A THEORY OF BILATERAL OLIGOPOLY

In horizontal mergers, concentration is often measured with the Hirschman–Herfindahl Index (HHI). This index yields the price–cost margins in Cournot competition. In many modern merger cases, both buyers and sellers have market power, and indeed, the buyers and sellers may be the same set of firms. In such cases, the HHI is inapplicable. We develop an alternative theory that has similar data requirements as the HHI, applies to intermediate good industries with arbitrary numbers of firms on both sides, and specializes to the HHI when buyers have no market power. The more inelastic is the downstream demand, the more captive production and consumption (not traded in the intermediate market) affects price–cost margins. The analysis is applied to the merger of the gasoline refining and retail assets of Exxon and Mobil in the western United States. (JEL L13, L41)     

AN EXPERIMENTAL ANALYSIS OF DYNAMIC INCENTIVES TO SHARE KNOWLEDGE

Knowledge‐sharing arrangements are an important part of the innovation process as they help firms acquire technological capabilities, shorten development time, and spread risk and cost. A question central to the study of knowledge‐sharing arrangements is the impact of competition on cooperation. While cooperation has the benefit of avoiding duplication, it may have an adverse effect on the competitive advantage of a leading firm. Hence, firms face a difficult challenge during the innovation process while deciding which components of it, if any, to carry out in collaboration with other firms. This paper reports the results of controlled laboratory experiments which identify how the decision to form research joint ventures changes with both relative progress during the R&D process and the intensity of product market competition. The design is based on a modified version of Erkal and Minehart “Optimal Sharing Strategies in Dynamic Games of Research and Development.” Research Paper 1038, University of Melbourne, Department of Economics, 2008. The results indicate that if expected profits are such that the lagging firms always stay in the race, cooperation unravels as firms move forward in the discovery process and as monopoly profits become more attractive. These results are generally consistent with the theoretical predictions. (JEL C91, L24, O30, D81)     

HORIZONTAL MERGERS IN THE PRESENCE OF CAPACITY CONSTRAINTS

We examine a merger between two competitors in a Bertrand‐Edgeworth model. We find that the effects of merger depend on the tightness of capacity constraints. The combination of two firms has no price effect if and only if the capacity constraints of all firms are binding both before and after the merger. However, a merger may turn a binding capacity constraint into a slack one, which results in higher prices. In an industry where excess capacity drives the premerger prices of all firms to the marginal cost, a merger may cause prices to rise even though aggregate capacity remains constant. (JEL L13, L40)     

ANTI‐POACHING AGREEMENTS IN LABOR MARKETS

We analyze competition for experienced workers among wage‐setting firms. The firms can design poaching offers with higher wages to workers who switch from rivals relative to wages paid to their own existing employees. We evaluate the profit and welfare effects of anti‐poaching agreements that eliminate poaching offers as a recruiting method. Anti‐poaching agreements increase industry profits, whereas workers are made worse off. We show that the effects of anti‐poaching agreements on total welfare are determined by the magnitude of workers' switching costs and the productivity change associated with switching employers. (JEL L41, L40, J42)     

PRODUCT BUNDLING AND INCENTIVES FOR MERGERS AND STRATEGIC ALLIANCES

This paper analyzes firms' choice of a merger or a strategic alliance in bundling their products with other complementary products. Tying two products of unequal value makes them equally valuable as they become inseparable for purchase. Consequently, firms can charge a higher price for the bundled products than before. If foreclosure is not the main purpose of bundling, firms would prefer strategic alliances to mergers because mergers only intensify competition by internalizing the complementarities of two products. In equilibrium, bundling occurs only through strategic alliances. (JEL L4, L11, L13, L23)     

TECHNOLOGICAL ASYMMETRY AMONG FOREIGN INVESTORS AND MODE OF ENTRY

How does the preferred entry mode of foreign investors depend on their technological capability relative to that of their rivals? This article develops a simple model of entry mode choice and evaluates its main testable implication using data on foreign investors in Eastern European countries and the successor states of the Soviet Union. The model considers competition between two asymmetric foreign investors and captures the following trade‐off: while a joint venture (JV) helps a foreign investor secure a better position in the product market vis‐à‐vis its rival, it also requires that profits be shared with the local partner. The model predicts that the efficient foreign investor is less likely to choose a JV and more likely to enter directly relative to the inefficient investor. Our empirical analysis supports this prediction: foreign investors with more sophisticated technologies and marketing skills (relative to other firms in their industry) tend to prefer direct entry to JVs. This empirical finding is robust to controlling for host country–specific effects and other commonly cited determinants of entry mode. (JEL F13, F23, O32)     

STRATEGIC INFORMATION DISCLOSURE: THE CASE OF MULTIATTRIBUTE PRODUCTS WITH HETEROGENEOUS CONSUMERS

We examine the incentives for firms to voluntarily disclose otherwise private information about the quality attributes of their products. In particular, we focus on the case of differentiated products with multiple attributes and heterogeneous consumers. We show that there exist certain configurations of consumers' multidimensional preferences under which a firm, no matter whether producing a high‐ or low‐quality product, may choose not to reveal the quality even with zero disclosure costs. The failure of information unraveling arises when providing consumers with more information results in more elastic demand, which triggers more intensive price competition and leads to lower prices and profits for competing firms. As a result, the equilibrium in which disclosure is voluntary may diverge from that in which disclosure is mandatory. (JEL L15, L5)     

THE WELFARE EFFECTS OF THIRD‐DEGREE PRICE DISCRIMINATION IN A DIFFERENTIATED OLIGOPOLY

This article examines the welfare effects of third‐degree price discrimination under oligopolistic competition with horizontal product differentiation. We derive a necessary and sufficient condition for price discrimination to improve social welfare: the degree of substitution must be sufficiently greater in the “strong” market (where the discriminatory price is higher than the uniform price) than in the “weak” market (where it is lower). It is verified, however, that consumer surplus is never improved; social welfare improves solely owing to an increase in the firms' profits in the case of linear demands. (JEL D43, L11, L13)     

CONGLOMERATES AND REGULATION

Conglomerates operating integrated productions in different regulated and unregulated sectors may benefit of scope economies. However, the precise size of these synergies is often unknown to both rival firms and regulators. We show that the conglomerate's private information on scope economies may negatively affect both the regulated and the unregulated sectors depending on the precise nature of competition (strategic substitutes or complements). We also unveil a novel effect of regulation that involves an informational externality to the conglomerate's rivals. Notwithstanding these complications, and independently of the nature of competition, we show that in our model it is desirable, as for welfare, to let the firm run integrated productions, unless diseconomies of scope may realize. (JEL L51, L43, L52)     

CAN ENTRY OR EXIT EVENT STUDIES INFORM HORIZONTAL MERGER ANALYSIS? EVIDENCE FROM GROCERY RETAILING

This study estimates how prices change following the entry and exit of grocery retailers. We estimate the effects of entry (exit) by comparing affected markets to a set of unaffected markets using both a difference‐in‐difference estimator and a synthetic control estimator. We find that entry typically results in reduced prices. More surprisingly, we find that exit is frequently associated with falling prices. Our estimated effects of entry on grocery prices are similar in magnitude to estimates of merger price effects in the supermarket industry. This finding suggests that entry event studies may be a useful tool for horizontal merger analysis. (JEL L11, L4, L81)     

SUPERMARKETS AS A NATURAL OLIGOPOLY

This paper proposes and tests a model of supermarket competition based upon an endogenous fixed cost (EFC) framework (Sutton, J. Sunk Cost and Market Structure: Price Competition, Advertising, and the Evolution of Concentration. Cambridge: MIT Press, 1991.). The relevance of the EFC framework to supermarket competition stems from the industry's surprisingly uniform competitive structure: irrespective of the size of the local market, a small number of firms (between three and six) capture the majority of sales. As markets grow, local rivalry drives firms to expand their fixed investments, limiting the number of firms that can profitably enter even the largest markets. Although markets stay concentrated, competition remains fierce, reflecting the inherently rivalrous nature of the underlying competitive mechanism. The goal of this paper is to identify the strategic focus of this rivalry, namely the drive to provide an ever greater variety of consumer products, and to eliminate alternative explanations for the observed structure by highlighting the unique form of firm conduct that characterizes this industry. (JEL D21, D43, L11, L13, L22, L81)     

MEASURING THE INTERDEPENDENCE OF MULTINATIONAL FIRMS' FOREIGN INVESTMENTS

Earlier work found evidence for geographic linkages of aggregate foreign direct investment across countries and country‐pairs. From a theoretical point of view, such linkages at the macroeconomic level may root in between‐firm as well as within‐firm linkages and originate from information spillovers across or within firms in exploring unknown markets, and vertical linkages between production plants across different locations within the firm. We use data on the universe of German multinational enterprises (MNEs) to empirically explore how marginal investments at one foreign affiliate depend on investments at other affiliates within the same MNE. The empirical approach employs two channels or modes of cross‐affiliate interdependence: mere geography (capturing horizontal linkages through correlated learning and horizontal competition within the firm) and input–output relationships within or across industries (which capture vertical linkages). Adding to earlier findings at the aggregate level, we find evidence of a significant interdependence of investments within the firm. In the firm‐level data at hand, vertical linkages appear to be more important than horizontal ones. Investments at one location tend to stimulate investments at other locations of the same MNE, particularly if input linkages are strong. The opposite seems to be true for output linkages. Beyond vertical linkages, mere geographic proximity matters only to a minor extent. This suggests that evidence of linkages through geographic closeness at aggregate data levels accrue mainly to reasons of vertical linkages within networks of affiliates. (JEL C31, D22, F21, F23, F68, G31, H32)     

THE COMMON POOL, BARGAINING, AND THE RULE OF CAPTURE

Firms producing from a single oilfield face the common-pool problem: how to divide production and profits among themselves. The rule of capture creates competition among them to produce the oil before anyone else does, and a tendency for overproduction. Private bargaining among the firms can avoid the wasteful production practices associated with the rule of capture and increase joint profits. This paper explores the structure and expected outcome of the common-pool problem, and demonstrates that smaller producers hold a bargaining advantage that is not easily overcome by larger producers or neutral arbitrators.     

DIVIDEND POLICY IN REGULATED NETWORK INDUSTRIES: EVIDENCE FROM THE EU

We study the dividend policy of firms in regulated network industries, focusing on the impact of different regulatory regimes and government control. We link payout and smoothing decisions to different regulatory mechanisms (cost‐based vs. incentive regulation) and state versus private ownership. We test our predictions on a panel of listed European electric utilities, accounting for potential endogeneity of the choice of regulatory and ownership patterns. We find that incentive‐regulated firms smooth their dividends less than cost‐based regulated firms and that they report higher target payout ratios. Consistent with the interest group theory of regulation, we find that incentive regulation schemes are less likely when the state is still an important shareholder in the sector. Additionally, our results show that government control undermines the efficiency‐enhancing effects of incentive regulation on dividend policy, for example, lower smoothing is only due to private firms. (JEL G35, L51, L32, L9)     

FIGHT,FOLD OR SETTLE?: MODELLING THE REACTION TO FTC MERGER CHALLENGES

This paper models the reaction of firms to Federal Trade Commission (FTC) decisions which seek to block proposed horizontal mergers. We find that firms' responses to the FTC's decisions depend on a number f factors, but only weakly on the structural merits of the FTC's challenge. For a large number of the FTC's merger challenges, we find that firms have strong incentives to settle with the Commission, regardless of the relevant competitive concerns. Therefore, in these matters the FTC appears to have powers more like a regulatory agency than a prosecutor.     

FIRM HETEROGENEITY AND THE PATTERN OF R&D COLLABORATIONS

We consider an oligopoly setting in which firms form pairwise collaborative links in research and development with other firms. Each collaboration generates a value that depends on the identity of the firms that collaborate. First, we provide properties satisfied by pairwise equilibrium networks and efficient networks. Second, we use these properties in two types of situation: (1) there are two groups of firms, and the value of a collaboration is higher when firms belong to the same group; (2) some firms have more innovative capabilities than others. These two situations provide clear insights about how firms' heterogeneity affects both equilibrium and efficient networks. We also show that the most valuable collaborative links do not always appear in equilibrium, and a public policy that increases the value of the most valuable links may lead to a loss of social welfare. (JEL C70, L13, L20)     

Union rents and market structure revisited

Several recent studies give conflicting evidence on whether market power associated with industry concentration is an important source of union rents. Using a 1977 sample of 327 four-digit manufacturing industries, we re-examine the issue with a regression analysis that allows for differential union effects on price-cost margins across three levels of concentration. Large and small firm as well as industry average price-cost margins are analyzed. The results reaffirm those of Hirsch and Connolly (1987), who conclude that the effect of unions on profits is independent of market structure, and thus market power is not an important source of union rents. We find that unionization: (1) reduces industry profits in all three concentration groups with statistically insignificant differential effects, and (2) has a greater negative effect on the profits of large firms than it does on the profits of small firms, regardless of the concentration category. We benefited from the comments of an anonymous referee. Any remaining errors are our own.     

A structural theory of interlocking corporate directorates

A theory is proposed that explains where interlocking corporate directorates should appear between sectors of an economy, where they should not appear, and the profitability of efficient corporate interlocking. Taking the sector of an economy as the unit of analysis, interlocking directorates are cast as strategically created constraints on those sectors of the economy most “problematic” for obtaining profits in a given industry of firms. The extent to which each sector of the American economy is problematic for obtaining profits in two-digit and four-digit manufacturing industries is estimated from research linking industry profits with the form of the pattern of relations defining the industry as a position in the network of dollar flow transactions given in the 1967 Input-Output Study for the United States. A two-stage process is described for sampling firms representative of large corporations involved in American manufacturing. Measures of alternative strategies for interlocking across sectors are described. Two classes of hypotheses are derived: (1) Firms in an industry should interlock with firms in some other sector in proportion to the extent to which the sector constrains the industry's profits. (2) Controlling for production and market differences, the ability of firms in an industry to obtain unusually high profits reflects their success in creating interlocks with those sectors most problematic for their industry's profits.     

MEDIA CONCENTRATION AND CONSUMER PRODUCT PRICES

This article examines the interaction of commercial media and retail producers of well-known consumer products when advertising is used to differentiate brands. In particular, I address how competition in the media market affects choices of advertising and program quality. The results suggest counterintuitively that advertisers may actually prefer media markets with less competition for audiences. Product differentiation through advertising is more effective when media markets are less competitive, leading to higher prices for advertised products. As a result, media concentration may lead to higher profits for advertising firms if the additional revenue exceeds the higher advertising costs associated with media concentration. (JEL L11 , L82 , M37 )     

LESSONS FROM A FAILED AIRLINE AUCTION

In 1995, USAir placed itself for sale in an English auction. Interestingly, no bids were placed. This does not imply that the available firm is not a valuable acquisition. If losing reduces profits, firms wish to avoid a profit-reducing bidding war. However, in a sealed-bid auction (with no credible nonparticipation commitments), firms place profit-reducing bids in equilibrium. Also, a novelty of our analysis is the specification of the loser's profit rising with the price that the winner pays. This highlights an important explanation of bidding wars because a firm may bid simply to make the eventual winner pay a higher price. ( JEL L1, L9)