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on Industrial Competition |
| By: | Marc Escrihuela Villar; Ramon Fauli Oller (School of Economics, Universidad de Guanajuato) |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:gua:wpaper:ec200701&r=com |
| By: | Jaap H. Abbring (Vrije Universiteit Amsterdam); Jeffrey R. Campbell (Federal Reserve Bank of Chicago, and NBER) |
| Abstract: | This paper considers the effects of raising the cost of entry for a potential competitor on infinite-horizon Markov-perfect duopoly dynamics with ongoing demand uncertainty. All entrants serving the model industry incur sunk costs, and exit avoids future fixed costs. We focus on the unique equilibrium with last-in first-out expectations: A firm never exits leaving behind an active younger rival. We prove that raising a second producer's sunk entry cost in an industry that supports at most two firms reduces the probability of having a duopoly but increases the probability that some firm will serve the industry. Numerical experiments indicate that a barrier to entry's quantitative relevance depends on demand shocks' serial correlation. If they are not very persistent, the direct entry-deterring effect of a barrier to a second firm's entry greatly reduces the average number of active firms. The indirect entry-encouraging effect does little to offset this. With highly persistent demand shocks, the direct effect is small and the barrier to entry has no substantial effect on the number of competitors. This confirms Carlton's (2004) assertion that the effects of a barrier depend crucially on industry dynamics that two-stage "short run/long run" models capture poorly. |
| Keywords: | LIFO; FIFO; Sunk costs; Markov-perfect equilibrium; Competition policy |
| JEL: | L13 L41 |
| Date: | 2007–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20070037&r=com |
| By: | Ward A. van den Berg (Erasmus Universiteit Rotterdam); Han T.J. Smit (Erasmus Universiteit Rotterdam) |
| Abstract: | This paper explains why consolidation acquisitions occur in waves and it predicts the differing role each firm is likely to play in the consolidation game. We propose that whether a firm assumes the role of rival consolidator, target, or passive observer depends on the position of the firm relative to the entity that merges first. Our model predicts that an initial acquisition triggers a wave of follow-on acquisitions, where the process of asset accumulation by the consolidator is accelerated since the value of follow-on acquisitions is enhanced by the more concentrated industry structure. An initial consolidation can trigger a consolidating acquisition by a rival in a remote market segment, while some firms prefer to be a target and others remain passive observers that await the outcome of the consolidation process rather than merge amongst themselves. Fragmentation, demand uncertainty, and investment costs determine the timing of acquisitions. |
| Keywords: | Acquisitions; Spatial competition; Real options |
| JEL: | G34 L10 |
| Date: | 2007–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20070026&r=com |
| By: | Hoffmann, Magnus; Schmidt, Frederik |
| Abstract: | In the following, we examine a market of a digital consumption good with monopolistic supply. In this market, it is the ability of the consumer to bypass (”crack”) the copy-protection of the monopolist which induces a lower price of the digital good, compared to an uncontested monopoly (textbook case). We analyze the complex relationship between the cracking efforts of the consumer, the copy-protection efforts and the pricing decision of the monopolist, and the welfare of the economy. We find, for example, that the monopolist will deter piracy if the (exogenous) relative effectiveness of the consumer’s bypassing activity is low compared to the copy-protection technology. In this case welfare is lower than the welfare in the textbook case. On the contrary, welfare rises above the textbook case level if the relative effectiveness of cracking is sufficiently high. |
| Keywords: | Digital Products; Contests; Security of Property Rights; Endogenous Monopoly Price |
| JEL: | D42 C72 D23 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3289&r=com |
| By: | Antonio Villar (Department of Economics, Universidad Pablo de Olavide) |
| Abstract: | Competitive pricing is a pricing rule that combines two principles that are present in competitive markets. The profit principle (an action will be chosen only if it yields maximal payoffs), and the scarcity principle (markets make expensive those commodities that restrict production possibilities). It is shown that, under standard assumptions, these principles imply profit maximization at given prices. But also that they can be applied to economies with non-convex production sets (e.g. firms with S-shaped production functions). The chief properties of this pricing rule, as well as the existence and efficiency of the associated equilibria, are analyzed |
| Keywords: | non-convex production sets, competitive pricing rule, competitive pricing equilibrium. |
| JEL: | D50 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:07.08&r=com |
| By: | Idrees Khawaja (Pakistan Institute of Development Economics, Islamabad.); Musleh-ud Din (Pakistan Institute of Development Economics, Islamabad.) |
| Abstract: | Interest spread of the Pakistan’s banking industry has been on the rise for the last two years. The increase in interest spread discourages savings and investments on the one hand, and raises concerns on the effectiveness of bank lending channel of monetary policy on the other. This study examines the determinants of interest spread in Pakistan using panel data of 29 banks. The results show that inelasticity of deposit supply is a major determinant of interest spread whereas industry concentration has no significant influence on interest spread. One reason for inelasticity of deposits supply to the banks is the absence of alternate options for the savers. The on-going merger wave in the banking industry will further limit the options for the savers. Given the adverse implications of banking mergers for a competitive environment, we argue that to maintain a reasonably competitive environment, merger proposals may be subjected to review by an antitrust authority with the central bank retaining the veto over merger approval. |
| Keywords: | Banks, Determination of Interest Rates, Mergers, Acquisitions |
| JEL: | G21 E43 G34 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2007:22&r=com |
| By: | Idrees Abdul Qayyum (Pakistan Institute of Development Economics, Islamabad.); Sajawal Khan (Pakistan Institute of Development Economics, Islamabad.) |
| Abstract: | This study aims at empirical investigation of the x-efficiency, scale economies, and technological progress of commercial banks operating in Pakistan using balance panel data for 29 banks. As banking sector efficiency is considered as a precondition for macroeconomic stability, monetary policy execution, and economic growth. We also make efficiency comparisons between the domestic and foreign banks and big banks. Our results indicate that the domestic banks operating in Pakistan are relatively less efficient than their foreign counterparts for the period 2000-05. The scale economies for small banks, especially foreign banks are higher. Our results suggest the existence of technological progress for all groups of banks for the year 2000 and onward. It was lowest for big banks in 2000 and highest for foreign banks in 2005. Again, technological progress is lower for domestic banks relative to foreign banks. The results show also that the market share of big five banks are declining over the period but average interest spread shows fluctuations. The main conclusions that can be drawn from these results are that mergers are more likely to take place, especially in small banks. If the mergers do take place between small domestic banks and foreign banks, these will reduce cost due to scale economies as well as x-efficiency (because foreign banks are x-efficient relative to small domestic banks). Even if mergers do take place between small and big banks, cost will reduce without conferring any monopolistic power to these banks. This will also help in stability of the financial sector, which is an important concern of the State Bank of Pakistan (SBP). So the best policy option for SBP is to encourage mergers, while keeping a check on interest spread, so that the benefits from reduction in cost due to mergers are passed on to depositors and borrowers. |
| Keywords: | X-efficiency, Scale Economies, Technological Progress, Competition, Spread |
| JEL: | G14 G18 G21 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2007:23&r=com |
| By: | Granlund, David (Department of Economics); Rudholm, Niklas (The Swedish Retail Institute (HUI)) |
| Abstract: | In this paper, the impact of increased information on brand name and generic pharmaceutical prices is analyzed both theoretically and empirically. The theoretical results show that an increase in information is likely to reduce the price of brand name pharmaceuticals, while the results regarding generics are less clear. In the empirical part of the paper, the introduction of the substitution reform in the Swedish pharmaceuticals market in October 2002 is used as a natural experiment regarding the effects of increased consumer information on pharmaceutical prices. The results clearly show that the reform has lowered the price of both brand name- and generic pharmaceuticals. |
| Keywords: | Pharmaceutical industry; generic competition; generic drugs; brand name drugs |
| JEL: | D80 D83 I11 L65 |
| Date: | 2007–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:huiwps:0008&r=com |