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)     

MAKING THREATS: MINIMAL DETERRENCE,EXTENDED DETERRENCE AND NUCLEAR WARFIGHTING*

This analysis contributes to a political sociology of the arms race by linking the history of U.S. strategic policy with sociological explorations in the organization of power. American nuclear policy illustrates continuity and episodic change. Continuity is expressed in near-universal support among policy-makers of a policy of “extended” rather than “minimal” deterrence. Extended deterrence implies a threat to use nuclear weapons first. The change in nuclear policy is the variation in the determination to modernize the nuclear force structure. That is, the actual commitment to prepare to fight and win a nuclear war oscillates from one period to another. Sustained efforts to improve the nuclear force structure have been concentrated in four periods: the Truman administration between 1947 and 1950, the first two years of the Kennedy administration, the last two years of the Nixon administration, and the last year of the Carter administration to the present. The determination to modernize the nuclear force structure is situated within intra-elite debates between advocates of containment and proponents of rollback, and the installation of new foreign policy projects necessary to adjust the position of the U.S. in the world arena.     

MULTIPLE EQUILIBRIA AND DETERRENCE IN AIRLINE MARKETS

We use a longitudinal dataset from the U.S. airline industry to estimate three different models for entry games with very general forms of heterogeneity between U.S. carriers in airline markets: a simultaneous game with complete information and two sequential games with or without strategic entry deterrence. In a sequential game with entry deterrence, an incumbent decides whether to incur a cost to deter potential entrants. We show that the model with sequential games with strategic deterrence provides the best fit to the data. We conclude that the results reject the hypothesis of a static model and support the hypothesis of the existence of strategic entry deterrence. (JEL L1)     

CONTEST DESIGN AND OPTIMAL ENDOGENOUS ENTRY

This paper derives the effort-maximizing contest rule and the optimal endogenous entry in a context where potential participants bear fixed entry costs. The organizer is allowed to design the contest under a fixed budget with two strategic instruments: the value of the prize purse and a monetary transfer (entry subsidy/fee) to each participating contestant. The results show that the optimally designed contest attracts exactly two participating contestants in its unique subgame perfect equilibrium and extracts all the surplus from participating contestants. The direction (subsidy or fee) and amount of the monetary transfer depend on the magnitude of the entry cost. ( JEL C7, D7)     

ALTERNATIVE COLLECTIVE-GOODS MODELS OF MILITARY ALLIANCES: THEORY AND EMPIRICS

How should the defense activities of allies be aggregated to determine the alliance-wide level of defense? Two alternative models–best shot and weakest link–are contrasted with simple summation of defense spending or manpower for aggregating allies' defense efforts. We extend the joint product model to include these methods of aggregation, and devise an empirical procedure to test between best-shot and weakest -link models. We apply this test to four alliances: Triple Alliance (1880–1914), Triple Entente (1880–1914), Warsaw Pact (1963–1987), and NATO (1961–1987). The testing procedure can be applied to other collective choice situations.     

SPATIAL COMPETITION AND STRATEGIC FIRM RELOCATION

Firms compete spatially for customers who have some degree of brand loyalty. The number and attractiveness of the alternatives available to these customers dictates the level of competition facing firms. In this study, data on ticket pricing in four professional sports leagues are used to empirically examine the existence of spatial competition in sports, and the impact of space on team relocations. Results, allowing for structural breaks over time while using spatial autoregressive techniques, suggest that sports franchises spatially compete when pricing their tickets, and that spatial characteristics, including the level of spatial competition, have influenced the relocation of teams. (JEL D40, L11, R30, L83)     

CHILDHOOD FAMILY STRUCTURE AND ENTRY INTO FIRST MARRIAGE

The present study uses data from the National Survey of Families and Households to examine socialization and stress hypotheses which link family structure during childhood with entry into first marriage. Results from logistic regressions show evidence for both hypotheses. The findings show that years lived with mother only during early childhood and change from both biological parents to mother-only families significantly increase chances for delayed marriage for whites. One other factor, being born into a mother-only family, increased chances for early marriage. Thus, for whites, we found counteracting influences of family structure during childhood on marriage. For blacks, the family structure measures, overall, show little effect on entry into marriage. Finally, we found that family structure had a stronger impact for those born in the 1940s than for those born later.     

ENTRY BARRIERS,COMPETITION, AND TECHNOLOGY ADOPTION

I build a model of technology adoption to study the quantitative effect of entry barriers on total factor productivity (TFP). In my model, incumbent firms choose technologies that are sufficiently productive to deter entry from a potential competitor. I show that higher entry barriers help to deter entry and lead to the choice of less productive technologies. A novelty of my work is that I use a direct measure of entry barriers. I find that reducing entry barriers from their average level in the poorest 30% of countries to their U.S. level leads to a sizeable increase in aggregate TFP of 12%. (JEL O11, O43)     

COMPETITIVE INDUSTRY EQUILIBRIUM UNDER UNCERTAINTY AND FREE ENTRY

This paper investigates the properties of industry equilibrium under price uncertainty given free entry and exit. For any form of risk-averse behavior, it is shown that an increase in demand uncertainty (as measured by a mean-preserving spread) increases mean output price and reduces output of firms in long-run equilibrium.     

TARIFF POLICY AND ENTRY WITH COST-BASED INFORMATIONAL ASYMMETRIES

This study introduces a cost-based informational asymmetry into a two period signaling model. We examine the effects of import tariff policy within this environment of incomplete information and compare them to the standard, full information effects. When tariff rates can be credibly fixed, the standard effects of tariff policy may be significantly altered. For example, lower tariffs may discourage foreign entry because of the induced signaling effects of tariff policy. Moreover, because the impact of tariff policy depends on the cost structure of domestic firms, uninformed policymakers will not be able to predict the qualitative effects of tariff policy. ( JEL F12, F13)     

ENTRY AND EXIT,PRODUCT VARIETY,AND THE BUSINESS CYCLE

We study the stochastic behavior of a dynamic general equilibrium model with monopolistic competition. Each seller sells his product in the consumption goods as well as the investment goods market and has market power in both. Consumers derive utility from a constant elasticity of substitution (CES) aggregate of all the consumption goods and augment their capital stock by a CES aggregate of all the investment goods. We analyze the equilibrium of this economy allowing for an endogenous determination of the number of firms and therefore of products. The principal effect we wish to highlight is the endogenous propagation and magnification of technology and preference disturbances through product space variations. (JEL E32, D43, L16)     

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)     

ALLIANCES IN THE SHADOW OF CONFLICT

Victorious alliances often fight about the spoils of war. This article presents an experiment on the determinants of whether alliances break up and fight internally after having defeated a joint enemy. First, if peaceful sharing yields an asymmetric rent distribution, this increases the likelihood of fighting. In turn, anticipation of the higher likelihood of internal fight reduces the alliance's ability to succeed against the outside enemy. Second, the option to make nonbinding nonaggression declarations between alliance members does not make peaceful settlement within the alliance more likely. Third, higher differences in the alliance players' contributions to alliance effort lead to more internal conflict and more intense fighting. (JEL D72, D74)     

MIXED OLIGOPOLY, SEQUENTIAL ENTRY, AND SPATIAL PRICE DISCRIMINATION

This paper is the first to examine the welfare consequences of a public firm in a traditional model of spatial price discrimination. It demonstrates that when a private firm acts as a Stackelberg location leader, the presence of a public firm always improves welfare. Moreover, when three firms locate sequentially, the presence of a public firm improves social welfare unless it locates last. Thus, despite examining a variety of location timings, including simultaneous location, privatization never improves welfare and usually harms welfare. This conclusion differs from several currently in the literature in which privatization often improves welfare. ( JEL L13, L32, L33, L52)