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on Industrial Competition |
| By: | Timothy Dunne; Shawn Klimek; Mark Roberts; Daniel Yi Xu |
| Abstract: | Market structure is determined by the entry and exit decisions of individual producers. These decisions are driven by expectations of future profits which, in turn, depend on the nature of competition within the market. In this paper we estimate a dynamic, structural model of entry and exit in an oligopolistic industry and use it to quantify the determinants of market structure and long-run firm values for two U.S. service industries, dentists and chiropractors. We find that entry costs faced by potential entrants, fixed costs faced by incumbent producers, and the toughness of short-run price competition are all important determinants of long run firm values and market structure. As the number of firms in the market increases, the value of continuing in the market and the value of entering the market both decline, the probability of exit rises, and the probability of entry declines. The magnitude of these effects differ substantially across markets due to differences in exogenous cost and demand factors and across the dentist and chiropractor industries. Simulations using the estimated model for the dentist industry show that pressure from both potential entrants and incumbent firms discipline long-run profits. We calculate that a seven percent reduction in the mean sunk entry cost would reduce a monopolist's long-run profits by the same amount as if the firm operated in a duopoly. |
| Keywords: | entry, exit, market structure, competition, service industry |
| JEL: | L11 L13 L84 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:09-23&r=com |
| By: | John Hutchinson (European Central Bank); Jozef Konings (Economics Department, K.U. Leuven); Patrick Paul Walsh (SPIRe and The Geary Institute University College Dublin) |
| Abstract: | We show that the stylized facts of the Firm Size Distribution (FSD) by age cohorts, as shown in Cabral and Mata (2003), bind within 4-digit manufacturing industries in the UK and Belgium. As in Klepper and Thompson (2006) and Sutton (1998), we explore whether time to build a portfolio of products is a mechanism that relates age to firm size. While inter industry diversification, to some extent, accounts for the role of age, we find that the presence of economies of scope has a separate impact on firm size when controlling for age, amongst other factors. Using the techniques in Cabral and Mata's we show that the FSD by degrees of product diversification shifts to the right, but more so in older age groups. This shows a role for inter-industry diversification over and above an age effect. |
| JEL: | L10 L11 L16 |
| Date: | 2009–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:ucd:wpaper:200926&r=com |
| By: | Joshua Drucker |
| Abstract: | In a seminal article, Benjamin Chinitz (1961) raises the question of the effects that industry size, structure, and economic diversification may have on firm performance and regional economies. His line of inquiry suggests a related but conceptually distinct issue: how does the extent to which a industry is regionally dominated—concentrated locally in a single or small number of firms—impact the local performance of that industry? This question has received little attention, principally because accurately measuring industrial concentration at the regional scale requires firm-level information. This paper makes use of confidential plant- and firm-level manufacturing data to explore patterns of industrial concentration in the United States at the regional scale. Regional analogues of concentration ratios and other measures commonly used in the aspatial industrial organization literature indicate the extent to which manufacturing activity is concentrated in a small number of firms. Both the manufacturing sector as a whole and major manufacturing industry sectors are examined in order to determine the extent of industrial concentration in the continental United States, to explore changes over time in geographic patterns of concentration, and to investigate associations between industrial concentration and employment growth at the regional scale. Implications for understanding regional growth and for devising regional economic development policy are discussed. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:09-06&r=com |
| By: | Nicola Cetorelli |
| Abstract: | Empirical studies show that competition in the credit markets has important effects on the entry and growth of firms in nonfinancial industries. This paper explores the hypothesis that the availability of credit at the time of a firm’s founding has a profound effect on that firm’s nature. I conjecture that in times when financial capital is difficult to obtain, firms will need to be built as relatively solid organizations. However, in an environment of easily available financial capital, firms can be constituted with an intrinsically weaker structure. To test this conjecture, I use confidential data from the U.S. Census Bureau on the entire universe of business establishments in existence over a thirty-year period; I follow the life cycles of those same establishments through a period of regulatory reform during which U.S. states were allowed to remove barriers to entry in the banking industry, a development that resulted in significantly improved credit competition. The evidence confirms my conjecture. Firms constituted in post-reform years are intrinsically frailer than those founded in a more financially constrained environment, while firms of pre-reform vintage do not seem to adapt their nature to an easier credit environment. Credit market competition does lead to more entry and growth of firms, but also to complex dynamics experienced by the population of business organizations. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:09-07&r=com |
| By: | Albert Banal-Estanol (City University of London and Universitat Pompeu Fabra); Paul Heidhues (University of Bonn and CEPR); Rainer Nitsche (European School of Management and Technology); Jo Seldeslachts (University of Amsterdam and WZB) |
| Abstract: | In our paper targets, by setting a reserve price, screen acquirers on their (expected) ability to generate merger-specific synergies. Both empirical evidence and many common merger models suggest that the difference between high- and low-synergy mergers becomes smaller during booms. This implies that the target’s opportunity cost for sorting out rel- atively less fitting acquirers increases and, hence, targets screen less tightly during booms, which leads to a hike in merger activity. Our screening mechanism not only predicts that merger activity is intense during economic booms and subdued during recessions but is also consistent with other stylized facts about takeovers and generates novel testable predictions. |
| Keywords: | Takeovers, Merger Waves, Defense Tactics, Screening |
| JEL: | D21 D80 L11 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:270&r=com |
| By: | Janda, Karel |
| Abstract: | This article belongs to the game theoretic and information economics literature dealing with the problem of signaling in the context of game theoretical models of entry into the industry. As opposed to the majority of literature we consider the situation of asymmetric information where the private information belongs to the entrant. We model the capacity decision of the entrant as a signal of his strength. We show that in the Stackelberg model of market entry for some values of underlying parameters the entrant fully utilizes his capacity while for other parameter values he builds excess capacity. The model may be empirically relevant for industrial organization analysis of the entry of a new supplier to the existing supply chain. |
| Keywords: | Signaling; Entry; Capacity |
| JEL: | L13 D82 D43 |
| Date: | 2009–08–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17007&r=com |
| By: | Gottschalk, Sandra; Müller, Kathrin; Niefert, Michaela |
| Abstract: | This paper analyzes empirically the determinants of new born firms' initial size. As survival prospects of young firms tend to be linked to a firm's start-up size, a better understanding of the factors influencing start-up size is crucial. Most of the rare literature on initial firm size focuses on industry characteristics. We contribute to the understanding of the determinants of initial firm size by analyzing firm specific factors such as founders' human capital composition and entry strategies. We find that in addition to industry effects start-up size is considerably influenced by the human capital of firm founders. We distinguish between generic and specific human capital. Generic human capital refers to the general knowledge acquired through formal education and professional experience and usually coincides with a higher personal wealth. Specific human capital comprises competences that can be directly applied to the entrepreneurial job. For generic human capital we find that having a university degree has a positive influence on start-up size. The same applies for general working experience proxied by the founder's age. For the specific human capital components we find that successful entrepreneurial experience and managerial experience gained in dependent employment support a higher start-up size. Altogether, specific human capital tends to have a larger impact on initial size than generic human capital. Entry strategies are expected to have a crucial influence on start-up size, because objectives of market entry largely determine the resources a firm requires. We distinguish between different types of entry strategies. On the one hand, we look at entry strategies based on innovation. We measure innovation by a variable which indicates if a firm carries out continuous R&D. On the other hand, entry is classified according to the main motive of the founders for firm formation. We conclude that different motives are accompanied by diverse entry strategies. The four main groups of entry strategies are independency entrepreneurship, opportunity entrepreneurship, spin-out entrepreneurship and necessity entrepreneurship. The results indicate that firms conducting R&D continuously start larger than others when measuring initial employment in full-time equivalents. We do not observe a significant effect on start-up size measured in head counts. This suggests that R&D tasks are mostly carried out by fulltime employees and to a lesser extent by persons working part-time for the firm. Further, firms with entry strategies based on the exploitation of new market opportunities as well as spin-out entrepreneurship exhibit a higher initial size while start-ups established from necessity appear to start at a smaller scale. |
| Keywords: | firm start-up size,human capital,firm foundation |
| JEL: | L11 L26 J24 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:09030&r=com |
| By: | Prokop, Jacek; Regibeau, Pierre; Rockett, Katharine |
| Abstract: | The authors examine the timing and quality of product introduction in an R&D stopping game, where they allow for horizontal and vertical differentiation in the product market. They observe that discontinuous changes in introduction dates can occur as firms' abilities as researchers change. Further, the authors observe differences in the social optimality of entry patterns depending on the underlying research abilities of the firms. Minimum quality standards and novelty requirements can play a role in correcting these suboptimal patterns of entry. The authors find that increasing the novelty requirement does not necessarily increase either the profits or, consequently, the investment levels of the initial innovator, contrary to much of the cumulative innovation literature. When the research abilities of the firms differ, either the high ability firm or the low ability firm may be the first mover. Policy interventions have much more ambiguous welfare effects in this asymmetric case, as they can change the order of entry. |
| Keywords: | Innovation,minimum quality standards,novelty requirements,stopping game |
| JEL: | L15 L16 O31 O33 O34 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:200933&r=com |
| By: | Sjaak Hurkens; Doh-Shin Jeon |
| Abstract: | In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes. |
| Keywords: | Mobile Penetration, Termination Charge, Access Pricing, Networks, Interconnection, Regulation, Telecommunications. |
| JEL: | D4 K23 L51 L96 |
| Date: | 2009–07–31 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:777.09&r=com |
| By: | Perekhozhuk, Oleksandr; Grings, Michael; Glauben, Thomas |
| Abstract: | Most of the studies based on the New Empirical Industrial Organization (NEIO) approach use the industry data to estimate the degree of market power at the national level. Yet, only a few empirical studies presented the results that measure the degree of market power at the regional level and found the existence of market power in the regional markets. While the fact is that there is an extensive evidence for the existence of potential oligopsony market power in the Ukrainian milk processing industry (price cartels and geographic market sharing among milk processing enterprises, interference of the state authorities, higher concentration on regional markets), the estimation results of the market structure model at the national level did not produce any evidence suggesting the exercise of oligopsony power (the estimated parameter of oligopsony power is close to zero and statistically insignificant). The objective of this study is to estimate the degree of oligopsony power in the regional market for raw milk. The estimation results of the market structure model at the regional level indicate the existence of oligopsony power in nine out of the twenty three regions of Ukraine. |
| Keywords: | New Empirical Industrial Organization (NEIO); Oligopsony Power; Ukraine; |
| JEL: | L11 L13 |
| Date: | 2009–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16991&r=com |
| By: | Alvin Silk; Charles King III |
| Abstract: | We analyze changes in concentration levels in the U.S. Advertising and Marketing Services industry using data from the U.S. Census Bureau’s quinquennial Economic Census and the Service Annual Survey. Heretofore largely ignored, these data allow us to redress some of the measurement problems surrounding estimates found in the existing literature Firm level concentration as measured by the Herfindahl-Hirschman Index varies across the sectors comprising the industry, but all are within the range generally considered as indicative of a competitive industry. At the holding company level, the four largest organizations account for about a quarter of the industry’s total revenue, a share lower by an order of magnitude than that frequently cited in the trade press. |
| Keywords: | advertising agencies, advertising and marketing services, concentration levels |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cen:wpaper:09-16&r=com |