Competitive Pressure and Intertemporal Linkages: A New Definition and Theoretical Expansions

Based on the generalized user-revenue model constructed by Homma (2009, 2012, 2018, 2021), this paper clarifies the relation between competitive pressure and the efficient structure and quiet-life hypotheses, and examines the intertemporal linkages and long-term competitive pressure when the sufficient condition for competitive pressure holds for the long term. Given that the source of this competitive pressure is the possibility of a decrease in quasi-short-run profits, the essence of the pressure is the increase in dynamic cost efficiency driven by that possibility. Competitive pressure defined from this point of view comes into existence when the efficient structure and quiet-life hypotheses are accepted and the two hypotheses have opposing implications with respect to industrial organization policy. From this perspective, the existence of such pressure is desirable insofar as the extended generalized-Lerner index (EGLI) on the cost frontier decreases (i.e., the degree of competition on the cost frontier increases). Indeed, if no competitive pressure exists, then there is the possibility that accepting the efficient structure hypothesis is undesirable with regard to industrial organization policy. Furthermore, when the derived sufficient condition for competitive pressure holds for the long term, there are a linkage between current and future improvements in the dynamic cost efficiencies, a linkage between current and future decreases in the EGLIs on the cost frontier, and long-term competitive pressure (i.e., a linkage between a previous decrease in the EGLI on the cost frontier and future improvements in dynamic cost efficiency).