Dennis W. Carlton

The Location and Employment Choices of New Firms: An Econometric Model with Discrete and Continuous Endogenous Variables

B USINESS location is a subject of great interest. Businessmen obviously want to know where to locate their plants. State planners want to know the best way to attract new employment to their state. Regional economists use business location to get an advance reading on the health of an economy. Newly locating plants are responding to current incentives in making their locational choices and are therefore a better barometer of a regions future than employment at existing plants whose decisions are obviously influenced by their prior locational decision. Despite all the interest, economists know very little about the factors influencing new business location. (See Carlton (1979) for a survey.) Part of the reason is undoubtedly the lack of data on new business formation. As far as I know, Dun and Bradstreet is the only systematic data source available for studying new business formation. However, there have been only a handful of studies using this data set. And only two, Schmenner (1975) and Carlton (1979), have econometrically attempted to model location by economic variables. Schmenners study looked at location within an SMSA and failed to find much explanatory power for his economic variables. Carlton (1979) focused on interregional location of new single establishment (one plant) firms and was able to uncover some significant economic effects. I also examined the location of branch plants in that paper, but failed to model the size of the branch plant. Obviously, what is of interest is not only where new location will occur but how much employment will be generated. No one to my knowledge has linked the two. This paper simultaneously models both the location and employment choice of new branch plants across SMSAs. The important methodological contributions are showing that the two decisions are linked (via duality theory) and exploiting this link in the model estimation. A special bonus of the methodology is that it allows for direct testing of the independence of irrelevant alternatives assumption in a logit model. The study takes special care to use information on individual plants in narrowly defined industries (4 digit SIC code) and narrowly defined geographic regions (SMSAs). The use of such disaggregate data is a distinguishing feature of the work. Some of the specific findings of the study are the following:

The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries

This article investigates how the tying of complementary products can be used to preserve and create monopoly positions. We first show how a monopolist of a product in the current period can use tying to preserve its monopoly in the future. We then show how a monopolist in one market can employ tying to extend its monopoly into a newly emerging market. Our analysis explains how a dominant firm can use tying to remain dominant in an industry undergoing rapid technological change. The analysis focuses on entry costs and network externalities. We also relate our analysis to the Microsoft case.

VERTICAL INTEGRATION IN COMPETITIVE MARKETS UNDER UNCERTAINTY

VERTICAL integration has never been a well-understood phenomenon. Although it is possible to postulate conditions such as technological coordination where the incentives for vertical integration are obvious, it is still difficult to rationalize the amount of vertical integration that occurs in our economy. The dissatisfaction with the treatment of vertical integration is best expressed by Williamson [i i].

Does Antitrust Need to be Modernized

In 2002, Congress established the Antitrust Modernization Commission to address whether the antitrust laws needed to be changed in light of globalization and rapid technological change. This paper addresses that question. Although the basic framework of the antitrust laws is suitable to deal with current economic conditions, the paper identifies several areas where antitrust can be improved. The paper first examines whether the proper criterion for antitrust should be total or consumer surplus. Then it identifies some key issues that need to be clarified and explains how they should be clarified. Those issues include market definition, merger policy and the treatment of efficiencies, the interaction of antitrust and intellectual property, exclusionary conduct, the right of indirect purchasers to sue, and the proper allocation of responsibility between regulation and antitrust.

Benefits and costs of airline mergers: a case study

This paper provides a methodology to analyze the potential benefits and costs of airline mergers. The methodology is applied to the recent merger between North Central Airlines and Southern Airways -- the superior product created by a merger which increases the amount of single-carrier versus multiple-carrier service. A conditional logit model of travel demand is used to estimate the benefit of the introduction of a superior product. Our analysis of possible costs (in reduced competition) focuses on the definition of the market and the significance of potential competition.

Why Barriers to Entry are Barriers to Understanding

This paper discusses and criticizes the usual definitions of barriers to entry. The failure of the concept of barrier to entry to incorporate a time dimension means that it is a concept that is in need of additional embellishment in order to be useful in a practical problem or for antitrust or regulatory proceedings.

The Need to Measure the Effect of Merger Policy and How to Do It

In this article, I explain the inadequacy of our current state of knowledge regarding the effectiveness of antitrust policy towards mergers. I then discuss the types of data that one must collect in order to be able to perform an analysis of the effectiveness of antitrust policy. There are two types of data one requires in order to perform such an analysis. One is data on the relevant market pre and post merger. The second is data on the specific predictions of the government agencies about the market post-merger. A key point of this article is to stress how weak an analysis of only the first type of data is. The frequent call for retrospective studies typically envisions relying on just this type of data, but the limitations on the analysis are not well understood. As I explain below, retrospective studies that ask whether prices went up post merger are surprisingly poor guides for analyzing merger policy. It is only when the second type of data is combined with the first type that a reliable analysis of antitrust policy can be carried out. There is a need both to collect the necessary data and to analyze it correctly.

Market Power and Mergers in Durable-Good Industries

THIS article investigates the effect on competition of mergers in industries that produce durable goods and shows how difficult it is to create market power through merger in a durable good industry.1 The implications of the analysis are that mergers in durable-good industries do not raise the same antitrust concerns as mergers in non-durable-good industries and, therefore, that it would be a mistake to blindly use the same type of analysis in a durable-good industry that has been developed to analyze mergers in a non-durable-good industry. Our results are separate from those in the recent theoretical literature on a durable-good monopolist and instead depend on the nature of competition in a dynamic setting with used goods.2 The implication of recent theoretical work following Coase is that one may not have to worry about monopoly or its creation through merger in durable-good industries. The reason has to do with the inability of the

PRODUCT VARIETY AND DEMAND UNCERTAINTY: WHY MARKUPS VARY WITH QUALITY*

We demonstrate that demand uncertainty can explain equilibrium product variety in the presence of sunk costs. Product variety is an efficient response to uncertainty because it reduces the expected costs associated with excess capacity. We find that within the firms product line, the highest quality product has the highest profit margin but the lowest percentage margin, while the lowest quality product has the highest percentage margin but the lowest absolute margin. Both of these relationships are consistent with evidence available from marketing studies.

Futures Trading, Market Interrelationships, and Industry Structure

Futures markets arise as a response to economic uncertainty. One goal of this paper is to measure how futures trading in existing contracts changes in response to changes in uncertainty caused by inflation. A difficult issue that other researchers have addressed is why only a small handful of all markets have successful futures markets (see, e.g., Telser and Higginbotham). Although we do not provide a complete answer to this question, we make progress toward an answer by investigating the covariance structure of various futures prices. This allows us to predict which markets are the least needed and to see whether