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on Industrial Organization |
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Issue of 2008‒11‒11
eleven papers chosen by |
| By: | Xavier Boutin (INSEE (D3E-MSE) and CREST-LEI); Lionel Janin (DGTPE and CREST-LEI) |
| Abstract: | During the 80s, several empirical studies have shown a positive correlation between concentration, prices and profits. It is well known that these estimates all suffer from simultaneity bias: market structure and prices are affected by common factors, some of which are not observable, which rules out any causal interpretation of cross-sectional correlations. Mergers are an interesting instrument to identify the (static) impact of concentration on prices, since they induce breaks in strategic interactions between actors. The few ex post studies on mergers that are currently available are difficult to generalize, because they pertain to specific markets. This study looks more systematically to selling prices in 63 sectors observed between 1989 and 2002. The approach that has been chosen is a difference in differences approach, applied to price movements around mergers. The rate of inflation in a sector where a merger has occurred is compared to a counterfactual. In a simple framework, in line with previous studies (McCabe 2002), this counterfactual would be built as the mean of inflation rates in other sectors. This paper focuses on more relevant estimates, provided by a factor model. This methodology allows tracking the profile of prices around mergers. We separate mergers between French firms and mergers between other European firms controlled by European authorities (and thus assumed to have affected the common market). We also distinguish mergers having led to an in-depth inquiry by competition authorities (« phase 2 ») and those benefiting from a shorter procedure (« phase 1 »). We observe an acceleration of price movements around the most important of French mergers, but not for the ones authorized under phase 1. We also observe a break in price movements for mergers between foreign firms examined by the European Commission, generally in the other direction. Dans les années 80, de nombreuses études empiriques ont établi une corrélation positive entre concentration, prix et profit. Ces estimations souffrent cependant de biais de simultanéité : la structure des marchés et les prix découlent de caractéristiques identiques, dont toutes ne sont pas observables. La corrélation en coupe ne peut donc être interprétée de manière causale. Les fusions, qui induisent une rupture dans les interactions stratégiques, constituent des instruments intéressants pour identifier l’impact (statique) de la concentration sur les prix. Les rares études ex post sur les fusions, portant sur des marchés particuliers, sont difficilement généralisables. Cette étude s’intéresse aux prix de vente de 63 secteurs entre 1989 et 2002. L’approche choisie ici est une analyse en différences de différences des mouvements de prix de vente autour des fusions. L’inflation d’un secteur dans lequel s’est produit une fusion est comparée à une inflation « contrefactuelle ». Une approche simple retenue par les travaux antérieurs (McCabe 2002) consiste à calculer la moyenne des inflations des autres secteurs. Dans ce papier, une structure plus riche est utilisée, sous la forme d’un modèle à facteurs. Cette méthodologie permet de tracer le profil de prix autour des fusions. On distingue les fusions entre entreprises françaises des fusions entre d’autres entreprises européennes examinées par les autorités communautaires au titre de l’affectation du marché commun. Par ailleurs, on distingue également les fusions qui ont fait l’objet d’une analyse approfondie de la part des autorités de concurrence (phase 2) de celles autorisées au terme d’une procédure plus courte (phase 1). L’étude met en évidence une accélération des prix pour les fusions françaises les plus importantes, mais pas pour celles autorisées en phase 1. On observe également une rupture de pente, généralement de sens opposé, pour les fusions entre entreprises étrangères traitées par la Commission européenne. |
| Keywords: | mergers, prices, factor models / fusions, prix, modèles à facteurs |
| JEL: | G34 L11 C53 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpdeee:2008-08&r=ind |
| By: | DE FEO, Giuseppe (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)) |
| Abstract: | In the theoretical literature, strong arguments have been provided in support of the efficiency defense in antitrust merger policy. One of the most often cited results is due to Williamson (1968) that shows how relatively small reduction in cost could offset the deadweight loss of a large price increase. Furthermore, Salant et al. (1983) demonstrate that (not for monopoly) mergers are unprofitable absent efficiency gains. The general result, drawn in a Cournot framework by Farrell and Shapiro (1990), is that (not too large) mergers that are profitable are always welfare improving. In the present work we challenge the conclusions of this literature in two aspects. First, we show that Williamson's results underestimate the welfare loss due to a price increase and overestimate the effect of efficiency gains. Then, we prove that the conditions for welfare improving mergers defined by Farrell and Shapiro (1990) hold true only when consumers are adversely affected. This seems an argument to disregard their policy prescriptions when antitrust authorities are more "consumers-oriented". In this respect, we provide a necessary and sufficient condition for a consumer surplus improving merger: in a two firm merger, efficiency gains must be larger than the pre-merger average markup. |
| Keywords: | mergers, efficiency gains, Cournot oligopoly. |
| JEL: | D43 L11 L22 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvco:2008005&r=ind |
| By: | GABSZEWICZ, Jean (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); LAUSSEL, Didier; TAROLA, Ornella |
| Abstract: | In this paper we address the following question: is it more profitable, for an entrant in a differentiated market, to acquire an existing firm than to compete? We illustrate the answer by considering competition in the banking sector. |
| Keywords: | Vertical differentiation, entry, banking competition |
| JEL: | G34 L13 L22 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvco:2008027&r=ind |
| By: | Stephen Davies (Centre for Competition Policy, University of East Anglia); Matthew Olczak (Centre for Competition Policy, University of East Anglia) |
| Abstract: | It is conventional wisdom that collusion is more likely the fewer firms there are in a market and the more symmetric they are. This is often theoretically justified in terms of a repeated non-cooperative game. Although that model fits more easily with tacit than overt collusion, the impression sometimes given is that ‘one model fits all’. Moreover, the empirical literature offers few stylised facts on the most simple of questions – how few are few and how symmetric is symmetric? This paper attempts to fill this gap while also exploring the interface of tacit and overt collusion, albeit in an indirect way. First, it identifies the empirical model of tacit collusion that the European Commission appears to have employed in coordinated effects merger cases – apparently only fairly symmetric duopolies fit the bill. Second, it shows that, intriguingly, the same story emerges from the quite different experimental literature on tacit collusion. This offers a stark contrast with the findings for a sample of prosecuted cartels; on average, these involve six members (often more) and size asymmetries among members are often considerable. The indirect nature of this ‘evidence’ cautions against definitive conclusions; nevertheless, the contrast offers little comfort for those who believe that the same model does, more or less, fit all. |
| Keywords: | tacit collusion, collective dominance, coordinated effects, cartels, European mergers, asymmetries, firm numbers |
| JEL: | L13 L41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ccp:wpaper:wp08-32&r=ind |
| By: | GABSZEWICZ, Jean J. (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); ZANAJ, Skerdilajda |
| Abstract: | In this paper, we propose an example of successive oligopolies where the downstream firms share the same decreasing returns technology of the Cobb-Douglas type. We stress the differences between the conclusions obtained under this assumption and those resulting from the traditional example considered in the literature, namely, a constant returns technology. |
| Keywords: | successive oligopolies, vertical integration, technology. |
| JEL: | D43 L1 L22 L42 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvco:2008050&r=ind |
| By: | Yassine LEFOUILI; Catherine ROUX |
| Abstract: | We examine the effect of the Amnesty Plus policy on firms' incentives to engage in cartel activities. Amnesty Plus is a proactive antitrust enforcement strategy aimed at attracting amnesty applications by encouraging firms already convicted in one market to report collusive agreements in other markets. It has been heavily advertised that Amnesty Plus weakens cartel stability. We show to the contrary that Amnesty Plus does not always have this desirable effect. Only under specific conditions, Amnesty Plus deters a cartel which would have been sustainable under an antitrust policy without Amnesty Plus. Otherwise, Amnesty Plus is either neutral or even stabilizes a cartel. We also show that firms can exploit their multimarket contact to reduce the effectiveness of the Amnesty Plus policy. |
| Keywords: | Amnesty Plus; Leniency Program; Multimarket Contact; Antitrust Policy |
| JEL: | K21 K42 L41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:08.05&r=ind |
| By: | MESNARD, Louis de (LATEC - CNRS UMR 5118 - Université de Bourgogne) |
| Abstract: | Profit-rate maximization leads to use fewer factors —including labor— even if profits are high and it corresponds to shareholders’ financial behavior, by contrast to economic-profit maximization which corresponds to shareholders’ strategic behavior. This is shown in two steps. In part 1, two types of firms are considered: those which maximize their net profit, as assumed classically in the microeconomic theory, and those which maximize their profit rate. We compare the behavior of both types of firms by respect to output and price. If the firm is producing, the output (and the input consumption) of a profit-rate-maximizing firm is lower than (or equal to) those of a pure-profit-maximizing firm; the price of output evolves in the opposite way. The demonstration is valid for monopoly (higher price, lower input) and for perfect competition (lower input); in perfect competition with fixed coefficient of capital, the output price loses any role in the equilibrium what implies no coordination. It is also applied to the case where the capital is the total capital engaged (EVA versus ROCE) or where it is the equity (EVA versus ROE) as in part 2. Part 2 explores how shareholders’ behavior may influence companies’ objective. Two main cases are examined (leaving aside the questions of corporate governance or agency theory). (i) The “strategic behavior”. Strategic or controlling shareholders try to maintain fixed their control rate on firms: they maximize their own net income which includes companies' distributed profit. Hence companies maximize their economic profit. (ii) The “financial behavior”. Financial shareholders control the composition of their portfolio, allocating freely their equity capital between firms: they maximize the return on their equity capital. Hence companies are encouraged to maximize their profit rate: they employ less factors, as labor. (iii) The “sleepingpartner” behavior; sleeping shareholders let their equity invested in the firm for a long time, without subscribing to any new issue of shares: they maximize the return on their equity but because of their inertia, they have a small influence on the firm. The combination of these behaviors is considered. As a result, profit-sharing leads to profit-rate maximization and natural selection is in favor of profit-rate-maximizing firms. |
| Keywords: | Profit rate ; Pure profit ; EVA ; ROE ; Shareholder. |
| JEL: | L21 D21 D24 D41 D42 G11 M2 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:lat:legeco:2008-05&r=ind |
| By: | Alexia Gaudeul (Centre for Competition Policy, University of East Anglia) |
| Abstract: | I consider a Vickrey-Salop model of spatial product differentiation with quasi-linear utility functions and contrast two modes of production, the proprietary model where entrepreneurs sell software to the users, and the open source model where users participate in software development. I show that the OS model of production may be more efficient from the point of view of welfare that the proprietary model, but that an OS industry is vulnerable to entry by entrepreneurs while a proprietary industry can resist entry by OS projects. A mixed industry where OS and proprietary development methods coexist may exhibit large OS projects cohabiting with more specialized proprietary projects, and is more efficient than the proprietary model of production from the point of view of welfare. |
| Keywords: | open source, proprietary, software industry, copyright, non-profit organization, mixed market, welfare, spatial product differentiation |
| JEL: | D23 H44 L17 L22 L86 O34 O38 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ccp:wpaper:wp08-31&r=ind |
| By: | Alberto Gaggero (Department of Economics, University of Essex.); Claudio A. Piga (Dept of Economics, Loughborough University) |
| Abstract: | We study the relationship between pricing and market structure on the routes connecting the UK and the Republic of Ireland. Because in 2007 the European Commission prohibited the takeover of Aer Lingus by Ryanair, the analysis focuses on their pricing strategies in particular. We use an original dataset of fares posted on-line, which allows to control for the fares' intertemporal pattern for each specific flight and each carrier's specific yield management system. Our evidence supports the European Commission's view that the elimination of a competitor in the Irish airline market is likely to have harmful consequences for consumers. |
| Keywords: | merger policy; consumers; anti-trust. |
| JEL: | L11 D61 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2008_12&r=ind |
| By: | Patrick A. Scholten (Bentley University); Jeffrey A. Livingston (Bentley University); David Ortmeyer (Bentley University); Wilson Wong (Bentley University) |
| Abstract: | This paper examines price data on over 222 LCD televisions to estimate indirect network effects arising from two sources. First, we conjecture that the disconnect between the timing of when broadcasters are required to convert to an only digital-signal world and when television manufacturers were required to have an ATSC digital tuner install on all new televisions has created an indirect network effect whereby television that are backward compatible with the analog QAM and VSB-8 systems have short-run value. Over time, however, we argue that the ATSC digital tuner will become more valuable. The second indirect network effect we estimate stems from the number and types of ports available on LCD televisions. In each case, we find statistically significant evidence for the presence of indirect network effects in the market for LCD televisions. |
| Keywords: | HDTV, Internet, Connectivity, Compatibility, Indirect Network Externalities |
| JEL: | L81 L86 M21 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0840&r=ind |
| By: | Carlo, CAPUANO; Giuseppe, DE FEO (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)) |
| Abstract: | The purpose of this paper is to investigate the effect of privatization in a mixed duopoly, where a private firm complete in quantities with a welfare-maximizing public firm. We consider two inefficiencies of the public sector : a possible cost inefficiency and an allocative inefficiency due to the distortionary effect of taxation (shadow cost of public funds). Furthermore, we analyze the effect of privatization on the timing of competition by endogenezing the determiantion of simultaneous (Nash-Cournot) versus sequential (Stackelberg) games using the model developed by Hamilton and Slutsky (1990). The latter is especially relevant for the analysis of privatization, given that results and policy prescription emerged in the literature crucially rely on the type of competition assumed. We show that privatization has generally the effect of shifting from Stackelberg to Cournot equilibrium and that, absent efficiency gains privatization never increases welfare. Moreover, even when large efficiency gains are realized, an inefficient public firm may be preferred. |
| Keywords: | mixed oligopoly, privatization, endogenous timing, distortionary taxes |
| JEL: | H2 H42 L13 L32 L33 |
| Date: | 2008–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2008015&r=ind |