nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒08‒08
fourteen papers chosen by
Russell Pittman
US Department of Justice

  1. Collusion in markets with imperfect price information on both sides By Christian Schultz
  2. Make vs Buy in a Monopoly with Demand or Cost Uncertainty By L. Lambertini
  3. "An Agent Based Cournot Simulation with Innovation: Identifying the Determinants of Market Concentration" By Kochanski, Tim
  4. Does Competition Favor Delegation? By Christian Alejandro Ruzzier
  5. Endogenous Market Structures and Corporate Finance By Federico Etro
  6. Cross-Border Mergers and Acquisitions: Financial and Institutional Forces. By Nicolas Coeurdacier; Roberto A. De Santis; Antonin Aviat
  9. Revisiting the Merger and Acquisition Performance of European Banks By Ioannis Asimakopoulos; Panayiotis Athanasoglou,
  10. Banking Deregulations, Financing Constraints and Firm Entry Size By William R. Kerr; Ramana Nanda
  11. Strategic Vertical Pricing in the U.S. Butter Market By Du, Ying; Stiegert, Kyle
  12. An Analysis of Pricing in the U.S. Cotton Seed Market By Shi, Guanming; Stiegert, Kyle; Chavas, Jean Paul
  13. The Flocking Strategy and Vertical Disintegration By Waka Cheung; Yew-Kwang Ng
  14. Input Constraints and the Efficiency of Entry: Lessons from Cardiac Surgery By David M. Cutler; Robert S. Huckman; Jonathan T. Kolstad

  1. By: Christian Schultz (Department of Economics, University of Copenhagen)
    Abstract: The paper considers tacit collusion in markets which are not fully transparent on both sides. Consumers only detect prices with some probability before deciding which fi?rm to purchase from, and each fi?rm only detects the other fi?rm's price with some probability. Increasing transparency on the producer side facilitates collusion, while increasing transparency on the consumer side makes collusion more difficult. Conditions are given under which increases in a common factor, affecting transparency positively on both sides, are pro-competitive. With two standard information technologies, this is so, when fi?rms are easier to inform than consumers.
    Keywords: transparency; tacit collusion; cartel theory; competition policy; internet
    JEL: L13 L40
    Date: 2009–07
  2. By: L. Lambertini
    Date: 2009–05
  3. By: Kochanski, Tim
    Abstract: In this paper, I develop a hybrid model that contains elements of both agent based simulations (ABS) as well as analytic Cournot models, to study the effects of firm characteristics, market characteristics, and innovation on market concentration, as measured by a Herfindahl-Hirschman Index (HHI). The model accommodates the following components: multiple firms with heterogeneous marginal costs, market entry and exit, barriers to entry, low or high cost industries, changing demand, varying levels of marginal cost reducing returns-to-innovation, varying costs associated with innovation, increased returns to innovation from past experience innovating, and varying propensities to innovate within the market. The components mentioned above are commonly cited as determinants of market concentration. A sensitivity analysis which is robust to high degrees of model complexity demonstrates that the model provides results that are consistent with economic theories of markets.
    Keywords: agent based simulation; Cournot; game; innovation; oligopoly
    JEL: C79 D43
    Date: 2009–06
  4. By: Christian Alejandro Ruzzier (Harvard Business School)
    Abstract: This paper studies the consequences of product-market competition on firms' decisions to delegate more or fewer decision-making responsibilities to managers. By simultaneously addressing the choice of both competitive actions and organizational design, the paper makes an attempt at bringing economic theory and management strategy closer together. An increase in substitutability between the products of the different firms triggers a different response depending on the size of the firm: larger firms delegate more responsibility, whereas smaller firms centralize decision making. The increase in substitutability also causes some firms to exit the market, which pushes in the direction of reduced managerial autonomy. Stronger competition also leads to less discretion in markets in which the possibilities for product differentiation are important. For a given number of firms, an increase in market size increases centralization, as the owner of the firm finds it more costly to accept rent seeking by the managers. However, this increase in market size will lead to the entry of more firms, which calls for more decentralized decision making. Under reasonable conditions, the aggregate effect leads to a U-shaped relationship where firms in both small and large markets are characterized by high levels of discretion, while there is less discretion for intermediate market sizes. Finally, a reduction in entry barriers leads unambiguously to an increase in the level of discretion given to the agent, as it results in a larger number of firms entering the market and, for a given market size, in lower concentration or expected firm-level demand, which reduces the value of having control and pushes in the direction of increased autonomy.
    Keywords: product-market competition, delegation, authority, oligopoly, firm organization
    JEL: D43 L13 L22 M21
    Date: 2009–07
  5. By: Federico Etro
    Abstract: We characterize the optimal financial structure as a strategic de- vice to optimize the value of a firm competing in a market whose struc- ture is endogenous. Contrary to traditional results based on duopolies and depending on the form of competition, we show the general opti- mality of moderate debt financing whenever positive shocks increase the marginal profitability of strategies that reduce prices, indepen- dently from whether they are strategic susbtitutes or complements. We derive the general formulas for the optimal financial structure un- der Cournot and Bertrand competition with endogenous entry and cost uncertainty and extend the results in many directions.
    Keywords: Financial structure, Debt, Modigliani-Miller theorem, Endogenous entry
    JEL: G31 G32 L11
    Date: 2009–07
  6. By: Nicolas Coeurdacier (London Business School, Regent's Park, London NW1 4SA, UK.); Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Antonin Aviat (Paris School of Economics, Pse--Ens, 48 bd Jourdan, F-75014 Paris, France.)
    Abstract: Cross-border mergers and acquisitions (M&As) sharply increased over the last two decades. It is often pointed out that cross-border capital reallocation is partly the result of financial liberalization policies, government policies and regional agreements. In this paper, we identify some of the main forces driving cross-border M&As using a unique database on bilateral cross-border M&As at the sectoral level (in manufacturing and services) over the period 1985-2004. We focus on the role of institutional and financial developments with a special attention to the role played by the European Integration process. We identify the impact of (i) joining the European Union and (ii) joining the Euro on cross-border M&As. We show that EU and EMU have almost doubled M&As in manufacturing towards their members from all over the globe, with an additional 50% increase within EMU countries. Conversely, the service sector did not exploit the opportunity offered by the single currency. We also show how cross-border M&As are linked to the acquirer expected profitability and provide insights on the effectiveness of policies to attract foreign capital (such as corporate tax incentives, and interventions to improve the country's financial system and product market regulations). JEL Classification: F30, F36, F41, G11.
    Keywords: Cross Mergers and Acquisitions, Gravity Equation, Euro.
    Date: 2009–03
  7. By: Dyuti S. Banerjee; Teyu Chou
    Abstract: This paper uses a strategic entry-deterrence approach to address the effects of anti-commercial piracy policies on a firm’s incentive to innovate. Monitoring increases the firm’s incentive to innovate. However, inclusion of innovation does not necessarily result in monitoring as the socially optimal policy. If monitoring is the socially optimal policy then the commercial pirate’s entry may or may not be deterred. The entry-deterring limit price and quality is less than that in the monopoly case. Only in the extreme situation the monopoly results are restored.
    Keywords: Accommodating strategy, aggressive strategy, copyright protection, innovation.
    JEL: K42 L11
    Date: 2009–08
  8. By: Milena Stoyanova
    Abstract: The 2002 Common Regulatory Framework diversifies remedies to competition problems according to the market strength of telecoms providers. One set of remedies is particularly targeted at posing constraints on (pre-)existing significant market power (SMP) in the relevant market. Those remedies are provided for in the Access and Interconnection Directive and in ascending order of intrusiveness they are transparency obligation, non-discrimination obligation, accounting separation, access obligation and price control. A second set of measures are meant to apply to all telecoms providers irrespective whether they have market power or not. This set of measures is introduced by the Universal Service Directive (USD).
    Date: 2009–06–15
  9. By: Ioannis Asimakopoulos (Bank of Greece); Panayiotis Athanasoglou, (Bank of Greece)
    Abstract: The study examines the value creation of Merger and Acquisition (M&A) deals in European Banking from 1990-2004. This is performed, first, by examining the stock price reaction of banks to the announcement of M&A deals and, second, by analysing the determinants of this reaction. The findings provide evidence of value creation in European banks as the shareholders of the targets have benefited from positive and (statistically) significant abnormal returns while those of the acquirers earn small negative but non-significant abnormal returns. In the case of the shareholders of the acquirers, domestic M&As and especially those between banks with shares listed on the stock market, seem to be more beneficial compared to cross-border ones or those when the target is unlisted. Shareholders of the targets earn in all cases positive abnormal returns. Finally, although the link between abnormal returns and fundamental characteristics of the banks is rather weak, it appears that the acquisition of smaller, less efficient banks generating more diversified income are more value creating, while acquisition of less efficient, liquid and characterised by higher credit risk banks is not a value creating option.
    Keywords: Bank mergers; mergers and acquisitions; abnormal returns
    JEL: G14 G21 G34
    Date: 2009–08
  10. By: William R. Kerr (Harvard Business School, Entrepreneurial Management Unit); Ramana Nanda (Harvard Business School, Entrepreneurial Management Unit)
    Abstract: We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, this result masks the differences in entry size among startups that failed within three years of entry and those that survived for four years or more. Long-term entrants started at a 2% larger size relative to their size in their fourth year, while churning entrants were no larger. Our results suggest that the banking deregulations had two distinct effects on the product market. On the one hand, they allowed entrants to compete more effectively against incumbents by reducing financing constraints and facilitating their entry at larger firm sizes. On the other hand, the process of lowering financing constraints democratized entry and created a lot more churning among entrants, particularly at the low end of the size distribution. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
    Keywords: entrepreneurship, entry size, financial constraints, banking.
    JEL: E44 G21 L26 L43 M13
    Date: 2009–08
  11. By: Du, Ying; Stiegert, Kyle
    Abstract: This article develops a methodology for empirically analyzing vertically strategic interactions in a multi-level supply channel. The model is used to analyze the vertical channel for U.S. butter manufacturing and retailing. Aggregating products to the firm level and using a nonlinear AIDS demand system under alternative strategic pricing assumptions is estimated using full information maximum likelihood (FIML) for seven geographic markets from 1998-2002. The market demand for butter was found to very price elastic. Furthermore, cross price elasticities between private labels and the two large national brands were also very elastic. The selected market structure was one indicating category profit maximization of national brands (separate from private label) at the retail level, Vertical Nash competition in the vertical channel, and Bretrand competition at the manufacturing level. Our results strongly suggest that the retail market for food products is impacted by the underlying vertical structure. The study provides useful measures of imperfect competition in the retail manufacturing sector.
    Keywords: Vertical interaction, market structure, strategic pricing, market power, AIDS model, butter., Agribusiness, Agricultural and Food Policy, Consumer/Household Economics, Demand and Price Analysis, Industrial Organization, L13, L22, L66,
    Date: 2009–06
  12. By: Shi, Guanming; Stiegert, Kyle; Chavas, Jean Paul
    Abstract: The purpose of the research in this paper is to investigate the impact of differentiated vertical strategies by agricultural biotechnology firms in the U.S. cottonseed market. The model advances the measurement of industry concentration to consider substitution/complementarity relationships among differentiated products delivered under different vertical structures. We find evidence of sub-additive pricing in the stacking of bundled biotech traits. Prices paid by farmers for cottonseed sold under vertical integration are found to be higher than under licensing. The model is flexible and allows for evaluation of the effects of changing market structures. The parameters on traditional measures of concentration indicate that higher concentration leads to higher prices. The effects of cross-market concentrations stress the need to conduct the analysis in a multi-market context.
    Keywords: Modal Vertical Strategy, imperfect competition, cotton seed, biotechnology, Agricultural and Food Policy, Demand and Price Analysis, Industrial Organization, L13, L4, L65,
    Date: 2009–06
  13. By: Waka Cheung; Yew-Kwang Ng
    Keywords: vertical disintegration, agglomeration effect, specialization, lighters, Wenzhou. Abstract: In the industry center of lighters in Wenzhou, China, lighters are produced by a large number of small, vertically specialized, and agglomerated firms. Some firms specialize in assembling lighters, while the others specialize in producing parts. A perfect-competition model is developed to analyze this phenomenon, and four related factors are revealed to be involved. First, compared with standard factories, household workshops have the cost advantage in producing the parts of lighters. Next, lighters are produced by firms owned mostly by those transferring from peasants and other occupations. Due to the difficulty in financing, each of them focus on a specific component part of the product. Last, a large extent of market and agglomeration lead to low transaction costs. This makes it beneficial for the specialized firms to coordinate the production through the market. In the presence of the agglomeration effect in lowering the transaction costs, a perfectly competitive industry may have multiple equilibria. The ability of the industry of lighters in Wenzhou to expand to the high-level equilibrium by capturing the world market helps to explain the huge decreases in prices.
    JEL: D23 D41 L22 L25
    Date: 2009–08
  14. By: David M. Cutler (Harvard University); Robert S. Huckman (Harvard Business School, Technology and Operations Management Unit); Jonathan T. Kolstad (The Wharton School, University of Pennsylvania)
    Abstract: Prior studies suggest that, with elastically supplied inputs, free entry may lead to an inefficiently high number of firms in equilibrium. Under input scarcity, however, the welfare loss from free entry is reduced. Further, free entry may increase use of high-quality inputs, as oligopolistic firms underuse these inputs when entry is constrained. We assess these predictions by examining how the 1996 repeal of certificate-of-need (CON) legislation in Pennsylvania affected the market for cardiac surgery in the state. We show that entry led to a redistribution of surgeries to higher-quality surgeons and that this entry was approximately welfare neutral.
    Date: 2009–07

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