Public Disclosure of Patent Applications, R & D, and Welfare

In this paper we examine the consequences of this difference for (i) firm's R&D and patenting behavior, (ii) consumers' surplus and social welfare, and (iii) the incentives of firms to innovate, in a setting where patent protection is imperfect in the sense that patent applications may be rejected and patents are not always upheld in court. We show that public disclosure of patent applications leads to fewer applications and fewer innovations, but for a given number of innovations, it raises the probability that new technologies will reach the product market and thereby enhances consumers' surplus and possibly total welfare as well.

Price and Non-Price Restraints When Retailers are Vertically Differentiated

This paper considers vertical restraints in the context of an intrabrand competition model in which a single manufacturer deals with two vertically differentiated retailers. We establish two main results. First, we show that if the market cannot be vertically segmented, the manufacturer will foreclose the low quality retailer either directly by dealing exclusively with the high quality retailer, or indirectly by setting a sufficiently high minimum RPM or a sufficiently high wholesale price. Although vertical restraints are not needed to foreclosure the low quality retailer, the manufacturer prefers to impose restraints because they lead to a higher retail price and hence a higher profit. This result means that exclusive dealings with the high quality retailer or an RPM may have anti competitive effects. Moreover, the use of vertical restraints to foreclose low quality retailers is often justified on the grounds that it alleviates a free rider problem in the provision of special services. However since we show that foreclosure occurs even without restraints, it is clear that the benefits associated with foreclosure cannot be used to justify the use of vertical restraints. Second, we show that if the market can be vertically segmented, the manufacturer will impose customer restrictions by requiring the low quality retailer to deal only with consumers whose willingness to pay for quality is below some threshold. We show that this restriction benefits the manufacturer as well as consumers with low willingness to pay for quality, including some that are served by the high quality retailer, but it harms consumers with high willingness to pay for quality.

On the Evolutionary Emergence of Optimism

Successful individuals were frequently found to be overly optimistic. This is puzzling because it might be thought that optimistic individuals who consistently overestimate their eventual payoffs will not do as well as realists who see the situation as it truly is and hence will not survive evolutionary pressures. We show that contrary to this intuition, there is a large class of either competitive or cooperative strategic interactions between randomly matched pairs of individuals in the population, in which "cautiously" optimistic individuals not only survive but also prosper and take over the entire population. The reason for this result is that optimistic individuals who overestimate the impact of their actions on their payoffs, behave more aggressively than realists and pessimists. When the interactions between individuals involve negative externalities (the payoff of one player decreases with the actions taken by another player) and the actions are strategic substitutes, being aggressive induces the opponent to be softer, so optimists gain a strategic advantage that, for moderate levels of optimism, outweighs the loss from having the wrong perception of the environment. Likewise, when the interactions between individuals involve positive externalities and the actions are strategic complements, being aggressive triggers a favorable aggressive behavior from the opponent. Hence, in both cases, cautiously optimistic types fare better on average than other types of individuals. We show that if the initial distribution of types is sufficiently wide, then over time it will converge in distribution to a mass point on some level of cautious optimism.

INVESTMENT IN FLEXIBILITY UNDER RATE REGULATION

This paper considers the effects of a regulated firm's capital structure on the firm's choice of technology. In models of rate regulation, the firm has an incentive to adopt a technology that is too inflexible, relative to the social optimum, in the sense that it would like to choose a cost function with higher than optimal variable costs and lower than optimal fixed costs. This effect arises because regulators wish to maximize welfare, and therefore have an incentive to require that the regulated price will be set as close as possible to marginal cost. Hence, a technology with a low marginal cost is associated with a low regulated price, and is not attractive to the firm. Performance under rate regulation can be improved, however, if the firm is leveraged, because debt induces regulators to increase the regulated price to prevent the firm from becoming financially distressed. Consequently the cost of flexibility to the firm is lowered, leading it to choose a more flexible technology, closer to the socially optimal level. In the context of this model, the firm may have an incentive to gold plate (i.e., waste resources) if regulators restrict its ability to issue debt. This incentive disappears, however, when the firm is allowed to issue its most preferred capital structure

Horizontal Subcontracting

Horizontal subcontracting agreements between rival firms, each of which is capable of producing and marketing its products independently, are common. This article explains this practice and evaluates its welfare implications. The analysis shows that firms with asymmetric convex costs can use horizontal subcontracting to allocate production more efficiently between them and consequently generate a mutually beneficial surplus. For a wide range of parameters, this increase in production efficiency leads to an increase in industry output. The counterintuitive result is that welfare is thereby enhanced. In fact, when industry output falls, welfare can still increase if production costs are sufficiently lowered.

The Capital Structure of Regulated Firms

The equilibrium price, investment, and capital structure of a regulated firm are examined using a sequential model of regulation. The firm's capital structure is shown to have a significant effect on regulated prices, so that the firm's choice of debt and equity levels refelect regulatory responses. Moreover, debt financing weakens the incentive for regulators to "hold up" the firm so that leveraged firms can invest more than all-equity firms.capital structure, regulation, investment, public utilities, bankruptcy.

Capital Structure with Countervailing Incentives

The regulated firm's choice of capital structure is affected by countervailing incentives: the firm wishes to signal high value to capital markets to boost its market value while also signalling high cost to regulators to induce rate increases. When the firm's investment is large, countervailing incentives lead both high- and low-cost firms to choose the same capital structure in equilibrium, thus decoupling capital structure from private information. When investment is small or medium-sized, the model may admit separating equilibria in which high-cost firms issue greater equity and low-cost firms rely more on debt financing.