Pricing under innovation

We study pricing when firms introduce process and product innovations over time. We set up a model of endogenous productivity and markup under imperfect competition and dynamic pricing. We estimate it using output price indices reported by an unbalanced panel of 2,300 Spanish manufacturing firms during 1990-2006. Markups turn out to be procyclical and change with the introduction of innovations. Firms use innovation to increase margins, but product innovators are careful to raise prices on new or improved goods. Process innovations tend to leave prices unchanged, product innovations tend to raise prices and firms that introduce both tend to decrease them

Exploring ways to estimate endogenous productivity

This paper explores methods to assess the impact on firm productivity of the investment in innovation activities (endogenous productivity). It uses 23 years of firm-level data generated by the Spanish ESEE survey (1990-2012). We first apply traditional approaches to the measurement of productivity such as Solow Residual and Multilateral Index. We then replicate the estimation of the model in Doraszelski and Jaumandreu (2013) using more data now available. We briefly compare both approaches and discuss about the importance of treating inputs and productivity as endogenous. We then discuss ways to apply the model for endogenous productivity when there are no firm-level output price indices available, a limitation of many data bases. Including the demand of the firm in the estimation allows us to obtain a "composite" of productivity, demand elasticity, and demand heterogeneity. This unobservable, often called "revenue productivity", is the estimate of productivity used by most scholarly studies. We find that this composite does not behave as productivity and, in particular, neither is greater for firms that perform R&D nor its distribution shows stochastic dominance. Its persistence and returns also give misleading results. Our findings highlight the importance of producing more complete databases, especially if policy implications are to be drawn. They also suggest caution in interpreting the results based on revenue productivity

Does innovation stimulate employment? A firm-level analysis using comparable micro-data from four European countries

This paper studies the impact of process and product innovations introduced by firms on employment growth in these firms. A simple model that relates employment growth to process innovations and to the growth of sales separately due to innovative and unchanged products is developed and estimated using comparable firm-level data from France, Germany, Spain and the UK. Results show that displacement effects induced by productivity growth in the production of old products are large, while those associated with process innovations, which are likely to be compensated by price decreases, appear to be small. The effects related to product innovations are, however, strong enough to overcompensate these displacement effects

Does innovation stimulate employment? A firm-level analysis using comparable micro data on four European countries

This paper studies the impact of process and product innovations introduced by firms on their employment growth. A model that relates employment growth to process innovations and to the growth of sales due to innovative and unchanged products is derived and estimated using a unique source of comparable firm-level data from France, Germany, Spain and the UK. Results for manufacturing show that, although process innovation tends to displace employment, compensation effects are prevalent, and product innovation is associated with employment growth. In the service sector there is less evidence of displacement effects, and growth in sales of new products accounts for a non-negligible proportion of employment growth. Overall the results are similar across countries, with some interesting exceptions

Modelling price competition across many markets : an application to the Spanish loans market

The purpose of this work is the structural modelling of price competition in a product-differentiated industry in which many firms of varying size compete across many independent small markets, with the target of identifying price behaviour. We apply it to model competition among the more than 79 banks that were active in the Spanish loans market during the period 1983–1991, using micropanel data. A model in which national banks (as opposed to regional and local banks) fully internalize their cross-rate effects in pricing is selected as the model that best fits the data. Our framework allows us to estimate the dead-weight loss due to market power, and to decompose it assessing the part attributable to price coordination.Publicad

Identifying changes in behavior in a multiproduct oligopoly: Incumbents' reaction to tariffs dismantling *

Abstract The Spanish automobile market of the nineties experienced a perfectly foreseeable tariff dismantling, complicated by a strong demand downturn, with the observed result of an apparently sharpened producer competition, both in products and prices. This paper is aimed at testing whether or not there really was a change in pricing behavior, using a structural model of competition among oligopolistic multiproduct firms. We understand by behavior the particular strategies, in a set of well defined, marketspecific equilibrium concepts, which are sustained at a given moment. To answer that question, we specify and estimate a pricing equation with panel data for 164 models belonging to 31 firms which competed in the market during this period. The specification includes several equilibria as alternative (overlapping) estimating models, considering prominently tacit coalitions by which a group of firms sets prices, taking into account the cross effects on their demands. The statistical test selects as the best model given the data a switch from collusion to competition of domestic and European producers at the beginning of the nineties. * We are grateful to Simon Anderson and Steve Berry for comments on previous drafts of this paper. We also wish to acknowledge useful comments by Tim Bresnahan, Neil Gandal, Marc Ivaldi, Tor Klette, Pedro Marín, Lars-Hendrik Röller and the audience at the Third CEPR Conference on Applied IO (Bergen). All remaining errors are ours

Total Factor Productivity Estimation: A Practical Review

This paper aims to provide empirical researchers with an overview of the methodological issues that arise when estimating total factor productivity at the establishment level, as well as of the existing techniques designed to overcome them. Apart from the well-known simultaneity and selection bias; attention is given to methodological issues that have emerged more recently and that are related to the use of deflated values of inputs and outputs (as opposed to quantities) in estimating productivity at the firm level, as well as to the endogeneity of product choice. Using data on single-product firms active in the Belgian food and beverages sector, I illustrate the biases introduced in traditional TFP estimates and discuss the perfirmance of a number of alternative estimators that have been proposed in the literature

A spatial productivity index in the presence of efficiency spillovers: Evidence for U.S. banks, 1992–2015

We present the methodology for a new spatial decomposition of total factor productivity (TFP) growth. The relevant literature is underdeveloped as there is just one short study which proposes a partial spatial TFP growth decomposition. We develop this literature in four respects. The first two developments are methodological to go from a partial decomposition to a complete one. First, we augment the partial decomposition with a cost efficiency spillover growth component. Second, we introduce own and spillover allocative efficiency growth components. Third, we provide a more detailed coverage of the spatial decomposition of TFP growth. Fourth, in contrast to the traditional application to geographical areas (e.g., countries) in the relevant literature, we apply our decomposition using firm level data, which suggests that there can be an important role for spatial productivity analysis in OR. Our application is to large U.S. banks over the period 1992–2015. Among other things, we find for the average large U.S. bank that TFP growth since the financial crisis has become much more dependent on the bank itself and less so on spatial spillovers

Employment Effects of Different Innovation Activities: Microeconometric Evidence

Using the model recently developed by Jaumandreu (2003) this paper reports new results on the relationship between innovation and employment growth in Germany. The model is tailor-made for analysing firm-level employment effects of innovations using specific information provided by CIS data. It establishes a theoretical link between employment growth and innovation output. The econometric analysis confirms that product innovations have a positive impact on employment. In contrast to previous studies, this effect is independent of the novelty degree. Moreover, different employment effects between manufacturing and service firms regarding process innovations were found. Finally, from a cross country perspective the results for Germany are similar to those found for Spain and the UK