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Volume 27, Issue 2, Summer 2018

Poaching in media: Harm to subscribers?

Elias Carroni

Two media platforms compete for heterogeneous users bothered by commercials and sell advertising spaces to firms. In a two‐period model, media are allowed to condition subscription prices on the past behavior of users. Within‐group price discrimination intensifies media competition on the firms’ side, as some firms advertise only on one media outlet (single‐home), where they can meet early users and switchers. As a consequence, advertising revenues are reduced and this puts an upward pressure on subscription prices. However, price discrimination also induces stronger within‐group competition to poach the rival’s users. Depending on the balance between these two forces, conditioning subscription prices on past behavior might be beneficial or detrimental to users, whereas it is always detrimental to platforms. In relation to within‐group uniform pricing, total welfare might increase or decrease, as the lower advertising intensity may entail either underprovision or a mitigation of overprovision of advertisements.

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Multibrand pricing as a strategy for consumer search obfuscation in online markets

Stephen McDonald and Colin Wren

This paper argues that a firm with multiple brands can obfuscate consumer search by excluding the brands of other firms from a consumer’s consideration set. This is examined empirically by regressing price data for a leading U.K. motor insurance price comparison site (or “shopbot”). It finds that multibrand firms own three‐quarters of brands in this market, and that allowing for other brand strategies, they post significantly lower and clustered prices relative to other firms. The firms also conceal their brand ownership, consistent with search obfuscation. The results are not otherwise explained and they have implications for market competitiveness.

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Volume 27, Issue 2, Summer 2018

Multibrand pricing as a strategy for consumer search obfuscation in online markets

Stephen McDonald and Colin Wren
This paper argues that a firm with multiple brands can obfuscate consumer search by excluding the brands of other firms from a consumer's consideration set. This is examined empirically by regressing price data for a leading U.K. motor insurance price comparison site (or “shopbot”).

Contractual structures and consumer misperceptions

Christian Michel
We analyze how firms can design contracts to strategically induce consumer misperceptions. A fraction of consumers is naive and underestimates the costs of claiming a warranty payment in the event of product breakdown. This leads to an inference error that makes consumers prone to overpredict product quality, which a firm can profitably exploit.

Inefficient NGO labels: Strategic proliferation and fragmentation in the market for certification

Anthony Heyes and Steve Martin
Nongovernmental organization (NGO) certification is a prerequisite for corporate engagement in enhanced social behaviors in many settings. Labels with broad scope (like “sustainability”) coexist with niche competitors much narrower in scope (like “bird-friendliness”). Modeling multi-issue competition between NGOs allows us to be the first to analyze label fragmentation and provide a novel perspective on proliferation that has frustrated practitioners.

Poaching in media: Harm to subscribers?

Elias Carroni
Two media platforms compete for heterogeneous users bothered by commercials and sell advertising spaces to firms. Within-group price discrimination intensifies media competition on the firms' side, as some firms advertise only on one media outlet (single-home), where they can meet early users and switchers. However, price discrimination also induces stronger within-group competition to poach the rival's users. Depending on the balance between these two forces, conditioning subscription prices on past behavior might be beneficial or detrimental to users, whereas it is always detrimental to platforms.

Behavior‐ and characteristic‐based price discrimination

Stefano Colombo
We develop a model of behavior‐ and characteristic‐based discriminatory pricing where consumers are heterogeneous both in tastes and in price sensitivity.

The role of performance appraisals in motivating employees

Jurjen J.A. Kamphorst Otto H. Swank
Workers' rewards and career perspectives often depend on how their supervisors perceive their performance. However, evaluating a worker's performance is often difficult. Supervisors give, on average, “too” positive appraisals, and both positive and negative feedback can (de)motivate workers.

Skill development, bargaining power, and a theory of job design

Seongwuk Moon
We examine the job design decision in the context of skill development and bargaining power. The choice between specialization and multitasking requires employees to develop either specialized or varied task‐specific skills. Employees' (i.e., the owners of the acquired skills) bargaining power depends on their skill sets, which differentiate their ability to hold up production and threaten to leave a firm.

Licensing and innovation with imperfect contract enforcement

Richard Gilbert and Eirik Gaard Kristiansen
Licensing promotes technology transfer and innovation, but enforcement of licensing contracts is often imperfect. We model contract enforcement as a game with perfect information but probabilistic enforcement and explore the implications of weak enforcement on the design of licensing contracts, the conduct of firms, and market performance.

Asymmetric sequential search under incomplete information

Yizhaq Minchuk Aner Sela
We study a multistage sequential search model with n agents who compete for one job. We also investigate the relation between the optimal ability thresholds as well as the optimal order of agents in all stages according to the agents' distributions of abilities.
Web of Science Most Cited (2015-2018)
      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
Web of Science Most Cited (All Time)
    1. Private Politics, Corporate Social Responsibility, and Integrated Strategy, by David P. Baron, Spring 2001
    2. Value‐based Business Strategy, by Adam M. Brandenburger and Harborne W. Stuart, Jr., Spring 1996
    3. How Well Do Social Ratings Actually Measure Corporate Social Responsibility? by Aaron K. Chatterji, David I. Levine, and Michael W. Toffel, Spring 2009
    4. A Practitioner’s Guide to Estimation of Random‐Coefficients Logit Models of Demand, by Aviv Nevo, Winter 2000
    5. An Empirical Analysis of the Strategic Use of Corporate Social Responsibility, by Donald S. Siegel Donald F. Vitaliano, Fall 2007

Volume 27
Issue 1

Volume 27, Issue 1, Spring 2018

Do retail mergers affect competition? Evidence from grocery retailing

Daniel S. Hosken, Luke M. Olson, and Loren K. Smith
This study estimates the price effects of horizontal mergers in the U.S. grocery retailing industry. We find that mergers in highly concentrated markets are most frequently associated with price increases, and mergers in less concentrated markets are most often associated with price decreases.

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

Adrian Chadi and Clemens Hetschko
We investigate a crucial event for job satisfaction: changing one's workplace. For representative German panel data, we show that the reason why the previous employment ended is strongly linked to satisfaction with the new job.

First mover or higher quality? Optimal product strategy in markets with positive feedbacks

P.J. Lamberson and Scott E. Page
Conventional wisdom holds that in markets with positive feedbacks being first to market can matter more than product quality. In this paper, we test that intuition within a generalized Pólya urn model. We find that if we assume constant feedbacks, in the long run, higher quality products dominate the market regardless of initial market shares, contradicting the common wisdom. However, when we allow for variable feedbacks, initial advantages persist almost indefinitely. 

Learning quality through prices and word-of-mouth communication

Carla Guadalupi
This paper studies the effect of word-of-mouth communication on the optimal pricing strategy for new experience goods.The main result is that word-of-mouth communication is essential for the existence of separating equilibria, wherein the high-quality monopolist signals high quality through a low introductory price (lower than the monopoly price), and the low-quality one charges the monopoly price. 

Price and quality competition with quality positions

Shogo Kurokawa and Nobuo Matsubayashi
In this study, we investigate price and quality decisions in a duopoly in the presence of firms’ quality positions, which are determined by the quality levels of their existing core products. Our results show that the presence of repositioning costs restricts firms’ abilities to improve profitability and differentiate themselves vertically. 

The O-ring theory of the firm

Michael T. Rauh
We develop an O-ring production function characterized by specialization and division of labor and where shirking or negative shocks can have major adverse consequences. We show that when the principal can monitor individual output, the firm tends be large (potentially larger than first best), with a high degree of specialization and division of labor, weak incentives, and low pay as in traditional nonunion manufacturing.

The burden of glory: Competing for nonmonetary incentives in rank-order tournaments

Raja Kali, David Pastoriza, and Jean-François Plante
In an environment in which elite, highly paid professionals compete for nonmonetary rewards, we find evidence of underperformance. Our analysis suggests that choking under pressure from high-stakes nonmonetary rewards is behind the underperformance.

Contests with endogenous deadlines

Christian Seel
This paper analyzes the problem of a contest designer who chooses a starting time and a deadline of the contest to maximize discounted total effort by the contestants. I analyze how the optimal starting time and deadline change for a variable contest prize, different types of asymmetries, a Tullock lottery contest success function, and different goal functions of the designer.

Are patent fees effective at weeding out low-quality patents?

Gaétan de Rassenfosse and Adam B. Jaffe
The paper investigates whether patent fees are an effective mechanism to deter the filing of low-quality patent applications. The study analyzes the effect on patent quality of the Patent Law Amendment Act of 1982, which resulted in a substantial increase in patenting fees at the U.S. Patent and Trademark Office. 

Volume 26
Issue 4

Volume 26, Issue 4, Winter 2017

Customer-oriented employees: Blessing or curse for firms?

Ester Manna
I investigate whether the presence of customer-oriented employees benefits firms in a competitive environment. Employees are defined as customer-oriented if they are interested not only in their wage but also in the well-being of their customers. I find that firms may obtain higher profits by hiring self-interested rather than customer-oriented employees.

Customer-employee substitution: Evidence from gasoline stations

Emek Basker, Lucia Foster, and Shawn Klimek
We document the adoption of self-service pumps in U.S. gasoline stations from 1977 to 1992. Using establishment-level data from the Census of Retail Trade over this period, we show that self-service stations employ approximately one quarter fewer attendants per pump, all else equal. The work done by these attendants has shifted to customers, biasing upward conventional measures of productivity growth.

Choosing not to compete: Can firms maintain high prices by confusing consumers?

Paulo Crosetto and Alexia Gaudeul
Firms with very similar products often present their products in different ways. This makes it difficult for consumers to find out which product fits their needs best, or which one is the cheapest. Why is there no convergence toward common ways to present products? Is it possible for firms to maintain high prices by confusing consumers? We run a market experiment to investigate those questions.

Learning remotely: R&D satellites, intrafirm linkages, and knowledge sourcing

Joel Blit
Using U.S. patent data, I show that firm headquarters disproportionately source knowledge from third parties in remote locations where they have an R&D satellite. This “satellite effect” on knowledge flow is economically significant, representing up to 60% of the knowledge-flow premium associated with collocation.

The economic value of patent portfolios

Alfonso Gambardella, Dietmar Harhoff, and Bart Verspagen
Patent holders may choose to protect innovations with single patents or to develop portfolios of multiple, related patents. We propose a decision-making model in which patent holders allocate resources to either expanding the number of related patents or investing in higher value of patents in the portfolio.

Signaling by an informed service provider

Frances Xu Lee and Yuk-fai Fong
We study a service provider, who, at the time of offering a contract, is better informed than the potential client. A service provider that is hired to increase the client's chance of a gain, an “enhancer,” may be better informed of whether the client has a big or small opportunity. A service provider that is hired to reduce the client's chance of a loss, a “problem solver,” may be better informed of whether the client has a big or small problem.

Should everybody be in services? The effect of servitization on manufacturing firm performance

Matthieu Crozet and Emmanuel Milet
The servitization of the manufacturing sector refers to the evolution of manufacturers' capabilities to offer services as complements to or substitutes for the goods that they produce. A vast literature has described these strategies and has shown that this phenomenon is widespread and growing in most developed economies. However, very little systematic evidence of the extent or consequences of servitization based on a comprehensive data set of firms exists. In this paper, we provide such evidence using exhaustive data for French manufacturing firms between 1997 and 2007.

Manufacturer collusion: Strategic implications of the channel structure

Markus Reisinger and Tim Paul Thomes
We investigate how the structure of the distribution channel affects tacit collusion between manufacturers. When selling through a common retailer, we find—in contrast to the conventional understanding of tacit collusion that firms act to maximize industry profits—that colluding manufacturers strategically induce double marginalization so that retail prices are above the monopoly level.

Will a matchmaker invite her potential rival in?

Rupayan Pal and Vinay Ramani
This paper analyzes optimal strategies of an incumbent intermediary, who matches agents on the two sides of a market, in the presence of entry threat under alternative scenarios. It shows that, when entry is free, strategic entry accommodation is the optimal choice of the incumbent—not entry deterrence, unless the variation in agents' types is small. Entry accommodation remains optimal for the incumbent for a wide range of parametric configurations even when there is a fixed cost of entry.

Volume 26
Issue 3

Volume 26, Issue 3, Fall 2017

Do tournaments solve the adverse selection problem?

Theofanis Tsoulouhas
This paper provides a solution to a puzzle in the analysis of tournaments, that of why there is no agent discrimination or differential contracting in certain business practice settings. The analysis connotes that by using relative instead of absolute performance measures, firms with employees who are not substantially heterogeneous not only can alleviate the agency problem, but there is also no need to extract the agents' ex ante private information about their innate abilities via a screening menu.

The taxation of bonuses and its effect on executive compensation and risk taking—Evidence from the UK experience

Maximilian von Ehrlich and Doina Radulescu
This paper explores the effects of a bonus tax adopted in the UK in December 2009 on the compensation structure of executives and on risk-taking behavior in the financial sector. Using a comprehensive dataset on executive compensation, we show that the introduction of the bonus tax decreased the net cash bonuses awarded to directors by about 40%, accompanied, however, by a simultaneous increases in other forms of pay leaving total compensation as well as risk levels unaffected.

The effects of major U.S. domestic airline code sharing and profit-sharing rule

Caixia Shen
This paper presents a structural model of code sharing among major U.S. domestic airlines and estimates a profit-sharing rule. The profit-sharing rule between partner firms in code sharing is estimated at 0.92, which suggests that the operating carrier acquires around 92% of profits from a round-trip, and the marketing carrier retains 8% as a commission fee. Meanwhile, the economies of code sharing reduces marginal cost, and firms are able to price at higher markups. This implies that demand increases and consumers have larger surplus if code sharing creates new products.

Targeted advertising, platform competition, and privacy

Henk Kox, Bas Straathof, and Gijsbert Zwart
We study competition for consumers between web sites that can show targeted advertisements. We find that more targeting increases competition and reduces the web sites' profits, but yet in equilibrium web sites choose maximum targeting as they cannot credibly commit to low targeting. A privacy protection policy can be beneficial for both consumers and web sites.

Scientific research, firm heterogeneity, and foreign R&D locations of multinational firms

René Belderbos, Bart Leten, and Shinya Suzuki
We examine the influence of host countries’ scientific research strengths on global R&D location choices by multinational firms. In an analysis of 277 new R&D activities identified for 175 firms in 40 host countries and 30 technology fields, we find that the strength of relevant university research positively affects the likelihood that host countries attract foreign R&D.

Rivalry information acquisition and disclosure

Xinyu Li and Ronald Peeters
In the recent past, there have been numerous scandals around poor product qualities in various industries. Although it can be easily rationalized why bad practices have not been reported by the inflictors themselves, it is more difficult to understand why the non-inflicting competitors did not report their rivals' acts. In this paper, we study these competitors' incentives to acquire and to disclose information on the quality of their rivals' products and question when we can leave the information disclosure process to the competitive pressure of markets and when there is a need for governmental intervention.

Prevention incentives in long-term insurance contracts

Renaud Bourlès
Long-term insurance contracts are widespread, particularly in public health and the labor market. Such contracts typically involve monthly or annual premia which are related to the insured's risk profile. A given profile may change, based on observed outcomes which depend on the insured's prevention efforts. The aim of this paper is to analyze the latter relationship.

Motivate and select: Relational contracts with persistent types

Radoslawa Nikolowa
We develop a model of relational contracts with moral hazard and asymmetric persistent information about an employee's type. We find that the form of the optimal contract depends on the job characteristics and the distribution of employees' talent.

From fixed to state-dependent duration in public-private partnerships

Daniel Danau and Annalisa Vinella
A government delegates a build-operate-transfer project to a private firm. In the contracting stage, the operating cost is unknown. The firm can increase the likelihood of facing a low cost, rather than a high cost, by exerting costly effort when building the infrastructure. Once the infrastructure is in place, the firm learns the true cost and begins to operate. Under limited commitment, either partner may renege on the contract at any moment thereafter. The novelty with respect to incentive theory is that the contractual length is stipulated in the contract in such a way that it depends on the cost realization.