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on Industrial Competition |
| By: | Lydia Cheung (Department of Economics, Faculty of Business and Law, Auckland University of Technology) |
| Abstract: | The Upward Pricing Pressure (UPP) test developed by antitrust economists Joseph Farrell and Carl Shapiro marks a new era in antitrust and provides an alternative to the traditional concentration-based tests in merger analysis. In addition to being free of market denition, the UPP's appeal lies in its ease of use: one simple formula indicates whether a merging rm has an incentive to increase prices postmerger. This paper rst establishes the theoretical relationship between the UPP and the standard structural merger simulation, namely, that the UPP is a \singleproduct merger simulation" that ignores the re-equilibration of all other endogenous variables except that product's own price. To assess the consequence of this simpli cation, I compute \true" UPP values for a cross-section of airline markets using structurally estimated price elasticities, and confront them with the \gold standard" of a merger simulation. I examine the predictive accuracy of both the sign and magnitude of the UPP. I nd that it gives wrong sign predictions to an average 10% of the observations, and its value has an average correlation of 0:92 with the structurally simulated price changes. However, since this test is meant to bypass a complicated demand estimation, I then use the example of a simple logit demand to illustrate the consequence of using inaccurate demand-side inputs in the UPP: the test will give a wrong sign prediction over a much larger range of cost synergies. Lastly, I discuss the pass-through conditions for Farrell and Shapiro's proposition, demonstrate empirically that they are not innocuous, and show that their violation can lead to false positive results (type I errors) in the UPP. |
| Keywords: | merger, upward pricing pressure |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:aut:wpaper:201303&r=com |
| By: | Bruno Larue; Mohamed Jeddy; Sébastien Pouliot |
| Abstract: | We first show in the context of sequential multi-unit auctions under complete information that a seller’s revenue may increase or decrease as the number of buyers increases, even when the additional bidders win an object. We use data from the Quebec daily hog auction to empirically analyze the effect of invitations extended to bidders from Ontario. Our estimation accounts for the endogenous timing of these rare invitations, but we nevertheless uncover a negative “invitation” effect. We attribute this anti-competitive effect to the fact that the addition of bidders increases competition in late rounds, but not necessarily in early ones. |
| Keywords: | Auctions, Livestock, Competition, Price |
| JEL: | D44 C23 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:creacr:2013-4&r=com |
| By: | Gregory Pavlov (University of Western Ontario) |
| Abstract: | We study cheap-talk pre-play communication in the static all-pay auctions. For the case of two bidders, all correlated and communication equilibria are payoff equivalent to the Nash equilibrium if there is no reserve price, or if it is commonly known that one bidder has a strictly higher value. Hence, in such environments the Nash equilibrium predictions are robust to preplay communication between the bidders. If there are three or more symmetric bidders, or two symmetric bidders and a positive reserve price, then there may exist correlated and communication equilibria such that the bidders’ payoffs are higher than in the Nash equilibrium. In these cases, pre-play cheap talk may affect the outcomes of the game, since the bidders have an incentive to coordinate on such equilibria. |
| Keywords: | Communication; Collusion; All-pay auctions |
| JEL: | C72 D44 D82 D83 L41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:uwowop:20132&r=com |
| By: | Yuanzhu Lu (China Economics and Management Academy, Central University of Finance and Economics, China); Sougata Poddar (Department of Economics, Faculty of Business and Law, Auckland University of Technology) |
| Abstract: | We show that a two-part tariff licensing contract is always optimal to the insider patentee in spatial models irrespective of the size of the innovation or any pre-innovation cost asymmetries. The result provides a simple justification of the prevalence of two-part tariff licensing contracts in industries. |
| Keywords: | Salop Model, Hotelling Model, Costs, Innovation,PAtent Licensing |
| JEL: | D43 D45 L13 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:aut:wpaper:201308&r=com |
| By: | Tarcisio da Graca (Université du Québec (Outaouais)); Robert Masson (Cornell University) |
| Abstract: | We show that some influential literature supporting the RPM efficiency view is flawed when it relies on the presale service justification for RPM. In particular we consider presale services that do not modify in use value of a good, what we term sterile services. We debunk what we call the Bork proposition, using Bork¹s own assumptions except one. Specifically Bork does not consider the fact that value in use may differ from prepurchase perceived value in use. We apply the value-in-use standard which exposes the loss in consumer surplus in Bork¹s model and reveals that even Bork¹s dissenters significantly underestimate their calculated losses to inframarginal consumers When consumer surplus is the antitrust/competition policy standard, our results suggest that a rule of reason regime in which competition/antitrust authorities or consumer protection agencies bear the burden of proof is inferior to a per se regime. |
| Keywords: | Resale Price Maintenance; Welfare Effects; Antitrust. |
| JEL: | L42 |
| Date: | 2013–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:042013&r=com |
| By: | Tarcisio da Graca (Université du Québec (Outaouais)); Robert Masson (Cornell University) |
| Abstract: | We examine acquisitions to identify the effect that a measure of management entrenchment (Eindex) has on firms¹ values. Greater E-index gives more power to management and less to shareholders. We model the problem in reduced form and as a structural model. The latter suggests: (1) high E-index firms are more valuable and (2) targets with higher E-indices tend to lose negotiation power against the acquirer. These results diverge somewhat from the literature. However, with reduced form, results align with the literature. This raises concerns that interpretations/conclusions about the E-index¹s impact on firms¹ values might be driven by the analytical framework. |
| Keywords: | Board entrenchment; E-index; event study; structural analysis; mergers and Acquisitions. |
| JEL: | G34 G14 |
| Date: | 2013–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:pqs:wpaper:032013&r=com |
| By: | Mo Xiao (University of Arizona); Jiandong Ju (Tsinghua University); Ying Fan (University of Michigan) |
| Abstract: | Reputation is generally considered an asset, especially in e-commerce markets. Any reputation system, however, elicits strategic responses from the sellers. Using panel data on a large random sample of online sellers from China’s largest e-commerce platform, Taobao.com, we study how reputation affects revenue, prices, transaction volume, and survival likelihood as well as how sellers manage their reputation. We find that seller reputation has a substantial positive impact on established sellers, but new sellers fail to reap such benefits. Pursuing the long-run returns to reputation, new sellers actively manage their reputation by engaging in costly activities such as sales and switching product categories. In this “losing to win†process, new sellers may have spent too much resource to survive to next stage. Our results provide empirical support for the theory of career concern and reputation dynamics. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:192&r=com |
| By: | Nocke, Volker; Yeaple, Stephen |
| Abstract: | We present an international trade model with multiproduct firms. Firms are heterogeneously endowed with two types of capabilities that jointly determine the trade-off within firms between managing a large portfolio of products and producing at low marginal cost. The model can explain many of the documented cross- sectional correlations in firm performance measures, including why larger firms are more productive and more diversified, and yet more diversified firms trade at a discount. Globalization is shown to induce heterogeneous responses across firms in terms of scope and productivity, some of which are consistent with existing empirical work, while others are potentially testable. |
| Keywords: | multiproduct firms , trade liberalization , diversification discount , firm heterogeneity , productivity |
| JEL: | F12 F15 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mnh:wpaper:33985&r=com |
| By: | Peter Arendorf Bache (Department of Economics and Business, Aarhus University); Anders Laugesen (Department of Economics and Business, Aarhus University) |
| Abstract: | We build a three-country model of international trade in final and intermediate goods and study the relation between different types of trade liberalisation and vertical integration. Firms are heterogeneous with respect to both productivity and factor intensity as observed in data. Final-good producers face decisions on exporting, vertical integration of intermediate-input production, and whether the intermediate-input production should be offshored to a low-wage country. We find that due to firm-level complementarities, the shares of final-good producers that pursue either vertical integration, offshoring, or exporting are all increasing when intermediate- or final-goods trade is liberalised and when the cost of vertical integration is reduced. At the same time, one will observe individual firms that shift away from either vertical integration, offshoring, or exporting. All these results hold for a class of productivity distributions to which the Pareto distribution belongs. |
| Keywords: | International Trade, Firm Heterogeneity, Incomplete Contracts, Vertical Integration, Offshoring, Exporting, Trade Liberalisation |
| JEL: | D23 F12 L23 |
| Date: | 2013–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2013-14&r=com |
| By: | Burghardt, Dirk |
| Abstract: | This paper studies the impact of trade policy on industry concentration. Based on the Swiss Business Census, concentration levels for all four-digit manufacturing industries in Switzerland are calculated. Then the effect of a bilateral reduction in technical barriers to trade with the European Union is estimated. Adopting a difference-in-differences approach, it turns out that concentration in affected industries with low R&D intensity increased significantly following the policy change. This supports the notion that fewer firms are able to survive as the toughness of price competition increases. The effect on industries with high R&D intensity is found to be insignificant. |
| Keywords: | Industry Concentration, Sunk Costs, R&D Expenses, Price Competition, Globalization, Trade Barriers, Natural Experiment, Plant-level Data |
| JEL: | F13 L10 L60 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:usg:econwp:2013:17&r=com |