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Showing papers in "The RAND Journal of Economics in 2001"


Journal ArticleDOI
TL;DR: In this paper, the authors examine the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation and find that semiconductor firms do not rely heavily on patents to appropriate returns to R&D.
Abstract: We examine the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation. Recent survey evidence suggests that semiconductor firms do not rely heavily on patents to appropriate returns to R&D. Yet the propensity of semiconductor firms to patent has risen dramatically since the mid1980s. We explore this apparent paradox by conducting interviews with industry representatives and analyzing the patenting behavior of 95 U.S. semiconductor firms during 1979‐1995. The results suggest that the 1980s strengthening of U.S. patent rights spawned ‘‘patent portfolio races’’ among capital-intensive firms, but it also facilitated entry by specialized design firms.

2,063 citations


Journal ArticleDOI
TL;DR: In this article, the authors propose a solution to the problem of procurement contracts in the context of contract negotiations, which they call Procurement Contracts (PC) and procurement contracts (PC).
Abstract: В статье представлена модель, объясняющая многие стилизованные факты о контрактах на поставку (procurement contracts). Согласно модели покупатель несет издержки дизайна контракта и сталкивается с дилеммой: либо создавать стимулы у продавцов не проявлять оппортунизм, либо снижать ex post трансакционные издержки, связанные с затратами на пересмотр контракта. Авторы показывают, в каких случаях контракты с фиксированной ценой и контракты, составленные по принципу издержки плюс, будут превалировать над остальными стимулирующими контрактами. Также делается вывод о том, что в случае высокой сложности товара внутрифирменное производство будет доминировать рыночные контракты на поставку.

863 citations


Journal ArticleDOI
TL;DR: In this article, the authors examine the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation and find that semiconductor firms do not rely heavily on patents to appropriate returns to R&D.
Abstract: We examine the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation. Recent survey evidence suggests that semiconductor firms do not rely heavily on patents to appropriate returns to R&D. Yet the propensity of semiconductor firms to patent has risen dramatically since the mid-1980s. We explore this apparent paradox by conducting interviews with industry representatives and analyzing the patenting behavior of 95 U.S. semiconductor firms during 1979-1995. The results suggest that the 1980s strengthening of U.S. patent rights spawned "patent portfolio races" among capital-intensive firms, but it also facilitated entry by specialized design firms. Copyright 2001 by the RAND Corporation.

793 citations


Journal ArticleDOI
TL;DR: In this article, the authors examine the profit, utility, and welfare implications of price discrimination policies in an oligopolistic framework and show that an equilibrium outcome of competitive nonlinear pricing when consumers have private information about their tastes is for firms to offer efficient two-part tariffs.
Abstract: We model firms as supplying utility directly to consumers. The equilibrium outcome of competition in utility space depends on the relationship π (u) between profit and average utility per consumer. Public policy constraints on the “deals” firms may offer affect equilibrium outcomes via their effect on π(u) .F rom this perspective we examine the profit, utility, and welfare implications of price discrimination policies in an oligopolistic framework. We also show that an equilibrium outcome of competitive nonlinear pricing when consumers have private information about their tastes is for firms to offer efficient two-part tariffs.

494 citations


Posted Content
TL;DR: In this article, the effects of R&D commercial subsidies by means of a model of firms' decisions about performing research when some government support can be expected is explored. But the model is based on an unbalanced panel sample of more than 2,000 performing and non-performing Spanish manufacturing firms.
Abstract: This paper explores the effects of R&D commercial subsidies by means of a model of firms’ decisions about performing R&D when some government support can be expected. The model is estimated with an unbalanced panel sample of more than 2,000 performing and non-performing Spanish manufacturing firms. For the non-performing firms, we compute the trigger subsidies required to induce R&D spending. Among the performing firms, we detect those that would cease to perform R&D if subsidies were eliminated. We also explore the change in the privately financed R&D effort of the performing firms. Results suggest that subsidies stimulate R&D activities, and even show that some firms would stop performing these activities in their absence, but also reveal that most actual subsidies go to firms that would have performed R&D otherwise. In these firms, however, subsidies are found to enlarge expenses with no crowding out of private funds.

450 citations


Journal ArticleDOI
TL;DR: A structural model of health insurance and health care choices using data on single individuals from the NMES is estimated and it is found that riskier types buy more coverage and, on average, end up using more care.
Abstract: Adverse selection is perceived to be a major source of market failure in insurance markets. There is little empirical evidence on the extent of the problem. We estimate a structural model of health insurance and health care choices using data on single individuals from the NMES. A robust prediction of adverse-selection models is that riskier types buy more coverage and, on average, end up using more care. We test for unobservables linking health insurance status and health care consumption. We find no evidence of informational asymmetries.

436 citations


Journal ArticleDOI
TL;DR: The authors show that strong creditor protection may lead to market equilibria in which cheap credit is inappropriately emphasized over project screening, and restrictions on collateral requirements and the protection of debtors in bankruptcy proceedings may redress this imbalance and increase credit-market efficiency.
Abstract: Many economists argue that the primary economic function of banks is to provide cheap credit, and to facilitate this function, they advocate the strict protection and enforcement of creditor rights. But banks can serve another important economic function: through project screening they can reduce the number of project failures and thus mitigate their private and social costs. Strict protection of creditor rights would leave the tradeoff between these two banking functions to the market. In this paper, we show that because of market imperfections in the banking industry, strong creditor protection may lead to market equilibria in which cheap credit is inappropriately emphasized over project screening. Restrictions on collateral requirements and the protection of debtors in bankruptcy proceedings may redress this imbalance and increase credit-market efficiency.

361 citations


Journal ArticleDOI
TL;DR: This article showed that risk-tolerant individuals take few precautions and are disinclined to insure, but they are drawn into a pooling equilibrium by the low premiums created by the presence of safer, more risk-averse types.
Abstract: This article reverses the standard conclusion that asymmetric information plus competition results in insufficient insurance provision. Risk-tolerant individuals take few precautions and are disinclined to insure, but they are drawn into a pooling equilibrium by the low premiums created by the presence of safer, more risk-averse types. Taxing insurance drives out the reckless clients, allowing a strict Pareto gain. This result depends on administrative costs in processing claims and issuing policies, as does the novel finding of a pure-strategy, partial-pooling, subgame-perfect Nash equilibrium in the insurance market. Copyright 2001 by the RAND Corporation.

361 citations


ReportDOI
TL;DR: This article examined responses to the Japanese patent reforms of 1988 and found no evidence of an increase in either R&D spending or innovative output that could plausibly be attributed to patent reform.
Abstract: Does an expansion of patent scope induce more innovative effort by firms? We examine responses to the Japanese patent reforms of 1988. Interviews with practitioners and professional documents for patent agents suggest the reforms significantly expanded the scope of patent rights. However, econometric analysis using both Japanese and U.S. patent data on 307 Japanese firms finds no evidence of an increase in either R&D spending or innovative output that could plausibly be attributed to patent reform. Copyright 2001 by the RAND Corporation.

344 citations


Journal ArticleDOI
TL;DR: In this paper, the authors argue that advertisements that give consumers product information should primarily affect consumers who have never tried the brand, whereas advertisements that create prestige or image effects should affect both inexperienced and experienced users.
Abstract: This article introduces techniques to empirically distinguish different effects of brand advertising in nondurable, experience goods markets. I argue that advertisements that give consumers product information should primarily affect consumers who have never tried the brand, whereas advertisements that create prestige or image effects should affect both inexperienced and experienced users. I apply this empirical argument to consumer-level data on purchases of a newly introduced brand of yogurt. Empirical results indicate that the advertisements for this brand primarily affect inexperienced users of the brand. I conclude that the primary effect of these advertisements was that of informing consumers. Copyright 2001 by the RAND Corporation.

342 citations


Journal ArticleDOI
TL;DR: In this paper, the authors analyze collusion in an infinitely repeated Bertrand game, where prices are publicly observed and each firm receives a privately observed, i.i.d. cost shock in each period.
Abstract: We analyze collusion in an infinitely repeated Bertrand game, where prices are publicly observed and each firm receives a privately observed, i.i.d. cost shock in each period. Productive efficiency is possible only if high-cost firms relinquish market share. In the most profitable collusive schemes, firms implement productive efficiency, and high-cost firms are favored with higher expected market share in future periods. If types are discrete, there exists a discount factor strictly less than one above which first-best profits can be attained using history-dependent reallocation of market share between equally efficient firms. We also analyze the role of communication and side-payments.

Journal ArticleDOI
TL;DR: In this paper, a dynamic version of the old leverage doctrine is proposed, and it is shown that when an incumbent monopolist faces the threat of entry in all complementary components, tying may make the prospects of successful entry less certain, discouraging rivals from investing and innovating.
Abstract: The idea that an incumbent supplier may tie two complementary products to fend off potential entrants is popular among practitioners yet is not fully understood in formal economic theory. This article makes sense of the argument by formally deriving a dynamic version of the old leverage doctrine. We show that when an incumbent monopolist faces the threat of entry in all complementary components, tying may make the prospects of successful entry less certain, discouraging rivals from investing and innovating. Tie-in sales may reduce consumer and total economic welfare. Copyright 2001 by the RAND Corporation.

Journal ArticleDOI
TL;DR: In this paper, a simple model of strategic networks was developed to capture two distinctive features of inter-firm collaboration activity: bilateral agreements and non-exclusive relationships, and the authors examined the incentives of firms to form collaborative links and the architecture of strategically stable networks.
Abstract: textMany markets are characterized by a high level of inter-firm collaboration in R&D activity. This paper develops a simple model of strategic networks which captures two distinctive features of such collaboration activity: bilateral agreements and non-exclusive relationships. We study the effects of collaborations on individual R&D effort, cost reduction, and market performance. We then examine the incentives of firms to form collaborative links and the architecture of strategically stable networks. Our analysis highlights the interaction between market competition and R&D network structure. We find that if firms are Cournot competitors then individual R&D effort is declining in the level of collaborative activity. However, cost reduction and social welfare are maximized under an intermediate level of collaboration. In some cases, firms can gain market power, and even induce exit of rival firms, by forming suitable collaboration agreements. Moreover, under certain circumstances, such asymmetric collaboration networks are also strategically stable. By contrast, if firms operate in independent markets then individual R&D effort is increasing in the level of collaborative activity. Cost reduction and social welfare are maximized under the complete network, which is also strategically stable.

Journal ArticleDOI
TL;DR: In this paper, the authors developed an equilibrium theory of vertical merger that incorporates these additional strategic considerations and showed that under fairly general conditions, a vertical merger will result in both efficiency gains and a collusive effect.
Abstract: It is well known that vertical integration cats change the pricing incentive of an upstream producer. However, it has not been noticed that vertical integration may also change the pricing incentive of downstream producer and the incentive of a competitor in choosing input suppliers. I develop an equilibrium theory of vertical merger that incorporates these additional strategic considerations. Under fairly general conditions, a vertical merger will result in both efficiency gains and a collusive effect. The competitive effects of a vertical merger depend on the cost of switching suppliers and the degree of downstream product differentiation. Copyright 2001 by the RAND Corporation.

Journal ArticleDOI
TL;DR: In this paper, the authors present a quality-ladder model, in which innovations benefit society directly as well as through their use as building blocks to future inventions, and the rate of arrival for the future innovation is unobserved.
Abstract: When innovations are heterogeneous, it may be advantageous to provide a variety of patents. By trading off patent breadth for length, it is possible that fees are not needed in the optimal policy. We present two examples. The first is a quality-ladder model, in which innovations benefit society directly as well as through their use as building blocks to future inventions, and the rate of arrival for the future innovation is unobserved. More fertile innovations get more breadth for a shorter time. Menus may also be useful in the case of horizontal product differentiation. Copyright 2001 by the RAND Corporation.

Journal ArticleDOI
TL;DR: In this paper, the authors analyze a model of oligopolistic competition with ongoing investment and derive a new comparative statics result for general games with strategic substitutes, which applies to our investment game.
Abstract: We analyze a model of oligopolistic competition with ongoing investment. Special cases include incremental investment, patent races, learning by doing, and network externalities. We investigate circumstances under which a firm with low costs or high quality will extend its initial lead through investments. To this end, we derive a new comparative statics result for general games with strategic substitutes, which applies to our investment game. Finally, we highlight plausible countervailing effects that arise when investments of leaders are less effective than those of laggards, or in dynamic games when firms are sufficiently patient.

Journal ArticleDOI
TL;DR: In a two-stage differentiated-products oligopoly model, profit-maximizing owners first choose incentive schemes in order to influence their managers' behavior as discussed by the authors, and then the managers compete either both in prices, both in quantities, or one in price and the other in quantity.
Abstract: In a two-stage differentiated-products oligopoly model, profit-maximizing owners first choose incentive schemes in order to influence their managers' behavior. In the second stage, the managers compete either both in prices, both in quantities, or one in price and the other in quantity. If the owners have sufficient power to manipulated their managers' incentives, the equilibrium outcome is the same regardless of how the firms compete in the second stage. If demand is linear and marginal cost is constant, basing the manager's objective function on a linear combination of the firm's profit and its rival's profit is sufficient for the equivalence result. Copyright 2001 by the RAND Corporation.

Journal Article
TL;DR: In this paper, the authors consider the problem of the financing of a research project under uncertainty about the time of completion and the probability of eventual success, and distinguish between two financing modes, namely relationship financing, where the allocation decision of the entrepreneur is observable, and arm's-length financing where it is unobservable.
Abstract: We consider the financing of a research project under uncertainty about the time of completion and the probability of eventual success. We distinguish between two financing modes, namely relationship financing, where the allocation decision of the entrepreneur is observable, and arm's-length financing, where it is unobservable. We find that equilibrium funding stops altogether too early relative to the efficient stopping time in both financing modes. The rate at which funding is released becomes tighter over time under relationship financing, and looser under arm's-length financing. The tradeoff in the choice of financing modes is between lack of commitment with relationship financing and information rents with arm's-length financing.

Journal ArticleDOI
TL;DR: In this article, the authors examine a principal-agent model with multiple projects where a risk-neutral manager is protected by limited liability and show that incentive problems are a natural source of economies of scope.
Abstract: I examine a principal-agent model with multiple projects where a risk-neutral manager is protected by limited liability. The analysis has several interesting implications: (i) incentive problems are shown to be a natural source of economies of scope, as combining multiple projects under the management of a single manager relaxes the limited-liability constraint; (ii) as a result, managers may be overloaded with work and exert inefficiently high effort; and (iii) the analysis has implications for the optimal allocation of projects to different managers. Copyright 2001 by the RAND Corporation.

Journal ArticleDOI
TL;DR: The authors examined the effects of strategic delegation in a simple ultimatum game experiment and showed that when the proposer uses a delegate, her share increases both when the delegate is optional or mandatory, despite the fact that the delegate cannot be used as a commitment device.
Abstract: We examine the effects of strategic delegation in a simple ultimatum game experiment. We show that when the proposer uses a delegate, her share increases both when the delegate is optional or mandatory. This is true despite the fact that the delegate cannot be used as a commitment device. We also show that unobserved delegation by the responder reduces her share, as her delegate is perceived to be more willing to accept tough offers.

Journal ArticleDOI
TL;DR: In this paper, the authors compare the two doctrines of damages, lost profit (lost royalty) and unjust enrichment, and argue that unjust enrichment protects the patent holder better than lost royalty in the case of proprietary research tools.
Abstract: We investigate how liability rules and property rules protect intellectual property. Infringement might not be deterred under any of the enforcement regimes available. However, counterintuitively, a credible threat of infringement can actually benefit the patentholder. We compare the two doctrines of damages, lost profit (lost royalty) and unjust enrichment, and argue that unjust enrichment protects the patentholder better than lost royalty in the case of proprietary research tools. Both can be superior to a property rule, depending on how much delay is permitted before infringement is enjoined. For other proprietary products (end-user products, cost-reducing innovations), these conclusions can be reversed.

Posted Content
TL;DR: In this paper, the analysis of tacit collusion in quantity setting supergames involving cost-asymmetric rms is dealt with by assuming that rms have a dierent share of a specic asset which aects marginal costs.
Abstract: This paper contributes to the analysis of tacit collusion in quantity setting supergames involving cost-asymmetric rms Asymmetry is dealt with by assuming that rms have a dierent share of a specic asset which aects marginal costs The model extends optimal punishment schemes in the style of Abreu (1986, 1988) and provides conditions for industry-wide collusion to be enforced From the analysis of the impact of asset transfers on the sustainability of tacit collusion, merger policy implications can be drawn In particular, it is shown that if the merger induces an increase in the inequality of asset holdings, this will hinder collusion

Journal ArticleDOI
TL;DR: This article revisited the Akerlofs (1970) classic adverse selection market and asked the following question: do greater information asymmetries reduce the gains from trade? Perhaps surprisingly, the answer is no.
Abstract: This paper revisits Akerlofs (1970) classic adverse selection market and asks the following question: do greater information asymmetries reduce the gains from trade? Perhaps surprisingly, the answer is no. Better information on the selling side worsens the buyers curse, thus lowering demand, but may shift supply as well. Whether trade increases or decreases depends on the relative sizes of these effects. A characteization is given. On the other hand, improving the buyers information i.e. making private information public unambiguously improves trade so long as market demand is downward sloping.

Posted Content
TL;DR: In this article, the authors studied the effect of market structure on entry in the UK fast food industry over the years 1991-1995 and found that rival presence increases the probability of entry.
Abstract: We study the effects of market structure on entry using data from the UK fast food (counter-service burger) industry over the years 1991-1995. Over this period, the market can be characterized as a duopoly. We find that market structure matters greatly: for both firms, rival presence increases the probability of entry. We control for market specific time-invariant unobservables and their correlation with existing outlets of both firms through a variety of methods. Such unobservables generally play a minor role. For both firms, variable profits per customer are increasing in the number of own outlets, and decreasing in the number of rival outlets. Structural form estimations show that the positive effect of rival presence on the probability of entry is due to firm learning: rival presence increases the estimate of the size of the market. The firms are differently affected by demand variables and have different fixed costs of entry. These results strongly suggest the presence of product differentiation, firm learning and market power.

Journal ArticleDOI
TL;DR: In this paper, the authors investigate whether simple spot arrangements are less common when local trucking markets are thin, and they find weaker evidence of relationships between local market thickness and contractual form for short hauls.
Abstract: A central proposition of the transaction costs literature is that firms will substitute more complicated contractual arrangements for simple spot arrangements when transactions involve relationship-specific investments. I investigate this proposition by testing whether simple spot arrangements are less common when local trucking markets are thin. I find that doubling the thickness of the market increases the likelihood that simple spot arrangements govern transactions by about 30% for long hauls. I find weaker evidence of relationships between local market thickness and contractual form for short hauls—hauls for which quasi-rents are particularly small. Contracts protect quasi-rents over a surprisingly large range, but they play a less important role as quasi-rents decrease.

Journal ArticleDOI
TL;DR: In this paper, the authors extend the implicit incentives literature by analyzing how career concerns affect a risk-neutral manager's decision about how much to learn about a project before investing in it, and find that an unobservable investment in the precision of project evaluation allows the manager to control the probabilities of future reputational states.
Abstract: We extend the “implicit incentives” literature by analyzing how career concerns affect a riskneutral manager’s decision about how much to learn about a project before investing in it. The manager has unknown ability that determines the probability with which a good project is available, so the market updates ability assessments from project outcomes. While project choice is efficient in equilibrium, an unobservable investment in the precision of project evaluation allows the manager to control the probabilities of future reputational states. This distorts his investment in precision above first best when project payoffs can be observed only on accepted projects.

Journal ArticleDOI
TL;DR: In this article, the authors present a strategic model of competition in both price and availability when firms can publicly commit to prices but not inventories (or capacities), and show that firms that maintain reputations for higher service rates may earn even higher profits.
Abstract: This paper presents a strategic model of competition in both price and availability when firms can publicly commit to prices but not inventories (or capacities). Demand is uncertain and firms may stock out in equilibrium. Consumers choose where to shop given the price and expected availability at each firm (the probability of being served). In a one period model, I show that firms can use higher prices to “signal” higher availability (regardless of whether price or inventory is chosen first). This generates a floor on equilibrium prices and industry profits that exists regardless of the number of firms in the industry. In a repeated game, firms that maintain reputations for higher service rates may earn even higher profits. The model sheds light on the relationship between price, availability, and reputations in the video rental industry.

Journal ArticleDOI
TL;DR: In this paper, the authors present an empirical study of spatial competition and a methodology to estimate demand for products with unobservable characteristics using panel data, and estimate a discrete-choice model with latent-product attributes and unobserved heterogeneous consumer preferences.
Abstract: We present an empirical study of spatial competition and a methodology to estimate demand for products with unobservable characteristics. Using panel data, we estimate a discrete-choice model with latent-product attributes and unobserved heterogeneous consumer preferences. Our application of the methodology to the network television industry yields estimates that are consistent with experts' views. Given our estimates, we compute Nash equilibria of a product location game and find that firms' observed strategies (such as the degree of product differentiation) are generally optimal. Discrepancies between actual and optimal strategies reflect the networks' adherence to "rules of thumb" and, possible, bounded rationality behavior. Copyright 2001 by the RAND Corporation.

Journal ArticleDOI
TL;DR: In this article, the authors present a quality-ladder model, in which innovations benefit society directly as well as through their use as building blocks to future inventions, and the rate of arrival for the future innovation is unobserved.
Abstract: When innovations are heterogeneous, it may be advantageous to provide a variety of patents. By trading off patent breadth for length, it is possible that fees are not needed in the optimal policy. We present two examples. The first is a quality-ladder model, in which innovations benefit society directly as well as through their use as building blocks to future inventions, and the rate of arrival for the future innovation is unobserved. More fertile innovations get more breadth for a shorter time. Menus may also be useful in the case of horizontal product differentiation.

Journal ArticleDOI
TL;DR: In this article, the authors show that outside ownership may alleviate the deadweight losses associated with such costly distributional conflict, even if all it does is add another level of conflict, which suggests, among other things, an explanation of why some firms are organized as partnerships and others as stock corporations.
Abstract: If contracting within the firm is incomplete, managers will expend resources on trying to appropriate a share of the surplus that is generated. We show that outside ownership may alleviate the deadweight losses associated with such costly distributional conflict, even if all it does is add another level of conflict. In case managers have to be provided with incentives to make firm-specific investments, there is a tradeoff between minimizing rent-seeking costs and maximizing output. This suggests, among other things, an explanation of why some firms are organized as partnerships and others as stock corporations.