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Effects of a Domestic Merger on Exports: The case study of a merger of Korean automakers in 1998 (Japanese)
Abstract
This paper examines the economic consequences of a horizontal merger between two Korean automakers in 1998. Estimates of structural demand and supply reveal that the merger enhanced the production efficiency of the merging parties by a magnitude of 8.4%. Simulations based on the estimates indicate that while the merger increased domestic auto prices, it more than doubled the exports of the merging parties. The merger effects vary according to auto model type.
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Since the mid-1990s, antitrust authorities and courts in the U.S and the EU use several merger simulation models to evaluate unilateral effects of horizontal mergers. Merger simulation models combine game theoretic models with some premerger market data such as demand elasticity to predict the impact of the merger on price, consumers' surplus and total welfare. However, standard merger simulation tools are developed for a closed economy and do not consider the role of exports. In an open economy or export-oriented economy, a typical manufacturing industry exhibits quite high export shares. The welfare effects of merger would be quite different between an open economy and a closed economy because of export volumes. This article provides a framework on how to incorporate the export role in a standard Cournot merger simulation model.
This paper estimates a dynamic oligopoly model to assess the economic consequences of a horizontal merger that took place in 1970 to create the second largest global producer of steel. The paper solves a Markov perfect Nash equilibrium for the model and simulates the welfare effects of the horizontal merger. Estimates reveal that the merger enhanced the production efficiency of the merging party by a magnitude of 4.1 %, while the exercise of market power was restrained primarily by the presence of fringe competitors. Our simulation result also indicates that structural remedies endorsed by the competition authority failed to promote competition.
The authors evaluate the voluntary export restraint that was initially placed on exports of automobiles from Japan in 1981. They evaluate the impact this policy had on U.S. consumer welfare, firm profits, and foregone tariff revenue from its initiation through 1990.
Horizontal-merger price simulations, which rely upon pre-merger data to predict post-merger prices, have been proposed and used in antitrust policymaking. However, a dearth of closely observed large mergers in differentiated-product industries makes empirical investigations of simulation performance extremely difficult, and raises many questions regarding the accuracy of simulation performance. Although a handful of previous studies exist, they focus on short-term simulation performances and ignore long-run effects of mergers. This research investigates the long-run simulation performance and long-run pricing effects of merger in the Korean automobile industry for the period 1991-2010. This period saw the merger of Hyundai and Kia Motors in 1998, a merger caused by the Asian economic crisis and which resulted in the conglomeration of 70 percent of the Korean automobile market. By taking Nevo's (2000, 2001) method as a base and measuring its performance against this real-world merger, I find that post-merger prices can be predicted reasonably well in the short term, but that large discrepancies appear in the long-run simulation. To account for this discrepancy, I confirm four further factors that appear essential to move toward a more accurate post-merger price simulation model: change in marginal costs, change in product lines, and change in consumer incomes and preferences. I counterfactually investigate each factor's contribution to price change, confirming their significance. In my investigation I estimate consumer preferences and substitution patterns leading up to the merger, then I calculate marginal costs, and simulate post-merger prices. In addition, I estimate automobile assembly plant-level production functions to evaluate merger synergy effects. By incorporating changes in the four factors I mention, I can account for 61 percent of the long-run price discrepancies.
The difference and system generalized method-of-moments estimators, developed by Holtz-Eakin, Newey, and Rosen (1988, Econometrica 56: 1371-1395); Arellano and Bond (1991, Review of Economic Studies 58: 277-297); Arellano and Bover (1995, Journal of Econometrics 68: 29-51); and Blundell and Bond (1998, Journal of Econometrics 87: 115-143), are increasingly popular. Both are general estimators designed for situations with "small T , large N" panels, meaning few time periods and many individuals; independent variables that are not strictly exogenous, meaning they are correlated with past and possibly current realizations of the error; fixed effects; and heteroskedasticity and autocorrelation within individuals. This pedagogic article first introduces linear generalized method of moments. Then it describes how limited time span and potential for fixed effects and endogenous regressors drive the design of the estimators of interest, offering Stata-based examples along the way. Next it describes how to apply these estimators with xtabond2. It also explains how to perform the Arellano-Bond test for autocorrelation in a panel after other Stata commands, using abar. The article concludes with some tips for proper use. Copyright 2009 by StataCorp LP.
The paper examines the Japanese steel industry to evaluate the role of export subsidy policies. Export subsidies can be instrumental in increasing an industry's cost competitiveness in the presence of learning by doing, a characteristic of production in the steel industry. Using a dynamic estimation model, this paper identifies a significant learning rate of above 20% with little intra-industry knowledge spillover. Simulations made with the model indicate that the subsidy policy had an insignificant impact on industry growth. The paper finds that the export subsidy had a small effect in stimulating industry growth, because the estimated steel supply function was relatively inelastic.
The existing literature on domestic-airline mergers focuses on domestic competitive incentives determining merger behavior and neglects the impact of international competitive incentives. I argue that domestic airline mergers increase international efficiency — via the enhancement of domestic networks and the elimination of domestic competition — which correspondingly leads to an improved international competitive position. Comprehensive panel data — covering international airline markets between the US and twenty nations over the 1984–1992 period — allows testing this argument. The results support both domestic mergers and large domestic networks improving the international competitive position of airlines.
Estimation of the dynamic error components model is considered using two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator. Both estimators require restrictions on the initial conditions process. Asymptotic efficiency comparisons and Monte Carlo simulations for the simple AR(1) model demonstrate the dramatic improvement in performance of the proposed estimators compared to the usual first-differenced GMM estimator, and compared to non-linear GMM. The importance of these results is illustrated in an application to the estimation of a labour demand model using company panel data.
"In this paper, we study mergers in two-sided industries and, in particular, the effects of mergers in the newspaper industry. We present a model which shows that mergers in two-sided markets may not necessarily lead to higher prices for either side of the market. We test our conclusions by examining a spate of mergers in the Canadian newspaper industry in the late 1990s. Specifically, we analyze prices for both circulation and advertising to try to understand the impact that these mergers had on consumer welfare. We find that greater concentration did not lead to higher prices for either newspaper subscribers or advertisers." Copyright (c) 2009 Wiley Periodicals, Inc..
The US airline industry went through tremendous turmoil in the early 2000s, with four major bankruptcies, two major mergers, and various changes in network structure. This paper presents a structural model of the industry, and estimates the impact of demand and supply changes on profitability. Compared with 1999, we find that, in 2006, air-travel demand was 8 percent more price sensitive, passengers displayed a stronger preference for nonstop flights, and changes in marginal cost significantly favored nonstop flights. Together with the expansion of low-cost carriers, they explain more than 80 percent of legacy carriers' variable profit reduction. (JEL L13, L25, L93)
This paper proposes a technique for obtaining more precise estimates of demand and supply curves when one is constrained to market-level data. The technique allows one to augment market share data with information relating consumer demographics to the characteristics of the products they purchase. This extra information plays the same role as consumer-level data, allowing estimated substitution patterns and (thus) welfare to directly reflect demographic-driven differences in tastes for observed characteristics. I apply the technique to the automobile market, estimating the economic effects of the introduction of the minivan. I show that models estimated without micro data yield much larger welfare numbers than the model using them, primarily because the micro data appear to free the model from a heavy dependence on the idiosyncratic logit "taste" error. I complete the welfare picture by measuring the extent of first-mover advantage and profit cannibalization both initially by the innovator and later by the imitators. My results support a story in which large improvements in consumers' standard of living arise from competition as firms cannibalize each other's profits by seeking new goods that give them some temporary market power.
This paper considers the estimation of Cobb-Douglas production functions using panel data covering a large sample of companies observed for a small number of time periods. GMM estimatorshave been found to produce large finite-sample biases when using the standard first-differenced estimator. These biases can be dramatically reduced by exploiting reasonable stationarity restrictions on the initial conditions process. Using data for a panel of R&Dperforming US manufacturing companies we find that the additional instruments used in our extended GMM estimator yield much more reasonable parameter estimates.
This article considers the problem of "supply-and-demand" analysis on a cross section of oligopoly markets with differentiated products. The primary methodology is to assume that demand can be described by a discrete-choice model and that prices are endogenously determined by price-setting firms. In contrast to some previous empirical work, the techniques explicitly allow for the possibility that prices are correlated with unobserved demand factors in the cross section of markets. The article proposes estimation by "inverting" the market-share equation to find the implied mean levels of utility for each good. This method allows for estimation by traditional instrumental variables techniques.
A product is called technically inefficient when it has higher price and/or lower quality than others. Technical inefficiency of product has been conceptualized since Lancaster (1966), and empirically measured by many researchers, for example, Fernandez-Castro and Smith (2002) and Lee et al. (2005) among others. If we know further the information about structure of utility function, allocative inefficiency can also be measured. Even though a product is technically efficient with highest quality together with lowest price, it could not be chosen in the market, if it cannot match the preference structure of consumers, i.e. it is allocatively inefficient. This study poses a conceptual and methodological framework to measure technical and allocative efficiency at the product level considering consumer’s choice, which comprises the overall efficiency. Empirically we combine Data Envelopment Analysis (DEA) and discrete choice model to measure the level of inefficiencies. The suggested framework is applied to the Korean automobile market. The relationship between the level of efficiency and market performance in terms of market share is discussed.
During the 1980"s, all Japanese automobile producers opened assembly plants in North America. Industry analysts and previous research claim that these transplants are more productive than incumbent plants and that they produce with a substantially different production process. I compare the production processes by estimating a model that allows for heterogeneity in technology and productivity, both of which are intrinsically unobservable. The model is estimated on a panel of assembly plants, controlling for capacity utilization and price effects.The results indicate that the more recent technology uses capital more intensively and it has a higher elasticity of substitution between labour and capital. Hicks--neutral productivity growth is estimated to be lower, while capital--biased (labour--saving) productivity growth is higher for the new technology. Using the estimation results, I decompose industry--wide productivity growth and find plant--level changes in lean plants to be the most important contributor. Plant--level productivity growth is further decomposed to reveal the importance of capital--biased productivity growth, increases in the capital--labour ratio, and returns to scale. Copyright The Review of Economic Studies Limited 2003
This paper develops techniques for empirically analyzing demand and supply in differentiated product markets and then applies these techniques to the U.S. automobile industry. The authors' framework enables one to obtain estimates of demand and cost parameters for a class of oligopolistic differentiated products markets. These estimates can be obtained using only widely available product-level and aggregate consumer-level data, and they are consistent with a structural model of equilibrium in an oligopolistic industry. Applying these techniques, the authors obtain parameters for essentially all autos sold over a twenty-year period. Copyright 1995 by The Econometric Society.
Corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In both types of interaction with the public sector, the private agents are bound to face uncertainty with respect to their disposable incomes. To analyse effects of this uncertainty, a stochastic dynamic growth model with the public sector is examined. It is shown that deterministic excessive red tape and corruption deteriorate the growth potential through income redistribution and public sector inefficiencies. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates.
Car prices in Europe are characterized by large and persistent differences across countries. The purpose of this paper is to document and explain this price dispersion. Using a panel data set extending from 1980 to 1993, we first demonstrate two main facts concerning car prices in Europe: (1) The existence of significant differences in quality adjusted prices across countries, with Italy and the U.K. systematically representing the most expansive markets; (2) Substantial year-to-year volatility that is to a large extent accounted for by exchange rate fluctuation and the incomplete response of local currency prices to these fluctuations. These facts are analyzed within the framework of a multiproduct oligopoly model with product differentiation. The model identifies three potential sources for the international price differences: price elasticities generating differences in markups, costs, and import quota constraints. Local currency price stability can be attributed either to the presence of a local component in marginal costs, or to markup adjustment that is correlated with exchange rate volatility; the latter requires that the perceived elasticity of demand is increasing in price. We find that the primary reason for the higher prices in Italy is the existence of a strong bias for domestic brands that generates high markups for the domestic firm (Fiat). In the U.K. higher prices are mainly attributed to better equipped cars and/or differences in the dealer discount practices. The import quota constraints are found to have a significant impact on Japanese car prices in Italy, France, and the U.K. With respect to local currency price stability, 2/3 of the documented price inertia are attributed to local costs, and 1/3 to markup adjustment that is indicative of price discrimination. Based on these results, we conjecture that the EMU will substantially reduce the year-to -year volatility observed in the car price data, but without further measures to increase European integration, it will not completely eliminate existing cross-country price differences.
Reliability Examination in Horizontal-Merger Price Simulations
- H Yoshimoto
Yoshimoto, H. (2011) "Reliability Examination in Horizontal-Merger Price Simulations:
- 金奉吉
金奉吉 (2008) 「韓国自動車産業の発展パターンと競争力構造」奥田聡・安倍誠編『韓国主
要産業の競争力』第 3 章:71-109 日本貿易振興機構アジア経済研究所