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on Industrial Competition |
| By: | Simone Pieralli; Silke Hüttel; Martin Odening |
| Abstract: | Analyzing the dynamics of structural change of an industry is a fundamental but challenging issue in economics. Accordingly, many attempts have been made to rationalize entry and exit decisions of firms, which, in total, appear as structural change of a sector. Among the most often hypothesized determinants of entry and exit behavior are (in)efficiency and uncertainty in conjunction with sunk costs of irreversible investments. According to the efficient market hypothesis competitive superiority discriminates among firms (Demsetz 1973). In the long run inefficient firms should be driven out of the market. In fact, inefficiency seems to increase the probability of exit. Among others, Wheelock and Wilson (2000) have shown that there exists a correlation between inefficiency and exit. However,many firms that are found inefficient persist in the market (Emvalomatis, Stefanou, and Lansink 2011). Another relevant strand of literature is the real options approach. Uncertainty and irreversibility generate a value of waiting which, in turn, leads to (dis)investment reluctance and economic inertia (Dixit and Pindyck 1994). Empirical evidence of the presence of real options effects has been provided, for example by Hinrichs, Musshoff, and Odening (2008). Both aforementioned explanations of firm’s entry and exit behavior have received extensive attention in the literature, but only separately. A joint treatment of these two aspects is the topic of this paper. We derive a model of firm exit under output price risk allowing for inefficiency of firms. To the best of our knowledge the interaction of inefficiency and uncertainty has not been analyzed so far in the framework of dynamic firm models. The consideration of inefficiency into the real options approach requires to introduce a production function. We do not impose a priori specific functional forms on the production function. We derive the properties inherited to the instantaneous profit function from the original production function by using a dual Legendre transformation. This allows deriving flexibly the substitution properties of the production function among multiple inputs and multiple outputs in a general setting. We derive two classes of profit functions imposing structure on the primal technology. The difference among the classes depends on how the inefficiency is considered. In the first class, inefficiency is considered separately from inputs and outputs, and acts as a shifter. In the second case inefficiency modifies the production function, directly interacting with inputs and outputs. Specific calculations to simulate the exit trigger prices are carried out on the particular case of a Cobb-Douglas production function. In both the separable and the non-separable classes inefficiency causes firms to exit from the market earlier compared with more efficient firms. Higher volatility of output price makes more reluctant the firms to decide to exit irreversibly the market. Higher unit costs, as well as a higher salvage value, decrease the reluctance to exit the market. Calculations are done for different hypothetical returns to scale cases, a higher and a lower one without qualitative difference in the findings. But these results show that, for the same price, it is possible to have a range of firms of different levels of efficiency and different returns to scale present in the market. Our model results generate a rich set of hypothesis that can be empirically tested, for example, in the case of German dairy sector. |
| Keywords: | Germany, Modeling: new developments, Microsimulation models |
| Date: | 2013–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:ekd:004912:5236&r=com |
| By: | Stéphane Caprice; Vanessa von Schlippenbach; Christian Wey |
| Abstract: | Considering a vertical structure with perfectly competitive upstream firms that deliver a homogenous good to a differentiated retail duopoly, we show that upstream fixed costs may help to monopolize the downstream market. We find that downstream prices increase in upstream firms' fixed costs when both intra- and interbrand competition exist. Our findings contradict the common wisdom that fixed costs do not affect market outcomes. |
| Keywords: | Fixed costs, vertical contracting, monopolization |
| JEL: | L13 L14 L42 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1408&r=com |
| By: | Feng, Lipan |
| Abstract: | With more and more retailers claimed their strategic layout of Omni-channel retailing, and the model of offline to mobile regarded as a shortcut to carry it out. In this paper, we construct a consumer choice model in which both the risk of direct marketing channel and the searching cost of the retailing channel are considered, and two kinds of models are analyzed to derive the optimal pricing policies, demands and efficiency of different scenario. The result demonstrates that the retailer can also benefit from the offline to mobile model for Omni-channel retailing although the market coverage level doesn’t improve. Moreover, we analytically reveal that the relative advantage of the offline of mobile model decreases with the customer acceptance of the network selling channel, whereas it increases with the customer acceptance of mobile Internet selling channel. |
| Keywords: | mobile Internet; Omni-channel retailing; offline to mobile; game theory |
| JEL: | M11 |
| Date: | 2014–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:58058&r=com |
| By: | Yuriy Gorodnichenko; Oleksandr Talavera |
| Abstract: | We document basic facts about prices in online markets in the U.S. and Canada, a rapidly growing segment of the retail sector. Relative to prices in regular stores, prices in online markets are more flexible as well as exhibit stronger pass-through (60-75 percent) and faster convergence (half-life less than 2 months) in response to movements of the nominal exchange rate. Multiple margins of adjustment (frequency of price changes, direction of price changes, size of price changes, exit of sellers) are active in the process of responding to nominal exchange rate shocks. Furthermore, we use the richness of our dataset to show that degree of competition, stickiness of prices, synchronization of price changes, reputation of sellers, and returns to search effort are important determinants of pass-through and speed of price adjustment for international price differentials. |
| JEL: | E3 F40 F41 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20406&r=com |
| By: | Neale Mahoney; E. Glen Weyl |
| Abstract: | Standard policies to correct market power and selection can be misguided when these two forces co-exist. Using a calibrated model of employer-sponsored health insurance, we show that the risk adjustment commonly used by employers to offset adverse selection often reduces the amount of high-quality coverage and thus social surplus. Conversely, in a model of subprime auto lending calibrated to Einav, Jenkins and Levin (2012), realistic levels of competition among lenders generate a significant oversupply of credit, implying greater market power is desirable. We build a model of symmetric imperfect competition in selection markets that parameterizes the degree of both market power and selection and use graphical price-theoretic reasoning to provide a general analysis of the interaction between selection and imperfect competition. We use the same logic to show that in selection markets four principles of the United States Horizontal Merger Guidelines are often reversed. |
| JEL: | D42 D43 D82 I13 L10 L41 |
| Date: | 2014–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20411&r=com |
| By: | Gorecki, Paul |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:rb2014/2/4&r=com |
| By: | Klaus S. Friesenbichler (WIFO); Michael Böheim (WIFO); Daphne Channa Laster |
| Abstract: | This paper provides a survey of the effects of market competition in the transition economies of Eastern Europe and Central Asia. The pivotal element of the transition was inter-firm competition, which replaced economic planning as the method to identify demand. Pro-competitive policies that facilitated the transition are discussed, including international trade, attracting foreign direct investment and firm entry. Research topics with respect to competition changed as the transition advanced. The focus shifted from churn and macroeconomic shock-management in the initial phases toward firm entry, privatisation and restructuring of incumbents. In the later phases of transition, differentials in aggregate economic performance became obvious, pointing at institutional differences and their interplay with transitions. These are equally reflected by the degree of competition of the business environment. Also the methods changed with the evolution of the research agenda. Early case studies were displaced by large-scale, cross-country econometric studies as survey data became increasingly available. |
| Keywords: | competition, transition, survey, Eastern Europe and Central Asia |
| Date: | 2014–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2014:i:477&r=com |
| By: | Walsh, Darragh; Malaguzzi Valeri, Laura |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp488&r=com |