Endogenous market structures and the optimal financial structure

Abstract We characterize the optimal financial structure as a strategic device to optimize the value of a firm competing in a market where entry is endogenous. Debt financing is always optimal under quantity competition, and, contrary to the Brander‐Lewis‐Showalter results based on duopolies, we show the optimality of moderate debt financing also under price competition with cost uncertainty (but not with demand uncertainty). We derive the formulas for the optimal financial structure, which does not affect the strategies of the other firms but reduces their number.     

Biased managers with network externalities

In network industry under Cournot and Bertrand competition, we examine a model when owners of firms hire biased managers who have incorrect market demand. Contrast to previous studies, we show that (i) regardless of the strength of network externalities when consumers form the responsive and passive expectations, owners realize strategic advantage by hiring biased managers to be more aggressive under Cournot and Bertrand competition, (ii) firms prefer facing passive expectations for the weak network externalities and vice versa for the strong network exteranlities under Bertrand and Cournot competition, (iii) if the network size is sufficiently large, then the prisoner's dilemma that firms hire aggressive managers no longer exists under both competition modes. As with no delegation case, we obtain the different rankings of firms' profit depending on both network externalities and forming of expectations under Cournot and Bertrand competition.     

Strategic corporate social responsibility,imperfect competition,and market concentration

We examine the strategic use of corporate social responsibility (CSR) in imperfectly competitive markets. Before firms decide upon supply, they choose a level of CSR which determines the weight they put on consumer surplus in their objective function. First, we consider Cournot competition and show that the endogenous level of CSR is positive for any given number of firms. However, positive CSR levels imply smaller equilibrium profits. Second, we find that an incumbent monopolist can use CSR as an entry deterrent. Both results indicate that CSR may increase market concentration. Finally, we show that CSR levels decrease as the degree of product heterogeneity increases in Cournot competition and are zero in Bertrand Competition.     

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.     

Lifetime Employment Contract and Strategic Entry Deterrence: Cournot and Bertrand

This paper is based on a two-stage model of an incumbent firm and a potential entrant, and studies both quantity-setting competition and price-setting competition. We consider a lifetime-employment-contract policy as a strategic commitment that generates kinks in the reaction curve. Furthermore, demand functions are classified into two cases in terms of the strategic relevance between both firms. Therefore, we examine the following four cases: 'quantity-setting competition with strategic substitutes', 'quantity-setting competition with strategic complements', 'price-setting competition with strategic substitutes' and 'price-setting competition with strategic complements'. The purpose of this paper is to analyse entry deterrence in the four cases and to show the effectiveness of the lifetime-employment-contract policy as a result of its analyses.     

Identifying the structure of knowledge networks in the US mobile ecosystems: patent citation analysis

With the emergence of smartphones, the paradigm of the mobile ecosystem has changed rapidly. In particular, global mobile firms focus on technological competition when jostling for market position in recognition of the strategic need to secure a strong mobile platform. In this paper, we analyse the network structure of technological knowledge flows in mobile ecosystems using US patent citation information. We find that two subsectors, platform providers and application and software providers, are at the centre of knowledge exchange activity and play a brokerage role as the key knowledge mediator. Then, we categorise mobile firms into five different groups based on the patterns of their network centrality: knowledge keystone players, knowledge-distributing mediators, knowledge-absorbing mediators, catch-up players, and pure knowledge receivers. The categorisation of firms demonstrates that knowledge flows in the mobile industry converge towards a few leading firms, and such patterns are shaping the mobile ecosystem with respect to technological knowledge. The firms categorised as catch-up players have played a brokerage role within their group, while the firms categorised as knowledge keystone players play a brokerage role across different groups.     

GROWTH,INTER‐INDUSTRY AND INTRA‐INDUSTRY COMPETITION AND WELFARE*

In this paper we introduce strategic interaction between firms in an R&D growth model which captures both the intra‐industry competition between firms operating within an industry and the inter‐industry competition between firms in different industries. We show that the more substitutable the goods produced within each industry (across industries) are, that is, the more intense the intra‐industry (inter‐industry) competition, the higher is the growth rate. In the comparison between social optimum and a decentralized economy, it is shown that the market outcome is characterized by inefficiently high entry of firms within each industry and insufficient productivity growth.     

Multinational Firms and Strategic FDI Subsidies

A simple three‐stage game model of an international Cournot duopoly, consisting of domestic and foreign multinational firms, is exploited to examine strategic FDI subsidies. While in the first stage the governments decide the optimal FDI subsidies, the firms endogenously choose their FDI levels (or subsidiary plant sizes) in the second stage and their output–export levels in the third stage. Thus, this paper finds that while the outflow and inflow FDI subsidies have different effects on firms’ FDI choices, the FDI subsidies are used as tools for the implementation of strategic policies and that the optimal FDI subsidies vary, depending on whether the governments assess labor employment.     

On intrabrand and interbrand competition: The strategic role of fees and royalties

We examine oligopolistic markets with both intrabrand and interbrand competition. We characterize equilibrium contracts involving a royalty (or wholesale price) and a fee when each upstream firm contracts with multiple downstream firms. Royalties control competition between own downstream firms at the expense of making them passive against rivals. When the number of downstream firms is endogenous, each upstream firm chooses to have only one downstream firm. This result is in sharp contrast to previous literature where competitors benefit by having a larger number of independent downstream firms under only fixed fee payments. We discuss why allowing upstream firms to charge per-unit payments in addition to fixed fees dramatically alters their strategic incentives.     

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.     

DUOPOLY IN THE JAPANESE AIRLINE MARKET: BAYESIAN ESTIMATION FOR THE ENTRY GAME*

This paper provides an econometric analysis of a duopoly game in the Japanese domestic airline market. We establish a novel Bayesian estimation approach for the entry game, which allows the incorporation of flexible inference techniques. We find asymmetric strategic interactions between Japanese firms. This result implies that competition is still influenced by the former regulation regime. Furthermore, our prediction analysis indicates that the new Shizuoka airport will suffer from a lack of demand in the future.     

Credible delegation

We show that the vertical delegation of decision-making authority to agent firms can act as a credible strategic commitment even when contracts are unobservable (or renegotiable) if and only if multilateral delegation is combined with decentralized ownership of the agent firms. In this case, the possibility of renegotiation of other agents’ contracts constrains the set of contracts acceptable to each agent. Delegation may induce more or less aggressive behavior, depending on the nature of within-structure competition among the agent firms. Thus, delegation may be a valuable, credible strategic commitment mechanism when strategies are either substitutes or complements.     

PROFITABLE STRATEGIC DELEGATION WITH CONJECTURAL VARIATIONS

Firms delegate strategic decisions to managers because they find it profitable to do so. In the product market, when agents make conjectures about the reaction of their rivals to marginal changes in their own strategies, the set of equilibriums can be enlarged with respect to the case of no conjectures. This paper takes a duopolistic linear market parameterization where firms selling differentiated products can delegate either price or output decisions to managers. We show that it is a dominant strategy for firms to delegate no matter whether firms are Cournot or Bertrand competitors, although the equilibrium is not necessarily efficient. Futhermore, in equilibrium Cournot competition is more profitable for firms than Bertrand competition. Finally, requiring consistency in conjectures yields the same outcome no matter what type of strategic interaction and managerial choice there is on the part of firms.     

Profitability of price and quantity strategies in a duopoly with vertical product differentiation

Using a model according to Mussa and Rosen (1978) and Bonanno and Haworth (1998) we consider a sub-game perfect equilibrium of a two-stage game in a duopolistic industry in which the products of the firms are vertically differentiated. In the industry, there are a high quality firm and a low quality firm. In the first stage of the game, the firms choose their strategic variables, price or quantity. In the second stage, they determine the levels of their strategic variables. We will show that, under an assumption about distribution of consumers' preference, we obtain the result that is similar to Singh and Vives (1984)' proposition (their Proposition 3) in the case of substitutes with nonlinear demand functions. That is, in the first stage of the game, a quantity strategy dominates a price strategy for both firms. Received: April 23, 1999; revised version: May 31, 2000     

INSUFFICIENT ENTRY OF EMPLOYEE‐CONTROLLED FIRMS IN A FREE‐ENTRY OLIGOPOLY

This study is a theoretical examination of whether employee‐controlled firms (ECFs) enter a free‐entry oligopolistic market excessively or insufficiently, from the viewpoint of welfare maximization. The excess entry theorem is well known in oligopoly theory. According to this theorem, a greater number of profit‐maximizing firms enter a free‐entry oligopolistic market than is optimal for welfare maximization. We demonstrate the possibility that insufficient entry arises when ECFs compete in a free‐entry market. In particular, we show that if both the demand and cost functions are convex, insufficient ECF entry necessarily occurs. Our results suggest that competition among firms seeking purposes other than profit might lead to insufficient entry because differences in competing firms’ objectives affect the intensity of market competition.     

Vertical product differentiation and two-sided markets

We model platform competition in a market where products are characterized by cross network externalities. Consumers differ in their valuation of these externalities. Although the exogenous set-up is entirely symmetric, we show that platform competition induces a vertical differentiation structure that allows for the co-existence of asymmetric platforms in equilibrium. We establish this result in two set-ups: in the first one platforms commit to prices, in the second one they commit to network sizes.     

Noncooperative versus cooperative R&D with endogenous spillover rates

This paper deals with a general version of a two-stage model of R&D and product market competition. We provide a thorough generalization of previous results on the comparative performance of noncooperative and cooperative R&D, dispensing in particular with ex-post firm symmetry and linear demand assumptions. We also characterize the structure of profit-maximizing R&D cartels where firms competing in a product market jointly decide R&D expenditure, as well as internal spillover, levels. We establish the firms would essentially always prefer extremal spillovers, and within the context of a standard specification, derive conditions for the optimality of minimal spillover.     

Long-run industry equilibrium with uncertainty

In this paper we consider the effects of uncertainty on industry equilibrium when firms must commit themselves to production before prices are revealed. We show that (a) an increase in demand uncertainty will (i) not affect the equilibrium number and size of firms if they are risk neutral, (ii) reduce the equilibrium number of firms if they are risk averse, but will have an ambiguous effect on their size. (b) In equilibrium, firms operate at capacity if they are risk neutral, but at excess capacity if they are risk averse.