IMPERFECT COMPETITION AND STRATEGIC TRADE THEORY: WHAT HAVE WE LEARNED

International Relations/Trade,

The Duopolistic Firm with Endogenous Risk Control: Case of Persuasive Advertising and Product Differentiation

In this paper, a two-period game is constructed, where duopoly firms choose advertising strategies in the first period and compete in price or quantity in the second period by maximizing the value of firm equity. Using certainty equivalence, we demonstrate the impacts of uncertainty and modes of competition on duopoly firms' optimal pricing, production, and advertising strategies. Equilibrium price and quantity outcomes emerge as significantly different from the standard industrial organization model of profit maximization. It turns out that the common measurement of market power, the Lerner index, is generally mis-stated. In contrast to the literature, we also find that firms will optimally switch from quantity to price competition either when advertising costs are low, demand is high, or if idiosyncratic risk is reduced. A series of simulations confirm these findings.

Market Value Maximization through Strategic Delegation

In this paper, we develop a model of strategic delegation in which shareholders maintain an objective of market value maximization (MVM) of the firm's assets as measured by a capital asset pricing model (CAPM). Optimal delegation requires that managers maximize a linear combination of expected profits and firm values. An interesting feature of this model is that optimal delegation contracts of the MVM objective mitigate competition relative to standard price and quantity duopoly outcomes. In the MVM model, the delegation encourages managers to control systematic risk, which leads to greater market coordination, higher profits, and higher stock values. Impacts of degree of product differentiation on delegation under price and quantity competitions are also explored extensively. Our findings show that concerns about identifying the mode of competition are overstated in the literature.Market Value Maximization, Strategic Delegation, Quantity Competition, Price Competition, Product Differentiation, Marketing,

Local Buyer Market Power and Horizontally Differentiated Manufacturers

In this paper we study a farmer-processor relationship, where market power is bidirectional: processors have buyer as well as seller market power. Farmers supply a homogeneous raw input to the processors, which, in turn, process it into a horizontally differentiated product. The analysis shows that the spread between prices that both parties receive can be decomposed into two components: one due to buyer market power in the agricultural input market and one due to seller market power in the differentiated processed market. Farmers receive a decreasing dollar share of the final price as concentration in the processed good market increases. On the other hand, the price spread due to processors' buyer (seller) market power decreases (increases) when farmers' transportation costs shrink and when consumers' strength for brand preference increases. We also examine welfare: while the surplus of farmers serving a specific processor is adversely affected in a more concentrated processed good market, the total surplus of farmers serving all processors is independent of the industry concentration. In addition, consumers are worse off when the processed good market is more concentrated and farmers' transportation costs are larger. While stronger brand preference implies a larger "travel cost" for consumers, it may encourage more processors to join the market and provide more varieties.buyer market power, horizontal differentiation, Agribusiness, Industrial Organization, Marketing, D43, L13, M31, Q13,

Buyer Market Power and Vertically Differentiated Retailers

We consider a model of vertical competition where downstream firms (retailers) purchase an upstream input from a monopolist and are able to differentiate from each other in terms of quality. Our primary focus is to study the effects of introducing a large retailer, such as a Wal-Mart Supercenter, that is able to lower wholesale prices (i.e. buyer market power). We obtain two main results. First, the store with no buyer market power responds to the presence of the large retailer by increasing its quality, a finding that is consistent with recent efforts by traditional retailers to enhance shoppers’ buying experience (i.e. quality). Second, the presence of a large retailer causes consumer welfare to increase. There are, however, two reasons for the increase in consumer welfare: consumers gain from the large retailer’s low price (because the upstream discount is partially passed on to the retail price) as well as from the high quality level offered by the traditional retailer. Contrary to the conventional wisdom most of the consumer welfare gains seem due to the latter. The intuition for this result is that price competition softens substantially as a result of firms’ quality differentiation. We also investigate the effects of buyer market power on retail and wholesale prices as well as on producer welfare.buyer market power, vertical differentiation, Wal-Mart

Structural Change in the U.S. Food Manufacturing Sector

This study examines the market structure-conduct-performance relationship for 48 four-digit SIC Food and Tobacco Processing Industries during the 1970s, 1980s and 1990s. The simultaneous-equation analyses are used to explore the relationship among price-cost margin (PCM), market concentration, advertising outlay, and various control variables. With an intertemporal setting, our findings provide evidence of structural changes over time in the U.S. food manufacturing sector and support some of the conventional SCP wisdoms, but challenge others.Agribusiness,

Strategic Pricing Behavior under Asset Value Maximization

This paper investigates a comprehensive assessment of firm strategic behavior under financial market uncertainty. A general theoretical model of market value maximization (MVM) is constructed using a traditional capital asset pricing format. The model built on the nonlinear Almost Ideal Demand Systems (AIDS) and structural first-order conditions is developed. By full information maximum likelihood (FIML) estimation, the model evaluates pricing strategies in the U.S. margarine and butter retail markets using 4-week interval scanner data from 1998 to 2002. The model of profit maximization is rejected in favor of the MVM structure, and it indicates that financial market uncertainty plays an important role in the pricing behavior in this industry. We estimate the price elasticities of demand for leading brands and investigate the degree of market power in this industry.Market Value Maximization, AIDS, FIML, Model Selection, Risk and Uncertainty,

Market Value Maximization through Strategic Delegation

In this paper, we develop a model of strategic delegation in which shareholders maintain an objective of market value maximization (MVM) of the firm’s assets as measured by a capital asset pricing model (CAPM). Optimal delegation requires that managers maximize a linear combination of expected profits and firm values. The model allows for a much deeper consideration of an investor’s view of risk that, up until now, has been widely ignored in the delegation and industrial organization literature. In particular, we focus on the CAPM’s distinction of nondiversifiable risk as opposed to the more general concept of profit or revenue variability. The results indicate that strategic delegation of the MVM objective mitigates competition in both price and quantity games relative to the standard profit maximization objective. We further show that the prisoner’s dilemma common in quantity delegation games is functionally impractical because shareholders would have to reward managers for lower stock values. In addition, we demonstrate that the disparity of equilibrium outcomes in quantity and price games is smaller with delegation than without delegation. As products become more differentiated, the mentioned difference becomes very small. The results suggest that mode of competition issues remain important but are less pressing than commonly believed

The determinants of a pornography actress’s career life

Statistics on Japanese adult video (A.V.) indicated that it is an industry that produces over 4500 videos every month and has recently provided 5.27 hundred million U.S. dollars a year. All related stories and sex toys promote the culture and trades of sex goods in Japan at home and abroad. They even affect the mass in sexual life, knowledge, chats as well as values in both good and bad ways. Nonetheless, almost no empirical analysis exists of this industry. This study investigates empirically the influences of debuting age, risky-sex movies and other related factors on the career life of Japanese A.V. actresses. By analysing data concerning the Japanese A.V. actresses whose careers commenced between 2002 and 2014, the authors found that the larger the cup size of an actress, the more likely she also serves as a model entertainer, and the longer she stays. On the contrary, an A.V. actress has to retire earlier or leave the industry because of a later starting age or the numbers of risky-sex movies she has produced