Patent office in innovation policy: Nobody's perfect

The number of patent applications and “bad” patents issued has been rising rapidly in recent years. Based on this trend, we study the overload problem within the Patent Office and its consequences on the firms' R&D incentives. We assume that the examination process of patent applications is imperfect, and that its quality is poorer under congestion. Depending on policy instruments such as submission fees and the toughness of the non-obviousness requirement, the system may result in a high-R&D equilibrium, in which firms self-select in their patent applications, or in an equilibrium with low R&D, opportunistic patent applications and the issuance of bad patents. Multiple equilibria often co-exist, which deeply undermines the effectiveness of policy instruments. We investigate the robustness of our conclusions as to how the value of patent protection is formalized, taking into consideration the introduction of a penalty system for rejected patent applications, as well as the role of commitment to a given patent protection policy.     

Collective Wage Contracts,Opt‐Out Clauses,and Firm Wage Differentials: Evidence from Linked Employer–Employee Data

Using a large linked employer–employee data set, this article studies whether the existence and use of flexibility provisions within centralized collective wage agreements alter the structure of pay across employers. Using level regressions and first‐difference methods, we find that—compared with contracts without any flexibility—wages under opt‐out clauses are more responsive to local profitability conditions in below‐average‐performing establishments. In contrast, the sensitivity of wages to local profitability is smaller in high‐performance establishments. Our results provide further evidence for a threat potential of the existence of opt‐out clauses whose impact on flexibility is larger than the real application.     

On the duration of technology licensing

We model an innovator's choice of payment scheme and duration as a joint decision in a multi-period licensing game with potential future innovations and some irreversibility of technology transfer. We find that it may be optimal to license the innovation for less than the full length of the patent and that royalty contracts can be more profitable than fixed-fee licensing even in the absence of information asymmetry and risk aversion. Moreover, licensing contracts based on royalty have a longer duration than fixed-fee licenses and are more likely to be used in industries where innovations are frequent and intellectual property protection is weak. Our paper also highlights an important link between the study of technology licensing and the theory of durable goods.     

Termination fees revisited

We reconsider the question of the optimal level of termination fees between communication networks in the context of heterogeneous usage and elastic participation. The interaction between these two features yields new insights; in our model: i) The profit maximizing reciprocal termination fee is above marginal cost; ii) the welfare maximizing termination fee is also above cost; iii) the welfare-maximizing termination fee is below the profit-maximizing one in the absence of termination-based price discrimination, but can be above it otherwise.     

Commodity price inflation, retail pass-through and market power

When commodity prices rise, wholesalers and retailers of products derived from basic commodities respond by passing along at least a portion of the price increase to consumers. In this paper we examine whether firms respond differently to positive commodity price shocks than to negative commodity price shocks; that is, whether commodity price volatility alters market power. We exploit recent volatility in food commodity prices over the period 2007-2010 to investigate how commodity price shocks translate into market power in two different vertically-structured food product industries: potatoes and fluid milk. For potatoes, we find both wholesale and retail market power decreases (increases) during periods of rising (falling) commodity prices. Moreover, price-cost margins widen a substantially greater degree in response to negative shocks than margins narrow in response to positive shocks, indicating that commodity price volatility increases market power. For fluid milk, we find that market power likewise declines during periods of rising commodity prices; however, market power does not significantly change during periods of falling commodity prices, suggesting that commodity price volatility decreases market power.     

Dynamic competition in technological investments: An empirical examination of the LCD panel industry

When are technological laggards more likely to try to catch up with leaders? We offer empirical evidence on firm-level data of plant investments in the TFT-LCD panel industry, where technological competition has been intense and dynamic. We find that the followers' level of technology has a non-monotonic effect on technology-improving investments, with intermediate followers the most apt to invest in catch-ups. This result is a puzzle given the existing theory on technology race. We also find that followers' catch-up investments increase with the capacity of the leader that employs the state-of-the-art technology. These results are robust to variations in specification and alternative accounts of effects. We discuss our findings and contributions in light of the technology race literature.     

HORIZONTAL MERGERS,STRUCTURAL REMEDIES,AND CONSUMER WELFARE IN A COURNOT OLIGOPOLY WITH ASSETS*

Competition authorities sometimes require that firms divest some of their assets to rivals in order to allow a merger to take place. This paper extends the results of Farrell and Shapiro [1990a] and shows that, in the absence of technological synergies, a merger is highly unlikely to benefit consumers, even if it is subjected to appropriate structural remedies. For instance, a merger may ultimately lead to a lower price only if at least two different firms acquire the divested assets, and if the merging parties had relatively important pre‐merger market shares.     

Outsourcing induced by strategic competition

We show that intermediate goods can be sourced to firms on the “outside” (that do not compete in the final product market), even when there are no economies of scale or cost advantages for these firms. What drives the phenomenon is that “inside” firms, by accepting such orders, incur the disadvantage of becoming Stackelberg followers in the ensuing competition to sell the final product. Thus they have incentive to quote high provider prices to ward off future competitors, driving the latter to source outside.     

Ordered search in differentiated markets

This paper presents an ordered search model in which consumers search both for price and product fitness. I construct an equilibrium in which there is price dispersion and prices rise in the order of search. The top firms in consumer search process, though charge lower prices, earn higher profits due to their larger market shares. Compared to random search, ordered search can induce all firms to charge higher prices and harm market efficiency.     

On equivalence between Cournot competition and the Kreps-Scheinkman game

The existing literature dealing with the equivalence between the Kreps-Scheinkman (KS) game and Cournot competition has focused on the case of a concave demand function. This paper analyzes the equivalence possibilities under the much extended circumstances of strictly decreasing marginal (industrial) revenue, a twice differentiable demand function, and convex costs. It proves that in the extended context, the outcomes in the subgame perfect Nash equilibrium (SPNE) of the KS game are those of Cournot equilibrium (CE) and that a CE is on the path of the SPNE of the KS game if the marginal cost of each firm in some special (borderline) cases is not too high. It further proves that for decreasing continuous demand and strictly increasing costs, the outcome in the SPNE of the KS game (if the SPNE exists) is that of CE. Based on these results, we argue that the KS game can serve as the basic form for studying “quantity competition” and for developing a T-stage game-theoretical framework to make competition form and timing endogenous.     

Is there a U-shaped relation between competition and investment?

We consider a two-stage game with cost-reducing investments followed by a linear differentiated Cournot duopoly. With competition inversely parameterized by the extent of product differentiation, investment in the subgame perfect equilibrium is typically minimal for intermediate levels of competition. Laboratory experiments partly confirm the U-shape in a reduced one-stage version of the game. In the two-stage version, there is no evidence for positive effects of moving from intermediate to intense competition.     

EFFICIENCY GAINS AND STRUCTURAL REMEDIES IN MERGER CONTROL*

This paper studies the role of structural remedies in merger control in a Cournot setting where (endogenous) mergers are motivated by prospective efficiency gains and must be submitted to an Antitrust Authority (AA) which might require partial divestiture for approval. From a merger policy perspective, this paper's main contribution is two‐fold. First, it shows that if mergers do not involve all firms in the industry, then merger remedies help the AA to increase consumer surplus only if assets are divested to competitors already in the market. Second, it presents a model which clarifies that there can only exist social costs to ‘over‐fixing’ the anticompetitive effects of a merger if merger review policy treats mergers as one‐time events. When a more dynamic view is taken of sequential merger review, then there can never be an ‘over‐fixing’ problem. In this case, however, remedies are shown to be needed to make myopic merger review optimal.     

An experimental test of automatic mitigation of wholesale electricity prices

In several major deregulated electricity generation markets, the market operator uses an “automatic mitigation procedure” (AMP) to attempt to suppress the exercise of market power. A leading type of AMP compares the offer price from each generation unit with a recent historical average of accepted offer prices from that same unit during periods when there was no transmission-system congestion to impede competition. If one or more units' offer prices exceed the recent historical average by more than a specified margin, and if these offer prices raise the market-clearing price by more than a specified margin, the market operator replaces the offending offer prices with lower ones. In an experiment, we test an AMP of this type. We find that it keeps market prices close to marginal cost if generation owners have low market power in uncongested periods. However, with high market power in uncongested periods, a condition that may apply in many parts of the world, the generation owners are able to gradually raise the market price well above short-run marginal cost in spite of the AMP. We also test the effect of the AMP on the frequency with which high-variable-cost units are used, inefficiently, in place of low-variable-cost units.     

Competition law and regulation in the Turkish telecommunications industry: Friends or foes?

The interaction between national competition authorities (NCAs) and national regulatory authorities (NRAs) plays a vital role in institutionalizing competition policy during regulatory reforms. Questions about jurisdictional authority over competition policy are far from settled     

Effects of innovation on employment: A dynamic panel analysis

This paper estimates the effect of innovation on employment at the firm level. Our uniquely long innovation panel data set of German manufacturing firms covers more than 20 years and allows us to use various innovation measures. We can distinguish between product and process innovations as well as between innovation input and innovation output measures. Using dynamic panel GMM system estimation we find positive effects of innovation on employment. This is true for innovation input as well as for innovation output variables. Innovations show their positive effect on employment with a time lag and process innovations have higher effects than product innovations.     

Corrigendum to “The strategic choice of union-oligopoly bargaining agenda” [Int. J. Ind. Organ. 17 (1999) 1029-1040]

Assuming Cournot competition, Bughin (1999, 'The strategic choice of union-oligopoly bargaining agenda', International Journal of Industrial Organization) states that in a unionized oligopoly with firm specific negotiations, Efficient Bargaining (EB) is always the industry equilibrium both under blockaded and non-blockaded market structures. Extending Bughin's (1999) framework to a conjectural variation model, this note shows that EB emerges as equilibrium only for entry deterrence reasons. In all other cases, conflict of interests among the bargaining parties arise due todifference in dominant strategies, whatever is the degree of competitiveness of the industry.     

Linking smallholder farmers to markets on extensive and intensive margins: Evidence from Nicaragua☆

Access to modern commercialization channels is key for smallholder farmers to move away from subsistence farming and overcome poverty. However, achieving that goal is challenging for smallholders given their lack of appropriate managerial practices, production technology and infrastructure. This paper examines the association between receiving trainings in two distinct entrepreneurial practices, one direct at the individual and farmer-association level and another indirect at the community level, and commercialization in non-local markets at the extensive and intensive margins. We exploit a panel dataset of bean producers in Nicaragua that participated in an NGO program implemented between 2007 and 2012. We find opposite results for the two market-linkage activities, especially on the intensive margin or volume of sales. While reciving direct training on entrepreneurial practices (EP) is positively associated with commercialization, training on municipality engagement (ME) activities is negatively associated. These correlation patterns are mainly observed among entrant farmers as opposed to those already participating in commercial markets prior to the program implementation. We also find varying results for ME activities by plot size and leadership position. Additional estimations show that training activities that are positively correlated with bean commercialization are not necessarily correlated with the commercialization of other crops, and vice versa.     

Supply function equilibria with capacity constraints and pivotal suppliers

The concept of a supply function equilibrium (SFE) has been widely used to model generators' bidding behavior and market power issues in wholesale electricity markets. Observers of electricity markets have noted how generation capacity constraints may contribute to market power of generation firms. If a generation firm's rivals are capacity constrained then the firm may be pivotal; that is, the firm could substantially raise the market price by unilaterally withholding output. However the SFE literature has not fully considered the impact of capacity constraints and pivotal firms on equilibrium predictions. We characterize the set of symmetric supply function equilibria for uniform-price auctions when firms are capacity constrained and show that this set is increasing as capacity per firm rises. We provide conditions under which asymmetric equilibria exist and characterize these equilibria. In addition, we compare results for uniform-price auctions to those for discriminatory auctions, and we compare our SFE predictions to equilibrium predictions of models in which bidders are constrained to bid on discrete units of output.     

Legal unbundling can be a golden mean between vertical integration and ownership separation

We study an industry in which an upstream monopolist supplies an essential input at a regulated price to several downstream firms. Legal unbundling means in our model that a downstream firm owns the upstream firm, but this upstream firm is legally independent and maximizes its own upstream profits. We allow for non-tariff discrimination by the upstream firm and show that under quite general conditions legal unbundling never yields lower quantities in the downstream market than ownership separation and integration. Therefore, typically, consumer surplus will be largest under legal unbundling. Outcomes under legal unbundling are still advantageous when we allow for discriminatory capacity investments, investments into marginal cost reduction and investments into network reliability. If access prices are unregulated, however, legal unbundling may be quite undesirable.