25 years of European merger control

We study the determinants of common European merger policy over its first 25 years, from 1990 to 2014. Using a novel dataset at the level of the relevant antitrust markets and containing all relevant merger cases notified to the European Commission, we evaluate how consistently arguments related to structural market parameters – dominance, rising concentration, barriers to entry, and foreclosure – were applied over time and across different geographic market definitions. On average, linear probability models overestimate the effects of structural indicators. Using non-parametric machine learning techniques, we find that dominance is positively correlated with competitive concerns, especially in markets with a substantial increase in post-merger concentration and in complex mergers. Yet, its importance decreased following the 2004 merger policy reform. Competitive concerns are also correlated with rising concentration, especially if entry barriers and foreclosure are of concern. The impact of these structural indicators in explaining competitive concerns is independent of the geographic market definition and does not change over time.     

A note on the market share-profitability relationship

This study extends earlier empirical work to determine whether there is a breakpoint or critical level in the frequently observed relationship between firm market share and profit rate. The analysis focuses on the banking industry and uses a sample of 10,690 firms located in 2165 different local geographic markets. Though the results apply directly only to banking, the similarity of findings on various other industrial organization topics in banking and the industrial sector suggests that the results of this study will be broadly relevant to the industrial sector.The main findings of the study are that (1) in general, firm market share is directly related to profitability; (2) the firm market share variable remains positive and significant when controlling for market concentration either with concentration as a separate independent variable or by conducting tests with subsamples of firms that are in markets with similar concentration ratios; and (3) while there is no sharp breakpoint in the market share-profitability relationship, the results indicate that profit rates of firms increase at a decreasing rate up to a share of about 55 percent. Since numerous studies have found that economies of scale are not particularly important in banking, it appears that the observed relationship is not due to greater efficiency with larger shares.     

DISTANCE,BANK HETEROGENEITY AND ENTRY IN LOCAL BANKING MARKETS*

We examine the determinants of entry into Italian local banking markets during the period 1991–2002 and build a simple model in which the probability of branching in a new market depends on the features of both the local market and the potential entrant. Econometric findings show that banks are more likely to expand into those markets that are closest to their pre‐entry locations. Large banks are also more able to cope with distance‐related entry costs than small banks. Finally, banks have become increasingly able to open branches in distant markets, due to the advent of information and communication technologies.     

Buyer power with atomistic upstream entry: Can downstream consolidation increase production and welfare?

This paper investigates the effects of buyer power on entry into an atomistic upstream market and economic welfare. Under reasonable market conditions, we show that industries with a few buyers induce more upstream entry than industries with a larger number of firms. In particular, monopsony can be more conducive to entry and lead to higher social welfare than more fragmented industry structures. This seeming paradox arises because a single buyer better internalizes the positive effects of entry on later-periods’ supply conditions than a collection of firms. This result is relevant in a number of market settings, including markets for specialized labor and processing markets for agricultural products.     

Determinants of Entry and Profits in Local Banking Markets

This paper estimates a two equation model of market entry and profits, utilizing data on entry into over 2,000 banking markets over the period 1977--88. The entry equations measure whether entry depends on incumbent firms' profits and other market attributes that reflect the long-term attractiveness of markets for entry. Market profits, assumed to follow a partial-adjustment process, are affected by entry directly and indirectly through market structure. The model also corrects for an unavoidable source of error in market-level profits for the banking industry. The estimates suggest that a competitive process is at work in banking markets that limits the ability of supra-normal profits to persist. Entry is more likely in markets that have high profits, consistent with previous empirical results that market structure adjusts more quickly when profits are supra-normal. Population and population growth are also strong determinants of entry. Entry, in turn, reduces profits in rural markets.     

Creating Growth in New Markets: A Simultaneous Model of Firm Entry and Price*

Sales in a new market generally follow a hockey‐stick pattern: After commercialization, sales are very low for some time before there is a dramatic takeoff in growth. Reported sales takeoffs across products vary widely from a few years to several decades. Prior research identifies new firm entry or price declines as key factors that relate to the timing of a sales takeoff in new markets. However, this literature considers these variables to be exogenous and only finds unilateral effects. In the present article, new firm entry and price declines are modeled as being endogenous. Thus, the simultaneous relationship between price declines and firm entry in the introductory period of new markets when industry sales are negligible is studied. Using a sample of new markets formed in the United States during the last 135 years, strong support for a simultaneous model of price and firm entry is found: Price decreases relate to the competitive pressures associated with firm entry, and, in turn, firm entry is lower in new markets with rapidly falling prices. Furthermore, a key driver of firm entry during the early years of a new market involves the level of patent activity, and a key driver of price decreases is the presence of large firms. In contrast to the recommendations from other research, these results indicate that rapid price declines may further delay sales takeoff in industries by dampening new firm entry. Instead, rapid sales takeoffs in new markets come from encouraging greater innovative activity and the entry of large firms.     

Entrepreneurial failure: Statistical and psychological explanations

Research summary : Entrepreneurial start‐ups suffer high rates of business failure. Previous research on entrepreneurial failure has focused on two kinds of explanations: statistical and psychological. Statistical explanations attribute excess entry to random errors made by boundedly rational entrepreneurs attempting to estimate business opportunities in risky markets. Psychological explanations focus on entrepreneurial overconfidence and competition neglect. These explanations emerged independently and have not been tested or compared in the same study. In this experimental study, we distinguish entrepreneurial markets from other types of markets and test statistical and psychological hypotheses for all market types. We find that excess entry is significantly greater in small, risky markets than in other market types, and that confidence levels account for excess entry, over and above the effects of unbiased statistical errors. Managerial summary : How can we explain the fact that most entrepreneurial ventures fail within five years? Market risk, inadequate capital and inexperienced management certainly play a role. However, from an economic point of view, it seems odd that inexperienced, under‐funded people continue to engage in risky behavior that is widely known to fail. We conducted experiments that tested two explanations of entrepreneurial failure. The first explanation – the statistical hypothesis – argues that entrepreneurship involves high uncertainty, so random errors are inevitable and can produce excess entry (or under‐entry). The second explanation – the psychological hypothesis – says that entrepreneurs' mistakes are not random but skewed heavily toward excess entry; hence, their decisions are distorted by psychological factors such as overconfidence. Our experiments found support for both of these explanations. Random errors under uncertainty explained 60% of the excess entry in our experiments. However, the overconfidence hypothesis correctly predicted that excess entry exceeds under‐entry, and our psychological measures of overconfidence found support in the data. We also found that the markets that most often attract entrepreneurial investment – emerging markets with high uncertainty – were the markets most conducive to excess entry, due to a combination of psychological and market factors. Hence, we conclude that potential entrepreneurs should pay less attention to their own abilities and aspirations, and more attention to the external realities of competition in the marketplace. Copyright © 2015 John Wiley & Sons, Ltd.     

Making sense of overconfidence in market entry

Entrepreneurs are often described as overconfident (or at least very confident), even when entering difficult markets. However, recent laboratory findings suggest that difficult tasks tend to produce underconfidence. How do entrepreneurs maintain confidence in difficult tasks? Our two laboratory experiments and one archival study reconcile the literature by distinguishing types of overconfidence and identifying what type is most prominent in each type of task. Furthermore, we critically examine the notion that ‘overconfidence’ explains excess market entry: we find that entry into different markets is not driven by confidence in one's own absolute skill, but by confidence in one's skill relative to that of others. Finally, we consider whether overconfidence in relative skill is driven by neglecting competitors or by systematic errors made when considering them. Copyright © 2013 John Wiley & Sons, Ltd.     

Firm resources and entry-related advantages: An empirical study in China

The majority of research on order of market entry has focused on market pioneer advantages or the specialized assets that industry incumbents would need to possess. However, relatively little attention has been paid to whether and how certain firm resources or capabilities may provide latecomers with entry-related advantages. This issue is of particular interest when multinational organizations decide to enter emerging markets, such as China, where the transitional economy provides both opportunities and challenges. This study attempts to bridge this gap by discussing the entry-related advantages in terms of pioneer advantages, early follower advantages, and late entrant advantages, and by investigating how each of the entry-related advantages has unique impacts on market performance. In particular, this study examines the relations between innovation management, firm resources, entry-related advantages, and market performance simultaneously with cross-sectional data from 191 firms in China. Our findings reveal that technical resources and skills (R&S), marketing R&S, and market intelligence are associated with different advantages for market pioneers, early followers, and late entrants. Technical R&S is also found to have significant impacts on order of market entry as pioneers. Furthermore, the findings show that remarkable differences exist among the three entrant types (i.e., market pioneers, early followers, and late entrants) in their strategic approaches to attain market performance. We offer implications to foreign firms operating in China or intending to enter China's markets.     

Brown Shoe Versus the Horizontal Merger Guidelines

The new Horizontal Merger Guidelines, if treated by courts as a source of law, would reduce the discretion that is traditionally exercised by courts in defining relevant markets and market power in merger cases. This is an undesirable shift in the balance of power because courts have used the market power inquiry stage of merger analysis as a general checkpoint or weigh station for evaluating factors relevant to the welfare effects of a merger.     

An antitrust analysis of non-profit hospital mergers

This paper considers such issues involved in non-profit hospital mergers as relevant product and geographic markets and the impacts of mergers on competition. The roles of non-price competition, entry barriers, and merger-generated efficiencies are considered. Close attention is given to the relevance of the Justice Department Merger guideline to the hospital industry. Through detailed examination of four litigated or challenged cases, the geographic market is shown to depend upon particular medical services. Outpatient services are found to comprise a separate market from inpatient hospital services, and non-profit status is determined to warrant the usual antitrust merger treatment.     

Growing with the market: How changing conditions during market growth affect formation and evolution of interfirm ties

Research Summary: Market conditions are known to matter for firm performance and growth. This study explores how changing levels of uncertainty and competition affect interfirm ties of entrepreneurial firms as markets transition from nascent to growth stage. Tracing six entrepreneurial game publishers during the growth stage of the U.S. wireless gaming market, the findings reveal that in a growth stage market, as uncertainty decreases, certain ties of entrepreneurial firms are terminated. First, existing partners may cut ties and become competitors after entering the market directly. This is a “winner's curse” as more successful firms are more likely to entice their partners to enter the market directly. Second, ties may be terminated as prominent firms that are “overwhelmed” with too many partners cut ties with low to mediocre performance, while their remaining partners enter a positive spiral of tie strength and performance. Finally, as uncertainty decreases, new firms may enter the market as competitors to prominent firms. While entrepreneurial firms with high‐ and low‐performing ties to prominent partners may find ties with these new entrants attractive, those with mediocre ties to few prominent partners find this move too risky and wait for a first mover to legitimate it. Overall, the findings show that changing levels of uncertainty and competition in growth stage markets can have different consequences for firms due to heterogeneity in their ties and power relative to partners. The findings provide several contributions to literature regarding the relationship among interfirm ties, firm performance, and market evolution. Managerial Summary: Based on interviews at six entrepreneurial game publishers in the United States and their partners, this study shows how changing levels of uncertainty and competition in growing markets can have different consequences for firms based on the different types of alliances in their portfolio and their power relative to partners. The findings highlight the importance of managing partners differently based on alliance type and goal of the partner. They advocate remaining flexible in alliance management as information asymmetries, intentions and bargaining power of partners can change and lead to abrupt alliance dissolution. They show that alliance portfolio management goes beyond a firm's capability of managing individual alliances, and provide a tool for managers to evaluate their alliance portfolios and take the necessary precautions.     

How marketing capabilities and current performance drive strategic intentions in international markets

Drawing from two strategic views of the firm—the capability-based view and performance-feedback theory—this study examines the role of both marketing capabilities and current market performance as potential influencers of two key aspects of the intended future competitive strategy of firms operating in international markets: efficiency and marketing differentiation. Hypotheses are developed and tested in a survey of a sample of British exporting manufacturers. The findings are supportive of a more prominent role of marketing capabilities over recent market performance on future strategic intentions in export markets. Additional analyses of firms with an already established market position reveal a clear effect of informational capability on marketing differentiation and of product development capability and current market performance on efficiency intentions. We also find that target international market competitive intensity is a direct driver of efficiency-related but not differentiation-related strategic intentions.     

The dynamics of industrial organization

This paper introduces the special issue of The Review of Industrial Organization on ‘The Dynamics of Industrial Organization’. What binds these papers together is a focus on markets in motion—the process by which new firms enter an industry, either grow and survive, or else ultimately exit out of the industry. In contrast to more traditional static analyses, the concern of these papers is identifying where do firms come from and what happens subsequent to their entry. Influences of geographic as well as product space are found to exert an influence on the dynamics of industrial organization.

     

Defining market boundaries

This study shows how spatial information about product supply and demand can be used to determine the geographic extent of markets. It demonstrates that markets thus defined allow finer-grained measurement of competitive conditions than is possible using conventional approaches. Two procedures are developed and contrasted: one, called a natural market approach, is drawn from the Industrial Organization economics literature; the second, called an enactment approach, is associated with the open systems perspective on organizations. Applied to a set of hospitals in the San Francisco Bay area, geographic market boundaries established in these ways are shown to lead to finely defined markets, and to reveal strong variation in competitive conditions across the area—variation not detectable if conventional approaches to market definition are used. It is shown that these approaches have applications beyond geographic market definition, and can also be applied to define markets in term of product or service types.     

Some determinants of entry into the rapeutic drug markets

This paper investigates empirically some determinants of entry into the U.S. pharmaceutical industry during the period 1964–1974. The statistical findings of the study are consistent with a priori expectations. Market growth is found to provide incentives for entry, Product differentiation, market concentration, and drug innovation are found to be significant barriers to entry into drug markets.     

Foreign entrant survival and foreign market share: Canadian companies' experience in united states medical sector markets

We show that successful foreign market entry is related to the extent of foreign presence in an industry at the time of entry. Survival of 31 Canadian-based businesses that entered 24 U.S. medical sector markets between 1968 and 1989 tended to be somewhat longer in product markets in which foreign-based businesses held a moderate market share when the Canadian businesses entered than in low and high foreign share product markets. The result controls several other industry and business-level factors, including industry concentration, entry year, corporate size, related diversification, entry mode, and service sector status.     

Estimating the performance effects of business groups in emerging markets

Business groups—confederations of legally independent firms—are ubiquitous in emerging economies, yet very little is known about their effects on the performance of affiliated firms. We conceive of business groups as responses to market failures and high transaction costs. In doing so, we develop hypotheses about the effects of group affiliation on firm profitability: affiliation could either boost or depress firm profitability, and members of a group are likely to earn rates of return similar to other members of the same group. Using a unique data set compiled largely from local sources, we test for these effects in 14 emerging markets: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey. We find evidence that business groups indeed affect the broad patterns of economic performance in 12 of the markets we examine. Group affiliation appears to have as profound an effect on profitability as does industry membership, yet strategy scholars have a much clearer grasp of industries than of groups. Moreover, membership in a group raises the profitability of the average group member in several of the markets we examine. This runs contrary to the wisdom, conventional in advanced economies, that unrelated diversification depresses profitability. Overall, our findings suggest that the roots of sustained differences in profitability may vary across institutional contexts; conclusions drawn in one context may well not apply to another. Copyright © 2001 John Wiley & Sons, Ltd.     

Integrating Research on Markets for Space and Capital†

This article discusses the importance of recognizing that there are two distinct but interrelated real estate markets: the market for tenant space and the market for investment capital. The use decision is made in the space market whereas the investment decision is made in the capital market. The article points out that past research has tended to focus on a separate analysis of each of these two markets. That is, research historically has focused on understanding how changes in supply and demand affect equilibrium in either the space market or the capital market as if each market was autonomous. A graphical framework is illustrated that can be used to examine the effect of an exogenous shock to market equilibrium from either the market for space or the market for capital.     

Does Competition Lead to Agglomeration or Dispersion in EMR Vendor Decisions?

We examine hospital Electronic Medical Record (EMR) vendor adoption patterns and how they relate to hospital market structure. As in many network technology adoption decisions, hospitals face countervailing incentives to coordinate or differentiate in their choice of vendors. We find evidence of substantial agglomeration on EMR vendors, which increases as hospital markets become more competitive. These findings suggest that incentives to coordinate dominate incentives to differentiate overall, and the relative balance grows stronger in favor of coordination as markets become more competitive. Our findings also have important implications regarding antitrust policy. A potential downside of hospital consolidation—increased obstacles in information sharing due to vendor differentiation—should be taken into account in evaluation of hospital mergers.