Showing papers on "Market power published in 1978"

Vertical Integration, Appropriable Rents, and the Competitive Contracting Process

Abstract: The potential of post-contractural apportunistic behavior for improving market efficiency through intrafirm rather than interfirm transactions is examined under the assumption that vertical costs will increase less than contracting costs as specialized assets and appropriable quasi rents increase. Vertical integration protects against the risk of contract cancellation and can create market power which is not generally referred to as monopoly. Contracts used as a alternative provide economically enforceable protection against opportunistic behavior. Solutions to opportunistic behavior problems can include joint ownership of common assets and condominium ownership of services. Economies of scale are major factors in some businesses, such as insurance. The complexities of ownership relations makes it difficult to assign higher costs to either the contract or vertical-integration approach. This suggests that economic analysis should be used to identify which is most advantageous for specific kinds of activities.

Forces Generating and Limiting Concentration under Schumpeterian Competition

Abstract: Stochastic theories of the firm size distribution explain observed size differences among firms as the consequence of random growth rate differences, accumulated over time. Little attention has thus far been paid, however, to economic interpretation of the abstract stochastic processes involved. This paper investigates the implications for size distribution phenomena of a model of industry evolution in which the stochastic elements reflect the uncertainties attending firms' efforts to advance productivity. A simulation experiment establishes that the development of concentration in the model industry is significantly affected by the rate of growth of potential ("latent") productivity, the effectiveness of technological imitation efforts, and the extent to which firms restrain investment in response to perceived market power.

Industrial Concentration and Interindustry Wage Determination

Abstract: THE hypothesis that firms with market power pay higher wages than competitive industries has implications that are important to many areas of policy. If firms with market power do pay higher wages, the excessive portion of those wages would be a rather large addition to the social costs of monopoly. In addition, wages that are inconsistent with labor market characteristics and not uniformly sensitive to business cycles will hamper the implementation of macroeconomic stabilization programs. Previous studies in this area have usually tested the market power hypothesis by determining the relationship between industry concentration and industry wages.' In addition, studies focusing upon other aspects of interindustry wages, such as the effect of unions2 and plant size3 have included concentration as an explanatory variable in their models. Results of these studies have differed with respect to their findings on the importance of concentration. Some studies found concentration to be important in the wage determination process while others did not. The research reported in this article indicates that the concentrationwage relationship changes significantly over the business cycle making cross sectional studies sensitive to the year used for the analysis. This finding is consistent with the results of models developed to describe the wage determination process over time. The method of analysis used here focuses upon the concentration-wage relationship at two points in the business cycle. A cross sectional test of a model of interindustry wage determinants in manufacturing is presented for the years 1958 and 1967. The results of these tests indicate that six independent variables can explain over 72% of the variation in wages found in each of the two test years, with each of the six coefficients statistically significant in both years. However, the impact of the independent variables change considerably over the business cycle. Of particular interest are findings that support the hypotheses (1) that concentration's effect upon wages appears to change over the business cycle, thus providing support for the "spillover" hypothesis and (2) that the wage-concentration relationship is not linear.

Market Power and Inflation

Abstract: I would like to present to you an explanation of inflation in terms of the market power of the buyers and sellers whose behaviour determines prices and wages. That has been done before, of course. A good example is that most simpleminded explanation of all, which blames inflation on the overweening power of labour in the labour market. My argument is only a little less simpleminded than that; and while it mostly consists of well tried and well tested bits and pieces, I hope it will provide a new way of looking at some of our old problems and will focus attention on a shortcoming of the market economy: its inadequate handling of the problem of distribution. In our economy, the market performs the economic functions, most of them pretty well. It does so at a cost; but the costs of the market are kept manageable by our use of money, because money prices are the simplest form in which to express and handle market information, and also because its use splits barter into separate sales and purchases, which greatly simplifies the exercise of economic rationality. Unfortunately, however, the splitting of barter into separate buying and selling also has a serious drawback: it divides between factor and product markets the performance of a function-the distribution of income-which would be much better performed by undivided acts in a single market. In a barter economy, wage contracts would fully and unequivocally determine labour's share in society's income. In a money economy, labour believes that wage contracts determine its share in income; but that belief may be true or false, depending on how product prices and their relation to labour costs are determined. Price formation in product markets validates the income distribution determined in labour markets, and confirms expectations created by wage contracts, only if the balance of power between the transacting parties is the same in the two markets. An example of such sameness is universal perfect competition. Another, more important because more practical, example is the case where producers have the upper hand in both the market in which they sell their products and the market in which they hire their workers. Whenever the balance of power in the labour market differs from that in the product market, price formation in the two markets has conflicting impacts on the distribution of income; and I aim to show that that conflict, and the resolution of that conflict, leads to a one-way drift in the general level of wages and prices, which is part of the world-wide inflation we experience today. An extreme case of such conflicting power relations is that where producers dominate product markets and organized labour dominates the labour market. There probably is such a conflict in some countries today: but I should like to focus here on a more common form of it which, though more moderate, is not much less inflationary: the conflict between producer dominance in product markets and parity of power between labour

On Estimating the Relationship between Discrimination and Market Structure

Abstract: Considerable attention [4; 6; 8; 13; 17] has been focused recently on the hypothesis that firms and industries with market power exercise managerial discretion in the form of discrimination. Substantial empirical evidence exists both for and against the existence of this form of managerial discretion. The problem is that none of the previous tests has examined the hypothesis within the context of a fully specified equation. A suspicion arises that the diversity of results may in part be due the effect of left-out variables. This paper investigates an alternative specification of the test of that hypothesis and provides additional empirical evidence on this contentious issue. An individual is said to have a taste for discrimination if he acts as if he

Ownership Concentration and Market Power in Urban Land Markets

Abstract: In many North American cities the recent period of inflation has been accompanied by a very rapid increase in land prices, resulting in a significant increase in the relative price of housing.' One of the popular targets for " blame " for this phenomenon is large developers and landowners who have been accused of restricting development and raising prices for their own gain. However, an adequate analysis of the determinants and consequences of the existence of market power in urban land markets cannot be found in the urban literature, where competitive conditions are assumed to prevail. In this paper we develop a theoretical analysis of the effect of concentration of ownership on the allocation of resources in urban land markets, focusing on the relationship between market structure and the spatial distribution of occupancy and land prices in an urban area. We will show that because of the spatial heterogeneity of land, a natural entry barrier exists which implies that concentrated ownership always confers potential market power on large landowners, and that exercised market power necessarily distorts the spatial distribution of occupancy and land prices. In particular, we show that leapfrog development is one possible result of exercised market power, providing a possible explanation for this common urban phenomenon. 1. THE MODEL We will use a model of a circular city which is adapted from Solow's version (1973) of the standard urban location model. Since we wish to examine the relationship between concentration, per se, and market power, we will assume that there is an arbitrarily large amount of homogeneous land so that there are no " entry " barriers resulting from limited supplies of specialized land. For simplicity, we will assume the Central Business District (CBD) is a circular region of fixed size with radius R. We will ignore the production aspect of the CBD other than to assume a composite consumption good and composite housing good are produced. The consumption good is produced by a perfectly competitive industry at constant costs. The composite housing good, also produced by a perfectly competitive industry, is a flow of housing serviceg consisting of housing and land in fixed proportions, so that the housing composite is measured by lot size. The supply price of a unit of housing services at distance x from the CBD, excluding the cost of land, is C(x), where C'(x) > 0. Thus C(x) includes the cost of providing and maintaining serviced land and housing at distance x from the CBD, but not the (rental) cost of the raw land. With no loss in generality, we assume that land outside the CBD has no economic use other than for housing. Households thus consume a single composite consumption good and a composite

Rational expectations with market power- the paradox of the disadvantageous tariff on oil

Abstract: The theoretical analysis of exaustible resources has to date largely ignored the "geo-political realities" which preoccupy policy makers and has concentrated on the logically prior problem of analyzing market equilibrium in an autarkic economy. Autarky is a useful framework for the study of competitive equilibrium but is ill-suited to analyze the taxation of those exhaustible resources which are traded between large sovereign nationan-states.

Market Power and Employment Discrimination

Abstract: A theoretical model is developed which yields the prediction that firms in more highly concentrated industries will be more likely to practice employment discrimination than other firms. The model is tested for both race and sex discrimination. The results generally confirm that firms in more highly concentrated industries discriminate more. The evidence suggests that firms which discriminate on the basis of race also do so on the basis of sex. The implications of equal-work-equal-pay legislation for employment discrimination are investigated, and we find that there may be a trade-off between employment discrimination and equalization of wages.

An Industry Approach to Owner-Manager Control and Profit Performance

Abstract: Several recent articles have dealt empirically with the separation of ownership and control and its ultimate effect on corporate performance (Kamerschen 1968; Monsen, Chiu, and Cooley 1968 [hereafter MCC]; Larner 1970; Palmer 1973; Sorenson 1974; Holl 1975; and Ware 1975). This separation occurs when a firm is owned by a large number of stockholders with no one individual or group holding a commanding share. Dispersion of shareholding creates a condition wherein a hired manager makes most of the firm's decisions. The question of concern involves situations in which an entrepreneur does not combine the functions of ownership and control. Is the microeconomic theory of the firm able to accommodate this tendency? An affirmative answer would require that there be no identifiable economic differences between firms controlled by owners and those controlled by managers. Empirical measurement of the economic behavior and performance of the corporate firm is clearly important, not only for the theorist but also to the shaping of economic policies affecting business and society. Neoclassical economic theory assumes an owner-entrepreneur. If vioAn empirical study of the effects of control type on firm performance. Four measures are considered: return on equity, operating net income to total assets minus cash, net sales to total assets, and net income to net sales. Sample industries are defined at the four-digit SIC level and four firm concentration ratios vary from 17% to 61%. An analysis-of-variance model with one repeated measure and two covariates is used to test for a systematic effect of control type on performance. Each industry is tested separately. Other variables included in the model are leverage (debt/equity), firm size, and time. The F-statistics generated for each industry are correlated against concentration ratio and market-share data to test the hypotheses that market power and concentration affect discretionary power of managers. A previous study by Monsen et al. is reexamined. * The authors wish to thank Professor James S. Williams for his valuable assistance. Any remaining errors are the responsibility of the authors.

The determinants of concentration trends in the french manufacturing sector

Abstract: PREVIOUS cross section empirical studies' have shown that concentration on the supply side is positively and significantly related to profit rates in the French industrial sector. Concentrated industries also seem to pay their workers more than their opportunity cost and thus the misallocation of resources due to market power is probably more important than it appears to be when one uses corporate profit rates to evaluate it. Those results call into question the French industrial policy of the last I5 years. Indeed in the past, the French administration has systematically favored the emergence of large firms under the assumption that they would be best able to face an increasingly stiff foreign competition and it has all but neglected the problems associated with high and increasing levels of concentration on the domestic markets. The desirability of controlling the evolution of market structures and preventing unnecessary further increases in concentration is now widely accepted in government circles and it can be useful from a public policy point of view to shed light on the determinants of concentration trends in particular industries. This question has until recently received only scant attention in the economic literature probably because the theory of industrial organization seems to be an inappropriate conceptual tool to explain historical trends, because of its static nature. However Sheperd [7] and more recently Mueller and Hamm [4] have tried to tackle the problem and have come up with interesting (and somewhat pessimistic) conclusions about the potential impact of concentration trends on competition in the U.S. Following these analyses as well as those of Caves, Khalilzadeh-Shirazi and Porter [i], we try in this paper to identify the forces at work behind concentration trends in the French manufacturing sector and to assess the relative importance of each one. After briefly outlining the main features of the change in industrial concentration between I96I and i 969, the explanatory model of the concentration trends and the results of the empirical tests are discussed. Finally the policy implications of the analysis are presented.

Nonprice Competition in Banking Markets

Abstract: Several recent papers [7; 13; 14; 15] have studied the possibility that the effect of seller concentration on advertising intensity in an industry takes the form of an "inverted U." This paper extends the earlier empirical work by examining the relation between a firrti's market power and its use of nonprice forms of competition. The hypothesis tested is that a firm will increase its use of nonprice competitive devices as its market power initially increases from a low level, but that its use of nonprice rivalry will eventually decrease as its market power increases beyond some intermediate level. This study also adds to previous work by attempting to control for the differentiability of products by observing only one type of seller, namely a specific type of bank, and isolating several distinct local markets comprised of such sellers. The empirical results support the hypothesized nonlinear relationship between market power and the intensity of nonprice competition, althodgh the direction of causality is open to question. And subject to the difficulty of empirically separating persuasive from informative nonprice behavior, the results suggest that the prevalence of persuasive forms of competition increases as market power increases over an intermediate range.

Market power and resource misallocation in medicine: the case of neurosurgery.

Abstract: This article concludes that substantial excess neurosurgical capacity exists. Neurosurgery like other specialties has permitted almost free entry and as a result of such factors as high earnings and status, excess capacity has developed and because of insufficient competition it has not been eliminated. The costs of excess capacity include idle capacity and an alleged reduction in skill levels. The neurosurgery market's performance is evaluated and it is found that while relative income has declined, entry has continued at a high rate; excess capacity is therefore not being eliminated. Policy recommendations of a pro-competitive variety are suggested to improve the market's performance instead of regulation (whether governmental or by the profession itself).

Market structure and advertising in the U.S. pharmaceutical industry: some implications for public policy.

Abstract: Distortions in market processes for pharmaceuticals raise the important policy problem of devising measures to improve industry performance. This paper first reviews the basic issues involved in formulating economic policy regarding the pharmaceutical industry. Methods for reducing structural market power and undesirable promotional expenditures are examined, and the impacts of four oft-suggested policy "reforms"--removal of trade names, removal of patents, relaxation of requirements for certification of new drug products, and increased enforcement of antitrust laws--are then analyzed. Finally, problems requiring additional research are identified.

Vertical Integration and Different Inputs

Abstract: Vertical integration decisions, which determine the boundaries of the firm, are among the largest investment decisions firms make and can have a major influence on their success. In some cases, the failure to integrate can result in the inability to obtain the desired inputs at reasonable prices. In other instances, an integrated firm may be severely affected by economic fluctuations due to overheads that the unintegrated firms do not bear. Research on vertical integration has stressed the balance between the inflexibility of integration and the cost reduction and/or potential increase in market power that integration may allow.

The competitive environment of liner conferences

Abstract: Although liner conferences are traditionally assumed to possess effective monopoly power, such a view ignores many important aspects of their competitive environment. This article examines some of these neglected competitive features and shows how they may decisively influence conference pricing strategies. In the analysis of linear shipping, the notion that conferences are effective monopolists lies at the root of many of the grievances of the conference system. It has also become an integral part of the conventional wisdom of shipping economies, to such an extent that the monopoly power of conferences is virtually regarded as a matter of established fact rather than what it really is-namely a postulated assumption open to testing and refutation. It is the purpose of this paper to explore the competitive conditions of the industry in which liner conferences operate and to try and establish the extent and limitations of their market power. This will involve an analysis of hte bariers to entry which confer...

Coal transport and coal market integration

Abstract: The coal market is characterized by a competitive market allocation system distributing coal from fixed supply regions to fixed demand regions with geological, environmental, and transport capacity constraints. Considerable success in coal market forecasting has been recorded using linear programming models. These models have a natural extension to the evaluation of coal transport policy. Careful interpretation of the optimal solution and dual variables of an integrated coal transport and coal market model can be used to examine two specific issues: the determination of transport rates that are negotiated between parties having substantial market power, and the social costs and benefits associated with relieving potential transportation bottlenecks in coal delivery. This paper defines the appropriate linear programming model in some detail and shows how it is used to investigate these issues. /Author/

Market Power and Land Development Timing

Abstract: noticed the trend in recent years toward larger development projects. As a careful observer of these markets, the Urban Land Institute notes that "dramatic shifts in the scale and characteristics of real estate development projects have occurred. . . . Projects have become increasingly broad in scope, more complex, and involving much greater capital investment" (Wilburn and Gladstone 1972, p. 9). Factors cited as contributing to the trend are public programs like urban renewal and Title VII new, community loan guarantees and grants, and new capital sources brought about through the "corporatization" of the development industry. An indisputable consequence of this trend is that development decisions devolve to a smaller number of agents. This challenges the traditional view of economists that real estate markets are competitive and raises some of the market power issues long associated with industrial markets. The purpose of this paper is to examine the consequences of market power in real estate markets on the timing and efficiency of development.