Handbook of Industrial Organization 

About: Handbook of Industrial Organization is an academic journal. The journal publishes majorly in the area(s): Market power & Oligopoly. It has an ISSN identifier of 1573-448X. Over the lifetime, 39 publications have been published receiving 11948 citations.

Chapter 18 Empirical studies of innovation and market structure

Abstract: Publisher Summary This chapter discusses the perceptible movement of empirical scholars from a narrow concern with the role of firm size and market concentration toward a broader consideration of the fundamental determinants of technical change in industry. Although tastes, technological opportunity, and appropriability conditions themselves are subject to change over time, particularly in response to radical innovations that alter the technological regime, these conditions are reasonably assumed to determine inter-industry differences in innovative activity over relatively long periods. Although a substantial body of descriptive evidence has begun to accumulate on the way the nature and effects of demand, opportunity, and appropriability differ across industries, the absence of suitable data constrains progress in many areas. It has been observed that much of the empirical understanding of innovation derives not from the estimation of econometric models but from the use of other empirical methods. Many of the most credible empirical regularities have been established not by estimating and testing elaborate optimization models with published data but by the painstaking collection of original data, usually in the form of responses to relatively simple questions.

Empirical studies of industries with market power

Abstract: Publisher Summary This chapter describes the econometric studies of market power in single markets and in groups of related markets. The recent increase in the number of such studies and substantial advances in the methods for carrying them out constitute a dramatic shift in the focus of empirical work in the industrial organization (IO) field. The chapter discusses time series data from single industries or on data from closely related markets. The new empirical industrial organization (NEIO) is clearly somewhat different than the previously dominant empirical method in the field, the structure–conduct–performance paradigm (SCPP). The chapter presents the formation and enforcement of tacitly collusive arrangements, the nature of noncooperative oligopoly interaction in the world, the degree of single-firm market power under product differentiation, and the size and determinants of the industry price-cost margin. It reviews the various empirical models of monopoly power and of oligopoly interaction and describes the theoretical and empirical arguments for why it is monopoly power that is being measured.

Chapter 14 The timing of innovation: Research, development, and diffusion

Abstract: Publisher Summary The analysis of the timing of innovation posits a particular innovation and examines the way the expected benefits, the cost of research and development, and interactions among competing firms combine to determine the pattern of expenditure across firms and over time, the date of introduction, and the identity of the innovating firm. In the case of a sequence of innovations, the expected lifetime of a given innovation and the pattern of technological leadership are also determined endogenously. Given that an innovation has been perfected, the extent and timing of its dissemination into use may be examined. This may depend upon a number of factors, including the existence of rival firms and institutions, which may facilitate or retard the dissemination of innovations. The chapter discusses the issues of innovation production in the context of symmetric noncooperative models. The chapter investigates the extent of dissemination of the innovation, where this dissemination is achieved through licensing.

Chapter 2 The theory of the firm

Abstract: Publisher Summary The theory of the firm has long posed a problem for economists. This chapter discusses the analytical models of the firm that go beyond the black-box conception of a production function. The firm is seen as a contract among a multitude of parties. The main hypothesis is that contractual designs, both implicit and explicit, are created to minimize transaction costs between specialized factors of production. This follows Coase's original hypothesis that institutions serve the purpose of facilitating exchange and can best be understood as optimal accommodations to contractual constraints rather than production constraints. There are three problems that need attention. A first step is to develop and apply techniques that deal with nonstandard problems, such as incomplete contracts, bounded rationality, and multi-lateral contracting. The second step ought to integrate observations from neighboring fields, such as sociology and psychology, in a consistent way into the theoretical apparatus. The third step will be to increase the evidence/theory ratio, which is currently very low in this field.

Coordination and Lock-In: Competition with Switching Costs and Network Effects

Abstract: Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power – over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such “competition for the market” or “life-cycle competition” can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct efficiency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers' and complementors' expectations hinge on non-efficiency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later “tips” to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another's existing customers, and so also discourage more aggressive entry. Because of these competitive effects, even inefficient incompatible competition is often more profitable than compatible competition, especially for dominant firms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favor thoughtfully pro-compatibility public policy.