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on Industrial Competition |
| By: | Adelina Gschwandtner; Val E. Lambson |
| Abstract: | Dynamic competitive models of industry evolution predict higher variability of firm value over time and lower variability of firm activity over time in industries where sunk entry costs are higher. These predictions have done well empirically. Here we extend the theory to allow an additional category of sunk costs---depreciation---and argue that this generates countervailing effects. We test this assertion empirically and find the results are consistent with the theory. |
| JEL: | L00 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:0902&r=com |
| By: | Bruno Versaevel (EMLYON Business School, Ecully, F-69134 and University of Lyon, Lyon, F-69003, France; CNRS, UMR 5824, GATE, Ecully, F-69130, France; ENS LSH, Lyon, F-69007, France) |
| Abstract: | This paper investigates the combined impact of a first-mover advantage and of firms’ limited mobility on the equilibrium outcomes of a continuous-time model adapted from by Boyer, Lasserre, and Moreaux (2007). Two firms face market development uncertainty and may enter by investing in lumpy capacity units. With perfect mobility, when the first entrant plays as a Stackelberg leader a Markov perfect preemption equilibrium obtains in which the leader invests earlier, and the follower later, than in the Cournot benchmark scenario. There is rent equalization, and the two firms’ equilibrium value is lower. This result is not robust to the introduction of firm-specific limited mobility constraints. If one firm is sufficiently less able than its rival to mobilize resources at early stages of the market development process, there is less rent dissipation, and no equalization, in a constrained preemption equilibrium. The first-mover advantage on the product market then results in more value for the less constrained firm, and in less value for the follower than when they play `a la Cournot with perfect mobility. The leading firm maximizes value by entering immediately before its constrained rival, though later than made possible by its superior mobility. Greater uncertainty reduces the value differential to the benefit of the follower. It also increases the distance between the firms’ respective investment triggers. The specifications and results are discussed in light of recent developments in the market for music downloads. |
| Keywords: | Real options, Preemption, First-mover advantage, Mobility |
| JEL: | C73 D43 D92 L13 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0906&r=com |
| By: | Argenton, C.; Willems, B.R.R. (Tilburg University, Center for Economic Research) |
| Abstract: | It is well established that an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility. In this paper we study the trade-off between positive effects (risk sharing) and negative effects (exclusion) of exclusivity contracts. We revisit the seminal model of Aghion and Bolton (1987) under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market but also to crowd out financial investors willing to insure the buyer at competitive rates. We further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, there is no room for an insurance defense of exclusivity contracts. |
| Keywords: | exclusivity;contracts;monopolization;risk-aversion;risk-sharing;damages |
| JEL: | D43 D86 K21 L12 L42 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200924&r=com |
| By: | Magali Chaudey (CREUSET - Centre de Recherche Economique de l'Université de Saint-Etienne - CNRS : FRE2938 - Université Jean Monnet - Saint-Etienne); Muriel Fadairo (CREUSET - Centre de Recherche Economique de l'Université de Saint-Etienne - CNRS : FRE2938 - Université Jean Monnet - Saint-Etienne) |
| Abstract: | This paper deals with contractual design and vertical relationships within a franchise chain, in the field of the literature on share contracts. Within a double-sided moral hazard, the contract sharing the profit generated by the vertical decentralized structure results from the necessity to incite both the franchisee and the franchisor. This paper takes into account the five franchisor incentive mechanisms in order to study the chosen type of vertical coordination in different contexts. Using a multinational European dataset, we provide evidence that the two-sided externalities and monitoring costs have an influence on the type of vertical coordination in the network |
| Keywords: | Agency theory; econometrics of contracting; vertical restraints |
| Date: | 2009–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00376243_v1&r=com |
| By: | Guadalupe, Maria; Wulf, Julie |
| Abstract: | This paper establishes a causal effect of product market competition on various characteristics of organizational design. Using a unique panel dataset on firm hierarchies of large U.S. firms (1986-1999) and a quasi-natural experiment (trade liberalization), we find that increasing competition leads firms to flatten their hierarchies, i.e., (i) firms reduce the number of positions between the CEO and division managers and (ii) increase the number of positions reporting directly to the CEO (span of control). Firms also alter the structure and level of division manager compensation, increasing total pay as well as local (division-level) and global (firm-level) incentives. Our estimates show that for the average firm, span of control increased by 6% and depth decreased by 11% as a result of the quasi-natural experiment. |
| Keywords: | competition; complementarities; decentralization; hierarchy; incentives; organizational change; organizational structure; performance-related pay |
| JEL: | L2 M2 M52 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7253&r=com |
| By: | Doh-Shin Jeon; Domenico Menicucci |
| Abstract: | We consider competition among n sellers when each of them sells a portfolio of distinct products to a buyer having limited slots (or shelf space). We study how bundling affects competition for slots. When the buyer has k number of slots, efficiency requires the slots to be allocated to the best k products among all products. We first find that without bundling, equilibrium often does not exist and hence the outcome is often inefficient. Bundling changes competition between individual prod- ucts into competition between portfolios and reduces competition from rival products. Therefore, each seller has an incentive to bundle his products. Furthermore, under bundling, an efficient equilibrium always exists. In particular, in the case of Digital goods, all equilibria are efficient if firms do not use slotting contracts. However, inefficient equilibria can exist if firms use slotting contracts. In the case of physical goods, pure bundling also can generate inefficient equilibria. Finally, we identify portfolio effects of bundling and analyze the consequences on horizontal merger. |
| Keywords: | Bundling, Portfolios, Slots (or Shelf Space), Pure Bundling, Slotting Contracts |
| JEL: | D4 K21 L13 L41 L82 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1152&r=com |
| By: | Marius Schwartz (Department of Economics, Georgetown University) |
| Abstract: | Arrow (1962) showed that a secure monopolist (unconcerned with preemption) has a weaker incentive than would a competitive firm to invest in a patentable process innovation. This paper shows that the ranking can be reversed for product innovations. Only the innovator sells the new product, a differentiated substitute for the old. Under alternative market structures considered, the old product is sold only by that same firm (two-product monopoly), only by a different firm (post-innovation duopoly), or in perfect competition. In an asymmetric Hotelling model, the innovation incentive under monopoly is greater than under duopoly if and only if the new product has the higher quality, and is always greater than under perfect competition. Classification-JEL Codes: D4, L1 |
| Date: | 2009–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:geo:guwopa:gueconwpa~09-09-02&r=com |
| By: | Jay Pil Choi |
| Abstract: | This paper develops a framework to analyze the incentives to form a patent pool or engage in cross-licensing arrangements in the presence of uncertainty about the validity and coverage of patents that makes disputes inevitable. It analyzes the private incentives to litigate and compares them with the social incentives. It shows that pooling arrangements can have the effect of sheltering invalid patents from challenges. This result has an antitrust implication that patent pools should not be permitted until after patentees have challenged the validity of each otherfs patents if litigation costs are not too large. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd08-044&r=com |
| By: | Luigi Marengo; Corrado Pasquali; Marco Valente; Giovanni Dosi |
| Abstract: | The economic theory of intellectual property rights is based on a rather narrow view of both competition and technological knowledge. We suggest some ways of enriching this framework with a more empirically grounded view of both and, by means of a simulation model, we analyze the impact of different property right regimes on the dynamics of a complex product industry, that is an industry where products are complex multi-component objects and competition takes place mainly through differentiation and component innovation. We show that, as the complexity of the product spaces increases, stronger patent regimes yield lower rates of innovation, lower product quality and lower consumers' welfare. localized ones. |
| Keywords: | patents; appropriability of innovation; complex product industries; industrial dynamics |
| JEL: | O31 O34 L11 |
| Date: | 2009–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2009/05&r=com |
| By: | Richard Rubble (EMLYON Business School - EMLYON Business School); Bruno Versaevel (EMLYON Business School - EMLYON Business School, GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | Current EU policy exempts horizontal R&D agreements from antitrust con- cerns when the combined market shares of participants are low enough. This paper argues that existing theory does not support limiting the exemption to low market shares. This is done by introducing a set of non-innovating outside ï¬rms to the standard framework to assess what link might exist between the market share of innovating ï¬rms and the product market beneï¬ts of cooperation. With R&D output choices, the market share criterion, while it rules out the most socially harmful R&D cooperation agreements, also hinders the most beneï¬cial ones. With R&D input choices, cooperation may actually be desirable in concentrated industries, and harmful in more competitive ones. If R&D cooperation does have anti-competitive effects in product markets, it seems that these are therefore best addressed by other tools than market share criteria. |
| Keywords: | R&D; Cooperation; Competition; Regulation |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00377541_v1&r=com |
| By: | Rigoberto A. López (Department of Agricultural and Resource Economics, University of Conneticut.); Elena López (Departamento de Fundamentos de Economía e H.E. , Universidad de Alcalá.); Carmen Liron-Espana (System Planning, ISO-NE.) |
| Abstract: | This article estimates the impact of industrial concentration on market power and cost and then links the ensuing welfare changes to market structure characteristics using a sample of 232 U.S. manufacturing industries. Empirical results indicate that further increases in concentration would enhance welfare in 70% of the industries due to widespread efficiency gains, although these would generally not be passed on to consumers. From a social standpoint, further concentration is more likely to be beneficial in industries with economies of size, high export intensity, which are engaged in consumer-oriented goods, face larger markets, and have low or moderate levels of initial concentration. |
| Keywords: | Concentration, Welfare, Economies of size, Market power, Manufacturing. |
| JEL: | L11 L60 D43 D61 F12 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:alc:alcamo:0901&r=com |
| By: | Etienne Billette De Villemeur (GREMAQ - Groupe de recherche en économie mathématique et quantitative - CNRS : UMR5604 - Université des Sciences Sociales - Toulouse I - Ecole des Hautes Etudes en Sciences Sociales); Laurent Flochel (CRA - Charles River Associates International - Charles River Associates International); Bruno Versaevel (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | Collusion sustainability depends on ï¬rms' aptitude to impose sufficiently severe punishments in case of deviation from the collusive rule. We characterize the ability of oligopolistic ï¬rms to implement a collusive strategy when their ability to punish deviations over one or several periods is limited by a severity constraint. It captures all situations in which either structural conditions (the form of payoff functions), institutional circumstances (a regulation), or ï¬nancial considerations (proï¬tability requirements) set a lower bound to ï¬rms' losses. The model speciï¬cations encompass the structural assumptions (A1-A3) in Abreu (1986) [Journal of Economic Theory, 39, 191-225]. The optimal punishment scheme is characterized, and the expression of the lowest discount factor for which collusion can be sustained is computed, that both depend on the status of the severity constraint. This extends received results from the literature to a large class of models that include a severity constraint, and uncovers the role of structural parameters that facilitate collusion by relaxing the constraint. |
| Keywords: | Collusion ; Oligopoly ; Penal codes |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00375798_v1&r=com |
| By: | Goppelsroeder, Marie |
| Abstract: | In this paper we present an experiment in which we test the effects of sequential entry on the stability of collusion in oligopoly markets. Theoretical as well as experimental research suggests that a larger number of firms in an industry makes collusion harder to sustain. In this study, we explore to what extent collusion can be upheld with exogenous entry when groups start off small and when it is common knowledge that the entrant is informed about the history of her group prior to entry. We find that collusion is indeed easier to sustain in the latter case than in groups starting large. We conjecture that an implicit coordination problem is resolved more easily in a smaller group and that coordination, once it has been established, can be transferred to the enlarged group by means of a common code of conduct. Moreover, the results suggest that entrants emulate the behavior of their group upon entry. |
| Keywords: | Collusion; Entry; Experiments |
| JEL: | L13 C92 C72 L40 |
| Date: | 2009–03–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14707&r=com |
| By: | Fernandes, Ana M.; Paunov, Caroline |
| Abstract: | Over the past two decades, globalization, and more specifically the increased exposure to competition from low-price producers in China and India, has created a new economic environment for other emerging economies. The most advantageous way for manufacturing firms in those economies to position themselves in domestic and international markets is to offer upgraded and differentiated rather than"mundane"labor-intensive products. This paper investigates whether increased competitive pressure from imports forces firms to improve the quality of their products. The econometric analysis relies on a rich dataset of Chilean manufacturing plants and their products. Product quality is measured with unit values (average prices) and industry-level transport costs are used as an exogenous measure of import competition. The authors find a positive and robust effect of import competition on product quality. This effect is found to be particularly strong for non-exporting plants. The results also show that increased import competition from less advanced economies is the major cause for the positive impact on quality upgrading. The overall evidence points to the benefits of trade openness for product innovation but demonstrates at the same time that competitive pressure alone will not enable local plants to catch up with leading world producers. |
| Keywords: | Transport Economics Policy&Planning,Markets and Market Access,Economic Theory&Research,Water and Industry,Access to Markets |
| Date: | 2009–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4894&r=com |
| By: | Thomas Y. Mathä (Central Bank of Luxembourg, 2 bd. Royal, L-2983 Luxembourg.); Olivier Pierrard (Central Bank of Luxembourg, 2 bd. Royal, L-2983 Luxembourg.) |
| Abstract: | We develop a search-matching model, where firms search for customers (e.g. in form of advertising). Firms use long-term contracts and bargain over prices, resulting in a price mark up above marginal cost, which is procyclical and depends on firms’ relative bargaining power. Product market frictions decrease the steady state equilibrium, improve the cyclical properties of the model and provide a more realistic picture of firms’ business environment. This suggests that product market frictions may well be crucial in explaining business cycle fluctuations. Finally, we also show that welfare costs of price rigidities are negligible relative to welfare costs of frictions. JEL Classification: E10, E31, E32. |
| Keywords: | Business cycle, Frictions, Product market, Price bargain. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901036&r=com |