nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒07‒23
fourteen papers chosen by
Russell Pittman
United States Department of Justice

  1. R&D investments fostering horizontal mergers By Petrakis, Emmanuel; Moreno, Diego; Manasakis, C.; Cabolis, C.
  2. Merger Activity in Industry Equilibrium By Theodosios DIMOPOULOS; Stefano SACCHETTO
  3. Search costs and the severity of adverse selection By Francesco Palazzo
  4. Targeted information and limited attention By Andreas Hefti; Shuo Liu
  5. Endogenous timing of managerial contracts in unionised oligopolies By Luciano Fanti; Nicola Meccheri
  6. Efficiency in decentralized oligopolistic markets By Francesco Nava
  7. Do Firms Sell What They Produce of Produce What They Sell? By Kurt Annen
  8. Retention Strategies in a Switching Cost Model By Andreia Amorim; Rosa-Branca Esteves
  9. Advertising, Innovation and Economic Growth By Pau Roldan; Laurent Cavenaile
  10. The Strange Career of Independent Voting Trusts in U.S. Rail Mergers By Pittman, Russell
  11. Threat of Entry and Debt Maturity: Evidence from Airlines By Gianpaolo PARISE
  12. On the optimality of bank competition policy By Ioannis G. Samantas
  13. Mergers And Acquisitıons In Pharmaceutical Industry As A Growth Strategy: An Investigation Upon Practice By Yasin ÇİLHOROZ; Cuma SONÄžUR; Mehmet GÖZLÜ; Murat KONCA
  14. Emission intensity and firm dynamics: reallocation, product mix, and technology in India By Geoffrey Barrows; Hélène Ollivier

  1. By: Petrakis, Emmanuel; Moreno, Diego; Manasakis, C.; Cabolis, C.
    Abstract: We study a homogenous good triopoly in which firms first choose their cost-reducing R&D investments and consider alternative merger proposals, and then compete à la Cournot in the ensuing industry. We identify conditions under which both horizontal mergers and non integration are sustained by Coalition-Proof Nash equilibria (CPNE). These conditions involve the effectiveness of the R&D technology, as well as the distribution of the bargaining power between the acquirer and the acquiree, which determine the allocation of the incremental profits generated by the merger. We show that whether firms follow duplicative or complementary research paths, sustaining a merger generally requires a sufficiently effective R&D technology that creates endogenous cost asymmetries and renders the merger profitable, and a moderate distribution of bargaining power that allows to spread the benefits of the merger. We examine the welfare effects of mergers and obtain clear policy guidelines.
    Keywords: Coalition-Proof Nash Equilibrium; Antitrust; Endogenous Efficiency Gains; Cost-Reducing Innovation; Horizontal Mergers
    Date: 2016–06–01
  2. By: Theodosios DIMOPOULOS (University of Lausanne and Swiss Finance Institute); Stefano SACCHETTO (Tepper School of Business, Carnegie Mellon University)
    Abstract: We study a dynamic industry-equilibrium model that features mergers, entry, and exit by heterogeneous firms. We show how different sources of synergies affect merger cyclicality. Improvements in marginal productivity between merging firms generate a procyclical motive for mergers, while reductions in fixed costs of production generate a countercyclical one. The presence of a merger market makes poorly performing firms less likely to exit the industry in recessions, and it increases the mean and variance of the cross-sectional distribution of firm-level productivities. Consistent with the empirical evidence, we show that announcement returns for large acquirers are lower than for small acquirers, despite large acquirers' higher Tobin's Q.
    Keywords: Mergers, Industry Equilibrium
    JEL: D21 D92 E22 E32 G34
  3. By: Francesco Palazzo (Bank of Italy)
    Abstract: In view of some recent empirical evidence, I suggest a relationship between the magnitude of search costs and the severity of adverse selection in the context of a dynamic model with asymmetric information. In markets with small search costs sellers with low quality products misrepresent their quality and demand a high price. If instead search costs are not negligible and buyers receive sufficiently precise signals, sellers’ price offers are truthful and all product qualities are traded over time. In markets with small search costs, a budget balanced mechanism can avoid to exacerbate adverse selection: sellers should pay a per period market participation tax and receive a rebate after trading.
    Keywords: dynamic adverse selection, decentralized markets, search theory, time on market observability
    JEL: D47 D82 D83
    Date: 2016–07
  4. By: Andreas Hefti; Shuo Liu
    Abstract: We study targeted information in a duopoly model with differentiated products, allowing for consumers with limited attention. The presence of inattentive consumers incentivizes firms to behave as if they were mass-advertisers, despite their ability to direct their mes- sages precisely towards consumers with the strongest preferences. We show that the scope for targeting as an efficient marketing instrument can be severely reduced, for both firms and consumers, if the standard assumption of unbounded attention capacities is dropped. A central insight of our model is that limited attention may explain the recent evidence on increased ad-blocking, which has become a key concern to the entire advertising in- dustry. Our main findings are robust to several variations, including price and salience competition as well as varying quality of the available marketing data.
    Keywords: Targeting, limited attention, advertising avoidance, salience competition
    JEL: D43 L13 M37
    Date: 2016–07
  5. By: Luciano Fanti (Department of Economics and Management, University of Pisa, Italy); Nicola Meccheri (Department of Economics and Management, University of Pisa, Italy; The Rimini Centre for Economic Analysis, Italy)
    Abstract: In a managerial duopoly with unionised labour markets, this paper analyses whether owners of firms prefer to decide on incentive contracts for their managers sequentially or simultaneously. When firms compete in quantities, firms' owners can prefer choosing incentive contracts simultaneously or sequentially, depending on the unions' relative bargaining power and the degree of product differentiation. Instead, when firms compete in prices, firms' owners choose incentive contracts sequentially with substitute goods and simultaneously with complement goods. While the result under Bertrand confirms that obtained by the received literature in a framework where labour markets are competitive (non-unionised), the result under Cournot is distinctly different.
    Keywords: endogenous timing; managerial contracts; unionised oligopoly
    JEL: J33 J51 L13
    Date: 2016–07
  6. By: Francesco Nava
    Abstract: The paper analyzes quantity competition in economies in which a network describes the set of feasible trades. A model is presented in which the identity of buyers, of sellers, and of intermediaries is endogenously determined by the trade flows in the economy. The analysis first considers small economies, and provides sufficient conditions for equilibrium existence, a characterization of prices and flows, and some negative results relating welfare to network structure. The second and central part of the analysis considers behavior in large markets, and presents necessary and sufficient conditions on the network structure for equilibria to be approximately efficient when the number of players is large.
    Keywords: decentralized markets; intermediation; oligopoly; efficiency; market power
    JEL: C7 D6 D85 L13
    Date: 2015–05
  7. By: Kurt Annen (Department of Economics and Finance, University of Guelph)
    Abstract: In economic models, "sales equals production" is typically treated as an identity and not as an equilibrium outcome. This distinction, however, matters when production is sequential because of off-equilibrium path behavior. This paper shows that the first mover advantage in the standard Stackelberg oligopoly game may be reduced when "sales equals production" is no longer treated as an identity. Moving rst does not per se produce a strategic advantage. It is only first moves that are suciently costly that produce this advantage. With costless production, the advantage disappears completely and the Cournot outcome is obtained.
    Keywords: Oligopoly, Stackelberg competition, sales versus production
    JEL: L13
    Date: 2016
  8. By: Andreia Amorim (Department of Economics/NIPE, University of Minho); Rosa-Branca Esteves (Department of Economics/NIPE, University of Minho)
    Abstract: With the developments in technology, fi rms can gather information about consumers´ purchase history which can be use to price discrimination accordingly. This type of price discrimination is designed in economic literature as Behaviour-Based Price Discrimination (BBPD) or dynamic pricing. This work is motivated by a recent report of the UK regulator for the communication markets (Ofcom (2010)), that raises concerns about the competitive and welfare effects of retention strategies. The aim of this paper is to analyze the effects of BBPD where firms apply retention strategies under a switching costs approach considering asymmetry on the switching costs of consumers (consumers have different switching costs) and the existence of a dominant fi rm.
    Date: 2016
  9. By: Pau Roldan (New York University); Laurent Cavenaile (New York University)
    Abstract: We develop a model of firm dynamics through product innovation that explicitly incorporates advertising decisions by firms. We model advertising by constructing a framework that unifies a number of facts identified by the empirical marketing literature. The model is then used to explain several empirical regularities across firm sizes using U.S. data. Through a novel interaction between R&D and advertising, we are able to explain empirically observed deviations from Gibrat’s law, as well as the behavior of advertising expenditures across firms, the degree of substitution between R&D and advertising expenditures as firms grow large, and broadly the effects of advertising on both firm and economic growth. We find that smaller firms can be both more innovation- and advertising-intensive as in the data even when there exist increasing returns to scale in research.
    Date: 2016
  10. By: Pittman, Russell
    Abstract: Voting trust arrangements have a long history at both the Interstate Commerce Commission and the Surface Transportation Board as devices to protect the incentives of acquiring firms and maintain the independence of acquiring and target firms during the pendency of regulatory investigation of the merger proposal. However, they are not without problems. The STB argued in 2001 that as Class I railroads have become fewer and larger, it may be difficult to find alternative purchasers for the target firm if the STB turns down the proposal. The Antitrust Division argued in 2016 that joint stock ownership creates anticompetitive and/or otherwise undesirable incentives, even if the independence of the voting trustee is complete. On the other hand, the functions served by voting trusts in railroad mergers are served by merger termination fees and other contractual “lockup” mechanisms in other parts of the economy, without the same incentive problems as voting trusts. Thus voting trusts may no longer serve a useful function in railroad merger deliberations.
    Keywords: railroads, mergers, voting trusts, merger termination fees, merger lockup provisions
    JEL: D82 G34 K23 L92 N71 N72
    Date: 2016–07–19
  11. By: Gianpaolo PARISE (University of Lugano and Swiss Finance Institute)
    Abstract: This paper provides evidence for the effect of threat of entry on corporate debt structure in the airline industry. In particular, the evolution of the main low cost air carriers' route network is used to identify routes where the probability of future entry increases dramatically. Empirical results show that when the most strategic routes are threatened, incumbents significantly increase debt maturity before low cost airlines start flying. Overall, the main findings suggest that airlines respond to entry threats by lengthening the maturity of their debt in order to reduce liquidity risk.
    Keywords: airlines, competition, debt maturity, rollover risk, threat of entry
    JEL: G31 G32 D21 D43 L93
  12. By: Ioannis G. Samantas (University of Athens)
    Abstract: This study examines whether the effect of market structure on financial stability is persistent, subject to current regulation and supervision policies. Extreme Bounds Analysis (EBA) is employed over a sample of 2450 banks operating within the EU-27 during the period 2003-2010. The results show an inverse U-shaped association between market power and soundness and a stabilizing tendency in markets of less concentration, where policies lean towards limited restrictions on non-interest income, official intervention in bank management and book transparency. Regulation significantly contributes as a stability channel through which bank competition policy is optimally designed.
    Keywords: Market power; financial stability; regulation; extreme bound analysis
    JEL: D21 D4 L11 L51
    Date: 2016–07
  13. By: Yasin ÇİLHOROZ (Hacettepe University); Cuma SONÄžUR (Hacettepe University); Mehmet GÖZLÜ (Hacettepe University); Murat KONCA (Hacettepe University)
    Abstract: Until the begining of 1990s, firms had been looking ways to attain the competitive advantage and increase their profitabilites depending on it by realizing economies of scale or benefiting from market failure. Nowadays, with the impact of globalization, particularly great companies have started to purchase other firms or merge with them as a growth strategy. Pharmaceutical industry has the first place where the mergers and acquisitions occur mostly. Among the drives that leads pharmaceutical firms to mergers or acquisitions; high costs of research and development, economies of scale, motivation for new markets, efforts to improve the existing marketing possibilities, trying to keep up with competition can be counted. The aim of this study is to discuss mergers and acqusisitions in pharmaceutical sector and to evaluate global pharmaceutical industry in this terms.
    Keywords: Merger, Acquisition, Growth Strategy, Pharmaceutical Industry
    JEL: F23 G34 L65
  14. By: Geoffrey Barrows; Hélène Ollivier
    Abstract: We study how market conditions shape aggregate CO2 emission intensity from manufacturing. We first develop a multi-product multi-factor model with heterogeneous firms, variable markups, and monopolistic competition in which each product has a specific emission intensity. Competition affects output shares across heterogeneous firms, product-mix across heterogeneous products, and technological choice within firm-product lines. We find that increased competition shifts production to cleaner firms, but has ambiguous effects on withinfirm changes in emission intensity via product-mix and technology adoption. Next, using detailed firm-product emission intensity data from India, we find core-competency products tend to be cleaner than non-core products; but since market conditions have induced Indian firms to shift production away from core-competency, product-mix has increased CO2 emission intensity in India by 49% between 1990-2010. These emission intensity increases are offset by reductions within firm-product lines and by across-firm share shifts, so aggregate emission intensity has actually fallen by 50%.
    Date: 2016–06

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