Firms` Strategic Decisions: Theoretical and Empirical Findings

In this chapter, we consider an oligopolistic model for parking lots with conjectures concerning the price variations depending upon the agents’ offered parking space increase or decrease, given an existing exogenous shop driven demand, which may be affected by a parking discount for shop customers. Taking into account piecewise linear cost functions, which is quite natural assumption for parking lots, we are able to elaborate existence of an exterior equilibrium. Moreover, under some natural assumptions we are able to introduce conjectured or interior equilibrium. And we prove the existence and uniqueness of it. The concept of equilibrium with the conjectures is different from the classical Cournot-Nash one. We can establish that there exists a unique interior (conjectured) equilibrium (which is different from the classical Cournot-Nash equilibrium) in a model where firms have a piecewise linear cost function.

In this chapter, we consider unionization structure and show that in quantity competition, the total utilities of the decentralised unions are higher than the utility of the centralised union only if the centralised union charges a uniform wage and the firms’ productivity differences are large irrespective of product differentiation; in price competition, the total utilities of the decentralised unions are higher than the utility of the centralised union only if the centralised union charges a uniform wage with the firms’ productivity differences are large and the degree of product differentiation is small. Total profits in Bertrand competition are less than Cournot competition under differentiated duopoly with firm heterogeneity and hence, the standard result on the ranking of Cournot and Bertrand profits is not reversed with the productivity difference and unionization structures. In addition, the social welfare is always higher under Bertrand competition than under Cournot competition irrespective of unionization structures.

The majority of industrial economics works deals with competition between mono-product firms. However, the hypothesis of mono-product competition is a very poor representation of the observed reality in the industry. In this chapter, we revisit two classical examples of merger regulation. We show how the analysis of multi-store competition may be complex and may require a more sophisticated modeling than the classical models used in mono-store framework. We provide notably, an appropriable tool to discuss the power of a multi-store firm to stimulate price co-ordination in the industry. We use general models to derive specific price equilibrium applying to collusive price behavior between multi-store firms and mono-store firms. We show how the multi-store firm may find strategically advantageous to base its pricing policy on the degree of substitutability of its product line with respect to those offered by its competing rivals. Finally, we show that the decisive factor in establishing multi-store initiated cartelization may be (i) the number of firms included in the cartelization and (ii) the location of the independent store relative to those owned by the dominant firm. These two elements can indeed be as decisive as the total number of players in the market.

This chapter presents results that contrast outcomes in banking industry following a simultaneous non-cooperative competition among banks of roughly similar sizes vis-a-vis a sequential move competition between a leader and other follower banks. We also present results that link credit demand and bank efficiency (defined as the cost that it takes a bank to make loans) with liquidity creation and the total supply of liquidity in the market. We find that in a banking industry characterized by a sequential move competition with some leaders and other followers, aggregate credit generation may be larger, and price of loans may be cheaper in comparison to a situation where similarly sized banks compete simultaneously. This critical insight calls for special care that should be taken while regulating banks that are commonly perceived to be “too large” or “too big to fail.” We also present results that connect the effects of cost-reducing investments in the banking industry on credit supply and loan pricing. We also briefly review the vast and ever-expanding scholarship on bank competition and its economic impacts.

This chapter investigates an international mixed duopoly market in which a state-owned firm coexists with a foreign labour-managed firm. The following timing of actions is considered. First, firms decide simultaneously and non-cooperatively whether to use lifetime employment as a strategic commitment device. If a firm provides lifetime employment, then it chooses an output level and enters into a lifetime employment contract with the number of workers necessary to achieve the output level. Second, firms choose actual outputs simultaneously and non-cooperatively. This chapter traces the firms’ reaction functions in the mixed duopoly model with lifetime employment. Generally, duopoly reaction functions intersect only once, which yields the stable equilibrium solution. However, this chapter shows that there may be multiple stable Cournot solutions in the international mixed duopoly model.

This chapter considers a two-stage price-setting model of an established firm and a potential entrant and investigates whether the use of strategic commitments by the established firm is effective to deter entry. Most studies on entry deterrence examine the situation of strategic complements where goods are substitutes in Bertrand competition. Therefore, the chapter divides demand functions into four cases, and correlates each case with either of two opposite strategic commitments. This chapter examines the entry-deterring equilibrium outcomes resulting from the strategic commitments of the established firm in all four cases and shows that strategic commitments can be used as an effective tool for entry deterrence in Bertrand competition.

We study a vertical market in which the upstream input market is monopolized and the downstream is composed of a Cournot oligopoly. The downstream firms also choose their internal channel structures strategically. Two main points are made. First, uniform pricing by the monopoly input supplier leads to higher total welfare than under discriminatory pricing. Second, uniform pricing is more profitable than price discrimination for the monopoly input supplier.

We analyze two royalty structures in a two-tier industry in which a franchisee makes a demand increasing investment. Suppose the franchisor can propose either a margin-based royalty (MBR) or a sales-based royalty (SBR). We show that the SBR has the advantage of providing a greater incentive for the franchisee to invest, but has the disadvantage of inducing a greater double-margin distortion. On the other hand, the MBR has the advantage of influencing a smaller double-margin distortion, but has the disadvantage of weakening the incentive for the franchisee to invest. Our main claims are two: the first is that if the market is non-elastic, the franchisor enjoys a higher pay-off from SBR than from MBR. The other is that the investment level under SBR is always larger than that under MBR, regardless of market elasticity.

This chapter examines the optimal two-part tariff licensing strategies of eco-technology by an eco-innovator toward polluting firms. In the presence of environmental regulation, we analyze the vertically related industries where polluting industry may purchase a license of pollution abatement technology from an eco-industry. We find that eco-innovator can construct the optimal two-part tariff licensing strategies to provide non-exclusive licensing contracts. However, the optimal strategies might yield welfare loss for some ranges of production cost and environmental regulation. Therefore, eco-innovator’s two-part tariff licensing strategies should be carefully restricted under the regulatory considerations on environmental policy and industrial policy.

We develop a method to evaluate financial losses of enterprises caused by breaks of information security systems. The method can be used to estimate the losses as a result of the information system’s accidents (for example, computer attacks or unauthorized intrusions). In addition, this method can evaluate the risk level of any enterprise. As an illustration, a practical example of estimating financial losses based upon a real-life case is presented. Some results of dynamic changes of variables involved in the method are also shown.

In this chapter, we investigate whether the choice of a particular source of funds represented by trade credit is associated to technical efficiency progress for a large sample of Italian manufacturing small and medium enterprises (SMEs) observed from 2003 to 2007. Applying a data envelopment analysis (DEA) approach to firm-level data, we retrieve a measure of technical efficiency change and perform some nonparametric tests to verify whether the differences observed are significant. According to our results, higher trade credit ratios tend to be associated to firm efficiency gains in almost all the sectors under analysis.