Regime Shift in Antitrust

This paper empirically models the longer-run deep-seated shift in intellectual thinking that followed the Chicago School’s criticism of the older antitrust doctrine, the shorter-run driving forces related to switches of the political party in power, merger waves, changes in economic activity and the level of funding and quantifies their impact on enforcement by the Antitrust Division of the U.S. Department of Justice over the period 1958-2002. The key findings are: (1) a distinct regime-shift in antitrust enforcement during the 1970s and, post-regime-shift, there has been a marked compositional change with a quantitatively large increase (decrease) in criminal (civil) antitrust court cases initiated; (2) post-regime-shift, there appears to be a change in the role played by politics with Republicans initiating more (less) criminal (civil) court cases than Democrats and the estimated quantitative effects are large; (3) disaggregating the total number of court cases into the main categories under which they are initiated (price-fixing, mergers, monopolization and restraints-of-trade) shows that individual types of cases have widely differing responses to changes in the driving forces; and (4) in a horse-race between the regime-shift and political effect on one side and the remaining variables on the other, the former forces win hands-down in explaining broad shifts in enforcement. Modeling the longer-run shift and disaggregating the court cases emerge as crucial to gaining insights into the intertemporal shifts in enforcement. The paper elaborates on the causes for the shift in enforcement and on the effectiveness of antitrust.Antitrust enforcement; regime-shift; politics; supreme court; effectiveness

The Law and Economics of Enhancing Cartel Enforcement: Using Information from Non-Cartel Investigations to Prosecute Cartels

I present the following proposal: information revealed during non-cartel investigations by competition law enforcement authorities, such as evaluation of M&As or investigation of monopolization (dominance) conduct, should be directly used to investigate and prosecute cartels. Currently, in several jurisdictions, information acquired in, for example, a M&A investigation typically cannot be directly used for a cartel case due to the underlying statutes and the legal and administrative procedures that govern information use. Reviewing the management and corporate strategy literature, I note that M&As form a vital part of firms’ core business strategy, with the longer-run strategic aspects being more important. These longer-run strategies could be jeopardized if the firms were engaging in collusion, as the likelihood of detection and prosecution would increase under the proposed rule change, which would punish bad (collusive) behavior. I argue that irrespective of exactly how many cartels are actually prosecuted via this channel, the proposal has the likelihood of creating a meaningful deterrence effect. I also discuss the potential downsides related to Type 1 errors and administrative costs. Overall, I argue that the proposed rule change could increase the efficiency and effectiveness of cartel enforcement, and open an additional front in the fight against hardcore cartels that operate within jurisdictions as well as internationally.cartels, enforcement, law and economics

Endemic Volatility of Firms and Establishments: Are Real Options Effects Important?

Consider the intertemporal volatility of the number of firms and establishments within an industry over a relatively long span of time. Data from the U.S. manufacturing sector shows that this degree of endemic volatility varies widely across industries. Examining the determinants of this volatility is important in its own right as it reflects on the underlying forces governing entry and exit. In addition, data shows that the volatility of firms and establishments is significantly correlated with the volatility of the number of production and nonproduction workers employed in an industry. The primary focus of this paper is to evaluate the role played by the real options channel which suggests that sunk costs and uncertainty may be important determinants of the degree of volatility of the number of firms. We also control for other factors related to advertisingintensity, industry growth and technological change. An advantage of the manufacturing industry dataset we use in this study is that it combines the annual timeseries data from the Annual Survey of Manufactures with data from the five-yearly Census of Manufactures. This allows us to construct measures of uncertainty about profits, sunk capital costs, technological change, among others. Our key findings are: (1) industries with higher sunk capital costs and profit uncertainty have significantly lower endemic volatility of the number of firms and establishments; and (2) these relationships are non-linear as suggested by theory with even small amounts of sunk costs or profit uncertainty contributing to significantly lower firm volatility. Our findings appear broadly consistent with the predictions of the real options channel. We highlight some implications of our findings for antitrust/competition policy and labor market dynamics. ZUSAMMENFASSUNG - (Endemische Volatilität von Unternehmen und die Bedeutung von 'real option effects') Betrachtet man die intertemporale Schwankung der Anzahl von Unternehmen eines Industriezweigs über einen relativ langen Zeitraum, so zeigen Daten der U.S.amerikanischen verarbeitenden Industrie eine große Variation des Grades dieser endemischen Schwankungen zwischen unterschiedlichen Industriezweigen. Die Untersuchung der Determinanten dieser Volatilität ist für sich genommen bedeutsam, indem sie die Hintergründe für den Markteintritt und - austritt von Firmen beleuchtet. Darüber hinaus lässt sich eine hohe Korrelation zwischen der Schwankung in der Anzahl der Unternehmen und der Volatilität der Zahl der Arbeiter, die in der Produktion und in nicht-produzierenden Tätigkeiten beschäftigt sind, herstellen. Das Hauptaugenmerk dieses Papier ist es zu bewerten, welche Rolle der 'real options'- Kanal spielt, was impliziert, dass 'sunk costs' und Unsicherheit entscheidende Bestimmungsfaktoren für den Grad an Volatilität der Unternehmenszahl sind. Bei der Untersuchung werden auch andere Faktoren, die mit Werbungsintensität, Industriewachstum und technologischem Wandel verbunden sind, kontrolliert. Ein Vorteil des in der Analyse verwandten Datensatzes liegt darin, dass er jährliche Zeitreihendaten aus dem Jahresbericht des verarbeitenden Gewerbes der U.S.A. (Annual Survey of Manufacturers) mit Daten des Zensus des verarbeitenden Gewerbes, der fünfmal im Jahr erhoben wird, kombiniert. Das gestattet die Konstruktion von Maßzahlen zur Unsicherheit über Gewinne, versunkene Kapitalkosten, technologischen Wandel, etc.. Die Hauptergebnisse der Untersuchung sind: (1) Industriezweige mit höheren versunkenen Kapitalkosten und Gewinnunsicherheit zeichnen sich durch signifikant geringere endemische Volatilität in der Anzahl der Unternehmen aus; (2) diese Beziehungen sind nicht-linear, wie bereits die Theorie vermuten lässt, die besagt, dass schon geringe 'sunk costs' oder Gewinnunsicherheit zu bedeutend geringerer Schwankungsbreite in der Unternehmenszahl beitragen. Die Ergebnisse scheinen insgesamt mit den Aussagen zum 'real options'- Kanal übereinzustimmen. Einige Implikationen der Resultate für die 'Antitrust'- und Wettbewerbspolitik sowie Arbeitsmarkt-dynamik werden herausgestellt.Firm and establishment volatility; sunk capital costs; profit uncertainty; technological change; antitrust/competition policy; employment dynamics

Impact of Uncertainty and Sunk Costs on Firm Survival and Industry Dynamics

In theory, uncertainty and sunk costs can influence industry dynamics through the option value and financing constraints channels. Empirical evaluation of these models in the context of industry dynamics are, however, at a nascent stage. Our empirical analysis, covering 267 U.S. manufacturing industries over a 30-year period, reveals that greater uncertainty (i) decreases the number of small firms and establishments in high sunk cost industries, (ii) has virtually no impact on larger establishments, (iii) results in a less skewed size distribution of firms and establishments in high sunk cost industries and (iv) marginally increases industry output concentration. Addressing the recent literature, we also control for technological change and our estimates show that technical progress decreases the number of small firms and establishments in an industry. While past studies have emphasized technological change as a key driver of industry dynamics, our results indicate that uncertainty and sunk costs play a crucial role. Our findings could be useful for the study of firm survival, models of creative destruction, evolution of firm size distribution, mergers and acquisitions and competition policy.

The law and economics of enhancing cartel enforcement: Using information from non-cartel investigations to prosecute cartels

I present the following proposal: information revealed during non-cartel investigations by competition law enforcement authorities, such as evaluation of M&As or investigation of monopolization (dominance) conduct, should be directly used to investigate and prosecute cartels. Currently, in several jurisdictions, information acquired in, for example, a M&A investigation typically cannot be directly used for a cartel case due to the underlying statutes and the legal and administrative procedures that govern information use. Reviewing the management and corporate strategy literature, I note that M&As form a vital part of firms' core business strategy, with the longer-run strategic aspects being more important. These longer-run strategies could be jeopardized if the firms were engaging in collusion, as the likelihood of detection and prosecution would increase under the proposed rule change, which would punish bad (collusive) behavior. I argue that irrespective of exactly how many cartels are actually prosecuted via this channel, the proposal has the likelihood of creating a meaningful deterrence effect. I also discuss the potential downsides related to Type 1 errors and administrative costs. Overall, I argue that the proposed rule change could increase the efficiency and effectiveness of cartel enforcement, and open an additional front in the fight against hardcore cartels that operate within jurisdictions as well as internationally

Firm and Establishment Volatility: The Role of Sunk Costs, Profit Uncertainty and Technological Change

The degree of endemic volatility in the number of firms and establishments varies considerably across industries. Examining the within-industry range of variation (max.-min.) of the number of firms over our sample period, the low and high values across U.S. manufacturing industries are 4 and 3,500 firms respectively, with a mean value of about 324 firms. This reveals that (1) the typical industry experiences significant fluctuations in the number of firms and (2) there are large cross-industry differences in this dimension. Theory suggests several potential factors that might explain this dispersion of firm volatility across industries: for example, sunk capital costs, uncertainty about profits and technological change. An advantage of the manufacturing industry dataset we have assembled for this study is that it combines the annual time-series data from the Annual Survey of Manufactures with data from the five-yearly Census of Manufactures. The former allows us to measure uncertainty about profits and technological change, while the latter enables us to obtain information on the industry-specific size distribution of establishments, the number of establishments per firm and construct proxies for sunk capital costs. Our empirical findings show that: (1) industries with higher sunk capital costs and profit uncertainty have significantly lower variability of the number of firms; and (2) these relationships are non-linear as suggested by theory with initial increases in sunk costs or uncertainty having relatively greater effect on firm volatility. The effects of technological change appear to be mixed. We explore the implications of our findings for antitrust analysis

Business Decision-Making under Uncertainty: Evidence from Employment and Number of Businesses

Using the framework provided by the asymmetric-information and real-options theories, we examine the impact of uncertainty on firms' decisions and market outcomes. We construct alternative measures of uncertainty based on survey of professional forecasters and our estimation of regression-based forecasting models for GDP growth, inflation, S&P500 stock price index, and fuel prices. Our results indicate that greater uncertainty has a negative impact on growth of employment and the number of businesses, and the effects are primarily felt by relatively smaller businesses. The impact on large businesses are generally non-existent or weaker. Our results suggest that to truly understand the effects of uncertainty on firms' decisions, we need to focus on the relatively smaller and entrepreneurial businesses. We discuss some implications for framing of policy

Investments in Modernization, Innovation and Gains in Productivity: Evidence from Firms in the Global Paper Industry

This paper examines the impact of investments in modernization and innovation on productivity in a sample of firms in the global pulp and paper industry. This industry is important because it has traditionally accounted for significant amounts of employment and capital investment in North America and Europe. In contrast to much of the existing literature which focuses on the impact of R&D and patents on firms’ performance and productivity, we examine data on actual investment transactions in four main areas of operations: (i) mechanical, (ii) chemicals, (iii) monitoring devices and (iv) information technology. We find that firms which made decisions to implement a greater number of investment transactions in modernization achieved higher productivity, and these estimated quantitative effects are greater than the impact of standard innovation variables such as patents and R&D. Investment transactions in the information technology and digital monitoring devices imparted a particularly noticeable boost to productivity. These results are obtained after controlling for other firm-specific variables such as capital-intensity and mergers and acquisitions. Two broad messages emerge from our study. First, firms’ decisions to undertake investments in modernization and various forms of incremental innovations appear to be critical for achieving gains in productivity. While these may typically generate small gains on a year-to-year basis, they can compound to form meaningful differences in performance, productivity and competitive position across firms in the longer-run. Second, for some of the traditional industries like pulp and paper, R&D and patents seem to be particularly poor indicators of innovation and, more generally, how firms go about achieving gains in productivity. While this paper focuses on the pulp and paper industry, our broad framework and methodology is general and can be applied to understanding firms’ strategies related to enhancing performance and productivity in a variety of industries.Pulp and paper industry; investment; modernization; innovation; productivity; organizational behavior

Firm-level Human Capital and Innovation: Evidence from China

Understanding the factors that may produce a sustained rate of innovation is important for promoting economic development and growth. In this paper, we examine the role of human capital in firms’ innovation by using a large sample of manufacturing firms from China. We use two firm-level datasets from China: one from metropolitan cities, and one from provincial small and medium sized cities. Patent applications are used as the measure of innovation. Human capital indicators used include skilled human capital (number of highly educated workers), general manager’s education and tenure, and management team’s education and age. We find that skilled human capital has a significant positive effect on firms’ innovation, while the management team’s age has a significant negative effect on innovation. The General Manager’s tenure plays a significant positive role in firm innovation in metropolitan cities, while it is the General Manager’s education that has a positive and significant effect on firms’ innovation in small and middle cities. We also find that the effect of R&D on patents is insignificant for firms in large cities, but it is positive and significant in the smaller and medium sized cities. We conclude by noting some policy issues for promoting innovation in developing economies

Adoption and diffusion of health information technology: The case of primary care clinics

We empirically examine the determinants of adoption of information technology by primary healthcare clinics using a large sample of physician clinics from several States in the U.S. Ours is one of the first studies to intensively investigate primary care clinics. These clinics are important as they represent the frontlines in the delivery of services in this large and complex market. Our study generates several interesting results related to the adoption and diffusion of Health Information Technology (HIT), including: (1) the adoption probabilities vary considerably by the specific type of clinic; (2) in contrast to numerous studies in the broader technology adoption literature, we find little evidence to suggest a relationship between firm (clinic) size and the likelihood of adoption; (3) there appears to be no definitive relationship between the age of a clinic and the likelihood of adoption; (4) there is a strong effect of geographic location, as measured by specific types of urban and rural counties, on the likelihood of adoption; (5) market competitive forces appear to have a mixed influence on adoption; (6) there is a distinct State-specific effect suggesting that information privacy, medical malpractice laws and State initiatives may play an important role in adoption; and (7) HIT is diffusing at a faster rate over time. Our findings have the potential to provide a better understanding of the longer-run effectiveness and efficiency in the provision of healthcare, and crafting appropriate policy responses. We note some future extensions of our work