Out Of The Way
Innovating Big Tech firms and competition policy: Favoring dynamic over static competition
Nicolas Petit & David Teece
Industrial and Corporate Change, October 2021, Pages 1168-1198
Abstract:
This paper gives a fresh account of competition in the digital economy. Economic analysis in the field of industrial organization remains largely focused on a sophisticated version of the Schumpeter-Arrow debate, which is unresolved and largely irrelevant. We posit the need to look at competition anew. Static models of monopoly firms and markets in equilibrium are often used to characterize Big Tech firms' size and scope. We suggest that this characterization is inappropriate because the growth and diversification of many digital firms lead to a situation of broad-spectrum competition that cuts across markets. Current market positions do not reflect entrenched monopoly power but are vulnerable to competitive pressure of disequilibrating forces arising from the use of data-driven operating models, astute resource orchestration, and the exercise of dynamic capabilities. A few strategic errors by management in the handling of internal transitions and/or external challenges and they could be competitively impaired. The implications of a more dynamic understanding of the competition process in the tech sector are explored. We consider how big data and entrepreneurial management impacts firm performance. We also explore the nature of different types of rents (Schumpeterian, Ricardian, and monopoly rents) and suggest a modified long-term consumer welfare standard for competition policy. We formulate preliminary tests and predictors to assess dynamic competition. Our perspective advances a policy stance that favors innovation.
How Do Top Acquirers Compare in Technology Mergers? New Evidence from an S&P Taxonomy
Ginger Zhe Jin, Mario Leccese & Liad Wagman
NBER Working Paper, January 2022
Abstract:
Some argue that large platforms, such as Alphabet/Google, Amazon, Apple, Facebook and Microsoft (or GAFAM), are unusual in their number, pace and concentration of technology mergers, with the potential to harm market competition. Using a unique taxonomy developed by S&P Global Market Intelligence, we compare the M&A activities of GAFAM to other top acquirers from 2010 to 2020. We find: (i) GAFAM completed more tech acquisitions per firm than other groups of top acquirers, and acquired younger and more consumer-facing firms on average. (ii) The top 25 private equity firms outpaced GAFAM in tech acquisitions per firm since 2018. (iii) GAFAM acquisitions are less concentrated across tech categories than other top acquirer groups, due, in part, to an "acquire-adjacent-and-then-expand" strategy. (iv) Over time, more and more GAFAM and other top acquirers acquire in the same categories. (v) No evidence suggesting that a GAFAM acquisition in a category, compared to similar categories without GAFAM acquisitions, is correlated with a slowdown in the number of new acquirers acquiring in that category. Overall, we find that technology acquisitions do not shield GAFAM from competition, at least not from other GAFAM members or other firms that acquire in the same categories.
Profitable Horizontal Mergers Without Efficiencies Can Increase Consumer Surplus
Charles Thomas
Journal of Industrial Economics, September 2021, Pages 730-741
Abstract:
In a standard procurement model I show that consumer surplus can increase after rival sellers consummate a profitable merger that generates no cost savings. This finding contrasts sharply with conventional wisdom in antitrust that horizontal mergers without efficiencies must enhance sellers' market power to be profitable, thereby harming buyers. The model fits industries in which individual buyers conduct distinct procurement contests for which sellers incur costs to participate, say to assess their cost of fulfilling the contract. Mergers benefit buyers by inducing stronger contest-level entry, echoing common claims from merging parties that their merger improves competition by creating a stronger competitor.
The Welfare Consequences of Regulating Amazon
German Gutierrez Gallardo
NYU Working Paper, November 2021
Abstract:
Amazon acts as both a platform operator and seller on its platform, designing rich fee policies and offering some products direct to consumers. This flexibility may improve welfare by increasing fee discrimination and reducing double marginalization, but may decrease welfare due to incentives to foreclose rivals and raise their costs. This paper develops and estimates an equilibrium model of Amazon's retail platform to study these offsetting effects, and their implications for regulation. The analysis yields four main results: (i) Optimal regulation is product- and platform-specific. Interventions that increase welfare in some categories, decrease welfare in others. (ii) Fee instruments are substitutes from the perspective of the platform. Interventions that ban individual instruments may be offset by the endogenous response of (existing and potentially new) instruments. (iii) Regulatory interventions have important distributional effects across platform participants. (iv) Consumers value both the Prime program and product variety. Interventions that eliminate either of the two decrease consumer as well as total welfare. By contrast, interventions that preserve Prime and product variety but increase competition - such as increasing competition in fulfillment services - may increase welfare.
Large Firms, Consumer Heterogeneity and the Rising Share of Profits
Robert Feenstra, Luca Macedoni & Mingzhi Xu
NBER Working Paper, January 2022
Abstract:
We examine the relationship between large firms and the rising profit share in a model that features oligopolistic competition and consumer heterogeneity. Conditional on the sales distribution, the presence of consumer heterogeneity increases the profit share because it increases firm-level markups. Using data on purchases at the household-barcode level from Nielsen, we quantify the role of consumer heterogeneity, finding that the aggregate markup and the profit share are 8 and 3 percentage points larger than those predicted by a model of a representative consumer. Furthermore, we find that the profit share has been increasing over time and that firm targeting of consumer types plays a role in explaining this rise.
Patent Screening, Innovation, and Welfare
Mark Schankerman & Florian Schuett
Review of Economic Studies, forthcoming
Abstract:
Critics claim that patent screening is ineffective, granting low-quality patents that impose unnecessary social costs. We develop an integrated framework, involving patent office examination, fees, and endogenous validity challenges in the courts, to study patent screening both theoretically and quantitatively. In our model, some inventions require the patent incentive while others do not, and asymmetric information creates a need for screening. We show that the endogeneity of challenges implies that courts, even if perfect, cannot solve the screening problem. Simulations of the model, calibrated on U.S. data, indicate that screening is highly imperfect, with almost half of all patents issued on inventions that do not require the patent incentive. While we find that the current patent system generates positive social value, intensifying examination would yield large welfare gains. The social value of the patent system would also be larger if complemented by antitrust limits on licensing.
Innovation Networks and Innovation Policy
Ernest Liu & Song Ma
NBER Working Paper, December 2021
Abstract:
We study the optimal allocation of R&D resources in an endogenous growth model with an innovation network, through which one sector's past innovations may benefit other sectors' future innovations. First, we provide closed-form sufficient statistics for the optimal path of R&D resource allocation, and we show that planners valuing long-term growth should allocate more R&D toward key sectors that are upstream in the innovation network. Second, we extend to an open-economy setting and illustrate an incentive for countries to free-ride on fundamental technologies: an economy more reliant on foreign knowledge spillovers has less incentive to direct resources toward innovation-upstream sectors, leading to cross-country differences in unilaterally optimal R&D allocations across sectors. Third, we build the global innovation network based on over 30 million global patents and establish its empirical importance for knowledge spillovers. Fourth, we apply the model to evaluate R&D allocations across countries and time. Adopting optimal R&D allocations can generate substantial welfare improvements across the globe. For the United States, R&D misallocation accounts for about 0.68 percentage points of missing annual growth since the 2000s.
A Nudge to Credible Information as a Countermeasure to Misinformation: Evidence from Twitter
Elina Hwang & Stephanie Lee
University of Washington Working Paper, September 2021
Abstract:
Fueled by social media, health misinformation is spreading rapidly across online platforms. Myths, rumors, and false information on COVID-19 and vaccines are flourishing, and the aftermath can be disastrous. A more concerning trend is that people are increasingly relying on social media to obtain healthcare information and tending to believe what they read on social media. Given the serious consequences of misinformation, this study aims to advance our understanding of a potential cure for the infodemic we face. Specifically, we focus on a countermeasure that Twitter currently employs, which is to nudge users toward credible information when users search topics for which erroneous information is rampant. Twitter's policy is unique, in that the intervention is not about censorship but rather about redirecting users away from false information and toward facts. Our analysis utilizes 1,796 news articles that contain misinformation about health topics such as measles, vaccine, cancer, and COVID-19. Our analysis reveals that Twitter's policy effectively reduces misinformation diffusion. After the policy introduction, a news article that contains misinformation is 17% less likely to start a diffusion process on Twitter. In addition, tweets that contain a link to misinformation articles are less likely to be retweeted, quoted, or replied to, which leads to a significant reduction in the aggregated number of tweets each misinformation article attracts. We further uncover that the observed reduction is driven by the decrease both in original tweet posts - those that first introduce misinformation news articles to the Twitter platform - and in those resharing the misinformation, although the reduction is more significant in resharing posts. Lastly, we find that the effect is driven primarily by a decrease in human-like accounts that share links to unverified claims but not by a decrease in activities by bot-like accounts. Our findings indicate that a misinformation policy that relies on a nudge to a credible source rather than on censorship can substantially contain misinformation.
A New Era of Midnight Mergers: Antitrust Risk and Investor Disclosures
John Barrios & Thomas Wollmann
NBER Working Paper, January 2022
Abstract:
Antitrust authorities search public documents to discover anticompetitive mergers. Thus, investor disclosures may alert them to deals that would otherwise escape scrutiny, creating disincentives for managers to divulge transactions. We study this behavior in publicly traded US companies. First, we estimate a regression discontinuity that exploits mandatory disclosure thresholds stipulated by securities law. We find that releasing information to investors poses antitrust risk. Second, we present a method for measuring undisclosed merger activity that relies on financial accounting reporting requirements. We find that undisclosed mergers total $2.3 trillion between 2002 and 2016.
How regulations undervalue occupational fatalities
Kip Viscusi & Robert Cramer
Regulation & Governance, forthcoming
Abstract:
The U.S. Occupational Safety and Health Administration establishes incentives for safety by setting and enforcing regulatory standards. Using four and a half decades of inspection data, this article provides a comprehensive analysis of the factors underpinning penalties following fatalities. The "fatality premium" for regulatory violations following a worker death is quite modest and is several orders of magnitude below the value-of-a-statistical-life figure needed to establish efficient levels of deterrence in the absence of all other financial incentives. Although there are low statutory caps on penalties, only 8% of the penalties for violations involving fatalities are constrained by the cap, suggesting that current statutes establish norms for reasonable penalty amounts. In situations involving a fatality at firms with union representation during the inspection, the enforcement sanctions are more stringent. Fatalities involving migrant laborers are less heavily penalized.
Growing Platforms by Adding Complementors Without Consent: Evidence from On-Demand Food Delivery Platforms
Raveesh Mayya & Zhuoxin Li
NYU Working Paper, September 2021
Abstract:
This empirical research investigates the impact of an aggressive growth strategy used by delivery platforms to add restaurants to their platforms without restaurants' consent. Although these platforms provide a valuable option to consumers to access restaurant services, they experience strong resistance from the other side (restaurants), due to unclear benefits from the partnership and the potential risks of cannibalization. To grow the multi-sided networks, platforms have experimented with a new seeding strategy that enlists restaurants on platforms without restaurants' consent. Such a seeding strategy is controversial and is under regulation scrutiny (e.g., in California). Using a rich panel dataset compiled from public and proprietary sources, this research exploits two shocks to identify the impact of the aggressive platform growth strategy and the retrospective regulation on restaurants. The first shock is non-partnered restaurants being listed on the platform without the restaurants' consent. The second shock is the de-listing of non-partnered restaurants from the platform after California deemed such a platform strategy illegal. Our results suggest that being listed on a platform reduces a restaurant's dine-in visits but increases takeout visits. However, independent restaurants lose more dine-in visits than they gain in takeout visits, resulting in a net loss of total demand. Furthermore, retrospective regulation to de-list non-partnered restaurants actually hurt these restaurants. After the regulation, independent restaurants not only lose takeout visits but also fail to recover to the dine-in visits level prior to being listed. The findings provide practical insights that can help restaurants, delivery platforms and policymakers make informed decisions around policies and regulations.
Exclusive Rights Stimulate Design Around: How Circumventing Edison's Lamp Patent Promoted Competition and New Technology Development
Ron Katznelson & John Howells
Journal of Competition Law & Economics, December 2021, Pages 1007-1052
Abstract:
Designing around patents is prevalent but not often appreciated as a means by which patents promote economic development through competition. We provide a novel empirical study of the extent and timing of designing around patent claims. We study the filing rate of incandescent lamp-related patents during 1878-1898 and find that the enforcement of Edison's incandescent lamp patent in 1891-1894 stimulated a surge of patenting. We studied the specific design features of the lamps described in these lamp patents and compared them with Edison's claimed invention to create a count of noninfringing designs by filing date. Most of these noninfringing designs circumvented Edison's patent claims by creating substitute technologies to enable participation in the market. Our forward citation analysis of these patents shows that some had introduced pioneering prior art for new fields. This indicates that invention around patents is not duplicative research and contributes to dynamic economic efficiency. We show that the Edison lamp patent did not suppress advance in electric lighting and the market power of the Edison patent owner weakened during this patent's enforcement. We propose that investigation of the effects of design around patents is essential for establishing the degree of market power conferred by patents.
The Price of Nails since 1695: A Window into Economic Change
Daniel Sichel
NBER Working Paper, December 2021
Abstract:
This paper focuses on the price of nails since 1695 and the proximate source of changes in those prices. Why nails? They are a basic manufactured product whose form and quality have changed relatively little over the last three centuries, yet the process for producing them has changed dramatically. Accordingly, nails provide a useful prism through which to examine a wide range of economic and technological developments that touch on multiple areas of both micro- and macroeconomics. Several conclusions emerge. First, from the late 1700s to the mid 20th century real nail prices fell by a factor of about 10 relative to overall consumer prices. These declines had important effects on downstream industries, most notably construction. Second, while declining materials prices contribute to reductions in nail prices, the largest proximate source of the decline during this period was multifactor productivity growth in nail manufacturing, highlighting the role of the specialization of labor and re-organization of production processes. Third, the share of nails in GDP dropped back from 0.4 percent of GDP in 1810 - comparable to today's share of household purchases of personal computers - to a de minimis share more recently; accordingly, nails played a bigger role in American life in that earlier period. Finally, real nail prices have increased since the mid 20th century, reflecting in part an upturn in materials prices and a shift toward specialty nails in the wake of import competition, though the introduction of nail guns partly offset these increases for the price of installed nails.
The micro persistence of layouts and design: Quasi-experimental evidence from the United States housing corporation
Arianna Salazar Miranda
Regional Science and Urban Economics, forthcoming
Abstract:
Neighborhood plans have been a crucial tool used by urban planners to control developments' type and character. This paper examines whether the initial plan of neighborhoods and their design features have a causal and persistent effect on a neighborhood's physical form. I explore this question in the context of the United States Housing Corporation - the first large-scale urban planning housing initiative in the United States. I show that the plans introduced by the USHC persisted and continue to influence the structure of neighborhoods today. To disentangle the role of location fundamentals (e.g., geography) from the causal effect of plans, I exploit a sharp natural experiment where I compare USHC neighborhoods that were planned but canceled with others that were planned and constructed and show that this persistence is causal and reflects the path dependence of plans. I then decompose plans into their design features and show that the configuration of blocks and the street layout persist via path dependence and are, therefore, characteristics that urban planners can influence in the long-run. Finally, I discuss potential mechanisms and provide suggestive evidence pointing to the role of coordination failures in generating path dependence.