Issue 1

Volume 17 JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY
Spring 2008

Repeat Purchase amid Rapid Quality Improvement: Structural Estimation of Demand for Personal Computers

Jeffrey T. Prince
This paper estimates a structural model of demand for the personal computer (PC) by repeat purchasers. Taking advantage of a large data set on household-level PC purchases, the econometric model uses variation in PC holdings among PC owners to identify households' marginal values of quality improvements. The analysis only requires data on a cross-section of households along with observed PC offerings over time, and accounts for stock effects, forward-looking behavior, and large amounts of household heterogeneity. The estimates allow us to measure sensitivity to long-term and short-term price and technology changes, as well as consumer welfare changes from technological improvements

Are Frequent-Flyer Programs a Cause of the “Hub Premium”?

Mara Lederman
This paper estimates the relationship between frequent-flyer programs (FFPs) and fares at hub airports. I exploit the formation of partnerships that allowed members of one airline's FFP to earn that airline's points on flights operated by its partner. If FFPs allow an airline to charge higher fares on routes that depart from its hubs, these partnerships should allow an airline's partner to charge higher fares on routes that depart from these same airports. I find that offering the FFP points of the dominant carrier at an airport does, indeed, lead to higher fares. Combining these estimates with estimates of the “hub premium” suggests that FFPs may account for at least 25% of the “hub premium.”

Fat Products

Alexei Alexandrov
The economics literature generally considers products as points in some characteristics space. With more products being flexible or self-customizable to some degree, it makes sense to model products with positive measure. I develop a model of firms which can offer interval-long “fat” products in the spatial model of differentiation. Contrary to the standard results, profits of the firms can decrease with increased differentiation in the market—there is a standard effect of lowering the incentive to cut prices, but there is also an incentive to provide more content, resulting in higher costs and possibly overall losses.

Are Sunk Costs a Barrier to Entry?

Luís M. B. Cabral and Thomas W. Ross
The received wisdom is that sunk costs create a barrier to entry—if entry fails, then the entrant, unable to recover sunk costs, incurs greater losses. In a strategic context where an incumbent may prey on the entrant, sunk entry costs have a countervailing effect: they may effectively commit the entrant to stay in the market. By providing the entrant with commitment power, sunk investments may soften the reactions of incumbents. The net effect may imply that entry is more profitable when sunk costs are greater.

Information Acquisition and Strategic Disclosure in Oligopoly

Jos Jansen
I study the incentives of oligopolists to acquire and disclose information on a common demand intercept. Because firms may fail to acquire information even when they invest in information acquisition, firms can credibly conceal unfavorable news while disclosing favorable news. Firms may earn higher expected profits under such a selective disclosure regime than under the regimes where firms commit to share all or no information. In particular, this holds under both Cournot and Bertrand competition, if the firms have sufficiently flat information acquisition cost functions. For steeper cost functions Cournot duopolists prefer strategic disclosure, if their goods are sufficiently differentiated.

Distorted Performance Measures and Dynamic Incentives

Oddvar M. Kaarbøe and Trond E. Olsen
Incentive contracts must typically be based on performance measures that do not exactly match the agents' true contribution to the principals' objectives. Such misalignment may pose difficulties for effective incentive design. We analyze the extent to which implicit dynamic incentives, such as career concerns and ratchet effects, alleviate or aggfravate these problems. Our analysis demonstrates that the interplay between distorted performance measures and implicit incentives implies that career and ratchet effects have real effects in that stronger ratchet effects or greater distortion may increase optimal monetary incentives, and that distortion affects the optimality of different promotion rules.

Designing Contracts for University Spin-offs

Inés Macho-Stadler, David Pérez-Castrillo and Reinhilde Veugelers
We provide a theoretical model about how to design academic spin-off contracts between the university technology transfer office (TTO), the researcher, and the venture capitalist. The optimal contract entails the allocation of founder shares to the researcher to secure her participation in the venture. It may also require the researcher to be financially involved in the project to give her incentives to provide effort. We also show that when the TTO has better information than the other two participants concerning the likelihood of success of the spin-off, it will end up owning both founder and financial shares in the venture.

Option Contracts in Supply Chains

Sabine Böckem and Ulf Schiller
This paper considers optimal contracts in supply chains that consist ofn≥ 2firms and face a potential investment hold-up problem. We show that option contracts may solve the incentive problems. First, we provide case-study evidence for the use of option contracts in the semiconductor industry. As our second contribution, we generalize the earlier option contract approach by introducing continuous quantities. Third, we extend the setting tonparties. For long supply chains, the first-best allocation can be achieved if there is a particular order of renegotiations.

Downstream Competition, Bargaining, and Welfare

George Symeonidis
I analyze the effects of downstream competition when there is bargaining between downstream firms and upstream agents (firms or unions). When bargaining is over a uniform input price, a decrease in the intensity of competition (or a merger) between downstream firms may raise consumer surplus and overall welfare. When bargaining is over a two-part tariff, a decrease in the intensity of competition reduces downstream profits and upstream utility and raises consumer surplus and overall welfare. Standard welfare results of oligopoly theory can be reversed: less competition can be unprofitable for firms and/or beneficial for consumers and society as a whole.