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on Industrial Competition |
| By: | Jim Y. Jin; Tatiana Damjanovic; Osiris J.Parcero |
| Abstract: | Duopoly competition can take different forms: Bertrand, Cournot, Bertrand-Stackelberg, Cournot-Stackelberg and joint profit maximization. In this paper we find a clear price ranking among these five markets when goods are substitutes and an output ranking when goods are complements. Moreover, the ranking can be explained by different levels of conjectural variation associated with those markets. |
| Keywords: | Bertrand, Cournot, Stackelberg, monopoly, ranking, conjectural variation |
| JEL: | L11 L13 D43 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:crieff:0516&r=com |
| By: | Noh, Yong-Hwan; Moschini, GianCarlo |
| Abstract: | We analyze the entry of a new product into a vertically differentiated market in which an entrant and an incumbent compete in prices. Here the entry-deterrence strategies of the incumbent firm rely on “limit qualities.” With a sequential choice of quality, a quality-dependent marginal production cost, and a fixed entry cost, we relate the entry-quality decision and the entry-deterrence strategies to the level of entry cost and the degree of consumer heterogeneity. Quality-dependent marginal production costs in the model entail the possibility of inferior-quality entry as well as an incumbent’s aggressive entry-deterrence strategies of increasing its quality level toward potential entry. Welfare evaluation confirms that social welfare is not necessarily improved when entry is encouraged rather than deterred. |
| Keywords: | entry deterrence; quality choice; vertical product differentiation. |
| JEL: | C72 D43 L13 |
| Date: | 2005–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:12412&r=com |
| By: | Juha Kilponen (Bank of Finland); Torsten Santavirta (University of Helsinki) |
| Abstract: | In this study we provide a theoretical prediction of a complementary relationship between the incentive effects of product market competition and R&D subsidies using the theory of Aghion et. al (1997, 2001). The complementarity relationship and that of an inverted U-relationship is then tested using a large Finnish firm level data set combined with patent and patent citations of the firms. Econometric analysis shows that the inverted U-relationship is fairly robust to different innovation measures derived from patent data. We also find that the inverted-U relationship tends to be steeper when also R&D subsidies are considered. This result suggests that there exists a complementarity between competition and R&D subsidies. |
| Keywords: | Product market competition, Innovations, R&D subsidies |
| JEL: | L |
| Date: | 2005–09–16 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpio:0509009&r=com |
| By: | Jaspers, F.; Hulsink, W.; Theeuwes, J.J.M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Recently, several new mobile virtual network operators (MVNOs) have entered the European mobile telecommunications markets. These service providers do not own a mobile network, but instead they buy capacity from other companies. Because these virtual operators do not possess an infrastructure of their own, they have signed contracts with incumbent mobile operators with a network. The growth of these MVNOs which use leased network capacity from existing carriers, presents the incumbent mobile operators with a strategic dilemma. Network-based mobile operators have almost full control over their infrastructure but they may not know their customers well enough to fill the demand for cheaper and/or innovative services. New service-based operators may create affinity with the customer and introduce quickly all kinds of innovations and/or price discounts, but they still have to negotiate access terms and conditions with one of the domestic network-based operators. It has become important, and in some countries even urgent, to introduce regulatory measures concerning non-discriminatory access to the mobile telecommunications sector. This paper looks furthermore deeper into the entry and innovation strategies by MVNOs on the mobile market in the Netherlands, and its impact on competition. |
| Keywords: | MVNO (Mobile Virtual Network Operators);Entry & Innovation Strategies;Virtual Enterprise;Unbundling Value Chain;David & Goliath Competition; |
| Date: | 2005–06–28 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30007070&r=com |
| By: | Stefan Behringer (Economics Department, Frankfurt University) |
| Abstract: | This paper looks at the effects of entry on welfare in the telecommunication industry. The equilibrium pricing parameters for an incumbent (state) monopoly and for a duopoly situation are determined in which access charges are chosen non-reciprocally. A welfare comparison between the monopoly and duopoly equilibrium situation is undertaken and the welfare consequences of alternative access pricing regimes are investigated. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:jep:wpaper:05003&r=com |
| By: | Cleeren, K.; Dekimpe, M.G.; Verboven, F. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | Although economically very important, local-service sectors have received little attention in the extensive literature on competitive interactions. Detailed data gathering in these sectors is hard, not only because of the multitude of local players, but also because key service dimensions are hard to quantify. Using empirical entry models, we show how to infer information on these sectors’ degree of intra- and inter-channel competition from the observed entry decisions in different local markets. The approach also controls for relevant socio-demographic characteristics of the trading area that may affect performance. We apply the proposed empirical entry model to the video-rental market. Additional entries of video stores are found to significantly increase the level of intra-channel competition. Unlike the predictions of many normative economic models, we find this increase to be larger when the entry occurs in a duopoly than in a monopoly, a pattern consistent with recent experimental research on collusive behavior in oligopolies. We also find evidence of inter-channel cannibalization from the upstream channel (movie theatres), but not from the downstream channel (premium cable). Finally, various socio-demographic characteristics of the trading zone, such as income and household size, are found to also have a significant impact on store performance. |
| Keywords: | Channel competition;Empirical entry models;Movie industry; |
| Date: | 2005–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30002090&r=com |
| By: | André Rocha; José Pedro Pontes |
| Abstract: | This paper examines the equilibrium of location of N vertically-linked firms. In a spatial economy composed of two regions, a monopolist firm supplies an input to N consumer goods firms that compete in quantities. It was concluded that, when there are increases in the transport cost of the input, downstream firms prefer to agglomerate in the region where the upstream firm is located, in order to obtain savings in the production cost. On the other hand, increases in the general transport cost or in the number of downstream firms lead to a dispersion of these firms, in order to reduce competition and locate closer to the final consumer. |
| Keywords: | Agglomeration; Intermediate Goods; Spatial Oligopoly. |
| JEL: | R30 L13 C72 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp112005&r=com |
| By: | Dulleck, Uwe; Kerschbamer, Rudolf |
| Abstract: | This paper studies price competition between experts and discounters in a market for credence goods. While experts can identify a consumer's problem by exerting costly but unobservable diagnosis effort, discounters just sell treatments without giving any advice. The unobservability of diagnosis effort induces experts to use their tariffs as signaling devices. This makes them vulnerable to competition by discounters. We explore the conditions under which experts survive competition by discounters and find that there exist situations in which adding a single customer to a large population of existing consumers leads to a switch from an experts only to a discounters only market. |
| Keywords: | credence goods; discounters; experts; vertical restraints |
| JEL: | D40 D82 L15 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5242&r=com |
| By: | Joseph E. Harrington, Jr |
| Abstract: | In reviewing the theoretical and empirical literature on collusion, this paper distills methods for detecting cartels and distinguishing collusion from competition. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:526&r=com |
| By: | Matthew Ellman; Fabrizio Germano |
| Abstract: | We model the market for news as a two-sided market where newspapers sell news to readers who value accuracy, and sell space to advertisers who value advert-receptive readers. We show that a monopoly newspaper under-reports or biases news that suffciently reduces advertiser profits, whereas in the duopoly case, newspapers may paradoxically increase accuracy as the size of advertisers grows. We then show how advertisers can thwart this competitive effect on newspaper accuracy by committing to certain cut-off strategies, potentially inducing the same level of under-reporting as in the monopoly case. |
| Keywords: | Two-sided markets, advertising, media accuracy, media bias, media economics. |
| JEL: | L13 L82 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:800&r=com |
| By: | Anderson, Simon P; Gabszewicz, Jean Jaskold |
| Abstract: | Media industries are important drivers of popular culture. A large fraction of leisure time is devoted to radio, magazines, newspapers, the Internet, and television (the illustrative example henceforth). Most advertising expenditures are incurred for these media. They are also mainly supported by advertising revenue. Early work stressed possible market failures in program duplication and catering to the Lowest Common Denominator, indicating lack of cultural diversity and quality. The business model for most media industries is underscored by advertisers’ demand to reach prospective customers. This business model has important implications for performance in the market since viewer sovereignty is indirect. Viewers are attracted by programming, though they dislike the ads it carries, and advertisers want viewers as potential consumers. The two sides are coordinated by broadcasters (or 'platforms') that choose ad levels and program types, and advertising finances the programming. Competition for viewers of the demographics most desired by advertisers implies that programming choices will be biased towards the tastes of those with such demographics. The ability to use subscription pricing may help improve performance by catering to the tastes of those otherwise under-represented, though higher full prices tend to favour broadcasters at the expense of viewers and advertisers. If advertising demand is weak, program equilibrium program selection may be too extreme as broadcasters strive to avoid ruinous subscription price competition, but strong advertising demand may lead to strong competition for viewers and hence minimum differentiation (la pensee unique). Markets (such as newspapers) with a high proportion of ad-lovers may be served only by monopoly due to a circulation spiral: advertisers want to place ads in the paper with most readers, but readers want to buy the paper with more ads. |
| Keywords: | advertising finance; circulation spiral; pensee unique; platform competition; two-sided markets |
| JEL: | D43 L13 L82 M37 Z11 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5223&r=com |
| By: | Patrick Paul Walsh; Franco Mariuzzo; Ciara Whelan (Department of Economics, Trinity College) |
| Abstract: | Thresholds defined on the level and change in the HHI (Herfindahl- Hirschmann Index) applied to market shares seem to be the main instrument to select notified mergers for investigation in both the EU and US. We question the use of such a selection rule in di?erentiated products industries. We propose the use of a structural approach to apply HHI thresholds based on profit shares rather than market shares. We illustrate our point using product data for Retail Carbonated Soft Drinks (Price, Market Share and Characteristics). We estimate company (product) mark-ups consistent with a structural model of equilibrium, using demand primitives from a Nested Logit model and a Random Coe?cient model. We provide an example where the HHI thresholds based on profit shares identify potentially damaging mergers not captured by applying thresholds to output shares, or conversely, identify mergers of no concern that would be selected on the basis of output shares. |
| JEL: | K2 L11 L25 L40 L81 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:wpaper:tep10&r=com |
| By: | Joseph E. Harrington, Jr; Joe Chen |
| Abstract: | Previous research exploring the effect of corporate leniency programs has modelled the oligopoly stage game as a Prisoners’ Dilemma. Using numerical analysis, we consider the Bertrand price game and allow the probability of detection and penalties to be sensitive to firms’ prices. Consistent with earlier results, a maximal leniency program necessarily makes collusion more difficult. However, we also find that partial leniency programs - such as in the U.S. - can make collusion easier compared to offering no leniency. We also show that even if cartel formation is not deterred, a leniency program can reduce the prices charged by firms. |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:528&r=com |
| By: | Moshe Kim (University of Haifa); Eirik Gaard Kristiansen (Norwegian School of Economics and Business Administration); Bent Vale (Norges Bank) |
| Abstract: | We introduce a model analyzing how asymmetric information problems in a bank-loan market may evolve over the age of a borrowing firm. The model predicts a life-cycle pattern for banks’interest rate markup. Young firms pay a low or negative markup, thereafter the markup increases until it falls for old firms. Furthermore, the pattern of the life-cycle depends on the informational advantage of the inside bank and when more dispersed borrower information yields fiercer bank competition. By applying a new measure of the informational advantage of inside banks and a large sample of small Nor-wegian firms, we find empirical support for the predicted markup pattern. We disentangle effects of asymmetric information (Akerlof effect)from effects of a concentrated banking market(Herfindahl effect). Our results indicate that the interest rate markups are not influenced by bank market concentration. |
| Keywords: | Banking, risk-pricing, lock-in |
| JEL: | G21 L15 |
| Date: | 2005–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2005_08&r=com |
| By: | Aydin Celen (Competition Authority, Turkey); Tarkan Erdogan (Competition Authority, Turkey); Tarkan Erdogan (Department of Economics, METU) |
| Abstract: | Fast moving consumer goods (FMCGs) constitute a large part of consumers' budget in all countries. The retail sector for FMCGs in Turkey is in the process of a drastic transformation. New, "modern" retail formats, like chain stores and hyper/supermarkets, have rapidly diffused in almost all major urban areas, and increased their market share at the expense of traditional formats (grocery shops, green groceries, etc.) in the last couple of decades. This rapid transformation has raised concerns about competitive conditions in the sector. This study is aimed at to shed light on competitive conditions prevailing in the FMCGs retail trade sector in Turkey. We analyze how the structure of the market is being transformed in recent years by new retail formats. The study is focused on the analysis of competitive dynamics (inter-firm rivalry, pricing and non-price policies, barriers to entry, regulatory conditions, etc.) within the sector, and draws lessons for competition policy. |
| Keywords: | FMCG, competition policy, Turkey |
| JEL: | L4 L81 |
| Date: | 2005–06 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:0503&r=com |
| By: | Donald A R George |
| Abstract: | A monopolist regulated via a price cap may well have an incentive to change other variables of interest to consumers, in an attempt to shift the cost and demand curves in his favour. This paper develops a model in which the monopolist can vary product quality and the terms of a warranty, in response to price regulation. The regulated and unregulated monopoly outcomes are compared with the Pareto-efficient outcome. |
| URL: | http://d.repec.org/n?u=RePEc:edn:esedps:4&r=com |
| By: | Doh-Shin Jeon |
| Abstract: | In this paper, I consider a general and informationally effcient approach to determine the optimal access rule and show that there exists a simple rule that achieves the Ramsey outcome as the unique equilibrium when networks compete in linear prices without network-based price discrimination. My approach is informationally effcient in the sense that the regulator is required to know only the marginal cost structure, i.e. the marginal cost of making and terminating a call. The approach is general in that access prices can depend not only on the marginal costs but also on the retail prices, which can be observed by consumers and therefore by the regulator as well. In particular, I consider the set of linear access pricing rules which includes any fixed access price, the Efficient Component Pricing Rule (ECPR) and the Modified ECPR as special cases. I show that in this set, there is a unique access rule that achieves the Ramsey outcome as the unique equilibrium as long as there exists at least a mild degree of substitutability among networks' services. |
| Keywords: | Networks, Access Pricing, Interconnection, Competition Policy |
| JEL: | D4 K21 L41 L51 L96 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:808&r=com |
| By: | Forslid, Rikard; Häckner, Jonas; Muren, Astri |
| Abstract: | This paper first presents stylized evidence showing how the date of the introduction of competition policy is correlated with country size. Smaller countries tend to adopt competition policy later. We thereafter present a simple theoretical model with countries of different size and firms competing à la Cournot. The predictions of the model are consistent with the empirical regularity presented. An implication of our model is that globalization may give very different incentives regarding competition policy for small and large developing countries. |
| Keywords: | anti-trust; competition policy; trade costs |
| JEL: | F12 F15 F21 R12 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5162&r=com |
| By: | Stefan Behringer (Economics Department, Frankfurt University) |
| Abstract: | This paper looks at competition in the telecommunication industry. We determine the equilibrium pricing parameters for a duopoly situation with a particular emphasis on the role of competitively chosen non-reciprocal access prices. In the symmetric equilibrium the networks optimally choose positive access charge markups which reconciles empirical observation with the theoretical economics literature. |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:jep:wpaper:05002&r=com |
| By: | Kranenburg,Hans,van (METEOR) |
| Abstract: | The aim of this study is to investigate the effect of market structure and area characteristics on the subscription prices and advertising rates for regional newspapers in the Netherlands. The price-market structure analysis in this study shows that there exists a negative relationship between market structure and prices. The results also show that advertising rates, differently to subscription prices, are significantly influenced by regional income and particularly by population density in the specific area. Furthermore, the evidence indicates that the relevant market for regional newspapers in the Netherlands is a market which encompasses regional newspapers, national newspapers and other media sources. |
| Keywords: | Strategy; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2005025&r=com |
| By: | Brenkers, Randy; Verboven, Frank |
| Abstract: | For a variety of reasons, it is likely that the market definition approach will remain an important tool in competition policy analysis for some time, despite the increased importance of other tools such as the simulation approach. Against the background of the new block exemption regulation for cars in Europe, we explore an econometric approach to define the relevant markets with differentiated products. On the one hand, the approach is directly consistent with the SSNIP-test, and it is in fact more satisfactory than previous approaches, such as critical elasticity analysis or the simple use of standard industry classifications. On the other hand, the approach shares a lot of features with the simulation approach (similar data requirements, and similar assumptions about current market power). We find that the relevant market for minivan cars is defined at the widest level, i.e. at the aggregate country level. Furthermore, in Italy the relevant markets for domestic cars are defined at an intermediate level, i.e. at the segment level. In all other cases, the relevant markets for cars may be defined at the narrowest level, i.e. at the subsegment level. Based on these results, we identify the firms that may violate the market share thresholds stipulated in the block exemption regulation. We find that, if we would have used an approach based on standard industry classifications instead of our econometric approach, our conclusions would have been different and, in fact, inconclusive. We also draw attention to other issues in market definition that may be of use to practitioners. |
| Keywords: | competition policy; market definition |
| JEL: | L4 L42 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5249&r=com |
| By: | Sean Barrett; (Department of Economics, Trinity College) |
| Abstract: | The analysis contained in the YHEC report indicates that the report did not consider adequately the role of competition in the market for health insurance. This is a major weakness and appears in part to be due to a late deletion of competition from the report’s final research brief by the HIA.(p.90) The evidence on the average age of BUPA Ireland members, 38 years and VHI members, 44 years provides no basis for transfers from BUPA Ireland to VHI. In the case of females between 38 and 44 years health expenditures decline with extra years. The regressiveness of the transfers and cross subsidies in Irish health insurance under community rating is illustrated by the internal transfers from low cost profitable Plans A and B within VHI to high cost loss making Plans C, D and E. Under the proposed transfer of €34m a year from BUPA Ireland to VHI a low cost BUPA essential health insurance cover with a premium of €272.39 would be levied to cross subsidise VHI Plan E costing €1,316.33 per adult. The price of the most expensive subsidised product under the HIA proposal is 4.8 times the price of the product to be levied in order to finance the cross subsidisation. The average BUPA premium was €327 while the average VHI premium was €435. The price of the average product to be subsidised is therefore 33% greater than the price of the average product to be levied to finance the cross subsidisation. CSO data confirms that expenditure on health insurance rises over all ten income deciles. Incomes in the top decile are 10.1 times those in the bottom decile but health insurance expenditure is 22.9 times greater. Section C of this report deals with the HIA letter to BUPA Ireland requiring the equalisation payment of €34m annually from BUPA Ireland for transfer to VHI which had operating profits of €73.3m (before unexpired risk reserve) in their accounts to February 2004. The HIA presents no analysis of the rationale for the payment. It mistakenly asserts that consumers as a whole will be better off from levying one firm in order to cross-subsidise another. It asserts without evidence that the payments required are significant, rising, likely to rise further in the absence of risk equalisation and that in their absence the stability of the industry will be threatened. While there is recognition of possible withdrawal from BUPA Ireland of some younger members because of the price rise in order to finance payments to VHI there is no recognition in the letter of the benefits of competition to health insurance consumers. Section D examines the competition issues neglected by both YHEC and HIA and the benefits foregone by the anti-competitive levies imposed on BUPA. The Irish health service is characterised by high costs and rent-seeking by producers which are extreme by EU standards. The scope for immediate cost savings and further future leveraged savings in a high cost health service is therefore large but these benefits are foregone by regulators adopting the anticompetitive levies recommended by the regulator in this sector. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:200058&r=com |
| By: | Moen, Espen R; Riis, Christian |
| Abstract: | In an important paper, Aghion and Bolton (1987) argue that a buyer and a seller may agree on high liquidation damages in order to extract rents from future suppliers. As this may distort future trade, it may be socially wasteful. We argue that Aghion and Bolton's analysis is incomplete in some respects, as they do not model the entry of new suppliers. We construct a model where entry is costly, so that entering suppliers have to earn a quasi-rent in order to recoup the entry cost. Reducing an entrant's profits by the help of a breach penalty then reduces the probability of entry in the first place, thus making a breach penalty less attractive for the contracting parties. We show that the initial buyer and seller only have incentives to include a breach penalty if there is excessive entry without it. Forcing the initial buyer and seller to eliminate the breach penalty reduces welfare. |
| Keywords: | breach penalties; efficiency; entry; exclusive contracts |
| JEL: | L42 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5257&r=com |
| By: | David S. Evans; Richard Schmalensee |
| Abstract: | Two-sided platforms (2SPs) cater to two or more distinct groups of customers, facilitating value-creating interactions between them. The village market and the village matchmaker were 2SPs; eBay and Match.com are more recent examples. Other examples include payment card systems, magazines, shopping malls, and personal computer operating systems. Building on the seminal work of Rochet and Tirole (2003), a rapidly growing literature has illuminated the economic principles that apply to 2SPs generally. One key result is that 2SPs may find it profit-maximizing to charge prices for one customer group that are below marginal cost or even negative, and such skewed pricing pattern is prevalent, although not universal, in industries that appear to be based on 2SPs. Over the years, courts have also recognized that certain industries, notably payment card systems and newspapers, now understood to be based on 2SPs, are governed by unusual economic relationships. This chapter provides an introduction to the economics of 2SPs and its application to several competition policy issues. |
| JEL: | D4 L1 L4 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11603&r=com |
| By: | David S. Evans; Michael Salinger |
| Abstract: | We apply and extend the cost-based approach to bundling and tying under competition developed in Evans and Salinger (2004) to over-the-counter pain relievers and cold medicines. We document that consumers pay much less for tablets with multiple ingredients than they would if they bought tablets with each ingredient separately. We then decompose the sources of these savings into marginal cost savings and a component that reflects fixed costs of product offerings. The analysis both documents substantial economies of bundling and illustrates the sort of cost analysis that is necessary for understanding tying. |
| JEL: | L11 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1519&r=com |
| By: | Darius Lakdawalla; Neeraj Sood |
| Abstract: | Innovation policy often involves an uncomfortable trade-off between rewarding innovators sufficiently and providing the innovation at the lowest possible price. However, in health care markets with insurance for innovative goods, society may be able to ensure efficient rewards for inventors and the efficient dissemination of inventions. Health insurance resembles a two-part pricing contract in which a group of consumers pay an up-front fee ex ante in exchange for a fixed unit price ex post. This functions as if innovators themselves wrote efficient two-part pricing contracts, where they extracted sufficient profits from the ex ante payment, but still sold the good ex post at marginal cost. As a result, we show that complete, efficient, and competitive health insurance for innovative products - such as new drugs, medical devices, or patented procedures - can lead to perfectly efficient innovation and utilization, even when moral hazard exists. Conversely, incomplete insurance markets in this context lead to inefficiently low levels of innovation. Moreover, optimally designed public health insurance for innovative products can solve the innovation problem by charging ex ante premia equal to consumer surplus, and ex post co-payments at or below marginal cost. When these quantities are unknown, society can usually improve static and dynamic welfare by covering the uninsured with contracts that mimic observed private insurance contracts. |
| JEL: | I1 O3 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11602&r=com |
| By: | J Thijssen; (Department of Economics, Trinity College) |
| Abstract: | In this paper, the problem of mergers and acquisitions under pro¯t uncer- tainty is considered. A two ¯rm model is developed where M&A activity is modelled as an act of risk diversi¯cation. We study the case where only the larger ¯rm engages in M&A activity and the case where both ¯rms do. It is shown that takeovers can be optimal during both economic expansions and contractions. The option value of M&A activity is determined. We argue that there is a minimum level of positive synergies for M&A activity to be optimal, which is increasing in the level of diversi¯cation. Furthermore, it is shown that under M&A competition, this option value vanishes completely and that hostile takeovers are never optimal. An analysis of optimal portfolio selection by a risk averse investor shows ambiguous wealth results of M&A activity. |
| JEL: | F |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:200056&r=com |
| By: | Peeters,Ronald; Strobel,Martin (METEOR) |
| Abstract: | In markets with differentiated products Bertrand-Nash equilibria in pure strategies may not exist. Mixed strategies are difficult to calculate. For these cases Morgan and Shy (2000) suggest an alternative solution concept, the undercut-proof equilibrium (UPE). While the Nash-equilibrium is motivated by the question of how ones own behavior influences one''s payoff, the UPE is motivated by the question of how others'' behavior influence one''s payoff. We report on an experiment where we test these two concepts with respect to their comparative statics. Moreover we investigate the nature of subjects'' underlying thinking process. Our results provide strong evidence against the UPE and in favor of Bertrand-Nash. |
| Keywords: | microeconomics ; |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2005020&r=com |
| By: | Charles Ou |
| Abstract: | Banking consolidation has continued to accelerate over the past several years, assisted by technological innovations in information management and statistical modeling, and by the large merger and acquisition (M&A) deals of the late 1990s. Total domestic assets held by the largest 50 bank holding companies (BHC) rose from around 52 percent in June 1997 to nearly 70 percent in June 2002, and the number of small banks with assets under $500 million declined from 8,647 in June 1997 to 7,208 in June 2002. The perennial question about the impact of banking consolidation on the availability of financing to small business remains a major concern to small business researchers and policymakers. This paper provides a review of recent major studies conducted over the past several years. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:sba:wpaper:05ou&r=com |
| By: | Campa, José Manuel; Hernando, Ignacio |
| Abstract: | This paper looks at the performance record of M&As that took place in the European Union financial industry in the period 1998-2002. First, the paper reports evidence on shareholder returns from the merger. Merger announcements implied positive excess returns to the shareholders of the target company around the date of the announcement, with a slight positive excess-return on the 3-months period prior to announcement. Returns to shareholders of the acquiring firms were essentially zero around announcement. One year after the announcement, excess returns were not significantly different from zero for both targets and acquirers. The paper also provides evidence on changes in the operating performance for the subsample of merges involving banks. M&As usually involved targets with lower operating performance than the average in their sector. The transaction resulted in significant improvements in the target banks performance beginning on average two years after the transaction was completed. Return on equity of the target companies increased by an average of 7%, and these firms also experience efficiency improvements. |
| Keywords: | banking; European integration; mergers and acquisitions |
| JEL: | G21 G34 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5204&r=com |
| By: | Helge Sanner |
| Abstract: | In this paper we show that Puu (2002) does not provide a stable solution to the location game, according to his own definition of stability. If the usual two-stage game is considered, where in the first stage a location is chosen once and forever, and in the second stage prices are determined, the equilibrium proves stable for a sizeable interval of parameters, however. Even though this procedure is most common in analyzing Hotelling's location problem, it is not satisfying because it exhibits an inconsistent informational structure. The search for a better concept of stability is imperative. |
| Keywords: | Hotelling's main street; Instability of equilibrium |
| JEL: | D43 L11 L13 R30 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:pot:vwldis:79&r=com |
| By: | Benito Arruñada |
| Abstract: | Professional services are characterized by information asymmetries, economies of scope and externalities. To resolve conflicts of interest, they require special organizational formulas, based on deferred and variable compensation, self-selection and, when positive externalities are necessary, competitive restraints. In principle, a set of criteria and organizational design patterns could be used for assessing, managing and regulating all types of professional organization, whether public or private, competitive or monopolistic. Competitive restraints, however, entail substantial risks, one of the main ones being that they tend to outlast their useful life. This risk is illustrated here by examining pharmacists and notaries, two professions for which the existing restraints are today dysfunctional because most of the services that might have made such restraints necessary are now in fact provided by other public and private agents. Liberalization is therefore advisable, especially for standard services. |
| Keywords: | professions, competition, lawyers, notaries, pharmacists |
| JEL: | K21 K23 J44 L44 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:827&r=com |