Market Share Dynamics in a Model with Search and Word-of-Mouth Communication

Abstract:

This paper analyzes price competition in an infinitely repeated duopoly game. In each period, consumers remember the existence and location of their previous supplier. New information is gathered via search or word-of-mouth communication. Market outcomes are history-dependent, and the Markov perfection refinement is used to narrow the set of equilibria. Firms are shown to use mixed pricing strategies in equilibrium. The resulting price dispersion generates non-trivial market share dynamics. The goal of the paper is to characterize these dynamics, and to reveal the driving forces behind them.

Classification-JEL:D43, D83, L11

Keywords: repeat purchasing, search, customer loyalty, lock-in, mixed pricing

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301.pdf

Carbon leakage: Grandfathering as an incentive device to avert relocation

Abstract:

Emission allowances are often distributed for free in an early phase of a cap-and-trade scheme (grandfathering) to reduce adverse effects on the profitability of firms. If the grandfathering scheme is phased out over time, firms may nevertheless relocate to countries with a lower carbon price once the competitive disadvantage of their home industry becomes sufficiently high. We show that this is not necessarily the case. A temporary grandfathering policy can be a sufficient instrument to avert relocation in the long run, even if immediate relocation would be profitable in the absence of grandfathering. A necessary condition for this is that the permit price triggers investments in low-carbon technologies or abatement capital.

Classification-JEL:Q55, Q58, L51

Keywords: climate policy, emissions trading, grandfathering, leakage, cap-and-trade

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300.pdf

Deterrence in Competition Law

Abstract:

This paper provides a comprehensive discussion of the deterrence properties of a
competition policy regime. On the basis of  the economic theory of law enforcement
we identify several factors that are likely to affect its degree of deterrence: 1)
sanctions and damages; 2) financial and human resources; 3) powers during the
investigation; 4) quality of the law; 5) independence; and 6) separation of power. We then discuss how to measure deterrence. We review the literature that use surveys to solicit direct information on changes in the behavior of firms due to the threats posed by the enforcement of antitrust rules, and the literature based on the analysis of hard data. We finally argue that the most  challenging task, both theoretically and empirically, is how to distinguish between “good” deterrence and “bad” deterrence.
 

JEL classification: K21, K42, L4

Keywords: Competition Policy, Law Enforcement, Deterrence

October 2009

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285.pdf

Measuring the deterrence properties of competition policy: the Competition Policy Indexes

Abstract:

The aim of this paper is to describe in detail a set of newly developed indicators of the quality of competition policy, Competition Policy Indexes, or CPIs. The CPIs measure the deterrence properties of a competition policy in a jurisdiction, where for competition policy we mean the antitrust legislation, including the merger control provisions, and its enforcement. The CPIs incorporate data on how the key features of a competition policy regime score against a benchmark of generally-agreed best practices and summarise them so as to allow cross-country and cross-time comparisons. The  CPIs have been calculated for a sample of 13 OECD
jurisdictions over the period 1995-2005.

JEL classification: K21, K42, L40

Keywords: Competition Policy, Indicator, Deterrence, Competition Law

October 2009

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284.pdf

Competition Policy and Productivity Growth: An Empirical Assessment

Abstract:

This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy asmeasured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional setup and antitrust activities (rather than merger control). The effect is strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.

JEL classification: L4, K21, O4, C23

Keywords: Competition Policy, Productivity Growth, Institutions, Deterrence, OECD

October 2009

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283.pdf

How does entry regulation influence entry into selfemployment and occupational mobility?

Abstract:

We analyze how an entry regulation that imposes a mandatory educational standard affects entry into self-employment and occupational mobility. We exploit the German reunification as a natural experiment and identify regulatory effects by comparing differences between regulated occupations and unregulated occupations in East Germany with the corresponding differences in West Germany after reunification. Consistent with our expectations, we find that entry regulation reduces entry into selfemployment and occupational mobility after reunification more in regulated occupations in East Germany than in West Germany. Our findings are relevant for transition or emerging economies as well as for mature market economies requiring large structural changes after unforeseen economic shocks.

JEL: J24, J62, K20, L11, L51, M13
Keywords: Entry Regulation, Self-Employment, Occupational Mobility

July 2009

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267.pdf

On the Stability of Research Joint Ventures: Implications for Collusion

Abstract:

Though there is a body of theoretical literature on research joint ventures (RJV) participation facilitating collusion, empirical tests are rare. Even more so, there are few empirical tests on the general theme of collusion. This note tries to fill this gap by assuming a correspondence between the stability of research joint ventures and collusion. By using data from the US Nation Cooperation Research Act, we show that large RJVs in concentrated industries are more stable and hence more suspect to collusion.
Keywords: research joint ventures, product market collusion, empirical test
JEL classification: L24, L44, L52
March 2008

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240.pdf

The impact of horizontal mergers on rivals: Gains to being left outside a merger

Abstract:

It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert-identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, 'future acquisition probability' does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type.
Keywords: rivals, mergers, acquisitions, event-study
JEL classification: G14, G34, L22, M20
June 2008

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239.pdf

Domestic Rivalry and Export Performance: Theory and Evidence from International Airline Markets

Abstract:

The much-studied relationship between domestic rivalry and export performance consists of those supporting a national-champion rationale, and those supporting a rivalry rationale. While the empirical literature generally supports the positive effects of domestic rivalry, the national-champion rationale actually rests on firmer theoretical ground. We address this inconsistency by providing a theoretical framework that illustrates three paths via which domestic rivalry translates into enhanced international exports. Furthermore, empirical tests on the world airline industry elicit the existence of one particular path - an enhanced firm performance effect - that connects domestic rivalry with improved international exports.
JEL classification: L52, L40, L93
February 2008

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225.pdf

The Dynamics of Research Joint Ventures: A Panel Data Analysis

Abstract:

The aim of this paper is to test the determinants of Research Joint Ventures’ (RJVs) group dynamics. We look at entry, exit and turbulence in RJVs that have been set up under the US National Cooperative Research Act, which allows for certain antitrust exemptions in order to stimulate firms to cooperate in R&D. Accounting for unobserved project characteristics and controlling for inter-RJV interactions and industry effects, the Tobit panel regressions show the importance of group and time features for an RJV’s evolution. We further identify an average RJV’s long-term equilibrium size and assess its determining factors. Ours is a first attempt to produce robust stylized facts about cooperational short- and long-term dynamics, an important but neglected dimension in research cooperations.
Keywords: research joint ventures, dynamics, panel data
JEL classification: C23, L24, O32
October 2007

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221.pdf

Remedy for Now but Prohibit for Tomorrow: The Deterrence Effects of Merger Policy Tools

Abstract:

Antitrust policy involves not just the regulation of anti-competitive behavior, but also an important deterrence effect. Neither scholars nor policymakers have fully researched the deterrence effects of merger policy tools, as they have been unable to empirically measure these effects. We consider the ability of different antitrust actions – Prohibitions, Remedies, and Monitorings – to deter firms from engaging in mergers. We employ cross-jurisdiction/pan-time data on merger policy to empirically estimate the impact of antitrust actions on future merger frequencies. We find merger prohibitions to lead to decreased merger notifications in subsequent periods, and remedies to weakly increase future merger notifications: in other words, prohibitions involve a deterrence effect but remedies do not.
JEL classification: L40, L49, K21
September 2007

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218.pdf

The Impact of ISO 9000 Diffusion on Trade and FDI: A New Institutional Analysis

Abstract:

The effects of ISO 9000 diffusion on trade and FDI have gone understudied. We employ panel data reported by OECD nations over the 1995-2002 period to estimate the impact of ISO adoptions on country-pair economic relations. We find ISO diffusion to have no effect in developed nations, but to positively pull FDI (i.e., enhancing inward FDI) and positively push trade (i.e., enhancing exports) in developing nations.
Keywords: FDI, trade, transaction costs, institutions
JEL classification: C51, F23, L31
November 2006

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179.pdf

Bankintermediation bei der Kreditvergabe an junge oder kleine Unternehmen

Abstract:

Loan financing, especially long term bank loan financing, is important for young or small firms in Germany. A large share of all small business lending in Germany originates in public financing programs and cooperative banks, (non-cooperative) private sector credit banks as well as savings banks mediate in the assignment of loans from these programs. Our empirical analyses of this loan type provide insights into the small business loan assignment behavior of the three different bank groups in general. Using various econometric techniques, observation periods and data sources – including detailed data on 6.880 firms – we find three robust, originate results: Not only recently, but already at the beginning of the 1990s credit banks played no substantial, statistically significant role in small business lending. Cooperative and savings banks have, in contrast, a strong, significant positive influence on young, small firms’ loan access. In addition, the loan assignment behavior of the two latter groups is found to be very similar. This is an important result given the ongoing controversial discussion on reforming the German savings bank sector.
Keywords: Kreditvergabeverhalten von Genossenschaftsbanken, Kreditbanken und Sparkassen, Finanzierung junger, kleiner Unternehmen, langfristige Kredite und öffentliche Förderprogramme, Reformierung des deutschen Sparkassensektors
August 2006

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178.pdf

Bailouts in a common market: a strategic approach

Abstract:

Governments in the EU grant Rescue and Restructure Subsidies to bail out ailing firms. In an international asymmetric Cournot duopoly we study effects of such subsidies on market structure and welfare. We adopt a common market setting, where consumers from the two countries form one market. We show that the subsidy is positive also when it fails to prevent the exit. The reason is a strategic effect, which forces the more efficient firm to make additional cost-reducing effort. When the exit is prevented, allocative and productive efficiencies are lower and the only gaining player is the rescued firm.
Keywords: subsidies, asymmetric oligopoly, exit, European Union
JEL classification: F13, L13, L52
October 2005

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177.pdf

Effectiveness of bailouts in the EU

Abstract:

Governments in the EU frequently bail out firms in distress by granting state aid. I use data from 86 cases during the years 1995-2003 to examine two issues: the effectiveness of bailouts in preventing bankruptcy and the determinants of bailout policy. The results are threefold. First, the estimated discrete-time hazard rate increases during the first four years after the subsidy and drops after that, suggesting that some bailouts only delayed exit instead of preventing it. The number of failing bailouts could be reduced if European control was tougher. Second, governments’ bailout decisions favored state-owned firms, even though state-owned firms did not outperform private ones in the survival chances. Third, subsidy choice is an endogenous variable in the analysis of the hazard rate. Treating it as exogenous underestimates its impact on the bankruptcy probability. Several policy implications of the results are discussed in the paper.
Keywords: State aid, European Union, Discrete-time hazard, Bivariate probit
JEL classification: K2, G3, L5
October 2006

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176.pdf

Is the Event Study Methodology Useful for Merger Analysis? A Comparison of Stock Market and Accounting Data

Abstract:

Using a sample of 167 mergers during the period 1990-2002 involving 544 firms either as merging firms or competitors, we contrast a measure of the merger’s profitability based on event studies with one based on accounting data. We find positive and significant correlations between them when using a long window around the announcement date and, for rivals, in case of anticompetitive mergers.
Keywords: Mergers, Merger Control, Event Studies, Ex-post Evaluation
JEL classification: L4, K21, G34
September 2006

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163.pdf

How Effective is European Merger Control?

Abstract:

This paper applies a novel methodology to a unique dataset of large concentrations during the period 1990-2002 to assess merger control’s effectiveness. By using data gathered from several sources and employing different evaluation techniques, we analyze the economic effects of the European Commission’s (EC) merger control decisions and distinguish between blockings, clearances with commitments (either behavioral or structural), and outright clearances. We run an event study on merging and rival firms’ stocks to quantify the profitability effects of mergers and merger control decisions. We back up our results and methodology by using alternative measures for the merger’s profitability effects based on balance sheet data and obtain consistent results. Our findings suggest that outright blockings solve the competitive problems generated by the merger. Remedies are not always effective in solving the market power concerns, at least not on average. Nevertheless, both structural (divestitures) and behavioral remedies do help restore effective competition when correctly applied to anticompetitive mergers during the first investigation phase. Yet, they are on the whole ineffective or even detrimental when applied after the second investigation phase. Finally, remedies - especially behavioral ones - seem to constitute a rent transfer from merging firms to rivals when mistakenly applied to pro-competitive mergers.
Keywords: Mergers, Merger Control, Remedies, European Commission, Event Studies, Expost Evaluation
JEL classification: L4, K21, G34, C2, L2
July 2006

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153.pdf

EU Merger Remedies: A Preliminary Empirical Assessment

Abstract:

Mergers that substantially lessen competition are challenged by antitrust authorities. Instead of blocking anticompetitive transitions straight away, authorities might choose to negotiate with the merging parties and allow the transactions to proceed with modifications that restore or preserve the competition in the involved markets. We study a sample of 167 mergers that were under the European Commission’s scrutiny from 1990 to 2002. We use an event study methodology to identify the potential anticompetitive effects of mergers as well as the remedial provisions on these transactions. Stock market reactions around the day of the merger’s announcement provide information on the first question, whereas the stock market reactions around the commission’s final decision day convey information about the outcome of the bargaining process between the authority and the merging parties. We first classify mergers according to their effects on competition and then we develop hypotheses on the effects that remedies are supposed to achieve depending on the merger’s competitive outcome. We isolate several stylized facts. First, we find that remedies were not always appropriately imposed. Second, the market seems to be able to predict remedies’ effectiveness when applied in phase I. Third, the market also seems able to produce a good prior to phase II’s clearances and prohibitions, but not to remedies. This can be due either to a measurement problem or related to the increased merging firms’ bargaining power during the second phase of the merger review.
Keywords: Merger Control, Remedies, European Commission, Event Studies
JEL classification: L4, K21, C12, C13
January 2006

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81.pdf

Integrating Industrial Organization and International Business to Explain the Cross-National Domestic Airline Merger Phenomenon

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

The domestic airline merger phenomenon of the late 1980s and early 1990s sparked a great deal of Industrial Organization literature; yet, that literature neglected non-US merger activity and the potential for international competitive incentives. Using an International Business perspective to complement a primarily Industrial Organization analysis, I argue that factoring international competitive gains helps explain the domestic airline merger phenomenon. A Cournot model of airline competition illustrates the international incentives behind integrating domestic with international routes and behind acquiring domestic competitors. Further, comprehensive panel data tests also support large domestic networks and actual mergers improving the international competitiveness of airlines.
Keywords: airline-mergers, imperfect-competition, international-determinants
July 2004

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19.pdf