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on Industrial Competition |
| By: | Molnar, Jozsef (Bank of Finland Research) |
| Abstract: | This paper proposes and tests an explanation as to why rational managers seeking to maximize shareholder value can pursue value-decreasing mergers. It can be optimal to overpay for a target firm and decrease shareholder value if the loss is less than in an alternative where the merger is undertaken by a product market rival. This paper presents a model based on synergies, market power and competition for merger targets. Consistent with the model the empirical results obtained here show a strong correlation between the returns of acquiring firms and close rivals around merger events. |
| Keywords: | acquisitions; auction; event study; oligopoly; preemption |
| JEL: | D43 D44 G14 G34 L13 |
| Date: | 2007–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_017&r=com |
| By: | Dirk Hackbarth (Washington University, St. Louis - John M. Olin School of Business); Erwan Morellec (University of Lausanne - Institute of Banking and Finance (IBF)) |
| Abstract: | This paper develops a real options framework to analyze the behavior of stock returns in mergers and acquisitions. In this framework, the timing and terms of takeovers are endogenous and result from value-maximizing decisions. The implications of the model for abnormal announcement returns are consistent with the available empirical evidence. In addition, the model generates new predictions regarding the dynamics of firm-level betas for the time period surrounding control transactions. Using a sample of 1090 takeovers of publicly traded US firms between 1985 and 2002, we present new evidence on the dynamics of firm-level betas, which is strongly supportive of the model's predictions. |
| Keywords: | takeovers, real options, stock returns, firm-level betas |
| JEL: | G13 G14 G31 G34 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp0601&r=com |
| By: | David Encaoua (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Abraham Hollander (Université de Montréal - [Université de Montréal]) |
| Abstract: | The paper examines under what conditions vertically differentiated duopolists engage in first-degree price discrimination. Each firm decides on a pricing regime at a first stage and sets prices at a second stage. The paper shows that when unit cost is an increasing and convex function of quality, the discriminatory regime is the unique subgame-perfect equilibrium of such two-stage game. In contrast to the case of horizontal differentiation, the discriminatory equilibrium is not necessarily Pareto-dominated by a bilateral commitment to uniform pricing. Also, the quality choices of perfectly discriminating duopolists are welfare maximizing. The paper explains why a threat of entry may elicit price discrimination by an incumbent monopolist. |
| Keywords: | competition in pricing regimes, duopoly, quality choice |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00177604_v1&r=com |
| By: | Doh-Shin Jeon (Department of Economics and Business, Universitat Pompeu Fabra); Sjaak Hurkens (Institute for Economic Analysis); |
| Abstract: | We study a retail benchmarking approach to determine access prices for interconnected networks. Instead of considering fixed access charges as in the existing literature, we study access pricing rules that determine the access price that network i pays to network j as a linear function of the marginal costs and the retail prices set by both networks. In the case of competition in two-part tariffs, we consider a class of access pricing rules, similar to the optimal one under competition in linear prices, derived by Jeon (2005), but based on average retail prices. We show that firms choose the variable price equal to the marginal cost under the class of rules. Therefore, the regulator can choose one among the rules to pursue additional objectives such as consumer surplus, network coverage or investment: in particular, we show that the regulator can achieve static and dynamic efficiency at the same time. |
| Keywords: | Networks, Access Pricing, Interconnection, Competition Policy, Telecommunications, Investment, Two-part Tariff |
| JEL: | D4 K21 L41 L51 L96 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0711&r=com |
| By: | Sergio Currarini (Department of Economics, University Of Venice Cà Foscari and School for Advanced Studies in Venice); Francesco Feri (University of Innsbruck) |
| Abstract: | We study the problem of information sharing in oligopoly, when sharing decisions are taken before the realization of private signals. Using the general model developed by Raith (1996), we show that if firms are allowed to make bilateral exclusive sharing agreements, then some degree of information sharing is consistent with equilibrium, and is a constant feature of equilibrium when the number of firms is not too small. Our result is to be contrasted with the traditional conclusion that no information is shared in common values situations with strategic substitutes - such as Cournot competition with demand shocks - when firms can only make industry-wide sharing contracts (e.g., a trade association). |
| Keywords: | Networks, Information sharing, oligopoly, networks, Bayesian equilibrium |
| JEL: | D43 D82 D85 L13 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:21_07&r=com |
| By: | Azacis, Helmuts (Cardiff Business School); Collie, David R. (Cardiff Business School) |
| Abstract: | The result of Colombo and Labrecciosa (2006) that optimal punishments are inferior to Nash-reversion trigger strategies with decreasing marginal costs is due to the output when a firm deviates from the punishment path being allowed to become negative. |
| Keywords: | Optimal punishments; trigger strategies; collusion; cartels |
| JEL: | C73 D43 L13 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2007/27&r=com |
| By: | Hussein Kassim (School of Political, Social and International Studies and Centre for Competition Policy, University of East Anglia); Kathryn Wright (Centre for Competition Policy, University of East Anglia) |
| Abstract: | The modernisation of EC antitrust rules timed to coincide with the 2004 enlargement of the European Union is widely recognised as an historic and revolutionary reform. According to the dominant view that has emerged in both law and political science, the change is to be explained in terms of the interest and ability of the European Commission to engineer a reform that, behind the guise of decentralisation to national authorities, has in practice extended its power and influence over the control of anti-competitive agreements. Drawing on original research, this paper contests the conventional wisdom and the image of the Commission as an imperialistic actor that underlines it. It argues that such a view dramatically overstates the Commission’s power and that a more sophisticated explanation is required. First, the Commission was motivated more by changes in the thinking within an epistemic community of competition practitioners and lawyers than by an impulse to expand its authority. Second, contrary to the monolithic conception of the Commission on which the dominant view depends, the Commission was internally differentiated and the development of its reform proposals the product of internal negotiation and conflict, rather than the expression of an inner drive to expansionism. Third, scrutiny reveals the Commission to be a constrained organisation, rather than a body able to re-write competition law autonomously. |
| Keywords: | Modernisation, reform, European Commission, competition policy |
| JEL: | P48 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:ccp:wpaper:wp07-19&r=com |
| By: | Massimo Del Gatto (University of Cagliari); Gianmarco I.P. Ottaviano (University of Bologna); Marcello Pagnini (Bank of Italy) |
| Abstract: | We use Italian firm-level data to investigate the impact of trade openness on the distribution of firms across marginal cost levels. In so doing, we implement a procedure that allows us to control not only for the standard transmission bias identified in firm-level TFP regressions but also for the omitted price bias due to imperfect competition. We find that more open industries are characterized by a smaller dispersion of costs across active firms. Moreover, in those industries the average cost is also smaller. |
| Keywords: | Cost dispersion, openness to trade, firm-level data, firm selection, total factor productivity. |
| JEL: | F12 F15 R13 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_635_07&r=com |
| By: | Jens Metge |
| Date: | 2007–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:cla:levrem:122247000000001622&r=com |
| By: | H. BOULHOL; S. DOBBELAERE; S. MAIOLI |
| Abstract: | This paper tests the pro-competitive effect of trade in the product and labour markets of UK manufacturing sectors between 1988 and 2003 using a two-stage estimation procedure. In the first stage, we use data on 9820 firms from twenty manufacturing sectors to simultaneously estimate mark-up and workers’ bargaining power parameters according to sector, firm size and period. We find a significant drop in both the mark-up and the workers’ bargaining power in the mid-nineties. In the second stage, we relate our parameters of interest to trade variables. Our results show that imports from developed countries have significantly contributed to the decrease in both mark-ups and workers’ bargaining power. |
| Keywords: | Workers’ bargaining power, mark-ups, pro-competitive effect |
| JEL: | C23 F16 J51 L13 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:07/479&r=com |
| By: | Nicholas Economides (Stern School of Business, New York University); Joacim Tåg (Swedish School of Economics and Business Administration, FDPE, and HECER); |
| Abstract: | We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers “on the other side” of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees “on the other side” of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees “on the other side” of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets. |
| Keywords: | net neutrality, two-sided markets, Internet, monopoly, duopoly, regulation, discrimination |
| JEL: | L1 D4 L12 L13 C63 D42 D43 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0714&r=com |
| By: | Yongmin Chen (Department of Economics, University of Colorado at Boulder); Scott J. Savage (Department of Economics, University of Colorado at Boulder); |
| Abstract: | An important issue in economics is how market structure affects prices. While the standard view is that competition lowers prices, Chen and Riordan (2006) argued that with product differentiation it is not exceptional for prices to be higher under duopoly than monopoly. This paper empirically investigates one implication from Chen and Riordan, namely, that prices are lower under duopoly when consumer preferences for the two products are similar, and they are more likely to be higher under duopoly if consumer preferences for the two products are more diverse. Focusing on the price for cable modem Internet access, with or without competition from a digital subscriber line provider, and using education dispersion as a proxy for consumer preference diversity, we find empirical support for this implication. In markets where education dispersion is low, competition reduces prices. As education dispersion increases, the negative effect of competition on prices diminishes; and when the dispersion is high enough, competition increases prices. |
| Keywords: | competition, Internet, preference diversity, prices |
| JEL: | L1 L13 L96 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0713&r=com |
| By: | Mo Xiao (Eller College of Management, University of Arizona); Peter F. Orazem (Department of Economics, Iowa State University); |
| Abstract: | Past empirical literature provides strong evidence that competition increases when new firms enter a market. However, rarely have economists been able to examine how competition changes with the threat of entry. This paper uses the evolution of the zip code level market structure of facilities-based broadband providers from 1999 to 2004 to investigate how a firm adjusts its entry strategy when facing the threat of additional entrants. We identify the potential entrant into a local market as threatened when a neighboring market houses more than firms providing broadband services. We first document that such a market is more likely to accommodate more than firms in the long run. Taking account of endogeneity of entry into neighboring markets, we find that the first 1 to 3 entrants significantly delay their entrance into an open local market facing entry threat. We do not find evidence of delayed entry for firms following the 3rd entrant. The evidence suggests that the mere threat of entry may curb market power associated with oligopolistic market structure. |
| Keywords: | Entry, Entry Threat, Broadband Providers |
| JEL: | L13 L8 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:net:wpaper:0709&r=com |
| By: | Prufer, J. (Tilburg University, Center for Economic Research) |
| Abstract: | Should mergers among nonprofit organizations be regulated differently than mergers among for-profit firms? The relevant empirical literature is highly controversial, the theoretical literature is scarce. I analyze the question by modeling duopoly competition with quality-differentiated goods. I compare welfare effects of mergers between firms with the effects of mergers between nonprofits dominated by consumers, workers, suppliers, and pure donors respectively. I find that mergers both among firms and among most types of nonprofits do not increase welfare. Mergers among consumerdominated nonprofits, however, can improve welfare. These results imply for competition law and regulation that ?nonprofit? might be too crude a label for organizations with varying goals. Consequently, mergers among certain nonprofit organizations should not necessarily be treated in the same way as mergers among for-profit firms ? a notion that is absent in current merger guidelines both in the US and the EU. |
| Keywords: | Nonprofits; Mergers; Antitrust; Governance; Owner Objectives; Notfor- profit Sector; Organizational Choice |
| JEL: | L44 L31 L22 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200782&r=com |
| By: | Darlene C. Chisholm; George Norman |
| Abstract: | We analyze how product line rivalry by multi-product oligopolists is affected by market product substitutability. We show that the width and degree of overlap in competing lines is determined by the tension between two effects: the drive to “be where the demand and the desire to weaken competition and intra-firm product cannibalization. Product shown to be wider and more overlapped in large markets and when product substitutability weak. We provide econometric support for our main hypotheses using data on weekly programming choices by first-run movie theatres in a large US metropolitan market. |
| Keywords: | Product line rivalry; market size; product substitutability; movie exhibition |
| JEL: | D21 D43 L13 L82 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:tuf:tuftec:0709&r=com |
| By: | Ana Isabel Guerra Hernández (Departament d'Economia Aplicada, Universitat Autonoma de) |
| Abstract: | Using a newly constructed data set, we calculate quality-adjusted price indexes after estimating hedonic price regressions from 1988 to 2004 in the Spanish automobile market. The increasing competition was favoured by the removal of trade restrictions and the special plans for the renewal of the Spanish automobile fleet. We find that the increasing degree of competition during those years led to an overall drop in automobile prices by 20 percent which implied considerable consumer gains thanks to higher market efficiency. Additionally, our results indicate that loyalty relevance and discrepancies in automobile reliability declined during those years. This is captured |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:uab:wprdea:wpdea0707&r=com |
| By: | James B. Bushnell; Erin T. Mansur; Celeste Saravia |
| Abstract: | This paper examines vertical arrangements in electricity markets. Vertically integrated wholesalers, or those with long-term contracts, have less incentive to raise wholesale prices when retail prices are determined beforehand. For three restructured markets, we simulate prices that define bounds on static oligopoly equilibria. Our findings suggest that vertical arrangements dramatically affect estimated market outcomes. Had regulators impeded vertical arrangements (as in California), our simulations imply vastly higher prices than observed and production inefficiencies costing over 45 percent of those production costs with vertical arrangements. We conclude that horizontal market structure accurately predicts market performance only when accounting for vertical structure. |
| JEL: | L11 L13 L94 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13507&r=com |
| By: | Hainz, Christa |
| Abstract: | Why do banks remain passive? In a model of bank-firm relationship we study the trade-off a bank faces when having defaulting firms declared bankrupt. First, the bank receives a payoff if a firm is liquidated. Second, it provides information about a firm’s type to its competitors. Thereby, asymmetric information between banks is reduced and bank competition intensifies. We find that the better the institutions and the more competitive the banking sector, the higher the bank’s incentive to bankrupt defaulting firms. This makes information between banks less asymmetric and thus leads to lower interest rates and less credit rationing. |
| Keywords: | Creditor passivity; bank competition; information sharing; institutions; bankruptcy; relationship banking |
| JEL: | G21 G33 K10 D82 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:2028&r=com |
| By: | Darlene C. Chisholm; George Norman |
| Abstract: | This paper presents an empirical assessment of movie theatre attendance in two major metropolitan markets and provides strong support for the importance of spatial characteristics in determining attendance. We consider the hypothesis that attendance at a particular movie theatre reflects a tension between two effects: a competition effect and an agglomeration effect. We find evidence that the agglomeration effect dominates. Further, we identify a pattern of systematic spatial decay in the benefits deriving from agglomeration. |
| JEL: | L11 D43 L82 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:tuf:tuftec:0711&r=com |
| By: | Erin T. Mansur |
| Abstract: | In a market subject to environmental regulation, a firm's strategic behavior affects the production and emissions decisions of all firms. If firms are regulated by a Pigouvian tax, changing emissions will not affect the marginal cost of polluting. However, under a tradable permits system, the polluters' decisions affect the permit price. This paper shows that this feedback effect may increase a strategic firm's output. Relative to a tax, tradable permits improve welfare in a market with imperfect competition. As an application, I model strategic and competitive behavior of wholesalers in the Pennsylvania, New Jersey, and Maryland electricity market. Simulations suggest that exercising market power decreased local pollution by approximately nine percent, and therefore, substantially reduced the price of the region's pollution permits. Furthermore, I find that had regulators opted to use a tax instead of permits, the deadweight loss from imperfect competition would have been approximately seven percent greater. |
| JEL: | L13 L94 Q53 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13510&r=com |
| By: | Erin T. Mansur |
| Abstract: | Restructuring electricity markets has enabled wholesalers to exercise market power. Using a common method of measuring competitive behavior in these markets, several studies have found substantial inefficiencies. This method overstates actual welfare loss by ignoring production constraints that result in non-convex costs. I develop an alternative method that accounts for these constraints and apply it to the Pennsylvania, New Jersey, and Maryland market. For the summer following restructuring, the common method implies that market imperfections resulted in considerable welfare loss, with actual production costs exceeding the competitive model's estimates by 13 to 21 percent. In contrast, my method finds that actual costs were only between three and eight percent above the competitive levels. In particular, it is the fringe firms whose costs increase, while strategic firms reduce production and costs. |
| JEL: | L13 L94 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13509&r=com |
| By: | Erin T. Mansur |
| Abstract: | Electricity restructuring has created the opportunity for producers to exercise market power. Oligopolists increase price by distorting output decisions, causing cross-firm production inefficiencies. This study estimates the environmental implications of production inefficiencies attributed to market power in the Pennsylvania, New Jersey, and Maryland electricity market. Air pollution fell substantially during 1999, the year in which both electricity restructuring and new environmental regulation took effect. I find that strategic firms reduced their emissions by approximately 20% relative to other firms and their own historic emissions. Next, I compare observed behavior with estimates of production, and therefore emissions, in a competitive market. According to a model of competitive behavior, changing costs explain approximately two-thirds of the observed pollution reductions. The remaining third can be attributed to firms exercising market power. |
| JEL: | H23 L13 L33 L94 Q53 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13511&r=com |