Vivek Ghosal

Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics

In theory, uncertainty and sunk costs can influence industry dynamics through the option value and financing constraints channels. Empirical evaluation of these models in the context of industry dynamics are, however, at a nascent stage. Our empirical analysis, covering 267 U.S. manufacturing industries over a 30-year period, reveals that greater uncertainty (i) decreases the number of small firms and establishments in high sunk cost industries, (ii) has virtually no impact on larger establishments, (iii) results in a less skewed size distribution of firms and establishments in high sunk cost industries and (iv) marginally increases industry output concentration. Addressing the recent literature, we also control for technological change and our estimates show that technical progress decreases the number of small firms and establishments in an industry. While past studies have emphasized technological change as a key driver of industry dynamics, our results indicate that uncertainty and sunk costs play a crucial role. Our findings could be useful for the study of firm survival, models of creative destruction, evolution of firm size distribution, mergers and acquisitions and competition policy.

Regime Shift in Antitrust Laws, Economics and Enforcement

This article empirically models the longer-run, deep-seated shift in intellectual thinking that followed the Chicago Schools criticism of the older antitrust doctrine and the shorter-run driving forces related to switches of the political party in power, merger waves, changes in economic activity, and the level of funding for the Antitrust Division, and quantifies their impact on enforcement by the Antitrust Division of the U.S. Department of Justice over the period from 1958 to 2002. The key findings are: (1) a distinct regime shift in antitrust enforcement during the 1970s and, post-regime shift, there has been a marked compositional change with a quantitatively large increase (decrease) in criminal (civil) antitrust court cases initiated; (2) post-regime shift, there appears to be a change in the role played by politics with Republicans initiating more (less) criminal (civil) court cases than Democrats, and the estimated quantitative effects are large; (3) disaggregating the total number of court cases into the main categories under which they are initiated (price-fixing, mergers, monopolization, and restraints-of-trade) shows that individual types of cases have widely differing responses to changes in the driving forces; and (4) in a horserace between the regime-shift and political effects on one side and the remaining variables on the other, the former forces win hands-down in explaining broad shifts in enforcement. Modeling the longer-run shift and disaggregating the court cases emerge as crucial to gaining insights into the intertemporal shifts in enforcement. The article elaborates on the causes for the shift in enforcement and on the effectiveness of antitrust.

Competition in International Postal Markets: Should the Universal Postal Union's Anti-Remail Provisions Be Repealed?

The Universal Postal Union (UPU) is the governing body that provides the framework for agreements in international postal markets. The UPU Congress in 1999 and 2004 will attempt to reform some key international agreements related to remail and terminal dues. The private postal carriers argue that UPUs anti-remail provisions are anti-competitive and deny consumers the benefit of higher quality services. With an expanding private sector, there is increasing pressure on UPU to repeal some of its anti-remail Articles. These changes can have a significant impact on private and public postal carriers, and businesses and individual consumers of mail services. This paper provides an analysis of the issues related to remail and terminal dues, and demonstrates that in many instances remail opportunities arise primarily due to distortions in the global terminal dues structure. We argue that, at this juncture, repealing some of the anti-remail Articles could potentially have a significant impact on the U.S. Postal Services costs and revenues in the domestic market and undermine its ability to provide universal service. international trade

The Law and Economics of Enhancing Cartel Enforcement: Using Information from Non-Cartel Investigations to Prosecute Cartels

I present the following proposal: information revealed during non-cartel investigations by competition law enforcement authorities, such as evaluation of M&As or investigation of monopolization (dominance) conduct, should be directly used to investigate and prosecute cartels. Currently, in several jurisdictions, information acquired in, for example, a M&A investigation typically cannot be directly used for a cartel case due to the underlying statutes and the legal and administrative procedures that govern information use. Reviewing the management and corporate strategy literature, I note that M&As form a vital part of firms’ core business strategy, with the longer-run strategic aspects being more important. These longer-run strategies could be jeopardized if the firms were engaging in collusion, as the likelihood of detection and prosecution would increase under the proposed rule change, which would punish bad (collusive) behavior. I argue that irrespective of exactly how many cartels are actually prosecuted via this channel, the proposal has the likelihood of creating a meaningful deterrence effect. I also discuss the potential downsides related to Type 1 errors and administrative costs. Overall, I argue that the proposed rule change could increase the efficiency and effectiveness of cartel enforcement, and open an additional front in the fight against hardcore cartels that operate within jurisdictions as well as internationally.

Discovering Cartels: Uncovering Dynamic Interrelationships Between Criminal and Civil Antitrust Investigations

This paper focuses on the genesis, taxonomy and timeline of U.S. criminal antitrust investigations, and uses time-series data on enforcement to examine the interrelationships between the various criminal enforcement variables as well as the linkages between criminal and civil enforcement. The key findings are: (1) there appears to be considerable dynamic interplay between the criminal variables. For example, an increase in grand jury investigations or criminal cases initiated or the number of individuals or firms convicted generates increases in most of these (endogenous) variables in future periods. A broad conclusion that can be drawn is that information unearthed during a given criminal investigation and prosecution often reveals information about other conspiracies leading to future investigations and prosecutions; (2) an increase in civil enforcement leads to future increases in the criminal cases and firms and individuals convicted. This suggests that information gleaned during civil investigations, such as mergers or monopolization cases, may reveal information about collusive behavior in markets leading to criminal investigations and prosecutions; and (3) criminal enforcement follows a counter-cyclical pattern with the number of criminal cases prosecuted increasing following an economic downturn. We relate this to the literature which points to cartel instability during economic downturns. Overall, our results point to complementarities in the investigative process within different facets of criminal investigations as well as between criminal and civil investigations.

Adjustment Costs of Capital, Pre-Emptive Investments and Industry Structure

Theoretical models of strategic investments indicate that an incumbent firm by making pre-emptive capital investments may restrict an entrants size and increase its market share, or deter entry. This paper focuses on the incentives of pre-emptive investments to show that upward and downward adjustment costs of capital will be important determinants of the desirability and credibility of pre-emptive investments. This in turn reveals a link between the upward and downward adjustment costs and industry structure. Our empirical results provide some evidence in favor of such a relationship.

Assessing Potential Competition in Antitrust Markets

The book aims to further our understanding of how economic reasoning and legal expertise complement each other in defining the fundamental issues and principles in competition policy. In specially commissioned chapters the book provides a scholarly review of economic theory, empirical evidence and standards of legal evaluation with respect to monopolization of markets, exploitation of market power and mergers, among other issues.

Endemic Volatility of Firms and Establishments: Are Real Options Effects Important?

Consider the intertemporal volatility of the number of firms and establishments within an industry over a relatively long span of time. Data from the U.S. manufacturing sector shows that this degree of endemic volatility varies widely across industries. Examining the determinants of this volatility is important in its own right as it reflects on the underlying forces governing entry and exit. In addition, data shows that the volatility of firms and establishments is significantly correlated with the volatility of the number of production and nonproduction workers employed in an industry. The primary focus of this paper is to evaluate the role played by the real options channel which suggests that sunk costs and uncertainty may be important determinants of the degree of volatility of the number of firms. We also control for other factors related to advertisingintensity, industry growth and technological change. An advantage of the manufacturing industry dataset we use in this study is that it combines the annual timeseries data from the Annual Survey of Manufactures with data from the five-yearly Census of Manufactures. This allows us to construct measures of uncertainty about profits, sunk capital costs, technological change, among others. Our key findings are: (1) industries with higher sunk capital costs and profit uncertainty have significantly lower endemic volatility of the number of firms and establishments; and (2) these relationships are non-linear as suggested by theory with even small amounts of sunk costs or profit uncertainty contributing to significantly lower firm volatility. Our findings appear broadly consistent with the predictions of the real options channel. We highlight some implications of our findings for antitrust/competition policy and labor market dynamics. ZUSAMMENFASSUNG - (Endemische Volatilitat von Unternehmen und die Bedeutung von real option effects) Betrachtet man die intertemporale Schwankung der Anzahl von Unternehmen eines Industriezweigs uber einen relativ langen Zeitraum, so zeigen Daten der U.S.amerikanischen verarbeitenden Industrie eine grose Variation des Grades dieser endemischen Schwankungen zwischen unterschiedlichen Industriezweigen. Die Untersuchung der Determinanten dieser Volatilitat ist fur sich genommen bedeutsam, indem sie die Hintergrunde fur den Markteintritt und - austritt von Firmen beleuchtet. Daruber hinaus lasst sich eine hohe Korrelation zwischen der Schwankung in der Anzahl der Unternehmen und der Volatilitat der Zahl der Arbeiter, die in der Produktion und in nicht-produzierenden Tatigkeiten beschaftigt sind, herstellen. Das Hauptaugenmerk dieses Papier ist es zu bewerten, welche Rolle der real options- Kanal spielt, was impliziert, dass sunk costs und Unsicherheit entscheidende Bestimmungsfaktoren fur den Grad an Volatilitat der Unternehmenszahl sind. Bei der Untersuchung werden auch andere Faktoren, die mit Werbungsintensitat, Industriewachstum und technologischem Wandel verbunden sind, kontrolliert. Ein Vorteil des in der Analyse verwandten Datensatzes liegt darin, dass er jahrliche Zeitreihendaten aus dem Jahresbericht des verarbeitenden Gewerbes der U.S.A. (Annual Survey of Manufacturers) mit Daten des Zensus des verarbeitenden Gewerbes, der funfmal im Jahr erhoben wird, kombiniert. Das gestattet die Konstruktion von Maszahlen zur Unsicherheit uber Gewinne, versunkene Kapitalkosten, technologischen Wandel, etc.. Die Hauptergebnisse der Untersuchung sind: (1) Industriezweige mit hoheren versunkenen Kapitalkosten und Gewinnunsicherheit zeichnen sich durch signifikant geringere endemische Volatilitat in der Anzahl der Unternehmen aus; (2) diese Beziehungen sind nicht-linear, wie bereits die Theorie vermuten lasst, die besagt, dass schon geringe sunk costs oder Gewinnunsicherheit zu bedeutend geringerer Schwankungsbreite in der Unternehmenszahl beitragen. Die Ergebnisse scheinen insgesamt mit den Aussagen zum real options- Kanal ubereinzustimmen. Einige Implikationen der Resultate fur die Antitrust- und Wettbewerbspolitik sowie Arbeitsmarkt-dynamik werden herausgestellt.