Firms` Strategic Decisions: Theoretical and Empirical Findings

This chapter compares two subcontracting systems in a three-stage duopoly model. An American-typed assembler such as GM generally produces an input internally, while a Japanese-typed assembler such as Toyota purchases it from its affiliated (Keiretsu) supplier. The American-typed assembler has the advantage of investment incentive, but has the disadvantage of the input price management. On the other hand, the Japanese-typed assembler has the advantage of the input price adjustment, but has the disadvantage of providing investment incentive for the affiliated supplier. Our results are as follows: if the Japanese assembler can support its affiliated supplier prior to purchasing the input, the support enables the assembler to purchase the input at a low price. As a result, the assembler has a competitive advantage in the final product market.

We use the conjectural variations solution to analyze the profitability of horizontal mergers as a function of the degree of competition. We prove that any merger can be profitable if the environment is relatively competitive since in industries that are already cooperating, a merger loses attractiveness as an anti-competitive device. We also derive two welfare results: (i) mergers are socially beneficial if the competition is intense enough and (ii) any welfare enhancing merger is also profitable if the proportion of firms involved in the merger is relatively large. Finally, we obtain that the presence of free entry raises merger profitability only when the degree of competition is low enough.

This chapter analyzes royalty modes in the franchise arrangements of convenience stores under double-sided moral hazard. In Japan, the majority of franchisors charge margin-based royalties based on gross margin rather than sales-based royalties based on sales. We show that the franchisor can attain the first-best outcome by adopting margin-based royalties under double-sided moral hazard. We consider a case where a franchisee sells two kinds of goods; one is shipped from its franchisor and the other is purchased from another (independent) manufacturer. In this case, the franchisor is completely unable to control the wholesale price of the goods bought from the manufacturer. Therefore, the franchisor cannot achieve the first-best outcome via sales-based royalties under double-sided moral hazard.

In this chapter, I present a systematic overview of the market outcomes for classical oligopoly games. This study contains six games: pure quantity competition, pure price competition as well as price and quantity competition, each with simultaneous and sequential moves. I present equilibrium prices, quantities and profits for each game. In particular, I present the mixed strategy equilibrium of the simultaneous price and quantity competition. This equilibrium was found by Gertner (1986), but remained unrecognized so far. From a comparison of market outcomes, I can classify situations where the choice of decision variable(s) and timing gives strategic advantages.

Social concerns play an important role in the recent economic literature. We model customers that obtain an aversion to firms’ profits. We discuss this effect of customers’ concern on equilibrium outcomes in monopoly and oligopoly markets with differentiated goods. We find that in monopoly markets and markets with Cournot or Bertrand competition, customers’ social concern leads to lower equilibrium prices but has no effect on optimal quantities. When considering out of equilibrium pricing, our model can account for the preference for fair-trade products.

This chapter considers a continuous-time infinite-horizon duopoly model with complementary products. The chapter investigates the optimal level of labour investment by duopoly firms in a new complementary product industry. Based on the analysis of the model, it is shown that there exist multiple perfect equilibrium outcomes where both firms invest beyond their steady-state reaction curves.

This chapter examines a two-stage quantity-competition model with an established firm and a potential entrant. Demand functions are divided into the following four cases: ‘substitute goods and strategic complements’, ‘substitute goods and strategic substitutes’, ‘complementary goods and strategic substitutes’ and ‘complementary goods and strategic complements’. All these cases are correlated with two opposite strategic devices. This chapter discusses the entry-deterring behaviours resulting from strategic commitments by the established firm in all four cases.

The present chapter studies conjectured variations equilibrium states (CVEs) in a mixed oligopoly model. It is different from a classical oligopoly in that a labormanaged firm is involved. The agents (including the labor-managed firm) when making decisions use conjectures about how the market clearing price can vary as a result of varying their supplies. The concept of equilibrium with the conjectures is different from the classical Cournot-Nash one. Under fixed feasible conjectures, the existence and uniqueness theorems for the conjectured variations equilibrium (called the exterior equilibrium) are proven. With an aim to specify a more complicated notion of the interior equilibrium, a consistency criterion for the conjectures (called also as influence coefficients) is proposed. The existence of at least one consistent conjectural variations equilibrium state (CCVE) is also established. Numerical experiments with a small test oligipoly are also described.

This chapter examines a three-stage model where a state-owned firm and a labour-managed firm can sequentially offer a wage-rise contract as a strategic device before competing in quantities. The following three stages are considered. At stage one, the state-owned firm chooses whether or not to offer a wage-rise contract. At stage two, the labour-managed firm chooses whether or not to offer a wage-rise contract. At stage three, the firms set their outputs simultaneously and independently. This chapter studies the equilibrium outcome of the three-stage mixed market model.

This chapter investigates a mixed duopoly model where a joint-stock firm and a state-owned firm are allowed to offer lifetime employment as a strategic commitment. The chapter considers the following situation. First, the state-owned firm chooses whether to provide lifetime employment or not. Second, the joint-stock firm chooses whether to provide lifetime employment or not. Third, each firm sets its actual quantity simultaneously and independently. The chapter presents the equilibrium solution of the mixed market model. As a result of this, it is suggested that introducing lifetime employment into the model of quantity-setting mixed duopoly is beneficial for the state-owned firm.

I present a generalized form of firms’ objective function. Besides classical own profit maximization, I add two distinct concerns: consumer surplus and competitors’ profits. This generalization can account for public and partially privatized firms, socially concerned firms as well as partially cooperating firms. I study a simple duopoly game to compare and discuss the effects of both concerns on equilibrium outcomes.

This chapter investigates a mixed duopoly model where a capitalist private firm and a state-owned public firm coexist. The following two-stage game is considered. At stage one, the firms choose whether or not to provide lifetime employment as a strategic device simultaneously and noncooperatively. This irreversible behavior changes the price-competing market environment of stage two. At stage two, the firms set prices simultaneously and noncooperatively. The chapter discusses the equilibrium solution of the mixed market model. As a result of this analysis, we discover that introducing lifetime employment into the model of price-setting mixed duopoly may be beneficial for the state-owned firm.

This chapter estimates the extent of Pricing to Market (PTM) for Japanese automobiles exported to the US market over the 1987-2000 period. The price data used is the annual, model-specific, manufacturer’s suggested retail price (MSRP) of identical cars (17 models in total), all made in Japan, but sold in both the US and Japan. These prices ratios (of foreign over domestic) are regressed on the real exchange rate, real wages and US and Japanese real GNI as in the seminal work of Marston (1990) which originally used industry level price data. As with Marston, I find a high degree of PTM behavior, indeed over 100% PTM, somewhat higher than Marston (1990). Moreover, it appears that this PTM behavior has fallen somewhat over time. This implies increasing exchange rate pass-through, contrary to Taylor’s (2000) conjecture.

Taking advantage of a unique panel of small and medium-sized manufacturing firms observed from 1998 to 2006, this work investigates the determinants of multiple lending relationships in a country where small businesses are the heart of the productive structure. Our results suggest that larger, more indebted and innovative firms tend to be more inclined to establish multiple relationships. Conversely, closer ties with a main bank seem decreasing the propensity to be multiple-banked. Finally, we detect some persistence in the number of relationships, presumably due to switching costs.

The question of whether opening up the market for foreign direct investment in retail businesses will be a hindrance to the survival of the small unorganized retail outlets is still a matter of debate. Based on a primary survey data from the National Capital Region and Chennai in South India this study shows that the organized corporate retail businesses (OCRB) did displace some small unorganized retail outlets (SURO). Drawing on the location theory, it is argued that the displaced SURO relocated themselves in fringe areas of the cities and earned more profits. This indeed is an efficient strategic decision making by the SURO.