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.     

HORIZONTAL MERGERS IN A DIFFERENTIATED COURNOT OLIGOPOLY

Using a standard differentiated goods quantity competition setting, we show three facts about horizontal two‐firm mergers that are not true for a homogeneous goods Cournot market. First, merger of two firms is profitable for the merging firms provided that goods are sufficiently distant substitutes. Second, merging of two firms can lead to more two‐firm mergers. Third, an initially non‐profitable two‐firm merger can occur in anticipation of subsequent mergers. These facts imply that mergers are more likely to occur in differentiated goods markets than in homogeneous goods markets.     

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.     

Intertemporal price cap regulation under uncertainty

This paper examines the intertemporal price cap regulation of a firm that has market power. Under uncertainty, the unconstrained firm 'waits longer' before investing or adding to capacity and as a corollary, enjoys higher prices over time than would be observed in an equivalent competitive industry. In the certainty case, the imposition of an inter-temporal price cap can be used to realise the competitive market solution; by contrast, under uncertainty, it cannot. Even if the price cap is optimally chosen, under uncertainty, the monopoly firm will generally (a) under-invest and (b) impose quantity rationing on its customers.     

Socially responsible firms and endogenous choice of strategic incentives

In this paper we are analyzing a mixed quantity-setting duopoly consisting of a socially concerned firm and a profit-maximizing firm. The socially concerned firm considers one group of stakeholders in its objective function and maximizes its profit plus a share of consumer surplus. Both firms have the option to hire a manager who determines the production quantity on behalf of the firm's owner. We find that in the subgame-perfect equilibrium of this game both firms hire a manager and delegate the production choice. If the unit production costs of the firms are similar, then the socially concerned firm has a higher market share and even higher profit. Interestingly, we observe that the relationship between the share of consumer surplus taken into account by the socially concerned firm and its profit is non-monotonic. As the share increases, the socially concerned firm's profit first increases and then decreases. The conclusion is that it pays off to take stakeholder interests into account, but not too much.     

Organizational Structure and the Choice of Price versus Quantity in a Mixed Duopoly

We consider the choice of price/quantity of a public and a private firm in a mixed differentiated duopoly. First, we study the way in which the strategic choice of the market variable is affected by different given organizational structures (managerial or entrepreneurial) of the public and the private firm. Second, we investigate how the price/quantity choice interacts with the endogenous choice of the organizational structure, thus determining a subgame perfect equilibrium at which firms choose to behave as price‐setters and to adopt a managerial structure.     

Are Public Firms Always Less Innovative than Private Firms?

The effect of information spillovers is analysed in a mixed duopoly where a profit‐maximizing private firm and a market‐share‐maximizing public firm decide whether to invest in a process innovation. It is shown that, when the spillover effect is rather strong, the public firm innovates in order to acquire a larger market share, while the private firm prefers that its rival invests in the new technology and reaps the benefits of technological leakages if investment costs are moderate. Thus, when information spillovers are taken into account, the public firm sometimes behaves more innovatively than the private firm, which is contrary to the well‐known results. Furthermore, in a mixed duopoly where only the public firm invests, its average cost exceeds that of its competitor, but investment remains an efficient strategy compared with non‐investment.     

Endogenous Choice of Strategic Contracts in a Mixed Duopoly with Bargaining Over Managerial Delegation Contracts

We revisit the endogenous choice problem of strategic contracts for the public firm and the private firm in a managerial mixed duopoly with differentiated goods. We consider the situation wherein the managerial delegation contracts are determined by maximising social welfare within the public firm, which is equal to the objective function of its owner, and through bargaining over the content of managerial delegation contracts between the owner and manager within the private firm. We show that, in equilibrium, when the manager of the private firm has high bargaining power relative to that of the owner, the public firm chooses a price contract, while the private firm chooses a quantity contract. However, there is no equilibrium market structure under the pure strategic contract class when the manager has sufficiently low bargaining power relative to that of the owner.     

Choosing price or quantity? The role of delegation and network externalities

We consider a differentiated duopoly and endogenise the firm choice of the strategy variable (price or quantity) to play on the product market in the presence of network externalities. We model this choice by assuming both competition between entrepreneurial (owner-managed) firms and competition between managerial firms in which market decisions are delegated from owners to revenue-concerned managers. While network externalities are shown not to alter the symmetric equilibrium quantity choice arising in the no-delegation case, sufficiently strong network effects allow us to eliminate the multiplicity of equilibria under delegation and lead to a unique equilibrium in which both firms choose price.     

EFFECTS OF ASYMMETRIC INFORMATION WITHIN A FIRM ON OLIGOPOLISTIC MARKET OUTCOMES

I analyze the implications of the Laffont–Tirole type agency problems on oligopolistic market outcomes. In the model, a firm's marginal cost is decreasing in managerial effort and is subject to an additive shock. Both managerial effort and the realization of the shock are a manager's private information. A firm first offers a menu of contract to its manager, and then competes in the product market. As in the model of single principal and single agent, the incentive contracts implement efforts that are distorted downward relative to full information. In this model, with multiple agency relationships, an additional source for upward distortion of effort emerges as a result of the interaction in the product market. The results are robust to whether firms compete in price or quantity.     

Product line pricing in a vertically differentiated oligopoly

Abstract This paper examines the joint pricing decision of products in a firm’s product line. When products are distinguished by a vertical characteristic, those with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is an additional price premium for products on the industry and/or the firm frontier, that is, for the products with the highest value of the characteristic in the market or in a firm’s product line. We also investigate the existence of price premia for lower‐ranked products and other product line pricing questions. Using personal computer price data, we show that prices decline with the distance from the industry and firm frontiers, even after holding absolute quality constant. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). There is also evidence that a product’s price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm’s offerings constant), possibly as an attempt to reduce cannibalization. Finally, a product’s price declines with the time it is offered by a firm, suggesting intertemporal price discrimination.     

RANDOM SHOCK UNCERTAINTY AND INVESTMENT REVERSIBILITY: REAL OPTION FRAMEWORK

This paper examines, in the presence of random shock, how changes in reversibility of investment affect a firm's optimal investment strategies including the investment timing (trigger) and quantity. Existing results do not consider random shock, where the quantity is independent of the degree of reversibility and the investment trigger is always decreasing with the degree of reversibility. In contrast, we show that with random shock, the quantity exhibits an inverse U‐shape, and the investment trigger is not always monotonically decreasing with the degree of reversibility. Additionally, we show that the firm undertakes a smaller quantity with random shock than without random shock for any degree of reversibility. Finally, we find that the presence of random shock decreases firm value, which implies that random shock is costly for firms.     

Technological Upgrading under Tariffs and Equivalent Quotas*

This paper compares the effect of tariffs and that of equivalent quotas on the domestic firm’s production technology choice when it competes with a foreign firm in the domestic market. It is shown that under Bertrand price competition, the ranking of technology under tariff protection and quota protection is ambiguous, as it depends on the relative strength of the strategic vs output effects. The equivalent quota regime can generate a higher‐technology (implying a lower production cost) choice than the tariff regime if the strategic effect dominates the output effect. In contrast, the technology level is necessarily higher under the tariff regime than under the equivalent quota regime when the firms engage in Cournot quantity competition.     

企业与市场:相关关系及其性质——一个基于回归古典的解析框架

通过对科斯替代逻辑的反思 ,重新考察了企业与市场的相关关系。认为交易费用的提出虽然打开了新古典企业的“黑箱” ,但是由此来解释企业的性质 ,其结论与现实相悖。本文提出了一个趋于古典的分析框架 ,发现企业与市场是分别建立在两种不同但有紧密相关性的分工基础上的 ,因而 ,它们各自的性质及其相互关系源于一般分工与个别分工各自的性质及其相关关系———企业是要素所有者为分享“合作剩余”而达成的合约 ,而市场则是商品所有者交换比较优势的制度安排。两者互补而不相互替代。这一结论较好地解释了实体经济中不论是企业规模 ,还是企业数量都在不断扩张 ,同时市场范围随之不断扩展 ,两方面相互促进、正相关推进发展的现实。     

Strategic competition and optimal parallel import policy

Abstract In a two‐country Hotelling type duopoly model of price competition, we show that parallel import (PI) policy can act as an instrument of strategic trade policy. The home firm’s profit is higher when it cannot price discriminate internationally if and only if the foreign market is sufficiently bigger than the domestic one. The key mechanism in the model is that the home firm’s incentive to keep its domestic price close to the optimal monopoly price affects its behavior during price competition abroad. We also analyze the welfare implications of PI policies and show that our key insights extend to quantity competition.     

Cost Signals under Uncertain R&D Outcomes

When it is difficult for firms to differentiate their products from those of their competitors, research and development (R&D) spending on process innovation to lower the cost of production is crucial for profitability. However, the information asymmetry in production costs that results from innovation reduces the efficiency of all firms in a market for a homogeneous good. We employ a signalling game to discuss the feasibility of utilising R&D spending and output levels as cost signals in an environment of quantity competition. The results show that a firm does not spend its money on R&D solely to signal the type of cost. Rather, R&D spending may be chosen as a cost signal over the output level only if expenditures on R&D can lead to a sufficiently high probability of reducing production costs.     

中国汽车工业的市场规模和企业数量研究

本文根据Bresnahan&Reiss(1 991 )的文章所发展的模型和计量方法 ,对中国汽车工业的市场规模和企业数量进行回归分析。证实了在汽车产业中同样存在着市场规模和企业数量正相关关系 ,并且从实证的角度衡量了中国汽车工业规模小、企业数量多、投资分散的程度。我们的经济计量分析表明 ,在当今中国的汽车行业 ,企业实际数目与理论估算的合理企业数目相吻合 ,且单个企业的生产尚未严重受到“最低市场需求量”这一门槛水平的制约的省份 ,只剩下上海、天津和吉林三个省市。这从一定程度上揭示了 ,下一步中国汽车行业的重组、兼并与整合的任务有多么艰巨     

Endogenous asset ownership structures in deregulated markets

This paper determines the equilibrium ownership structure in an emerging market deregulated by a joint privatization and investment liberalization. It is shown that bidding competition in the privatization stage is not sufficient for reaching an efficient equilibrium market structure. Competition in the ensuing entry stage is also required. Otherwise, one firm can induce another to take the role of the weak firm in the subsequent product market competition, by making concessions in the bidding in the privatization auction. It is also shown that Employment Guarantees may “help” the buyer of the privatized firm “abstain” from investing and thus create a less competitive market structure.     

Price and quantity regulation in general equilibrium

We consider a general equilibrium model with a production externality (e.g. pollution), where the regulator does not observe firm productivity shocks. We examine quantity (permit) regulation and price (tax) regulation. The quantity of permits issued by the regulator are independent of the productivity shock, since shocks are unobserved. Price regulation implies use of the regulated input is an increasing function of the productivity shock because firms take advantage of a good productivity shock by increasing input use. Thus price regulation generates higher average, but more variable, production. Therefore, we show that in general equilibrium the relative advantage of quantity versus price regulation depends not only on the slopes of marginal benefits and costs, but on general equilibrium effects such as risk aversion. The general equilibrium effects are often more important than the slopes of the marginal benefits and cost curves. In the simplest model, a reasonable risk aversion coefficient implies quantity regulation generates higher welfare regardless of the benefit function.     

Regulation,Local Monopolies and Spatial Competition

Many regulated industries involve an oligopoly market structure. We examine optimal incentive regulation for a duopoly model of spatial competition when firms have private cost information. Market structure is endogenous as regulation determines market segments for firms and output distribution across consumers in each firm's market. By varying the assignment of consumers to firms, a relatively more efficient firm can be rewarded with a larger market, thus reducing quantity incentive distortions. We derive the optimal policy, assess the impact of asymmetric information relative to full information, and examine extensions to allow for ex ante asymmetries in firm structure.