nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒05‒12
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. How (not) to measure competition By van der Wiel, Henry; Boone, Jan; van Ours, Jan C
  2. The Price Effects of Horizontal Mergers: A Survey By Matthew Weinberg
  3. Are Sunk Costs a Barrier to Entry? By Luís Cabral; Thomas Ross
  4. Reciprocity, inequity-aversion, and oligopolistic competition By Santos-Pinto, Luís
  5. Competition and Waiting Times in Hospital Markets By Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
  6. Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration By Glenn Ellison; Sara Fisher Ellison
  7. Enhancement and Deepening of the Competitiveness of the Philippine Electronics Industry Under a Bilateral Setting By Austria, Myrna S.

  1. By: van der Wiel, Henry; Boone, Jan; van Ours, Jan C
    Abstract: We introduce a new measure of competition: the elasticity of a firm's profits with respect to its cost level. A higher value of this profit elasticity (PE) signals more intense competition. Using firm-level data we compare PE with the most popular competition measures such as the price cost margin (PCM). We show that PE and PCM are highly correlated on average. However, PCM tends to misrepresent the development of competition over time in markets with few firms and high concentration, i.e. in markets with high policy relevance. So, just when it is needed the most PCM fails whereas PE does not. From this we conclude that PE is a more reliable measure of competition.
    Keywords: competition; concentration; measures of competition; price cost margin; profit elasticity; profits
    JEL: D43 L13
    Date: 2007–05
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:6275&r=ind
  2. By: Matthew Weinberg (University of Georgia)
    Abstract: This paper surveys the literature on the price effects of horizontal mergers. The majority of mergers that have been examined in the nine studies conducted over the past 22 years resulted in increased prices for both the merging parties and rival firms, at least in the short run. There is some evidence that product prices increase after mergers are announced but before they are consummated.
    Date: 2007–01
    URL: http://d.repec.org/n?u=RePEc:pri:cepsud:140weinberg&r=ind
  3. By: Luís Cabral (New York University); Thomas Ross (University of British Columbia)
    Abstract: The received wisdom is that sunk costs create a barrier to entry— if entry fails, then the entrant, unable to recover sunk costs, incurs greater losses. In a strategic context where an incumbent may prey on the entrant, sunk entry costs have a countervailing effect: they may effectively commit the entrant to stay in the market. By providing the entrant with commitment power, sunk investments may soften the reactions of incumbents. The net effect may imply that entry is more profitable when sunk costs are greater.
    Date: 2007–02
    URL: http://d.repec.org/n?u=RePEc:pca:wpaper:19&r=ind
  4. By: Santos-Pinto, Luís
    Abstract: This paper extends the Cournot and Bertrand models of strategic interaction between firms by assuming that managers are not only profit maximizers, but also have preferences for reciprocity or are averse to inequity. A reciprocal manager responds to unkind behavior of rivals with unkind actions, while at the same time, it responds to kind behavior of rivals with kind actions. An inequity averse manager likes to reduce the difference between own profits and the rivals’ profits. The paper finds that if firms with reciprocal managers compete à la Cournot, then they may be able to sustain “collusive” outcomes under a constructive reciprocity equilibrium. By contrast, Stackelberg warfare may emerge under a destructive reciprocity equilibrium. If there is Cournot competition between firms and their managers are averse to advantageous (disadvantageous) inequity, then firms are better (worse) off than if managers only care about maximizing profits. If firms compete à la Bertrand, then only under very restrictive conditions will managers’ preferences for reciprocity or inequity aversion have an impact on equilibrium outcomes.
    Keywords: Reciprocity; Inequity Aversion; Cournot; Bertrand.
    JEL: D43 D63 L21 L13
    Date: 2006–05–17
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:3143&r=ind
  5. By: Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
    Abstract: This paper studies the impact of hospital competition on waiting times. We use a Salop-type model, with hospitals that differ in (geographical) location and, potentially, waiting time, and two types of patients; high-benefit patients who choose between neighbouring hospitals (competitive segment), and low-benefit patients who decide whether or not to demand treatment from the closest hospital (monopoly segment). Compared with a benchmark case of regulated monopolies, we find that hospital competition leads to longer waiting times in equilibrium if the competitive segment is sufficiently large. Given a policy regime of hospital competition, the effect of increased competition depends on the parameter of measurement: Lower travelling costs increase waiting times, higher hospital density reduces waiting times, while the effect of a larger competitive segment is ambiguous. We also show that, if the competitive segment is large, hospital competition is socially preferable to regulated monopolies only if the (regulated) treatment price is sufficiently high.
    Keywords: competition; hospitals; waiting times
    JEL: H42 I11 I18 L13
    Date: 2007–05
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:6285&r=ind
  6. By: Glenn Ellison; Sara Fisher Ellison
    Abstract: This paper develops a new approach to testing for strategic entry deterrence and applies it to the behavior of pharmaceutical incumbents just before they lose patent protection. The approach involves looking at a cross-section of markets and examining whether behavior is nonmonotonic in the size of the market. Under certain conditions, investment levels will be monotone in market size if firms are not influenced by a desire to deter entry. Strategic investments, however, may be nonmonotone because entry deterrence is unnecessary in very small markets and impossible in very large ones, resulting in overall nonmonotonic investment. The pharmaceutical data contain advertising, product proliferation, and pricing information for a sample of drugs which lost patent protection between 1986 and 1992. Among the findings consistent with an entry deterrence motivation are that incumbents in markets of intermediate size have lower levels of advertising and are more likely to reduce advertising immediately prior to patent expiration.
    JEL: L13 L65
    Date: 2007–04
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:13069&r=ind
  7. By: Austria, Myrna S.
    Abstract: The participation of the Philippines in the global production network of multinational electronic companies has undoubtedly shaped the pattern and structure of the country’s international trade since the early 1990s. While the industry has remained the largest foreign exchange earner for the country, the country’s participation in the global production network industry is confronted, for the longest time, with one major issue. That is, the country hardly progressed beyond the lowest level of the production chain--labor intensive and import dependent assembly and testing; and hence, the value added of the industry has remained small. The industry is competitive in 18 electronic products that accounted for about 86 percent of the industry’s total exports. The government, however, needs to address the weaknesses and inadequacies of the local support structures that have constrained the ability of the country to move towards higher levels of the value chain in order to ensure that the global players currently operating in the country will remain and expand operations. Since the global production network is market-driven, negotiations under an RP-US Free Trade Area should be focused on trade and investment liberalization and facilitation in order to improve the functioning of the markets of both economies.
    Keywords: competitiveness, electronics, international trade, free trade agreement (FTA), global production networks, local support structures, harmonization of standards, mutual recognition of procedures
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:phd:dpaper:dp_2006-09&r=ind

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