Market Structures with Multi-product Firms: Welfare Analysis and Policy Implications

In the real world firms operate in more than one market and consequently can exploit scope economies and/or demand complementarities. Introducing multi-product firms in the picture makes the standard assumption that more competition is always beneficial for social welfare less clear-cut. In this paper we show that a concentrated structure can be socially preferable in the presence of scope economies, whereas a fragmented structure has to be preferred when products are close substitutes. We also identify either analytically or numerically the socially optimal market structure when aggregate output (and then consumer surplus) or total welfare are used as ranking criteria. The analysis is useful for discussing which market structure should be favored by policy makers aimed at introducing competition in sectors which were previously monopolized by state-owned firms. To that respect, our findings point out that not only the level (number of firms) but also the form (type of firms) of competition matters.     

Price Discrimination and the Cruise Line Industry: Implications for Market Definition,Competition, and Consumer Welfare

This article extends the price discrimination literature and applies it to market definition and competitive effects analysis in recent mergers in the cruise line industry. In that industry, short run output is fixed. If firms want to increase price and restrict output to price‐insensitive customers, they have to increase the output and lower price to the price‐sensitive customers. We show that with fixed output (1) it is in firms’ interest to engage in price discrimination, (2) firms have increased ability to engage profitably in price discrimination as the intensity of competition decreases, and (3) the average price of price‐sensitive and ‐insensitive consumers increase with reduced competition. Unlike the economists at the Federal Trade Commission, our analysis suggests that cruise lines engage in third‐degree price discrimination. Moreover, the cruise industry could be a separate market and a reduction in the number of competitors might raise average prices.     

Worlds apart: The changing market geography of the German machinery industry

German producers of advanced machinery have long enjoyed a reputation for technical excellence and export success. The literature attributes much of the industry's success, inter alia, to various forms of interfirm cooperation between SMEs within spatial clusters such as that found in Baden-Württemberg. However, this industry entered a period of relative crisis in the early 1990s, experiencing stagnant or declining sales and growing competition from foreign firms. Among the reasons commonly advanced to explain this crisis are the decline of intraregional cooperation (especially with other machinery producers), the loss of domestic sales in the wake of the German car industry's downturn, and excessively costly wages and benefits for workers in the machinery industry. This paper offers an alternative interpretation, based on geographical shifts in the industry's markets and the difficulty of sustaining close, mutually beneficial interaction with customer firms abroad. Evidence comes from a study of the production and use of advanced manufacturing technologies, involving interviews with machinery producers in Germany and user firms in Canada. Interviews reveal that, in the light of less than satisfactory relations with German machinery firms, North-American customers are turning increasingly to domestic sources of supply. In responding to these challenges, the German machinery industry is now instituting changes to its spatial organization which may undermine the future integrity of its traditional home production regions.An earlier version of this paper was delivered at the Annual Meetings of the Association of American Geographers, San Francisco, CA, April 1, 1994.     

Founding family leadership and industry profitability

In this article, we argue that firms in high-margin industries can benefit from founding family influence. Specifically, in more profitable markets, the influence of the founding family provides an additional corporate governance-monitoring function. The sample consists of 294 firm-year observations from 98 publicly traded companies headquartered in Sweden, representing approximately half of all non-financial traded firms. Our support that the effect of family leadership in publicly held firms should be assessed in relation to the intensity of industry competition.

The shipping strategies of internet retailers: Evidence from internet book retailing

Managing the shipment of goods to consumers is one of the central aspects of retail competition on the internet. In this article, we analyze internet retailers’ shipping strategies using data from the internet book retailing industry. We find that, controlling for a variety of observable firm characteristics, firms with lower product prices offer lower shipping fees and higher quality shipping in terms of average delivery time, compared to firms with higher product prices. These patterns cannot be readily reconciled with a large class of models of competition under perfect consumer information. Theories based on imperfect consumer information can explain the findings better.

Spatial competition with endogenous location choices: An application to discount retailing

This paper examines the importance of geographical differentiation in store location decisions of firms in the retail discount industry. Using a novel data set that includes the store locations and accompanying market conditions for all stores belonging to the Wal-Mart, Kmart, and Target chains, we study the factors that influence the entry and location decisions of these firms. The model involves an incomplete information game between the three players where each firm has private information about its own profitability. A key feature of our modeling approach is that it permits asymmetries across firms in the impact of exogenous market characteristics and competitive interaction effects. Variations in the exogenous firm specific characteristics, such as the distances from the market to firms’ headquarters and the nearest distribution centers, serve as exclusion restrictions and provide the source for model identification. Parameter estimates of the payoff functions are used to predict the equilibrium market structure under a variety of market conditions that provide insights into the competitive landscape of the industry. Results show that all firms exert a strong negative impact on competitors when they are in close proximity, but the effect decreases with distance to rivals suggesting strong returns to spatial differentiation in this industry. Target stores fare well under competition except when these competitors are in close proximity. Wal-Mart’s supercenter format is found to be the most formidable player as it substantially impacts competitors even at a large distance. We also find significant asymmetries across players in their response to market conditions and competition interactions.

Small firm entry in manufacturing industries: Lower Saxony, 1979–1989

This paper is an empirical study of inter-industry and inter-temporal variations in entry of new firms using longitudinal data covering all manufacturing establishments in Lower Saxony between 1979 and 1989. Patterns of entry are reported for 29 industries based on numbers of new firms, gross rates of entry, and entry intensities (shares of employees) in different types and size classes of new firms. Entry varies considerably between firm types, industries, and over time. Focussing on entry by small single firms an empirical model is applied to search for industry characteristics that are highly correlated with entry. Pooling of cross-section and time-series data allows to control for influences of varying macroeconomic conditions and unobserved industry characteristics. A highly robust estimation method is applied for the first time in a study of entry rates, and it turns out that extreme observations often have large effect on the results. Entry intensity tends to be positively related to industry growth, concentration, and high unemployment, but negatively to high interest rates, profits, and (insignificantly) to intensive use of capital and R&D. I plead for further research vialearning by asking those who are doing.This paper is part of the research project Production, Employment Growth, and Exports by Lower Saxonian Firms. The computations based on the establishment level data from the official surveys of the manufacturing sector were made possible by a special arrangement between the Ministry of Economics, the Statistical Office, and the Labor Research Group at the Department of Economics, Hannover University. I thank Uwe Rode from the Lower Saxonian Statistical Office for preparing the longitudinal establishment level data base. Financial support from research funds provided by the state of Lower Saxony is gratefully acknowledged.     

Unobservable industry characteristics and the innovation-concentration-advertising-maze: Evidence from an econometric study using panel data for manufacturing industries in the FRG, 1979–1986

In discussing the nexus between innovations and market structure it is often argued that industry characteristics (called opportunities) might play an important role as determinants of innovation, and that simultaneity rather than one-way causality prevails. We consider a three-equation model for innovation, advertising, and concentration. Based on pooled cross-section time-series data for 26 German manufacturing industries we estimate single equation models with and without fixed industry and/or time effects (to control for unobservable industry or time effects, respectively) and simultaneous equation systems including fixed effects, and controlling for extreme cases (outliers) or not. Furthermore, we use two different measures for innovations, i.e., the percentage of shipments due to new products, and the percentage of firms which classified themselves as innovators. Our results can be summarized as follows: (1) The firm size has no significant effect on innovation. One can, therefore, not conclude from this data set that large firms are more innovative than small ones; (2) unobservable industry effects do matter; (3) the treatment of outliers does matter; (4) simultaneity does matter (5) the way innovations are measured does matter; (6) different stories could be told based on the results of the systems of interdependent equations estimated.Earlier versions of this paper were presented at the annual meeting of the committee of industrial economists of the Verein fuer Socialpolitik at Hohenheim University in March, 1990, and at the 1990 conferences of the European Economic Association and the European Association for Research in Industrial Economics in Lisboa. We would like to thank participants of these meetings and three anonymous referees for helpful comments. A more complete version of the paper with a set of tables for the results of all computations is available from the authors on request.     

The Financial Conditions for Swedish SMEs: Survey and Research Agenda

This paper shows that in two important sectors of Swedish industry in the early 1990s the existence of finance demand (internally generated) constraints in addition to the familiar finance supply (externally generated) constraints on businesses are a significant empirical phenomenon. Firms are aware that relinquishing some control would improve performance. However, the returns in growth, profits and survival are not sufficient to offset the utility of control loss. Owners of younger firms, especially in Business Services, regard very favourably the added expertise of new (preferably angel) equity holders, with one in three such firms having actively sought new owners. Equity finance is therefore to be regarded as a package from the viewpoint of the smaller firm, with transfer of management skills from venture capitalist to firm sweetening the bitter pill of control-loss.     

Formation,growth and survival; Small firm dynamics in the U.S. Economy

Four out of five new firms fail within the first five years. This statement has been made so many times that most people believe it is true. But it isn't. In fact, using a relatively new data source developed by the U.S. Small Business Administration, we found that on the average, 39.8 percent of new firms survive six or more years. This is equivalent to a failure rate of three out of five, substantially lower than popularly believed.Survival rates vary by industry with manufacturing having the greatest (46.9 percent) and construction the smallest (35.3 percent). More important, however, is the discovery that survival rates more than double for firms that grow. Even a small amount of growth boosts the average survival rate to 66.3 percent; that is two out of three growing firms survive. The earlier in the life of the business that growth occurs, the higher the chance of survival.But, most firms do not grow in the first four years. On average, only ten percent of firms show growth in the first four years. By the sixth year, however, 34.3 percent of the firms show growth and over fifty percent show growth within eight years.To put the old adage to rest, two out of five new firms survive at least six years and over half of the survivors grow.     

The Exploration of Technological Diversity and Geographic Localization in Innovation: Start-Up Firms in the Semiconductor Industry

This paper examines the innovative ability of small firms in the semiconductor industry regarding their exploration of technological diversity and their integration within local knowledge networks. Through the analysis of patent data, we compare the innovative activity of start-up firms and larger firms. We find that small firms explore new technological areas by innovating in less crowded areas. The analysis of patent citation data reveals that small firms are tied into regional knowledge networks to a greater extent than large firms. These findings point to the role of entrepreneurial firms in the exploration of new technological spaces and in the diffusion of their accumulated knowledge through local small firm networks.     

The strategic role of quality in small size firms

It is often claimed that, especially in mature industries, European firms can compete against low-cost NICs firms only if they are able to implement quality based strategies. The emphasis on the strategic role of quality, however, often leads to underestimate the extent of organizational and economic efforts, needed to turn quality from a potential opportunity into a real advantage. The lack of a thorough comprehension of the requirements of a quality based strategy can question the effectiveness of the investments some firms plan to improve their quality level. These firms can in fact remain stuck in the middle, if they do not have enough resources to turn quality into a source of sustainable competitive advantage.This paper is aimed at a better comprehension of both benefits and costs of a quality based strategy, with regard to a specific class of firms, Small Size Firms (SSFs), where a strategic use of quality is more difficult. The paper is articulated into two parts. Part one discusses the main obstacles facing the adoption of a quality based strategy by SSFs. A dynamic model for the adoption of this strategy over time, aimed at minimizing the risks for SSFs, is also presented.Part two describes the results of an empirical research, aimed at verifying the viability of quality based strategies in an industry composed only by SSFs, the shoe-machinery industry. The empirical research supports the viability of the model presented in the first part of the paper.     

Information and Disclosure in Strategic Trade Policy: Revisited

In a recent paper, Creane and Miyagiwa (J Int Econ 75:229–244, 2008) show that the mode of competition determines whether information sharing occurs between firms and governments within an international duopoly context in which the firms are located in different countries. In this paper, we show that when a price instrument is implemented to control exports, then the relative number of firms located in each country is also critical. In particular, we illustrate that with quantity competition and under the presence of demand and cost uncertainty, information sharing does not occur when the number of firms in one country is higher than the number of firms in the other country and vice-versa. However, when direct quantity controls are implemented the number of firms is irrelevant and information sharing always occurs. Moreover, we show that the informational prisoner’s dilemma restricts only to the case where subsidies are implemented in both countries when the number of firms across countries is equal.     

Start-ups as drivers of market mobility: an analysis at the region–sector level for The Netherlands

Although recent literature suggests that competition among incumbent firms is caused by the entry of new firms, this relationship has not yet been tested directly. In this study a regression model is established in which a direct measure of competition among incumbent firms, the market mobility rate, is explained by start-up rates and control variables. The results show that the effect of start-ups on market mobility varies by sector. There is a strong positive relationship for industry sectors but an insignificant relationship for service sectors. These results suggest differences in the types of entry between sectors and in the roles start-ups play in different sectors.     

Has Import Disciplined Swedish Manufacturing Firms in the 1990s?

This paper analyses how increased integration and the ongoing enlargement of the EUs internal market affected the performance of Swedish manufacturing firms. The pro-competitive effect of international trade, in term of intensified import competition on domestic firms market power, has been investigated extensively at the industry-level. In contrast to previous studies, this analysis is based on detailed firm-level information and import data divided into both an EU member group and a group of recently approved EU member candidates. It focuses on how imports from these groups, together with imports from other non-European trading partners, impact on firm-level profitability, while taking firm-specific efficiency effects into account. The findings are that imports from the new EU-candidates, Japan and Asian newly industrialized countries seem to have a disciplinary effect on firm-level profits, whereas imports from EU-member countries only appear to have an impact on firms with large market shares and in highly concentrated industries.     

The Japanese Automobile Tyre Industry under Scrutiny

This paper investigates the evolution of competition in the Japanese tyre market from 1976 to 2010 (35 years). An innovative measure of competition developed by Jan Boone is employed, as well as traditional competition indices and price–cost margin regressions, using accounting data at the firm level. Traditional indicators such as the concentration ratio and Herfindahl–Hirschman Index (HHI) suggest a very high market concentration. However, regressions using the two Boone measures and price–cost margin suggest that some competitive behavior in the Japanese tyre industry exists. By introducing dummy variables for the Sumitomo–Ohtsu merger and antimonopoly action by the Japan Fair Trade Commission, the Boone-style regressions also suggest that the merger had no impact, but the cartel breakup did have a statistically significant (p < 0.1) impact on firm’s profitability in this oligopolistic market.     

Small-v-large firms in Australian manufacturing

The measurement of the relative efficiency of the sub-groups of large and small enterprises in each Australian manufacturing industry is undertaken in this study using two concepts of efficiency. Technical efficiency is assessed in relation to an estimated frontier production function while economic efficiency is expressed in terms of a sales based price-cost margin — a proxy for profitability. The large enterprises were found, for the most part, to be more technically efficient than the small. In terms of the profitability measure the small firms were just as likely to be the more efficient in any industry. They were generally more dispersed around the mean of both efficiency measures than were the large. The industries in which the large (or small) firms were found to be more technically efficient were not necessarily the industries for which the large (or small) firms were the more profitable. The study highlights the relationships between technical and economic efficiency and emphasises the need for careful definition of the concept efficiency when making comparisons of performance among enterprises.     

Advertising budgets in competitive environments

Firms can approach advertising competition either by setting advertising budgets (as in the percentage of sales method) or target sales levels (as in the objective and task approach). We study firms’ incentives to adopt one or the other posture using a two-stage model of duopolistic competition. In the first stage, each firm chooses to commit either to an advertising budget, letting its sales follow from the market response function, or to a desired sales level, promising to adjust its advertising spending accordingly. In the second stage, firms choose the actual levels of their advertising budget or sales target. When prices are exogenous, we show that, due to strategic effects, if a firm benefits from its rival’s advertising (as when advertising increases awareness of the product category) then setting an advertising budget dominates setting a sales target. On the other hand, if a firm is harmed by its rival’s advertising (as when advertising increases the firm’s share of a fixed market), then committing to a sales level dominates. We extend these results in several directions and show that when firms engage in price competition as well as advertising the nature of advertising and product-market competition interact to determine whether setting an advertising budget or sales target dominates.

Banking Competition and SMEs Bank Financing. Evidence from the Italian Provinces

This work investigates whether local differences in banking competition impact on the amount of bank debt used by Italian small and medium sized manufacturing firms. Sample selection and Double Hurdle models are adopted as the process, which results in the choice of bank financing may differ from that determining its amount. Our main finding is that more competitive banking markets seem to be associated with relatively higher usage of bank debt by less transparent firms. On the other hand, a higher banking competition seems to have no effect on the probability of receiving bank loans.

Innovation and Competition in the Netherlands: Testing the Inverted-U for Industries and Firms

Competition can be good or bad for innovation by firms. On the one hand it stimulates firms to innovate in order to escape competition, on the other hand it hampers firms to reap additional profits from innovation. The recent literature has embraced a model that describes an inverted-U shape relationship between competition and innovation at the industry-level. With the Price Cost Margin and Profit Elasticity as measures of competition, we find evidence supporting this prediction using industry data from the Dutch National Accounts. Moreover, we test the non-linear relation at the micro-level, with special attention for the role of the distribution of technology within industries. We find evidence that there is a threshold for this ‘technology spread’ at which the (marginal) effect of competition on innovation activity by firms turns from positive to negative.