nep-ind New Economics Papers
on Industrial Organization
Issue of 2006‒09‒16
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Collusion when the Number of Firms is Large By Luca Colombo; Michele Grillo
  2. Collusion and Durability By Dan Sasaki; Roland Strausz
  3. Mergers and CEO power By Felipe Balmaceda
  4. Olygopoly and Outsourcing By Subhayu Bandyopadhyay; Howard Wall
  5. Exclusive vs Overlapping Viewers in Media Markets By Ambrus, Attila; Reisinger, Markus
  6. The impact of competition on bank orientation By Degryse,Hans; Ongena,Steven

  1. By: Luca Colombo; Michele Grillo
    Abstract: In antitrust analysis it is generally agreed that a small number of firms operating in the industry is an essential precondition for collusive behavior to be sustainable. However, the Italian Competition Authority (AGCM) challenged this view in the recent case RCA (2000), when an information exchange among forty-four firms in the car insurance market was assessed as having an anticompetitive object. The AGCM’s basic argument was that an information exchange facilitates collusion because it changes the market environment in such a way as to relax the incentive compatibility constraint for collusion, thus circumventing the decrease in the critical discount factor when the number of firms in the industry increases. In this paper we model collusive behavior in a “dispersed” oligopoly. We prove that, when the technology exhibits decreasing returns to scale, collusion can always be sustained, regardless of the number of firms, provided the marginal cost function is sufficiently steep. Moreover, we show how an information exchange can sustain collusive behavior when the number of firms is “large” independently of the assumptions on technology.
    Keywords: Collusion, Industry structure, Facilitating practices
    JEL: L41 L13 L11 K21
    Date: 2006–03
  2. By: Dan Sasaki (University of Tokyo, Institute of Social Science); Roland Strausz (Free University of Berlin, Department of Economics)
    Abstract: We make the observation that cartels which produce goods with lower durability are easier to sustain implicitly. This observation generates the following results: 1) implicit cartels have an incentive to produce goods with an inefficiently low level of durability; 2) a monopoly or explicit cartel is welfare superior to an implicit cartel; 3) welfare is non--monotonic in the number of firms; 4) a regulator may demand inefficiently high levels of durability to prevent collusion.
  3. By: Felipe Balmaceda
    Abstract: In this paper a simple model of mergers in which synergies, private benefits and CEO power play a crucial role is proposed. A merger is modeled as a bargaining process between the acquiring and target board with the gains from a merger divided according to Rubinstein’s alternating-offer game with inside options. Boards consider both firm value and CEOs’ payoff. when deciding whether or not to merge. The more powerful CEOs are, the more board members consider the consequences of a merger on CEOs’ payoffs. The model determines the optimal firm scope and yields predictions that are consistent with several empirical regularities about mergers such as: (i) inefficient mergers take place when acquiring CEOs are powerful and units are not related; (ii) target shareholders are better-o. after a merger, acquiring shareholders are sometimes worse-off., and combined value is positive; and (iii) in the presence of credit constraints, acquiring firms are more likely to merge with low-productivity firms and with firms in which CEOs are less powerful.
    Date: 2006
  4. By: Subhayu Bandyopadhyay (Department of Economics, West Virginia University and IZA, Bonn); Howard Wall (Federal Reserve Bank of St. Louis)
    Abstract: With outsourcing comes a perceived tension between the competitive pressures faced by domestic firms and the effect that outsourcing has on domestic workers. To address this tension, we present a general-equilibrium model with an oligopolistic export sector and a competitive import-competeing sector. When there is a minimum wage, an outsourcing tax might be desirable and the usual profit-shifting objectives of an export subsidy are mitigated, perhaps completely, because it might lead to higher unemployment. Also, increased international competition has no effect on the level of outsourcing, but the direction of its effect on unemployment and national income depends on the relative factor intensities of the two sectors. Under wage flexibility, an outsourcing tax cannot be justified and the profit-shifting motive is the same as in a model without outsourcing. Further, if export subsidies are not possible due to WTO regulations, it is optimal to subsidize rather than to tax outsourcing. Finally, the effect of increased foreign competition on welfare depends on the relative factor intensities of the two sectors.
    Date: 2005
  5. By: Ambrus, Attila; Reisinger, Markus
    Abstract: This paper investigates competition for advertisers in media markets when viewers can subscribe to multiple channels. A central feature of the model is that channels are monopolists in selling advertising opportunities toward their exclusive viewers, but they can only obtain a competitive price for advertising opportunities to multi-homing viewers. Strategic incentives of firms in this setting are different than those in former models of media markets. If viewers can only watch one channel, then firms compete for marginal consumers by reducing the amount of advertising on their channels. In our model, channels have an incentive to increase levels of advertising, in order to reduce the overlap in viewership. We take an account of the differences between the predictions of the two types of models and find that our model is more consistent with recent developments in broadcasting markets. We also show that if channels can charge subscription fees on viewers, then symmetric firms can end up in an asymmetric equilibrium in which one collects all or most of its revenues from advertisers, while the other channel collects most of its revenues via viewer fees.
    Keywords: Media; Multihoming; Platform Competition; Two-Sided Markets
    JEL: D43 L13
    Date: 2006–09
  6. By: Degryse,Hans; Ongena,Steven (Tilburg University, Center for Economic Research)
    Abstract: How do banks react to increased competition? Recent banking theory offers conflicting predictions about the impact of competition on bank orientation - i.e., the choice of relationship based versus transactional banking. We empirically investigate the impact of interbank competition on bank branch orientation. We employ a unique data set containing detailed information on bank-firm relationships. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending. Our results illustrate that competition and relationships are not necessarily inimical.
    Keywords: bank orientation;bank industry specialization;competition;lending relationships
    JEL: G21 L11 L14
    Date: 2006

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