Industrial Organization Literature Research Articles

Firm selection and industry evolution: the post-entry performance of new firms

A dynamic framework based on the process of firm selection and industry evolution is used to analyse the post-entry performance of new firms. In particular, it is hypothesized that, based on the stylized fact that virtually all new firms start at a very small scale of output, firm growth and survival are shaped by the need to attain an efficient level of output. The post-entry performance of more than 11,000 U.S. manufacturing firms established in 1976 is tracked throughout the subsequent tenyear period. Firm growth is found to be negatively influenced by firm size but positively related to the extent of scale economies, capital intensity, innovative activity, and market growth. By contrast, the likelihood of survival is identified as being positively influenced by firm size, market growth, and capital intensity, but negatively affected by the degree of scale economies in the industry. When viewed through the dynamic framework of firm selection and industry evolution, the empirical results shed considerable light on several paradoxes in the industrial organization literature, such as the continued persistence over time of an asymmetrical firm-size distribution consisting predominantely of suboptimal scale firms, and the failure of capital intensity and scale economies to substantially deter the entry and start-up of new firms.

Do Regulators Read the Literature? Bank Merger Regulation, 1963-1990

During the early 1980s a series of events occurred that altered the regulatory, political, and scholarly underpinnings of bank merger regulation. New laws that deregulated financial institutions increased actual and potential competition in banking markets. Consistent with the laissez faire spirit of this deregulation, the Reagan Justice Department relaxed its enforcement of the merger antitrust laws. New banking cost studies produced lower estimates of optimal bank scale, suggesting that small banks might be more effective rivals of large full service banks than previously thought. New studies in industrial organization began to question the traditional notion that concentration and collusion are the root causes of excess profits, weakening one of the primary justifications for denying mergers of banks and nonbanks alike. This paper explores whether the Federal Reserve Board of Governors' commercial bank merger policy changed around 1980, and whether these changes were consistent with contemporaneous regulatory, political, and scholarly developments. The determinants of the Board's merger policy both before and after the early 1980s are estimated using a binomial probit model. The results suggest that the Board revised its overall merger policy consistent with changes in the Justice Department's Merger Guidelines, but was only marginally influenced by changes in the banking cost and industrial organization literature. Although merger policy became more relaxed as Reagan appointees were added to the Board, the possibility that this loosening was a response to the increased competition in financial markets could not be dismissed.

Small business in Industrial Economies : the new learning

The focus of analysis in industrial organization has traditionally been on the largest firms comprising industries. However, a recent wave of studies has not only identified that small firms are playing an increased role in industrial markets, but that their economic function is distinct from that of larger enterprises. The purpose of this paper is to weave together these studies which, combined together, constitute a new learning with respect to the role of small firms in industrial markets. In particular, the role of small firms under static analysis in the industrial organization literature is contrasted to the dynamic role that emerges when viewed through a more evolutionary lens.

Small firms and R&D spillovers : Evidence from Italy

The recent emergence, in the industrial organization literature of a wave of studies identifying small firms as being at least as innovative as their larger counterparts poses something of a paradox. Where do small firms get their knowledge generating inputs ? The purpose of this paper is to link innovative inputs to innovative outputs. This allows one to identify the extent to which spillovers exist between major sources generating new knowledge, such as the R&D laboratories of private and public firms, as well as universities, to the innovative activity of large and small enterprises. Based on 15 Italian regions over a time period of nine years, the empirical evidence suggests that, while firm R&D expenditures contribute to the generation of innovative output both for all firms and for small firms, the spillovers from universities are apparently more important for small-firm innovation than for their larger counterparts.

Reply on comment to ?small firms and the merger mania?

Research on performance differences between small and large firms is booming. It emerges relatively separated from the mainstream Industrial Organization Literature. Inspired by Levy's comment on an earlier paper we try to bridge the gap between the two areas. Especially we screen non cooperative game theoretical models for predictions on performance differences. Most of them forecast higher profits for larger firms, but there exist also some models which predict the opposite for very specific circumstances.

MANAGING THE MANAGER: AN APPLICATION OF THE PRINCIPAL AGENT MODEL TO THE HUDSON'S BAY COMPANY

Controlling the ability of agents to operate in their own self-interest motivates much of the recent industrial organization literature. However, that literature is generally intractable to empirical testing. Yet we need to know whether firms can successfully attenuate managerial opportunism. The Hudson's Bay Company provides the context, and its records provide the data, for the authors' analysis. They model its agency problem and using that model the authors simulate and calibrate the company's experience. Their numerical estimates show that agency was a potential problem for chartered companies but the Hudson's Bay Company had control of its managers. Copyright 1993 by Royal Economic Society.

Economic determinants of quarterly earnings data

We conduct exploratory data analysis on the economic determinants of quarterly earnings data. After surveying the industrial organization literature, we selected firm-size, product-type and barriers-to-entry as independent variables useful in explaining autocorrelation in quarterly earnings and sales. We perform cross-sectional regression analysis on a sample of 364 calendar year-end. New York Stock Exchange firms. As our dependent variable, we employed both seasonal and non-seasonal lags of the levels and first differences of the sample autocorrelation functions (SACF) of quarterly earnings and sales data. Our results support a pervasive impact of firm-size on the levels of the SACF. This outcome is consistent with the notion that larger firms exhibit mare stable, higher pronounced levels of serial correlation in their quarterly earnings numbers than smaller firms. Results for the other economic variables were more contextual, depending m whether we used the full sample or a subgroup and on whether the data were differenced. Stronger results on the product-type and barriers-to-entry variables were documented for the seasonal firm subgroup at seasonal lags. This result is suggestive of an economic rationale for the seasonal behavior of quarterly earnings and sales data.

Explicit and Implicit Tax Effects of the R & D Tax Credit

This paper investigates the effects of the 1981 Research and Development (R&D) tax credit, first, by examining the impact of the credit on the level of R&D investment and, second, by estimating the magnitude of the implicit tax created by the credit. The two effects are interrelated because an increase in the level of R&D investment will increase the demand for R&D inputs, thus reducing the pretax rate of return from R&D activity.1 I test the credit's investment effect using a time-series R&D spending model that includes both factors from the industrial organization literature (to control for nontax effects) and an R&D credit usability variable to capture the incentive created by the credit. Previous research has produced mixed evidence on whether the credit had any positive

Goal Settings Self-Efficacy, and Exercise Behavior

Whereas the success of goal setting is well documented in the industrial-organizational literature (Locke & Latham, 1990), the empirical efforts to determine its effectiveness in sport settings have met with minimal success, and no studies exist that document the role played by goals in successful adherence to exercise regimens. We examined the relationships among goals, efficacy, and exercise behavior in the context of community conditioning classes. Female participants' goal efficacy was predictive of perceived goal achievement at the end of the program, and exercise self-efficacy was significantly related to subsequent intensity but not frequency of exercise participation. Moreover, a proposed interaction between exercise importance and self-efficacy failed to account for further variation in physical activity participation. The results are discussed in terms of the physical activity history of the sample and the roles played by goals and efficacy at diverse stages of the exercise process.

The Internationalization of Retailing and 1992 Europe

The internationalization of retailing has been relatively slow if compared to the internationalization of manufacturing industries. However, the pace of cross-border investments by retail companies has been increasing in recent years. This trend has been particularly visible in Europe, as a consequence of the completion of the common market (project 1992). The author considers the case of direct foreign investment (DFI) by retail companies, focusing on their motives and means, and reviews the evidence available with respect to Europe. While there are a number of recent articles which investigate the existing patterns of DFI by retail companies, not much has been done in trying to analyse this evidence using the well established concepts developed by industrial organization literature. The first aim of the article is to review these concepts and see if, and to what extent, they can be useful to understand the patterns of DFI in retailing. Since the main reason for investing abroad lies in some form of inno...

Work Characteristics, Firm Size and Wages

A positive wage-firm size relationship is well documented in the empirical literature in industrial organization and labor economics. Firm size seems to proxy various unobserved determinants such as job satisfaction, monitoring costs, more complex technologies and worker participation in monopoly profits. It is generally argued that, the greater the possibility of controlling for these latent factors, the less likely that a significant size effect will appear. This paper attempts to distinguish firm size from other wage determinants for a rich data source for West Germany and demonstrates the persistence of the size premium.

Sunk costs and market structure: price competition, advertising, and the evolution of concentration

Sunk Costs and Market Structure bridges the gap between the new generation of game theoretic models that has dominated the industrial organization literature recently and the traditional empirical agenda of the subject as embodied in the structure-conduct-performance paradigm developed by Joe S. Bain and his successors. Because many results turn out to depend on detailed features of the market that are difficult to measure, some observers argue that the game theory literature offers little basis for the kind of cross-industry studies that have formed the empirical base of the subject since the 1950s. Using current game-theoretic methods, John Sutton reexamines the traditional agenda. He argues that despite the delicate nature of many results, there are theoretical predictions that turn out to be extremely robust to reasonable changes in model specification, and these results should be taken into account when looking for statistical regularities across a broad spectrum of different industries. Sutton assembles a matrix of industry studies relating to twenty markets within the food and drink sector, in six countries—France, Germany, Italy, Japan, the United Kingdom, and the United States. He combines theory, econometric evidence, and a detailed account of the various patterns of evolution of structure found in these industries in a rigorous evaluation of the strengths and limitations of a game-theoretic approach in explaining the evolution of industrial structure.

Advertising and pricing policies in the equine breeding industry or sex and the single stallion

A unique aspect of the equine breeding industry is the way in which the current year's demand for stud services depends on the previous year's production levels. In a monopolistically competitive market, product differentiation and product promotion and advertisement are important aspects of industry conduct. A stallion's reputation and therefore demand for his services depend on the stallion owner's ability to differentiate the product. The price a stallion owner charges depends on the quality of the stud himself, and also on the quality of his offspring. The producer's output (foals) become advertisements for the stallion when they are raced, shown, etc. They also can become substitutes for the stallion, since they are an alternative source of the stallion's genes. Stallion owners are in the special position that they need to prove their stallion's ability to sire quality offspring, while bearing in mind they are producing possible substitutes. Outstanding offspring will generate demand for the parent's services if they are successfully shown, raced, etc. Conversely, progeny who compete unsuccessfully will decrease demand by contributing to a poor reputation for themselves, their breeder and their sire. But, outstanding individuals eventually become breeding stock and therefore offer an alternative source for the ‘winning genes’. This intergenerational dependence has led to pricing policies and practices in the equine breeding industry which have important implications. Common practices include: incentives to compete, rebates for gelding male offspring, price discrimination in favour or quality mares and limited bookings. These policies illustrate aspects of industry conduct commonly discussed in industrial organization literature such as first-degree price discrimination, non-linear pricing and non-price competition. The use of artificial insemination and other new breeding technologies and thus the potential for a stallion to breed larger numbers of mares, further compounds the extent and results of such practices. This paper investigates pricing policies in the equine breeding industry, using a case study approach. A model of indsutry pricing policies is developed and tested using data for American Quarter Horses.

THE EFFECTS OF ADVERTISING (AND) INVESTMENT ON AGGREGATE PROFITS

The Relationship between advertising and industry profitability is one of the best explored in the Industrial Organization literature. Yet, we are aware of no single study that attempted to test the potential existence of such a relationship at the macroeconomic level. Given the central importance of profits in any market economy, the above asymmetric appears paradoxic and unsatisfactory. Our aim in this paper is to fill this gap in the literature. We test the hitherto unexplored relationship between advertising investment and aggregate profits using U.K. time series data. Our results lend support to the idea that advertising investment has a positive impact on aggregate profits. We also find support for another little explored idea; that investment is an important determinant of aggregate profits. Copyright 1991 by Scottish Economic Society.

Supply‐Chain Management: The Industrial Organisation Perspective

While supply chain management concepts are receiving increasing attention in literature and practice, the supply chain management philosophy is supported by a limited theoretical base. The industrial organisation literature related to the advantages, disadvantages and applications of vertical integration and obligational contracts is explored. The industrial organisation literature regarding vertical integration and obligational contracts is related to supply chain management. The advantages and disadvantages which supply chain management shares with vertical integration and obligational contracts are discussed. It is concluded that supply chain management is a way of combining many of the advantages of vertical integration and obligational contracts, while overcoming some of their disadvantages. Using the industrial organisation literature and findings from two case studies, prerequisites are developed for supply chain management, and three competitive situations are described. Supply chain management holds promise as a competitive form, provided that certain hazards are avoided, and that a competitive advantage results.

Strategic management and economics

This essay examines the relationship between strategic management and economics. It introduces the special issue on this same topic by providing a guide to the eight papers contained in the special issue, and it offers the guest editors viewpoints on the contributions of each discipline to the other. The essay notes the major contribution from economics has been primarily from the industrial organization literature, with promises of important gains to be made from the ‘new’ economics as it breaks away from the neoclassical theory of the firm. Contributions from strategic management to economics are noted. Areas for further research utilizing the relationship between strategic management and economics are also indicated.

Government Size and Decentralization: Evidence from Disaggregated Data

Public choice models of government behavior draw heavily from the economics literature of industrial organization. Following the argument that private monopoly in production leads to relatively high prices and profits, the public choice literature suggests that similar analysis of government structure may be useful in the modeling of public production. Brennan and Buchanan [3; 4] model government as Leviathan-a public entity which seeks to maximize its revenue. The Leviathan hypothesis is motivated by the desire to successfully understand government behavior as well as to recommend effective means of controlling its behavior. Among other suggestions, Brennan and Buchanan offer the private monopoly corollary that competition among different fiscal units is an effective means of controlling the aggregate size of Leviathan. The resulting decentralization hypothesis is: total government intrusion into the economy should be smaller, ceteris paribus, the greater the extent to which taxes and expenditures are decentralized [3, 15]. This paper tests the decentralization hypothesis by examining a data set which considers all units of government. By disaggregating Federal spending on a state-by-state basis, we construct a cross-section of state data on Federal, state and local government activity. All previous examinations of the decentralization hypothesis at the level of the state have excluded the activity of the Federal government. However, given that Federal government expenditures greatly exceed those of state and local governments, previous cross-sectional tests of the decentralization hypothesis may have employed grossly incomplete measures of governmental activity in each state. Our study provides two extensions to the debate. One, by testing the decentralization hypothesis at the level of state aggregation, we suggest that previous cross-sectional studies do not report strong evidence in support of the hypothesis because of their exclusion of the Federal sector. Two, our study suggests the importance of including all potential competitors in the government arena: state, local and Federal governments. Our study does not solve all issues concerning aggregation

Auditor Reputation: The Impact of Critical Reports Issued by Government Inspectors

In recent years U.K. Department of Trade investigations into the affairs of a specific company have sometimes been critical of the work done by its auditors and reporting accountants. This article assesses the impact of this criticism on the auditor's reputation. In particular, it examines the stock price performance of the auditor's listed clients. The results show a small wealth loss for the audit clients. The article also examines the impact of the Department of Trade criticism on an audit firm's number of listed clients and its future audit fees. Compared to a control group, the criticized auditors appear to suffer a small loss in market share based on number of listed clients and on audit fees. The evidence suggests that criticized auditors incurred economic losses from the damage to their reputations. This is consistent with models of reputation advanced in the industrial organization literature.

Imperfect competition and import penetration

Finger-pointing has become a popular activity during the recent surge in U.S. imports. Inefficient production on the part of domestic firms has been singled out often as one significant cause of the import problem. The related remedy: mergers and joint ventures designed to enhance the international competitiveness of domestic producers. This scenario plays well before selected audiences in Pittsburgh and elsewhere, but the plot is thin. It overlooks the direct risks associated with changes in the market structure of domestic firms. While mergers may reduce production costs, they clearly do increase domestic concentration. The positive association between concentration and markups is a recurring theme in the industrial organization literature, so the possibility arises that the merger remedy to the import problem may actually be counterproductive. If the net effect of potentially lower costs and higher markups is upward pressure on prices, then the mergers may promote further import penetration, since, after all, an industry's foreign rivals take their cue from domestic prices, not from domestic costs. The professional literature blending industrial organization and international trade theories is extensive and rapidly growing, but related empirical research has not kept pace. The few empirical studies which do exist indicate that there is no statistically significant relationship between industry concentration and either import penetration

Wage Norms and Involuntary Unemployment

This paper and its sequel consist of a series of models or examples, each trying to explain the possibility of non-Walrasian wage rates and involuntary unemployment equilibrium. In recent years there have been many attempts to explain the possibility of equilibrium wages at non-market clearing levels with involuntary unemployment. There are the wage efficiency models (Yellen, I984), contract models, bargaining models (e.g. Shaked and Sutton, I984) to name but a few. The common feature of these models and the ones I shall discuss is that involuntary unemployment (for a certain range) does not lead any agent to change his behaviour. My models as in the works of Lindbeck and Snower (I985, I986) are based on the distinction between insiders and outsiders. In my models, however, workers and firms live for more than one period, and as a result they may follow norms which are not in their short-term interest but are rational in the longrun. I shall model the labour market in a repeated game framework. The literature on repeated games in recent years has shown that in general there are a large number of equilibria (see Fudenberg and Maskin, I986). A major application of repeated games has been to the industrial organisation literature, where it has been shown that many types of behaviour on the part of firms (e.g. collusion, predatory pricing) can be supported as equilibria of the game (see Fudenberg and Tirole, I984). My models, which are applications of the repeated game to the problems of insiders and outsiders, also contain many equilibria. The Walras-ian outcome is one of the possible resulting equilibria; there are also others. The equilibria that I shall discuss, however, are those which may help us to understand some stylised facts and at the same time generate non-Walrasian outcomes. I shall try to show that, for some levels of unemployment, each insider may rationally choose strategies which deter firms from trying to push the wages down and/ or deter unemployed from under-cutting. In this paper, I shall define insider's as those who follow the norm. If an insider deviates from the norm, he loses his insider position. The firm(s) agree(s) to pay higher wages than the market clearing rate because the insiders threaten to go on strike if the firm tries to force down the wages of any one of them and there are not enough unemployed workers to replace all insiders. Moreover, the threat of each insider turns out to be credible because, if he does not follow the norm, he will lose his insider status and will not be protected by other insiders in the next period and thus will be at the mercy of the firm. Therefore, in this paper the non-Walrasian outcomes are the result of the firm