The Timing of Entry into New Markets

Under what circumstances will a successful incumbent in a related market be the first to enter a new market? We present a model in which the order of entry into new markets has long run effects on the firms' profits. We assume that a firm that is successfully producing in a related market has valuable information about the demand in the new market. By his choice of location in product space in the new market the incumbent reveals information about the demand to the potential entrant. Thus, the incumbent would like to enter after the newcomer in order to prevent the rival from free riding on his proprietary information; however, the rival would also like to enter second so that he can benefit from the other's information. When both firms want to enter last, the order of entry is modeled as a timing game in continuous time. Using a refinement of Nash equilibrium known as "risk-dominance" we show that when the informational advantage of the incumbent is very great, his implicit threat to wait out his rival is less powerful than the equivalent threat by the potential entrant, and the incumbent will enter first. On the other hand, the incumbent's lower incentive to enter the new market due to the "cannibalization" effect of entering a related market is a weapon that the incumbent can use to "force" the rival to enter first, in equilibrium. We also find that incumbent entrants into new markets are more likely to succeed in the new market, in equilibrium, than are newcomers, regardless of order of entry. On the other hand, looking cross sectionally across markets, incumbents are more likely to succeed when they are early rather than late entrants, but newcomers are more likely to succeed when they are late entrants than early.

An Economic Perspective on Balancing Unquantified Harms and Benefits Under the Consumer Welfare Standard

Judge Ginsburg’s address on how to balance unquantified benefits and harms under the consumer welfare standard highlights two distinct roles for qualitative assessment. The first is the role of qualitative evidence in antitrust analyses. The second is the consideration of both price and non-price effects. While these two topics are related—e.g., analysis of non-price competitive effects often relies on qualitative evidence—they raise distinct issues. We provide an economic perspective on these topics as a complement to Judge Ginsburg’s learned legal commentary. Specifically, we explain the central role that sound qualitative evidence traditionally and properly plays in the economic analysis of both price and non-price effects of mergers and accused conduct. We also discuss the state of economic analysis when a broad economic interpretation of the consumer welfare standard would require balancing the welfare of one group against another

Bonuses and Penalties as Equilibrium Incentive Devices, with Application to Manufacturing Systems

Although psychologists view bonuses and penalties as very different means of providing incentives for workers, economists have had less success at making sense of the distinction. A rational worker should be indifferent as to whether a payment scheme is called a bonus or a penalty plan if the actual contingent pay stream is identical in the two cases. In this paper we provide a framework for understanding the difference between payment plans that are deemed to be penalty or bonus schemes, and derive implications for when such plans should be implemented as a function of observable features of the manufacturing and monitoring systems. We call a payment plan a "bonus" scheme if the high payment occurs infrequently in equilibrium; a payment scheme entails a possible "penalty" if the low wage occurs infrequently. The frequency of high and low payments is derived in equilibrium in a model with moral hazard and probabilistic monitoring. We focus on the role of commitment and the possibility of false positives in he monitoring technology. It is shown that when the firm can commit to a monitoring intensity the workers will (almost) always be diligent and a penalty scheme will be observed. When commitment is infeasible the optimal payment structure depends on whether the monitoring technology permits false positives. In the absence of false positives the workers will be observed to face a penalty scheme if found shirking, but when false positives are possible there will be considerable shirking by workers in equilibrium, and a bonus scheme will be observed. We then analyze the crucial features of our theoretical monitoring technology in he context of actual employment situations. We find that middle-management and other non-production jobs are appropriate for bonus-type incentives, whereas in unskilled jobs or aspects of highly skilled jobs that require diligence but not skill, such as arriving on the job on time, we predict penalty incentives. We argue that the observed scarcity of penalty-type schemes can be explained by our model, without resorting to psychological justifications. In addition, we interpret the Japanese manufacturing systems as having a particular, built-in monitoring system that can be analyzed in our framework and shown to implement a high level of diligence from factory workers.

An Economist's Guide to U.S. v. Microsoft

W hile most antitrust cases proceed in obscurity, the case brought againstMicrosoft by federal and state antitrust authorities was front-page news.Much of the drama and media hype centered on the struggle between the titan of high technology, personified in Bill Gates, and the titan of government, personified in U.S. Assistant Attorney General Joel Klein. For economists and policymakers, however, the case was about the appropriate role of competition policy in the new economy. Antitrust critics claim that the nineteenth century Sherman Act is ill-suited for the high-technology markets of the twenty-first century. Others argue that the Sherman Act provides a broad constitution for antitrust enforcement that is flexible enough to protect both the interests of consumers and the ability of firms to compete in high-technology markets. In the Microsoft case, the government (by which we mean the U.S. Department of Justice, 19 state attorneys general, and the Attorney General of the District of Columbia that brought the case) asserted that Microsoft engaged in anticompeti-tive conduct designed to maintain its operating system monopoly to the detriment of consumers. According to the government, antitrust enforcement would rein in the Microsoft monopoly and result in more competition and innovation in the software industry. In its defense, Microsoft contended that the company is a vigorous competitor that benefited consumers by supplying high quality, innovative products. According to Microsoft, antitrust action against it would dampen incen-tives for competition and slow software innovation. In this paper, we analyze the central economic issues raised by the Microsof

Using the Capital Market as a Monitor: Corporate Spinoffs in an Agency Framework

A model is developed in which corporate spinoffs are a feature of incentive contracts for product managers in diversified firms. I argue that the possibility of a future spinoff can improve current incentives for divisional managers, even if a spinoff rarely actually occurs. Spinoff incentive policies exploit the fact that after a spinoff, the stock value of the product line is a much cleaner signal of managerial productivity than when the division belongs to the parent firm. I show that providing current incentives through such a reorganization policy can dominate standard principal-agent contracts in highly diversified firms. Empirical implications of the model are developed regarding corporate spinoff behavior and the compensation of divisional managers.

An examination of the antecedents of repatronage intentions across different retail store formats

This study explores the extent to which repatronage intentions of retail stores are affected by perceived value for money, customer satisfaction and consumption feelings. In addition, we examine the effect of store service provision as an antecedent to such consumer evaluations of retail stores. These relationships are modeled overall and then examined in the context of both department stores (defined as mass-merchandisers, which highlight quality image and high customer service) and discount stores (defined as mass-merchandisers with an emphasis on self-service and low prices). While all paths (except one) were significant in the overall model, differences were found when comparing the department and discount store models. Overall, perceived value for money played a much more significant role in the discount store model, whereas consumption feelings were shown to be more central to the department store model

Service brands and communication effects

It has long been recognized that marketing communications, particularly advertising, have a significant effect on consumers. However, an important influence on the behaviour of service consumers comes from communications that are essentially uncontrolled by the marketer. This study examined the role of marketer-controlled and marketer-uncontrolled communications on consumption-aroused feelings and service brand attitudes. Data were gathered from customers of specific service brands and comparisons were made across two different service types (retail stores and banks). The findings indicated that advertising has a significant effect on consumption-aroused feelings and service brand attitudes, whereas word-of-mouth communications affects brand attitudes only in terms of bank brands and publicity has no effect on consumption-aroused feelings or brand attitude

An exploratory perspective of service brand associations

Over the past 20 years the commercial importance of services has been realised, highlighting the importance of research to understand service brands and their meaning for consumers. However, to date, the branding models developed lack empirical testing, are derived from the perspective of brand practitioners rather than consumers, and pay little attention to the branding of services. This study seeks consumer-based information via qualitative and quantitative methods regarding brand dimensions that hold meaning to consumers for branded services. The results indicate a number of key dimensions that are important to consumers for both goods and services, such as core product/service, experience with brand and image of user. Dimensions such as feelings and self-image congruence were not found to be important, while word-of-mouth, servicescape, and employees held importance for branded services. The results also indicate significant relationships for brand dimension importance and brand associations, associations and attitudes, and attitudes and intentions. The results suggest important implications for brand managers, in addition to providing a platform on which future research can be built to further understand service branding