Spatial competition with endogenous location choices: An application to discount retailing

This paper examines the importance of geographical differentiation in store location decisions of firms in the retail discount industry. Using a novel data set that includes the store locations and accompanying market conditions for all stores belonging to the Wal-Mart, Kmart, and Target chains, we study the factors that influence the entry and location decisions of these firms. The model involves an incomplete information game between the three players where each firm has private information about its own profitability. A key feature of our modeling approach is that it permits asymmetries across firms in the impact of exogenous market characteristics and competitive interaction effects. Variations in the exogenous firm specific characteristics, such as the distances from the market to firms’ headquarters and the nearest distribution centers, serve as exclusion restrictions and provide the source for model identification. Parameter estimates of the payoff functions are used to predict the equilibrium market structure under a variety of market conditions that provide insights into the competitive landscape of the industry. Results show that all firms exert a strong negative impact on competitors when they are in close proximity, but the effect decreases with distance to rivals suggesting strong returns to spatial differentiation in this industry. Target stores fare well under competition except when these competitors are in close proximity. Wal-Mart’s supercenter format is found to be the most formidable player as it substantially impacts competitors even at a large distance. We also find significant asymmetries across players in their response to market conditions and competition interactions.

Strategic trade policy with endogenous choice of quality and asymmetric costs

This paper examines strategic trade and joint welfare maximizing incentives towards investment in the quality of exports by an LDC and a developed country. Firms first compete in qualities and then export to an imperfectly competitive, third country market. Under Bertrand competition, unilateral policy involves an investment subsidy by the low-quality LDC and an investment tax by the developed country, whereas jointly optimal policy calls for the reverse so as to reduce price competition by increasing product differentiation. Under Cournot competition, unilateral policy is also reversed from the Bertrand outcome, but jointly optimal policy involves a tax in both countries.     

Brand equity,warranty costs,and firm value

Warranty management is frequently discussed in the context of businesses’ ongoing efforts to reduce costs. However, how marketing can contribute to warranty cost reduction is empirically unclear. This opacity led to the current study, which focused on how warranty claim costs and abnormal warranty accrual costs mediate the relationship between brand equity and firm value—as well as the contingencies for the mediation. The result shows that brand equity reduces warranty claim rate and abnormal warranty accrual rate through which it increases firm value. In addition, product innovativeness decreases the association between brand equity and warranty claims and between brand equity and abnormal warranty accruals. As such, the findings revealed the roles of brand equity and product innovation in warranty cost reduction and thus suggested the need for managers to build and leverage their marketing resources when attempting to control warranty costs.     

Multi-product capacitated facility location problem with general production and building costs

This research introduces the multi-product capacitated facility location problem with general production and building costs (MP-CFLPGC). The MP-CFLPGC extends previous problems found in the literature by including multiple products and general production and building cost functions that allow the modeling of different behaviors like economies of scale and congestion. The MP-CFLPGC is formulated as a mixed integer linear program (MILP). To evaluate the performance of the proposed formulation we analyze the results of a commercial optimizer on a set of 288 randomly generated test instances that resemble the Colombian cement industry supply chain. After one hour the optimizer achieved an optimality gap of 1.0 % or less in 55 % out of the 288 test instances. On average the optimality gap was 3.57 %. Additionally, we propose a randomized mathematical-programming-based heuristic for the test instances where the MILP formulation presents significantly high optimality gaps.     

Enforcement of regulation,irregular sector,and firm performance: a computational agent-based model

This paper investigates how enforcement of regulation affects the size of the irregular sector, firm performance and the exit rate to the market. Three kinds of enforcement policy will be tested in the model: control, punish and legitimacy. The first policy is based on the number of inspectors present in the economy; the second is defined by the magnitude of punishment; the third is measured by social legitimacy. Results show the negligible influence of control to fight irregularity; the strong effect of punishment on the irregular sector and on the exit rate; the good effect of legitimacy policy in promoting regularity but low output performance.     

A theoretical analysis of endogenous and exogenous switching costs

This paper studies the relation between endogenous and exogenous switching costs. A firm can determine the size of endogenous switching costs, but not the size of exogenous switching costs. This paper develops a game theoretical model to investigate whether these two types of switching costs complement or substitute each other in a firm’s strategy. Our analysis uncovers a substituting relationship, i.e., the equilibrium size of endogenous switching costs should be higher in markets with lower exogenous switching costs. In the equilibrium, the endogenous switching costs cause profit losses to competing firms; the amount of profit loss decreases with the size of exogenous switching costs.     

New firm location: An equilibrium model and its disequilibrium dynamics

This paper is centered on two basic statements: i) the birth of new firms is spatially related to location factors endowment and ii) the set of location factors can support only up to a given number of firms.The paper firstly defines the regional ex-ante demand for firms as a function of location factors set. In the following step a definition of regional equilibrium stock of firms is given and a static equilibrium model of new firms birth is built up. In a dynamic disequilibrium model the net birth of firms is a function of two disequilibrium terms: a sectoral and a regional one.The sectoral disequilibrium depends on the industry production structure, the regional disequilibrium is linked to the adaptation elasticity of location factors set to an exogenous shock.Finally, a first estimation on Italian data is performed, on the basis of which some new lines of analysis are suggested.     

Business strategy and firm location decisions: testing traditional and modern methods

Business Economics - For nearly a century, economists have relied upon the neoclassical principle of a “profit-maximizing firm.” Two modern challenges to this principle have arisen: the...     

Exports,investment and production growth: A dynamic heterogeneous firm model with learning and entry costs

We analyze a firm’s joint decision to export and invest using a model that incorporates the essential features of self-selection and learning-by-exporting theories of firm-level dynamics. We calibrate the model to 2002–2007 Chilean manufacturing plant data and simulate it under different assumptions, finding that neither self-selection nor learning-by-exporting alone can adequately explain the observed cross-sectional relationship between firm level exports and capital, favoring instead a model that allows both mechanisms to work in tandem.     

Network externalities,transport costs,and tariffs

This article formulates a reciprocal market model of international duopoly with network externalities to reconsider welfare effects of reductions in transport costs and tariffs. Depending on the magnitude of network externalities, we show two possibilities. One of them, which emerges under strong network externalities, illustrates that freer trade unambiguously improves welfare for any initial level of trade barriers. This finding provides an affirmative evaluation of freer trade.     

The endogenous role of location choice in product innovations

The location choice of product innovations is a prevalent phenomenon one that has received little attention in the literature. This study examines the ways in which comparative industry environment, technology and product characteristics, and entry timing affect the firm's location choice of new product development activities between headquarters and foreign subsidiaries and the implications of location choice for performance. Our findings indicate that: (1) firms are more likely to locate their new product development activities at foreign subsidiaries in mainland China than at headquarters in Taiwan when the industry environment at foreign subsidiaries is more favorable, when technologies and products are more mature, and when the entry to mainland China's market is earlier than that of its competitors; (2) in general, firms locating their new product development activities at headquarters in Taiwan perform better than firms locating their new product development activities at foreign subsidiaries in mainland China after controlling for endogeneity bias; (3) firms locating their new product development activities at headquarters (at foreign subsidiaries) perform better than if they had located their new product development activities at foreign subsidiaries (at headquarters). Managerial implications and future research directions are discussed.     

A multilevel and dynamic model of intragroup conflict and decision making: Application of agent-based modeling

Although intragroup conflict has both multilevel and dynamic natures, less attention has been paid to establishing a holistic model of intragroup conflict that emerges across levels and unfolds over time. To address this research gap, we extend the multilevel view of intragroup conflict (Korsgaard et al. 2008) to develop a multilevel and dynamic model of intragroup conflict that explicitly includes (a) the role of time and (b) the feedback loop to encompass the dynamic aspect of intragroup conflict. We further instantiate the extended model in the context of team decision-making. To achieve this and systematically examine the complex relationships, we use agentbased modeling and simulation (ABMS). We directly investigate how two types of intragroup conflict—task and relationship conflict—interplay with cross-level antecedences, interrelate and develop over time, and affect team outcomes. This study adds to the intragroup conflict research by extending the field with multilevel and dynamic views.     

Industrial clusters, transactions costs and the institutional determinants of MNE location behaviour

This paper discusses the institutional and organizational assumptions underlying many of the currently popular notions of industrial clustering. By adopting a transactions costs perspective, we explain that there are three fundamentally different types of industrial cluster. We then discuss how the institutional differences between each of these clusters provide different possibilities for the location behaviour of the multiplant or multinational firm. Using two examples from the global semiconductor industry, we show that observations of industrial clusters must be interpreted very carefully when we are discussing multinational firms. The reason for this is that many simple clustering notions are predicated on assumptions which are often incompatible with multinational firms. The potential advantages of industrial clustering can only be understood when location strategies are considered with respect to the organizational and institutional logic of both the firm and the cluster.     

The impact of transport costs on new venture internationalisation

This paper investigates the importance of transport costs in new venture internationalisation, i.e. of firms that start exporting before they are 3 years of age. It does so by merging two large international datasets, on the firm level (covering 49,584 firms) as well as on the country level (covering 154 countries). It is found that transport costs matter significantly for new venture internationalisation, for older firms’ decision to export, as well as the extent of the latter’s subsequent exports. Export costs, the quality of transport infrastructure and domestic logistics costs affect new venture internationalisation even when controlling for a range of standard determinants. New international ventures behave differently from older firms in two important ways: (1) Transport costs affect the probability that they will export but not the extent of their subsequent exports and (2) their probability of exporting is affected negatively by their networking, domestic success and ISO status, whilst in the case of older firms, these factors have a positive impact. Various recommendations for policy and further research are made.     

Spatial agglomeration and firm exit: a spatial dynamic analysis for Italian provinces

The paper investigates the effect of spatial agglomeration on firm exit in a dynamic framework. Using a large dataset at the industry-province level for Italy (1998–2007), we estimate a spatial dynamic panel model via a GMM estimator and analyze the short-run impact of specialization and variety on firm exit. Specialization negatively affects firm exit rates in the short-run. The effect is particularly significant for low-tech firms. The impact of variety on firm mortality rates at the industry level is instead less clear, although still negative and significant for low-tech firms.     

Competition regimes and air transport costs: The effects of open skies agreements

The relevance of transport costs has increased as liberalization continues to reduce artificial barriers to trade. Is it worthwhile to implement policies designed to increase competition in transport markets? Focusing on air transport, this paper quantifies the effects of liberalization of air cargo markets on transport costs. Between 1990 and 2003, the United States implemented a series of Open Skies Agreements, providing a unique opportunity to assess the effect that a change in the competition regime has on prices. In our sample, Open Skies Agreements reduce air transport costs by 9% and increase by 7% the share of imports arriving by air. Those results hold for developed and upper-middle-income developing countries but for lower-middle-income and low-income developing countries Open Skies Agreements do not reduce air transport costs.     

Explaining variability in the investment location choices of MNEs: An exploration of country,industry and firm effects

This paper examines the variation in foreign direct investment (FDI) location decisions of European multinational enterprises (MNEs.) An innovative empirical approach is applied to a new data set which contains over 15,000 individual FDI location decisions in 25 European countries over a 17-year period and combines country-, industry- and firm-level factors. The empirical results show that the responsiveness of FDI location choices to country-level factors is heterogeneous both across sectors and across firms of different characteristics as well as unobserved factors. For example, the results show that the importance of market size increases with investing firm’s size and skill intensity, while proximity between countries, as well as cultural and linguistic ties are more important for smaller firms.     

Satisfaction with household production: the effect of time spent in household production by husbands and wives

The purpose of the study was to examine the relationship between the extent of household production and satisfaction with household production. Data were obtained from 400 married couples who responded to a postal questionnaire. The dependent variable was an index of satisfaction incorporating two aspects of household production, quality and quantity. Regression analysis indicated that of the three variables representing the extent of household production in the model — hours spent by each spouse in household production and an activity index to measure the number of household production activities — only husband's hours spent in household production demonstrated a significant, independent effect. Other significant variables included husband's hours of market work, household net worth, age of respondent and gender of respondent. Two significant interactions indicated that (i) the relationship between wife's hours of household production and satisfaction with household production differed according to the gender of the respondent, and (ii) the relationship of husband's hours of market work and satisfaction differed according to the age of the respondent.     

Resources of the firm, Russian high-technology startups, and firm growth

Russia possessed many world-class technologies prior to the break up of the Soviet Union. Entrepreneurial endeavors resulted from this technological ability as market forces encouraged individuals to leave the large state enterprises that produced those technologies. Founding characteristics of the firm impact the resources that are available to the startup firm. This study investigates the extent to which founding factors in Russia help high-technology firms to prosper. It was found that the team establishing the business mitigated the liability of newness. However, in contrast to the US, the culture of Russia does not produce negative results if the founding team grows very large. Additionally, it was shown that firms that pursued more technological products and enter the market later performed best.     

Globalization and firm level adjustment with imperfect labor markets

In a model with search generated unemployment and heterogeneity on both sides of the labor market, exporting firms are bigger and pay higher wages than other firms. Moreover, there is imperfect persistence in the decision to export and liberalization increases the wage gap between high- and low-skill workers. Openness can increase aggregate productivity in export-oriented markets while generating within-firm productivity losses for the weakest firms. In contrast, openness can lead to within-firm productivity gains for the weakest firms in import-competing industries.