Volume 18, Issue 6:

Röller, Lars-Hendrik & Sickles, Robin C. "Capacity and product market competition: Measuring market power in a 'Puppy-Dog' industry"

JEL codes: L5; L93

Abstract: In this paper we specify and estimate a structural model which accounts for competition in two variables: capacity and prices. The model has a two-stage setup. In the first stage firms make capacity decisions followed by a product-differentiated, price setting game in the second stage. Since costs are endogenized though the first stage, this has important implications for the measurement of market power in the product market. In particular, simpler one-stage specifications would results in a bias in the measurement of market power, which can be linked to the taxonomy for two-stage games given in Fudenberg and Tirole (1984). We then estimate this model - demand, cost (shrot run and long run), and conduct - for the European Airline Industry using data for the period of 1976-1990. We perform a number of specification tests and reject a simple one-stage specification in favor of our two-stage set-up. In particualr, we find that empirically the game is consistent with a fat-cat strategy. In other words, European Airlines overinvest in capacities in order to be less aggressive. Moreover, we find that some degree of market power in the product market exists. However, market power in the two-stage set-up is significantly lower than in the more widely employed one-stage specification, which is consistent with the direction bias in fat-cat games. This illustrates that firms market power in the product market is significantly overestimated whenever capacity competition is not accounted for.

Collie, David

"State aid in the European Union: the prohibition of subsidies in an integrated market"

JEL codes: L13; L40; L52
Keywords: state aid; European Union; oligopoly; distortionary taxation

Abstract: The effect of prohibiting state aid in an integrated market is analysed in a symmetric Cournot oligopoly model where one firm is located in each member state. Subsidies are financed by distortionary taxation so there is a trade-off between the deadweight loss from the oligopolistic distortion and that from distortionary taxation. It is shown that there exists a range of values for the opportunity cost of government revenue where member states want to give subsidies and where the multilateral prohibition of subsidies would increase aggregate welfare. Furthermore, this range of values is shown to include plausible estimates of opportunity cost.

Brady, Una & Feinberg, Robert M.

"An examinaiton of stock-price effects of EU merger control policy"

JEL codes:

Abstract: This paper is an attempt at judging the impact of the adoption of EU merger controls and subsequent enforcement on European share prices of companies likely to have been affected. The event study approach is applied to both regime and case-specific effects. The regime effects are weak, and generally not statistically significant, but are suggestive of changed investor views of companies most likely to be affected, namely merger-prone multinationals or those in smaller countries without their own merger enforcement apparatus. The case effects appear stronger. We find that enforcement of the merger regulation has had substantial effects on individual companiy stock values.

Bouckaert, Jan & Degryse, Hans

"Price competition between an expert and a non-expert"

JEL codes: D43; L13; L15
Keywords: Price competition; differentiation; re-entry; quality

Abstract: This paper characterizes price competition between an expert and a non-expert. In contrast with the expert, the non-expert´s repair technology is not always successful. Consumers visit the expert after experiencing an unsuccessful match at the non-expert. This re-entry affects the behavior of both sellers. For low enough probablity of successful repair at the non-expert, all consumers first visit the non-expert, and a "timid-pricing" equilibrium results. If the non-expert´s repair technology performs well enough, it pays for some consumers to disregard the non-expert a visit. They directly go to the expert´s shop, and an "aggressive-pricing" equilibrium pops up. For intermediate values of the non-expert´s successful repair a "mixed-pricing" equilibrium emerges where the expert randomizes over the  monopoly  price and some lower price.

Swagel, Phillip

"Union behavior, industry rents, and optimal policies"

JEL codes: L52; J51; L61
Keywords: Optimal policy; production subsidy; labor rent; union behavior

Abstract: This paper examines the welfare gains from strategic industrial policy in the U.S. steel industry, focusing particularly on the role of capacity utilization and the potential gains from capturing labor rents. With underutilized capacity, strategic policies to capture labor rents lead to an endogenous response that diminishes their importance. On the other hand, reducing domestic labor market distortions results in welfare gains nearly as large as those from the optimal subsidy. I conclude that the focus on labor rents as the subject of industrial policy is overstated, at least in manufacturing industries such as integrated steel.

Vagstad, Steinar

"Centralized vs. decentralized procurement: does dispersed information call for decentralized decisionmaking?"

JEL codes: D44, D82, L51, R38
Keywords: incentive contracts, auctions, discrimination, procurement, quality

Abstract: Should the government procure equipment for its agencies or let them run their own procurement auctions? Suppose the agency has private information about product quality, but is inclined to favour local suppliers. Decentralization saves bureaucracy and "agency costs' (costs tied to truthful revelation of quality information), but leads to biased decisions (a discriminatory auction). I show that the costs associated with discrimination may increase when the quality differences (or the probability that the agency knows the quality) increase. Moreover, this effect may be dominant, implying that incrased importance of local information may be an argument for centralization.
Konrad, Kai A.
"Spatial contests"
JEL codes: D44, L11, L13
Keywords: contests, location choice, spatial differential
Abstract: Competition in some markets is a contest. Sellers compete for contracts by making promotional efforts that cannot be recovered, even if the firm is not awarded the contract. This paper characterizes equilibrium of location choice of firms in a spatial model if firms compete for customers in a pure contest.
Ashiya, Masahiro

"Weak Entrants are Welcome"

JEL codes: D43, F13, L13
Keywords: Entry deterrence, Product differentiation, Trade policy, Uniqueness of equilibrium

Abstract: This paper investigates the decision problem of an incumbent firm confronted by both a weak and strong entrant in a differentiated market. Suppose that the incumbent can deter entry of the weak firm, but cannot deter entry of the strong firm by itself. Then the incumbent may allow entry of the weak firm and use it to alter the strong firm's entry decision. The present paper formalizes this idea, and it sheds new light on the fact that domestic firms are sometimes able to block strong foreign firms after trade liberalization. The idea also explains why a dominant firm lets fringe firms be in the market.

Bergman, Mats A.

"A note on N. Economides: The incentive for non-price discrimination by an input monopolist"

Economides, Nicholas

Comment on "A note on N. Economides: The incentive for non-price discrimination by an input monopolist"

Bloch, Francis