We study innovation incentives in the presence of "product hopping," whereby the incumbent patents a minor modification of a drug (e.g., a new delivery method) and invests in marketing to switch demand towards the minor modification. In our setting firms compete sequentially to discover two innovative drugs. The winner of the first R&D race (the incumbent) can alter the market structure that follows the second R&D race through product hopping. This can increase investments during the second R&D race when product hopping softens competition or when the incumbent benefits from becoming a multi-product monopolist. The change in expected continuation values can increase or decrease investments during the first R&D race. Thus, the welfare effect of product hopping is ambiguous. We discuss our results in the context of the current policy debate on product hopping, welfare, and antitrust.
{"title":"Product Hopping and Innovation Incentives","authors":"Jorge Lemus, Olgu Ozkul","doi":"10.2139/ssrn.3275815","DOIUrl":"https://doi.org/10.2139/ssrn.3275815","url":null,"abstract":"We study innovation incentives in the presence of \"product hopping,\" whereby the incumbent patents a minor modification of a drug (e.g., a new delivery method) and invests in marketing to switch demand towards the minor modification. In our setting firms compete sequentially to discover two innovative drugs. The winner of the first R&D race (the incumbent) can alter the market structure that follows the second R&D race through product hopping. This can increase investments during the second R&D race when product hopping softens competition or when the incumbent benefits from becoming a multi-product monopolist. The change in expected continuation values can increase or decrease investments during the first R&D race. Thus, the welfare effect of product hopping is ambiguous. We discuss our results in the context of the current policy debate on product hopping, welfare, and antitrust.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"202 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133805421","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Alfredo Martín-Oliver, J. Sákovics, V. Salas-Fumás
We study the process of capacity reduction by multi-plant firms competing in many markets, following a permanent, negative aggregate demand shock. The resulting insight on strategic plant closure is relevant to competition policy. We focus on the measurement of strategic delay in local markets, using data on the closures of bank branches in Spain during the Great Recession. We geolocate each branch and identify its competitors: those that lie within 150 meters. We also cluster the local markets in the same census tract, enabling the use of fixed effects in our regressions. We find that branches with competitors are less likely to close in any given year than branches without, indicative of strategic behavior. Further -only when controlling for possible correlation between demand size and vulnerability to the shock, through fixed effects - the probability of exit is decreasing in the number of competitors. This is the opposite slope of what the literature -unable to use fixed effects - tends to find. We argue that this sign reversal is also rationalizable by a war of attrition. Finally, we confirm that branches are more likely to close if their parent bank has multiple branches in the same local market.
{"title":"The Bank Branch Exit Game","authors":"Alfredo Martín-Oliver, J. Sákovics, V. Salas-Fumás","doi":"10.2139/ssrn.3738528","DOIUrl":"https://doi.org/10.2139/ssrn.3738528","url":null,"abstract":"We study the process of capacity reduction by multi-plant firms competing in many markets, following a permanent, negative aggregate demand shock. The resulting insight on strategic plant closure is relevant to competition policy. We focus on the measurement of strategic delay in local markets, using data on the closures of bank branches in Spain during the Great Recession. We geolocate each branch and identify its competitors: those that lie within 150 meters. We also cluster the local markets in the same census tract, enabling the use of fixed effects in our regressions. We find that branches with competitors are less likely to close in any given year than branches without, indicative of strategic behavior. Further -only when controlling for possible correlation between demand size and vulnerability to the shock, through fixed effects - the probability of exit is decreasing in the number of competitors. This is the opposite slope of what the literature -unable to use fixed effects - tends to find. We argue that this sign reversal is also rationalizable by a war of attrition. Finally, we confirm that branches are more likely to close if their parent bank has multiple branches in the same local market.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"19 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131490611","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this study, we examine the nature of Schumpeterian competition between entrants and incumbents. We argue that incumbents may respond to the threat of entry by either attacking the entrant or try...
{"title":"The Dynamics of Learning and Competition in Schumpeterian Environments","authors":"Gianluigi Giustiziero, A. Kaul, Brian Wu","doi":"10.1287/ORSC.2018.1264","DOIUrl":"https://doi.org/10.1287/ORSC.2018.1264","url":null,"abstract":"In this study, we examine the nature of Schumpeterian competition between entrants and incumbents. We argue that incumbents may respond to the threat of entry by either attacking the entrant or try...","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-05-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133839144","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We empirically show that adverse selection is a key determinant of banking market structure. Using newly-constructed panel data on all US bank branches over the 1981-2016 period, we study banks' decisions to expand or contract geographically. First, we show that banks are more likely to expand in counties that are similar, in terms of industry shares, to those in which they already have branches. Second, we show that banks are more likely to contract in more similar areas. These results are consistent with the theory that banks value diversification, but that informational barriers to entry prevent them from achieving optimal scale. These findings have implications for the assessment of banking competition and for the rise of fintech.
{"title":"Entry in Banking Markets","authors":"Marina Traversa, Guillaume Vuillemey","doi":"10.2139/ssrn.3355572","DOIUrl":"https://doi.org/10.2139/ssrn.3355572","url":null,"abstract":"We empirically show that adverse selection is a key determinant of banking market structure. Using newly-constructed panel data on all US bank branches over the 1981-2016 period, we study banks' decisions to expand or contract geographically. First, we show that banks are more likely to expand in counties that are similar, in terms of industry shares, to those in which they already have branches. Second, we show that banks are more likely to contract in more similar areas. These results are consistent with the theory that banks value diversification, but that informational barriers to entry prevent them from achieving optimal scale. These findings have implications for the assessment of banking competition and for the rise of fintech.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"9 1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-03-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125064490","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze, by means of a formal economic model, the use of price-cost tests to assess the competitive effects of loyalty discounts. In the model, a dominant firm enjoys a competitive advantage over its rivals and uses loyalty discounts as a means to boost the demand for its product. We show that in this framework price-cost tests are misleading or, at best, completely uninformative. Our results cast doubts on the applicability of price-tests to loyalty discount cases.
{"title":"Loyalty Discounts and Price-Cost Tests","authors":"G. Calzolari, V. Denicoló","doi":"10.2139/ssrn.3173756","DOIUrl":"https://doi.org/10.2139/ssrn.3173756","url":null,"abstract":"We analyze, by means of a formal economic model, the use of price-cost tests to assess the competitive effects of loyalty discounts. In the model, a dominant firm enjoys a competitive advantage over its rivals and uses loyalty discounts as a means to boost the demand for its product. We show that in this framework price-cost tests are misleading or, at best, completely uninformative. Our results cast doubts on the applicability of price-tests to loyalty discount cases.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"37 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121908564","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a nonparametric approach to test for monotone behavior in optimizing agents and to make out-of-sample predictions. Our approach could be applied to simultaneous games with ordered actions, with agents playing pure strategy Nash equilibria or Bayesian Nash equilibria. We require no parametric assumptions on payoff functions nor distributional assumptions on the unobserved heterogeneity of agents. Multiplicity of optimal solutions (or equilibria) is not excluded, and we are agnostic about how they are selected. To illustrate how our approach works, we include an empirical application to an IO entry game.
{"title":"Nonparametric Analysis of Monotone Choice","authors":"Natalia Lazzati, J. Quah, K. Shirai","doi":"10.2139/ssrn.3301043","DOIUrl":"https://doi.org/10.2139/ssrn.3301043","url":null,"abstract":"We develop a nonparametric approach to test for monotone behavior in optimizing agents and to make out-of-sample predictions. Our approach could be applied to simultaneous games with ordered actions, with agents playing pure strategy Nash equilibria or Bayesian Nash equilibria. We require no parametric assumptions on payoff functions nor distributional assumptions on the unobserved heterogeneity of agents. Multiplicity of optimal solutions (or equilibria) is not excluded, and we are agnostic about how they are selected. To illustrate how our approach works, we include an empirical application to an IO entry game.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-04-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128895317","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Conspicuous consumption of status goods signals consumers’ status and grants status value to them. In this article, we examine how firms selling status goods make vertical line extension decisions when they take consumers’ status preferences into account. Analyzing an incumbent's vertical line extensions when it faces a threat of entry, we find that status preferences can make unprofitable extensions profitable. Moreover, without status preferences, an incumbent can introduce line extensions to crowd out the competitor's profit and deter entry. However, with status preferences, introducing line extensions can increase the competitor's profit and attract entry. We also find that incumbents should introduce downward extensions when they are monopolists and upward extensions when they face competition from lower‐quality entrants. As the cost of entry increases, incumbents should change from introducing upward extensions to introducing downward extensions. As consumers’ status preferences increase, incumbents introduce downward extensions under a wider range of situations.
{"title":"Status Goods and Vertical Line Extensions","authors":"Krista J. Li","doi":"10.2139/ssrn.3149551","DOIUrl":"https://doi.org/10.2139/ssrn.3149551","url":null,"abstract":"Conspicuous consumption of status goods signals consumers’ status and grants status value to them. In this article, we examine how firms selling status goods make vertical line extension decisions when they take consumers’ status preferences into account. Analyzing an incumbent's vertical line extensions when it faces a threat of entry, we find that status preferences can make unprofitable extensions profitable. Moreover, without status preferences, an incumbent can introduce line extensions to crowd out the competitor's profit and deter entry. However, with status preferences, introducing line extensions can increase the competitor's profit and attract entry. We also find that incumbents should introduce downward extensions when they are monopolists and upward extensions when they face competition from lower‐quality entrants. As the cost of entry increases, incumbents should change from introducing upward extensions to introducing downward extensions. As consumers’ status preferences increase, incumbents introduce downward extensions under a wider range of situations.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"79 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122877932","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In recent years, the increasing awarding of patents has captured the attention of scholars operating in different fields. The economic literature has studied the causes of this proliferation; we propose an entry game focusing on one of the consequences, showing how an incumbent may create a patent portfolio in order to control market entry and to collude. The incumbent fixes the level of patent protection and the threat of denunciation reduces the entrant's expected profits; moreover, if the entrant deviates from collusion, the incumbent can strengthen punishment suing the competitor for patent infringement, reducing her incentive to deviate. Our analysis suggests that antitrust authorities should pay attention to the level of patent protection implemented by the incumbent and note whether the holder of a patent reacts to entry by either suing or not suing the competitor. In the model, we use completely general functional forms in analyzing the issues, and this allows us to obtain general results not depending on the assumptions about the kind of oligopolistic competition.
{"title":"Patent Protection and Threat of Litigation in Oligopoly","authors":"C. Capuano, Iacopo Grassi","doi":"10.2139/ssrn.3135093","DOIUrl":"https://doi.org/10.2139/ssrn.3135093","url":null,"abstract":"In recent years, the increasing awarding of patents has captured the attention of scholars operating in different fields. The economic literature has studied the causes of this proliferation; we propose an entry game focusing on one of the consequences, showing how an incumbent may create a patent portfolio in order to control market entry and to collude. The incumbent fixes the level of patent protection and the threat of denunciation reduces the entrant's expected profits; moreover, if the entrant deviates from collusion, the incumbent can strengthen punishment suing the competitor for patent infringement, reducing her incentive to deviate. Our analysis suggests that antitrust authorities should pay attention to the level of patent protection implemented by the incumbent and note whether the holder of a patent reacts to entry by either suing or not suing the competitor. In the model, we use completely general functional forms in analyzing the issues, and this allows us to obtain general results not depending on the assumptions about the kind of oligopolistic competition.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-03-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124214225","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using firm level data for a sample of 78 country markets in 2012, this paper analyzes the relationship between the severity of non-tariff measures related to the entry and operation of foreign firms and firm profitability in the commercial banking sector, and differentiates the impact of these non-tariff measures on foreign-owned and domestic firms. Overall, there is a non-linear relationship between the level of restrictions and the profitability of firms. Banks in countries with low levels of restriction are significantly more profitable than banks in countries with no restrictions, while banks in countries with moderate levels of restriction are less profitable than banks in countries with no restrictions. Additionally, foreign owned firms are significantly more profitable than domestic firms when there are no restrictions on the entry and operation of foreign firms, but less profitable than domestically owned firms at both low and moderate levels of restriction.
{"title":"Do Non -Tariff Measures Make Domestic Firms More Profitable? Evidence from the Commercial Banking Sector","authors":"Sarah Oliver","doi":"10.2139/ssrn.3233866","DOIUrl":"https://doi.org/10.2139/ssrn.3233866","url":null,"abstract":"Using firm level data for a sample of 78 country markets in 2012, this paper analyzes the relationship between the severity of non-tariff measures related to the entry and operation of foreign firms and firm profitability in the commercial banking sector, and differentiates the impact of these non-tariff measures on foreign-owned and domestic firms. Overall, there is a non-linear relationship between the level of restrictions and the profitability of firms. Banks in countries with low levels of restriction are significantly more profitable than banks in countries with no restrictions, while banks in countries with moderate levels of restriction are less profitable than banks in countries with no restrictions. Additionally, foreign owned firms are significantly more profitable than domestic firms when there are no restrictions on the entry and operation of foreign firms, but less profitable than domestically owned firms at both low and moderate levels of restriction.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-12-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126522004","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this article, I present causal effects of institutional entry barriers to new firms on incumbents’ technological innovation. In particular, I investigate the effect of entry barriers to municipal providers on incumbents’ technology deployment in the U.S. broadband industry. I use a spatial regression discontinuity design for private incumbents’ investment behavior and different entry regimes as sharp cutoffs for municipal entry threat. I collect and combine unique firm-level data on cable investment decisions and state-level data on legal entry barriers. I find that in markets with these entry barriers incumbents invest less in new technologies. Specifically, I find that the local entry barriers lead to a 20% lower technology adoption rate by cable incumbents because of reduced entry threat. These results imply that institutions that restrict entry of new firms can lead to significantly decreased technological innovation and lower internet quality across local markets, not only by deterring new firms but also by altering incumbents’ strategic investment in broadband networks.
{"title":"Entry Barriers and Technological Innovation in Broadband","authors":"Tedi Skiti","doi":"10.2139/ssrn.3049367","DOIUrl":"https://doi.org/10.2139/ssrn.3049367","url":null,"abstract":"In this article, I present causal effects of institutional entry barriers to new firms on incumbents’ technological innovation. In particular, I investigate the effect of entry barriers to municipal providers on incumbents’ technology deployment in the U.S. broadband industry. I use a spatial regression discontinuity design for private incumbents’ investment behavior and different entry regimes as sharp cutoffs for municipal entry threat. I collect and combine unique firm-level data on cable investment decisions and state-level data on legal entry barriers. I find that in markets with these entry barriers incumbents invest less in new technologies. Specifically, I find that the local entry barriers lead to a 20% lower technology adoption rate by cable incumbents because of reduced entry threat. These results imply that institutions that restrict entry of new firms can lead to significantly decreased technological innovation and lower internet quality across local markets, not only by deterring new firms but also by altering incumbents’ strategic investment in broadband networks.","PeriodicalId":169574,"journal":{"name":"ERN: Entry & Exit (Topic)","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121271675","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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