nep-ind New Economics Papers
on Industrial Organization
Issue of 2008‒09‒05
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Predicting market power in wholesale electricity markets By Newbery, D.
  2. Focal prices and price cycles in an alternating price duopoly experiment By Leufkens Kasper; Peeters Ronald
  3. Post-Merger Restructuring and the Boundaries of the Firm By Vojislav Maksimovic; Gordon Phillips; N. R. Prabhala
  4. Product Market Synergies and Competition in Mergers and Acquisitions By Gerard Hoberg; Gordon M. Phillips
  5. An Industrial Organization Analysis for the Colombian Banking System By Sandra Rozo; Diego Vásquez; Dairo Estrada

  1. By: Newbery, D.
    Abstract: The traditional measure of market power is the HHI, which gives implausible results given the low elasticity of demand in electricity spot markets, unless it is adapted to take account of contracting. In its place the Residual Supply Index has been proposed as a more suitable index to measure potential market power in electricity markets, notably in California and more recently in the EU Sector Inquiry. The paper investigates its value in identifying the ability of firms to raise prices in an electricity market with contracts and capacity constraints and find that it is most useful for the case of a single dominant supplier, or with a natural extension, for the case of a symmetric oligoply. Estimates from the Sector Inquiry seem to fit this case better than might be expected, but suggests an alternative defintion of the RSI defined over flexible output that should give a more reliable relationship.
    Keywords: Residual Supply Index, Cournot equilibrium, Lerner Index, electricity markets, market power
    JEL: D43 K21 L94
    Date: 2008–08
  2. By: Leufkens Kasper; Peeters Ronald (METEOR)
    Abstract: In the infinite horizon alternating price setting duopoly of Maskin and Tirole (1988), a focal price equilibrium and an equilibrium consisting of Edgeworth cycles coexist. In this study we investigate which of these two equilibria is more likely to emerge by means of a laboratory experiment. In 20 out of 27 observations the focal price equilibrium emerges, while price cycles are observed in only one observation. Furthermore, we study the duopoly in case of a long but finite horizon. Although the corresponding unique subgame-perfect equilibrium consists of Edgeworth cycles, experimentally we still observe a focal price in the majority of the observations. Nevertheless, price cycles are observed far more often than for the infinite horizon setting.
    Keywords: microeconomics ;
    Date: 2008
  3. By: Vojislav Maksimovic; Gordon Phillips; N. R. Prabhala
    Abstract: Mergers and acquisitions are a fast way for a firm to grow. Using plant-level data, we examine how firms redraw their boundaries after acquisitions. We find that there is a large amount of restructuring in a short period following mergers. Acquirers sell 27% and close 19% of acquired plants within three years of the acquisition. Plants in the target's peripheral divisions, especially in industries in which asset values are increasing, and in industries in which the acquirer does not have a comparative advantage, are more likely to be sold by the acquirer. Acquirers with skill in running their peripheral divisions tend to retain more acquired plants. Plants retained by acquirers increase in productivity whereas sold plants do not. The extent of post-merger restructuring activities and their cross-sectional variation do not support an empire building explanation for mergers. Acquirers readjust their firm boundaries in ways that are consistent with the exploitation of their comparative advantage across industries.
    JEL: G3 G34
    Date: 2008–08
  4. By: Gerard Hoberg; Gordon M. Phillips
    Abstract: We examine how product differentiation influences mergers and acquisitions and the ability of firms to exploit product market synergies. Using novel text-based analysis of firm 10K product descriptions, we find three key results. (1) Firms are more likely to enter restructuring transactions when the language describing their assets is similar to all other firms, consistent with their assets being more redeployable. (2) Targets earn lower announcement returns when similar alternative target firms exist. (3) Acquiring firms in competitive product markets experience increased profitability, higher sales growth, and increased changes in their product descriptions when they buy target firms that are similar to them and different from rival firms. Our findings are consistent with similar merging firms exploiting synergies to create new products and increase their product differentiation relative to ex-ante rivals.
    JEL: G3 G34
    Date: 2008–08
  5. By: Sandra Rozo; Diego Vásquez; Dairo Estrada
    Abstract: This paper presents two versions of a spatial competition model for the banking sector. The first version, describes a framework that fol- lows closely Salop’s spatial competition model. This version is modi- fied in the second part by introducing the loan market and default risk probabilities for credit. Both theoretical approaches are analyzed em- pirically for the Colombian data,covering the period 1996-2005. Our results allow us to construct a deviation of the observed number of branches from an optimal number of branches for the banking system throughout the period of study. The deviation indicates that in the last years the number of branches is below the optimum which sug- gest that political measures should focus in increasing the number of branches in the country. Additionally, we found empirical evidence of market separability between the loan and deposit markets, and fi- nally, we were able to determine the signs of the relations between credit collateral, payment probability and interest rates.
    Date: 2008–08–26

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