Showing papers in "Journal of Industrial Economics in 2010"
TL;DR: In this paper, the authors construct a panel of eBay seller histories and examine the importance of eBay's reputation mechanism, finding that when a seller first receives negative feedback, his weekly sales rate drops from a positive 7% to a negative 7%; subsequent negative feedback ratings arrive 25% more rapidly than the first one and don't have nearly as much impact as the first.
Abstract: We construct a panel of eBay seller histories and examine the importance of eBay’s reputation mechanism. We find that, when a seller first receives negative feedback, his weekly sales rate drops from a positive 7% to a negative 7%; subsequent negative feedback ratings arrive 25% more rapidly than the first one and don’t have nearly as much impact as the first one. We also find that a seller is more likely to exit the lower his reputation is; and that, just before exiting, sellers receive more negative feedback than their lifetime average. We consider a series of theoretical models and measure them against these empirical results. Regardless of which theoretical model best explains the data, an important conclusion of our paper is that eBay’s reputation system gives way to noticeable strategic responses from both buyers and sellers.
474 citations
TL;DR: This article developed a model of this "make-or-buy" choice that highlights the trade-off between productive efficiency and the costs of contract administration, and identified a range of service and city characteristics as significant determinants of contracting decisions.
Abstract: Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this "make-or-buy" choice that highlights the trade-off between productive efficiency and the costs of contract administration. We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions. Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services.
417 citations
TL;DR: The authors analyzes the effects of tying on market competition and social welfare in two-sided markets when economic agents can engage in multi-homing by participating in multiple platforms to reap maximal network benefits, showing that tying induces more consumers to multi-home and makes platform-specific exclusive content available to more consumers, which is beneficial to content providers.
Abstract: This paper analyzes the effects of tying on market competition and social welfare in two-sided markets when economic agents can engage in multi-homing by participating in multiple platforms to reap maximal network benefits. The model shows that tying induces more consumers to multi-home and makes platform-specific exclusive content available to more consumers, which is beneficial to content providers. As a result, tying can be welfare-enhancing if multi-homing is allowed, even in cases where its welfare impacts are negative in the absence of multi-homing. The analysis thus can have important implications for recent antitrust cases in industries where multi-homing is prevalent.
258 citations
TL;DR: This article showed that the quality of products in restaurants and daily newspapers increases with market size, but the market does not offer much additional variety as it grows large, consistent with IO theories of endogenous product quality and with theories that emphasize the consumption advantages of cities.
Abstract: Do larger markets offer better products? The question has implications for theories of cities and theories of market organization. We document that in the restaurant industry, where quality is produced largely with variable costs, the range of qualities on offer increases in market size. In daily newspapers, where quality is produced with fixed costs, the average quality of products increases with market size, but the market does not offer much additional variety as it grows large. These results are consistent with IO theories of endogenous product quality and with theories that emphasize the consumption advantages of cities.
157 citations
TL;DR: In this paper, the authors construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions.
Abstract: Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this ‘make-or-buy’ choice that highlights the trade-off between productive efficiency and the costs of contract administration. We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions. Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services.
119 citations
TL;DR: In this article, the authors test the theories empirically using data on wholesale prices for antibiotics sold through various distribution channels (chain and independent drugstores, hospitals, HMOs) in the U.S. during the 1990s.
Abstract: There are a number of theories in the industrial organization literature explaining the conventional wisdom that larger buyers may have more "countervailing power" than small buyers, in that they receive lower prices from suppliers. We test the theories empirically using data on wholesale prices for antibiotics sold through various distribution channels—chain and independent drugstores, hospitals, HMOs—in the U.S. during the 1990s. Price discounts depend more on the ability to substitute among alternative suppliers than on sheer buyer size. In particular, hospitals and HMOs, which can use restrictive formularies to enhance their substitution opportunities beyond those available for drugstores, obtain substantially lower prices. Chain drugstores only receive a small size discount relative to independents, at most two percent on average, and then only for products for which drugstores have some substitution opportunities (i.e., not for on-patent branded drugs). Our findings are roughly consistent with collusion models of countervailing power and inconsistent with bargaining models and have implications for recent government proposals to form purchasing alliances to reduce prescription costs.
119 citations
TL;DR: In this article, the authors analyze the effect of interbrand and intrabrand competition in a context where rival manufacturers distribute their products through the same competing retailers and show that the impact on prices depends on the extent of potential competition at either level as well as on the parties' influence in determining the terms of the contracts.
Abstract: Dampening of interbrand as well intrabrand competition is often advanced to justify per se illegality of RPM. We analyze this argument in a context where rival manufacturers distribute their products through the same competing retailers. We show that RPM indeed limits the exercise of competition at both levels and can generate industry-wide monopoly pricing. The impact on prices depends on the extent of potential competition at either level as well as on the parties' influence in determining the terms of the contracts. Our analysis sheds a new light on ongoing legal developments and is supported by recent empirical studies.
111 citations
TL;DR: In this paper, the authors analyzed the gain in pricing power that a firm achieves by merging with a potential competitor in its market using pricing data for the merger of USAir and Piedmont, and found that prices rose by 5.0 to 6.0 per cent on routes that one carrier served and the other was a potential entrant.
Abstract: This paper analyzes the gain in pricing power that a firm achieves by merging with a potential competitor in its market. Using pricing data for the merger of USAir and Piedmont, empirical analysis finds that prices rose by 5.0 to 6.0 per cent on routes that one carrier served and the other was a potential entrant. This was more than half the increase on routes where the two carriers had been direct competitors. Other important factors included carrier size, market concentration, incumbent's identity and the potential entrant's presence at one or both endpoints.
81 citations
TL;DR: In this paper, the authors studied the relationship between the length of patent review and the importance of inventions and found that more important innovations would be approved more quickly and that the approval delay is likely to decrease as an industry moves from the early stages of an innovation cycle to later stages.
Abstract: We study the relationship between the length of patent review and the importance of inventions. We build a simple model of the U.S. patent review process. Among the model predictions are that, controlling for a patent's position in a new technology cycle, more important innovations would be approved more quickly. Also, the approval delay is likely to decrease as an industry moves from the early stages of an innovation cycle to later stages. These predictions are in line with the evidence we obtain from a data set on U.S. patents granted in the field of genetically modified crops from 1983 to 1999. We also show that failing to account for the innovation lifecycle - as previous studies have done - is likely to bias upwards the estimates of the relationship between delay and importance. © 2010 The Authors. Journal compilation © 2010 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.
79 citations
TL;DR: In this paper, the role of structural remedies in merger control in a Cournot setting was studied and it was shown that if mergers do not involve all firms in the industry, then merger remedies help the AA to increase consumer surplus only if assets are divested to competitors already in the market.
Abstract: This paper studies the role of structural remedies in merger control in a Cournot setting where (endogenous) mergers are motivated by prospective efficiency gains and must be submitted to an Antitrust Authority (AA) which might require partial divestiture for approval. From a merger policy perspective, this paper's main contribution is two-fold. First, it shows that if mergers do not involve all firms in the industry, then merger remedies help the AA to increase consumer surplus only if assets are divested to competitors already in the market. Second, it presents a model which clarifies that there can only exist social costs to ‘over-fixing’ the anticompetitive effects of a merger if merger review policy treats mergers as one-time events. When a more dynamic view is taken of sequential merger review, then there can never be an ‘over-fixing’ problem. In this case, however, remedies are shown to be needed to make myopic merger review optimal.
71 citations
TL;DR: In this paper, the authors provide evidence on organizational structure and performance at bank holding companies (BHC's), and find that BHC's with many subsidiaries are less profitable and have lower q ratios than similar BHCs with fewer subsidiaries.
Abstract: We provide evidence on organizational structure and performance at bank holding companies (BHC's). First, we show that a BHC's member banks benefit from access to internal capital markets. Second, we ask if these benefits are best realized within loosely structured, decentralized organizations or more consolidated, centralized firms. We find that BHC's with many subsidiaries are less profitable and have lower q ratios than similar BHC's with fewer subsidiaries. However, because we study multi-unit firms in a single industry, our results suggest that the diversification discount reported in the corporate finance literature reflects not only industry diversification, but also organizational structure.
TL;DR: In this paper, the authors show that age and size affect growth and survival even after controlling for chain characteristics and unobserved chain-specific efficiency, and that chain size increases rather than decreases exit among young chains, and chains converge in size over time.
Abstract: Using data on franchised chains, which are the type of single-product entities emphasized in industry dynamics models, we show that age and size affect growth and survival even after controlling for chain characteristics and unobserved chain-specific efficiency. This implies that age and size affect firm growth and survival for reasons other than those emphasized in learning-type models. We also find that several chain characteristics affect growth and survival directly, and thus controlling for firm characteristics is important. Finally, we find that chain size increases rather than decreases exit among young chains, and chains converge in size over time.
TL;DR: In this paper, the authors consider the survival of new firms in Canadian manufacturing from a financial perspective, using a unique data set, and quantifying the effect of financial frictions in determining post entry performance of firms.
Abstract: Recent theories of industry dynamics emphasize the role of financial frictions in determining post entry performance of firms. Testing these theories has been dicult because of the lack of financial data on the small, young and private firms. Using a unique data set, this paper considers the survival of new firm in Canadian manufacturing from a financial perspective. Duration analysis quantifies the eects of firm,
TL;DR: The incentives to invest in product security are investigated by investigating how a decline in the number of vulnerabilities and an increase in the probability that the firm will identify vulnerabilities ex-post (before hackers) affect disclosure policy, price and profits.
Abstract: Software security is a major concern for vendors, consumers and regulators. When vulnerabilities are discovered after the software has been sold to consumers, the firms face a dilemma. A policy of disclosing vulnerabilities and issuing updates protects only consumers who install updates, while the disclosure itself facilitates reverse engineering of the vulnerability by hackers. The paper considers a firm that sells software which is subject to potential security breaches and derives the conditions under which a firm would disclose vulnerabilities. It examines the effect of a regulatory policy that requires mandatory disclosure of vulnerabilities and a ‘bug bounty’ program.
TL;DR: This article revisited third-degree price discrimination when input buyers serve multiple product markets, and showed that price discrimination can provide welfare gains by shifting output to less competitive markets when lower demand markets also have less competition.
Abstract: This paper revisits third-degree price discrimination when input buyers serve multiple product markets. Such circumstances are prevalent since buyers often use the same input to produce different outputs, and even homogenous outputs are routinely sold through different locations. The typical view is that price discrimination stifles efficiency (and welfare) by resulting in price concessions to less efficient firms. When buyers serve multiple markets, price discrimination leads to price breaks for firms in markets with lower demand. When lower demand markets also have less competition, price discrimination can provide welfare gains by shifting output to less competitive markets.
TL;DR: In this paper, a market analysis of the Chinese automobile industry under imperfect competition was conducted using market-level data on quantities, prices' and automobile characteristics from 1995 to 2001, using a nested multinomial logit model to ascertain the demand features of China's automobile market.
Abstract: In this study, using market-level data on quantities, prices' and automobile characteristics from 1995 to 2001, we conduct a market analysis of the Chinese automobile industry under imperfect competition. On the demand side, we apply a nested multinomial logit model to the national market share data in order to ascertain the demand features of China's automobile market. On the supply side, we assume Bertrand behavior to uncover the markups set by automobile manufacturers. Our empirical results suggest that some large automobile manufacturers set high markups, indicating their strong market power in China's automobile market. However, their declining markups in the late 1990's imply a reduction in market control by the major producers.
TL;DR: In this article, the effect of uncertainty on the investment decisions of petroleum refineries in the US was investigated using hazard models from commodity futures market and data on actual capacity changes to measure investment episodes, showing that a small number of investment spikes account for a large fraction of the change in industry capacity.
Abstract: This paper investigates the effect of uncertainty on the investment decisions of petroleum refineries in the US We construct uncertainty measures from commodity futures market and use data on actual capacity changes to measure investment episodes Capacity changes in US refineries occur infrequently and a small number of investment spikes account for a large fraction of the change in industry capacity Given the lumpy nature of investment adjustment in this industry, we empirically model the investment process using hazard models An increase in uncertainty decreases the probability a refinery adjusts its capacity The results are robust to various investment thresholds Our findings lend support to theories that emphasize the role of irreversibility in investment decisions
TL;DR: In this article, the authors show that price-matching guarantees and most-favored-customer clauses complement each other when offered unilaterally by a single firm and can lead to higher prices than either one could have facilitated by itself.
Abstract: Many retailers promise that they will not be undersold by rivals and extend their promise to include their own future prices. That is, many retailers combine elements of both price-matching guarantees and retroactive most-favored-customer clauses. This is puzzling because the extant literature has shown that each practice independently has the potential to facilitate supracompetitive prices, and thus one might think the two practices are substitutes. In this paper, we show that price-matching guarantees and most-favored-customer clauses complement each other when offered unilaterally by a single firm and can lead to higher prices than either one could have facilitated by itself.
TL;DR: In this article, the authors examine the impact of vertical industry structure on upstream process innovation and find that vertical integration generally enhances innovation under downstream Cournot competition, but can diminish it under downstream Bertrand competition.
Abstract: We examine the impact of vertical industry structure on upstream process innovation. We find that vertical integration (VI) generally enhances innovation under downstream Cournot competition, but can diminish innovation under downstream Bertrand competition. We also find that under Bertrand competition, VI can increase innovation when the direct incentives for innovation are limited, but can reduce innovation when the direct incentives are pronounced.
TL;DR: In contrast with the case of more intensive copyright enforcement, more extensive copyright enforcement over some range can increase the incentive to generate intellectual property while also reducing the loss to consumers from monopoly power as mentioned in this paper.
Abstract: When copyright enforcement is targeted at high-value buyers such as corporate and government users, the copyright holder charges super-monopoly prices, thereby encouraging low-value buyers to switch to inferior pirated copies. We show that enlarging the copyright holder's captive market through more extensive copyright enforcement reduces prices toward the monopoly level, increases sales of legitimate copies and can increase consumer surplus. Therefore, in contrast with the case of more intensive copyright enforcement, more extensive copyright enforcement over some range can increase the incentive to generate intellectual property while also reducing the loss to consumers from monopoly power.
TL;DR: In this paper, international patent application decisions of nine agricultural biotechnology firms from 1990-2000 in Australia, Brazil, Canada, China, the European Patent Office, Japan and South Africa were examined.
Abstract: This paper examines international patent application decisions of nine agricultural biotechnology firms from 1990–2000 in Australia, Brazil, Canada, China, the European Patent Office, Japan and South Africa. The data reveal a low frequency of international applications despite an initial United States' application, indicating very low values for patents abroad. The results indicate that invention quality plays an important role in firms' decisions to patent abroad and that a single international application is a good predictor of multiple international applications. Further, significant country fixed effects suggest wide differences in business climates and patent enforcement among countries.
TL;DR: In this article, the authors extend the results of Farrell and Shapiro [1990a] and show that, in the absence of technological synergies, a merger is highly unlikely to benefit consumers, even if it is subjected to appropriate structural remedies.
Abstract: Competition authorities sometimes require that firms divest some of their assets to rivals in order to allow a merger to take place. This paper extends the results of Farrell and Shapiro [1990a] and shows that, in the absence of technological synergies, a merger is highly unlikely to benefit consumers, even if it is subjected to appropriate structural remedies. For instance, a merger may ultimately lead to a lower price only if at least two different firms acquire the divested assets, and if the merging parties had relatively important pre-merger market shares.
TL;DR: In this paper, the authors consider the case of vertically differentiated products and show that Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high-quality rival.
Abstract: In the case of vertically differentiated products, Bertrand competition at the retail level does not prevent an incumbent upstream firm from using exclusivity contracts to deter the entry of a high-quality rival. Indeed, because of differentiation, the incumbent's inferior product is not eliminated upon entry. Due to the resulting competitive pressure, a retailer who considers rejecting the exclusivity contract expects to earn much less than the incumbent's monopoly rents. Thus, in equilibrium, the incumbent can always offer high enough an upfront payment to induce all retailers to sign the contract and achieve exclusion. This is true under linear pricing for intermediate levels of entry costs, and with two-part tariffs even in the absence of entry costs. Copyright 2010 The Author. The Journal of Industrial Economics 2010 Blackwell Publishing Ltd. and the Editorial Board of The Journal of Industrial Economics.
TL;DR: In this paper, the authors analyze licensing contracts between informed innovators and developers exerting profit-increasing effort and show that the best innovators signal themselves by taking more royalties even if it reduces the developers' share of returns and their incentives.
Abstract: We analyze licensing contracts between informed innovators and developers exerting profit-increasing effort. Those contracts must simultaneously induce innovators to convey information on the value of their ideas, while inducing developers to exert effort and protecting the innovators' intellectual property rights. We show that the best innovators signal themselves by taking more royalties even if it reduces the developers' share of returns and their incentives. Moreover, royalties are more likely to be used when property rights are easy to enforce and pre-contractual evidence on innovation quality is hard to produce.
TL;DR: In this article, the authors provide measures of the degree of understatement of the true harm when traditional approaches are used and show how the size of the error depends on a degree of competitiveness of downstream markets.
Abstract: Legal actions by direct and indirect purchasers to recover damages from price-fixing, common in the United States for years, are now appearing in a number of other countries. Traditional measures of damages are flawed as measures of the true harm suffered and will often significantly understate that true harm. This paper provides measures of the degree of understatement of the true harm when traditional approaches are used and shows how the size of the error depends on the degree of competitiveness of downstream markets. The paper also provides measures of distribution of the true harm between direct and indirect purchasers.
TL;DR: In this article, the authors investigate how procurement costs are affected by the information that buyers reveal about sellers' behavior, in a setting with two sequentially offered contracts for which a seller's privately known costs are identical.
Abstract: I investigate how procurement costs are affected by the information that buyers reveal about sellers' behavior, in a setting with two sequentially offered contracts for which a seller's privately known costs are identical. Expected prices are lowest when sellers learn nothing until all contracts are allocated, are higher when they learn all sellers' price offers as contracts are allocated, and typically are even higher when they learn only the winner's identity, or the winner's identity and price offer. The results suggest that buyers engaged in repeated procurement may pay less by revealing minimal or extensive information, rather than an intermediate amount.
TL;DR: In this paper, the authors study the relationship between the precision of information about the performance of an agent in a market, and the incentives this agent has for exerting effort to produce high quality.
Abstract: We study the relationship between the precision of information about the performance of an agent in a market, and the incentives this agent has for exerting effort to produce high quality. We show that this relationship can be nonmonotonic. There exists an efficient plausible equilibrium that induces a threshold beyond which any further improvement in the precision of information weakens the agent’s incentive to produce high quality. Accordingly, both very accurate and very inaccurate signals about the agent’s performance may destroy its incentive to exert effort. A few applications of this result are discussed.
TL;DR: In this article, sellers simultaneously choose prices and advertising strategies, and the market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium with significant seller market power.
Abstract: In this experiment, sellers simultaneously choose prices and advertising strategies. Buyers either purchase at an advertised price or search sequentially for other prices. In the unique symmetric equilibrium, sellers charge a high unadvertised price or advertise a price chosen from a lower interval. Increases in search or advertising costs raise equilibrium prices and affect equilibrium advertising intensity. Empirical results are consistent with most comparative static predictions. Sellers, however, price much lower and advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium with significant seller market power.
TL;DR: In this paper, the authors analyze the implications of imperfect appropriability and strategic disclosure for the firms' profits and the probability of innovation, and show that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers.
Abstract: The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free-rider effect in the competition for the innovation that countervails the familiar business-stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms' profits and the probability of innovation.
TL;DR: In this article, the authors consider a few large firms and a competitive fringe of many small suppliers choosing quantities in an infinite-horizon setting subject to demand shocks and show that a collusive agreement among the large firms may not only bring an output contraction but also an output expansion (relative to the non-collusive output level) the latter occurs during booms and is due to the strategic substitutability of quantities.
Abstract: Following the structure of many commodity markets, we consider a few large firms and a competitive fringe of many small suppliers choosing quantities in an infinite-horizon setting subject to demand shocks We show that a collusive agreement among the large firms may not only bring an output contraction but also an output expansion (relative to the non-collusive output level) The latter occurs during booms and is due to the strategic substitutability of quantities (we will never observe an output-expanding collusion in a price-setting game) We also find that the time at which maximal collusion is most difficult to sustain can be either at booms or recessions