QUALITY DISCLOSURE AND COMPETITION*

We analyze costly quality disclosure with horizontally differentiated products under duopoly and a cartel, and characterize the effect of competition on disclosure and welfare. We show that expected disclosure is higher under a cartel than under duopoly, and the welfare comparison depends on the level of disclosure cost: when the disclosure cost is low, welfare is higher under a cartel than duopoly, but when the disclosure cost is high, welfare is higher under duopoly. In either market structure, disclosure is excessive in terms of total surplus, but insufficient in terms of consumer surplus.     

STRATEGIC INFORMATION DISCLOSURE AND COMPETITION FOR AN IMPERFECTLY PROTECTED INNOVATION*

The imperfect appropriability of revenues from innovation affects the incentives of firms to invest, and to disclose information about their innovative productivity. It creates a free‐rider effect in the competition for the innovation that countervails the familiar business‐stealing effect. Moreover, it affects the disclosure incentives such that full disclosure emerges for extreme revenue spillovers (e.g., full protection and no protection of intellectual property), but either partial disclosure or full concealment emerges for intermediate spillovers. I analyze the implications of imperfect appropriability and strategic disclosure for the firms' profits and the probability of innovation.     

REAL AND VIRTUAL COMPETITION*

Goods sold by electronic firms are not perfect substitutes for otherwise identical goods sold by their offline counterparts. Online purchases are associated with waiting costs, and they do not allow consumers to inspect the product prior to purchase. Visiting a conventional retailer, on the other hand, involves positive travelling costs. In this paper I extend the circular city model to include two types of firms, conventional and electronic. I show that under some parameter configurations, conventional stores actually raise their prices in response to entry of electronic firms. Moreover, economic welfare goes down.     

NETWORK SECURITY: VULNERABILITIES AND DISCLOSURE POLICY*

Software security is a major concern for vendors, consumers and regulators. When vulnerabilities are discovered after the software has been sold to consumers, the firms face a dilemma. A policy of disclosing vulnerabilities and issuing updates protects only consumers who install updates, while the disclosure itself facilitates reverse engineering of the vulnerability by hackers. The paper considers a firm that sells software which is subject to potential security breaches and derives the conditions under which a firm would disclose vulnerabilities. It examines the effect of a regulatory policy that requires mandatory disclosure of vulnerabilities and a ‘bug bounty’ program.     

PATENT DAMAGES AND SPATIAL COMPETITION*

We analyze price competition between a spatially differentiated product patentee and an imitator anticipating probabilistic future patent damages. We compare the performance of three damage regimes. The ‘reasonable royalty’ regime, which yields symmetric equilibrium pricing, maximizes static welfare and yields the highest innovation incentives when patent enforcement is nearly certain. The ‘lost profits’ regime, which may deter infringement, yields the highest innovation incentives when patent enforcement is less‐than‐certain and products are sufficiently valuable. The ‘unjust enrichment’ regime yields low static efficiency and low innovation incentives. We offer new insights into the ‘hypothetical negotiation’ that courts use to construct reasonable royalties.     

COMPETITION AND COST OVERRUNS IN PROCUREMENT*

Most cases of cost overruns in public procurement are related to important changes in the initial project design. This paper provides a rationale for the observed pattern in public procurement of underinvestment in design specification. We propose a two‐stage model in which the sponsor first decides how much to invest in design specification and auctions the project to horizontally differentiated contractors. After the contract has been awarded and implemented, the sponsor and contractor receive new information about the optimal project design and renegotiate the contract to accommodate changes in the initial project's design. We show that the sponsor's optimal strategy is to underinvest in design specification, which makes significant cost overruns likely. Since no such underinvestment occurs when contractors are not horizontally differentiated, cost overruns are seen to arise as a consequence of lack of competition in the procurement market.     

PRODUCT MARKET COMPETITION AND AGENCY COSTS*

We model the effects of competition on managerial efficiency and isolate the agency effect of competition, present only in firms subject to agency costs, from the direct pressure effect of competition, which is present in all firms. Using a unique set of Canadian data that surveys both firms and their employees, we then evaluate the empirical significance of these two effects. We find that competition has a significant direct pressure effect as well as a significant agency effect. Both effects increase the importance firms place on quality improvements and cost reductions as well as on contractual incentives and employee effort.     

NEGATIVE EXTERNALITIES,COMPETITION AND CONSUMER CHOICE*

Consumers sometimes make choices that impose greater external costs on those who do not make the same choice. This paper examines how the selectivity of negative externalities in such situations affects the competitive equilibrium and the desirability of an externality‐reducing public policy. Selective negative externalities create network externalities, but outcomes may differ greatly from typical network effects. Price effects may cause the imposing product's sales to decline with the size of the negative externality. Consequently, a positive competitive effect may overwhelm the externality's negative direct effects on welfare, such that a policy that enlarges the externality may improve welfare.     

PRICE DISPERSION AND COMPETITION WITH DIFFERENTIATED SELLERS*

I measure price dispersion among differentiated retail gasoline sellers and study the relationship between dispersion and the local competitive environment. Significant price dispersion exists even after controlling for differences in station characteristics, and price differences between sellers change frequently. The extent of price dispersion is related to the density of local competition, but this relationship varies significantly depending on the type of seller and the composition of its competitors. These findings are consistent with interactions between seller and consumer heterogeneity that are not well understood in the existing price dispersion literature.     

ENTRY AND COMPETITION IN LOCAL HOSPITAL MARKETS*

We extend the entry model developed by Bresnahan and Reiss to make use of quantity information, and apply it to data on the U.S. hospital industry. The Bresnahan and Reiss model infers changes in the toughness of competition from entry threshold ratios. Entry threshold ratios, however, identify the product of changes in the toughness of competition and changes in fixed costs. By using quantity data, we are able to identify separately changes in the toughness of competition from changes in fixed costs. This model is generally applicable to industries where there are good data on market structure and quantity, but not on prices, as for example in the quinquennial U.S. Economic Census. In the hospital markets we examine, entry leads to a quick convergence to competitive conduct. Entry reduces variable profits and increases quantity. Most of the effects of entry come from having a second and a third firm enter the market.     

INFORMATION EXCHANGE AND COMPETITION IN COMMUNICATIONS NETWORKS*

We develop a model of information exchange between calling parties. We characterize the equilibrium when two interconnected networks compete by charging both for outgoing and incoming calls. We show that networks have reduced incentives to use off‐net price discrimination to induce a connectivity breakdown when calls originated and received are complements in the information exchange. This breakdown disappears if operators are allowed to negotiate reciprocal access charges. We also study the relationship between sending and receiving retail charges as a function of the level of access charges. We identify circumstances where private negotiations over access charges induce first‐best retail prices.     

INFORMATION REVELATION AND BUYER PROFITS IN REPEATED PROCUREMENT COMPETITION*

I investigate how procurement costs are affected by the information that buyers reveal about sellers' behavior, in a setting with two sequentially offered contracts for which a seller's privately known costs are identical. Expected prices are lowest when sellers learn nothing until all contracts are allocated, are higher when they learn all sellers' price offers as contracts are allocated, and typically are even higher when they learn only the winner's identity, or the winner's identity and price offer. The results suggest that buyers engaged in repeated procurement may pay less by revealing minimal or extensive information, rather than an intermediate amount.     

PRODUCT VARIETY AND COMPETITION IN THE RETAIL MARKET FOR EYEGLASSES*

I use original data on eyewear retailers in a cross‐section of U.S. markets to study how firms' product range choices vary with the degree of local competition. Market level regressions show average per firm variety declining in the number of rivals. In regressions at the firm level, taking account of spatial differentiation within each market, a non‐monotonic relationship between product ranges and competition is apparent. As the number of nearby rivals increases, per firm variety may first rise before eventually declining. Explanations for this pattern are offered, in terms of a tradeoff between business stealing and clustering effects.     

RELATIONSHIPS,COMPETITION AND THE STRUCTURE OF INVESTMENT BANKING MARKETS*

It is well known that competition can destroy incentives to invest in firm‐specific relationships. This paper examines how the tension between relationships and competition is resolved in the investment banking market, which for decades has been characterized by both relationships and competition. The model studies the impact on relationships of four different dimensions of competition: non‐exclusive relationships, competition from arm's‐length intermediaries, non‐price competition, and endogenous entry. The analysis shows how market equilibrium adjusts so that relationships are sustained in the face of such competition. Banks are shown to establish relationships without either local or aggregate monopoly power. The model rationalizes two distinct empirical regularities of market structure: the invariance of market concentration to market size; and a pyramidal market structure with an oligopoly comprising similar‐sized players at the top and a large number of small banks at the bottom. The analysis may also shed light on the industrial organization of other professional service industries.     

MARKET COMPETITION,R&D AND FIRM PROFITS IN ASYMMETRIC OLIGOPOLY*

We investigate a Cournot model with strategic R&D investments wherein efficient low‐cost firms compete against less efficient high‐cost firms. We find that an increase in the number of high‐cost firms can stimulate R&D by the low‐cost firms, while it always reduces R&D by the high‐cost firms. More importantly, this force can be strong enough to compensate for the loss that arises from more intense market competition: the low‐cost firms' profits may indeed increase with the number of high‐cost firms. An implication of this result is far‐reaching, as it gives low‐cost firms an incentive to help, rather than harm, high‐cost competitors. We relate this implication to a practice known as open knowledge disclosure, especially Ford's strategy of disclosing its know‐how publicly and extensively at the beginning of the 20th century.     

PRICES,SPATIAL COMPETITION AND HETEROGENEOUS PRODUCERS: AN EMPIRICAL TEST*

Homogeneous‐producer models attribute lower prices in denser markets solely to lower optimal markups. I argue here that when producers have different production costs, competition‐driven selection on costs also reduces prices. This selection mechanism can be distinguished from the homogenous‐producer case because it implies that higher density leads not only to lower average prices, but to declines in upper‐bound prices and price dispersion as well. I find empirical support for this mechanism in the prices of ready‐mixed concrete plants. I also show these findings do not simply reflect lower factor prices in dense markets, but result instead because dense‐market producers are more efficient.     

PRICE DISCRIMINATION IN STACKELBERG COMPETITION*

We examine the effects of price discrimination in the Stackelberg competition model for the linear demand case. We show that the leader does not use any price discrimination at all. Rather, the follower does all price discrimination. The leader directs all of its first mover preemptive advantage to attract the highest value consumers who pay a uniformly high price. We observe that profits and total welfare are larger and consumer surplus is smaller than those of the standard Stackelberg competition model.     

VERTICAL CONTRACTING WHEN COMPETITION FOR ORDERS PRECEDES PROCUREMENT*

This paper reverses the standard order between input supply negotiations and downstream competition and assumes that competition for orders takes place prior to procurement of inputs in a vertical chain. It is found that oligopolistically competitive outcomes will result despite the presence of an upstream monopolist. Here, vertical integration is a means by which the monopolist can leverage its market power downstream to the detriment of consumers. However, it does so, not by foreclosing on independent downstream firms, but by softening the competitive behaviour of its own integrated units.     

COMPETITION OR PREDATION? CONSUMER COORDINATION,STRATEGIC PRICING AND PRICE FLOORS IN NETWORK MARKETS*

Although network effects can make predation more likely to succeed, we find that the leading anti‐predation rules may lower or raise efficiency and consumer welfare in network markets. We find that: (a) the extensive debates about the ‘correct’ measure of cost on which to base price floors are unlikely to be productive; (b) the Ordover‐Willig rule that is widely thought to be correct in theory but difficult to apply in practice is, in fact, incorrect in theory; and (c) efficient price floors would have to depend on consumer expectations and coordination processes that are unlikely to be observable in practice.