nep-com New Economics Papers
on Industrial Competition
Issue of 2005‒05‒23
twenty papers chosen by
Russell Pittman
US Department of Justice

  1. Monopoly, asymmetric information, and optimal environmental taxation By Manel Antelo
  2. Do Daily Retail Gasoline Prices adjust Asymmetrically? By Leon Bettendorf; Stephanie van der Geest; Gerard Kuper
  3. The “risk-adjusted” price-concentration relationship in banking By Elijah Brewer, III; William E. Jackson, III
  4. Two-part pricing under revenue cap regulation By Lantz, Björn
  5. Who competes with whom? the case of depository institutions By Robert M. Adams; Kenneth P. Brevoort; Elizabeth K. Kiser
  6. The effects of competition from large, multimarket firms on the performance of small, single-market firms: evidence from the banking industry By Allen N. Berger; Astrid A. Dick; Lawrence G. Goldberg; Lawrence J. White
  7. Learning by observing: information spillovers in the execution and valuation of commercial bank M&As By Gayle DeLong; Robert DeYoung
  8. Betcha can’t acquire just one: merger programs and compensation By Richard J. Rosen
  9. The economics of ideas and intellectual property By Michele Boldrin; David K. Levine
  10. Intellectual property and market size By Michele Boldrin; David K. Levine
  11. Banking markets in a decade of mergers : a preliminary examination of five North Carolina markets By John A. Weinberg
  12. Entry into Local Retail Food Markets in Sweden: A Real-Options Approach By Daunfeldt, Sven-Olov; Orth, Matilda; Rudholm, Niklas
  13. Monopoly-Creating Bank Consolidation? The Merger of Fleet and BankBoston By Charles W. Calomiris; Thanavut Pornrojnangkool
  14. Eat or Be Eaten: A Theory of Mergers and Merger Waves By Gary Gorton; Matthias Kahl; Richard Rosen
  15. Price Adjustment at Multiproduct Retailers By Daniel Levy; Shantanu Dutta; Mark Bergen; Robert Venable
  16. Determinants of Profit in the Broadcasting Industry | Evidence from Japanese Micro Data| By Norihiro KASUGA; Manabu Shishikura
  17. Analysis of Power Sector in India: A Structural Perspective By Deepak Kumar; J P Singh; Niranjan Swain
  18. The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains By Daniel Levy; Mark Bergen; Shantanu Dutta; Robert Venable
  19. Does Geography Play a Role in Domestic Takeovers? Theory and Finnish Micro-level Evidence By Petri Böckerman; Eero Lehto
  20. Do Vertical Mergers Facilitate Upstream Collusion? By Volker Nocke; Lucy White

  1. By: Manel Antelo (Universidad de Santiago de Compostela)
    Abstract: This paper aims to examine optimal environmental taxation in an incomplete-information two-period model in which a monopolistic firm produces and pollutes. It is assumed that the polluting firm is privately informed about its costs of production, and the policymaker, which can only infer the firm's costs from observing the output produced in the first period, has the chance to set environmental taxes to affect emissions; the emitter of pollution may then choose a non-optimal level of production in such a period in order to manipulate the policymaker's beliefs concerning its costs. If the policymaker values environmental quality sufficiently, the low-cost polluter has an incentive to misrepresent itself as a high-cost firm in order to secure a low environmental tax in the second period. This leads the high-cost polluting firm to produce, in the first period, an output level that is not higher than output which would be optimal if only short-term considerations were taken into account. The optimal environmental tax rate in the first period, when the firm's output is a signal of its cost, is then lower than or equal to what it would be if the firm's output was not a signal of firm's costs. The expected emissions in the former context are also lower than or equal to those in the latter case. By contrast, when the policymaker's valuation of the environment is sufficiently low, the environmental tax is negative (a subsidy per unit of pollutant emitted) in both the signaling and non-signaling contexts and no less in the former context than in the latter.
    Keywords: Environmental tax and subsidy policy, monopolistic polluting firm, vertical asymmetric information, signaling and non-signaling
    JEL: D62 D82 L13
    Date: 2005
  2. By: Leon Bettendorf (Faculty of Economics, Erasmus Universiteit Rotterdam); Stephanie van der Geest (Faculty of Economics, Erasmus Universiteit Rotterdam); Gerard Kuper (University of Groningen)
    Abstract: This paper analyzes adjustments in the Dutch retail gasoline prices. We estimate an error correction model on changes in the daily retail price for gasoline (taxes excluded) for the period 1996-2004 taking care of volatility clustering by estimating an EGARCH model. It turns out the volatility process is asymmetrical: an unexpected increase in the producer price has a larger effect on the variance of the producer price than an unexpected decrease. We do not find strong evidence for amount asymmetry. However, there is a faster reaction to upward changes in spot prices than to downward changes in spot prices. This implies timing or pattern asymmetry. This asymmetry starts three days after the change in the spot price and lasts for four days.
    Keywords: Asymmetry; Retail gasoline prices; Volatility
    JEL: D43 E31
    Date: 2005–04–22
  3. By: Elijah Brewer, III; William E. Jackson, III
    Abstract: Price-concentration studies in banking typically find a significant and negative relationship between consumer deposit rates (i.e., prices) and market concentration. This relationship implies that highly concentrated banking markets are “bad” for depositors. It also provides support for the Structure-Conduct-Performance hypothesis and rejects the Efficient-Structure hypothesis. However, these studies have focused almost exclusively on supply-side control variables and have neglected demand-side variables when estimating the reduced form price-concentration relationship. For example, previous studies have not included in their analysis bank-specific risk variables as measures of cross-sectional derived deposit demand. The authors find that when bank-specific risk variables are included in the analysis the magnitude of the relationship between deposit rates and market concentration decreases by over 50 percent. They offer an explanation for these results based on the correlation between a bank’s risk profile and the structure of the market in which it operates. These results suggest that it may be necessary to reconsider the well-established assumption that higher market concentration necessarily leads to anticompetitive deposit pricing behavior by commercial banks. This finding has direct implications for the antitrust evaluations of bank merger and acquisition proposals by regulatory agencies. And, in a more general sense, these results suggest that any Structure-Conduct-Performance-based study that does not explicitly consider the possibility of very different risk profiles of the firms analyzed may indeed miss a very important set of explanatory variables. And, thus, the results from those studies may be spurious.
    Date: 2004
  4. By: Lantz, Björn (Department of Business Administration, School of Economics and Commercial Law, Göteborg University)
    Abstract: This paper aims at developing the theoretical understanding of revenue capping as a way of regulating monopolistic firms. It is shown that the fact that a standard monopolist regulated by a fixed revenue cap will raise its price above the unregulated monopoly level is robust to two-part pricing. It is also shown that when regulation of a two-part pricing monopolist is based on a hybrid revenue cap defined as a linear function of quantity, it is the slope of the cap that determines its incentives for efficiencient behaviour while the intercept of the cap only affects the profit level of the firm. This also holds if the cap is defined as a hybrid price-revenue cap. The general conclusion of this is that the slope of the hybrid cap needs to be steeper that the slope of the firm’s cost function in order to prevent the incentive to raise price above the unregulated monopoly level. <p>
    Keywords: Monopoly regulation; incentive regulation; revenue cap regulation
    Date: 2005–05–17
  5. By: Robert M. Adams; Kenneth P. Brevoort; Elizabeth K. Kiser
    Abstract: Little empirical work exists on the substitutability of depository institutions. In particular, the willingness of consumers to substitute banks for thrifts and to switch between multimarket and single-market institutions (i.e., institutions with large vs. small branch networks) has been of strong interest to policymakers. We estimate a structural model of consumer choice of depository institutions using a panel data set that includes most depository institutions and market areas in the United States over the period 1990-2001. Using a flexible framework, we uncover utility parameters that affect a consumer's choice of institution and measure the degree of market segmentation for two institution subgroups. We use our estimates to calculate elasticities and perform policy experiments that measure the substitutability of firms within and across groupings. We find both dimensions --thrifts and banks, and single- and multimarket institutions-- to be important market segments to consumer choice and, ultimately, to competition in both urban and rural markets.
    Keywords: Banks and banking ; Thrift institutions ; Financial institutions
    Date: 2005
  6. By: Allen N. Berger; Astrid A. Dick; Lawrence G. Goldberg; Lawrence J. White
    Abstract: We offer and test two competing hypotheses for the consolidation trend in banking using U.S. banking industry data over the period 1982-2000. Under the efficiency hypothesis, technological progress improved the performance of large, multimarket firms relative to small, single-market firms, whereas under the hubris hypothesis, consolidation was largely driven by corporate hubris. Our results are consistent with an empirical dominance of the efficiency hypothesis over the hubris hypothesis-on net, technological progress allowed large, multimarket banks to compete more effectively against small, single-market banks in the 1990s than in the 1980s. We also isolate the extent to which technological progress occurred through scale versus geographic effects and how they affected the performance of small, single-market banks through revenues versus costs. The results may shed light as well on some of the research and policy issues related to community banking, and on the question of how community banks should be defined.
    Date: 2005
  7. By: Gayle DeLong; Robert DeYoung
    Abstract: We hypothesize that banks become better able to manage acquisitions, and investors become better able to value those acquisitions, as these parties ‘learn-by-observing’ information that spills-over from previous bank M&As. We find evidence consistent with these hypotheses for 216 M&As of large, publicly traded U.S. commercial banks between 1987 and 1999. Our theory and our results are predicated on the idea that acquisitions of large and increasingly complex commercial banks were a relatively new phenomenon in the late-1980s, with no best practices to inform bank managers and little information upon which investors could base their valuations. Our findings provide a new explanation for why academic studies have found little evidence that bank mergers create value. Furthermore, our finding that investors become more accurate pricers of new phenomena as they observe greater quantities of those phenomena is consistent with the theory of semi-strong stock market efficiency.
    Keywords: Bank mergers ; Financial institutions
    Date: 2004
  8. By: Richard J. Rosen
    Abstract: This paper examines the evolution of merger programs, that is, repeated acquisitions by the same firm. Most acquisitions are made by firms with merger programs. Acquisitions that are part of programs are different from one-off acquisitions both in the effect on CEO compensation and in the reaction of the stock market. CEO compensation rises more after growth from program acquisitions than after internal growth or growth from one-off acquisitions. During a merger program, the increase in CEO compensation is much larger when the acquirer’s stock price is increasing than at other times. This is not true for other types of growth. Merger programs also show a distinct evolution. Initially, program mergers are received better by the stock market than are one- off mergers. ; As a program progresses, however, the acquisitions tend to have lower announcement reactions and long-run returns. In addition, the effect on CEO compensation is smaller for mergers later in a program. There is evidence that some firms are predisposed to make acquisitions. Firms that have made acquisitions in the recent past and that already pay their CEOs well are more likely to make future acquisitions. This suggests that there may be a managerial motivation for merger programs: firms where CEOs can expect to get large compensation increases from acquisitions are more likely to have merger programs.
    Keywords: Bank mergers ; Bank management
    Date: 2004
  9. By: Michele Boldrin; David K. Levine
    Abstract: Innovation and the adoption of new ideas are fundamental to economic progress. Here we examine the underlying economics of the market for ideas. From a positive perspective, we examine how such markets function with and without government intervention. From a normative perspective, we examine the pitfalls of existing institutions, and how they might be improved. We highlight recent research by ourselves and others challenging the notion that government awards of monopoly through patents and copyright are “the way” to provide appropriate incentives for innovation.
    Date: 2005
  10. By: Michele Boldrin; David K. Levine
    Abstract: Intellectual property protection involves a trade-off between the undesirability of monopoly and the desirable encouragement of creation and innovation. As the scale of the market increases, due either to economic and population growth or to the expansion of trade through treaties such as the World Trade Organization, this trade-off changes. We show that, generally speaking, the socially optimal amount of protection decreases as the scale of the market increases. We also provide simple empirical estimates of how much it should decrease.
    Date: 2005
  11. By: John A. Weinberg
    Abstract: In the 1990s, a wave of merger activity altered the structure of the banking industry at both the national and local levels. While banking remains a relatively unconcentrated industry at the national level, markets for some banking services continue to be primarily local. Concentration looks greater at the local level and generally increased in the 1990s. One can classify the possible motivations for mergers into two categories—those having to do with market power and those having to do with the efficient allocation of capacity among market participants. This article begins an examination of these motives through the behavior of the banking market structures in five North Carolina metropolitan areas from 1990 to 2002.
    Keywords: Banks and banking
    Date: 2005
  12. By: Daunfeldt, Sven-Olov (The Swedish Research Institute of Trade (HUI)); Orth, Matilda (Department of Economics, School of Economics and Commercial Law, Göteborg University); Rudholm, Niklas (Department of Economics, Umeå University)
    Abstract: A real-options approach was used, incorporating uncertainty and irreversibility of investments, to study the number of stores entering the Swedish retail food market during the period 1994-2002. It was found that uncertainty affected the entry-decision. Entry was less frequent in highly concentrated local retail food-markets characterized by a high degree of uncertainty, whereas higher profit opportunities seem to have increased the probability of entry. <p>
    Keywords: Real options; uncertainty; retail food; entry; negative binomial regression
    JEL: L13 L81
    Date: 2005–05–17
  13. By: Charles W. Calomiris; Thanavut Pornrojnangkool
    Abstract: The merger of Fleet and BankBoston in September 1999 resulted in a regional New England lending market in which only one large, universal bank remained. We explore the extent to which that merger resulted in monopoly rents for the combined entity in some niches within the regional loan market. For small- and medium-sized middle-market borrowers, prior to the merger, Fleet and BankBoston charged unusually low loan interest rates, reflecting their ability to realize economies of scope and scale. After the merger, those cost savings were no longer passed on to medium-sized middle-market borrowers, which resulted in an increase in the average interest rate credit spreads to those borrowers of roughly one percent. Small-sized middle-market borrowers (which continued to enjoy the advantage of loan market competition from remaining small banks) maintained their low spreads. Our results suggest that it may be desirable for regulators to consider the concentration in lending markets in addition to deposit markets when evaluating mergers and structuring appropriate divestiture requirements.
    JEL: G21 L13 D43
    Date: 2005–05
  14. By: Gary Gorton; Matthias Kahl; Richard Rosen
    Abstract: In this paper, we present a model of defensive mergers and merger waves. We argue that mergers and merger waves can occur when managers prefer that their firms remain independent rather than be acquired. We assume that managers can reduce their chance of being acquired by acquiring another firm and hence increasing the size of their own firm. We show that if managers value private benefits of control sufficiently, they may engage in unprofitable defensive acquisitions. A technological or regulatory change that makes acquisitions profitable in some future states of the world can induce a preemptive wave of unprofitable, defensive acquisitions. The timing of mergers, the identity of acquirers and targets, and the profitability of acquisitions depend on the size of the private benefits of control, managerial equity ownership, the likelihood of a regime shift that makes some mergers profitable, and the distribution of firm sizes within an industry.
    JEL: G3
    Date: 2005–05
  15. By: Daniel Levy (Bar-Ilan University); Shantanu Dutta (University of Southern California); Mark Bergen (University of Minnesota); Robert Venable (Robert W. Baird, Co.)
    Abstract: We empirically study the price adjustment process at multiproduct retail stores. We use a unique store level data set for five large supermarket and one drugstore chains in the U.S., to document the exact process required to change prices. Our data set allows us to study this process in great detail, describing the exact procedure, stages, and steps undertaken during the price change process. We also discuss various aspects of the microeconomic environment in which the price adjustment decisions are made, factors affecting the price adjustment decisions, and firm-level implications of price adjustment decisions. Specifically, we examine the effects of the complexity of the price change process on the stores’ pricing strategy. We also study how the steps involved in the price change process, combined with the laws governing the retail price setting and adjustment, along with the competitive market structure of the retail grocery industry, influence the frequency of price changes. We also examine how the mistakes that occur in the price change process influence the actions taken by these multiproduct retailers. In particular, we study how these mistakes can make the stores vulnerable to civil law suits and penalties, and also damage their reputation. We also show how the mistakes can lead to stock outs or unwanted inventory accumulations. Finally, we discuss how retail stores try to minimize these negative effects of the price change mistakes.
    Keywords: Cost of Price Adjustment, Price Adjustment Process, Menu Cost, Posted Prices, Multiproduct Retailer, Price rigidity, Sticky Prices, Frequency of Price Changes, Time Dependent Pricing, Retail Supermarket and Drugstore Chains
    JEL: E31 E12 E50 G13 G14 L11 L15 L16 M21 M31 Q11 Q13
    Date: 2005–05–15
  16. By: Norihiro KASUGA (Faculty of Economics, Nagasaki University); Manabu Shishikura (Institute for Information & Communications Policy)
    Abstract: The operating areas of each terrestrial broadcasting station in Japan are geographically divided by a licensing system and form oligopolies in each of their respective markets. These institutional constraints define the market structure, and as a result, affect the business performance of the broadcasting industry. The primary purpose for regulation is based on the gMedia Ownership Rule,h a rule designed for preserving gplurality,h gdiversityh and hlocalismh of stations. Similar rules exist in many countries, but benchmarks differ. To this end, if the regulative authority introduced a new regulation framework, it might be useful to improve the financial foundation of the licensed stations, thus preserving the original purpose of the rule. With the rapid progress of digital technology and the increasingly diversified selection of media types, the government needs to urgently review Japanfs old regulations with the aim of giving more freedom in the operation of terrestrial stations and so promote voluntary restructuring. Based on the above viewpoints, we implemented an econometric analysis with respect to factors that affect on the business performance (especially on profit) of each station. We focus on the terrestrial broadcasting industry because it plays a central role in the Japanese broadcasting system. As a result, we ascertained the following points. (1) Structural parameters: market share of each station has a positive correlation with profit, although market concentration appears to have no correlation. (2) Geographical parameters: the number of households per station and the income per household have positive correlations. (3) Business parameters: the aired ratio of self-produced TV programs has a positive correlation with revenue, although it has a negative correlation with profit. It is said that geographical environment is quite important for business performance in the broadcasting industry. This hypothesis is strongly supported by our results. Therefore deregulation and subsequent voluntary rearrangement may reinforce the operating basis of each station.
    Keywords: Terrestrial Broadcasting Station, Determinants of profit, Principle of Media Ownership Rule, Audience Share, Oligopoly
    JEL: D43 L13 L82
    Date: 2005–05–17
  17. By: Deepak Kumar (ICFAI University Press); J P Singh (BHU); Niranjan Swain (ICFAI)
    Abstract: The inhibitors to growth in power sector were many—small and big but the main roadblock in the growth path was Government Policy, which made it difficult or rather impossible for a private player to enter. This further aggravated the problem that Indian entrepreneurs didn’t have enough knowledge and experience in developing power projects. To worsen the scenario, the SEBs and other Government Agencies became financially weak to propel any future expansion or growth in the sector. Electricity Act, 2003 was a major step in solving the above underlying problems of the power sector. A whole new system was evolved where private players were invited to be an active participant. The system demanded financial, political and other infrastructural growth—with major requirement in roads and communication. Some of the bold steps taken in the Act were moving generation and distribution out of ‘License Raj’ regime, opening access to national grid and demolishing the ‘Single Buyer’ model. The failure of the huge federal structure and the changing global scenario have forced Government to think of ways to revive this fundamental infrastructure sector. Two of the avenues that government can count on for future growth of this sector is “Midgets or Small Power Plants” and “CDM—Clean Development Mechanism” .
    Keywords: Power Sector , India
    JEL: K
    Date: 2005–05–20
  18. By: Daniel Levy (Bar-Ilan University); Mark Bergen (University of Minnesota); Shantanu Dutta (University of Sourthern California); Robert Venable (Robert W. Baird, Co.)
    Abstract: We use store-level data to document the exact process of changing prices and to directly measure menu costs at five multi-store supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average $105,887/year per store, comprising 0.70% of revenues, 35.2% of net margins, and $0.52/price change. These menu costs may be forming a barrier to price changes. Specifically, (1) a supermarket chain facing higher menu costs (due to item pricing laws which require a separate price tag on each item) changes prices 2 1/2 times less frequently than the other four chains; (2) within this chain, the prices of products exempt from the law are changed over three times more frequently than the products subject to the law.
    Keywords: Menu Cost, Posted Prices, Multiproduct Retailer, Price Rigidity, Sticky Prices, Rigid Prices, Cost of Price Adjustment, New Keynesian Economics, Time Dependent Pricing
    JEL: E12 E31 E50 G13 G14 L11 L15 L16 M21 M31 Q11 Q13
    Date: 2005–05–15
  19. By: Petri Böckerman (Labour Institute for Economic Research); Eero Lehto (Labour Institute for Economic Research)
    Abstract: This paper explores domestic mergers and acquisitions (M&As) from the regional perspective. The Finnish firm-level evidence reveals that geographical closeness matters a lot for M&As within a single country. Thus, a great number of domestic M&As occur within narrowly defined regions. Interestingly, domestic M&As reinforce the core-periphery dimension. The results from matched firm-level data show that the strong ability by an acquiring company to monitor the target (measured by the knowledge embodied in human capital) is able to support M&As that occur across distant locations.
    Keywords: mergers, acquisitions, monitoring, agglomeration
    JEL: G34 R12
    Date: 2005–05–13
  20. By: Volker Nocke (Department of Economics, University of Pennsylvania); Lucy White (Finance, Harvard Business School)
    Abstract: In this paper we investigate the impact of vertical mergers on upstream firms’ ability to sustain collusion. We show in a number of models that the net effect of vertical integration is to facilitate collusion. Several effects arise. When upstream offers are secret, vertical mergers facilitate collusion through the operation of an outlets effect: Cheating unintegrated firms can no longer profitably sell to the downstream affiliates of their integrated rivals. Vertical integration also facilitates collusion through a reaction effect: the vertically integrated firm’s ‘contract’ with its downstream affiliate can be more flexible and thus allows a swifter reaction in punishing defectors. Offsetting these two effects is a possible punishment effect which arises if the integrated structure is able to make more profits in the punishment phase than a disintegrated structure.
    Keywords: vertical mergers, collusion
    JEL: L13 L42
    Date: 2003–11–17

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