BUYER-SUPPLIER INTERACTION, ASSET SPECIFICITY, AND PRODUCT CHOICE

The goal of this paper is to explore how the demand for specific investments may affect the product variety in a bilateral duopolistic industry. In the literature on the hold-up problem, it is generally assumed that the degree of specificity of investments is either exogenously determined or chosen by the suppliers. We develop a model where the degree of specificity of investments is endogenously determined through the product choices of both buyers and suppliers. In an environment where input prices are determined by bilateral negotiations, we show that the existence of alternative buyers causes suppliers to choose less-than-fullyspecialized input types. Their location and investment choices crucially depend on the degree of product differentiation in the downstream market. This implies that the buyers may choose to increase their own competition by producing more similar products in order to increase the suppliers’ investment incentives. The results offer an explanation for why we may observe instances of intermediate product differentiation by focusing on the interactions between buyers and suppliers.asset specificity, vertical interactions, product differentiation

The Decision to Patent, Cumulative Innovation,and Optimal Policy

Optimal patent breadth is an issue that is still being vigorously debated at both the theoretical and empirical levels. This paper analyzes optimal patent policy in the context of cumulative innovation in a model that endogenizes the patenting decisions of early innovators. In the theoretical literature on cumulative innovation, it is generally assumed that all innovations are patented. However, studies such as Cohen et al. (2000) and Levin et al. (1987) report that firms frequently rely on secrecy to protect their discoveries. Cumulative innovation implies that innovators may have significant incentives to keep their innovations secret to get a head start in subsequent R&D races. This paper shows that if innovators cannot rely on secrecy to protect their innovations, it is optimal to have relatively narrow patent protection. This happens if the government has a weak trade secret policy or if innovators cannot monitor the flow of their technological information. This is because when innovators cannot rely on secrecy to protect their innovations, they have increased incentives to patent them and it is not necessary for the government to give them extra incentives to patent. In the case when innovators always prefer secrecy over patenting, it becomes optimal to have a flexible antitrust policy rather than a flexible patent policy. Since non-disclosure reduces the investment incentives in the second R&D race, allowing collusive licensing agreements between competing innovators becomes optimal in order to stimulate investment in the second R&D race.cumulative innovation, patenting decision, patent policy, antitrust policy

Optimal Licensing Policy in Differentiated Industries

This paper analyses the policy implications of licensing between producers of differentiated goods. We consider and compare two-part tariff, fixed fee, royalty and collusive licensing contracts. Under the optimal licensing policy, there will be no technology transfers if the innovation size is sufficiently small and degree of product differentiation is sufficiently low. On the other hand, licensing deals that involve drastic innovations are always socially desirable. In the limit, as product differentiation converges to zero, it becomes socially desirable to transfer drastic innovations only. The range of innovation sizes that is socially optimal to transfer increases as product differentiation increases.Patent licensing, product differentiation, antitrust policy

Limit on the LMC mass from a census of its satellites

We study the orbits of ultra-faint dwarf galaxies in the combined presence of the Milky Way and LMC and we find 6 dwarfs which were likely accreted with the LMC (Car 2, Car 3, Hor 1, Hyi 1, Phe 2, Ret 2), in addition to the SMC, representing strong evidence of dwarf galaxy group infall. This procedure depends on the gravitational pull of the LMC, thus allowing us to place a lower bound on the Cloud's mass of $M_{\rm LMC} > 1.24\times10^{11} M_\odot$. This mass estimate is validated by applying the technique to a cosmological zoom-in simulation of a Milky Way-like galaxy with an LMC analogue where we find that while this lower bound may be overestimated, it will improve in the future with smaller observational errors. We apply this technique to dwarf galaxies lacking radial velocities and find that Eri 3 has a broad range of radial velocities for which it has a significant chance ($> 0.4$) of having being bound to the Cloud. We study the non-Magellanic classical satellites and find that Fornax has an appreciable probability of being an LMC satellite if the LMC is sufficiently massive. In addition, we explore how the orbits of the Milky Way satellites change in the presence of the LMC and find a significant change for several objects. Finally, we find that the LMC satellites are slightly smaller than the Milky Way satellites at a fixed luminosity, possibly due to the different tidal environments they have experienced.Comment: 9 pages, 7 figures. Submitted to MNRAS. Comments welcom

Scarcity of Ideas and Options to Invest in R&D

We consider a model of the innovative environment where there is a distinction between ideas for R&D investments and the investments themselves. We investigate the optimal reward policy and how it depends on whether ideas are scarce or obvious. By foregoing investment in a current idea, society as a whole preserves an option to invest in a better idea for the same market niche, but with delay. Because successive ideas may occur to different people, there is a conflict between private and social optimality. We argue that private incentives to create socially valuable options can be achieved by giving higher rewards where "ideas are scarce." We then explore how rewards should be structured when the value of an innovation comes from its applications, and ideas for the innovation may be more or less scarce than ideas for the applications.Ideas; patents; intellectual property, innovation; options; nonobviousness

Horizontal Mergers with Free Entry in Differentiated Oligopolies

Antitrust authorities view the possibility of entry as a key determinant of whether a proposed merger will be harmful to society. This paper examines the effects of horizontal mergers in models of non-localized, differentiated Bertrand oligopoly that allow for free entry. The analysis of the long run effects of mergers in differentiated products markets raises issues that are significantly different from those in the short run or in homogeneous products markets due to the introduction of new varieties. Our analysis reveals that determining the properties of consumer preferences is crucial to the antitrust analysis of mergers in differentiated products markets. Specifically, we show that if the demand system satisfies the Independence from Irrelevant Alternatives (IIA) property and if the number of firms is treated as a continuous variable, mergers in differentiated products markets have no long run effect on consumer welfare. Moreover, in this case, marginal cost savings are to a large extent irrelevant to the consumer welfare effects of mergers. If the number of firms is treated as a discrete variable, fixed or marginal cost savings are a necessary condition for mergers to have zero or positive effect on consumer welfare. Using the example of linear demand, we show that if the demand system does not satisfy the IIA property, mergers in differentiated products markets can harm consumer welfare in long run equilibrium. Moreover, the amount of harm increases with consumers’ taste for variety.Horizontal mergers; free entry; product differentiation; independence from irrelevant alternatives; antitrust policy

Optimal Sharing Strategies in Dynamic Games of Research and Development

This paper builds a theoretical foundation for the dynamics of knowledge sharing in private industry. In practice, research and development projects can take years or even decades to complete. We model an uncertain research process, where research projects consist of multiple sequential steps. We ask how the incentives to license intermediate steps to rivals change over time as the research project approaches maturity and the uncertainty that the firms face decreases. Such a dynamic approach allows us to analyze the interaction between how close the firms are to product market competition and how intense that competition is. If product market competition is relatively moderate, the lagging firm is expected never to drop out and the incentives to share intermediate research outcomes decreases monotonically with progress. However, if product market competition is relatively intense, the incentives to share may increase with progress. These results illustrate under what circumstances it is necessary to have policies aimed at encouraging cooperation in R&D and when such policies should be directed towards early vs. later stage research.Multi-stage R&D, Innovation, Knowledge Sharing, Licensing, Dynamic Games

Optimal Sharing Strategies in Dynamic Games of Research and Development

This paper analyses the dynamic aspects of knowledge sharing in R&D rivalry. In a model where research projects consist of N sequential stages, our goal is to explore how the innovators' incentives to share intermediate research outcomes change with progress and with their relative positions in an R&D race. We consider an uncertain research process, where progress implies a decrease in the level of uncertainty that a firm faces. We assume that firms are informed about the progress of their rivals and make joint sharing decisions either before or after each success. Changes in the firms' absolute and relative positions affect their incentives to stay in the race and the expected duration of monopoly profits if they finish the race first. We show that firms always prefer to have sharing between their independent research units if they are allowed to collude in the product market. However, competing firms may have either decreasing or increasing incentives to share intermediate research outcomes throughout the race. If the lagging firm never drops out, the incentives to share always decrease over time as the research project nears completion. The incentives to share are higher earlier on because sharing has a smaller impact on each firm's chance of being a monopolist at the end of the race. If the lagging firm is expected to drop out, the incentives to share may increase over time. We also use our framework to analyze the impact of patent policy on the sharing incentives of firms and show that as patent policy gets stronger, sharing incentives may decrease or increase depending on whether or not the lagging firm has increased incentives to drop out.