nep-com New Economics Papers
on Industrial Competition
Issue of 2006‒12‒16
eighteen papers chosen by
Russell Pittman
US Department of Justice

  1. Interconnection and competition among asymmetric networks in the internet backbone market By Jahn,Eric; Pruefer,Jens
  2. The Impact of Bank Size on Market Power By Jacob A. Bikker; Laura Spierdijk; Paul Finnie
  3. Financial market integration and the value of global diversification: evidence from US acquirers in cross-border mergers and acquisitions By Francis , Bill B; Hasan , Iftekhar; Sun , Xian
  4. Outsourcing Induced by Strategic Competition By Yutian Chen; Pradeep Dubey; Debapriya Sen
  5. Endogenous timing with free entry By Antonio TESORIERE
  6. Strategic online-banking adoption By Roberto Fuentes; Rubén Hernández-Murillo; Gerard Llobet
  7. The performance of the European market for corporate control : evidence from the 5th takeover wave By Martynova,Marina; Renneboog,Luc
  8. Incompatibility and investment in ATM networks By Timothy H. Hannan; Ron Borzekowski
  9. Intermediation and investment incentives By Paul, BELLEFLAMME; Martin PEITZ
  10. Non-Stationary Demand in a Durable Goods Monopoly. By José María Usategui
  11. Mergers and risk By Craig H. Furfine; Richard J. Rosen
  12. The adverse selection problem in imperfectly competitive credit markets By Mälkönen , Ville; Vesala , Timo
  13. The Jukebox Mode of Innovation - a Model of Commercial Open Source Development By Joachim Henkel
  14. Business cycles: a role for imperfect competition in the banking system By Federico S. Mandelman
  15. The profitability of small, single-market banks in an era of multimarket banking By Timothy H. Hannan; Robin A. Prager
  16. Consolidation of Cooperative Banks (Shinkin) in Japan:Motives and Consequences By Kaoru Hosono; Koji Sakai; Kotaro Tsuru
  17. Acquisition targets and motives in the banking industry By Timothy H. Hannan; Steven J. Pilloff
  18. Satisficing in sales competition: experimental evidence By Siegfried Berninghaus; Werner Güth; M. Vittoria Levati; Jianying Qiu

  1. By: Jahn,Eric; Pruefer,Jens (Tilburg University, Center for Economic Research)
    Abstract: We examine the interrelation between interconnection and competition in the internet backbone market. Networks asymmetric in size choose among different interconnection regimes and compete for end-users. We show that a direct interconnection regime, Peering, softens competition compared to indirect interconnection since asymmetries become less influential when networks peer. If interconnection fees are paid, the smaller network pays the larger one. Sufficiently symmetric networks enter a Peering agreement while others use an intermediary network for exchanging traffic. This is in line with considerations of a non-US policy maker. In contrast, US policy makers prefer Peerings among relatively asymmetric networks.
    Keywords: Internet Backbone;Endogenous Network Interconnection;Asymmetric Networks; Two-Way Access Pricing
    JEL: L10 L96 D43
    Date: 2006
  2. By: Jacob A. Bikker; Laura Spierdijk; Paul Finnie
    Abstract: Over the past few decades, the worldwide banking industry has undergone strong consolidation. As a result, the number of banks has fallen sharply. At the same time, the size of the largest banks has increased substantially, both in absolute figures and relative to the size of smaller banks. This paper analyzes the impact of this development on competition by assessing the relation between bank size and market power. We use an extended version of the Panzar-Rosse (P-R) model that allows bank size to affect market power. Based on a large sample of more than 18,000 banks in 101 countries comprising more than 112,000 bank-year observations, we show that market power varies with bank size. Large banks have substantially more market power than small banks in many of the countries under consideration, including the world's major economies and covering more than 85% of all banks in our sample. Our results contradict the common finding in the empirical P-R literature that competition increases with bank size. We show that misspecification of the P-R model in the existing literature leads to wrong assessment of the relation between market power and bank size.
    Keywords: banking; bank size; competition; consolidation; market power; market structure; Panzar-Rosse model.
    JEL: D4 G21 L11 L13
    Date: 2006–11
  3. By: Francis , Bill B (Lally School of Management and Technology); Hasan , Iftekhar (Lally School of Management, Rensselaer Polytechnic Institute and Bank of Finland); Sun , Xian (US Department of Treasury, Risk Analysis Department)
    Abstract: Using theories of internal capital markets, this paper examines the link between financial market integration and the value of global diversification. Based on a sample of 1,491 completed cross-border mergers and acquisitions (M&As) conducted by US acquirers during the 1990–2003 period, we find that, in general, US shareholders gain significant positive abnormal returns following the announcement of the merger/acquisition. Specifically, firms that acquire/merge with targets from countries with financially segmented markets experience significantly higher positive abnormal returns than those that acquire/merge with targets from countries with financially integrated capital markets. We find that the significantly higher positive returns are driven particularly by deals between firms from unrelated industries. These firms with higher announcement returns are also characterized by positive and significant post-merger operating performance. This finding is consistent with our event study results and suggests that the overall improvement in the merged firms’ performance is likely due to the influx of internal capital from wholly integrated acquirers to segmented targets, firms that, on average are usually faced with higher capital constraints.
    Keywords: financial market integration; global diversification; internal capital markets; mergers; acquisitions
    JEL: G15 G31 G34
    Date: 2006–12–14
  4. By: Yutian Chen; Pradeep Dubey; Debapriya Sen
    Date: 2006–12–08
  5. By: Antonio TESORIERE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: A free entry model with linear costs is considered where firms first choose their entry time and then compete in the market according to the resulting timing decisions. Multiple equilibria arise allowing for infinitely many industry output configuations encompassing one limit-output dominant firm and the Cournot equilibrium with free entry as extreme cases. Sequential entry is never observed. Both Stackelberg and Cournot-like outcomes are sustainable as equilibria however. When the number of incumbents is given, entry is always prevented, and industry output is sometimes larger than the entry preventing level
    Keywords: Free entry, Market leadership, Entry prevention
    JEL: L11 L13
    Date: 2006–11–15
  6. By: Roberto Fuentes; Rubén Hernández-Murillo; Gerard Llobet
    Abstract: In this paper we study the determinants of the decision of U.S. banks to create a transactional website for their customers. We show that although bank-specific characteristics (such as the volume of deposits) are important, competition plays a prominent role. In more competitive markets banks are more likely to adopt earlier. Even more important, banks adopt earlier in markets where their competitors have already adopted. A contribution of this paper is to study the adoption decision over time using a panel of commercial banks. We also contribute to the literature by adapting a measure of competition related to the choices of competitors that a bank faces in each market.
    Keywords: Internet banking
    Date: 2006
  7. By: Martynova,Marina; Renneboog,Luc (Tilburg University, Center for Economic Research)
    Abstract: For the 5th takeover wave, European M&As were expected to create significant takeover value: the announcement reactions were strongly positive for target shareholders (more than 35%) and the bidding shareholders also expected to gain a small though significant increase in market value of 0.5%. While, most of the expected takeover synergies are captured by the target firm shareholders, The combined value creation is significantly positive. However, the expected value strongly depends on the wave pattern, with optimistic expectations at the climax of the wave and a more pessimistic outlook at the decline. We establish that the characteristics of the target and bidding firms and of the bid itself have a significant impact on takeover returns. While some of our results have been documented for other markets of corporate control (e.g. US), a comparison of the UK and Continental European M&A markets reveals that the corporate environment is an important factor affecting the market reaction to takeovers: (i) In case a UK firm is taken over, the abnormal returns exceed those in bids involving a Continental European target. (ii) The presence of a large shareholder in the bidding firm has a significantly positive effect on the takeover returns in the UK and a negative one in Continental Europe. (iii) Weak investor protection and low disclosure environment in Continental Europe enable bidding firms to invent takeover strategies that allow them to act opportunistically towards target firm's incumbent shareholders; more specifically, partial acquisitions and acquisitions with undisclosed terms of transaction.
    Keywords: takeovers;mergers and acquisitions;diversification;hostile takeover;means of payment;cross-border acquisitions;private target;partial acquisitions
    JEL: G34
    Date: 2006
  8. By: Timothy H. Hannan; Ron Borzekowski
    Abstract: The literature on network industries and network effects notes that incompatibility across rival systems can influence firms' incentives to invest in product changes that are beneficial to the consumer. We investigate this phenomenon in the case of bank ATM networks, where the number of ATM locations serves as the measure of product quality and surcharge fees serve as an index of incompatibility. Using as a natural experiment the lifting of a surcharge ban in Iowa (and not in neighboring states), we find that the associated increase in incompatibility for Iowa banks caused a substantial increase in the number of ATM locations offered to customers. This effect is found to be larger (in percentage terms) for larger banks than for smaller ones.
    Date: 2006
  9. By: Paul, BELLEFLAMME (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Martin PEITZ (University of Mannheim)
    Abstract: We analyze whether and how the fact that products are not sold on free, public, platforms but on competing for-profit platforms affects sellers’ investment incentives. Investments in cost reduction, quality, or marketing measures are here to joint and coordinated efforts by sellers. We show that, in general, for-profit intermediation is not neutral to such investment incentives. As for-profit intermediaries reduce the rents that are availale in the market, one might suspect that sellers have weaker investment incentives with competing for-profit platforms. However, this is not necessarily the case. The reason is that investment incentives affect the size of the network effects and thus competition between intermediaries. In particular, we show that whether for-profit intermediation raises or lowers investment incentives depends on which side of the market singlehomes
    Keywords: Two-Sided Maarkets, Network Effects, Intermediation, Investment Incentives
    JEL: L10 D40
    Date: 2006–09–15
  10. By: José María Usategui (Universidad del Pais Vasco)
    Abstract: In a context where demand for the services of a durable good changes over time, and this change may be uncertain, the paper shows that social welfare may be higher when the monopolist seller can commit to any future price level she wishes than when she cannot. Moreover, the equilibrium under a monopolist with commitment power may Pareto-dominate the equilibrium under a monopolist without commitment ability. These results affect the desired regulation of a durable goods monopolist in this context.
    Keywords: Durable good, commitment, demand variations, regulation
    JEL: D42 L12 L41
    Date: 2006–12–02
  11. By: Craig H. Furfine; Richard J. Rosen
    Abstract: This paper examines the impact of mergers on default risk, finding that, on average, a merger increases the default risk of the acquiring firm. This is surprising for two reasons: risk reduction is among the reasons commonly cited for mergers, and asset diversification should reduce default risk unless the newly-merged firm takes some action to increase risk. We associate the risk increase with mergers satisfying one of a trifecta of conditions related to agency problems: mergers financed with stock, acquirers with a high market- to-book ratio, and acquirers with poor stock price performance prior to a merger announcement. We also demonstrate higher levels of default risk are not accompanied by higher post- merger returns.
    Keywords: Bank mergers ; Risk management
    Date: 2006
  12. By: Mälkönen , Ville (VATT (Government Institute for Economic Research)); Vesala , Timo (Bank of Finland Research)
    Abstract: We study the adverse selection problem in imperfectly competitive credit markets and illustrate the circumstances where a separating equilibrium emerges, even without collateral. The borrowers are heterogeneous in their preferences concerning the banks. Separation obtains in market segments where the ‘high risk’ borrowers receive credit from their preferred bank. The ‘low risk’ borrowers choose the ex-ante less-preferred bank that offers loan contracts with lower interest rates. The availability of credit will be maximized under an intermediate level of competition, a prediction that is supported by recent empirical evidence.
    Keywords: asymmetric information; credit rationing; bank differentiation
    JEL: D43 D82 G21 L13
    Date: 2006–12–14
  13. By: Joachim Henkel
    Abstract: In this paper, I describe and analyze the phenomenon of informal development collaboration between firms in the field of embedded Linux, a type of open source software. To explain the observed phenomenon of voluntary revealing, I develop a duopoly model of quality competition. The central assumptions are that firms require two complementary technologies as inputs, and differ with respect to the relative importance they attach to these technologies. The main results are, first, that a regime with compulsory revealing can lead not only to higher profits, but also to higher product qualities than a proprietary regime. Second, when the decision to reveal is endogenized equilibria arise with voluntary revealing by both players.
    Keywords: Innovation; development collaboration; open source software; embedded Linyx
    JEL: L11 L15 L86
    Date: 2006
  14. By: Federico S. Mandelman
    Abstract: This paper studies the cyclical pattern of ex post markups in the banking system using balance-sheet data for a large set of countries. Markups are strongly countercyclical even after controlling for financial development, banking concentration, operational costs, inflation, and simultaneity or reverse causation. The countercyclical pattern is explained by the procyclical entry of foreign banks, which occurs mostly at the wholesale level and signals the intention to spread to the retail level. My hypothesis is that wholesale entry triggers incumbents' limit-pricing strategies, which are aimed at deterring entry into retail niches and which, in turn, dampen bank markups. In the second part of the paper, I develop a general equilibrium model that accounts for these features of the data. I find that this monopolistic behavior in the intermediary financial sector increases the volatility of real variables and amplifies the business cycle. I interpret this bank-supply channel as an extension of the credit channel pioneered by Bernanke and Blinder (1988).
    Date: 2006
  15. By: Timothy H. Hannan; Robin A. Prager
    Abstract: This paper examines the relationship between multimarket bank presence and the profitability (and therefore viability) of small, single-market banks. We find that increased presence of multimarket banks is associated with a significant reduction in the profitability of small, single-market banks operating in rural banking markets, but not of those operating in urban markets. We explore this relationship by breaking single-market bank profits down into several components in order to shed light on the mechanisms through which multimarket bank presence might influence the profitability of single-market banks.
    Date: 2006
  16. By: Kaoru Hosono; Koji Sakai; Kotaro Tsuru
    Abstract: We investigate the motives and consequences of the consolidation of cooperative banks (Shinkin) in Japan during the period 1984-2002. Our major findings are as follows. First, less profitable and less cost efficient banks are more likely to be an acquirer and a target, though even less profitable and less cost efficient banks are more likely to be a target rather than an acquirer. In addition, a larger bank is more likely to be an acquirer and smaller one a target. These results are consistent with the regulators' motive for stabilizing the local banking system.¡¡Second, acquiring banks improved cost efficiency after the consolidation. M&As also raised the loan interest rate and improved profitability and X-efficiency particularly since the latter half of the 1990s. Nonetheless, the improvement of ROA after the merger was not sufficient to fill in the initial gap of the capital ratio between merging banks and peers, resulting in the deterioration of the capital ratio of consolidated banks relative to peers. M&As did not contribute to sufficiently stabilize the local banking system despite the regulators' motive. Third, the consolidation tended to improve the profitability of merging banks when the difference in profitability and healthiness between acquiring banks and target banks were large, which is consistent with the relative efficiency hypothesis (e.g., Akhavein, Berger, and Humphrey, 1997).Length: 48 pages
    Date: 2006–08
  17. By: Timothy H. Hannan; Steven J. Pilloff
    Abstract: This paper uses a large sample of individual banking organizations, observed from 1996 to 2003, to investigate the characteristics that made them more likely to be acquired. We use a definition of acquisition that we consider preferable to that used in much of the previous literature, and we employ a competing-risk hazard model that reveals important differences that depend on the type of acquirer. Since interstate acquisitions became more numerous during this period, we also investigate differences in the determinants of acquisition between in-state and out-of-state acquirers. The hypothesis that acquisitions serve to transfer resources from less efficient to more efficient uses receives substantial support from our results, as do a number of other relevant hypotheses.
    Date: 2006
  18. By: Siegfried Berninghaus; Werner Güth; M. Vittoria Levati; Jianying Qiu
    Abstract: In a stochastic duopoly market, sellers must form state-specific aspirations expressing how much they want to earn given their expectations about the other's behavior. We define individually and mutually satisficing sales behavior for given individual beliefs and aspiration profiles. In a first experimental phase, whenever satis¯cing is not possible, beliefs or aspirations have to be adapted, or other strategy profiles must be found. In a second phase, participants are free to select non-satisficing sales profiles. The results reveal that most people are satisficers who, either mandatorily or deliberately, tend to adjust aspiration levels if they cannot be satisfied.
    Keywords: Satisficing behavior, bounded rationality, duopoly
    JEL: C72 C92 D43
    Date: 2006–12

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