nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒07‒27
nine papers chosen by
Russell Pittman
US Department of Justice

  1. When are Auctions Best? By Jeremy I. Bulow; Paul D. Klemperer
  2. The Choice of Market Entry Mode: Greenfield Investment, M&A and Joint Venture By Raff, Horst; Ryan, Michael; Stähler, Frank
  3. Cross-Border Mergers & Acquisitions and the Role of Trade Costs By Görg, Holger; Hijzen, Alexander; Manchin, Miriam
  4. Perishable Durable Goods By In-Koo Cho
  5. Conflicts of Interests Among Shareholders: The Case of Corporate Acquisitions By Jarrad Harford; Dirk Jenter; Kai Li
  6. Counterintuitive Number Effects in Experimental Oligopolies By Henrik Orzen
  7. Mergers and Acquisitions in the Colombian Financial Sector (Impact on Efficiency 1990 – 2005) By Sergio Clavijo; Carlos I. Rojas; Camila Salamanca; Germán Montoya
  8. Implications of Network Convergence on Local Access Regulation in the U.S. and the EU By Vanberg, Margit A.
  9. The Effects of Trade Liberalization on Productivity and Welfare: The Role of Firm Heterogeneity, R&D and Market Structure By Long, Ngo Van; Raff, Horst; Stähler, Frank

  1. By: Jeremy I. Bulow; Paul D. Klemperer
    Abstract: We compare the two most common bidding processes for selling a company or other asset when participation is costly to buyers. In an auction all entry decisions are made prior to any bidding. In a sequential bidding process earlier entrants can make bids before later entrants choose whether to compete. The sequential process is more efficient because entrants base their decisions on superior information. But pre-emptive bids transfer surplus from the seller to buyers. Because the auction is more conducive to entry in several ways it usually generates higher expected revenue.
    JEL: D44 G34 L13
    Date: 2007–07
  2. By: Raff, Horst; Ryan, Michael; Stähler, Frank
    Abstract: Multinationals may enter a host market by different modes of foreign direct investment (FDI). This paper examines the choice of FDI mode, and shows that the profitability of greenfield investment influences this choice not only directly, but also indirectly since it determines the outside option of potential acquisition targets and joint venture partners. In particular, even if greenfield investment is a viable option, the multinational may prefer a joint venture to M&A, and M&A to greenfield investment, provided that M&A and joint venture both involve sufficiently low fixed costs. The reason is that the profitability of greenfield investment both reduces the acquisition price in the case of M&A, and gives local firms an incentive to agree to a joint venture.
    Keywords: Foreign direct investment, multinational firms, merger and acquisition, joint venture, greenfield investment
    JEL: F12 F23
    Date: 2007
  3. By: Görg, Holger; Hijzen, Alexander; Manchin, Miriam
    Abstract: Cross-border mergers and acquisitions (M&As) have increased dramatically over the last two decades. This paper analyses the role of trade costs in explaining the increase in the number of cross-border mergers and acquisitions. In particular, we distinguish horizontal and non-horizontal M&As and investigate whether trade costs affect these two types of mergers differently. We analyse this question using industry data for 23 OECD countries for the period 1990-2001. Our findings suggest that while in the aggregate trade costs affect cross-border merger activity negatively its impact differs importantly across horizontal and non-horizontal mergers. The impact of trade costs is less negative for horizontal mergers, which is consistent with the tariff-jumping argument.
    Keywords: FDI; gravity; mergers and acquisitions; trade costs
    JEL: F02 F15 F21 F23
    Date: 2007–07
  4. By: In-Koo Cho (Department of Economics, University of Illinois)
    Abstract: We examine whether the Coase conjecture [7, 14, 4, 10] is robust against slight ability of commitment of the monopolist not to sell the durable goods to consumers. We quantify the commitment ability in terms of the speed that the durable goods perish, while keeping the time between the offers small. We demonstrate that the slight commitment capability makes a substantial difference by constructing two kinds of reservation price equilibria [10] that refute the Coase conjecture. In the first equilibrium, the monopolist can credibly delay to make an acceptable offer. All consumers are served, but only after extremely long delay. Most of gains from trading is discounted away, and the resulting outcome is extremely inefficient. In the second equilibrium, the monopolist's expected profit can be made close to the static monopoly profit, if the goods perish very slowly. By focusing on the reservation price equilibria, we rigorously eliminate any source of reputational effect. In fact, by using the first kind of reservation price equilibrium as a credible threat against the seller, we can construct many other reputational equilibria [2] to obtain the Folk theorem. Various extensions and applications are discussed.
    Date: 2007–07
  5. By: Jarrad Harford; Dirk Jenter; Kai Li
    Abstract: We identify important conflicts of interests among shareholders and examine their effects on corporate decisions. When a firm is considering an action that affects other firms in its shareholders' portfolios, shareholders with heterogeneous portfolios may disagree about whether to proceed. This effect is measurable and potentially large in the case of corporate acquisitions, where bidder shareholders with holdings in the target want management to maximize a weighted average of both firms' equity values. Empirically, we show that such cross-holdings are large for a significant group of institutional shareholders in the average acquisition and for a majority of institutional shareholders in a significant number of deals. We find evidence that managers consider cross-holdings when identifying potential targets and that they trade off cross-holdings with synergies when selecting them. Overall, we conclude that conflicts of interests among shareholders are sizeable and, at least in the case of acquisitions, affect managerial decisions.
    JEL: G30 G34
    Date: 2007–07
  6. By: Henrik Orzen (University of Nottingham)
    Abstract: Recent theoretical research on oligopolistic competition suggests that under certain conditions prices increase with the number of competing firms. However, this counterintuitive result is based on comparative-static analyses which neglect the importance of dynamic strategies in naturally-occurring markets. When firms compete repeatedly, supra-competitive prices can become sustainable but this is arguably more difficult when more firms operate in the market. This paper reports the results of laboratory experiments investigating pricing behavior in a setting in which (static) theory predicts the counterintuitive number effect. Under a random matching protocol, which retains much of the one-shot nature of the model, the data corroborates the gametheoretic prediction. Under fixed matching duopolists post substantially higher prices, whereas prices in quadropolies remain very similar. As a result, the predicted effect is no longer observed, and towards the end the reverse effect is observed.
    Keywords: Market Concentration; Experiments; Tacit Collusion
    JEL: C72 C92 D43
    Date: 2006–12
  7. By: Sergio Clavijo; Carlos I. Rojas; Camila Salamanca; Germán Montoya
    Abstract: Colombia has witnessed a renewed interest in merging and acquiring financial institutions during 2003-2005. These have been “complementary mergers” that seek to exploit economies scale and scope. This process contrasts favorably with those mergers & acquisitions that occurred during the mid-1990s, which involved mainly “twin institutions” that lacked potential for gaining multiproduct efficiency. This document analyzes the need to remove some of the regulatory constraints that obstruct further exploitation of such economies of scale-scope and quantifies the “cost efficiencies” shown by the Colombian banking sector (1994-2005). At the aggregate level, we found (absolute) banking efficiency to be around 63%, a similar value to those found in related studies post-crisis. This implies that banks operating in Colombia have been able to recover their efficiency levels during postcrisis 2003-2005, except for mortgage institutions. We highlight regulatory barriers that could be removed to help the banking system move closer to the optimal production frontier.
    Date: 2006–07–31
  8. By: Vanberg, Margit A.
    Abstract: This paper provides an overview of telecommunications regulation in the U.S. and in Europe. For each region the history of telecommunications regulations as well as the current regulatory regime is portrayed. The focus of this overview is on the question of how unbundling regulations in the local access market have evolved in parallel to the convergence of telecommunications with Internet and broadcasting services. The criteria used by the regulatory authorities to identify those network elements which incumbents are required to offer to competitors at regulated rates are compared to the criteria provided by the “essential facilities doctrine”, a concept used in antitrust law. The analysis concludes that U.S. deregulation has gone too far with respect to some broadband access markets while in Europe, a severe tendency to overregulation is observed.
    Keywords: network convergence, unbundling regulation
    JEL: L15 L43
    Date: 2007
  9. By: Long, Ngo Van; Raff, Horst; Stähler, Frank
    Abstract: This paper develops an oligopolistic model of international trade with heterogeneous firms and endogenous R&D to examine how trade liberalization affects firm and industry productivity, as well as social welfare. We identify four effects of trade liberalization on productivity: (i) a direct effect through changes in R&D investment; (ii) a scale effect due to changes in firm size; (iii) a selection effect due to inefficient firms leaving the market; and (iv) a market-share reallocation effect as efficient firms expand and inefficient firms reduce their output. We show how these effects operate in the short run when market structure is fixed, and in the long run when market structure is endogenous. Among the robust results that hold for any market structure are that trade liberalization (i) increases (decreases) aggregate R&D for low (high) trade costs; (ii) increases expected firm size if trade costs are high; and (iii) raises expected social welfare if trade costs are low.
    Keywords: international trade, firm heterogeneity, R&D, productivity, market structure
    JEL: F12 F15
    Date: 2007

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