Pharmaceutical regulation and innovative performance: a decision-theoretic model, Managerial and Decision Economics, forthcoming, 2014.

Abstract : In this paper we develop a model of the impact of the drug approval process on the terms of a contract between a pharmaceutical company that requires the services of a contract research organization (CRO) to carry out testing of new drug molecules. Results show that if the equilibrium contract includes a variable payment (royalty), the CRO gives more effort to create a more accurate result, the more strict the FDA approval process. We also find that given the royalty shares in the contract if the FDA demands more accuracy in results as a condition of approval, then the CRO will generate more accurate results from late stage tests. However, greater FDA stringency in the approval process benefits pharmaceutical companies because the greater is FDA stringency, the less is the risk of a drug recall. We also find that in order to employ a CRO in the testing process, the pharmaceutical company's prior probability that the drug is of high quality must be very high.
JEL codes : L24, L65
Keywords : Pharmaceutical regulation, Food and Drug Administration, R&D outsourcing, contract research.

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Refusal to Deal and Investment in Product Quality , Working Paper 1275, Krannert School of Management, Purdue University, July 2013

Abstract : Recent U.S. Supreme Court decisions have taken the views that monopoly profit is "incentive to innovate" and that obliging a vertically-integrated antitrust monopolist to deal with downstream rivals "may lessen the incentive for the monopolist, the rival, or both to invest in ... economically beneficial facilities." In a model of endogenous product quality, refusal to deal reduces equilibrium investment in quality, consumer surplus, and net social welfare if varieties are moderate or good substitutes. If varieties are poor substitutes, the integrated firm sets a wholesale price that allows the downstream rival a small economic profit.
JEL codes : L13, L12, L22, L41
Keywords : refusal to deal, vertical exclusion, endogenous sunk cost.

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Market Performance Implications of the Transfer Price Rule (joint with Jan Vandekerckhove), Southern Economic Journal 80(2), October 2013, pp. 466-487.

Abstract : The "transfer price rule" (TPR) defines a vertical price squeeze as an input price, output price combination set by a vertically-integrated firm monopoly producer of an essential input that would not allow the firm's downstream unit to earn at least a normal rate of return on investment in the "as-if" case that it had to purchase the input at the price charged independent firms. In its 2009 linkLine decision, the U.S. Supreme Court rejected the TPR for the purpose of enforcing the anti-monopolization prohibition of Section 2 of the Sherman Act. In contrast, a vertical price squeeze, defined by a TPR-like standard, is an abuse of a dominant position under Article 102 of the Treaty on the Functioning of the European Union (TFEU). In this paper, we model the impact of the TPR on market performance. We find that the TPR increases consumer surplus and net social welfare if all firms remain active in the downstream market. It sometimes induces the upstream firm to refuse to supply the downstream firm, and in such cases, consumer surplus and net social welfare are reduced. The impact of the TPR on market performance thus depends on whether or not an upstream firm can refuse to supply downstream firms on terms that would offer it at least a normal rate of return on investment.
JEL codes : L12, L41, L44
Keywords : price squeeze; transfer price rule; vertical relations; antitrust.

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Market Structure and Market Performance, Review of Industrial Organization 40, 2012, pp. 87-108.

Abstract : I review studies of the determinants of market performance in the aircraft, passenger airline, supermarket, liner shipping, and hospital industries, and of mergers and market performance in markets for fast food, soft drinks, and retail gasoline. Common factors are more competitive market structures accompany better market performance, and that firm conduct and industry-specific factors play independent roles as well.
JEL codes : L11, L13, L41
Keywords : market structure, competition, performance.

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Innovation Races with the Possibility of Failure (joint with Subhasish M. Chowdhury), Economics Discussion Paper No. 1106, University of Otago, August 2011.

Abstract: The standard innovation race specification assumes a memoryless exponential distribution for the time to success of an R&D project. This specification implies that a project succeeds, eventually, with probability one. We introduce a positive probability that an R&D project fails. With this modified specification, we compare the noncooperative and cooperative R&D in terms of innovation effort, consumer surplus, and net social welfare.
JEL codes : L13, O31, O38
Keywords : innovation, research & development, R&D joint ventures, parallel research projects.

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Exclusivity and Exclusion on Platform Markets (joint with Subhasish M. Chowdhury).

Working Paper 1254, Department of Economics, Krannert School of Management, Purdue University, September 2010;

Abstract: We examine conditions under which a platform firm can exclude rivals by bundling a product that some on one side of the market regard as essential with its platform, and pursue implications for market performance. We show that the impact of an exclusive dealing contract between the upstream firm and one of the downstream firms on market performance depends on the strength of consumer preferences for the products of the two downstream firms and the relative size of the market segment for which the complementary consumption good is essential. In some cases this may reduce the net social welfare.
JEL codes : L12, L13, L22, L42
Keywords : exclusion; essential components; exclusive contract; platform market.

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The Goals of Antitrust and Competition Policy, pp. 19-84 in Wayne Dale Collins, editor, Issues in Competition Law and Economics, American Bar Association, 2008.

Abstract: U.S. antitrust policy and EC competition policy began at different times and in very different contexts. U.S. antitrust at first pursued multiple economic and political goals. Against a persistent, if cyclical, campaign that it was at best unnecessary and at worst absolutely harmful, antitrust developed first a reliance on competition in the sense of rivalry to promote good market performance and has lately moved to explicit welfare evaluation, in an economic sense, as a policy standard. How one ought to measure market performance (consumer welfare or net social welfare) remains a subject of discussion. Use of the economic welfare standard in the United States is, at this writing, characterized by judicial application that is inconsistent with mainstream economics. EC competition policy long relied on competition in the sense of rivalry to promote market integration and good market performance, the two goals being thought to be largely compatible. It is now in a time of transition, with the Directorate General for Competition and the European Courts moving toward explicit welfare evaluation as a basis for treating business conduct. There are some signs that enforcement agencies regard the market integration task as sufficiently far along to give it less weight, relative to promotion of good market performance, than in the past. Whether this approach will prevail, and whether European Courts will follow, remains to be seen.
JEL codes : L4, K2
Keywords : antitrust, competition policy.

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Publication Patterns in Four Industrial Economics Journals. My slides from the editors' roundtable, EARIE 2006, Amsterdam, 27 August 2006.

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"Equilibrium state aid in integrating markets" (joint with Paola Valbonesi).

B.E. Journal of Economic Analysis & Policy 8(1), Article 33, 2008.

Abstract: We present a model of the impact of state aid on equilibrium market structure and on market performance in an integrating market when the process of integration is driven by consumer inertia. In a partial equilibrium model, it is an equilibrium for governments to grant state aid, even though this reduces common market welfare.
JEL codes : F15, L11, L53
Keywords : state aid, exit, market integration.

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Competition policy, collusion, and tacit collusion, International Journal of Industrial Organization 24(6), November 2006, pp. 1299-1332.

Abstract: In this paper, I pursue three goals. The first is to model collusion in a way that is distinct from noncooperative collusion. The second and third are to develop a particular specification of a standard model of noncooperative collusion that permits explicit solution for equilibrium outputs and reversion thresholds, and to extend this analysis to allow for a deterrence-based competition policy that investigates conduct based on observed high prices (investigation thresholds).
JEL codes:
Keywords: competition policy, antitrust policy, collusion, tacit collusion.

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Remembrance of Things Past: Antitrust, Ideology, and the Development of Industrial Economics, December 2005

Abstract: In this chapter I review the impact of antitrust ideology on the development of industrial economics.
JEL codes: B2, L0, L4
Keywords: antitrust, industrial economics, ideology.

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Coal and steel: first steps in European market integration , February 2004

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Globalization and the natural limits of competition revised October 2010.

Abstract: The chapter begins with a review of the different meanings that are given to the term "competition" in the economics literature. I follow this by a survey of empirical evidence on returns to scale, of the impact of actual and potential rivalry on productivity growth and on market structure, and draw implications for the benefits, in the sense of improved market performance, that may be expected to flow from globalization. A final consideration of policy restrictions on the market mechanism suggests that the greatest limitations to competition in global markets may lie in a political unwillingness to accept the resource reallocations that are part and parcel of the benefits following from globalization.
JEL codes: L11, F15, D24, O31
Keywords: competition; globalization; competition policy; innovation; market performance; organization; regulation.

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Sunk cost and entry Review of Industrial Organization 20(4) June 2002, pp. 291-304.

Abstract: The usual mechanisms by which sunk costs are said to affect entry are through raising the expected average cost of an entrant, relative to that of incumbents. I show that in standard models and in the absence of risk premia imposed by financial markets on an entrant's cost of capital, sunk costs may make entry unprofitable because of their effect on the post-entry unit costs of incumbents.
JEL codes: L40, O31, O38
Keywords: sunk cost, entry, entry barriers.

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Kreps & Scheinkman with product differentiation: an expository note July 1999 (revised April 2000)

Abstract: Kreps and Scheinkman's (1983) celebrated result is that in a two-stage model of a market with homogeneous products in which firms noncooperatively pick capacities in the first stage and set prices in the second stage, the equilibrium outcome is that of a one-shot Cournot game. This note derives capacity reaction functions for the first stage and extends the Kreps and Scheinkman result to the case of differentiated products.
JEL codes: D43, L13
Keywords: capacity-constrained oligopoly, product differentiation.

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