nep-com New Economics Papers
on Industrial Competition
Issue of 2009‒09‒19
twelve papers chosen by
Russell Pittman
US Department of Justice

  1. Mom-and-Pop Meet Big-Box: Complements or Substitutes? By John C. Haltiwanger; Ron S. Jarmin; C. J. Krizan
  2. Mixed Duopoly with Price Competition By Roy Chowdhury, Prabal
  3. The Kinked Demand Model and the Stability of Cooperation By Sergio Currarini; Marco Marini
  4. Markets fo Heterogeneous Products: a Boundedly Rational Consumer Model By Marco Valente
  5. The Price-Marginal Cost Markup and its Determinants in U.S. Manufacturing By Mazumder, Sandeep
  6. Theory and Evidence on Mergers and Acquisitions by Small and Medium Enterprises By Utz Weitzel; Killian J McCarthy
  7. Endogenous mergers: Bidder momentum and market reaction By Gerhard Kling; Utz Weitzel
  8. The Impact of Firm Size and Market Size Asymmetries on National Mergers in a Three-Country Model By Santos-Pinto, Luís
  9. Financial distress and firm exit: determinants of involuntary exits, voluntary liquidations and restructuring exits By Balcaen,S.; Buyze, J.; Ooghe,H.
  10. Reform and Competitive Selection in China: An Analysis of Firm Exits By Qing Gong Yang; Paul Temple
  11. Monopoly Distortions in Durability and Multi-Dimensional Quality By Roland Strausz
  12. Market fields structure & dynamics in industrial automation By Slowak, André P.

  1. By: John C. Haltiwanger; Ron S. Jarmin; C. J. Krizan
    Abstract: In part due to the popular perception that Big-Boxes displace smaller, often family owned (a.k.a. Mom-and-Pop) retail establishments, several empirical studies have examined the evidence on how Big-Boxes’ impact local retail employment but no clear consensus has emerged. To help shed light on this debate, we exploit establishment-level data with detailed location information from a single metropolitan area to quantify the impact of Big-Box store entry and growth on nearby single unit and local chain stores. We incorporate a rich set of controls for local retail market conditions as well as whether or not the Big-Boxes are in the same sector as the smaller stores. We find a substantial negative impact of Big-Box entry and growth on the employment growth at both single unit and especially smaller chain stores – but only when the Big-Box activity is both in the immediate area and in the same detailed industry.
    JEL: L26 L81 R11 R3
    Date: 2009–09
  2. By: Roy Chowdhury, Prabal
    Abstract: This paper examines coalition-proof Nash equilibria (CPNE) of a mixed duopoly with price competition where the public firm meets all the demand coming to it. If the private firm is free to supply less than demand, then the unique CPNE involves the competitive price. If however the private firm also has to supply all its demand, then the set of CPNE prices turns out to be an interval, with prices ranging from the socially optimal one, to the price under complete privatization.
    Keywords: Mixed duopoly; coalition-proof Nash equilibrium; price competition.
    JEL: L2 L3 L1
    Date: 2009–08
  3. By: Sergio Currarini (Department of Economics,Faculty of Economics, Università degli Studi di Venezia "Ca' Foscari"); Marco Marini (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy))
    Abstract: This paper revisits a particular behaviour for rms competing in imperfect competitive markets, underlying the well known model of kinked demand curve. We show that under some symmetry and regularity conditions, this asymmetric behaviour of rms sustains monopoly pricing, and possesses therefore some "rationality" interpretation. We also show that such a behaviour can be generalized and interpreted as a norm of behaviour that sustains efficient outcomes in a more general class of symmetric games.
    Keywords: Kinked Demand, Symmetric Games, Norms of Behaviour.
    JEL: C70 D21 D43 L13
    Date: 2009
  4. By: Marco Valente
    Abstract: The paper is based on the acknowledgement that properties of markets stemming from features of demand are too frequently overlooked in the economic literature, and a re-balancing is necessary to properly account for theoretical and empirical phenomena. We sustain that one of the most relevant reasons for the neglect of the role of demand is the lack of an adequate representation of consumers. This claim is particu- larly relevant for evolutionary economics since its critique to the mainstream approach stopped at the representation of firms. The standard utility maximization approach to consumers? theory is even less defensible than the related assumption of producers? rationality, given the lack of competitive pressure on consumers. As a contribution to this theoretical gap, the paper presents a model for consumer based on the assumption of bounded rationality and inspired to the literature on experimental psychology. The proposed model can be applied to multi-dimensional products/services and relies on intuitive and potentially observable parameters, allow- ing for a wide range of theoretical and empirical applications. Moreover, the intrinsic structure of the model provides a clear definition of preferences, meant as ex-ante decisional criteria, distinguished from post-hoc justification of any decisional result. Though structurally simple, the proposed model is very flexible and allows for a clear exploration of the impact of specific demand features on the produced results. Several experiments show that the model can be successfully applied both to generate standard results and to implement complex configurations such as those of generated by large markets with heterogeneous products. Among the results presented, the most relevant concerns the identification of two classes of market segmentation, generated by the identical suppliers and demand?s ex- ogenous factors, but different consumers? decisional mechanisms. The results produced are observationally equivalent, but are shown to have radically different properties, and are proposed as initial elements of a taxonomy for the classification demand classes, likely to explain common properties across different markets.
    Keywords: Evolutionary Economics, Consumer Theory, Bounded Rationality, Marketing and Preferences, Simulation Models, Market Structure
    JEL: C63 D11 D81 L10 L15 M30
    Date: 2009–09–08
  5. By: Mazumder, Sandeep
    Abstract: This paper estimates the price-marginal cost markup for US manufacturing using a new methodology. Most existing techniques of estimating the markup are a variant on Hall's (1988) framework involving the manipulation of the Solow Residual. However this paper argues that this notion is based on the unreasonable assumption that labor can be costlessly adjusted at a fixed wage rate. By relaxing this assumption, we are able to derive a generalized markup index, which when estimated using manufacturing data is highly countercyclical and decreasing in trend since the 1960s. When we then seek to explain what causes the manufacturing markup to behave in this way, the most important determinant is the share of imported goods in the industry. Thus, increasing foreign competition in manufacturing has led to a decline in the industry's markup over time.
    Keywords: Markup; Marginal Cost
    JEL: E32 D40 D24
    Date: 2009–09
  6. By: Utz Weitzel; Killian J McCarthy
    Abstract: The theory of mergers and acquisitions (M&As) has been developed almost exclusively from the study of large deals by large firms. In this paper we argue that the behaviour and success of M&As by small and medium sized enterprises (SMEs) may be significantly different. Accordingly, we revisit established M&A theories, and develop a theoretical framework, and several testable hypotheses, regarding the distinctive features of SME M&As. Our empirical results support our expectations and show that, compared to large firms, acquiring SMEs: rely more intensively on external growth via M&As; are more likely to be withdrawn, suggesting that SMEs are more flexible, and more able to avoid deals that turn sour; and, finally, SME M&As are more likely to be financed with equity rather than debt, indicating that the influential financial pecking order theory is of less relevance to SMEs.
    Keywords: mergers, acquisitions, small and medium sized enterprises
    JEL: M13 G34
    Date: 2009–08
  7. By: Gerhard Kling; Utz Weitzel
    Abstract: Recent empirical studies on stock misvaluation as a possible determinant of mergers are inconclusive concerning the central hypothesis that over(under)valuation is negatively (positively) associated with merger announcement returns in stock mergers, but not in cash mergers. We provide empirical support for this hypothesis. In contrast to prior research, we employ a two-stage model to account for endogenous mergers and suggest an alternative specification of misvaluation based on an asset-pricing model (bidder momentum). In the first stage, we specify panel logit models to predict U.S. mergers from 1981 to 2003 and find that bidder momentum triggers stock mergers, but not cash mergers. In a second stage, we regress cumulated abnormal returns on merger probabilities to control for the endogeneity of mergers. This reveals a lower market response for stock mergers compared to cash mergers, which we identify as market correction of misvalued acquirers.
    Keywords: Mergers and acquisitions; overvaluation; endogeneity; momentum
    JEL: G14 G34
    Date: 2009–08
  8. By: Santos-Pinto, Luís
    Abstract: This paper studies the impact of firm and market size asymmetries on merger decisions. To do that I consider a model where a small and a large country compete in a third (world) market. Each of the two countries has two firms (with potentially different costs) that supply the domestic market and export to the third market. Merger decisions in the two countries are modeled as a simultaneously move game. The paper finds that firms in the large country have more incentives to merge than firms in the small country. In contrast, the government of the large country has more incentives to block a merger than the government of the small country. Thus, the model predicts that conflicts of interest between governments and firms concerning national mergers are more likely in large countries than in small ones.
    Keywords: International Trade; Merger Policy; Size Asymmetry
    JEL: H77 L11 F13 L41
    Date: 2009–08–26
  9. By: Balcaen,S.; Buyze, J.; Ooghe,H. (Vlerick Leuven Gent Management School)
    Abstract: This paper provides new insights on the determinants of firm exit after distress. Using nested logit models and a sample of 6118 distress-related exits from Belgium, we analyze the impacts of available and potential slack and the relative efficiency of voluntary liquidation, compared to acquisition and merger, on the type of exit. It appears essential to examine the type of exit outcome as a two-stage process. The first stage considers the fundamental distinction between voluntary and involuntary exit, the latter being the least favorable and most avoided exit strategy. In this situation, high levels of available and potential slack resources, as reflected by large cash holdings, strong group relations and low current leverage, increase the probability of voluntary exit. High slack allows distressed firms to avoid bankruptcy and decide on their exit process. In the second stage, and provided that exit is voluntary, voluntary liquidation is compared to restructuring exit (acquisition, merger or split) In this stage, a higher relative efficiency of voluntary liquidation compared to a restructuring exit, as indicated by absence of group relations, small firm size, high secured debt level and large cash holdings, increase the likelihood of voluntary liquidation and reduce the probability of a restructuring exit.
    Date: 2009–08–13
  10. By: Qing Gong Yang (New Zealand Commerce Commission); Paul Temple (University of Surrey)
    Abstract: This paper considers aspects of the competitive selection process in China - firm entry, survival, and exit - in an important sector of manufacturing, looking in particular for changes resulting from the latest stage of reforms. Using industry survey data from a province in North-East China, we find substantial differences in the process between ownership types. By conducting a simple decomposition of the aggregate productivity growth and exploring the determinants of firm’s exit using a hazard rate model, we observe a substantial rate of churning of enterprises in the sector, and find that the competitive selection processes operate, for small and collectively owned enterprises (COEs), in a manner consistent with a private market economy. In contrast, such processes appear not to be functioning for state owned enterprises (SOEs). We conclude that competitive selection in China is not providing a sufficiently strong substitute for corporate governance based on ownership.
    Keywords: Competition; Exit; Productivity, Hazard Models
    JEL: C5 D2 L6 P5
    Date: 2009–09
  11. By: Roland Strausz (Humboldt-Universitaet zu Berlin)
    Abstract: I show that Swan’s (1970) independence result requires a mul- tiplicative interaction between durability and all other quality at- tributes. Because there is no compelling argument for a multiplica- tivity in quality, monopolists tend to distort durability, even with constant marginal costs. Distortions in durability and other quality aspects are aligned exactly when the marginal cost of quality do not increase too much with durability.
    Keywords: Durability, quality, monopoly
    JEL: L15
    Date: 2009–09
  12. By: Slowak, André P.
    Abstract: There is a research tradition in the economics of standards which addresses standards wars, antitrust concerns or positive externalities from standards. Recent research has also dealt with the process characteristics of standardisation, de facto standard-setting consortia and intellectual property concerns in the technology specification or implementation phase. Nonetheless, there are no studies which analyse capabilities, comparative industry dynamics or incentive structures sufficiently in the context of standard-setting. In my study, I address the characteristics of collaborative research and standard-setting as a new mode of deploying assets beyond motivations well-known from R&D consortia or market alliances. On the basis of a case study of a leading user organisation in the market for industrial automation technology, but also a descriptive network analysis of cross-community affiliations, I demonstrate that there must be a paradoxical relationship between cooperation and competition. More precisely, I explain how there can be a dual relationship between value creation and value capture respecting exploration and exploitation. My case study emphasises the dynamics between knowledge stocks (knowledge alignment, narrowing and deepening) produced by collaborative standard setting and innovation; it also sheds light on an evolutional relationship between the exploration of assets and use cases and each firm's exploitation activities in the market. I derive standard-setting capabilities from an empirical analysis of membership structures, policies and incumbent firm characteristics in selected, but leading, user organisations. The results are as follows: the market for industrial automation technology is characterised by collaboration on standards, high technology influences of other industries and network effects on standards. Further, system integrators play a decisive role in value creation in the customer-specific business case. Standard-setting activities appear to be loosely coupled to the products offered on the market. Core leaders in world standards in industrial automation own a variety of assets and they are affiliated to many standard-setting communities rather than exclusively committed to a few standards. Furthermore, their R&D ratios outperform those of peripheral members and experience in standard-setting processes can be assumed. Standard-setting communities specify common core concepts as the basis for the development of each member's proprietary products, complementary technologies and industrial services. From a knowledge-based perspective, the targeted disclosure of certain knowledge can be used to achieve high innovation returns through systemic products which add proprietary features to open standards. Finally, the interplay between exploitation and exploration respecting the deployment of standard-setting capabilities linked to cooperative, pre-competitive processes leads to an evolution in common technology owned and exploited by the standard-setting community as a particular kind of innovation ecosystem.
    Keywords: standard-setting,innovation,industry dynamics and context,industrial automation
    JEL: D71 M21 L69 O32
    Date: 2009

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