Top PDF Firm behaviour in markets with capacity constraints

Firm behaviour in markets with capacity constraints

Firm behaviour in markets with capacity constraints

Since Edgeworth’s modification of Bertrand’s price game, economists have studied how capacity constraints can change the nature of short-run competition. These studies have tended to remain theoretical in nature. The seminal 1983 work of Kreps and Scheinkman [12] founded a literature of what I call ‘capacity-price’ models. These models are based on two- stage games, games where firms choose capacity at stage one, then price at stage two after all firms observe capacity choices. The work of Kreps and Scheinkman was extended to different rationing rules (Davidson and Deneckere [5]), uncertain demand in the short-run (Reynolds and Wilson [14]), and to the differentiated products setting (Friedman [8]). However, most of this work has remained fixedly theoretical, for good reason. Under Kreps and Scheinkman’s standard assumptions, pure-strategy equilibria only exist under particular conditions, such as assuming the efficient rationing rule. This limits the use of comparative statics in any possible applications. 1 Furthermore, in this literature, only Reynolds and Wilson tackle the issue of uncertain demand, which is at the heart of the economic dilemma outlined above. In the specific case of electricity, theory is even more problematic, as electricity markets are not only subject to capacity constraints on the production of electricity, but also to capacity constraints on its transmission. This abundance of non-linear network constraints has seen economists turn away from theory in favour of economic experiments. Such work is relatively new, but promising: economic experiments avoid the intractability that bedev- ils theoreticians. However, current experiments are usually limited to three or four node networks; hardly a good approximation of, say, the California electricity grid.
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Joint Bidding under Capacity Constraints

Joint Bidding under Capacity Constraints

In this paper we analyze the anticompetitive effects of concentration of ownership in auction markets. We compare two different auction formats with uniform price. In the first, the price equals the highest accepted bid, whereas in the second the price equals the lowest rejected bid. For the former, and for a two-unit, two-plants, two-firms model, we find an equilibrium where all plants (all firms) bid according to a common bidding function. The concentration of the ownership has the same effect on the bidding behavior as elimi- nating one plant. However, the expected price is lower than the one expected in such three independent plant scenario. More surprisingly (and special to this 2 × 2 × 2 case), the equilibrium is efficient. In the latter, al- ternative auction format, firms bids asymmetrically for its two plants. Hence, the equilibrium is inefficient. Also, with this format, we show that the market price may be arbitrarily large. Thus, and contrary to some plausible expectation base in received auction theory, a (sealed-bid) auction format in which the price for a bidder is unrelated to his bid becomes less efficient than one in which the price may coincide with that bid- der’s bid, when one admits that several bidders may coordinate (through ownership) their bids. The results add to a literature that favors more winner’s-bid pricing rules.
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Unobserved Capacity Constraints and Entry Deterrence

Unobserved Capacity Constraints and Entry Deterrence

The fully informative separating equilibrium can be sustained, specifically, when the constrained incumbent faces relatively lower expansion costs than the unconstrained firm. This difference in expansion costs might arise if, for instance, financial institutions discriminate constrained and unconstrained incumbents, charging different financial costs to each type. In this case, only the separating equilibrium arises where, as suggested above, entry patterns coincide with those under complete information, and no policy intervention is needed. In other contexts, both types of firm might face relatively similar expansion costs, illustrating situations where financial markets are not capable of differentiating constrained and unconstrained incumbents, thus charging both types of incumbent similar financial costs. In this setting, our paper shows that government intervention might be welfare improving under certain conditions, even when the regulator is uninformed about the incumbent’s cost structure. In particular, we demonstrate that a policy reducing the financial costs associated with expansion induces a change in the equilibrium outcome from a pooling to a separating equilibrium. 3 We also predict that, despite the potential benefits from lowering financial costs —inducing similar entry patterns as under complete information— such policy can be easily overdone, which occurs when expansion costs are reduced beyond certain levels. In particular, under extremely low expansion costs, both types of incumbent expand their facilities, changing the equilibrium prediction, from a pooling equilibrium where no type of incumbent expands to one where both types expand. However, entry patterns coincide in the pooling equilibrium with and without expansion.
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Essays on firm behaviour in the euro area

Essays on firm behaviour in the euro area

the former hold substantially more cash than the latter. In fact, across the di¤erent percentiles distribution of cash, private …rms hoard more than their public counterparts. This is consistent with the notion of the precautionary motive. Firms which su¤er from higher levels of information asymmetry and have a restricted access to capital markets should hoard more cash as a precaution. These …ndings contradict the recent studies on private and public …rms’cash reserves (Akguc and Choi, 2013; Gao et al., 2013) but are in line with those which focus on small …rms (Bigelli and Sánchez-Vidal, 2012; Hall et al., 2014). However, the di¤erence between sub-samples is not statistically signi…cant (column 4). A similar pattern is observed when considering cash ‡ow. The mean of cash ‡ow for private …rms is higher than for their public counterparts. More important, for private (public) …rms at the 25th percentile of distribution, the cash ‡ow is negative (closer to zero). In other words, these may indicate that private …rms at the low end of the distribution are not able to hold cash in‡ows from their operations and may need to raise external …nance more. Private …rms are on average smaller and highly leveraged when compared with public …rms. Looking at the percentiles of the distribution of both variables, the statistics indicate that the leverage (size) for …rms at the 25th percentile of the distribution is positive and below the median for both private and public …rms although the latter present lower levels than the former. This seems to be consistent with the argument that private …rms depend more on internal debt and/or equity whilst public …rms obtain …nance through the public equity market (Brav, 2009).
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A MODEL OF FIRM BEHAVIOUR WITH EQUITY CONSTRAINTS AND BANKRUPTCY COSTS.

A MODEL OF FIRM BEHAVIOUR WITH EQUITY CONSTRAINTS AND BANKRUPTCY COSTS.

The first model analysed above, where firms have limited access to the equity market but not to the debt market, is characterised by rather straightforward results. Both lower levels of current cash flow from existing operations and higher uncertainty over output prices lead to lower levels of production and investment. These variables do not affect investment when financial markets are perfect, but play an important role in this context of imperfect financial markets due to their impact on the expected marginal bankruptcy cost. In turn, a decrease in the banks’ required return leads to an increase in production and investment; in this case, two channels operate: the ‘conventional’ impact on the standard user cost of capital and the impact on the marginal bankruptcy cost, which reinforces the ‘conventional’ effect. 27
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Firm Growth and Liquidity Constraints: A Dynamic Analysis

Firm Growth and Liquidity Constraints: A Dynamic Analysis

less than 50 employees than for medium and large firms with 50 employees or more. Analysing the results by firm size we find much weaker effects from cash flow for medium and large firms. This result is consistent with the idea that small firms which face more financ ing constraints and are more sensitive to the availability of internal finance grow more than the larger ones. Larger firms can finance their growth from internal resources, debt or issuance of equity. By contrast, smaller firms are limited in the extent of their internal earnings. The weaker effects from cash flow for medium and large Portuguese manufacturing firms may be explained by institutional characteristics. There is one institutional feature of the Portuguese financial system that is in sharp contrast to that practised in the US and UK, both of which may impact the extent to which liquidity constraints occur. The institutional difference that may directly impact the relationship between firm size and growth involves the system of firm finance. Portugal can be classified in the “bank-oriented financial system” along with the French-origin OECD countries (Belgium, France, Greece, Italy and Spain). Given the specific characteristics of the Portuguese financial system, based on an undeveloped stock market, compared with not only the US, but to some extent, other large European countries as well, and in keeping with an industrial structure which includes a relatively large number of small and medium sized firms, we may expect small and large firms to have a complex dependence on internal funds. This complexity is reinforced by a concentrated ownership (lack of ownership dispersion) and control (lack of separation between ownership and control) even of large firms, giving its family owners an active interest in the day-to-day operations of the typical firm. Like other Continental European countries, the Portuguese stock market is not an important source of finance and ownership is concentrated among quoted and not-quoted firms.
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Firm Constraints on the Link between Proactive Innovation, Open Innovation and Firm Performance

Firm Constraints on the Link between Proactive Innovation, Open Innovation and Firm Performance

Table 5 shows that the proactive innovations surpass reactive counterparts in terms of their effect on firm performance, proxied by both profit and sale increases, consistent with hypothesis H2. This result is in line with the findings in other fields like proactive exporters [60]. In a Vietnamese context, this finding presents important implications. One explanation for this could come from the planned behavior theory [60]. In the aspect of perceived behavioral control, it may be easier to tailor innovations towards firm characteristics or strategies, rather than just passively comply with regulatory requirements. Moreover, attitudes toward innovation may be more positive when firms conduct innovations to win market share, to satisfy customer demand rather than just to satisfy regulators. Regulatory requirements may not go hand in hand with firm strategy, and firms may lack control over what external stakeholders demand. Secondly, going beyond what is required may win trust from various stakeholders. Finally, when firms are proactive in innovations, they have more plans, which means that they can reserve appropriate resources. The reactive market orientation approach will always fall behind the proactive market orientation approach due to the fact that the latter address both the expressed and latent needs from customers [77].
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The dynamics of bidding markets with financial constraints

The dynamics of bidding markets with financial constraints

We develop a model of bidding markets with financial constraints ` a la Che and Gale (1998b) in which two firms choose their budgets optimally and we extend it to a dynamic setting over an infinite horizon. We provide three main results for the case in which the exogenous cash-flow is not too large and the opportunity cost of budgets is positive but arbitrarily low. First, firms keep small budgets and markups are high most of the time. Second, the dispersion of markups and “money left on the table” across procurement auctions hinges on differences, both endogenous and exogenous, in the availability of financial resources rather than on significant private information. Third, we explain why the empirical analysis of the size of markups based on the standard auction model may have a bias, downwards or upwards, positively correlated with the availability of financial resources. A numerical example illustrates that our model is able to generate a rich set of values for markups, bid dispersion and concentration.
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Financial constraints in China: firm-level evidence.

Financial constraints in China: firm-level evidence.

Almost all specifications in Table 4 suggest that FDI eases Chinese private firms’ credit constraints, as compared to estimates from the specification including only CF K / , reproduced in column 1. The coefficients on the interaction terms, CF K / times our proxies for foreign capital, which are almost all negative and significant for private firms, suggest that the presence of foreign firms reduces credit constraints. Hence, there is no evidence of crowding-out. Those findings are in line with those of Harrison et al. (2004) from a cross-country firm-level panel which showed that foreign FDI flows are associated with a reduction in firm-level financing constraints. However they contrast with the results in Harrison and McMillan (2003) on Ivory Coast data, where the presence of foreign firms crowds local firms out of domestic capital markets. These diverging results highlight differences in financial sector organization and practice: the scope of crowding out is much more limited in China because of the lack of incentives of most banks to lend to non state-owned companies. Our results thus overall indicate that abundance of foreign capital constitutes a circumstance under which financial distortions may not represent an impediment to private economic activity.
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Efficiency in large markets with firm heterogeneity

Efficiency in large markets with firm heterogeneity

While SDA preferences generate a variable elasticity of substitution, they differ from other symmetric preferences that feature variable elasticities of substitution (VES). For instance, the literature on monopolistic competition generates variable elasticities through a number of dif- ferent preference forms, such as quasilinear and quadratic (Melitz and Ottaviano 2008; Nocco et al. 2013), indirectly additive (Bertoletti and Etro 2016) and homothetic (Benassy 1996; Feenstra 2003). The optimality results generated in other VES, but non-SDA preferences, heterogeneous firm models differ. For example, Bertoletti et al. (forthcoming) demonstrate for the full class of indirectly additive preferences (which includes CES preferences), market expansion is neutral on prices, production and the equilibrium cutoff for active firms, thus replicating the CES re- sults always, and not just at the limit. However except under CES preferences, the equilibrium is inefficient in terms of pricing, production and selection. Similarly, Nocco et al. (2017) find market allocations are inefficient in their setting: the market cutoff productivity is too low and low cost firms under-produce while high cost firm over-produce in the market. 7 Furthermore, firm heterogeneity makes entry distortions dependent on the cost distribution. Finally, Arkolakis et al. (forthcoming) consider a demand system encompassing additively separable preferences with a bounded choke price. While they don’t consider optimality, they discuss the gains from trade liberalization as in Arkolakis et al. (2012). SDA preferences differ from these preferences, as they do not have a bounded choke price, and large markets cause heterogeniety across firms to collapse in this case.
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Financing Constraints and Firm Inventory Investment: A Reexamination

Financing Constraints and Firm Inventory Investment: A Reexamination

Inventory investment and cash flow are modeled as endogenous variables in a VAR context with minimal restrictions. This approach, recognizes the usual critique on the (questionable) exogeneity of cash flow in investment equations. Moreover, in the presence of financing constraints, real and financial decisions should be intertwined and this fact is encompassed in a VAR framework. The specification is as follows:

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Financial constraints in China : firm-level evidence

Financial constraints in China : firm-level evidence

investment demand or expectations due to changes in industry-level conditions (for example, industry-wide technology changes, industry demand shocks, or the entry of new firms). Our main variable of interest is the coefficient on the cash-flow. When investment significantly depends on a firm’s internally generated cash flow this can be regarded as an indication that the firm is credit constrained. We estimate successively our model with OLS, IV and finally firm-fixed effects to check the robustness of our results. We start by reporting OLS results in columns 1 to 3. The focus of our attention goes to the sign and magnitude of the coefficient on the lagged cashflow which is our measures of credit constraints. As conjectured, we find that private firms in China significantly rely on their cash flow to finance their investments which is evidence of credit constaints, while SOEs and foreign firms do not. The results are robust to the inclusion of sector-time effects or time effects only. However, the OLS estimates may be biased due to the endogeneity of the cash flow, our proxy for internal finance. In columns 4 to 6 we apply an IV technique to address this where we use the cash flow over assets in periods t-2 and t-3 as instruments. 14 The results go through be it with a weaker significance of the positive coefficient on the private firms, suggesting that the endogeneity of the cash flow is not too serious an issue. We systematically check the validity of our instruments with Sargan’s J-test of overidentifying restrictions. Insignificant test statistics indicate that the orthogonality of the instruments and the error terms cannot be rejected, and thus that our choice of instruments is appropriate. 15 In the case of private firms (column 4), the overidentifying restrictions are accepted. By constrast the Sargan test rejects the validity of our instruments for state and foreign firms, a problem encountered also in previous work emphasizing the weakness of IV instruments in this kind of estimations (Aghion et al. 2008). We also report the cluster-robust F-stat form of the Cragg- Donald statistic; this statistic has been suggested by Stock and Yogo (2002) as a global test for the presence of weak instruments (i.e., it tests the null hypothesis that a given group of instruments is weak against the alternative that it is strong). The test rejects if the computed statistic exceeds the critical value. Results of weak
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The Dynamic Effects of Firm Level Borrowing Constraints

The Dynamic Effects of Firm Level Borrowing Constraints

Figure 1 displays some of the firm’s policy functions in greater detail. The first panel of Figure 1 shows the policies that arise when the productivity parameter 4 equals 0.976. Consider what happens as equity increases. Panel A shows firms begin operations with a fair amount of debt, borrowing in order to generate additional revenues. But investing in internal production is risky, even if the expected return is high. Therefore, as firms accu- mulate some equity, they begin to move their capital out of internal production and into the rental market. This generates the surprising result that firms with better finances choose to produce less. (Similar effects appear for all values of 4 less than or equal to 1.119.) Recall that when the probability of exiting is high, a firm’s returns can be convex across realizations of 4 . When this is the case, firms will seek risk, i.e., use their capital to pro- duce instead of renting it out. But as equity increases, the odds of shutting down decrease, making firms more risk-averse and inducing them to reduce their scale of operations. Since firms must also purchase labor, they continue to borrow, but they steadily reduce their debt. As equity grows, accumulated savings start to dwarf internal capital needs. Eventually, firms accumulate so much savings that their rental income covers labor costs as well. At this point, with rental markets closed, firms put their excess income into bonds, so that debt is negative. Finally, when equity is around 24 units of output, firms stop growing, and start paying dividends.
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Firm Turnover in Imperfectly Competitive Markets

Firm Turnover in Imperfectly Competitive Markets

Are postal areas a reasonable market definition for hair salons? To a first approximation, the number of consumers needed to make a hair salon viable should be roughly the same across markets, which would translate into a strong correlation between population and the number of firms. The raw correlation (for 1,534 postal areas) between M SIZE and F IRM S is 0.92. In contrast, the corresponding correlation for postal codes is only 0.16. A simple example can explain this. Consider a typical medium sized town, which is a single postal area with 20,000 inhabitants and 20 postal codes. The center of the town has three postal codes, and the 17 other postal codes comprise residential suburbs. Although relatively few people live in the center, many of the hair salons are located there and, as a consequence, the majority of the other postal codes do not have a single hair salon. This explains the low correlation between between population and the number of firms in a postal code. Aggregating to the postal area level reflects our lack of information on exactly how market demand is geographically distributed. In larger towns (say, with a population above 100,000), there are often several centers, and so the postal area is too broad a market definition. To sum up, the population in a postal area is an imperfect measure of market size, but should be a sufficiently powerful measure to allow us to distinguish between small and large markets. Since measurement problems are likely to be most pronounced in large towns, we focus our analysis on smaller markets.
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Local banking markets and firm location

Local banking markets and firm location

Specifically, firm births are associated with higher rates of bank profits, higher numbers of bank employees, lower levels of concentration, higher proportions of small banks, and high[r]

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Consumer's behaviour on food markets

Consumer's behaviour on food markets

consumer’s preferences and wealth (income, re- sources) are viewed as exogenous quantities in the neoclassical theory. They are not explained in the framework of the model, but they are viewed as the given ones. Methodological individualism, rational behaviour, equilibrium and perfect information of consumer are the further features of this concept. Simple precautions are the necessary condition for model application.

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Group behaviour in financial markets

Group behaviour in financial markets

Economics, known for too long as 'the dismal science', is undergoing a paradigm shift, bringing in researchers from different domains to reflect more accurately the multi- disciplinary nature of the subject matter. Economics embraces psychology, sociology, statistics, physics and biology – to name a subset of disciplines – in a closely-grouped cluster of related interests. However, as Ormerod (1998) highlights, it was not until relatively recently that economics as a discipline actually began testing and developing theories with empirical data. Prior to this, economics was largely theoretical, relying on idealistic assumptions about human behaviour to permit a myriad of analytical solutions to different economic problems. More recently, a trend in academic literature has begun to correct this oversight, approaching traditional economic subjects from alternative and non-traditional perspectives. Research presented in this thesis can be considered part of this new behavioural and empirical economics, readily embracing the viewpoint of the subject as fundamentally a social science: concerned with people, their reactions, their preferences, their decision-making, striving to understand, and perhaps even predict, aggregate social behaviour within particular economic contexts.
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Behaviour of subjects in risk markets

Behaviour of subjects in risk markets

(4) S�reading the risk – Another mechanism is a dis- persion of the consequences of some economic activity into more subjects. The typical example is an insurance, which represents a sale of a certain part of the respective risk to different subjects. however, a similar role also has the asset market, especially the stock market. it allows the firm owners to change the yield flow in time in the single-shot income, but primarily to spread the risk, which would result from the fact that their property would be allocated only in one firm. The asset market (especially stocks) allows transferring the risk from the subjects, who rather have the risk aversion, to those, who are to run the risk for certain compensation; thereby it is a vehicle of spreading the risk.
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Domestic constraints, firm characteristics, and geographical diversification of firm-level manufacturing exports in Africa

Domestic constraints, firm characteristics, and geographical diversification of firm-level manufacturing exports in Africa

Trade” initiatives. Yet there is only a handful papers that address domestic and cross-border constraints in export performance of firms. One such paper is Clarke (2005), which uses a similar dataset from ICS to show how behind-the-border, direct constraints on trade (e.g., ports and customs efficiency) affect firm-level export performance in Africa. This paper extends Clarke’s research by incorporating the geographical orientation of firms’ export performance and the extent of their market diversification in its analysis. Specifically, it differentiates exports to markets outside Africa, such as the EU and U.S., from exports to the regional markets within Africa in addressing the relationship between firms’ export performance and the behind-the-border factors. This paper also considers a wider set of behind-the-border domestic factors, including both those directly related to trade and those related to production, which are either public (e.g., public infrastructure service quality) or private (e.g., generator ownership, capital vintage). The paper also examines various firm attributes that help lower trading costs, including both sunk entry cost, such as search cost, as well as variable trading costs (e.g., Internet access).
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The cyclical behaviour of IPO markets

The cyclical behaviour of IPO markets

Table 7.4: Table 7,5: Table 7.6: Table 7.7: Table 7.8: Table 7.9: Table 7.10: Table 7.11: Table 7.12: Table 7.13: Table 7.14: Table 7.15: Table 7.16: Table 8.1: Maximum Likelihood Estima[r]

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