nep-com New Economics Papers
on Industrial Competition
Issue of 2007‒09‒09
nineteen papers chosen by
Russell Pittman
US Department of Justice

  1. Pricing, Investments and Mergers with Intertemporal Capacity Constraints By Christou, Charalambos; Kotseva, Rossitsa; Vettas, Nikolaos
  2. Price discrimination By Armstrong, Mark
  3. Mergers as Auctions By Ivaldi, Marc; Motis, Jrissy
  4. Do mergers create or destroy value? Evidence from unsuccessful mergers By Cole, Rebel; Fatemi, Ali; Vu, Joseph
  5. An efficiency perspective on the gains from mergers and asset purchases By Sugata Ray; Missaka Warusawitharana
  6. Acquiring foreign firms far away might be hazardous to your share price: evidence from Germany By Michael H. Grote; Fabian Rücker
  7. Varieties of Capitalism, Varieties of Markets: Mergers and Acquisitions in Japan, Germany, France, the UK and USA By Gregory JACKSON; MIYAJIMA Hideaki
  8. Competition Policy Implications of Electronic Business-to-Business Marketplaces: Issues for Marketers By Andrew Pressey; John K. Ashton
  9. The Impact of Organizational Structure and Lending Technology on Banking Competition By Degryse, Hans; Laeven, Luc; Ongena, Steven
  10. Competition in Hong Kong's Banking Sector: A Panzar-Rosse Assessment By Jim Wong; Eric Wong; Tom Fong; Ka-fai Choi
  11. Testing for Collusion in the Hong Kong Banking Sector By Jim Wong; Eric Wong; Tom Fong; Ka-fai Choi
  12. Determinants of the Performance of Banks in Hong Kong By Jim Wong; Tom Fong; Eric Wong; Ka-fai Choi
  13. Liquidity, Competition & Price Discovery in the European Corporate Bond Market By BIAIS, Bruno; DECLERCK, Fany
  14. Footloose Monopolies: Regulating a "National Champion" By Calzolari, Giacomo; Scarpa, Carlo
  15. Designing a Two-Sided Platform: When To Increase Search Costs? By HAGIU, Andrei; JULLIEN, Bruno
  16. An Empirical Study of Price Dispersion in Homogenous Goods Markets By Thierry Warin; Daniel B. Leiter
  17. The Price Consideration Model of Brand Choice By Ching, Andrew; Erdem, Tulin; Keane, Michael
  18. Internationalizing R&D Co-opetition: Dress for the Dance with the Devil By Schmiele, Anja; Sofka, Wolfgang
  19. Multilateral Subsidy Games By Dermot Leahy; J. Peter Neary

  1. By: Christou, Charalambos; Kotseva, Rossitsa; Vettas, Nikolaos
    Abstract: We set up a duopoly model with dynamic capacity constraints under demand uncertainty. We endogenize the investment decisions of the firms, examine their intertemporal pricing behavior, their incentives to merge, as well as the welfare implications of a merger. Whereas under known and constant demand the high capacity firm lets its low capacity rival sell out, under demand uncertainty we obtain a rich set of sales patterns. Each unit of available capacity has an option value (or opportunity cost), which depends on both firms' capacities, the current demand and the remaining horizon. This option value may be higher when the firms act non-cooperatively compared to the case when they merge to form a monopoly. Trade surplus may be higher when a merger takes place, as capacity is more efficiently managed over time. The prospect of a merger also leads to higher investment levels, as each firm wishes to appropriate a higher share of the total surplus. For some levels of the capacity instalment cost, a merger that turns the duopoly into a monopoly is welfare improving.
    Keywords: capacity constraints; dynamic oligopoly; inventories; mergers; price competition
    JEL: D43 L13 L22
    Date: 2007–08
  2. By: Armstrong, Mark
    Abstract: This paper surveys recent economic research on price discrimination, both in monopoly and oligopoly markets. Topics include static and dynamic forms of price discrimination, and both final and input markets are considered. Potential antitrust aspects of price discrimination are highlighted throughout the paper. The paper argues that the informational requirements to make accurate policy are very great, and with most forms of price discrimination a laissez-faire policy may be the best available in practical terms. However, careful case-by-case analysis of situations involving selective price cuts and margin squeeze seems worthwhile.
    Keywords: Price discrimination; bundling; entry deterrence; competition policy
    JEL: L1 L13
    Date: 2006–10
  3. By: Ivaldi, Marc; Motis, Jrissy
    Abstract: Most empirical studies that evaluate motives and gains in M&A conclude that acquirers at best do not lose from the deal while targets obtain positive gains. With a database containing merging firms’ characteristics and final bids, we propose a structural approach to infer acquirers’ gains from merging by interpreting a merger as an auction. Using nonparametric methods, we estimate bidders’ private values for targets and informational rents. We provide evidence of significant and positive merging gains. Moreover, investigating for the source of bidders’ private valuation and informational rents, our empirical analysis supports the synergy hypothesis as a motive in horizontal mergers.
    Keywords: auctions; corporate finance; event studies; merger
    JEL: C14 G14 G34 L10 L20
    Date: 2007–08
  4. By: Cole, Rebel; Fatemi, Ali; Vu, Joseph
    Abstract: In this study, we examine unsuccessful takeover attempts for new evidence on whether mergers create or destroy value for acquirers and targets. We contribute to the literature in three important areas. First, we contribute to the literature on signaling by investigating whether a takeover attempt signals investors about the quality of firm management as well as the quality of the specific firm investment under consideration. We find that bid announcement returns are partially, but not completely, reversed by termination announcement returns, evidence that the merger proposal itself contains information about the value of the bidding firm. Second, we contribute to the literature on the value of diversification by examining how merger bids and terminations affect the relative values of bidders attempting diversifying and focusing takeovers. Our evidence enables us to differentiate between the synergistic and agency views of mergers. We find significant differences in the responses of firms attempting focusing versus diversifying mergers. The reversal of bid announcement returns by termination announcement returns is significantly different for focusing and diversifying firms. There is no reversal for diversifying firms while there is a partial reversal for focusing firms. This provides evidence in support of both the synergistic and agency views of mergers. Synergies are evident in focusing mergers while agency costs are evident in diversifying mergers. Third, we contribute to the literature on the valuation effects of mergers by using data from the 1991-2000 period to re-examine the important topic of who wins and who loses when mergers are terminated. Previous research examining terminated mergers has relied exclusively upon data from the 1980s.
    Keywords: acquisition; diversification; focus; merger; signaling; takeover; terminated merger
    JEL: G34 G14
    Date: 2006–10
  5. By: Sugata Ray; Missaka Warusawitharana
    Abstract: A simple efficiency-based view states that acquisitions shift assets to more productive owners. This implies that expected returns from acquisitions increase with transaction value. We propose using the sensitivity of abnormal returns to scaled transaction value as a measure of efficiency gains. Using this method, we find that the average acquirer obtains an increase of 3% - 5% in the value of the acquired assets. However, efficiency gains vary sharply across acquirer and deal characteristics. We find statistical significance for interactions of relative value and variables known to affect acquirer normal returns. The inclusion of the interaction term sometimes drives away the significance of the variable of interest. These results suggest that improving productivity via capital reallocation plays an important role in understanding acquirer returns from acquisitions.
    Date: 2007
  6. By: Michael H. Grote; Fabian Rücker
    Abstract: This paper examines shareholder wealth effects of cross-border acquisitions. In a sample of 155 large acquisitions by German corporations from 1985–2006 international transactions in total do not lead to significant announcement returns. Geography, however, makes a difference: Shareholders of acquiring firms gain 6.5% in cross-border transactions into countries that have a common border with Germany but lose 4.4% in other international transactions. We find proximity to be one of the most important success factors in cross-border mergers and acquisitions, even when we control for firm, deal and country characteristics.
    Date: 2007–08
  7. By: Gregory JACKSON; MIYAJIMA Hideaki
    Abstract: This paper compares the characteristics of M&A in 1991-2005 across five countries: Japan, France, Germany, the UK and USA. We ask what factors explain the growth of M&A markets across these countries, and what similarities and differences exist in the ways the M&A market operates. We find that the growth of M&A reflects a rather similar combination of sectoral, international, and financial factors. However, despite some convergence toward increasing levels, we find important differences in the characteristics of M&A transactions that reflect institutional differences found within different national 'varieties of capitalism'. We find systematic differences between what Hall and Soskice (2001) call liberal market economies (UK and USA) and coordinated market economies (Japan, France, and Germany) across a wide range of in deal characteristics: takeover bids, the size of stakes purchased, the prior stakes held, the use of private negotiation, degree of hostility, and takeover premium. In line with theories of the social embeddedness of markets (Granovetter 1985), we find that in countries with 'coordinated' market economies, M&A reflects greater 'coordination' of transactions through on going business relations. As such, the market for corporate control does not necessary entail a convergence of national business systems, but a pattern of change influenced by strong continuities.
    Date: 2007–09
  8. By: Andrew Pressey (Norwich Business School and Centre for Competition Policy, University of East Anglia); John K. Ashton (Centre for Competition Policy, University of East Anglia)
    Abstract: Electronic marketplaces (e-marketplaces) allow networks of buyers and sellers to conduct business online and to exchange information more efficiently using Internet technology. Despite the benefits that e-marketplaces potentially afford firms, concerns have been raised that these markets may damage competition. This study considers the antitrust or competition legislation related to e-marketplaces and examines the possible competition concerns they raise. Potentially anticompetitive features of e-marketplaces are examined and guidance for firm conduct when creating or participating in an e-marketplace is offered.
    Keywords: Electronic marketplaces, antitrust, policy
    JEL: M31 K21 L42
    Date: 2007–06
  9. By: Degryse, Hans; Laeven, Luc; Ongena, Steven
    Abstract: Recent theoretical models argue that a bank’s organizational structure reflects its lending technology. A hierarchically organized bank will employ mainly hard information, whereas a decentralized bank will rely more on soft information. We investigate theoretically and empirically how bank organization shapes banking competition. Our theoretical model illustrates how a lending bank’s geographical reach and loan pricing strategy is determined not only by its own organizational structure but also by organizational choices made by its rivals. We take our model to the data by estimating the impact of the lending and rival banks’ organization on the geographical reach and loan pricing of a singular, large bank in Belgium. We employ detailed contract information from more than 15,000 bank loans granted to small firms, comprising the entire loan portfolio of this large bank, and information on the organizational structure of all rival banks located in the vicinity of the borrower. We find that the organizational structures of both the rival banks and the lending bank matter for branch reach and loan pricing. The geographical footprint of the lending bank is smaller when rival banks are large and hierarchically organized. Such rival banks may rely more on hard information. Geographical reach increases when rival banks have inferior communication technology, have a wider span of organization, and are further removed from a decision unit with lending authority. Rival banks’ size and the number of layers to a decision unit also soften spatial pricing. We conclude that the organizational structure and technology of rival banks in the vicinity influence local banking competition.
    Keywords: authority; banking sector; competition; hierarchies; technology
    JEL: G21 L11 L14
    Date: 2007–08
  10. By: Jim Wong (Research Department, Hong Kong Monetary Authority); Eric Wong (Research Department, Hong Kong Monetary Authority); Tom Fong (Research Department, Hong Kong Monetary Authority); Ka-fai Choi (Research Department, Hong Kong Monetary Authority)
    Abstract: A re-examination of the competitive conditions of the banking industry in Hong Kong, based on the Panzar-Rosse approach and using a panel dataset with longer time-series data, reconfirms previous findings in our RM 04/2004 that the degree of competition was fairly high during the period 1992-2002. The empirical analysis also suggests that competitive pressures have been maintained in subsequent years, notwithstanding significant changes in the operating environment. The estimation results showed that competitive pressures were higher among larger banks and lower among smaller banks. This may suggest that while larger banks compete with smaller banks keenly in local retail markets on products such as mortgages and credit cards, they may be subject to even stronger pressures from other competitors at the regional or international levels in the corporate banking market, wealth management and other off-balance sheet activities, where they are more heavily involved. While relaxation of regulations and advances in technology tend to increase competition in the banking system, the effect of consolidation may depend on the prevailing market settings. To the extent that bank consolidation in recent years may have hampered competition, regulatory liberalisation and technological progress appear to have largely offset the adverse effect. The emergence of a number of larger banks through mergers and acquisitions which should be more capable of competing with existing large banks may have also contributed. Nonetheless, with bank consolidation expected to continue, how market concentration may impact on competition in the years to come needs to be closely monitored.
    Date: 2006–10
  11. By: Jim Wong (Research Department, Hong Kong Monetary Authority); Eric Wong (Research Department, Hong Kong Monetary Authority); Tom Fong (Research Department, Hong Kong Monetary Authority); Ka-fai Choi (Research Department, Hong Kong Monetary Authority)
    Abstract: This working paper examines the degree of collusion in the banking sector of Hong Kong based on the conjectural variation approach. The results suggest that banks in Hong Kong operated in a competitive fashion in the loan market during the period 1991-2002 with no significant sign of collusion on pricing. The market conduct was largely maintained in subsequent years, despite significant changes in the operating conditions. While major bank consolidations in 2001-2002 have resulted in fewer banks and thus a market more conducive to develop and maintain collusions, interest rate deregulations implemented around the same time has promoted a more competitive environment. The estimation results show that while banks do not appear to have exercised any collusive pricing in either the retail market or the corporate loan market, it is relatively less likely to develop oligopolistic collusions in the corporate loan market than in the local retail market.
    Keywords: Conjectural variation, price, Hong Kong banking, market structure
    JEL: G21 G28 L13 L22
    Date: 2007–02
  12. By: Jim Wong (Research Department, Hong Kong Monetary Authority); Tom Fong (Research Department, Hong Kong Monetary Authority); Eric Wong (Research Department, Hong Kong Monetary Authority); Ka-fai Choi (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper develops a model to identify the major determinants of a bank's profit, and the general level of profitability of a banking market. It found that in Hong Kong's case, market structure, such as market concentration and market shares of banks, is not a major contributory factor. Cost efficiency of banks, which measures the ability of banks to optimise their input mix for producing outputs, is a major determinant of banks' profitability. Since larger banks are found to be in general more cost efficient than smaller banks in our previous study on banks' efficiency, larger banks can offer services at lower prices to compete with smaller banks, yet attaining a similar or even higher level of profits. Smaller banks may, therefore, be more vulnerable to intense competitions in the loan market than larger banks, particularly in cut-throat price wars.
    Keywords: Profitability, price, Hong Kong banking, bank efficiency, market structure
    JEL: G14 G21 G28 L11
    Date: 2007–04
  13. By: BIAIS, Bruno; DECLERCK, Fany
    Date: 2007–08
  14. By: Calzolari, Giacomo; Scarpa, Carlo
    Abstract: We analyze the design of optimal regulation of a domestic monopolist that also competes in an unregulated foreign market. We show how foreign activities by the regulated firm affect domestic regulation, consumers’ surplus and firm’s profits. Although expansion in unregulated foreign markets amplifies the regulatory distortions that are caused by the regulator’s limited information, we also show that allowing the firm to compete abroad does not necessarily harm domestic consumers and we analyze if and when the firm’s decision to expand abroad does in fact coincide with consumers’ interests in the regulated market.
    Keywords: Foreign Competition; Multinational Enterprises; National Champions; Regulation
    JEL: F23 L51
    Date: 2007–08
  15. By: HAGIU, Andrei; JULLIEN, Bruno
    JEL: L1 L2 L8
    Date: 2007–08–23
  16. By: Thierry Warin; Daniel B. Leiter
    Abstract: This paper presents the results of an empirical study of price dispersion in homogeneous goods markets. Modern economic theory suggests that inevitable asymmetries of information in markets lead to an equilibrium in which price dispersion is present even when goods are perfectly homogenous. In this paper we present an empirical analysis in which we employ both cross-sectional and time-series data gathered directly from, one of the most popular and comprehensive online shopping/price-comparison sites on the Internet. In particular our analysis focuses on (i) the effect that the number of firms offering a good has on price dispersion, (ii) the informational value to the consumer of using the Pricegrabber website, and (iii) the persistency of price dispersion over time.
    Keywords: E-commerce, Internet marketing, Price dispersion, Signaling, Search Cost, Gatekeepers, Regression and other statistical techniques JEL Classification: L81, L86, L11
    Date: 2007–10
  17. By: Ching, Andrew; Erdem, Tulin; Keane, Michael
    Abstract: The workhorse brand choice models in marketing are the multinomial logit (MNL) and nested multinomial logit (NMNL). These models place strong restrictions on how brand share and purchase incidence price elasticities are related. In this paper, we propose a new model of brand choice, the “price consideration” (PC) model, that allows more flexibility in this relationship. In the PC model, consumers do not observe prices in each period. Every week, a consumer decides whether to consider a category. Only then does he/she look at prices and decide whether and what to buy. Using scanner data, we show the PC model fits much better than MNL or NMNL. Simulations reveal the reason: the PC model provides a vastly superior fit to inter-purchase spells.
    Keywords: Brand Choice; Purchase Incidence; Price Elasticity; Inter-purchase Spell
    JEL: M31 C41 C25
    Date: 2007–08–18
  18. By: Schmiele, Anja; Sofka, Wolfgang
    Abstract: Competitors can be valuable sources and partners for innovation activities. Against the background of international expansion of firms and increased international competition, the R&D collaborations with international competitors (international co-opetition) is becoming an increasingly interesting way to gain access to well guarded knowledge from abroad. However, to be able to benefit from these paradox alliances, a certain level of international co-opetition readiness is required. On the one hand, this readiness is important to protect the companies’ intellectual property that should not be leaked to competitors. On the other hand, the firm has to be able to absorb and utilize the knowledge and capabilities of the collaborating competitor. Hence, we envision co-opetition as a balancing act between appropriability practices and absorptive capacities in a cross-border context. We test these dual hypotheses for a broad sample of roughly 1,000 innovative firms in the German manufacturing sector. We find that co-opetition with international competitors requires a shift in appropriability practices from informal methods (secrecy, lead time) towards formal ones (like patents and copyrights). Besides, we discover that the readiness for international co-opetition can be achieved by developing international collaboration experience through collaborations with international customers or suppliers.
    Keywords: Co-opetition, R&D collaboration, internationalization, innovation management
    JEL: D83 F23 O31 O32
    Date: 2007
  19. By: Dermot Leahy; J. Peter Neary
    Abstract: This paper examines the rationale for multilateral agreements to limit investment subsidies. The welfare ranking of symmetric multilateral subsidy games is shown to depend on whether or not investment levels are "friendly", raising rival profits in total, and/or strategic complements, raising rival profits at the margin. In both Cournot and Bertrand competition, when spillovers are low and competition is intense (because goods are close substitutes), national-welfare-maximizing governments will over-subsidize investment, and banning subsidies would improve welfare. When spillovers are high, national governments under-subsidize from a global welfare perspective, but the subsidy game is welfare superior to non-intervention.
    Keywords: Industrial Policy, Investment Subsidies, Subsidy Wars, Strategic Trade Policy, R&D Spillovers, Oligopoly
    JEL: L13 F12
    Date: 2007

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