April 2016

Themes that run through my research

The basic economic model of a competitive market involves consumers buying goods from producers. It is notable that in this elegant, but simple, framework: (i) Neither consumers nor producers have any market power; (ii) Production and retailing are subsumed into one process conducted by one firm; and (iii) The government does little other than define and enforce property rights.

This is in stark contrast to the markets that characterize most industries in a modern economy. Production, distribution and retailing are processes that involve many different firms: even simple products pass through complex supply chains (referred to as the vertical market structure) before connecting with final consumers. Many firms enjoy some level of market power and even more firms invest heavily to attain it. Finally, government is a pervasive presence in markets, from being an active participant (e.g. via contracting for road repair), or regulator (e.g. via the Department of Justice's involvement in competition (or antitrust) law enforcement) through to more ubiquitous interventions such as taxation.

My research is aimed at understanding elements of how allocation, production and exchange work in industries characterized by market power, a complex vertical structure and an active government presence. Using a combination of empirical and theoretical tools, I aspire to contribute to our understanding of how these factors shape economic policy at the industry level, at both a normative and positive level. Each of my projects involves some combination of the study of market power, regulation, and vertical market structures.

Antitrust Policy and Government Intervention

Most developed economies have laws that prohibit the abuse of market power. In the US these laws are known collectively as the antitrust law, and comprise several statutes including the Sherman, Clayton and FTC Acts. Across jurisdictions these laws tend to prohibit a variety of conduct including collusion between firms, contracting practices between manufacturers, suppliers and retailers that diminish competition, mergers that would significantly reduce competition in an industry, and the abuse of market dominance.

My work on antitrust has tended to focus on collusive activity, in which rival firms form a cartel in which they agree to cooperate rather than compete, and conduct in vertical markets, in which, say, upstream firms (e.g. manufacturers) contract with downstream firms (e.g. retailers) in ways that may give rise to competitive harm to the market. Both these lines of inquiry give rise to issues that also arise in regulating mergers, and much of the technical analysis is applicable to merger analysis.

In what follows, I first discuss my work on cartels, and then on vertical markets, and then that part of my writing that seeks to link the purely academic economic work to legal and regulatory practice.

Cartel conduct

Despite the strong foundations economic theory provides for antitrust enforcement, large areas of the administration of these laws are currently open to debate. Empirically, we know relatively little about how firms collude and the impacts that this has on market efficiency and the damages collusion imposes on market participants. A Study of the Internal Organization of a Bidding Cartel uses a unique data set of information accumulated by a cartel participant to unravel these issues in a particular cartel setting in the North American market for collectable postage stamps. The findings are interesting in that they suggest new avenues through which cartels can inflict economic damages, illustrate some of the practical constraints on forming an effective cartel and illustrate frontier techniques in the econometric assessment of damages.

An important aspect of making advances in this area involves bringing new data sets to light that illustrate unexplored phenomena. In Leniency and Post-Cartel Market Conduct: Preliminary Evidence from Parcel Tanker Shipping I use court records and data on ship movements to explore the potential for a past cartel to influence post-cartel conduct through coordinating firms on a particular unilaterally sustainable industry equilibria.

Ongoing research (with Allan Collard-Wexler and Jan de Loecker) into the impact of the OPEC cartel on the global pattern of oil production is directed at contributing to our understanding of the empirical impact of cartel-like market structures on production patterns and inefficiencies. Another ongoing line of research (with Chaim Ferstman, Jihye Jeon and Ariel Pakes) seeks to develop a computationally tractable model of a dynamic auction in which the competitive impact of information sharing among firms (as opposed to explicit coordination on bids) can be examined.

Vertical market structure and conduct

When a good is produced by a manufacturer who sells it to a retailer, the good travels through a `vertical' market in which upstream and downstream firms interact. Vertical markets can have many tiers. Competition in vertical markets is complicated. Concerns about exclusive contracting practices, price fixing between upstream and downstream firms and strategic pricing are central features of this literature.

Raising Retailers' Profits: On Vertical Practices and the Exclusion of Rivals (with Heski Bar-Isaac), is a theoretical examination of the logic behind the claim that various forms of contracting practice between manufacturers and retailers can lead to artificial barriers to entry being created. In some part it seeks to explore claims made in recent federal court decisions about the potential rationale for successfully prosecuting cases in which one party is accused of excluding another from the market by using distribution agreements with loyalty payments, resale price maintenance provisions and other forms of implied payments for (potentially) exclusive service. The most notable of these being the 2007 Supreme Court {\it Leegin} decision.}

Diagnosing Foreclosure due to Exclusive Dealing adds to the investigation of exclusionary conduct and examines exclusive contracting and competition in an empirical setting. This paper examines the relationship between beer brewers and distributors in the Chicago beer market. Large brewers in this market have dedicated (exclusive) distributors. The paper finds that the exclusive relationships between brewers and their distributors appear most consistent with providing incentives for greater service and efficiencies, rather than the improper maintenance of market power. (The working paper version of this paper is also an early step in the ongoing development of generally applicable empirical tools for modeling the interaction of firms in vertical markets).

Particularly in service industries, relationships are a persistent feature of vertical markets. Competition and the Structure of Vertical Relationships in Capital Markets (with Alexander Ljungqvist) investigates the market for underwriting services and argues that information flows make vertical market interactions in financial markets (and by extension, professional services markets generally) fundamentally different from those in more traditional physical goods industries.

Ongoing research in this area (with Heski Bar Isaac) examines the competitive impact of minimum advertised price (MAP) policies, in which manufacturers impose advertising restrictions on retailers.

Reaching a wider audience

Communicating existing results to a wider audience is an important aspect of making sure that academic research has social impact. Much of my research has direct applicability to policy, particularly antitrust policy. For this reason, I have invested some time in writing for more general audiences, in which I translate much of my own work, and that of others, and discuss how it applies to contemporary policy. In Bidding Rings I survey the extant literature on collusion in auctions. In Vertical Practices and the Exclusion of Rivals Post Eaton (with Shannon Seitz) and Tomorrow's Antitrust Rulings on Conditional Pricing (with Selvin Akkus-Clemens) we discuss the application of the ideas in Raising Retailers' Profits: On Vertical Practices and the Exclusion of Rivals to the liability theories underlying recent antitrust cases bought by private plaintiffs and government agencies seeking redress for alleged exclusionary conduct by dominant firms in a variety of industries. The target audiences for these last two articles are practicing lawyers, and hence these are published in specialist antitrust journals that service the antitrust bar.

Linking research to policy also motivates participation in the preparation of amicus briefs for submission in specific court proceedings. Similarly, contributing to trade publications, such as the preparation of the 3rd edition of the American Bar Association's Proving Antitrust Damages: Legal and Economic Issues is an effort to make sure economic research and legal practice remain appropriately aligned.

Investment and Industry Dynamics

Long run firm and industry dynamics are important for many policy questions (such as those discussed above), but are poorly understood relative to many other areas of industrial economics. Central to fixing this is an understanding of how firms make investments and the implications of this for industry performance. In recent work I have sought to understand investment and industry performance, and (where appropriate) reach out to research communities in other areas of economics.

Dynamic Inputs and (Mis)Allocation (with Allan Collard Wexler and Jan De Loecker) uses techniques from the productivity measurement literature to illustrate that differences in productivity between firms in the same industry need not reflect underlying inefficiencies in the markets that allocate inputs to firms. This engages with a provocative and important discussion about the extent to which resource misallocation leads to firms, industries and countries failing to realize their productive potential, and hence exacerbate impediments to economic growth. This paper provides a framework in which the mere existence of differences in the returns to capital (MRPK) need not signal resource misallocation, and shows that this framework is consistent with empirical patterns observed in firm-level production data. By offering a framework in which macro data fails to make the case for large scale industrial policy intervention, the paper challenges moves toward large scale industrial intervention that are unsupported by targeted micro-evidence. Ongoing research (with Allan Collard-Wexler and Jan de Loecker, also discussed above) into the impact of the OPEC cartel on the global pattern of oil production is directed at contributing to the development of the kind of micro-economic evidence that links industry level policy interventions to (large scale) macroeconomic outcomes.

Corporate Investment and Stock Market Listing: A Puzzle? (with Joan Farre-Mensa and Alexander Ljungqvist) examines investment behavior of publicly listed and privately held firms in the US economy. The paper finds significant differences between otherwise comparable firms, leading to a discussion of how corporate financing structure may affect firm and industry performance. This work engages with issues more commonly found in the corporate finance literature.

Lastly, Subsidies, Entry and the Distribution of R\&D Investment (an early paper with Mariagiovanna Baccara) investigates heterogeneity in the response of firms' equilibrium investment policies to R\&D subsidies and related policies.

Understanding industry dynamics is a challenge for economics generally, and industrial organization in particular. It is notable that many antitrust arguments made in courts center around questions of incentives for innovation and investment, but understanding of the economics underlying these processes, and particularly how to accurately model counterfactuals, has progressed more slowly than other areas. Pushing on this, I hope, can yield real gains in our understanding of how antitrust policy and industrial policy generally, should be better configured.

Auctions and Procurement

An auction can be viewed as a very structured form of multi-party negotiation in which one party has enough power to dictate the rules of the game. This party (the auctioneer) structures the game so as to exploit competition between the other parties (bidders) so as to better extract gains from trade. That is, auctions can be viewed as a means to price discriminate and exploit market power. Early in my career I pursued a line of research into auction design that focused on the design of procurement auctions.

The central question is: how can an auction be structured when factors other than price are crucial to the decision to buy? For instance, the government, when buying a contract for road construction services, cares not only about the cost but also about the speed at which work can be done. Properties of scoring auctions (with Estelle Cantillon) investigates the properties of a common mechanism (scoring auctions) used in this setting. Although a theory paper, it was prompted by a deficiency in existing theories' ability to map, in an estimable way, to data. Hence this paper is primarily intended to provide a framework for empirical work in this area. Procurement when Price and Quality Matter (again, with Estelle Cantillon) is a much more theoretical paper investigating optimal and near-optimal mechanisms in this setting.

Other early papers are smaller contributions to our understanding of the economics of auctions. (In particular, Bidding up, Buying out and Cooling-off: An examination of auctions with withdrawal rights and Teaching Auction Strategy using Experiments administered via the Internet (with Brit Grosskopf, Carl N. McKinney, Muriel Niederle, Alvin E. Roth and Georg Weizsacker)).

Since the work on scoring auctions, the auction-related projects I have pursued have been increasingly applied. For instance, Subsidizing (and Taxing) Business Procurement studies the impact of business subsidies and taxes directed at suppliers of an input used by a manufacturer. The manufacturer procures the input using a competitive tendering process. The paper examines the extent to which upstream subsides benefit the downstream manufacturer. Hence, this paper is a study of taxation in an auction nested within a vertical market structure. Another example is A Study of the Internal Organization of a Bidding Cartel (discussed above), which studies collusion in an auction market.

(As at April 2016, An earlier (2009) version is found here.)

The following keywords may help clarify the content of my research: Industrial Organisation, Antitrust Regulation, Cartels, Bidding Rings, Collusion, Vertical Market Structure, Procurement, Economics of Supply Chain Management, Exclusive Dealing, Vertical Integration, Contracting, Price Descrimination, Firm Investment, Applied Econometrics, Non-Parametric Econometric Methods, Auction Theory.