In a rapidly growing industry, potential entrants strategically choose which local markets to enter. Facing the threat of additional entrants, a potential entrant may lower its expectation of future profits and delay entry into a local market, or it may accelerate entry due to preemptive motives. Using the evolution of local market structures of broadband Internet service providers from 1999 to 2007, we find that the former effect dominates the latter after allowing for spatial correlation across markets and accounting for endogenous market structure. On average, it takes 2 years longer for threatened markets to receive their first broadband entrant. Moreover, this entry delay has long‐run negative implications for the divergence of the U.S. broadband infrastructure: 1 year of entry delay translates into an 11% decrease on average present‐day download speeds.

Kyle Wilson

Mo Xiao

Peter F. Orazem

Previously Featured Articles

27.1 – The O-Ring Theory of the Firm

by Michael T. Rauh

27.1 – The magic of the new: How job changes affect job satisfaction

by Adrian Chadi and Clemens Hetschko
      1. Crowdfunding: Geography, Social Networks, and the Timing of Investment Decisions, by Ajay Agrawal, Christian Catalini, and Avi Goldfarb, Summer 2015
      2. Privacy Regulation and Market Structure, by James Campbell, Avi Goldfarb, and Catherine Tucker, Spring 2015
      3. Endowment Origin, Demographic Effects, and Individual Preferences in Contests, by Curtis R. Price and Roman M. Sheremeta, Fall 2015
      4. The Provision of Relative Performance Feedback: An Analysis of Performance and Satisfaction, by Ghazala Azmat and Nagore Iriberri, Spring 2016
      5. Promotion Signals, Experience, and Education, by Michael Bognanno and Eduardo Melero, Spring 2016

Recently Published Articles

Volume 31, Issue 3, Fall 2022 (current issue)

Market effects of new product introduction: Evidence from the brew-at-home coffee market

Philip G. Gayle and Ying Lin
With retail coffee data spanning 5 years after the single-cup brew coffee pods were introduced to grocery chains, this paper empirically studies the market effects of new product introduction in the brew-at-home coffee market. We use a structural model of demand and supply to capture the changes in consumers’ preference for this new product over time.

Reference-price shifts and customer antagonism: Evidence from reviews for online auctions

Tobias Gesche
This paper investigates how bidders in an auction become antagonized over their successful bid. Using data from a large-scale sales campaign on eBay shows that auction buyers use the platform's feedback system to punish the seller when they discover that the same item is later offered for a lower fixed price.

Dynamic monopoly and consumers profiling accuracy

Didier Laussel, Ngo Van Long, and Joana Resende
Using a Markov-perfect equilibrium model, we show that the use of customer data to practice intertemporal price discrimination will improve monopoly profit if and only if information precision is higher than a certain threshold level. This U-shaped relationship lends support to a popular view that knowledge is good only if it is sufficiently refined.

Platform price parity clauses and market segmentation

Joan Calzada, Ester Manna, and Andrea Mantovani
Price parity clauses (PPCs) are widely adopted by online platforms to force client sellers not to lower their prices elsewhere. We investigate under what conditions online travel agencies (OTAs) decide to apply PPCs, and how this affects hotels' listing decisions on OTAs.

Information accuracy and collusion

Stefano Colombo and Aldo Pignataro
In this study, we investigate firms' ability to collude when price discrimination based on the inherited market is possible, but the information accuracy about the inherited market is imperfect. We show that the level of information accuracy affects collusion sustainability nonmonotonically, according to the starting level of information and the consumers' reservation price. Moreover, we show that banning price discrimination might increase the sustainability of tacit collusion.

On the profitability of interfirm bundling in oligopolies

Sang-Hyun Kim and Jong-Hee Hahn
This paper examines the profitability of interfirm bundling among independent single-good producers in a two-dimensional Hotelling framework. We show that interfirm bundling tends to relax price competition by preventing consumers from mixing and matching (i.e., making it difficult to switch brands) and therefore is more profitable than separate sales, provided that firms are sufficiently symmetric.

Information technology and the spatial reorganization of firms

Youngho Kang and Jeongmeen Suh
This study investigates how the adoption of an enterprise resource planning (ERP) system affects firms' spatial organization. We first provide a conceptual framework that explains how a firm reallocates different types of labor across establishments in different locations by adopting an ERP system, to lower internal coordination costs. Guided by this framework, we empirically find that ERP adopters increase production activities in non-headquarter (HQ) establishments, while they decrease these activities in their HQ.

The local bias in equity crowdfunding: Behavioral anomaly or rational preference?

Lars Hornuf, Matthias Schmitt, and Eliza Stenzhorn
We use data on individual investment decisions to analyze whether investors in equity crowdfunding direct their investments to local firms and whether specific investor types can explain this behavior. We then examine whether investments exhibiting a local bias are more or less likely to fail. We show that investors exhibit a local bias, even when we control for those with personal ties to the entrepreneur.

Decentralizing investment: Evidence from municipal organization after close elections

Gabriel Natividad
I use close municipal elections in a nonparametric regression discontinuity framework to study the organizational dimension of local public investment following a decentralization reform in Peru.

Volume 31, Issue 2, Summer 2022

Price competition online: Platforms versus branded websites

Oksana Loginova
The focus of this theoretical study is price competition when some firms operate their own branded website while others sell their products through an online platform, such as Amazon Marketplace. I derive the equilibrium prices and profits, analyze the firms' behavior in the long run, and compare the equilibrium outcome with the social optimum.

A theory of maximalist luxury

Zhenqi (Jessie) Liu, Pinar Yildirim, and Z. John Zhang
The availability of high-quality, low-price counterfeits in many luxury markets threatens the role of luxury goods as a status symbol. If those counterfeits look and feel the same as the authentic counterparts, as many professional authenticators observe, and they are available at a fraction of the price of authentic goods, why would self-interested consumers purchase authentic luxury goods? In this paper, we propose that the presence of high-quality, low-price counterfeits can, surprisingly, motivate the wealthy consumers to pursue what we term as the “maximalist luxury” strategy.

Behavior-based price discrimination with nonuniform distribution of consumer preferences

Rosa-Branca Esteves, Qihong Liu, and Jie Shuai
Existing theories of competition with behavior-based price discrimination typically assume that consumer valuations are distributed uniformly. This assumption implies that the availability of BBPD creates a prisoner's dilemma in which firms are worse off and consumers better off in equilibrium, relative to uniform pricing. In this paper, we consider a wider class of consumer distributions and show that profit and welfare results change qualitatively.

Consumer informedness: A key driver of differentiation

Amit Pazgal, David Soberman, and Raphael Thomadsen
Minimum Differentiation is the equilibrium in spatial models with fixed prices, while firms move apart to reduce the intensity of competition when firms set prices. Nevertheless, firms collocate in many industries where marketing-active firms compete on price. This puzzle is called the Hotelling paradox. We offer a resolution of this puzzle by noting that imperfect information about the availability of all products can soften competition, allowing firms to produce similar products without engaging in intense price competition.

Reliance on science by inventors: Hybrid extraction of in-text patent-to-article citations

Matt Marx and Aaron Fuegi
We curate and characterize a complete set of citations from patents to scientific articles, including 16.8 million from the full text of USPTO and EPO patents. In-text citations are more diverse temporally, geographically, and topically; moreover, they are less self-referential and less likely to be copied from one patent to the next. In replicating two articles that use only front-page citations, we show that failing to capture in-text citations leads to understating the role of academic science in commercial invention.

Supply chain technology spillover, customer concentration, and product invention

Po-Hsuan Hsu, Hai-Ping Hui, Hsiao-Hui Lee, and Kevin Tseng
Using a panel of approximately 1670 US technology-intensive supplier firms during the period 2001–2013, we find that the number and value of new products of a supplier firm are positively related to technology spillover it receives from its supply chain partners (i.e., buyer firms). However, this positive relation is negatively related to customer concentration, which may be attributed to the supplier firm's narrowed technology search scope.

Does female labor scarcity encourage innovation? Evidence from China’s gender imbalance

Taoran Chen, Zhibo Tan, and Xiaobo Zhang
This paper studies how the scarcity of different types of workers in a region shapes firm innovation across industries, using the unbalanced regional sex ratios in China as a source of identification strategy. The empirical results show that the shortage of female workers has spurred firms in female-intensive industries to innovate more, particularly in industries with low substitution between female and male workers, consistent with the price effect of the directed technical change theory.

Air pollution and CEO compensation: Evidence from China

Kam C. Chan, Tao Chen, Baohua Liu, and Junfeng Wu
This paper complements the literature on green finance by probing whether air pollution matters for CEO compensation. Using a sample covering 240 cities in 31 provinces in China from 2005 to 2017, we document a positive association between air pollution and CEO compensation. These findings indicate that firms headquartered in areas with unhealthy air compensate their CEOs with higher pay than those headquartered in areas with better air quality.

Designing relational sanctions in buyer–supplier relationships

Juan-José Ganuza and Fernando Gomez
This paper explores the role of supplier performance measures (scorecards and others) in the internal design of relational contracts. We analyze a simple supplier–buyer repeated interaction in which incentives arise by the threat of terminating the relationship—temporarily or permanently.

Volume 31, Issue 1, Spring 2022

Competitive survival in a devastated industry: Evidence from hotels during COVID-19

Michael D. Noel
Using the lodging industry as the application, this article shows that businesses' failure risk in a pandemic depends on a business' native ability to adapt to changing safety needs, in particular its ability to provide a socially distanced environment. Effects are identified by comparing prepandemic expectations of outcomes to updated within-pandemic expectations of outcomes, all while holding the place and the time of consumption fixed.

Streaming platform and strategic recommendation bias

Marc Bourreau and Germain Gaudin
We consider a platform that carries content from two upstream content providers and presents personalized recommendations to participating customers. We establish that if consumers are sufficiently insensitive to bias, the recommendation system allows the platform to credibly threaten upstream providers to steer consumers away from their content, which reduces their market power. We also investigate the effects of vertical integration by the platform and show the robustness of our results to nonlinear (personalized) streaming services.

A world without borders revisited: Impact of online sales tax collection on shopping and search

Mallick Hossain
I study the effect of closing the online sales tax loophole on online spending and search. Using online shopping data, sales taxes, and Amazon's staggered sales tax collection, I estimate that a household's tax elasticity is −1.9, implying a 13% decline in Amazon's revenues upon sales tax collection.

Attention to online sales: The role of brand image concerns

Markus Dertwinkel-Kalt and Mats Köster
We provide a novel intuition for why manufacturers restrict their retailers' ability to resell brand products online. Our approach builds on models of salience-driven attention according to which price disparities across distribution channels guide a consumer's attention toward prices and lower her appreciation for quality.

Uniform and targeted informative advertising with asymmetric customer loyalty

Michael Arnold, Eric Schmidbauer, and Lan Zhang
We model optimal firm pricing and advertising intensity strategies under both uniform and targeted advertising regimes in a duopoly market in which firms have asymmetric loyal market shares and must engage in costly informative advertising to attract customers. Our main results explore the strategic trade-off between advertising intensity and price competition and demonstrate how optimal firm pricing, advertising strategies, and equilibrium outcomes differ with the relative size of a firm's loyal market and with the advertising regime.

Competitive response to unbundled services: An empirical look at Spirit Airlines

Lei He, Myongjin Kim, and Qihong Liu
In 2010, Spirit Airlines announced that it would start charging passengers for carry-on baggage. Using a vector of route-level characteristics, we construct a matched group consisting of routes which best match those served by Spirit (the treated group). We then run a difference-in-difference estimation using the treated and matched group, and examine the impact of Spirit's baggage fee policy on its rivals' ticket prices.

Managing automation in teams

Mustafa Dogan and Pinar Yildirim
In this paper, we study a principal's decision to introduce automation into a production process governed by a team of employees. When introduced, automation displaces an employee with a machine. This displacement increases efficiency as the machine carries out the tasks of the employee at a lower cost, and reduces the scope of moral hazard as the machine does not make unobserved effort choices. We show that, despite the direct benefits, a principal may prefer not to adopt automation due to its indirect costs.

The effect of options to reward and punish on behavior in bargaining

Svetlana Pevnitskaya and Dmitry Ryvkin
We use a lab experiment to investigate how providing the responder with options to reward and/or punish the proposer postacceptance affects behavior in ultimatum bargaining. We find that the presence of costly reward and punishment options affects behavior of both bargaining parties, even if those instruments are rarely used.

Vertical integration and capacity investment in the electricity sector

David P. Brown and David E. M. Sappington
We examine the incentives for and the effects of vertical integration in the electricity sector. We find that vertical integration often reduces retail prices and increases industry capacity investment, consumer surplus, and total welfare. Unilateral vertical integration often is profitable, and so arises in equilibrium. However, ubiquitous vertical integration can reduce aggregate industry profit.

Volume 30, Issue 4, Winter 2021

Buyers’ role in innovation procurement: Evidence from US military R&D contracts

Francesco Decarolis, Gaétan de Rassenfosse, Leonardo M. Giuffrida, Elisabetta Iossa, Vincenzo Mollisi, Emilio Raiteri, and Giancarlo Spagnolo
This study provides the first quantification of buyers' role in the outcome of R&D procurement contracts. We combine together four data sources on US federal R&D contracts, follow-on patented inventions, federal public workforce characteristics, and perception of their work environment. By exploiting the observability of deaths of federal employees, we find that managers' death events negatively affect innovation outcomes: a 1% increase in the share of relevant public officer deaths causes a decline of 32.3% of patents per contract, 20.5% patent citations per contract, and 34.3% patent claims per contract.

Do exit options increase the value for money of public–private partnerships?

Marco Buso, Cesare Dosi, and Michele Moretto
We study the effects of granting an exit option allowing the private party to terminate a Public–Private Partnerships contract early if it turns out to be loss-making. In a continuous-time setting with hidden information about the private returns on investment, we show that an exit option, acting as a risk-sharing device, can soften agency problems and, in so doing, spur investment and increase the government's expected payoff, even while taking into account the costs that the public sector will have to meet in the future to resume the project.

Private labels and product quality under asymmetric information

Zhiqi Chen and Heng Xu
Contrary to the existing theories of private label (PL) products, we demonstrate that the introduction of a PL product by a retailer may improve the profit of the supplier of a competing national-brand (NB) product.

Mobile Internet usage and usage-based pricing

Jeffrey Prince and Shane Greenstein
Using data on mobile Internet usage of thousands of individuals, we provide some of the first analyses linking mobile usage to key demographics such as income. We find a reverse-U relationship between mobile Internet usage and income—notably different than the monotonically declining relationship found on home devices. We then construct a simple model of mobile Internet usage that incorporates demand features suggested by our empirical finding and prior empirical findings on device adoption and usage.

Too big to succeed? Overstaffing in firms

Hans K. Hvide and Yanren Zhang
Overstaffing appears to be a source of significant inefficiencies in organizations, but there is little economic theory that informs us why. We extend the canonical Lazear–Rosen tournament model to a dynamic setting that yields overstaffing at the managerial level.

Promotions, managerial project choice, and implementation effort

Frédéric Loss and Antoine Renucci
In our model where career concerns take the form of promotion, managers use projects and effort to influence the labor market beliefs regarding their ability. We show that managers consider how projects affect the extent to which posterior beliefs can differ from initial beliefs, the precision of posterior beliefs, and equilibrium implementation effort costs.

Social efficiency of entry: Implications of network externalities

Debasmita Basak and Emmanuel Petrakis
We examine the welfare effects of entry in the presence of network externalities. We show that if network goods are fully incompatible, entry is socially insufficient as long as the entry cost is high, the goods are sufficiently differentiated, and the degree of network externality is low. Further, we show that as the degree of compatibility between the network goods increases, insufficient entry becomes more likely. Our findings provide policy guidelines for anticompetitive and procompetitive entry regulations.

Exclusive dealing when upstream displacement is possible

Ke Liu and Xiaoxuan Meng
We study exclusive dealing when the incumbent may be displaced by a more efficient entrant due to the need for a firm to pay a fixed cost to remain active. We show that the incumbent can deter socially efficient entry through exclusive contracts under the one-buyer-one-supplier framework. This result continues to hold in the presence of product differentiation, in which case exclusion is more likely to occur when the efficiency gap between the entrant and the incumbent falls into an intermediate range.

The role of expertise in syndicate formation

Sylvain Bourjade
In most initial public offerings around the world, an underwriter selects syndicate members and uses their information to set the offering price. The objective of this paper is to develop a model of the “book building” process in which the formation of the syndicate is an endogenous decision variable. I show that the underwriter faces a tradeoff between the cost of extracting information and valuation accuracy.

Volume 30, Issue 3, Fall 2021

Organization of R&D outsourcing: Asymmetric cross-effects between locations

María García-Vega and Elena Huergo
When companies acquire R&D from external national providers, would they benefit if they also acquired knowledge from foreign providers? And the other way around? In this paper, we try to answer these questions by empirically examining the cross-effects of international and national R&D outsourcing to generate innovation.

Can information economics explain the organization of productive facilities?

Phillip J. Lederer and Xiaobo Zheng
A management system exists to coordinate, control, and make decisions about activities within an organization. These functions are information intensive, and therefore the design of management hierarchy has much to do with information-processing economics. Most economic entities' management structures are described by “an organization chart” which is a network of departments. The goal of this paper is to take an analytical look at management hierarchy modeled as a tree with information-processing departments at nodes.

Information gathering by overconfident agents

Justin Downs
A principal hires an agent to both gather information about a project's costs and implement it. The agent's information-gathering effort and what he learns are his private information. I allow the agent to be overconfident in the sense that he underestimates his expected cost of implementation and study the effects this overconfidence has on the efficiency of information acquisition and implementation.

On the precision of information

Samuel C. A. Pereira
This paper explores a model in which the agent's effort affects (solely) the precision (variance) of a performance measure (signal) of the outcome. When moral hazard and adverse selection are considered together, and there is enough uncertainty related to adverse selection, the risk-sharing rule is above the first-best for more efficient types, but below the first-best for less efficient types. Further, the precision of the signal increases with the expected outcome.

When market unraveling fails and mandatory disclosure backfires: Persuasion games with labeling and costly information acquisition

Ennio Bilancini and Leonardo Boncinelli
In this paper, we develop a variant of the persuasion game by Milgrom and Roberts to study the emergence and the desirability of product labeling when buyers can acquire information on the quality of the product by paying a cost. Labeling is modeled as the (verifiable) public disclosure of an otherwise unobservable trait of the seller that is correlated with the quality of the product. Our main finding is that market unraveling can fail, in which case imposing mandatory disclosure can backfire.

Experiments on creativity and work design

Cortney S. Rodet
This study uses a controlled laboratory experiment to understand the impact of time constraints and goal setting on creativity. I find that reducing task constraints by making time constraints ambiguous increases the creativity of ideas without undermining their quantity, relative to the baseline. I also find that a nonbinding quantity-oriented goal increases the quantity of ideas without reducing creative quality. Likewise, a nonbinding creativity-oriented goal increases the creativity of ideas without decreasing the number of ideas.

Product selection in online marketplaces

Federico Etro
A marketplace such as Amazon hosts many products by third party sellers and acts as a first party or private label retailer. Assuming an advantage of Amazon in logistics and of sellers in marketing, we investigate whether entry by Amazon is excessive from the point of view of consumers.

Exclusive content in two‐sided markets

Akifumi Ishihara and Ryoko Oki
This study investigates the role of exclusive content provision in two‐sided markets in which both sides are allowed to join multiple platforms.

Intertemporal stability of survey-based measures of risk and time preferences

Andreas C. Drichoutis and Achilleas Vassilopoulos
This paper provides theory and evidence on airline bag fees, offering insights into a real-world case of product unbundling. The theory predicts that an airline's fares should fall when it introduces a bag fee, but that the full-trip price (the bag fee plus the new fare) could either rise or fall.