Competition and Diversification Trends in Telecommunications: Regulatory, Technological and Market Pressures

In this paper, I examine: (i) regulatory, technological and economic trends driving telecommunications diversification and competition; and (ii) substantial investments and marketing efforts of telecommunications firms to diversity and enter each others' markets via vertical integration, joint ventures, and mergers. The Telecommunications Act of 1996 and ongoing regulatory, market and technological trends have addressed concerns that local exchange company (LEC) ownership of essential facilities may hinder diversification into local markets and stimulated substantial competition across historically distinct markets. (For example, long distance companies have entered local markets.) The entry of one LEC into the Connecticut long-distance market demonstrates that the benefits of competition—lower rates and service innovation—will be realized when Bell operating companies are allowed to enter long distance markets.     

TRADE POLICY AND MARKET POWER: FIRM‐LEVEL EVIDENCE

This article identifies the effect of trade policy on market power through new data and a new identification strategy. We identify market power by observing how exporting firms price discriminate across markets following variations in bilateral exchange rates. Pricing‐to‐market is prevalent in all countries in our sample, even among small firms, although it is increasing in firm size. More importantly, we find that the effect of nontariff measures (NTMs) is not isomorphic to that of tariffs. Whereas tariffs reduce the market power of foreign firms through rent‐shifting effects, NTMs reinforce the market power of nonexiting firms, domestic and foreign alike.     

Collusive behavior in noncooperative epsilon-equilibria of oligopolies with long but finite lives

In a game of a finite number of repetitions of a Cournot-type model of an industry, if firms are satisfied to get close to (but not necessarily achieve) their optimal responses to other firms' sequential strategies, then in the resulting noncooperative “equilibria” of the sequential market game, (1) if the lifetime of the industry is large compared to the number of firms, there are equilibria corresponding to any given duration of the cartel, whereas (2) if the number of firms is large compared to the industry's lifetime, all equilibria will be close (in some sense) to the competitive equilibrium.     

Income instability,terms of trade,and the choice of exchange rate regime

In this article terms of trade fluctuations, which constitute an important source of income instability in many LDC's, are decomposed into three principal components: (a) shifts in world market conditions, (b) shifts in home market conditions and (c) changes in exchange rates. The appropriateness of a ‘basket peg’ is then analyzed in terms of a country's net export-side market power and a weighting formula is derived which would offset variations in third countries' exchange rates on the home country's terms of trade. Initial empirical results tend to support the hypothesis that basket pegs are usually adopted by countries with net export-side market power.     

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.     

Exchange rate uncertainty and firm-level investment: Finding the Hartman–Abel effect

Motivated by Lee and Shin (2000, AER), we study the interplay of the share of variable input, investment irreversibility, and market power in shaping the relationship between investment and uncertainty. Employing a large panel of Chinese manufacturing firms, combined with industry-specific exchange rates for the period 1998–2006, our system Generalized Method of Moments (GMM) estimation finds that uncertainty significantly encourages (discourages) investment for firms with high (low) labor share or low (high) investment irreversibility, and the impact is magnified for firms with low market power. Our paper demonstrates the importance of the share of variable input, investment irreversibility, and market power in the Hartman–Abel paradoxical effect that predicts a positive relationship between uncertainty and investment in the international economics context.     

Sectoral labor adjustment and monetary policy in a small open economy

This paper studies the welfare implications of sectoral labor adjustment cost in a two-sector small open economy model with sticky prices. We find that, when the economy faces external shocks, if monetary policy can stabilize the real economy, then sectoral labor market adjustment cost will lead to welfare loss. However, if monetary policy such as fixed exchange rates cannot stabilize real variables, then some degree of labor market friction will improve welfare instead and the gain will be significant. As a result, the welfare gap between flexible exchange rates and fixed exchange rates decreases with sectoral labor market friction. This is because the friction can offset some of the nominal rigidity and become a substitute for monetary policy to stabilize the real economy.     

An analysis of accounting measures on the performance of U.S. international corporations

Accounting measures (earnings and cash flow) have been shown to affect market performance (stock price) in U.S. firms operating domestically. In general, earnings have statistically significant explanatory power of stock price movement, albeit superior to cash flow. However, U.S.-based international corporations consolidate earnings from foreign operations. Consolidation can report significant gains (losses) from foreign transactions, as well as from the translation of foreign assets and liabilities, as currency exchange rates flucturate. Researchers are divided over the impact, if any, that such gains (losses) have on stock price. Indeed, gain (loss) is not realized until foreign currency is converted into the parent firm's functional currency. Foreign operations may accumulate assets and foreign currency even while U.S. exchange rates decline. Stock analysts may consider all currencyadjusted data to be unreliable and prefer simple data such as sales. Currency-adjusted accounting measures may or may not influence market performance.     

The effects of cash flow and size on the investment decisions of ICT firms: A dynamic approach

This paper examines one of the fastest growing industries in our world today, the ICT industry. We assess the sensitivity of a firm’s investment to a set of financial determinants, by developing a flexible adjustment dynamic model. In particular, we examine the degree to which a firm’s liquidity influences firm investment and whether firm size and firm specialization have any additional implications. Moreover, the effect of the dot-com burst is also considered. For a panel of ICT and non-ICT US companies listed on the NASDAQ stock exchange, the results reveal the following: (1) all firms are sensitive to the availability of internal funds; (2) investment intensity decreases with firm size; (3) and leverage negatively affects investment for ICT firms.     

Export pricing and exchange rate expectations under uncertainty

This paper contributes to the literature on firms’ export pricing by assessing whether and to what extent firms take into account the expected future evolution of the exchange rates while setting their prices. Using French micro-level trade data, our empirical analysis reveals that by adjusting their export prices, firms partly absorb information about future exchange rate variations. The extent to which individual exporters absorb future exchange rate fluctuations is found to depend on their market power, in accordance with theoretical dynamic demand-side models encompassing mechanisms creating an inter-temporal relationship between current market shares and future profits. The analysis also shows that the strength of such expectation-related mechanism is considerably reduced with greater future exchange rate uncertainty, in line with an interpretation of pricing-to-market as an investment decision under uncertainty. In a comparative perspective our results are shown to drive asymmetric responses across destinations of aggregate bilateral export flows to expected exchange rate movements.     

Trade prices and supply in the UK economy

Current account imbalances are a major source of instability in the world monetary and trading system. Measures to correct these imbalances have largely involved adjustments to exchange rates. In the international trade literature, when the current account is in deficit, the Marshall-Lerner condition is sufficient for a successful devaluation. However, this partial equilibrium condition — apart from being based on the assumption that supply elasticities are infinite — abstracts from how the domestic economy responds to the change in relative prices. In this paper we develop a model of price and output determination in an open economy with imperpectly competitive markets, and draw a distinction between goods which are exported and those which are supplied to the domestic market. This means that we have to determine jointly both export prices and the domestic price of house sales. We show that as long as there is no money illusion in the labour market a fall in the nominal exchange rate raises domestic and export prices proportionally and leaves trade volumes unaffected. However, shifts in domestic absorption relative to overseas demand — by changing relative prices — cause shifts in the relative supply of exports and domestically sold goods and affect the trade balance. Thus fiscal and monetary measures directed towards reducing domestic absorption are more likely to be successful in correcting current account imbalances than exchange rate depreciation.     

Exchange Rate Exposure of Chinese Firms at the Industry and Firm Level

This study investigates the exchange rate exposure of Chinese firms at the industry and firm level based on the conventional capital asset pricing model (CAPM) framework. At the industry level, the dynamic conditional correlation MGARCH (DCC MGARCH) estimates demonstrate that the market model and three‐factor model are appropriate for exposure measurements, and industry returns are more likely to be exposed to unanticipated changes in the real exchange rate and the trade‐weighted effective exchange rate, particularly for manufacturing industries. At the firm level, although the seemingly unrelated regression (SUR) estimates vary across markets, it is apparent that there is a relationship between firm size and exposure effects, which also show that lagged exchange rate changes have significant exposure effects on firm returns. This study finally suggests that non‐financial firms should set up special commissions to hedge currency risks of their future cash flows.     

A Theory of International Strategic Alliance

As an alternative to exporting, a firm can enter a foreign market by forging a strategic alliance with its foreign counterpart. The alliance eliminates transportation costs and duplications in product distribution networks. At the same time, strategic alliance lessens competition between the firms so that it leads to smaller outputs and higher prices. The degree of lessening of competition depends on the firms’ ability to commit to output levels. In the case where the firms can credibly commit to output levels, the alliance effectively becomes a cartel, restoring prices to the monopoly level. On the other hand, if such commitment is not credible or not possible, prices will be lower than the monopoly level but will still be higher than that if firms had exported to each other's market directly. The welfare effects of the strategic alliance are in general ambiguous.     

The analysis of a price war strategy under market demand growth

We use the finite repeated Prisoners' Dilemma game model herein to discuss how firms choose their optimal strategy under a price war with market demand growth. This model has two players: one is an R-type player and the other is a TFT-type player. Each player has two strategies to choose from: a preemption strategy and a “wait” strategy. Our results indicate that: (i) if the probability that the opponent is an R-type (TFT-type) player is high, then the time when the opponent adopts a preemption strategy will be early (late); (ii) Market demand growth is an incentive for cooperation among firms; (iii) if the market demand growth rate is high, then the R-type player will not have an evolutionary advantage. We use the competition between cell phone manufacturing firms Nokia and Motorola in China as an example. When Nokia is an R-type player and adopts a preemption strategy, Motorola should preferably use a preemption strategy rather than a “wait” strategy. However, as a TFT-type player, this will benefit Motorola under the situation of market demand growth.     

Competition, cooperation, and the neighboring farmer effect

In this paper we propose a model that explains how cooperation can emerge spontaneously between firms in a highly competitive market environment. The basic idea is that the more competitive is the market, the less costly it is for firms to help each other like good neighbors. Cooperation takes the form of sharing technical know-how, which speeds up the adoption of new technologies (normally developed elsewhere) that spur industrial development. The model comports with the development history of Japan's first example of successful industrial development – its cotton spinning industry – whose conditions match those of firms in small open economies today.     

Technological evolution of the semiconductor industry

New forces are emerging in the semiconductor industry. These are likely to change the pattern and speed of technical change in that industry. The changes include: (1) movement towards greater service and customer orientation; (2) higher prices for technology sales; (3) greater emphasis on strategic alliances for technology and market sharing; and (4) greater U.S. government involvement in protecting the U.S. industry. All factors point to an increase in market power of the large firms. The next five years will be a transitional period during which various adjustments will be made to the evolving strategies of the firms. During this period, we have no reason to believe that there will be any slowing down in the pace of technical change. Thereafter, i.e., once the new structure matures, the pace of change is likely to slow down.     

Purchasing Power Parity and aggregation bias for a developing country: The case of Mexico

This paper investigates long-run Purchasing Power Parity (PPP) between the US and Mexico. We use a panel of disaggregated price data between the US and Mexico with a long time series to look at two types of aggregation bias. The first is examined in Imbs et al. — which we refer to as estimator aggregation bias — and the second is put forth by Broda and Weinstein — hereafter, data aggregation bias. The findings indicate substantial estimator aggregation bias and data aggregation bias. Although estimates using aggregate data and imposing homogeneous coefficients provide little evidence of PPP, findings with disaggregated data and heterogeneous coefficient estimators offer strong support. The results also suggest the presence of small-sample bias as examined in Chen and Engel, but with little effect on the qualitative results. Tradable goods and non-tradable goods show little distinction in convergence rates. Estimated half-lives are lower under flexible than fixed exchange rates and indicate rapid convergence during the Mexican peso crisis.     

Macroeconomic Fragility and Exchange Rate Vulnerability: A Cautionary Record of Transition Economies

The interaction between the exchange rate regime and macroeconomic stabilization in several transition economies during 1990–1996 was influenced by the persistence of high inflation rates and the initial disequilibrium between the highly undervalued nominal exchange rates in relation to their purchasing power parity estimates. Policymakers generally adopted the flexible (nominal) exchange rate regimes for manipulating real exchange rates with a view to correcting the exchange rate disequilibrium and conveying inflation control signals. The rates of real appreciation were higher in the earlier years of high inflation rates. By 1996, lower inflation rates required less currency appreciations thereby reducing the negative impact of the latter on trade competitiveness. However, the persistence of unwarranted interest rate differentials, a consequence of the domination of monetary control over prudent fiscal management, and the associated inflows of foreign funds put an upward pressure on exchange rates exacerbating trade competitiveness. The transition record suggests that innovative exchange rate arrangements can provide only a brief interval during which sound fiscal discipline needs to be put in place for controlling inflation.J. Comp. Econom.,December 1998, 26(4), pp. 621–641. Columbia University, New York, New York 10027.     

美国煤电合约特点及对我国的启示

从交易成本经济学的角度来看,煤炭产业和电力产业适合选择长期合约的合作方式。以美国煤电合约为研究对象,分析在20世纪80年代后美国煤电合约期限缩短(即由原来长期合约为主变为5年期以下的合约占主导)的原因。从以下三个方面对此现象做出解释:能源市场波动削弱了煤炭企业的谈判势力;电力市场放松管制增强了电力企业的谈判势力;其他政策法规产生约束作用。最后结合我国煤电合约现状,借鉴美国构建稳定煤电关系的经验,为缓和我国煤电矛盾提出如下建议:加快实现竞价上网,放松发电企业管制;完善合约条款设置;转变政府参与角色。     

Free Entry under Uncertainty

When focusing on firm’s risk-aversion in industry equilibrium, the number of firms may be either larger or smaller when comparing market equilibrium with and without price uncertainty. In this paper, we introduce risk-averse firms under cost uncertainty in a model of spatial differentiation and show that the impact of uncertainty will increase the number of firms in an industry. With increased uncertainty, the risk premium of the marginal buyer increases by more than the risk premium of the average buyer, so that the price increases by more than the risk premium. When turning to the free entry game, we find that the market generates too many firms.