Opportunity Costs,Competition, and Firm Selection

Abstract

The paper questions the standard economic assumptions that competing economic agents have identical reservation utility levels, and that when differences in opportunity costs exist, they can be conveniently represented by fixed costs. Asymmetries in opportunity costs are considered in relation to current efficiency. The effect of this interchangeability of skills is studied in the context of the effect of entry on firm selection in a Cournot setting. It is found that inefficient firms are more likely to crowd out efficient ones when the relationship between current efficiency and opportunity costs is strong, and when the fixed costs of changing markets are high. Moreover, in the long-run, firms with intermediate cost levels are likely to induce the exit of low and high cost firms. The model sheds light on the benefits of diversification by multiproduct and multinational firms, and their relationship to skill transferability.     

Assessing the Impact of Formal and Informal Regulations on Environmental and Economic Performance of Brazilian Manufacturing Firms

This study investigates the impact of formal and informal regulations on environmental and economic performance of Brazilian manufacturing firms. We adopt a dual approach where production technology is represented by a cost function, approximated by a translog form. Pollution is considered as a negative by-product that can be modified trough using either formal regulation (inspections or sanctions) or informal regulation (community pressure). A simultaneous equation model is estimated by three-stage least squares on a sample of 404 industrial establishments located in the state of S?o Paulo, Brazil. We show that pollution abatement costs for the Brazilian manufacturing sector are different from zero which suggests that pollution emissions are affected by environmental regulation. We also demonstrate that environmental performance of firms is jointly affected by formal and informal regulation. Lastly, formal regulation is largely influenced by informal regulation and more specifically by community pressure.     

The Comparison of ad Valorem and Specific Taxation under Uncertainty

The comparison between specific (per unit) and ad valorem (percentage) taxation has been one of the oldest issues in public finance. In Cournot markets, with deterministic costs structures, conventional wisdom has it that ad valorem taxation tax‐revenue dominates specific. It is shown that in the presence of uncertainty, regarding firms’ cost structures, and under reasonable conditions, the conventional wisdom might not hold. The implication of this, from a policy perspective, is that the precise evaluation of the two types of taxation requires an explicit consideration of cost uncertainty.     

专业化产业集聚、空间成本与区域工业化

本文扩展了贸易成本的范围，认为贸易成本不仅包括产品运输成本，而且也包括要素流动成本，并引入前后向产业联系，认为中间产品使用及种类的增加所创造的成本和需求联系效应有利于提高最终产品的生产效率。在此基础上文章发展了可解的中心一外围模型，并探讨了在各种条件下相应的经济学含义，认为在推动我国区域经济一体化的进程中，对落后地区的技术支持必不可少，重视区域间产业发展的互动，否则，我国区域经济一体化进程难以有效推进。     

专业化产业集聚、空间成本与区域工业化

本文扩展了贸易成本的范围,认为贸易成本不仅包括产品运输成本,而且也包括要素流动成本,并引入前后向产业联系,认为中间产品使用及种类的增加所创造的成本和需求联系效应有利于提高最终产品的生产效率。在此基础上文章发展了可解的中心-外围模型,并探讨了在各种条件下相应的经济学含义,认为在推动我国区域经济一体化的进程中,对落后地区的技术支持必不可少,重视区域间产业发展的互动,否则,我国区域经济一体化进程难以有效推进。     

A revisionist view of the economic implications of child labor regulations

The conventional neoclassical wisdom predicts that banning, restricting, or improving the working conditions of child labor will increase the costs of production, thereby diminishing the competitiveness of those jurisdictions that legislate against child labor. However, from a behavioral theoretical perspective this need not be the case when a productivity differential favoring adult labor exists which at least compensates for the pay differential between child and adult labor, and where the increased cost of child labor is compensated for by their increased productivity. In this case, legislating against child labor will not have the negative economic consequences predicted by the conventional wisdom. The cost of such restrictions, however, will then fall largely on the family income of affected families unless compensated for by sufficient increases in real adult wages, increases in the adult labor force participation rate, or other sources of income. This paper was revised while the author was Visiting Scholar with the Center for North American Studies, Duke University. Thanks go to two anonymous referees and Louise Lamontagne for their comments and suggestions. The standard caveat applies.     

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.     

Symbiotic Production and Optimal Export Policy

This paper constructs a two‐country trade model to examine the optimal policies relating to the export of final and intermediate products under Cournot as well as Bertrand competition when firms engage in symbiotic production internationally. The paper shows that given linear demand for the final product, the optimal export policies are to tax the exports of both the final and intermediate goods under symbiotic production, regardless of whether firms engage in Cournot or Bertrand competition in the final good market, which is contrary to the conventional wisdom.     

“It Pays to be Green” – A Premature Conclusion?

It has been claimed that good environmental performance can improve firms’ economic performance. However, because of e.g. data limitations, the methods applied in most previous quantitative empirical studies on effects of environmental performance on economic performance of firms suffer from several shortcomings. We discuss these shortcomings and conclude that previously applied methods are unsatisfactory as support for a conclusion that it pays for firms to be green. Then we illustrate the consequences of these shortcomings by performing several regression analyses of the effect of environmental performance on economic performance using a panel data set of Norwegian plants. A pooled regression where observable firm characteristics like e.g. size or industry are controlled for, confirms a positive effect of environmental performance on economic performance. However, the estimated positive effect could be due to omitted unobserved variables like management or technology. When the regression model controls for unobserved plant heterogeneity, the effect is generally no longer statistically significant. Hence, although greener plants tend to perform economically better, the analysis provides little support for the claim that it is because they are greener. These empirical findings further indicate that a conclusion that it pays to be green is premature.     

A NOTE ON QUALITY, MARKET STRUCTURE AND THE IMPORTANCE OF THE 'INTEGER CONSTRAINT'

Faced with the integer constraint brought about by quality-related fixed costs, a socially-managed industry is more flexible than a free-entry oligopoly, for it can adjust the integer-constrained number of firms either upwards or downwards. As a result, and contrary to conventional wisdom, product quality may be identical under the two regimes.     

In-house competition, organizational slack, and the business cycle

Multiplant firms pit their facilities against each other for production assignments. The present paper studies the consequences of this practice in a model where production is limited by capacity constraints and asymmetric information allows facilities to accumulate slack. It shows the amount of slack per unit of output to be pro-cyclical. Indeed, as capacity constraints become more acute in economic booms, the power of in-house competition for quota assignments is reduced and slack per unit of output increases, while the opposite is true in downturns. Moreover, in downturns firms may use higher cost facilities even when lower cost plants are not running at capacity since this boosts X-efficiency in low-cost plants.     

New technology and the economic organization of the clothing industry

The economic organization of an industry is ultimately determined by the cost functions of its component firms. The costs that matter for the competitive state of an industry are not just long-run variable costs but also the costs of entry to and exit from the industry, and the joint costs of different products that the firms in the industry produce. In the clothing industry the costs of creating and implementing new designs is a further important factor affecting competition between firms. Since costs are largely determined by technology, we expect repercussions on the organization of the industry when technology changes. Application of the new information technologies in the clothing industry will encourag agglomerations by growth and by merger, with larger firms producing a wider range of products and introducing new products faster than hitherto. Trends in the geographic organization of production will also be reversed.     

Pollution Abatement as a Barrier to Entry

With the dramatic increase in federal and state environmental regulation in the 1970s, the cost of compliance also rose. While compliance costs have been discussed elsewhere, the implications for the competitiveness of markets have been evaluated using case studies of specific law changes and specific industries. This study examines the role of environmental regulations as barriers to entry using a panel of industries over ten years. The results indicate that environmental costs increase the value of q for the top quartile of firms, which suggests that compliance cost constitutes a barrier to entry and creates rents for larger existing firms.     

The trade-offs from pattern bargaining with uncertain production costs

Pattern bargaining is a negotiating strategy that is often employed by industry-wide unions in oligopolistic industries to set wages. The conventional wisdom is that pattern bargaining “takes labor out of competition” and therefore softens bargaining between the union and firms, resulting in higher industry wide wages. However, this does not explain why firms agree to pattern bargaining. We introduce a model in which the agents face uncertainty about the relative product-market positions of the firms and compare the trade-offs involved in adopting different bargaining mechanisms. We show that with sufficient heterogeneity in non-labor costs, there are situations in which both the union and the firms prefer pattern bargaining. We also show that in such situations, the adoption of pattern bargaining harms consumers. This provides an explanation as to how pattern bargaining can arise in equilibrium and why there is often strong political opposition to it.     

Regulating away competition: the effect of regulation on entrepreneurship and employment

Many scholars have worried that regulation deters entrepreneurship because it increases the cost of entry, reduces innovation in the regulated industry, and benefits large firms because they can overcome the costs of complying with regulations more easily than smaller firms. Using novel data on the extent of US federal regulations by industry and data on firm births and employment from the Statistics of US Businesses, we run fixed effects regressions to show that more-regulated industries experienced fewer new firm births and slower employment growth in the period 1998–2011. Large firms may even successfully lobby government officials to increase regulations to raise their smaller rivals’ costs. We also find that regulations inhibit employment growth in all firms and that large firms are less likely to exit a heavily regulated industry than small firms.     

Exit with incomplete information about cost

This paper presents a model of output decisions by competitive firms which have incomplete information about costs. Unlike other work on this topic, our model incorporates the possibility of exit from the market after a firm has observed its unit cost. At the equilibrium expected aggregate output and the likelihood of exit depend upon the opportunity cost of staying in the market, the number of informed firms, and the intensity of competition. Uninformed firms may be better off than informed firms if exit is feasible. As a result, even if all firms face the same cost of acquiring information, informed firms may coexist with uninformed firms.     

Dynamics of environmental quality and economic development: the regional experience from Yangtze River Delta of China

This article investigates the dynamic relationship between economic progress and environmental quality at a regional level. An important economic intuition in this context is that environmental degradation will be limited by human behaviour if costs and benefits of such degradation are local since economic agents will then be incentivized to choose appropriate corrective action. Therefore, we note the likelihood that regional economic development can help regions ‘grow out of’ environmental problems. Using a new data set from Yangtze River Delta of China, we find a strong confirmation of the intuition that human can and will resolve the environmental problem by altering the damaging behaviour of economic agents. A very interesting finding of this study is that the relationship between environmental quality and economic progress measured by per capita income can display a wave-like function in the case of water pollution, as opposed to the much dramatized environmental Kuznets curve, with significant policy implications.     

Optimal collusion under cost asymmetry

Cost asymmetry is generally thought to hinder collusion because a more efficient firm has both more to gain from deviations and less to fear from retaliation than less efficient firms. Our paper reexamines this conventional wisdom and characterizes optimal collusion without any prior restriction on the class of strategies. We stress that firms can credibly agree on retaliation schemes that maximally punish even the most efficient firm. This implies that whenever collusion is sustainable under cost symmetry, some collusion is also sustainable under cost asymmetry; efficient collusion, however, remains more difficult to sustain when costs are asymmetric. Finally, we show that in the presence of side payments cost asymmetry facilitates collusion.     

Puzzles in the economic institutions of capitalism: production coordination, contracting and work organisation in the Irish linen trade, 1750-1850

Pre-Famine Ireland is a byword for market failure and path dependence.Production of flax yarn and linen cloth was highly regulatedand coordinated by the market rather than by firms. Contemporarypolitical economists suggested that these institutional featuresprovided evidence of organisational inefficiency. The historicalevidence suggests that they were a rational response to transactionand production costs. The Irish case provides a test of thehypotheses that firms emerge to reduce the cost of market transactions.It suggests that institutions other than the firm can modifytransaction costs, coordination of production can affect bothtransaction and production costs, and that agents choose betweenmarket and firm coordination given technology and factor prices.Finally, centralisation of production was driven by technology.     

Privatization when the public firm is as efficient as private firms

The literature on mixed oligopoly shows that when production costs are quadratic the public firm is privatized if the competition in the product market is high enough. Similarly, when the public firm is less efficient than private firms and the marginal costs of production are constant, the government privatizes the public firm if its efficiency is low enough. In this paper we analyze this issue assuming that the public firm maximizes the weighted sum of consumer surplus, private profit and the profit of the public firm. If all firms have the same marginal cost of production we obtain that for some value of parameters the government does not privatize the public firm regardless of how many private firms are competing in the product market. We also obtain that the consumer surplus can be lower in the mixed oligopoly than in the private oligopoly.