Efficient Entrant Research Articles

All-Unit Discounts and the Problem of Surplus Division

Competition authorities often challenge all-unit discounts due to the high pressure they impose upon buyers to meet the quantity threshold. We analyze this so called suction effect in a sequential-entry model where an incumbent seller seeks to shift rents from a more efficient entrant. We find that, in contrast to other rent-seeking mechanisms such as exclusive dealing contracts which are usually seen as being very similar, all-unit discounts do not fully allow the incumbent seller to disentangle the implementation of the desired quantity from the surplus division with a buyer. We show that this leads to inefficiencies if and only if the buyer has a high outside option which is the case when competition between potential entrants is high, and we argue that this source of inefficiencies is typical for all-unit discounts.

All-Unit Discounts and the Problem of Surplus Division

Competition authorities often challenge all-unit discounts due to the high pressure they impose upon buyers to meet the quantity threshold. We analyze this so called suction effect in a sequential-entry model where an incumbent seller seeks to shift rents from a more efficient entrant. We find that, in contrast to other rent-seeking mechanisms such as exclusive dealing contracts which are usually seen as being very similar, all-unit discounts do not fully allow the incumbent seller to disentangle the implementation of the desired quantity from the surplus division with a buyer. We show that this leads to inefficiencies if and only if the buyer has a high outside option which is the case when competition between potential entrants is high, and we argue that this source of inefficiencies is typical for all-unit discounts.

Competitiveness, Productivity and Externalization: Food versus Autos in Catalonia

This paper re-examines the innovation-productivity nexus on the basis of a paired comparison between Catalonia's food and auto sectors. The sectoral studies expose a set of productivity enhancement mechanisms that do not involve innovation in the sense of anything new to the world, that are grouped under the rubric of renovation and comprise: - Reaching efficient scale - Rectifying (other) obvious internal deficiencies - Replicating or imitating innovations, techniques, etc., developed by others - Replacement of inefficient incumbents by more efficient entrants - Redeployment of resources across sectors The paper also discusses the implications of this broader perspective for industrial policy, and for internationalization.

Access regulation under asymmetric information about the entrant’s efficiency

We study the impact of access regulation on an entrant’s decision whether to invest in a telecommunications network or to ask for access when the regulator cannot observe its efficiency level. We show that an efficient entrant may have incentives to target low demand after entry in order to convince the regulator that it needs cheap access in the future. Therefore, the regulator must set access prices, contingent on demand, which penalize the inefficient entrant. We further show that, although linear prices are not always sufficient to promote the investment of an efficient entrant without introducing distortions, two-part tariffs already allow the regulator to achieve this objective.

Naked Exclusion: Towards a Behavioral Approach to Exclusive Dealing

We report experimental results on exclusive dealing inspired by the literature on naked Our key findings are: First, exclusion of a more efficient entrant is a widespread phenomenon in lab markets. Second, allowing incumbents to discriminate between buyers increases exclusion rates compared to the non-discriminatory case only when payments to buyers can be offered sequentially and secretly. Third, allowing discrimination does not lead to significant decreases in costs of exclusion. Accounting for the observation that buyers are more likely to accept an exclusive deal the higher is the payment, substantially improves the fit between theoretical predictions and observed behavior.

INTER-MARKET COMPETITION THROUGH BUNDLING IN THE PRESENCE OF COST ADVANTAGE

This paper presents a model of inter-market competition through bundling wherein each firm has a cost advantage in a different market and competes against fringe firms. Without cost saving through bundling, there is no equilibrium in which the bundled good is provided. However, with cost saving through bundling, there exist equilibria in which one firm provides bundling and the other does not. In this case, bundling can be used as a device for entry deterrence. Finally, we illustrate that bundling can reduce social welfare by discouraging the efficient entrant from entering the market.

Entry in Foreign Markets under Asymmetric Information and Demand Uncertainty

This paper examines the mode of entry of a multinational firm that has less information about the host market stochastic demand than the local firm. The foreign firm can enter the market either through direct investment or exports. Each entry mode entails different costs and has different informational implications. Entry through foreign direct investment (FDI) is favored by greater variability in demand. Interestingly enough, strategic behavior by the incumbent firm, which deviates from its first period monopoly output, might be aimed at increasing the probability of foreign entry through FDI despite having to compete against an equally informed and efficient entrant; this never happens in a symmetric information environment. Such host firm behavior is aimed at reducing the strategic uncertainty derived from the foreign firm's beliefs. Compared with the symmetric information setting, entry via direct investment may occur in more cases.

Optimal Debt Contracts and Product Market Competition with Exit and Entry

We show that optimal debt contracts in the presence of product market competition are typically different from standard debt contracts. We consider a market with two incumbents, one levered (target) and one with deep pockets (competitor). Renewal of target's debt depends on its profits, which are determined by the competitor's pricing strategy. When the competitor benefits from non-renewal of target's debt, it has incentive to price more aggressively. To counter this, bondholders make renewal less profit sensitive, and the optimal debt contract is smooth (nonkinked) and concave, and lies below the standard debt contract. Bondholders leave the limited liability constraint slack in a region of profits, and therefore appear to leave money on the table by failing to collect all profits when they fall short of the debt's face value. But this flattening of the contract results in higher profits for the levered firm for each state of demand, and a higher expected payout for bondholders. The larger the competitor's benefit from non-renewal, the flatter the contract. On the other hand, when the competitor benefits from renewal of the target's debt (say non-renewal results in target's replacement by a more efficient entrant), then the optimal debt contract is nonsmooth (sometimes taking the form of a binary option), and much more profit sensitive for some profit levels than the standard contract. This increased sensitivity amplifies the competitor's incentive to price less aggressively, resulting in higher profits for the levered firm and higher payout to bondholders. In either case, our results demonstrate the optimal contract must be designed accounting for the impact of the contract itself on the profit function of the levered firm. Furthermore, bondholders prefer lending to weaker firms (firms whose competitors benefit from renewal) because the competitor's pricing incentive, amplified by the more profit sensitive contract, results in higher expected payouts.

Open Competition in League Sports

The fundamental difference between the structure of team sports in the U.S. and in the rest of the world is openness. In the U.S., sports leagues are closed: membership of the league is in the gift of the existing members, who typically only grannt the right of entry in exchange for a substantial fee. Outside of the U.S., teams sports leagues are open: membership of the league is contingent on success. Sports are organized in ascending tiers (generally called divisions) and every year the worst performing teams are relegated to the nnext lowest division and replaced by the best performing teams from that division. This system operates in soccer, rugby (league and union), European basketball, cricket and almost all other team sports. Our main argument in this paper is that the institution of promotion and relegation tends to raise consumer welfare by increasing effective competition among the teams in a league. Because teams seek to avoid relegation as well as to win championships, they have greater incentives to invest in players than teams participating in closed competitions. For lesser teams in lower divisions tha allure of promotion to the top division enhances the inncentive to invest in players and provides added interest to junior league competition. Moreover, promotion provides a market-based means of permitting new entry to check the power of incumbent clubs to exercise market power - most notably their ability to secure tax subsidies for stadia. Promotion and relegation is in fact an ideal structure for surgical antitrust intervention to promote entry, since it involves replacing the least efficient (in terms of wins) incombent with the most efficient entrant. Moreover, entry is only conditional on continuing success, so that a relegated incumbent has an opportunity to recapture its position the following season. In this sense, promotion and relegation is analogous to the Baumol-Willig efficient components pricing rule (ECPR), which requires incumbents to grant than the incumbent can enter the market. We justify antitrust intervention through an argument that the decision by current clubs to maintain a closed-league structure constitutes an unreasonable restraint of trade.

Exclusionary Vertical Contracts and Product Market Competition

This article considers whether a monopolist is able to deter more efficient entrants through contracting with buyers. In the antitrust literature, the Chicago School's stand is that such contracts cannot be anticompetitive; hence vertical contracts should be accorded per se legal status. In a four-stage game with the following features: (1) the incumbent enjoys a first-mover advantage, (2) the entrant must incur some sunk cost to enter the market, and (3) entry is uncertain, the author shows that vertical contracts can be anticompetitive if there exists product-market competition. Thus, the author advocates caution in treating all contracts as per se legal. A three-factor, repeated-measures experiment tested the effect of leadership style (charismatic, structuring, and considerate) on performance improvement on a manufacturing task over four trials. Findings from a repeated-measures multivariate analysis of variance indicated that individual exposed to considerate leadership had superior initial performance but that this difference faded over time. Further analysis indicated that self-efficacy fully mediated the relationship between leadership style and performance. Copyright 1999 by University of Chicago Press.

Raising Rivals' Costs Strategies via Emission Permits Markets

In the present paper we examine the effect of emissions permit price manipulation within an oligopolistic model. We examine the effect that positioning strategies in permits markets have on the degree of competition in the product market as well as on social welfare. The analysis is based on the concept of raising rivals' cost strategies. We find that competition in the product market can be lessened substantially. The welfare effect is ambiguous. If the leader expands its market share at the expense of a less efficient rival, or if it excludes a less efficient entrant, overall efficiency may increase despite the decrease in the industry's output. When efficiency decreases, or when consumers' protection is a policy priority, the initial distribution of permits can be used to control power in the permits market. Such interventions though, improve efficiency only when policy makers have substantial information on the technological structure of the industry, and thus, should be used with caution. Given the importance of information, sharing of information and coordination of actions between policy makers is very important.

Empirical studies of entry and exit: A survey of the evidence

Over 70 empirical studies of entry and exit patterns covering eleven different countries generally support the expectation that entry is more frequent in more profitable, rapidly growing industries, and slower where the absolute costs of capital required to build a minimum efficient scale plant are imposing. Scale economies, excess capacity, and limit pricing receive little empirical support as entry impediments. The evidence concerning the effects of advertising and R&D intensity is confusing. Exit is faster where profits are lower, and slower where durable specific (sunk) capital costs are more important. Exit and entry are strongly correlated, probably due to displacement (of incumbents by more efficient entrants) and vacuum effects (in which entrants are enticed by the prospects of selling to uncommitted customers abandoned by a recent exit).