Volume 18, Issue 8:

Barry J. Seldon, R. Todd Jewell & Daniel M. O´Brien  

"Media Substitution and Economies of Scale in Advertising"

JEL codes: L13; M37; D21
Keywords: Advertising; economies of scale, media substitution; advertising bans; beer

Abstract: Two important issues in the economics of advertising are media substitutability in generating sales and scale economies in advertising. If media are substitutes then partial bans, e.g., broadcast bans on cigarettes or alcohol beverages, may be ineffective;  and mergers among radio and TV firms, currently widespread in the U.S. and Mexico, are unlikely to result in market power in setting advertising rates. If there are scale diseconomies in advertising, concerns that advertising increases entry barriers may be unfounded. Using U.S. beer firm data over 1983:Q1-1994:Q4 for three media categories, we find evidence of high substitutability and diseconomies of scale.

Bhattacharya, M. & Bloch, Harry

"The Dynamics of Industrial Concentration in Australian Manufacturing"

JEL codes: L11, L60
Keywords: industry concentration, barriers to entry, dynamic adjustment

Abstract: A dynamic model of concentration is developed, with incomplete and industry-specific adjustment to devistions of concentration from its steady state. Cross-sectional analysis is carried out against a sample of 102 Australian manufacturing industries at the Australian Standard Industrial Classification (ASIC9 four-digit level over the period 1977/78 to 1984/85. The estimated adjustment is found in studies of the more mature industrial economies and this adjustment is found to significantly increase with reductions in tariff protection. There is also empirical support for John Sutton´s argument that the relationship between concentration and market size depends on whether set-up costs are exogenous.

Haynes, Michelle, Steve Thompson and Mike Wright

"The determinants of corporate divestment in the UK "

JEL codes: G34; C25
Keywords: Divestment; Diversification; Count Data Analysis; Corporate Refocusing

Abstract: It has been widely suggested that since the early 1980s many  diversified firms narrowed the scope of their activities by refocusing on their core businesses, primarily through divestment activity. This study examines the extent and determinants of divestment across a large sample of UK firms over the period 1985 to 1989. Divestment is then analyzed using both a proportions and count data (Poisson and Negative Binomial regressions) approach. The results confirm that corporate divestment is not merely a reflection of managerial idiosyncracies or mean reversion behaviour in the activities undertaken, but is a purposeful response to exogenous change in a manner broadly consistent with both the agency theoretic and strategic views of the firm.

Erik Dietzenbacher, Bert Smid and Bjørn Volkerink

"Horizontal integration in the Dutch financial sector "

JEL codes: G20; L13; L41
Keywords: Cournot; Bertrand; Horizontal Integration

Abstract: In this paper, the consequences of cross-shareholding in an n-firm industry are analyzed. Our attention is focused on the case where firms have silent interest in each other. These interests can be direct or indirect. We analyze the effects of cross-shareholding on the price-cost margins in a Cournot and a Bertrand setting. In all cases, competition is reduced due to shareholding interlocks. As an empirical example, the Dutch financial sector is used. Comparing the case of shareholding with the case of no-shareholding, the price cost margins are found to be up to 2% higher in a Bertrand-market, and 8% higher in a Cournot market.

Kjerstad, E. & Vagstad, S.

"Procurement auctions with entry of bidders"

JEL codes: D44; D82; L51
Keywords: incentives contracts; auctions; entry; procurement

Abstract: In procurement auctions with a fixed number of bidders there is a tradeoff between cost efficiency and rent extraction. An optimal mechanism therefore entails distortions of effort (Laffont and Tirole, 1987). If potential suppliers must sink an entry investment before they can participate in the auction, then decreasing the firms´rent may imply reduced entry. We show that if potential bidders are uninformed before entry, commitment to a plain, nondistortive auction is optimal. In contrast, if potential bidders learn all their private information before entry, the optimal mechanism entails the same distortions as in Laffont and Tirole´s static model.

Herguera, I., Kujal, P. & Petrakis, E.

"Quantity restrictions and endogenous quality choice"

JEL codes: F12
Keywords: Vertically Differentiation; Quotas; VERs; Quality Downgrading

Abstract: In a vertical product differentiation model under Cournot competition both foreign and domestic firms respond by lowering their investment in long run quality for a quantity restriction at, and in the neighborhood of, the free trade import level. Average quality increases only when the low quality foreign firm faces a substantially restrictive quota/VER. The change in quality depends on whether the foreign  firm  is of high or low quality and upon the restrictiveness of the quota. The imposition of quantity restrictions has important strategic effects on the long run choice of quality.

Roy, Santanu

"Strategic Segmentation of  a Market"

JEL codes: L13, L43, O17, D63
Keywords: Segmentation, Fragmentation, Advertising, Direct Marketing, Oligopoly

Abstract: When competing firms target information towards specific consumers through diredt marketing activities, complete segmentation of markets can result. We analyze a two-stage duopoly where, prior to price competition, each firm targets information to specific consumers and only consumers informed by a firm can buy from it. This has the effect of endogenously determining market segments in a model of "sales". In equlibrium, pure local monopoly emerges, firms target and sell to mutually exclusive market segments. When the cost of marketing approaches zero, market shares reflect relative production efficiency (equal shares when firms are symmetric); this may not be the case when marketing cost is high.

Todd R. Kaplan

"Effective price-matching: a comment"

JEL codes: L10
Keywords: price-matching, price-beating, monopoly pricing

Abstract: Corts (1995) showed that when allowing for price-beating policies in addition to price-matching policies, the competitive outcome prevails in lieu of monopoly pricing. I show by expanding the strategy set further to include effective price strategies, the possibility of monopoly pricing is restored.