nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒06‒16
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Brand Capital and Firm Value By Belo, Frederico; Lin, Xiaoji; Vitorino, Maria Ana
  2. Signalling Rivalry and Quality Uncertainty in a Duopoly By Bester, Helmut; Demuth, Juri
  3. Adverse Selection and Moral Hazard in Anonymous Markets By Klein, T.J.; Lambertz, C.; Stahl, K.
  4. Competition policy and cartel size By Bos A.M.; Harrington Jr. J.E.
  5. Do horizontal mergers induce entry? Evidence from the US airline industry By Bougette, Patrice; Hüschelrath, Kai; Müller, Kathrin
  6. The Effect of Mergers in Search Market: Evidence from the Canadian Mortgage Industry By Jason Allen; Robert Clark; Jean-François Houde
  7. The Concurrent Impact of Cultural, Political, and Spatial Distances on International Mergers and Acquisitions By MC. Di Guardo; E. Marrocu; R. Paci

  1. By: Belo, Frederico (University of MN); Lin, Xiaoji (OH State University); Vitorino, Maria Ana (University of MN)
    Abstract: We study the role of brand capital--a primary form of intangible capital--for firm valuation and risk in the cross section of publicly traded firms. Using a novel empirical measure of brand capital stock constructed from advertising expenditures accounting data, we show that: (i) firms with low brand capital investment rates have higher average stock returns than firms with high brand capital investment rates, a difference of 5.2% per annum; (ii) more brand capital intensive firms have higher average stock returns than less brand capital intensive firms, a difference of 5.1% per annum; and (iii) investment in both brand capital and physical capital is volatile and procyclical. A neoclassical investment-based model in which brand capital is a factor of production subject to adjustment costs matches the data well. The model also provides a novel explanation for the empirical links between advertising expenditures and stock returns around seasoned equity offerings (SEO) documented in previous studies.
    JEL: E32 G12
    Date: 2013–03
  2. By: Bester, Helmut; Demuth, Juri
    Abstract: This paper considers price competition in a duopoly with quality uncertainty. The established firm (the `incumbent') offers a quality that is publicly known; the other firm (the `entrant') offers a new good whose quality is not known by some consumers. The incumbent is fully informed about the entrant's quality. This leads to price signalling rivalry because the incumbent gains and the entrant loses if observed prices make the uninformed consumers more pessimistic about the entrant's quality. When the uninformed consumers' beliefs satisfy the `intuitive criterion' and the `unprejudiced belief refinement', prices signal the entrant's quality only in a two-sided separating equilibrium and are identical to the full information outcome.
    Keywords: Quality uncertainty; Signalling; Oligopoly; Price competition
    JEL: D43 D82 L15
    Date: 2013–05
  3. By: Klein, T.J.; Lambertz, C.; Stahl, K. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We study the effects of improvements in eBay’s rating mechanism on seller exit and continuing sellers’ behavior. Following a large sample of sellers over time, we exploit the fact that the rating mechanism was changed to reduce strategic bias in buyer rating. That improvement did not lead to increased exit of poorly rated sellers. Yet, buyer valuation of the staying sellers—especially the poorly rated ones—improved significantly. By our preferred interpretation, the latter effect results from increased seller effort; also, when sellers have the choice between exiting (a reduction in adverse selection) and improved behavior (a reduction in moral hazard), then they prefer the latter because of lower cost.
    Keywords: Anonymous markets;adverse selection;moral hazard;reputation building mechanisms.
    JEL: D83 L15
    Date: 2013
  4. By: Bos A.M.; Harrington Jr. J.E. (GSBE)
    Abstract: This paper examines endogenous cartel formation in the presence of a competition authority. Competition policy makes the most inclusive stable cartels less inclusive. In particular, small firms that might have been cartel members in the absence of a competition authority are no longer members. Regarding the least inclusive stable cartels, competition policy can either increase or decrease their inclusiveness. Highly inelastic market demand is sufficient for the presence of a competition authority to cause the least inclusive stable cartels to increase in size.
    Date: 2013
  5. By: Bougette, Patrice; Hüschelrath, Kai; Müller, Kathrin
    Abstract: Theoretical research has investigated the relevance of entry-inducing effects as countervailing factor to a merger-related increase in market power. We use route-level data for the America West Airlines - US Airways merger (2005) to investigate whether such an effect can be identified empirically. Our results show that both entry-inducing and entry-dissuading effects can be observed depending on the type of affected route and the carrier under investigation. --
    Keywords: Airline industry,merger,entry-inducing effects
    JEL: K21 L40
    Date: 2013
  6. By: Jason Allen; Robert Clark; Jean-François Houde
    Abstract: We examine the relationship between concentration and price dispersion using variation induced by a merger in the Canadian mortgage market. Since interest rates are determined through a search and negotiation process, consolidation eliminates a potential negotiation part- ner, weakening consumers bargaining positions. We combine reduced-form techniques to es- timate the mergers distributional impact, with a structural model to measure market power across consumers with different search costs. Our results show that competition benefits only consumers at the bottom and middle of the transaction price distribution. Estimates from a search and negotiation model attribute these differences to the presence of large search frictions.
    JEL: L11 L41 L85
    Date: 2013–06
  7. By: MC. Di Guardo; E. Marrocu; R. Paci
    Abstract: The paper explores the concurrent effects of cultural, political, and spatial distances on M&A flows occurring between any two countries belonging to the whole European Union (27 States) or to the European Neighbors group (16 States) over the period 2000-2011 . By employing zero-inflated negative binomial specifications, entailing both a binary and count process, we adequately model the two different mechanisms which may generate zero observations in the cross-border bilateral deals. Zeros may be due to either the lack of any transactions or unsuccessful negotiations. We find robust evidence that the multi-dimensional distance between two countries negatively affects the probability that they will engage in M&A deals, while the recurrence rate of these deals is positively related to population, gross domestic product, and technological capital and negatively related to geographical distance.
    Keywords: european neighboring countries, Cross-border M&As, cultural and political distances, geographical distance, European Union, zero-inflated models
    JEL: G34 F23 C31
    Date: 2013

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