Supplier Innovation in the Presence of Buyer Power

A theoretical framework is constructed to derive general conditions under which increased buyer power weakens or strengthens a supplier’s incentive to innovate. These conditions are then applied to two sets of specific models: one on product innovation and the other on process innovation. The analysis shows that the effects of buyer power depend on the type of innovation, the source of buyer power, and the channel through which buyer power manifests itself. It identifies circumstances under which an increase in buyer power has a negative, positive or zero impact on innovation. The welfare consequences of buyer power are also investigated

Monopoly and Product Diversity: The Role of Retailer Countervailing Power

We analyse a monopolist’s choice of product diversity and the effects of retailer countervailing power on that choice. We show that monopoly causes distortion in product diversity even after we take into consideration the effects of monopoly pricing. Specifically, the number of differentiated goods produced by the monopolist is smaller than that of the constrained social optimum. Retailer countervailing power lowers consumer prices but reduces product diversity. Consequently, it alleviates the distortion in prices but exacerbates the distortion in product diversity. In our model the former is outweighed by the latter and countervailing power makes consumers worse off. Therefore, price changes do not tell the whole story about how consumers are affected by countervailing power

Venture Capital Networks and Investment Performance in China

We investigate the relationship between venture capital (VC) networks and investment performance in China. Distinct features of China’s VC networks are captured in our econometric model through the inclusion of an index of network stability and a dummy variable that indicates a VC firm’s connections with the Chinese state. Our econometric analysis shows that a VC firm’s position in its network, its network stability and close connections with the state all contribute to its investment performance. Comparison with the findings in Hochberg et al. (2007) indicates that networks are more important for investment performance in China than in the US. Moreover, our analysis suggests that familiarity with local culture and customs and understanding of the idiosyncrasies of China’s markets and institutions are important for the success of a VC firm in China

Private Labels and Product Quality under Asymmetric Information

Contrary to the existing theories of private label products, we demonstrate that the introduction of a private label product by a retailer may improve the profits of the supplier of a competing national brand product. Our theory is built on two main elements. First, the introduction of a private label product may expand the total demand for the products carried by the retailer and thus enlarge the joint profit to be split between the retailer and the supplier of the national brand product. Second, in an environment where consumers do not know the quality of the private label product, the national brand serves as a bond to assure consumers that the retailer sells high-quality products only. This quality assurance enhances the joint profit generated by the introduction of the private label product, which, in conjunction with the weakening of the retailer’s bargaining position caused by asymmetric information, may enable the national brand supplier to earn a larger profit than in the absence of the private label product

Specific Investment and Supplier Vulnerability: Theory and Evidence

Apart from the familiar holdup problem, we investigate another implication of specific investment that has not been examined systematically in the literature. That is, the presence of specific investment can make a supplier vulnerable to large negative shocks to its customer’s business. In a theoretical model, we demonstrate that this vulnerability causes the supplier to under-invest. A higher degree of specificity induces the supplier to invest more, and it leads to a lower mean and higher volatility in the supplier’s profit. Using panel data on over 5000 U.S. firms from 1990 to 2010, our empirical analysis shows the prevalence of the supplier vulnerability problem associated with specific investment

Do Merger Efficiencies Always Mitigate Price Increases?

In a Cournot model with differentiated products, we demonstrate that merger efficiencies in the form of lower marginal costs for the merging firms (the insiders) lead to higher postmerger prices under certain conditions. Specifically, when the degree of substitutability is low between the products offered by the two insiders but high between those by an insider and an outsider, increased merger efficiencies may exert upward rather than downward pressure on the prices of the merging firms. Our results suggest that in cases where firms engage in quantity competition, antitrust authorities should not presume that merger efficiencies will necessarily mitigate the anticompetitive effects of the merger. Prices can go up because of large efficiencies

Horizontal Mergers in the Presence of Capacity Constraints

We analyze the effects of a merger between two competitors in a Bertrand-Edgeworth model. The merger has no effect on equilibrium prices if a pure strategy equilibrium prevails both before and after the merger. Otherwise, the merger leads to higher prices. In the case where a mixed strategy equilibrium prevails before and after the merger, for example, the support of the price distributions shifts rightward after the merger and the post-merger price distribution of each firm stochastically dominates its pre-merger counterpart. The pre-merger capacity level of each firm plays a crucial role in determining the effects of the merger

Downstream Competition and the Effects of Buyer Power

To examine the interaction between buyer power and competition intensity in a downstream market, we consider four variations of a model in which oligopolistic retailers compete in the downstream market and one of them is a large retailer that has its own exclusive supplier. We demonstrate that an increase in the buyer power of the large retailer against its supplier leads to a fall in retail price and an improvement in consumer welfare, and this is true even in the extreme case where the large retailer is a monopoly in the downstream market. More interestingly, we find that the beneficial effects of an increase in buyer power are large when the intensity of downstream competition is low, with the effects being the largest in the case of downstream monopoly

Education as a Positional Good: The Role of Vouchers

People's satisfaction from some goods and services depends on their relative as distinct from their absolute position as consumers. Such items are called "positional goods", and a restriction of their supply in the situation of general income growth is conducive to expenditure escalation as in an arms race. If education is a positional good in this sense, arrangements are needed that will best prevent such an outcome. The introduction of education vouchers of a value egual to the average per capita public school expenditure, it is argued, will only hinder not help. This is because some recipients will be tempted to obtain more education with marginal additions to their vouchers from their own pockets. Vouchers are thus welfare reducing because they encourage rather than discourage "arms race" situations. Using a formal median voter model we show that concerns over possible escalation of expenditure will prompt a majority of voters to reje

Buffer Joint Ventures

While strategic alliances and joint ventures have become important organizational forms promising a variety of efficiency benefits for the economy, a body of research has been building showing that alliances between competitors can have significant anticompetitive consequences. This paper explores a particular kind of arrangement, here called a “buffer joint venture”, in which parent firms create an entity selling products located between their own locations in product or geographic space. Depending upon the governance structure of the joint venture and the timing of price-setting by the joint venture and its parents, the buffer joint venture may reduce competition between the parents leading to higher prices and profits and lower social welfare. The presence of such a joint venture can also affect the incentives for, and the effects of, collusion by the parents