Overseeing the Economy
Customer Satisfaction and Firm Profits in Monopolies: A Study of Utilities
Abhi Bhattacharya, Neil Morgan & Lopo Rego
Journal of Marketing Research, forthcoming
Abstract:
There is a growing body of evidence that customer satisfaction is predictive of firms' future financial performance. However, studies of this relationship have been limited to competitive markets, and monopolistic markets have been largely ignored. This study explores the large and important utilities market and exploits its unique regulatory requirements that generate detailed and reliable operating and accounting data to examine the overall relationship between customer satisfaction and utility profit and establish the causal mechanisms involved. Using data from U.S. public utility firms, the authors show that even when customer satisfaction does not affect future revenues, it does positively predict future profitability by reducing utility firm operating costs. More specifically, they find that higher satisfaction reduces the costs of utility firm distribution, customer service, and sales and general administration expenses. These findings and additional post hoc evidence are consistent with the notion that customer satisfaction (1) generates efficiency-enhancing benefits for utility firms by lowering the direct and employee engagement costs of dealing with dissatisfied customers and (2) fosters greater trust and cooperation from customers. This study has important implications for both managers and regulators and provides important new insights for market-based asset theory and regulatory economic theory.
Artificial Intelligence, Firm Growth, and Industry Concentration
Tania Babina et al.
Columbia University Working Paper, November 2020
Abstract:
Which firms invest in artificial intelligence (AI) technologies, and how do these investments affect individual firms and industries? We provide a comprehensive picture of the use of AI technologies and their impact among US firms over the last decade, using a unique combination of job postings and individual-level employment profiles. We introduce a novel measure of investments in AI technologies based on human capital and document that larger firms with higher sales, markups, and cash holdings tend to invest more in AI. Firms that invest in AI experience faster growth in both sales and employment, which translates into analogous growth at the industry level. The positive effects are concentrated among the ex ante largest firms, leading to a positive correlation between AI investments and an increase in industry concentration. However, the increase in concentration is not accompanied by either increased markups or increased productivity. Instead, firms tend to expand into new product and geographic markets. Our results are robust to instrumenting firm-level AI investments with foreign industry-level AI investments and with local variation in industry-level AI investments, and to controlling for investments in general information technology and robotics. We also document consistent patterns across measures of AI using firms' demand for AI talent (job postings) and actual AI talent (resumes). Overall, our findings support the view that new technologies, such as AI, increase the scale of the most productive firms and contribute to the rise of superstar firms.
Dog Eat Dog: Measuring Network Effects Using a Digital Platform Merger
Chiara Farronato, Jessica Fong & Andrey Fradkin
NBER Working Paper, November 2020
Abstract:
Digital platforms are increasingly the subject of regulatory scrutiny. In comparison to multiple competitors, a single platform may increase consumer welfare if network effects are large or may decrease welfare due to higher prices or reduction in platform variety. We study the net effect of this trade-off in the context of the merger between the two largest platforms for pet-sitting services. We exploit variation in pre-merger market shares and a difference-in-differences approach to causally estimate network effects at the platform and market level. We find that consumers are, on average, not substantially better off with a single combined platform than with two separate and competing platforms. On one hand, users of the acquiring platform benefited from the merger because of network effects. On the other hand, users of the acquired platform experienced worse outcomes. Our results highlight the importance of platform differentiation even when platforms enjoy network effects.
Cover-Up of Vehicle Defects: The Role of Regulator Investigation Announcements
Soo-Haeng Cho, Victor DeMiguel & Woonam Hwang
Management Science, forthcoming
Abstract:
Automakers, including Toyota and General Motors, were recently caught by the U.S. regulator for deliberately hiding product defects in an attempt to avoid massive recalls. Interestingly, regulators in the United States and United Kingdom employ different policies in informing consumers about potential defects: the U.S. regulator publicly announces all ongoing investigations of potential defects to provide consumers with early information, whereas the UK regulator does not. To understand how these different announcement policies may affect cover-up decisions of automakers, we model the strategic interaction between a manufacturer and a regulator. We find that, under both countries' policies, the manufacturer has an incentive to cover up a potential defect when there is a high chance that the defect indeed exists and it may inflict only moderate harm. However, if there is only a moderate chance that the defect exists, only under the U.S. policy does the manufacturer have an incentive to cover up a potential defect with significant harm. We show that the U.S. policy generates higher social welfare only for very serious issues for which both the expected harm and recall cost are very high and the defect is likely to exist. We make four policy recommendations that could help mitigate manufacturers' cover-ups, including a hybrid policy in which the regulator conducts a confidential investigation of a potential defect only when it may inflict significant harm.
Does Building New Housing Cause Displacement?: The Supply and Demand Effects of Construction in San Francisco
Kate Pennington
University of California Working Paper, December 2020
Abstract:
San Francisco is gentrifying rapidly as an influx of high-income newcomers drives up housing prices and displaces lower-income incumbent residents. In theory, increasing the supply of housing should mitigate increases in rents. However, new construction could also increase demand for nearby housing by improving neighborhood quality. The net impact on nearby rents depends on the relative sizes of these supply and demand effects. This paper identifies the causal impact of new construction on nearby rents, displacement, and gentrification by exploiting random variation in the location of new construction induced by serious building fires. I combine parcel-level data on fires and new construction with an original dataset of historic Craigslist rents and panel data on individual migration histories to test the impact of proximity to new construction. I find that rents fall by 2% for parcels within 100m of new construction. Renters' risk of being displaced to a lower-income neighborhood falls by 17%. Both effects decay linearly to zero within 1.5km. Next, I show evidence of a hyperlocal demand effect, with building renovations and business turnover spiking and then returning to zero after 100m. Gentrification follows the pattern of this demand effect: parcels within 100m of new construction are 2.5 percentage points (29.5%) more likely to experience a net increase in richer residents. Affordable housing and endogenously located construction do not affect displacement or gentrification. These findings suggest that increasing the supply of market rate housing has beneficial spillover effects for incumbent residents, reducing rents and displacement pressures while improving neighborhood quality.
The Aggregate Implications of Mergers and Acquisitions
Joel David
Review of Economic Studies, forthcoming
Abstract:
This paper develops a search and matching model of mergers and acquisitions (M&A) and uses it to evaluate the implications of merger activity for aggregate economic outcomes. The theory is consistent with a rich set of facts on US M&A, including sorting among merging firms, a substantial merger premium and serial acquisition. It provides a sharp link between these facts and the nature of merger gains. At the micro-level, both complementarities between merging firms and productivity improvements of target firms are important in generating gains. At the macro-level, the model suggests a significant beneficial impact of M&A on aggregate outcomes - the contribution to steady state output is 14% and 4% for consumption - which occurs through the reallocation of resources across firms and equilibrium effects on firm selection and new entrepreneurship. Nevertheless, the economy is not efficient, suggesting a scope for policy improvements - a simple flat tax on M&A can raise steady state consumption as much as 2% relative to the laissez-faire equilibrium. In short, the boundaries of the firm can matter for macroeconomic outcomes.
Price Competition with Endogenous Entry: The Effects of Marriott & Starwood's Merger in Texas
Shuang Wang
Boston University Working Paper, December 2020
Abstract:
This paper evaluates the merger that created the world's largest hotel company, Marriott's acquisition of Starwood. By endogenizing firms' entry decisions into a price competition model, I address the selection bias issue in estimation and allow firms to optimally enter or exit in merger simulation. To avoid any arbitrary assumption on the equilibrium selection mechanism, I use moment inequality estimation, and propose a novel lower probability bound that makes it computationally feasible to have many players. Comparing the simulated pre- and post-merger equilibrium market outcomes, I find that the consumer benefit from cost synergy outweighs the consumer harm from increased market power. The merger increases consumer surplus by 17.14%-24.03% in the served market, and the merged firm will enter 6%-24% of the potential markets after the merger. Moreover, I show that evaluation overlooking the entry stage would find the merger to be harmful due to the estimation bias and the neglect of entry into new markets.
Trade-Offs of Occupational Licensing: Understanding the Costs and Potential Benefits
Bobby Chung
University of Illinois Working Paper, October 2020
Abstract:
Occupational licensing potentially benefits consumers by screening and training workers but at the cost of lower employment. To evaluate this trade-off, I leverage a quasi-experimental setting in which Illinois required compliance training for new and existing real estate agents. Using multiple data sources on official licensee records and housing statistics, I find that the reform caused a one-time spike in agent outflows, a decrease in home sales, and lower worker flows. Whereas the reform affected worker sorting, I do not find a significant reduction in new misconduct incidents. To understand this insignificant effect, I develop a screening model with license training to highlight that licensing may fail to screen and train workers in ethics-related attributes.
Economic Impact of Category Captaincy: An Examination of Assortments and Prices
Madhu Viswanathan, Om Narasimhan & George John
Marketing Science, forthcoming
Abstract:
We empirically investigate the impact of category captaincy, an arrangement where the retailer works exclusively with a manufacturer to manage both the manufacturer's and his rivals' products. Using a unique data set that contains information on category captaincy as well as SKU-store-level sales and price across 24 retail chains and eight local markets in the United States for a frozen food category, we quantify the impact of captaincy on prices, assortments, profits, and consumer welfare. Interestingly, our estimates suggest that captaincy can lead to welfare gains for consumers, which argues against a purely negative view of captaincy by policy makers.