Anticompetitive vertical mergers waves

This paper develops an equilibrium model of vertical mergers. We show that competition on an upstream market between integrated firms only is less intense than in the presence of unintegrated upstream firms. Indeed, when an integrated firm supplies the upstream market, it becomes a soft downstream competitor to preserve its upstream profits. This benefits other integrated firms, which may therefore choose not to cut prices on the upstream market. This mechanism generates waves of vertical mergers in which every upstream firm integrates with a downstream firm, and the remaining unintegrated downstream firms obtain the input at a high upstream price. We show that these anticompetitive vertical mergers waves are more likely when downstream competition is fiercer.

Upstream Competition between Vertically Integrated Firms

We propose a model of two-tier competition between vertically integrated firms and unintegrated downstream firms. We show that, even when integrated firms compete in prices to offer a homogeneous input, the Bertrand result may not obtain, and the input may be priced above marginal cost in equilibrium, which is detrimental to consumers' surplus and social welfare. We obtain that these partial foreclosure equilibria are more likely to exist when downstream competition is fierce. We then use our model to assess the impact of several regulatory tools in the telecommunications industry.Vertical foreclosure, vertically-related markets, telecommunications.

Anticompetitive vertical mergers waves

This paper develops an equilibrium model of vertical mergers. We show that competition on an upstream market between integrated firms only is less intense than in the presence of unintegrated upstream firms. Indeed, when an integrated firm supplies the upstream market, it becomes a soft downstream competitor to preserve its upstream profits. This benefits other integrated firms, which may therefore choose not to cut prices on the upstream market. This mechanism generates waves of vertical mergers in which every upstream firm integrates with a downstream firm, and the remaining unintegrated downstream firms obtain the input at a high upstream price. We show that these anticompetitive vertical mergers waves are more likely when downstream competition is fiercer

Trading and Liquidity with Limited Cognition

We study the reaction of financial markets to aggregate liquidity shocks when traders face cognition limits. While each financial institution recovers from the shock at a random time, the trader representing the institution observes this recovery with a delay, reecting the time it takes to collect and process information about positions, counterparties and risk exposure. Cognition limits lengthen the recovery process. They also imply that traders who find their institution has not yet recovered from the shock place market sell orders, and then progressively buy back at relatively low prices, while simultaneously placing limit orders to sell later when the price will have recovered. This generates round trip trades, which raise trading volume. We compare the case where algorithms enable traders to implement this strategy to that where traders can only place orders when they have completed their information processing task

Trading and Liquidity with Limited Cognition

We study the reaction of financial markets to aggregate liquidity shocks when traders face cognition limits. While each financial institution recovers from the shock at a random time, the trader representing the institution observes this recovery with a delay, reecting the time it takes to collect and process information about positions, counterparties and risk exposure. Cognition limits lengthen the recovery process. They also imply that traders who find their institution has not yet recovered from the shock place market sell orders, and then progressively buy back at relatively low prices, while simultaneously placing limit orders to sell later when the price will have recovered. This generates round trip trades, which raise trading volume. We compare the case where algorithms enable traders to implement this strategy to that where traders can only place orders when they have completed their information processing task

Trading and Liquidity with Limited Cognition

We study the reaction of financial markets to aggregate liquidity shocks when traders face cognition limits. While each financial institution recovers from the shock at a random time, the trader representing the institution observes this recovery with a delay reflecting the time it takes to collect and process information about positions, counterparties and risk exposure. Cognition limits lengthen the market price recovery. They also imply that traders who find that their institution has not yet recovered from the shock place market sell orders, and then progressively buy back at relatively low prices, while simultaneously placing limit orders to sell later when the price will have recovered. This generates round trip trades, which raise trading volume. We compare the case where algorithms enable traders to implement this strategy to that where traders can place orders only when they have completed their information processing task.

Intergenerational Risk Sharing in Life Insurance: Evidence from France

We study intergenerational risk sharing taking place in one of the most common retail investment products in Europe---life insurance savings contracts---focusing on the 1.4 trillion euro French market. Using regulatory and survey data, we show that contract returns are an order of magnitude less volatile than the returns of assets backing the contracts. Contract return smoothing is achieved using reserves that absorb fluctuations in asset returns and that generate intertemporal transfers across generations of investors. We estimate the average annual amount of intergenerational transfer at 1.4% of contract value, i.e., 17 billion euros per year or 0.8% of GDP. While theory asserts that intergenerational risk sharing cannot take place in competitive markets because it relies on non-exploited return predictability, we show that: (a)~contracts returns are indeed predictable; (b)~investor flows barely react to predictable returns; (c)~observed fees offset the estimated gain from exploiting contract return predictability

Limits of limits of arbitrage: Theory and evidence

Abstract We present a model where arbitrageurs operate on an asset market that can be hit by information shocks. Before entering the market, arbitrageurs are allowed to optimize their capital structure, in order to take advantage of potential underpricing. We …nd that, at equilibrium, some arbitrageurs always receive funding, even in low information environments. Other arbitrageurs only receive funding in high information environments. The model makes two easily testable predictions: …rst, arbitrageurs with stable funding should experience more mean-reversion in returns, in particular following low performance. Second, this larger mean-reversion should be lower, if many other funds have stable fundings. We test these predictions on a sample of hedge funds, some of which impose impediments to withdrawal to their investors

Limits of Limits of Arbitrage: Theory and Evidence

Mimeo, 2009We present a model where arbitrageurs operate on an asset market that can be hit by information shocks. Before entering the market, arbitrageurs are allowed to optimize their capital structure, in order to take advantage of potential underpricing. We find that, at equilibrium, some arbitrageurs always receive funding, even in low information environments. Other arbitrageurs only receive funding in high information environments. The model makes two easily testable predictions: first, arbitrageurs with stable funding should experience more mean-reversion in returns, in particular following low performance. Second, this larger mean-reversion should be lower, if many other funds have stable fundings. We test these predictions on a sample of hedge funds, some of which impose impediments to withdrawal to their investors

Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?

We study whether R&D-intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax-induced changes to R&D cost. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (by about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained R&D allowing firms to increase product differentiation. As a result, while firms in import-competing industries cut capital expenditures and employment, R&D-intensive firms downsize considerably less