Showing papers in "The RAND Journal of Economics in 1990"
TL;DR: In this paper, the authors put forward patent counts weighted by citations as indicators of the value of innovations, thereby overcoming the limitations of simple counts, and found that simple patent counts are highly correlated with contemporaneous RD, however, the association is within afield over time rather than cross-sectional.
Abstract: The use ofpatents in economic research has been seriously hindered by the fact that patents vary enormously in their importance or value, and hence, simple patent counts cannot be informative about innovative output. The purpose of this article is to put forward patent counts weighted by citations as indicators of the value of innovations, thereby overcoming the limitations of simple counts. The empirical analysis of a particular innovation (Computed Tomography scanners) indeed shows a close association between citation-based patent indices and independent measures of the social value of innovations in that field. Moreover, the weighting scheme appears to be nonlinear (increasing) in the number of citations, implying that the informational content of citations rises at the margin. As in previous studies, simple patent counts are found to be highly correlated with contemporaneous RD however, here the association is within afield over time rather than cross-sectional.
2,765Â citations
TL;DR: In this paper, the effect of multimarket contact on the degree of cooperation that firms can sustain in settings of repeated competition was examined and conditions under which multimarkET contact facilitates collusion were identified.
Abstract: Traditional analyses of industrial behavior typically link the exercise of market power in an industry to internalfeatures such as demand conditions, concentration, and barriers-to-entry. Nevertheless, some economists have remained concerned that external factors, such as contact across markets, may also play a significant role in determining the level of competitiveness in any particular industry. In this article, we examine the effect of multimarket contact on the degree of cooperation that firms can sustain in settings of repeated competition. We isolate conditions under which multimarket contact facilitates collusion and show that these collusive gains are achieved through modes of behavior that have been identified in previous empirical studies of multimarketfirms.
1,286Â citations
TL;DR: Conditions under which the optimal patent policy involves infinitely-lived patents, with patent breadth adjusting to provide the required reward for innovation are provided.
Abstract: In providing rewards to innovators, there is a tradeoff between patent length and breadth. This article provides conditions under which the optimal patent policy involves infinitely-lived patents, with patent breadth adjusting to provide the required reward for innovation.
884Â citations
TL;DR: In this article, empirical regularities concerning firm growth rates and industry firm-size distributions have been developed by studying primarily mature industries and the primary purpose of this article is to bring together and extend empirical regularalities on the evolution of new industries and to use these regularities to gain further insight into the forces governing industry evolution.
Abstract: Several empirical regularities concerning firm growth rates and industry firm-size distributions have been developed by studying primarily mature industries. The primary purpose of this article is to bring together and extend empirical regularities on the evolution of new industries and to use these regularities to gain further insight into the forces governing industry evolution. To explain these regularities, a model is constructed which emphasizes how factors governing the early evolution of industries may shape their market structure at maturity. It stresses how chance events and exogenous factors that influence the number of potential entrants to the industry, the growth rate of incumbents, and the ease of imitation of industry leaders will influence the ultimate number and size distribution of firms in the industry.
793Â citations
TL;DR: In this article, the trade-off between a patent's length and its scope of coverage is explored, and it is shown under what conditions infinitely lived but very narrowly focused patents are the socially efficient way to reward innovation.
Abstract: I explore the trade-off between a patent's length (that is, its lifetime) and its width (that is, its scope of coverage). A wider patent generally reduces the distortion of consumers' choices between the patented brand of the product and unpatented, lower-priced varieties sold by competitors but also permits higher prices, which increase (relative to profits) the deadweight losses from consumers switching consumption out of the product class. I show under what conditions infinitely lived but very narrowly focused patents are the socially efficient way to reward innovation and under what conditions very short-lived but very broad patents are optimal.
691Â citations
TL;DR: In this paper, the authors quantify the costs of pollution controls by reporting the results of simulations of the growth of the U.S. economy with and without regulation and find that pollution abatement has emerged as a major claimant on the resources of the American economy.
Abstract: In this article we quantify the costs of pollution controls by reporting the results of simulations of the growth of the U.S. economy with and without regulation. For this purpose, we have constructed a detailed model of the economy that includes the determinants of long-term growth. We have also analyzed the interaction between industries in order to capture the full repercussions of environmental regulations. However, we have not attempted to assess the benefits resulting from a cleaner environment. We find that pollution abatement has emerged as a major claimant on the resources of the U.S. economy. The cost of emission controls is more than 10% of the total cost of government purchases of goods and services.
509Â citations
TL;DR: In this paper, conditions under which exclusive license contracts (linear and non-linear) and nonexclusive linear contracts are used to transfer technology are identified, and it is shown that a licensor signals her technology type with an output-based payment (or royalty) and may leave some of the rents with the licensee.
Abstract: Licensing contracts for newly patented innovations are observed to vary along several dimensions, including the form and size of the payment to the inventor (fixedfee versus some output-based royalty), the degree of exclusivity, and the division of rents. In this article, we show that theform of the contract can be explained by two problems in technology exchange: the superiority of a licensor's precontractual information about the economic value of the innovation and thefact that sharing this information with the licensee mayfacilitate imitation. We show that a licensor signals her technology type with an output-based payment (or royalty) and may leave some of the rents with the licensee. Conditions under which exclusive license contracts (linear and nonlinear) and nonexclusive linear contracts are used to transfer technology are identified.
504Â citations
TL;DR: In this article, the mean conduct parameter for each airline is estimated, and inferences are drawn about whether Bertrand, Cournot, or cartel models are supported by the data.
Abstract: In this empirical study, conduct parameters (also known as conjectural variations) are calculated for a set of duopoly airline routes. The mean conduct parameter for each airline is estimated, and inferences are drawn about whether Bertrand, Cournot or cartel models are supported by the data. Some sensitivity analysis is also conducted with respect to the underlying parameters. It is found that the Cournot model, rather than the Bertrand or cartel model, is most consistent with the data.
465Â citations
TL;DR: In this article, the authors compare weak and strong novelty requirements from the standpoint of social efficiency and ask how their answer depends on the rule that determines which firm gets a patent when two firms have patents pending on the same technology.
Abstract: The stringency of the novelty requirement in patent law affects the pace of innovation because it affects the amount of technical information that is disclosed among firms. It also affects ex ante profitability of research. We compare weak and strong novelty requirements from the standpoint of social efficiency. We ask how our answer depends on the rule that determines which firm gets a patent when two firms have patents pending on the same technology. The possible rules are "first-to-invent," which applies in the U.S., and "first-to-file," which applies everywhere else.
451Â citations
TL;DR: In markets where conditions are changing rapidly, the flow of information to consumers becomes a primary determinant of welfare as discussed by the authors, and consumers' food choices represent an important example of consumption decisions in a changing environment.
Abstract: In markets where conditions are changing rapidly, the flow of information to consumers becomes a primary determinant of welfare. Individuals’ food choices represent an important example of consumption decisions in a changing environment. The rapidly developing scientific evidence linking diet and health now indicates that individual dietary choices are important determinants of health; five of the top ten causes of death in the U.S. have been substantially linked to diet (U.S. Surgeon General 1988). Clearly, this evolving scientific information can improve welfare only if it is assimilated into consumers’ decision-making. Yet, our understanding of how economic forces determine whether information is quickly incorporated into decisions is quite limited.
318Â citations
TL;DR: In this article, the authors propose a monopolistic competition framework to analyze the effects of different disclosure rules used by trade associations on the incentives to share information and on the welfare of consumers, firms, and society.
Abstract: In this article I propose a monopolistic competition framework to analyze the effects of different disclosure rules used by trade associations on the incentives to share information and on the welfare of consumers, firms, and society. This framework is appropriate whenever a single firm cannot influence aggregate market magnitudes, and serves as a benchmark for the analysis of information-pooling agreements abstracting from strategic considerations. I report two main results. First, a policy of nonexclusionary disclosure destroys the incentives to share information, while exclusionary disclosure preserves them. Second, information sharing increases expected total surplus with Cournot competition but decreases it with Bertrand competition in the context of a Quadratic-Normal model with demand uncertainty.
TL;DR: This article argued that the least costly way to achieve a given expected fine is to set the fine as high as possible, presumably equal to the offender's wealth, and adjust its probability to achieve the desired expected fine.
Abstract: A standard assumption in the economic literature on crime and punishment is that
fines are costless transfers. Given this assumption, several economists have argued that it is
optimal to set the fine for engaging in a proscribed activity as high as possible.' The argument
is a simple one. Raising the probability of a fine is costly, since it requires devoting more
resources to monitoring and apprehending individuals. In contrast, raising the magnitude
of a fine is costless. Therefore, the least costly way to achieve a given expected fine is to set
the fine as high as possible, presumably equal to the offender's wealth, and adjust its probability
so that the desired expected fine is obtained.
TL;DR: In this paper, the effects of changes in the ownership or productive assets in a concentrated industry were studied using a Cournot model, and the authors identified those industry conditions and asset transactions for which equilibrium increases in concentration reliably indicate worsened industry performance.
Abstract: We study the effects of changes in the ownership or productive assets in a concentrated industry. Using a Cournot model, we analyze (1) investment by an oligopolist, (2) the sale of capital goods by one oligopolist to another, and (3) stock market purchases, whereby one firm acquires a partial interest in a rival firm. In each case, we determine how the change in asset ownership affects price, profits, industry performance, and measured concentration. We identify those industry conditions and asset transactions for which equilibrium increases in concentration reliably indicate worsened industry performance.
TL;DR: In this article, the authors examine licensing as a means of choosing the competitors which a patentee-monopolist will face in the period after the patent expires and find that choosing the competition was an important motivation of the licensor's behavior.
Abstract: This article examines licensing as a means of choosing the competitors which a patentee-monopolist will face in the period after the patent expires. The queue of entrants consists of two firms which differ in their relative 'strengths' as competitors (for example, by size or level of marginal cost). By structuring the industry to be composed of 'weak' competitors, the incumbent is able to prolong its dominant position in the industry after the patent expires. Examples are presented in which the evidence suggests that 'choosing the competition' was an important motivation of the licensor's behavior.
TL;DR: This article proposed a simple and natural reparameterization of such models in terms of empirically observable market characteristics, thereby generating testable predictions about the relationship between market size and market structure (concentration).
Abstract: Models of (horizontal) product differentiation generally admit many equilibria. These include concentrated equilibria, in which few firms each offer many products, andfragmented equilibria, in which many firms each offer one product. Since these outcomes depend in a delicate way on features of the models that are hard to identify or proxy empirically, these models may seem empirically empty in regard to predictions about industrial structure. This article proposes a simple and natural reparameterization of such models in terms of empirically observable market characteristics, thereby generating testable predictions about the relationship between market size and market structure (concentration).
TL;DR: In this paper, the authors extended their previous work on price adjustment in longterm coal contracts to cover a period in which the nominal market prices for coal were below the prices specified in the preexisting long-term contracts.
Abstract: This article extends my previous work on price adjustment in long-term coal contracts to cover a period in which the nominal market prices for coal were below the prices specified in the preexisting long-term contracts. Two related sets of questions are explored. First, did actual transactions prices for coal delivered pursuant to old contracts follow contractual pricing formulas, leading to higher rather than lower prices, or did they adapt quickly to changing market conditions? Second, what were the relative roles offormal contractual provisions, voluntary renegotiation, and breach of contractual promises in determining actual transactions prices, quantities, and the durability of contractual relations. It appears that actual transactions prices for coal delivered pursuant to old contracts were rigid downward, following written contractual provisions rather than changes in current market values. Changing economic conditions led to an increase in renegotiation, breach, and litigation, but the vast majority of existing long-term contracts endured through the market downturn without major changes in prices or quantities from those previously agreed to by contract. The threat of legal sanctions appears to have played an important role in sustaining contractual promises.
TL;DR: In this paper, the authors evaluate pension asset reversions as a source of takeover gains and find that the reversions can on average explain approximately 11% of the takeover premium in cases where they actually occur.
Abstract: This article evaluates pension asset reversions as a source of takeover gains. In our sample of 413 takeovers, pension funds were reverted by 15.1% of acquirers in the two years following hostile takeovers compared to 8.4% in the two years following friendly takeovers. Reversions following takeovers tend to occur in unit-benefit plans, where the potential for wealth transfer is the greatest. These results are consistent with the view that hostile takeovers breach implicit contracts between firms and employees. We estimate that the reversions can on average explain approximately 11% of the takeover premium in cases where they actually occur. Reversions are too small to be the sole, or even dominant, source of takeover gains.
TL;DR: In this article, the highly differential impacts of FDA regulations on pharmaceutical firms of various sizes (where size is measured as scale of R&D expenditures) were estimated using the method of maximum quasi-likelihoods using productivity trends of the United Kingdom as a control to isolate FDA regulatory effects in the United States.
Abstract: This article estimates the highly differential impacts of FDA regulations on pharmaceutical firms of various sizes (where size is measured as scale of R&D expenditures). Estimation is performed using the method of maximum quasi-likelihoods, using productivity trends of the United Kingdom as a control to isolate FDA regulatory effects in the United States. It is shown that smaller U.S. pharmaceutical firms suffered devastating reductions in research productivity because of FDA regulations. In contrast, the largest U.S. pharmaceutical firms apparently benefited from regulation, as sales gains due to reduced competition more than offset their quite moderate declines in research productivity.
TL;DR: In this article, the authors consider the care choice of a potentially bankrupt injurer when care is pecuniary and the legal system is characterized by strict liability, and they show that such an injurer may take too little or too much care, and that neither injurer care nor victim welfare is necessarily increasing in injurer wealth when injurers behave optimally.
Abstract: This article considers the care choice of a potentially bankrupt injurer when care is pecuniary and the legal system is characterized by strict liability. I show, contrary to previous results, that such an injurer may take too little or too much care, and that neither injurer care nor victim welfare is necessarily increasing in injurer wealth when injurers behave optimally. Analysis of an "expected cost function" demonstrates that injurer expected costs are a concave and increasing function of injurer assets, a result suggesting applications to the study of vertical relationships and markets for agents.
TL;DR: In this article, the authors proposed to adopt antitakeover measures to enable the shareholders of a target firm to increase their share of any synergy gains expected to result from combining their firm with a bidder.
Abstract: Adopting antitakeover measures can enable the shareholders of a targetfirm to increase their share of any synergy gains expected to result from combining their firm with a bidder. Adopting such measures enhances the bargaining power of the target's manager, who will be a tougher bargainer than the nonmanagerial shareholders will, owing to his expected loss of his job following the target's acquisition. If the manager's expected loss of utility is very large, targetfirm shareholders may maximize their takeover-related gain by both adopting antitakeover measures and awarding the manager a golden parachute of the optimal size.
TL;DR: This paper examined the sequence of divestment in 30 chemical products and found that small plants had higher rates of closure and most exiting firms were small, while large multi-plant firms were more likely to close individual plants.
Abstract: Data on 30 chemical products are used to examine the sequence of divestment in declining industries. Small firms and plants might be expected to close first, given lack of scale economies. However, recent theories suggest that large producers may have greater incentives to exit or cut capacity. Both predictions receive some empirical support. Small plants had higher rates of closure, and most exiting firms were small. Holding the influence of plant size constant, large multiplant firms were more likely to close individual plants.
TL;DR: In this article, the authors assess the impact of U.K. Department of Trade investigations into the affairs of a specific company have sometimes been critical of the work done by its auditors and reporting accountants.
Abstract: In recent years U.K. Department of Trade investigations into the affairs of a specific company have sometimes been critical of the work done by its auditors and reporting accountants. This article assesses the impact of this criticism on the auditor's reputation. In particular, it examines the stock price performance of the auditor's listed clients. The results show a small wealth loss for the audit clients. The article also examines the impact of the Department of Trade criticism on an audit firm's number of listed clients and its future audit fees. Compared to a control group, the criticized auditors appear to suffer a small loss in market share based on number of listed clients and on audit fees. The evidence suggests that criticized auditors incurred economic losses from the damage to their reputations. This is consistent with models of reputation advanced in the industrial organization literature.
TL;DR: In this paper, the authors present empirical evidence concerning the value offranchise bidding competition as a means of controlling natural monopoly behavior in the cable television industry, using data collected in a survey of local government officials in cabled communities throughout the continental United States.
Abstract: This article presents empirical evidence concerning the value offranchise bidding competition as a means of controlling natural monopoly behavior. The analysis focuses on the cable television industry, using data collected in a survey of local government officials in cabled communities throughout the continental United States. One important potential problem raised by critics offranchise bidding is the ability offranchise winners to engage in ex post opportunistic behavior by reneging on the promises that they made in order to win the franchise contract. The results of my analysis suggest that although franchise competition does leadfirms to engage in some degree of opportunistic behavior, the extent of opportunism is not severe. Furthermore, reputation effects appear to play a role in constraining firm behavior, while rate regulation actually seems to exacerbate ex post behavioral problems.
TL;DR: In this paper, the authors provide estimates of long-run response to a nonexperimental residential TOU rate offered by Duke Power, and find that customer response increases over time in a manner that enhances the ability of TOU rates to reduce system peak.
Abstract: Modifications in demand due to time-of-use (TOU) pricing have potential to improve the efficiency of electric power supply. With long lead times for plant construction, utility planners need long-run estimates of response to TOU rates. Existing evidence is primarily drawn from short-run TOU experiments. We provide estimates of long-run response to a nonexperimental residential TOU rate offered by Duke Power. The rate contains a demand charge applied to the maximum rate of energy consumption during the peak period. We find that customer response increases over time in a manner that enhances the ability of TOU rates to reduce system peak.
TL;DR: In this paper, the authors examine the legal rules that govern the interpretation of standardized form contracts and show that the traditional common-law rule, which binds an assenting recipient of a form contract to fine-print terms he has not read, has little effect in encouraging parties to read contracts, contrary to the conventional wisdom among lawyers.
Abstract: This article examines the legal rules that govern the interpretation of standardized form contracts. Different legal rules induce different bargaining games between buyers and sellers, and they can influence the efficiency of exchange when communication is costly. The traditional common-law rule, which binds an assenting recipient of a form contract to fine-print terms he has not read, has little effect in encouraging parties to read contracts, contrary to the conventional wisdom among lawyers. Instead, there is little practical difference between a rule that nominally holds the drafter of a form contract responsible for communicating its terms and one that holds the receiving party responsible. Moreover, the traditional rule may be Pareto inferior to a rule providing presumptive warranties when negotiation is costly.
TL;DR: The 1989 Cable Act eliminated most price regulation of cable television operators, including the right of municipalities to enforce price terms in franchise agreements, and profits appeared to have increased in areas where the competition from broadcast television was less severe as mentioned in this paper.
Abstract: The 1989 Cable Act eliminated most price regulation of cable television operators, including the right of municipalities to enforce price terms in franchise agreements. Deregulation was justified, at least partially, by the contention that competition from other entertainment media eliminated any market power of cable franchises. We examine the value at sale of existing cable systems before and after deregulation. Assuming that this value represents the expected present value of future profits, deregulation had the predicted negligible effect on profits in cities with significant broadcast competition. However, profits appear to have increased in areas where the competition from broadcast television was less severe. We explore several explanations for this increase and conclude that significant market power is the most plausible explanation.
TL;DR: In this paper, the authors present a theoretical model of the competition between two duopolists in a market that undergoes a life cycle of growth and eventual decline, where firms in this market have the option of exit and reentry.
Abstract: This article presents a theoretical model of the rivalry between two firms in a market that undergoes a life cycle of growth and eventual decline. Firms in this market have the option of exit and reentry. In the equilibrium for the growth phase, high entry costs can act like high exit costs, thereby conveying a commitment advantage. For some parameter configurations, this advantage is sufficient to enable a high costfirm to preempt its lower cost rival. During the decline phase, the smaller duopolist is able to outlast its rival, provided that the smaller firm's reentry costs are positive.
TL;DR: In this article, the authors proposed several modifications to the Vogelsang and Finsinger price adjustment scheme to improve its performance and broaden its applicability, including the inclusion of a monopoly franchise market and the firm's past prices and earnings in the price adjustment constraints.
Abstract: The regulatory price-adjustment process originally proposed by Vogelsang and Finsinger has been shown to be vulnerable to strategic manipulation by the regulated firm. This article proposes several modifications to that scheme which improve its performance and broaden its applicability. Inclusion of a monopoly franchise market and the firm's past prices and earnings in the price-adjustment constraints are shown to ensure efficient production by the firm and convergence to Ramsey prices regardless of the firm's cost structure.
TL;DR: In this paper, a voting procedure was developed in which the unique element in the core is also the unique outcome when a Nash equilibrium in undominated strategies for the whole game induces a Nash equilibria for every subgame.
Abstract: In past experiments, committees voting under majority rule have often failed to choose the Condorcet alternative (the core). Since this failure of theory might be due to flaws in experimental design, we developed a voting procedure in which the unique element in the core is also the unique outcome when a Nash equilibrium in undominated strategies for the whole game induces a Nash equilibrium in undominated strategies for every subgame. Nevertheless, our committees frequently chose other alternatives. To explain these results, we formulated a new theory that takes account of threshold effects and identifies a "selection set" predicted to contain the committee's choice. The revised theory performs well both in our experiments and in past experiments.