Essays on consolidation and efficiency in network-based industries

Essays on Consolidation and Efficiency in Network-Based Industries deals with three examples of network-based industries—the physical branch network of commercial banking in Europe in 1998–1999, the turn-of-the-century railroad network in the US, and the physical branch network of commercial banking in Japan in 1998–1999. The three essays focus on: (1) identifying and measuring the cost efficiencies from increasing the utilization of a network and expanding its size; (2) determining the factors influencing the magnitude of network utilization and expansion; and (3) examining the implications of these efficiencies for managerial decision-making and for policymakers. The first and second essays develop a model for measuring cost efficiencies on the margin from undertaking more transactions within a network (economies of density) and from expanding the size of the network (economies of scale). The first and second essays find evidence in support of the hypothesis that cost efficiencies from increased network utilization and expansion are strongly impacted by firm size—larger firms (in this case banks) are more likely than smaller firms (banks) to have reached capacity within their physical branch networks (have exhausted economies of density) and are less likely to find cost efficiencies in further expanding their branch networks (have exhausted economies of scale). In the first essay, I find evidence supporting this hypothesis across the overall sample of European countries, as well as within each country. The second essay tests the hypothesis in contemporary Japan across traditionally different banking markets—the city bank market, the trust bank market, and the regional bank market—and within each market. I find evidence that supports the hypothesis for each type of bank, as well as across types. The third essay develops a model suggesting that users have the incentive to under-invest or under-use a network if it is formed by incomplete contracts between the constituent parties composing the network. I find evidence supporting this when I examine the ownership structures between the Great Northern Railroad, the Northern Pacific Railroad, and the Chicago, Burlington, and Quincy Railroad at the turn-of-the-century.