Brand-specific tastes for quality

This paper develops a model of nonlinear pricing with competition. The novel element is that each consumer's willingness to pay for quality is private information and is allowed to differ across brands. The consumer's preferences are represented by a multidimensional type containing the marginal value of quality for different products. Buyers with high willingness to pay for quality also display strong preferences for particular brands, and require higher discounts in order to switch away from their favorite product. Therefore, competition is fiercer for buyers with lower tastes for quality, and hence more elastic demands. This is in sharp contrast to earlier models in which competition is fiercer for higher-taste, more valuable buyers. In equilibrium, firms either compete intensively for the entire market (providing strictly positive rents to all consumers) or shut down the least profitable segment of the market. Quality levels are distorted downwards for all buyers, except for those with the highest type. The number of competing firms and the degree of correlation across brand preferences enhance the efficiency of the allocation.     

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.     

Remedies for tying in computer applications

Recent anti-trust decisions have proposed remedies for tying of different computer software and applications. The remedies have drawn criticism for being ineffectual. This paper develops a model tailored to deal with the specific issue of tying in computer applications. It provides a rationale for such tying and also any associated harm to social welfare. It then examines proposed remedies and finds conditions under which those remedies will be effective in improving social welfare.     

Price and quantity experimentation: A synthesis

This paper compares experimentation about product differentiation in a linear setting under four market structures: quantity-setting and price-setting monopoly, Cournot and Bertrand duopoly. Quantity-setting firms always experiment by raising their quantities and the monopolist experiments relatively more than the duopolists. A price-setting monopolist does not experiment. The value of information to Bertrand duopolists may be positive or negative depending on the degree of product differentiation. When information is valuable, price-setting duopolists experiment by lowering prices. A numerical example indicates that the intensity of experimentation is higher in a Cournot duopoly than in a Bertrand duopoly.     

Optimal best-price policy

A best-price policy (BP) is a promise by a seller to give her customer a refund if she reduces her price after the customer has already purchased the product. We characterize the optimal BP policy as when the seller can control both the policy length (when the promise expires) and the refund scale (what portion of the price difference is refunded). We explain why the policy length is finite and varies across industries. In a setting where consumers' valuations decline over time, we show that a finite-length BP allows the seller to commit to not lowering her price too soon, while at the same time letting her capture some of the benefits of intertemporal price discrimination. However, because the decline in consumers' valuations is uncertain, a BP does not allow the monopolist to achieve the profit she could earn with a full commitment.     

Shared ownership and pricing in a network switch

We observe that many wholesale switches in automated teller machine (ATM) networks are jointly owned by their members and that this tends to occur more frequently when the wholesale industry is highly concentrated. We also observe that network switches are ‘natural monopolies’, their costs being largely fixed and their demand exhibiting substantial network externalities. Motivated by these observations, we model the competition for members between wholesale switches and the role joint ownership can play in attracting members. The model analyzes both the adoption decision (which network a bank chooses to join) and the subsequent pricing of switch and ATM services. We compare competition between two solely owned switches with competition between one solely owned and one jointly owned switch. Our analysis shows that a more concentrated structure results under the latter and that retail prices are higher. This calls into question the leniency of antitrust policy toward jointly owned structures.     

Coordination and the provision of incentives to a common regulated firm

This paper considers the problem faced by two regulators in providing incentives to a common (privately informed) regulated firm under various degrees of coordination. In the model, the firm exerts effort toward cost reduction and self-dealing, and incentives can be input-based (monitoring) and output-based (demanded cost targets). Full coordination between the regulators leads to the second best allocation. A setting in which the regulators do not fully coordinate leads to (i) higher overall monitoring (more aggressive input-based incentives) and (ii) higher demanded cost targets (i.e., more lenience in terms of output-based incentives). As a consequence of (i), in all possible equilibria, the effort toward cost reduction will be smaller when the agent reports to two regulators who do not coordinate. (i) and (ii) imply that the impact on the effort toward self-dealing activities is ambiguous. In our leading example, self-dealing will be larger if the regulators coordinate on monitoring levels but smaller if they choose monitoring levels independently.     

R&D in markets with network externalities

This paper studies the consequences of network externalities on R&D rivalry between an incumbent firm and a potential entrant. In the model, all differences between the R&D projects chosen in market equilibrium and the socially best projects are solely due to network externalities. From a welfare perspective, the incumbent chooses a too risky and the entrant a too certain R&D project. Rothschild and Stiglitz's mean preserving spread criterion is used as a measure of risk. Adoption of a new standard is more likely in equilibrium than in the social optimum.     

Strengthening intellectual property rights: Experience from the 1986 Taiwanese patent reforms

Do stronger intellectual property rights spur inventive activity and foreign direct investment (FDI) in developing countries? What are the characteristics of industries where strengthening patent rights has the most favorable impact? In an attempt to answer these questions, this paper uses the 1986 Taiwanese patent reforms to examine the effects of strengthening patent rights in a developing economy. I find that the reforms encouraged R&D effort across industries. In addition, industries that were highly R&D intensive witnessed a marked increase in their patenting in the United States. The reforms also induced additional FDI.     

Location and competition in retail banking

We investigate the impact of banking deregulation during the 1990s on consumer welfare. We estimate a spatial model of consumer demand for retail bank deposits that explicitly accounts for consumer disutility from distance traveled. This is important given the substantial changes in banks' branch networks observed in the data. Our model indicates that cross-price elasticities between banks whose branches are close to consumers (‘close’ banks) are larger than those between ‘far’ banks and more than double the cross-price elasticity of ‘close’ banks with respect to ‘far’ banks. We distinguish between thrifts and other banks and find that within-thrift competitive effects are stronger than within-bank effects or those between thrifts and banks. We use our estimates to predict the effect of changes in market structure on consumer welfare following the branching deregulation of the Riegle–Neal Act of 1994. Our results indicate that the median household gained around $60 per year from the changes. Approximately two thirds of the gains come from within-market changes in market structure. The gains were greater in markets with high initial numbers of banks than elsewhere.     

Timing of technology adoption and product market competition

This paper examines how product market competition affects firms' timing of adopting a new technology, as well as whether the market provides sufficient adoption incentives. It demonstrates that adoption dates differ, not only among symmetric firms, but also among markets with different market features. More specifically, technology adoption can occur earlier in a market with Cournot competition than in a market with Bertrand competition. It can also occur earlier in a market in which goods are not too close substitutes. Therefore, this paper shows that competition toughness does not always reinforce adoption incentives. When goods are sufficiently differentiated, adoption occurs later than is socially optimal.     

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.     

Does the fourth entrant make any difference?: Entry and competition in the early U.S. broadband market

We study the importance of sunk costs in determining entry conditions and inferences about firm conduct in an adapted Bresnahan and Reiss (1991, 1994) framework. In our framework, entrants incur sunk costs to enter, while incumbents disregard these costs in deciding on continuation or exit. We apply this framework to study entry and competition in the local U.S. broadband markets from 1999 to 2003. Ignoring sunk costs generates unreasonable variation in firms' competitive conduct over time. This variation disappears when entry costs are allowed. Once the market has one to three incumbent firms, the fourth entrant has little effect on competitive conduct.     

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.     

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.     

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.     

Strategic NPV: Real Options and Strategic Games under Different Information Structures

Research summary : Among the most difficult firm strategic choices is the trade‐off between making a long‐term commitment or holding off on investment in the face of uncertainty. To operationalize strategic management theory under demand, technological and competitive uncertainty, we develop a Strategic Net Present Value (NPV) framework that integrates real options and game theory to quantify value components and interactions at the interface between NPV, real options, and strategic games. Our approach results in new propositions clarifying the way learning‐experience conditions, technological uncertainty, and proprietary information interact to tilt the balance in the interplay between wait‐and‐see flexibility and strategic commitment. As such, Strategic NPV adds to our understanding of the conditions where NPV, real options, or strategic thinking are more relevant. Managerial summary : This study develops and elucidates implementation of a new valuation construct, “Strategic Net Present Value (NPV),” that integrates real options and game theory to more accurately portray strategic decisions underlying management theory. Among the most difficult firm strategic choices in capital intensive industries, such as energy, mining, chip manufacturing, and infrastructure development, is the trade‐off between making a long‐term commitment or holding off on investment in the face of demand, technological, and competitive uncertainties. The study provides new insights on the way various conditions, such as learning‐experience effects, technological uncertainty, and proprietary information, interact to tilt the balance in the interplay between commitment and wait‐and‐see flexibility. As such, Strategic NPV adds to our understanding of when NPV, real options, or strategic thinking matter more critically for decision making. Copyright © 2017 John Wiley & Sons, Ltd.