A CEPR workshop on 'Competition Policy' was held in Lausanne on 13/15 November 1995, organized by  Damien Neven (Université de Lausanne and CEPR) and Patrick Rey (ENSAE-CREST and CEPR). The workshop formed part of CEPR's research programme on `Market Structure and Competition Policy', supported by the European Commission's Human Capital and Mobility Programme. Additional support was provided by ???
Thomas von Ungern-Sternberg (Université de Lausanne) presented his analysis of `Competition and Monopoly in the Fire Insurance Industry'. He deals explicitly with the market for housing insurance against fire and natural damages in Switzerland where the organisation of the market differs regionally. There are 19 cantons with regional state monopolies, and 7 cantons with only private insurance companies and no government supplier. Using this constellation for cross-section comparisons von Ungern finds that state monopolies are considerably more efficient than private insurance companies. This shows a comparison of the average premium rates of the two systems: the monopolies are considerably cheaper than the private insurance companies. The reason is that state monopolies incur considerably lower administrative costs since they do not have to run after their customers, and thus pay no commissions to representatives. The latter usually amount to 15%-20% of the annual premium payment. Hence, the state monopoly leads to a substantial cost-saving which allows for a substantial reduction in premium rates.
Lars-Hendrik Röller (Wissenschaftszentrum Berlin and Humboldt Universität and CEPR) examined in joint work with Damien Neven how product market competition affects managerial incentives to control firms' costs in the European airline industry. Their paper `Rent Sharing in the European Airline Industry' starts from the observation that due to imperfect monitoring managers can control the disposition of market rents. Hence, when competition is lax they may opt for `the quiet life' and inflate costs rather than work hard for the sole purpose of handing these rents over to the firms' owners. This presumption seriously complicates the task of competition authorities since the evaluation of costs associated with market power should take into account the excessive costs that managers can afford to maintain. Furthermore, to the extent that costs become endogenous, the mere observation of price-cost margins offers little guidance to the evaluation of market power. The paper proposes a method to measure empirically the link between competition and rent sharing by focusing on the settlement of excessive wages. The authors focus is on rent sharing between unions and management as a mechanism through which costs are endogenised. They propose and estimate a structural model of competition which formalises the airlines' decisions as a two stage game. At the first stage the management and a representative union bargain over wages, at the second stage airlines set prices in the market game. The model is then estimated using data for 8 European airlines from 1976-1990. The authors find considerable support for the hypothesis that lax competition induces extensive rent sharing through excessive wages.
Pedro Barros (Universidade Nova de Lisboa and CEPR) presented joint work with Antonio P.N. Leite (Universidade Nova de Lisboa) entitled `The Good Monopoly; a Case for Joint Ownership of Competing Systems'. This paper challenges the conventional argument according to which separate ownership of different firms producing (imperfect) substitutes is welfare improving. It studies a setting where two competing systems such as GSM cellular and trunk radio telecommunications networks are available to consumers who value more highly the good available in the system with higher production costs. The authors show that in this framework joint ownership may lead to a higher level of welfare than separate ownership when the difference in costs from the least preferred system to the competing system is relatively large. The reason is that for sufficiently different costs, separate ownership of competing systems may lead to excessive adoption of the system most favoured by consumers. When this effect is big enough, it more than compensates the `monopoly distortion', i.e. the welfare cost resulting from the monopolist's (joint owner's) enhanced ability to extract rents, which in turn decreases with the differential in cost.
Massimo Motta (Universitat Pompeu Fabra) presented work with Ramon Faulí-Oller (Universitat d'Alicant and CEPR) on `Managerial Incentives for Mergers'. The paper starts from the empirical observation that mergers are very often unprofitable. This phenomenon is explained as a consequence of the incentives given to managers by the firm's owners. The paper extends Fershtman and Judd's (1987) model of managerial incentives by allowing managers to undertake mergers with other firms in the industry in addition to setting the firm's price or quantity. In both, the former and the present model one finds that under strategic substitutability managerial incentives are distorted away from profit maximization to include size considerations in order to make the manager more aggressive in the product market. However, in the present model this incentive structure has the additional effect of inducing the manager to take rival firms over even if this is not profitable for the owner. Contrary to the results usually derived by the literature on managerial incentives this finding may arise independent of the nature of competition in the product market. Hence, even if the market game exhibits strategic complementarities the owner finds it optimal not to ask the manager to maximise profits. Here, the intuition is that by making the manager more aggressive, the other firms have lower profits and accept to sell out at lower prices.
Theo van de Klundert (CentER of Economic Research, Tilburg University) presented 'Economic Growth, Toughness of Competition, and Welfare' written with Sjak Smulders. This paper combines endogenous growth theory and the industrial organisation literature on innovation to analyse the impact of competition on growth and welfare. The number of firms, the mark-up over marginal cost set by firms, and the rate of innovation are endogenous. The paper studies how the intensity of competition affects market structure and innovation by distinguishing between different regimes of oligopolistic competition in a market with heterogeneous products. The tougher price competition, the lower profit margins for a given rate of concentration. In a zero profit equilibrium the number of firms and product variety is therefore smaller the tougher competition is. Average firm size is larger which stimulates innovation since the gains from R&D can be applied to a larger market. Bertrand competition is found to yield higher growth rates than Cournot competition at the cost of lower product variety. From a welfare point of view accumulation of firm-specific knowledge is also low even if inter-firm knowledge spillovers are neglected.
In `Entry and Competitive Selection' John Vickers (University of Oxford) re-examines the excess entry question under Cournot competition. It is well known that in the homogeneous goods Cournot model with symmetric firms there is a tendency for the entry externality to be negative (unless consumer surplus has a sufficiently greater weight than profit in social welfare). Thus there is a tendency towards excess entry. But assuming that firms are symmetric means that competition has no role in selecting between firms with different efficiency levels. This paper studies the entry externality in the homogeneous goods Cournot framework when firms are not assumed to be equally efficient. Hence, competitive selection plays a role. The result is that under quite a wide range of circumstances, the entry externality is more favourable when firms may be asymmetric because of the role of competition in selection.