Optimal Concentration and Deadweight Losses in Canadian Manufacturing

When economies of scale are impontant, there may be too many firms in a market to effectively exploit these scale economies. Although more firms imply reduced market power, this may not offset the adverse impact of higher unit cost. We explore this trade-off by estimating for 107 Canadian industries optimal concentration, this being the concentration that maximizes, for given firm conduct, producers and consumers' surplus. We then calculate deadweight losses as the difference between total surplus at optimal concentration and total surplus at current concentration levels. Among the conclusions are that the majority of industries have concentration that is too low.     

Commitment,flexibility and market outcomes

An n-firm oligopoly model, parametrized by the degree of flexibility of the technology and where firms choose the optimal scale of production (capacity) first and then a competitive stage follows, is presented. It is shown that in (Nash) equilibrium as one moves from non-flexible to flexible technologies the resulting price ranges from the Cournot price to the Bertrand price. Furthermore, if the slope of short run marginal cost is bounded, the order of magnitude of the margin of price over long run unit cost is 1/n² and the speed of convergence to the efficient outcome as the number of firms grows is, in a finer sense, faster the more flexible is the technology.     

Competition under capacitated dynamic lot-sizing with capacity acquisition

Lot-sizing and capacity planning are important supply chain decisions, and competition and cooperation affect the performance of these decisions. In this paper, we look into the dynamic lot-sizing and resource competition problem of an industry consisting of multiple firms. A capacity competition model combining the complexity of time-varying demand with cost functions and economies of scale arising from dynamic lot-sizing costs is developed. Each firm can replenish inventory at the beginning of each period in a finite planning horizon. Fixed as well as variable production costs incur for each production setup, along with inventory carrying costs. The individual production lots of each firm are limited by a constant capacity restriction, which is purchased up front for the planning horizon. The capacity can be purchased from a spot market, and the capacity acquisition cost fluctuates with the total capacity demand of all the competing firms. We solve the competition model and establish the existence of a capacity equilibrium over the firms and the associated optimal dynamic lot-sizing plan for each firm under mild conditions.     

Optimal productive size of hospital's intensive care units

Authors of past studies focusing on returns to scale in hospitals proffered mixed results. These seemingly contradictory findings have probably arisen due to different methodological approaches (parametric or non parametric), different aggregation levels of analysis (hospital/department/units), nature of data (quantity data or economic values) and also due to technological improvements operating in hospitals and case mix adjustment to account for the severity of patients' conditions.In this paper, we apply a new approach to determining returns to scale for single and multi-output homogenous technologies, which is different from traditional DEA models. Our approach is characterized by (1) a non parametric approach based on quantity data that allows us to avoid assumptions on cost minimization or profit maximization behavior of hospitals, on relevancy of economic values for hospitals (costs, revenues and prices) and on a priori specification of the health care production function, and (2) an analysis of optimal productivity size at both the disaggregated level of intensive care units and at the aggregated hospital level. The methodological advantage is that we can unambiguously define increasing returns to scale, which is lacking in more traditional non-parametric approaches because of the convexity assumption imposed earlier. We apply the methodology to intensive care units (cardiac care (CICU), medical/surgical care (MSICU), pediatric care (PCIU) and neonatal care (NICU), which are operating in 235 general short term hospitals of Florida state in 2005. We also consider the hospital level by analyzing the general activity of the hospitals in our population.To summarize our findings, we find that 60% of intensive care units are operating at increasing returns to scale, 10% are operating at optimal productive size and 30% are characterized by decreasing returns to scale. In average intensive care units operate 40% under the optimal size. The policy implication of this result should be an increase of the size of all types of intensive care units to meet productivity gains. The picture is completely reversed at the aggregate hospital level. Here decreasing returns to scale prevail for 65% of hospitals while only one fourth are operating at increasing returns to scale. In average hospitals' number of beds should decrease by 40% to reach the optimal productivity size. One policy solution may include reallocating resources from general beds to the more specialized beds.     

Restructuring Public Transit Systems: Evidence on Cost Properties from Medium and Large-Sized Companies

This paper analyses the cost structure of a sample of local public transport companies operating in medium and large urban centres in Italy in order to identify the proper network configuration for the service. Technological characteristics of public transit systems are analysed by estimating both variable and total cost function models. The evidence shows the presence of short-run and long-run economies of scale, as well as of economies of network density. This suggests that a suitable network design should at least include a large urban centre, while a regulatory policy aimed at fragmenting the served area would imply an efficiency loss.      

Economies of Scope and Density in the Market for Real Estate Brokerage Services

Using a multiproduct translog cost function, this paper examines the case for economies of scope and density in the market for residential real estate brokerage services. Earlier research that treated output as a homogeneous commodity reported modest economies of scale for this industry. The results of this study suggest that the composition of output is an important source of these scale economies, rather than simply the size of the firm. The economies of scope which we find imply that a balanced mix of listing and sales is the least costly type of operation, a result borne out by the product mix found in our sample. The results also show product-specific diseconomies of scale, suggesting that specialization in either listing or sales may be sub-optimal under the current institutional arrangements present in the market. Finally, market density appears to be, at best, only a nominal source of savings for real estate brokerage firms.     

DESIGNING A MARKET STRUCTURE WHEN FIRMS COMPETE FOR THE RIGHT TO SERVE THE MARKET*

In many industries, a regulator designs an auction to select ex‐ante the firms that compete ex‐post on the product market. This paper considers the optimal market structure when firms incur sunk costs before entering the market and when the government is not able to regulate firms in the market. We prove that a free entry equilibrium results in an excessive entry when the entry costs are private information. Then, we consider an auction mechanism selecting the firms allowed to serve the market and show that the optimal number of licences results in the socially optimal market structure. When all the potential candidates are actual bidders, the optimal number of firms in the market increases with the number of candidates and decreases with the social cost of public funds. When the market size is small, as the net profit in the market decreases with the number of selected firms, entry is endogenous. As increasing competition in the market reduces competition for the market, the optimal structure is more concentrated than in the previous case.     

Productive efficiency and firm exit in the food sector

This work examines the effects of productive efficiency on the survival of firms in the Greek food sector. Technical and scale efficiency scores are computed within a data envelopment analysis (DEA) framework and are used as explanatory variables in a parametric (Weibull) survival model. High technical efficiency increases the median survival time and lowers the hazard rate of exit. As the scale efficiency of a firm operating either at increasing or decreasing returns to scale approaches one (1), its theoretically maximum value, the expected median survival time, is maximized for all types of exits. Developments in biotechnology, the evolution of alternative food supply networks, innovations in the food sector and competition policy are likely to affect technical and scale efficiency of food manufacturing firms. Results unraveling the effects of technical and scale efficiency on the survival of firms in the food sector are of particular relevance to food policy makers.     

PROFITABILITY,TRANSACTIONAL ALIGNMENT,AND ORGANIZATIONAL MORTALITY IN THE U.S. TRUCKING INDUSTRY

The winds of creative destruction rarely blow more fiercely than in a newly deregulated environment. Managers simultaneously face a novel focus on operating efficiency and an onslaught of new competitors. What must managers do to enable their firms to survive in such an environment? What factors bear on firms’ survival? This paper presents an analysis of mortality of large motor carriers in the U.S. interstate for-hire trucking industry after deregulation. It examines this phenomenon through a multidisciplinary lens that encompasses organizational ecology, neoclassical economics, and transaction cost economics. The paper posits that carrier mortality is a function of both firm-level and industry-level attributes, which are drawn from both ecological and economic theories. While each of these theories separately informs motor carrier mortality, the inclusion of predictions derived from both disciplines in one model significantly increases explanatory power over either theory evaluated alone. The empirical analysis is among the first to show increased mortality when firms do not adhere to operating policies consistent with transaction cost minimization principles. In sum, managers are well advised to adopt a multidisciplinary approach to strategy to ensure their firms’ survival. © 1997 by John Wiley & Sons, Ltd.     

Network effects and the adoption of new technology: evidence from the U.S. telecommunications industry

This paper examines variations in the adoption of new technology by firms operating in a network-based industry: telecommunications. These variations are explained as a function of three network effects: the first is the conversion effect, driven by operations-related increasing returns to scale; the second is the consumption effect, driven by demand-side increasing returns to scale; the third is an imitative effect. We expect the conversion effect to be felt more strongly during earlier phases of a technology's evolution, while a strong consumption effect is felt throughout. The imitative effect is also expected to be felt throughout. These hypotheses are examined with respect to electronic switching adoption in the local operating sector of the U.S. telecommunications industry. An analysis of the variations in adoption levels of the 40 largest firms over a period lasting from 1973 to 1987 supports our expectations, except for the imitative effect. © 1998 John Wiley & Sons, Ltd.     

Why Do Established Firms Enter Some Industries and Exit Others? Empirical Evidence on Italian Business Groups

In this paper the determinants of entry and exitdecisions are analysed empirically on a sample of wellestablished business groups operating in Italianmanufacturing. The focus is on the role of sunk costsas entry barriers. Two competing hypotheses aretested. On the one hand, setup costs, R & D andadvertising outlays act as barriers to entry for bothnew and already established firms because of theirindustry-specific commitment value. On the other hand,they may induce established firms, which operate insimilar industries, to enter. This is the case if R & Dand advertising are firm-specific investments whichgenerate externalities to be efficiently exploited inadjacent industries. Overall results suggest that thesecond hypothesis gives a better picture of thebehaviour of our sample of firms.     

试析沉没成本对企业进入市场的影响

在行业规模固定不变的情况下,沉没成本的大小成为阻碍部分潜在企业进入这一行业的因素之一。通过理论推导和数值模拟论证表明,低沉没成本的企业组合具有较低的行业总体沉没成本和较高的总体社会财富,优于高沉没成本企业组合,从而将高沉没成本企业阻挡在行业之外。     

Multinationality and downside risk: The roles of option portfolio and organization

Multinational operations confer firms a portfolio of switching options that offer potential operating flexibility in the context of input cost variability, helping firms reduce downside risk. We suggest that two conditions may shape the relationship between multinationality and downside risk. When subadditivity is present in a firm's option portfolio, such as when the firm operates affiliates in host countries with similar labor cost developments, multinationality is less likely to reduce downside risk since less valuable opportunities exist for shifting operations. Multinationality is more likely to reduce downside risk if a firm's organization facilitates the coordination of cross‐border activities, enabling the exploitation of the shifting opportunities. Analysis of a comprehensive panel dataset of Japanese manufacturing firms and their foreign manufacturing affiliates provides support for these conjectures. Copyright © 2013 John Wiley & Sons, Ltd.     

Cell Production and Workplace Innovation in Japan: Toward a New Model for Japanese Manufacturing?

This article investigates the current trend toward cell production and other workplace innovations in Japan using a large–scale sampling survey of manufacturing firms and in–depth interviews with four leading electrical and electronic establishments. The quantitative analysis reveals the correlation between the use of cell production and the ratio of female to male workers and production strategy variables, as well as the positive effect of cell production on operating profit rates and ordinary profit rates. The case studies reveal the following points: First, processes and organizations have been decentralized to the degree that individual workshops move toward taking primary responsibility for customer relations, production decisions, and delivery. Corporate headquarters increasingly play a coordinating rather than decision–making role. Second, firms have steadily implemented make–to–order systems by tightening links to suppliers and customers and developing new inventory and cost–control systems. Third, firms have started to implement more performance–based personnel practices. However, considerable variance among firms is observed in complementary changes, particularly personnel innovations.     

Modeling the firm's response to research & development tax credit policies

In this article, we develop a microeconomic model of normative firm behavior under the incentive of a research and development (R&D) tax credit. The model is based on the well-known concept of a two-factor learning model in which R&D expenditures and manufacturing capacity expansion are the principle determinants of cost reduction in a new technology product. We distinguish between the behavior of start-up firms and ongoing firms and study the potential impacts of progressively larger R&D tax credits. We find highly significant differences in the potential impact of the credit on start-up firms versus ongoing firms. We also find that the credit can significantly impact optimal product pricing of the technology when introduced into the marketplace. We examine the implications of this latter fact on the overall social cost of the R&D tax credit.     

DIVERSIFICATION AS REAL OPTIONS AND THE IMPLICATIONS ON FIRM-SPECIFIC RISK AND PERFORMANCE

The management literature posits that firms can create value through diversification. In contrast, the established finance literature concludes that diversified firms destroy value.

This paper suggests a way to reconcile these two warring camps by articulating a new theory of the way in which diversification can add value not by increasing performance, but by reducing risk in ways mat investors cannot replicate.

Specifically, diversification, understood dynamically, provides a way for companies competing in especially turbulent industries to hedge the competitive risk attendant to “convergence” phenomena. That is, in industries where the optimal operating scope of a firm is in question because the promise of convergence cannot be exploited using market-mediating mechanisms, firms will “over diversify” as a hedge against uncertain future reconfigurations of industry boundaries.

In other words, these firms diversify as a way to create “real options” on future integration. These options create a form of “strategy insurance” that investors can not recreate with a portfolio of focused firms: investments in two separate, focused firms do not create an option on a single firm that encompasses the activities of those two companies. As uncertainty spawned of convergence begins to fade, strategically-hedged firms will re-focus their operations by exercising or abandoning their options on integration in a manner appropriate to the demands of their newly-defined marketplaces.

Option-creating diversification has potentially profound implications on operating performance and risk profile. Most significantly, options-based diversification is asserted to cause the operating performance of such firms to fall as they diversify and increase as they focus, in keeping with the observations of the finance literature. Yet the firms will have created value for shareholders by compensating for significant strategic risks that investors cannot otherwise hedge.     

The Role of Competition in Natural Monopoly: Costs, Public Ownership, and Regulation

Conventional policy for industries with very high economies of scale is to permit monopoly but to subject it to regulation or public ownership. Since the latter may not result in cost minimization, however, it is possible that competition, by forcing firms to operate at the cost frontier, may be less costly despite sacrificing some scale economies. The paper sets out the relevant analytical considerations, estimates a cost function for electric distribution utilities in the U.S., and tests for the relative costs of monopoly and duopoly utilities. Among other notable findings, it concludes that competition does indeed lower net costs.     

MARKET COMPETITION,R&D AND FIRM PROFITS IN ASYMMETRIC OLIGOPOLY*

We investigate a Cournot model with strategic R&D investments wherein efficient low‐cost firms compete against less efficient high‐cost firms. We find that an increase in the number of high‐cost firms can stimulate R&D by the low‐cost firms, while it always reduces R&D by the high‐cost firms. More importantly, this force can be strong enough to compensate for the loss that arises from more intense market competition: the low‐cost firms' profits may indeed increase with the number of high‐cost firms. An implication of this result is far‐reaching, as it gives low‐cost firms an incentive to help, rather than harm, high‐cost competitors. We relate this implication to a practice known as open knowledge disclosure, especially Ford's strategy of disclosing its know‐how publicly and extensively at the beginning of the 20th century.     

Applying Industrial Design and Cost Engineering to New Product Development in Early‐Stage Firms

For early‐stage firms, successful commercialization of each new product is critically important, given the shortage of financial resources, the limited product portfolio, and small staffs typical of such firms. This paper investigates two key contributing factors for new product success in entrepreneurial firms: designing products that are appealing to target users in both form and function and designing products that can be manufactured at an attractive margin so that the new enterprise can generate much needed positive cash flow. These two practices—industrial design and cost engineering—are well studied in the context of larger, established corporations but have not been explored in the context of new ventures. This study focuses on the intensity of individual and combined adoption of design and cost engineering as measured by product development efficiency and effectiveness. The study was conducted on a homogeneous sample of early‐stage firms that develop physical, assembled products where design plays a role. The data collection focused only on the first product developed by each firm respectively. The results show that when implemented together, industrial design and cost engineering enhance both the effectiveness and efficiency of new product development in early‐stage firms, to greater effect than each does individually. Intensive individual adoption of practices had a negative impact on development efficiency measures such as development cost and duration. Only cost engineering individually had a beneficial impact on development effectiveness as measured by product margins. When combined, these two practices had a beneficial impact on both development duration and cost for the company's first commercial product, thereby reducing time‐to‐market and precious cash expenditures while maximizing project breakeven timing. The most successful firms in the study achieved a balance between creative innovation and cost discipline in the NPD process with third‐party design and manufacturing resources. It was found that integrating third‐party design firms into the development process can challenge, simplify, and add additional creative resources to the core entrepreneurial team, maximizing the ability to catalyze beneficial tension between creativity and cost discipline.     

Opportunity costs and non‐scale free capabilities: profit maximization,corporate scope,and profit margins

The resource‐based view on firm diversification, subsequent to Penrose ( 1959 ), has focused primarily on the fungibility of resources across domains. We make a clear analytical distinction between scale free capabilities and those that are subject to opportunity costs and must be allocated to one use or another, thereby shifting the discourse back to Penrose's ( 1959 ) original argument regarding the stock of organizational capabilities. The existence of resources and capabilities that must be allocated across alternative uses implies that profit‐maximizing diversification decisions should be based upon the opportunity cost of their use in one domain or another. This opportunity cost logic provides a rational explanation for the divergence between total profits and profit margins. Firms make profit‐maximizing decisions to increase total profit via diversification when the industries in which they are currently competing become relatively mature. Due to the spreading of these capabilities across more segments, we may observe that firms' profit‐maximizing diversification actions lead to total profit growth but lower average returns. The model provides an alternative explanation for empirical observations regarding the diversification discount. The self‐selection effect noted in recent work in corporate finance may not be indicative of inferior capabilities of diversifying firms but of the limited opportunity contexts in which these firms are operating. Copyright © 2010 John Wiley & Sons, Ltd.