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on Industrial Competition |
| By: | Gerard Hoberg; Gordon M. Phillips |
| Abstract: | We examine how product differentiation influences mergers and acquisitions and the ability of firms to exploit product market synergies. Using novel text-based analysis of firm 10K product descriptions, we find three key results. (1) Firms are more likely to enter restructuring transactions when the language describing their assets is similar to all other firms, consistent with their assets being more redeployable. (2) Targets earn lower announcement returns when similar alternative target firms exist. (3) Acquiring firms in competitive product markets experience increased profitability, higher sales growth, and increased changes in their product descriptions when they buy target firms that are similar to them and different from rival firms. Our findings are consistent with similar merging firms exploiting synergies to create new products and increase their product differentiation relative to ex-ante rivals. |
| JEL: | G3 G34 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14289&r=com |
| By: | Stephen Davies (Centre for Competition Policy, University of East Anglia); Matthew Olczak (Centre for Competition Policy, University of East Anglia) |
| Abstract: | Previous empirical assessments of the effectiveness of structural merger remedies have focused mainly on the subsequent viability of the divested assets. Here, we take a different approach by examining how competitive are the market structures which result from the divestments. We employ a tightly specified sample of markets in which the European Commission (EC) has imposed structural merger remedies. It has two key features: (i) it includes all mergers in which the EC appears to have seriously considered, simultaneously, the possibility of collective dominance, as well as single dominance; (ii) in a previous paper, for the same sample, we estimated a model which proved very successful in predicting the Commission’s merger decisions, in terms of the market shares of the leading firms. The former allows us to explore the choices between alternative theories of harm, and the latter provides a yardstick for evaluating whether markets are competitive or not – at least in the eyes of the Commission. Running the hypothetical post-remedy market shares through the model, we can predict whether the EC would have judged the markets concerned to be competitive, had they been the result of a merger rather than a remedy. We find that a significant proportion were not competitive in this sense. One explanation is that the EC has simply been inconsistent – using different criteria for assessing remedies from those for assessing the mergers in the first place. However, a more sympathetic – and in our opinion, more likely – explanation is that the Commission is severely constrained by the pre-merger market structures in many markets. We show that, typically, divestment remedies return the market to the same structure as existed before the proposed merger. Indeed, one can argue that any competition authority should never do more than this. Crucially, however, we find that this pre-merger structure is often itself not competitive. We also observe an analogous picture in a number of markets where the Commission chose not to intervene: while the post-merger structure was not competitive, nor was the pre-merger structure. In those cases, however, the Commission preferred the former to the latter. In effect, in both scenarios, the EC was faced with a no-win decision. This immediately raises a follow-up question: why did the EC intervene for some, but not for others – given that in all these cases, some sort of anticompetitive structure would prevail? We show that, in this sample at least, the answer is often tied to the prospective rank of the merged firm post-merger. In particular, in those markets where the merged firm would not be the largest post-merger, we find a reluctance to intervene even where the resulting market structure is likely to be conducive to collective dominance. We explain this by a willingness to tolerate an outcome which may be conducive to tacit collusion if the alternative is the possibility of an enhanced position of single dominance by the market leader. Finally, because the sample is confined to cases brought under the ‘old’ EC Merger Regulation, we go on to consider how, if at all, these conclusions require qualification following the 2004 revisions, which, amongst other things, made interventions for non-coordinated behaviour possible without requiring that the merged firm be a dominant market leader. Our main conclusions here are that the Commission appears to have been less inclined to intervene in general, but particularly for Collective Dominance (or ‘coordinated effects’ as it is now known in Europe as well as the US.) Moreover, perhaps contrary to expectation, where the merged firm is #2, the Commission has to date rarely made a unilateral effects decision and never made a coordinated effects decision. |
| Keywords: | tacit collusion, collective dominance, single dominance, coordinated effects, merger remedies |
| JEL: | L13 L41 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:ccp:wpaper:wp08-28&r=com |
| By: | Vojislav Maksimovic; Gordon Phillips; N. R. Prabhala |
| Abstract: | Mergers and acquisitions are a fast way for a firm to grow. Using plant-level data, we examine how firms redraw their boundaries after acquisitions. We find that there is a large amount of restructuring in a short period following mergers. Acquirers sell 27% and close 19% of acquired plants within three years of the acquisition. Plants in the target's peripheral divisions, especially in industries in which asset values are increasing, and in industries in which the acquirer does not have a comparative advantage, are more likely to be sold by the acquirer. Acquirers with skill in running their peripheral divisions tend to retain more acquired plants. Plants retained by acquirers increase in productivity whereas sold plants do not. The extent of post-merger restructuring activities and their cross-sectional variation do not support an empire building explanation for mergers. Acquirers readjust their firm boundaries in ways that are consistent with the exploitation of their comparative advantage across industries. |
| JEL: | G3 G34 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14291&r=com |
| By: | André van Stel; Andrew Burke |
| Abstract: | Despite the fact that the main contribution of entrepreneurship theory to economics has been to provide an account of the performance of markets in disequilibrium, little empirical research on entrepreneurship has examined firm entry and exit in this context. In this paper, we attempt to redress this by modelling the interrelationship between firm entry and exit rates in disequilibrium. Using a data base of Dutch retail industries over the period 1980-2001, we are able to distinguish between displacement (entry causing exit) and replacement (exit causing entry) effects. We introduce a new methodological approach which allows us to investigate whether the relations under consideration differ between situations of undershooting’ (the actual number of firms is below the equilibrium number) and ‘overshooting’ (vice versa). We find that the equilibriumrestoring mechanisms are different in these two situations – being faster in over than undershoots. Our estimation results also imply that for undershooting, a lack of competition between incumbent firms contributes to restoration of equilibrium (creating room for new-firm entry) while in overshooting competition induced by new firms (in particular strong displacement) causes the number of firms to move towards equilibrium. The research helps to embed entrepreneurship theory into mainstream economics in a manner that adds greater insight into the performance of markets in disequilibrium. |
| Date: | 2008–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:eim:papers:h200809&r=com |
| By: | Lisa R. Anderson (Department of Economics, College of William and Mary); Beth A. Freeborn (Department of Economics, College of William and Mary) |
| Abstract: | We experimentally test a rent seeking model under five levels of competition. At one extreme, a subject’s probability of winning a prize is equal to her share of the total expenditures. At lower levels of competition, a subject’s probability of winning is affected more by her own expenditures than by the expenditures of others. Predicted expenditure levels are positively associated with higher levels of competition. Consistent with previous rent seeking experiments, we find that subjects spend significantly more than the Nash equilibrium prediction at all levels of competition. However, expenditure patterns generally follow the Nash prediction; expenditures decrease as the level of competition decreases. Our experimental design also includes a lottery choice experiment to control for subjects’ risk preference. We find that subjects who are more risk averse spend significantly less in the contest and this effect is particularly strong for female subjects |
| Keywords: | rent seeking, experiment, rent dissipation, political competition |
| JEL: | C9 D72 |
| Date: | 2008–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:cwm:wpaper:75&r=com |
| By: | Newbery, D. |
| Abstract: | The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship. |
| Keywords: | Residual Supply Index, Cournot equilibrium, Lerner Index, electricity markets, market power |
| JEL: | D43 K21 L94 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0837&r=com |
| By: | Nillesen, P.; Pollitt, M.G. |
| Abstract: | New Zealand is the only country to date to have implemented forced ownership unbundling of electricity distribution from the rest of the electricity supply industry (in 1998). This paper examines the impact of this policy on electricity prices, quality of service and costs. We find that ownership unbundling did not achieve its objectives of facilitating greater competition in the electricity supply industry but that it did lead to lower costs and higher quality of service. We suggest that this experience indicates the potential benefits of ownership unbundling in Europe but also the danger of un-intended consequences. |
| Keywords: | electricity distribution, ownership unbundling, New Zealand |
| JEL: | L94 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0836&r=com |
| By: | Brunekreeft, G. |
| Abstract: | This paper presents a social cost benefit analysis of ownership unbundling (as compared to legal und functional unbundling) of the electricity transmission system operators in Germany. The study relies on the Residual Supply Index for its competitive concept. The analysis models some 15 effects, grouped in three categories: the competition effect, the interconnector effect and the cost effect. Facing a looming capacity shortage, we find that the total available generation capacity and the effect of unbundling on capacity are of crucial importance. Overall, for the base-case, the net weighted discounted social-cost-benefit effect (weighted-?SCB) is likely to be positive, but small. |
| Keywords: | unbundling, electricity, networks, regulation, competition |
| JEL: | L11 L50 L94 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0833&r=com |
| By: | Sandra Rozo; Diego Vásquez; Dairo Estrada |
| Abstract: | This paper presents two versions of a spatial competition model for the banking sector. The first version, describes a framework that fol- lows closely Salop’s spatial competition model. This version is modi- fied in the second part by introducing the loan market and default risk probabilities for credit. Both theoretical approaches are analyzed em- pirically for the Colombian data,covering the period 1996-2005. Our results allow us to construct a deviation of the observed number of branches from an optimal number of branches for the banking system throughout the period of study. The deviation indicates that in the last years the number of branches is below the optimum which sug- gest that political measures should focus in increasing the number of branches in the country. Additionally, we found empirical evidence of market separability between the loan and deposit markets, and fi- nally, we were able to determine the signs of the relations between credit collateral, payment probability and interest rates. |
| Date: | 2008–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005001&r=com |
| By: | Brown , W.; Bryson , A.; Forth , J. |
| Abstract: | For most of the twentieth century, collective bargaining provided the terms on which labour was commonly employed in Britain. However, the quarter century since 1980 has seen the collapse of collectivism as the main way of regulating employment. Our argument is that the tacit settlement between organized labour and employers was undermined by increasing product market competition. The paper first provides an overview of the changing map of collective bargaining, focusing on the private sector. It then moves on to ask why the retreat took place, and to explore the part played by product market competition and, in particular, by the profitability of different industries. The paper concludes with an analysis of the consequences of privatisation. |
| Keywords: | collective bargaining, trade unions, competition, privatisation. |
| JEL: | D40 J30 J50 L33 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0831&r=com |
| By: | Gerard Hoberg; Gordon M. Phillips |
| Abstract: | We examine how product market competition affects firm cash flows and stock returns in industry booms and busts. In competitive industries, we find that high industry-level stock-market valuation, investment and new financing are followed by sharply lower operating cash flows and abnormal stock returns. We also find that analyst estimates are positively biased and returns comove more when industry valuations are high in competitive industries. In concentrated industries these relations are weak and generally insignificant. Our results suggest that when industry stock-market valuations are high, firms and investors in competitive industries do not fully internalize the negative externality of industry competition on cash flows and stock returns. |
| JEL: | G10 G14 G31 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14290&r=com |