nep-ind New Economics Papers
on Industrial Organization
Issue of 2007‒06‒11
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. MERGERS IN ASYMMETRIC STACKELBERG MARKETS By Ramón Faulí-Oller; Marc Escrihuela
  2. Cartel Damages Claims and the Passing-on Defence By Van Dijk, Theon; Verboven, Frank
  3. Modelling the Folk Theorem: A Spatial Cournot Model with Explicit Increasing Returns to Scale By Sylvain Barde
  4. Mixed Oligopoly under Demand Uncertainty By Anam, Mahmudul; Basher, Syed A.; Chiang, Shin-Hwan
  5. Understanding the M&A boom in Japan: What drives Japanese M&A? By ARIKAWA Yasuhiro; MIYAJIMA Hideaki
  6. Firm Growth: A Survey By A. Coad

  1. By: Ramón Faulí-Oller (Universidad de Alicante); Marc Escrihuela (Universidad de Alicante)
    Abstract: It is well known that the profitability of horizontal mergers with quantity competition is scarce. However, in an asymmetric Stackelberg market we obtain that some mergers are profitable. Our main result is that mergers among followers become profitable when the followers are inefficient enough. In this case, leaders reduce their output when followers merge and this reduction renders the merger profitable. This merger increases price and welfare is reduced.
    Keywords: Mergers; Asymmetries; Stackelberg.
    JEL: L13 L40 L41
    Date: 2007–05
    URL: http://d.repec.org/n?u=RePEc:ivi:wpasad:2007-14&r=ind
  2. By: Van Dijk, Theon; Verboven, Frank
    Abstract: We develop a general economic framework for computing cartel damages claims by purchaser plaintiffs. We decompose the lost profits from the cartel in three parts: the direct cost effect (or anticompetitive price overcharge), the pass-on effect and the usually neglected output effect. The pass-on effect is the extent to which the plaintiff passes on the price overcharge by raising its own price, and the output effect is the lost business resulting from this passing-on. We subsequently introduce various models of imperfect competition for the plaintiff's industry. This enables us to evaluate the relative importance of the cost, pass-on and output effects. We show that an adjusted passing-on defence (i.e. accounting for the output effect) is justified under a wide variety of circumstances, provided that sufficiently many firms in the plaintiff's market are affected by the cartel. We derive exact discounts to the direct cost effect, which depend on relatively easy-to-observe variables, such as the pass-on rate, the number of firms, the number of firms affected by the cartel, and/or the market shares. We finally extend our framework to assess the cartel's total harm, further demonstrating the crucial importance of the output effect. Our results are particularly relevant in light of the recent developments by U.S. and European antitrust authorities to make cartel damages claims more in line with actually lost profits.
    Keywords: cartels; damages; passing-on defence
    JEL: L40
    Date: 2007–06
    URL: http://d.repec.org/n?u=RePEc:cpr:ceprdp:6329&r=ind
  3. By: Sylvain Barde
    Abstract: This paper attempts to model directly the "folk theorem" of spatial economics, according to which increasing returns to scale are essential for understanding the geographical distributions of activity. The model uses the simple structure of most New Economic Geography papers, with two identical regions, a costlessly traded agricultural sector and a manufacturing sector subject to iceberg costs. This simple setting isolates IRS in manufacturing production function as the only potential agglomerating force. This implies that an unstable symmetric equilibrium means IRS cause agglomeration. The central result is that while a CRS manufacturing sector will always stay at the symmetric equilibrium, the presence of IRS in manufacturing causes the symmetric equilibrium to become unstable and agglomeration becomes the only long run equilibrium for the system.
    Keywords: Agglomeration; increasing returns to scale; imperfect competition
    JEL: R10 R12 F12
    Date: 2007–01
    URL: http://d.repec.org/n?u=RePEc:ukc:ukcedp:0701&r=ind
  4. By: Anam, Mahmudul; Basher, Syed A.; Chiang, Shin-Hwan
    Abstract: In this paper we introduce product demand uncertainty in a mixed oligopoly model and reexamine the nature of sub-game perfect Nash equilibrium (SPNE) when firms decide in the first stage whether to lead or follow in the subsequent quantity-setting game. In the non-stochastic setting, Pal (1998) demonstrated that when the public firm competes with a domestic private firm, multiple equilibria exist but the efficient equilibrium outcome is for the public firm to follow. Matsumura (2003a) proved that when the public firm's rival is a foreign private firm, leadership of the public firm is both efficient as well as SPN equilibrium. Our stochastic model shows that when the leader must commit to output before the resolution of uncertainty, multiple SPNE is possible. Whether the equilibrium outcome is public or private leadership hinges upon the degree of privatization and market volatility. More importantly, Pareto-inefficient simultaneous production is a likely SPNE. Our results are driven by the fact that the resolution of uncertainty enhances the profits of the follower firm in a manner that is well known in real option theory.
    Keywords: Mixed oligopoly; Partial privatization; Demand Uncertainty.
    JEL: L13 D8 C72
    Date: 2007–06–08
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:3451&r=ind
  5. By: ARIKAWA Yasuhiro; MIYAJIMA Hideaki
    Abstract: In this paper, we examine the causes of the first merger boom since the late 1990s in Japan. Using industry-level data, we show that mergers and acquisitions (M&As) are driven mainly by economic shocks. While industries with higher growth opportunities are likely to have more M&A activity, industries facing negative fundamental shocks, such as rapid sales declines, also experience larger M&A deals. These results suggest that the recent merger wave in Japan is mainly explained by the neoclassical model. At the firm level, we find that the bidder is the firm with the higher growth opportunity, and the target is the one with the lower growth opportunity. This means that Japanese firms improved their efficiency through merger activity since the 1990s. Lastly, we find that internal funds for the acquiring firm play a very important role in bidding activity, while a high probability of being targeted for M&A is associated with high leverage.
    Date: 2007–06
    URL: http://d.repec.org/n?u=RePEc:eti:dpaper:07042&r=ind
  6. By: A. Coad
    Abstract: We survey the phenomenon of the growth of firms drawing on literature from economics, management, and sociology. We begin with a review of empirical ‘stylised facts’ before discussing theoretical contributions. Firm growth is characterized by a predominant stochastic element, making it difficult to predict. Indeed, previous empirical research into the determinants of firm growth has had a limited success. We also observe that theoretical propositions concerning the growth of firms are often amiss. We conclude that progress in this area requires solid empirical work, perhaps making use of novel statistical techniques.
    Keywords: Firm Growth, Size Distribution, Growth Rates Distribution, Gibrat’s Law, Theory of the Firm, Diversification, ‘Stages of Growth’ models Length 73 pages
    JEL: L11 L25
    Date: 2007–05
    URL: http://d.repec.org/n?u=RePEc:esi:evopap:2007-03&r=ind

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