the assessment competition policy the paper advances four propositions concerning the objectives content and institutions of competition policy first the role of policy should be to advance economic efficiency rather than competition for its own sake or some wider definition of the public interest second economic analysis is generally ambiguous a priori about the efficiency effects of particular market structures and conduct third the design of policy and institutions needs to reflect this ambiguity policy rules are essential but there should be scope for parties to argue countervailing efficiency benefits a policy institution should be empowered to identify investigate and propose remedies for failures of competition subject to review by an independent competition tribunal fourth international harmonization of competition policies is essential current policies in the u k and ec and relationships between the two are evaluated and the case made for a radical reform of u k policy copyright 1993 by oxford university press

sunk costs financial markets and contestability abstract this paper analyzes the proposition that the theory or contestable markets will yield good predictions for markets in which sunk costs although present are unimportant two results are of interest 1 if costs are at all sunk incumbent firms will be able to engage in strategic behavior with respect to entrants 2 if no costs are sunk but firms finance investment by borrowing incumbent firms will be able to engage in strategic behavior with respect to entrants in these cases one must analyze strategic behavior of incumbent firms to analyze market performance

market structure of multi product firms under free entry abstract three sources of advantages to multi product firm are considered economies of scope risk reduction and demand complementarity each source if of sufficient magnitude leads to a market equilibrium dominated by multi product firms as the market becomes sufficiently large the multi product cournot nash model is shown to converge to an efficient outcome

multimarket competition theory and evidence the multimarket perspective identifies potential entrants as existing firms in related markets the paper uses this new framework to analyze entry strategies and entry deterrence successful entry permitting and entry deterring strategies require understanding of the feedbacks from the entry market to the home market and vice versa the multimarket perspective integrates literature on industrial organization and strategic management

industrial organization and public policy competition policy has been dominated by politics industrial organization can expect to exert an influence only insofar as it commands superior knowledge that is true with respect to the long run since economies of scale are limited to the short run competition is feasible in the long run therefore a trade off approach seeking to identify optimal market structures is misleading competition policy should instead be directed at prohibiting protective strategies of incumbents to deter entry competition being a process of creative destruction political viability of a competitive order requires competition policy to be supplemented by a social welfare policy

oscillating currents the changing rationale for government intervention in the electricity industry the appropriate role for government in the electricity industry has emerged as a major issue throughout the world this is explained using the terms of neoclassical economics by shifts in the rationales for government intervention in that industry the two historic rationales natural monopoly and public good have been diminishing in importance while the need to deal with negative environmental externalities has been given increasing attention this paper details the changes in each rationale and then synthesizes this information to probe the implications for policy a key conclusion is that while there will be pressures toward similar policy responses and similar models for the electricity sector there will remain opportunities and justification for significant differences between regions and countries

stackelberg and marshall this paper advocates a generalized n firm stackelberg model as a plausible testable alternative description of oligopoly a pure strategy equilibrium must exist for this model the main result is that efficiency obtains in the limit as the scale of each firm is shrunk relative to demand this is demonstrated for the case of u shaped average cost and also for that of natural monopoly copyright 1990 by american economic association

slipping into and out of poverty the dynamics of spells this paper examines the dynamics of poverty previous analyses have examined either fluctuations in the male heads earnings or the frequency of poverty periods over a fixed time frame our approach depends on a definition of spells of poverty using this methodology we find that the majority of poor persons at any time are in the midst of a rather long spell of poverty the methodology also allows us to estimate that less than 40 percent of poverty spells begin because of a drop in the heads earnings while 60 percent of the spells end when the heads earnings increase thus researchers must focus on household formation decisions and on the behavior of secondary family members there has been a dramatic resurgence recently of discussion of the underclass the discussion is reminiscent of debates about poverty during the 1960s when the notions of a culture of poverty particularly as popularized by michael harrington s other america 1962 dominated both intellectual and policy thinking the idea of an underclass seems inconsistent however with much of the research on the dynamics of poverty during the 1970s that research using new longitudinal data seemed to show that the bulk of the poor were poor for only a few years the research also showed that the poor were a very heterogeneous group including a small minority of persistently poor the persistence of poverty is of interest both for understanding the phenomenon and for developing policy claims about dependency and separate life styles among the poor rest on assumptions about the long term nature of poverty questions

trade and trade policy with imperfect competition the case of identical products and free entry abstract this paper analyses intra industry trade between economies containing an imperfectly competitive industry in which firms produce a homogeneous output production is subject to increasing returns to scale and there is free entry and exit of firms trade is shown to unambiguously increase welfare by reducing the degree of monopoly in each market and increasing firm size the effects of differences in technology and endowments on the pattern of trade and welfare are examined import tariffs are shown to raise welfare in the country employing the tariff and the welfare implications of various types of industry subsidy are examined

deregulating european airlines deregulating european airlines francis mcgowan and paul seabright one of the industries with the greatest potential to benefit from the single european market is civil aviation which has been highly regulated by european governments the deregulation of civil aviation in the us since the late 1970s has provided valuable evidence about the nature of the airline industry and its response to the liberalization of conditions of entry by new carriers we examine the us experience and look at the changing regulatory framework for the european industry we also consider the main sources of market failure in air transport the lessons of the us experience are threefold first deregulation can in principle produce major gains to consumers without damaging the long run profitability of carriers by reducing the high costs of operation of european airlines second congestion problems especially the availability of landing slots at airports need to be managed effectively to prevent incumbent carriers squeezing out new entrants we recommend a system of slot auctions to achieve this third in spite of relatively low sunk costs of entry to the industry there remain significant opportunities for the exercise of market power by incumbent carriers deregulation of entry needs therefore to be supplemented by a vigorous competition policy especially with regard to the approval of mergers

a note on macleod s treatment of contestability a model by macleod seeks to correct contestability theory s neglect of strategic interaction among market participants however the model reverses a central assumption of that theory viz that the incumbent s price response lag is longer than the entry lag also the analysis is incomplete and as a result emphasizes internal market conditions rather than entry conditions the focus of contestability theory modifications demonstrate the interaction of internal and entry conditions in determining equilibrium

contestability queues and governmental entry deterrence this paper demonstrates that a perverse kind of entry deterrence can result when government subsidized production is combined with non price rationing in the form of queuing even though queuing leads to a total cost to the consumer not including the tax cost that is higher than the cost of an unsubsidized private supplier and even though the government s money price is rigid the market is not contestable the key to the result is that the waiting cost portion of the consumer s acquisition cost declines immediately upon entry and losses would be forced upon the entrant privatization would negate the entry deterrence thus leading to entry increased output at lower full prices lower average production costs decreased waiting costs increased profits and increased consumer surplus

market contestability in the presence of sunk entry costs this article extends previous laboratory experimental research to examine the competitive discipline of contested markets with a natural monopoly type cost structure where sunk costs are neither zero nor infinite several alternative conjectures as to how or whether sunk costs can weaken the discipline of contested markets are presented and interpreted in the context of the experimental design sunk costs are found to weaken the support for strong interpretations of the contestable markets hypothesis and thus yield a wide diversity of dynamic patterns of market performance yet the disciplining power of contestability remains impressive with no indications of sustained monopoly pricing

bank lending and property prices in hong kong abstract this paper studies the relationship between residential property prices and bank lending in hong kong this is an interesting topic for three reasons first swings in property prices have been extremely large and frequent in hong kong second under the currency board regime monetary policy cannot be used to guard against asset price swings third despite the collapse in property prices since 1998 the banking sector remains sound while the contemporaneous correlation between lending and property prices is large our results suggest that the direction of influence goes from property prices to bank credit rather than conversely

industrial organization paradigms empirical evidence and the economic case for competition policy the recent reform of competition policy in canada prompts one to ask whether there remains a tenable economi c case for antitrust policy to answer this question this paper begi ns by sketching competing industrial organization i o paradigms th e empirical evidence bearing on these paradigms particularly the m ainline structure conduct performance paradigm which has provided the main theoretical support for competition policy is examined it is concluded that recent theoretical and empirical work in i o have undermined the traditional economic case for competition policy the last section of the paper attempts a partial reconstruction of the ca se for competition policy along somewhat unorthodox lines

efficiency of dynamic quantity competition a remark on markovian equilibria this paper extends maskin and tirole analysis of dynamic quantity competition in terms of markov perfect equilibria to the case in which firms have different fixed costs it is proved that allocative efficiency still prevails but not productive efficiency

credible retaliatory entry and strategic toe holds the anticipated profits from entry by an established firm into a new market will depend on how incumbents in that market are expected to respond one possibility suggested by cases and the literature is that an incumbent may respond with retaliatory entry into the first entrant s home market the model presented here describes conditions under which this can be a credible threat that deters the first entry when the conditions are such that it is not credible the paper shows how firms can provide credibility through the establishment of toe hold investments in other markets

japanese monetary policy introduction kenneth j singleton 1 a comparative perspective on japanese monetary policy short run monetary control and the transmission mechanism kazuo ueda 2 market operations in japan theory and practice kunio okina 3 japanese corporate investment and bank of japan guidance of commercial bank lending takeo hoshi david scharfstein and kenneth j singleton 4 the interest rate process and the term structure of interest rates in japan john y campbell and yasushi hamao 5 monetary policy and the real economy in japan hiroshi yoshikawa 6 an aggregate demand aggregate supply analysis of japanese monetary policy 1973 1990 kenneth d west

credible entry threats into contestable markets a symmetric multi market model of contestability the theory of contestable markets emphasizes potential competition yet it is reticent on the identity of potential entrants recent literature discusses the im possibility of hit and run entry for several types of entrants r d cairns and d mahabir 1988 argue that existing firms in related markets are most likely to be capable of hit and run entry but unlikely to be motivated this paper expands their arguments by sketching a multimarket framework and by discussing a model that captures most of the current debate the model marks a first step into revising contestability theory along the lines of this debate copyright 1992 by the london school of economics and political science

optimal cartel trigger price strategies abstract a dynamical model of industry equilibrium is described in which a cartel deters deviations from collusive output levels by threatening to produce at cournot quantities for a period of fixed duration whenever the market price falls below some trigger price in this model firms can observe only their own production level and a common market price the market demand curve is assumed to have a stochastic component so that an unexpectedly low price may signal either deviations from collusive output levels or a downward demand shock

quality in contestable markets a historical problem the theory of contestable markets has made notable inroads into the traditional way of looking at markets with only a few producers but its relationship to the theory of monopolistic competition in general and the quality of goods in particular has not been explored in depth such a connection is suggested by a feature of contestable markets emphasized by william baumol in his presidential address baumol emphasizes the fact that an incumbent is always vulnerable to hit and run entry if he ever tries to exert his potential monopoly power 1

entry and entry deterrence in penetrable markets this paper presents a game theoretic model of entry a potential entrant into a given market is postulated to be a currently produci ng firm whose product is a substitute on the production side for the good being sold in the market an entrant is capable of switching pr oduction between markets faster than firms in general can adjust thei r total outputs to some extent a market faced with entry as such wi ll resemble a contestable market and limit pricing behavior will occ ur copyright 1988 by the london school of economics and political science

concentration potential entry and performance in the airline industry airline markets do not satisfy the theoretical conditions for perfect contestability and theory does not indicate which deviations from perfect contestibilty significantly affect performance thus the effect of potential entry on performance in airline markets is explored empirically the best model for explaining fares is found to be one in which the measure of market concentration takes into account not only the number and size distribution of incumbents but also the number of potential entrants not significantly disadvantaged due to economies of scale and scope the hypothesis that all city pair markets are perfectly contestable is rejected coauthors are richard l johnson andrew s joskow gregory j werden and michael a williams copyright 1989 by blackwell publishing ltd

cartel stability and tariff policy abstract in this paper we investigate the effect that tariff policy has on the ability of firms to collude in oligopolistic industries we find that small tariff rates lead to an industry structure more conducive to collusive behavior while large tariff rates weaken cartels there exists a critical tariff rate which has no effect on the cartel s stability this critical value is found to be a decreasing function of n the number of firms in the industry and n d n the proportion of firms that are domestic

deregulation disintermediation and agency costs of debt evidence from japan abstract many japanese firms reduced dependence on banks following financial deregulation in the 1980s the financial architecture of japanese firms after liberalization provides an opportunity to investigate the choice of financing with public bonds versus monitored bank loans examination of accounting and stock price data for a sample of japanese firms in the late 1980s suggests that debt structure is related to variables that serve as proxies for agency costs of debt in particular we find that the proportion of bond debt is inversely related to growth opportunities while the proportion of bank debt is positively related to growth opportunities

retrospective on the bubble period and its relationship to developments in the 1990s in reviewing what happened in the 1980s in japan and how the bursting of the bubble created problems in the early 1990s the following conclusions are obtained 1 in order to limit damage to the economy from a bubble and its bursting it is important to build a resilient financial system through strict supervision policy so that asset price fluctuations would not weaken financial institutions supervision policy would include regulatory measures limiting lending concentration and exposure to real estate related sectors 2 monetary policy should pay attention to asset price movements but it may be difficult and inappropriate to raise the interest rate sharply when inflation is low below one per cent like in japan even though asset prices are increasing at 30 40 per cent 3 the official discount rate could have been raised in the summer of 1988 in japan when the federal reserve and bundesbank raised interest rates this would have slowed down the rise of stock and land prices but the bubble was already large by then 4 the bubble in the second half of the 1980s was only partially responsible for the lost decade of the 1990s in japan a series of policy errors made a small problem of the burst bubble much bigger than necessary

moral hazard as an entry barrier in an experience goods industry an entrant who could make positive profits by providing a better deal to buyers than do incumbents may cheat buyers by providing goods of low quality to make even greater profits if buyers foresee this possibility they will be unwilling to buy from an entrant as a result moral hazard in a seller s choice of the quality of an experience good can lead to a barrier to entry in particular since hit and run entry is likely to lead to low quality choice the threat of such entry may not discipline the pricing of incumbents we also show that the temptation to dishonest entry the moral hazard problem is stronger if buyers are already receiving some consumer surplus as a result there is a first entrant advantage because the first entrant faces less temptation to provide inefficiently low quality than do subsequent entrants and with rational buyers this works to his advantage the scale of entry may affect quality incentives and therefore introductory offers may assure buyers of an entrant s quality but this cannot happen under a suitable definition of constant returns

should central banks respond to movements in asset prices in recent decades asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries in light of this experience how if at all should central bankers respond to asset price volatility we have addressed this issue in previous work bernanke and gertler 1999 the context of our earlier study was the relatively new but increasingly popular monetary policy framework known as inflation targeting see e g bernanke and frederic mishkin 1997 in an inflation targeting framework publicly announced medium term inflation targets provide a nominal anchor for monetary policy while allowing the central bank some flexibility to help stabilize the real economy in the short run the inflation targeting approach gives a specific answer to the question of how central bankers should respond to asset prices changes in asset prices should affect monetary policy only to the extent that they affect the central bank s forecast of inflation to a first approximation once the predictive content of asset prices for inflation has been accounted for there should be no additional response of monetary policy to assetprice fluctuations in use now for about a decade inflationtargeting has generally performed well in practice however so far this approach has not often been stress tested by large swings in asset prices our earlier research employed simulations of a small calibrated macroeconomic model to examine how an inflation targeting policy defined as one in which the central bank s instrument interest rate responds primarily to changes in expected inflation might fare in the face of a boom and bust cycle in asset prices we found that an aggressive inflationtargeting policy rule in our simulations one in which the coefficient relating the instrument interest rate to expected inflation is 2 0 substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses as well as in scenarios in which technology shocks drive stock prices intuitively inflation targeting central banks automatically accommodate productivity gains that lift stock prices while offsetting purely speculative increases or decreases in stock values whose primary effects are through aggregate demand conditional on a strong policy response to expected inflation we found little if any additional gains from allowing an independent response of central bank policy to the level of asset prices in our view there are good reasons outside of our formal model to worry about attempts by central banks to influence asset prices including the fact that as history has shown the effects of such attempts on market psychology are dangerously unpredictable hence we concluded that inflationtargeting central banks need not respond to asset prices except insofar as they affect the inflation forecast in the spirit of recent work on robust control the exercises in our earlier paper analyzed the performance of policy rules in worst case discussants robert shiller yale university glenn rudebusch federal reserve bank of san francisco kenneth rogoff harvard university

collusion and predation under almost free entry abstract this study investigates the degree of cooperation that firms can support in the absence of significant barriers to entry a free entry subgame perfect equilibrium is defined by q n where q is the collusive output rate and n is the number of active firms such that there is no incentive for an active firm to deviate output from q and there is no incentive for a potential entrant to enter the industry it is shown that for all n 1 if the discount factor is sufficiently high there exists a free entry equilibrium in which active firms sustain a non trivial degree of cooperation cooperation is supported by active firms credibly threatening to respond to entry with a period of aggressive competition

selection in dynamic entry games abstract this paper proposes a game theoretic framework to study dynamic competition with entry deterrence sufficient conditions are given such that the competition process results in the most efficient firm being eventually selected we show this selection property for asymmetric firms to be the natural economic extension to the rent dissipation property obtained for symmetric firms this framework is used to discuss previous models in which the selection property had not been studied dynamic limit pricing and capacity renewal or may fail to hold quantity competition journal of economic literature classification numbers c73 d43 l12

family change employment transitions and the welfare state household income dynamics in the united states and germany since the demise of modernization theory social scientists have sought explanations for persisting differences in the stratification of industrialized societies primarily by studying how educational and labor market institutions shape the life chances of individuals this approach undervalues two key features of any stratification system family dynamics and the welfare state employment changes changes in household composition and changes in the employment situation of a spouse or partner can all trigger large shifts in income and material well being the impact of these events is mediated by public tax and transfer mechanisms and by private actions taken by household members this comparative analysis of household income dynamics in the united states and germany shows that variations in welfare state policy produce distinct societal patterns of income mobility and furthermore shows that the relative importance of labor market events family change and welfare state policies for income dynamics depends on gender the strong interrelationship between individual incentives and the structure of opportunity produces an asymmetry in the long term impact of events the negative effects of events that reduce income generally decay over time while the effects of positive events generally persist

spatial preemption with finitely lived equipments abstract this paper proposes a dynamic approach to potential competition in a spatial framework where productive investments are location specific and have finite duration we define a notion of strategic sustainability against multiple entries in which spatial preemption comes from anticipated renewal policies of plants we show that in an infinite horizon model with no discounting potential competition leads to average cost renewal but a positive value can be attached to incumbency the conditions for the existence of such strategically sustainable structures are determined in the model of the circular city under mill or discriminatory pricing rules our results are finally related to the usual two stage notion of free entry equilibrium in spatial models

contestable markets an uprising in the theory of industry structure presents a transcript of the presidential address delivered at the 94th meeting of the american economic association on december 29 1981 discussion of developments in the theory of industry structure welfare attributes of contestable markets behavior characteristics of oligopoly equilibrium intertemporal vulnerability to inefficient entry ebsco

the role of potential competition in industrial organization potential competition has been recognized as a mechanism to control the exploitation of market power at least since the work of j b clark 1902 but it was not until 50 years later that economists most notably joe bain and paolo sylos labini refocused attention on the idea with inputs from the theories of imperfect competition optimal control and dynamic games their work evolved into ever more sophisticated models of the reactions of existing competitors to the threat of new competition although the most appropriate models of competitive interaction are those which begin with a specific industry a number of theories have been proposed which attempt to develop more general conclusions my purpose in this paper is to develop an understanding of the strengths and limitations of these alternative theories by examining the available theoretical empirical and institutional knowledge rather than attempt the sisyphean task of recounting every model which relates conditions of entry and market performance i have partitioned the analysis into four major schools of thought according to their most central propositions these are the traditional model of limit pricing dynamic limit pricing the theory of contestable markets and the market efficiency model traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult dynamic limit pricing is similar but emphasizes that markets can only be temporarily protected from entry contestability theory in its pure form asserts that potential competition is as effective as actual competition in controlling market performance the efficient markets hypothesis broadly interpreted states that markets are workably competitive and that the market structure reflects differential efficiency not strategic behavior while one can construct many other hypotheses about potential competition these classifications

forward induction and sunk costs give average cost pricing abstract this paper applies the idea of forward induction to a classical economic problem the existence of an efficient form of competition in the case of increasing returns to scale it proves that properly formalized this idea leads to average cost pricing as the horizon goes to infinity journal of economic literature classification numbers

monopoly monopsony and contestability in health insurance a study of blue cross plans i introduction blue cross and blue shield plans the plans have historically occupied a unique niche in health care pauly 1987 notes that the plans serve both as sellers of health insurance and as buyers of health services marmor 1991 described the plans development of health insurance concepts in the 1930s their role as innovators permitted them to occupy a dominant market share position in most geographic areas as a result blair ginsburg and vogel 1975 believe they have traditionally received favorable regulatory treatment including non profit organization status and exemption from taxation potentially the plans have dual market power 1 monopoly power in the market for health insurance and monopsony power in the market for health services this may result in operating inefficiencies and may produce adverse welfare consequences monopsony theory posits that the plans will reduce payments to providers and may stifle innovation in the market for health services this occurs as the result of the plans dominant market shares generated from the fact that they were often the first in the market for insurance and from their ability to enforce a credible threat to reduce providers business should providers refuse to provide reduced cost services the plans dominant market share and their advantage in the market for health services permit them to maintain a competitive advantage in the market for health insurance 2 monopoly theory suggests that the plans advantage in the market for medical services due to regulatory and tax advantages will cause them to i raise premium prices ii sell only a limited range of health insurance policies iii offer policies with more complete coverage than consumers demand 3 iv reduce innovation in the health insurance market and v demonstrate unduly high administrative costs in the 1970s empirical work supported these predictions however the 1980s has been an era of growth of competition and the potential for even more competition in the market for health insurance baumol panzar and willig 1982a noted that a credible threat of entry can produce competitive market conditions in a concentrated market resulting in reduced prices increased quantity and more efficient administrative cost structures if pauly is correct that there are no inherent scale economies in the health insurance market and if the market for health insurance is contestable the plans will pass advantages along to subscribers as reduced premiums and will tolerate fewer administrative cost inefficiencies accordingly the plans present an opportunity to study market structure and its impact in both the market for health care and the market for health care insurance to date no study has evaluated this interplay greater understanding of these interactions is important not only to deal with the phenomena of the plans for instance more appropriate regulatory policies but also to refine the single payer debate and to consider operating standards for health alliances and health plans included in the administration s health care reform package outlined by the white house domestic policy council 1993 section ii of this paper evaluates prior studies of the plans section iii motivates the model for plan behavior section iv describes the results of our empirical study of the plans premium pricing provider payment and administrative costs section v contains our conclusions ii prior studies of plan behavior a number of prior studies have evaluated the plans unique position in the market for health insurance and in the market for health care most focus on the plans monopsony power and payments to providers most important they evaluate markets that have gone through substantial change as health maintenance organizations and preferred provider organizations hmos and ppos have replaced fee for service plans several assess market power and administrative costs

structure and performance with profit measures based on stock market prices the theory that there is a causal relationship between industry structure conduct and performance is the fundamental premise in the field of industrial organization the most carefully researched component of that general theory is the hypothesis that increasing industrial concentration will give rise to increasing profits this traditional view is important not only because of its prominence in the academic analysis of industrial markets but also because of its implications for government policy especially antitrust policy the traditional view typically has been tested by treating an accounting based measure of industry profit as the dependent variable with concentration and other structural variables as independent variables within a cross section of manufacturing industries at a given point in time numerous papers have found that concentration has a positive impact on profits the methodology adopted in this paper is different the profit measures are based on stock market prices and are adjusted for risk this is an improvement because accounting methods are so poorly adapted to the measurement of economic profit and because risk may vary with concentration 2 39 another methodological innovation is the choice of time series over cross section analysis the question asked is whether the change over time in each industry s level of concentration had an impact on profits this minimizes the problem of omitted or inaccurately measured independent variables since there should be less change in basic structural characteristics over short time periods within an industry than between industries at a single point in time 2 a second important advantage is freedom from a basic assumption of crosssection studies the assumption that the relationship between concentration and profit is homogeneous across industries if the assumption is invalid empirical results are subject to bias two tests 7 26 have firmly rejected the homogeneity assumption 3

william j baumol an entrepreneurial economist on the economics of entrepreneurship william j baumol is the 2003 winner of the international award for entrepreneurship and small business research throughout his career baumol has urged the profession to pay attention to the instrumental role of entrepreneurship in economic renewal and growth at the same time he has insisted that economists continue to use their usual tool box when the purview of analysis is extended to entrepreneurship hence baumol can be characterized as a revolutionary from within in this article we present and discuss baumol s research contribution in the areas of entrepreneurship and small business economics notably from a growth perspective in addition to placing his work in these areas into the wider context of his full contribution we emphasize baumol s findings that growth cannot be explained by the accumulation of various factors of production per se human creativity and productive entrepreneurship are needed to combine the inputs in profitable ways as a result an institutional environment that encourages productive entrepreneurship and human experimentation becomes the ultimate determinant of economic growth

strategic competition among the few some recent developments in the economics of industry the title of this article is intended as a signal of two things first we are concerned with industries where several but not many firms are actually or potentially in competition with each other thus our topic is competition among the few 1 or oligopoly rather than the polar extremes of textbook perfect competition and pure monopoly secondly we are interested in the strategic nature of competition between firms where the meaning of strategic can be explained as follows if the essence of a game of strategy is the dependence of each person s proper choice of action on what he expects the other to do it may be useful to define a strategic move as follows a strategic move is one that influences the other person s choice in a manner favourable to one s self by affecting the other person s expectations of how one s self will behave schelling 1960 p 150

lending behavior and real estate prices abstract the willingness of banks to provide funding for real estate purchases depends on the creditworthiness of borrowers besides other factors this creditworthiness depends on the development of real estate prices real estate prices in turn depend on the demand for homes which is influenced by the supply of mortgages i develop a theoretical model which explains this circular relationship i show how different kinds of expectation formations can lead to fluctuations in real estate prices furthermore i show that banks make above average profits in the upswing phase of the real estate cycle but suffer high losses when the market turns

parametric equivalence scales and scale relativities we respond to banks and johnson s 1994 comment on coulter et al 1992 drawing on a more general discussion of parametric equivalence scale and scale relativity issues and new empirical results we show that criticisms of our earlier work are unfounded when the mcclements scale is properly characterised the scale does indeed provide lower estimates of poverty and inequality levels than most other scales we reiterate our conclusion that relationships between scale relativities and inequality and poverty indices may be index specific moreover the picture about distributional trends may differ from that about levels

contestability a revisionist view many claims have been made about the significance of the contribution of contestability theory to industrial organizat ion this paper concludes that contestability theory leaves unanswere d questions about the identity of entrants and the source of their re sources a modification to the theory is proposed rather than as a h indrance to potential entry sunk costs are viewed as being of key si gnificance for the disciplining of oligopolists through potential ent ry with the proposed modification the analysis of the costs of mult iproduct firms may be more easily integrated with recent developments in industrial organization copyright 1988 by the london school of economics and political science

inefficient diversification in multi market oligopoly with diseconomies of scope this paper considers the incentives of oligopolistic firms to diversify into technologically related markets when there are diseconomies of scope there is a rent extraction incentive for firms to adopt flexible technologies which enable them to enter technologically related markets thereby increasing competition however this strategic motive leads to inefficiency in production owing to diseconomies of scope this paper shows that the welfare gain arising from increased competition is offset by the inefficiency in production which may lead to lower welfare than in the case of pure monopoly this is a counter example to the contention that the diversification increases social welfare

a poverty dynamics approach to social stratification the south african case abstract the wave of upbeat stories on the developing world s emerging middle class has reinvigorated a debate on how social class in general and the middle class in particular ought to be defined and measured in the economics literature most scholars agree that being middle class entails being free from poverty which means being able to afford the basic things in life not only today but also tomorrow in consequence there is an increasing tendency to define the middle class based on a lack of vulnerability to poverty in this paper we strengthen and expand on these existing approaches in three ways first we incorporate the differentiation between the middle class and a non poor vulnerable group into a broader social stratification schema that additionally differentiates between transient and chronic poverty second in estimating the risk of poverty we employ a multivariate regression model that explicitly allows for possible feedback effects from past poverty experiences and accounts for the potential endogeneity of initial conditions unobserved heterogeneity and non random panel attrition four factors insufficiently addressed in existing studies third we highlight the value of paying attention to these conceptual and modelling issues by showing that class divisions based on monetary thresholds inadequately capture a household s chances of upward and downward mobility we then apply our conceptual framework to the south african case we find that only one in four south africans can be considered stably middle class or elite access to stable labor market income is a key determinant of achieving economic stability a lack of jobs as well as the prevalence of precarious forms of work drive high levels of vulnerability which in turn constrains the development of an emergent middle class not only in south africa but potentially also in other parts of the developing world that face similar labor market challenges

contestable markets and the theory of industry structure a review article contestable markets and the theory of industry structure is a comprehensive integration expansion and application of the ideas of william j baumol elizabeth e bailey john c panzar robert d willig edward zajac and their associates on contestability theory in 16 chapters baumol panzar and willig 1982a try to make precise especially in a multiproduct context ideas related to the chicago school approach to industrial organization to argue forcefully that potential entry disciplines monopoly and at the same time to offer a product more directly useful to the policymaker than the more abstract mathematical writings on increasing returns there are at least five basic ideas presented here first under certain structural conditions on technology and certain technical requirements on demands frictionless entry and exit together with equal access to technology lead to a type of competitive equilibrium with desirable welfare consequences even though there may be only one active firm in equilibrium a market with the foregoing characteristics of frictionless reversible entry and equal access to technology is called a perfectly contestable market by baumol et al 1982a the market for air travel between two cities serves as a canonical example such a market may support only one airline but the active airline must price at cost to prevent a price cutting rival airline from flying in and skimming off customers the authors conclude that the presence of such shadow entrants will force competition like behavior by the incumbent even though the market may be a natural monopoly second baumol et al 1982a define natural monopoly as a situation where the technology is characterized by a subadditive cost function that is to say c l7 yt l c y for any collection of output

contestability vs competition analyzes the ultra free entry as normative contribution to industrial organization ultra free entry in context of the evolving field of industrial organization assessment of the conceptual validity of william baumol elizabeth bailey john panzar and robert willig s analysis in representing the nature of competition empirical issues in measuring and testing ultra free entry ebsco

repeated games and the reciprocal dumping model of trade abstract a repeated game version of the basic brander and krugman 1983 model is analyzed in the brander krugman model rivalry among oligopolistic firms gives rise to international trade it is now shown that no trade which is welfare reducing when transportation costs are negligible is a strong nash equilibrium of the supergame the threat strategies that support no trade the discount rate and the crucial role of transportation costs are discussed extending the branderkrugman analysis in a natural way

scaling the commanding heights of public enterprise economics there is a new orthodoxy in the economics of the public sector that has been promoted by privatization and for which ownership as such is essentially seen as irrelevant as compared to conditions of competition and regulation this is shown to depend upon an illegitimate and static view of the beneficial effects of competition a questionable distinction between natural and artificial monopoly a false history of the motives for and the performance of the nationalized industries a reduction of industrial to competition policy and a failure to examine intersectoral linkages rectifying these deficiencies suggests an alternative analytical and more favorable stance on public ownership copyright 1990 by oxford university press

how effective is potential competition abstract i examine robustness of perfect contestability a small sunk cost s causes large deviations from the results if the response lag l is even smaller there is an essential discontinuity at s 0 l i also examine what happens if incumbant not entrant exists after l

on the costs of a bank centered financial system evidence from the changing main bank relations in japan we examine the effects of bank firm relationships on firm performance in japan when access to capital markets is limited close bank firm ties increase the availability of capital to borrowing firms but do not lead to higher profitability or growth the cost of capital of firms with close bank ties is higher than that of their peers this indicates that most of the benefits from these relationships are appropriated by the banks finally the slow growth rates of bank clients suggest that banks discourage firms from investing in risky profitable projects however liberalization of financial markets reduces the banks market power the close relationship between manufacturing firms and financial institutions in japan has recently been at the center of the debate on the appropriate financial system for the reforming economies of eastern europe as opposed to the anglo saxon separation of finance and industry long term ties between main banks and their client firms involving bank loans bank equity holding and some bank appointed personnel which are common in japan and germany have often been described as a growth oriented financial system that could serve the needs of developing and reformed economiies better than anonymous capital markets modeled after the arnerican and british financial systems the claim that close ties between investmentoriented banks and industrial firms could help overcome the difficulties of relative backwardness dates back to gerschenkron 1962 who investigates european development rosovsky 1961 applies gerschenkron s framework to the analysis of japanese growth more recently aoki patrick and sheard 1994 hoshi kashyap and loveman 1994 and teranishi 1993 among others portray the close ties between finance and industry in japan as an important factor in the international competitiveness of modern japanese

financial liberalization credit constraints and collateral investment in the mexican manufacturing sector abstract we examine the impact of financial liberalization on fixed investment in mexico using establishment level data from the manufacturing sector in addition to analyzing changes in cash flow sensitivities an innovative approach explores the role of real estate as collateral and addresses a potential censoring problem the results suggest that financial constraints were eased for the smallest firms but not for larger ones however the importance of possessing real estate increased given banks reliance on collateral in their lending the results also provide microeconomic evidence consistent with the role attributed to financial accelerator mechanisms during lending booms and during post crisis recessions

contestable markets an uprising in the theory of industry structure comment a situation traditionally identified as conducive to imperfect competition is when average costs decline and the cheapest scale of production is large relative to the size of the market however some of the more recent literature on industrial organization has emphasized a supposed distinction between fixed costs of production and sunk costs of production a point frequently made is that while the possibility of sunk costs can create genuine barriers to entry pure fixed costs per se do not inhibit competitive market performance this approach finds its logical extreme in the norm or abstraction of perfect contestability perfect contestability is essentially a theory of the polar case of frictionless entry and exit as william baumol stated a contestable market is one into which entry is absolutely free and exit is absolutely costless p 3 certainly this is the most reasonable interpretation of a situation where potential entrants feel free to disregard an incumbent s price response suppose every potential and actual producer has access to the same technology in a perfectly contestable market there are no set up or shut down losses the main result is that even with declining average costs of production the incumbent firm does not dare to post a price higher than average cost price above cost invites being undercut by a hit and run shadow entrant capable of producing at the same flow rate and at identical unit cost during just the briefest instant of time i argue that this line of reasoning is misleading perfect contestability gets around the problem of increasing returns only by in effect assuming it away a hit and run technology makes the firm behave as if it is competitive in a market precisely because the convexity preconditions for competition are de facto being met in that market this comment shows that strictly speaking there is no such thing as a pure fixed cost unless there are sunk costs located somewhere in the relevant production technology all costs are variable as a matter of formal theory you cannot have a range of decreasing average cost without sunk costs presumably there is also an approximation theorem which states that when sunk costs are close to being negligible then average production costs are practically nondecreasing perfect contestability holds approximately in a market only to the extent that production costs for the market are approximately nondecreasing my discussion will be restricted to the familiar case of a single well defined homogeneous fully divisible commodity while more general approaches are possible for the sake of simplicity the following definition is used the average cost function a c y t describes say the minimum cost per unit of output produced at a uniform flow rate y throughout the time interval 0 t especially in applications to industrial organization theory it is essential to remember that cost functions are not generally timeless and that writing ac as a function of y alone can be dangerously vague behind the free entry and exit of a hitand run technology in a perfectly contestable market is the abstraction of no sunk costs investments are fully reversible because nothing is lost in setting up or shutting down production

the inefficiency of private adaptation to pollution in the presence of endogenous market structure the paper considers an industry where production costs rise due to pollution but where this effect can be partially off set by investing in adaptation as a private good the focus is not on external effects but industries where economies of scale are introduced from adapting to pollution the structure of the resulting oligopolistic market is endogenous since the level of adaptation is chosen by the firms the analysis of externalities usually disregards defensive or adaptation measures with a few exceptions that point to considerable complications the present debate on adaptation to climate change shows the importance of understanding defensive measures i show that the market failure caused by economies of scale leads to production costs above the social optimum i e to under adapation when pollution increases adaptation only increases if demand is price inelastic otherwise welfare loss from market failure decreases with pollution the total welfare loss is only convex if demand is price inelastic and the influence of pollution on production costs is stronger than the influence of adaptation concave welfare loss has crucial implications for abatement policies

contestability vs competition once more baumol willig and other advocates of contestability theory continue to urge the idea not only for its insights but also as a clear basis for many antitrust and regulatory decisions yet the limits of the theory remain the three key assumptions are extremely strict and two of them are in mutual conflict the theory is not robust to imperfections in order to displace effective competition with contestability baumol must adopt a sequence of implausible propositions which unfortunately have little analytical or empirical basis

strategic rate making in the context of dynamic ramsey pricing as a result of the public utilitie regulatory policies act of 1978 purpa state public utility commissions have begun to implement cost based rate setting procedures in order to rationalize energy choices made by utilities and utility customers this rationalization had been necessary in view of the increased competition characterizing the eletric utility industry taking these regulatory and competitive change as a point of departure we develop and implement an electricity rate setting model which is cost based which explicitly accounts for static and dynamic competitive pressures and which is welfare maximizing the model extends standard ramsey methods to include bothshort run andlong run price responses in the inverse elasticity rule we use the estimated model to evalute and design alternative rates our analysis takes a distincly strategic approach explicitly addressing competition from other fuels and the possibility of competitive bypass

contestability reconsidered the meaning of market exit costs abstract this paper analyses the main result of the contestable market approach namely that potential competition reaches its maximum power if market entry and exit is costless and newcomers can use the hit and run strategy different time lag structures are considered average cost pricing turns out to be no equilibrium if there are no market exit costs furthermore exit costs don t necessarily create a barrier to entry but may even strengthen the discipline arising from the threat of entry

the effect of bank credit on asset prices evidence from the japanese real estate boom during the 1980s bernanke bs 2001 am econ rev v91 p253 doi 10 1257 aer 91 2 253 cargill thomas 2000 financial policy cen gerlach s 2005 j bank financ v29 p461 doi 10 1016 j jbankfin 2004 05 015 hoshi t 2000 nber macroecon annu v14 p129 hoshi t 1993 4421 nber hoshi t 2001 monetary ec studies v19 p1 hutchison m 1997 political ec japanes ito t 1996 monetary ec studies v14 p143 ito t 2004 japans lost decade o p17 kindleberger c 1978 financial crises the kitagawa h 1994 financial dev japan p81 kiyotaki n 1997 j polit econ v105 p211 doi 10 1086 262072 peek j 2000 am econ rev v90 p30 doi 10 1257 aer 90 1 30 petersen ma 2002 j financ v57 p2533 doi 10 1111 1540 6261 00505 ueda k 2000 crisis change japane p59 ueda k 1994 japanese main bank s p89 weinstein de 1998 j financ v53 p635 doi 10 1111 0022 1082 254893

in praise of frank ramsey s contribution to the theory of taxation frank ramsey s brilliant 1927 paper modestly entitled a contribution to the theory of taxation is a landmark in the economics of public finance nearly a half century later through the work of diamond and mirrlees 1971 and mirrlees 1971 his paper can be thought of as launching the field of optimal taxation and revolutionising public finance ramsey f p 1927 a contribution to the theory of taxation economic journal vol 37 145 pp 47 61

potential competition actual competition and economic welfare though the origins of anti trust legislation at least in the united states undoubtedly lie in late nineteenth century populist sentiments its current intellectual foundations rest on modern welfare economics these intellectual foundations provide more than just rhetoric as courts have increasingly relied on the testimony of economists to interpret and reinterpret the inevitably vague language of the legislation the reliance on modern welfare economics is somewhat paradoxical for the assumptions underlying the fundamental theorem of welfare economics are peculiarly ill suited to deal with competition in the central area to which anti trust is applied the industrial sectors of modern economies these sectors are characterized by important non convexities which admittedly present inherent problems for competition the competition that does take place is as likely to take the form of product and r d competition rather than price competition product competition plays no role in the conventional welfare paradigm which assumes a complete set of commodities and it is not that arrow and debreu simply forgot to include technical change in their formulations the natural assumptions underlying the analysis of the production marketing and utilization of knowledge are basically inconsistent with those underlying the arrow debreu model invited paper european economic association meetings copenhagen august 1987 financtal support from the national science foundation and the hoover institution is gratefully acknowledged the presence of non convexittes in production is central in explaining why only a ftnite subset of the set of possible commodities is in fact produced techmcal change is characterized by non convexities in its production radner and stiglitz 1984 if technology exhibits say constant returns to scale at a fixed technology when inputs devoted to r d are included it exhibits non convexities the value or information may increuse with the scale of production while conventional theory focuses on markets for homogeneous commodities each piece of new knowledge must be dinerent from previously produced knowledge knowledge has many of the properties of public goods it being both dificult and undesirable to exclude markets for knowledge are at best imperfect and as we have argued

strategic choice of flexible production technologies and welfare implications this paper examines the market conditions under which firms would choose a more flexible production technology with respect to product design the authors use a two stage game in which firms choose between flexible and less flexible production technologies in the first stage and subsequently choose output they find that consumers would benefit from the introductions of flexible production technologies in their model the authors also find that the production technology game is a prisoner s dilemma when firms invest in flexible manufacturing systems they derive the conditions under which the resulting equilibria are efficient copyright 1990 by blackwell publishing ltd

why are child poverty rates higher in britain than in germany a longitudinal perspective we analyze why child poverty rates were much higher in britain than in western germany during the 1990s using a framework focusing on poverty transition rates child poverty exit rates were significantly lower and poverty entry rates significantly higher in britain we decompose these cross national differences into differences in the prevalence of trigger events changes in household composition household labor market attachment and labor earnings and differences in the chances of making a poverty transition conditional on experiencing a trigger event the latter are the most important in accounting for the cross national differences in poverty exit and entry rates