This paper examines how price competition in the product market affects the intensity and breadth of innovation. I assemble a unique data set comprising all 461 prosecuted collusion cases in the United States from 1975 through 2016, where I match 1,818 collusive firms to firm-level data on innovation. Empirical results from a difference-in-differences methodology show a negative causal relationship between price competition and innovation. When collusion suppressed price competition, colluded firms increased patent filings by 20.5 percent and top-quality patents by 16 percent. A significant portion of these patents are attributable to fundamental innovation activities since innovation inputs—R&D investment and the number of unique patenting inventors—increased in tandem by 15.2 percent and 22.9 percent, respectively. Furthermore, firms broadened their scope of innovation by exploring new technological areas; the number of patented technology classes increased by 11.9 percent. When competition was restored by collusion breakup, the increased and broadened innovation activities reverted to their previous levels. The effects were greater for collusion that was stronger and in fast-growing industries. I shed light on market profitability and firm financial constraints as key economic mechanisms driving the trade-off between price competition and innovation growth.
{"title":"How Does Price Competition Affect Innovation? Evidence from US Antitrust Cases","authors":"Hyosuk Kang","doi":"10.2139/ssrn.3516974","DOIUrl":"https://doi.org/10.2139/ssrn.3516974","url":null,"abstract":"This paper examines how price competition in the product market affects the intensity and breadth of innovation. I assemble a unique data set comprising all 461 prosecuted collusion cases in the United States from 1975 through 2016, where I match 1,818 collusive firms to firm-level data on innovation. Empirical results from a difference-in-differences methodology show a negative causal relationship between price competition and innovation. When collusion suppressed price competition, colluded firms increased patent filings by 20.5 percent and top-quality patents by 16 percent. A significant portion of these patents are attributable to fundamental innovation activities since innovation inputs—R&D investment and the number of unique patenting inventors—increased in tandem by 15.2 percent and 22.9 percent, respectively. Furthermore, firms broadened their scope of innovation by exploring new technological areas; the number of patented technology classes increased by 11.9 percent. When competition was restored by collusion breakup, the increased and broadened innovation activities reverted to their previous levels. The effects were greater for collusion that was stronger and in fast-growing industries. I shed light on market profitability and firm financial constraints as key economic mechanisms driving the trade-off between price competition and innovation growth.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124219976","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 platform markets, consumers often choose which platform to use for making a bundle of transactions with sellers rather than for each transaction. Based on a competition-in-utility framework, I analyze the impact of such usage lock-in on platform competition. Usage lock-in allows platforms to extract sellers' transaction surplus, which increases the platforms' willingness to compete for usage. Consequently, usage lock-in induces an excessive platform competition and leads to higher consumer surplus, lower seller surplus, and often higher platform profits. Analyses of entry, merger, and limit pricing show that intensifying platform competition often negatively affects welfare by exacerbating the problem of excessive competition. Furthermore, in the long run, usage lock-in may hurt even consumers and platforms by discouraging seller investments. The result of this study provides a rationale for recent policy intervention toward platforms' strategies that benefit consumers at the expense of sellers.
{"title":"Usage Lock-In and Platform Competition","authors":"Susumu Sato","doi":"10.2139/ssrn.3864942","DOIUrl":"https://doi.org/10.2139/ssrn.3864942","url":null,"abstract":"In platform markets, consumers often choose which platform to use for making a bundle of transactions with sellers rather than for each transaction. Based on a competition-in-utility framework, I analyze the impact of such usage lock-in on platform competition. Usage lock-in allows platforms to extract sellers' transaction surplus, which increases the platforms' willingness to compete for usage. Consequently, usage lock-in induces an excessive platform competition and leads to higher consumer surplus, lower seller surplus, and often higher platform profits. Analyses of entry, merger, and limit pricing show that intensifying platform competition often negatively affects welfare by exacerbating the problem of excessive competition. Furthermore, in the long run, usage lock-in may hurt even consumers and platforms by discouraging seller investments. The result of this study provides a rationale for recent policy intervention toward platforms' strategies that benefit consumers at the expense of sellers.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"67 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125118216","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 study the collusive efficacy of competition clauses (CC) such as the meeting competition clause (MCC) and the beating competition clauses (BCC) in a general framework. In contrast to previous theoretical studies, we allow for repeated interaction among the retailers and heterogeneity in their sales capacities. Besides that, the selection of the form of the CC is endogeneized. The retailers choose among a wide range of CC types - including the conventional ones such as the MCC and the BCCs with lump sum refunds. Several common statements about the collusive (in)efficacy of CCs cannot be upheld in our framework. We show that in the absence of hassle costs, MCCs might induce collusion in homogeneous markets even if they are adopted only by few retailers. If hassle and implementation costs are mild, collusion can be enforced by BCCs with lump sum refunds. Remarkably, these findings hold for any reasonable rationing rule. However, a complete specification of all collusive CCs is in general impossible without any further reference to the underlying rationing rule.
{"title":"The Collusive Efficacy of Competition Clauses in Bertrand Markets with Capacity-Constrained Retailers","authors":"Michael Trost","doi":"10.2139/ssrn.3866328","DOIUrl":"https://doi.org/10.2139/ssrn.3866328","url":null,"abstract":"We study the collusive efficacy of competition clauses (CC) such as the meeting competition clause (MCC) and the beating competition clauses (BCC) in a general framework. In contrast to previous theoretical studies, we allow for repeated interaction among the retailers and heterogeneity in their sales capacities. Besides that, the selection of the form of the CC is endogeneized. The retailers choose among a wide range of CC types - including the conventional ones such as the MCC and the BCCs with lump sum refunds. Several common statements about the collusive (in)efficacy of CCs cannot be upheld in our framework. We show that in the absence of hassle costs, MCCs might induce collusion in homogeneous markets even if they are adopted only by few retailers. If hassle and implementation costs are mild, collusion can be enforced by BCCs with lump sum refunds. Remarkably, these findings hold for any reasonable rationing rule. However, a complete specification of all collusive CCs is in general impossible without any further reference to the underlying rationing rule.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127008901","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}
This paper proposes a network model of the economy in which conglomerate firms transmit idiosyncratic shocks from one industry to another. The strength of inter-industry connections is determined by the conglomerate's share of total industry sales and by the industry's share of the conglomerate's total sales. The empirical results show that industry growth rates comove more strongly within industry pairs that are more closely connected in the conglomerate network. These results hold after controlling for industry-pair and year fixed effects, input-output connections, reverse causality, and in tests that exploit exogenous cross-sectional industry shocks from import tariff changes. Finally, our model also provides a new cross-industry extension for the widely-used Herfindahl index of concentration.
{"title":"The Conglomerate Network","authors":"K. Ahern, Lei-Lei Kong, Xinyan Yan","doi":"10.2139/ssrn.3829358","DOIUrl":"https://doi.org/10.2139/ssrn.3829358","url":null,"abstract":"This paper proposes a network model of the economy in which conglomerate firms transmit idiosyncratic shocks from one industry to another. The strength of inter-industry connections is determined by the conglomerate's share of total industry sales and by the industry's share of the conglomerate's total sales. The empirical results show that industry growth rates comove more strongly within industry pairs that are more closely connected in the conglomerate network. These results hold after controlling for industry-pair and year fixed effects, input-output connections, reverse causality, and in tests that exploit exogenous cross-sectional industry shocks from import tariff changes. Finally, our model also provides a new cross-industry extension for the widely-used Herfindahl index of concentration.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"61 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-04-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122889282","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 new method to estimate Tobin's qs of conglomerate divisions without relying on standalone firms. Divisional qs differ considerably from those of standalone firms across industries, over time, and in their sensitivity to economic shocks. The differences are explained by intra-conglomerate covariance structures and access to internal capital markets that mitigate external financing frictions. Consequently, the qs capture variation in the allocation of assets in the economy: within firms through internal capital markets, and across focused and diversified firms through diversifying acquisitions. Overall, our method provides opportunities to study the economic mechanisms that explain corporate diversification.
{"title":"Dissecting Conglomerate Valuations","authors":"Oliver Boguth, R. Duchin, Mikhail Simutin","doi":"10.2139/ssrn.2693847","DOIUrl":"https://doi.org/10.2139/ssrn.2693847","url":null,"abstract":"We develop a new method to estimate Tobin's qs of conglomerate divisions without relying on standalone firms. Divisional qs differ considerably from those of standalone firms across industries, over time, and in their sensitivity to economic shocks. The differences are explained by intra-conglomerate covariance structures and access to internal capital markets that mitigate external financing frictions. Consequently, the qs capture variation in the allocation of assets in the economy: within firms through internal capital markets, and across focused and diversified firms through diversifying acquisitions. Overall, our method provides opportunities to study the economic mechanisms that explain corporate diversification.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"112 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-03-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124136664","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}
This paper provides an empirical test of the Coase Theorem. I analyze whether emissions are independent from allowance allocations in the electricity sector regulated under the EU's Emissions Trading System (EU ETS). Exogenous variation in levels of free allocation for power producing installations enables a difference-in-differences strategy. The analysis reveals that a change in al- location levels does not significantly affect emissions, either at the plant or firm level. However, I identify an adjustment period with temporarily lower emissions for some firms. The results suggest that policy makers may use free allocation as a political tool without compromising the program's cost-effectiveness.
{"title":"Coase and Cap-and-Trade: Evidence on the Independence Property from the European Electricity Sector","authors":"A. Zaklan","doi":"10.2139/ssrn.3545207","DOIUrl":"https://doi.org/10.2139/ssrn.3545207","url":null,"abstract":"This paper provides an empirical test of the Coase Theorem. I analyze whether emissions are independent from allowance allocations in the electricity sector regulated under the EU's Emissions Trading System (EU ETS). Exogenous variation in levels of free allocation for power producing installations enables a difference-in-differences strategy. The analysis reveals that a change in al- location levels does not significantly affect emissions, either at the plant or firm level. However, I identify an adjustment period with temporarily lower emissions for some firms. The results suggest that policy makers may use free allocation as a political tool without compromising the program's cost-effectiveness.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127536459","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}
This article provides a new rationale for the "leverage theory" of bundling in vertical markets. We analyze a framework with a capacity-constrained retailer and uncover that buyer power explains the emergence of bundling practices by a multi-product manufacturer to foreclose a more efficient upstream rival. We further show that the retailer may counteract this adverse effect by expanding its stocking capacity. Finally, we highlight that a ban on bundling practices may restore the retailer's incentives to restrict its stocking capacity which generates detrimental effects for welfare.
{"title":"Buyer Power, Upstream Bundling, and Foreclosure","authors":"C. Chambolle, H. Molina","doi":"10.2139/ssrn.3511692","DOIUrl":"https://doi.org/10.2139/ssrn.3511692","url":null,"abstract":"This article provides a new rationale for the \"leverage theory\" of bundling in vertical markets. We analyze a framework with a capacity-constrained retailer and uncover that buyer power explains the emergence of bundling practices by a multi-product manufacturer to foreclose a more efficient upstream rival. We further show that the retailer may counteract this adverse effect by expanding its stocking capacity. Finally, we highlight that a ban on bundling practices may restore the retailer's incentives to restrict its stocking capacity which generates detrimental effects for welfare.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"14 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114780317","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}
A large theoretical literature on value capture uses cooperative games under complete information to study how and why firms earn supernormal profits. However, firms often have different information, beliefs, or creative foresight. We extend value capture theory to incomplete information (“known unknowns”) or unawareness (“unknown unknowns”) and illustrate some conceptual issues with that extension. Using the case study of Cirque du Soleil, we show how an entrepreneurial firm can profit even when it does not contribute materially to value creation. In a case study of Apple iTunes, we show how value capture depends quantitatively on the beliefs of other firms.
{"title":"Value-Capture in the Face of Known and Unknown Unknowns","authors":"K. Bryan, M. D. Ryall, Burkhard C. Schipper","doi":"10.2139/ssrn.3442024","DOIUrl":"https://doi.org/10.2139/ssrn.3442024","url":null,"abstract":"A large theoretical literature on value capture uses cooperative games under complete information to study how and why firms earn supernormal profits. However, firms often have different information, beliefs, or creative foresight. We extend value capture theory to incomplete information (“known unknowns”) or unawareness (“unknown unknowns”) and illustrate some conceptual issues with that extension. Using the case study of Cirque du Soleil, we show how an entrepreneurial firm can profit even when it does not contribute materially to value creation. In a case study of Apple iTunes, we show how value capture depends quantitatively on the beliefs of other firms.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114225258","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}
It is widely believed that cartels with too many members are destined to fail. The standard argument is that as the number of cartel members increases, shares of collusive profit diminish relative to deviation profits. We show that this argument is built on unreasonable assumptions about plant capacity. We add plant capacity choices to an otherwise standard dynamic oligopoly game, and we analyze the feasibility of a collusive strategy in which each firm chooses plant capacity equal to its static Nash output level, produces an equal share of monopoly output, and uses Nash reversion to punish deviations. Our main results are constructive. We first derive a uniform upper-bound on the minimum discount factor needed for collusion based on the ratio of collusive to monopolistic profits. We then prove that as the number of firms goes to infinity, our collusive strategy profile is an equilibrium as long as the discount factor is below 0.63. Thus, collusion is robust to the number of firms when capacity is chosen pro-collusively. Finally, we use the rho-concavity concept for classifying demand to obtain sharper bounds based on demand primitives.
{"title":"Collusive Capacity","authors":"Daehyun Kim, Rustin Partow","doi":"10.2139/ssrn.3423175","DOIUrl":"https://doi.org/10.2139/ssrn.3423175","url":null,"abstract":"It is widely believed that cartels with too many members are destined to fail. The standard argument is that as the number of cartel members increases, shares of collusive profit diminish relative to deviation profits. We show that this argument is built on unreasonable assumptions about plant capacity. We add plant capacity choices to an otherwise standard dynamic oligopoly game, and we analyze the feasibility of a collusive strategy in which each firm chooses plant capacity equal to its static Nash output level, produces an equal share of monopoly output, and uses Nash reversion to punish deviations. Our main results are constructive. We first derive a uniform upper-bound on the minimum discount factor needed for collusion based on the ratio of collusive to monopolistic profits. We then prove that as the number of firms goes to infinity, our collusive strategy profile is an equilibrium as long as the discount factor is below 0.63. Thus, collusion is robust to the number of firms when capacity is chosen pro-collusively. Finally, we use the rho-concavity concept for classifying demand to obtain sharper bounds based on demand primitives.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"102 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127127520","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 theory of long-run equilibrium in blockchain-based financial systems. Our theory elucidates the key market design features that separate proof of work and proof of stake approaches in the long run. Under proof of work, wasteful computation is used to secure the system, and users' utility in equilibrium is determined by the threat of a fork. Under proof of stake, by contrast, users' utility in equilibrium is generally above the fork threat level because custodians can use relational contracts to incentivize a higher quality of service. Relational contracts under proof of stake rely only on local institutions - but combining them with cryptography can create a platform for formal global contracts.
{"title":"Market Design for a Blockchain-Based Financial System","authors":"Christian Catalini, Ravi Jagadeesan, S. Kominers","doi":"10.2139/ssrn.3396834","DOIUrl":"https://doi.org/10.2139/ssrn.3396834","url":null,"abstract":"We develop a theory of long-run equilibrium in blockchain-based financial systems. Our theory elucidates the key market design features that separate proof of work and proof of stake approaches in the long run. Under proof of work, wasteful computation is used to secure the system, and users' utility in equilibrium is determined by the threat of a fork. Under proof of stake, by contrast, users' utility in equilibrium is generally above the fork threat level because custodians can use relational contracts to incentivize a higher quality of service. Relational contracts under proof of stake rely only on local institutions - but combining them with cryptography can create a platform for formal global contracts.","PeriodicalId":281108,"journal":{"name":"ERPN: Industrial Organization (Topic)","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133503441","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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