nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒03‒18
29 papers chosen by
Russell Pittman
United States Department of Justice

  1. Bargaining power and market power: approaches to separation for the purposes of antitrust policy By Morozov, Anton (Морозов, Антон Н.); Pavlova, Natalia (Павлова, Наталья С.)
  2. Superstars in two-sided markets: exclusives or not? By Elias Carroni; Leonardo Madio; Shiva Shekhar
  3. Reference pricing systems on the pharmaceutical market By Unsorg, Maximiliane
  4. The impact of price adjustment costs on price dispersion in E-commerce By Böheim, René; Hackl, Franz; Hölzl-Leitner, Michael
  5. Welfare Effects of Certification under Latent Adverse Selection By Creane, Anthony; Jeitschko, Thomas; Sim, Kyoungbo
  6. The business model of a streaming platform By E. Carroni; D. Paolini
  7. Price competition with uncertain quality and cost By Sander Heinsalu
  8. Production efficiency of nodal and zonal pricing in imperfectly competitive electricity markets By Sarfati, M.; Hesamzadeh, M-R.; Holmberg, P.
  9. Market Power and Spatial Competition in Rural India By Chatterjee, S.
  10. Advertising strategy in the presence of reviews: An empirical analysis By Hollenbeck, Brett; Moorthy, Sridhar; Proserpio, Davide
  11. Bertrand-Edgeworth duopoly with a socially concerned firm By Nagy, Balázs; Tasnádi, Attila
  12. Impact of a direct channel on the choice of absorption versus direct costing using cost-based transfer price By Hamamura, Jumpei
  13. Geography, Competition, and Optimal Multilateral Trade Policy By Antonella Nocco; Gianmarco I.P. Ottaviano; Matteo Salto
  14. The Curse of Knowledge: Having Access to Customer Information Can Reduce Monopoly Profit By Didier Laussel; Ngo Van Long; Joana Resende
  15. Does deregulation drive innovation intensity? Lessons learned from the OECD telecommunications sector By Polemis, Michael; Tselekounius, Markos
  16. Stackelberg Independence By Toomas Hinnosaar
  17. Market size, product differentiation and bidding for new varities By Jie Ma; Ian Wooton
  18. Concentration in International Markets: Evidence from US Imports By Alessandra Bonfiglioli; Rosario Crinò; Gino Gancia
  19. Europe's transformation after Gutenberg: the impact of new media and competition By Jeremiah Dittmar
  20. Strengths and Weaknesses of the British Market Model By Newbery, D.
  21. Bunching Below Thresholds to Manipulate Public Procurement By Bedri Kamil Onur Tas
  22. A fractional-order difference Cournot duopoly game with long memory By Baogui Xin; Wei Peng; Yekyung Kwon
  23. Firm size and concentration inequality: A flexible extension of Gibrat’s law By Lina Cortés; Juan M. Lozada; Javier Perote
  24. Challenges to the Future of European Single Market in Natural Gas By Chyong, C-K.
  25. Production Externalities and Investment Caps: a Welfare Analysis under Uncertainty By Luca Di Corato; Yishay D. Maoz
  26. Coordination failure in capacity-then-price-setting games By Güth, Werner; Stadler, Manfred; Zaby, Alexandra
  27. Designing organizations in volatile markets By Shuo Liu; Dimitri Migrow
  28. Do Public Firms Respond to Industry Opportunities More Than Private Firms? The Impact of Initial Firm Quality By Vojislav Maksimovic; Gordon M. Phillips; Liu Yang
  29. Do Institutions Determine Economic Geography? Evidence from the Concentration of Foreign Suppliers By Fariha Kamal; Asha Sundaram

  1. By: Morozov, Anton (Морозов, Антон Н.) (The Russian Presidential Academy of National Economy and Public Administration); Pavlova, Natalia (Павлова, Наталья С.) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: At first glance, the effects of market power on one side of the market are similar to the effects of asymmetric distribution of bargaining power. This is the source of their mistaken confusion. These effects include both distributional and coordination. However, some of the effects may be related to the distribution of winnings, for example, in favor of sellers, but not related to restricting competition (the so-called exclusionary practices). The prevailing approaches to law enforcement in Russia, based primarily on the concepts of market power, dominant position and abuse of dominance, give rise to the question of the need to find a new balance between the categories of restriction of competition and the effects of bargaining power.
    Keywords: bargaining power, bargaining power, buyer power, balancing power, dominant position
    JEL: K21 L12
    Date: 2019–03
  2. By: Elias Carroni; Leonardo Madio; Shiva Shekhar
    Abstract: This article studies incentives for a premium provider (Superstar) to offer exclusive contracts to competing platforms mediating the interactions between consumers and firms. When platform competition is intense, more consumers subscribe to the platform hosting the Superstar exclusively. This mechanism is self-reinforcing as firms follow consumer decisions and (some) join exclusively the platform with the Superstar. Exclusivity always benefits firms and may benefit consumers. Moreover, when the Superstar is integrated with a platform, non-exclusivity becomes more likely than if the Superstar was independent. This analysis provides several implications for managers and policy makers operating in digital and traditional markets.
    Keywords: exclusive contracts, platforms, two-sided markets, ripple effect, content providers, market power
    JEL: L13 L22 L86
    Date: 2019
  3. By: Unsorg, Maximiliane
    Abstract: Constantly rising expenditures for pharmaceuticals require government intervention in firms' pricing decisions. To this end, reference pricing systems are a frequently employed regulatory mechanism. This paper considers a duopoly market with vertically differentiated firms under different competition types. Starting from the existing literature it can be confirmed that the introduction of a reference price leads to lower equilibrium prices and induces fiercer competition between firms. Further, it can be shown that reference pricing promotes generic usage and leads to an increased market coverage. Hence, an improved provision of medical supply is achieved due to the lower prices and the stimulated demand for drugs. The paper demonstrates that even under the increased demand consumer and insurance expenditures are reduced. The model isolates the mechanisms of reference pricing and shows the effects on the consumer decisions. Lastly, consumer surplus increases when implementing the regulation.
    Keywords: reference pricing,pharmaceutical market,copayment,price cap,price competition,expenditures,consumer surplus
    JEL: I11 I18 L51
    Date: 2018
  4. By: Böheim, René; Hackl, Franz; Hölzl-Leitner, Michael
    Abstract: We analyze price dispersion using panel data from a large price comparison site. We use past pricing behavior to instrument for potential endogeneity that might result from the selection of firms to certain product markets. We find that greater price adjustment costs result in greater price dispersion. Although the impact of price adjustment costs on price dispersion became weaker over time, the causal effect of price adjustment costs on price dispersion is still present at the end of the period. Our results are robust to many alternative empirical speciffications. We also test a range of alternative explanations of price dispersion, such as search cost, service differentiation, obfuscation, vertical restraints, and market structure.
    Keywords: price dispersion, price adjustment costs, menu costs, e-commerce
    Date: 2019–03
  5. By: Creane, Anthony; Jeitschko, Thomas; Sim, Kyoungbo
    Abstract: Asymmetric information is a classic example of market failure that undermines the efficiency associated with perfectly competitive market outcomes: the “lemons” market. Credible certification, that substantiates unobservable characteristics of products that consumers value, is often considered a potential solution to such market failure. This paper examines welfare effects of certification in markets in which there is asymmetric information, but without an adverse selection problem. We analyze the market equilibrium when the certification technology becomes available and contrast this with the equilibrium without certification. We find that despite an improvement in allocative efficiency, overall welfare may decrease due to the possibility of certification when such certification is either costly or inaccurate. In fact, most of these results are not derived from the direct welfare cost of certification, but rather from certification’s effect on the market(s).
    Keywords: Credible certification, welfare-reducing certification, asymmetric information, adverse selection.
    JEL: D4 D41 D8 L1
    Date: 2019–03–07
  6. By: E. Carroni; D. Paolini
    Abstract: A streaming platform obtains contents from artists and offers commercial spaces to advertisers. Users value contents' variety and quality of the service and are heterogeneously bothered by ads. Two solutions can be proposed to users. If they pay a positive price, they subscribe to a commercial-free service with an upgrade of quality (Premium). Otherwise, they have free access to service of a basic quality. We find that a wider audience gives incentives to the platform to increase both the advertising intensity and the quality upgrade in the Premium. As a consequence, some people move to the Premium. At the limit, the platform opts for a purely subscription-based business model as the audience reaches a certain level. The parsimonious model we propose is able to give a rationale to the emergence of different business models in the streaming market as well as to the (end of the) disputes between artists and the Spotify model
    Keywords: Media;Advertising;Multi-Sided Markets;Platform;Second-degree price discrimination
    Date: 2019
  7. By: Sander Heinsalu
    Abstract: Consumers in many markets are uncertain about firms' qualities and costs, so buy based on both the price and the quality inferred from it. Optimal pricing depends on consumer heterogeneity only when firms with higher quality have higher costs, regardless of whether costs and qualities are private or public. If better quality firms have lower costs, then good quality is sold cheaper than bad under private costs and qualities, but not under public. However, if higher quality is costlier, then price weakly increases in quality under both informational environments, but with asymmetric information, full separation cannot occur.
    Date: 2019–03
  8. By: Sarfati, M.; Hesamzadeh, M-R.; Holmberg, P.
    Abstract: Electricity markets employ different congestion management methods to handle the limited transmission capacity of the power system. This paper compares production efficiency and other aspects of nodal and zonal pricing. We consider two types of zonal pricing: zonal pricing with Available Transmission Capacity (ATC) and zonal pricing with Flow-Based Market Coupling (FBMC).We develop a mathematical model to study the imperfect competition under zonal pricing with FBMC. Zonal pricing with FBMC is employed in two stages, a day-ahead market stage and a re-dispatch stage. We show that the optimality conditions and market clearing conditions can be reformulated as a mixed integer linear program (MILP), which is straightforward to implement. Zonal pricing with ATC and nodal pricing is used as our benchmarks. The imperfect competition under zonal pricing with ATC and nodal pricing are also formulated as MILP models. All MILP models are demonstrated on 6-node and the modified IEEE 24-node systems. Our numerical results show that the zonal pricing with ATC results in large production inefficiencies due to the incdec-game. Improving the representation of the transmission network as in the zonal pricing with FBMC mitigates the inc-dec game.
    Keywords: Congestion management, Zonal pricing, Flow-based market coupling
    JEL: C61 C72 D43 L13 L94
    Date: 2019–02–27
  9. By: Chatterjee, S.
    Abstract: In this paper, I argue that market power of intermediaries plays an important role in contributing to low incomes of farmers in India. I study the role of spatial competition between intermediaries in determining the prices that farmers receive in India by focusing on a law that restricts farmers to selling their goods to intermediaries in their own state. I show that the discontinuities in market power generated by the law translate into discontinuities in prices. Increasing spatial competition by one standard deviation causes prices received by farmers to increase by 6.4%. To shed light on spatial and aggregate implications, I propose and estimate a quantitative spatial model of bargaining and trade. Using this structural model, I estimate that the removal of the interstate trade restriction in India would increase competition between intermediaries substantially, thereby increasing the prices farmers receive and their output. Estimates suggest that average farmer prices and output would increase by at least 11% and 7% respectively. The value of the national crop output would therefore increase by at least 18%.
    JEL: D43 F12 L13 L81 O13 Q13 R12
    Date: 2019–03–06
  10. By: Hollenbeck, Brett; Moorthy, Sridhar; Proserpio, Davide
    Abstract: We study the relationship between online reviews and advertising spending in the hotel industry. Combining a dataset of TripAdvisor reviews with other datasets describing these hotels’ advertising expenditures, we show, first, that online ratings have a causal demand-side effect on ad spending. Second, this effect is negative: hotels with higher ratings spend less on advertising than hotels with lower ratings. This suggests that hotels treat TripAdvisor ratings and advertising spending as substitutes, not complements. Third, the relationship is stronger for independent hotels than for chains, and stronger in less differentiated markets than in more differentiated markets. The former suggests that a strong brand name continues to provide some immunity to reviews and the latter that the advertising response is stronger when ratings are more likely to be pivotal. Finally, we show that the relationship between online ratings and advertising has strengthened over time, just as TripAdvisor has become more popular, implying that firms respond to online reviews if and only if consumers respond to them.
    Keywords: Online reviews, advertising, regression discontinuity
    JEL: L1 L15 L20 M31 M37
    Date: 2019–03–14
  11. By: Nagy, Balázs; Tasnádi, Attila
    Abstract: The government may regulate a market by obtaining partial ownership in a firm. This type of socially concerned firm behaves as a combined profit and social surplus maximizer. We investigate the presence of a socially concerned firm in the framework of a Bertrand-Edgeworth duopoly with capacity constraints. In particular, we determine the mixed-strategy equilibrium of this game and relate it to both the standard and the mixed versions of the Bertrand-Edgeworth game. In contrast to other results in the literature we find that full privatization is the socially best outcome, that is the optimal level of public ownership is equal to zero.
    Keywords: Bertrand-Edgeworth, mixed duopoly, semi-public firm, mixedstrategy equilibrium
    JEL: D43 L13
    Date: 2019–02–28
  12. By: Hamamura, Jumpei
    Abstract: This study analytically investigates the choice of a cost accounting system based on the cost-based transfer price by a divisionalized firm that has a direct channel through electronic commerce (EC). The findings show that the optimal choice between direct and absorption costing affects the increase of overhead allocation for the retail division through the cost-based transfer price. While traditional strategic transfer pricing literature shows that absorption costing is optimal in specific economic environments, this study demonstrates that direct costing is also optimal in a specific economic environment by considering dual channel competition. This research thus contributes to the extant strategic transfer pricing literature, which considers the choice of a cost accounting system in management accounting.
    Keywords: Economics; Game theory; Cost-based transfer pricing; Cost accounting; Direct channel
    JEL: D43 M41
    Date: 2018–12–25
  13. By: Antonella Nocco (Università del Salento); Gianmarco I.P. Ottaviano (Bocconi University); Matteo Salto (European Commission)
    Abstract: How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across firms and countries. We use 'disadvantaged' to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost firms to all countries, but especially to disadvantaged ones; trim the sales of high cost firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough.
    Keywords: International trade policy, monopolistic competition, firm heterogeneity, pricing to market, multilateralism.
    JEL: D4 D6 F1 L0 L1
    Date: 2019–03–12
  14. By: Didier Laussel; Ngo Van Long; Joana Resende
    Abstract: We demonstrate the "curse of knowledge" when a monopolist can recognize different consumer groups through their purchase histories which are influenced by its dynamic pricing policies. Under the Markov-perfect equilibrium, after each commitment period, the firm offers a new introductory price so as to attract new customers. More and more market segments are added gradually. Eventually, the whole market is covered. Shortening the commitment period will result in a fall in profit. In contrast, a full-commitment monopolist would choose to stick to uniform pricing, achieving higher profit. Hence, the firm is better off by refraining from collecting customer information. Nous démontrons la "malédiction du savoir" lorsqu'un monopoleur peut reconnaître différents groupes de consommateurs à travers leurs historiques d'achat influencés par sa politique de prix dynamique. Sous l'équilibre de Markov-parfait, l'entreprise propose, après chaque période d'engagement, un nouveau prix de lancement afin d'attirer de nouveaux clients. De plus en plus de segments de marché sont ajoutés progressivement. Finalement, tout le marché est couvert. La réduction de la période d'engagement entraînera une baisse des bénéfices. En revanche, un monopoleur pleinement engagé choisirait de s'en tenir à un prix unique, réalisant des bénéfices plus élevés. Par conséquent, le monopoleur gagnerait plus de profit s’il pouvait s'engager de ne pas collecter des informations sur les clients.
    Keywords: Coasian Dynamics,Information Collection,Monopoly,Regulatory Policies, La dynamique coasienne,La collecte d’infomation,Monopole,Politiques réglementaires
    JEL: L12 L15
    Date: 2019–03–06
  15. By: Polemis, Michael; Tselekounius, Markos
    Abstract: The channel between innovation and industry regulation constitutes a non-lasting debate among the economists and researchers within the recent years. Despite the significant contributions on this field, mostly made from the empirical standpoint, the existing literature is still incomplete. This might be attributed to the fact that existing studies fail to combine a strong theoretical framework with the empirical scrutiny in order to exemplify and decompose the relationship between regulation intensity and innovation activity. We attempt to shed light on this limitation by theoretically modeling the telecommunications sector, in which access regulation impacts the non-separable activity in process and product innovation. We then empirically test our model by deploying an efficient panel threshold technique along the lines of Hansen (1999). Our balanced panel dataset comprises of 32 OECD countries over the period 1995-2012. The empirical results unveil a non-monotonic relationship of an “inverted V-shaped” form between regulation and innovation. We argue that beyond certain thresholds increasing the regulatory stringency further results in decreasing sector innovation. Our findings survive robustness checks after the inclusion of two alternative threshold variables (market structure and entry regulation) incurring significant implications for the policy makers and government officials.
    Keywords: Innovation; Regulation; Telecommunications, Market structure; Panel threshold model.
    JEL: C24 D43 L51 L80 L96
    Date: 2019–03–15
  16. By: Toomas Hinnosaar
    Abstract: The standard model of sequential capacity choices is the Stackelberg quantity leadership model with linear demand. I show that under the standard assumptions, leaders' actions are informative about market conditions and independent of leaders' beliefs about the arrivals of followers. However, this Stackelberg independence property relies on all standard assumptions being satisfied. It fails to hold whenever the demand function is non-linear, marginal cost is not constant, goods are differentiated, firms are non-identical, or there are any externalities. I show that small deviations from the linear demand assumption may make the leaders' choices completely uninformative.
    Date: 2019–03
  17. By: Jie Ma (University of Business and Economics); Ian Wooton (Department of Economics, University of Strathclyde)
    Abstract: We analyse a firm's investment in a regional economy composed of two countries. The firm already manufactures a horizontally differentiated good in the region and we determine the firm's equilibrium location choice for the new good and the welfare consequences of fiscal competition between the two countries. We find that the firm's location decision is efficient. Fiscal competition does not affect the location of production but redistributes rents between the firm and the taxpayers of the host country. The implications of endogenous product differentiation and the new good being produced by a competing firm are also considered. As far as we know the tax competition literature has not previously addressed the issue of product differentiation.
    Keywords: FDI, import substitution, market size, MNEs, product differentiation
    JEL: F21 F23 L22
    Date: 2019–03
  18. By: Alessandra Bonfiglioli; Rosario Crinò; Gino Gancia
    Abstract: We use transaction-level data to study changes in the concentration of US imports. Concentration has fallen in typical industry, while it is stable by industry and country of origin. The fall in concentration is driven by the extensive margin: the number of exporting firm has grown, and the number of exported products has fallen more for top firms. Instead, average revenue per product of top firms has increased. At the industry level, top firms are converging, but top firms within country are diverging. These facts suggest that intensified competition in international markets coexists with growing concentration among national producers.
    Keywords: superstar firms, concentration, US imports, firm heterogeneity, international trade
    JEL: E23 F12 F14 L11 R12
    Date: 2019–03
  19. By: Jeremiah Dittmar
    Abstract: Jeremiah Dittmar explores the effects of the printing press and the new forms of competition that accompanied its introduction.
    Keywords: new media,competition
    Date: 2019–03
  20. By: Newbery, D.
    Abstract: The UK privatized the electricity supply industry from 1989 in the expectation that private ownership and incentive regulation would invest and operate sufficiently more efficiently to offset the higher cost of private finance. This was achieved in the first two decades, assisted by spare capacity, contract-based entry of new efficient and cheap CCGTs, and regulatory pressure on transmission and distribution companies. The climate change imperative to decarbonize requires massive durable and very capital-intensive investment that casts doubt on the liberalised financing model. In the past 30 years, much has been learned about mitigating market power, the failings of an energy-only market, and the potential distortions of poorly designed prices for renewables and tariffs for networks. Innovation has been successfully stimulated though competitions. Efficiency, falling renewable costs and the carbon tax have almost completely driven coal out of the system.
    Keywords: British electricity supply, reforms, financing, renewables, tariffs, nuclear
    JEL: D43 H23 L94 Q48 Q54
    Date: 2019–02–27
  21. By: Bedri Kamil Onur Tas
    Abstract: I examine a manipulation scheme that public authorities can use to exercise more discretion in public procurement. I propose that regression discontinuity manipulation tests can be implemented to identify manipulative authorities. I investigate the European Union public procurement data set. I find that 10-13% of examined authorities have high probabilities of bunching estimated costs just below thresholds. Manipulative authorities have significantly lower probabilities of employing competitive procurement procedure. The bunching manipulation scheme significantly diminishes cost-effectiveness of public procurement. On average, prices of below threshold contracts are 18-28% higher when the authority has an elevated probability of bunching.
    Keywords: Public Procurement, Manipulation, Competition, European Union
    JEL: C31 D44 H57
    Date: 2019–02
  22. By: Baogui Xin; Wei Peng; Yekyung Kwon
    Abstract: We reconsider the Cournot duopoly problem in light of the theory for long memory. We introduce the Caputo fractional-order difference calculus to classical duopoly theory to propose a fractional-order discrete Cournot duopoly game model, which allows participants to make decisions while making full use of their historical information. Then we discuss Nash equilibria and local stability by using linear approximation. Finally, we detect the chaos of the model by employing a 0-1 test algorithm.
    Date: 2019–03
  23. By: Lina Cortés; Juan M. Lozada; Javier Perote
    JEL: C14 L11 L25
    Date: 2019–03–07
  24. By: Chyong, C-K.
    Abstract: Recent gas price dynamics in Europe shows convergence to the extent that locational price differentials approached transport tariffs and hence arbitrage was largely saturated – it is a sign of a well-functioning pan-European gas wholesale market. We employ a transaction cost economics framework to understand how we got to where we are in terms of the evolution of the gas industry structure in Europe and its institutional setup. The move towards a single market in gas, which is still ongoing, has allowed European gas consumers to benefit from transparently set, market-based wholesale prices as well as from increased market competition between suppliers. However, as the gas market in Europe matures and with the increased penetration of renewable energy generation in the electricity sector as well as overall decarbonization of the energy sector in Europe, the gas market and its current regulatory regime face a number of challenges. Addressing these challenges may require an update to the current market design and possibly drastic reforms to tariff setting in the gas transport market.
    Keywords: Natural gas, European single gas market, security of supply, regulatory policy
    JEL: L94
    Date: 2019–02–27
  25. By: Luca Di Corato (Department of Economics, University Of Venice Cà Foscari); Yishay D. Maoz (The Open University of Israel)
    Abstract: In markets where production has adverse externalities, policy makers may wish to increase welfare by imposing a cap on market entries. In this paper, we examine the implications that the cap has on the firms’ investment equilibrium policy and on social welfare in the presence of market uncertainty. In contrast with previous literature, we explicitly model the present externality and then let the social planner choose the cap level maximizing welfare. We find that: i) if the consideration of the option value triggers investment at price above the social marginal cost of production, then it is optimal to have no cap at all; ii) otherwise, the cap should be set on the current market quantity and a ban on further market entries should be announced.
    Keywords: Investment, Uncertainty, Caps, Competition, Externalities, Welfare
    JEL: C61 D41 D62
    Date: 2019
  26. By: Güth, Werner; Stadler, Manfred; Zaby, Alexandra
    Abstract: In capacity-then-price-setting games, soft capacity constraints are planned sales amounts where producing above capacity is possible but more costly. While the subgame perfect equilibrium predicts equal prices, experimental evidence often reveals price discrepancies. This failure to coordinate on equal prices can imply losses, especially when serving demand is obligatory. We compare coordination failure with efficient rationing as well as with compulsory serving of demand, and additionally allow for simultaneous and sequential capacity choices. These treatments lead to a varying severity of the threat of losses. Our experimental results show that (possible) coordination failure affects behavior through two channels: via anticipating as well as via reacting to a loss. While capacities increase in anticipation of losses, prices increase when anticipating losses but decrease after experiencing losses. Coordination failures are more probable after subjects experienced a loss.
    Keywords: capacity-then-price competition,loss avoidance,path dependence,sequentiality of decisions,intra-play communication
    JEL: C72 C91
    Date: 2019
  27. By: Shuo Liu; Dimitri Migrow
    Abstract: Multinational and multiproduct firms often experience uncertainty in the relative return of conducting activities in different markets due to, for example, exchange rate volatility or the changing prospects of different products. We study how a multi-divisional organization should optimally allocate decision-making authority to its managerial members when operating in such volatile markets. To be able to adapt its decisions to local conditions, the organization has to rely on self-interested division managers to collect and disseminate the relevant information. We show that if communication takes the form of verifiable disclosure, then centralized decision-making does not suffer from information asymmetry and it allows the headquarter of the organization to better cope with the inter-market uncertainty. However, a downside of centralization is that it can discourage information acquisition, and this negative effect is amplified by the need for coordinating the activities of different divisions. As a result, the optimality of decentralized decision-making can actually be driven by a large coordination motive.
    Keywords: Centralization, decentralization, volatile markets, coordinated adaptation, information acquisition, verifiable disclosure, costly exaggeration
    JEL: D82 M52
    Date: 2019–03
  28. By: Vojislav Maksimovic; Gordon M. Phillips; Liu Yang
    Abstract: We track firms at birth and compare the growth pattern of IPO firms and their birth-matched counterparts. Firms that are larger at birth with faster initial growth are more likely to attain a larger size later in life and go public. Firms in the top percentile of predicted propensity to go public grow 29 times larger fifteen years later than matched firms if they actually become public, and 14 times larger if they stay private, showing a large selection effect. We show that public firms, and especially those public firms backed by venture capital, respond more to demand shocks post-IPO.
    JEL: G20 G24 G3 G32 L1 L22 L23 L25 L26
    Date: 2019–03
  29. By: Fariha Kamal; Asha Sundaram
    Abstract: Do institutions shape the geographic concentration of industrial activity? We explore this question in an international trade setting by examining the relationship between country-level institutions and patterns of spatial concentration of global sourcing. A priori, weak institutions could be associated with either dispersed or concentrated sourcing. We exploit location and transaction data on imports by U.S. firms and adapt the Ellison and Glaeser (1997) index to construct a product-country-specific measure of supplier concentration for U.S. importers. Results show that U.S. importers source in a more spatially concentrated manner from countries with weaker contract enforcement. We find support for the idea that, where formal contract enforcement is weak, local supplier networks compensate by sharing information to facilitate matching and transactions.
    Keywords: buyer-seller match, global sourcing, contract enforcement, institutions, spillovers, trade
    JEL: F1 F14 R12
    Date: 2019–02

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