competition, product differentiation
TRANSCRIPT
-
8/13/2019 Competition, Product Differentiation
1/16
Presenter :
Febri Rahadi 1007443
-
8/13/2019 Competition, Product Differentiation
2/16
Paper InfoBoard of Governors of the Federal ReserveSystem (U.S.) in its series Finance and
Economics Discussion Series with number2004-46.
Andrew Cohen (Federal Reserve Board ofGovernors) and Michael J. Mazzeo (KelloggSchool of Management NorthwesternUniversity, USA)
Keyword : Product Differentiation (One
Characteristic of Monopolistic Competition)
-
8/13/2019 Competition, Product Differentiation
3/16
The relationship between product quality andmarket concentration has long been ofinterest to both industrial organizationeconomists and regulators
particular concern is the potential for firmswith market power to reduce their productquality in order to save costs and maximize
their profits Relatively little research has examined the
effects of competition on nonprice outcomes
-
8/13/2019 Competition, Product Differentiation
4/16
A. Product Quality and Market Concentration Competition may provide incentives for a firm to
increase quality
Alternatively, quality could make markets more
concentrated Try to find evidence of a connection between fixed
investments in quality and local market structure byanalyzing branching activity in a cross-section ofrural banking markets
-
8/13/2019 Competition, Product Differentiation
5/16
B. Bank Branching- in order to operate, a bank must open at least
one branch while additional branches mayserve to overcome a firms capacity constraintor to expand its geographic coverage
- Examine how differences in institution typemay affect firms branching decisions
- Also measure product differentiation amongsingle and multimarket institutions as well asbanks and thrifts
-
8/13/2019 Competition, Product Differentiation
6/16
to understand the relationship between bankbranching decisions (our measure of product quality)and market structure :
Bi,m:number of branches that institution i has inmarket m,
Zmis : vector of market-level control variables, : vector of parameters to be estimated, the vector
Nm : indicates the number and institution types ofthe competitors firm i faces in its market, i,m : represents the unobservable component of the
firms branching decision
-
8/13/2019 Competition, Product Differentiation
7/16
Profit Function
Xm:vector of control variables for theprofit function
: vector of parameters, and
m :market-level profit unobservable
-
8/13/2019 Competition, Product Differentiation
8/16
Data on banks and their branch networks from1,763 non-MSA labor market areas (LMAs)
- Focus on smaller geographic markets
-
eliminated all urbanized areas (MSAs) andlarger rural areas (LMAs with more than100,000 residents)
Thrifts operating in each LMA and the number
of branches owned by each obtained from theOffice of Thrift Supervisions Branch OfficeSurvey
-
8/13/2019 Competition, Product Differentiation
9/16
-
8/13/2019 Competition, Product Differentiation
10/16
Approximately 59%of the firm/marketcombinations insample operate onlya single branch
including all theactive firms inapproximately20% of the marketsin sample.
-
8/13/2019 Competition, Product Differentiation
11/16
Explanatory variables contained in each stage of the estimation arebased on Authors intuition regarding which factors contribute to entry andbranching, respectively.
-
8/13/2019 Competition, Product Differentiation
12/16
S d B hi R i
-
8/13/2019 Competition, Product Differentiation
13/16
Second-stage Branching Regressions
- Strong NegativeCorrelation
- Significantly bias the
uncorrected results
-
8/13/2019 Competition, Product Differentiation
14/16
-
8/13/2019 Competition, Product Differentiation
15/16
Competition from traditional single-marketbanks and thrifts is associated with smallerbranching networks
Institutions (of all types) tend to have morebranches (higher quality) when they facemultimarket banks as their competitors
implication of recent deregulation and
suggests that submarketswithin retailbankingare very important for understandingcompetition in this industry.
-
8/13/2019 Competition, Product Differentiation
16/16
Failing to account for the endogeneity ofmarket structure would have led tosignificantly different conclusions
Within correlations between product qualityand market competition, the effects onconsumer welfare are ambiguous.