Massimo Motta

Foreign Direct Investment and Spillovers Through Workers' Mobility

We analyze a model where a multinational firm can use its superior technology in a foreign subsidiary only after appropriate training of local managers. Technological spillovers from foreign direct investment arise when such managers are later hired by a local firm. Benefits for the host economy may also take the form of the rent that trained managers receive by the foreign affiliate to prevent them from moving to local competitors. We study conditions under which technological spillovers occur. We also show that under certain circumstances the multinational firm might find it optimal to resort to export instead of foreign direct investment, to avoid dissipation of its intangible assets.

Endogenous Quality Choice: Price vs. Quantity Competition

Two versions of a vertical product differentiation model, one with fixed and the other with variable costs of quality, are analyzed to study how the hypotheses of price versus quantity competition affect equilibrium solutions. Product differentiation arises under all the scenarios considered, contrasting previous findings of symmetric quality choices under Cournot behavior. However, to relax harsher market competition, firms differentiate more under Bertrand than under Cournot. A simple welfare measure also indicates that the economy is better-off when firms compete on prices-with fixed costs of quality, not only consumer but also producer surplus is higher under price competition. Copyright 1993 by Blackwell Publishing Ltd.

Leniency Programs and Cartel Prosecution

We study the enforcement of competition policy against collusion under Leniency Programs, which give reduced fines to firms revealing information to the Antitrust Authority. Such programs give firms an incentive to break collusion, but may also have a pro-collusive effect, since they decrease the expected cost of misbehaviour. We analyze the optimal policy under alternative rules, obtaining a ranking of the different schemes and showing when the use of reduced fines may improve antitrust enforcement.

Multinationals without Advantages

We question the widespread argument that firms embarking on foreign direct investments must possess some specific advantages to offset the penalties of operating across national and cultural boundaries. A simple model shows that firms might invest abroad to capture local advantages through geographical proximity of plant location, rather than to exploit existing ones. Because of spatially bounded spillovers, laggard firms might use foreign investments to acquire location-specific knowledge, whereas leading firms might prefer costly exports to avoid the dissipation of their advantages. Copyright 1999 by The editors of the Scandinavian Journal of Economics.

A Simple Theory of Predation

We propose a simple theory of predatory pricing, based on scale economies and sequential buyers (or markets). The entrant (or prey) needs to reach a critical scale to be successful. The incumbent (or predator) is ready to make losses on earlier buyers so as to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including markets where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterised by common costs. Conditions under which predation may take place in actual cases are also discussed.

Sunk Costs and Trade Liberalisation

A model of vertical product differentiation is applied to the study of trade between two countries of differing sizes. Firms in the small country choose lower-quality products in autarky. Unlike A. Shaked and J. Sutton (1984), welfare effects of trade are fully analyzed and shown to depend on the degree of sunkness of costs. If firms have not sunk costs, losses from trade may arise for the small country in the short run (when quality is fixed) and for the large country in the long run (when quality is variable). If costs are sunk, both countries always gain from trade. Copyright 1992 by Royal Economic Society.

Risk dominance selects the leader: An experimental analysis

Coordination games arise very often in studies of industrial organization and international trade. This type of games has multiple strict equilibria, and therefore the identification of testable predictions is very difficult. We study a vertical product differentiation model with two asymmetric players choosing first qualities and then prices. This game has two equilibria for some parameter values. However, we apply the risk dominance criterion suggested by Harsanyi and Selten and show that it always selects the equilibrium where the leader is the firm having some initial advantage. We then perform an experimental analysis to test whether the risk dominance prediction is supported by the behaviour of laboratory agents. We show that the probability that the risk dominance prediction is right depends crucially on the degree of asymmetry of the game. The stronger the asymmetries the higher the predictive power of the risk dominance criterion.

International trade and investments in a vertically differentiated industry

Abstract A model of vertical product differentiation is applied to the study of trade and investments between two economies of differing sizes. At the autarky equilibrium, firms in the smaller country are shown to produce lower quality. The choice of the firms between exports and foreign investments when borders open is studied. Intra-industry trade or reciprocal investments arise when the quality gap is not too wide. The strategic role of foreign investments is emphasized. In particular, the establishment of a subsidiary abroad can crowd out both sales by local firms and exports by the co-national firm.

On the Anticompetitive Effect of Exclusive Dealing When Entry by Merger is Possible

We extend the literature on exclusive dealing by allowing the incumbent and the potential entrant to merge. This uncovers new effects. First, exclusive dealing can be used to improve the incumbents bargaining position in the merger negotiation. Second, the incumbent finds it easier to elicit the buyers acceptance of exclusivity. Third, despite allowing the more efficient technology to find its way into the industry, exclusive dealing reduces welfare because (i) it may trigger entry through merger whereas independent entry would be socially optimal and (ii) it may deter entry altogether.

Exclusive Dealing: Investment Promotion May Facilitate Inefficient Foreclosure

This paper studies a model whereby exclusive dealing (ED) can both promote investment and foreclose a more efficient supplier. Since ED promotes the incumbent sellers investment, the seller and the buyer realize a greater surplus from bilateral trade under exclusivity. Hence, the parties involved may sign an ED contract that excludes a more efficient entrant in circumstances where ED would not arise absent investment. The paper therefore invites a more cautious attitude towards accepting possible investment promotion arguments as a defense for ED.