186
Aalto-Setälä, Ville
Economies of scale, concentration and market power in oligopolistic market
Abstract: This paper examines the relationship between store-level economies of scale, concentration and market power in grocery retailing. The Geographical Information System (GIS) was used to delineate market areas for stores and analyse the nature of competitiveness. The results showed store-level economies of scale to exist in grocery retailing. The biggest stores had the lowest prices on average. Store-level concentration was not found to increase the market power of the retailing groups, if their market shares were fixed. However, a large capacity share of a retailing group in a market area increased the market power of the group. Another factor which raised the price level was multimarket contact.
Key words: Economies of scale, Market power, Imperfect competition
JEL classification: L13, L81, L41

257
Acutt, Melinda
Elliott, Caroline
Regulation and contestability
Abstract: This paper suggests an original link between the theory of contestable markets and firm regulation. When hit and run entry is believed to be a non-credible threat, potential entry may not constrain incumbent firms’ pricing and production decisions. However, the credible threat of intervention by a regulator may impact upon incumbent firms’ decisions. A theoretical model verifies that the threat of regulator intervention can be credible. Prices in the English and Welsh electricity pool market are then investigated to discover whether the threat of regulator intervention may have influenced the pricing strategies of the dominant firms in this market.
Key words: Contestable markets, Regulation, Utility industries
JEL classification: L4, L5, L9

387
Aiginger, Karl
Wolfmayr, Yvonne
Market size and the degree of specialization
Abstract: The impact of an increase in market size on the market structure has received increasing attention in different strands of economics. Industrial organization provides predictions how concentration behaves if the size of the market is extended, forecasting that differences arise between industries with exogenous and those with endogenous sunk costs. Traditional trade theory emphasizes the extended possibilities to increase specialization, if markets increase by integration or giobalization. Economic geography emphasizes that the influence on an reduction of trade costs may be non linear, first leading to agglomeration and then to regional dispersion. The integration process in Europe and the forces of globalization provide a unique experiment to test these theories with empirical material. We use data on intra and extra trade in Europe, as well as a database on production and employment to investigates first the pattern of European specialization and then the changes over the last 10 years. We investigate how these trends depend on those variables expected to be important in Industrial Organization: economies of scale sunk costs, product differentiation, type of competition.

19
Almus, Matthias
Nerlinger, Eric A.
Testing Gibrat's law for young firms - empirical results for Western Germany
Abstract: The present paper deals with the question whether "Gibrat's law" is applicable to firms founded between 1989 and 1996 within the Western German manufacturing sector or not. The underlying assumption is that size of a firm has no influence on its growth. Growth is rather determined by a process of random influences. Using data from the ZEW-Foundation Panel (West), "Gibrat's law" is rejected for the group of innovative as well as for the group of non-innovative young firms. This confirms the results of a number of empirical studies, indicating that smaller firms have larger growth potential then larger ones.
Key words: Young innovative firms, New technology-based firms, Employment Growth, Gibrat's law
JEL classification: L11, L60

354
Anderson, Simon P.
de Palma, André
Price dispersion, reservation prices, and boundedly rational consumers
Abstract: We model consumer behaviour by a simple rule that describes purchase decisions for goods that are (typically) infrequently purchased and constitute a small fraction of the consumer's budget. Consumers are assumed to be equally likely to buy any product that meets their minimum requirements. Thus we model individual choice by recourse to a simple reservation price formulation whereby a consumer buys the first good encountered that is priced below the reservation price. This description of consumer behaviour builds on an approach proposed by Tversky and used in theoretical and empirical studies in psychology and marketing. We show how prices can be introduced in a coherent manner in the Tversky framework, and we aggregate over consumers with differing discriminatory thresholds to yield market demand functions. We illustrate within the context of a linear demand model. The oligopoly model yields several testable hypotheses. First, equilibrium prices are dispersed, and the range of prices increases with the number of firms, but the gap between any pair of prices falls, which corresponds to a thicker price distribution. Profits (and equilibrium demand) are higher the lower the price of the firm in the price ranking. In the limit as the number of firms gets large, (demand-weighted) prices tend towards the competitive level and profits converge to zero for all firms. Moreover, the ratio of profits across different firms is bounded. The oligopoly outcome is compared to that of a multiproduct monopolist. The monopolist price discriminates in a manner akin to the "Noisy Monopolist" a la Salop, and sets more dispersed prices than would single-product firms. We also show that the presence of "economists" who necessarily buy the cheapest product can actually increase prices in equilibrium, so that these bargain-hunters impart a negative externality on the other consumers, in contrast to the usual idea that rational consumers improve the efficiency of markets.

1
Antonelli, Cristiano
Localized technological change and economies of growth: the case of Fiat: 1900-1970
Abstract: Fiat is to-day one of the leading European car manufacturers. One hundred year after foundation, its growth offers an unique opportunity to analyze empirically the role of technological knowledge in economies of growth. The interaction between localized technological change and output growth, because of the interplay between switching costs and localized learning capabilities, is elaborated and tested for the Fiat case. The dynamics of growth of output and technological changes, as measured by patent data, in the period 1900-1970 for the leading Italian car company provides strong evidence on the spiralling recursive dynamics of growth and innovation.
Key words: Technological change, Growth, Patents
JEL classification: O33

112
Aquino, Antonio
Competition policy and fiscal benefits for the production of manufactures in Southern Italy
Abstract: Southern Italy has a rate of unemployment of more than 20 per cent and net imports of goods and services greater than 13 per cent of GDP. Northern Italy on the contrary, has full employment and net exports of goods and services for more than 8 per cent of GDP. This means that the price of labour is higher than the equilibrium level in the South and lower in the North; a competitive equilibrium requires a monetary price of labour in the South about two thirds that in the North. This could be obtained either through lower monetary wages in the South, or through taxation on labour employed in tradable sectors higher in the North than in the South. The choice is a political one. This paper argues that the objections of the European Commission to fiscal benefits for southern tradable production on fairness of competition grounds do not seem to have a firm theoretical basis.
Key words: Competition, Southern Italy, Fiscal benefits
JEL classification: L40

277
Arocena, Pablo
Waddams Price, Catherine
Generating efficiency: the power of price caps in the public and private Spanish electricity sectors
Abstract: Economic regulation of firms with market power has placed increasing emphasis on incentive-based regulation such as price caps. The move to such regulation often coincides with a change of ownership, making it difficult to separate the incentive effects. We use data envelopment analysis to analyse response to a price cap type regulation on publicly and privately owned Spanish electricity generators from 1988. We find that public firms are on average more efficient than private firms at the beginning of the period, but that private firms respond more actively to the incentives of price caps, and that the constitution of the efficiency changes differs between the sectors.
Key words: Price Cap Regulation, Total Factor Productivity, Electricity
JEL classification: L51, L94, D24

34
Arvanitis, Spyros
Hollenstein, Heinz
The determinants of the adoption of advanced manufacturing technology (AMT) - an empirical analysis based on firm-level data for Swiss manufacturing
Abstract: The paper investigates the decision of firms to adopt "Advanced Manufacturing Technologies" (AMT) based on a comprehensive specification of a "rank model" of technology adoption using firm-level data for Swiss manufacturing. The model takes account of many dimensions of the (anticipated) benefits from and costs of technology adoption allowing for uncertainty as well as for information and adjustment costs. Moreover, the effect of complementarities between various functional groups of AMT (design, fabrication, communication) as well as of learning from the use of previous technology vintages within such functional groups is analyzed. Finally, the size-dependency of the adoption decision is studied in some detail.
Key words: Technology adoption, Size-dependency of adoption decisions, Technological complementarities, Learning from technology use, Advanced manufacturing technologies
JEL classification: O31, O33

168
Arvidsson, Niklas
Asplund, Marcus
Eriksson, Rickard
Liquidity constraints and price adjustments
Abstract: We examine how Swedish newspapers adjusted their prices during the 1990-1992 recession and the 1994-1996 recovery. The data allows us to test if liquidity constrained firms raised prices in markets with high switching costs in order to avoid default. We also test if firms operating in more competitive markets behave differently in the two periods. There is evidence that firms with low solvency raised prices of subscriptions - where consumers’ switching costs are high - more than others when entering the recession. This effect is not present in the market for advertising space, where switching costs are of minor importance.
Key words: Liquidity constraints, Switching costs, Price adjustment, Newspaper industry
JEL classification: D43, E32, G33, L82

165
Asaba, Shigeru
Lieberman, Marvin
Why do firms behave similarly? A study on new product introductions in the Japanese soft-drink industry
Abstract: We analyze new product introductions in the Japanese soft-drink industry to distinguish among theories of why firms exhibit similar behaviour. Some theories suggest that firms mimic others with comparable resource endowments in order to mitigate rivalry or to minimize risk. Other theories suggest that imitation economizes on information costs. The empirical results provide support for both sets of theories, but in different contexts. Findings suggest that bunching of entry into emerging product markets is largely the result of economizing on information costs, whereas bunching of product introductions within established categories is caused more by competitive interaction among similar firms.
Key words: Behavioural similarity, New product introduction, Herd behaviour, Competitive interaction
JEL classification: L13, L66

25
Asplund, Marcus
On the size distributions of firms and markets
Abstract: Two weak restrictions on equilibrium market structures are that firms who decide to enter make sufficient profits to cover entry costs and fixed costs of production, and that no new firm could profitably enter. I examine these restrictions by the size distribution of firms in the same industry, but who compete in different geographical markets. The industry is characterised by small exogenous entry costs, comparatively large fixed costs of production, negligible efficiency differences, and primarily spatial product differentiation. The inherent symmetry of conditions results in a strong tendency towards equal sized firms within markets. Market structures with many small firms are never observed and rarely are those with a few large firms, thereby illustrating the bite of the two restrictions.
Key words: Size distribution of firms, Market structure, Market size, Exogenous sunk costs, Driving schools
JEL classification: L11, L84

170
Asplund, Marcus
Friberg, Richard
Retail price levels and the concentration of wholesalers, retailers, and hypermarkets
Abstract: Food is a principal component of most household budgets and food prices exhibit substantial regional differences. We explain price variation across grocery retailers by the concentration of wholesalers and retailers, and the local market share of hypermarkets. We use retail prices of specific products from a large (unbalanced) panel of stores in Sweden that operate in many regional, well-defined, markets. Our results show that concentration at the wholesale level is an important determinant of prices. The price effect of retail concentration and hypermarket market share are statistically significant but small in economic terms. The pass-through of a large reduction in VAT was roughly the same (0.7) across products and markets.
Key words: Firm concentration, Market structure, Price competition, Grocery retail, Grocery wholesale
JEL classification: D43, L13, L81

231
Athey, Susan
Schmutzler, Armin
Innovation and the emergence of market dominance
Abstract: We introduce a general dynamic model of oligopolistic competition that incorporates models of incremental investment, patent races, networks and learning-by-doing as special cases. We use this model to investigate under which circumstances firms with low costs or high quality will extend their initial lead. It turns out that many oligopoly models have characteristics that make such increasing dominance likely. However, counterveiling effects might result because leading firms may find it more costly than others to achieve the same increment to their state. This force is particularly salient in models, such as many models of patent races, where firms compete in research investments in an attempt to achieve the same level of technology.
Key words: Innovation Races

271
Baniak, Andrzej
Phlips, Louis
Antitrust enforcement with asymmetric information and Cournot strategies
Abstract: In the context of antitrust enforcement of collusion, we model the situation in which the antitrust authorities are at an informational disadvantage to the firms in the industry regarding the cost structure. We refer to the existing EC policy assuming that the "normal" competitive equilibria are Cournot-Nash equilibria and that tacit collusion is as illegal as explicit collusion. We show that under asymmetric information it is optimal for the antitrust authorities to allow collusion by a low-cost industry, no matter how high are the fines imposed and how low the costs of enforcement are.
Key words: Antitrust enforcement, Collusion

234
Barba Navaretti, Giorgio
Bussoli, Patrizia
von Graevenitz, Georg
Ulph, David
Information sharing, research co-ordination and membership of research joint ventures
Abstract: This paper examines which firms from a heterogeneous pool are more likely to join together and form a RJV. It differs from previous contributions as it introduces a set of realistic hypothesis on the characteristics of research co-operation and information sharing. Research paths can be substitute or complementary. This affects the nature of and consequently the gains from co-operation. The model shows that gains from co-operation are likely to be larger in the second case, as the probability of making a discovery is higher. This paper also assumes that firms do not share information voluntarily if they do not co-operate only when the firms' products are substitute. If the firms' products are complementary there may be gains in sharing information also under non co-operation. This eliminates the gains from co-operation arising from information sharing. If this is the case, RJVs are more likely to be formed between firms producing substitute products. If we combine these two results we have the prediction that firms co-operate in research when they produce substitute products and when they follow complementary research paths. The empirical analysis carried out on a sample of European RJVs confirms and supports this prediction. The model also carefully explores the role of asymmetries in costs between the two firms. It shows that it is not possible to derive clear cut predictions. Under some circumstances larger, asymmetries increase the gains from co-operation and under other circumstances they reduce them. Also this result is supported by the empirical analysis.
JEL classification: O31, O32, L22, F23

47
Barla, Philippe
Constantatos, Christos
Demand uncertainty and airline network morphology with strategic interactions: to hub or not to hub?
Abstract: In this paper, we examine how strategic interactions affect airline network. We develop a three stage duopoly game: At stage 1 airlines determines their network structure (linear versus hub-and-spoke). At stage 2 they decide on their capacities, and at stage 3 firms compete in quantities. The main feature of the model is that firms have to decide on network structure and capacities while facing demand uncertainty. We show that while hubbing is efficient, airlines may choose a linear network for strategic reasons. Furthermore, we show that this structure softens competition by preventing contagion of competition across markets.
Key words: Airlines, Competition, Capacity constraints, Network, Uncertainty
JEL classification: L13, L93

316
Barreda, Iván
Georgantzís, Nikolaos
Vertical relations in horizontally differentiated markets with differentiation costs
Abstract: In a model of spatial competition with vertical relations, we study the role of the costs faced by a maximum of two retailers wishing to differentiate with respect to the variety produced by an upstream firm. The manufacturer decides, first, on the distribution mode and his pricing policies. Then, the retailers decide how much to differentiate from the standard variety subject to the differentiation costs, and they set their prices. We show that the role of differentiation costs is not trivial, their size being the crucial factor in determining the degree of differentiation among retailers and the distribution mode in equilibrium. Social welfare analysis shows that the distribution modes preferred by the manufacturer are not always socially optimal. These results provide theoretical support to some competition policy decisions.
Key words: Horizontal differentiation, Vertical relations, Differentiation costs
JEL classification: L12, L13, L42

287
Barros, Fátima
A note on internal efficiency in a mixed duopoly
Abstract: In this paper we show that a public firm might be less efficient than a private firm due only to the structure of managers’ contracts. In order to maximize the social welfare the government gives incentives to his manager to behave in a more aggressive way than a private manager, in the product market. A direct consequence of this incentive structure is that the public manager has less incentive to undertake cost reduction activities because he is less penalized for the firm’s costs than a private manager. However despite the fact that the public firm is less efficient at the equilibrium the government chooses to keep the control of the public firm.
Key words: Internal Efficiency, Mixed oligopoly, Strategic contracts
JEL classification: D82, L13, L32

275
Barros, Pedro Pita
Martinez-Giralt, Xavier
Public and private provision of health care
Abstract: An issue present in (nearly) all policy discussions of the past two decades is cost containment. The rise of health care expenditures to unpredicted levels has lead to a general concern about costs. The introduction of market (or market-like) mechanisms has been advocated as one of the ways to keep costs under control. However, there is not much knowledge on the working of such markets, applied to the specific features and institutions of health care. Here, we compare the performance of different reimbursement schemes in a mixed public-private market structure. This allows for a discussion of attractiveness of different regimes to a cost-concerned health authority.
Key words: Mixed oligopoly, Health care
JEL classification: I11, I18, D43, L13

274
Barros, Pedro Pita
Olivella, Pau
Patient selection for private treatment under public health service waiting lists
Abstract: We develop a model of waiting lists for public hospitals when physicians deliver both private and public treatment using the same public hospital equipment. Public treatment is rationed. Both physicians and patients take into account that each patient treated in the private practice schedule reduces the waiting list for public treatment. We show that physicians do not necessarily cream skim the less severe cases even if physicians are completely selfish. We explore the consequences of changes in the health administration’s rationing policy on patients’ and doctors’ behaviour. We also explore the consequences of allowing doctors to determine the rationing policy.
Key words: Public versus private health services, Waiting lists, Patient selection, Non-urgent treatments
JEL classification: I11, I18

97
Barut, Yasar
Kovenock, Dan
Noussair, Charles
A comparison of multiple-unit all-pay and winner-pay auctions under incomplete information
Abstract: This paper examines the properties of independent-private-value all-pay and winner-pay auctions when there are multiple units sold. We study bidding behaviour, efficiency and revenue in a set of nine experimental sessions, each with six bidders. All-pay auctions were played in six of the sessions, three sessions with four units and three sessions with two units auctioned. A four-unit winner-pay auction was played in three of the sessions. Our data show that the all-pay auction and the winner-pay auction are empirically revenue equivalent and yield higher revenue than the risk neutral Bayesian equilibrium. Revenue is higher in the all-pay auction when K=2 than when K=4, despite the fact that Bayesian equilibrium revenues are identical for the two cases. Our evidence also suggests that the winner-pay auction is more likely to lead to a Pareto-efficient allocation than the all-pay auction. This appears to result from both the failure of monotonicity of the individual bidding functions and the existence of bidder heterogeneity in the all-pay auction.

235
Bassanini, Anna
Nastasi, Alberto
Competition in the rail transport sector and the problem of track allocation
Abstract: The process of railway liberalization in Europe involves separating infrastructure management from operations and opening network access to competing transport operators. These changes imply devising a decentralized capacity allocation mechanism and a pricing scheme for track access. This paper proposes a game-theoretic model where profit-maximizing transport operators are allocated rail capacity by the infrastructure manager based on their requests, and accordingly set service prices for the final users. Effective train schedules and access fees are determined through a non-discriminatory mechanism which is applied to rail lines in order of decreasing importance in order to ensure coordination between services offered on different lines.
Key words: Railway degeneration, Infrastructure access, Generalized nash game
JEL classification: L92, C72, L13

115
Battisti, Giuliana
The replacement of the old with the new: the decision to invest in a new technology
Abstract: Nearly all existing economic literature on technology diffusion concentrates upon the pattern of adoption across firms (i.e. inter-firm diffusion). Despite its relevance, the pattern of adoption within firms (i.e. intra-firm diffusion) has been almost completely ignored. Based upon a sample of UK firms it is proved that the level of intra-firm diffusion accounts for most part of the spread of a new technology within an industry. This paper criticises the existing literature and presents a new equilibrium. Intra-firm model of technology diffusion based on investment functions. This model suggests that the level of usage of a new technology within a firm is independent of market concentration and it is mostly driven by its cost and its relative technological performance.
Key words: Technological diffusion, Investment function
JEL classification: O3, E2

118
Battistini, Alberto
Specificity of investments and efficiency of institutional arrangements: costs and benefits of grouping economic organizations
Abstract: assuming potentially imitable investments, in this paper it is argued that, while a quasi-rent is always necessary for specificity, it is also sufficient only when the analysis is restricted to bilateral relations. When multilateral relations are considered, in fact, one can have a quasi rent without specificity simply by imitating an existing investment yet to be overtaken by subsequent innovations. From, this reasoning two propositions follow. First, in explaining economic institutions, a "free-riding organizational" problem must be added to that of "hold-up". Second, a grouping form of economic organization, based on non market relationships at the level of the group and on market relationships within the group, can emerge as a solution to the resulting tendency to over-or under-invest. Applications to the actual forms of institutional regulation between cooperation and competition in some post-fordist production modes are also provided.
JEL classification: L11, L22

172
Beaudry, Catherine
Enterprise in orbit: the supply of communication satellites
Abstract: The objective of this study is to develop a general understanding of the evolution of the commercial communication satellite supply industry. Initial information classifies this industry as an oligopoly with the vendors as price setters. Over three generations, the technical attributes of communication satellites are advancing. Taking the hedonic regression approach, satellite prices are shown to decrease over time. Exploring the relationship between price and complexity, it is demonstrated that in the short-run the oligopoly structure of this industry is accompanied by a simple form of cost-plus price-setting, while in the long-run, the engineering satellite pricing ‘rule of thumb’ applies.
Key words: Hedonic prices, Technical change, Mark-up pricing, Oligopoly
JEL classification: L11, L63, O30

173
Beaudry, Catherine
Swann, G. M. Peter
Clusters, growth and the age of firms: a study of seven European countries
Abstract: This paper studies how firm performance is influenced by the strength of the industrial cluster (or industrial district) in which it is located. The paper presents estimates of firm-level growth models for a range of 2-digit industries in seven European countries. In these models, employment in the firm’s own sector and employment in other sectors is taken as a measure the strength of the cluster. Strong positive clustering effects are found in many industries, but nevertheless some clustering effects are negative. The age distribution of firms by region also yields some useful insights into the economic health of different regions.
Key words: Industrial clusters, Growth, Age distribution of firms, Firm performance
JEL classification: L10, O40, R12

157
Becchetti, Leonardo
Salloum, Damian
The choice of financial structure for ownership controlled firms
Abstract: The paper investigates the choice of financial structure for a large sample of small-medium ownership controlled (OC) firms. It finds that entrepreneurial risk and agency costs between debt holders and equity holders (which generate the so called "asset substitution" effect) are much more relevant than agency costs between managers and stockholders in explaining leverage for these types of firms in which there is no strong separation between ownership and control and personal wealth is often at risk. Empirical findings show that balance sheet proxies of firm return and risk are negatively correlated with firm leverage and the significance of additional variables which have a role in explaining the choice of financing structure (family ownership, poor human capital, size for small firms) seem to be explained by additional risk factors which are not well captured by the balance sheet proxies. Our results have interesting policy implications and seem to suggest that policy measures aimed at reducing entrepreneurial risk for small firms (upsizing, improvement of workers human capital, ..) may significantly increase their access to external finance.

335
Becker, Wolfgang
Peters, Jürgen
Technological opportunities, absorptive capacities and innovation
Abstract: The aim of the paper is to analyze the effects of technological opportunities on the innovation activities of firms, depending on their absorptive capacities. The importance and impacts of the ability of firms to use external knowledge sources were inquired especially for external knowledge stemming from scientific research. Using a simple theoretic model, different innovation effects were empirically outlined for the German manufacturing industry for the first time. On the innovation input side, the effects of science-related technological opportunities in combination with absorptive capacities variables are stronger on the intensities as in the estimations without such proxies. Further, the innovation output of firms is positively influenced by the ability to adapt external knowledge efficiently. Firms in the German manufacturing industry with in house absorptive capacities and a high importance of scientific knowledge are characterized by higher sales shares of new and improved products and higher probabilities of patent registrations than other firms.
Key words: Absorptive capacities, Technological opportunities, Scientific knowledge, Innovation
JEL classification: O31, I20, L20, L60

135
Bedi, Arjun S.
Cieslik, Andrzej
Foreign direct investment, wages and wage growth: the case of Poland
Abstract: This paper explores the role of foreign direct investment in promoting the diffusion of knowledge capital. To study this we use data from Poland to examine the effect of foreign participation on wages and wage growth. We find that workers in manufacturing industries with greater foreign presence enjoy higher wages and higher wage growth. Our results display that distinguishing between the type of foreign participation, that is, joint ventures or fully owned foreign subsidiaries, is important in isolating the source of these effects. On the basis of our results, it appears that the positive effects of foreign presence stem largely from joint ventures.
Key words: Foreign Direct Investment, Wages, Wage growth
JEL classification: F23, J31

107
Beloqui, Lander
Usategui, José María
Minimum quality standards with endogenous market coverage
Abstract: This paper analyzes the effects of imposing a minimum quality standard in a duopoly model where firms decide on quality and prices in two stages and where both covered or uncovered market may be endogenous outcomes of the game. A context where firms face quality-dependent fixed linear costs is considered. We show the consequences of the standard in terms of transitions between market configurations, quality levels, prices, firms profits, buyers surplus, sales and market shares, and social welfare. We find situations where the standard induces the low quality firm to increase its quality more than it is required by the standard. Moreover, we prove that there are not incentives to leapfrog neither in the unregulated equilibrium nor in any of the equilibria that may result when a standard is set.
Key words: Minimum quality standard, Vertical differentiation, Market coverage, Linear fixed quality-costs, Leapfrogging
JEL classification: L13, L15, L52

361
Benfratello, Luigi
Beyond profitability: the effect of acquisitions on technical efficiency in the Italian pasta industry
Abstract: Traditional studies on the effects of mergers and acquisitions focus on profitability; on the contrary, this paper measures the effect of acquisitions on acquired firms’ technical efficiency. Using a panel of Italian firms in the pasta industry for the 1981-1997 period I estimate a stochastic production frontier with factors affecting efficiency (i.e. the Battese and Coelli (1995) model) using a translog specification with non-neutral technical progress. The results show that acquisitions have a positive impact on acquired units' technical efficiency.
Key words: Acquisitions, Efficiency
JEL classification: L40, L66

193
Blind, Knut
Driving forces for standardisation at standardisation development organisations: the German experience
Abstract: Derived from theoretical hypotheses, driving forces for the introduction of the ISO 9000 series in innovative service companies are analysed. Based on the Community Innovation Survey (CIS) probit models are estimated with different explaining variables for Germany. In a comprehensive probit model, it turned out that the likelihood of introducing ISO 9000 increases with increased competition, intensive use of safety relevant technologies and service customers as external sources of knowledge. However, in smaller companies and in firms with organisational rigidities the probability to go through the ISO registration procedure is significantly lower. Consequently, the empirical results underline most of the theoretical hypotheses concerning the role of quality standards in service companies.
Key words: Standards, Patents, R&D, Export, Import, Market concentration
JEL classification: F13, L11, O33, O34

159
Bortolotti, Bernardo
Fantini, Marcella
Siniscalco, Domenico
Regulation and privatisation: the case of electricity
Abstract: This paper sheds some light about privatisation in utilities. An empirical analysis based on sales in the electricity sector in 38 countries for the period 1977-97 shows that regulation is a crucial institutional variable in privatisation. Not only it allows governments to increase the pace of divestiture and to sell higher stakes, but also to maximise proceeds reducing regulatory risk. The revenues-efficiency trade-off loses some relevance in electricity privatisation.
Key words: Privatisation, Regulation
JEL classification: G30, L51

160
Bortolotti, Bernardo
Fantini, Marcella
Siniscalco, Domenico
Privatisation, politics, institutions and financial markets
Abstract: Which legal, political, and economic institutions are shaping privatisation processes in the world? This paper addresses the issue presenting new evidence for a sample of 49 countries. From an empirical analysis for the period 1977-96, the decision to privatise appears to be influenced by the political majority and public sector budget constraints, but the success of a privatisation process requires, most of all, appropriate legal institutions and developed capital markets.
Key words: Privatisations, Corporate law, Capital markets
JEL classification: G30, K22

242
Bourreau, Marc
Averaging constraints and adoption strategies in the local loop
Abstract: In this paper, we examine the impact of an averaging constraint between different markets on the adoption strategies of a multimarket incumbent and a potential entrant. This question is motivated by a new access technology, the wireless local loop, which threatens the incumbents positions in the local loop. We develop a simple model of multimarket competition subject to an averaging constraint and study the firms incentives to adopt the new access technology in a dynamic framework. We show that due to averaging constraints the new entrant may preempt the incumbent operator. Finally, we discuss the social efficiency of averaging constraints.
Key words: Telecommunications (local loop), Averaging constraint, Innovation, Preempion
JEL classification: O31, L96, L5

386
Brammer, Stephen
Lyons, Bruce
Is corporate profitability simply a matter of choosing the right industries and producing in the right countries?
Abstract: Corporate profitability is often thought of by industrial organisation economists as a matter of market power and individual efficiency. This paper adopts an alternative approach as a precursor to integrating the insights of IO with the corporate strategy literature. Building on some original research into the disaggregated industrial and international composition of production by leading UK manufacturing firms (including their non-manufacturing activities), we calculate the "expected profits" each firm would obtain if it achieved the average level of profitability in each industry and country in which it operates. We find that this accounts for over half of the variance in actual profit rates. An econometric investigation then seeks to explain the contribution of market share, diversification, multinationality and size to the actual performance of these firms relative to their "expected" performance.
Key words: Corporate profitability, Multinationals, Market share, Diversification
JEL classification: L10, L19

117
Brandão, António
Escaleira, José
Trade policy and tacit collusion with price and quantity competition
Abstract: In this work we use an infinitely repeated game to study the conditions for tacit partition of the international market by two firms each located in one country. We show that this kind of collusion is never an equilibrium solution in the framework of a two stage game where the governments commits first to a tariff rate on imports and after the firms decide to export to the other country or to stay in its country. However, if we allow for the infinite repetition of this game, tacit collusion can be an equilibrium whether we consider quantity or price competition. Moreover, with price competition collusion is a less likely result with higher product differentiation. Welfare, however, is greater when one of the firms deviates.
Key words: Price and quantity competition, Tacit collusion, International duopoly, Trade policy
JEL classification: F13, L13

301
Branston, Robert
A counterfactual price analysis of electricity privatisation in England and Wales
Abstract: The aim of this paper is to challenge the widely held view that electricity privatisation in England and Wales was beneficial simply because the price of electricity has subsequently fallen in real terms. This is done by comparing the electricity prices actually observed with ones that might have been charged had the industry remained in public ownership. In order to do this the paper develops a counterfactual scenario for the likely decisions and effects of a publicly owned industry. This leads the paper to conclude that observed prices are indeed significantly higher than they would have been had privatisation not occurred.
Key words: Electricity, Privatisation, Counterfactual price analysis
JEL classification: L94, C53, L51

221
Branston, Robert
Cowling, Keith
Michie, Jonathan
Sugden, Roger
Strategic decision and the public interest. Modern corporations and the case of soccer
Abstract: This paper considers issues of corporate governance from the perspective of the democratic deficit that characterises most large corporations. An analysis of large corporations shows that there is a widespread problem of hierarchical decision-making that excludes many shareholders from involvement in strategic decisions and tends to serve the narrow interests of an elite few. The issue of who takes decisions, and in whose interests, takes on particular significance in the case of the attempted take-over of Manchester United by BSkyB and the emergence of other media groups showing an interest in English soccer clubs. In the absence of regulation, vertical integration between software providers (soccer clubs) and broadcasters would mean that the interests of the soccer industry would become subservient to those of broadcasting (which is controlled by a handful of firms). The authors argue that if corporations are to be governed in the "public interest" the governance process needs to be characterised by more participation and democracy. They suggest that this might be achieved by a regulator for football (currently under consideration by the UK government’s Football Task Force due to report by this summer) with responsibilities that would include monitoring the activity of clubs to ensure effective representation of the public interest in strategic decision making.
Key words: Corporate Governance, Competition Policy, Public Interest
JEL classification: L1, L2, L4, L5, L8, D7

166
Braunerhielm, Pontus
Carlsson, Bo
Johansson, Dan
Karaömerlioglu, Dilek C.
The old and the new: the evolution of polymer and biomedical clusters in Ohio and Sweden
Abstract: This paper examines the rapid growth of the polymer-based and biomedical clusters in Ohio and Sweden - two regions of similar size and with similar traditions undergoing similar industrial restructuring. Two issues are addressed: First, why has growth been so strong in these particular clusters, i.e., can we identify the sources of the growth and dynamics in these sectors? Second, why do these two clusters differ in Ohio and Sweden in terms of size, level and type of activity, number and composition of actors, size structure of firms and growth patterns over the last couple of decades? In particular, what is the role of public policies as well as cultural, historical, and geographic factors? Our main conclusions are (1) that there is strong path dependence in both clusters in both countries, and (2) that the key to rapid development is a high absorptive capacity combined with rapid diffusion to new potential users. Our policy discussion addresses these issues.
Key words: Clusters, Evolution, Systems, Polymers, Biomedicine
JEL classification: L23, O30

282
Brito, Duarte
Mergers in spatial competition models
Abstract: In most papers concerning the impact of a merger on profits and welfare, insiders are generally not the most benefited part after the merger. This fact may question the optimality of the merger decision. If outsiders gain more from the occurence of a merger, firms may optimally decide to wait for some merger to happen. This paper analyses the effects of a two firm merger in two similar contexts (Salop's circular model and Von Ungern-Sternberg's pyramid model). In the circular model, outsiders will not necessarily be the most benefited part. This will have implications for the merger decision.
Key words: Mergers, Spatial competition
JEL classification: L10

148
Brouwer, Maria
Entry barriers and limit price: strategies for entrants and incumbents
Abstract: The paper follows up on a debate on the relationship between limit price and long run equilibrium industry structure, which was ignited by Modigliani in 1958, but never satisfactorily concluded. Sylos Labini and Bain had both contended that industry structure is primarily determined by entry barriers, but differed in the formulation of entry preventing price. The paper agrees with Sylos Labini that limit price leaves incumbents ample room for market power. Lumpy exogenous and endogenous sunk costs deter entrants. Innovation can facilitate entry, if it reduces optimal plant and particularly firm size.
Key words: Sunk costs, Market structure, Minimum efficient scale, Entry, Innovation
JEL classification: B30, D43, L11, L13

78
Brunello, Giorgio
Graziano, Clara
Parigi, Bruno
Ownership or performance: what determines board of directors' turnover in Italy?
Abstract: This paper analyzes the turnover of board of directors members on a sample of companies listed on the Milan Stock Exchange in the period 1988-1996. Our aim is to investigate if board members change more frequently when company performance is poor, as the literature suggests, if this relationship is similar for C.E.O.s and other board members, and if and how the ownership structure of Italian companies affects these relationships. We use three different measures of board of directors turnovers: turnover A is the turnover of all board members; turnover B is the turnover of the President, Vice-President, C.E.O. and General Manager; finally turnover C is the turnover of C.E.O.s only. We find that changes in ownership affect turnover and that the relationship between turnover and performance is stronger in companies that have experienced a change in the controlling shareholder.
Key words: Board of Directors, Corporate Governance, Financial Agency
JEL classification: G34, J63

324
Brunnekreeft, Gert
Gross, Wolfgang
Price structures in the market for long-distance voice telephony in Germany
Abstract: This paper analyses price structures in the liberalised German market for long-distance telephone services. Theoretically deduced patterns are backed-up by empirical observations. This specific market is interesting because it is exceptionally competitive. Entry is taking place at large scale and prices are falling sharply. Moreover, the product is strongly homogeneous and search costs are extremely low. We concentrate on the necessary absence of systematic price discrimination and necessary presence of a demand-compatible peak-load structure. With respect to the latter we observe a move of the peak time, which can be explained by a regulatory failure.
Key words: Price discrimination, Peak-load pricing, Telecommunications, Long-distance services
JEL classification: D41, L43, L96 

110
Bucci, Alberto
Market power and growth in a Schumpeterian framework of innovation
Abstract: In this paper we build two different models of innovation and economic development. What results from our analysis is that in the more familiar deterministic, neo-Schumpeterian R&D-Based Growth Models, the relationship between some measure of market power and aggregate growth rate is not robust at all, depending on variables such as the kind of inputs each industry employs in order to obtain its own output and the way in which these inputs are combined. This is particularly relevant in terms of public policies towards the allocation of skilled workers to the different sectors of an economy.
Key words: Monopoly Power, Technological Change, Economic Growth
JEL classification: D43, O31, O41

32
Buccirossi, Paolo
Access to an essential facility: efficient component pricing rule or unrestricted private property rights?
Abstract: In this paper we compare the access to an essential facility in two different property rights regimes. In the first, the owner of the facility has an unrestricted private property right of the essential facility. In the second, access is regulated according to the efficient component pricing rule. Proponents of the second regime claim that this rule is efficient, for it forecloses the complementary market only to inefficient producers. We prove that, as far as entry is concerned, the two legal frameworks are equivalent if we do not consider the possibility of the transfer of the property right, and that if this is allowed the efficient component pricing rule might exclude efficient suppliers.
Key words: Network, Access, Property Rights, Regulation, Antitrust, Public Policy
JEL classification: L13, L40

114
Buehler, Stefan
Network competition under asymmetric interconnection regulation: lesson from the Swiss case
Abstract: This paper analyzes the effects of asymmetric and cost-oriented regulations on network competition, using the Swiss regulatory framework as a typical example. A short review of the relevant legal prescriptions highlights the main elements of this approach: mandatory negotiations and a fall-back policy implementing cost-oriented rates in case of disagreement. Results from a simple model suggest that under two-way network competition, this approach (i) is ineffective in preventing excessive interconnection rates and (ii) implements inefficient rates that might be even worse than tacit collusion with respect to social welfare. Cost-orientation is therefore not a useful regulatory approach under network competition.
Key words: Telecommunications, Network competition, Interconnection, Tacit collusion
JEL classification: D43, K23, L43, L51, L96

7
Bunte, Frank
van Tongeren, Frank
Co-ordination and bargaining in vertically related markets
Abstract: This paper compares the non-cooperative, cooperative and bargaining solutions of vertically related chains. The major contributions of the paper refer to the incorporation of product differentiation, multiproduct firms and a bargaining process for the wholesale price. Aggregate profits rise when franchising is applied if the intersector elasticity of subsitution is sufficiently large relative to the intrasector elasticity of substitution. Upstream and downstream prices rise with the number of varieties per firm. Finally, the paper presents a bargaining solution for the wholesale price which encompasses the wellknown Stackelberg and franchise solutions.
Key words: Vertical coordination, Bargaining, Multiproduct firms
JEL classification: D43, L13, L14, L22

207
Burguet, Roberto
Caminal, Ramon
Matutes, Carmen
Golden cages for showy birds: optimal switching costs in labour contracts
Abstract: Why do some workers sign contracts with high quitting penalties? Are these restrictions on the workers’ mobility perverse for efficiency or workers’ welfare? We postulate an answer that hinges on the degree of observability of the worker’s performance by alternative employers. When performance is privately observed by the employer, then alternative employers face an adverse selection problem when competing for the worker. In equilibrium separations take the form of layoffs with compensation to the worker with no role for quitting fees. However, if performance is quite public this adverse selection problem is absent and buy-out fees serve to appropriate alternative employer’s rents from the reallocation of the worker. In this case, efficiency is not affected. Bargaining power (both before and after signing the contract) determines whether buy-out fees are detrimental or not to the worker’s welfare.
Key words: Labor contracts, Buyout fees, Severance payments
JEL classification: J41, J44, L14, L42

129
Cable, John
Morris, Clare
Market share instability and the competitive process: a case study of the UK national daily newspaper market
Abstract: Previous writers have long advocated using measures of the instability of market shares in addition to, or in place of, concentration indices in antitrust cases. We argue that the welfare implications of instability are too ambiguous for it to stand as an absolute defence in such cases. In a case study of the UK newspaper industry we also find that the capacity of instability indices to capture the competitive process for diagnostic purposes is limited. However, when used in conjunction with other indicators, such indices can be powerful tools in the full scale analysis of competitive behaviour.
Key words: Market shares, Dynamics, Antitrust, Newspaper Industry
JEL classification: L10, L40, L67, C43

199
Cadot, Oliver
Röller, Lars-Hendrik
Stephan, Andreas
Contribution to productivity or pork-barrel? The two faces of infrastructure investment
Abstract: This paper proposes a simultaneous-equation approach to the estimation of the contribution of transport infrastructure accumulation to regional growth. We model explicitly the political-economy process driving infrastructure investments; in doing so, we eliminate a potential source of bias in production-function estimates and generate testable hypotheses on the forces that shape infrastructure policy. Our empirical findings on a panel of France's regions over 1984-91 suggest that influence activities were, indeed, significant determinants of the cross-regional allocation of transportation infrastructure investments. Moreover, we find little evidence of concern for the maximization of economic returns to infrastructure spending, even after controlling for pork-barrel and when imposing an exogenous preference for convergence in regional productivity levels.
Key words: Infrastructure investment allocation, Productivity effects, Lobbying, Political economy
JEL classification: C33, D78, H54

339
Calabrese, Giuseppe
Innovation capabilities in small-medium car suppliers
Abstract: This paper analyses the innovation patterns of 25 small-medium car suppliers of the district of Turin. All the firms were face-to-face interviewed. Small-medium firms represent more than 90% of Italian firms, 50% of Italian production and 2/3 of employment and they need support in innovation process especially in known technology. The small-medium firm, in fact, operates chiefly in medium to low technology sectors, but cannot for this reason reject innovation. Suppliers are often too small to make the necessary investments in training, computer systems, research and development to make an effective partnership with final producers. Within this scenario the behaviour of the small-medium car suppliers is quite different, vertical disintegration, reorganisation of the supply base and the development of buyer-supplier relationships have undoubtedly changed the role of suppliers in the carmaker’s strategies.
Key words: Small medium firms, Innovation, Car industry
JEL classification: L2, O32, L62

266
Calzolari, Giacomo
Optimal incentive regulation of multinational enterprises
Abstract: Multinational enterprises (MNE) are spreading all over the world. The benefits these firms lead will be lost if we fail to realize that the game MNEs play is a different one. We study a model in which a privately informed MNE produces for two countries and is regulated by the national authorities. The firm can also affect countries’ general interest in MNE’s profit with country specific lobbying activities. We solve the international multiprincipal game with indirect mechanisms and study competition in national regulations when the MNE is free to shut down production in one country. We characterize consumption of the regulated goods both in a symmetric and asymmetric environment. New and unexpected results arise. For example, a country with sufficiently high (and larger than the other’s) profit weight overconsumes with respect to first best. The other country under-consumes and the MNE cross-subsidizes production in the former. Moreover, we study MNE’s incentives to allocate resources to lobby the two countries and we analyze ownership patterns with respect to MNE’s profit and countries welfare.
Key words: Multinational Enterprises, Regulation, Asymmetric Information, Multiprincipal, Lobbying
JEL classification: L51, F23

39
Cantner, Uwe
Pyka, Andreas
Classifying technology policy from an evolutionary perspective
Abstract: Asked for the most important driving forces of economic development, most economists do not hesitate to state, that it is technical progress which is the main source of quantitative and qualitative economic development generated in National Systems of Innovation (NSI). To classify and analyze NSI’s the concepts of mission- and diffusion-oriented policy designs were introduced. Although, we suppose this taxonomy to be well suited to analyze technology policy, it seems to us in its basic formulation somewhat crude, especially with respect to the supposed characteristics to assign a specific innovation system to the one or the other policy design. To surmount these shortcomings we develop a new classificatory scheme building on a questionnaire approach and suggesting four categories spread out between the technology and the economic side. This scheme allows for deeper insights and more evident comparisons of different NSI’s.
Key words: Technology policy, Mission-orientation, Diffusion-orientation, Evolutionary economics
JEL classification: O39

146
Carpenter, Robert E.
Petersen, Bruce C.
Is it time to abandon the Marshallian shutdown condition?
Abstract: This paper provides the first broad-based empirical examination of the firm’s temporary shutdown condition. We provide a simple model, together with an overview of the evidence on sunk hiring and training costs, which suggests that the temporary shutdown point is often far below the standard textbook point. Employing a panel of over 175,000 quarterly observations, we find that firms frequently incur losses far below those consistent with the textbook shutdown condition. We also find that temporary shutdowns appear to be uncommon. Our results have implications for the magnitude of sunk costs, bankruptcy, predatory pricing and strategic behavior of incumbents.
Key words: Shutdown condition, Sunk costs, Labor hoarding
JEL classification: D9, L2

154
Carree, Martin
Thurik, Roy
van Stel, André
Wennekers, A. Sander R.M.
Business ownership and economic growth in 23 OECD countries
Abstract: In the present paper we address the relationship between the extent of business ownership (self-employment) and economic growth. Specifically, we will focus upon three issues. First, how is the equilibrium rate of business ownership related to the stage of economic development? Second, what is the speed of convergence towards the equilibrium rate when the rate of business ownership is out-of-equilibrium? Third, to what extent does deviating from the equilibrium rate of business ownership lead to less economic growth? Hypotheses concerning all three issues are used setting up a new two-equation model, while also variables like the unemployment rate, labor income quote and gross domestic product play a role. We find confirmation for the hypothesized effects using a data panel of 23 OECD countries. An important policy implication of our exercises is that free entry and exit of self-employed/businesses is a necessary condition for the equilibrium seeking mechanisms that are vital for sound economic development.
Key words: Business ownership, Economic growth, Entrepreneurship
JEL classification: L16, O12

13
Casado, F. Javier
Location decisions: the role of uncertainty about consumer tastes
Abstract: This paper analyzes the extent to which firms make decisions about location based upon uncertainty about consumer tastes. The model used in this analysis incorporates a linear city and quadratic consumer transportation costs. In this framework, when firms choose locations, or in other words, choose the kind of product they are going to manufacture, they ignore the location, or real tastes, of their consumers. The existence of uncertainty raises the degree of product differentiation, because the anti-competitive effect that arises as distance from rivals increases counteracts the reduction in the degree of differentiation provided by the demand effect.
Key words: Maximum differentiation, Linear city, Firm location
JEL classification: L13, D43

357
Cassiman, Bruno
Veugelers, Reinhilde
R&D cooperation and spillovers: some empirical evidence
Abstract: This paper provides some first empirical evidence on the relationship between R&D spillovers and R&D cooperation. The results suggest disentangling different aspects of know-how flows. Firms which rate incoming spillovers more importantly and who can limit outgoing spillovers by a more effective protection of know-how, are more likely to cooperate in R&D. Our analysis also finds that cooperating firms have higher incoming spillovers and higher protection of know-how, indicating that cooperation may serve as a vehicle to manage information flows. Our results thus suggest that on the one hand the information sharing and coordination aspects of incoming spillovers are crucial in understanding cooperation, while on the other hand, protection against outgoing spillovers is important for firms to engage in stable cooperative agreements by reducing free-rider problems. Distinguishing different types of cooperative partners reveals that while managing outgoing spillovers is less critical in alliances with non-commercial research partners than between vertically related partners, the incoming spillovers seem to be more critical in understanding the former type of R&D cooperation.

96
Catalao Lopes, Margarida
Strategic default, credit access, and the optimal level of competition in banking
Abstract: We develop a model of strategic default and analyze how the existing number of credit suppliers influences the incentives to repudiate debt and, in equilibrium, how it affects the possibility of projects being financed. This framework applies to the study of the effects of mergers in the banking sector on the access to credit. The social implications of reducing the number of independent banks or increasing their degree of information sharing are analyzed and conclusions are drawn about the appropriate level of competition in the credit market as a function of the portfolio of investment projects.
Key words: Strategic default, Credit access, Bank mergers
JEL classification: D82, G21, L40

84
Ceccagnoli, Marco
The effect of spillovers and rivalry among firms with heterogeneous technological capabilities on R&D efforts
Abstract: The article first presents a model of strategic R&D investments in oligopolistic industries with heterogeneous competitors, where firms differ in their ability to both generate innovations and absorb knowledge spillovers from rivals. The impact of spillovers and heterogeneous rivalry on R&D is then analyzed theoretically and empirically, using data from the Carnegie Mellon Survey on the appropriability of R&D in the US manufacturing sector. Both the theory and the empirical estimates indicate that the composition of industries in terms of capable and incapable firms has both a direct effect on R&D and a critical role in conditioning the effect of spillovers on R&D incentives.
Key words: R&D, Knowledge Spillovers, Asymmetric Oligopoly, Technological Capabilities
JEL classification: D43, L13, O31, O32

75
Cefis, Elena
Persistence in profitability and in innovative activities
Abstract: The aim of the paper is to see whether there is a relationship between the strong inertia of firm profits and the persistence in innovation activities. In other words, the purpose is to investigate whether there is persistence in innovation and profitability considered jointly, at the firm level. The analysis is based on a balanced panel of 82 UK manufacturing firms observed continually throughout the period 1978 to 1991. We implement a non-parametric approach based on directly modelling the dynamics of the evolving cross-section distributions to analyse intra-distribution mobility and persistence of the firms’ innovative activities and profitability. This alternative methodology uses discrete Markov chains to approximate and estimate a law of motion for the evolving distribution. Taking into account separately patents and profits distributions points out that, at the firm level, there is high persistence in both dimensions. The result suggests that the mobility in a firm’s relative position is likely in the long run, while a strong inertia drives the dynamics in the short run. The analysis of the joint distributions gives a very similar picture: firms which are systematic innovators and earn profits above the average have a high probability to keep innovating and earning profits above the average, as well as firms which are occasional innovators and earn profit below the average have a high probability to remain in the initial situation. Finally, the mobility in a firm’s relative position with respect to the average profitability appears not to be correlated with the firm’s relative position in the innovation dimension in the short run. However, firm’s relative position in the innovation dimension matters in the long run: the probability to earn profits above the average, in the long run, is higher if a firm starts as a systematic innovator than as an occasional innovator.
Key words: Persistence, Innovation, Patents, Profitability, Firms' growth
JEL classification: O31, D21

17
Cellini, Roberto
Lambertini, Luca
A differential game approach to investment in product differentiation
Abstract: We consider a dynamic oligopoly where firms invest to increase product differentiation and an externality effect operates in the R&D activity via the demand functions. In the fully noncooperative setting, we find that the degree of differentiation resulting from R&D effort is higher, the larger is the population of firms in the industry. If firms cooperate in the R&D activity by setting up an R&D cartel, aggregate investment is larger and product substitutability is lower than in the decentralised case.
Key words: Differential games, R&D investment, Product differentiation, Spillovers
JEL classification: C73, L13, O31

229
Chae, Suchan
Heidhues, Paul
Concentration in the movie theatre industry and incentives to enter the movie producing industry: a bargaining theoretic perspective
Abstract: This paper studies the relationship between across-local market integration in the movie theatre industry and incentives to enter the movie producing industry. It shows that concentration in the movie theatre industry increases its bargaining power, which lowers incentives to enter the movie producing industry. From a modelling point of view, the paper introduces bargaining as a mechanism to determine prices in a bilateral oligopoly market.
Key words: Bargaining, Nash bargaining solution, Bargaining power, Entry, Movie industry, Antitrust
JEL classification: C78, D43, L41, L96, L98

258
Chalkley, Martin
Stewart, Geoff
International trade and the incentive for merger
Abstract: In this paper we consider whether a movement towards freer trade generates incentives for firms to merge and, if so, what forms of merger are most profitable. In a linear Cournot model of oligopoly we show that a reduction in transport cost may induce merger, that intermediate levels of transport cost and market concentration are most likely to be associated with merger and that mergers across international frontiers will usually, but not always, be preferred over domestic mergers.
Key words: Merger, International trade, Oligopoly
JEL classification: L4, F2

212
Chapelle, Karine
Firm survival and contestability in the Ivorian manufacturing sector. Estimations using a hazard function
Abstract: This paper examines the process of firm selection in the Ivorian manufacturing sector. Non parametric and parametric models are used for estimations on 181 firms surveyed during March 1995 and March 1996 for the World Bank Regional Program on Enterprise Development (RPED). The main findings are that firms are selected on the basis of active learning and that hazard rate follows a positive duration dependence suggesting that mature firms are replaced by younger enterprises. Capital intensive technologies, highly educated and experienced entrepreneurs and the wholly withholding of an enterprise increase enterprise life duration. Finally, the competitive environment plays an important role essentially by the bias of entrants and of price competition which has a negative effect on firm survival.
Key words: Active learning, Passive learning, Duration models, LDC
JEL classification: D21, D4, L1

270
Cho, M. Michael
Market structure and efficiency
Abstract: The "efficiency" theory of market structure and the "market power" theory of the behavior of firms in highly concentrated markets are analyzed using data from 458 U.S. manufacturing industries from 1958 to 1992. Empirical studies thus far have generally neglected to include a measurement for productivity in determining the relevance of the two juxtaposing theories. Total factor productivity growth rates are calculated for each industry, and the relationships between market concentration and productivity are examined. The empirical findings are in support of the "efficiency" theory in that they show that increases in profit rates are significantly correlated with increases in productivity levels in highly concentrated markets.
Key words: Market Structure, Productivity
JEL classification: L1, L4

314
Clemenz, Gerhard
Moral hazard and deep pockets: a model of financial predation
Abstract: It is shown that the deep pocket argument for the possibility of a financially strong firm to attempt a successful predatory attack may hold if the probability of success of a defensive action depends on the unobservable effort of the financially weaker firm. The resulting moral hazard problem may induce the lender either to charge a loan rate of interest that makes the defence unprofitable, or to deny a loan altogether. Both possibilities are more likely to occur when interest rates are relatively high.
Key words: Predation, Deep pocket, Credit rationing
JEL classification: L10, L40

256
Corchón, Luis C.
Fauli-Oller, Ramon
To merge or not to merge: that is the question
Abstract: In this paper we analyze the implementation of socially optimal mergers when the regulator is not informed about the parameters that determine social and private gains from potential mergers. We focus attention on dominant strategy mechanisms. We find that most of the standard tools in dominant strategy implementation, like the revelation principle or the Vickrey-Clark-Groves mechanism can not be applied in our framework. We also show that implementation of socially optimal mergers in dominant strategies is possible in some cases.
Key words: Antitrust, Mergers
JEL classification: L21, L41

217
Costa Cabral, Celia
Kujal, Praveen
Trade policy and incentives for cost reduction in a differentiated industry: price vs. quantity competition
Abstract: The incentives for governments to impose subsidies and tariffs on R&D and output is analysed in a differentiated good industry where firms invest in a cost saving technology. When government commitment is credible, subsidies to R&D and output are positive both under Bertrand and Cournot competition. However, if the government cannot commit to a policy action, it chooses a tariff under Bertrand competition and a subsidy under Cournot competition.
Key words: Product differentiation, Trade policies, Commitment, Tariffs, Subsidies
JEL classification: F12, F13, L13

232
Costantatos, Christos
Larue, Bruno
Touil, Chedlia
Using the black market to price discriminate: the case of cigarettes smuggling in Canada
Abstract: We analyse the case of cigarettes smuggling in Canada, characterised by: a) smuggled cigarettes are almost entirely of Canadian brands, b) the tobacco industry in Canada is highly concentrated. In our model, domestic production is monopolized and there is a continuum of consumers differentiated by their willingness-to-pay. Social conscience and/or risk reduce the utility from illegal goods even though the latter have the same physical attributes as the legal ones. Unlike previous studies, smuggling results from the monopolist's strategy of introducing a lower quality, hence it may arise even absent a tax on the legal good. The model predicts a) a larger part of any tax increase passed on to consumers; b) a tax on the legal good reduces total consumption.
Key words: Vertical differentiation, Price discrimination, Smuggling, International Trade
JEL classification: L13, F12, H26

71
Cowling, Keith
Tomlinson, Philip
The Japanese crisis - a case of strategic failure?
Abstract: The aim of this paper is to provide an alternative insight into Japan’s current economic problems. In doing so, we concentrate upon the role played by the economy’s central actors, namely Japan’s transnational corporations. Since the early 1980’s, Japan’s transnationals have become dominant players in the global economy, and now have a higher rate of physical investment in new, overseas greenfield sites than any of their international competitors. We argue that this has had detrimental consequences for Japan’s domestic economy, particularly for those small firms who operate in the keiretsu networks. This has led to concerns about the possible "hollowing out" of Japan’s domestic industry raising the possibility of long term industrial decline and the spectre of "strategic failure".
Key words: Transnationals, Keiretsu firms, Overseas production, Strategic failure
JEL classification: F21, F23

302
Crémer, Jacques
Hariton, Cyril
The tarification of critical applications in the Internet
Abstract: The economics of networks has recently been partly focused on the tarification of Internet usage, with the proposal of smart markets for the allocation of capacity. This approach does not take into account the demand of capacity for several consecutive periods. This paper first shows the limits of the smart markets in the example of an infinite horizon stationary model for resource reservation with agents valuing only possessing two consecutive periods. Then, it studies a second model where the auctioneer faces consumers who value one or two periods, with high or low willingness to pay. Whereas ex-ante per period valuation of consumers axe equal, the optimal mechanism favors the high type long term user.
Key words: Auction, Capacity allocation, Infinite horizon, Internet, Network economics, Telecommunication
JEL classification: D4, L1, L95

62
Creti, Anna
Firms' organisation and efficient communications networks
Abstract: This paper presents a very simple characterisation of the technological choices underlying M-form and U-form. We first show that the externalities within a function favour the M-form, which gives higher profit, output level and lower prices than the U-form. The major innovation of the paper consists in the analysis of communication flows that constitute a positive externality on demand schedules. When these information flows are introduced, we find conditions under which the U-form gives output and communication flows higher than the M-form.
Key words: Hierarchical firms' organisation, Communication flows, Network externalities
JEL classification: D23, L23, L96

227
Currarini, Sergio
Marini, Marco
Sequential play and cartel stability in oligopolies
Abstract: In this paper we characterise a sequential concept of equilibrium. for the problem of cartel formation represented in characteristic form. We denote this concept f -core to distinguish it from. its simultaneous-strategy equivalent, defined g -core. Using this framework, we are able to prove that, in a symmetric oligopoly with linear demand and linear costs, the f -core selects a unique allocation (the equal split allocation) out of the g -core. We then apply this result to show that when firms forming a cartel have a first mover advantage (as in the f -core approach), the unique stable cartel is the grand coalition. Some conclusions are drawn at the end of the paper.

313
Dadoun, Béatrice
Strategic behaviour and endogenous externalities: a dynamic model
Abstract: This paper examines how behaviours of rational agents leads to complex systems as complex markets, in presence of endogenous externalities. We design a system through two isolated dynamics and three simultaneous dynamics. These processes coupled actually different strategic behaviours in context of an industrial structure. We find the conditions for stability of each type of equilibrium, and we show that the aggregation of behaviours leads in somes cases to an unstable market structure.
Key words: Dynamic process, Externalities, Interactive behaviour
JEL classification: D62, H31, H49, L19, L29

 141
De Bonis, Riccardo
Ferrando, Annalisa
The Italian banking structure in the Nineties: testing the multimarket contact hypothesis
Abstract: The multimarket contact hypothesis holds that more contacts between firms competing in the same markets may induce more collusion. This paper tests the hypothesis for the Italian banking market, analysing the behaviour of the largest Italian banks from 1990 to 1996. Market rivalry is gauged by changes in loan market shares and interest rates in each Italian province. We estimate the effects of increasing multimarket contacts, concentration indicators, banks’ costs and loan demand on variations in market shares and interest rates. No support is found for the multimarket contact hypothesis. Geographical overlap in banking is positively correlated with changes in market shares, confirming the thesis of an overall increase in competition within the Italian banking system. Greater multimarket links also seem to correspond to lower lending rates.
Key words: Multimarket competition, Market power, Banking
JEL classification: L13, G21

 105
De Juan, Rebeca
The independent submarkets model: an application to the Spanish retail banking market
Abstract: The aim of this paper is to test the predictions of Sutton's independent submarkets model with data on the Spanish retail banking market. The prediction of this model is that, within each submarket, when the products are close substitutes and price competition is weak, the only form of equilibrium outcome will be an extreme 'fragmented' structure. However, the aggregates of submarkets will simultaneously show a concentrated structure. To test these predictions, firstly I propose methods to identify independent submarkets. Then I analyze the degree of inequality in bank sizes for markets with different levels of aggregation (submarkets, regions and national market). Using concentration by towns' data, I find that in single market towns the degree of inequality of the size among banks, measured by their number of branches, is zero. Moreover, multimarket towns with a significant degree of concentration are shown to be formed by a different number of independent submarkets where each bank owns one branch. Nonetheless, when the regional and national bank markets axe considered, the degree of inequality in bank sizes becomes high. These results are consistent with the predictions of the theoretical model.
Key words: Independent submarkets, Fragmentation, Concentration, Banks, Braches
JEL classification: D4, L1, R3

340
De Santis, Roberto A.
Stähler, Frank
Endogenous market structures and the gains from foreign direct investment
Abstract: This paper discusses the gains from foreign direct investment (FDI) in a general equilibrium setting with a domestic oligopoly and free entry/exit. If FDI is profitable, we demonstrate that all national firms become multinational, and that the foreign country is always better off. However, the impact on the domestic welfare is indeterminate. If market concentration occurs, domestic welfare and even total welfare can decline. From the normative trade theory point of view, we claim that, in this setting, FDI with respect to trade has not the same unambiguous mutual welfare improving effects of trade with respect to autarky.
Key words: Foreign direct investment, Multinational enterprises, Imperfect competition, Welfare
JEL classification: F12, F15,

312
Delgado, Miguel A.
Jaumandreu, Jordi
Martín Marcos, Ana
Price dynamics at the firm level: evidence on adjustment costs
Abstract: This paper provides evidence on the forms that take price adjustments at the firm level, by exploiting the price changes observed in an (unbalanced) panel sample of more than 2,000 Spanish manufacturing firms from 1990 to 1997. Without assuming a particular model for adjustments, we firtsly measure for each firm at each time its "price disequilibrium", or difference between the actual and desired prices. Observed price changes are then related to the initial price disequilibria. Using a non-parametric framework we explore both inaction (no price change) and the part of the price gap that is closed in a given period, as functions of disequilibria.

218
Delmastro, Marco
A static model of the organizational structure: theory and evidence
Abstract: Economists are increasingly concerned about the internal working of firms and the determinants of the organizational structure. Nonetheless, the empirical evidence on these issues is generally scarce. This paper aims to test (some of) the predictions of economic theory on the organizational architecture by looking at the relation between the depth of the management hierarchy of plants and some plant and industry-specific variables. I test this relation through the estimates of an ordered logit econometric model. For this purpose, Politecnico di Milano and Università di Pavia have designed a questionnaire analysis which has provided detailed information on the organization of a sample of 438 Italian manufacturing plants. The findings show that the plant size, the characteristics (i.e. vintage and extent of use) of the production and communication technologies in use, the plant’s ownership status (i.e. private versus public ownership, and differences in the nationality of firms to which plants belong) figure prominently in explaining the complexity of a plant’s organization.
Key words: Organizational structure, Hierarchy, Technology
JEL classification: D23

331
Dietrich, Vera
Liberalization of health services in Europe: who benefits from cross-border care?
Abstract: Traditionally, health care systems in the EU had been excluded from intra-European competition. The paper analyses the economic impact of a leading decision of the European Court of Justice which recently applied the principle of free movement to the health care sector. Depending on interregional differences in the price and quality of health services, patients will now be able to choose between European health care providers. Comparing welfare before and after liberalisation under the current financing scheme, in a Duopoly model with Cournot competition it is shown that liberalization will not only yield welfare gains for low-quality regions but might also improve welfare in EU-member states, which are subsidizing health services in order to guarantee a high quality of medical treatment. Net welfare gains from subsidization, however, prove to be sensible to the extent domestic health care facilities are used by foreign patients. Therefore, since patient migration cannot be controlled after full liberalization, high-quality EU member states cannot be expected to support a complete liberalization.
Key words: European Integration, Health services, Regulation, Competition
JEL classification: L5, I11

249
Dilling-Hansen, Mogens
Eriksson, Tor
Madsen, Erik Stojer
Smith, Valdemar
The impact of R&D on productivity: evidence from Danish firm-level data
Abstract: The aim of the paper is to examine the relationship between R&D capital and productivity using firm level data for the Danish industries. Following Griliches (1986) we adopt the production function approach to estimate the output elasticities of R&D under various assumptions concerning the measurement of R&D capital, i.e. the influence of the rate of depreciation of R&D, and the correction for double-counting of R&D input (number of researchers and/or capital expenditure). In addition to R&D we account for factors such as ownership, innovative characteristics, funding and product market competition. The data are collected from the biannual official R&D survey of Danish private firms and a large detailed accounting database of Danish manufacturing firms during the period 1987-95. After controlling for double-counting, we find returns to R&D capital around 15 per cent, which is in line with results from recent studies in other countries. Furthermore, we find that the foreign-owned firms’ R&D capital is associated with greater returns than domestic firms.
JEL classification: L1, D24

259
Dilling-Hansen, Mogens
Eriksson, Tor
Madsen, Erik Stojer
Smith, Valdemar
The influence of competition and ownership structure on the performance of Danish manufacturing firms
Abstract: This paper is to provide some empirical evidence on the effects of competition on firm productivity accounting for differences in financial pressure and ownership control. Moreover, we are also interested in whether the effects of competition differ between firms with little and heavy debt payments services, between owner-controlled and other firms, and small and large firms. We examine the influence of the three categories of factors - (i) competition in the firms' product markets, (ii) the financial pressure, and (iii) type and dispersion of ownership - on the productivity performance of 550 Danish firms in a longitudinal sample covering a 6-year period, 1990-95.
JEL classification: D24, L11

131
Dixon, Stuart
Limit pricing and multimarket entry
Abstract: This paper has considered the effects of trade policy on the strategic behaviour of domestic producers vis-a-vis foreign competitors. It discuss the different effects of tariffs and quotas on strategic firm behaviour. Both national and joint (customs union) trade policies are considered. When incumbents do not trade but entry is threatened, a tariff lowers the limit price while an equivalent national quota raises it. Restrictive national quotas destroy limit pricing, restrictive joint quotas yield equivalent results to tariffs. When trade exists takes place between incumbents, limit pricing still occurs under a national quota system, but disappears with a joint quota. Welfare is also considered.
JEL classification: D82, L13, F12

315
Dobson, Paul W.
Waterson, Michael
The public policy implications of increasing retailer power
Abstract: This paper argues that the tendency to think of retailing as a highly competitive activity is misplaced. By contrast with manufacturing, trends in retailing have been towards a marked increase in concentration. Retailers themselves have also taken actions, such as enhancing their private label presence, to strengthen their positions. Possibly there are circumstances in which this creates some countervailing power against manufacturers. However, one implication is that competition authorities will have to consider more seriously than hitherto the effects of increasing power in the retail sector. In particular, we suggest a consistent framework should be applied to retail mergers and exclusivity arrangements with suppliers.
Key words: Public Policy, Retailing, Concentration, Countervailing Power
JEL classification: L40, L81, L14, L43

211
Doganoglu, Toker
Dynamic price competition with persistent consumer tastes
Abstract: We analyze the dynamic price competition in a horizontally differentiated duopoly when consumers value previous market shares. The conditions for the existence of a unique markov-perfect equilibrium in linear strategies where the market is covered at every period are established. The equilibrium outcomes can be of two types: monotonic or price-war. In the monotonic outcome, the steady state is reached monotonically; while in the price-war outcome, firms’ prices and market shares oscillate around the steady state values. The model can produce outcomes where the steady state is reached very slowly which provides an alternative explanation for slow emergence of competition when entrants face an established incumbent.
Key words: Dynamic price competition, Long memory, Markov-perfect equilibrium, Stability, Product differentiation
JEL classification: C73, D21, D43, L13, L21

149
Drescher, Klaus
Connor, John
Market power and economies of scales in the German food-retail industry
Abstract: In most studies the food retail market in Germany is described despite a high concentration as a competitive market. Small sales returns are taken as an expression of small margins and signs of a tough competition. The present article deals with the relation between sales returns and competition. Using a Cournot model the hypothesis is expressed that up to a specific level increasing concentration leads to decreasing food prices due to economies of scales. Higher concentration rates in the German food retail industry lead to an increase of food prices. Underlying a quadratic function for the concentration measure, it could be shown that from a specific concentration food prices significantly increase. In addition, high concentration have a different influence on prices depending on product categories.
Key words: Cournot model, Retail industry, Concentration, Market power, Economies of scales
JEL classification: L0, L1, D4

317
Driffield, Nigel
Inward investment, industry concentration and the speed of adjustment
Abstract: The paper develops a model of concentration, based on the standard literature of concentration determination, which is then estimated within a panel framework. Such a model provides an estimate of the "equilibrium level" of concentration in the industry, based on observed industry level characteristics. The paper not only shows that foreign penetration acts to reduce concentration levels, but it also acts to increase the rate at which the industry moves towards equilibrium. Finally, the importance of this deviation, in terms of explaining foreign penetration is explored.
Key words: FDI, Concentration
JEL classification: F23, L11

228
Duso, Tomaso
Do endogenous switching costs promote high quality entry?
Abstract: This paper analyzes how endogenous switching costs and product quality interact to influence the entry process in an ex-monopolistic industry. We assume that the incumbent's main strategic variable is switching costs, i.e. the price attached consumers are charged in order to change firm affiliation. We prove the existence of a unique subgame perfect Nash equilibrium in which entry occurs. First period consumers are locked in by the incumbent and do not switch, while the entrant attracts some of the additional costumers. If sunk entry costs are low, incumbent's strategy leads to higher prices and less investment in quality than in absence of switching costs, which lowers total welfare. For higher entry costs, endogenous switching costs promote high quality entry, and surprisingly this can increase efficiency. Policy suggestions are discussed.
Key words: Switching Costs, Entry, Vertical Product Differentiation, Heterogeneous Consumers
JEL classification: D43, L13, L14

174
Ecchia, Giulio
Lambertini, Luca
Endogenous timing and quality standards in a vertically differentiated duopoly
Abstract: The consequences of the adoption of quality standards on the endogenous timing of moves are investigated in a vertically differentiated duopoly. We obtain two main results. First, the quality standard is always consistent with the distribution of roles endogenously chosen by firms. Second, the timing game in the quality space has no equilibrium in pure strategies, so that the standard has to be set taking into account a mixed strategy equilibrium played by firms.
Key words: Minimum Quality Standard, Extended game, Endogenous timing
JEL classification: L13

33
Elberfeld, Walter
Nti, Kofi O.
Time to coordination in a market with entry and exit
Abstract: We study the time to coordination in a market whose evolution is governed by a mixed strategy entry and exit dynamics. Time to coordination depends on the initial market state, entry costs and the level of sunk costs. If sunk costs are low, it takes longer to coordinate from the unoccupied state than from the overcrowded state but the results are reversed when sunk cost are high. Coordination may be faster or slower as the number of competitors increases. Our analysis suggests that coordination is faster in markets with relatively high entry costs and low sunk costs.
Key words: Coordination, Entry and exit dynamics, Potential competition
JEL classification: D43, L13

285
Eliasson, Gunnar
Taymaz, Erol
Institutions, entrepreneurship, economic flexibility and growth. Experiments on an evolutionary micro-to-macro model
Abstract: The capacity of an economic system to grow through competitive entry and flexible adjustment is investigated on a firm based evolutionary simulation model of the Swedish economy. Entry, speed of exit and of labor market reallocation define flexibility. Entry is determined by observed profit opportunities in markets and growth, among other things, through dynamic competition by way of entry. Both entry and growth ultimately depend on the existence of property rights institutions that reduce the uncertainty surrounding private access at any time to the expected present value of future profits from investment commitments today. We find that in a predictable market regime (stable, relative foreign prices) long run growth benefits from slow market adjustments. Fast reallocation creates price instability, erroneous expectations and (easily) cost overshooting. Rapid new entry, however, is always growth promoting in the long run. The positive scenario for slow market adjustment is completely reversed under an unstable (unpredictable) external market regime, when flexibility in the production system is needed to reallocate resources smoothly and without cost escalation. Different methods of econometrically representing and estimating the magnitudes involved in non-linear evolutionary models are presented.
Key words: Evolutionary micro based macro model, Experimentally organized economy, Innovation entry, Economic flexibility
JEL classification: D5, L1, L6, O3

248
Ellingsen, Tore
Market foreclosure
Abstract: Can vertical integration and long-term supplier contracts inefficiently exclude new suppliers from the market? The current paper shows that foreclosure is an issue if (i) the entrant's product is not identical to the incumbent's product and (ii) the buyer's valuation is private information at the renegotiation stage. The distortion arising from. Long-term contracts which involve damages for breach is worse than the distortion from vertical integration. Importantly, harmful foreclosure could be a by-product of contracts which enhance internal efficiency; it does not require intent.
Key words: Vertical restraints, Foreclosure, Damages, Breach
JEL classification: L12, L42 

12
Emons, Winand
Product differentiation and price competition between a safe and a risky seller
Abstract: We consider a market served by a safe and a risky seller. While the expensive safe seller can solve the problems of all consumers, the cheap risky seller can help a consumer only with a certain probability. The risky seller's success probabilities are distributed across consumers and by the choice of her quality the risky seller determines the shape of this distribution. If the risky seller fails, a consumer ends up with the safe seller, paying for the service twice. We study the price-quality competition between the two providers. We show that the principle of maximum product differentiation does not hold in our model, i.e., the risky seller does not choose the minimum quality level in order to relax price competition.
Key words: Price-quality competition, Product differentiation
JEL classification: D43, L13, L15

92
Esteve-Pérez, Silviano
Exit with vertical product differentiation
Abstract: In contrast to previous IO literature on exit, we present a dynamic (duoply) model of vertical product differentiation to explicitly analyse how technological and strategic factors determine the order of exit when demand declines. The higher quality firm can be the ''loser'' in the exit game if adjusting product-quality is very costly and high-quality firm's fixed costs associated to ''quality image'' are sufficiently larger than its low-quality competitor's. If firms are similarly efficient in production, the larger firm enjoys higher price-cost margins, and possibly scale economies in production. However, it will incur larger costs related to both capacity and maintaining its ''perceived image''.
Key words: Exit, Vertical Production Differentiation, Minimum Quality Standards
JEL classification: L13, D43, L110

279
Fares, M'hand
Contract duration and specific investment: theory and empirical evidence
Abstract: We develop an explanatory contract duration model from a new theory: Incomplete Contract Theory. Inspired by Lyons’ model, it explains how contract duration varies when an asymmetry between contractual parties confronted to a contractual efficient breach is assumed. This model puts forward a proposition that we test on a 173 long term Canadian natural gas procurement contracts database. We find a confirmation of this proposition and of the one we present when we modify the model in order to introduce a symmetry between the parties in the efficient breach decision. Our study is the first one in the literature that tests and confirms propositions derived from the Incomplete contract Theory. But our regressions do not refute the usual propositions of the transaction cost theory concerning the asset specificity and uncertainty effect on contract duration.
Key words: Incomplete Contract Theory, Transaction Cost Theory, Contract Design, Natural Gas Deregulation
JEL classification: K12, L14, L95

345
Fariñas, José C.
Ruano, Sonia
Efficiency and export markets: a firm level analysis
Abstract: This paper examines total factor productivity differences between exporting and non-exporting firms. These differences are documented using a sample of Spanish manufacturing firms over the period 1991-1996 drawn from the ESEE. The paper also examines two complementary explanations for the superior productivity of exporting firms: 1) the market selection hypothesis, and 2) the learning hypothesis. Results indicate clearly higher levels of productivity for exporting firms than for non-exporting firms. Evidence favours the selection hypothesis but not the learning hypothesis.
Key words: Total factor productivity, Exports, Stochastic dominance
JEL classification: D24, F10, M20, L10

 195
Ferrando, Annalisa
Ganoulis, Ioannis
Investment revision and business shocks: is there heterogeneity among firms?
Abstract: This paper examines whether there are systematic differences in the frequency and type of business shocks individual firms face depending on their size and/or their geographical location. Business shocks affecting investment decisions are only considered. A panel data set comprising information on plans for and realisations of investments by Italian manufacturing firms between 1985 and 1996 is explored for that purpose. The difference between plans and realisations of investment is employed as an indicator of "news" (business shocks) of a large enough intensity to affect the investment decisions of firms. Survey information on factors leading to a revision of investment is then exploited in order to identify the source of business shocks. The effect of size and location is then tested (using binary models) both on total revisions and on revisions due to a particular source of business shocks.
Key words: Investment, Business shocks, Revisions of investment plans
JEL classification: D80, E22

153
Feuerstein, Switgard
Collusion with fluctuating exchange rates
Abstract: The paper explores how a flexible exchange rate affects the ability of an international oligopoly to support collusion by grim trigger strategies. The sustainability of two collusive outcomes is compared, and both price setting and quantity setting oligopolies are considered. In any case, the fluctuating exchange rate makes collusion more difficult to sustain.
Key words: Collusion, Oligopoly, Fluctuating exchange rates
JEL classification: F12, D43, L13

152
Filippini, Luigi
Leapfrogging in a model of vertical differentiation
Abstract: The model considers a two- period duopoly game where in the first period the leader produces a good with a given quality and the other firm can only imitate it. It is the Stackelberg case where in addition the leader has the choice of the quality of the good and the imitation is costly, but not prohibitively so. Under this assumption quantities and profits in terms of the quality are derived as subgame perfect equilibrium. In the second period there exists the possibility for the leader and / or the follower to make an investment. The outcome of this is uncertain: it could either be the case that a good of better quality can be introduced, or that a cost-reduction in producing the existing good is attained. The former case is a product innovation, whereas the latter case is a process innovation. By solving the game backwards as a function of the quality of the first period, there exists the possibility of an equilibrium where the follower chooses to invest and the leader does not invest.
Key words: Leapfrogging, Product differentiation
JEL classification: D43, L13

223
Findlay, Janette
Holahan, William L.
Oughton, Christine
Revenue sharing from broadcasting football
Abstract: This paper examines the individual and collective motives for revenue sharing in sports leagues. It shows that redistribution of income from leading to lagging teams can enhance league balance and increase the overall demand for match viewing. It may therefore be in the interests of leading clubs to subsidise lagging clubs, if their smaller share is compensated for by an increase in total revenue. The incentives for revenue sharing are considered under a number of alternative regulatory regimes including: collective league bargaining Vs the sale of rights by individual clubs; vertical integration between broadcasters and football clubs; and the emergence of competition from rival ‘super-leagues’.
Key words: Economics of sport, Revenue sharing, League balance, Vertical integration
JEL classification: L0, L2, L5, L8, D7

377
Forni, Mario
Paba, Sergio
Technological externalities and growth of local industries. Evidence from Italy
Abstract: We investigate the importance of local knowledge spillovers for the growth of localized industries. We use Italian census data on manufacturing employment in 1971 and 1991 for 101 three-digit manufacturing sectors and 955 small geographical areas (the local labor markets). We regress the local employment growth of each three-digit sector between 1971 and 1991 on a number of explanatory variables, including the specialization of each two-digit industry at the beginning of the period. We find evidence of intra-industry Marshallian external economies. We also find that the initial variety of the local industry matters for growth, but the inter-industry technological spillovers occur mainly through input-output relations or across industries that share similar technologies. Finally, we find that the nature of the externalities - whether inter or intra-sectoral- does not depend on the technological intensity of the industry.

94
Foros, Oystein
Hansen, Bjorn
Competition and compatibility among Internet Service Providers
Abstract: We consider competition between two Internet Service Providers (ISPs) operating in the same geographic area. The firms offer access to the Internet. Access is assumed to be a differentiated good. Furthermore we assume that there are positive consumption externalities. We consider a two stage game with competition á-la Hotelling in the second stage. In the first stage the two ISPs choose the level of compatibility, or quality, of the link between the two networks. In the absence of vertical differentiation the firms will choose a high level of compatibility. Furthermore we find that when both ISPs are active in the market at stage 2 (market sharing equilibrium), our compatibility results are not altered when vertical differentiation is introduced into the model. Finally we find that if compatibility is costly, the firms over invest in compatibility in equilibrium.
Key words: Compatibity, Internet, Competition, Duopoly
JEL classification: L13, L96, L41

318
Fotopoulos, Georgios
Louri, Helen
Determinants of hazard confronting new entry: does financial structure matter?
Abstract: This paper attempts to identify the determinants of hazard confronting 219 new manufacturing Greek firms established in 1982-84 and followed up to 1992 using a Cox regression model. Three sets of variables are combined in the analysis: firm-, sector- and cohort-specific. Financial, firm-specific characteristics such as larger initial financial capital size, conservative borrowing, heavier fixed asset commitment and lower diversification in terms of holding other firms' assets are estimated to reduce firm hazard. Higher sectoral entry rate and lower sunk cost sectoral requirements by increasing market contestability increase risk of failure together with cyclical variations.
Key words: Hazard, New firms, Failure, Entry, Exit

351
Fraquelli, Giovanni
Erbetta, Fabrizio
Privatization in Italy: an analysis of factors productivity and technical efficiency
Abstract: This work aims at investigating the changes in technical efficiency following the privatization process of 39 Italian medium-sized firms operating in competitive sectors. Using Data Envelopment Analysis over a period of 10 years we highlight that, apart from acquisitions by foreign groups, there have not been significant changes in the levels of total efficiency.The only statistically significant change concerns the strong recovery in labour productivity that showed to be continuous even during the period undergoing public control. The results, in contrast with the main theoretical predictions, shift attention to the Italian financial market. A weak incentive system and the low competition in the access to the market for corporate control seem to be the main explanatory variables.
Key words: Privatization, DEA, Efficiency
JEL classification: L33, C61

360
Fraser, Stuart
Paton, David
Does advertising increase labour supply? Time series evidence from the UK
Abstract: Despite the rapid rise in wages over the past fifty years, hours worked by manual workers in the UK have decreased only marginally. This paper examines the possibility that there has been a shift in the preferences of workers from leisure to increased consumption, caused by the huge increase in mass media advertising. A VAR cointegration framework is used to test this hypothesis on UK time series data for both males and females from 1952 to 1997. Advertising is positively associated with hours worked for both male and female series. Causality tests indicate that, for females, advertising is causing hours worked, but for males, there is evidence of two-way causation
Key words: Advertising, Labour supply, Cointegration, Causality
JEL classification: J22, M37, C22

132
Fuentelsaz, Lucio
Gomez-Villascuerna, Jaime
Strategic and queue effects at entry: the case of Spanish savings banks
Abstract: This paper studies the determinants of the expansion process carried out by the Spanish savings banks during the period 1986-1996, after the restrictions which impeded them to operate all over the national territory were removed. The model we use is the one initially proposed by Lemelin (1982). We adapt the methodology recently presented by Merino and Rodríguez (1997) for the consistent analysis of diversification decisions to the geographic diversification case. In accordance to previous studies, our results show that firm specific characteristics and objective market features are important to explain diversification patterns in the Spanish savings bank market.
Key words: Entry decisions, Spanish banking competition, Geographic diversification
JEL classification: L11, G21

177
Fung, K.C.
Maechler, Andréa M.
Can a cleaner environment be good for business?
Abstract: In the debate between environmentalists and businesses, it is generally assumed that to achieve greater environmental quality, businesses will suffer because of higher compliance costs. In this paper, we highlight a theoretical case where producers and consumers can profit from better environmental quality. While consumers benefit from greater environmental quality at the expense of lower consumption, firms can also benefit from higher compliance costs by moving towards a greater degree of collusion. After providing a formal model where the interests of consumers, firms and environmentalists can be all compatible, we use empirical estimates to verify the validity of our results.
Key words: Emission tax, Empirical, Environment, Market structure, Oligopoly, Theoretical
JEL classification: D43, H2, L13, Q4

147
Garcia Mariñoso, Begoña
Jelovac, Izabela
GPs' payment contracts and their referral policy
Abstract: The aim of this paper is to compare the role of general practitioners in determining access to specialized and hospitalized health care in two different types of health care systems: Systems where a GP referral is compulsory for specialist/hospitalized attention and systems where this referral is only facultative. We model the dependence between the GPs’ diagnosis effort and referral practice, and concentrate on the optimal contracts that induce the best behaviour from the public insurers’ point of view with asymmetric information on both effort and individual referral decisions. The paper concludes by comparing the performances of facultative and compulsory referral systems, which depend on the cost of providing incentives to the GP, the cost of health care by a specialist, the patient’s health loss resulting from unnecessary treatment and the accuracy of patients’ information.
Key words: Health economics, Screening and moral hazard
JEL classification: D82, I18, L51

83
García-Alonso, Mary del Carmen
Security and price arbitrage
Abstract: We examine the effect of international price arbitrage on the effectiveness of export controls. The restriction to the quality of exports of security sensitive products limits the outside option of domestic customers: if the product available on the international market is of low quality the firm can charge a high price to domestic customers for its latest technology. This effect leads the government to set looser export controls on security sensitive products.
JEL classification: F12, O31

206
Geroski, Paul A.
Mazzucato, Mariana F.
Myopic selection and the learning curve
Abstract: We explore the relationship between the severity of selection mechanisms and the myopia of selection processes through a duopoly model in which one firm tries to move down a learning curve in which costs are initially higher than its rival’s but ultimately much lower. The intensity of product market selection is studied by varying a parameter which denotes the degree of consumer price sensitivity: the more price sensitive are consumers the more severe is selection. We find a trade-off between catch-up time and asymptotic market share; on the one hand, the more severe are selection pressures, the less likely it is that the learning technology will survive due to its higher initial costs and prices. On the other hand, if it does survive, the learning technology will in the limit be more competitive the more severe are selection pressures. We review the implications for optimal pricing strategies under different parameter configurations.
Key words: Learning by doing, Selection, Strategic pricing, Capital markets
JEL classification: L1, D4, G30

4
Gil Pareja, Salvador
Exchange rates and European countries export prices: an empirical test for asymmetries in pricing to market behaviour
Abstract: This paper uses forward instead of spot exchange rates to test for the presence of asymmetries in the response of export prices to exchange rate movements on a wide sample of European Union exporter countries and highly disaggregated product categories. In most cases, the data give support to the hypothesis of a symmetric pricing to market behaviour during periods of depreciation and appreciation of the exporter’s currency.
Key words: Asymmetry, Pricing to market, Forward rate
JEL classification: F12, F14

171
Giulietti, Monica
Otero, Jesus
The timing of tariff structure changes in regulated industries: evidence from England and Wales
Abstract: In this paper we investigate the dynamic evolution of tariffs in telecommunications, gas, airports, electricity and water in England and Wales. The statistical analysis is based on the tariffs charged by the companies which have been subject to a price-cap after privatisation. The period covered, between 1975 and 1998, allows us to investigate systematic changes in the tariff structure before and since privatisation. In all the industries, with the exception of gas, we identify changes in the tariff structure immediately before privatisation. Some limited evidence of changes in electricity and gas tariffs before the introduction of competition is also found.
Key words: Utilities, Tariffs, Privatisation, Competition, Structural breaks, England and Wales
JEL classification: L97, L50, L11, C22

374
Goedhuys, Micheline
Entrepreneurship and growth of entrepreneurial firms in Cote d'Ivoire
Abstract: This paper analyses the factors which determine individuals’ choice into self-employment and the determinants of entrepreneurial success measured in terms of firm growth. Entrepreneurial activity is found to be undertaken by individuals who succeed in increasing their entrepreneurial abilities and reducing the risk of starting a business through a learning process that takes place through ageing, professional experience, and apprenticeship or, alternatively, formal education. The learning process takes place both before and after entry into the industry, as firms grow into a larger size. Firms of entrepreneurs with higher levels of formal education grow more successfully as entrepreneurs catch up for the initial loss of on-the-job training and reach higher levels of entrepreneurial efficiency. However, there are strong indications that entrepreneurship and firm growth are affected by financial market failures.
Key words: Occupational choice, Entrepreneurship, Firm growth
JEL classification: D83, D92, J24, O55

375
Goedhuys, Micheline
Technical efficiency, market share and profitability of manufacturing firms in Cote d'Ivoire
Abstract: Using a unique data set of firms active in the manufacturing sector in Cóte d'Ivoire, this paper measures the level of technical efficiency of firms using a stochastic frontier production function and investigates whether there are systematic efficiency differences among certain groups of firms. Subsequently the effect of technical efficiency on firm market shares and profitability is analysed. Most sectors exhibit large economies of scale implying that one source of efficiency gains consists of broadening the scale of activities of firms. Moreover, firms produce far below the maximum attainable output level but some significant inter-firm differences seem to exist. More efficient production translates into a better competitive position and higher profitability. However, legitimation effects also determine a firms market share and profitability.
Key words: Technical efficiency, Frontier production function, Profitability, Market share
JEL classification: L11, L60, O55

95
Görg, Holger
Fragmentation and trade: US inward processing trade in the EU
Abstract: Fragmentation, which refers to the splitting up of a previously integrated production process into separate components, is seen as one of the reasons for the increasing globalisation of the world economy. We undertake an empirical study of the extent of US inward processing trade (IPT) in the EU, which we use as a proxy for fragmentation in trade. We provide empirical evidence for the twelve EU member states. Our results give support to the importance of comparative advantage for the sectoral distribution of US IPT in countries at the periphery of the EU, while it does not seem to have any impact for EU core countries. Also, we find that the level of US FDI stocks has a positive impact on US IPT in EU peripheral countries.
Key words: Fragmentation, Trade, Comparative advantage, Multinational companies
JEL classification: F14, L14

244
Gourlay, Adrian R.
The determinants of technology diffusion: evidence from the UK financial sector 1972 to 1996
Abstract: This paper examines the role of firm- and market-specific factors in the diffusion of automated teller machines in the United Kingdom financial sector. A general duration model of technology adoption is employed in the empirical modelling to allow different theories of innovation diffusion to be incorporated. This model is then applied to an annual panel of adoption histories during 1972 to 1996. The main factors affecting the diffusion of new technology are found to be epidemic effects (endogenous learning), cumulative learning-by-doing effects, institution size, growth and profitability, institutional factors and technology price expectations. The results are found to be robust under a number of specifications of the baseline hazard function.
Key words: Innovation, Diffusion, Duration models, Financial sector
JEL classification: G41, G21, O31

362
Granero, Luis M.
Coscollà, Mari Paz
The strategic choice of managerial incentives and loan commitments in oligopoly. Analysis of horizontal mergers
Abstract: We consider a Cournot oligopoly when firms increase their strategic power by means of using managerial incentives and loan commitments. The interest rate is determined endogenously. Moreover, the sequence in choosing the strategic variables may be the firms' financial structure then the commercial one or vice-versa. After studying the firms’ optimal strategic behaviour, we will analyse the incentives for horizontal mergers. We conclude that firms achieve less collusive results than in the usual Cournot oligopoly. However, this effect may be offset by an even higher incentive to merger and the resulting less number of firms.
Key words: Managerial incentives, Loan commitments, Horizontal mergers, Oligopoly
JEL classification: L13, L20

175
Grishagin, Vladimiro A.
Sergeyev, Yaroslav D.
Silipo, Damiano B.
Firms' R&D decisions under incomplete information
Abstract: The paper considers a patent race when firms do not know their relative position during the race. In this setting, it shows that, firms that start in the same position proceed at the highest possible speed; and if one firm has an initial advantage in the race it preempts the rival, but at the cost of dissipating a significant part of its monopoly rent. So, the paper shows that incomplete information in a patent race leads to rent dissipation. The latter is higher the higher is the value of the prize and/or the lower is the cost of R&D. Thus, for innovations that provides relatively high profits the timing of discovery is shortened, but the social losses are likely to be high, due to wasteful duplication of efforts.
JEL classification: O3

367
Gröhn, Andreas
Network effects in PC-software: an empirical analysis
Abstract: Network effects became an important issue for antitrust policy in the software industry as well as in the credit card industry. This paper analyzes the importance of network effects in word processing software using a hedonic price approach. Word processing is the most important application on Personal Computers. During the sample period 1985 to 1995 the market leader changed twice. Despite the variance and the fast development in the industry, the regressions are able to explain up to 74 percent of the price variations in the market. Network effects are found to have a significant effect on prices.
Key words: Hedonic Price Approach, Network Effects, Software Industry
JEL classification: C23, D43, L15, L63

18
Gruber, Harald
Verboven, Frank
The diffusion of mobile telecommunications services in the European Union
Abstract: We study the technological and regulatory determinants of the diffusion of mobile telecommunications services in the European Union, using a logistic model of diffusion. We find that the transition from the analogue to the digital technology during the early nineties, and the corresponding increase in spectrum capacity, has had a major impact on the diffusion of mobile telecommunications. The impact of introducing competition was also significant, during both the analogue and the digital period, though the effect was proportionately smaller. Finally, we find that countries which granted first licenses at later points in time, show a significant catching-up effect, though international convergence may be expected only by the year 2006. The empirical results remain robust when other possible determinants of diffusion are included, such as the size of the fixed network and GDP per capita.
Key words: Technology diffusion, Regulation and competition, Mobile telecommunications
JEL classification: L1, L86, O3

24
Grupp, Hariolf
Technological change and growth: matching theory with new measurements on market level
Abstract: From a microeconomic viewpoint, no innovation theory, regardless of its basic thought, is capable of producing direct, constitutive guidelines for measuring progress. The specific problems inherent in the empirical operationalisation must be recognized and overcome by an acceptance of an irresolvable discrepancy between theory and observation. New growth theories suggest the measurement of "quality ladders". This contribution seeks to create and apply a measurement concept to quantify product quality progress through changes in characteristics starting with Lancaster's consumer theory. This concept is given the name technometrics. The following results are obtained: Growth of today's net production cannot be attributed to technical progress if one surveys the level of economic branches (industries). Variation within the branches is so great that no effect resulting from progress can be detected. If, however, one looks at goods markets, it can be shown that a growth-promoting effect due to technical progress exists that ceases after four to seven years. This is true for not only highly innovative markets, but also for those in which few R&D resources are invested. The findings can be explained by the fact that there are other innovation sources aside from R&D that affect the production of advanced goods, particularly the investment in modern machinery and the investment-embodied input factors associated with it.
Key words: Growth, Technical change, Quality ladders
JEL classification: O4, O3, L0

91
Gual, Jordi
Deregulation, integration and market structure in European banking
Abstract: European banking has gone through a process of deregulation and integration which reaches its peak with the adoption of the Euro in 1999. This paper argues that the characteristics in terms of seller concentration of the new equilibrium with integrated markets will depend on the nature of banking competition. Markets will remain moderately concentrated if banks engage in competition through standard strategic variables such as price or customer service. Concentration is likely to increase substantially if competition focuses on endogenous sunk costs. The paper provides an empirical analysis which shows that banking competition in Europe is based on variable costs.
Key words: Banking, Market structure, European integration, Deregulation, Concentration

305
Guarino, Antonio
Intra-industry and inter-industry knowledge spillovers and R&D activity
Abstract: This paper studies the decision sof a firm in the presence of knowledge spillovers. It analyzes three problems: the (dis)incentive effect of spillovers on R&D activity; the choice of a firm to reveal its knowledge when it can control the level of spillover ("endogenous spillovers"); the technological cooperation (research joint ventures) among firms. The paper considers spillovers within industries and between industries and distinguishes between substitute and complementary research projects. Interindustry spillovers incentive the R&D activity in the case of complementary research projects and disincentive it in the case of substitute research programs. Intraindustry spillovers disincentive the R&D activity for substitute research programs and have an ambiguous effect in the case of complementary research projects. If a firm can control the level of spillover, it can decide to reveal completely its knowledge to a firm operating in another market but only for complementary research projects. A firm can also decide to reveal knowledge to its rival when the competition in the market is not very high. Technological cooperation not necessarily determines a complete sharing of information and not necessarily increases the level of R&D activity.
Key words: Technological Spillovers, R&D, RJV
JEL classification: D43, L13, O31, O32

20
Gürtzgen, Nicole
Wage-employment bargaining in a unionized oligopoly and international market integration
Abstract: In a framework of a unionized oligopoly, this paper analyzes the incentive for firms and an industry wide union to adopt efficient bargaining under intensifying foreign competition. As compared to the right-to-manage framework, it is shown that under autarchy efficient bargaining entails lower industry rents and may lead to lower utilities for both parties. As a consequence, there may be consensus between the bargaining parties to bargain over wages only. In an integrated product market, there arises a conflict of interests with respect to the bargaining agenda. As regards the joint surplus, however, efficient bargaining turns out to be strategically optimal.
Key words: Trade Unions, Oligopoly, Efficient Bargaining, Product Market Integration
JEL classification: J50, L13

164
Haan, Marco
Competition policy may deter entry
Abstract: In this paper, we show that a policy that forbids cartels may benefit dominant firms, and hurt consumers. When cartels are prohibited, an incumbent monopolist can commit not to form a cartel in case a new entrant should enter the market. This reduces the entry threat, which implies that entry occurs less often, and the incumbent monopolist is less likely to set a limit price.
Key words: Limit pricing, Competition policy, Cartels
JEL classification: L12, L13, L41

99
Haan, Marco
Riyanto, Yohanes E.
The effects of takeover threats on shareholders and firm value
Abstract: We study the role of takeover threats as a corporate control mechanism using Aghion-Tirole’s (1997) model of formal and real authority. Share hoders do not monitor the manager’s action, since ownership is widely dispersed. A corporate rider may monitor, and steps in if a profit opportunity exists. In our model, a takeover threat decreases the manager’s effort and does not benefit shareholders. The effect of a takeover threat on the expected value of the firm is ambiguous. It is in the interest of the corporate raider if severance payments the manager receives upon being fired are high. Shareholders, however, prefer them to be low.
Key words: Takeover threats, Dispersed ownership structure, Firm and shares value, Formal and real authority
JEL classification: G34, G35, G38

79
Haid, Alfred
Weigand, Jürgen
R&D, liquidity constraints and corporate governance
Abstract: The paper discusses the link between financing R&D and tangible investment, firm size, and corporate governance. Mechanisms of corporate governance, such as the presence of large shareholders or stakeholders, may reduce agency and specificity problems and improve access to external finance. High ownership concentration, cross-shareholdings of industrial firms, and banks as block holders and proxy voters are main features of the German system of corporate governance. This network-orientation is often seen as alleviating agency problems and providing sufficient finance for risky long-term investment such as R&D. However, no empirical evidence has been presented yet supporting this claim. Therefore, we base our empirical analysis on a panel data set of 106 large and medium-sized German companies, which reported R&D investment throughout the period 1987 to 1993. We find evidence that R&D and tangible investment of owner-controlled firms is constrained by the availability of internal and external funds. No such liquidity constraints are found for the manager-controlled majority-held and diffusely held firms. Further, for the manager-controlled firms we observe a significant negative impact of firm size and market concentration on R&D investment, rejecting the Neo-Schumpeter hypotheses for this group of firms.
Key words: R&D investment, Corporate finance, Corporate governance
JEL classification: G3, L2, O31

338
Haid, Micheal H.
Nowak, Eric
Executive compensation and the susceptibility of firms to hostile takeovers. An empirical investigation of the U.S. oil industry
Abstract: We investigate the suggested substitutive relation between executive compensation and the disciplinary threat of takeover imposed by the market for corporate control. We complement other empirical studies on managerial compensation and corporate control mechanisms in three distinct ways. First, we concentrate on firms in the oil industry for which agency problems were especially severe in the 1980s. Due to the extensive generation of excess cash flow, product and factor market discipline was ineffective. Second, we obtain a unique data set drawn directly from proxy statements which accounts not only for salary and bonus but for the value of all stock-market based compensation held in the portfolio of a CEO. Our data set consists of 51 firms in the U.S. oil industry from 1977 to 1994. Third, we employ ex ante measures of the threat of takeover at the individual firm level which are superior to ex post measures like actual takeover occurrence or past incidence of takeovers in an industry. Results show that annual compensation and, to a much higher degree, stock-based managerial compensation increase after a firm becomes protected from a hostile takeover. However, clear-cut evidence that CEOs of protected firms receive higher compensation than those of firms considered susceptible to a takeover cannot be found.
Key words: Executive compensation, Takeovers, Compensation contracting, Oil industry
JEL classification: G3, G34, J33

278
Hamar, Judit
Policy changes and the altering ways of linking to the global corporate networks. Hungarian experiences with the OPT and the MNCs
Abstract:A brief summary of Hungarian experiences with growing equity relations and its effects on the OPT and the MNCs’ activities proves that policy changes in the host country altere the modes and the effects of linking to the global corporate networks. The OPT had key role to overcome the transitional crises, but latter it faded out. As the investment worthiness at the macro and micro economic level and prospects have improved, the multinationals have gained leading roles in the export-ability improvement. However, it does not mean that only few MNCs have "caused" the recent economic growth, or they would lack any negative side effects either. Each company group has significantly increased its performance recently, and each group (even that of the MNCs) has included largely different kinds of firms. Alarming signals of dual type of economy could also be registered.

10
Harabi, Najib
Innovation through vertical relations between firms, suppliers and customers: a study of German firms
Abstract: The surge in inter firm cooperative agreements can be seen as expressing a way for firms to respond to and to organize market failure, especially in technology markets. The incentives of firms to internalize activities are to avoid the disadvantages, or capitalize on the advantages, of imperfections or disequilibria in external mechanisms of resource allocations. The purpose of this paper is to investigate empirically the occurrence and importance of different modes of vertical relations between innovating firms, suppliers and users, using data from Germany. The analysis is based on a survey conducted by the "Center for European Economic Research" (Mannheim, Germany) among 3122 firms representing 378 different lines of business, mainly in the manufacturing sector. The main results can be summarized as follows: (i) 84% of all innovating firms responded that they have had R&D cooperation agreements with either suppliers or customers or both. This percentage is even higher (99%) if we consider only those innovating firms that have also had formal R&D departments. The phenomenon of vertical R&D cooperation is therefore widespread among German firms. (ii) Informal exchange of technical knowledge was perceived as the most important mode of R&D cooperation between innovating firms on one hand and customers and suppliers on the other, followed by formal methods of cooperation such as joint development teams and contractual R&D cooperation. Joint ventures and direct R&D orders to either customers or suppliers were seen as the least important modes of vertical cooperation. (iii) The occurrence and importance of cooperative agreements between innovating firms, users and input suppliers vary across industries. (iv) Results of multivariate statistical analysis (correlation, principal components and cluster analysis) suggested that the various modes of R&D cooperation between innovating firms on one hand and customers and suppliers on the other could be reduced to two subgroups: the first one includes formal modes of cooperation, the second one includes only informal exchange of technical knowledge. On this basis patterns of cooperative agreements could be established for firms operating in different industries and for firms using different product and process technologies.

127
Harhoff, Dietmar
Körting, Timm
How many creditors does it take to tango?
Abstract: We use comprehensive survey data on small and medium-sized German firms to study the determinants of the number of creditors. Our results suggest that financially distressed firms typically have significantly more creditors than other firms. The number of creditors increases in firm age and firm size, and innovative firms tend to have more creditors than other enterprises, ceteris paribus. Our data also allow us to explore the development of the number of creditors over time. About one fifth of all firms started debt service relationships with new bank partners over the time period from 1992 to 1997. Firms that experienced financial distress in this time period and innovative firms were significantly more likely than other enterprises to establish new relationships in addition to existing ones.
Key words: Lending relationships, Financial intermediation
JEL classification: C21, C24, C25, D45, G21

180
Haynes, Michelle
Thompson, Steve
The productivity impact of IT deployment: an empirical evaluation of ATM introduction
Abstract: The term "IT productivity paradox" has been coined to describe the failure of much empirical economic research to discern any substantial productivity growth associated with the high contemporary levels of capital investment in information technology. The recent debate over this phenomenon has centred on the service sector, especially financial services, where most of the investment has been concentrated, where the observed effects appear to have been smallest and where the associated measurement difficulties are most acute. This paper sets out to circumvent the usual problems of input and output measurement in this field by examining the productivity consequences of the introduction of a completely new and distinct embodied IT innovation - the automated teller machine (ATM) - on a panel of unusually homogeneous potential adopters, 93 UK building societies over the years 1981-93. The paper employs an augmented production function design to explore the contemporaneous and lagged productivity effects of ATM deployment. It finds evidence of large productivity gains and thus contradicts the "productivity paradox" conclusion, although the results are supportive of those, such as Grilliches, who have attributed the apparent paradox to measurement difficulties in the IT-using industries, particularly services.
JEL classification: D24, G21, L80, O33

224
Haynes, Michelle
Thompson, Steve
Wright, Mike
The determinants of corporate divestment: evidence from a panel of UK firms
Abstract: It has been widely suggested that during the 1980s many diversified firms narrowed the scope of their activities by refocusing on their core businesses, primarily through divestment activity. This study examines the determinants of divestment using an unbalanced panel of 144 UK quoted companies over the years 1985-91. Divestment activity is analysed 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 idiosyncrasies but is a purposeful response to financial, corporate governance and strategic variables and, as such, appear broadly consistent with both the agency theoretic and strategic views of the firm.
Key words: Divestment, Diversification, Count data analysis, Corporate refocusing, Panel data
JEL classification: G34, C23

219
Heavner, D. Lee
Vertical integration and bargaining with other production stages: the non-integration profit shield
Abstract: I use the incomplete contracts methodology to analyze how a vertical merger affects firms' interactions with economic agents in other production stages. Midstream-downstream integration causes the owner of the midstream unit to value downstream profits. Consequently, midstream-downstream integration allows the upstream unit to increase the price of its product. By remaining non-integrated, the midstream and downstream units shield downstream profits from the upstream-midstream negotiations. I show that if the midstream unit's marginal productivity of investment diminishes rapidly, then this non-integration profit shield is sufficiently valuable that the midstream and downstream units forgo efficient integration. In addition to its theoretical value, this result has important implications for regulating vertical integration.
JEL classification: L2, L1, L5, D2

255
Hehenkamp, Burkhard
An evolutionary solution to the Bertrand paradox explaining parallel behaviour
Abstract: We consider an evolutionary model where sellers charge prices for a homogeneous commodity and consumers decide at which seller they try to buy this commodity. These decisions are adapted over time and it is assumed that the adaptation is based on imitation and experimentation. Only if consumers always imitate with probability one, classical Bertrand equilibrium can be sustained. If consumers are slightly sluggish, other prices can be observed as well and the dynamic process itself displays the characteristic quality of parallel pricing. In particular, if consumers imitate sufficiently rarely, evolution picks up monopoly pricing.
Key words: Bertrand paradox, Consumers, Imitation, Evolution
JEL classification: D43, L13, C72

51
Herguera, Iñigo
Kujal, Praveen
Petrakis, Emmanuel
The use of several instruments in trade policy in a vertically differentiated industry
Abstract: We study the effects of trade policy when the Government has two policy instruments available: quantitative restrictions and subsidies to the domestic firm and the firms compete in quantities and in the quality that they achieve for their products. Both instruments used in isolation may have radical effects on the industry configuration. When the Government uses a combination of the instruments even a non-restrictive ex-post announcement of policy may have, ex-ante, a radical effect on the industry equilibrium shifting the allocation in favor of the domestic firm (and country). If the Government announces the policy mix in a credible way, the policy ex-post may become non binding but its effects are advanced by the firms and may lead to a Pareto superior allocation from the point of view of a nationalistic Government.
Key words: Trade policy instruments, Vertical differentiation, Switch in industry equilibrium

215
Hernán, Roberto
Marín, Pedro L.
Siotis, Georges
Why do firms form research joint ventures? An empirical evalutation
Abstract: This paper empirically analyses the determinants of firms' participation in Research Joint Ventures (RJVs). We identify testable hypotheses from a review of the theoretical literature. Using the Eureka database on RJVs and firm level data, we are able to estimate a probit. The results are that sectoral R&D intensity positively influences the probability of forming an RJV. Market share goes in the same direction, but its effect is smaller. By contrast, the degree of industry fragmentation negatively affects the probability of RJV formation. Last, Italian firms appear as less keen to form RJVs, while the opposite is true for firms originating in Finland, Norway, and Switzerland.
Key words: Research Joint Ventures, EUREKA, Europe, Probit, Spillovers
JEL classification: C25, L13, O31

194
Hertzendorf, Mark N.
Overgaard, Per Baltzer
Price competition and advertising signals - signaling by competing senders
Abstract: Can price and advertising be used by vertically differentiated duopolists to signal qualities to consumers? We show that pure price separation is impossible if the vertical differentiation is small, while adding dissipative advertising ensures existence of separating equilibria. Two simple, but non-standard, equilibrium refinements are introduced to deal with the multisender nature of the game, and they are shown to produce a unique separating and a unique pooling profile. Pooling results in a zero-profit Bertrand outcome. Separation gives strictly positive duopoly profits, and dissipative advertising is used by the high-quality firm when products are sufficiently close substitutes. Finally, depending on the differentiation, the separating prices of both firms may be distorted upwards or downwards compared to the complete information benchmark.
Key words: Duopoly signaling, Quality uncertainty, Equilibrium, Refinements
JEL classification: C72, D82, L15

22
Hoernig, Steffen
A model of dynamic R&D competition with endogenous innovation targets and leapfrogging
Abstract: We analyse an infinitely repeated R&D-race where firms do not only choose their research efforts but also decide upon their innovation targets and whether they leapfrog the opponent. Closed-form and numerical solutions to the resulting differential game are presented, and finite and asymptotic properties of the equilibrium innovation targets and research efforts are characterised. The innovation hazard effect determines whether followers catch up in a step-by-step or cost-matching fashion, while the replacement and efficiency effects determine whether persistence of leadership or frequent leapfrogging arises.
Key words: Innovation, Leapfrogging, Innovation hazard effect, Stochastic Jump Differential Game
JEL classification: L13, O31, C73, C61, D92

220
Holahan, William L.
Oughton, Christine
The analysis of a sports league dominated by a buyer's cartel
Abstract: Sports enthusiasts and industry analysts often express concern over the balance of talent within a league and the dominance of the league by just a small number of teams located in large towns. Cast as a dominant buyer’s cartel, a sports league buys talent in the market-place and stages games whose excitement depends on the balance of talent among the teams. Dominance by a few firms depresses wages and reduces the overall amount of talent drawn to the league. But the talent that is drawn to the league is spread more evenly across teams when the cartel is functioning than if all the teams competed as price taking buyers. Moreover, it is shown that a payroll cap imposed upon the league will transform a competitive buyers’ market into one that mimics the dominant buyers’ cartel.
Key words: Economics of sport, Payroll caps, Dominant buyer's cartel
JEL classification: L0, L1, L2, L8, J3, J4

29
Hoppe, Heidrun C.
Lehmann-Grube, Ulrich
Spatial competition in credit markets
Abstract: Using Hotelling’s two-stage model of spatial competition, we develop a lending model which admits subgame-perfect (location-then-price) equilibria in pure strategies for linear transportation costs and general logconcave customer densities - in contrast to Hotelling’s model in which no such equilibrium exists. The difference is due to the specificities of banks’ activities: banks perform independent tests to assess the credit-worthiness of their loan applicants, and thereby create a non-geographic customer heterogeneity. If banks are sufficiently pessimistic about the credit-worthiness of firms who passed only their own test, they choose to locate at the market fringes so as to minimize the risk of default.
Key words: Banking competition, Hotelling, Information acquisition, Credit-worthiness tests
JEL classification: D83, G21, L13

81
Horváth, Réka
Information sharing in research joint ventures and the limited liability effect
Abstract: In spite of the advantages of research joint ventures this type of R&D cooperation is generally very fragile. One important reason is that the information sharing, one main input of joint research activity cannot be contracted. This creates a moral hazard problem when the partners are competitors in the product market. In this paper I propose a way to alleviate this problem. I find that there is a direct relationship between the debt of the firm and its incentives to disclose its know-how. If debt financing is possible, under some conditions about the profit function firms finance at least partially with debt. As a result, the equilibrium level of disclosure is higher than without the possibility of debt financing. That is, the leverage acts as a commitment device to share knowledge. With the possibility of borrowing, firms can also successfully cooperate in order to maximize the value of the industry: they can write a contract on debt levels which they could not do on the share of information.
Key words: Research joint venture, Financial structure, Information sharing, Commitment

289
Hubert, Florence
Pain, Nigel
Inward investment and technical progress in the United Kingdom
Abstract: New growth theories suggest that spillovers from foreign investments by multinational companies may affect technical change and economic growth in host economies. We examine the impact of inward investment on the pace of technical change in the UK using two separate econometric studies. The first examines the link between inward investment and technical progress in five economic sectors. The strongest evidence of significant spillovers is in the manufacturing sector, but we also find smaller, statistically significant effects in service industries. A panel data set of domestically-owned firms in a number of manufacturing industries suggests that their behaviour is largely influenced by the overall scale of operations by foreign-owned firms within the manufacturing sector, rather than just by spillovers within the industry in which foreign firms are located.
Key words: Foreign direct investment, Spillovers, Technical progress
JEL classification: F23, O3, O4

334
Hvide, Hans K.
Kristiansen, Eirik G.
Risk taking in selection contests
Abstract: We study selection contests in which the strategic variable is degree of risk rather than amount of effort. The selection efficiency of such contests is examined. We show that the selection efficiency of a contest may be improved by limiting the competition in two ways; a) by having a small number of contestants, and b) by restricting contestant quality. The results contribute to our understanding of such diverse phenomena as promotion processes in firms, selection of fund managers and research tournaments.
Key words: Contest, Selection, Risk taking
JEL classification: C44, D29, D83, J41

373
Hviid, Morten
Moellgaard, H. Peter
Countervailing power and price transparency
Abstract: We investigate whether increased transparency about prices may increase the countervailing power exercised by buyers of an intermediate good and whether this will lead to a decrease of intermediate goods prices. We attempt to identify circumstances in which this effect may dominate possibly improved oligopolistic coordination due to better information. The results are related to the experience of the Danish Competition Authority’s practice in the 1990s.
Key words: Negotiated intermediate prices, Countervailing power, Price transparency
JEL classification: L20, L40

124
Ibanez, Lisette
Competition in environmental labelling
Abstract: This paper analyzes environmental labelling strategies in a duopoly market. We consider a three-stage game where firms successively choose their production technology, label signal and price. The willingness to pay for the environmental quality is explained by an altruistic parameter as consumers axe voluntarily contributing to the preservation of the environment, which is a public good. Having pointed out the necessity for the consumer behaviour to be continuous, we consider a population of consumers who are uniformly distributed according to their prosocial behaviour. Thanks to the competition aspect, we can determine two Bayesian equilibria: one where firms are able to sell environmentally differentiated products and another where no environmental-friendly product will be marketed.
Key words: Environment, Labels, Duopoly, Imperfect information
JEL classification: D64, L15, L17, L19

284
Iidaka, Yuki
R&D organization, industry structure, and welfare; with an application to biotechnology
Abstract: Two R&D organizations will be considered; Integrated R&D where a firm runs all projects internally and Separated R&D where a firm delegates a project to an independent lab while it runs the rest. We will examine which of the two organizations will facilitate more fragmentation of industries than the other. The resultant social welfare of the industries will be also analyzed. We will examine the current situations in biotechnology industry in the light of our results. We argue that, depending on circumstances, the further growth in contractual R&D may not be socially desirable.
Key words: R&D organization, Industry structure, Information assimilation ability, The success probability, An applicability rate
JEL classification: L13, L29, O31

89
Ilmakunnas, Pekka
Kanniainen, Vesa
Lammi, Uki
Entrepreneurship, economic risks, and risk-insurance in the Welfare State
Abstract: We find strong evidence in the OECD country panel data to support the Knightian view that non-diversifiable economic risks shape the equilibrium entrepreneurship in an occupational choice model. Differential social insurance of entrepreneurial and labour risk is found to be statistically significant and detrimental to entrepreneurship. The crowding-out effect of public production of private goods on entrepreneurship dominates the crowding-in effect of public production of public goods. Evidence is found for the proposition that the rate of entrepreneurship is positively related to the degree of income inequality and negatively to the union power in the economy. The results suggest that a high living standard also has a detrimental effect on entrepreneurial risk-taking.
Key words: Entrepreneurship, Risk, The Welfare State, Social risk insurance, Crowding-in, Crowding-out
JEL classification: D2, G3, H1, L2

28
Iossa, Elisabetta
Stroffolini, Francesca
Price cap regulation and information acquisition
Abstract: In this paper we endogenise the information structure under price cap regulation. We show that, in order to induce the firm to acquire valuable but costly information, price cap mechanisms need to ensure high and undue profits to the firm. Further, we compare incentives for information acquisition under price cap regulation and under an optimal mechanism designed to deal with the standard case where asymmetric information is assumed. We show that the latter provides higher incentives for information acquisition, and that the welfare loss associated with price cap regulation - with respect to the optimal regulatory mechanism - increases when the issue of information acquisition is considered.
Key words: Information acquisition, Price cap, Regulation
JEL classification: D82, D83, L5 

111
Iozzi, Alberto
Portiz, Jonathan A.
Valentini, Edilio
Distributional equity and price cap regulation
Abstract: One of the desirable characteristics of price cap regulation is that it ensures the long run convergence toward Ramsey prices. However, it has been put forward that there may exist some possible adverse distributional effects of Ramsey prices as they entail higher mark-ups on those goods with lower demand elasticity. As these are often the goods which represent a large share of low-income consumers’ expenditures, Ramsey prices may have a large effect on these consumers’ welfare. Feldstein (1972a) proposes an alternative vector of optimal prices under the hypothesis of a distributionally weighted additive welfare function. Feldstein’s result provides a second-best price vector which it is clearly more desirable than Ramsey prices in terms of distributional properties. This paper proposes a modified price cap mechanism which, despite not being informationally demanding, shows the same long run behaviour with respect to Feldstein prices that the traditional price cap has for Ramsey prices. Moreover, the price cap mechanism presented does not alter the usual desirable properties of price cap regulation in terms of incentives to cost minimisation.
Key words: Regulation, Price cap, Distribution equity
JEL classification: L51, D63

120
Irngartinger, Markus
Organizational structures of R&D under uncertain innovation
Abstract: Organizational structures of R&D are compared in a game-theoretic model with respect to their provision of incentives for undertaking R&D. In the first stage firms undertake knowledge enhancing investments. In the next period firms may exchange interim knowledge depending on the organizational structure of R&D. In the final stage firms compete in an R&D contest for achieving a patentable innovation. A research joint venture (RJV) decreases the investment of non-participating firms compared to independent research and to a bargaining game about knowledge transfer. We give conditions for an increase of investments by the participating firms of the RJV.
Key words: Research joint venture, Exclusive dealing, Externalities, Knowledge sharing
JEL classification: D80, L20, O31, O32

190
Ishigaki, Hiroaki
Repetitive advertising to deter new entry
Abstract: The purpose of this article is twofold. One is to introduce a new advertising model in which firms can repetitively advertise. In the model, consumers know the existence of a brand from its ads, but a firm can crowd the information of the existence of its rival’s product out of their memory through repetitive advertising. The other is to examine an incumbent’s strategic advertising to influence the condition of new entry into a homogeneous-product, post-advertising price-setting market if repetitive advertising is allowed. I show that when new entry is effectively impeded, the incumbent’s optimal strategy may involve repetitive advertising.
Key words: Repetitive advertising, Strategic entry deterrence, Bertrand competition, Bounded rationality
JEL classification: D43, L12, M37

108
Jansen, Jos
Product preannouncement and concealment in R&D races with learning labs
Abstract: Innovating firms that compete in a dynamic R&D race are sensitive to information that they receive from rivals. Competing firms choose strategically whether to disclose or conceal intermediate discoveries to affect competition in later stages. The extent to which firms choose to disclose intermediate information about cost of investment, both influences firms’ incentives to acquire this information, and their incentives to invest in later stages. We compare equilibria under voluntary disclosure with those under mandated disclosure. Both the degree of correlation between firms’ costs and mandating disclosure affect equilibrium disclosure and investments substantially.
Key words: R&D competition, Information acquisition, partial disclosure
JEL classification: D82, D83, L23, O31, O32

66
Janssen, Maarten C.W.
Maasland, Emiel
Information acquisition in the Stackelberg model
Abstract: This paper studies a simple Stackelberg model with random linear demand in which firms have to decide whether or not to do market research on an unknown demand parameter. Depending on the parameter values different outcomes are possible. If uncertainty is small, both Leader and Follower refrain from market research. If uncertainty is large, only the Leader does market research. For the intermediate case, only the Follower does market research. We also show that if the Leader has more information about demand than the Follower there exists a unique D1 equilibrium and that this equilibrium is perfectly revealing.
Key words: Information acquisition, Asymmetric information, Separating equilibria, Signalling games, Stackelberg Competition
JEL classification: C72, C73, D82, L10

179
Jensen, Richard
Innovative leadership and new product adoption
Abstract: This paper studies strategic innovation adoption with uncertainty about the profitability of the innovation that cannot be resolved instantaneously. That is, profit is not only random, but its distribution is unknown (because the distribution of demand for the new product is unknown). Thus, there is a free rider problem associated with adoption. Each firm has an incentive to take a "wait and see" approach because adoption by a rival provides the same information about demand as its own adoption. A stochastic game is analyzed in which all firms begin with the same, common knowledge initial estimate of the probability of high demand. If any firm adopts, all firms observe realized demand and revise the estimate accordingly: up for good news (high demand), and down for bad news (low demand). One interesting result is an increase in the initial estimate can actually decrease the number of firms that initially adopt. A higher estimate is accompanied by a higher updated good news estimate, and this may induce adoption in the next period by a firm which otherwise would not have adopted. This reduces expected profit in the next period for all firms. This is more likely for riskier innovations and greater competition (more firms). Moreover, innovative leadership does not imply early adoption. Essentially, a leader has a larger incentive to free ride on information from rival adoption because its leadership position guarantees it cannot be excluded from the new good market if it waits. Other firms have no such guarantee. Leadership does, however, imply higher expected (discounted) profit.
Key words: Adoption, Innovation, Leadership
JEL classification: C73, O31, O33

54
Jensen, Richard
Showalter, Dean
Debt and R&D expenditures
Abstract: Although a considerable amount of attention has been devoted to investment in R&D, with few exceptions these models assume that firms finance R&D entirely through equity. The analysis of capital structure and its effects on R&D is an especially topical issue given a recent trend among high-tech companies in the United States toward increasing use of borrowed funds to finance their initial operations. We merge the literature on strategic debt with that on patent races, and thereby reveal a link between financing and R&D. The use of debt acts as a credible commitment to a future R&D strategy. The substitution of debt for equity results in lower total R&D expenditures. If R&D expenditures are an up-front, fixed cost (strategic substitutes), then firms do not use debt because it carries a strategic disadvantage. Debt commits a firm to lower total investment, thus inducing an increase in investment by its rival and lowering its profit. But if R&D expenditures are a flow cost (strategic complements), then firms will use at least some debt to finance R&D because it carries a strategic advantage. Debt commits the firm to lower total investment, thus inducing a favourable reduction in R&D expenditures by its rival and increasing its profit.
Key words: Debt, Innovation, Research and development, Patent race
JEL classification: G32, O31, O32

50
Jie-A-Joen, Clive
Belderbos, René
Sleuwaegen, Leo
Local content requirements, vertical cooperation, and foreign direct investment
Abstract: We examine the effects of a local content requirement (LCR) in the context of potential vertical cooperation between a host country’s upstream and downstream producers and foreign direct investment (FDI) in upstream manufacturing by a foreign multinational. The relationship- specific investment which sustains cooperation also allows the host country firms to commit to a FDI pre-empting strategy through manipulation of the price of intermediates supplied to the foreign firm. It is found that depending on the presence of economies of scale in the upstream industry and the cost advantage of the multinational, the LCR can either induce cooperation and increase host country profits, or reduce the incentives to cooperate and induce FDI. In the latter case, the LCR reduces profits of all firms but benefits consumers.
Key words: Local content requirements, Cooperative bargaining, Foreign direct investment, Strategic rent shifting
JEL classification: F13, F23, L13, L22

145
Jin, Jim Y.
Perfect collusion under private uncertainty
Abstract: This paper shows firms may be able to maximize the total profit even when they only know their own demand and costs. This can occur in three types of n-firm asymmetric oligopolies, namely, (i) a market with a representative consumer, (ii) a market with horizontally differentiated products and (iii) a market with vertically differentiated products. In each case, perfect collusion is feasible in spite of private uncertainty. Moreover, perfect collusion can be incentive compatible if an industry consultant possesses certain information, which is normally deemed insufficient for collusion.
Key words: Joint profit maximization, Product differentiation, Monitoring
JEL classification: D43, L13

61
Jonard, Nicolas
Schenk, Eric
A duopoly logit model with price competition and strategic compatibility
Abstract: This paper provides an analysis of compatibility decisions with oligopolistic price setting in a duopoly logit model. We consider a sequential game in which firms first choose whether they supply compatible products and then set the price which is charged. The equilibrium compatibility configuration is the outcome of a trade-off between consumers valuation of compatibility and the loss of product differentiation which is associated with compatibility. Finally, it is shown that firms incentives towards compatibility tend to be socially insufficient.
Key words: Compatibility, Product differentiation, Price competition, Multinomial logit, Welfare
JEL classification: L13, D4

102
Junius, Theo
On non-competitive behaviour in a simple two-sector model
Abstract: Based on Walrasian general equilibrium theory it is the target of applied general equilibrium modelling to specify and to investigate realistic models of actual economies. The specific theoretical background of applied general equilibrium modelling is often explained in terms of a simple two-sector model due to Jones. In the Jones-model two competitive firms enter with linear-homogeneous technologies However, reality suggests that on a number of markets non-competitive behaviour is the "rule". So simultaneous competitive behaviour on all markets must be considered as an "extreme" for studying actual economies. The aim of this paper is to study at a more basic level the relation between non-competitive behaviour and general equilibrium modelling. For that purpose we apply standard microeconomic theory of monopoly behaviour for extending the two-sector model of Jones. In the literature on applied general equilibrium modelling non-competitive behaviour is inserted by assuming that the price elasticity of monopoly demand is a given constant, i.e. independent of input prices. From a methodological point-of-view such an approach is improper because it yields non-optimal outcomes. In our paper we follow a more general approach. Firstly, market equilibrium under non-competitive behaviour consists of two ingredients, market clearing on input markets and proper monopoly profit maximization. This implies that an imaginary market auctioneer has to investigate not only the excess demand functions but also the excess marginal revenue function of the monopolist. As a result, it is not necessary to assume that the price elasticity of monopoly demand is a given constant. This elasticity becomes an endogenous variable on the domain of input prices. Secondly, if the utility functions are linear-homogeneous, then it is possible to obtain an explicit mathematical expression for the relationship between monopoly profit and monopoly demand functions. Yielding a recursive non-competitive equilibrium model. Our approach is illustrated by an extension of a numerical example due to Shoven-Whalley.
Key words: Applied general equilibrium, Non-competitive behaviour, Two-sector modelling
JEL classification: C68, D58, L13

389
Kamien, Morton I.
Zang, Israel
Virtual patent extension by cannibalization
Abstract: We propose a model to explain the recent practice of pharmaceutical firms to introduce generic substitutes for their own branded products before their patents expire. By this early introduction, a branded product’s provider seeks to establish a Stackelberg leadership role in the forthcoming generic substitute market. Along with the early introduction of the generic substitute for its branded product, the firm optimally raises the price of its branded product above its prior monopoly level. However, despite its Stackelberg leadership position in the subsequent generic substitute market, the firm’s branded product’s price declines for a sufficiently large number of entrants into that market. Consumers, who are assumed to be composed of a brand loyal segment and a price sensitive segment, are better off both before and after the branded product’s patent expires as a result of the branded products’ suppliers early introduction of generic substitutes. The branded products’ suppliers are also better off, but the generics' suppliers are not, as a result of this practice. However, total producer profits are higher than they would be if the branded products' suppliers were not involved in supplying their own generic substitute.
JEL classification: L1

298
Kaplan, Todd
Luski, Israel
Wettestein, David
Government policy towards multinational corporations
Abstract: We analyze environments where a country tries to attract a multinational corporation. We consider the use of taxes and grants to achieve the country’s goals. Both country and firm are interested in maximizing their revenues and we use the subgame-perfect equilibrium to characterize an equilibrium course of action. We show that when the country has private information it can often convey it via its choice of a tax-grant pair and in all cases it is able to extract the full surplus. When there is private information on the side of the firm, we show that under certain conditions an appropriately constructed schedule of taxes and grants enables the country to screen the firms and once more extract the whole surplus.
Key words: Foreign direct investment, International competition, Subsidization, Multinationals, Subgame-perfect equilibrium
JEL classification: F21, F23, H71

183
Katsoulacos, Yannis
Ulph, David
Biboli, A.
Research joint ventures: formation, performance and welfare evaluation
Abstract: A large number of papers that have appeared over the last decade or so have examined RJVs in terms of their performance relative to the non-cooperative equilibrium and/or the social optimum. Most contributions follow the seminal analysis of D’Aspremont and Jacquemin (1988) who set out a model where there was (a) homogeneous product; (b) Cournot competition; (c) perfectly complementary research activities; (d) fixed spillovers; (e) symmetric equilibrium. More recently Katsoulacos and Ulph (1998) set out a model in which they relaxed (d) but argued that in doing so it was important to (a) distinguish between substitute and complementary industries; (b) distinguish different types of competition (e.g. Cournot and Bertrand); (c) distinguish between complementary and substitute research path; and (e) consider asymmetric equilibria where the RJV operates a single lab – this is important when thinking about avoiding duplication. However many of these distinctions are still important in the d’A&J framework. o here we revisit this. Our aim is to compare levels of profits and welfare in the cooperative and non-cooperative equilibrium and see whether the private gains to form an RJV are strongest where the social gains are strongest.

238
Kim, Moshe
Kliger, Doron
Vale, Bent
Estimating switching costs and oligopolistic behaviour
Abstract: We present an empirical model of firms' strategic behaviour in the presence of switching costs. Consumers' transition probabilities embedded in firms strategic interaction are used in a two-stage game to derive structural estimable equations of a first order condition, market-share (demand), and supply equations. The novelty of the model is in its ability to extract information on both the magnitude and significance of switching costs, as well as on consumers' transition probabilities, from conventionally available highly aggregated data which do not contain consumer-specific information. As a matter of illustration, the model is applied to panel data of banks, to estimate the switching costs in the market for bank loans. We find that the point estimate of the average switching cost is 6.6% which is about one half of the market average interest rate on loans and that over a quarter of the customer's added value is attributed to the lock-in phenomenon generated by this switching cost. More than a third of the average bank's market share is due to its established bank-borrower relationship. The duration of bank-customer relationship implied by the model estimates averages 14 years. The presented technique may be applicable to modelling a wide class of problems where only aggregate data exists.
Key words: Switching costs, Transition probability, Structural model, Banking
JEL classification: L13, G21

226
Klepper, Steven
Simons, Kennet L.
The making of an oligopoly: firm survival and technological change in the evolution of the U.S. tire industry
Abstract: The number of firms producing tires in the United States grew steadily over the first 25 years of the industry, peaking at 274 firms in the early 1920s. It subsequently declined sharply, to less than 50 firms, by 1940 and continued to decline for many years thereafter. The industry was dominated early by four firms which increased their collective market share from over 50% to over 70% during the sharp decline in the number of firms in the 1920s and 1930s. The role of technological change in shaping the evolution of the market structure of the industry is explored. A model of industry evolution featuring dynamic increasing returns from technological change is used to develop predictions regarding firm survival and innovation. The predictions are tested using a novel data set combining information on firm entry, exit, size, location, and distribution networks with firm technological choices in the early 1920s prior to the sharp reduction in the number of tire producers. The findings are consistent with the various predictions of the theory and indicate that older and larger firms survived longer, principally due to the influence of age and size on technological change. Firms located around the geographic center of the industry were also found to be more technologically progressive, which contributed to their longer survival.
Key words: Market structure, Firm survival, Technological change, Industry evolution, Oligopoly, Dynamic increasing return, Firm size
JEL classification: L1, L6, O3

40
Knieps, Günter
Access to networks and interconnection: a disaggregated approach
Abstract: As a consequence of the recent developments towards deregulation and subsequent vertical disintegration of networks, problems of network access as well as network interconnection gain increasing importance. The purpose of this paper is to approach the increasing vertical and horizontal interconnection problems within networks in a conceptual way. In particular, the question will be analyzed to what extent interconnection/access problems can be solved by voluntary market contracts of the parties involved and to what extent government interventions (e.g., harmonization and integration policies by the Council of the European Union) should be implemented.
Key words: Open network provision, Network access, Disaggregated regulatory framework
JEL classification: L51, L96

323
Konings, Jozef
Van Cayseele, Patrick
Warzynski, Frederic
The dynamics of industrial markups: using firm-level data in two small open economies to assess whether national competition policies matter
Abstract: In order to determine whether antitrust policy affects competition and the pricing behaviour of firms, we estimate mark-up ratios according to the techniques developed by Hall (1986, 1988) and Domowitz et al. (1988) for the Dutch and Belgian manufacturing industry from 1992 to 1997. Antitrust laws were applied less toughly in the Netherlands. We correct for three major weaknesses of the method: first, because the estimating equation is derived within the context of the theory of the firm, we use firm-level data. This increases efficiency thanks to the larger number of observations. Second this allows us to select valid instruments that have economic sense. Third we include material costs in our calculations to avoid the upward bias that occurs when omitting them. We find evidence of large mark-up ratios in the manufacturing industry as a whole and in a lot of 2-digit industries. The mark-up ratio did not decline in Belgium following the creation of a national competition policy authority. However we show that the mark-up ratio is higher in the Netherlands than in Belgium in the whole manufacturing industry but also in most smaller subsets. In addition, the import penetration ratio positively influences the mark-up ratio in the Netherlands, meaning that imports do not discipline the industry.
Key words: Competition policy, Mark-up, Import penetration
JEL classification: C23, K21, L13, L4

245
Konrad, Kai A.
Lommerud, Kjell Erik
Foreign direct investment, intra-firm trade and ownership structure
Abstract: Asymmetric information about true opportunity cost in trade between a multinational and its foreign affiliate can alleviate the hold-up problem in foreign direct investment. Selling shares in the affiliate to locals is also beneficial because it increases the parent multinational’s information rent that is protected from a host government’s confiscatory taxation.
Key words: Foreign direct investment, Intra-firm trade, Hold-up problem
JEL classification: F23, F34, G15, H87

322
Koski, Heli A.
Network externalities, R&D spillovers and technology policy, and the R&D intensity of the communications sector
Abstract: This paper empirically explores the determination of the R&D intensity of the communications sectors of OECD countries from 1980 to 1995. Our data suggest that there are two key factors that significantly impact on the order of magnitude of communications R&D expenditures: R&D spillovers and network externalities. Technological progress in the office and computing equipment sector and the radio, TV and communications equipment sector provide substantial R&D spillovers to, and consequently facilitate innovation in, the communications sector. Our empirical investigation also provides evidence that network externalities related to new network technologies, or the order of magnitude of the installed user base of certain network technologies, may have a substantial accelerating impact on innovation in the network markets. The institutional or policy factors such as the opening up market to competition, privatisation and the type of regulatory agency do not seem to have a notable effect on the R&D intensity of the communications sector.
Key words: Network externalities, R&D spillovers, Technology policy, Innovation
JEL classification: L1, L5, O3

35
Krepps, Matthew B.
Exploring linkages between product markets and capital markets: strategic layoff preannouncements
Abstract: Extensive field research indicates that managers believe preannouncing impending layoffs adversely affects worker productivity, yet such voluntary disclosures occur. In a disproportionate share of cases, layoff announcements with long lead times immediately precede borrowing by the announcer or its rivals. This paper tests the proposition that these preannouncements are a form of costly disclosure undertaken by managers who are unable to commit contractually to future layoffs in order to influence capital costs. Empirical evidence presented suggests that the need to obtain outside financing - by the announcer or its rivals - is an important determinant of these putatively costly preannouncements.
Key words: Signalling, Layoffs, Strategic commitment
JEL classification: G14, G30, L13

310
Kretschmer, Tobias
Competition, inertia, and network effects: slicing the pie before it's baked
Abstract: I present a model in which different versions of a new technology with network effects compete to replace an old, inferior one with an installed base. The quality of the different versions is revealed after the first period. Because adopters are cautious not to move too early and end up with an ex-post sub-optimal technology, first-period adoption will decrease. This decrease in early adoption and the corresponding loss in network utility is at least partly offset by a higher probability of adopting a high-quality technology. I derive circumstances in which it is socially beneficial to introduce another technology. Relating the results to the case of quadraphonic sound, I claim that the increase in the option value of waiting was one of the reasons why the technology eventually failed.
Key words: Technology adoption, Network externalities, Installed base, Quadraphonic sound
JEL classification: L1, L4, O3

113
Krickx, Guido A.
Excessive integration and ferrite cores: the role of property rights and process innovation
Abstract: Excessive vertical integration, beyond what transaction cost analysis expects, is often explained as driven by lower production costs. This paper shows that when property rights are not clearly established and when process innovations are hard to protect, greater integration is consistent with transaction cost reasoning. An extensive example concerning vertical integration with respect to ferrite cores, an early solid-state mainframe memory component, provides support for the main conclusion. Not the product characteristics, but the process-related transactions cause the pattern of vertical integration. Such integration undertaken to resolve transaction cost difficulties, also reduces production costs.
JEL classification: D23, L22, L63, N62, O31

90
Kuhn, Michael
Sweetening the lemons? Imperfect auditing and entry into a credence goods market under rational anticipation of average quality
Abstract: The paper inquires whether quality auditing with an associated label mitigates adverse selection, where a high quality (HQ) product variant is underprovided. A model, integrating entry into a perfectly competitive, vertically differentiated industry and rationally expected quality structure (REQS) under asymmetric information, provides conditions for the label, serving as screening device, to increase HQ supply and curb pooling. Perverse reactions entail decreasing HQ supply, enhanced pooling, or increasing low quality supply. It is shown that the common single crossing property disregards the impact of changes in REQS on absolute profitability and may misdiagnose firms’ incentives to attain the label.
Key words: Asymmetric information, Quality labelling, Entry, Market structure, Screening, Vertical differentiation
JEL classification: D82, L11, L15

370
Laursen, Keld
Revealed comparative advantage and the alternatives as measures international specialisation
Abstract: The paper is an analysis of Balassa’s "revealed comparative advantage" (RCA). The papers shows that when using the RCA, it should always be adjusted in such a way, so that it becomes symmetric. The conclusion is based on a theoretical discussion of the properties of the measure, but also on convincing empirical evidence, based on the Jarque-Bera test of normality of the error terms from regressions, using both the RCA and the RSCA. RSCA is also compared to other measures of international trade specialisation. These measures included the Michaely index and the chi square measure. The conclusion emerging from the analysis is that the RSCA is - on balance - the best measure of comparative advantage.
Key words: Revealed comparative advantage, International specialisation
JEL classification: C43, F14

319
Leech, Dennis
Minority control: an analysis of British companies using voting power indices
Abstract: An exercise in the empirical use of voting power indices from co-operative game theory applied to ownership data for large companies, this paper contributes in two areas: (1) the analysis of company control based on shareholder voting power, and (2) the empirical use of power indices and understanding of the comparative properties of different indices. New algorithms for calculating power indices, which quantify voting power in weighted voting bodies like company meetings, are applied to detailed data on beneficial ownership of 444 large UK companies without majority control. The results show that the Banzhaf index is, and the Shapley-Shubik index is not, useful for this analysis and a control classification of the firms is obtained.
Key words: Ownership and control, Power indices, Shapley-Shubik index, Banzhaf index, Oceanic games, Co-operative game theory
JEL classification: G32, G34, C71, C88

143
Lehto, Eero
Switching costs and networks externalities in the production of payment services
Abstract: This study considers retail banking duopoly in the production of payment services. Switching costs make the old clients locked-in. Network externalities are exhibited due to high transaction costs in making a transfer to another bank’s customer, and due to low marginal costs in processing an intrabank transfer. This makes the discounted marginal profits from the old clientele increase in the number of old clients which favours a larger bank. This can encourage the larger bank to capture the new clients which are free of switching costs, even if price discrimination between old and young clients is not allowed. To obtain this result, requires, however, that a maximal price premium extracted from a payment transfer to another bank’s customer is small enough. Thus the ordinary result according to which, it is too big sacrifice for a larger bank to lower also the prices of the old clients in order to capture the new clients, can be reversed.
Key words: Retail banking, Switching costs, Network externality
JEL classification: G21, L11, L12

103
Leiponen, Aija
Core complementarities of the corporation? Knowledge and the organization of an innovating firm
Abstract: This paper examines the dynamic implications of organizational choices. Does it matter in the long rung if the firm contracts out some activities instead of keeping them all internal? The starting point is that cooperation and cross-functional communication is more easily sustained in internal organization. Modern innovation literature characterizes innovation as a process of interaction of the relevant sources of knowledge, and since an important part of these capabilities do not transfer very well, collaboration between these sources can be critical for innovation. This paper develops a model, making use of monotone comparative statics, where it is studied how collaboration should be organized in different technological environments. The analysis demonstrates how the static and dynamic costs from organizational choices may diverge, and how organization, investment, and innovation decisions are intertwined. Low cumulativeness of knowledge in the technological regime, or equivalently in this static model, a high rate of radical technological change, is identified as the main driver of separate governance of complementary activities.
Key words: Innovation, Organization theory, Firm capabilities, Complementarities
JEL classification: D23, L22, O31, O32

126
Lethiais, Virginie
Entry and lateral integration in two parallel markets
Abstract: In this paper, I compare entry and merger as two ways for firms that compete in a market in which the demand is unknown and low -the uncertain market- to have access to a market in which the demand is known and higher -the certain market. I assume that entry implies an additional cost: the transfer cost. In this setting, I consider a three stages game. At the first stage, firms in the uncertain market choose either to merge with a firm of the certain market or to remain independent. At the second stage, firms install their production capacities. At the third stage, production takes place; independent firms of the uncertain market can enter the certain market. I show, in the particular case of two duopolistic markets, that firms do not always choose to merge in order to have access to the certain market. Indeed, depending on the transfer cost there may be no merger at the equilibrium.
Key words: Entry, Lateral integration, Parallel markets, Space industry
JEL classification: L11, L40

343
Lever, Marcel H.C.
Nieuwenhijsen, N.R.
van Stel, A.J.
The degree of collusion in the Dutch construction sector
Abstract: The purpose of this paper is to determine the elasticity of collusion in the construction sector in the Netherlands, using the oligopoly model proposed by Appelbaum. The model consists of five equations. Three factor demand equations are used to determine marginal costs. The demand equation provides an estimate of the price elasticity of demand. The price equation provides an estimate of the elasticity of collusion. The model is estimated using annual data for 5 three-digit sectors and 2 or 3 size classes for the years 1983 up to and including 1993. The elasticity of collusion appears to be 0.05, which implies some oligopoly power.
Key words: Market power, Collusion, Oligopoly, Construction sector
JEL classification: D43, L13, L74

52
Liu, Xiaming
Parker, David
Vaidya, Kirit
Wei, Y.
The impact of foreign direct investment on labour productivity in the Chinese electronics industry
Abstract: Foreign direct investment (FDI) can have a positive impact on labour productivity in recipient industries through direct introduction of capital and management skills and indirectly through spillover or demonstration effects on domestic firms. This study uses a model intended to capture both direct and indirect effects of inward FDI in the Chinese electronics industry. The data used are for 47 sub-sectors of the industry in 1996 having differing levels of FDI. Labour productivity is modelled as dependent on the degree of foreign presence in the industry and other variables which are known to have a positive impact on productivity, namely capital intensity, human capital and firm size for scale factors. The results suggest that human capital has the largest positive elasticity with respect to the explanatory variable with firm size and foreign presence also significant at the 10% level or better. Capital intensity was found to have the expected sign but was marginally statistically insignificant. Foreign presence in the industry, reflecting the stock of FDI, was associated with higher labour productivity but had the smallest elasticity. This suggests that the impact of FDI on raising efficiency in the Chinese electronics industry can be exaggerated.
Key words: FDI, Labour productivity, China, Electronics industry
JEL classification: F21, L63

292
Llerena, Patrick
Oltra, Vanessa
Diversity of innovative strategy as a source of technological performance
Abstract: This paper explores through a micro-simulation model the impact of diversity of innovative strategies of firms upon the industrial dynamics. We consider two types of firms each one being characterised by a specific innovative strategy. Basically we assume that some cumulative firms adopt an internal learning by searching strategy, while non-cumulative firms adopt an external learning strategy aiming at absorbing external sources of knowledge. The results show that the co-existence of the two types of firms leads to an oligopolistic structure characterised by asymmetries in the size of firms and higher technological performances. Thus the diversity of innovative strategies generates a diversity in firms market shares and is a source of dynamic efficiency in the long run.
Key words: Industrial dynamics, Innovation, Diversity, Learning
JEL classification: L1, C63

3
Llorca Vivero, Rafael
Product differentiation and process R&D: testing the model with Spanish firm data
Abstract: Using a vast Spanish firm data source we test the effect of the strategic competition among firms in a market on the process innovation performance of a company. Our theoretical model stated a quadratic relationship between the spending by a firm on cost reducing innovation and its vertical product differentiation that is confirmed by the data. The predictions about the negative effect of "rivalry" and the positive one of the "pull of demand" are accepted when considering all types of firms. If we only take into account those firms with some degree of vertical product differentiation, it seems that "firm size" excludes these two variables.
Key words: Firm size, Productivity, Product differentiation, Rivalry
JEL classification: L11, D43, O31

161
Lombardini-Riipinen, Chiara
Environmental quality and taxation in vertically differentiated oligopolies
Abstract: This paper studies the interaction between firms' voluntary overcompliance with environmental regulation and taxation by means of a vertical differentiation model. The following main results are obtained. First, commodity taxes reduce the level of environmental quality without affecting the degree of differentiation. Second, emission taxes increase the levels of quality and decrease the degree of differentiation. Third, income taxes may increase or decrease quality depending on the amount of consumer heterogeneity. Fourth, commodity taxes are always welfare decreasing while emission taxes can be welfare increasing.
Key words: Voluntary overcompliance, Environmental quality, Vertical product differentiation, Taxation
JEL classification: H21, L13, L15, Q28

65
López-Cuñat, Javier M.
Adverse selection and managerial incentives
Abstract: We analyze managerial contracts under asymmetric information about costs. Under adverse selection in both, monopoly and competitive settings, we show that, to decrease the manager's expected informational rents, the owner makes the manager more aggressive distorting incentives away from profit maximization. However, the non additive interactions between the strategic and informational effects imply non standard results. Unlike the monopoly framework, we show that the manager may become more aggressive under moral hazard than under adverse selection. Unlike the moral hazard setting, we show that, under adverse selection, the manager may become more aggressive under monopoly than under competition.
Key words: Managerial incentives, Moral hazard, Adverse selection, Quantity competition
JEL classification: D43, D82, L13

187
Lotti, Francesca
Santarelli, Enrico
R&D, embodied technological change, producers-users interaction, and productivity at the firm level: a Germany-Italy comparison
Abstract: This paper follows a knowledge production function approach to assess the contribution of the level and type of R&D spending, the purchase of new machinery, economies of scale, and producers-users interaction to the productivity performance of German and Italian firms in 20 manufacturing industries. For this purpose it employs micro-aggregated data from the First Community Innovation Survey. The regression analysis confirms the results of previous studies that technological change embodied in new machinery and capital equipment is a major factor affecting the productivity level of manufacturing firms in several industries (in particular in Italy), although the role of R&D activities is crucial for most firms in both countries, and that this is also the case in traditional consumer goods industries such as textiles, clothing, and leather & leather products. Conversely, only for Germany does producers-users interaction prove significantly to influence the productivity level of firms in certain industries.
Key words: R&D, Innovation, Firm performance, Productivity, Germany, Italy
JEL classification: F15, L60

21
Love, James H.
Roper, Stephen
Scale, appropriability conditions, and the organisation of R&D
Abstract: This paper extends the analysis of the choice between internal and external R&D to consider the costs of internal R&D. The underlying hypothesis is that the choice of R&D mode is determined by their relative costs. Rather than merely estimating a reduced form probit model for R&D mode, we employ the Heckman two-stage estimator to estimate in addition the determinants of internal R&D unit cost (i.e. cost per innovation) allowing for sample selection effects. Theory indicates that R&D unit cost will be influenced by scale issues and by the technological opportunities faced by the firm. We also allow for transaction costs arising from the highly uncertain and incomplete nature of contracting encountered in research activities. In addition, consideration is given to issues of appropriability which influence the choice of R&D mode without affecting the unit cost of internal or external R&D, i.e. factors affecting the likelihood of dissipation of rents accruing from R&D activity. The model is tested on data from a sample of over 500 innovating UK manufacturing plants. The key determinants of R&D mode are the scale of plant and R&D input, and appropriability conditions. In terms of the R&D cost equation, scale factors are again important and have a non-linear relationship with R&D unit cost. Specificities in physical and human capital also affect unit cost, but have no clear impact on the choice of R&D mode. There is no evidence of technological opportunity affecting either R&D cost or the internal/external decision.
Key words: Scale, Appropriability, R&D
JEL classification: D23, L22, O32

48
Machado, José A. F.
Mata, José
Box-Cox quantile regression and the distribution of firm sizes
Abstract: Using the Box-Cox Quantile Regression model, we analyze the size distribution of firms in Portuguese manufacturing during the 1980s. Specifically, we estimate the effect of selected industry attributes on the location, scale, skewness and kurtosis of the conditional size distributions of firms. We find that industry attributes affect the size of firms in the same direction across the distribution, but the effects of these variables are typically much greater at the largest quantiles. Over time the distribution shifted towards smaller firms, owing mainly to the way the economy responds to industry characteristics rather than to changes of the level of these characteristics. The prediction of lognormality, implied by Gibrat's Law is soundly rejected by the observed distribution of firm sizes. However, we found that, at least in 1983, lognormality is a reasonable description of the conditional size distribution.
Key words: Box-Cox transformation, Regression quantiles, Firm size distribution, Gibrat's law
JEL classification: C20, L11

56
Macho-Stadler, Inés
Pérez-Castrillo, David
Auditing with signals
Abstract: We analyze the value of information that can be used to improve the audit selection to better target the tax gap. We consider a tax authority allocating resources in an attempt to identify the taxpayers who are underreporting with more probability and to increase voluntary compliance. In a simple model, we discuss the optimal enforcement policy when the tax authority decides its auditing strategy before the taxpayers fill their report, and identify some results that contrast with the literature on optimal auditing when no signal, in addition to the tax return, is considered. In particular, we discuss the relationship between effective tax progressivity and the informational content of the signal.

155
Mahmood, Talat
Survival of newly founded businesses: a log-logistic model approach
Abstract: Based on a longitudinal data base we test the "liability of adolescence" hypothesis which states that new firm hazard rates follow an inverted U-shaped pattern. That is, the hazard rate is low for the initial period; the end of adolescence is marked by a hazard maximum, from which then rate declines monotonically. We use a log-logistic model which shows that the "liability of adolescence" argument describes the hazard rates of new establishments for all two and three-digit industries fairly well. Further, the rate shows that the desegregation of industries matters, and considerable differences are found within and across two and three-digit low-, moderate- and high-tech industries. In assessing the effect of market environment conditions on risk we find that risk tends to be elevated in a relatively large number of two-digit low- and high-tech industries in the presence of scale economies, but it is substantially reduced in moderate-tech industries. By contrast, the hazard rate tends to be reduced for quite a large number of three-digit low-, moderate- and high-tech industries in comparison with the two-digit industries, indicating a longer adolescence. The influence of start-up size in reducing the hazard rate is apparently similar between two and three digit low-, moderate- and high-tech industries. The impact of market growth on the risk of failure is not much different for both two and three-digit low-, moderate- and high-tech industries. That is, market growth tends not to reduce the risk exposure. R&D intensity exerts influence interchangeably on the risk of failure confronting new establishments within the two and three-digit low-, moderate- and high-tech industries.

150
Mañez Castillejo, Juan A.
Unbeatable value: low price guarantee or loss leaders strategy?
Abstract: This paper investigates the effects of a low-price guarantee (price-beating guarantee) on the patterns of price setting of the supermarkets involved in it using micro level price data. Following recent theoretical developments (Hviid and Shaffer, 1997, 1998) the paper analyses the influence of hassle-costs on the ability of low-price guarantees to sustain anticompetitive prices. Furthermore, the consideration of the supermarket as a multiproduct firm leads to analyse the possible relationship between low-price guarantees and loss-leaders pricing strategies.
Key words: Low-price guarantees, Loss-leaders, Supermarkets, Price competition
JEL classification: D49, L81

382
Mangani, Andrea
Advertising and competition in television and radio markets
Abstract: Television channels and radio stations operate in a dual product market: they sell access to audience to firms and they "offer" their programs to viewers and listeners. Advertising price depends on the circulation, and the number of listeners and viewers is affected by advertising. A simple linear model is used to describe these relationships; in the case of advertiser-supported media we show that the equilibrium outcome resulting from increased competition depends on the degree of product differentiation. If we consider mixed subscriber-advertiser supported media we obtain a different result, consisting in a aut-aut choice between subscription and advertising messages. Finally, we extend the model to allow for investments in "talent", and we analyse how preferences and differentiation affect the amount of investment and advertising time.
Key words: Advertising, Media markets, Oligopoly
JEL classification: D43, L11, L13, L82, M37

333
Marcoul, Philippe
A model of consultancy
Abstract: A manager has an opinion on a decision he must make in the future. However, at some point before the decision must be implemented, the manager can, with a private cost, obtain more information about the decision he has to make and possibly change his first decision. We assume that the firm finds it worthwhile to induce the manager to obtain this supplementary information. We then discuss the opportunity of hiring a consultant with a given expertise who will report his opinion to the manager. We characterize the contracts that must be offered to the manager when a consultant is hired. We find that the benefit curve of the firm is not an increasing function of the consultant's expertise. Moreover, there exists an optimal expertise level of the consultant that maximize locally the firm benefit. We discuss the factors that may increase the resort to consultancy.
Key words: Consultancy, Information acquisition, Learning, Asymetric Information, Expertise
JEL classification: D82

192
Markovich, Sarit
Snowball - the evolution of dynamic oligopolies with network externalities
Abstract: This paper considers a dynamic oligopolistic market for complementary services (software), in which consumers first decide which one of the two incompatible durable goods (hardware) they wish to adopt and then buy compatible software. Software firms decide whether or not to enter or exit the market, which technology to produce for and how much to invest in the quality level of their products. The results show that when the probability of software innovation is low, in the long run the industry exhibits the snowball effect such that one hardware technology becomes the industry standard. However, if the probability of innovation is high, both hardware technologies remain active in the long run.
Key words: Dynamic games, Oligopoly, Network externalities, Complementary goods

14
Martin, Stephen
Spillovers, appropriability and R&D
Abstract: I distinguish the impacts of input spillovers and imperfect appropriability of the revenue generated by cost-saving innovation in a racing model. Comparative static relationships with respect to the level of spillovers depend on the levels of post-innovation payoffs; comparative static relationships with respect to the degree of appropriability depend on changes in the levels of post-innovation payoffs. Simulations illustrate conditions under which private payoffs and net social welfare are maximized for positive spillover levels and incomplete appropriability. The main qualitative results of the basic model hold if it is extended to include endogenous absorptive capacity.

97
Martin, Stephen
Normann, Hans-Theo
Snyder, Christopher M.
Vertical foreclosure in experimental markets
Abstract: This experiment was designed to test theories of foreclosure in vertically related markets. There is one upstream firm and two Cournot downstream firms. We analyse the market power of the upstream monopolist with and without integration of a downstream firm. We also investigate the effect of public versus secret contracts. To a large extend, the experimental data confirm the theoretical predictions. While the upstream firm can maintain its monopoly power under integration, the commitment problem arising with non-integration and secret contracts leads to the loss of monopoly power.
Key words: Experiments, Foreclosure, Commitment, Vertical integration
JEL classification: L12, L22, C90, D82

140
Martini, Gianmaria
A multi-period antitrust game: the dynamic effects of competition policy
Abstract: The Antitrust process shows its main benefits for the society’s welfare in the after-verdict behaviour of the guilty firms. In fact, empirical studies have shown that prices tend to decrease in industries where conspiracies have been uncovered and convicted. This paper builds a game-theoretic model where these dynamic benefits are taken into account. The policy is given by the equilibrium strategy of a public agency in charge of it, which adopts discretion in deciding whether to investigate or not, and of an industry which sells an homogeneous good and has private information about its costs. The game is a two-period one. The equilibrium policy is not unique but rather depends upon the level of some exogenous parameters. However, in all of the feasible solutions, it is not possible to eliminate the conspiracies from the market.
Key words: Antitrust policy, Dynamic effects, Discretion
JEL classification: L41, L51

371
McCabe, Mark J.
Academic journal pricing and market power: a portfolio approach
Abstract: Library demand for academic journals is unique. Cost per citation is minimized across a broad field of study, subject to a budget constraint, and the result is a demand for portfolios of titles. This demand structure encourages competing commercial publishers to adopt pricing strategies which profit from relatively modest increases in firm size, whether via merger or internal growth. This paper describes the demand structure and develops a two-stage model of pricing. A structural supply and demand system is estimated that supports this concept of demand and the adverse impact of changes in firm size on journal prices. The results also identify the contributions of other factors to journal price inflation, including entry by new titles and changes in journal quality. The implications for antitrust policy and directions for future research are discussed.

178
Merzoni, Guido
Collusion through renegotiable managerial contracts in duopoly
Abstract: This paper contains two slightly different models of delegation in Cournot duopoly. The possibility that managerial contracts are openly renegotiated is considered and the intuition that open renegotiation enlarges the set of attainable equilibria is verified. It is shown that observable but renegotiable contracts can be used by owners to coordinate in order to implement any product market equilibrium allowing the owners to get a level of profit at least as large as the profit obtainable in the strategic delegation equilibrium without renegotiation, which is used as a threat point. The equilibrium set includes joint profit maximisation, that is, perfect collusion. These Folk Theorem-like results are derived both when only one round of perfectly observable renegotiation is allowed and when renegotiation only becomes observable to rivals with a short delay, while renegotiation is costly.
Key words: Duopoly, Collusion, Contracts, Renegotiation
JEL classification: L2, L13, C72

222
Michie, Jonathan
Ramalingam, Shay
From Barnsley to the Green Bay Packers: mutuals as a means of removing stakeholder conflict
Abstract: This paper argues that mutual organisations are effective in removing stakeholder conflict. This has been demonstrated in particular in the financial services industry in the form of mutual assurance firms and building societies. We argue that this form of organisation would suit the culture, ethos and objectives of football clubs and should be encouraged. Short of mutualisation, clubs such as Barnsley Football Club in Britain and the Green Bay Packers in the States provide examples whereby widespread local and fan ownership has been utilised to reduce stakeholder conflict. The paper discusses how this might be institutionalised through the progressive transfer of shares to Trust status.
Key words: Mutuals, Principal agent problem, Corporate governance
JEL classification: L0, K0, L5, L1

344
Midelfart Knarvik, Karen Helene
Steen, Frode
Vertically linked industries: are there any gains from agglomeration?
Abstract: Vertical industry linkages are analysed. First, the downstream industry’s sales effect on an upstream industry’s sales is modelled in a turnover model to capture correlation in sales. Then, the external economic of scale type externalities stemming from output growth, and the externalities stemming from spillover effects from knowledge stock in vertically linked industries are captured in within the same model. By including both these sources to externalities, both their importance and their relative position are measured. Furthermore, by comparing the turnover model with the externality model results, the paper identify which type of externalities - technological or pure - that are dominating. A number of Norwegian maritime transport and service sectors are analysed. The results are promising in the sense that the model distinguishes empirically both between different sources of externalities and between different types of externalities. The maritime transport/service agglomeration is dominated by externalities stemming from knowledge stock spillovers. The types of externalities varies according to which service sector one is looking upon.
Key words: External economies of scale, Endogenous growth, New economic geography agglomerations, Spillovers, Turnover, Productivity

58
Mizuno, Keizo
Entry-deterrence contracts under a price-ceiling regulation
Abstract: This paper examines an incumbent’s entry-deterrence contracts in an asymmetric regulatory environment in which a natural monopoly serves two markets; a regulated market and a competitive market. The analysis shows that the incumbent’s strategy to offer the contract can have welfare-enhancing property through the exclusion of cream-skimming, especially when the level of a regulated price-ceiling is low. It also claims that the contract does not always deter entry: It inspires entry when the level of price ceiling is high.
Key words: Entry-deterrence contract, Cream-skimming, Price-ceiling regulation
JEL classification: L43, L51, L97

45
Moldovanu, Benny
Sela, Aner
Patent licensing to Bertrand competitors
Abstract: A cost-reducing process innovation protected by a patent is sold to one of several firms engaged in price competition. There is incomplete information about production costs. Our main result is that none of the classical auction mechanisms (first-price sealed-bid, second-price sealed-bid, English, Dutch) allocates the innovation efficiently. The inefficiency result extends also to ''patent races'' frameworks.

293
Moner-Colonques, Rafael
Sempere-Monerris, José J.
Urbano, Amparo
Equilibrium distribution systems under retailers' strategic behaviour
Abstract: We analyze a three-stage non-cooperative game between two differentiated manufacturers and two potential retailers. Retailers behave strategically in that they hold the power to choose whether they wish to be supplied by one manufacturer, by both or by none of them. Therefore, the existence of inter-brand and intra-brand competition is endogenously determined by retailers’ decisions. When linear transfer price contracts are employed, the SPE of the game involves both retailers dealing with both brands. It guarantees the maximal inter and intra-brand rivalry in the markets.
Key words: Distribution systems, Retailers' control
JEL classification: L19, L42

329
Moral, M. José
Jaumandreu, Jordi
Optimal multiproduct prices. An application in the automobile market
Abstract: This paper is devoted to the specification of price equations based on the optimal pricing rules of multiproduct firms, and their empirical estimation using data on the firms operating in the Spanish automobile market and the car models they sold. We obtain general pricing rules for multiproduct firms under logit demand models in which the marginal effects of the price on consumer utility varies with the stage of the product life cycle. The empirical part of the paper applies this model with monthly panel observations from 1990 to 1996 for a total of 183 car models that belong to 31 different firms.
Key words: Multiproduct firm, Logit demand, Life cycle, Hedonic regression
JEL classification: D43

106
Moreno Martín, Lourdes
Rodriguez, Diego
Domestic and foreign price-cost margins of Spanish manufacturing firms: a structural approach
Abstract: This paper analyzes the differences in price-cost margins according to geographic markets, export and domestic markets, for Spanish export manufacturing firms in the period 1990-1995. The estimation of a multiproduct cost function permits us to obtain the marginal costs and the margins of the firms for both markets. The results indicate a bigger marginal cost associated to exports, and a larger margin in domestic markets. However, the different evolution of both margins over the period permitted its convergence in 1995.
Key words: Marginal cost, Price-cost margins, Translog cost function, Export firms
JEL classification: L60, L13, F12

353
Mosconi, Franco
The economics of newspapers. A study on market size - market structure relationship
Abstract: This paper analyses the evolution of concentration in the newspapers industry in the light of new trends that draw on J. Sutton’s "endogenous sunk costs model". Beginning with a look at the leading publishers in the world, two points will stand out: on the one hand, the presence of the top flight publishers operating at the same time in most parts of the world and publishing the most widely-read papers in their countries; on the other, a tendentially high degree of concentration of the industry across a wide sample of countries notwithstanding the presence there of a high number of firms. In order to explain this market structure, emphasis will be placed on "product differentiation": are we - it will be asked - looking at vertical differentiation or horizontal? The question is of no secondary importance since it is precisely the kind of differentiation which shapes the market structure. Chapter 4, in particular, deals with the formal application of Sutton’s Paradigm on the market size-market structure (i.e., concentration) relationship to the newspapers industry. The situation in 15 industrialized countries will be examined at two distinct moments in time: the late-60s and the mid-90s. An Appendix contains all the relevant statistical data for each of the countries examined along with the quantitative tests (logarithmic transformation, lower bound to concentration).
JEL classification: L13, L82

349
Motta, Massimo
Polo, Michele
Leniency programs and cartel prosecution
Abstract: We study the enforcement of competition policy against collusion under Leniency Programs, which give reduced fines to firms which reveal information to the Antitrust Authority. Such programs give firms an incentive to brack collusion, but may also have a pro-collusive effect, since they decrease the expected cost of misbehaviour. We show that it is optimal to adopt such programs only if the Antitrust Authority has intermediate levels of resources available. We also compare different Leniency Rules as adopted by the US and EU regulations.

385
Mueller, Dennis C.
Gugler, Klaus
Yurtoglu, Burcin
Marginal q, Tobin's q, cash flow and investment
Abstract: Many studies of the determinants of investment use Tobin's q to control for the investment opportunities of a firm. Tobin’s q roughly measures the average return on a firm’s capital anticipated by the market. More relevant for investment decisions, however, is the marginal return on capital. In this paper we estimate investment and R&D equations using the empirical counterpart of marginal q derived from Mueller and Reardon (Southern Economic Journal, 1993). Using this measure as a discrimination device and as an explanatory variable, we offer new tests of the existence of cash constraints and managerial discretion. For a sample of 562 US firms observed over the 1977-1996 period we present evidence confirming both hypotheses.
Key words: Investment, Returns, Tobin's q
JEL classification: G31, G32, O16

378
Müller, Jürgen
Restructuring of the Telecommunications Sector in the West and the East and the Role of Science and Technology
Abstract: The telecommunications sector plays a crucial role in modern economies because it not only facilitates communication, but also trade, transactions and international specialization. In the socialist economies these telecommunications services and the underlying equipment sector were poorly developed, except for some special military applications. With the move to a decentralized, market oriented system, the importance of telecommunications has grown. This is obvious not only by the increased need to coordinate transactions between businesses nationally and internationally, but also to satisfy the fast growing demand of private households. At the same time the sector is undergoing fundamental changes, due to liberalization, privatization and globalization. The aim of this paper is to show how the restructuring process is being achieved in the service and equipment sector and what are its determinants. Among these, we focus specifically on the role the research and development institutions (science and technology systems, in the following called S&TS) play and to which extent they are contributing to this process. The question of technology transfer both for the equipment industry and for the service sector will therefore have to be considered in greater detail, especially since the telecommunications sector has been much more advanced in Western countries, helped by rapid technical change on the one hand and market liberalization on the other. A further question is if the restructuring process in the West can serve as a model for the restructuring process of the enterprises in the post-socialist economies or if competition and industry structure will evolve differently. The countries we focus on are Russia, the Baltics (particularly Latvia) and Hungary. These countries have all fundamentally reorganized the sector, but they show very different approaches to the sector. The policies pursued range from opening the market to dominant foreign investors, as in Latvia and Hungary, to a much more state controlled approach in Russia. In addition, we also observe very different levels of aggregate demand for services in these countries, allowing us to look at greater detail at the effect the overall economic development has on progress and technology transfer in the telecom sector. At first we analyze the evolution and industry structure of the service and equipment sector in the West, in order to establish a reference model for sectoral transformation. Special attention is given to the major axis of competition, as well as other determinants of sectoral change (Chap.2). We then review the development of the sector during the previous Socialist period (Chap.3), before looking in detail at the three countries themselves (Chap. 4, 5 and 6). The paper concludes with an assessment of the lessons to be learned for the development of the sector in other post-socialist countries in Chap.7).

123
Nahata, Babu
Hybrid third-degree price discrimination: the economics of buy one, get one free
Abstract: A hybrid form of third-degree price discrimination that simultaneously uses linear and non linear pricing is analyzed. Consumers can either buy only one unit or buy the first unit at the "regular" price and get the second one free. Under a monopoly with linear demands and constant marginal cost, it is shown that that when the maximum reservation price of consumers is at least five times the minimum price acceptable to the producer, the hybrid form not only is more profitable than uniform pricing and third-degree price discrimination, but it is also Pareto-improving. Analysis further shows that when "buy-one-get-one-free," is used as the only option, it is also Pareto-improving resulting in a Pareto-efficient output.
Key words: Buy-one-get-one-free pricing, Price discrimination, Pareto-improvement
JEL classification: D42, L10, M21

74
Neubauer, Silke
Multimarket contact, collusion and the internal structure of firms
Abstract: Multimarket contact has an impact on the sustainability of collusive outcomes, whenever firms or markets differ from each other or scope effects are present. An implicit assumption made in the literature dealing with multimarket contact and collusion in infinitely repeated games is the existence of a single decision taker. Nevertheless, big firms often hand over responsibility for single markets to managers, who maximize divisional profits. If markets were independent from each other, the impact of multimarket contact would vanish. In this paper, the consequences of divisionalization on the sustainability of are analyzed in a two-firm two-market framework with intra-firm scope effects. Within a divisionalized structure, each manager chooses the output of his market to maximize long-term divisional profits. Managers do not coordinate their collusion or deviation decisions. It is shown, that - dependent on the kind of scope effects - the lack of coordination between divisions may increase or decrease the collusive power of firms. If firms face economies of scope, collusion is easier to sustain within a divisionalized structure, whereas firms facing diseconomies of scope prefer centralized decision making and coordination of collusion across markets. Furthermore, the impact of the compensation scheme for managers is explored: Managers should be made to internalize negative spillover effects, but should be made to neglect positive spillovers.
Key words: Collusion, Divisionalization, (dis-)economies of scope, Multimarket contact
JEL classification: L1, L2

76
Neumann, Manfred
Weigand, Jürgen
Gross, Alexandra
Market size, fixed costs and horizontal concentration
Abstract: A Cournot oligopoly model is used to relate horizontal concentration to market size and fixed costs. Assuming that higher fixed costs yield a lower level of marginal costs, a growing market size is shown to leave horizontal concentration unchanged if there is free entry. In a subsequent empirical study focusing on changes in concentration, the number of suppliers and the variance of market shares in some 300 lines of business in West Germany over the period 1978 to 1993 we find evidence for the existence of entry barriers which cannot be attributed to economies of scale. Likewise Sutton’s proposition that in the case of vertical product differentiation fixed costs render the relationship between market size and horizontal concentration ambiguous is not borne out by the evidence.
JEL classification: D43, L1

139
Neven, Damien J.
Röller, Lars-Hendrik
Zhang, Zhentang
The provision of public goods and the soft budget constraints
Abstract: Firms in centralized (or formerly centralized) economies often provide a public good in addition to a private good, which makes it difficult for a government to commit not to bail out the firm once it is in financial trouble. This creates a soft budget constraint syndrome which causes the firm to underinvest ex ante in order to extract state subsidy and thereby reduces dynamic efficiency. In this paper, we show that separating the provision of public goods from private goods can harden budget constraints, while introducing competition into the private market may not.
Key words: Soft budget constraints, Dynamic efficiency, Public good provision
JEL classification: L13, L30

119
Nicolini, Rosella
Local agglomerations and trade: an empirical investigation
Abstract: This paper proposes an empirical investigation of some outcomes in economic geography. First of all we intend to assess the role of the home market effect and of the level of transport costs on the outcoming trade flows. For this purpose we will refer to a chosen sample of European regions. In the second part we will focus on the analysis of the trade flows for a sample of Italian districts. In addition to the previous purpose, in this part the attention will be addressed to state the benefits that services provide for the firms that belong to a district.
Key words: Agglomerations, Industrial districts, Home market, Transport costs, Trade flows
JEL classification: F12, R12, R15

167
Nilsson, Arvid
Price advertising and competition
Abstract: This paper examines the effects of price advertising in a Bertrand duopoly. It is shown that increased advertising reduces price in a single play of the stage game. In the repeated game, there may not be advertising in equilibrium. Nonetheless, the mere possibility of advertising can reduce the collusive price.
Key words: Advertising bans, Bertrand oligolopy, Collusion, Competition policy, Imperfect information
JEL classification: C72, L13, L41

72
Nocke, Volker
Cartel stability under capacity constraints: the traditional view restored
Abstract: The existence of a negative relationship between cartel stability and the level of excess capacity in an industry has for a long time been the dominant view in the traditional IO literature. Recent supergame-theoretic contributions (e.g. Brock and Scheinkman 1985) appear to show that this view is ill-founded. Focussing on the issue of enforcement of cartel rules ("incentive constraints"), however, this literature completely ignores firms’ "participation constraints". Reverting the focus of attention, the present paper restores the traditional view: large cartels will not be sustainable in periods of high excess capacity (low demand). In contrast to the supergame-theoretic literature, it predicts a negative relationship between excess capacity and the collusive price.
Key words: Excess capacity, Business cycle, Cartel stability
JEL classification: L13, D43

196
Nolan, Dermot
Predatority pricing in an oligopolistic framework
Abstract: In this paper we study the nature of predatory behaviour in an oligopolistic framework. We use the long-purse story of financial vulnerability to demonstrate that predatory behaviour is less likely to occur in an oligopoly than in a monopoly. We show the nature of the free-rider problem, and illustrate the range of multiple equilibria that may exist in this situation. We also show how small firms may be less likely targets for predatory attacks than their' larger, more efficient rivals, examine the model with uncertainty added, and discuss the model's application to antitrust.
JEL classification: D43, L13

15
Okuguchi, Koji
Yamazaki, Takeshi
Two-stage lobbying model of protection
Abstract: Domestic firms facing competition from foreign firms in the domestic market engage in lobbying seeking for a higher tariff rate to be imposed on the foreign firms. In this paper we will generalize Long-Soubeyran two-stage lobbying oligopoly model for protection without the assumption of constant marginal costs. Three results are established: (1) All domestic firms’ profits increase if the tariff rate is increased. (2) There exists a unique equilibrium direct lobbying cost. (3) Linear and non linear numerical examples are presented to show a paradox that entry of a new domestic firm increases the domestic incumbents’ profits.
Key words: Lobbying, Protection, Tariff, Entry
JEL classification: D43, D72, F13, L13

288
O'Mahony, Mary
Vecchi, Michela
More R&D or more advertising? Tangible and intangible investment and economic performance: evidence from company accounts
Abstract: The aim of this paper is to ascertain to what extent different forms of investment impact on company performance. The main focus will be on intangible investment and, specifically, in R&D and other intangible investment, the latter including advertising expenditure. The paper provides evidence for 5 countries: the United States, the United Kingdom, France, Germany and Italy. Company data are available for each country from the World scope database. Sector specific analysis (i.e. chemical sector) will be carried on, as well as a detailed empirical investigation of the relationship between output and tangible and intangible investments for a sample of manufacturing and non-manufacturing firms in each country. Our results suggest that, although R&D has a stronger effect on productivity, positive returns to other intangible investments are present in most countries.
Key words: R&D capital, Intangible capital, Productivity, Chemical sector, Panel data
JEL classification: C23, D24, L65, O32, O57

273
Orlando, Michael J.
On the importance of geographic and technological proximity for R&D spillovers: an empirical investigation
Abstract: Estimates of the importance of external R&D to firm productivity suggest both geographic and technological distance attenuate spillovers from innovative activity. The high degree of correlation between measures of geographic and technological proximity suggest it is possible that only one of these factors is actually important. The empirical results presented here show little evidence that geographically proximate knowledge stocks explain firm productivity when the analysis is generalized to simultaneously control for these two concepts of distance. In contrast, technologically proximate knowledge stocks remain an important determinant of firm productivity suggesting some evidence of geographically dependent spillovers may be driven by the propensity of similar industrial activity to agglomerate in space.
Key words: R&D, Spillovers, Firm-level, Empirical studies
JEL classification: O3, L6

 93
Palomino, Frédéric
Prat, Andrea
Risk taking and optimal contracts for money managers
Abstract: Recent empirical work suggests a strong connection between the incentives money managers are offered and their risk-taking behaviour. We develop a general model of delegated portfolio management, with the feature that the agent can control the riskiness of the portfolio. This represents a departure from the existing literature on agency theory in that moral hazard is not only effort exertion but also risk taking behaviour. The moral hazard problem with risk taking involves an incentive-compatibility constraint on-risk, which we characterize. We distinguish between one period and several periods. In the former case, under mild conditions, there exists a first-best contract which takes the form of a bonus contract. In the latter, we show that there exists no first-best contract and we use a numerical approximation to study the properties of the second-best contract.
Key words: Money managers, Risk, Moral hazard, Limited liability
JEL classification: G11, G24, D82

128
Pandit, Naresh R.
Cook, Gary A.S.
Swann, G.M. Peter
The dynamics of industrial clustering in UK financial services
Abstract: This study examines patterns of clustering in the UK financial services industry. It studies the effects of cluster strength on the growth of the firm and on rates of surviving entry. The results for this non-high technology industry make for an interesting comparison with earlier studies which have examined clustering patterns in some high technology industries. We find positive, large and statistically significant clustering effects in the UK financial services industry, both in the growth model and the entry model. Moreover, these effects are very similar to those observed in the computing and biotechnology industries.
Key words: Industrial clusters, Growth, Entry, Financial services
JEL classification: L8, L10, O40, R12

336
Pastine, Ivan
Pastine, Tuvana
Co-ordination in markets with consumption externalities: the role of advertising and product quality
Abstract: This paper studies advertising in markets with consumption externalities. It shows that firms may engage in advertising competition in order to co-ordinate consumer expectations on their own brand. This co-ordinating role of advertising in markets with consumption externalities has not been previously analyzed. Advertising competition for co-ordination has the form of an all-pay auction. Firms will advertise in order to co-ordinate consumer expectations only as long as the product quality differences are not too far apart. If the quality differences are not too large, advertising will co-ordinate consumer expectations, and the lower quality product will usually be more popular.
Key words: Advertising, All-pay auction, Consumption externalities, Co-ordination

337
Pastine, Ivan
Pastine, Tuvana
On endogenous leadership in price competition
Abstract: This paper analyzes endogenous price leadership in a duopolistic market with differentiated products. We inquire into the type of equilibrium leader-follower outcomes that are likely to arise as a result of non-cooperative competition between symmetrically informed firms which are not too dissimilar. When firms face a cost of delay in price announcements, we show that the only non-cooperative equilibrium that yields endogenous price leadership is a mixed-strategy equilibrium. Hence, one firm consistently leading all price changes in an industry may be regarded as strong evidence of collusion. The mixed-strategy equilibrium takes the interpretation of a war of attrition, where firms struggle over the preferred follower position. We also show that no leader-follower outcome can occur as a result of non-corporative competition when firms face strict deadlines for price announcements.
Key words: Endogenous timing, Price leadership, Collusion, War of attrition

359
Paton, David
Vaughan-Williams, Leighton
Monopoly rents and price fixing in UK betting markets
Abstract: Betting markets provide an ideal environment in which to examine monopoly power due to the availability of detailed information on product pricing. In this paper we argue that the pricing strategies of companies in the betting industry are likely to be an important source of monopoly rents, particularly in the market for forecast bets. Pricing in these markets are shown to be explicitly co-ordinated. Further, price information is asymmetrically biased in favour of producers. We find evidence, based on UK data, that significantly greater monopoly rents are extracted in the market for these bets than for single bets. The extra monopoly power is estimated to result in a dead-weight loss of £ 2.5 million per year and a transfer from consumers to producers of £ 5 million per year.
Key words: Pricing, Collusion, Information, Monopoly rents
JEL classification: D4, L1, L5

308
Pénard, Thierry
Entry strategy and regulation of telecommunications: a judo economics model
Abstract: This paper analyses the capacity investments of new telecommunications operators and the strategic interactions with the former monopoly (the Public Telecommunications Operator) on recently liberalized markets. A rational strategy for the entrants consists in limiting their capacities, which is known as a strategy of judo economics (Gelman et Salop [1983]). The aim of this paper is to evaluate the efficiency of the regulation in matters of local access when the new operators comply with judo economics. Precisely, we compare the capacities and profits of the operators whenever the incumbent is forced or not to separate its competitive activities from its monopoly activities (the local network). We show that accounting separation which is a regulatory device, complex and costly to implement, may have questionable efficiency and is like1y to hinder the entry on the long distance telecommunications markets.
Key words: Telecommunication, Entry, Accounting separation, Judo economics
JEL classification: L12, L43, L96

346
Peneder, Michael
Intangible investment and human resources. The new WIFO taxonomies of manufacturing industry
Abstract: Being first in a series of three papers on "intangible investments and competitive performance", this one establishes the basic analytic tools for subsequent analyses. Two new taxonomies of manufacturing industries are presented by means of statistical cluster techniques. The first focuses on the distinction between sources of exogenous, location dependent comparative cost advantages, such as relative endowments with capital and labour, and endogenously raised firm specific advantages created by intangible investments in marketing or innovation. The second taxonomy discriminates industries by their patterns of labour skills. Finally, econometric tests on the complementarity between intangible investments and human resources are presented.
Key words: Intangible investments, Human resources, Endogenous sunk costs, Industry structure, Statistical cluster analysis
JEL classification: L1, L6, M3, O3

27
Pereira, Pedro
Cost reduction and consumer search
Abstract: This paper reconciles two opposing views in the R&D and agency literatures about how market power influences incentives to reduce costs. I develop a model, where consumers search for prices, firms choose prices, and technology is determined stochastically through investment, to show that the relation between market power and cost reduction depends on the context. I show that shifts in different parameters induce market power and investment to vary jointly in different ways. This view is supported by the ambiguity of the conclusions of the empirical literature on the determinants of R&D. I also talk about predation and cost volatility.
Key words: Search, Cost reduction, Market power, Predation
JEL classification: D83, L1

64
Pérez-Castrillo, David
Riedinger, Nicolas
Auditing cost overrun claims
Abstract: We consider a procurement contract between the administration and a firm. The contract is linear in cost overruns and the true cost overrun is private information of the firm before the project ends. We characterize the optimal auditing policy of cost overrun claims as a function of the initial contractual payment, the share of the cost overrun paid by the administration, the cost of the auditing, the accuracy of the auditing, and the penalty rate that can be imposed on fraudulent firms. We also analyze the effects of the possibility of fraud on the quality of the project chosen by the administration.
Key words: Cost overruns, Procurement
JEL classification: M57, L50, D82

88
Perry, Martin K.
Sákovics, József
Split-award second-sourcing and the competition among input suppliers
Abstract: Buyers of a homogeneous input employ second-sourcing by splitting their input requirements into two contracts awarded to different suppliers. We model this practice using sequential second-price auctions for the contracts with independent private values for the costs of suppliers. We obtain three principal findings. First, we find that the buyer pays a premium for using second-sourcing, but this premium is lower when the cost distribution of suppliers is more favourable to low cost realizations. Second, we find that second-sourcing may not be very effective in protecting buyers from an exogenous reduction in the number of suppliers of the input. In particular, the percentage increase in the input price from a reduction in the number of suppliers is greater with second-sourcing contracts than with a sole-source contract when the cost distribution of suppliers is more favorable to low cost realizations. Third, we identify the conditions under which the buyer can use second-sourcing to attract a new entrant such that the additional competition will offset the premium and lower the expected price of the input.

41
Persson, Lars
The auctioning of a failing firm
Abstract: This paper evaluates the welfare consequences of the failing firm doctrine in the EU and US merger laws. I combine an oligopoly model with an "endogenous valuations" auction model. Thereby, I take into account that a firm's willingness to pay for the assets depends on the identity of the alternative buyer. The main result is that the doctrine leads to cost inefficiencies, due to a "least danger to competition" (LDC) condition, which favours small, and thus inefficient, firms. In particular, the LDC condition implies that small firms can preempt acquisitions that would lead to both higher producer surplus and higher consumer surplus.
Key words: Competition policy, Failing firm defence, Auction
JEL classification: L1, L4

342
Pfaffermayr, Michael
Employment in domestic plants and foreign affiliates: a note on the elasticity of substitution
Abstract: For high wage countries, such as Austria, it is commonly expected that the growing employment in foreign affiliates abroad substitutes jobs at home. This note uses bilateral data on foreign and domestic activities of Austrian manufacturing over the period 1989-1990 covering the 10 most important host countries and 7 industrial sectors. The level equations of relative labour demand in the small three-way panel indicate a low and insignificant elasticity of substitution between employment at home and employment in foreign affiliates Allowing the substitution elasticity to vary across industries reveals significant, but likewise inelastic substitution in some industries. In contrast, in a dynamic framework formulated in first differences an elasticity of substitution greater than one has been found. The size of total demand as well as plant specific relative labour productivity, however, seem to be the more important determinants of relative labour demand.
Key words: Labour demand, Multinational enterprises, Panel econometrics
JEL classification: F23, J23, C33

350
Pianta, Mario
Innovation, demand and employment
Abstract: The paper examines the link between technological change and demand and their impact on employment in manufacturing industry. The specific nature of innovation, mainly oriented towards product or process innovations, is considered, in the light of the competitive strategies of firms and industries. An interpretative model is proposed and an empirical analysis is carried out, using the data of the European Innovation Surveys for five countries. The results of cross-industry regressions show that demand, structural change and orientation toward product innovations have a positive impact on employment change in the 1990s, while the intensity of innovative expenditure (including R&D, design, innovative investment, etc.) has a negative effect. A more general comparison between Europe, the US and Japan is also carried out examining their productivity and employment performance, which can be seen as the result of the different orientation of technological change.

 208
Piga, Claudio A.G.
Pigouvian taxation and sustainable development in tourism
Abstract: A definition of sustainable development focuses on the trade-off between the intra and intergenerational types of equity. Such a dynamic trade-off is at the centre of the paper, which describes a policy game between a monopolist in a tourist area and the local government, who acts as a Stackelberg leader. In each period the former has to decide the size of land undergoing development, whereas the latter has to choose the tax to levy on each newly developed area unit. Linear Perfect Markov strategies are derived for both the non-cooperative and the public monopoly case. We find that a public monopoly would develop land more rapidly than a private monopoly. Furthermore, the more the monopolist discounts the future, the more the long run use of the natural resource is reduced. The relation to other forms of public intervention in tourist planning is also discussed.
Key words: Differential games, Natural resources
JEL classification: H21, Q32, R52

11
Pinske, Joris
Slade, Margaret E.
Brett, Craig
Spatial price competition: a semiparametric approach
Abstract: We investigate the nature of price competition among firms that produce differentiated products and compete in local markets. We propose a series estimator for the matrix of cross-price response coefficients, demonstrate that our estimator is consistent, and derive its asymptotic distribution. Our semiparametric approach allows us to discriminate among prominent theoretical models. In particular, we examine highly localized spatial models, symmetric monopolistically competitive models, and hybrids that lie between the two extremes. We apply our semiparametric estimator to data from U.S. wholesale-gasoline markets and find that, in this market, competition is highly localized.
Key words: Price competition, Differentiated products, Spatial models, Monopolistic competition, Nonparametric estimation, Series estimators, Wholesale gasoline
JEL classification: C12, C13, C14, L13, L81

383
Pitchford, Rohan
A theory of deregulation
Abstract: It is well known in the Principal-Agent literature that it is always worth using an informative signal for incentives. When applied to regulation of a firm, any signal of the firm’s activity that is informative will be used to regulate the firm. This paper develops a theory of deregulation in which the manager of a firm is able to distort reports of firm activity, making the degree of verifiability of performance endogenous. Sufficient conditions are derived for deregulation to be optimal despite the existence of a signal that contains information about the firm’s activity. The conditions ensure that there is an adverse response by the firm whenever the regulator tries to use the signal for incentives. The approach is robust and avoids knife edge assumptions that would be required in the multitask analysis of Holmstrom and Milgrom (1991). The relation to literature on incomplete contracts is discussed.

116
Portela Forte, Rosa
Brandão, António
The effects of trade policy liberalisation under imperfect competition: the Portuguese electrical and electronic industry
Abstract: This paper studies the effects on domestic welfare resulting from Portugal’s integration in the European Community in 1986. This integration led to the removal of the overall trade barriers between Portugal and others EC member’s states. The model calibrated to data on electrical and electronic industry investigates two types of equilibrium: Cournot and Bertrand. It is concluded that the removal of trade barriers yields to significant welfare gains, particularly in Bertrand’s case.
Key words: Imperfect competition, Integration in the European Community, Trade liberalisation, Calibrated model, Welfare
JEL classification: L13, F12, F15, F13, F17, I3

364
Poyago-Theotoky, Joanna
Endogenous spillovers in a non-tournament R&D duopoly
Abstract: The paper analyses a simple non-tournament model of R&D where firms are engaged in cost-reducing innovation. It is shown that when spillovers of information are treated as endogenous, firms never disclose any of their information when choosing their R&D non-cooperatively. Under co-operative R&D, firms will always choose to fully share their information, i.e. a research joint venture will operate with a maximal spillover value.
Key words: R&D duopoly, Non-tournament R&D model, Endogenous spillovers
JEL classification: 030, L13, D43

80
Raess, Pascal
von Ungern-Sternberg, Thomas
A model of regulation in the housing market
Abstract: This paper develops a model to study the effects of regulation on the housing market. Our model emphasises the following specific features of this market: product heterogeneity is important, search costs are high, moving costs are substantial, and the possibilities to price discriminate are important. We show that in an unregulated housing market rents will increase at the time of renegotiation as a result of the "hold-up" problem. A regulation which limits the owners’ possibilities to increase rents for a certain number of years leads to lower equilibrium rents and higher social welfare. Our model strongly suggests that a policy which indexes rents may be socially preferable to a simple laissez-faire solution.
Key words: Housing, Monopolistic competition, Regulation, Search, Hold-up
JEL classification: D83, L59

55
Rafiquzzaman, Mohammed
Whewell, Lori
Trends in cross-country innovative performance and the determinants of international patenting activities
Abstract: This paper presents an analysis of innovative performance, as measured by the growth in patenting activities, of the G-7 industrialized countries (Canada, the United States, Japan, Italy, Germany, France and the United Kingdom) and focuses on the factors that determine inventors' international patenting activities. Trends in patenting activity indicate that most of the G-7 countries experienced rapid growth in all dimensions of patenting in the 1980s and 1990s. Canada and the United States experienced the largest increases in growth, indicating that Canadian inventors are well positioned in the field of innovation vis-a-vis those of the other G-7 nations. The paper finds that the propensity for inventors to file cross-border patents has changed over time. In particular, dramatic changes have occurred in cross-border patenting between Canada and the United States. While Canada still receives the largest share of its foreign patents from American inventors, and the U.S. receives the highest share of foreign patents from Canadians, each of these shares has been falling over time. In part two of the study, the paper focuses on the determinants of international patenting activity in order to explain national differences in this activity. It finds that the characteristics of both technology source and destination countries, and the national patent system, play important roles in the patenting decision. Source country characteristics such as research intensity and home country bias are significant determinants of international. patenting activity. Destination country characteristics such as human capital, imports, market size, degree of intellectual property protection, and geographic proximity tend to induce inventors from the source country to patent in the destination country. The actual. cost of patenting, however, was not found to be an important determinant of international patenting activity.
Key words: Patent, Innovation, G-7 countries, International patenting activity
JEL classification: O30, O32, O34

294
Rahman, David
A geometry of price controls
Abstract: A model of price-controls is developed where the structure of a regulatory constraint may imply that it can be overcome by the regulated firm (that is, it can charge monopoly prices). In a one-good model, the firm prices erratically to overcome the constraint. With many goods, the need to price as erratically is mitigated. The firm faces a trade-off between price-dispersion across periods and the size of the relaxation of the constraint. A general regulatory formula is proposed and compared with the Ramsey solution. In the long-run most types of controls yield Ramsey prices.
Key words: Price controls, Regulation, Monopoly, Ramsey prices, Intertemporal pricing
JEL classification: D42, D92, L51

276
Reid, Gavin C.
Smith, Julia A.
Information system development in the small firm: tests of contingency, agency and markets & hierarchies approaches
Abstract: This paper is designed to explore the nature of information system development in small and medium sized enterprises (SMEs), by appeal to three theories: contingency, agency and markets vs. hierarchies. To address these theories empirically, use is made of new data which have been gathered from a sample of Scottish SMEs over a five-year period, 1994-1998. The structure of this paper is as follows. First, the three theories under examination, contingency, agency, and markets vs. hierarchies, are briefly described. Second, an overview of the methodology is presented, looking at sampling, the database and summary statistics. Third, the contingency theory approach is explored on the data, both taxonomically (using cluster analysis) and inferentially (using regression analysis). Fourth, the agency approach is tested, using probit analysis. Finally, the markets vs. hierarchies approach is tested, using regression analysis. The paper ends by concluding that the contingency approach is not a rival approach to the agency or markets vs. hierarchies approaches, but may rather be regarded as incorporating, and supporting, elements of both.
Key words: Information, Contingency, Agency, Markets and hierarchy, Small firms
JEL classification: D21, D82, L21, L22, M41

365
Repkine, Alexander
Walsh, Patrick Paul
European trade and investment U-shaping industrial output in Central and Eastern Europe: evidence for Bulgaria, Hungary and Romania
Abstract: Industrial output in Bulgaria, Hungary, Poland and Romania has evolved in a U-Shape during the transition process to a market economy. The theoretical literature thus far explains the collapse of industrial output as an inefficient outcome driven by supply side distortions that constrain the transition process. In this paper we argue that the common experiences of sectors across countries was due to large intra-sector product adjustment in terms of market orientation. The recovery, or the U-Shape in industrial output, is explained by the growing dominance of EU oriented production within sectors that compensates for the decline in former CMEA oriented production.
Key words: Foreign direct investment, Industrial output growth, Transition economies, Branches of industry regressions
JEL classification: F43, O33, P23

133
Resmini, Laura
The determinant of foreign direct investment into the CEECs: new evidence from sectoral patterns
Abstract: This paper deals with European Union FDI flows into the CEECs at sector level. The aim is to understand whether and to what extent FDI in different sectors reacts to the same characteristics of the host countries. The analysis is based on a data set created for this purpose. It concentrates on the manufacturing sectors, classified according to the Pavitt taxonomy. The paper first presents data that summarise recent trend of FDI in the CEECs and, then, regression evidence that seeks to account for differences among sectors. The estimated model is a modified gravity model incorporating more "classic", such as labour costs, and country specific, that is, the stage of the transition process, variables. The regression analysis, based on fixed effect panel data techniques, confirms the presence of heterogeneity at sector level.
Key words: Foreign direct investment, Transition, Central and Eastern Europe, Panel data
JEL classification: F15, F23, P20, C23

341
Reymondon, Olivier
The growth and survival of heterogeneous new firms: a simulation model
Abstract: Although evolutionary economics treats heterogeneity of firms as one of the main determinant of evolution, very few theoretical studies are explicitly concerned with the relation between organisational adaptation of firms and market selection. Based on Metcalfe’s model in which growth is assumed to be "costly", this paper uncover consequences of such a Penrosian hypothesis. The main goal of this paper is to explore the relationship between survival of new firms and the intensity of the selection process. First, in a sequential framework we show that Fisher principle tend to be invalidated. Second, considering different units of selection, a simulation model of market dynamics is presented in which we focus on the way variety of new firms drives selection. Although selection pressure appears more intense when heterogeneity of entrants is very high, a low variety level induces equally lower long run survival rates of new firms because of market turbulence. Finally, whatever the particular unit of selection considered, we conclude of a trade off in term of heterogeneity of the characteristics of new firms between selection and market turbulence.
Key words: New firms, evolutionary competition, selection, co-ordination
JEL classification: D70, C63, L11

98
Richard, Oliver M.
An empirical analysis of the location of flight departure times on airline routes
Abstract: This paper investigates empirically the location of flight departure times on airline routes and contributes, thereby, empirical evidence to the spatial differentiation literature. We document how network-level, organisational-level, and route-level considerations shape airline flight scheduling decisions. The primary finding is that departure times for non-stop flights on a route are, on average, almost evenly distributed throughout the hours of the day. The impact of the hub-and-spoke organisational structure is confined, on aggregate, to the early morning and late evening hours and it is specific to the direction of the route. Otherwise, locational patterns are stable across routes.
Key words: Empirical analysis, Spatial differentiation, Location theory, Airlines, Flight scheduling
JEL classification: L11, L93

100
Riyanto, Yohanes E.
Delegation of authority, interdivisional relation, and firm structure
Abstract: This paper studies the design of a firm's internal organization. We consider a firm which consists of a principal (head-office), two divisions, and two managers. The head-office has formal authority. However, she might delegate authority to the managers when the managers are more informed about projects' payoffs. In this case, the managers have real authority. The head-office of the firm can integrate the two divisions and appoint a manager to run the integrated-divisions. Alternatively, the head-office can also separate these two divisions and appoint a manager to run each division. We show that the choice of a firm's internal organization depends on the trade-off between inducement of managerial effort and benefits of integration. The intensity of this trade-off itself is determined, firstly, by the nature of interdependence between the two divisions. We model the interdependence as externalities accross divisions. Secondly, it is influenced by the possibility of conflict of interests between the head-office and divisional managers, Finally, it also depends the relative difference in organizational culture across divisions.
Key words: Formal and Real Authority, Divisional Interdependence, Delegation of Authority, Design of Divisional Structures
JEL classification: D89, L22

86
Rouvinen, Petri
R&D spillovers among Finnish manufacturing firms
Abstract: We study the effects of R&D spillovers on the cost and production structures of Finnish manufacturing industry. We also address the cost-reduction and incentive effects of R&D spillovers, and consider private and social rates of return on R&D investment. To the best of our knowledge this is the first time a cost function study of R&D spillovers is implemented with Finnish data. The data set provided by Statistics Finland is quite detailed and has extraordinary depth. Unlike previous studies, we experiment with three potential spillover sources and consider the inclusion of measures of external knowledge (time trend). The role of purchased R&D inputs is also studied. Some little discussed methodological issues are addressed.
Key words: R&D, R&D spillovers, Externalities, Cost function approach, Panel data, Manufacturing firms, System estimation
JEL classification: D24, L6, O33

225
Ruiz, Juan M.
Another perspective on planned obsolescence: is there really too much innovation?
Abstract: Recent models of durable goods with network externalities show that when a monopolist is the sole supplier of those goods, there is too much innovation from the social point of view, resulting in a planned obsolescence of those durables already on the market. We examine the robustness of this result to the inclusion of network externalities that set in with a lag. A simple model shows that, contrary to previous results, there is no planned obsolescence in equilibrium for all parameter configurations. Even though the monopolist has a tendency to introduce new models of the durable too fast, consumers have an incentive to delay their adoption of the good because externalities are lagging. In equilibrium, those consumers who already own a durable good are not induced to switch to a new model faster than it would be socially optimal, and for some parameters there might even be inefficient delay in equilibrium.
Key words: Planned obsolescence, Durable goods, Lagged network externalities, Monopoly, Delay
JEL classification: L12, D42, O31

307
Saal, David S.
A reassessment of the impact of defence procurement on manufacturing productivity growth
Abstract: As the 20th Century ends, technologies originally developed for defence purposes such as computers and satellite communications appear to have become a driving force behind economic growth. Paradoxically, almost all econometric models suggest that the largely defence-oriented federal industrial R&D funding that helped create these technologies had no discernible effect on industrial productivity growth. This paper addresses this paradox by stressing that defence procurement and hence federal R&D expenditures were targeted to a few narrowly defined manufacturing sub sectors that produced high tech weaponry. Panel data analysis employing disaggregated data from the NBER Manufacturing Productivity Database and the BEA’s Input Output tables then demonstrates that defence procurement amounted to a highly targeted industrial policy benefiting only a few small sub sectors of the economy.
Key words: Productivity, Defence, Procurement, Manufacturing, United States
JEL classification: H57, L6, O38, O33

300
Sällström, Susanna
Designation regulation and perceived quality differences
Abstract: It has been a major concern of EC law that consumers’ perception of labels may have anti-competitive effects. In a setting with consumer misperceptions of quality differences, I find that anti-competitive effects are more likely to arise when consumers are more heterogeneous (horizontally), complying (with the specification) is costly and the misperception is small. There is, however, also a possibility that the market becomes more competitive if all producers choose to comply. The effect on welfare (as opposed to consumers’ surplus) depends primarily on the size of the misperception and costs, and not on whether the market becomes more or less competitive.
Key words: Product regulation, Information, Oligopoly, Welfare
JEL classification: D18, K29, L13, L15

163
Sanna-Randaccio, Francesca
The impact of foreign direct investment on home and host countries with endogenous R&D
Abstract: This paper analyzes the impact of FDI on home and host countries, when firms compete both in the choice of international strategy and in R&D. A two-country, two-firm model is used. The problem is structured as a three-stage game in which firms must decide: the mode of foreign expansion, how much to invest in R&D, how much to sell in each market. It is shown that -differently from what traditional models predict- in high technology sectors a policy of attracting inward FDI may increase welfare in both the home and host country. Moreover, conditions are identified under which a ban on inward FDI has negative welfare repercussions on the country imposing it. A ban on outward FDI instead is shown to be always welfare reducing.
Key words: Multinational firm, Export, Foreign direct investment, R&D, Innovation, Intellectual property rights
JEL classification: F12, F23, L10, O34

9
Sasaki, Dan
Wen, Mei
On optimal privatisation
Abstract: When previously government-owned production facilities are transferred to the private sector, the incidence on social welfare is twofold: (1) to save the production costs and expand the aggregate production level to enhance welfare if the private operation more cost efficient; (2) there arises a conflict between the welfare-maximising public sector and the profit-maximising private sector. This paper shows that, under certain conditions, it can be socially optimal for the public firm not to privatise its whole production capacity, even when private production is strictly more cost-efficient than public operation. In particular, we observe that the partial privatisation is more likely when these two sectors compete repeatedly.
Key words: Mixed oligopoly, Simultaneous moves, Static game, Supergame, Folk theorem
JEL classification: L33, H42, D43

328
Schenk, Christoph
Signalling through subcontracting
Abstract: The article analyses if and how subcontracting between firms can be used to signal information and compares the welfare effects of signalling with those of information sharing. In a duopoly an informed firm can credibly signal cost information through the subcontracting price at which it sells to a rival firm. It faces a trade-off between influencing a rival’s beliefs and the allocative effects of subcontracting. Signalling will benefit consumers through lower prices. It is welfare enhancing and superior to information sharing. Signalling through subcontracting is a mechanism developed in the marketplace which can alleviate inefficiencies due to informational asymmetry.
Key words: Signalling, Subcontracting, Antitrust
JEL classification: L41, D82

299
Schenk, Hans
Policy implications of purely strategic mergers
Abstract: This paper discusses some implications of so-called "purely strategic mergers" for corporate governance policy, competition policy, and industrial policy. Connecting with the dismal economic record of mergers, purely strategic mergers are defined as those mergers which firms feel compelled to undertake despite an expected economic return of zero or worse. These mergers are motivated by the prospect of strategic comfort rather than wealth creation or the appropriation of monopoly rents. Since purely strategic mergers can only persist when an efficient operation of market mechanisms is obstructed, and merger control policies have explicitly been set up to prevent this, it follows that policy adaptations would be necessary-even from a mainstream perspective. The paper suggests, first, that a so-called "Full Efficiency Test" (FET) should be incorporated in merger control. Such a test should also extend towards preventing inadvertent takeovers of innovative SMEs by much larger firms. Secondly, industrial policies should contribute to this latter goal by furthering a capital market which is conducive to both de novo entry and the successful survival of SMEs. In this respect, the paper argues in favour of what is called here a "virtual (Internet-based) stock exchange with regional counters" (VERC).
Key words: Competition policy, Industrial policy, Theory of mergers, Competitiveness
JEL classification: D81, F23, L13, L21, L40, L50, O38

68
Scherer, Frederic M.
The innovation lottery
Abstract: Diverse surveys have shown the distribution of rewards from technological innovators to be highly skew, with a few big winners realizing the lion's share of profits. This paper reviews that evidence and shows that skew distributions also emerge for the composers or performers of music and the producers of motion pictures. It then asks whether skew reward distributions might be particularly efficacious in motivating creative effort. Analogies are drawn to horse racing, for which there is evidence that bettors are skewness-lovers, and to sweepstakes lotteries. There is reason to believe that some independent technological innovators and artists are similarly attracted to skew reward potentials, although the generalization seems less likely to apply within large business organizations. Implications for intellectual property policies are drawn.
Key words: Innovation, Skew distributions, Risk aversion
JEL classification: D81, L82, O31

36
Schoonbeek, Lambert
Kooreman, Peter
The impact of advertising in a duopoly model
Abstract: We investigate the impact of advertising in a simple static differentiated duopoly model. In order to do that, we compare the situation where the firms compete with two strategic variables-i.e. the prices and the advertising expenditures - with the situation where the firms only compete in prices and do not advertise at all. We characterize in terms of the model parameters the circumstances in which the profits, prices and/or outputs of each firm are greater (smaller) in the Nash equilibrium with advertising than in the Nash equilibrium without advertising.
Key words: Duopoly, Advertising, Profits
JEL classification: D43, L13, M37

70

Schroeter, John R.
Azzam, Azzeddine M.
Zhang, Mingxia
Identifying the equilibrium concept in bilateral oligopoly
Abstract: Econometric methods for assessing the degree of market power typically rely on a maintained hypothesis of price-taking behaviour on one side of the market or the other. In the analysis of bilateral oligopoly, however, one would like to leave open the question of whether buyers or sellers (or both) behave competitively while allowing for the possible exercise of market power on either side. In this paper, we address the problem of distinguishing among three candidate equilibrium concepts for bilateral oligopoly: bilateral price-taking, seller price-taking, and buyer price-taking. Choosing among them comes down to a test of non-nested, nonlinear, simultaneous equation models. Our application to the U.S. wholesale market for beef, characterized by high degrees of concentration among both sellers (beef packers) and buyers (primarily, retail grocery chains), reveals seller-price-taking, among the three candidates, to be the most consistent with the data.

309
Senbongi, Shuichi
Second mover advantage: observation values
Abstract: We consider three-stage duopoly models with cost uncertainty, where firms choose between Cournot or Stackelberg competition in the first stage, observe marginal costs in stage 2, and produce in the homogeneous product market in stage 3. We examine three types of observation; no, private, and public observations. Private observation result implies that asymmetric information structure, which enables the Stackelberg follower to infer unknown private information, is a source of second mover advantage. The public observation result implies that asymmetric information structure is not essential, but that sensitivity of players’ equilibrium response to observation determines the magnitude of information value.
JEL classification: L13, D43, D80

 125
Shy, Oz
Stenbaka, Rune
Market structure and risk taking in the banking industry
Abstract: This study demonstrates that the common view according to which an increase in competition leads banks to increased risk taking fails to hold in an environment where consumers can choose in which bank to make a deposit based on their knowledge of the riskiness incorporated in the banks’ outstanding loan portfolios. We show that, in the absence of deposit insurance, competition between differentiated banks will increase the returns from diversification. We offer a welfare analysis establishing that introduction of competition into the banking industry can only improve social welfare. However, competition cannot always guarantee that diversification will occur to a socially optimal extent. Finally, we show that deposit insurance would eliminate the beneficial effects from banks competing with asset quality as a strategic instrument.
Key words: Risk taking in banking, Banks' portfolio diversification, Bank competition, Deposit insurance
JEL classification: G21, G28, E53

252
Siebert, Ralph
Innovation by multiproduct firms
Abstract: This paper extends the literature on Innovation in markets characterized by vertical Product Differentiation. Earlier analyses focused on entry of a multiproduct monopolist or single product duopolists into empty markets (simultaneously or sequentially) and on their incentives to innovate by taking entry by a potential rival into account. This paper presents a model where two firms each offer one product and have the option of introducing an additional product as well as withdrawing their former product from the market. Two scenarios are distinguished: (i) only one firm innovates, and (ii) both firms introduce a new product simultaneously. When only one firm innovates, it will withdraw the first product and introduce a new product of superior quality. When both firms innovate they always withdraw their former product in order to reduce price competition and to avoid cannibalizing its own demand. The new degree of product differentiation depends on the firms’ cost structure and strategies. I show that the quality leader always accommodates innovation since it is not a credible strategy to deter the competitor from innovation. As a result, always two products are offered in the market.
Key words: Vertical product differentiation, Product innovation, Preemption, Multiproduct firms, Product proliferation, Asymmetric firms
JEL classification: C7, D0, L1, O3

325
Siebert, Ralph
Multimarket competition, market power and learning by doing in the DRAM industry
Abstract: The existing literature about the industry for Dynamic Random Access Memories (DRAMs) has emphasized Learning by Doing effects as an explanation for an enormous price decrease over time. The previous literature assumed single product markets in order to investigate the dynamic effects on firms costs and found significant Learning by Doing effects and Cournot or even higher mark-ups. In this paper I allow firms to be engaged in a multiproduct market which enables them to internalize effects on their neigh boring generations. I analyze and test a structural dynamic model in order to! quantify the various effects on Learning by Doing and on firms market power. Using firm-level output as well as firm-level cost data from 1974-1996, it is possible to investigate the corresponding effects precisely. My results indicate that Learning by Doing effects are still present. But opposed to the previous literature the industry becomes more competitive and firms market power and price-cost margins decline to a level of almost perfect competition.
Key words: Multimarket competition, Learning by doing, Market power, Dynamic random access memory market
JEL classification: L0, L6, O3

368
Siler, Pamela
Wang, Chengqi
Liu, Xiaming
Manufacturing technology transfer within multinational enterprises: panel data evidence from US subsidiaries in Scotland
Abstract: This study examines technology transfer from 49 American parent firms to their 53 manufacturing subsidiaries in Scotland for the period 1992-1995. Empirical evidence indicates that R&D undertaken in the parent firms influences productivity levels in their affiliates. Results from sub-sample analyses show that firms in product industries are more likely to transfer technologies than firms in process industries. In addition, the larger the sizes and the higher the levels of technology of parents and their subsidiaries, the more significant the transfer of technology from the parents to subsidiaries. An important finding is that the technological competence of the subsidiary affects the transfer process. This finding has policy implications for regional economic development.
Key words: Multinational enterprises, Technology transfer, Parent firm, Subsidiary, Panel data
JEL classification: L1, O3

372
Sleuwaegen, Leo
Konings, Jozef
Mommaerts, Gerry
Exit under uncertainty in a small open economy: evidence from Belgian manufacturing
Abstract: This paper studies the impact of foreign competition on the exit decision of firms in Belgium. The paper finds that import competition is a major source of exit, but finds important differences in exit behavior between "open" industries strongly exposed to foreign competition and "closed" industries focusing on the domestic market. The paper finds capital intensity, product differentiation and the existence of strategic market niches to impede exit in open sectors. Export opportunities and the growth of the domestic market reduce the probability to exit in closed sectors. Because of less flexibility in substituting imports for domestic sales, exit is also postponed if capital investments are highly irreversible and future sales uncertain in closed sectors.
JEL classification: F14, F15, L60

37
Spagnolo, Giancarlo
Debt as a (credible) collusive device
Abstract: This paper proposes a theory of the anti-competitive effects of debt finance based on the interaction between capital structure, managerial incentives, and firms' ability to sustain collusive agreements. It shows that shareholders' commitments that reduce conflicts with debt holders - such as a manager with a valuable reputation or "conservative" managerial incentives - besides reducing the agency cost of debt finance also greatly facilitate tacit collusion in product markets. Collusive credit markets or large banking groups can ensure the credibility of such commitments, thereby "exporting" collusion through leverage in otherwise non-collusive product markets.
Key words: Oligopoly, Capital structure, Tacit collusion, Managerial incentives, Corporate governance, Financial market - product market interactions
JEL classification: D21, G32, L13, L41

198
Stephan, Andreas
The impact of road infrastructure on productivity and growth: new results for the German manufacturing sector
Abstract: Using time-series cross-section data from the manufacturing sector of the 11 Bundesländer from 1970 to 1993, we examine the impact of road infrastructure on private production applying three different approaches; i.e., a Cobb-Douglas production function, a translog production function and a growth accounting approach. Our econometric analysis explicitly takes into account four of the most frequent problems in the context of time-series cross-section analysis: serial correlation, group wise heteroscedasticity, cross-sectional correlation and non-stationarity of data. For all approaches and tested specifications, we find that road infrastructure is significant for production in the manufacturing sector. Moreover, we find that variations between the Bundesländer are more important for explaining infrastructure's contribution to production than variations across years.
Key words: Infrastructure and growth, Measurement of aggregate productivity, Panel data analysis
JEL classification: C23, H54, O47

 136
Sterlacchini, Alessandro
Do innovative activities matter to small firms in non-R&D-intensive industries? An application to export performance
Abstract: The paper deals with the role of innovative activities in small, non-R&D-performing firms which belong mainly to "supplier dominated" industries and, to a lesser extent, to "specialised suppliers". After describing the type and extent of non-R&D innovation inputs for a sample of Italian manufacturing firms, their export behaviour and performance are analysed by means of Tobit, Probit and truncated regressions. The results show that the probability of being an exporter is affected positively (up to an upper threshold) by the size of a firm and negatively by its nature as a sub-contractor; conversely, innovative activities, and especially the amount of expenditure on design, engineering and pre-production developments, exert a significant and positive impact on the share of exports on sales.
Key words: Innovative activities, Non-R&D-intensive industries, Small firms, Export performance
JEL classification: O30, O33

134
Symeonidis, George
Are cartel laws bad for business? Evidence from the UK
Abstract: This paper examines the impact of cartel policy on firms’ profits using a panel data set of UK manufacturing industries over 1954-1973. The introduction of cartel laws in the UK in the late 1950s caused an intensification of price competition in previously cartelised manufacturing industries, but it did not affect those industries which were not cartelised. The econometric results from a comparison of the two groups of industries suggest that the UK cartel legislation had no significant impact on firms’ profits, although it had a strong effect on market structure. These results are in line with theoretical models that endogenise market structure by means of a free entry condition such as Selten (1984) and Sutton (1991).
Key words: Cartels, Price competition, Market structure, Profits, UK manufacturing
JEL classification: L1

188
Temple, Paul
Urga, Giovanni
Driver, Ciaran
The influence of uncertainty of investment in the UK: a macro or micro phenomenon?
Abstract: While the theory examining the relationship between uncertainty and investment has suggested new research avenues, it has little overall predictive power. At the policy level the benefits for investment of a more stable economic climate are being emphasised. Both considerations point to the need for empirical work. Accordingly, this paper obtains industry level panel data by marrying the UK Census of Production with the CBI Industrial Trends Survey. Dynamic panel data methods are used to distinguish between macro and micro sources of uncertainty and to consider the role of financial factors. It is found that both sources of uncertainty exert a considerable negative impact on investment, while financial factors may be important in some industries.
Key words: Investment, Uncertainty, Panel Data
JEL classification: C33, E22, D81

142
Thomas, Charles J.
Multimarket contact and imperfect information
Abstract: With perfect information about relevant strategic variables, economic theory predicts that firms engaged in competition across several markets sometimes can use their multimarket contact to enhance collusion. In practice, perfect information likely is unavailable, which is known to impede firms' collusive efforts. I extend a standard oligopoly supergame to examine simultaneously the effects of imperfect information and multimarket contact on the degree of co-operation that firms can sustain. One striking result is that the destabilizing nature of demand shocks might make strategically linking markets unprofitable, despite the excess enforcement power exploited in perfect information models.
Key words: Collusion, Optimal punishment, Multimarket contact
JEL classification: C61, D43, D82, L41

101
Toivanen, Otto
Waterson, Michael
Market structure and entry: where's the beef?
Abstract: We study the effects of market structure on entry using data from the UK fast food (counter-service burger) industry over the years 1991-1995. Over this period, the market can be characterized as a duopoly. We find that: firms’ entry decisions are not endogenous to each other; market structure matters greatly; both firms are more likely to enter markets where they are not present but their rival is, rather than markets where neither is present; and that the firms are differently affected by demand and cost variables. We conclude that the level of competition in the market cannot be very high.
Key words: Entry, Fast Food, Retailing, Competition
JEL classification: L81, L13, M11

290
Tombak, Michael
The market for innovations with asymmetric firms
Abstract: We examine the licensing of a cost reducing technology to rivals or entrants when the product market competition is asymmetric Cournot. We study which firms would be sold licenses under different price setting mechanisms and different pricing structures. We find that the innovator would prefer to: (i) license an entrant instead of an existing rival if the license is exclusive; (ii) broadly license to both rivals and entrants (iii) license to existing rivals in order of weakest to strongest, (iv) market its innovation via pair wise bargaining as opposed to price setting, and (v) use royalty payments instead of fixed fees. We find that consumers would also prefer a bargaining mechanism but with a fixed fee pricing structure.
Key words: Licensing, Technological innovation, Size distribution of firms
JEL classification: D45, O31, L11

59
Tomlin, KaSaundra M.
Foreign direct investment decisions: the impact of exchange rate skewness with external financing
Abstract: This paper argues that foreign direct investment (FDI) decisions depend on skewness in the exchange rate distribution when a firm requires external financing (a loan) to invest abroad. A stylized paradigm is developed which suggests that any degree of skewness in the exchange rate distribution, positive or negative, affects the initial exchange rate required for entry (FDI), the expected profitability from investing, and the firms ability to cover costs associated with external finance. The firms decision rule for FDI is based on the expected profitability from investing, which depends on the amount of external finance and the exchange rate process. The model shows that the expected profitability from FDI is higher with a skewed exchange rate distribution rather than with a symmetric distribution suggesting entry rates are higher in the skewed case. Using data on FDI in the U.S. by foreign firms across 4-digit SIC industries from 1982 to 1993, maximum likelihood estimates suggest that a higher degree of exchange rate skewness makes foreign direct investment more likely.
Key words: Foreign direct investment, Exchange rates, Skewness
JEL classification: F21, F23, F3

43
Toolsema-Veldman, Linda A.
Schoonbeek, Lambert
Bank behaviour and the interbank rate in an oligopolistic market
Abstract: The well-known Klein-Monti model of bank behaviour considers a monopolistic, profit-maximizing bank. This paper demonstrates that this model’s results on the comparative static effects of a change in the exogenous interbank market interest rate do not necessarily hold in oligopolistic generalizations. Introducing asymmetries in the cost functions of the banks, or in their way of conduct, may lead to counterintuitive effects of a change in the interbank interest rate on the banks’ volumes of loans and deposits and the corresponding interest rates.
Key words: Bank behaviour, Cournot oligopoly, Stackelberg oligopoly
JEL classification: D43, L13, G21

306
Traca, Daniel A.
Import-competition, market power and the infant-industry argument
Abstract: This paper addresses the impact of import-competition on the investment in R&D of a domestic monopolist, in a developing country, that competes with technologically advanced world producers. For an infant-industry, with a high productivity gap, the monopolist chooses to concede, whereas for mature industries, with a low productivity gap, import-competition stimulates productivity growth. Temporary protection sways an infant-industry to fight and catch-up, and is welfare increasing, - due to the distortion from the firm's market power. In the long-run, free-trade is the optimal policy. Hence we integrate the "old" argument for the temporary protection of infant-industries, with the notion that import-competition fosters innovation and productivity.
Key words: Import-competition, Infant-industry, R&D
JEL classification: F13, F43

253
Ueda, Masako
The boundaries and the size distribution of firms
Abstract: This paper studies a general equilibrium model of entrepreneurship in a principal-agent economy. Each individual is confronted by an occupational decision between manager and employee. Managers are paid depending on the performance of their own firm on the other hand employees receive fixed wages. In equilibrium, less risk averse individuals become managers and more risk averse individual become employees. The model demonstrates a variety of predictions about the size distribution of firm, managerial compensation, and inequality between managers and employees. Among all, the model suggests that increasing opportunities for foreign direct investment and technological changes account for the recent rise of inequality and increasing business start-up activities.
Key words: Entrepreneurship, Principal-Agent
JEL classification: G34, L22, M13

38
Valletti, Tommaso M.
Market foreclosure and exclusivity contracts when consumers have switching costs
Abstract: In the presence of switching costs, firms are often interested in expanding current market shares to exploit their customer base in the future. However, if the product is sold by retailers, manufacturers may face the problem of extracting too much surplus from the retailer. If this happens, then the latter has not an incentive to build a subscriber base. This paper would like to draw a line between two unrelated streams in the literature, respectively on switching costs and vertical restraints. An upstream-downstream duopoly model is presented to analyse the mutual incentive for firms to enter into particular trading relationships when consumers are repeat-purchasers.
Key words: Switching costs, Vertical restraints, Foreclosure, Exclusivity

352
Van Cayseele, Patrick J.G.
Pre-emptive search and R&D clustering: comment
Abstract: The results obtained by Cardon and Sasaki (1998) on R&D clustering are derived under the specific assumption that firms only can own one patent. Often firms own several related patents. The computation of the subgame perfect Nash equilibria in an R&D game in which each firm can own more than just one patent shows that the conditions derived to sustain R&D clustering tend to underestimate this form of collusive behaviour when search costs are substantial, while the reverse is true for smaller search costs.

311
Vandenbussche, Hylke
Wauthy, Xavier
European antidumping policy and firms' strategic choice of quality
Abstract: In this paper, we consider a European industry characterized by vertical product differentiation. Using a two-stage model with quality choice made before price competition takes place, we show that EU anti-dumping policy that takes the form of price-undertakings offers a powerful protection to domestic firms, but only at the price competition stage. Once the impact of the A-D policy on quality choices is taken into account, European Welfare as well as profits accruing to the domestic firm decrease whenever the free trade equilibrium is affected. Hence we show that European Antidumping policies may induce "perverse" leapfrogging.
Key words: Bertrand competition, Injury, Quality, Welfare, European antidumping policy
JEL classification: F13, L13

236
Vannoni, Davide
The incentive to operate in more than one market: a model of multiproduct firms
Abstract: The paper develops a simple model in which diversification strategies depend on the simultaneous play of four factors: demand relationships between goods, technological conditions (economies of scope), collusion within a market and across markets (multimarket contact). Other than encompassing in a unified way several of the recent formal models developed in the literature on multiproduct firms, the analysis is useful for examining the robustness of some of the hypotheses advanced by non formal theories of diversification. Moreover, we discuss seven applications which assess the impact on diversification choices of asymmetries in the cost function, increase in the demand for one good, market enlargement, managerial preferences, changes in the degree of collusion.
Key words: Multiproduct firms, Diversification strategies
JEL classification: L1, L2

291
Versaevel, Bruno
Innovation types and appropriability
Abstract: This paper offers a new explanation of vertical integration. A common agency model with complete information shows that, in contrast with some recent propositions in the literature, in many situations a tight appropriability regime may not be a sufficient condition for an innovator to obtain a rent. Two innovation types are distinguished in terms of returns to adoption and diffusion that relate to structural properties of profit functions. Sufficient conditions for appropriability and non appropriability of process and product innovations are proposed. Two examples illustrate the results.
Key words: Common agency, Innovation returns, Supermodularity
JEL classification: L10, O30

376
Veugelers, Reinhilde
De Backer, Koen
Access to external knowledge: an empirical analysis of alliances as spillover channel
Abstract: The theoretical IO literature has modeled the relationship between spillovers and cooperative (R&D)-agreements extensively; suggesting that spillovers induce cooperation as a means to internalize these involuntary effects, while cooperation simultaneously enhances voluntary spillovers through information sharing. The empirical literature on this topic however is scarce. This paper empirically assesses the interactions between alliances and transfers of knowledge. A first finding is that, consistent with the theoretical literature, the occurrence of alliances is correlated with traditional measures of (involuntary) spillovers, based on input-output relations and technology proximity. But not only R&D-cooperation corresponds to (the lack of) appropriability; the evidence shows that also non-R&D alliances are associated with transfers of knowledge. In a second part the impact of external know-how on the performance of industries in OECD-countries is analyzed. Following the association of alliances with spillovers, the impact of external know-how is weighted by the occurrence of alliances with the external source, based in the same industry or in other industries. Using information about 588 inter- and intra-industry R&D and non-R&D alliances formed in the period '86-'96, we find that sectoral R&D levels accessed through intra-industry R&D alliances have a negative impact on own productivity, while this effect is positive for industries with intra-sectoral non-R&D alliances. Know-how from other sectors has no significant impact on productivity, unless for those sectors with which R&D alliances are prevailing that extend beyond R&D to include production and/or distribution. In contrast to the findings in other studies, this effect of inter-industry spillovers is found to be negative. The specific character of alliances as spillover channel, gives rise to transfers of knowledge that may negatively affect industry productivity, if only because of the asymmetries in absorptive capacity between firms and the possibility of cheating of partners by absorbing as much as possible of the partner’s knowledge while concealing the own expertise. This especially holds in intra-industry alliances where partners are direct competitor. In inter-industry alliances, this competitive effect is less apparent; however alliances which combine R&D and production activities can turn partners in potential competitors by accommodating their entry.
Key words: Spillovers, Alliances, Absorptive capacity
JEL classification: O30, M21, L10

296
Vitali, Giampaolo
The entry mode choice of EU leading companies (1987-1997)
Abstract: The aim of the paper is to provide empirical evidence on the relationship between industrial structure and M&A process. We focus on the determining factors fostering a firm to choose controlling acquisitions or non-controlling ones. We used the Acquisitions and Divestments Database (ADD), a data-base collecting equity operations made by top-90 EU leaders in the period 1987-1997. A logit analysis shows some variables that increase the probability that the entry mode choice is a non-controlling-acquisition: at firm-level (size, oligopolistic competitor), industry level (concentration, international open), country level (cultural distance between home and host countries). On the contrary, the R&D product differentiation strategy (at industry level) and the role of the stock exchange market (at country level) enforce the probability that the entry mode is a wholly-owned acquisition.
Key words: Industrial structure, European industry, M&As, Acquisitions, Joint-ventures

261
von Graevenitz, Georg
How product market competition affects research joint ventures. A welfare analysis
Abstract: This paper provides an explicit welfare comparison between Research Joint Ventures and licensing in the context of product market competition by non-innovating firms. It is assumed that spillovers between firms both in and outside RJVs are endogenous. It is established that firms almost always share information with one another. The efficiency with which RJVs and licensing firms allocate inputs to R&D relative to a social optimum is studied. The relative allocative superiority of RJV formation and licensing is shown to depend on the degree of product market competition. Finally the profitability of RJV formation is also studied.
Key words: Research Joint Venture, Licensing, Information-Sharing
JEL classification: F13, L13

53
Von Ungern-Sternberg, Thomas
A note on fat cats and puppy dogs
Abstract: This paper studies under what circumstances an incumbent has an incentive to over-invest in a "commitment variable" such as advertising or R&D expenditures. It is sometimes argued that the answer crucially depends on the question, whether the "second stage variables" are strategic complements or substitutes. We show that in the derivation of this result the authors implicitly make the (very) restrictive assumption that the first stage "commitment variable" has no direct effect on the competitor's reaction function. Once this assumption is relaxed the clear cut distinction along the lines "strategic complements", "strategic substitutes" no longer holds.

240
Walsh, Patrick Paul
Whelan, Ciara
Regional location and firm performance in Central Eastern Europe transition economies
Abstract: It is important to recognise the role that regional heterogeneities play in determining firm performance within industrial sectors of transition economies. Trade and Foreign Direct investment are important aspects of the ongoing restructuring. Regional heterogeneities in factor endowments, infrastructure and transportation costs, and market access yield differences in the product and trade orientation that firms inherit from pre-transition economies, and in levels of FDI. Controlling for these factors, we undertake a firm level analysis that estimates the direct effect of trade orientation and the presence of foreign capital on performance, and its indirect effect through the type of ownership. Our results indicate a difference in the performance of state owned and recently privatised firms.
Key words: Location, Trade, Investment, Firm performance, Transition economies
JEL classification: F43, O33, P23

8
Weigand, Juergen
Audretsch, David B.
Does science make a difference? Investment, finance and corporate governance in German industries
Abstract: This paper examines the impact of industry knowledge conditions, firm size and corporate governance structures on tangible investment and its financing. Based on a large panel data set of German firms we investigate whether liquidity constraints vary systematically across firms engaged in activities reflecting very different knowledge conditions. In particular, we compare the extent of liquidity constraints in science-based firms with non science-based firms. Since science-based economic activity is subject to high uncertainty, asymmetric information and non-exclusiveness of newly created knowledge, liquidity constraints might be severe. Surprisingly, science does make a difference. We find firms in science-based industries to be less liquidity constrained than their non science-based counterparts. However, firm size and governance structures play an important role. After accounting for firm size and the mode of corporate governance, we observe that the large owner-controlled firms in both science- and non science-based industries are most liquidity constrained.
Key words: Determinants of investment, Liquidity constraints, Corporate governance
JEL classification: G3, L2, O31

26
Weigand, Jürgen
Lehmann, Erik
Does the governed corporation perform better? Governance structures and the market for corporate control in Germany
Abstract: The paper investigates the impact of governance structures on the performance of 403 German firms over the period 1991 to 1996. We find that governance structures do make a difference for firm performance when the company is not quoted on the stock exchange. Systematic interactive influences of ownership concentration and the identity of owners on ROA exists for non-quoted companies but not for quoted companies. Board representation of owners on the board of managers or on the supervisory board affects ROA significantly positively, regardless of stock market quotation. These findings support the view that tight governance curbs managerial discretion and thus expands shareholders' wealth.
Key words: Firm performance, Ownership concentration, Governance structures, Managerial discretion
JEL classification: L1, L2, G3

202
Wey, Christian
Compatibility investment in duopoly with demand-side spillovers under different degrees of co-operation
Abstract: This paper examines the effects of different degrees of co-operation on firms' incentives to undertake interbrand compatibility investments ex post, which benefit the competitor indirectly via an increase of its mass market demand. We find that co-operation in compatibility investments while preserving competition on the product market gives second-best welfare for all positive values of the spillover parameter. For large spillover effects cartelization in compatibility investments and on the product market is welfare improving compared to pure competitive behaviour. Furthermore, we examine the effects of an "open standardization policy" which increases the level of the spillover parameter, and show that an asymmetric outcome might dominate the symmetric solution.
Key words: Cournot duopoly, Demand side spillovers, Compatibility investments, Standardization committee, Antitrust, Intellectual property rights
JEL classification: L13, L14, L93

67
Willner, Johan
Ownership, efficiency and political interference
Abstract: Privatisation is often explained by a desire to make firms more efficient. Some authors argue that the main reason for inferior performance under public ownership is interference from politicians which promote output and employment instead of profits, in an attempt to please voters. However, Western state-owned companies tycally operate in markets which are likely to be imperfectly competitive under any form of ownership. Private ownership would then lead to underprovision. We present conditions under which interference from "biased" politicians yields higher welfare than under pure commercial rule, and vice versa. If efforts affect utility, interference may be beneficial even on a seemingly perfect market.
Key words: Efficiency, Privatisation, Public ownership
JEL classification: L32, L33, L44

268
Winter, S.G.
Kaniovski, Y.M.
Dosi, Giovanni
Modelling industrial dynamics with innovative entrants
Abstract: In this work we explore the dynamic features of industries characterized by the persistent arrival of innovative entrants. The models which follow build upon and modify the baseline model presented in Winter et al. (1997). In an extreme synthesis, in the latter we develop a framework of analysis of the competitive dynamics of industries composed of heterogeneous firms and continuing stochastic entry. There, we show that despite the simplicity of the assumptions, the model is able to account for a rather rich set of empirical 'stylized facts', such as: (i) continuing turbulence in market shares; (ii) persistent inflows and out-flows of firms; (iii) 'life cycle' phenomena - including, in particular, nearer the birth of an industry, relatively sudden 'shakeouts', yielding distinctly different industrial structure thereafter; and (iv) skewed size distributions of firms.

263
Wölfl, Anita
Absorbing external knowledge for innovation success - does the recipe work?
Abstract: This paper examines empirically the theoretical relationship between external knowledge and innovation success. Special emphasis is posed on the effects that arise from various types of spillovers and how these effects are influenced by firm-specific absorptive capacities. The results of the microeconometric analysis based on German firm data on innovation suggest that firms can effectively use external R&D within their own innovation process, as long as they have access to the relevant knowledge flows and as long as they have built up sufficient absorptive capacities. Furthermore, the results support the complementarity between own and foreign R&D. In contrast, lack of access to inter-industrial and international knowledge flows may result from informational barriers and ineffective inter-firm linkages.
Key words: Technology transfer, Technological spillovers, Absorptive capacity, Innovation
JEL classification: O31, O32, O34, L13, L14

46
Yamawaki, Hideki
Who survives in Japan?: An empirical analysis of European and U.S. multinational firms in Japanese manufacturing industries
Abstract: This paper provides new evidence on exit patterns of European and U.S. firms in Japanese manufacturing industries. Specifically, the paper tests two sets of hypotheses: (1) Japan's distinctive business institutions and practices work against foreign firms and constitute a barrier to operate in Japan; and (2) the global configuration and competitiveness of foreign firms determines their post-entry performance in Japan. Using a new sample of 366 subsidiaries established during the 1973-94 period in Japan, the paper finds, most importantly, that the probability that a foreign firm survives in Japan is influenced by Japan's business practice such as corporate groups or keiretsu, while the probability is also determined by the firm's international competitiveness.
Key words: Exit, European and U.S. multinationals, Japan
JEL classification: L1, F23

251
Yurtoglu, B. Burcin
Business groups, liquidity and investment: evidence from Turkey
Abstract: The paper presents evidence suggesting that corporate financial structure affects investment. We come to this conclusion by analyzing two sets of Turkish firms. The first set of firms are owned by diversified business groups centered around a holding company. The second set of firms have weaker links to a main bank and presumably faces greater problems raising capital. Investment is more sensitive to cash flow for the independent firms than for firms which have strong ties to business groups. The results also stress the role of banks in the investment process.
Key words: Business groups, Ownership structure, Internal funds, Investment, Turkey
JEL classification: G31, G32, O16

332
Yvrande, Anne
Is the new British railways structure stable? A transaction costs economics analysis
Abstract: The 1993 reform of rail transport in Great Britain led to a complete partition of the former vertically integrated monopoly of British Rail. All the railways activities have been isolated and divided up among private operators who coordinate themselves through contracts. This paper aims at assessing the relevance of railways industry dis-integration and the stability of the new British structure. Transaction Costs Theory, which mainly focuses on the explanation of vertical integration and contractual coordination, provides a relevant analytical framework. A detailed study of both transactions between the new operators and contracts coordinating their activities allows us first, to show that vertical separation is not a judicious choice, and second, that the coordinative mechanisms of the contracts cannot solve the problems involved by dis-integration. At last, the analysis of the structural changes introduced by the agents (operators and regulators) addresses the issue of the stability of this unique experience.
Key words: Vertical integration, Network industries, Public utilities reform, Railways organizational structure, Transaction Costs Economics
JEL classification: D23, L52, L92

303
Zaninotto, Enrico
Rossi, Alessandro
Gaio, Loris
Stochastic learning in co-ordination games: a simulation approach
Abstract: In the presence of externalities, consumption behaviour depends on the solution of a co-ordination problem. In our paper we suggest a learning approach to the study of co-ordination in consumption contexts where agents adjust their choices on the basis of the reinforcement (payoff) they receive during the game. The results of simulations allowed us to distinguish the roles of different aspects of learning in enabling co-ordination within a population of agents. Our main results highlight: 1. the role played by the speed of learning in determining failures of the co-ordination process; 2. the effect of forgetting past experiences on the speed of the co-ordination process; 3. the role of experimentation in bringing the process of co-ordination into an efficient equilibrium.
Key words: Adaptive learning, Reinforcement learning, Coordination games, Simulation, Equilibrium selection
JEL classification: C72, C73, D83

213
Zhao, Jingang
Cost savings and the optimal market structure
Abstract: It is known that monopoly (or a merger) is more efficient than the n-firm structure under Cournot competition if cost savings are large. We show that monopoly is the best among all partitions in a linear market if cost savings are sufficiently large. In a large class of linear markets, we show that the optimal number of firms gradually decreases from n to one as cost savings increase from sufficiently small to sufficiently large. In linear duopoly market, for example, monopoly is the best partition if and only if the difference in marginal costs (= size difference) is greater than 5/11 of the monopoly supply.
Key words: Market equilibrium, Merger, Oligopoly, Optimal market structure
JEL classification: D4, D43, L13

230
Zulehner, Christine
Learning-by-doing and firms' behaviour in the DRAM market
Abstract: This paper provides an empirical analysis of the semiconductor industry, in particular of the Dynamic Random Access Memory (DRAM) market. I apply a structural oligopoly model of dynamic non-price competition that incorporates learning-by-doing. Theory shows that learning has important consequences for firm behaviour. Whether firms take the strategic effects of learning actually into account when choosing their output strategies, is answered with empirical evidence. Using quarterly data from 1974-1996 at the firm level, I estimate demand and pricing relations for three different generations of DRAM chips. The empirical results show that there are economies of scale, mark-ups in excess of Cournot mark-ups, learning-by-doing and strategic dynamic behaviour of firms.
Key words: Learning-by-doing, Oligopoly, Dynamic games, Seconductor industry
JEL classification: L13, L63