Market Power and Multimarket Contact: Some Evidence from the Spanish Hotel Industry

This paper analyses the effect of multimarket contact on firms’ behaviour. According to Bernheim and Whinston [1990], firms that meet in several markets for an infinite number of periods may find it profitable to redistribute market power among markets where they are operating. We present evidence supporting this prediction by using data from the Spanish hotel industry. Moreover, we also find that the omission of variables measuring multimarket contact creates a downward bias on the effect of concentration on prices. This result questions previous conclusions about the role of competition in industries where multimarket behaviour is expected.     

On the relation between multimarket contact and service quality: Mutual forbearance or network coordination?

Research summary : We reconsider the relationship between multimarket contact and product quality in the airline industry by arguing that multimarket contact has both a negative mutual forbearance effect on quality and a positive network coordination effect on quality. Multimarket contact increases the frequency of contact between firms, and this anticipated future interaction promotes cooperation. In network industries, especially small firms may want to cooperate in order to increase the attractiveness of the composite product. By using size as a moderating variable, we indeed find a consistent positive effect of multimarket contact on product quality for small airlines. We show that this effect can be attributed to network coordination and that this effect generally dominates the negative mutual forbearance effect in a recent period. Managerial summary : Firms with sales in multiple geographical markets likely encounter each other with mutual respect (i.e., live and let live) because aggressive behavior in one market may lead to retaliatory responses in other markets. Such responses weaken competitive pressures on price and quality. Insofar these firms sell complementary products, they may however also coordinate and improve their joint product offering, resulting in better quality for the consumer. This paper shows that this positive effect of cooperation may dominate the negative competition‐reducing effect, depending on the size distribution of firms. The reason is that small or nondominant firms have a stronger incentive to produce compatible products than large or dominant firms with already a strong position in the (global) market. Copyright © 2015 John Wiley & Sons, Ltd.     

Dynamics of dyadic competitive interaction

In this study of firms’ entries into and exits from each other’s markets, we link research on multipoint competition to the emerging action‐oriented, dyadic approach to interfirm rivalry by specifying market interdependencies between pairs of firms that condition their potential for rivalry over time. Our dynamic analysis of competitive interactions between pairs of commuter airlines in California reveals the idiosyncratic and asymmetric market microstructures that characterize dyadic competitive relationships and helps explain why firms grapple vigorously with some of their competitors while being passive toward others. We show that there is an inverted U‐shaped relationship between firms’ rates of entry into and exit from each other’s markets and the level of multimarket contact in competitor dyads. We also show how this basic curvilinear effect varies from dyad to dyad as a function of relative levels of multimarket contact with competitors in other dyads and the relative sizes of competitors in a focal dyad. Copyright © 1999 John Wiley & Sons, Ltd.     

Multimarket contact and sales growth: evidence from insurance

Research on pricing, profits, and firm survival has shown that multimarket contact causes mutual forbearance against competition, but has not considered the consequences of imperfect observability of competitive moves. Here, predictions are developed to explain how mutual forbearance occurs—but sometimes fails—in markets with imperfect observability. Mutual forbearance means that firms do not seek to take market share from each other through price cuts or nonprice competition, and thus that sales grow at uniform rates. Firms defect from mutual forbearance, and hence have higher sales growth, if the potential rewards are high and the likelihood of being discovered is low. This theory is tested on a panel of firms operating in the Norwegian general insurance industry. The evidence suggests that sales growth is most rapid in firms that do not meet many multimarket competitors in a given market and firms that are economically troubled. Growing or highly concentrated markets have higher heterogeneity of growth rates. Copyright © 2007 John Wiley & Sons, Ltd.     

The risk of contagion from multimarket contact

It is conventional wisdom that the strategic linkage of markets that is enabled by multimarket contact typically increases the profitability of cooperation among rivals. We find to the contrary that a strong force against strategic linkage results from imperfect monitoring of adherence to cooperation. With such imperfections, strategically linking markets can lower payoffs by permitting the impact of adverse shocks in one market to spread to others. Consequently, players of repeated games on more than one front may find it strictly advantageous to avoid linking strategies on a front with clear monitoring to outcomes on a front with error-prone monitoring. One implication is that antitrust, competitive strategy, and foreign policy analyses have presumed too broadly that multimarket contact fosters cooperation. The game-theoretic equilibria characterized here shed light on why players such as firms and nations sometimes strategically link fronts in their rivalry, and sometimes take care to articulate that some fronts of particularly volatile conflicting interests will not trigger broader adverse moves against the rival.     

Rivalry within strategic groups and consequences for performance: the firm‐size effects

Our study examines how, in a given industry, rivalry functions within strategic groups defined according to the size of their member firms and how this rivalry affects performance. We hypothesize that, owing to several forms of group‐level effects including market power, efficiency, differentiation, and multimarket contact, strategic groups that comprise smaller firms will exhibit both increased rivalry and decreased performance compared with strategic groups that comprise larger firms. We test our hypotheses by estimating the effect of group‐level strategic interactions (i.e., conjectural variations) on firm performance. Ultimately, our analysis of empirical data on loans in the Spanish banking industry demonstrates that increased rivalry and decreased performance indeed characterizes firms belonging to a strategic group that comprises smaller firms. Copyright © 2011 John Wiley & Sons, Ltd.     

Exploring the incremental merger value from multimarket and technology arguments

We address the question through which channels mergers create incremental value to merging firms and consider various product market and technological arguments. Based on the pairwise stable allocation concept, we estimate firms’ pair-specific (incremental) merger value functions. Our results show that technological arguments contribute to the majority of added merger value. We also find that market power arguments across multiple markets contribute to explaining incremental post-merger value. In contrast, multimarket strategic effects do not add merger value. Our estimated match values are aligned with the merging firms’ post-merger stock market performance.     

Multimarket competition and business strategy

Multimarket competition abounds in the real world. Globalization of competition (triad rivalry) and economic integration of communities (European integration) contribute to the intensification of multimarket competition. The fact that firms meet in many markets has implications for rivalry. This paper introduces five key elements of multimarket competition and illustrates their working and influence by applying game-theoretic reasoning. By way of illustration the case of the artificial sweetening industry is discussed.Professor H.W. de Jong and M. van Wegberg are gratefully acknowledged for their valuable comments. Of course, the usual disclaimer applies.     

Collusive pricing patterns in the US airline industry

We formulate two empirical tests for collusive behavior based on the theoretical insights of Werden and Froeb (1994) and Athey, Bagwell, and Sanchirico (2004). The first predicts that colluding firms will reduce pair-wise differences in prices within a market if demand satisfies certain properties. The second predicts that colluding firms will sacrifice efficiency in production by increasing price rigidity to avoid informational costs. Using panel data from the US airline industry and fixed-effects estimation, we find that greater multimarket contact between carriers leads to pricing patterns consistent with both theoretical predictions, while code-share agreements are consistent with the second prediction.     

Markets Linked by Rising Marginal Costs: Implications for Multimarket Contact,Recoupment, and Retaliatory Entry

This paper studies the effects on prices and welfare of multimarket contact when firms serve multiple markets from a single facility with rising marginal costs. Here a link is created between markets, even with independent demands: greater output in one market leads to a higher marginal cost and lower output in other markets; and multimarket contact can indeed lower welfare. Variations of the model can explain two other puzzling phenomena: “recoupment” – lower prices in one market “paid for” by higher prices in other markets; and “retaliatory entry” – the credible threat to enter a rival’s market if it enters yours.     

Multimarket Contact in Health Insurance: Evidence from Medicare Advantage*

Many industries consist of large firms that compete in multiple geographic markets. Such overlap, defined as multimarket contact (MMC), may facilitate tacit collusion and soften competition. We examine the effects of MMC on health insurance prices and quality using comprehensive data on the Medicare Advantage (MA) market from 2008 through 2015. Our identification strategy exploits two plausibly exogenous changes to MMC: (1) out-of-market mergers; and (2) policy-driven changes in the benchmark rates of other markets. Our results consistently support the mutual forbearance hypothesis, where we find that prices are significantly higher and high-quality plans less pervasive as MMC increases.     

Multimarket Contact and Intensity of Competition: Evidence from an Airline Merger

This paper examines the relationship between multimarket contact (MMC) and the intensity of competition. We take advantage of a recent merger, which altered the extent of MMC throughout the US airline industry, to understand the nature of MMC’s impact on the airlines’ frequency of service. Evidence that non-price effects of MMC are a part of the longer-term industry equilibrium is not robust. However, we observe that following the merger the market players started taking the degree of MMC into account in making their frequency decisions in line with the ‘mutual forbearance’ hypothesis; however, the effect showed signs of diminishing over time. Our results have implications for merger evaluation in industries where consolidation may lead to a higher extent of multimarket contact.     

Strategic Substitutes and Strategic Complements With Interdependent Demands

Strategic substitutes and complements have become standard tools of analysis in industrial organization. Bulow et al. (1985) original model which introduced these concepts focused on multimarket oligopoly. Building upon that model, this paper shows that there becomes not one but two strategic interaction terms if the demands between markets is interdependent and the firms compete in prices. This new model is applied to the telecommunications industry, where the local exchange carriers face competition from competitive access providers. The theoretical model shows the critical variables in the local exchange carriers' strategic pricing decision.     

Reciprocal threats in multimarket rivalry: staking out ‘spheres of influence’ in the U.S. airline industry

The paper investigates the outcomes of multimarket competition among U.S. scheduled airlines when the interests and positions of the airlines differ in the mutually contested markets. Asymmetry in territorial interests provides multimarket competitors with footholds in important markets of their rivals, which can be used to deter the behavior of the rivals in other markets. Evidence suggests that airlines use footholds in their rivals’ important markets (particularly in their hubs) to reduce the competitive intensity of those rivals in the airlines’ own important markets (their hubs), and sustain their dominant positions (or spheres of influence) in those markets. Copyright© 1999 John Wiley & Sons, Ltd.     

Multipoint competition,strategic similarity and entry into geographic markets

The objective of this study is to integrate both multimarket contact and strategic similarity in the analysis of entry decisions. We also analyze the role of the reciprocity of contacts, market concentration, and coordination mechanisms at moderating the relationship. Our hypotheses are tested through the analysis of entry behavior into new geographical markets in the Spanish savings bank market. Interestingly, our results offer an opportunity of conciliating conflicting evidence in both the multimarket–mutual forbearance and the heterogeneity–rivalry literatures and offer further support to the U‐inverted influence of multimarket contact on entry. Given the coordination assumption implicit in the theory and the possible presence of unobservable variables, we also offer a method to cope with the common‐actor problem. Copyright © 2006 John Wiley & Sons, Ltd.     

Is a Big Entrant a Threat to Incumbents? The Role of Demand Substitutability in Competition Among the Big and the Small

We establish a model of market competition between large and small firms and investigate the way in which demand substitutability affects how the entry of big firms impacts incumbents. We focus on the relative strength of two opposing effects of entry on large incumbent firms’ demand: the direct substitution effect among large firms (negative) and the indirect feedback effect through the change in small firms’ aggregated behavior (positive). If the substitutability between large and small firms is sufficiently high, the indirect effect dominates the direct effect and large incumbents’ equilibrium prices and profits increase. We show that welfare effects are ambiguous, which calls for careful assessment when regulating large firms’ entry.     

WHO COMPETES WITH WHOM? THE CASE OF DEPOSITORY INSTITUTIONS*

The willingness of consumers to substitute between banks and thrifts and between multimarket and single‐market institutions is of strong interest to policymakers, yet little empirical work exists in this area. We estimate a structural model of consumer choice of depository institutions using a broadly representative panel data set covering the U.S. from 1990–2001. Using a flexible framework, we uncover utility parameters that affect a consumer's institution choice and measure the degree of market segmentation for two institutional subgroups. Our estimated parameters, elasticities and policy experiments suggest limited substitutability between banks and thrifts and between multimarket and single‐market institutions, especially in urban markets.     

HRM Practices and the Within‐Firm Gender Wage Gap

The effect of HRM practices on the within‐firm gender gap in wages in manufacturing is investigated merging a 1999 survey on work practices among Danish firms to matched employer–employee panel data. Self‐managed teams, project organization and job rotation schemes are the most widely introduced practices. Accounting for non‐randomness in adoption, the pay gap is reduced among hourly paid workers but increases among salaried workers. Considering practices individually, wage gains from adoption accrue to males except for salaried workers in firms that adopt project organization and for hourly paid workers in firms that introduce quality control circles.     

Innovation orientations and their effects on business performance: contrasting small‐ and medium‐sized service firms

This study examines the relative performance of small‐ versus medium‐sized service firms with respect to innovation orientations and their effect on business performance. We examine the effect of innovation on business performance between the two groups of firms, exploring differences in innovation orientation on performance between the groups of small‐ and medium‐sized firms. We also examine differences within each group, exploring the extent to which innovation focus differs within each group. The empirical data were drawn from 180 managers in Australian service small and medium enterprises. The findings suggest that while there is no difference between small‐ and medium‐sized firms with respect to their innovation orientations, significant differences exist between the firm's size with respect to the effect of innovation orientations on business performance. Specifically, exploitation innovation has a stronger effect on business performance among small firms compared with medium‐sized firms, and exploration innovation shows a stronger effect on business performance among medium‐sized firms compared with small firms. Overall, the findings show important relative differences between innovation orientations and business performance across different sized firms.     

Multimarket Contact in Banking

According to linked oligopoly theory, the anticipated effect of multimarket contact is reduced competition. Specifically, the theory predicts that contact lowers competition by reducing the benefit of aggressive action in any single market by providing rivals with the opportunity to retaliate in multiple common markets. The results of this paper are consistent with the theory. In banking, contact is positively related to profitability. Although the economic impact of this relationship is unimportant for most institutions, the relationship is meaningful for the small group of banks most heavily exposed to contact. This finding suggests that the importance of contact may rise as consolidation of the banking industry continues.