Advertising and R&D: theory and evidence from France

Advertising and innovation are two engines for firms to escape competition and improve profits. We propose a model that encompasses both the static and dynamic interactions between R&D, advertising and competitive environment. It provides three main predictions. First, for a given competitive environment, quality leaders spend more in advertising in order to extract maximal rents; thus, lower costs of ads may favor R&D. Second, the inverted-U relation between competition and R&D still holds with the introduction of advertising. Third, more competition is associated with on average more advertising expenditures. Empirical evidence from a large panel of 59,000 French firms over 1990–2004 supports these three properties.     

Market competition and firms' social performance

This paper investigates whether market competition encourages firms to be more socially responsible. We find that firms in more competitive markets exhibit better overall social performance, as measured by doing well (“strength”) and doing badly (“concern”) in areas such as community, environment, human rights, and treatment of employees. To deal with endogeneity, we instrument market competition on entry barrier and observe that market competition only significantly reduces social concerns but not increases social strengths. Thus, firms are more reactive in reducing social concerns than proactive in augmenting their social strengths. Amongst these concerns, firms appear to be more active in reducing environmental concerns. The paper underscores the limitations in relying on the “invisible hand” of the market to deal with the multi-dimensional challenges of firms’ social performance.     

Dynamic efficiency of Cournot and Bertrand competition: input versus output spillovers

We consider the efficiency of Cournot and Bertrand equilibria in a duopoly with substitutable goods where firms invest in process R&D that generates input spillovers. Under Cournot competition firms always invest more in R&D than under Bertrand competition. More importantly, Cournot competition yields lower prices than Bertrand competition when the R&D production process is efficient, when spillovers are substantial, and when goods are not too differentiated. The range of cases for which total surplus under Cournot competition exceeds that under Bertrand competition is even larger as competition over quantities always yields the largest producers’ surplus.     

GDP competition and corporate investment: Evidence from China

This study examines whether and how macroeconomic performance competition is related to investment at firm level. We use GDP competition as a proxy of dynamic macroeconomic conditions. We find that the effect of GDP competition on firm investments is significantly positive. We also find that GDP competition destroys investment efficiency significantly, especially by increasing overinvestment. Further tests show that GDP competition is more likely to affect the investment decisions of firms controlled by governments and firms located in regions with low marketization. In addition, our analyses reveal that the provincial officials facing competitive pressure are more likely to be promoted if firm investments accelerate. We use alternative proxies to measure GDP competition and find similar results that support our inference. Our findings support the notion that GDP competition of governments distorts investment behaviour. The present paper also elucidates investment problems and dilemmas faced by emerging economies.     

Market Size, Trade, and Productivity

We develop a monopolistically competitive model of trade with firm heterogeneity—in terms of productivity differences—and endogenous differences in the "toughness" of competition across markets—in terms of the number and average productivity of competing firms. We analyse how these features vary across markets of different size that are not perfectly integrated through trade; we then study the effects of different trade liberalization policies. In our model, market size and trade affect the toughness of competition, which then feeds back into the selection of heterogeneous producers and exporters in that market. Aggregate productivity and average mark-ups thus respond to both the size of a market and the extent of its integration through trade (larger, more integrated markets exhibit higher productivity and lower mark-ups). Our model remains highly tractable, even when extended to a general framework with multiple asymmetric countries integrated to different extents through asymmetric trade costs. We believe this provides a useful modelling framework that is particularly well suited to the analysis of trade and regional integration policy scenarios in an environment with heterogeneous firms and endogenous mark-ups.     

When should firms choose a risky new technology? An oligopolistic analysis

How to choose technology type in a competitive environment is an important and challenging problem, which has received little attention from scholars. To fill this gap, this paper builds a game-theoretic model to examine whether a firm should choose to adopt a risky new technology or to adopt a safe new technology to reduce its marginal cost. I find that the result that each firm should always choose the risky technology in a duopoly may be invalid when more firms enter the market. In this scenario, some firms should adopt the safe technology for relatively high product substitutability because the advantage of employing the risky technology is threatened by the business stealing externality, finally forming heterogeneous equilibria in which both types of technologies are present. Furthermore, I show that the heterogeneous technology choice equilibria are more likely to arise when increasing number of firms enter the market, and that in these equilibria more firms always choose the risky technology than the safe technology. This study conveys relevant economic insights for competitive firms confronted with a dilemma between taking risks in pursuit of greater technology rewards and taking no risks for conservative technology returns.     

ON THE SUSTAINABILITY OF COLLUSION IN A DIFFERENTIATED OLIGOPOLY WITH A CARTEL AND A FRINGE

We discuss the effects of the existence of non‐colluding (fringe) firms on cartel sustainability. We obtain, using trigger strategies, that with product differentiation collusion is always more easily sustained when firms compete in prices than when firms compete in quantities. This is true basically because (i) price competition is more intense than quantity competition, and (ii) fringe firms exacerbate the fact that cartel firms have more incentives to deviate from the agreement under quantity competition. This result reverses previous findings where, in the absence of fringe firms, product differentiation plays a crucial role in determining the effectiveness of price or quantity competition in sustaining collusion.     

A GAME THEORETIC FOUNDATION OF COMPETITIVE EQUILIBRIA WITH ADVERSE SELECTION

We construct an extensive form game that captures competitive markets with adverse selection. It allows firms to offer any finite set of contracts, so that cross‐subsidization is not ruled out. Moreover, firms can withdraw from the market after initial contract offers have been observed. We show that a subgame perfect equilibrium always exists. In fact, when withdrawal is costless, the set of equilibrium outcomes may correspond to the entire set of feasible contracts. We then focus on robust equilibria that continue to exist for small withdrawal costs. We show that the Miyazaki–Wilson contracts are the unique robust equilibrium outcome.     

Profits and competition under alternative technologies in a unionized duopoly with product differentiation

This paper aims at investigating if the conventional wisdom (i.e. an increase of competition linked to a decrease in the degree of product differentiation always reduces firms׳ profits) can be reversed in a unionized duopoly model. We show that a decrease in the degree of product differentiation may affect wages, hence profits, differently, depending on both the firms׳ production technology and the mode of competition in the product market. Specifically, under constant returns to labour, the “reversal result” can apply under both Cournot and Bertrand competition, but it is more likely when firms compete in quantities. By contrast, under decreasing returns, profits can increase with competition but only if firms compete in prices.     

QUALITY COMPETITION WITH STOCHASTIC DEMAND AND COSTLY SEARCH: THEORY AND EVIDENCE FROM THE VIDEO RENTAL MARKET

A theoretical model is developed to predict optimal service rates in markets where firms compete in availability. We show that firms are more likely to stock-out of popular products as the cost of consumer search increases. Carlton (1978) showed that, in a zero-profit competitive environment, firms balance the risk of not being able to serve a particular customer against the cost of holding excess capacity and that this balancing act will result in an equilibrium in which not all customers are served. The model was later adapted to oligopolistic competition by Peters (1984) and Deneckere and Peck (1995) . This paper extends this literature on competition under stochastic demand by developing a model that incorporates 1) the possibility that customers may be able to purchase from another firm in the case of a stock-out and 2) the option for firms to offer an imperfect substitute in order to persuade some customers to make a purchase when the first choice product is out of stock. Empirical evidence is presented in support of the theoretical model using data collected from video rental outlets in a midsize southeastern US city.     

Forecasting VoWLAN technology for the Taiwan mobile telecommunication industry

Disruptive innovation is always a great challenge to the management of incumbent firms, especially in fast-changing industries. In this study, scenarios were developed to facilitate strategic decision-making by incumbent mobile telecommunications firms that confront the threats of disruptive technology of voice over wireless local area network (VoWLAN). Combining various possible outcomes of uncertain conditions and strategic alternatives available to the incumbent firms, six scenarios were developed: incremental evolution, disruptive evolution, cost deterrence, fierce competition, market pre-emption and market convergence. The results show that a passive ‘do-nothing’ strategy by incumbent firms leads to failure if the disruptive technology is inevitable. However, firms can slow the pace of disruptive technology by applying a price-cut strategy and enjoy several years of profits in the process. Industrial insights and strategic implications obtained from all the scenarios are discussed.     

Trade Liberalization and the Degree of Competition in International Duopoly

This paper analyzes how a reduction in trade costs influences the possibility for firms to engage in international cartels, and hence how trade liberalization affects the degree of competition. We consider a particular intra‐industry trade model amended to allow for firms producing differentiated products. Our main finding is that trade liberalization may have an anti‐competitive effect. We find that there is no unique relation between a reduction in trade costs and the degree of competition. When products are differentiated, a lowering of trade costs is pro‐competitive if trade costs are initially high, but anti‐competitive if trade costs initially are low. Hence, trade policy is not necessarily a substitute for competition policy.     

Bottleneck co-ownership as a regulatory alternative

This paper proposes a regulatory mechanism for vertically related industries in which the upstream “bottleneck” segment faces significant returns to scale while other (downstream) segments may be more competitive. In the proposed mechanism, the ownership of the upstream firm is allocated to downstream firms in proportion to their shares of input purchases. This mechanism, while preserving downstream competition, partially internalizes the benefits of exploiting economies of scale resulting from an increase in downstream output. We show that this mechanism is more efficient than a disintegrated market structure in which the upstream natural monopoly bottleneck sets a price equal to average cost.     

BERTRAND Vs. COURNOT COMPETITION WITH UPSTREAM FIRM INVESTMENT

This paper compares Bertrand and Cournot competition in a vertical structure in which the upstream firm sets the input price and makes R&D investments. We show that from the downstream firms’ point of view, Cournot competition has the advantage of a more monopolistic effect, leading to the setting of a higher price, but has the disadvantage of inducing a lower incentive for the upstream firm to invest. On the other hand, Bertrand competition has the advantage of providing a greater incentive for the upstream firm to invest but has the disadvantage of a more competitive effect, leading to the setting of a lower price. Our main findings are as follows. First, R&D investment level is greater under Bertrand competition than under Cournot competition. Second, from the standpoint of the upstream firm and industry, Bertrand competition is more efficient than Cournot competition. Third, from the standpoint of the downstream firms, Bertrand competition is more efficient than Cournot when investment is sufficiently efficient and products are sufficiently differentiated.     

核心高管特征与公司成长性关系研究——基于中国沪深两市上市公司数据的经验研究

本文以我国沪深两市2004—2006年的上市公司为样本,从核心高级管理人员的人力资本特征视角,对高管特征与上市公司成长性的关系进行了经验检验。本文发现,在其他条件不变的情况下,上市公司成长性与核心高管的平均年龄、平均任职时间显著相关,而与核心高管平均学历的相关性不显著。进一步的研究还表明,在国有控股公司和非国有控股公司中,核心高管特征与公司成长性的关系具有显著差异。本文的研究有助于深化认知人力资本特征在公司发展过程中的重要地位,对强化核心高管遴选、完善人力资源管理具有积极的借鉴意义。     

Endogenous fluctuations in a cournotian monopolistic competition model with free entry and market power variability

The purpose of this article is to show that there is a link between imperfections of competition and occurrence of endogenous fluctuations. We consider a two-sector model in which a perfectly competitive final good sector uses inputs that are produced in a Cournot monopolistic competition market. We show that when inputs are not perfect substitutes, and the depreciation rate of capital is sufficiently small, Neimark bifurcations are susceptible to emerge. This is a consequence of additional variability in the dynamical system generated by the dependence of the markup on the number of firms. This number changes over time because firms can enter and exit the market without costs. Moreover, a fixed cost in the technology ensures that the number of active firms at a given date is finite provided that the elasticity of substitution between inputs is bounded from above.     

The evolving patterns of competition after deregulation: the relevance of institutional and operational factors as determinants of rivalry

In this research, we apply an ecological model of competition to analyze the effect of deregulation on within industry competitive patterns. Particularly, we identify organizational forms within the population according to two different perspectives: an operational one and an institutional one. We argue that deregulation influences the relative importance of each of these dimensions at determining the set of firms that can be considered direct competitors, and the intensity with which they compete. Our findings show that the use of these two perspectives is of utmost importance to understand the evolution of competition in contexts where deregulation takes place. As our arguments predict, we show that, during the regulated period, competition was based on institutional definitions of organizational forms. However, after deregulation, competition progressively focused on operational definitions of organizational form. Our findings confirm the relevance of deregulation at shaping competitive interdependences within an industry.     

Time as a strategic variable: business hours in the gasoline market

A popular argument in policy discussions on the liberalization of business hours proceeds on the assumption that business hours are strategic complements: if some firms open longer hours, competitors will be forced to extend their opening hours too. We provide first empirical evidence on the impact of competition and the form of strategic interaction in business hours between firms by using detailed information on business hours as well as the location of retail gasoline stations in Austria. Our findings reject the presumption of business hours being strategic complements. Firms tend to have longer opening hours in a more competitive environment.     

Competition and inter-firm credit: Theory and evidence from firm-level data in Indonesia

Using firm-level data we investigate the relationship between trade credit and suppliers' market structure and find a ∩-shaped relationship between competition and trade credit, with a discontinuous increase in credit provision between monopoly and duopoly. This “big jump” arises because monopolists are more likely to not offer any trade credit than firms in competitive environments. Our model exploits the fundamentally different nature between cash and trade credit sales, arguing that firms are unable to commit ex ante to a trade credit price. We show that monopolists will often sell only on cash, while credit is always provided in competitive environments.     

Does entry improve welfare? A general equilibrium approach to competition policy

We consider a simple general equilibrium model with imperfect competition. Firms are price takers in the input market and compete à la Cournot in some or all of the product markets and their technologies display constant returns to scale. We show that an increase in the number of firms in a given sector does not always improve welfare. We also provide a characterization in terms of mark-up rates of the sectors for which entry is welfare enhancing. Our results challenge the common idea that mergers with no cost synergy are not desirable for consumers.