Licensing under vertical product differentiation: Price vs. quantity competition

This paper develops a duopoly model of vertical product differentiation where two domestic firms incur variable costs of quality development. These domestic firms can purchase a superior foreign technology through licensing. Outcomes between Bertrand and Cournot competition are compared. We find that licensing raises domestic welfare, and domestic welfare is higher in Bertrand than in Cournot competition regardless of whether or not domestic firms engage in licensing. Non-exclusive licensing is also found to benefit the domestic country more than exclusive licensing.     

Strategic incentives under vertical integration: the case of wireline-affiliated wireless carriers and intermodal competition in the US

In its review of the Cingular/AT&T Wireless merger, the FCC noted the potentially conflicting incentives of wireline-affiliated (vertically integrated) versus independent (non-integrated) wireless carriers to act as intermodal competitors in the wireline exchange access market. Specifically, because Cingular and Verizon Wireless are owned by wireline carriers, they may have an incentive to compete “less aggressively” within their parents’ wireline territories while AT&T Wireless, an independent wireless carrier, would not. This paper examines these and other hypotheses by examining pre-merger data on the wireless plans offered by the three carriers. The empirical analysis suggests that AT&T Wireless did not design its plans based upon a regional strategy, whereas Cingular offered substantially smaller-minute wireless plans within its parents’ wireline territories. However, the results also suggest that Verizon Wireless did not design its plans in a markedly different fashion within and outside of its parent’s wireline region. It is posited that these findings might reflect the differing ownership and control structures of Cingular and Verizon Wireless.      

The strategic value of partial vertical integration

We investigate the strategic incentives for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when retailers privately know their costs and engage in price competition with differentiated goods. The partial misalignment between the profit objectives within a partially integrated manufacturer–retailer hierarchy implies a higher retail price than under full integration. This ‘information vertical effect’ translates into a ‘competition horizontal effect’: the partially integrated hierarchy's commitment to a higher price induces the competitor to increase its price, which strategically relaxes competition. Our analysis provides implications for vertical merger policy and theoretical support for the recently documented empirical evidence on partial vertical acquisitions.     

Vertical alliance and vertical integration for the inflow of technology and new product development in the pharmaceutical industry

Pharmaceutical firms are increasingly seeking vertical alliance (licensing and joint venture) or bridges and vertical integration (merger and acquisition, M&A) or buffers. However, the question remains whether alliance and integration modes of organisation contribute to the clinical trials activities for a new product development. Using data on 250 pharmaceutical firms, this study examines the linkage between the external technology-sourcing modes and an increase in clinical trials activities, advancing new product development. The findings indicate that licensing mode may not be an effective in comparison to joint ventures and M&A modes of the organisation. Comparing the two modes – vertical joint venture (bridges) and vertical integration (buffer) – the former appears to be effective than the latter (M&A) in sourcing external technology acquisition in the pharmaceutical industry. Implications of these findings are addressed in terms of strategy and structure in a broader context.     

Vertical Restraints and Market Access

This paper analyzes vertical restraints in relation to market access issues. In Section II we briefly review the recent three major trade conflicts between Japan and the USA in light of vertical restraints. In Section III we review the major policy lessons of the economics literature of vertical restraints, and analyze whether we need a special treatment for vertical restraints abroad for a market access reason. In Section IV we evaluate the policy options towards foreign foreclosure and suggest that nondiscriminatory application of foreign or home competition policy should be the mechanism to address such concern instead of trade policy actions such as voluntary import expansions.     

Housing prices,stock prices and the US economy

This paper studies the relationship between housing prices, stock prices, interest rates and aggregate output in the US using monthly data from 1993 to 2014. Evidence from causality tests and a variance decomposition procedure suggest that stock prices have a much larger effect on aggregate output in the US economy than do either housing prices or interest rates. Instead, the wealth effect created by changes in stock prices has a relatively large impact on US aggregate output. Separate estimations and variance decompositions for the sample periods 1993–2001, 2002–2008 and 2009–2014 show that the impact of housing prices relative to stock prices has been waning over time.     

Cartel sustainability with vertical product differentiation: Price versus quantity competition

In the context of a vertically differentiated duopoly, we analyse the influence of the degree of differentiation on cartel sustainability, under both price and quantity competition. We find that, under both Bertrand and Cournot competition, the effect of vertical product differentiation on sustainability of the collusive equilibrium is unclear. It is shown that, given a degree of differentiation, price collusion is more sustainable than quantity collusion.     

Natural gas prices and stock prices: Evidence from EU-15 countries

This study investigates the long-run relationship between natural gas prices and stock prices by using the Johansen and Juselius cointegration test and error–correction based Granger causality models for the EU-15 countries. We employ quarterly data covering the period from 1990:1 to 2008:1. Empirical findings suggest that there is a unique long-term equilibrium relationship between natural gas prices, industrial production and stock prices in Austria, Denmark, Finland, Germany and Luxembourg. However, no relationship is found between these variables in the other ten EU-15 countries. Although we detect a significant long-run relationship between stock prices and natural gas prices, Granger causality test results imply an indirect Granger causal relationship between these two variables. In addition, we investigate the Granger causal relationship between stock returns, industrial production growth and natural gas price increase for Austria, Denmark, Finland, Germany and Luxembourg. As a result, increase in natural gas prices seem to impact industrial production growth at the first place. In turn, industrial production growth appears to affect stock returns.     

Price and quantity competition under free entry

This paper complements that of Cellini et al. (Cellini, R., Lambertini, L., Ottaviano, G. I. P., 2004. Welfare in a differentiated oligopoly with free entry: A cautionary note. Research in Economics, 58:125–33.), which shows that Cournot competition may generate higher welfare compared to Bertrand competition in an economy with free entry. Unlike them, we provide a more general proof for this result and show that Cournot competition generates higher welfare compared to Bertrand competition when the products are sufficiently differentiated. If the products are close substitutes, welfare is higher under Bertrand competition. We show that these qualitative results hold whether or not number of varieties increases market size. We also show when the active firms earn higher profits under Bertrand competition compared to Cournot competition.     

Using Malmquist index to select the strategic partners in vertical integration: the case of Taiwan LED supply chain

In recent years, green technology efficiency has been one of the most interesting issues when referring to energy saving. The light-emitting diode (LED) is one of the competitive industries on green technology in Taiwan. The objective of this article is to select the vertical strategic partners of the 22 LED companies through investigating performance of integration. The Malmquist productivity index (MPI) is used to evaluate the average efficiency change from 2011 to 2015. The empirical results show that the productivity change was influenced by both catch-up effects and frontier effects. For upstream companies, the MPI of Tekcore is superior to others because it maintained technical efficiency and technological change. For downstream companies, most of them are performed well in technical efficiency than technological change. This article helps LED manufacturers select the appropriate strategic partners to achieve competitive advantage.     

Poverty,competition, democracy,and ownership: A general equilibrium model with vertical preferences

We consider a general equilibrium model where individuals are simultaneously workers, consumers, and shareholders, with two possible market structures: Monopoly and Duopoly, and two extreme ownership structures: egalitarian and concentrated. Considering three standard poverty indicators, the questions are, whether more competition generates more or less poverty for a given ownership structure; and whether a democratic choice between Monopoly and Duopoly leads to the alternative with less poverty. When the ownership is concentrated, we show that Duopoly generates less poverty than Monopoly and the majority votes for the alternative with less poverty. When the ownership is egalitarian, Duopoly may generate more or less poverty and democratic choice alleviates poverty regarding at least one poverty indicator and worsens poverty regarding at least another one, the three poverty indicators never converging. An empirical study on the effect of competition on poverty supports to some extent our theoretical findings.     

Asset prices and business cycles under market incompleteness

In this paper, we study the quantitative implications of a real business cycle model where the firm is the capital owner, households are heterogeneous, and markets are incomplete due to restricted asset trade. Since, under these assumptions, the usual firm objective is no longer well defined, several non-standard objectives are incorporated into the model. These include variants of market value maximization and a utility function for the firm. We find that the presence of market incompleteness alters little the behavior of asset returns. On the other hand, the behavior of the macroeconomic aggregates is quite sensitive to the firm objective, which affects the capital accumulation path. In contrast to conventional findings, capital is not necessarily higher when markets are incomplete. In addition, the different capital accumulation effects imply that shareholders with different asset wealth might prefer different firm objectives.     

International asset prices and portfolio choices under Bayesian learning

We calculate equilibrium asset prices and portfolio choices from a two-country OLG international asset pricing model under the assumption that investors are on a Bayesian learning path. Investors from both countries receive identical information flows, but domestic investors start off with less precise priors concerning foreign fundamentals. Learning is shown to produce first-order effects on the properties of asset prices, in the form of increased equity returns, volatility clustering, and time-varying correlations across national stock markets. Moreover, on a learning path, estimation risk generates portfolio biases similar to those observed empirically, i.e. a strong preference towards domestic securities and excessive turnover in foreign securities. These findings are robust to changes in prior beliefs, the calibration of initial information asymmetries, and the parameterization of the model. We use real GDP data for the US and Europe to calibrate the model and show that in the event of a financial liberalization during the 1970s, high excess returns, time-varying volatility, substantial home bias, and excess turnover should have been observed.     

The relationship between agricultural commodity prices,crude oil prices and US dollar exchange rates: a panel VAR approach and causality analysis

This study examines the relationship between crude oil prices, US dollar exchange rates and 30 selected international agricultural prices and five international fertilizer prices in a panel framework. The study uses panel VAR methods and Granger causality tests on panel data sets of agricultural commodity prices (as well as specific agricultural commodity sub-groups) and fertilizer prices with monthly observations of the period from June 1983 to June 2013. The empirical results of the present study indicate that crude oil prices as well as US dollar exchange rates affect international agricultural commodity and fertilizer prices. Furthermore, contrary to the findings of several studies in the literature, the present study supports bidirectional panel causality effects between crude oil prices and international agricultural prices as well as between US exchange rates and international agricultural prices.     

State prices,liquidity, and default

We show, in a monetary exchange economy, that asset prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank, through its effect on default and interest rates. Two agents trade goods and nominal assets to smooth consumption across periods and future states, in the presence of cash-in-advance financing costs that have effects on real allocations. We show that higher spot interest rates reduce trade and as a result increase state prices. Hence, states of nature with higher interest rates are also states of nature with higher risk-neutral probabilities. This result, which cannot be found in a Lucas-type representative agent model, implies that the yield curve is upward sloping in equilibrium, even when short-term interest rates are fairly stable and the variance of the (macroeconomic) stochastic discount factor is 0. The risk-premium in the term structure is, therefore, a monetary-cost risk premium.     

Exact aggregation under summability and homogeneity with individually variable prices

Exact aggregation of a system of individual expenditure functions with a single, individually variable price is analyzed. It is shown, under summability and homogeneity, that the individual and aggregate expenditure functions must take one of two specific functional forms.     

Intra-industry differences in vertical integration, heterogeneous costs and pricing: the case of web hosting

In many differentiated product industries, both traditional and “new economy” activities, vertically integrated firms also supply inputs to apparent rivals in the downstream business. This generates heterogeneity between low- and high-sunk cost suppliers with implications for entry and competitive conduct. The web hosting market is typical with primary suppliers operating alongside resellers who rent server space from them. We explore the impact of competition in US hosting using a unique dataset covering 15,000 packages offered by 3,500 firms. The results suggest price is sensitive to competitor clustering in quality space; an outcome consistent with easy entry for resellers with ultra-low fixed costs.

Risk,variety and volatility: growth,innovation and stock prices in early industry evolution

The paper studies the patterns of volatility in firm growth rates and stock prices during the early phase of the life-cycle of an old economy industry, the US automobile industry from 1900-1930, and a new economy industry, the US PC industry from 1974-2000. In both industries, firm growth rates are more volatile in the period in which innovation is the most radical. This is also the period in which stock prices are more volatile. The comparison sheds light on the co-evolution of industrial and financial volatility and the relationship between this co-evolution and mechanisms of Schumpetarian creative destruction. Results provide insight into the debate on whether the statistical behavior of firm growth rates is well represented by Gibrats Law.JEL Classification: L11, 030, G12I thank Massimiliano Tancioni for his excellent research assistance. Support from the following grants is much appreciated: European Commission Key Action Improving the socio-economic knowledge basecontract HPSE-CT-2002-00146, and the Open University RDF Grant contract no. 793.     

Monetary policy,corporate profit and house prices

By using portfolio theory, we explain the highly observed correlation between the seemingly unrelated corporate profit and house prices in the United States. We test the predictions of the underlying model using a vector autoregression representation and find the data to be supportive of the theory. Monetary impulses explain high correlation as both corporate profit and house prices exhibit similar dynamics in response to a monetary impulse. Robustness checks are presented by using the federal funds rate instead of the monetary base as a measure of the stance of monetary policy and by using other model variations. In all cases, the results are robust.     

Tuition fees: User prices and private incentives

This paper studies the aggregate and distributional implications of introducing tuition fees for public education services into a tax system with income and consumption taxes. The setup is a neoclassical growth model where agents differ in capital holdings. We show that the introduction of tuition fees (a) improves individual incentives to work and/or save and (b) can be both efficient and equitable. The focus is on the role of tuition fees as an extra price and how this affects private incentives.