compensate for the former’s cost handicap. This effect may lead consumers to prefer two producers of unequal qualities to two identical firms producing the (unweighted) average quality.
    Keywords: Cournot competition; quality; duopoly; asymmetric information; Nash equilibrium
    JEL: D43 D82 L13 L15
    Date: 2005–12–30
  8. By: Robert E. Prasch
    Abstract: Economic theory, of necessity, presents an abstraction to the reader. Abstraction is required to achieve the perspective that allows for theory, that is to say, understanding and interpretation, to occur. If the abstraction is done well only inessential details are set aside -- details that would otherwise divert the theorist from grasping the essential or fundamental elements of the process under examination. For example a study of the mechanisms that cause a moving automobile to stop can reasonably abstract from the vehicle's color scheme. For this process to be valid it is critical that the theorist distinguish between "simplifying" and "substantive" assumptions. The former clears away the inessential. The latter elevates or prioritizes the inessential -- thereby contributing to a distorted understanding. The difficulty is that distinguishing between simplifying and substantial assumptions remains, and will always remain, something of an art. Fifty years ago the siren of "Positive Economics" proposed that this critical distinction could be reliably made by adhering to a set of clear and simple rules. While some economists and empirical psychologists maintain a nostalgic commitment to that eclipsed understanding of science, today most thinking practitioners are aware that such an epistemological stance, with its triumphant dismissal of the need for defensible assumptions, was naive -- even misguided. Out of this epistemological vacuum economists have retreated to several crude "fixes" to guide their selection of abstractions. Occasional assertions to the contrary, these methods are conventions. Innocent of any knowledge of these issues, many economists instinctively deploy the abstractions used by their graduate advisor, or rely on those that most frequently appear in what are held to be the profession's premier journals. Economics, perhaps more than ever, is now defined by what economists do. Ideally, the distinction between substantive and simplifying assumptions could be grounded in something more meaningful. Such a ground does exist -- it is called judgment. Unfortunately judgment, like "beauty" or "goodness," is difficult to define without invoking specific cases. The reason is that good judgment requires a sense of context. Context is most readily gained through direct experience, a study of history, or the comparative method. Once acquired, this knowledge enables the researcher to "compare and contrast" one situation with another, to learn from previous efforts to interpret the subject at hand, or to benefit from multiple approaches to a single question. In short, judgment requires the kind of broad-ranging knowledge that is largely absent, even disdained, in the training of the economists of our era ("training" is the appropriate term in this context -- to be contrasted with "education"). To appreciate the implications and importance of the distinction between "simplifying" and "substantive" assumptions, consider the conventional assumption of "Free Entry and Exit."
    Date: 2005
  9. By: Chiara Fumagalli (Università Luigi Bocconi and CSEF); Massimo Motta (European University Institute, Universitat Pompeu Fabra and CEPR); Lars Persson (IUI (The Research Institute of Industrial Economics) and CEPR)
    Abstract: We extend the literature on exclusive dealing by allowing the incumbent and the potential entrant to merge. This uncovers new effects. First, exclusive deals can be used to improve the incumbent’s bargaining position in the merger negotiation. Second, the incumbent finds it easier to elicit the buyer’s acceptance than in the case where entry can occur only by installing new capacity. Third, exclusive dealing reduces welfare because (i) it may trigger entry through merger whereas de-novo entry would be socially optimal (ii) it may deter entry altogether. Finally, we show that when exclusive deals include a commitment to future prices, they will increase welfare.
    Keywords: Countervailing Power; Exclusion; Buyers’ Fragmentation
    JEL: D4 L13 L41
    Date: 2006–01–01
  10. By: Jens Høj; Michael Wise
    Abstract: Over the past decade, French economic growth has been insufficient to bring down high and persistent unemployment. Available cross-country evidence suggests that enhancing competition is an important means to improve economic performance. France is catching up with best practice in competition policy reform. However, other policy considerations often hamper the emergence of effective competition. Relatively weak competitive pressures remain in a number of sectors, particularly in sheltered service industries. Restrictions on competition reduce productivity growth and hinder job creation in regulated sectors. Policy must focus on giving more weight to overall consumer welfare in the face of opposition from relatively small but vocal special interest groups. This paper discusses reforms that would increase competition by: i) strengthening institutions and better clarifying their responsibilities with respect to competition enforcement; ii) reinforcing the ability of sector regulators to improve non discriminatory third party access and other aspects of competition in the network industries; iii) abolishing overly prescriptive regulation in the retail sector; and iv) removing unnecessary protection in some professional services. This Working Paper relates to the 2005 OECD Economic Survey of France (
    Keywords: network industries, France, regulatory reforms, competition law, productivity and growth, retail sector, product market competition
    JEL: K21 L11 L16 L33 L43 L81 L9
    Date: 2006–01–04
  11. By: Jean-Pascal Bénassy
    Abstract: Are prices less sticky when markets are more competitive? Our intuition would naturally lead us to give an affirmative answer to that question. But we first show that DSGE models with staggered price or wage contracts have actually the opposite and paradoxical property, namely that price stickiness is an increasing function of competitiveness. To eliminate this paradox, we next study a model where monopolistic competitors choose prices optimally subject to a cost of changing prices as in Rotemberg (1982a,b). For a given cost function, we find the more intuitive result that more competitiveness leads to more flexible prices.
    Date: 2005
  12. By: Brennan, Timothy (Resources For the Future)
    Abstract: Allegations of market power in wholesale electricity sales are typically tested using price-cost margins. Such tests are inherently suspect in markets - such as electricity - that are subject to capacity constraints. In such markets, prices can vary with demand while quantity, and thus cost measure, remain fixed. Erroneous conclusions are more likely when the proxy for marginal cost is the average operating cost of the marginal plant. Measured this way, Lerner indexes are consistent with competitive behavior. Using this proxy to cap wholesale prices, as the U.S. Federal Energy Regulatory Commission has proposed, would discourage entry by making it impossible for peak power suppliers to recover capital costs. The wholesale electricity sector may be susceptible to market power. But a preferable (if not unproblematic) test for market power would look not at prices but output, i.e., whether individual generators withheld energy that would have been profitable to supply at prevailing prices.
    Keywords: market power, electricity, peak load pricing
    JEL: D42 L11 L51 L94
  13. By: Domenico SCALERA; Alberto ZAZZARO (Universita' Politecnica delle Marche, Dipartimento di Economia)
    Abstract: Increasing premiums, increasing claims and decreasing profits are three striking facts associated in some European countries to motor insurance liberalization of 1990's. In this paper, we argue that these phenomena may be considered not a consequence of collusion or other misapplications of deregulation but rather an effect of the impact of liberalization on the companies’ optimal choices. In particular, by extending the Salop-Economides model, we show that price deregulation involves decreasing investments in monitoring and increasing compensation costs. Therefore, the transition from regulation to competition can yield prices and profits moving in either direction and possibly opposite directions.
    Keywords: motor insurance, regulation, spatial models
    JEL: G22 L11 L50
    Date: 2004–03

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