Essays in Product Market Competition

Abstract

The competitive environment of a firm shapes its financial policies. With the rise in the concentration of US industries, fewer listed firms, and reduced competition, questions about the effect of competition on firm behavior and policies are relevant and pertinent. In this research, I explore the effect of changes in competition on firm behavior. I do this in two settings.

First, I study if the product pricing effects of common ownership, when the same investors partially own two firms, are ubiquitous or if they vary based on the product market characteristics of the firm. I find that the anti-competitive effects of common ownership are present only in industries with similar products. Using a quasi-natural experiment, I find when firms with similar products experience an increase in common ownership, they have 3.2 percentage point higher industry-adjusted gross margin, reduce their R&D expenditures by 0.6 percentage point and have improved profitability. My findings show that common ownership worsens competition only when firms operate in relatively similar product spaces.

Second, along with my co-authors, I study how managerial traits affect firms’ responses to competitive shocks. Specifically, motivated by studies that show overconfident agents are more competitive, we test whether overconfident CEOs respond differently and perform better when competition increases. Using tariff reductions as exogenous shocks to competition and a tripled-difference specification on matched samples, we find that when competition increases, firms with overconfident CEOs slash their operating and gross profit margins, and increase advertising and research and development more intensively than rational CEOs do. Their actions lead to increased market share and value for their firms relative to firms led by rational CEOs. Our results imply that CEO overconfidence is beneficial when firms face increased competition.