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on Industrial Competition |
| By: | Elena Cefis; Orietta Marsili; Hans Schenk |
| Abstract: | This paper provides new empirical evidence on the effects of mergers and acquisitions on the shape of the firm size distribution (FSD), by using data of the population of manufacturing firms in the Netherlands. Our analysis shows that M&As do not affect the size distribution when we consider the entire population of firms. When we focus on the firms involved in a M&A event, we observed a shift of the FSD towards larger sizes. FSD becomes more concentrated around the mean size, less skewed to the right hand side, and thinner at the tails as a whole. The shift toward higher sizes due to M&A is not uniform but affects firms of different sizes in different ways. While the number of firms in the lower tail decreased, the number of firms in the central size classes increased substantially and outweighed the increase in the number (and mean size) of firms in the upper tail of the distribution (consequently the overall market concentration measured by the Herfindhal index declines). M&As leads to a departure from log-normality of the FSD, suggesting that external growth does not follow a Gibrat’s law. Our counterfactual analysis highlights that only internal growth does not affect the shape of the size distribution of firms. On the contrary, it suggests that the change in the size distribution is almost entirely due to the external growth of the firms. |
| Keywords: | Firms Size Distribution, Mergers and Acquisitions, Firm Entry and Exit, Industry Concentration |
| JEL: | L11 L25 D21 C14 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0617&r=com |
| By: | Gerlach, Heiko (IESE Business School) |
| Abstract: | This paper analyzes the role of communication between firms in an infinitely repeated Bertrand game in which firms receive an imperfect private signal of a common value i.i.d. demand shock. It is shown that firms can use stochastic, inter-temporal market sharing as a perfect substitute for communication in low-demand states. Therefore, partial communication in high-demand states is sufficient to achieve the most collusive, full communication outcome. And partial communication in low-demand states does not improve on the equilibrium without communication. Communication in high-demand states allows firms to coordinate their pricing, choose the most efficient uninformed price and avoid price wars. I demonstrate that under some conditions consumers are better off with communication among colluding firms. |
| Keywords: | Stochastic market sharing; communication; collusion; competition policy; |
| JEL: | D82 L13 L41 |
| Date: | 2007–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0674&r=com |
| By: | Rosa Branca Esteves (Universidade do Minho - NIPE) |
| Abstract: | This article is a first loock at the dynamic effects of customer poaching in homogeneous product markets, where firms need to invest in advertising to generate awareness. When a firm can recognize customers with different past purchasing histories, it may send them targeted advertisements with different prices. It is shown that only the firm that advertises the highest price in the first period will engage in price discrimination, and that poaching clearly benefits the discriminating firm. This gives rise to "the race for discrimination effect", through which price discrimination may act to soften price competition rather than to intensify it. As a result of that, all firms might become better off, even when only one of them can engage in price discrimination. This article offers a first attempt to evaluate the effects of price discrimination on the efficiency properties of advertising. In markets with low or no advertising costs, allowing frims to price discriminate leads them to provide too little advertising, which is not good for consumers and overall welfare. Only in markets with high advertising costs, may firms overadvertise. Regarding the welfare effects, price dsscrimination is generally bad for welfare and consumer surplus, though good for firms. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:nip:nipewp:12/2007&r=com |
| By: | Patricia Charléty (CEPN - Centre d'économie de l'Université de Paris Nord - [CNRS : UMR7115] - [Université Paris-Nord - Paris XIII]); Marie-Cécile Fagart (CEPN - Centre d'économie de l'Université de Paris Nord - [CNRS : UMR7115] - [Université Paris-Nord - Paris XIII]); Saïd Souam (CEPN - Centre d'économie de l'Université de Paris Nord - [CNRS : UMR7115] - [Université Paris-Nord - Paris XIII]) |
| Abstract: | We analyze the incentives of a controlling shareholder of a firm to acquire, directly or indirectly through his firm, shares in a competitor. We charaterize the conditions under which these partial acquisitions as well as the equilibrium toehold and its nature: controlling or silent. We find that while this shareholder gains, the acquisition is detrimental to minority shareholders of his firm, or of the target, or even of both. We show that the incentives are enhanced if the dominant shareholder initially holds silent stakes in rivals while controlling interests may discourage them. Moreover, we find that partial acquisitions always lead to a decrease in the joint profit of the two firms involved, and an increase in competitor's profits as the market becomes less competitive. |
| Keywords: | horizontal partial acquisitions ; real market concentration ; dominant shareholder ; minority shareholders ; silent interests. |
| Date: | 2007–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:hal-00143911_v1&r=com |
| By: | Markus Reisinger (Department of Economics, University of Munich, Kaulbachstr. 45, 80539 Munich, Germany, markus.reisinger@lrz.uni-muenchen.de, phone: 00 49 89 2180 5645, fax: 00 49 89 2180 5650); Ludwig Ressner (Department of Economics, University of Munich, Kaulbachstr. 45, 80539 Munich, Bavarian Graduate Program in Economics, Germany, ludwig.ressner@lrz.uni-muenchen.de, phone: 00 49 89 2180 5644, fax: 00 49 89 2180 5650) |
| Abstract: | This paper analyzes a duopoly model with stochastic demand in which firms first choose their strategy variable and compete afterwards. Contrary to the existing literature, we show that firms do not always choose a quantity which is the variable that induces a smaller degree of competition. The reason is that demand uncertainty and the degree of substitutability have countervailing effects on variable choice. Higher uncertainty favors prices, while closer substitutability favors quantities. Moreover, for intermediate values firms choose different strategy variables in equilibrium. |
| Keywords: | competition, strategy variables, demand uncertainty |
| JEL: | D43 L13 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:202&r=com |
| By: | Utz Weitzel; Stephanie Rosenkranz |
| Abstract: | We model takeovers as a bargaining process and explain termination fees for, both, the target and the acquirer, subject to parties’ bargaining power and outside options. In equilibrium, termination fees are offered by firms with outside options in exchange for a greater share of merger synergies. Termination fees decrease in firms’ bargaining power, and increase in firms’ outside options. We find that a merger with the second highest bidder, including a termination fee, can lead to equally high premiums as a merger with the highest bidder, without a termination fee. This novel result directly contrasts the agency cost perspective, which argues that termination provisions may be used by managers to lock into acquirers that do not generate the highest shareholder value. Further, even in a merger with the highest bidder and in the absence of bidding related costs, a termination fee is not necessarily a deal protection device, but can be used to improve shareholder value. Our bargaining model offers an alternative to auction related explanations of termination fees, like cost compensation or seller commitment. |
| Keywords: | Mergers and Acquisitions, Bargaining, Outside Option, Termination Fees, Break-Up Fees, Lockups |
| JEL: | G34 C71 C78 D44 K22 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0706&r=com |
| By: | Sallstrom Matthews, S.E. |
| Abstract: | What would happen if firms could collusively choose cost of transport (inconvenience) in Hotelling's spatial model? This paper endogenises inconvenience in a three stage game, where firms choose locations, the inconvenience, and finally compete in price, on the assumption of a common reservation price. The equilibrium of the game reveals a novel mechanism which induces firms to differentiate their products in moderation by locating halfway to the center and choosing inconvenience such that the market remains covered in equilibrium. Furthermore, using Launhardt's model with differential freight rate, it is shown that the collusive inconvenience is a Nash equilibrium. |
| Keywords: | spatial differentiation, location, market structure, cost of transport, inconvenience, freight rate, business strategies. |
| JEL: | L11 L13 D43 D21 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0720&r=com |
| By: | Lafontaine, Francine (Stephen M. Ross School of Business, University of Michigan); Slade, Margaret (Department of Economics,University of Warwick) |
| Abstract: | Understanding what determines firm boundaries and the choice between interacting in a firm or a market is not only the fundamental concern of the theory of the firm, but it is also one of the most important issues in economics. Data on value added, for example, reveal that in the US, transactions that occur in firms are roughly equal in value to those that occur in markets. The economics profession, however, has devoted much more attention to the workings of markets than to the study of firms, and even less attention to the interface between the two. Nevertheless, since Coase’s (1937) seminal paper on the subject, a rich set of theories has been developed that deal with firm boundaries in vertical or input/output structures. Furthermore, in the last 25 years, empirical evidence that can shed light on those theories has been accumulating. |
| Keywords: | Vertical integration ; firm boundaries ; vertical mergers ; firms versus markets |
| JEL: | L22 L24 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:799&r=com |
| By: | Behringer, Stefan |
| Abstract: | We investigate the equilibrium market sturcture in virtual platform duopoly (auctions or other market forms) that are prevalent in internet settings. We take full account of the complexity of network effects in such markets and determine optimal pricing strategies. We invstigate the welfare implications of such strategies, look at the impact of non-exclusive services and at what happens in large markets. |
| Keywords: | Two-sided Markets; Duopoly Pricing; |
| JEL: | D44 L14 |
| Date: | 2005–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3239&r=com |
| By: | Jiawei Chen; Ulrich Doraszelski; Joseph E. Harrington, Jr. |
| Abstract: | As is well-recognized, market dominance is a typical outcome in markets with network effects. A firm with a larger installed base offers a more attractive product which induces more consumers to buy its product which produces a yet bigger installed base advantage. Such a setting is investigated here but where firms have the option of making their products compatible. When firms have similar installed bases, they make their products compatible in order to expand the market. Nevertheless, random forces could result in one firm having a bigger installed base in which case the larger firm may make its product incompatible. We find that strategic pricing tends to prevent the installed base differential from expanding to the point that incompatibility occurs. This dynamic is able to neutralize increasing returns and avoid the emergence of market dominance. |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:537&r=com |
| By: | Jiri Podpiera; Marie Rakova |
| Abstract: | In this paper we show the relevance of the degree of competition for inferences about changes in export-production relative prices when the nominal exchange rate changes. We devise a model for tradable goods that combines the market competition and the pricing-tomarket literature and we empirically document the contrast between perfectly and imperfectly competitive markets for the export-production relative price responses to exchange rate changes. When the macroeconomic view is taken, a change in the degree of competition in exports (a change in the average mark-up on exported products) alternates the reaction in relative prices and quantity exported and thus requires careful policy-related consideration. |
| Keywords: | Degree of competition, exchange rate, pricing-to-market. |
| JEL: | C33 D4 F31 F41 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2006/10&r=com |
| By: | Kwoka, J.; Pollitt, M. |
| Abstract: | This paper analyses the performance impact of the merger wave which took place in the US electricity industry during the period 1994-2003. It does so by analyzing the impact on operating and total cost in electricity distribution. While there are past studies of efficiency and productivity effects, as well as of prices, profits, and other outcomes, this study differs in several ways. First, the database consists of many merging and non-merging firms, rather than only a few on which to base inferences. Second, all of these mergers arise in a single industry, greatly facilitating controlled comparison. Third, we have data on the several years of pre-merger and post-merger efficiency of the specific merging units, unlike virtually all past studies. And finally, we employ a powerful nonparametric technique - data envelopment analysis - to measure the efficiency of each operating unit. The results indicate that electricity mergers are not consistent with improved cost performance. |
| Keywords: | mergers, efficiency analysis, electricity distribution, data envelopment analysis. |
| JEL: | L25 L43 L94 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0725&r=com |
| By: | Rimvydas Baltaduonis (University of Connecticut and George Mason University) |
| Abstract: | In my recent experimental research of wholesale electricity auctions, I discovered that the complex structure of the offers leaves a lot of room for strategic behavior, which consequently leads to anti- competitive and inefficient outcomes in the market. A specific feature of these complex-offer auctions is that the sellers submit not only the quantities and the minimum prices at which they are willing to sell, but also the start-up fees that are designed to reimburse the fixed start-up costs of the generation plants. In this paper, using the experimental method I compare the performance of two complex-offer auctions (COAs) against the performance of a simple-offer auction (SOA), in which the sellers have to recover all their generation costs --- fixed and variable ---through a uniform market-clearing price. I find that the SOA significantly reduces consumer prices and lowers price volatility. It mitigates anti-competitive effects that are present in the COAs and achieves allocative efficiency more quickly. |
| Keywords: | strategic behavior, sealed-bid auction, complex offer auction, electricity, efficiency |
| JEL: | C72 D4 D61 L94 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2007-14&r=com |
| By: | Behringer, Stefan |
| Abstract: | This paper investigates the alleged predatory behaviour in the UK quality newspaper industry in the 1990s using a horizontal differentiation model and industry data. |
| Keywords: | Two-Sided Markets; Predation; Newspapers |
| JEL: | D43 L41 L12 |
| Date: | 2007–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3242&r=com |
| By: | Joëlle Noailly; Richard Nahuis |
| Abstract: | The 1999 Dutch Notary Act has initiated an ambitious deregulation process in the market for notary services in the Netherlands. We evaluate the impact of this liberalisation policy on (i) the level of competition in the profession and (ii) the quality of services. We compare the level of competition before and after the liberalisation using two different indicators, namely a relativeprofit indicator and a variation of the Bresnahan-Reiss indicator. Using the relative profit indicator, we find that the level of competition has increased after 1999. We find, however, no significant difference between the level of competition in 1996 and in 2002. This is particularly clear when we measure competition taking the local market as the relevant market for notary services. The results on the national market are more mixed and there is some evidence that competition in 2002 is higher than in 1996. Using the Bresnahan-Reiss indicator, we find that entry does affect conduct in the notary market, but again that the level of competition in the local market for notary services in 2003 does not significantly differ from the 1995 level. We also examine whether competition affects the quality of notary services. We use both subjective and objective measures for quality of notary services. We find that subjective quality - the perceived level of service by clients - is, if anything, negatively affected by competition. Using objective quality, i.e. quality that is not observable to clients, we find that in 2003 competition leads to a deterioration of quality, as the quality of monopoly notaries outperforms the quality of oligopoly notaries. This was not the case in 1995. Confronting our empirical findings with qualitative insights, we present options for policy. |
| Keywords: | Notary; Competition; Quality; Legal Service |
| JEL: | L11 L15 L69 |
| Date: | 2005–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:docmnt:94&r=com |
| By: | Fay Dunkerley (CES – KU Leuven, Belgium); André de Palma (THEMA, Univ de Cergy Pontoise, France & ENPC); Stef Proost (CES – KU Leuven, Belgium, CORE, Belgium) |
| Abstract: | We study the problem of a city with access to two firms or subcentres (restaurants, airports) selling a differentiated product and/or offering a differentiated workplace. The first subcentre is easily congested (near city centre, access by road), the second less prone to congestion but further away. Both need to attract customers and employees and need to make profits to cover their fixed costs. This is an asymmetric duopoly game that can be solved for a Nash equilibrium in prices and wages. This solution involves excessive congestion for the nearby subcentre. Three stylised policies are studied to address this congestion. The first policy is to widen the congested road to the nearby subcentre. The second policy option is to add congestion pricing (or parking pricing etc.) for the congested subcentre. The third policy is to provide a direct subsidy to the remote subcentre so that it can reduce its price. We illustrate the theory using a numerical model applied to the two Brussels airports. |
| Keywords: | duopoly, imperfect competition, congestion, general equilibrium, airport competition |
| JEL: | L13 D43 R41 R13 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2007-14&r=com |
| By: | Kurt Van Dender (Department of Economics, University of California-Irvine) |
| Abstract: | We use a simple analytical framework to derive pricing rules for oligpolistic airlines at airports that are served by competitive airlines as well. The pricing rules show how the degree of internalization of marginal congestion costs depends on market structure. The analysis illustrates the importance of selecting an accurate representation of market structure, when making recommendations about the desirability of congestion pricing mechanisms. |
| Keywords: | Airports; Airline; Congestion; Congestion tolls; Oligopoly |
| JEL: | L13 L93 R41 |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:060717&r=com |
| By: | Javier Coronado; Sergi Jiménez-Martín; Pedro L. Marín |
| Abstract: | The purpose of this paper is to analyze the effect of multimarket contact on the behavior of pharmaceutical firms controlling for different levels of regulatory constraints using IMS MIDAS database. Theoretically, firms that meet in several markets are expected to be capable of sustaining implicitly more profitable outcomes, even if perfect monitoring is not possible. Firms may find it profitable to redistribute their market power among markets where they are operating. We present evidence for nine OECD countries with different degrees of regulation and show that regulation affects the importance of economic forces on firms' price setting behavior. Furthermore, our results confirms the presence of the predictions of the multimarket theory for more market friendly countries (U.S. and Canada) and less regulated ones (U.K., Germany, Netherlands), in contrast, for highly regulated countries (Japan, France, Italy and Spain) the results are less clear with some countries being consistent with the theory while others contradicting it. |
| Keywords: | Pharmaceutical prices, Multimarket Contact, Regulation |
| JEL: | L11 L13 L65 I18 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1033&r=com |
| By: | Marisa Miraldo (Centre for Health Economics, University of York) |
| Abstract: | Within a horizontally differentiation model and allowing for heterogeneous qualities, we analyze the effects of reference pricing reimbursement on firms’ pricing strategies. With this analysis we find inherent incentives for firms’ pricing behaviour, and consequently we shed some light on time consistency of such policy. The analysis encompasses different reference price rules. Results show that if drugs have equal quality, reference pricing may lead to higher prices. With quality differentiation both the minimum and linear policies unambiguously lead to higher prices. |
| Date: | 2007–04 |
| URL: | http://d.repec.org/n?u=RePEc:chy:respap:rp27&r=com |