Regulate one service,tame the entire market: Credit cards in Turkey

In credit card markets banks provide both payment and credit services. Two regulations were recently enacted in the Turkish credit card market: one on payment services in 2005 and the other on credit services in 2006. By employing the well-known  and  method and a unique quarterly data set for 21 Turkish banks between 2002 and 2008, we investigate the extent of banks’ market power in the Turkish credit card market before and after the regulations. Unlike most of the existing literature, which considers competition and regulation for either credit or payment services and ignores the externalities between them, we consider the entire market by taking both services into account. Fixed effects estimations reveal that banks enjoyed collusive oligopoly power before the regulations. Although the first regulation did not have much impact, the second led to rises in both banks’ total revenues and competition in the entire market.     

Maximizing survival,growth and goal reaching under borrowing constraints

In this paper, we consider the survival, growth and goal reaching maximization problems treated in Browne [Math. Oper. Res., 1997, 22, 468–493] and solve them in a market constrained due to borrowing prohibition. To solve the problems, we first construct an auxiliary market introduced by Cvitanic and Karatzas [Ann. Appl. Probab., 1992, 2, 767–818] and then apply the dynamic programming approach. Via our solutions, an alternative approach is introduced in order to solve the problems defined under an auxiliary market.     

Endogeneity in panel stochastic frontier models: an application to the Japanese cotton spinning industry

We present a panel stochastic frontier model that handles the endogeneity problem. This model can treat the endogeneity of both frontier and inefficiency variables. We apply our method to examine the technical efficiency of Japanese cotton spinning industry. Our results indicate that market concentration is endogenous, and when its endogeneity is properly handled, it has a larger negative impact on the technical efficiency of cotton spinning plants. We find that the exogenous model substantially overestimates efficiency in concentrated markets.     

The degree of financial liberalization and aggregated stock-return volatility in emerging markets

In this study, we address whether the degree of financial liberalization affects the aggregated total volatility of stock returns by considering the time-varying nature of financial liberalization. We also explore channels through which the degree of financial liberalization impacts aggregated total volatility. We document a negative relation to the degree of financial liberalization after controlling for size, liquidity, country, and crisis effects, especially for small and medium-sized markets. Moreover, the degree of financial liberalization transmits its negative impact on aggregated total volatility through aggregated idiosyncratic and local volatilities. Overall, our results provide evidence in favor of the view that the broadening of the investor base due to the increasing degree of financial liberalization causes a reduction in the total volatility of stock returns.     

Unobservable Contracts as Precommitments

It is well known that signing publicly observable contracts with third parties is a means of credibly committing to certain actions and hence may yield strategic advantages. Previous work on the commitment value of unobservable contracts has been limited to normal form games and extensive form games in which only one party has the option to sign a contract. In this paper, we extend the analysis to extensive form games in which both players can sign contracts, and characterize the set of sequential equilibria. We show that any Nash equilibrium outcome of the original game in which both players receive more than their individually rational payoffs can be supported as a sequential equilibrium outcome. Therefore, delegation acts not only as a commitment device to gain advantage over the opponent, but also as a cooperative device to attain Pareto improvements over the subgame perfect equilibrium outcome. I would like to thank Atila Abdulkadiroglu, Jean-Pierre Benoit, Alberto Bisin, Boyan Jovanovic, Ehud Kalai, Giuseppe Lopomo, George Mailath, Efe Ok, Ariel Rubinstein, Andy Schotter, seminar participants at various universities and conferences, and anonymous referees for helpful comments and suggestions. Support from the Alfred P. Sloan Foundation and Program for Economic Research at Columbia University is also gratefully acknowledged.     

Manipulation Through Biased Product Reviews*

We study a signal-jamming model of product review manipulation in which rational consumers consult product reviews and price to better estimate a product's quality, and a firm, whose quality is either high or low, chooses its price and how much bias to insert into product reviews. We show that both firm types always exert positive effort to manipulate product reviews, and, depending on the equilibrium price level, one or both of them can increase its sales. When the high-type firm exerts more effort than the low-type, review manipulation benefits consumers by raising [lowering] their demand for the high-quality [low-quality] product.     

Strategic Product Line Choice under Asymmetric Demand Structure

We examine strategic product line choices of manufacturers in a stylised duopoly model where products have asymmetric and interdependent market conditions. We characterise the optimal product line decisions and show that manufacturers always prefer to have head‐to‐head competition (and never segment markets) when product line setup cost is small relative to profitability of the products. When setup costs are high, symmetric manufacturers may prefer to have asymmetric product lines or market segmentation. We show that high setup costs lead to the market segmentation outcome only if there is no significant market size difference and the level of product substitutability is moderate.     

Estimating market power using a composed error model

We present a maximum likelihood based composed error model to estimate market powers of firms. In our model, the stochastic part of the supply relation includes two random components: the conventional two‐sided error term and a random term, which is capturing firm‐specific conducts. Moreover, we provide a generalization of scaled Stevenson stochastic frontier model in the context of doubly truncated normal distributions. We estimate the market powers of Chicago based airlines as an empirical example that is showing the applicability of our estimation procedure.     

Introduction to the Special Issue: The Bank Structure Conference through the years

This is a special issue dedicated to the Federal Reserve Bank of Chicago’s annual Conference on Bank Structure and Competition. Invited articles are from financial economists that have had long standing relationships with the conference. Additionally, the effectiveness of the conference in influencing public policy and the financial and economic literature is evaluated.