R&D-induced industry polarization and shake-outs

We consider the standard two-stage game of R&D and Cournot competition with ex ante identical firms but depart from the literature in assuming that R&D is characterized by mildly, instead of strongly, decreasing returns to scale. We establish that only extreme R&D levels are possible at equilibrium, and that for a broad range of parameters, equilibria are asymmetric in R&D levels, possibly leading one firm to endogenously exit. This provides a simple link between returns to scale in R&D and industry polarization, including shake-outs. A novelty is that exit may be triggered by positive opportunities in a strategic setting. Given the original nature of our R&D equilibrium, a complete welfare analysis is conducted, including a possible role for R&D subsidies.     

On Welfare under Cournot and Bertrand Competition in Differentiated Oligopolies

Häckner (2000, Journal of Economic Theory 93, 233–239) shows that in a differentiated oligopoly with more than two firms, prices may be higher under Bertrand competition than under Cournot competition, implying that the classical result of Singh and Vives (1984, Rand Journal of Economics, 15, 546–554) that Bertrand prices are always lower than Cournot prices is sensitive to the duopoly assumption. Häckner (2000, Journal of Economic Theory, 93, 233–239), however, leaves unanswered the important question of whether welfare may be lower under price competition. This note shows that in Häckner’s model both consumer surplus and total surplus are higher under price competition than under quantity competition, regardless of whether goods are substitutes or complements.     

Endogenous capacities and price competition: The role of demand uncertainty

We analyze the role of demand uncertainty in markets of fixed size, in which firms take long-run capacity decisions prior to competing in prices. We characterize the set of subgame perfect Nash equilibria under various assumptions regarding the nature and timing of demand uncertainty. In order to prove equilibrium existence, we identify a sufficient condition for the capacity choice game to be submodular. This condition resembles the standard downward-sloping marginal revenue condition used in Cournot games. A robust conclusion of the analysis is that equilibrium capacity choices are asymmetric, even when firms are ex-ante identical. Concerning the equivalence between the capacity-price game and the Cournot game, we find that with inelastic demands, the equilibria of the former belong to the equilibrium set of the latter. However, as compared to the Cournot game, the capacity-price game leads to lower prices and generates price dispersion.     

Rent seeking in groups

Rent-seeking contests between groups involve conflicts of interests at the levels of individuals, groups, and the society as a whole. We conduct a series of economic experiments to study the behavior of groups and individuals competing against each other in rent-seeking contests. We find substantial over-contribution to rent-seeking relative to the equilibrium predictions of standard models regardless whether individuals compete against other individuals, groups compete against other groups, or individuals compete against groups.     

Price dynamics and collusion under short-run price commitments

We consider a dynamic homogeneous oligopoly in which firms set prices repeatedly. Theory predicts that short-run price commitments increase profits and may lead to less price stability. The experiments that we conducted provide support for the first effect and against the second effect when a random ending rule is applied. When a fixed ending rule is applied, we find no significant impact of short-run price commitments on profits and price stability.     

Comparing Cournot and Bertrand Equilibria in the Presence of Spatial Barriers and R&D

Review of Industrial Organization - We compare the equilibria under Bertrand and Cournot competition in the spatial barbell model where spatial barriers and process R&D are involved. We...     

The role of online platforms for media markets — Two-dimensional spatial competition in a two-sided market

We analyze the market for online and offline media in a model of two-dimensional spatial competition where media outlets sell content and advertising space. Consumer preferences are distributed along the style and type of news coverage where the distance costs may vary across dimensions. For integrated provision of online and offline platforms we show that entering the online market reduces average profits and may even constitute a prisoner's dilemma. Specialized provision may yield polarization in the style and type dimensions. This is in contrast to the maximum–minimum differentiation result previously established in the literature on multidimensional horizontal competition. We show that maximal differentiation in both dimensions occurs due to the discrete nature of the type dimension and asymmetric advertising markets.     

Serving the poor: Multisided mobile service platforms,openness, competition,collaboration and the struggle for leadership

Four billion people at the base of the economic pyramid live on incomes below $3000 a year in local purchasing power, and more often than not, lack consistent access to services, such as water, healthcare, banking or agricultural know-how. Rapid advances in mobile technology offer the potential to mediate access to essential services. Through this research, the answers to the following question were explored: will mobile service platforms bridge the gap between service providers and people living at the base of the pyramid in developing countries? Anchored in interviews with 31 experts in the field of mobile and ICT, qualitative analysis starting from platform leadership to explain the role of mobile service platforms is presented: how operator, device and service provider centric platforms compete, collaborate and open up (or not) for delivering scalable services to the poor. Based on the analysis in this paper, it is portended that although operator centric platforms are in pole position, device centric platform providers, being astute innovators, are positioned to close the lead by presenting alternatives to bridge the gap in developing countries. This paper frames the current debate on M4D through the lens of platform theory, and aims to provide guidance to policy makers to improve access to services for the poor.     

On platforms,incomplete contracts,and open source software

We analyze investment incentives for a firm A owning a software platform and an application and a firm B deciding whether to develop a new application for the platform. While B's entry helps the success of the platform, B fears ex post expropriation by A and is hence reluctant to enter and invest. We show that different platform governance structures prevalent in the Information and Communication Technology industry (integrated, proprietary, standardized, open source platform) serve to balance investment incentives for the platform and for the applications.     

Unionization structure, licensing and innovation

We show the effects of the unionization structure (viz., decentralized and centralized unions) on a firm's incentive for technology licensing and innovation. The incentive for technology licensing is stronger under decentralized unions. We identify circumstances under which the benefit from licensing creates a stronger incentive for innovation under decentralized unions. If the union's preference for employment is high, the benefit from licensing may create higher incentive for innovation under decentralized unions. However, if the union's preference for wage is high enough, the incentive for innovation is higher under a centralized union irrespective of licensing ex-post innovation. If the centralized union decides whether or not to supply workers to all firms, the possibility of higher innovation under decentralized unions increases. We further show that perfectly substitutable workers can be better off under decentralized unions if the labor productivity depends on the unionization structure, which occurs in our analysis when, e.g., licensing after innovation occurs only under decentralized unions or innovation (with no licensing) occurs only under a centralized union.     

Cartel formation and pricing: The effect of managerial decision-making rules

We experimentally investigate how the managerial decision-making process affects choices in a Bertrand pricing game with an opportunity to form non-binding cartels. To do so we compare the effects of three decision-making rules for the firm (decisions by CEOs, majority rule and consensus) to each other and to decisions in a benchmark consisting of single-individual firms. It has been argued elsewhere that groups behave more competitively than individuals. In this setting this predicts that for all three decision-making rules we should observe fewer cartels and lower prices. This is not what we find. For the formation of cartels, there are no differences across treatments. For prices asked, we find that first, cartels lead to higher prices in all treatments, despite the fact that they are non-binding. Second, the decision-making rules strongly affect the prices asked. One thing that stands out is that firms run by CEOs ask higher prices (i.e., defect less often from the cartel) than observed in the other treatments.     

Information value and externalities in reputation building

In sequential equilibrium theory, reputation building is independent of whether the reputation builder is matched with one long-run partner or a series of short-run “strangers”. We observe, however, that reputation builders are significantly more challenged by long-run players in both laboratory chain store and buyer-seller games. Reputation builder behavior is more predictable than implied by equilibrium, and so reputation information has more economic value than implied by equilibrium. For short-run players, this reputation information value is an externality. For long-run players, the value of the information is internalized and so they have greater incentive to challenge the reputation builder.     

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.     

A choice experiment model for beef: What US consumer responses tell us about relative preferences for food safety,country-of-origin labeling and traceability

Several food safety issues have prompted questions regarding the role of country-of-origin labeling, traceability, and food safety inspections in consumers’ perceptions of food safety and quality. The importance of origin-labeling and traceability have been discussed in the EU for some time. North American cases of mad cow disease have led to increased discussions of these topics in the US, however, relatively little research has been conducted to examine the value US consumers place on these attributes. Choice experiments were used to analyze US consumers’ relative preferences and willingness-to-pay for these meat attributes in labeled ribeye beef steaks. Relatively speaking, consumers value certification of USDA food safety inspection more than any of the other choice set attributes, including country-of-origin labeling, traceability and tenderness. As a result, indication of origin may only become a signal of enhanced quality if the source-of-origin is associated with higher food safety or quality.     

Experimental Research on the Relations between Stereoscopic Vision and Mechanical Designers' Activities, with a View to C.A.D. Teaching

This study examines the influence of two crossed factors upon the performance of a subject whose aim is to understand the functioning of a complex piece of technical apparatus, in this instance an automated arm from an assembly line. The primary factor was the encoding degree of the third dimension which constitutes the representation of the object. The methods of presentation were: a 3-D photograph, an axonometric perspective drawing and a first angle orthographic drawing. The second factor was professional experience. The subjects were, on the one hand, first year technology pupils (15--16 year-olds) and, on the other hand, professional draughtsmen from RENAULT. The results obtained with the 3-D photograph were twice as good as those obtained with the axonometric perspective or the orthographic drawing. It should be pointed out that experience did not effect the score. This revised version was published online in July 2006 with corrections to the Cover Date.     

Platforms,systems competition,and innovation: Reassessing the foundations of communications policy

Focusing on the effects of policy on investment and innovation this paper examines whether the conceptual foundations of sector regulation are aligned with the current technological and economic conditions of advanced communications. One conclusion is that the prevailing theories and practices are only adequate if the policy challenge can be reasonably approximated as a static or steady-state problem but they may have serious shortcomings if this is not possible. The article proceeds with a review and critical examination of two approaches that could augment or possibly replace the traditional approach under conditions of dynamic competition—the theory of platform markets and systems approaches. Both frameworks model aspects of competition in interconnected systems in more detail and offer novel insights to inform communications policy in an era of continuous change. Nonetheless, important theoretical and implementation gaps remain that will require additional efforts by researchers and practitioners.     

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.     

The degree of competition in the advertising industry

After a merger wave began among advertising agencies in the late 1960's, the Federal Trade Commission investigated the anticompetitive effects of the mergers and concluded that the industry would remain competitive. In this paper, we employ a method suggested by Bresnahan to investigate the issue of competition in the advertising industry. The method uses industry-level data over the period 1972–87 to consider the determinants of supply and demand for advertising messages and to calculate the degree of market power on the supply side of the market. Statistical results support the hypothesis that the industry was competitive over this period.We thank Robert Coen of McCann-Erickson, Inc., for providing data on advertising costs and expenditures and W. Bradford Todd of the Richards Group for information about the industry. Lacy Glenn Thomas directed us to McCann-Erickson. We also thank James C. Murdoch, two anonymous referees, and the Editor, William G. Shepherd. Pornpong Sumanun provided research assistance. The usual disclaimer applies.