Economic geography with tariff competition

A simple two-country model of economic geography is constructed in order to examine the effect of tariff competition on the spatial distribution of manufacturing activities as well as on welfare. We show that when the transport cost is small, tariff competition with firm migration leads to a core-periphery economy, where one of the two countries imposes no tariff in Nash equilibrium. We also show that when the transport cost is sufficiently large, both countries impose a positive tariff, which decreases the welfare of both countries.     

Profit sharing with a contest among agents

We consider how an internal competition in the form of a contest among agents can be combined with profit sharing in team production. The principal can choose to share between the principal and the agents as well as the sharing rule with a competitive contest among the agents. We show that under some conditions, a pure strategy equilibrium of profit sharing exists. In equilibrium, internal sharing involves a contest that is more competitive than proportional sharing, and the principal can get higher profit compared to proportional sharing.     

Voluntary Quality Disclosure under Price‐Signaling Competition

We analyze an oligopolistic competition with differentiated products and qualities. The quality of a product is not known to consumers. Each firm can make an imperfect disclosure of its product quality before engaging in price‐signaling competition. There are two regimes for separating equilibrium in our model depending on the parameters. Our analysis reveals that, in one of the separating regimes, price signaling leads to intense price competition between the firms under which not only the high‐quality firm but also the low‐quality firm chooses to disclose its product quality to soften the price competition. Copyright © 2011 John Wiley & Sons, Ltd.     

Firm governance and duopoly: in weakness may lie strength

The paper proposes a model of firm governance when two firms compete in a duopoly. The paper assumes that a motivational asymmetry exists between owners and managers: owners wish to obtain maximum profits, managers wish to maximize sales. Managers perceive that salary, social status or future job prospects are more closely associated with firm size (i.e. sales) than with firm profits. The paper takes an agency view of the firm where owners only indirectly influence the behaviour of firms through the level of control they exert over managers. The paper demonstrates that a weakly governed firm, acting as a sales maximizer, can gain a competitive advantage over a strongly governed firm, acting as a profit maximizer. The paper examines the extent of this advantage under cost leadership and differentiation strategies. The paper also demonstrates that the objectives of profit maximization and maximization of competitive advantage are not necessarily congruent. The paper graphically represents the profit functions of the two firms illustrating the Nash equilibrium under Cournot and Stackelberg conditions. Copyright © 2007 John Wiley & Sons, Ltd.     

Do firms share the same functional form of their growth rate distribution? A statistical test

We propose a hypothesis testing procedure to investigate whether the same growth rate distribution is shared by all the firms in a balanced panel or, more generally, whether they share the same functional form for this distribution, without necessarily sharing the same parameters. We apply the test to panels of US and European Union publicly quoted manufacturing firms, both at the sectoral and at the subsectoral NAICS level. We consider the following null hypotheses about the growth rate distribution of the individual firms: (i) an unknown shape common to all firms, with all the firms sharing also the same parameters, or with the firm variance related to its firm size through a scaling relationship, and (ii) several functional shapes described by the Subbotin family of distributions. Our empirical results indicate that firms do not have a common shape of the growth rate distribution at the sectorial NAICS level, whereas firms may typically be described by the same shape of the distribution at the subsectorial level, even if the specific shape may not be the same for different subsectors.     

Imitation and price competition in a differentiated market

We study the stable market outcome that evolves in a spatially differentiated market when price-competing firms choose actions by imitation of the most profitable firm. We compare and contrast the stable outcomes under two imitation procedures: one, where each firm immediately imitates the most profitable firm, and the other when a firm imitates another firm only if it is more profitable while being “sufficiently similar” (in context of the market segment it operates in) or “sufficiently close”. In either case, the symmetric pure strategy Nash equilibrium is always a stable outcome. However, when imitation of the most profitable firm is immediate and market differentiation is ‘moderate’, states with prices lower than the Nash equilibrium are also stable. In contrast, when imitation of the most profitable firm is more gradual and market differentiation is below a threshold, states with prices above the Nash equilibrium are also stable. Thus, while competitive evolutionary pressure in this imitation based model does result in the Nash equilibrium always being stable, other outcomes may be stable as well. Interestingly, the states that are stable under gradual imitation give the firms a higher profit than the stable states under immediate imitation.     

Platform market competition with endogenous side decisions

This paper develops a framework to analyze platform competition in two‐sided markets in which agents endogenously decide on which side of a platform to join. We characterize the equilibrium pricing structure and perform a comparative statics analysis on how the distribution of agents’ preferences affects the platforms’ profits. We also show that the market equilibrium under profit‐maximizing platforms leads to the first best social surplus, which illustrates the importance of the price mechanism to induce more balanced participation across the two sides. This framework can be applied to analyze market competition for “rental” or “sharing” platforms. In addition, we extend our analysis to consider an initial investment stage, which makes participants the owner of some durable goods to rent out.     

Managerial overconfidence,overinvestment, and R&D spillover

This paper examines whether a firm will select an overoptimistic manager when a cost‐reduction investment has a spillover effect. We consider a Cournot competition model where R&D investment ex ante occurs before the process of product market competition. Our analysis reveals that there exists a unique and symmetric equilibrium for firms to delegate overoptimistic managers. We show that only when the spillover effect is sufficiently high do firms benefit from delegation. Furthermore, the equilibrium confidence level and investment decision first decrease and then increase as the spillover parameter changes. As the initial production cost increases, the equilibrium performance becomes worse.     

The short and long-run impact of globalization if firms differ in factor input ratios

Empirical evidence has shown that exporters are more capital intensive than non-exporters. Based on this evidence, I construct a two-factor general equilibrium model with firm heterogeneity in factor intensities, monopolistic competition, scale economies and international trade. This setting can explain several empirical regularities on international trade, factor market competition, factor relocations and factor returns: (i) exporters are more capital intensive than non-exporters, regardless of a country's relative factor endowments; (ii) finite supply of capital limits a country's export activities; (iii) trade liberalization increases the relative return to capital; (iv) new profit opportunities in export markets change the distribution of firms towards the more capital intensive ones. Finally, I extend the setting to endogenous capital accumulation and show that trade liberalization induces economic growth and, in the long-run, benefits all factors in real terms.     

Sustaining Competitive Advantage Through Corporate Environmental Performance

This research investigates the relationship between a firm's environmental efforts and the sustainability of its competitive advantage by analyzing the effects of change in firm environmental performance on the persistence of profitability growth. We find that environmental resources allow a firm with superior financial performance to sustain its competitive advantage, and also complement the efforts of a poorly performing firm to hasten recovery from inferior financial performance. Our findings further indicate that firms attain such positive effects through enhanced profit margins resulting from improved environmental performance. Additionally, we observe that a corporate strategy of improving environmental performance demonstrates management's responsibility to maximize the shareholder wealth of a well‐performing firm. The results provide valuable insights to align environmental activities towards developing unique resources for sustaining the competitive advantage. The study provides an empirical support for creating economic value by benefiting the environment. Copyright © 2016 John Wiley & Sons, Ltd and ERP Environment     

Bargaining over Managerial Contracts in Delegation Games: The Generalized Oligopolistic Case

The main purpose of this paper is to disclose the properties of the equilibrium outcomes in the differentiated‐products model with two stages: (i) owner‐shareholders negotiate managerial compensation with their managers that comprises their profits and sales (sales delegation) and (ii) they engage in their market competition. The other purpose of this paper is to study the differentiated goods model in which an owner bargains the managerial compensation with her/his manager that comprises her/his profit and her/his rival's profit (relative performance delegation). We further investigate the situation wherein the firm with sales delegation and the firm with the relative performance delegation coexist. Copyright © 2012 John Wiley & Sons, Ltd.     

Competition Among Health Plans: A Two‐Sided Market Approach

We set up a two‐sided market framework to model competition between a Prefered Provider Organization (PPO) and a Health Maintenance Organization (HMO). Both health plans compete to attract policyholders on one side and providers on the other. The PPO, which is characterized by a higher diversity of providers, attracts riskier policyholders. Our two‐sided framework allows us to examine the consequences of this risk segmentation on the providers' side, especially in terms of remuneration. The outcome of the competition depends mainly on two effects: a demand effect, influenced by the value put by policyholders on the providers access and an adverse selection effect, captured by the characteristics of the health risk distribution. If the adverse selection effect is too strong, the HMO receives a higher profit in equilibrium. On the contrary, if the demand effect dominates, the PPO profit is higher in spite of the unfavorable risk segmentation. We believe that by highlighting the two‐sided market structure of the health plans' competition, our model provides a new insight to understand the increase in the PPOs' market share as observed in the USA during the last decade.     

Competition and innovation: The tango of the market and technology in the competitive landscape

Technology innovation can be a double‐edged sword in helping a firm to address competitive pressures. We explore the relationships among market competition, technology competition, and firms' advancement to a higher generation of production technology. Though market competition drives technology advancement as firms attempt to escape competition and technology competition also drives technology advancement as firms try to stay in the technology race, concurrent high market and technology competition lead a firm to defer advancement. We find supportive evidence with data on global flat panel display makers. Our findings shed light on how competition interacts with a firm's technology advancement decision and, in general, a firm's technology strategy.     

Relative performance as a strategic commitment mechanism

Can managers' personality traits be of use to profit maximizing firm owners? We investigate the case where managers have a variety of attitudes toward relative performance that are indexed by their type. We consider two stage games where profit maximizing owners select managers in the first stage, and these managers, knowing each other's types, compete in a duopoly game in the second stage. The equilibria of various types of competition are derived and comparisons are made to the standard case where managers are profit maximizers. We show that managers' types can be used as a strategic commitment device that can increase firm profits in certain environments. Copyright © 2002 John Wiley & Sons, Ltd.     

When Necessity Becomes a Virtue: The Effect of Product Market Competition on Corporate Social Responsibility

We test whether Corporate Social Responsibility (CSR) is driven by strategic considerations by empirically studying the link between competition and firms' social performance. We find that firms in more competitive industries have better social ratings. In particular, we show that (i) different market concentration proxies are negatively related to widely used CSR measures; (ii) that an increase in competition due to higher import penetration leads to superior CSR performance; (iii) that firms in more competitive environments have a superior environmental performance, measured by firm pollution levels; and (iv) that more product competition is associated to a larger within‐industry CSR variance. We interpret these results as evidence that CSR is strategically chosen.     

Peer‐to‐Peer File Sharing and the Market for Digital Information Goods

We study competitive interaction between two alternative models of digital content distribution over the Internet: peer‐to‐peer (p2p) file sharing and centralized client–server distribution. We present microfoundations for a stylized model of p2p file sharing where all peers are endowed with standard preferences and show that the endogenous structure of the network is conducive to sharing by a significant number of peers, even if sharing is costlier than freeriding. We build on this model of p2p to analyze the optimal strategy of a profit‐maximizing firm, such as Apple, that offers content available at positive prices. We characterize the size of the p2p network as a function of the firm's pricing strategy, and show that the firm may be better off setting high prices, allowing the network to survive, and that the p2p network may work more efficiently in the presence of the firm than in its absence.     

On the emergence of scale-free production networks

We propose a simple dynamical model for the formation of production networks among monopolistically competitive firms. The model subsumes the standard general equilibrium approach à la Arrow–Debreu but displays a wide set of potential dynamic behaviors. It robustly reproduces key stylized facts of firms׳ demographics. Our main result is that competition between intermediate good producers generically leads to the emergence of scale-free production networks.     

Welfare impacts of a non-profit firm in mixed commercial markets

Utilizing a model that allows for the welfare of the commercial NPO’s stakeholders directly in terms of their consumer surplus, and indirectly in terms of NPO profits, we explore the impact of changes in the NPO’s “social concern” for consumers on market efficiency. Three separate Cournot mixed market scenarios are analyzed: competition between the NPO and a private for-profit firm, competition between the NPO and a public firm, and a market scenario that includes all three firms. We find that the technical efficiency of the NPO vis-à-vis the profit maximizer is crucial in determining whether social welfare rises or falls as the NPO places more weight on their stakeholders’ surplus. In particular, if the NPO is less technically efficient than the profit maximizer or public firm, somewhat paradoxically social welfare may fall as the NPO shows a greater social concern for consumers. In other words, a movement away from pure profit maximizing behavior by a NPO may well be detrimental in these mixed commercial markets. We also show the additional sources of revenue available to a NPO may decrease the overall welfare in these mixed market situations.     

Agglomeration and competition

This paper presents and examines a simple Weberian model of location under conditions of imperfect competition. Given the number of homogeneous Cournot entrants, conditions are shown under which the firm may move toward the market site or to an input site. Demonstrated also is how output may be increased or decreased correspondingly. In any case, insofar as profit remains to be positive, new entry is kept attracted. The paper shows how in the process locational choice along with output may fluctuate as entry continues over time until a long-run non-negative/minimum profit equilibrium obtains.     

SUCCESSFUL IN THE LONG RUN: A META‐REGRESSION ANALYSIS OF PERSISTENT FIRM PROFITS

We study the profit persistence literature by applying meta‐regression analysis (MRA) to a set of 36 empirical papers, which analyze the persistence of abnormal firm profits over time. The analyzed literature provides evidence for a mediocre degree of persistence in abnormal profits. An initial analysis of the distribution of reported profit persistence estimates reveals some degree of excess variation. This points toward publication bias that favors significant results independent of their algebraic sign. The MRA, however, reveals that publication bias is particularly favoring results that indicate profit persistence and thus contradict the neoclassical model of perfect competition. Moreover, the MRA enables to control for heterogeneity driven by the study design. We find that the analyzed country (developing vs. developed), the applied econometric approach, as well as the analyzed period of time are significant drivers of heterogeneity in reported persistence estimates.