The Coordinated Effect of a Merger with Balanced Sharing of Collusive Profits

It is hard to assess the coordinated effect of mergers in solid and convincing fashion, in part because economic theory deals mainly with the sustainability of tacit collusion and generally does not explore the conditions that foster collusion in the first place. Also the most popular schemes of collusion (Joint profit maximization and Nash Bargaining) proposed by the economic literature seem at odds with the evidence recorded on cartels and with the practical attitude of entrepreneurs. In this scenario the recent version of the Horizontal Merger Guidelines contained the interesting suggestion to pay attention to the process - parallel behaviour – which leads to collusive equilibria. Working on the same intuition we propose an approach based on the idea that firms can always find a feasible collusive agreement, for every possible value of the factor which discounts future profits. Assuming that in order to collude, firms demand the fair sharing of collusive gains, we exploit the egalitarian property of grim trigger strategies when all incentive compatibility constraints are binding. This approach suggests using three indicators to determine whether and how a merger affects the probability of collusion. An application of this approach to a real-world case (the AT&T/T-Mobile merger) is provided.     

An Empirical Analysis of Competition in Brand Differentiated Oligopoly

The paper studies the behaviour of four oligopolistic firms in the Italian coffee market. We study whether their behaviour is better represented by Bertrand behaviour or by collusive pricing. We also investigate the role of advertising in product differentiation.     

Subsidies for FDI: Implications from a model with heterogeneous firms

This paper analyzes the welfare effects of subsidies to attract multinational corporations when firms are heterogeneous in their productivity levels. I show that the use of a small subsidy raises welfare in the FDI host country, with the consumption gains from attracting more multinationals exceeding the direct cost of funding the subsidy program through a tax on labor income. This welfare gain stems from a selection effect, whereby the subsidy induces only the most productive exporters to switch to servicing the host's market via FDI. I further show that for the same total subsidy bill, a subsidy to variable costs delivers a larger welfare gain than a subsidy to the fixed cost of conducting FDI, since a variable cost subsidy also raises the inefficiently low output levels stemming from each firm's markup pricing power.     

Japanese business culture: the government,mainstream enterprises and ‘mavericks’ in the steel industry

Some scholars have argued that Japanese business epitomizes organized capitalism, and no-one would deny that the government and trade associations were pivotal in the distinctive development of Japanese capitalism. But it is frequently emphasized that competition between firms was fierce. One interpretation is that Japanese firms co-operated in developing technologies, and also collaborated in pricing policy, output allocation and capital investment. This collaborative endeavour gives the impression of a business environment that was static and collusive. By contrast individual firms competed aggressively in the improvement of the product quality, in productivity and in marketing. Infrequently a few determined firms refused to follow government guidance and openly challenged it. Two examples, Kawasaki Steel in 1950 and Sumitomo Metal in 1965, require a wider perspective than business-government relationships. It is the triangular matrix of government, mainstream firms, and ‘mavericks’ that has to be considered. Mainstream firms have a close relationship with government and try to impede the aggressive behaviour of ‘mavericks’. Exploring these tripartite interactions is crucial to any understanding of Japanese industry.     

Unilateral Climate Policy and Competitiveness: Economic Implications of Differential Emission Pricing

Unilateral climate policy raises concerns about international competitiveness and emission leakage that result in preferential regulatory treatment of domestic energy‐intensive and trade‐exposed (EITE) industries. Our applied analysis of unilateral EU abatement illustrates the potential pitfalls of climate policy design which narrowly focuses on competitiveness concerns about EITE industries. The sector‐specific gains of differential emission pricing in favour of these branches must be traded off with the additional burden imposed on other industries. From the perspective of the unilaterally abating region preferential EITE emission pricing can induce non‐negligible excess cost as policy concedes (too) low emission prices to EITE industries and thereby foregoes relatively cheap abatement options in these sectors. With respect to global cost‐effectiveness of unilateral climate policy, we find that differential emission pricing in favour of EITE industries can reduce emission leakage and thereby provide global cost savings compared with uniform pricing. However, the scope for cost savings is limited and may change into substantial cost increases if unilateral reduction targets are moderate and EITE industries get close to exemptions.     

Free in-network pricing as an entry-deterrence strategy

This paper analyzes the entry-deterring power of free in-network pricing with multiple incumbents. Free in-network pricing may deter entry since it creates network externality that intensifies competition. One may expect that a particular entry-deterrent strategy adopted by all incumbents would have more entry-deterring power than when it is adopted by some incumbents only. However, we show that when free-in network plan has entry-deterrence power with two incumbent firms, sometimes one incumbent offering free in-network plan may have more entry deterrence power than both firms offering free in-network plans. In other words, we find that an asymmetric adoption of entry-deterrence strategies by the incumbent firms may be the best for entry deterrence. This result highlights the importance of the strategic choice of the pricing plan as a function of not only the likelihood/cost of entry but also of the plan choices of other firms, and may partially explain the asymmetric strategies used by competing firms.     

Taking marketing strategy risks with seemingly no expected gains

This paper investigates the competitive rationale for firms to invest in marketing activities aiming to enhance valuation and achieve differentiation and competitive advantage, while carrying the strategic risks of causing unintended negative consequences. We build a stylized theoretical model where firms offering similar (homogenous) products are competing by determining their marketing strategy and pricing. Each firm must choose between several marketing activities that have different potentials of enhancing consumers’ product valuations while carrying some risk of lowering consumer valuation if unintended negative outcomes occur. The stochastic nature of marketing implies that (1) even when both firms invest the same amount of money aiming to enhance product valuations by the same level, there will be a variety of (posterior) vertical differentiation scenarios where the consumers could value either firm’s product as better as or worse than the rival’s. (2) The firms may employ marketing activities that do not even lead to gains in consumer product valuation in expectation. The duopoly model analysis indicates that associated with strategic pricing, even such stochastic marketing activities may constitute desirable strategies for two a priori symmetric firms in order to avoid a Bertrand type competition as the benefit from differentiation is found to be significant enough to offset the unintended negative outcomes. The oligopoly model analysis indicates that there is an increased incentive to take marketing risk when there is a greater level of competitive intensity in the marketplace. Preliminary experimental evidence is presented to support the main findings from theoretical model analyses. The paper thus provides important managerial implications for firms contemplating investment in seemingly risky marketing activities.

     

Joint ventures in patent contests with spillovers and the role of strategic budgeting

We consider an R&D contest between n firms in the presence of external spillovers. Our analysis focuses on the effects of these spillovers on joint venture activities between firms. In particular, we are interested in how different budget responsibilities within the research joint venture (RJV) affect profits of firms taking part in the joint venture and profits of their non-cooperating rival firms. Three arrangements for RJVs are analyzed: First, cooperation, in which the firms participating in the joint venture completely share the research they create in the innovation process and each firm has a sovereign budget responsibility. Second, a collusive arrangement in which the participating firms not only share their research but have joint budget responsibilities in the sense that they make all strategic choices cooperatively and maximize joint profits. Third, a hierarchical form, in which the cooperating firms establish joint headquarters which have strategic budget responsibility in the sense that it can strategically subsidize R&D efforts of its member firms so as to maximize overall RJV profits. We show that the first two arrangements can be mimiced in the hierarchical structure and that a hierarchical structure is optimal if it completely subsidizes its members’ R&D activities. In this case all rival firms are driven out of the contest.     

Inflation inertia and credible disinflation

We develop a model of optimizing forward-looking staggered price setting where even fully credible disinflations display a delayed and gradual inflation response and significant output losses. There is a welfare trade-off between these output losses and the gains from smaller inflationary distortions. For reasonable parameter values disinflation improves welfare, and more so if it is phased in gradually. The pricing assumption of our model yields dynamics that are similar to models of sticky information, but its state space is much simpler, thereby allowing for the application of standard linearization methods.     

Mergers Among German Cooperative Banks: A Panel-based Stochastic Frontier Analysis

Based on an unbalanced panel of all Bavarian cooperative banks for the years of 1989--97, which includes information on 283 mergers, we analyze motives and cost effects of small-scale mergers in German banking. Estimating a frontier cost function with a time-variable stochastic efficiency term, we show that positive scale and scope effects from a merger arise only if the merged unit closes part of the former branch network. When we compare actual mergers to a simulation of hypothetical mergers, size effects of observed mergers turn out to be slightly more favorable than for all possible mergers. Banks taken over by others are less efficient than the average bank in the same size class, but exhibit, on average, the same efficiency as the acquiring firms. For the post-merger phase, our empirical results provide no evidence for efficiency gains from merging, but point instead to a leveling off of differences among the merging units.     

Pricing Policy and Partial Collusion

We study the pricing policy equilibria emerging in a partial collusion duopolistic framework where firms in the first stage of the game choose non-cooperatively the pricing strategy (perfect price discrimination or uniform pricing), and from the second stage onward collude on prices. We show that for intermediate discount factors and high firms’ asymmetry, the unique equilibrium is characterized by only the smaller firm choosing price discrimination. In the case of intermediate discount factors and low firms’ asymmetry, there are two possible equilibria: both firms price discriminate or no firm price discriminates. When the discount factor is particularly high or particularly low both firms price discriminate in equilibrium.     

Pricing Experience Goods in Information Good Markets: The Case of eBusiness Service Providers

We study the pricing strategies of firms providing a service in experience good markets with switching costs. Using data on vendors providing “hosting and related services” at an early stage of the market, we test for pricing distortions that follow from oligopolistic competition with quality uncertainty and switching costs. We find that firms with a brand name charge a premium for their product – leveraging the reputation accumulated in closely related markets. As the theoretical literature suggests, we also find that the type of pricing distortions along the product line depends on consumers’ expectations about quality. If consumers underestimate the quality of the product, firms behave as if they discount introductory contracts in order to build trust, and later on markup upgraded contract. In contrast, firms that offer a quality level that is lower than consumers’ expectations markup initial contracts while discounting upgraded ones.     

A Welfare Evaluation of History-Based Price Discrimination

We design an asymmetric duopoly model with inherited market dominance such that the dominant firm and the smaller firm can price discriminate based on consumers’ purchase history. We show that uniform pricing softens competition leading to higher industry profits than under history-based pricing. Consumers benefit from history-based price discrimination unless the switching cost is sufficiently high and the inherited degree of dominance is sufficiently weak. A ban on history-based pricing would typically introduce a distributional conflict between consumers and producers. Finally, we establish that the gains to industry profits associated with uniform pricing exceed the associated losses to consumers.     

Pricing in marketing strategies of U.S.- and foreign-based companies

This study examines the role of pricing in marketing plans of U.S.- and foreign-based companies operating in the United States. Concurrently, two other issues, centrality of pricing decisions and pricing objectives, are examined. One objective of this study is to complement prior research, which has suggested the existence of managerial differences in other marketing and nonmarketing areas between U.S.- and foreign-based firms.The results, based on a mail survey and personal interviews, show that some differences exist between the U.S.- and foreign-based firms so far as the pricing element of their marketing plans is concerned. Pricing decisions are also shown to be more centrally made in the U.S.-based firms than in the foreign-based firms. Distribution of pricing objectives of the two types of firms, however, were not significantly different from one another. Group mean scores for pricing objectives, on the other hand, do suggest some fundamental differences.     

Does Religion Matter to Equity Pricing?

For a sample comprising 36,105 U.S. firm-year observations from 1985 to 2008, we find that firms located in more religious counties enjoy cheaper equity financing costs. This result is robust to a battery of sensitivity tests, including alternative assumptions and model specifications, additional controls for noise in analyst forecasts, and various approaches to addressing endogeneity. In another set of tests, we find that the equity pricing role that religion plays comes predominantly from Mainline Protestants. We also document that the effect of religiosity on firms?? cost of equity capital is larger for firms (periods) lacking alternative monitoring (regulation) mechanisms as measured by lower institutional ownership (the pre-SOX era), implying that religion plays a corporate governance role. Finally, we find that the importance of religion to equity pricing is concentrated in firms that suffer lower visibility, which tend to be more sensitive to local social and economic factors. By examining the links between religiosity and valuation at the firm level, we provide strong, robust evidence supporting the perspective that religion facilitates economic development.     

Quality signaling via strikethrough prices

Why do firms often advertise their current price together with their past price? Although consumers expect high quality products to have high prices, such firms may optimally charge lower prices when faced with low production costs. Thus in markets in which quality is difficult to ascertain and costs often fall over time, for example technology products, high quality firms may face a challenge of signaling their quality through current price alone. In this paper we develop a price signaling model in which uninformed consumers draw inference not only from the current price but also the prior period's price (the “strikethrough price”) if the firm chooses to disclose it. We find that a high quality firm benefits from using strikethrough pricing when the prior probability of high quality is relatively low while the probability of costs falling is relatively high.     

Information Exchange as a Means of Collusion: The Case of the Italian Car Insurance Market

This paper employs an econometric methodology (the Panzar-Rosse H-statistic) to test the level of competition in the Italian car insurance market, where in 2000 the Antitrust Authority imposed a conspicuous fine on 39 companies for their anti-competitive behavior deriving from an ad hoc information exchange from 1994 onwards. Our set of results shows that during the years 1998–2003 the group of firms whose business in the motor segment exceeds 60% of total gross premiums has earned revenues as if it were under monopoly or collusive oligopoly conditions, and therefore appears to support the decision of the Antitrust Authority.     

Selling to strategic customers with cost uncertainty

Production cost can be influenced by previous sales in an uncertain way. In reality, production cost may decrease in the number of initial buyers due to the learning effect, or increase in the number of initial buyers due to the quality-improving pressure from negative comments of unhappy users. Taking this uncertainty into account, this paper studies the optimal intertemporal pricing strategies of a firm when selling to strategic customers in two periods where production cost in the second period randomly changes with the number of buyers in the first period. Our results suggest how firms should adjust their optimal pricing strategies under different market circumstances.     

Estimating the pro-competitive gains from trade liberalization: an application to Mexican manufacturing

An original two-stage method is proposed to estimate the pro-competitive gains from trade liberalization. In a first step, I estimate the sensitivity of the price-cost margins of domestic firms to changes in the effective rate of protection, on the basis of a structure-performance relationship. This parameter is later exploited in a second step, where the cost of protection is calculated on the basis of a simple partial equilibrium model where domestic and foreign goods are imperfect substitutes. Applied to the Mexican case, this estimation reveals that protection removal depresses margins significantly and suggests that important additional gains can be expected from pro-competitive forces.