Information Gathering Externalities for a Multi‐Attribute Good

Most goods and services vary in numerous dimensions. Customers choose to acquire information to assess some characteristics and not others. Their choices affect firms' incentives to invest in quality and so lead to indirect externalities in consumers' choices. We characterize a model in which a monopolist invests in the quality of a product with two characteristics, and consumers are heterogeneous ex‐ante. Consumers do not internalize their influence on the firm's investment incentives when choosing which information to acquire. Cheaper information affects consumers' information gathering and thereby firm investment. This can paradoxically reduce consumer surplus, profits, and welfare.     

Product innovation with vertical differentiation: Is a monopolist's incentive weaker?

This paper compares the incentives for product innovation across different market structures when the new product is vertically differentiated and of lower quality, a common case empirically. We show that innovation incentive rankings across market structures can differ substantially when the new product is of lower rather than higher quality. In particular, the incentive to add the new product can be greater for a monopolist over the old product than for a firm that would face any degree of competition from the old product. This incentive ranking cannot occur when, instead, the new product is of higher quality as has been analyzed in previous work. Moreover, in that case, the incentive ranking is the same whether the market is covered or not covered, whereas in our setting the ranking can differ. With the market covered, our setting provides another environment where the monopolist can have the greatest incentive to innovate, as previously shown when the new product is horizontally differentiated. Together, both settings show that Arrow's famous result—a secure monopolist gains less from a nondrastic process innovation than would a competitive firm—does not always extend to nondrastic product innovations. However, in all the cases analyzed here, consumer welfare (though not total welfare) is always lower under monopoly, even when only the monopolist would add the new product.     

On the diffusion of electronic commerce

This paper analyzes retailers' adoption of e-commerce in a technology adoption race framework. An internet-based firm with no traditional market presence competes with an established traditional firm to adopt the e-commerce technology and sell to a growing number of consumers with on-line shopping capability. The focus of the analysis is on identifying how consumer loyalty, differences in firms' technology and consumers' preferences for the traditional versus the virtual market, and the expansion in market size made possible by the internet can affect the timing and sequence of adoption by firms, as well as the post-adoption evolution of prices. The model's implications are used to discuss empirical evidence on adoption patterns for different product categories and firm types.     

Incentives through consumer learning about tastes

We consider a long-lived firm that faces an infinite sequence of finitely-lived consumers. In each period, the firm can exert either high or low effort, which is the firm's private information. When consumers learn about the firm's talent from the outcomes of previous transactions, there exists no equilibrium in which the firm always exerts high effort. However, when consumers learn about their own tastes, such an equilibrium can exist. Consumer learning about tastes therefore is an alternative to reputational concerns that produces stable incentives. We discuss the implications of this mechanism for advertising, advertising content, and consumer education.     

COMPATIBILITY INCENTIVES OF A LARGE NETWORK FACING MULTIPLE RIVALS*

Under network effects, we analyze when a firm with the largest market share of installed‐base customers prefers incompatibility with smaller rivals that are themselves compatible. With incompatibility, consumers realize that intra‐network competition makes the rivals' network more aggressive than a single‐firm network in adding customers. Consequently, under incompatibility the unique equilibrium can entail tipping away from the largest firm whatever its market share. The largest firm is more likely to prefer incompatibility as its share rises (above fifty per cent is necessary) or the potential to add consumers falls; the number of rivals and strength of network effects have ambiguous implications.     

Vertical Contract Disclosure in Three-Tier Industries*

Consider a three-tier industry with a monopolist supplying a manufacturer which sells its product to final consumers through two retailers. Contracts are linear and secret. Hence, upon receiving an out-of-equilibrium offer, each retailer must form a belief about the identity of the deviating upstream firm. This beliefs' specification problem wipes out if an Open Book Accounting (OBA) policy is implemented, whereby the input price is disclosed to retailers. Under Cournot (Bertrand) competition, OBA increases industry profits and consumer surplus if retailers believe that any out-of-equilibrium offer is more likely to reflect a deviation by the upstream supplier (by the manufacturer).     

Partners' centrality diversity and firm innovation performance: Evidence from China

While most studies of firm innovation with a social network perspective have focused on the focal firm's network structure, we explore the value of second-order social capital by examining partners' network structure to better understand firm innovation. Specifically, we examine how centrality diversity of the focal firm's network partners affects its innovation performance. A longitudinal study of Chinese publicly listed manufacturing firms from 2000 to 2016 indicates that partners' centrality diversity in a firm's board interlock network is positively related to that firm's innovation performance. We also find that the focal firm's knowledge breadth weakens the effect of partners' centrality diversity on innovation performance for the focal firm, while the proportion of non-independent ties between the focal firm and its network partners strengthens the effect.     

Business model innovation and competitive imitation: The case of sponsor‐based business models

This paper provides the first formal model of business model innovation. Our analysis focuses on sponsor‐based business model innovations where a firm monetizes its product through sponsors rather than setting prices to its customer base. We analyze strategic interactions between an innovative entrant and an incumbent where the incumbent may imitate the entrant's business model innovation once it is revealed. The results suggest that an entrant needs to strategically choose whether to reveal its innovation by competing through the new business model, or conceal it by adopting a traditional business model. We also show that the value of business model innovation may be so substantial that an incumbent may prefer to compete in a duopoly rather than to remain a monopolist. Copyright © 2012 John Wiley & Sons, Ltd.     

Optimal bundle pricing under correlated valuations

We study optimal pricing issues for a monopolist selling two indivisible goods to a continuum of consumers with correlated private valuations over the goods, where the (positive or negative) correlation is modeled using copulas in the Fréchet family. We derive explicit optimal pricing schemes and comparative statics results for various environments in our setting. The optimal pricing schemes can take several forms, including pure bundling, partial mixed bundling, and mixed bundling, depending jointly on the degrees of asymmetry and correlation of the consumers’ valuations. The explicit optimal pricing schemes also enable us to investigate whether and how the monopolist’s profit can be further improved via random assignments.     

Customer,regulatory, and competitive pressure as drivers of environmental innovation

We develop an economic analysis in order to examine the effects of consumer, regulatory, and competitive pressure on firm investments in environmentally friendly production. Specifically, we ask: Why do firms vary in their levels of environmental innovation? Under what conditions are such pressures effective in bringing about environmental innovation? We first consider a monopolist who faces the twin pressures of reduced customer demand and regulatory penalties, as a result of its emissions. In response to these pressures, the firm has the opportunity to make a costly investment in reduction of emissions. Secondly, we consider a competitive scenario in which two firms compete for environmentally sensitive customers. Solving our model, we find that pressure has the intended effect as long as the firm's initial level of emissions is below a certain threshold. If the emissions are above this threshold, we find that pressure might have an adverse effect on the firm's environmental investment, and that subsidies that support environmental innovation can be a better alternative. We also show that competition over environmentally sensitive customers can improve the effectiveness of environmental pressures.     

Manipulation Through Biased Product Reviews*

We study a signal-jamming model of product review manipulation in which rational consumers consult product reviews and price to better estimate a product's quality, and a firm, whose quality is either high or low, chooses its price and how much bias to insert into product reviews. We show that both firm types always exert positive effort to manipulate product reviews, and, depending on the equilibrium price level, one or both of them can increase its sales. When the high-type firm exerts more effort than the low-type, review manipulation benefits consumers by raising [lowering] their demand for the high-quality [low-quality] product.     

Pace,rhythm, and scope: process dependence in building a profitable multinational corporation

Many potential benefits of foreign expansion have been identified in the literature, yet empirical support that multinational firms perform better than domestic firms is mixed. This paper takes a longitudinal perspective and argues that how much a firm benefits from having foreign subsidiaries depends on its process of internationalization. We argue that a firm's capacity to absorb expansion is subject to constraints: some expansion patterns increase profitability less than others, owing to diseconomies of time compression. We hypothesize that the speed of internationalization, the spread of the geographical and product markets entered, and the irregularity of the expansion pattern negatively moderate a firm's increase in profitability resulting from international expansion. Model estimations based on panel data raised strong support for these predictions. Copyright © 2002 John Wiley & Sons, Ltd.     

Strategic incentives when supplying to rivals with an application to vertical firm structure

We consider a vertically integrated input monopolist supplying to a differentiated downstream rival. With linear input pricing, at the margin the firm unambiguously wants the rival to expand—unlike standard oligopoly with no supply relationship—for either Cournot or Bertrand competition. With a two-part tariff for the input, the same result holds if downstream choices are strategic complements, but is reversed for Cournot with strategic substitutes. We analyze vertical delegation as one mechanism for inducing expansion or contraction by the rival/customer.     

On Stability in Competition: Tying and Horizontal Product Differentiation

We combine Hotelling’s model of product differentiation with tie-in sales. A monopolist in one market competes with another firm in a second market. In equilibrium firms choose zero product differentiation. Due to the tying structure no firm can gain the whole market by a small price reduction. A differentiation effect due to tie-in sales leads to this equilibrium stability.      

Intra‐industry diversification and firm performance

We study how intra‐industry product diversity affects firm performance by analyzing the implications of expanding a firm's product line within its core business. We conjecture that increases in product diversity initially undermine performance because of negative transfer effects but then improve it due to economies of scope. We further theorize that this U‐shaped effect of product diversity becomes more pronounced as the firm increases the intensity of its technology investment, yet is likely to be attenuated by the firm's accumulated experience with intra‐industry diversification. Data on 156 U.S.‐based software firms operating from 1990 to 2001 furnish support for these conjectures. Our study advances emerging research on intra‐industry diversification by underscoring some of its contingent performance effects. Copyright © 2013 John Wiley & Sons, Ltd.     

Price and quality discrimination in durable goods monopoly with resale trading

We examine a durable goods monopolist’s optimal dynamic price and product quality strategy when buyers are rational and can trade used durables among themselves. In contrast to the usual credibility problem of the durable goods monopolist, intertemporal quality discrimination introduces a time-inconsistency problem of not raising prices against high-valuation consumers who delay purchase for quality upgrades. Resale trading ameliorates this time-inconsistency problem and allows the monopolist to effectively price discriminate, especially when the buyers are patient. The monopolist’s optimal price and quality offers in the new good market exhibit complex dynamic patterns, and new good prices can fall as product quality improves even in the absence of entry threats or learning economies. Initial quality distortions are followed by steady-state quality allocations that are always efficient for the high-valuation buyers, but sometimes also for the marginal consumer-types. Both the resale trading frequency and the price discount for secondhand goods are driven by the pace of strategic quality obsolescence in the new good market.     

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.     

Reassessing the fundamentals and beyond: Ronald Coase,the transaction cost and resource‐based theories of the firm and the institutional structure of production

In this paper, three points are argued. The first is that Ronald Coase, best known as the forefather of transaction cost theory, foresaw many of the critical questions that proponents of the resource‐based view are concerned with today. The second is that resource‐based theory plays a potentially much more critical role in economic theory and in explaining the institutional structure of production than even many resource‐based scholars recognize. The last point is that a more complete understanding of the organization of economic activity requires a greater sensitivity to the interdependence of production and exchange relations. The arguments presented in this paper highlight important, but relatively ignored, elements in Coase's work that inform strategy research. More importantly, this paper makes the case for a triangular alignment between the triumvirate of governance structure, transaction, and resource attributes and demonstrates how the identity and strategy of a particular firm influences how its resources interact with the transaction and how the firm chooses to govern it. The general argument is then applied to the context of interfirm collaborative relations, where the key focus is broadened from just cost to also include skills/knowledge and the interdependence between cost and skills with respect to firm boundaries, both in terms of choice and nature. Such a broadening of focus enables us to additionally examine the transacting process as a productive endeavor, which underpins the co‐evolution of the competencies of partner firms. Copyright © 2002 John Wiley & Sons, Ltd.     

Aftermarket power and foremarket competition

I revisit the issue of aftermarkets by developing an infinite period model with overlapping consumers. If the aftermarket is characterized by constant returns to scale, then social surplus and consumer surplus are invariant with respect to aftermarket power. Under increasing returns to scale, however, greater aftermarket power leads to: greater concentration in the foremarket; higher barriers to entry; higher social surplus; and possibly higher consumer surplus.     

A note on vertical integration as entry

This paper examines the incentive for an intermediate product monopolist to integrate forward into a competitively-structured final product industry when that industry has failed to achieve a position of long-run equilibrium. It is shown that the upstream monopolist's profits are increased more by entering the downstream industry than are the profits of other firms unrelated to this industry. Consequently, the monopolist is more likely to overcome whatever entry barriers might exist at the downstream stage. The welfare effects of this form of integration are shown to be positive, and a theoretical foundation is provided for the policy distinction commonly made between vertical integration by a major acquisition versus integration through internal expansion or a toehold acquisition followed by expansion.