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on Industrial Competition |
| By: | Hwa Ryung Lee |
| Abstract: | This study establishes the potential positive relationship between multimarket contact (MMC) and sustainable collusive profits under demand fluctuations. In particular, I focus on the correlation structure between demand shocks over multiple markets and show how it can lead to a positive link between collusive profit and MMC. Simple theoretical models show that, regardless of whether demand shocks are observable or not, MMC may improve collusive profits through diversification of demand shocks over overlapping markets. If firms meet in multiple markets and link those markets in the sense that deviation in any market will trigger simultaneous retaliations in every market, then a cheating firm will optimally deviate in every market. Demand fluctuation that a firm is facing in its markets in total will be reduced as the number of markets increases, unless demand shocks are perfectly and positively correlated between the markets. The reduction of demand fluctuations can boost collusion (1) by reducing the temptation to deviate in the period of high demand when demand shocks are observable and (2) by reducing the frequency of costly punishment on the equilibrium path when demand shock is unobservable. The conclusion in the case of observable demand shock provides us with a new testable implication that price competition will be muted by MMC in periods of high demand. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:501&r=com |
| By: | Moraga-Gonzalez, Jose L. (IESE Business School); Sandor, Zsolt (University of Groningen); Wildenbees, Matthijs R. (Kelly School of Business) |
| Abstract: | We generalize the model of Burdett and Judd (1983) to the case where an arbitrary finite number of firms sells a homogeneous good to buyers who have heterogeneous search costs. We show that a price dispersed symmetric Nash equilibrium always exists. Numerical results show that the behavior of prices with respect to the number of firms hinges upon the shape of the search cost distribution: when search costs are relatively concentrated (dispersed), entry of firms leads to higher (lower) average prices. |
| Keywords: | nonsequential search; oligopoly; arbitrary search cost distributions; |
| JEL: | C72 D43 |
| Date: | 2010–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0869&r=com |
| By: | Elijah Brewer, III; William E. Jackson, III; Julapa Jagtiani |
| Abstract: | Few transactions have the potential to generate revelations about the market value of corporate assets and liabilities as mergers and acquisitions (M&A). Corporate governance and control mechanisms such as independent directors, independent blockholders, and managerial share ownership are usually important predictors of the size and distribution of the incremental wealth generated by M&A transactions. The authors add to this literature by investigating these relationships using a sample of banking organization M&A transactions over the period 1990-2004. Unlike research on nonfinancial firms, the impact of independent directors, share ownership of the top five managers, and independent block holders on bank merger purchase premiums in this environment is likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. The authors model controls for risk characteristics of the target banks, the deal characteristics, and the economic environment. Their results are robust. They support the hypothesis that independent directors may provide an important internal governance mechanism for protecting shareholders' interests, especially in large-scale transactions such as mergers and takeovers. The authors also find the results to be consistent with the hypothesis that independent blockholders play an important role in the market for corporate control as does managerial share ownership. But these effects dampen the impact of independent directors on target shareholders' merger prices. Their overall findings would support policies that promote independent outside directors on the board of banking firms in order to provide protection for shareholders and investors at large. |
| Keywords: | Corporate governance ; Bank mergers |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-26&r=com |
| By: | Erel, Isil (Ohio State University); Liao, Rose C. (Rutgers University); Weisbach, Michael S. (Ohio State University) |
| Abstract: | Despite the fact that one-third of worldwide mergers involve firms from different countries, the vast majority of the academic literature on mergers studies domestic mergers. What little has been written about cross-border mergers has focused on public firms, usually from the United States. Yet, the vast majority of cross-border mergers involve private firms that are not from the United States. We provide an analysis of a sample of 56,978 cross-border mergers occurring between 1990 and 2007. We first characterize the patterns of who buys whom: Geography matters, with firms being much more likely to purchase firms in nearby countries than in countries far away. Purchasers are usually but not always from developed countries and they tend to purchase firms in countries with lower accounting standards. A significant factor in determining acquisition patterns is currency movements; firms tend to purchase firms from countries relative to which the currency of the acquirers country has appreciated. In addition, economy-wide factors reflected in the countrys stock market returns lead to acquisitions as well. Both the currency and stock market effect could suggest either misvaluation or wealth explanations. Our evidence is more consistent with the wealth explanation than the misvaluation explanation. |
| Keywords: | Mergers; Currency movements; Market movements; Valuation |
| JEL: | F30 G34 |
| Date: | 2010–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0075&r=com |
| By: | Hwa Ryung Lee |
| Abstract: | This paper studies how financial distress affects competition and how incumbent bankruptcy affects the growth of rivals, specifically in the context of airline bankruptcies. I begin by studying whether bankrupt airlines put competitive pressures on rivals by cutting fares and maintaining or expanding capacity on the 1000 most popular domestic routes from 1998-2008. The results suggest that, although bankrupt legacy airlines reduce fares, they also reduce capacities significantly. Low-cost carrier (LCC) rivals do not match the fare cuts and expand capacities by 13-18% above trend growth. The significant capacity reductions associated with legacy airline bankruptcies create growth opportunities for LCC rivals. This indicates the existence of barriers that have limited LCCs from expanding faster and more extensively. The LCC expansion during rivals' bankruptcies is even greater when I consider the 200 most popular airports instead of the 1000 most popular routes. During legacy airlines' bankruptcy, non-LCC rivals reduce capacities on the routes affected by the bankruptcy but expand at the affected airports. A likely explanation for this result is that non-LCCs avoid 'bankruptcy' routes as more competitive pressure is expected with increasing presence of LCCs, but they pick up the gates or time slots given up by the bankrupt airlines to expand on other routes. On balance the total route capacity on the 1000 popular routes shows only a modest decrease during bankruptcy and eventually recovers, but the capacity mix changes in favor of LCCs. Overall, I find little evidence that distressed airlines toughen competition and lower industry profitability. LCC's capacity growth during legacy rivals' bankruptcy suggests the existence of market frictions in competition. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:502&r=com |
| By: | Ciliberto, Federico; Schenone, Carola |
| Abstract: | We investigate the effects of Chapter 11 bankruptcy filings on product market competition using data from the US airline industry. We find that bankrupt airlines permanently downsize their national route structure, their airport-specific networks, and their route-specific flight frequency and capacity. We also find that bankrupt airlines lower their route-specific prices while under bankruptcy protection, and increase them after emerging. We do not find robust evidence of significant changes by the bankrupt airline's competitors along any of the dimensions above. Overall, our results are consistent with the hypothesis that bankruptcy is the result of a war of attrition over capacity and network cutbacks. |
| Keywords: | Airline Industry; Bankruptcy; Product Market Competition; Chapter 11; War of Attrition; Capacity Reduction |
| JEL: | K2 G3 L1 |
| Date: | 2010–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24914&r=com |
| By: | Ciliberto, Federico; Schenone, Carola |
| Abstract: | We use data from the US airline industry to investigate whether firms that are under bankruptcy protection, as well as these firms' product market rivals, change the quality of the products they offer. We measure the quality of the services offered by a carrier using flight cancellations and delays, and the age of the aircraft used by the carrier. We find that delays and cancelations are less frequent during bankruptcy filings but return to their pre-bankruptcy levels once the bankrupt firm emerges from bankruptcy. We also find that firms use Chapter 11 filings to permanently reduce the age of their fleet. We do not find evidence of statistically and economically significant changes by the airline's competitors along any of the dimensions above. |
| Keywords: | Bankruptcy; Chapter 11; Product Market Quality; Airline Industry |
| JEL: | K2 G3 L1 |
| Date: | 2010–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24915&r=com |
| By: | Toshihiro Matsumura; Noriaki Matsushima |
| Abstract: | We provide a simple theoretical model to explain the mechanism wherebyprivatization of international airports can improve welfare. The model consists of a downstream (airline) duopoly with two inputs (landings at two airports) andtwo types of consumers. The airline companies compete internationally. Using thesimple international duopoly model, we show that the outcome where both airportsare privatized is always an equilibrium while that where no airport is privatized is another equilibrium only if the degree of product differentiation is large. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:0792&r=com |
| By: | Pavlyuk, Dmitry |
| Abstract: | This paper is devoted to statistical analysis of spatial competition and cooperation between European airports. We propose a new multi-tier modification of spatial models, which allow estimating of spatial influence varying with the distance. Competition and cooperation effects don't diminish steadily with moving from a given airport, their structure is more complex. The suggested model is based on a set of distance tiers, with different possible effects inside each tier. We apply the proposed modification to the standard spatial stochastic frontier model and use it to estimation of competition and cooperation effects for European airport and airport's efficiency levels. We identify three tiers of spatial influence with different completion-cooperation ratio in each one. In the first, closest to an airport, tier we note significant advantage of cooperation effects over competition ones. In the second, more distant, tier we discover the opposite situation – significant advantage of completion effects. The last tier's airports doesn't influence significantly. In this paper we also consider some other possible applications of the proposed spatial multi-tier model. |
| Keywords: | spatial stochastic frontier; airport efficiency; competition; cooperation |
| JEL: | C51 L93 C31 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25050&r=com |
| By: | Anderson, Simon; Ciliberto, Federico; Liaukonyte, Jura |
| Abstract: | We study how much information firms include in their advertisements and what determines their choices. We use data from advertisement videos from the US OTC analgesics industry between 2001 and 2005 to measure information content in ads. For each video we code the number of cues it contains. The correlation between any two cues is rarely large, suggesting that each cue provides different information. We find: i) brands with inherently better characteristics (e.g. faster relief) transmit more information; ii) comparative advertisements contain significantly more information than self-promotion ads; iii) market share is negatively associated with the amount of information content; iv) a higher market share of the generic version of a brand is also associated with less information by the brand. Not controlling for endogeneity of market share and the decision to use comparative advertising would lead to significant estimation bias. Result (iii) is consistent with recent theoretical work that larger firms disclose less information, while result (iv) indicates the likely presence of information spillovers from brands to their generic counterparts. |
| Keywords: | Information Content; Advertising; Comparative Advertising; Content Analysis |
| JEL: | M37 D83 L15 |
| Date: | 2010–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24916&r=com |
| By: | S. Anderson (Department of Economics, University of Virginia - Uniiversity of Virginia); André De Palma (ENS Cachan - Ecole Normale Supérieure de Cachan - École normale supérieure de Cachan - ENS Cachan, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | Limited consumer attention limits product market competition: prices are stochastically lower the more attention is paid. Ads compete to be the lowest price in a sector but compete for attention with ads from other sectors: equilibrium ad shares follow a CES form. When a sector gets more proÞtable, its advertising expands: others lose ad market share. The "information hump" shows highest ad levels for intermediate attention levels. The Information Age takes off when the number of viable sectors grows, but total ad volume reaches an upper limit. Overall, advertising is excessive, though the allocation across sectors is optimal. |
| Keywords: | economics of attention, information age, price dispersion, advertising distribution, consumer attention, information Þltering, size distribution of Þrms, CES, information congestion. |
| Date: | 2010–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00517721_v1&r=com |
| By: | Ramello, Giovanni B. |
| Abstract: | This article explores the journal publishing industry in order to shed light on the overall economic consequences of copyright in markets. Since the rationale for copyright is among others to promise some market power to the holder of the successful copyrighted item, it also provides incentives to preserve and extend market power. A regular trait of copyright industries is high concentration and the creation of large catalogues of copyrights in the hands of incumbents. This outcome can be observed as the aggregation of rights and is one of the pivotal strategies for obtaining or extending market power, consistently with findings in other cases. Journal publishing is no different in this respect from other copyright industries, and in the last decade has experienced a similar trajectory, leading to a highly concentrated industry in which a handful of large firms increasingly control a substantial part of the market. It also provides a clear example of the effect of copyright dynamics on market structure, suggesting that a different attitude should be taken in lawmaking and law enforcement. |
| Keywords: | copyright and market power, endogenous market structure, journal-publishing industry |
| JEL: | D40 O34 O33 L12 L69 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:uca:ucapdv:146&r=com |
| By: | Pohl, Birte |
| Abstract: | In theory, the presence of foreign banks has spillover and competition effects on domestic banks leading to higher efficiency. Next to foreign banks from industrialized countries (north-south banks), foreign banks from developing countries (south-south banks) are important investors in Sub-Saharan Africa (SSA). South-south banks are either regional investors or are hosted in developing countries beyond SSA. This paper studies the competitive advantages and strategies of north-south as well as regional and non-regional south-south banks from a theoretical perspective. Moreover, the study examines theoretically whether these foreign banks induce different effects on domestic banks. To explore these issues empirically, 80 domestic banks in 17 countries of SSA between 1999 and 2006 are considered. The results show that the presence of north-south and south-south banks positively affects the costs of domestic banks. This suggests that domestic banks invest in the modern practices of foreign banks. Domestic banks margins are positively related to the presence of north-south and nonregional south-south banks indicating a lack of competitive pressure. In contrast, regional south-south banks have a negative impact on the margins of domestic banks. -- |
| Keywords: | south-south banks,spillover and competition effects,efficiency |
| JEL: | F21 F23 F36 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec10:10&r=com |