The welfare economics of dominant-firm acquisitions

Conclusion The main results of this paper provide some analytic underpinning for a strict horizontal merger policy relating to dominant firms. However, even under standard assumptions, examples have been demonstrated where dominant/fringe firm mergers increase welfare. Most of these examples imply shutting down acquired facilities, a practice regarded as unfavorable evidence by the court in theStandard Oil case; consequently, they do not by themselves seem to offer much hope for raising economies as an antitrust defense. Finally, it should be noted that this paper has considered only single-product economies; economies of scope arising in multi-product (and multi-market) contexts could be large enough to justify dominant/fringe firm mergers⁹.An earlier version of this paper was presented at the Economic Policy Office seminar, Antitrust Division, U. S. Department of Justice. The author is grateful to Marius Schwartz, other seminar participants and an anonymous referee of this journal for helpful comments. M. Daniel Westbrook and Brian Flynn kindly arranged for the calculations reported in Appendix C.     

Excess Entry in the Absence of Scale Economies

It is well-known that with free entry, more firms than is socially optimal typically enter provided there are economies of scale. This paper investigates the possibility of excess entry in the absence of scale economies We thank Simon Anderson, Tom Holmes, the late Arijit Mukherji, and Xavier Vives for helpful comments. We also thank the participants at the July 2001 Australasian Meetings of the Econometric Society in Auckland, June 2002 University of Melbourne-National University of Singapore Symposium and seminar participants at the University of Sydney and University of New South Wales for useful suggestions. We are especially thankful to an anonymous referee whose meticulous comments have helped us to improve the paper     

Middle-ground players in dynamic imitative markets: global entry strategies of Korean firms in the biosimilars market

ABSTRACT

This study examines the strategies used to enter the biosimilars market – the emerging biogeneric market – by five Korean biopharmaceutical firms. The analysis is based on a conceptual framework that characterises the use of imitative innovation by middle-ground firms. These middle-ground firms are positioned between globally innovative firms from major developed economies and latecomer firms from large emerging economies. The study finds that the five Korean firms used three entry modes that resemble the typology of strategies commonly used in the previous catch-up stage: exploiting scale economies and specialisation. The study also reveals the risk and potential of each entry mode.     

Intermediate Inputs and External Economies

Is the degree of external economies （at the industry level） higher than the degree of internal increasing returns （at the firm level）？ If so, what is the exact source of this difference？ In the general equilibrium model in which firms producing final goods choose the degree of specialization of their technologies, external economies arise from the usage of intermediate inputs and the existence of internal increasing returns. It is frequently assumed that increasing returns are absent at the firm level while present at the industry level. In this model, the existence of increasing returns at the form level is necessary for the existence of external economies at the industry level. We show that the degree of external economies increases with the level of linkage effects. However, a higher linkage effect does not always lead firms to choose more specialized technologies.     

Causes and consequences of exports' channel integration

This paper investigates the decision to export with a proprietary exports channel by Spanish manufacturing firms. The research focuses on the effects of organizational capabilities versus scale economies on the vertical integration decision, and postulates a system of two simultaneous equations to properly evaluate the influence of a proprietary exports channel on the volume of exports. The results show that scale economies are more relevant than organizational capabilities in the decision to vertically integrate, and that, when properly evaluated, the exports mode does not influence the level of exports. The first author acknowledges financial support from the Spanish Ministry of Education (CICYT SEC97-1368) and Comunidad de Madrid (06/0067/98). Previous versions of this paper have been presented at the 24th EARIE Conference in Leuven (Belgium), XIII Jornadas de Economía Industrial in Madrid (Spain). The authors want to thank two anonymous referees for their comments and suggestions, although any remaining mistake is our own responsibility.     

Does policy reform promote FDI in developing economies? a firm-level simulation approach

How do policy reforms for foreign investors in developing economies affect inward foreign direct investment? Using a firm heterogeneity model calibrated to match data on Japanese multinational firms, we simulate how multinationals respond to a decline in investment procedure days. We find that such policy reforms in investment procedures significantly increase the aggregate entries and sales of multinational firms in developing economies, with the more pronounced impact at the extensive margin than at the intensive margin. At the firm level, declining entry costs encourage more productive firms to invest in a wider range of markets although such impacts are modest for the most productive firms that already penetrate many markets. The impacts on foreign sales per multinational firm are less clear-cut in magnitude across productivity levels in part because falling entry costs directly increase multinational entry to developing economies, but only indirectly encourage their existing production in these markets.     

企业规模、城市规模与集聚经济——对中国制造业企业普查数据的实证分析

本文利用我国2004年制造业企业普查数据,检验了不同规模的企业在不同规模的城市中得益于何种类型的集聚经济。结果表明,在控制了人力资本的外部性和城市人口规模效应后,小型企业在中等城市和大城市中显著得益于马歇尔外部经济(行业内集聚经济),在超大和特大城市中显著得益于雅各布斯外部经济(跨行业集聚经济);中型企业在大城市、特大城市和超大城市中显著得益于马歇尔外部经济,但只在特大城市中显著得益于雅各布斯外部经济;大型企业即使在特大和超大城市中也很少得益于雅各布斯外部经济。     

Seize the state, seize the day: state capture and influence in transition economies

Data from the 1999 Business Environment and Enterprise Performance Survey is used to examine state capture and influence in transition economies. We find that a capture economy has emerged in many transition countries, where rent-generating advantages are sold by public officials and politicians to private firms. While influence is a legacy of the past inherited by large, incumbent firms with existing ties to the state, state capture is a strategic choice made primarily by large de novo firms competing against influential incumbents. Captor firms, in high-capture economies, enjoy private advantages in terms of more protection of their own property rights and superior firm performance. Despite the private gains to captor firms, state capture is associated at the aggregate level with social costs in the form of weaker economy-wide firm performance. Journal of Comparative Economics 31 (4) (2003) 751–773.     

Cost efficiency and scale economies in the Turkish insurance industry

This article examines the cost efficiency and scale economies of insurance firms in the Turkish insurance industry over a 15-year period, 1990–2004. Using the stochastic cost frontier model, cost efficiency scores and scale economies were estimated for each firm in the sample. The results show that mean cost inefficiencies range between 18.3 and 36.9% of total costs and they do not tend to decrease over time. On average, small firms are more cost efficient than large firms. Economies of scale appear present and significant for any class size. The results suggest that there is a substantial difference in scale economies between small and large insurance firms.     

Labor market effects of export processing zones in the presence of unemployment

When foreign firms motivated by higher profits engage in off-shore production activities of unemployment ridden host countries, concerns increase about the possibility of exploitation of local workers. However, using a two good two factor model this paper shows that foreign firms’ engagement under the scenario actually improves the host country's structure of wages, skill composition, employment level and wage inequality which cannot be achieved under full employment in the host countries. This paper thus presents a mechanism that explains the effects of export processing zones observed in most of the transitional economies of the world. Results have practical implications for traditional structural changes expected for these economies. Although foreign firms come to earn profits, it is possible for host country workers to take a part of the rent away from the foreign firms as they are doing currently in different parts of the world.     

What Makes Firms Competitive? States,Markets, and Organisational Embeddedness in Competitive Firm Restructuring in Postsocialist Economies

The prevailing transitions literature suggests that dynamic firms in postsocialist economies are the result of macroinstitutional reforms leading to the making of markets. This article builds on work in comparative political economy and economic sociology to show that the degree of competitive behaviour of postsocialist firms is determined not by the existence of general market institutions alone but by the kinds of organisational allies firms possess and the kinds of markets they compete in. Using firm survey data across 28 postsocialist economies, the article examines the determinants of competitive restructuring by firms, including product innovation, standards upgrade, financial transparency, and investments in research and development. The article confirms insights from comparative political economy which suggest that dynamic enterprise sectors emerge when governance is effective. However, at the firm level, the article finds that transnational ties and supportive policy environments are most significant in the making of dynamic postsocialist enterprises. The article also highlights important regional variation in firm behaviour and discusses the relationship between institutional frameworks, organisational embeddedness, and firm restructuring in postsocialist economies.     

Cost information sharing with uncertainty averse firms

Summary. A homogeneous Cournot duopoly with asymmetric information is analyzed. Every firm learns its own marginal cost parameter, but not the marginal cost parameter of the opponent. Every firm can commit to revealing its private information to the other firm, i.e. to share information. The influence of uncertainty aversion on the readiness of the duopolists to share cost information is analyzed. Uncertainty aversion is modeled according to the Choquet utility theory. It is shown that low uncertainty aversion leads the firms to share information, while high uncertainty aversion leads the firms not to share. A simple economic explanation for this result is given.Received: 5 January 2001, Revised: 7 May 2003, JEL Classification Numbers: D43, D81, D82.I wish to thank Jürgen Eichberger, Volker Krätschmer, Willy Spanjers, seminar participants at Universität des Saarlandes, seminar participants at University College London, participants in the conference of the Verein für Socialpolitik in Mainz 1999 and an anonymous referee for helpful comments. The views expressed in this paper are those of the author and do not necessarily reflect the views of the European Central Bank.     

Firm innovation and productivity in Europe: evidence from innovation-driven and transition-driven economies

This article examines the links between firm innovation and firm productivity performance across a range of European economies, and in particular, we explore the differences between countries which are in transition from efficiency-driven to innovation-driven with those which are primarily innovation-driven economies. We employ an endogenous-switching technique to explore micro-economic survey-based data from both innovating and noninnovating firms. The model allows us to construct counterfactual scenarios which overcome problems of self-selection in the data. Some of the findings provide support for the traditional patterns previously found in the innovation literature, in which innovation efforts and investments in physical and human capital are found to be important for product and process innovations in manufacturing and service firms and across economy types. Our counterfactual analysis also allows us to outline a rationale for policy intervention towards noninnovating firms as well as innovating firms depending on where the transitional heterogeneity effects are greatest.     

Economics of scale and scope in multiproduct firms: evidence from US railroads

Recently, there has been a surge of interest in analysing scale economies in US railroad firms. The analysis of scale economies in existing studies is, however, limited in view of recent advances in the theory of the multiproduct firm. In this paper, the previous work is extended to address the issue of scale and scope economies in multiproduct firms. The findings show that US railroads experience mild overall economies of scale, but rather marked product-specific economies of scale with respect to both freight and passenger services. However, there appear to be diseconomies of scope associated with the joint production of the two services. Based on these results, this study indicates that US railroad firms would have no tendency to behave as a natural monopoly in the absence of regulation.     

Racing in two dimensions

In this paper we study an industry in which there is an ongoing sequence of R&D races between two firms. Firms are engaged in product innovation. Products are horizontally and vertically differentiated. There are two key characteristics/dimensions to products, and the level at which these are embodied in products can be increased by R&D. At each time firms can spend R&D on improving their product in one or both dimensions. We allow the possibility of economies scope — so R&D undertaken in one dimension can spillover to the other. The question we are interested in is whether a firm that is ahead in a single dimension but behind in another will focus all its R&D effort in the area in which it is ahead (product specialisation), or whether it will try to do R&D in both dimensions in the hope that it might get ahead in both and end up with a superproduct that dominates in both characteristics. The outcome of this R&D competition determines a Markov transition probability matrix determining the evolution of the industry. We show that when the R&D technology is characterized by constant returns then the only steady-state outcome is one in which the economy stays forever in a position in which one firm produces a super-product and the other gives up doing R&D altogether. This outcome is unaffected by the degree of economies of scope. When the R&D technology is characterised by decreasing returns, then the industry will visit all states and so will exhibit both product specialisation and superproduct dominance at various times. Now the extent of economies of scope matters and we show that the greater the extent of economies of scope, the less likely is the industry to exhibit product dominance, and the more likely it is to exhibit product specialisation.     

Competition, cooperation, and the neighboring farmer effect

In this paper we propose a model that explains how cooperation can emerge spontaneously between firms in a highly competitive market environment. The basic idea is that the more competitive is the market, the less costly it is for firms to help each other like good neighbors. Cooperation takes the form of sharing technical know-how, which speeds up the adoption of new technologies (normally developed elsewhere) that spur industrial development. The model comports with the development history of Japan's first example of successful industrial development – its cotton spinning industry – whose conditions match those of firms in small open economies today.     

Productivity drivers of infrastructure companies: Network industries utilizing economies of scale in the digital era

What drives the productivity dynamics of infrastructure companies? Using a panel of firms in 14 countries, we study total factor productivity (TFP) enhancers of utility and network services companies. We find that moving TFP closer to the technological frontier drives productivity growth at higher speeds in Asian countries than in European countries. We also find that financial leverage exerts a positive effect on TFP growth for larger infrastructure firms and that more financially developed countries utilize economies of scale through better use of financial resources. Large utility and transportation companies display a higher rate of TFP growth, indicating that a competition policy to encourage M&As would be prudent for the utility/transportation sectors to maximize economies of scale. In contrast, we find diseconomies of scale for energy companies in some countries. Moreover, young network firms improve TFP growth faster than their peers in countries with fewer product market regulations. Therefore, policies should remove entry barriers while facilitating the departure of old and low-productivity firms from network markets. Finally, policymakers should offer well-targeted fiscal incentives for intangible investments to boost TFP because the accumulation of intangible assets such as digital technology promotes more scale economies through network effects.     

Worker flows, job flows and firm wage policies

Like many transition economies, Slovenia is undergoing profound changes in the workings of the labour market with potentially greater flexibility in terms of both wage and employment adjustment. To investigate the impact of these changes, we use unique longitudinal matched employer‐employee data that permits measurement of employment transitions and wages for workers and enables links of the workers to the firms in which they are employed. We can thus measure worker flows and job flows in a comprehensive and integrated manner. We find a high pace of job flows in Slovenia especially for young, small, private and foreign‐owned firms and for young, less educated workers. While job flows have approached the rates observed in developed market economies, the excess of worker flows above job flows is lower than that observed in market economies. A key factor in the patterns of the worker and job flows is the determination of wages in Slovenia. A base wage schedule provides strict guidelines for minimum wages for different skill categories. However, firms are permitted to offer higher wages to an individual based upon the success of the worker and/or the firm. Our analysis shows that firms deviate from the base wage schedule significantly and that the idiosyncratic wage policies of firms are closely related to the observed pattern of worker and job flows at the firm. Firms with more flexible wages (measured as less compression of wages within the firm) have less employment instability and are also able to improve the match quality of their workers. JEL Classifications: J23, J31, J41, J61, P23, P31.     

Econometric Cost Structure Estimates for Cellular Telephony in the United States

This article estimates economies of scale for a sample of five cellular telephony firms in the United States. We reject constant returns to scale for all but the smallest firm studied; the remaining firms exhibit decreasing returns to scale. This finding suggests that scale economies cannot be used to justify the current regulated duopoly structure of United States cellular markets.     

Profits in the long-term for the manufacturing sector

It is foreseeable that the integration of domestic economies into a single market (globalization) will have a direct consequence on firm profits. Firms will see their returns converge in the long-term towards an equilibrium value that is identical to that of diverse firms coming from other economies. The authors' objective is to test the existence of a process of convergence between economies. Thus, they analyze the evolution of the competitive process of the manufacturing sector in eight countries. The results suggest that even though the competitive forces that operate at an international level will result in the convergence of the respective returns of firms in the long-term, the convergence process is only partial. (JEL 16)This research has been financed by the MCYT-FEDER Research Project SEC 2002-00835