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on Industrial Competition |
| By: | Alejandro Saporiti (University of Manchester); German Coloma (Universidad del CEMA) |
| Abstract: | We analyze Bertrand's price competition in a homogenous good market with a fixed cost and an increasing marginal cost (i.e., with variable returns to scale). If the fixed cost is avoidable, we show that the non-subadditivity of the cost function at the output corresponding to the oligopoly break-even price, denoted by D(pL(n)), is su±cient to guarantee that the market supports an equilibrium in pure strategies with two or more active firms supplying at least D(pL(n)). Conversely, the existence of a pure strategy equilibrium ensures that the cost function is not subadditive at every output greater than or equal to D(pL(n)). As a by-product, the latter implies that the average cost cannot be decreasing over the range of outputs mentioned before. In addition, we also prove that the existence of a price-taking equilibrium is sufficient, but not necessary, for Bertrand's price competition to possess an equilibrium in pure strategies. This provides a simple existence result for the case where the fixed cost is fully unavoidable. |
| JEL: | D43 L13 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:541&r=com |
| By: | Christian A. Ruzzier (Harvard Business School) |
| Abstract: | It is often argued that competition forces managers to make better choices, thus favoring managerial autonomy in decision making. I formalize and challenge this idea. Suppose that managers care about keeping their position or avoiding interference, and that they can make strategic choices that affect both the expected profits of the firm and their riskiness. Even if competition at first pushes the manager towards profit maximization as commonly argued, I show that further increases in competitive forces might as well lead him to take excessive risks if the threat on his position is strong enough. To curb this possibility, the principal-owner optimally reduces the degree of autonomy granted to the manager. Hence higher levels of managerial autonomy are more likely for intermediate levels of competition. |
| Keywords: | product-market competition, authority, decision making, delegation, autonomy |
| JEL: | D23 L22 M12 M21 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:hbs:wpaper:09-082&r=com |
| By: | Joseph A. Clougherty; Tomaso Duso |
| Abstract: | It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert-identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, ‘future acquisition probability’ does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type. <br> <br> <i>ZUSAMMENFASSUNG - (Die Wirkung von horizontalen Zusammenschlüssen auf Wettbewerber: Der Nutzen einer Außenseiterposition bei Fusionen) <br>Es ist gemeinhin bekannt, dass Unternehmen nicht Außenseiter einer Fusion zwischen eigenen Wettbewerbern sein wollen. In dieser Arbeit zeigen wir, dass es für Unternehmen durchaus vorteilhaft sein kann, sich an einem großen horizontalen Zusammenschluss nicht zu beteiligen. Anhand einer Datenbank von großen Fusionen, in denen die relevanten Wettbewerber der fusionierenden Unternehmen von Experten der Europäischen Kommission identifiziert worden sind, und Mithilfe einer Ereignisstudienmethode, bestätigen wir empirisch, dass Wettbewerber durchschnittlich positive abnormale Gewinne bei der Ankündigung eines Zusammenschlusses erzielen. Darüber hinaus stellen wir fest, dass die Reaktion der Aktienkurse von Konkurrenten bei der Ankündigung eines Zusammenschlusses nicht anfällig für Fusionswellen ist, und dass die abnormalen Gewinne nicht von der "künftigen Firmenübernahmewahrscheinlichkeit" getrieben sind. Schließlich wird in der Studie ein konzeptioneller Rahmen entwickelt, der die Auswirkungen der Fusion sowohl auf die fusionierenden Unternehmen und als auch auf die Wettbewerber zusammenfasst, um die Art des Zusammenschlusses besser identifizieren zu können.<i> |
| Keywords: | Rivals, Mergers, Acquisitions, Event-Study |
| JEL: | G34 G14 M20 L22 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:wzb:wzebiv:fsiv2008-17&r=com |
| By: | Joseph E. Harrington, Jr. |
| Abstract: | If an antitrust authority chooses policies to maximize the number of successfully prosecuted cartels, when do those policies also serve to minimize the number of cartels that form? When the detection and prosecution of cartels is inherently difficult, we find that an antitrust authority¡¯s policies minimize the number of cartels, as is socially desirable. But when the detection and prosecution of cartels is not difficult, an antitrust authority is not aggressive enough in that it prosecutes too few cartel cases. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:jhu:papers:549&r=com |
| By: | Michael R. Baye (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Joshua D. Wright (George Mason University School of Law) |
| Abstract: | Modern antitrust litigation sometimes involves complex expert economic and econometric analysis. While this boom in the demand for economic analysis and expert testimony has clearly improved the welfare of economists—and schools offering basic economic training to judges—little is known about the empirical effects of economic complexity or judges' economic training on decision-making in antitrust litigation. We use a unique data set on antitrust litigation in district courts during 1996—2006 to examine whether economic complexity impacts decisions in antitrust cases, and thereby provide a novel test of the frequently asserted hypothesis that antitrust analysis has become too complex for generalist judges. We also examine the impact of one institutional response to economic complexity - basic economic training by judges. We find that decisions involving the evaluation of complex economic evidence are significantly more likely to be appealed, and decisions of judges trained in basic economics are significantly less likely to be appealed than are decisions by their untrained counterparts. Our results are robust to a variety of controls, including the type of case, circuit, and the political party of the judge. Our tentative conclusion, based on a revealed preference argument that views a party’s appeal decision as an indication that the district court got the economics wrong, is that there is support for the hypothesis that some antitrust cases are too complicated for generalist judges. |
| Keywords: | antitrust, Daubert, complexity, economic training, expert witness |
| JEL: | A2 K21 K41 L4 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:iuk:wpaper:2008-19&r=com |
| By: | Vicente Cuñat; Maria Guadalupe |
| Abstract: | This paper studies the effect of changes in foreign competition on the structure of compensation and incentives of U.S. executives. We measure foreign competition as import penetration and use tariffs and exchange rates as instrumental variables to estimate its causal effect on pay. We find that higher foreign competition leads to more incentive provision in a variety of ways. First, it increases the sensitivity of pay to performance. Second, it increases whithin-firm pay differentials between executive levels, with CEOs typically experiencing the largest wage increases, partly because they receive the steepest incentive contracts. Finally, higher foreign competition is also associated with a higher demand for talent. These results indicate that increased foreign competition can explain some of the recent trends in compensation structures. |
| Keywords: | Incentives, Performance-related-pay, Wage Structure, Promotions, Demand for talent, Globalization, Product Market Competition |
| JEL: | M52 L1 J31 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1134&r=com |
| By: | Oliver Lorz (Faculty of Business and Economics, RWTH Aachen University, 52056 Aachen, Germany); Matthias Wrede (Faculty of Business Administration and Economics, University of Marburg, 35032 Marburg, Germany) |
| Abstract: | This paper sets up a model of endogenous product differentiation to analyze the variety effects of international trade. In our model multi-product firms decide not only about the number of varieties they supply but also about the degree of horizontal differentiation between these varieties. Firms can raise the degree of differentiation by investing variety-specific fixed costs. In this setting, we analyze how trade integration, i.e. an increase in market size, influences the number of firms in the market, the number of product varieties supplied by each firm, and the degree of differentiation. |
| Keywords: | Product differentiation, multi-product firms, international trade. |
| JEL: | D43 F12 L25 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200902&r=com |
| By: | Cellini, Roberto; Lambertini, Luca; Sterlacchini, Alessandro |
| Abstract: | We study the product and process innovation choice of firms in which a managerial incentive à la Vickers (1985) is present. Taking a two-stage dynamic game approach, we show that managerial firms are led to over-invest in process innovation, as compared to standard profit-maximising firms, while they under-invest in product innovation. The reason is that process innovation allows to decrease cost, and this is consistent with a convenient increase in the production level. On the opposite, product innovation allows increasing price, which is in contrast with the taste for output expansion embodied in the objective function of firms run by managers. Preliminary empirical evidence on Italian companies suggests that in fact the managerial nature of firm associates with significantly smaller efforts in product innovation while the effect on process innovation is positive but non-significant. |
| Keywords: | Process innovation; Product innovation; R&D; Managerial incentive |
| JEL: | O32 O31 D43 C72 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12935&r=com |
| By: | Erik Stam (Tjalling Koopmans Institute, Utrecht School of Economics, Utrecht University, Utrecht, The Netherlands; Centre for Technology Management, University of Cambridge, Cambridge, United Kingdom; Scientific Council for Government Policy (WRR), The Hague, The Netherlands; Max Planck Institute of Economics - Entrepreneurship, Growth and Public Policy group, Jena, Germany); Karl Wennberg (Centre for Entrepreneurship and Business Creation, Stockholm School of Economics, Stockholm, Sweden.) |
| Abstract: | Innovative start-ups are an important driver of economic growth. This article presents empirical evidence on the effects of R&D on new product development, inter-firm alliances and employment growth during the early life course of firms. We use a dataset that contains a sample of new firms that is representative for the whole population of start-ups. This dataset covers the first six years of the life course of firms. R&D reveals to play several roles during the early life course of high tech as well as high growth firms. The effect of initial R&D on high tech firm growth runs via increasing levels of inter-firm alliances in the first post-entry years. R&D efforts enable the exploitation of external knowledge. Initial R&D also stimulates new product development later on in the life course of high tech firms, but this does not seem to affect firm growth. R&D does not affect the growth rate of new low tech firms, which seems to be driven mainly by the growth ambitions of the founding entrepreneur. The results show that R&D matters for a limited but important set of new high tech and high growth firms, which are key in innovation and entrepreneurship policies. |
| Keywords: | New Firms, Innovation, R&D, firm growth, alliances, product development |
| JEL: | D21 L23 L25 L26 M13 |
| Date: | 2009–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-004&r=com |
| By: | Kangsik, Choi |
| Abstract: | We investigate a differentiated mixed duopoly in which private and public firms can choose to strategically set prices or quantities by facing a union bargaining process. For the case of a unionized mixed duopoly, only public firm is able to choose a type of contract based on the degree of substitutability in the equilibrium. Focusing on the case of substitute goods, we show that Bertrand (respectively, Cournot) competition entails higher social welfare than Cournot (respectively, Bertrand) competition if the degree of substitutability is relatively small (respectively, large). Thus, there are multiple Nash equilibria in the contract stage of the game. As a result, Singh and Vives' ranking of social welfare is reversed in a range of substitution values for which it is a dominant strategy for public firm to choose either quantity or price contracts. |
| Keywords: | Wage Bargaining; Union; Cournot-Bertrand Competition; Mixed Duopoly. |
| JEL: | J51 L13 C7 D43 H44 |
| Date: | 2008–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12787&r=com |
| By: | Wiberg, Daniel (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology) |
| Abstract: | Economic theory tells us that abnormal industry and firm profits will not persist for any length of time. Any industry or firm making profits in excess of the normal rate of return will attract entrants and this competitive process will erode profits. A substantial amount of research however, has found evidence of persistent profits above the norm. Barriers to entry and exit are often put forward as explanation to this anomaly. In the absence of, or with low barriers to entry and exit, this reasoning provides little help in explaining why these above-norm profits arise and persist. In this paper the association between profits and the systematic search for knowledge is investigated. The results show that by investing in research and development firms may succeed in creating products or services that are preferred by the market and/or find a more cost efficient method of production. Corporations that systematically invest in research and development are, by doing so, offsetting the erosion of profits and thereby have profits which persistently diverge from the competitive return. It is argued that even in the absence of significant barriers to entry and exit profits may persist. This can be accredited to a systematic search for knowledge through research and development. |
| Keywords: | Persistence of profits; research and development; industrial organization |
| JEL: | L00 L22 L25 O32 |
| Date: | 2009–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0161&r=com |
| By: | Julien Chevallier (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre) |
| Abstract: | Stemming from politically given market imperfections in a tradable permits system, this paper develops a Stackelberg game with two types of non-cooperative agents to describe how a large -potentially dominant- agent may exercise market power at the expense of a competitive fringe. In a dynamic framework with full forward and backward temporal flexibility (i.e. 1:1 Intertemporal Trading Ratio), this intra-industry model then suggests an optimal allocation criterion for grandfathered permits based on recent emissions. This paper contributes to the permit trading literature by shedding some light on the decision to allow banking and borrowing, a debate which is typically overlooked by the debate to introduce the permits market itself among other environmental regulation tools. Provisional results are presented under perfect information. |
| Keywords: | emissions trading;banking;borrowing;market power;differential game |
| Date: | 2009–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00124713_v1&r=com |