nep-com New Economics Papers
on Industrial Competition
Issue of 2016‒07‒30
twenty-six papers chosen by
Russell Pittman
United States Department of Justice

  1. The prisoner’s dilemma in Cournot models: when endogenizing the level of competition leads to competitive behaviors. By Ibrahim Abada; Andreas Ehrenmann
  2. The effect of retail mergers on prices and variety: An ex-post evaluation By Argentesi, Elena; Buccirossi, Paolo; Cervone, Roberto; Duso, Tomaso; Marrazzo, Alessia
  3. Cooperative and noncooperative R&D in an asymmetric multi-product duopoly with spillovers By Juliane Fudickar; Ruzica Rakic
  4. Consumers on a Leash: Advertised Sales and Intertemporal Price Discrimination By Aniko Ory
  5. Innovation, Pricing and Targeting in Networks By Panebianco, Fabrizio; Verdier, Thierry; Zenou, Yves
  6. False Advertising By Rhodes, Andrew; Wilson, Chris M
  7. Competitive Effects of Partial Control in an Input Supplier By Brito, Duarte; Cabral, Luís M B; Vasconcelos, Helder
  8. Competing Mechanisms in Markets for Lemons By Piero Gottardi; Sarah Auster
  9. Intertemporal price discrimination: dynamic arrivals and changing values By Garrett, Daniel F.
  10. Common Ownership, Competition, and Top Management Incentives By Miguel Antón; Florian Ederer; Mireia Giné; Martin Schmalz
  11. Trade-in and Save: A Two-period Closed-loop Supply Chain Game with Price and Technology Dependent Returns By Talat S. Genc; Pietro De Giovanni
  12. Innovation, competition and public procurement in the pre-commercial phase By Valeria De Bonis
  13. On Perishability and Vertical Price Transmission: empirical evidences from Italy By Santeramo, Fabio Gaetano; von Cramon-Taubadel, Stephan
  14. Double auction with interdependent values: incentives and efficiency By Kojima, Fuhito; Yamashita, Takuro
  15. Strategic Technology Adoption and Hedging under Incomplete Markets By Markus LEIPPOLD; Jacob STROMBERG
  16. Competition in Retail Electricity Markets : An Assessment of Ten Years Dutch Experience By Willems, Bert; Mulder, M.
  17. Hospital competition with heterogeneous patient groups: Incentives and regulation By Vomhof, Markus
  18. Overbooking By Ely, Jeffrey; Garrett, Daniel F.; Hinnosaar, Toomas
  19. The Design and Price of Information By Bergemann, Dirk; Bonatti, Alessandro; Smolin, Alex
  20. Fragile markets: An experiment on judicial independence By Benito Arruñada; Marco Casari
  21. Innovación, Competitivad y Rentabilidad en los Sectores de la Economía Mexicana By Kurt Unger
  22. Supply Function Competition, Private Information, and Market Power: A Laboratory Study By Anna Bayona; Jordi Brandts; Xavier Vives
  23. Quantification of the Evolution of Firm Size Distributions Due to Mergers and Acquisitions By Sandro Claudio Lera; Didier Sornette
  24. Imported Intermediate Goods and Product Innovation : Evidence from India By Murat Seker; Daniel Rodriguez Delgado; Mehmet Fatih Ulu
  25. Technological Progress and Ownership Structure By Heng GENG; Harald HAU; Sandy LAI
  26. To deter or to moderate? Alliance formation in contests with incomplete information By Kai A. Konrad; Florian Morath

  1. By: Ibrahim Abada; Andreas Ehrenmann
    Abstract: In resource based economies, regulating the production and export activities have always been an important challenge. Examples in oil and gas show that different behaviors have been adopted ranging from the export monopoly to the complete opening of the export market. This paper tries to explain this multitude of solutions via strategic interactions. When modeling imperfect competition, players are separated in two categories: those who exert market power and those who are competitive and propose the good at their marginal supply cost. Letting a player freely choose whether it wants to exert market power or not when it optimizes its utility is not discussed in the literature. This paper addresses this issue by letting the players choose the level of competition they want to exert in the market. To do so, we analyze the behavior of two countries competing to supply a market with a homogeneous good in an imperfect competition setting. Each country decides the number of firms it authorizes to sell in the market. The interaction between the firms is of a Nash-Cournot type, where each one exerts market power and is in competition with all other firms allowed to sell, whether they belong to the same country or not. Each country optimizes its utility, that is the sum of the profits of its firms. We have studied four kinds of interaction between the countries. The first calculates the closed loop Nash equilibrium of the game between the countries. The second setup analyzes the cartel when the countries collude. The third focuses on the open loop Nash equilibrium and the fourth models a bi-level Stackelberg interaction where one country plays before the other. We demonstrate that in the closed loop Nash equilibrium, our setting leads to the prisoner’s dilemma: the equilibrium occurs when both countries authorize all their firms to sell in the market. In other words, countries willingly chose not to exert market power. This result is at first sight similar to the Allaz & Vila (1993) result but is driven by a completely different economic reasoning. In the Stackelberg and coordinated solutions, the market is on the contrary very concentrated and the countries strongly reduce the number of firms that enter the market in order to fully exert market power and increase the price. The open loop result lies in between: the countries let all their firms sell but market power remains strong. These results suggest that the prisoner’s dilemma outcome is due to the conjectural inconsistency of the Nash equilibrium. Finally, in the Stackelberg setting, we give countries the choice of being leader or follower and demonstrate that the counter-intuitive competitive outcome is very unlikely to occur in the market.
    Keywords: Imperfect competition, export oligopoly, open and closed loop Nash equilibrium
    JEL: L13 L7
    Date: 2016–07–21
  2. By: Argentesi, Elena; Buccirossi, Paolo; Cervone, Roberto; Duso, Tomaso; Marrazzo, Alessia
    Abstract: Unlike most retrospective merger studies that only focus on price effects, we also estimate the impact of a merger on product variety. We use an original dataset on Dutch supermarkets to assess the effect of a merger that was conditionally approved by the Dutch Competition Authority (ACM) on prices and the depth of assortment. We find that the merger did not affect prices but it led the merging parties to decrease the depth of their assortment, thereby reducing consumer choice. This effect is mainly driven by a reduction in variety for stores that were not re-branded after the merger, suggesting that the merging firms reposition their product offerings in order to avoid cannibalization. We also find that the reduction in variety for the merging parties is partially compensated by competitors increasing variety, except in very concentrated markets where all firms decrease variety. The issuance of divestitures partially outweighed the negative effect of the merger. Yet, it appears that additional divestitures would have been necessary to remove completely the adverse effect of the merger on the depth of assortment.
    Keywords: Mergers,Variety,Ex-post Evaluation,Retail sector,Supermarkets,Grocery
    JEL: L1 L41 L66 L81 D22 K21 C23
    Date: 2016
  3. By: Juliane Fudickar (Freie Universitaet Berlin); Ruzica Rakic (Humboldt-Universitaet Berlin)
    Abstract: We consider R&D investment with spillovers in a market where a multi-product firm competes with a single-product firm. We analyze whether investment incentives are higher under R&D cooperation or competition and show that this depends not only on the technology spillover but also on the degree of product differentiation. R&D investments under cooperation are lower when the products are close substitutes even if the spillover is substantial.
    Keywords: R&D investments, Multi-product firms, R&D cooperation Regulation
    JEL: L13 O31 O32
    Date: 2016–07–01
  4. By: Aniko Ory (Cowles Foundation, Yale University)
    Abstract: The Internet allows sellers to track “window shoppers,” consumers who look but do not buy, and to lure them back later by targeting them with an advertised sale. This new technology thus facilitates intertemporal price discrimination, but simultaneously makes it too easy for a seller to undercut her regular price. Because buyers know they could be lured back, the seller is forced to set a lower regular price. Advertising costs can, therefore, serve as a form of commitment: a seller can actually benefit from higher costs of advertising. Based on this framework, the impact of commitment on prices, profits, and welfare are analyzed using a dynamic pricing model. Furthermore, it is demonstrated how buyers’ time preferences give rise to price fluctuation or an everyday-low-price in equilibrium.
    Keywords: Advertising, Coases conjecture, commitment, dynamic pricing, intertemporal price discrimination, online markets, everyday-low-pricing
    JEL: D11 D21 D42 D90 L11 L12
    Date: 2016–07
  5. By: Panebianco, Fabrizio; Verdier, Thierry; Zenou, Yves
    Abstract: Consider a network of firms where a firm T is given the opportunity to innovate a product (first-generation innovation). If successful, this firm can temporarily sell this innovation to her direct neighbors because this will give her access to a larger market. However, if her direct neighbors innovate themselves on top of firm T's innovation (second-generation innovations), then firm T loses the right to sell her initial innovation to the remaining firms in the market. We analyze this game where each firm (T and her direct neighbors) has to decide at which price they want to sell their innovation. We show that the optimal price policy of each firm depends on the level of property rights protection, the position of firm T in the network, her degree and the size of the market. We then analyze the welfare implications of our model where the planner that maximizes total welfare has to decide which firm to target. We show that it depends on the level of property rights protection and on the network structure in a non-trivial way.
    Keywords: diffusion centrality; innovation.; Networks; targets
    JEL: D85 L1 Z13
    Date: 2016–07
  6. By: Rhodes, Andrew; Wilson, Chris M
    Abstract: There is widespread evidence that some firms use false advertising to overstate the value of their products. We consider a model in which a policymaker is able to punish such false claims. We characterize an equilibrium where false advertising actively influences rational buyers, and analyze the effects of policy under different welfare objectives. We establish precise conditions where policy optimally permits a positive level of false advertising, and show how these conditions vary intuitively with demand and market parameters. We also consider the implications for product investment and industry self-regulation, and connect our results to the literature on demand curvature.
    Keywords: Misleading Advertising; Product Quality; Pass-through; Self-Regulation
    JEL: D83 L15 M37
    Date: 2016–07–18
  7. By: Brito, Duarte; Cabral, Luís M B; Vasconcelos, Helder
    Abstract: Motivated by recent competition policy cases, we study an industry where downstream firms partially own a supplier. If ownership corresponds to control, then consumer surplus is higher and possibly non-monotonic with respect to the ownership share. We provide conditions such that consumers are better off when ownership of the upstream firm is shared by the downstream firms; and when ownership is partial (i.e., less than 100%). These results are based on two effects of partial ownership: first, a vertical-control effect, which effectively reduces the extent of double marginalization; and second, a tunneling effect, whereby the downstream firms use the wholesale price as a means to transfer value from independent upstream shareholders.
    Date: 2016–07
  8. By: Piero Gottardi (European University Institute); Sarah Auster (Bocconi, IGIER)
    Abstract: We study the competitive equilibria in a market with adverse selection and search frictions. Uninformed buyers post general direct mechanisms and informed sellers choose where to direct their search. We demonstrate that there exists a unique equilibrium allocation and characterize its properties: all buyers post the same mechanism and a low quality object is traded whenever such object is present in a meeting. Sellers are thus pooled at the search stage and screened at the mechanism stage. If adverse selection is sufficiently severe, this equilibrium is constrained inefficient. Furthermore, the properties of the equilibrium differ starkly from the case where meetings are restricted to be bilateral, in which case in equilibrium sellers sort themselves at the search stage across different mechanisms. Compared to such sorting equilibria, our equilibrium yields a higher surplus for most, but not all, parameter specifications.
    Date: 2016
  9. By: Garrett, Daniel F.
    Abstract: We study the profit-maximizing price path of a monopolist selling a durable good to buyers who arrive over time and whose values for the good evolve stochastically. The setting is completely stationary with an infinite horizon. Contrary to the case with constant values, optimal prices fluctuate with time. We argue that consumers'randomly changing values offer an explanation for temporary price reductions that are often observed in practice.
    JEL: D82 L12
    Date: 2016–07
  10. By: Miguel Antón (IESE Business School, Universidad de Navarra); Florian Ederer (Cowles Foundation, Yale University); Mireia Giné (IESE Business School, Universidad de Navarra); Martin Schmalz (University of Michigan)
    Abstract: Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don’t diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals’ performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals’ performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over the past decades.
    Keywords: Common ownership, competition, CEO pay, management incentives, governance
    JEL: D21 G30 G32 J31 J41
    Date: 2016–07
  11. By: Talat S. Genc (Department of Economics and Finance, University of Guelph and Department of Economics, Ipek University); Pietro De Giovanni (Department of Operations Management, ESSEC Business School)
    Abstract: Consumers evaluate the convenience of changing their products according to the price paid as well as the technology quality) level. When the consumers wish to capitalize the products residual value, they should return them as early as possible. Accordingly, we develop a model of Closed-loop Supply Chain (CLSC) where consumers seek to gain as much as possible from their returns and the return rate is a function of both price and quality. We model a two-period Stackelberg game to capture the dynamic aspects of a CLSC, where the manufacturer is the channel leader. We investigate who, namely, manufacturer or retailer, should collect the products in the market. Thus, we identify the best CLSC structure to adopt when the return rate is both price- and quality-dependent. Our results demonstrate that it is always worthwhile for companies to collect products and adopt an active return approach for returns. We investigate the eect of retail competition in both forward and backward channels and show the impact of eliminating the double marginalization on market outcomes.
    Keywords: Closed-Loop Supply Chain, Technology investments, Supply Chain structure, Competition.
    JEL: L11 L23 L42
    Date: 2016
  12. By: Valeria De Bonis (Università Sapienza di Roma - Dipartimento di Studi Giuridici, Filosofici ed Economici)
    Abstract: Should the supply or the demand side bear the risk connected to innovation? The two polar cases identified in the literature are the supply push and the demand pull. The former is the typical one, with the supplier bearing the costs and obtaining the benefits from innovating. The latter is technology procurement, where the buyer takes the risk, by procuring the innovative good or service. With respect to this, pre-commercial procurement is a peculiar solution that can explain the debate found in the literature relative to its configuration either as a supply-side or a demand-side instrument. The separation from the commercial phase allows the procurer to take only (part of) the risks connected to R&D services. Also, competition among suppliers gives the opportunity of evaluating different solutions and to obtain, in the commercial phase, a lower price for the innovative good. The counterpart of all this is a large portion of risk being left to the supplier. As a consequence, suppliers need to obtain a larger share of the benefits of the innovation process. This economic reason, besides the legal restrictions on State aid, explains the need for a shared risks-shared benefits approach, centred on the agreements on the assignment of IPRs.
    Keywords: innovation; competition; public procurement for innovation; pre-commercial procurement.
    JEL: H57 K21 L16 M38 O34 O38
    Date: 2016–07
  13. By: Santeramo, Fabio Gaetano; von Cramon-Taubadel, Stephan
    Abstract: Studies on the causes for asymmetries in vertical price transmission date back to decades ago, but the attention of theorists and empirical economists is still vivid. In particular the role of perishability is not fully defined. We investigate the vertical price transmission for a heterogeneous group of fruits and vegetables that differ for their degree of perishability. The error correction model we estimate allows toconclude that asymmetries in vertical price transmission tend to vanish for perishable products.
    Keywords: Asymmetries, AVECM, Fruits and vegetables, Perishability, Vertical price transmission.
    JEL: C32 D40 Q11 Q13
    Date: 2016–07–25
  14. By: Kojima, Fuhito; Yamashita, Takuro
    Abstract: We study a double auction environment where buyers and sellers have interdependent valuations and multi-unit demand and supply. We propose a new mechanism which satisfies ex post incentive compatibility, individual rationality, feasibility, non-wastefulness, and no budget deficit. Moreover, this mechanism is asymptotically efficient in that the trade outcome in the mechanism converges to the efficient level as in a competitive equilibrium as the numbers of the buyers and sellers become large. Our mechanism is the first double auction mechanism with these properties in the interdependent values setting.
    Keywords: double auction, interdependent values, multi-unit demand and supply, ex post incentive compatibility, asymptotic efficiency
    JEL: D44 D47 D82
    Date: 2016–07
  15. By: Markus LEIPPOLD (University of Zurich and Swiss Finance Institute); Jacob STROMBERG (University of Zurich and Swiss Finance Institute)
    Abstract: We investigate the implications of technological innovation and non-diversifiable risk on entrepreneurial entry and optimal portfolio choice. In a real options model where two risk-averse individuals strategically decide on technology adoption, we show that the impact of non-diversifiable risk on the option timing decision is ambiguous and depends on the frequency of technological change. Compared to the complete market case, non-diversifiable risk may accelerate or delay the optimal investment decision. Moreover, strategic considerations regarding technology adoption play a central role for the entrepreneur's optimal portfolio choice in the presence of non-diversifiable risk.
    Keywords: Real Options, Incomplete Markets, Technology Adoption, Optimal Portfolio Choice, Hedging
    JEL: G11 G31 E02
  16. By: Willems, Bert (Tilburg University, Center For Economic Research); Mulder, M.
    Abstract: This paper examines a decade of retail competition in the Dutch electricity market and discusses market structure, regulation, and market performance. We find a proliferation of product variety, in particular by the introduction of quality-differentiated green-energy products. Product innovation could be a sign of a well-functioning market that caters to customer’s preferences, but it can also indicate a strategic product differentiation to soften price competition. Although slightly downward trending, gross retail margins remain relatively high, especially for green products. Price dispersion across retailers for identical products remains high, as also across products for a single retailer. We do not find evidence of asymmetric pass-through of wholesale costs. Overall, the retail market matured as evidenced by fewer consumer complaints and higher switching rates. A fairly intensive regulation of mature energy retail markets appears to be needed to create benefits for consumers.
    Keywords: retail electricity market; competition; regulation; ex-post assessment
    JEL: L94 L43 L11
    Date: 2016
  17. By: Vomhof, Markus
    Abstract: Competing hospitals may not only use quality of service to attract patients but also their specialization profile. Applying a Hotelling-duopoly and interpreting respectively quality and specialization as vertical and horizontal differentiation, we analyze the optimal allocation in both dimensions for hospitals. To account for heterogeneity in preferences as well as in the health status, two patient groups are introduced. These groups differ in two parameters, (i) treatment costs and (ii) preference for a good match between patients' needs and hospitals' specialization profile. Moreover, we derive the optimal reimbursement scheme a regulator is able to achieve. The results show that the hospitals' specialization decision is determined mainly by two relations: which group is more profitable for hospitals and which group is endowed with the higher preference for a good match. The reimbursement scheme a regulator implements deviates from a pure cost partitioning scheme. In particular, the regulator aims at inducing higher quality by exploiting the heterogeneity in preferences.
    Abstract: Im Wettbewerb stehende Krankenhäuser könnten nicht nur Qualität, sondern auch ihr Spezialisierungsprofil nutzen, um attraktiver für Patienten zu werden. Wir wenden ein Hotelling Duopol mit vertikaler und horizontaler Differenzierung an, wobei erstere als Qualität und letztere als Spezialisierung interpretiert wird, um die optimale Allokation für Krankenhäuser in beiden Dimensionen zu untersuchen. Um Heterogenität in Präferenzen und im Gesundheitsstatus zu beachten, werden zwei Patientengruppen eingeführt. Diese Gruppen unterscheiden sich in zwei Parametern, (i) den Behandlungskosten und (ii) der Präferenz für eine gute Übereinstimmung zwischen den Bedürfnissen der Patienten und der Spezialisierung der Krankenhäuser. Zudem bestimmen wir das optimale Vergütungssystem, das mit Hilfe eines Regulators erreicht werden kann. Die Ergebnisse zeigen, dass die Spezialisierungsentscheidung von Krankenhäusern durch zwei Relationen bestimmt wird: Welche Gruppe ist für Krankenhäuser profitabler und welche Gruppe ist mit der stärkeren Präferenz für eine gute Übereinstimmung ausgestattet. Das Vergütungssystem des Regulators weicht von einer reinen Kostenaufteilung ab. Der Regulator möchte eine höhere Qualität erreichen, indem er die Heterogenität in den Präferenzen ausnutzt.
    Keywords: hospital competition,heterogeneity,hotelling-duopoly,regulation
    JEL: I11 I18 L13
    Date: 2016
  18. By: Ely, Jeffrey; Garrett, Daniel F.; Hinnosaar, Toomas
    Abstract: We consider optimal pricing policies for airlines when passengers are uncertain at the time of ticketing of their eventual willingness to pay for air travel. Auctions at the time of departure efficiently allocate space and a profit maximizing airline can capitalize on these gains by overbooking ights and repurchasing excess tickets from those passengers whose realized value is low. Nevertheless profit maximization entails distortions away from the efficient allocation. Under regularity conditions, we show that the optimal mechanism can be implemented by a modified double auction. In order to encourage early booking, passengers who purchase late are disadvantaged. In order to capture the information rents of passengers with high expected values, ticket repurchases at the time of departure are at a subsidized price, sometimes leading to unused capacity.
    Keywords: airlines, overbooking, revenue management, dynamic mechanism design
    JEL: D42 D44 D82
    Date: 2016–07
  19. By: Bergemann, Dirk; Bonatti, Alessandro; Smolin, Alex
    Abstract: This paper analyzes the trade of information between a data buyer and a data seller. The data buyer faces a decision problem under uncertainty and seeks to augment his initial private information with supplemental data. The data seller is uncertain about the willingness-to-pay of the data buyer due to this private information. The data seller optimally offers a menu of (Blackwell) experiments as statistical tests to the data buyer. The seller exploits differences in the beliefs of the buyer’s types to reduce information rents while limiting the surplus that must be sacrificed to provide incentives.
    Keywords: experiments; mechanism design; price discrimination; product differentiation.; selling information
    JEL: D42 D82 D83
    Date: 2016–07
  20. By: Benito Arruñada; Marco Casari
    Abstract: Contract enforcement does not only affect single transactions but the market as a whole. We compare alternative institutions that allocate enforcement rights to the different parties to a credit transaction: either lenders, borrowers, or judges. Despite all parties having incentives to enforce and transact, the market flourishes or disappears depending on the treatment: paying judges according to lenders' votes maximizes total surplus and equity; and a similar result appears when judges are paid according to average earnings in society. In contrast, paying judges according to borrowers' votes generates the poorest and most unequal society. These results suggest that parties playing the role of borrowers understand poorly the systemic consequences of their decisions, triggering under-enforcement, and hence wasting profitable trade opportunities.
    Keywords: impersonal exchange, third-party enforcement, steps of reasoning, other-regarding preferences, judicial independence.
    JEL: C91 C92 D53 D63 D72 K40
    Date: 2016–07
  21. By: Kurt Unger (Division of Economics, CIDE)
    Abstract: After a brief review of contemporary Mexican policy on science and technology we locate innovation experiences of firms in the context of innovation systems and market failures. Given the purpose of competitiveness as related to local innovation policy, the focus must be to solve the market failures inhibiting the firms' willingness to assume innovation risks and uncertainty. Most of all the failure of higher rates of profitability for non-tradeables, which are discriminating against tradeables in higher competition and more uncertain outcomes. For the most part there is also a lack of continuity in the participation of firms in the programs of subsides for innovation projects. In conclusion we argue for highly differentiated policy according to sectors and states.
    Keywords: innovation, competitiveness, profitability, continuity, sectors, states, firms.
    JEL: O32
    Date: 2015–11
  22. By: Anna Bayona; Jordi Brandts; Xavier Vives
    Abstract: In the context of supply function competition with private information, we test in the laboratory whether—as predicted in Bayesian equilibrium—costs that are positively correlated lead to steeper supply functions and less competitive outcomes than do uncorrelated costs. We find that the majority of subjects bid in accordance with the equilibrium prediction when the environment is simple (uncorrelated costs treatment) but fail to do so in a more complex environment (positively correlated costs treatment). Although we find no statistically significant differences between treatments in average behaviour and outcomes, there are significant differences in the distribution of supply functions. Our results are consistent with the presence of sophisticated agents that on average best respond to a large proportion of subjects who ignore the correlation among costs. Experimental welfare losses in both treatments are higher than the equilibrium prediction owing to a substantial degree of productive inefficiency.
    Keywords: divisible good auction, generalised winner’s curse, correlation neglect, electricity market
    JEL: C92 D43 L13
    Date: 2016–07
  23. By: Sandro Claudio Lera (ETH Zurich); Didier Sornette (Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC))
    Abstract: The distribution of firm sizes is known to be heavy tailed. In order to account for this stylized fact, previous studies have focused mainly on growth through investments in a company’s own operations (internal growth). Thereby, the impact of mergers and acquisitions (M&A) on the firm size (external growth) is often not taken into consideration, notwithstanding its potential large impact. In this article, we make a first step into accounting for M&A. Specifically, we describe the effect of mergers and acquisitions on the firm size distribution in terms of an integro-differential equation. This equation is subsequently solved both analytically and numerically for various initial conditions, which allows us to account for different observations of previous empirical studies. In particular, it rationalises shortcomings of past work by quantifying that, in order to observe a significant influence of mergers and acquisitions on the firm size distribution, more extensive datasets would have been required. Our approach is very flexible and can be extended to account for other sources of external growth, thus contributing towards a holistic understanding of the distribution of firm sizes.
    Keywords: firm size distribution, mergers and acquisitions, coagulation equation, econophysics
    JEL: C63 D21 G34 L11
  24. By: Murat Seker; Daniel Rodriguez Delgado; Mehmet Fatih Ulu
    Abstract: In this study, we build a structural model of multi-product firms that illustrates how access to new foreign intermediate goods contributes to product innovation. We establish a stochastic dynamic model of firm evolution allowing firms to be heterogeneous in their efficiency levels. Through introducing importing decision to this dynamic framework, we show that the effects of importing intermediate goods are twofold: i) it increases the revenues per each product created and ii) through the knowledge spillovers obtained from importing, firms become more likely to introduce new varieties. Calibration of the model to Indian data shows that the model can successfully explain the dynamics of product evolution and other moments related to importing and product distribution. Finally the comparison of autarky with trade equilibrium shows how liberalizing trade increases innovation performances and product growth.
    Keywords: Firm dynamics, Heterogeneous firms, Innovation, Endogenous product scope, Importing intermediate goods, Trade liberalization, Indian manufacturing sector
    JEL: F12 F13 L11 O31
    Date: 2015
  25. By: Heng GENG (University of Hong Kong); Harald HAU (University of Geneva and Swiss Finance Institute); Sandy LAI (University of Hong Kong)
    Abstract: Innovation processes under patent protection generate holdup problems if complementary patents are owned by different firms. We show that in line with Hart and Moore (1990), shareholder ownership overlap across firms with patent complementarities helps mitigate such holdup problems and correlates significantly with higher patent investment and more patent success as measured by future citations. The positive innovation effect is strongest for concentrated overlapping ownership and for the cases when the overlapping shareholders are dedicated investors.
    Keywords: Patents, holdup Problems, Innovation, Institutional Ownership
    JEL: L22 G31 G32
  26. By: Kai A. Konrad; Florian Morath
    Abstract: We consider two players' choice about the formation of an alliance ahead of conflict in a framework with incomplete information about the strength of co-players. When deciding on alliance formation, players anticipate the self-selection of other players and the informational value of own and other players' choices. In the absence of these signaling effects, strong players have an incentive to stand alone, which leads to a separating equilibrium. This separating equilibrium can be destabilized by deception incentives if beliefs are updated on the basis of endogenous alliance formation choices. Weak players may find it attractive to appear strong in order to deter competitors from positive effort choices. Strong players may find it attractive to appear weak in order to give their competitors a false sense of security and then beat them with little effort. Moreover, appearing weak allows players to free-ride when alliances are formed.
    Keywords: alliance; incomplete information; endogenous formation; all-pay contest
    JEL: D72 D74
    Date: 2015–12

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