nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒06‒03
seventeen papers chosen by
Russell Pittman
US Department of Justice

  1. Prices, Spatial Competition, and Heterogeneous Producers: An Empirical Test By Chad Syverson
  2. Mergers and Innovation: The Case of the Pharmaceutical Industry By Ornaghi, Carmine
  3. One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries. By Fabio M. Manenti; Ernesto Somma
  4. Open Source Development in a Differentiated Duopoly By Stephane Verani
  5. Product Choice and Product Switching By Stephen Redding; Andrew Bernard; Peter Schott
  6. Indicators of wireline/wireless competition in the market for telecommunication services By Krzysztof Dzieciolowski; John Galbraith
  7. Reputation and Cooperation in the Repeated Second-price Auctions By Kwiek, Maksymilian
  8. EU Merger Remedies: A Preliminary Empirical Assessment By Tomaso Duso; Klaus Gugler; Burcin Yurtoglu
  9. An International Multi-Level System of Competition Laws: Federalism in Antitrust By Wolfgang Kerber
  10. Efficiency defense: Possible mitigating effects in presence of imperfect redistribution tools By Cyril Hariton; Gwenaël Piaser
  11. The Role of Retail Chains: National, Regional, and Industry Results By Ronald Jarmin; Shawn Klimek; Javier Miranda
  12. Markkinoiden toimivuuden arvioiminen - Suuntaviivoja vertailevalle kilpailututkimukselle By Esa Viitamo
  13. Can a Newly Proposed Mechanism for Allocating Contracts in U.S. Electricity Wholesale Markets Lead to Lower Prices? A Game Theoretic Analysis By Vicki Knoblauch
  14. The Impact of Minimum Quality Standards on Firm Entry, Exit and Product Quality: The Case of the Child Care Market By V. Joseph Hotz; Mo Xiao
  15. Firm Entry and Exit in the U.S. Retail Sector, 1977-1997 By Javier Miranda; Shawn Klimek; Ron Jarmin
  16. Firm Structure, Multinationals, and Manufacturing Plant Deaths By J. Bradford Jensen; Andrew Bernard
  17. Import Price Pressure on Firm Productivity and Employment: The Case of U.S. Textiles By Patrick Conway

  1. By: Chad Syverson
    Abstract: In markets where spatial competition is important, many models predict that average prices are lower in denser markets (i.e., those with more producers per unit area). Homogeneous-producer models attribute this effect solely to lower optimal markups. However, when producers instead differ in their production costs, a second mechanism also acts to lower equilibrium prices: competition-driven selection on costs. Consumers’ greater substitution possibilities in denser markets make it more difficult for high-cost firms to profitably operate, truncating the equilibrium cost (and price) distributions from above. This selection process can be empirically distinguished from the homogenous-producer case because it implies that not only do average prices fall as density rises, but that upper-bound prices and price dispersion should also decline as well. I find empirical support for this process using a rich set of price data from U.S. ready-mixed concrete plants. Features of the industry offer an arguably exogenous source of producer density variation with which to identify these effects. I also show that the findings do not simply result from lower factor prices in dense markets, but rather because dense-market producers are low-cost because they are more efficient.
    Date: 2004–08
  2. By: Ornaghi, Carmine
    Abstract: This paper takes a new look at the effects of mergers on innovation by analysing the relationship between ex-ante technological (and product) relatedness of acquirers and targets and post-merger performances. The analysis is conducted using data on consolidations in the pharmaceutical industry for the period 1988-2004. Empirical results show that merger deals are more likely to be signed between firms with related technologies and drug portfolio. I .find that merged companies have on average, worst performances than the group of non-merging firms and that, contrary to what may be the common wisdom, higher levels of technological relatedness are associated with poorer performances. Finally, consolidations between large pharmaceutical companies seem to have a detrimental impact on the incentives of competitors to undertake research in those therapeutic areas where both acquirer and target are active players.
  3. By: Fabio M. Manenti (Dipartimento di Scienze Economiche "M. Fanno", Università di Padova, Via del Santo 33, 35123 PADOVA); Ernesto Somma (Dipartimento di Scienze Economiche, Università degli Studi di Bari, Via C. Rosalba 53, 70124 BARI)
    Abstract: We study the strategic choice of compatibility between two initially incompatible network goods in a two-stage game played by an incumbent and an entrant firm. Compatibility may be achieved by means of a converter. We derive a number of results under different assumptions about the nature of the converter (one-way vs two-way) and the existence of property rights. In the case of a two-way converter, which can only be supplied by the incumbent, incompatibility will result in equilibrium. When both firms can build a one-way converter and there are no property rights on the necessary technical specifications, the unique equilibrium involves full compatibility. Finally, when each firm has property rights on its technical specifications, full incompatibility and preemption are again observed at the equilibrium. With incompatibility, entry deterrence occurs for sufficiently strong network effects. The welfare analysis shows that the equilibrium compatibility regime is socially inefficient for most levels of the network effects.
    Keywords: Network externalities, one-way compatibility, two-way compatibility
    JEL: L13 L15 D43
  4. By: Stephane Verani (Department of Economics, The University of Western Australia)
    Abstract: Open source software is released under an open source licence giving individuals the right to use, modify, and redistribute freely the programs. This paper proposes a model of differentiated duopoly in which firms invest in the development of proprietary or open source software. The main findings are: (i) firms invest more when the products are substitutes; (ii) for substitute products, firms' investment in software development is greatest when the software is open source; (iii) for close to perfect complements, firms' investment in software development is greatest when the software is proprietary; and (iv) for substitute products, investment in open source software yields higher profits than investment in proprietary software.
    Keywords: Open Source Software, Differentiated Duopoly, Two-Stage Game, Bertrand Competition
    JEL: C72 D21 D43 L11 L13
    Date: 2006–02
  5. By: Stephen Redding; Andrew Bernard; Peter Schott
    Abstract: This paper develops a model of endogenous product selection within industries by firms. The model is motivated by new evidence we present on the prevalence and importance of product changing activity by U.S. manufacturers. Three-fifths of continuing firms alter their product mix within an industry every five years, and added and dropped products account for a substantial portion of firm output. In the model, firms make decisions about both industry entry and product choice. Product choice is shaped by the interaction of heterogeneous firm characteristics and diverse product attributes. Changes in market conditions within an industry result in simultaneous adjustment along a number of margins, including both entry/exit and product choice.
    Keywords: Product selection, heterogeneous firms, product differentiation, sunk entry costs
    JEL: L11 D21 L60
    Date: 2005–10
  6. By: Krzysztof Dzieciolowski; John Galbraith
    Abstract: We address evidence that competition from wireless telecommunications may already be having a substantial effect on the market for wireline services, despite historical estimates of price elasticity suggesting substantial market power (weak competition) in wireline services, considering both the elasticity argument per se and the observable recent trends in the wireline market. Among other points, we suggest that: <UL> <LI>Arguments based on observed historical elasticities may be weak in cases where there exists a potential competitor offering a service whose price was substantially higher in the past, but where the price difference between the relevant products has lessened. In these cases, the competitor may have had little effect on demand in the past, but can have a much greater effect as the price difference narrows. <LI>We can use a logistic-type demand relation, with the price difference as a key factor, to model such situations. In the present case, doing so produces results compatible with a substantially higher absolute elasticity of demand than would be observable in historical data. <LI>With respect to observed trends in demand, we note that the total number of wirelines serviced by Bell Canada showed a remarkably stable pattern of seasonal and trend variation which has been interrupted quite abruptly over the last four + years. The change, in the direction of actual demand well below levels compatible with the previous trend, indicates substantial changes in the nature of the wireline market. Since the total market for telecommunications services has continued to expand over this time, this suggests changes in consumers’ choices between different modes of telecommunication. <LI>Relating the wireline displacements to the numbers of wireless customers (for primary wirelines) or wireless and high-speed internet (for secondary and total wirelines) allows us to estimate wireline losses, producing numbers compatible with a reduction of up to 8% in the total size of the market for fixed wirelines as of the end of 2003 (after excluding approximately 3% of the competitive losses), relative to what demand would have been had the previous growth trend continued. <P>Nous soutenons la thèse selon laquelle la concurrence dans les télécommunications sans fil a déjà un effet important sur les marchés de services filaires, malgré les prévisions historiques de la théorie de l’élasticité-prix suggérant un pouvoir dominant sur le marché (concurrence défavorable) des services filaires. Nous traiterons l’argument de l’élasticité en soi, ainsi que de récentes tendances observables dans le marché des services filaires. Nous suggérons, entre autres que : <UL> <LI>Les arguments fondés sur les élasticités historiques observées peuvent être faibles dans les cas où il existe un compétiteur potentiel offrant un service dont les tarifs étaient beaucoup plus élevés dans le passé, mais dont la différence de prix entre les produits pertinents s’amoindrit. Dans ces cas, le compétiteur peut avoir eu une faible influence sur la demande dans le passé, mais est susceptible d’avoir une influence beaucoup plus grande lorsque la différence de prix se resserre. <LI>Nous pouvons utiliser un modèle de type logistique pour l’offre et la demande ayant comme facteur clé la différence de prix pour décrire de telles situations. Dans ce cas-ci, une telle méthode produirait des résultats compatibles avec une élasticité de la demande plus forte en absolu que celle observée dans les données historiques. <LI>En ce qui a trait aux tendances observées de la demande, nous avons noté que le nombre total de services filaires desservis par Bell Canada suit un modèle remarquablement stable de variation selon les saisons et les tendances mais qui a été soudainement interrompu durant les quatre dernières années. Ce changement, orienté vers la demande actuelle bien en dessous des niveaux compatibles avec la tendance précédente, indique des modifications substantielles de la nature même du marché des services filaires. Puisque le marché global des services de télécommunications a continué de prendre de l’expansion depuis ce temps, cela démontre des changements dans le processus décisionnel des clients entre les différents modes de télécommunication. <LI>La correspondance entre les déplacements des services filaires et le nombre de clients utilisant les services sans fil (pour le service filaire de base) ou sans fil et Internet haute-vitesse (pour le service filaire secondaire ou total) nous permet d’estimer les pertes de services filaires, produisant des nombres compatibles avec une réduction approximative de près de 8 % de la taille totale du marché des réseaux filaires pour la fin de 2003 (en excluant environ 3 % de pertes concurrentielles), comparativement à ce que la demande aurait été si la croissance avait continué. </UL>
    Date: 2004–10–01
  7. By: Kwiek, Maksymilian
    Abstract: This paper shows that there are strong reputational effects in a general class of second price auctions, including single-unit English and Vickrey auctions with interdependent values, multiunit ascending and uniform price auctions and a War of Attrition. It is based on recent results on reputation with symmetric discounting. If a reputation is one sided and bidders are patient, the bidder with reputation must obtain most of the surplus in the sequence of auctions, the other bidder and the seller get very little. If the reputation is two-sided then the bidders engage in a game akin to War of Attrition. The resulting payoff is very low for the bidders and very high for the seller. In any case, Folk Theorem fails: collusion in the second price auctions is impossible. The predictions of the model are that the path of prices is declining, in fact prices in the early auctions should reach levels that are higher than the value of the object and there should be a set of strong bidders emerging after a few auctions. A recent series of auctions of spectrum for UMTS services in Europe seems to fit both the assumptions and predictions of the model. Keywords; Repeated Auctions, Ascending Auctions, Second-Price Auctions, Collusion, Reputation, Aggressive bidding JEL Classification: D44, C72, L96,
  8. By: Tomaso Duso; Klaus Gugler; Burcin Yurtoglu
    Abstract: Mergers that substantially lessen competition are challenged by antitrust authorities. Instead of blocking anticompetitive transitions straight away, authorities might choose to negotiate with the merging parties and allow the transactions to proceed with modifications that restore or preserve the competition in the involved markets. We study a sample of 167 mergers that were under the European Commission’s scrutiny from 1990 to 2002. We use an event study methodology to identify the potential anticompetitive effects of mergers as well as the remedial provisions on these transactions. Stock market reactions around the day of the merger’s announcement provide information on the first question, whereas the stock market reactions around the commission’s final decision day convey information about the outcome of the bargaining process between the authority and the merging parties. We first classify mergers according to their effects on competition and then we develop hypotheses on the effects that remedies are supposed to achieve depending on the merger’s competitive outcome. We isolate several stylized facts. First, we find that remedies were not always appropriately imposed. Second, the market seems to be able to predict remedies’ effectiveness when applied in phase I. Third, the market also seems able to produce a good prior to phase II’s clearances and prohibitions, but not to remedies. This can be due either to a measurement problem or related to the increased merging firms’ bargaining power during the second phase of the merger review. <br> <br> <i>ZUSAMMENFASSUNG - (Auflagen im Fusionskontrollverfahren der EU: Eine erste empirische Bewertung) <br> Fusionen, die den Wettbewerb auf einem Markt vermindern oder verhindern, werden von Antitrustbehörden angefochten. Anstatt wettbewerbswidrige Zusammenschlüsse direkt zu blockieren, können die Behörden beschließen, mit den Parteien zu verhandeln und die Fusion mit Auflagen zu genehmigen, durch die der Wettbewerb in den entsprechenden Märkten wieder hergestellt oder aufrechterhalten wird. Wir analysieren eine Stichprobe von 167 Fusionen, die von der Europäischen Kommission zwischen 1990 und 2002 überprüft worden sind. Wir verwenden eine "event study" - Methodologie, um sowohl die möglichen wettbewerbswidrigen Wirkungen von Fusionen als auch die Wirkung der von der Behörde beschlossenen Auflagen zu untersuchen. Die Reaktion der Aktienpreise der beteiligten Unternehmen - sowohl der fusionierenden als auch der Wettbewerber - um den Tag der Fusionsankündigung liefert Informationen für die erste Frage, während die Reaktionen von Aktienpreisen um den Tag der EU-Kommissionsentscheidung Informationen über das Ergebnis der geheimen Verhandlungen zwischen der Behörde und den involvierten Parteien geben. Zuerst klassifizieren wir Fusionen entsprechend ihrer Effekte auf den Wettbewerb und dann entwickeln wir Hypothesen auf die Wirkung, welche die Auflagen in Abhängigkeit von den Wettbewerbseffekten der Fusion erzielen soll. Unsere Analyse ergibt einige stilisierte Fakten. Zuerst finden wir, dass die Auflagen von der EU-Kommission nicht immer adäquat angewandt wurden. Auflagen scheinen jedoch eine Wirkung auf die fusionierenden Unternehmen zu haben. Sie sind besonders effektiv, wenn sie bereits in Phase I des Fusionskontrollverfahrens eingesetzt werden. Jedoch scheint der Markt unfähig zu sein, eine gute Vorhersage für die Wirkung von Auflagen in Phase II zu produzieren. Dieses Ergebnis kann entweder auf einem Meßproblem beruhen oder es wird durch eine erhöhte Verhandlungsstärke der fusionierenden Unternehmen während der zweiten Phase der Fusionskontrolle verursacht.</i>
    Keywords: Merger Control, Remedies, European Commission, Event Studies.
    JEL: L4 K21 C12 C13
    Date: 2005–09
  9. By: Wolfgang Kerber (Philipps-Universität Marburg)
    Abstract: Since the 1990s, an intensive discussion on the necessity and the potential design of international competition policy has developed. As a preliminary result, some general tendencies can be observed: Many states (including the U.S. and the EU) and most antitrust experts hold the opinion that the traditional system of national competition laws (including their extra-territorial application) is not sufficient for the protection of competition in the new millennium. Therefore, some kind of international arrangement in regard to competition rules seems to be necessary. The introduction of substantive international competition rules with an international competition authority and a corresponding court (in analogy to the supranational European competition law) is not seen as feasible and/or desirable. Thus the solution should not be sought in centralised global competition rules but be based primarily upon national competition laws and authorities. Consequently, the main thrust of the discussion has shifted from the idea of a larger harmonisation and convergence of national competition laws to the problem of better international enforcement of these laws. Although bilateral cooperation between national competition authorities have become an increasingly important issue, bilateral cooperation agreements are considered only a first step to a more preferable multilateral (or plurilateral) solution (e.g. within the WTO). Generally, the path to international competition rules is seen as a pragmatic, step-by-step approach, which can achieve its aim only in the long run. The currently favoured informal network approach, which remains without commitment and emphasizes primarily the gathering, discussion and exchange of information between national competition authorities, is in line with such a pragmatic approach to the incremental evolution of international competition rules. How can we describe the present situation from a global perspective? We have a multitude of national competition laws and enforcement agencies (competition authorities, courts) with more or less different substantive and procedural rules. Different competition laws and enforcement agencies can also exist within a (kind of) federal system, as to some degree within the U.S. and to a larger extent within the EU, where European competition rules and national competition laws coexist on two different levels. Since the competencies of these competition laws and enforcement agencies overlap, many external effects and conflicts can emerge. Up to now we cannot reasonably argue that this complex structure of competition laws forms an integrated system for protecting competition in international markets. The establishment of international competition rules (as well as the less ambitious international network approach), which on one side should help to solve the problems of the current situation, can, on the other side, increase the complexity of the system, because an additional vertical regulatory level in regard to competition rules would be introduced – including new potential conflicts of competencies. But what are the long-term perspectives of this situation? What can an international system for protecting competition look like in the long run? Two basic perspectives can be outlined: One perspective is that such a pragmatic approach, which fosters the discussion between different countries and their competition authorities, eventually will lead to a uniform global competition law or – at least – to a quasi-harmonisation of national competition laws. If the differences between the competition laws disappeared, many of the current problems would vanish. From this perspective, the current situation with many different competition laws on two or three different levels does constitute only an intermediate phase, which in the long run would be replaced by one quasiuniform set of global competition rules. Another perspective proceeds from the more sceptical assumption that it will not be possible for all countries to agree on one uniform set of competition rules, even in the long run. There will always be different objectives of competition laws and different theories about what competition is and what rules are necessary for the protection of competition. Therefore, the coexistence of different competition laws should be seen as a permanent feature of an international system of competition laws, implying that substantial decentralisation and variety will remain a major characteristic of such an international system, also in the long run. This paper will focus on the second perspective, which can be characterised as an evolutionary one: The objectives of competition policy in different countries might change and remain different; competition theories mightevolve through academic progress; the rules for the protection of competition might have to change due to new anticompetitive business practices or new technology (such as the Internet). From this evolutionary perspective, it is crucial that an international system for the protection of competition should also include the long-term capability of adapting quickly to new competition problems, particularly by fostering legal innovations for improving the protection of competition. One important argument for a more decentralised international system of competition laws will be that decentralisation will increase the capability of the system for innovation and learning in regard to the development of effective legal rules for the protection of competition. But what can a workable international system with different competition laws and enforcement agencies on different levels, i.e., a decentralised international system of competition laws, look like? This paper can only present some considerations about this problem. But its goal is to outline an analytical framework, which can be used for designing a workable multi-level system of competition laws. The main idea is that we should apply economic theories about federalism and the advantages and disadvantages of centralisation and decentralisation to develop arguments about the appropriate institutional structure of an international multi-level system of competition laws. The theories that are used in this paper are the economic theory of federalism, the attempts to apply the concept of federalism to legal rules as well (legal federalism), and the theories of interjurisdictional and regulatory competition. The paper is structured as follows. In section II it is shown that the present situation can be interpreted as being already rather close to a kind of threelevel system of competition laws and that many current issues in European and international competition policy can be interpreted as discussions about problems of the horizontal and vertical delimitation of competencies within such a three-level system. In the main section III an analytical framework concerning the potential advantages and disadvantages of centralisation and decentralisation of competition policy will be developed on the basis of economic theories of federalism and regulatory competition. This will include a (still incomplete) set of criteria for regulatory federalism in competition law. Some conclusions for reconstructing international competition policy as a multi-level system of competition laws are presented in section IV.
  10. By: Cyril Hariton (Toulouse Business School); Gwenaël Piaser (Department of Economics, University Of Venice Cà Foscari)
    Abstract: It is often argued that, first, the decision criterion of antitrust authorities should be total social welfare and that, second, mergers increasing the value of this criterion but ending with lower consumer surplus should be allowed in the name of efficiency gains realized by merging firms. This paper studies merger control by a government with, first, preferences over wealth distribution among agents (weights to put on consume surplus and firms profit) and, second, imperfect redistribution tools. It shows that in such a case merger policy can not be parted off redistribution policy.
    Keywords: Surplus Analysis, Merging Analysis, Redistribution, Distortive Taxation.
    JEL: D43 D61 L49
    Date: 2006
  11. By: Ronald Jarmin; Shawn Klimek; Javier Miranda
    Abstract: We use the establishment level data in the Longitudinal Business Database to measure changes in market structure in the U.S. Retail Trade sector during the period, 1976 to 2000. We use firm ownership information to construct measures of firm entry and exit and also to categorize four types of retail firms: single location, and local, regional, and national chains. We use detailed location data to examine market structure in both national and county markets. We summarize the county level results into three groups: metropolitan, micropolitan, and rural. We find that retail activity is increasingly occurring at establishments owned by chain firms, especially large national chains. On average, we find that all types of retail firms are increasing in size during the period. We also find that larger markets experience more firm turnover. Finally, we see that entry and exit rates vary across two-digit retail industries.
    Keywords: retail trade, chain store, dynamics
    JEL: L11 L81 R12
    Date: 2005–12
  12. By: Esa Viitamo
    Keywords: competition, functioning of markets, market regulation, multifactor productivity
    JEL: D40 L51 O40
    Date: 2006–05–19
  13. By: Vicki Knoblauch (University of Connecticut)
    Abstract: This study of the wholesale electricity market compares the cost-minimizing performance of the auction mechanism currently in place in U.S. markets with the performance of a proposed replacement. The current mechanism chooses an allocation of contracts that minimizes a fictional cost calculated using pay-as-offer pricing. Then suppliers are paid the market clearing price. The proposed mechanism uses the market clearing price in the allocation phase as well as in the payment phase. In concentrated markets, the proposed mechanism outperforms the current mechanism even when strategic behavior by suppliers is taken into account. The advantage of the proposed mechanism increases with increased price competition.
    Keywords: strategic behavior, multi-unit auction, electricity, Bertrand competition
    JEL: C72 D44 L10 L94
    Date: 2004–04
  14. By: V. Joseph Hotz; Mo Xiao
    Abstract: We examine the impact of minimum quality standards on the supply side of the child care market, using a unique panel data set merged from the Census of Services Industries, state regulation data, and administrative accreditation records from the National Association of Education for Young Children. We control for state-specific and time-specific fixed effects in order to mitigate the biases associated with policy endogeneity. We find that the effects of quality standards specifying the labor intensiveness of child care services are strikingly different from those specifying staff qualifications. Higher staff-child ratio requirements deter entry and reduce the number of operating child care establishments. This entry barrier appears to select establishments with better quality into the market and alleviates competition among existing establishments: existing establishments are more likely to receive accreditation and higher profits, and are less likely to exit. By contrast, higher staff-education requirements do not have entry-deterrence effects. They do have the unintended effects of discouraging accreditation, reducing owners’ profits, and driving firms out of businesses.
    JEL: L5 L8
    Date: 2005–12
  15. By: Javier Miranda; Shawn Klimek; Ron Jarmin
    Abstract: The development of longitudinal micro datasets in recent years has helped economists develop a number of stylized facts about producer dynamics. However, most of the widely cited studies use only manufacturing data. This paper uses the newly constructed Longitudinal Business Database (LBD) to examine producer dynamics in the U.S. the retail sector. The LBD is constructed by linking twenty-six years (1975-2000) of the U.S. Census Bureau's Business Register at the establishment level. The result is a dataset on the universe of employer establishments in the U.S. on an annual basis with detailed geographic, industry, firm ownership, and employment information. We use the LBD to examine patterns of firm entry and exit in the U.S. retail sector. We find that many of the patterns observed by Dunne, Roberts, and Samuelson (1988) are also observed within the retail sector, but interesting and important differences do exist.
    Keywords: retail sector, entry-exit, longitudinal establishment data
    JEL: L11
    Date: 2004–10
  16. By: J. Bradford Jensen; Andrew Bernard
    Abstract: Plant shutdowns shape industry and aggregate productivity paths and play a major role in the dynamics of employment and industrial restructuring. Plant closures in the U.S. manufacturing sector account for more than half of gross job destruction. While multi-plant firms and multinationals dominate U.S. manufacturing, theoretical and empirical work has largely ignored the role of firms in the plant shutdown decision. This paper examines the effects of firm structure on manufacturing plant closures. Using U.S. data, we find that plants belonging to multi-plant firms are less likely to exit. Similarly, plants owned by U.S. multinationals are less likely to close. However, the superior survival chances are due to the characteristics of the plants themselves rather than the nature of the firms. Controlling for plant and industry attributes that reduce the probability of death, we find that plants owned by multi-unit firms and U.S. multinationals are much more likely to close. A recent change in ownership also increases the chances that a plant will be closed.
    Keywords: Exit, shutdown, closure, multi-plant firms, multinational firms, takeovers, entry costs, agglomeration, specialization
    JEL: D21 D24 F23 L20 L6
    Date: 2005–10
  17. By: Patrick Conway
    Abstract: Theoretical research has predicted three different effects of increased import competition on plant-level behavior: reduced domestic production and sales, improving average efficiency of plants, and increased exit of marginal firms. In empirical work, though, such effects are difficult to separate from the impact of exogenous technological progress (or regress). I use detailed plant-level information available in the US Census of Manufacturers and the Annual Survey of Manufacturers for the period 1983-2000 to decompose these effects. I derive the relative contribution of technology and import competition to the increase in productivity and the decline in employment in textiles production in the US in recent years. I then simulate the impact of removal of quota protection on the scale of operation of the average plant and the incentive to plant closure. The methodology employs a number of important innovations in examining the impact of falling import prices on the domestic production of an import-competing good. First, import competition is modeled directly through its impact on the relative prices of monopolistically competitive goods along the lines suggested by Melitz (2000). Second, the effect of technology is incorporated through structural estimation of plant-level production functions in four factors (capital, labor, energy and materials). Solutions to econometric difficulties related to missing capital data and unobserved productivity are incorporated into the estimation technique. The model is estimated for plants with primary product in SIC 2211 (broadwoven cotton cloth). Results validate modeling demand as for differentiated products. Technological coefficients are sensible, with exogenous technological progress playing a large role. In the simulations run, the effects of foreign price competition are orders of magnitude higher than those of technological progress for the period after quotas on imports are removed. The large-scale reduction in employment and output in the US is shown to be a combination of reduced employment and output at plants in continuous operation and of plant closures that exceed new entries.
    Date: 2006–03

This nep-com issue is ©2006 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.