nep-ind New Economics Papers
on Industrial Organization
Issue of 2009‒04‒13
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Merger Simulation in Competition Policy: A Survey By Oliver Budzinski; Isabel Ruhmer
  2. Implications of Unprofitable Horizontal Mergers: A Positive External Effect does not Suffice to Clear a Merger! By Oliver Budzinski; Jürgen-Peter Kretschmer
  3. Assessing excess profits from different entry regulations By Joan-Ramon Borrell; Laura Fernández-Villadangos
  4. General Network Effects and Welfare By Pollock, R.
  5. Testing the Effectiveness of Regulation and Competition on Cable Television Rates By Mary T. Kelly; John S. Ying
  6. Sales and Advertising Rivalry in interwar US Department Stores By Peter Scott; James Walker

  1. By: Oliver Budzinski (Department of Environmental and Business Economics, University of Southern Denmark); Isabel Ruhmer (CDSE,University of Mannheim, Germany)
    Abstract: Advances in competition economics as well as in computational and empirical methods have offered the scope for the employment of merger simulation models in merger control procedures during the past almost 15 years. Merger simulation is, nevertheless, still a very young and innovative instrument of antitrust and, therefore, its ‘technical’ potential is far from being comprehensively exploited and teething problems in its practical use in the antitrust environment prevail. We provide a classification of state-of-the-art merger simulation models and review their previous employment in merger cases as well as the problems and limitations currently associated with their use in merger control. In summary, merger simulation models represent an important and valuable extension of the toolbox of merger policy. However, they do not qualify as a magic bullet and must be combined with other, more traditional instruments of competition policy in order to comprehensively unfold its beneficial effects. The authors thank Ulrich Schwalbe, Wolfgang Kerber, Arndt Christiansen and Niels Vestergaard for valuable comments on earlier versions of the paper, the participants of the 30th Hohenheimer Oberseminar (Nuernberg, April 2008) for helpful discussion, and Barbara Güldenring for valuable editorial assistance.
    Keywords: Merger simulation, merger control, antitrust, oligopoly theory, auction models, mergers & acquisitions
    JEL: L40 C15 K21
    Date: 2009–01
  2. By: Oliver Budzinski (Department of Environmental and Business Economics, University of Southern Denmark); Jürgen-Peter Kretschmer (Economic Policy Unit, Philipps-University of Marburg, Germany)
    Abstract: We demonstrate that the popular Farrell-Shapiro-framework (FSF) for the analysis of mergers in oligopolies relies regarding its policy conclusions sensitively on the assumption that rational agents will only propose privately profitable mergers. If this assumption held, a positive external effect of a proposed merger would represent a sufficient condition to allow the merger. However, the empirical picture on mergers and acquisitions reveals a significant share of unprofitable mergers and economic theory, moreover, demonstrates that privately unprofitable mergers can be the result of rational action. Therefore, we extend the FSF by explicitly allowing for unprofitable mergers to occur with some frequency. This exerts a considerable impact on merger policy conclusions: while several insights of the original FSF are corroborated (f.i. efficiency defence), a positive external effect does not represent a sufficient condition for the allowance of a merger anymore. Applying such a rule would cause a considerable amount of false positives. We thank all participants of the 29th HOS Conference (Marburg, November 2007), the 35th EARIE Conference (Toulouse, September 2008) and the Annual Meeting of the Verein für Socialpolitik (Graz, September 2008) for a valuable and helpful discussion of this paper. Furthermore, we thank Barbara Güldenring for editorial assistance.
    Keywords: Oligopoly theory, horizontal merger policy, profitability of mergers, antitrust
    JEL: L13 L41 K21 D43
    Date: 2009–02
  3. By: Joan-Ramon Borrell (PPRE-IREA, Universitat de Barcelona); Laura Fernández-Villadangos (PPRE-IREA, Universitat de Barcelona)
    Abstract: Entry regulations affecting professional services such as pharmacies are common practice in many European countries. We assess the impact of entry regulations on profits estimating a structural model of entry using the information provided by a policy experiment. We use the case of different regional policies governing the opening of new pharmacies in Spain to show that structural models of entry ought to be estimated with data from policy experiments to pin down how entry regulations change payoffs functions of the incumbents. Contrary to the public interest rationales, regulations are not boosting only small town pharmacies payoffs nor increasing all pharmacies payoffs alike. The gains from regulations are very unevenly distributed,suggesting that private interests are shaping the current mix of entry and markup regulations.
    Keywords: Entry, regulation, professional services
    JEL: L51 H51 L84 I18
    Date: 2009–04
  4. By: Pollock, R.
    Abstract: (In)direct network effects arise frequently in economic models but, for reasons of analytical tractability, are often assumed to be linear. Here, we examine the general non-linear case with two platforms. We establish the conditions characterising equilibria and show that welfare changes can be related in a simple, intuitive way to the degree of diminishing returns of the network effects function.
    Keywords: Network Effects; Indirect Network Effects; Platforms; Welfare
    JEL: L13
    Date: 2009–04–07
  5. By: Mary T. Kelly (Department of Economics and Statistics, Villanova School of Business, Villanova University); John S. Ying (Department of Economics,University of Delaware)
    Abstract: Regulation of the cable television industry was marked by remarkable periods of deregulation, re-regulation, and re-deregulation during the 1980s and 1990s. Using FCC firm-level survey data spanning 1993 to 2001, we model and econometrically estimate the effect of regulation and competition on cable rates. Our calculations indicate that while regulation lowered rates for small system operators, it raised them for medium and large systems. Meanwhile, competition consistently decreased rates from 5.6 to 8.8 percent, with even larger declines during periods of regulation. Our results suggest that competition is more effective than regulation in containing cable prices.
    Keywords: cable rates, regulation, competition
    JEL: L51 L96
    Date: 2009–04
  6. By: Peter Scott (Centre for International Business History Henley Business School at the University of Reading); James Walker (Centre for International Business History Henley Business School at the University of Reading)
    Abstract: Department stores represented one of the most advertising-intensive sectors of American inter-war retailing. Yet it has been argued that a competitive spiral of high advertising spending, to match the challenge of other local department stores, contributed to a damaging inflation of costs that eroded long-term competitiveness. We test these claims, using both qualitative archival data and establishment-level national data sets. Returns to stores’ advertising are shown to have fallen over the period, while own advertising led to retaliatory advertising by rival department stores, which substantially lowered returns on advertising dollars in the 1930s (but not the 1920s).
    Keywords: Department stores, Interwar U.S. economic history, Advertising, Marketing
    JEL: L81 M37 N82
    Date: 2009

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