Volume 17, Issue 8:

Nishimura, Kiyohiko G. and Ohkusa, Yasushi and Ariga, Kenn

"Estimating the mark-up over marginal cost: a panel analysis of Japanese firms 1971-1994"

JEL codes: L10; L11; L13; L16; L60; L70; L80; L90
Keywords: Marginal cost; Mark-up rate; Factor shares; Japanese firms

Abstract: In this paper we propose a new method to estimate mark-ups over marginal cost at the firm level. This method is based on the identity between the short-run elasticity of output to inputs, the mark-up rate, and the factor shares. We then apply this method  to a panel of Japanese firms in 21 industries over 24 years. We have three main results. First, there is strong evidence of imperfect competition in this panel, in which internationally competitive industries show low mark-ups. Second, the mark-up rate differs considerably among firms and its distribution is skewed. Third, the mark-up rate over marginal cost shows strong procyclicality, and its sensitivity is uniform within the industry.

Schnitzer, Monika

"Expropriation and control rights: A dynamic model of foreign direct investment"

JEL codes: F2; F34; L14; O12
Keywords: Foreign direct investment; Sovereign risk; Implicit contracts

Abstract: This paper studies the strategic interaction between a foreign direct investor and a host country. We analyze how the investor can use his control rights to protect his investment if he faces the risk of "creeping expropriation" once his investment is sunk. It is shown that this hold-up problem may cause underinvestment if the outside option of the investor is too weak, and overinvestment if it is too strong. We also analyze the impact of spillover effects, we give a rationale for "tax holidays" and we examine how stochastic returns affect the strategic interaction of investor and host country.

Nilsson, Jan-Eric

"Allocation of Track Capacity"

JEL codes:
Keywords: Railway industry; track capacity allocation; second-price auction

Abstract: Allocation of track capacity concerns multiple users facing demand indivisibilities, running trains over an inelastic supply of railways tracks. The paper suggests a Vickrey-type mechanism to handle incentive aspects of this technically complex optimisation task. Here, the price for operating a train will correspond to the bids foregone by other operators who are pushed off their preferred routes. The paper reports the results of eleven experimental markets using variations of this mechanism where each market includes up to 10 trading periods, and subjects bid for routes over a highly stylised railway network. The experiments generated solutions that capture 90-100 % of potential benefits.

Ziss, Steffen

"Divisionalization and strategic managerial incentives in oligopoly under uncertainty"

JEL codes: L10, L20, L40
Keywords: oligopoly, divisionalization, strategic incentives

Abstract: This paper argues that divisionalization and incentive contracting are complementary rent shifting tools in the presence of demand uncertainty. The role for divisionalization arises if managers know the state of demand prior to making output decisions and if incentive contracts are linear and non-state contingent. In this context incentive contracts achieve expected Stackelberg outcomes but have no impact on the firm's responsiveness to demand shocks. Divisionalization, on the other hand has the strategically beneficial effect of making the firm more responsive to demand shocks.

Kleit, Andrew and Palsson, Halldor P.

"Horizontal concentration and anticompetitive behavior in the Central Canadian cement industry: testing arbitrage cost hypotheses"

JEL codes: L13, L41, L61
Keywords: collusion, cement, concentration

Abstract: Consider a market with a small number of firms attempting to collude. If they successfully at as a dominant firm, they will raise price. This in turn will expand output by any fringe firms and thus reduce the market share of the colluding group. Thus, higher prices will decrease concentration over time. Here we test this hypothesis, using a modification of Spiller and Huang (1986) and data from the post-1974 Toronto cement market. The weight of the evidence indicates that market price has a negative effect on concentration, implying that the firms in this market act, with significant though limited success, as a cartel.

Constantatos, Christos and Sartzetakis, Eftichios S.

"On commodity taxation in vertically differentiated markets"

JEL codes: D4, L1
Keywords: vertical product differentiation, commodity taxation, market structure

Abstract: We examine the impact of commodity taxation on vertically differentiated product markets when entry is allowed. We show that an ad valorem tax may have a dramatic effect on market structure by inducing the entry of a large number of firms in what was previously a natural monopoly. The producers of high quality products reduce market share after an increase in their unit production cost, leaving more room for lower quality products. While within a given market structure aggregate quality decreases monotonically with the tax rate, quality jumps upwards at tax rates that cause a change in market structure..

Fotopoulos, Georgios and Spence, Nigel

"Net entry behavior in Greek manufacturing: consumer, intermediate and capital goods industries"

JEL codes: L6, L60

Abstract: This research explores the nature and causes of net entry of firms in three groups of Greek manufacturing industries - consumer, intermediate and capital goods. The research questions whether or not the determinants of net entry rates across sectors are different. Econometric analyses reveal that, indeed, there are significant differences in the determinants of net entry rates across industry groups, but also there is strong within-group correlation across sectors.