Strategic Responses of Incumbents to New Entry: The Effect of Ownership Structure, Capital structure, and focus

Khanna, Naveen; Tice, Sheri

doi:10.1093/rfs/13.3.749

Cited by 162 publications

(74 citation statements)

References 28 publications

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“…highly leveraged firms, can form more stable cartels than firms financed by equity. This finding is consistent with Schleifer and Vishny (1992) and Khanna and Tice (2000), though through a different mechanism.…”

Section: Debt-financing Facilitates Cartelssupporting

confidence: 92%

Short-Term Managerial Contracts Facilitate Cartels

Han¹

2010

SSRN Journal

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This paper shows how a series of commonly observed short-term CEO employment contracts improves cartel stability compared to a long-term contract. When a manager's short-term appointment is renewed if and only if the firm hits a certain profit target, then (a) defection from collusion results in superior firm performance and thus reduces the chance of being fired immediately, while (b) future punishment results in inferior firm performance, thereby increasing the chance of being fired in the future. The introduction of this reemployment tradeoff intertwines with the usual monetary tradeoff and weakly improves cartel stability. Studying the impact of fixed versus variable salary components, I find that fixed components facilitate collusion with a short-term contract, while not affecting cartel stability with a long-term contract. I extend the model to argue how short-term renewable contracts are a source of cyclical collusive pricing.Finally, interpreting the results in the light of firm financing shows how debt-financed firms can form more stable cartels than equity-financed firms.Keywords: cartels, collusion, managerial contracts, price wars JEL codes: L10, L21, L40 * I thank Charles Angelucci, Arnoud Boot, Benno Bühler, Bruno Jullien, Henrik Lando, Evgenia Motchenkova, Erik Pot, Julien Sauvagnat, Maarten Pieter Schinkel, Randolph Sloof, Jeroen van de Ven, and Michael Yang for useful discussions, as well as seminar participants in Amsterdam (CLEEN 2010), Berlin (DIW), Düsseldorf (DICE), Istanbul (AERIE 2010), Toulouse (Brown Bag Seminar) and Utrecht (NAKE 2010). This research was initiated during a research visit at GREMAQ in Toulouse; I am grateful for their hospitality. Errors and opinions are mine.

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Section: Debt-financing Facilitates Cartelssupporting

confidence: 92%

Short-Term Managerial Contracts Facilitate Cartels

Han¹

2010

SSRN Journal

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“…The Stop n' Shop supermarkets competing with Supercenters advertised "Everyday Low Prices" despite the fact that the chain still utilizes HLP (Jones, 2004). These observations support the findings of Khanna and Tice (2000), stating that some incumbent stores choose to compete with Wal-Mart by improving service, image, or variety rather than attempting to lower prices to match the discount giant. If conventional supermarkets chose to compete with Supercenters solely in price, we would expect the prices at competing stores to exhibit a CV pattern that more closely resembles that of the comparison stores.…”

Section: The Effect Of Wal-mart Supercenters On Competitorssupporting

confidence: 81%

“…Marion, Heimforth, and Bailey (1993) determined that large warehouse and discount stores would result in a reduction in the ability of conventional supermarkets to coordinate pricing strategies. Additionally, the empirical work of Khanna and Tice (2000) found that depending on various store characteristics, such as corporate debt, internal ownership, store size, and chain size, different stores choose to compete with Wal-Mart through different means. Stores choose to compete in price, in quality or service, or they choose not to change the manner in which they do business.…”

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confidence: 99%

The Effect of Wal-Mart Supercenters on Grocery Prices in New England

Volpe¹,

Lavoie²

2008

Rev Agricultural Economics

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This study analyzes the effect of the presence of Wal-Mart Supercenters on the prices at conventional supermarkets in Massachusetts, Connecticut, and Rhode Island. Using price indexes constructed from primary price data on a basket of 54 goods and holding several demographics and market conditions constant, we determine that Supercenters result in a 7.79% average price reduction in national brand goods and a 6.38% average price reduction in private label goods. Wal-Mart Supercenters also price their groceries on average 15.65% lower than supermarkets competing with Supercenters and 22.28% lower than supermarkets geographically distant from Supercenters.

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“…The last two rows report entry rates into manufacturing activities weighted by sales (using 24 To avoid double counting this is computed as sum of the absolute value of all intra-group loans/credits divided by the number of firms that borrow/lend within the group. 25 Remember that we treat all firms of the same group that operate in the same market as a single unit.…”

Section: Entry Ratesmentioning

confidence: 99%

The deep-pocket effect of internal capital markets

Boutin

Cestone

Fumagalli

et al. 2013

Journal of Financial Economics

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We provide evidence suggesting that incumbents' access to group deep pockets has a negative impact on entry in product markets. Relying on a unique French data set on business groups, our paper presents three major findings. First, the amount of cash holdings owned by incumbent-affiliated groups is negatively related to entry in a market. Second, the impact on entry of group deep pockets is more important in markets where access to external funding is likely to be more difficult. Third, the "entry deterring effect" of group deep pockets is more pronounced when groups have more active internal capital markets. Our findings suggest that internal capital markets operate within corporate groups and that they have a potential anti-competitive effect.

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Strategic Responses of Incumbents to New Entry: The Effect of Ownership Structure, Capital structure, and focus

Cited by 162 publications

References 28 publications

Short-Term Managerial Contracts Facilitate Cartels

Short-Term Managerial Contracts Facilitate Cartels

The Effect of Wal-Mart Supercenters on Grocery Prices in New England

The deep-pocket effect of internal capital markets

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