The empirical content of Cournot competition

We consider the testable implications of the Cournot model of market competition. Our approach is nonparametric in the sense that we abstain from imposing any functional specification on market demand and firm cost functions. We derive necessary and sufficient conditions for (reduced form) equilibrium market price and quantity functions to be consistent with the Cournot model. In addition, we present identification results for the corresponding inverse market demand function and the firm cost functions. Finally, we use our approach to derive testable restrictions for the models of perfect competition, collusion and conjectural variations. This identifies the conditions under which these different models are empirically distinguishable from the Cournot model. We also investigate empirical issues (measurement error and omitted variables) related to bringing our testable restrictions to data.     

On the simultaneity of innovations and market structure

This paper examines the determinants of innovations and market structure within a simultaneous framework. From a competitive fringe model, quasi-conditional factor demand functions are derived that explain product and process innovations in terms of factor prices and market structure variables such as relative firm size, market size, and the concentration ratio where the latter set of variables result from the same optimizing process.Empirical evidence is gained from a cross section of 2276 West German firms in the manufacturing sector. In contrast to many other empirical studies, product and process innovations are measured by two dichotomous variables. An exogeneity test for the probit model is worked out and the conditional maximum likelihood estimator that emerges from this test is applied. The results show that simultaneity does matter, even if innovations are explained by market structure variables at the firm level. Accounting for endogeneity and cross-equation restrictions changes the results substantially.     

Cyclical dumping and correlated business cycles in imperfect markets: empirical applications to the Canadian pulp and paper industry

This paper deals with theoretical and empirical aspects of firm behaviour under imperfect competition and uncertainty. It contains an analysis of the behaviour of a firm facing a stochastic demand curve for its output in the ordinary (home market), but in addition with access to a backstop (international) market. The theory is thus a variation of the theory of dumping. Since the expected volume in general differs from the volume at the expected price, a price-setting mode is not equal to a quantity mode. Cyclical dumping, in the sense of a negative correlation between domestic and foreign sales, would occur if the firm adhered to a pricing mode in the ordinary market, and was able to learn about the demand conditions in the ordinary market before it decided how much to sell in the international market. The expirical part of the paper is an illustration of how to test for different behavioural modes and cyclical dumping by applying the model to the CAnadian pulp and paper industry. In the empirical exercise the domestic markets are the North American market for pulp and newsprint, while the backstop market are the corresponding European markets. One of the main results of this exercise is that the Canadian industry seems to operate under pricing behaviour for both pulp and newsprint, while cyclical dumping on the European market applies only for pulp.     

Decomposing service exports adjustments along the intensive and extensive margin at the firm‐level

Using a panel data set of Austrian service exporting firms this paper examines the determinants of service exports at the firm/destination country level. We implement a random effects Heckman sample selection firm‐level gravity model as well as a fixed effects Poisson model. Expected firm‐level service exports are decomposed into the intensive and extensive margins of adjustment as a response to counterfactual changes. We find market demand to be a key determinant. Results also suggest high service export potentials due to regulatory reform in partner countries within the EU. Adjustments at the extensive margin only play a marginal role. Increases in firm size as well as changes in distance related costs are most effective in developing new export relationships in services.     

Sequential location under one-sided demand uncertainty

In entering a new market, firms face demand uncertainty. We depart from the usual Hotelling duopoly model with sequential entry. We allow firms to locate outside of the city and assume that market conditions are common knowledge. We then introduce one-sided demand uncertainty. We find that demand uncertainty can be seen as a differentiation force when faced by the first entrant and as an agglomeration force when faced by the second entrant. Finally, the second firm’s imperfect information implies higher welfare losses.     

Duopoly signal jamming

Summary This paper examines a repeated duopoly market with heterogeneous outputs. Firms have (common) prior beliefs over the values of an unknown parameter of each firm's demand curve. Firms cannot observe rivals' quantities, but can observe market prices, which are subject to random disturbances and hence provide noisy information that firms use to update their beliefs concerning the unknown parameters' values. Each firm can potentially signal jam, or strategically vary its output level in order to manipulate the distribution of likely market prices and hence the likely inferences drawn by the opponent. We find that the opportunity to signal-jam introduces two conflicting effects, arising out of the desire to manipulate expectations concerning each of the two demand curves. Depending upon the relative magnitudes of these two effects, signal-jamming may lead firms to either increase or decrease period-one quantities. If the firms are symmetric, then the opportunity to signal jam induces both firms to increase output in order to induce their rival to conclude that demand is unfavorable. However, if the firms believe almost surely that one of the possible parameter values is true for firm 2's demand curve (for example), then firm 1 may signal-jam by producing less output.We thank two anonymous referees, an associate editor and Pieter Kop Jansen for helpful comments that corrected some errors. Larry Samuelson is grateful to the Center for Economic Research at Tilburg University and the Department of Economics at the University of Bonn for support. Financial support by the Deutsche Forschungsgemeinschaft (DFG) through Sonderforschungsbereich 303 is gratefully acknowledged.     

External Economies of Scale and Optimal Plant Location

This paper departs from earlier work on location theory by introducing external economies of scale into the Weber–Moses location model. It is shown that under Cournot–Nash competition, when external economies prevail, constant returns to scale at the firm level is not a sufficient condition for ensuring the invariance of the firm's optimal location with respect to a change in market demand, regardless of whether or not free entry is allowed. Moreover, when free entry is allowed and the production function exhibits decreasing returns to scale, but with very strong external economies, the optimal location moves towards or away from the market as demand increases according to whether the demand function is convex or concave. These results are different significantly from the conventional wisdom.     

Risk sharing and export performance with firm heterogeneity

We investigate how market uncertainty affects the export performance of a firm through financial frictions. We first extend Melitz's (2003) heterogeneous firm trade model by incorporating demand shocks, linking the demand uncertainties to the financing costs of firms. In this extension, the default probability is endogenously determined by a firm's productivity and demand uncertainty. Hence, firms with higher productivity or lower market uncertainty are offered lower interest rates and thus show better export performance. As an application, we also show that a risk-sharing mechanism, that pools default risk for a certain group of firms, lowers the default risk. This mechanism allows banks to charge lower interest rates to the member firms and therefore ultimately improves their export performance in both extensive and intensive margins. We find a real-world example of such a mechanism from business groups in Korea. Using Korean firm-level data, we show that the more diversified the business group, the greater the likelihood that its member firms export and the bigger their export revenues. We also show that our results are robust to alternative explanations for Korean business groups’ export competitiveness.     

Market power and compliance with output quotas

This paper examines the compliance behaviour of a dominant firm in an output quota market when the firm is able to exercise market power in both the quota and the output markets. Provided the firm has an initial quota endowment which is strictly positive, under some circumstances the firm may find it profitable to comply or even over-comply in its quota demand, even in the absence of enforcement. The results are compared to those found in the pollution permit literature for a firm with market dominance only in the permit market, to which some additional observations are also added concerning efficiency outcomes under non-compliance.     

The efficiency of SMEs in Thai manufacturing: A stochastic frontier analysis

This study examines the technical efficiency of Thai manufacturing SMEs and their firm-specific determinants utilising firm-level industrial census data for 1997 and 2007. Results from a stochastic frontier production function and technical inefficiency effects model reveal that Thai SMEs are overwhelmingly labour intensive with low average technical efficiency in both years. Results also indicate that firm size, firm age, skilled labour, location, type of firm ownership, government assistance, foreign investment and export activity are important firm-specific factors contributing to the technical efficiency of SMEs. Specific policies are warranted to improve Thai SMEs. These policy measures include: easier access to financial services, access to skilled labour, training of the workforce and entrepreneurs, addressing location and regional capacity inequities, encouraging foreign investment for operational synergies and export incentives for penetration in the world market.     

Effects of vertical integration on price and volume: An empirical inquiry

A simple model with two stages of production is used for deriving some empirically testable hypotheses. Firms (two upstream and two downstream) in the industry are either vertically integrated or not, hence the industry has three alternative patterns: Complete unintegrated, partially integrated, or fully integrated.Final good prices, outputs and profits of firms are different in each integration pattern but what is optimal can not be stated (i.e., pay-offs are much too complicated in order to solve the sub-game equilibrium).The essential feature of the model is that there are external markets for the intermediate inputs. Hence input trade between the four firms/divisions need not balance since excess supply or demand is traded at the external market. With this feature purely downstream exogenous shocks have no effect on upstream pricing nor production decisions if all four firms are unintegrated. Such exogenous shocks have non-zero effects if at least one firm is vertically integrated. There are also other dissimilarities in comparative statics of each industry integration pattern.An indirect method to test the effects of vertical integration on price and volume is presented and empirically tested. Depending on the vertical integration pattern of an industry exogenous shocks have dissimilar effects on prices and outputs of the final and intermediate good. A four equations system is estimated by using Finnish forest industry firm data. Final good demand rise has a reducing effect on both paper and pulp prices. Stumpage prices (upstream marginal costs) have a negative impact on paper and pulp production and a positive impact on prices. These effects from upstream (downstream) stage into downstream (upstream) market should not occur when all firms are unintegrated.This is a revised version of a paper which was presented at seminars at Brussels, Turku, Vienna, and Stuttgart. I would like to thank seminar participants (specially Frank Schmid) and anonymous referees for helpful comments. Financial support from the Marcus Wallenberg Foundation is gratefully acknowledged.     

Asymmetric Demand Information and Foreign Direct Investment*

We examine the FDI versus exports decision of firms competing in an oligopolistic (quantity‐setting) market under demand uncertainty and asymmetric information. Compared to a firm that chooses to export, a firm that chooses to set up a plant in the host market has superior information about local market demand. In addition to the well‐known tension between the fixed set‐up costs of investment, the additional variable costs of exports and oligopoly sizes, the incentive to invest abroad is explained by the strategic learning effect. FDI may be observed even if trade costs are zero. The analysis is robust to price competition and to the possibility that a foreign firm can engage in both FDI and exports.     

Firm integration strategies and imperfect labour markets

This paper introduces labour market imperfections into a three‐country model to study the determinants of firm integration strategies in an open economy. Accounting simultaneously for the decision upon in‐house production versus international outsourcing and the decision upon exporting versus horizontal foreign investment, the analysis points to a crucial role of labour market frictions for the interaction of vertical and horizontal aspects of firm integration strategies in a general equilibrium environment. Beyond that, the analysis sheds light on the consequences of integrating developing countries into the global market, thereby pointing to hitherto unexplored effects arising from adjustments of firm integration strategies. In a welfare analysis, we show that the existence of gains from trade crucially depends on whether firm integration strategies are endogenous or not.     

Product Emulation Strategies in The Presence of Reputation Effects And Network Externalities: Some Evidence From The Minicomputer Industry

A model of firm performance in the minicomputer industry is developed and estimated. We use an hedonic price formulation to analyze product design and pricing issues and a market share model to assess the demand effects of price-performance characteristics, installed base advantages and manufacturer reputation. The results, which are based on 1976–1983 data, demonstrate the importance of network externalities, price-performance competition and reputation. We utilize the estimated models to quantify the implications of several emulation strategies and several defensive strategies of incumbent manufacturers.     

Barriers to innovation in young and mature firms

This paper examines how firm age can affect a firm’s perception of the obstacles (deterring vs. revealed) that hamper and delay innovation. Using a comprehensive panel of Spanish firms for the period 2004–2011, the empirical analysis conducted shows that distinct types of obstacle are perceived differently by firms of different ages. First, a clear-cut negative relationship is identified between firm age and a firm’s assessment of both the internal and external shortages of financial resources. Second, young firms seem to be less sensitive to the lack of qualified personnel when initiating an innovative project than when they are already engaged in such activities. By contrast, the attempts of mature firms to engage in innovation activity are significantly affected by the lack of qualified personnel. Finally, mature incumbents appear to attach greater importance to obstacles related to market structure and demand than is the case of firms with less experience.     

Rapid Technology Change, ‘Technological Visions’, Corporate Organisation And Market Structure

This paper is a contribution to the analysis of how rapid technology change influences market structure. The paper uses a simple simulation model to explore the effects of four main factors on the development of market structure. These are: (1) the variance (or unpredictability) of the technology trajectory; (2) the speed with which the organisation's ‘technological vision’ adjusts to ongoing technological developments; (3) the absorptive capacity of each division in the multi-divisional firm to experience gained in other divisions; (4) the extent to which competence-destroying innovations generate greater cost penalties for the division of a multi-divisional firm than for a comparable mono-divisional firm. Simultion results are obtained for 100 technological trajectories, and a variety of parameterisations. While there is a tendency for noisier trajectories to disadvantage the larger multi-divisional firm, there are conditions under which such a firm benefits from a noisy technological environment. When competence-destorying innovations affect the division of a multi-divisional firm no worse than the comparable mono-divisional firm, the multi-divisional firm is not disproportionately affected by a noisy trajectory. It may, however, be seriously damaged by a slow adjustment of technological vision, especially when all scale economies are dynamic (rather than static). The simulations confirm that the absorptive capacity of each division to experience from others can be critical in determining the ultimate market structure. A brief empirical motivation for the model is offered by reference to some case studies of the semiconductor industry.     

Access to credit and its determinants: A comparison of survey‐based measures

Measuring access to finance represents an important challenge in empirical studies. Due to data limitations, perception‐based indicators or the usage of finance are often used as approximations of access to finance. However, these approximations disregard firm‐specific differences in the demand for finance. We derive a direct measure of access to credit from firm‐level survey data and explicitly model credit demand. We study the determinants of access to credit and disentangle, in contrast to other measures, their effects on demand for and access to credit. We find that the usage of credit is not a sufficient approximation, while perception‐based indicators are surprisingly precise.     

Uncertainty Resolution and Strategic Trade Policy in Oligopolistic Industries

This paper investigates a government's choice of strategic trade policy when the domestic firm observes a private noisy signal about the stochastic market demand while in competition with a rival firm. The government chooses between quantity controls and subsidies to maximize profits of the domestic firm. Assuming that firms compete à la Cournot in a third country, it is shown that the optimal trade policy depends not only on demand uncertainty but also on the predictability of the true market demand by the firms.     

INTERNATIONAL WELFARE AND EMPLOYMENT LINKAGES ARISING FROM MINIMUM WAGES*

We formulate a two‐country model with monopolistic competition and heterogeneous firms to reconsider labor market linkages in open economies. Labor market imperfections arise by virtue of country‐specific real minimum wages. Abstracting from selection of just the best firms into export status, standard effects on marginal and average firm productivity are reversed in our model, yet there are significant gains from trade arising from employment expansion. In addition, we show that with firm heterogeneity an increase in one country’s minimum wage triggers firm exit in both countries and thus harms workers at home and abroad.     

Utility Regulation and Risk Allocation: The Roles of Marginal Cost Pricing and Futures Markets

The effects on consumer welfare of requiring a utility facing cost or demand risk to use either a fixed retail price or marginal cost pricing are assessed. With marginal cost pricing and cost volatility an efficient futures market allows consumer welfare to be at least as high in every state as with the fixed price. With demand risk marginal cost pricing can benefit the consumer in every state without harming the firm if the profit difference is transferred to the consumer. A futures market can act as a partial replacement for the transfer.