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on Industrial Competition |
| By: | Phillipe Gagnepain; Pedro L. Marín |
| Abstract: | We consider an empirical model of worldwide airline alliances that we apply to a large set of companies for the period 1995-2000. Using observations at the companies level, we estimate a cost, capacity, and demand system that accounts for cross-price elasticities. From the estimates, we shed light on the fact that many airlines involved in the same alliances are potential substitutes. We also test for the effects of alliances on airlines’ fares and suggest that airlines inside alliances cut prices by 5% on average compared to airlines outside alliances. Finally, we construct price-cost margins for each airlines and suggest that current pricing habits are not uniform and vary from one alliance to another. |
| Keywords: | alliances, airline, cross-price elasticities, Nash behavior |
| JEL: | L11 L13 L41 L93 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we096540&r=com |
| By: | David B. Humphrey (Department of Finance, Florida State University, 600 W. College Avenue, Tallahassee, FL 32306, United States.) |
| Abstract: | Payment scale economies affect banking costs, competition in payment services, and pricing. Our scale measure relates operating cost to physical measures of European banking "output", finding large economies. This differs from relating total cost to the value of balance sheet assets (the conventional approach). Interest expenses are excluded since differences here are primarily due to mix, not scale. Also, since standard indicators of competition can give inconsistent results, a revenue-based frontier measure is developed and applied to European banks, with little difference evident across countries. Existing differences in bank prices (EC report) are associated with small differences in competition. JEL Classification: E41, C53. |
| Keywords: | Payment scale economies; bank competition; frontier analysis; European banks. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091136&r=com |
| By: | Özlem Bedre-Defolie (Toulouse School of Economics, Manufacture de Tabacs, 21 allées de Brienne – 31000 Toulouse, France.); Emilio Calvano (Department of Economics, Harvard University, Littauer Center, 1805 Cambridge Street, Cambridge, MA 02138, U.S.A) |
| Abstract: | In a payment card association such as Visa, each time a consumer pays by card, the bank of the merchant (acquirer) pays an interchange fee (IF) to the bank of the cardholder (issuer) to carry out the transaction. This paper studies the determinants of socially and privately optimal IFs in a card scheme where services are provided by a monopoly issuer and perfectly competitive acquirers to heterogeneous consumers and merchants. Different from the literature, we distinguish card membership from card usage decisions (and fees). In doing so, we reveal the implications of an asymmetry between consumers and merchants: the card usage decision at a point of sale is delegated to cardholders since merchants are not allowed to turn down cards once they are affiliated with a card network. We show that this asymmetry is sufficient to induce the card association to set a higher IF than the socially optimal IF, and thus to distort the structure of user fees by leading to too low card usage fees at the expense of too high merchant fees. Hence, cap regulations on IFs can improve the welfare. These qualitative results are robust to imperfect issuer competition, imperfect acquirer competition, and to other factors affecting final demands, such as elastic consumer participation or strategic card acceptance to attract consumers. JEL Classification: G21; L11; L42; L31; L51; K21. |
| Keywords: | Payment card associations; Interchange fees; Merchant fees. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091139&r=com |
| By: | Jean-Charles Rochet (Toulouse School of Economics, Manufacture de Tabacs, 21 allées de Brienne - 31000 Toulouse, France.); Julian Wright (Department of Economics, National University of Singapore, 21 Lower Kent Ridge Road, Singapore 119077.) |
| Abstract: | We build a model of credit card pricing that explicitly takes into account credit functionality. We show that a monopoly card network always selects an interchange fee that exceeds the level that maximizes consumer surplus. If regulators only care about consumer surplus, a conservative regulatory approach is to cap interchange fees based on retailers’ net avoided costs from not having to provide credit themselves. In the model, this always raises consumer surplus compared to the unregulated outcome, sometimes to the point of maximizing consumer surplus. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091138&r=com |
| By: | Wilko Bolt (De Nederlandsche Bank, Research Department, Postbus 98, 1000 AB Amsterdam, The Netherlands.); Heiko Schmiedel (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyzes the welfare implications of creating a Single Euro Payments Area. We study the e®ects of increased network compatibility and payment scale economies on consumer and merchant card fees and its impact on card usage. In particular, we model competition among debit cards and between debit and credit cards. We show that competitive pressures dampen merchant fees and increase total card acceptance. The paper argues that there is room for multilateral interchange fee arrangements to achieve optimal consumer and merchant fees, taking safety, income uncertainty, default risk, merchant's pricing power, and the avoided cost of cash at the retailers side into account. Consumers and merchants are likely to benefit the most from the creation of SEPA when sufficient payment card competition alleviates potential monopolistic tendencies. JEL Classification: L11; G21; D53. |
| Keywords: | SEPA; card network competition; optimal pricing; economic welfare. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091140&r=com |
| By: | Gloria Pasadilla; Melanie Milo (Philippine Institute for Development Studies) |
| Abstract: | The paper analyzes the impact of major policy changes on banking structure, performance and competition, using bank-specific data from 1990-2002. We find that the entry of more market players is correlated with drops in interest spread and profits which, partly, bespeaks of possible dissipation of previous monopoly profits of large commercial banks. We also compute the H-stat based on the Panzar-Rosse methodology and find that, in general, despite the characteristic presence of few, large commercial banks, the sector is fairly competitive, specially in the loan-granting business. Moreover, competition has increased in the latter half of 1990s, primarily due to the presence of more small commercial banks, rather than big banks. |
| Keywords: | banking reform, bank liberalization, h-statistics, competition policy, Panzar- Rosse methodology |
| JEL: | G21 O16 O10 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:1789&r=com |
| By: | Santiago Carbó-Valverde (University of Granada, Department of Economic Theory and History, Campus Universitario de Cartuja s/n, E-18071 Granada, Spain.); Sujit Chakravorti (Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413, United States.); Francisco Rodríguez Fernández (University of Granada, Department of Economic Theory and History, Campus Universitario de Cartuja s/n, E-18071 Granada, Spain.) |
| Abstract: | We study the effect of government encouraged or mandated interchange fee ceilings on consumer and merchant adoption and usage of payment cards in an economy where card acceptance is far from complete. We believe that we are the first to use bank-level data to study the impact of interchange fee regulation. We find that consumer and merchant welfare improved because of increased consumer and merchant adoption leading to greater usage of payment cards. We also find that bank revenues increased when interchange fees were reduced although these results are critically dependent on merchant acceptance being far from complete at the beginning and during the implementation of interchange fee ceilings. In addition, there is most likely a threshold interchange fee below which social welfare decreases although our data currently does not allow us to quantify it. JEL Classification: L11, G21, D53. |
| Keywords: | consumer payment choice; merchant payment adoption; network competition. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091137&r=com |
| By: | Gilberto M. Llanto; Enrico L. Basilio; Leilanie Basilio (Philippine Institute for Development Studies) |
| Abstract: | The Philippines is an archipelago of approximately 7,107 islands. It has a long coastline extending to 235,973 square kilometers which is longer than that of the United States (UNESCAP 2002b). The country’s archipelagic configuration requires an efficient maritime transport infrastructure composed of ports and shipping for growth and socioeconomic integration. The integration of peripheral islands to the urban economic nodes such as Metro Manila, Cebu, Davao and General Santos and the diffusion of investments and economic activities fundamentally count on an efficient road and maritime transport network. This paper examines competition policy and the regulatory framework of the port and shipping sectors. It assesses the policies and programs of the government in promoting competition in these sectors and recommends areas for policy and regulatory reform. After a brief description of the analytical underpinnings of competition policy and regulation the paper reviews the present state of competition and regulation in Philippine ports and interisland shipping to identify emerging issues that call for policy action. It provides specific recommendations for policy and regulatory reform. |
| Keywords: | maritime transport, ports and inter-island shipping, competition policy, regulatory framework, market contestability, landlord port model |
| JEL: | L51 L90 O19 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:1760&r=com |
| By: | Ma. Teresa Dueñas-Caparas (Philippine Institute for Development Studies) |
| Abstract: | The study assesses the state of competition in the Philippine wholesale and retail sector, focusing on the distribution of specialized goods and pharmaceutical products. It uses the traditional tools of analysis like concentration ratios and price-cost margins in determining the competitive state of the sector. The study also analyzes the other dimensions in retail competition like price, geographical location, retail product and retail service. Industry data from the National Statistics Office were used in the analysis, aided by a small-scale survey conducted in the Metro Manila area. The department store and grocery subsector appears to operate in a competitive environment despite the presence of two big dominating firms in the market. No price or quantity leader-follower behavior was observed, as validated by the tools used in the analysis. On the other hand, one firm, whose strategic advantages include economies of scope and space, retail image and consumer loyalty, dominates the distribution of pharmaceutical products. Potential market entrants face these forms of challenges—factors that are not regarded as anti-competitive and are welfare enhancing to the general public. The need for competition policy is recommended to guard against possible merger of the giant firms in the department store and grocery subsector. Any possible collusion between the big firms could result to a monopolistic outcome. The study observes that the apparent high price of pharmaceutical products is mainly attributed to the manufacturing process, and not at the distribution of these goods. Hence, it is recommended that a study analyzing the state of competitiveness of manufacturing pharmaceutical products be conducted. |
| Keywords: | competition policy, distribution sector, pharmaceutical products, and dimensions of competition |
| JEL: | L65 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:1742&r=com |
| By: | Gea M. Lee (Singapore Management University) |
| Abstract: | In this paper, we develop a model of collusion in which two firms play an infinitelyrepeated Bertrand game when each firm has a privately-informed agent. The colluding firms, fixing prices, allocate market shares based on the agent’s information as to cost types. We emphasize that the presence of privately-informed agents may provide firms with a strategic opportunity to exploit an interaction between internal contracting and market-sharing arrangement- the contracts with agents may be used to induce firms’ truthful communication in their collusion, and collusive market-share allocation may act to reduce the agents’ information rents. |
| Keywords: | Optimal collusion, internal contract, privately-informed agents, price-fixing |
| JEL: | C73 L13 L14 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:1553&r=com |
| By: | Schmidt, Klaus M. |
| Abstract: | There is a general presumption that social preferences can be ignored if markets are competitive. Market experiments (Smith 1962) and recent theoretical results (Dufwenberg et al. 2008) suggest that competition forces people to behave as if they were purely self-interested. We qualify this view. Social preferences are irrelevant if and only if two conditions are met: separability of preferences and completeness of contracts. These conditions are often plausible, but they fail to hold when uncertainty is important (financial markets) or when incomplete contracts are traded (labor markets). Social preferences can explain many of the anomalies frequently observed on these markets. |
| Keywords: | Social preferences; competition; separability; incomplete contracts; asset markets; labor markets |
| JEL: | C9 D5 J0 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:11313&r=com |
| By: | Erlinda M. Medalla (Philippine Institute for Development Studies) |
| Abstract: | This short paper attempts to lay down the framework and basic principles for the optimum interface between competition policy and infrastructure regulation. Competition policy should address exclusionary and exploitative acts and discipline firms when such acts are committed. In certain cases, more may be required by way of additional competition rules needed to assist the market and substitute for lack of a competitive process of allocation. This is where competition policy in the form of direct regulation comes in. This is usually where market power is inherent (in the structure), specifically the case of infrastructure sectors. The basic issues relate to- tendency for “overregulation,� problems with price regulation, privatization, unbundling, regulatory capture, and multiple objectives. The paper also highlights the findings from past studies on three major infrastructure/utilities sectors, namely power, shipping and telecommunications. For all these sectors, there have been significant attempts to enhance competition, mainly in terms of relaxing entry regulation and some effort at deregulating prices and privatization. It was not surprising to find difficulties in dealing with the trade-offs between social objectives, principally equity and access, and competition (efficiency) objectives. |
| Keywords: | competition and regulation interface, competition policy framework, infrastructure regulation |
| JEL: | H54 O12 O22 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:1775&r=com |
| By: | Rafaelita M. Aldaba (Philippine Institute for Development Studies) |
| Abstract: | The paper studies the impact of trade liberalization on competition and productivity. Competition is the main channel through which trade liberalization affects economic performance. Competition fosters innovation and technology adoption which leads to increases in competitiveness and growth that will have large consequences for poverty and inequality. To realize these expected effects, it is important that firms change their behavior and adjust to the new market environment. The success of reforms depends to a great extent on the capacity of firms to exploit the new competitive conditions in the market and on their ability to take advantage of the opportunities offered to them. Firms, however, will not venture into the unknown and uncertain. They will only take advantage of the new market opportunities if the government program for implementing policy reforms is a credible one. Policy reversals, delays in timetable, and inconsistent decision-making may undermine the success of liberalization. Hence, the overall environment for market transactions is also an essential ingredient. Therefore, the strength of competition is a function not only of the behavior of firms but also of the external environment within which they compete. This includes the state of transport and communications, framework of laws and regulations, effectiveness of the financial system in matching investment resources with entrepreneurial opportunities, as well as information available to consumers. The experience of the Philippine manufacturing sector shows that which despite liberalization, competition and productivity growth have remained weak due to inadequate physical and institutional infrastructure. |
| Keywords: | competition, trade liberalization, effective protection, total factor productivity growth |
| JEL: | F13 O24 F10 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:tradew:1716&r=com |
| By: | Luis Corchón; Félix Marcos |
| Abstract: | In this paper we consider price regulation in oligopolistic markets when firms are quantity setters. We consider a market for a homogeneous good with a special form of the demand function (?-linearity), constant returns to scale and identical firms. Marginal costs can take two values only: low or high. The regulator knows all parameters except marginal costs. Assuming that the regulator is risk neutral, we characterize the optimal policy and show how this policy depends on the basic parameter of demand and costs |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we100101&r=com |
| By: | Scopelliti, Alessandro Diego |
| Abstract: | This paper aims at analyzing, from an empirical point of view, the relationship between product market competition and economic growth, using the data on multi-factor productivity for a panel of 20 OECD countries over a period 1995-2005, and considering the role of the distance from the technological frontier in the growth process. Section A examines the impact of economic freedom and of the distance to frontier on the level and on the growth rate of multi-factor productivity. The analysis distinguishes between the indicators of business freedom and trade freedom, as proxies for the competitive pressures coming from domestic market and from foreign market. Then, trade liberalizations are more beneficial for the countries far from the frontier, because they can exploit the opportunities given by international trade also in order to adopt the existing technologies developed by the advanced economies. On the other hand, business liberalizations are more advantageous for the countries close to the frontier, because the elimination of regulatory barriers increases the possibility of entry in the market and then rises the potential competition to the incumbent firms. Section B studies the effect of product market regulation, employment protection legislation and of the distance to frontier on the level and on the growth rate of multi-factor productivity. Product market liberalization as well as labour market deregulation determine an increase of total factor productivity: moreover, the interaction of market rigidities with the distance to the frontier mostly displays an innovationenhancing effect, since the positive effect of market liberalizations on TFP is higher for the countries close to the frontier, where the existing technology level would reinforce the incentive for innovation. |
| Keywords: | multi-factor productivity; economic freedom; product market regulation; employment protection legislation; distance to frontier |
| JEL: | L44 O47 O43 L43 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:20127&r=com |