Showing papers in "Review of Industrial Organization in 1998"
TL;DR: A brief survey of recent empirical work on the performance of large companies can be found in this paper, where the authors try to pull together the literature in the form of six stylized facts, illustrating them with data drawn from a single sample.
Abstract: This paper contains a brief survey of recent empirical work on the performance of large companies. It tries to pull together the literature in the form of six stylized facts, illustrating them with data drawn from a single sample. The paper concludes by highlighting the issues which are thrown up for future work. These are: accounting for persistent heterogeneities between firms, accounting for the apparently erratic performance of many firms and, finally, moving away from hypothesis testing driven empirical agendas.
150 citations
TL;DR: This paper reviewed the economics of resale price maintenance and critiques selected Canadian cases since the passage of the Competition Act in 1986 and compared the evidence on their treatment under Canadian law and to compare jurisprudence in Canada with that of the U.S. and other jurisdictions.
Abstract: This paper reviews the economics of resale price maintenance and critiques selected Canadian cases since the passage of the Competition Act in 1986. Resale price maintenance (RPM) represents an area of active research in economics and continued controversy in competition law. In some respects, the US law has evolved to a more liberal treatment of contractual restrictions such as RPM, reflecting in part new learning on the explanations and effects of these restrictions. In Canada, the number of RPM cases brought by the Canadian Competition Bureau (the Bureau) has declined from the period 1980–1985, although the real value of the corresponding fines for those found guilty of the practice has increased: in 1980–85, there were 58 cases as compared to the period 1990–95 when there were 12 cases; the corresponding fines increased from $37,480 to $108,080.1 Some scholars have called for per se legality of vertical restraints but the appropriate antitrust treatment of these restraints remains unresolved. This symposium offers an opportunity to review the evidence on their treatment under Canadian law and to compare jurisprudence in Canada with that of the U.S. and other jurisdictions. In developing an economic framework for a synthesis of vertical restraints, a natural starting point is the benchmark of a simple, textbook contract for the transfer of a product. The simplest contract in a wholesale market would transfer to the retailer of a product a specific quantity of the product, which the retailer could then sell at any price and to any customer without limitations. The entire ownership of the product, i.e., the bundle of property rights associated with the product, would be transferred. The contract would allow the retailer to purchase any quantity at the uniform price posted by the seller. If the seller and the buyer are both firms in perfectly competitive and frictionless markets, then in fact this simple contract is optimal: the seller and retailer could not
138 citations
TL;DR: The economic theory of cartels suggests that one consequence may be reduced competitive balance in college football player recruiting, eligibility, and compensation as mentioned in this paper, and the enforced restrictions inhibit weak teams from improving, and protect strong teams from competition.
Abstract: The NCAA regulates college football player recruiting, eligibility, and compensation. The economic theory of cartels suggests that one consequence may be reduced competitive balance. The enforced restrictions inhibit weak teams from improving, and protect strong teams from competition. A “stratification” is implied which should be evident over time as less “churning” in national rankings and conference standings, and fewer schools achieving national prominence. I test this general hypothesis by comparing various competitive balance measures for about 25 years before and after NCAA enforcement began in 1952. The hypothesis is supported by all measures at both the national and conference levels.
111 citations
TL;DR: This article developed a model of price dispersion to distinguish the impact of price discrimination from that of peak load pricing schemes or atypical competition resulting from the financial difficulties of the early 1990s.
Abstract: We develop a model of price dispersion to distinguish the impact of price discrimination from that of peak load pricing schemes or atypical competition resulting from the financial difficulties of the early 1990s By utilizing three alternative measures of dispersion and appealing to economic theory for our specification, we find robust results suggesting an estrangement between price dis- persion and price discrimination While some discrimination continues to persist at monopolized endpoints, most dispersion is associated with fare wars and peak load pricing schemes
100 citations
TL;DR: In this paper, the paradox between the positive effect of industrial concentration on R&D spending, and its non-positive effect on the number of innovations is discussed, and the authors analyze whether concentration has different effects on small and large firms.
Abstract: This paper discusses the paradox between the positive effect of industrial concentration on R & D spending, and its non-positive effect on the number of innovations. Also, I analyze whether concentration has different effects on small- and large-firm R & D. The analysis shows that the positive effect of industrial concentration on R & D spending is at least as strong for small firms as it is for large firms within an industry, which indicates that the possession of market power is not in itself conducive to innovative effort. In addition, high concentration appears to be attended with a loss of efficiency in R & D spending.
67 citations
TL;DR: In this paper, a differential game of duopolistic competition through time where firms can use advertising and price as competitive tools is analyzed, and it is shown that firms' advertising are strategic complements and that profits are higher in the feedback equilibrium because firms advertise more.
Abstract: This paper analyses a differential game of duopolisticrivalry through time where firms can use advertisingand price as competitive tools. Two cases are consideredwhereby: (1) advertising has the main effect ofincreasing market size and firms differ in productionefficiency; (2) advertising has both predatory and cooperativeeffects in a symmetric market. The former shows thatmarket shares and advertising shares are positivelycorrelated and that market size increases with thedifference in firms' relative efficiency. The latterhighlights the differences in the feedback andopen-loop strategies. It is shown that firms' advertisingare strategic complements and that profits are higherin the feedback equilibrium because firms advertise more.The applicability of the model in markets wherefranchise contracts and dealership agreements operateis also discussed.
64 citations
TL;DR: In this paper, the potential effect of market structure on hospital technical efficiency as a measure of performance controlled by ownership and regulation is examined, which is relevant to provide an evaluation of the potential effects of recommended and initiated deregulation policies in order to promote market reforms in the context of a European National Health Service.
Abstract: In this article we examine the potential effect of market structure on hospital technical efficiency as a measure of performance controlled by ownership and regulation. This study is relevant to provide an evaluation of the potential effects of recommended and initiated deregulation policies in order to promote market reforms in the context of a European National Health Service. Our goal was reached through three main empirical stages. Firstly, using patient origin data from hospitals in the region of Catalonia in 1990, we estimated geographic hospital markets through the Elzinga-Hogarty approach, based on patient flows. Then we measured the market level of concentration using the Herfindahl-Hirschman index. Secondly, technical and scale efficiency scores for each hospital was obtained specifying a Data Envelopment Analysis. According to the data nearly two-thirds of the hospitals operate under the production frontier with an average efficiency score of 0.841. Finally, the determinants of the efficiency scores were investigated using a censored regression model. Special attention was paid to test the hypothesis that there is an efficiency improvement in more competitive markets. The results suggest that the number of competitors in the market contributes positively to technical efficiency and there is some evidence that the differences in efficiency scores are attributed to several environmental factors such as ownership, market structure and regulation effects.
59 citations
TL;DR: Learning spillovers in the production of EPROMs are investigated in this article, and it turns out that spillovers are significant, even though internal learning is the dominant source of learning.
Abstract: Learning spillovers in the production of EPROMs areinvestigated. It turns out that spillovers aresignificant, even though internal learning is thepredominant source of learning. Concerning externallearning, it does not appear to particularly matterwhether this comes from domestic rivals or foreigncompanies. There is some indication that Japanesecompanies have a steeper learning curve and with somegenerations are better able to appropriate externallearning from foreigners. Intergenerational learningis pervasive, which seems to provide competitiveadvantages to first movers. It could explain thepersistence of leadership of Intel in this industryacross a series of generations. Moreover, it coulddeliver scope for policy intervention.
58 citations
TL;DR: In this article, the consistency region (i.e., the region where the estimated cost function is well behaved) is used as the test region to test whether the underlying cost structure indicates anatural monopoly or not.
Abstract: Reorganization of public utilities is on the currentpolitical agenda in many European countries. However,in many cases the most fundamental question in termsof public policy towards these industries is nottested; does the underlying cost structure indicate anatural monopoly or not? Evans and Heckman's analysisof the US Bell System is one of the few exceptions,but their method has a serious problem as theirestimated cost function is not well behaved (negativemarginal costs). To solve this problem we propose touse the consistency region (i.e., the region where theestimated cost function is well behaved) as the testregion. We apply our testing procedure to Norwegianelectricity distribution and find that localelectricity distribution is characterised as a naturalmonopoly. Policy implications of the result isalso discussed.
49 citations
TL;DR: In this article, the authors present a model that more thoroughly characterizes market structure by including the variance in the market shares of the top four firms along with the concentration ratio, and test the model using a unique 1987 data set of 58 well-defined US food and tobacco manufacturing markets that used private datavendors for branded product market shares and media advertising aimed at household consumers.
Abstract: Previous advertising intensity models have failed toaddress adequately the rivalry effects of leadingfirms trying to protect and enhance the marketshares of their brands We argue that the relativedegree of market share parity among leading firms inoligopolies is a crucial determinant of marketadvertising levels This study presents a modelthat more thoroughly characterizes market structureby including the variance in the market shares ofthe top four firms along with the concentrationratio This model is then tested using a unique1987 data set of 58 well-defined US food andtobacco manufacturing markets that used private datavendors for branded product market shares and mediaadvertising aimed at household consumers We findthat industry advertising-to-sales ratios arehighest in those industries with the highestprice-cost margins, highest concentration, and thosewith equally-sized leading firms Oligopolists seemunable to control advertising expenses asconcentration increases and they likely overinvestin advertising rivalry when they have similar marketshares
35 citations
TL;DR: In this paper, the authors used Bertrand Pricing Models to show that monopoly power is absent from the surf clam and ocean quahog markets, and the results of the Bertrand model were used to compare the performance of the fishery for periods before and after ITQ introduction.
Abstract: Individual Transferable Quotas (ITQs) wereintroduced into the Mid-Atlantic Surf Clam and OceanQuahog fishery to reduce over-capitalization whileconserving clam populations. Because the number ofoperators in the fishery declined drastically sincethe introduction of this policy, there is concernabout its effect on competitiveness. This paperutilizes Bertrand Pricing Models to show thatmonopoly power is absent from the surf clam andocean quahog markets. Concentration ratios, Lorenzcurves and Gini Coefficients estimated for thefishery for periods before and after ITQintroduction support the results of the Bertrand model.
TL;DR: The Competition Act and the Competition Tribunal Act literally rewrote the book on competition law in Canada, particularly with regard to merger control and the review of the activities of dominant firms as discussed by the authors.
Abstract: The year 1996 marked ten years since the passing of two laws that promised to reform and dramatically revitalize antitrust in Canada. The Competition Act and the Competition Tribunal Act literally rewrote the book on competition law in Canada, particularly with regard to merger control and the review of the activities of dominant firms. The changes involved not only new offences and reviewable practices, but also a significant reform of the process: civil procedures replaced criminal ones for the review of mergers and certain other matters and a new quasijudicial body, the Competition Tribunal, was created to adjudicate civil competition cases. The tenth anniversary of the passage of these acts would seem to mark an appropriate occasion for a stock-taking. In 1995 a team including many of the most accomplished scholars of Canadian antitrust economics was assembled to review the progress of Canada’s new competition law. This special issue reports their assessments. While the individual papers that follow each have one or only a few authors, there is a sense in which the entire issue represents a team effort. Authors gathered to present first drafts of their papers at an “authors’ conference” sponsored by the Canadian Competition Bureau in 1996. In the discussions that followed each presentation, authors were given a great deal of input from others in attendance, including a number of enforcement officials from the Bureau, and the final versions of their papers clearly reflect these contributions as well as those of the anonymous referees.
TL;DR: This article showed that firms that operate at both levels of vertically related Cournot oligopolies will purchase some input supplies from independent rivals, even though they can produce the good at a lower cost, driving up input price for nonintegrated firms at the final good level.
Abstract: Firms that operate at both levels of vertically related Cournot oligopolies will purchase some input supplies from independent rivals, even though they can produce the good at a lower cost, driving up input price for nonintegrated firms at the final good level. Foreclosure, which avoids this strategic behavior, yields better market performance than Cournot beliefs.
TL;DR: In this article, the impact of expanded operating hours and floor space devoted to slot machines on the demand for casino gaming in Atlantic City was examined and the importance of developing aregulatory structure rigid enough to ensure thehonesty and integrity of the gaming industry, but flexible enough to allow management to respond tochanging market conditions.
Abstract: This paper examines the impact of deregulation on thedemand for casino gaming in Atlantic City. Specifically, the paper analyzes the impact ofexpanded operating hours and floor space devoted toslot machines. Using monthly win data between June1978 and July 1996, the analysis reveals that expandedfloor space had a significant, positive impact on win,resulting in an average monthly increase of over \$2million. This shows the importance of developing aregulatory structure rigid enough to ensure thehonesty and integrity of the gaming industry, butflexible enough to allow management to respond tochanging market conditions.
TL;DR: In this article, the legal standards and theeconomics of pass-through to indirect purchasers are reviewed and illustrated with a case involving ADMin the market for high fructose corn syrup (HFCS).
Abstract: This article reviews the legal standards and theeconomics of pass-through to indirect purchasers andillustrates these principles with a case involving ADMin the market for high fructose corn syrup (HFCS).With three assumptions about production technologies,buyers of HFCS experience a 100 percent pass throughof the direct overcharge. The extent of pass throughof the increase by buyers is shown to dependcritically upon the market structure of the purchasingindustry and the shape of the retail demand curve. Flexible demand functional forms are needed to avoidconstraining estimated pass through rates.
TL;DR: In this article, a review brings up to date analytical work establishing the pattern of competition or the lack of competition since the 1984 AT & T divestiture, and the remarkable results have been that price-cost margins increased while sales concentration declined.
Abstract: Telecommunications regulatory policy is driven by rhetoric and myth concerning the “competitiveness” of long-distance service. Relying on behavioral tests for competitiveness, this review brings up to date analytical work establishing the pattern of competition or the lack of competition since the 1984 AT & T divestiture. Through mid 1997, the three large long-distance carriers in setting their price-cost margins have managed to carry through on a previously established strategy of tacit collusion in both message toll services and WATS-type business services. The remarkable results have been that price-cost margins increased while sales concentration declined. This general pattern is not contradicted by the most recent offering of 15-cent per minute “one price” on new discount plans since that too implies an increase in carriers' price cost margins as concentration continued to decline.
TL;DR: The authors reviewed the United States' experience with utility sponsored energy conservation programs and concluded that these programs are exposed to three problems on the consumers' side (rebound, adverse selection and moral hazard) which lower the effectiveness of conservation incentives and impede in most practical cases a reliable quantification of the achieved conservation.
Abstract: This paper reviews the United States' experience with utility sponsored energy conservation programs. Such programs are central to the recent discussions about electric utility regulation in the United States and elsewhere. First it is shown that these programs are exposed to three problems on the consumers' side – rebound, adverse selection and moral hazard – which lower the effectiveness of conservation incentives and impede in most practical cases a reliable quantification of the achieved conservation. Moreover, the utilities have under the regulatory practice an incentive to invest in conservation measures but to limit factual conservation through a proper design of the program. Reviewing the recent literature shows that these four crucial points, which affect many of the applied conservation programs, are either insufficiently covered (rebound and adverse selection) or neglected entirely (moral hazard and regulated utilities' interest in little conservation). We conclude, that this undertaking has resulted in insignificant conservation and doubt the adequacy of these programs to reduce external social costs from energy use.
TL;DR: In this article, the authors investigate the stock price responses of listed firms in the US markets to announcements of R&D collaborations and find that abnormal returns of stocks are significantly positive after R & D collaborations are announced.
Abstract: In this paper, we investigate the stock price responses of listed firms in the US markets to announcements of R & D collaborations We find that abnormal returns of stocks are significantly positive after R & D collaborations are announced The positive stock price response towards the R & D cooperation initiations can be partially explained by the nature of the collaborations and the characteristics of the participating firms We also find that the stock prices of rival firms respond negatively to announcements of R & D cooperation This result seems to support the hypothesis that cooperative R & D improves economic efficiency of the cooperative firms that gain competitive advantage We do not find evidence supporting the hypothesis that R & D cooperation creates collusive, anticompetitive effects in the product market
TL;DR: The authors investigated the link between labor flexibility, ownership and firm performance using China as a case study and found that SOEs are much less able to adjust quickly to demandshocks than are other ownership forms and that the degree of worker input into hiring and firingdecisions slows the ability of firms to adapt,negatively affecting firm performance.
Abstract: Developed and developing countries alike areprivatizing or corporatizing state owned enterprises(SOEs), often citing the flexibility to hire and shedlabor as an advantage. However, there is littleempirical evidence on the extent to which thisimproves firm performance. This paper investigates thelinkage between labor flexibility, ownership and firmperformance using China as a case study. We find thatSOEs are much less able to adjust quickly to demandshocks than are other ownership forms and that thedegree of worker input into hiring and firingdecisions slows the ability of firms to adapt,negatively affecting firm performance.
TL;DR: The authors applied fuzzy logic to an oligopoly trigger pricing game and showed that collusion-sustaining price wars are most likely to occur during times of high demand. But they did not consider the effect of price volatility.
Abstract: Probability theory is the standard economic representation of uncertainty, although it is not always an accurate one. Fuzzy logic is an alternative representation that does not require individual beliefs regarding the explicit functional form of uncertainty. This paper applies fuzzy logic to an oligopoly trigger pricing game. The fuzzy trigger pricing game reverses the standard cyclical price war prediction; collusion-sustaining price wars are most likely to occur during times of high demand. The fuzzy model also predicts that markets with relatively volatile prices are more likely to undergo collusion-sustaining price wars. The predictions are consistent with available empirical evidence.
TL;DR: In this article, the authors modify the Herfindahl index of concentration to deal with supply-constrained markets, where domestic sellers face a small fringe of imports, or where import supply of any magnitude is limited by natural or artificial constraints.
Abstract: The widely used Herfindahl index of concentration measures market power incorrectly in cases where a core of sellers faces a competitive fringe or where some subset of sellers is supply-constrained. These cases arise, for example, where domestic sellers face a small fringe of imports, or where import supply of any magnitude is limited by natural or artificial constraints. Returning to the theoretical roots of the Herindahl, this paper demonstrates how the index should be modified to deal with such circumstances.
TL;DR: In this paper, the authors provide an introduction and examination of the abuse of dominance provisions in the Canadian Competition Act1 of 1986 (hereafter simply the Act), and provide a brief overview of the existing law prior to the 1986 reforms.
Abstract: In this paper we consider competition policy in Canada towards monopoly and monopolization. While our focus is primarily on providing an introduction and examination of the abuse of dominance provisions in the Canadian Competition Act1 of 1986 (hereafter simply the Act), we also provide a brief overview of the existing law prior to the 1986 reforms. An understanding of the nature of the law under the Combines Investigation Act,2 the predecessor of the Competition Act, provides insight into the need for reform in Canada and the nature of that reform. In particular the monopoly and monopolization provisions under the Combines Investigation Act contained very high hurdles for successful prosecution. As a result prosecutions under the provisions were infrequent and successful prosecutions were virtually non-existent. The late 1970s Supreme Court ruling in the Irving case effectively rendered Canada’s antitrust laws against monopoly and merger in the Combines Investigation Act unenforceable and made reform inevitable. In response to the old law and Canada’s enforcement experience, the monopoly provisions in the new Competition Act differ substantially from those found in the Combines Investigation Act. In this paper we argue that the abuse of dominance provisions in the Competition Act can be, and in practice have (mostly) proven to be, flexible and effective in addressing socially inefficient monopolization.
TL;DR: In this paper, the determinants of price-cost margins in U.S. 4-digit industries were investigated and a significant positive relationship was found between flexibility of labour demand and price cost margin, suggesting that it pays to be flexible.
Abstract: This paper addresses the determinants of price-cost margins inU.S. 4-digit industries. Margins are larger in capital intensive andconcentrated industries with high growth rates and R & D andadvertising to sales ratios. They also fluctuate significantly overthe business cycle. We go beyond the existing literature byconsidering an issue which is a dominant topic in the businessliterature, the flexibility of firms to adjust to exogenous shocks.In particular, we find a significant positive relationship betweenthe flexibility of labour demand and price cost marginssuggesting that it pays to be flexible.
TL;DR: In this article, the capacity choice of duopolists who set price exante under demand uncertainty with risk-neutrality is considered, and a formal model is presented, where the market share of each firm may deviate from the certainty share due to rationing.
Abstract: This paper considers the capacity choice of duopolists who set price ex-ante under demand uncertainty with risk-neutrality. The duopolists compete for market shares on the basis of availability of supply, rather than by price competition. Collusive pricing coexists with Cournot–Nash capacity choice. A formal model is presented, where the market share of each firm may deviate from the certainty share due to rationing. With shares reflecting different costs, capacity utilisation for the lower cost firm is expected to be substantially lower. The implications for the price-cost margin and capacity formation are also explored.
TL;DR: In this paper, the optimal firm size and patterns of returns to scale among the local exchange companies in the U.S. telecommunications industry are estimated for the years: 1975, 1978, 1981, 1984, 1987 and 1990.
Abstract: Optimal firm size and patterns of returns to scale among the local exchange companies in the U.S. telecommunications industry are estimated for the years: 1975, 1978, 1981, 1984, 1987 and 1990. The independent companies display increasing returns to scale, while the Baby Bells display constant or decreasing returns to scale. The independent companies operate at a scale smaller than optimal size, while the Baby Bells operate at a scale greater than optimal size. Efficiencies can be gained by industry restructuring, by allowing independents to expand their size while the Baby Bells can be downsized to create smaller units.