nep-ind New Economics Papers
on Industrial Organization
Issue of 2013‒11‒14
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Regulatory Versus Natural Endogenous Sunk Costs: Observational Equivalence In Rationalizing Lower Bounds On Industry Concentration By Pham Hoang Van; David D. VanHoose
  2. Mergers and Product Quality: Evidence from the Airline Industry By Chen, Yongmin; Gayle, Philip
  3. Evolutionary model of the bank size distribution By Kaldasch, Joachim

  1. By: Pham Hoang Van (Associate Professor of Economics, Hankamer School of Business, Baylor University); David D. VanHoose (Professor of Economics and Herman Lay Professor of Private Enterprise, Hankamer School of Business, Baylor University)
    Abstract: We propose a theory of 'regulatory endogenous sunk costs'(RESC), in which a captured regulator raises minimum quality standards when market size increases in order to protect incumbent firms. Our RESC theory's predictions that market size is unrelated to industry concentration and positively related to product quality are observationally equivalent to those of Sutton's theory of `natural endogenous sunk costs' (NESC), in which incumbents increase qualityinvestments to compete for a share of a growing market. The NESC theory suggests that, with higher entry costs, incumbents jockey for increased market shares by increasing quality investments. The RESC theory, however, predicts that product quality should be lower with higher entry costs. Entry costs and minimum quality standards each provide incumbents with protection from prot erosions that entry otherwise would produce. A key implication of our analysis is the possibility that some industries might be misclassied as natural oligopolies. We provide a few examples of candidate RESC industries.
    Keywords: Regulatory compliance costs, endogenous sunk costs
    JEL: L13 L51
    Date: 2013
  2. By: Chen, Yongmin; Gayle, Philip
    Abstract: Retrospective studies of horizontal mergers have focused on their price effects, leaving the important question of how mergers affect product quality largely unanswered. This paper empirically investigates this issue for two recent airline mergers: Delta/Northwest and Continental/United. Consistent with the theoretical premise that mergers improve coordination but diminish competitive pressure for quality provision, we find: (i) each merger is associated with a quality increase in markets where the merging firms did not compete pre-merger, but with a quality decrease in markets where they did; and (ii) the quality change can be a U-shaped function of the pre-merger competition intensity.
    Keywords: Mergers; Product Quality; Airlines
    JEL: L13 L93
    Date: 2013–11–04
  3. By: Kaldasch, Joachim
    Abstract: An evolutionary model of the bank size distribution is presented based on the exchange and expansion of deposit money. In agreement with empirical results the derived size distribution is lognormal with a power law tail. The key idea of the theory is to regard the creation of money as a slow process compared to exchange processes of deposit money. The exchange of deposits causes a preferential growth of banks with a fitness determined by the competitive advantage to attract permanent deposits. They generate the lognormal part of the size distribution. Sufficiently large banks, however, benefit from economies of scale leading to a Pareto tail. The model suggests that the liberalization of the banking system in the last decades is the origin of an increasing skewness of the bank size distribution. --
    Keywords: evolutionary economics,bank size,money,competition,Gibrat's law
    JEL: G21 L11 E11
    Date: 2013

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