Incomplete regulation, market competition and collusion

Regulators often do not regulate all firms competing in a given sector. Due to product substitutability, unregulated competitors have incentives to bribe regulated firms to have them overstate their costs and produce less, thereby softening competition. The best collusion-proof contract entails distortions both for inefficient and efficient regulated firms (distortion ‘at the top’). But a contract inducing active collusion may do better by allowing the regulator to ‘team up’ with the regulated firm to indirectly tax its competitor. The best such contract is characterized. It is such that the unregulated firm pays the regulated one to have it truthfully reveals its inefficiency. We finally compare those contracts.     

Job Securityand Product Market Competition

In the present paper, we relate the extent of job security offered to incumbent managers to the extent of competition among firms in the product market, where the extent of job security is measured by the probability that an incumbent manager continues to be employed by his current firm and the extent of competition is measured by the degree of differentiation between competing brands. We demonstrate that when competition between firms intensifies and "on-the-job training" is relatively more conducive to reducing the variable costs of production, firms tend to offer reduced (increased) job security to incumbent managers, provided that the degree of differentiation between competing products is sufficiently large (small), respectively. If "on-the-job training" is relatively more conducive to reducing the fixed costs of production, however, the previous result is reversed.     

Is the Competitor of my Competitor also my Competitor?

This paper presents several results on multimarket competition. First, whenever a firm faces multimarket competitors that sell goods in markets to which the firm itself has no access, the firm gains a strong incentive to expand production in its own market(s). In the capacity choice model, such a firm builds larger than Cournot capacity and pushes its competitors towards other markets. Consumers always benefit from multimarket competition. In asymmetric market structures, some firms may also benefit from multimarket arrangements, but in symmetric ones, all firms are necessarily harmed by it. Second, the intensification of indirect competition is not necessarily bad for the firm. It may be the case that, the more competitors its competitors have, the higher the firm’s profit. Finally, this model also has a multiproduct interpretation which suggests that a merger of single‐product firms may be beneficial or harmful from a social welfare perspective, depending on whether the new entity will compete with several single‐product firms or another multiproduct one.     

Revolutionary innovation and the incumbent business: Patterns of relationship and coping strategies

Revolutionary innovations bring about drastically new ways of doing business that potentially challenge the dominance and even the survival of many powerful incumbent firms. The choice of the incumbent firms’ strategies in coping with a revolutionary innovation depends on the specific patterns of relationship between the revolutionary innovation and the incumbent firms’ core business, be it substitutive, complementary, or parallel. In the situation of a substitutive relationship, the incumbent firms could exit from the incumbent business through swift divesting or gradual harvesting before it is eventually displaced or eroded. In a complementary relationship, the incumbents could absorb the innovation into the incumbent business by embracing the innovation that enables them to add entirely new functions to their incumbent business or assimilating the innovation to enhance the value of the incumbent business. In a parallel relationship, the revolutionary innovation either results in the retrenchment of the incumbent business or leaves it undisturbed, which, respectively, calls for specializing in certain niches of the incumbent business or further solidifying the incumbent business. In addition to the above coping strategies focusing primarily on the incumbent business, the incumbent firms also need to deal simultaneously with the new businesses inspired and propelled by the revolutionary innovation. They could fend off the potential disruptions of the innovation by engaging in a competitive fight in the market domain or a nonmarket fight in the sociopolitical domain. They could also enter those new businesses through greenfield entry or merger and acquisition.     

Financial analyst coverage for U.S. firms facing foreign competition: Evidence from trade liberalization

This study examines financial analyst coverage for U.S. firms following an increase in foreign product market competition. To capture exogenous shocks to domestic firms' competitive environments, we exploit a quasi‐natural experiment from large import tariff reductions over the 1984 to 2005 period in the manufacturing sector. Using data for the years before and after large tariff reductions, our difference‐in‐differences analysis shows evidence of a significant decrease in analyst coverage for incumbent U.S. firms when they face greater entry threat from foreign competitors. We also find that analysts with less firm‐specific experience and less accurate prior‐period forecasts are more likely to stop following the domestic firm when foreign competition intensifies. Overall, the findings suggest that foreign product market competition from global trade liberalization is an important determinant of financial analysts' coverage decisions.     

审计师选择与业绩承诺精准达标——基于中国借壳上市公司的经验证据

在借壳交易中，对借壳方（非上市公司）财务报告执行审计的审计师可以是壳公司（上市公司）的现任审计师，也可以是新任审计师。以2011—2020年完成借壳上市并签订业绩补偿承诺的我国A股借壳交易案件为样本，检验借壳上市审计师选择对借壳公司业绩承诺实现情况的影响。研究发现，与保留壳公司现任审计师的借壳公司相比，借壳上市交易中选择新审计师的借壳公司更可能在业绩承诺期间精准实现业绩承诺，盈余管理是借壳交易中审计师选择影响借壳公司精准实现业绩承诺的作用渠道。此外，当业绩承诺补偿方式为股份补偿以及借壳交易双方为关联方时，借壳交易中选择新审计师的公司对业绩承诺精准达标的正向作用更加显著。进一步研究发现，借壳上市交易中选择新审计师的公司更可能在业绩承诺到期后经历业绩滑坡，且大股东更可能在锁定期结束后减持股票。结果表明，与保留壳公司现任审计师的借壳公司相比，借壳交易中选择新审计师的借壳公司的机会主义行为更严重。     

Optimal regulation of technical progress in natural monopolies with asymmetric information

The focus of this paper is to characterize regulatory mechanisms for natural monopolies to provide for optimal technical progress when information is asymmetric. We model a Bayesian-Nash game where the monopolist has private knowledge of the cost-reducing effects of R&D investment to generate process innovations. In the first case, a price-regulated, profit-maximizing firm whose R&D level is unobservable sets its R&D level efficiently to maximize profits at the output level chosen by the firm. However, the level of technical progress achieved by the firm in this case is too high from the regulator's point of view since, in the second-best regulated solution of interest, the regulator has to provide for the R&D expenditures, assumed sunk, as well as for information rents transferred to the firm. In a second case, it can be shown that if the regulator can observe and set limits on the firm's investment in R&D, social welfare is improved, even though the regulated investment level is no longer efficient at the output level chosen by the firm. The reason for the welfare improvement is that losses in consumer surplus due to a decrease in output and an increase in the price are offset by a decrease in information rents and R&D costs transferred, causing the social costs of public funds to fall. Received: 31 July 1994 / Accepted: 15 January 1999     

Optimal zoning of managerial duopoly

This paper investigates optimal zoning of two managerial firms in an unconstrained linear city. Comparing with the case in which firms are not managerial type, the strategic delegation increases the incentives of one firm to locate farther from the rival. Then, a welfare function is introduced to highlight zoning regulation as an influential competition policy tool. Depending on the regulator's objective function and the timing of location choice, we provide a new mechanism that allows the regulator to attain the optimal locations of managerial firms and can lead to strong or weak competition.     

Exit Deterrence

This paper is the first to provide a general context whereby potential entry can lead incumbent firms to permanently reduce the intensity of competition in a market. All previous results found that potential entry would lead to lower prices and greater competition. Examining markets where entry occurs by the acquisition of access rights from an existing incumbent, we demonstrate that, where competitive choices are strategic complements, a more efficient entrant may be unable to acquire those rights from a less efficient incumbent due to the unilateral accommodating behavior of the efficient incumbent. Similarly, such accommodating behavior may deter efficient investment by an incumbent. These results have implications as to how economists view potential entry and its benefits.     

Potential competition and quality disclosure

This study presents a model of quality disclosure in which an incumbent, through its quality and disclosure choices, influences the potential that a new entrant enters the market. In this regard, we consider a sequential framework in which the incumbent chooses its quality and decides whether to disclose it to the market; subsequently, the entrant makes the same decisions, if it enters the market. We show that the potential competition can create strategic incentives for the incumbent to choose nondisclosure, because the availability of information about the incumbent's quality promotes entry by enhancing the entrant's expected profit from the market. In addition, an analysis of the effects of mandatory disclosure laws suggests that they can be effective in encouraging new market entrants and in improving the product quality of established firms.     

Entry and Technological Performance in New Technology Domains: Technological Opportunities,Technology Competition and Technological Relatedness

Entry and success in new technology domains (NTDs) is essential for firms' long‐term performance. We argue that firms' choices to enter NTDs and their subsequent performance in these domains are not only governed by firm‐level factors but also by environmental characteristics. Entry is encouraged by the richness of opportunities for technology development, while technology competition by incumbent firms discourages entry and render entries that do take place less successful. Firms are expected to be positioned heterogeneously to recognize and capitalize on technological opportunities, depending on the presence of a related technology base. We find qualified support for these conjectures in a longitudinal analysis of entry and technological performance in NTDs by 176 R&D intensive firms. While opportunity rich technology environments attract entries by firms even if these NTDs are distal from firms' existing technologies, firms require related technological expertise in order to exploit technological opportunities post‐entry.     

Process innovation and the persistence of monopoly with labour-managed firms

The issue of the persistence of monopoly when at least one labour-managed firm takes part in an auction for a cost-reducing innovation is tackled in this paper. It is shown that (i) when the incumbent is a profit-maximizing firm while the entrant is a labour-managed firm, monopoly persists; (ii) when both firms are labour-managed, monopoly persists only if the technology initially employed by the incumbent is highly inefficient as compared to the new one; and, finally, (iii) when the incumbent is labour-managed while the outsider is a profit seeking agent, then entry always occurs and monopoly changes hands. Received: 3 July 1997 / Accepted: 16 February 1998     

The Regulation of Predatory Firms

This article investigates the issue of predation by a regulated firm. Since it has private information, a regulated firm obtains higher rents in case of successful predation: the fewer the competitors, the higher the marginal social value of the regulated firm's effort and the higher the informational rents. Both principals (the investor of a "target" firm and the regulator) have to provide some incentives to prevent predation: the investor has to reduce the sensitivity of refinancing to predation; the regulator has to lower the gain of successful predation. It is shown that there is a trade-off between the power of the regulatory incentive scheme and the regulated firm's incentives to prey. In addition, as deterring predation is costly, the investor and the regulator compete when offering contracts: each wants to free-ride on the other. Hence, predation may occur in equilibrium although it makes both principals worse off.     

The Regulation of Predatory Firms

This article investigates the issue ofpredation by a regulated firm. Since it has private information, a regulated firm obtains higher rents in case of successful predation: the fewer the competitors, the higher the marginal social value of the regulated firm's effort and the higher the informational rents. Both principals (the investor of a "target" firm and the regulator) have to provide some incentives to prevent predation: the investor has to reduce the sensitivity of refinancing to predation; the regulator has to lower the gain of successful predation. It is shown that there is a trade-off between the power of the regulatory incentive scheme and the regulated firm's incentives to prey. In addition, as deterring predation is costly, the investor and the regulator compete when offering contracts: each wants to free-ride on the other. Hence, predation may occur in equilibrium although it makes both principals worse off.     

Leveraging of Reputation through Umbrella Branding: The Implications for Market Structure

The Klein–Leffler model explains how fear of reputation loss can induce firms to produce high‐quality experience goods. This paper shows that reputation can be leveraged across products via umbrella branding, but only by a firm with a monopoly on at least one product. Such a firm may be able to capture a market by using umbrella branding to make high quality credible at a lower price than the incumbent competitive firms. If monopolists compete for this capture, consumers are left better off than if the market remained competitive, in some cases even though the price increases.     

Regulation of Duopoly: Managed Competition vs Regulated Monopolies

This paper discusses the regulation of oligopolistic differentiated-product industries. The regulator can control prices and impose quantity restrictions, but cannot control the quality choices of the firms. We inquire about the optimal choice of regulatory regime—whether and under what conditions managed competition or segmentation of the market between regulated monopolies achieves better results. In the spatial duopoly model analyzed here, unhindered competition generally results in an inefficient allocation. When the regulator knows the technologies, optimal managed competition results in distortions of the quality choice, but an optimal regulated-monopolies regime achieves the first best outcome. When the regulator is uncertain about the technologies, neither of these methods yields the first-best outcome. The regulated-monopolies regime still tends to produce better quality choices, but managed competition tends to be more effective at extracting rents from the firms. The overall comparison depends on some finer details of the environment.     

Related variety and firm heterogeneity. What really matters for short-run firm growth?

ABSTRACT

In recent years, two concepts have become key elements in economic geography: related variety and firm heterogeneity. The first one predicts that knowledge spillovers within a region/local system occur among firms operating in ‘different but related’ sectors. The second one assumes that knowledge spillovers can occur among ‘different’ firms belonging to the same localised sector/industrial cluster. Using a sample of 27,817 Italian manufacturing firms observed during the period 2010–2013, this paper analyses the role played by related variety and within-sector firm heterogeneity on short-run employment growth. The results suggest that both related variety and within-sector firm heterogeneity have a positive effect, although the latter has a higher impact than the former. These results confirm the role played by related variety, but identify firm heterogeneity as a potential additional source of local knowledge spillovers.     

The Influence of Technological Knowledge Base and Organizational Structure on Technology Collaboration

This study investigates how an incumbent company's internal characteristics influence its propensity to form learning alliances. A firm may be reluctant to enter a research alliance when it has deep knowledge in a certain technological field due to concerns about knowledge leakage and the low possibility of being able to learn much from collaboration. On the contrary, when the firm has a broad knowledge base, it may have high propensity to enter alliances due to more self‐confidence in its ability to learn fast from partners. In addition, we argue that when a firm concentrates its R&D at a central location, this neutralizes the positive and negative influences of the two knowledge base features on alliance formation. We tested and found support for the hypotheses using a database of 1550 alliances undertaken by 78 large incumbent pharmaceutical, chemical, and agro‐food companies active in the biotechnology sector during 1993–2002.     

Optimal pricing strategy for foreign market entry: a game theoretic approach

Given that pricing plays an important role in a company's international competitive strategy, researchers have long argued the need for theory building in the area of international pricing. This study develops an optimal pricing strategy for foreign market entry using a game theoretic framework. The proposed model assumes two firms, a local incumbent and a foreign entrant, competing in a market. Consumers know the quality of the incumbent's offering, but do not know how it compares to that of the foreign entrant's. Based on these assumptions, and using the theory of inference making, we propose an upward price distortion by the entrant firm as an optimal entry strategy under incomplete information. The paper presents a game theoretic derivation to establish that the game has a unique intuitive separating equilibrium where the entrant firm stands to gain by engaging in upward price distortion to signal high quality to consumers. Copyright © 2006 John Wiley & Sons, Ltd.