Multimarket Contact Research Articles

Rivalry Deterrence In International Markets: Contingencies Governing The Mutual Forbearance Hypothesis

The mutual forbearance hypothesis states that when the same competitors meet in multiple markets, rivalry is deterred. Our study highlights how pressures for local responsiveness impact the veracity of this hypothesis for multinational corporations (MNCs) in host countries. We develop theory to explain how subsidiary ownership, home-host cultural distance, host country regulatory restrictions on MNC activities, and the presence of local competitors affect the rivalry-dampening impact of multi-market contact. We tested our hypotheses with a sample of 13 global automobile companies operating in 27 countries and report strong support for our hypotheses.

International Antitrust Enforcement and Multi-Market Contact

This paper analyzes international antitrust enforcement when multinational firms operate in several markets with antitrust authorities in each market. We are concerned with how the sustainability of collusion in one local market is affected by the existence of collusion in other markets when they are linked by demand relationships. The interdependence of collusion sustainability across markets leads to potential externalities in antitrust enforcement across jurisdictions. As a result, cartel prosecution can have a domino effect with the desistance of one cartel triggering the internal break-up of the cartel in the adjacent market. We further find that the equilibrium in antitrust authorities’ enforcement decisions may exhibit non-linearity due to a free-rider problem as the global economy is more integrated. We also analyze the equilibrium antitrust enforcement and compare it with the globally optimal antitrust enforcement policy.

Trade Costs and Multimarket Collusion

This paper explores the implications of reciprocal trade liberalization for implicit collusion and welfare in the context of a symmetric, homogeneous goods duopoly model with multi-market contact and quantity competition. One of our principal findings is that collusive conduct does not necessarily entail geographic separation of markets and cessation of intra-industry trade. Our analysis also reveals that, when trade costs and discount factors are not too high, efficient cartel agreements that involve the cross hauling of goods are easier to sustain because they circumscribe deviation incentives. As a consequence, for a certain range of discount factors, welfare is higher when there are no trade costs than when trade costs are so high that they eliminate trade. This establishes an important sense in which trade liberalization is pro-collusive in the neighborhood of unimpeded (i.e., free) trade. In contrast, reductions in trade costs are welfare-improving when they are high enough to eliminate trade flows in the efficient cartel agreement. The analysis examines both tariffs and transport costs and compares their effects on welfare. The model is also extended to consider the presence of more than one firm per country and to study the implications of imperfect substitutability in demand.

Strategic Interaction Across Countries and Multinational Agglomeration: An Application to the Cement Industry

Agglomeration in foreign direct investment (FDI) is typically attributed to location-specific characteristics such as natural resource advantages or production-related spillovers between multinational firms. The increasing collocation of the largest global firms in the cement industry since the 1980s is not easily attributed to either of these explanations. This paper draws on theories of multimarket contact to test whether strategic interaction across national markets has influenced the successive market entry decisions generating the observed agglomeration. We first establish that there is indeed nonrandom agglomeration of the six largest cement firms. We next show that preexisting cross-market interaction with current incumbents helps predict which firm will enter a given market and also the choice of market a given firm enters. The association does not appear to be caused by strategic convergence or mimicry of recent entry events and cannot be explained by production side effects, which depend only on local conditions. The findings are consistent with multimarket contact models where collocation allows firms to sustain higher prices in all markets. This latter inference is also supported by evidence of an association between global firm market share and local cement price. The paper suggests that pricing spillovers can serve as an alternative motivation for FDI agglomeration.

Multimarket contact in continuous-time games

This paper investigates whether multimarket contact is effective in increasing the value of collusion. We show that for any discount rate, the set of equilibrium payoffs (average per market) expands through multimarket contact in continuous-time games.

Performance Effects on Market Entry Decisions: Evidence from the U.S. Insurance Industry

This study examines boundary conditions of the mutual forbearance hypothesis, which predicts an inverted-U-shaped relationship between multimarket contact and market entry. Drawing on recent developments of the behavioral theory of the firm, we empirically test whether past performance and resource endowment shapes this relationship. Using a sample of 1391 companies in the U.S. insurance industry covering 51 states in a 4-year panel, we find that insurance companies take into account the level of multimarket contact with their rivals when making market entry decisions, and that past performance related to aspiration level and the firm's resource endowment have significant effects on such decisions.

Firm Scope Experience, Historic Multimarket Contact with Partners, Centrality, and the Relationship Between Structural Holes and Performance

This study investigates characteristics that affect the relationship between firms' positions in a network of collaborative ties with other firms and their performance. Firms located in similarly structured networks rich in structural holes may obtain different performance results depending on their (1) capacity to absorb heterogeneous information, (2) ability to protect against partner noncooperation, and (3) bargaining power. In this paper, I argue that firms with a wide scope of experience have superior absorptive capacity for dealing with heterogeneous information; hence, such firms will be able to extract performance improvements from network positions rich in structural holes. Furthermore, firms with a high level of historic multimarket contact (MMC) with their partners are able to reduce the risks of partner noncooperation, hence augmenting their performance compared to firms in open networks that do not enjoy MMC with their own partners. Finally, firms of low centrality in the industry's network of alliances will extract performance benefits from enhancing bargaining power as a result of exploiting brokerage opportunities in open networks. These arguments are corroborated in a study of relationships formed among investment banks' advising on the merger and acquisition transactions in the United Kingdom between 1992 and 2001.

Brand competition in CPG industries: Sustaining large local advantages with little product differentiation

In direct competition between national brands of consumer packaged goods (CPG), one brand often has a large local share advantage over the other despite the similarity of the branded products. I present an explanation for these large and persistent advantages in the context of local competition on perceived quality or brand image. The main result of the analysis is a relation between varying degrees of product similarity and equilibrium outcomes of local share advantages. Namely, I find that asymmetric quality positioning and associated local share advantages emerge especially when competing brands are objectively similar. Conversely, local share asymmetries based on brand positioning occur less when brands are dissimilar. This paper provides two reinforcing intuitions for this result. First, if brands are objectively similar, different levels of investment in local quality perceptions co-exist in equilibrium in the same market, because this investment is often borne as fixed cost. Also, early movers will invest in high perceived quality, whereas late movers have less incentive to invest because of demand sharing and increased price competition. Second, if the local advantages are shared by competitors across markets, the persistence of these advantages is reinforced by multimarket contact. Even when local brand building is free, firms may not want to improve perceived quality in their “weak” markets if it initiates retaliation by the competition in their “strong” markets. The increase in multimarket profits from collusion is large when the products are similar, because price competition looms large.

Multimarket contact and sales growth: evidence from insurance

AbstractResearch on pricing, profits, and firm survival has shown that multimarket contact causes mutual forbearance against competition, but has not considered the consequences of imperfect observability of competitive moves. Here, predictions are developed to explain how mutual forbearance occurs—but sometimes fails—in markets with imperfect observability. Mutual forbearance means that firms do not seek to take market share from each other through price cuts or nonprice competition, and thus that sales grow at uniform rates. Firms defect from mutual forbearance, and hence have higher sales growth, if the potential rewards are high and the likelihood of being discovered is low. This theory is tested on a panel of firms operating in the Norwegian general insurance industry. The evidence suggests that sales growth is most rapid in firms that do not meet many multimarket competitors in a given market and firms that are economically troubled. Growing or highly concentrated markets have higher heterogeneity of growth rates. Copyright © 2007 John Wiley & Sons, Ltd.

Markets Linked by Rising Marginal Costs: Implications for Multimarket Contact, Recoupment, and Retaliatory Entry

This paper studies the effects on prices and welfare of multimarket contact when firms serve multiple markets from a single facility with rising marginal costs. Here a link is created between markets, even with independent demands: greater output in one market leads to a higher marginal cost and lower output in other markets; and multimarket contact can indeed lower welfare. Variations of the model can explain two other puzzling phenomena: “recoupment” – lower prices in one market “paid for” by higher prices in other markets; and “retaliatory entry” – the credible threat to enter a rival’s market if it enters yours.

Multimarket Contact in Pharmaceutical Markets

We analyze the effect of multimarket contact on the pricing behavior of pharmaceutical firms controlling for different levels of regulatory constraints using the IMS MIDAS database for the industry. Theoretically, under product differentiation, firms may find it profitable to allocate their market power among markets where they are operating, specifically from more collusive to more competitive ones. We present evidence for nine OECD countries suggesting the existence of a multimarket effect for more market friendly countries (U.S. and Canada) and less regulated ones (U.K., Germany, Netherlands), while the results are more unstable for highly regulated countries with some countries being consistent with the theory (France) while others contradicting it (Japan, Italy and Spain). A key result indicates that in the latter countries, price constraints are so intense, that there is little room for allocating market power. Thus equilibrium prices are expected in general to be lower in regulated countries.

Concentration in the European electricity industry: The internal market as solution?

This article offers an analysis of the present competitive and regulatory framework of the European electricity sector and the results achieved with the liberalisation process. Considering the reactions of incumbents to the liberalisation, the focus in this work is mainly on the problem of market concentration in the sector. The new trends toward the creation of “national champions” as well as recent mergers between gas suppliers and electricity producers raise serious concerns about abuses of market power and risk of future collusion. In particular, the strategic linkage of existing markets and the expansion into new ones are analyzed in the light of the multimarket contact theory. Considering investment in interconnection among Member States, the internal market issue is investigated as a solution to the “risks” coming from liberalisation.

Credible collusion in multimarket oligopoly

AbstractThis article refines an established explanation of how multimarket contact facilitates collusion when firms enjoy reciprocal advantages across markets: When there are reciprocal asymmetries between firms, multimarket contact allows them not only to develop spheres of influence, but also to implement attractively simple strategies that are subgame perfect and weakly renegotiation proof. Hence, collusive equilibria are supported by fully credible punishments. A significant implication is, multimarket contact involving reciprocal differences between firms may be more facilitating to their cooperative efforts than multimarket contact based on other factors. The article discusses existing empirical work as it relates to this implication. Copyright © 2007 John Wiley & Sons, Ltd.

Multimarket Contact and On-Time Performance in the Us Airline Industry

We examine the impact of multimarket contact on on-time performance in the airline industry. Using flight-level data for more than 3.5 million flights, we find that increases in multimarket contact lead to increases in delays, and this result is robust to several delay measures and the inclusion of carrier-route, as well as month, fixed effects. We further determine that the effect is primarily in the form of departure delays, and not due to changes in scheduled flight times or time spent in the air. These findings provide support for the mutual forbearance hypothesis, and suggest that multimarket contact facilitates tacit collusion not only on price - but also on quality.

Examining the Impact of Internationalization on Competitive Dynamics

This paper examines the impact of the internationalization process on the competitive dynamics of an industry in an international context. The examination was carried out using two complementary approaches: first, by constructing a Dunning–Porter diamond framework, which is an extension of Porter's diamond framework, and embedding a causal modelling approach in it; second, by using the multi-market contact approach and evolving a deeper understanding of the impact of internationalization on competitive dynamics. One conclusion of this paper is that a firm's cost structure and the quality of skills (resources) possessed are important factors of market defence in an internationalization process driven by cost advantage factors. Another important conclusion is that a firm's cost structure and skills base have a joint influence on the impact of internationalization on incumbents and their subsequent competitive behaviour, especially in larger market segments. This paper combines internationalization and multi-market contact-based approaches towards an understanding of competitive dynamics. This is an initial attempt towards developing an internationalization framework, which may help clarify the complexity and uncertainty involved in operating in international markets.

The intent and extent of multimarket contact

Multimarket research studies the causes and consequences of firms meeting each other in multiple markets, and has found evidence that multimarket contact reduces competitive pressures. Recent work has examined whether multimarket contacts are sought strategically or entered coincidentally, with some papers finding a large role of coincidental entry. The finding is puzzling given the well-documented benefits of multimarket contact. This article takes advantage of advances in multimarket theory and measurement to analyze market entries, and finds that strategic entry is seen when the intent and extent of multimarket contacts are considered, but also that managers appear to be risk-averse when establishing multimarket contacts.

STRUCTURE OF COMPETITIVE ENVIRONMENT AND MIMETIC MARKET ENTRY.

The article looks at imitation between corporations and presents a study which examined corporations' diversified entries into new product markets. The article discusses how relationships between f...

DYNAMIC THEORY OF MULTIMARKET CONTACT: COMPETENCE DEPLETION, PUNCTUATED FORBEARANCE, PERFORMANCE.

I extend multimarket contact theory beyond its current focus on inter-firm tacit collusion, explaining how firm-level competence depletion and population-level punctuated forbearance converge to un...

Measuring the Effect of Multimarket Contact on Competition: Evidence from Mergers Following Radio Broadcast Ownership Deregulation

Abstract This paper examines the effects of multimarket contact on advertising prices in the U.S. radio broadcasting industry. While it is in general difficult to measure the effect of multimarket contact on competition, the 1996 Telecommunications Act substantially relaxed local radio ownership restrictions, giving rise to a major and exogenous consolidation wave. Between the years of 1995 to 1998, the average extent of multimarket contact in major U.S. media markets increased by 2.5 times. Importantly, the extent of change in multimarket contact varies across markets, and the change in multimarket contact varies separately from the change in concentration. Using a panel data set on 248 geographic U.S. radio broadcast markets, 1995-1998, we find that multimarket contact has little effect on advertising prices. This paper contributes to the empirical literature on multimarket contact by analyzing a different industrial context and using longitudinal data surrounding an ownership deregulation.

Brand Competition in CPG Industries: Sustaining Large Local Advantages with Little Product Differentiation

In direct competition between national brands of consumer packaged goods (CPG), one often has a large local share advantage over the other despite that the products are similar. I present an explanation for these large and persistent advantages in the context of local competition on perceived quality or image. The main result of the analysis is a relation between varying degrees of horizontal product differentiation and local share advantages. Namely, I find that local share advantages can be sustained especially if competing brands are objectively similar. Conversely, local share advantages can not be sustained if brands are dissimilar. This paper provides two independent intuitions for this result. First, if brands are objectively similar, different levels of investments in local quality perceptions can co-exist in the same market. Specifically, if it pays to do so, early movers will invest in high perceived quality. Late movers have reduced incentives to invest because of subsequent demand sharing and price competition. Second, if the perceived quality advantages are geographically distributed across competitors, the above argument is reinforced by multimarket contact. Even if local brand building is free, firms have an incentive to sustain asymmetric market shares because, holding total demand constant, multimarket profits are increasing in share variation, i.e., monopoly power, across regions. This increase is steeper when the products are similar, because price competition looms large.