nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒04‒16
24 papers chosen by
Russell Pittman
United States Department of Justice

  1. Beliefs and Consumer Search in a Vertical Industry By Maarten Janssen; Sandro Shelegia
  2. Input price discrimination with differentiated final products By Jong-Hee Hahn; Chan KIm
  3. Mergers and Demand-Enhancing Innovation By Bourreau, Marc; Jullien, Bruno; Lefouili, Yassine
  4. Price-Quality Competition in a Mixed Duopoly By Klumpp, Tilman; Su, Xuejuan
  5. Entry Games under Private Information By José-Antonio Espín-Sánchez; Álvaro Parra
  6. Imminent entry and the transition to multimarket rivalry in a laboratory setting By Mason, Charles F.; Phillips, Owen R.
  7. The Benefit of Collective Reputation By Zvika Neemam; Aniko Ory; Jungju Yu
  8. Investment in Outside Options as Opportunistic Behavior: An Experimental Investigation By Morita, Hodaka; Servátka, Maroš
  9. Reconciling the Original Schumpeterian Model with the Observed Inverted-U Relationship between Competition and Innovation By Roberto Bonfatti; Luis A. Bryce Campodonico; Luigi Pisano
  10. Spillovers and R&D Incentive under Incomplete Information By Chatterjee, Rittwik; Chattopadhyay, Srobonti; Kabiraj, Tarun
  11. Optimal Law Enforcement with Ordered Leniency By Landeo, Claudia; Spier, Kathryn
  12. Customer recognition and mobile geo-targeting By Baye, Irina; Reiz, Tim; Sapi, Geza
  13. Consumers' Privacy Choices in the Era of Big Data By Prüfer, Jens; Dengler, Sebastian
  14. The Effect of Big Data on Recommendation Quality: The Example of Internet Search By Maximilian Schäfer; Geza Sapi; Szabolcs Lorincz
  15. Competition For Versus In the Market of Long-Distance Passenger Rail Services By Cherbonnier, Frédéric; Ivaldi, Marc; Muller-Vibes, Catherine; Van Der Straeten, Karine
  16. The Differentiated Effect of Advertising on Readership: Evidence from a Two-Sided Market Approach By Ivaldi, Marc; Muller-Vibes, Catherine
  17. Media, Fake News, and Debunking By Ngo Van Long; Martin Richardson; Frank Stähler
  18. On the Effect of Parallel Trade on Manufacturers’ and Retailers’ Profits in the Pharmaceutical Sector. By Dubois, Pierre; Sæthre, Morten
  19. Proposed changes to the reimbursement of pharmaceuticals and medical devices in Poland and their impact on market access and the pharmaceutical industry By Karolina Badora; Aleksandra Caban; Cécile Rémuzat; Claude Dussart; Mondher Toumi
  20. The Effects of a Day Off from Retail Price Competition: Evidence on Consumer Behavior and Firm Performance in Gasoline Retailing. By Foros, Øystein; Nguyen-Ones, Mai; Frode, Steen
  22. The Effects of Mandatory Disclosure of Supermarket Prices By Itai Ater; Oren Rigbi
  23. To acquire or not to acquire: Mergers and Acquisitions in the Software Industry By Méndez Ortega, Carles,; Teruel, Mercedes
  24. R&D, IP, and firm profits in the North American automotive supplier industry By Lutz, Stefan Heinz Hermann

  1. By: Maarten Janssen; Sandro Shelegia
    Abstract: This paper studies vertical relations in a search market. As the wholesale arrangement between a manufacturer and its retailers is typically unobserved by consumers, their beliefs about who is to be blamed for a price deviation play a crucial role in determining wholesale and retail prices. The common assumption in the consumer search literature is that consumers exclusively blame an individual retailer for a price deviation. We show that in the vertical relations context, predictions based on this assumption are not robust in the sense that if consumers assign just a small probability to the event that the upstream manufacturer is responsible for the deviation, equilibrium predictions are qualitatively different. For the robust beliefs, the vertical model can explain a variety of observations, such as retail price rigidity (or, alternatively, low cost pass-through), non-monotonicity of retail prices in search costs, and (seemingly) collusive retail behavior. The model can be used to study a monopoly online platform that sells access to final consumers.
    Keywords: vertical relations, consumer search, Double Marginalization, product differentiation, price rigidities
    JEL: D40 D83 L13
    Date: 2018–03
  2. By: Jong-Hee Hahn (School of Economics, Yonsei University); Chan KIm (School of Economics, Yonsei University)
    Abstract: This paper examines the welfare effects of third-degree price discrimination by an input monopolist when downstream producers compete with differentiated goods and consumers have heterogeneous preferences for the products. The input monopolist's optimal pricing follows the standard inverse-elasticity rule, but its implication for welfare differs from the traditional analysis with homogeneous goods. Price discrimination can improve welfare even without an increase in total output or opening of new market. Also, the effect of price discrimination on consumer surplus differs from the one obtained for the case of price discrimination in final-goods markets. Our results shed new light on public policy regarding input price discrimination. We can no longer claim that price discrimination is harmful to society because it does not increase or reduces total output. Moreover, different policy responses are required depending on welfare standard. Simple policy guidelines are proposed that can be used in actual antitrust cases.
    Keywords: third-degree price discrimination, intermediate goods market, product differentiation, competition policy, antitrust JEL Classification: L11
    Date: 2018–04
  3. By: Bourreau, Marc; Jullien, Bruno; Lefouili, Yassine
    Abstract: This paper investigates the impact of horizontal mergers on firms' incentives to invest in demand-enhancing innovation. In our baseline model, we identify three key effects of a merger on the merging firms' incentives to innovate: the margin expansion effect, the demand expansion effect, and the innovation diversion effect. The first effect is negative, while the second is positive and the third can be either positive or negative depending on the nature of the innovation. We show that the overall impact of a merger on innovation can be either positive or negative and provide sufficient conditions and specific models under which each of these two scenarios arises. Finally, we extend our model to incorporate spillovers and synergies in R&D.
    Keywords: Horizontal Mergers; Innovation; Competition
    JEL: D43 L13 L40
    Date: 2018–03
  4. By: Klumpp, Tilman (University of Alberta, Department of Economics); Su, Xuejuan (University of Alberta, Department of Economics)
    Abstract: We examine competition between a private and a public provider in markets for "merit goods" such as education, healthcare, housing, recreation, or culture. The private firm provides a high-price/high-quality variety of the good and serves richer individuals, while the public firm provides a low-price/low-quality variety and serves poorer individuals. We first characterize the private competitor's best response to changes in the public firm's price and quality. This enables us to examine the distributional effects of government policies aimed at enhancing access to publicly provided goods, and of changes to the government's budget constraint that make publicly provided goods more expensive or decrease their quality. We then derive the government's optimal provision policy, taking the private response into consideration. Our results have implications for the financing of publicly provided goods, and for whether additional resources, if available, should be spent on reducing the price or enhancing the quality of these goods.
    Keywords: Mixed duopoly; quality differentiation; public provision of private goods; crowding-out/in; funding of public services; distribution
    JEL: D21 D43 H11 H42 H44 I00 L38
    Date: 2018–04–03
  5. By: José-Antonio Espín-Sánchez (Cowles Foundation, Yale University); Álvaro Parra (Sauder School of Business)
    Abstract: We study market entry decisions when firms have private information about their profitability. We generalize current models by allowing general forms of market competition and heterogeneous firms that self-select when entering the market. Post-entry profits depend on market structure, and on the identities and the private information of the entering firms. We introduce a notion of the firm's strength and show that an equilibrium where players' strategies are ranked by strength, or herculean equilibrium, always exists. Moreover, when profits are elastic enough with respect to the firm's private information, the herculean equilibrium is the unique equilibrium of the game.
    Keywords: Entry, Oligopolistic markets, Private Information
    Date: 2018–04
  6. By: Mason, Charles F.; Phillips, Owen R.
    Abstract: In this paper we study the behavior of rivals when there is a known probability of imminent entry. Experimental markets are used to collect data on pre- and postentry production when there is an announced time of possible entry; some markets experience entry and other do not. In all preentry markets competition is more intense. Postentry behavior in all markets is more competitive compared to a baseline that had no threat. There is evidence that postentry multimarket contact raises outputs in those markets that did not experience entry, behavior we generally refer to as a conduit effect.
    Keywords: entry; rivalry; market experimentation
    JEL: C9 L1 L4
    Date: 2016–11–08
  7. By: Zvika Neemam (Tel Aviv University); Aniko Ory (Cowles Foundation, Yale University); Jungju Yu (Yale School of Management)
    Abstract: We study a model of reputation with two long-lived ?rms that sell their products under a collective brand or under two di?erent individual brands. Firms face a moral hazard problem because their quality investments are not observed. Investments can only be sustained due to reputational concerns. In a collective brand, consumers cannot distinguish between the two ?rms. We show that in the long run, this makes it harder to establish a good reputation because of the incentives to free-ride on the other ?rm’s investments. But in the short run it mitigates the temptation to milk good reputation. Consequently, a collective brand can provide stronger incentives to invest in quality if ?rms are su?iciently impatient. We explain the connection between incentives and the type of industry in which the ?rms operate as captured by the underlying signal structure and consumers’ prior beliefs. We discuss the relation to country-of-origin labelling, agricultural cooperatives, and other collective brands.
    Keywords: Branding, Collective reputation, Commitment, Country of origin
    JEL: C70 D21 D40 D70 L10 L50
    Date: 2016–12
  8. By: Morita, Hodaka; Servátka, Maroš
    Abstract: Ex-post opportunistic behavior, commonly present in bilateral trade relationships, is a key element of the transaction cost economics. Investment in outside options is a prime example of such opportunism and often leads to inefficiency, for example by exerting effort to search for alternative business partners even if it does not add trade value. We experimentally investigate a bilateral trade relationship in which standard theory assuming self-regarding preferences predicts that the seller will be better off by investing in the outside option to improve his bargaining position. The seller’s investment, however, might negatively affect the buyer’s other-regarding preferences if the investment is viewed as opportunistic. We find overall support for our hypotheses that arise from the link between other-regarding behavior and opportunism. Our findings suggest that when the transaction cost economics approach is applied to the design of a governance structure, other regarding preferences, if relevant, should be taken into account.
    Keywords: altruism, experiment, opportunistic behavior, other-regarding preferences, outside option, disagreement payoff, rent seeking, theory of the firm
    JEL: C91 L2
    Date: 2018–03–19
  9. By: Roberto Bonfatti; Luis A. Bryce Campodonico; Luigi Pisano
    Abstract: Empirical studies have uncovered an inverted-U relationship between product-market competition and innovation. This is inconsistent with the original Schumpeterian Model, where greater competition reduces the profitability of innovation. We show that the model can predict the inverted-U if the innovators’ talent is heterogenous, and privately observable. With competition low and profitability high, talented innovators are credit constrained, since others are eager to mimic them. As competition increases, the mimickers become less eager, and talented innovators can invest more. This generates the increasing part of the relationship. With competition high, talented innovators are unconstrained, and the relationship is decreasing.
    Keywords: innovation, competition, Schumpeterian Model of Growth, asymmetric information
    JEL: O38 E60 G38
    Date: 2018
  10. By: Chatterjee, Rittwik; Chattopadhyay, Srobonti; Kabiraj, Tarun
    Abstract: Spillovers of R&D outcome affect the R&D decision of a firm. The present paper discusses the R&D incentives of a firm when the extent of R&D spillover is private information to each firm. We construct a two stage game involving two firms when the firms first decide simultaneously whether to invest in R&D or not, then they compete in quantity. Assuming general distribution function of firm types we compare R&D incentives of firms under alternative scenarios based on different informational structures. The paper shows that while R&D spillovers reduce R&D incentives under complete information unambiguously, however, it can be larger under incomplete information.
    Keywords: R&D incentives, Cournot duopoly, Spillovers, Incomplete information
    JEL: D43 D82 L13 O31
    Date: 2018–03–09
  11. By: Landeo, Claudia (University of Alberta, Department of Economics); Spier, Kathryn (Harvard Law School)
    Abstract: This paper studies the design of enforcement policies to detect and deter harmful short-term activities committed by groups of injurers. With an ordered-leniency policy, the degree of leniency granted to an injurer who self reports depends on his or her position in the self-reporting queue. By creating a "race to the courthouse," ordered-leniency policies lead to faster detection and stronger deterrence of illegal activities. The socially optimal level of deterrence can be obtained at zero cost when the externalities associated with the harmful activities are not too high. Without leniency for self reporting, the enforcement cost is strictly positive and there is underdeterrence of harmful activities relative to the first-best level. Hence, ordered-leniency policies are welfare improving. Our findings for environments with groups of injurers complement Kaplow and Shavell's (1994) results for single-injurer environments. Experimental evidence provides support for our theory.
    Keywords: Law Enforcement; Leniency; Self-Reporting; Ordered Leniency; Harmful Externalities; White-Collar Crime; Securities Fraud; Insider Trading; Market Manipulation; Whistle-blowers; Non-Cooperative Games; Prisoners Dilemma; Coordination Games; Risk Dominance; Pareto Dominance; Experiments
    JEL: C72 C90 D86 K10 L23
    Date: 2018–04–11
  12. By: Baye, Irina; Reiz, Tim; Sapi, Geza
    Abstract: We focus on four important features of mobile targeting. First, consumers' real-time locations are known to sellers. Second, location is not the only factor determining how responsive consumers are to discounts. Other factors such as age, income and occupation play a role, which are imperfectly observable to marketers. Third, sellers may infer consumer responsiveness from their past purchases. Fourth, firms can deliver personalized offers to consumers through mobile devices based on both their real-time locations and previous purchase behavior. We derive conditions that determine how combining behavior-based marketing with mobile geo-targeting influences profits and welfare in a competitive environment. Our setting nests some earlier models of behavior-based price discrimination as special cases and yields additional insights. For instance, different from previous studies we show that pro.t and welfare effects of behavioral targeting may depend on firm discount factor.
    Keywords: Mobile Marketing,Location Targeting,Price Discrimination,Customer Data
    JEL: D43 L13 L15 M37
    Date: 2018
  13. By: Prüfer, Jens (Tilburg University, Center For Economic Research); Dengler, Sebastian (Tilburg University, Center For Economic Research)
    Abstract: Recent progress in information technologies provides sellers with detailed knowledge about consumers' preferences, approaching perfect price discrimination in the limit. We construct a model where consumers with less strategic sophistication than the seller's pricing algorithm face a trade-off when buying. They choose between a direct, transaction cost-free sales channel and a privacy-protecting, but costly, anonymous channel. We show that the anonymous channel is used even in the absence of an explicit taste for privacy if consumers are not too strategically sophisticated. This provides a micro-foundation for consumers' privacy choices. Some consumers benefit but others suffer from their anonymization.
    Keywords: privacy; big data; perfect price discrimination; level-k thinking
    JEL: L11 D11 D83 D01 L86
    Date: 2018
  14. By: Maximilian Schäfer; Geza Sapi; Szabolcs Lorincz
    Abstract: Are there economies of scale to data in internet search? This paper is first to use real search engine query logs to empirically investigate how data drives the quality of internet search results. We find evidence that the quality of search results improve with more data on previous searches. Moreover, our results indicate that the type of data matters as well: personalized information is particularly valuable as it massively increases the speed of learning. We also provide some evidence that factors not directly related to data such as the general quality of the applied algorithms play an important role. The suggested methods to disentangle the effect of data from other factors driving the quality of search results can be applied to assess the returns to data in various recommendation systems in e-commerce, including product and information search. We also discuss the managerial, privacy, and competition policy implications of our findings.
    Keywords: Big Data, Recommendation quality, Internet search, E-Commerce, Economies of Scale, Search engines
    JEL: L81 L86 M15
    Date: 2018
  15. By: Cherbonnier, Frédéric; Ivaldi, Marc; Muller-Vibes, Catherine; Van Der Straeten, Karine
    Abstract: This paper is aimed at evaluating the net gains and trade-offs at stake in implementing the competition of the rail mode in the long distance passenger market either by means of franchise or by an open access mechanism. We simulate the outcomes of competition in and for the market using a differentiated-products oligopoly model allowing for inter- and intra-modal competition in a long distance passenger market. Specifically we first calibrate the model using data describing high speed lines in France and show that the incumbent railway operator’s strategy does not simply boil down to a short-term profit maximization (e.g., because of existing regulation or limit-pricing strategy). This yields two important results when simulating competition. First, whether it is for or in the market, the opening to competition does not guarantee a decrease in prices in favor of passengers. Second, the effects of opening up to competition for the market are relatively predictable and potentially positive, while those of opening up to competition in the market remain very uncertain.
    Keywords: Intermodal competition; Oligopoly model; Open access
    JEL: L13 L90 R40
    Date: 2018–03–19
  16. By: Ivaldi, Marc; Muller-Vibes, Catherine
    Abstract: In this paper, we empirically analyze the French print media market by modeling the existence of a reciprocal effect between the size of the readership and the amount of advertising. For this two-sided platform, we measure the cross-effects of advertising on the readership and periodical popularity on advertising. By estimating a structural model of simultaneous demand equations, we quantify some crucial elements in designing pricing and product-differentiating strategies. We measure the impact of advertising on reader demand and find in the data that it has opposite effects depending on whether the publication presents informational or entertaining content. By taking into account the market interactions, we compute price and advertising elasticities. Our results show that advertisers targeting a specific category of the audience would choose its corresponding periodicals and would trade off the size of the readership for these periodicals and the advertising insert price changes. Also, advertising campaigns aimed at reaching a broader spectrum of the population should focus on popular titles and on titles for which demand is inelastic to ensure a more consistent impact of the campaign. Finally, for magazines with low price demand elasticity on the readers’ side, editors’ revenues could be improved by increasing prices. These combined effects should allow a publisher to generate positive margins from both sides of the market, for certain content categories.
    Keywords: Media; Advertising; Discrete Choice Model; Two-Sided Markets
    JEL: C33 L11 L52 L82
    Date: 2018–03
  17. By: Ngo Van Long; Martin Richardson; Frank Stähler
    Abstract: We construct a Hotelling-type model of two media providers, each of whom can issue fake and/or real news and each of whom can invest in the debunking of their rival’s fake news. The model assumes that consumers have an innate preference for one provider or the other and value real news. However, that valuation varies according to their bias favoring one provider or the other. We demonstrate a unique subgame perfect Nash equilibrium in which only one firm issues fake news and we show, in this setting, that increased polarization of consumers - represented by a wider distribution - increases the prevalence of both fake news and debunking expenditures and is welfare reducing. We also show, inter alia, that a stronger preference by consumers for their preferred provider lowers both fake news and debunking. Finally, we compare monopoly and duopoly market structures in terms of “fake news” provision and show that a public news provider can be welfare improving.
    Keywords: fake news, media, debunking
    JEL: D21 L15 L82
    Date: 2018
  18. By: Dubois, Pierre (Toulouse School of Economics); Sæthre, Morten (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: Differences in regulated pharmaceutical prices within the European Economic Area create arbitrage opportunities that pharmacy retailers can use through parallel imports. For prescription drugs under patent, such provision decisions affect the sharing of profits among an innovating pharmaceutical company, retailers, and parallel traders. We develop a structural model of demand and supply in which retailers can choose the set of goods to sell to consumers, thus foreclosing the consumers’ access to some less-profitable drugs, which allows retailers to bargain and obtain lower wholesale prices with the manufacturer and parallel trader. With detailed transaction data, we identify a demand model with unobserved choice sets using supply-side conditions for optimal assortment decisions of pharmacies. Estimating our model, we find that retailer incentives play a significant role in fostering parallel trade penetration. Our counterfactual simulations show that parallel imports of drugs allows retailers to gain profits at the expense of the manufacturer, whereas parallel traders also gain but earn more modest profits. Finally, a policy preventing pharmacies from foreclosing the manufacturer’s product is demonstrated to partially shift profits from pharmacists to both the parallel trader and the manufacturer, and a reduction in the regulated retail price favors the manufacturer even more.
    Keywords: Parallel trade; Pharmaceuticals; vertical contracts; demand estimation; foreclosure.
    JEL: I11 L22
    Date: 2017–12–15
  19. By: Karolina Badora (Creativ-Ceutical Poland, Cracow, Poland.); Aleksandra Caban (Creativ-Ceutical Poland, Cracow, Poland.); Cécile Rémuzat (Creativ-Ceutical, Paris , France); Claude Dussart (P2S - Parcours santé systémique - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, Faculté de Médecine Laennec, Université de Lyon, Lyon, France.); Mondher Toumi (Faculté de Médecine, Laboratoire de Santé, Université de la Méditerranée, Marseille, France.)
    Abstract: In Poland, two proposed amendments to the reimbursement act are currently in preparation ; these are likely to substantially change the pricing and reimbursement landscape for both drugs and medical devices. Proposed changes include: alignment of medical device reimbursement with that of pharmaceuticals; relaxing the strict reimbursement criteria for ultra-orphan drugs; establishment of an additional funding category for vaccines; introduction of compassionate use, and a simplified reimbursement pathway for well-established off-label indications; appreciation of manufacturers' innovation and research and development efforts by creating a dedicated innovation budget; introduction of a mechanism preventing excessive parallel import; prolonged duration of reimbursement decisions and reimbursement lists; and increased flexibility in defining drug programmes. Both amendments are still at a draft stage and many aspects of the new regulations remain unclear. Nonetheless, the overall direction of some of the changes is already evident and warrants discussion due to their high expected impact on pharmaceutical and device manufacturers. Here we evaluate the main changes proposed to the reimbursement of drugs, vaccines, and medical devices, and examine the impact they are likely to have on market access and pharmaceutical industry in Poland. ARTICLE HISTORY
    Keywords: medical devices,drug policy,Poland,pharmaceuticals,Pricing and reimbursement,reimbursement policy
    Date: 2017–07–26
  20. By: Foros, Øystein (NHH, Department of Business and Management Science); Nguyen-Ones, Mai (NHH, Department of Business and Management Science); Frode, Steen (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: First, we analyze how regular days off from competition and a time-dependent price pattern affect firm performance. Second, we examine the effects on firms' profitability from consumers’ changing search- and timing behavior. We use microdata from gasoline retailing in Norway. Since 2004, firms have practiced an industry-wide day off from competition, starting on Mondays at noon, by increasing prices to a common level given by the recommended prices (decided and published in advance). In turn, a foreseeable low-price window is open before every restoration. During the data period, we observe an additional weekly restoration on Thursdays at noon. The additional day off from competition increases firm performance. As expected, a conventional price search of where to buy reduces firms’ profitability. In contrast, consumers who are aware of the cycle and spend effort on when to buy have a positive impact on firms’ profitability. If consumers spend effort on when to buy, they attempt to tank during low price windows. By its very nature, this shrink consumers’ ability to compare prices at several outlets. Consequently, more attention to when to buy may soften price competition.
    Keywords: Pricing cycles; Firm performance; Gasoline markets
    JEL: D22 L25 L42 L81
    Date: 2017–11–16
    Date: 2018
  22. By: Itai Ater; Oren Rigbi
    Abstract: We study how mandatory online disclosure of supermarket prices affects prices and price dispersion in brick-and-mortar stores. Using data collected before and after a transparency regulation went into effect in the Israeli food retail market, multiple complementary control groups and relying on a differences-in-differences research design, we document a sharp decline in price dispersion and a 4% to 5% drop in prices following the transparency regulation. The price drop varied across stores and products; it was smaller among private-label products than among branded products, and it was smaller among stores and products that were likely to have been associated with more intense search patterns even before prices became transparent (e.g., products in heavy-discount chains; popular products; products that meet stringent kosher requirements). Finally, we show that prices declined as more consumers used price-comparison websites, and we highlight the role of media coverage in encouraging retailers to set lower prices.
    Keywords: price transparency, information, mandatory disclosure, retail food, supermarkets
    JEL: D83 L81 L66
    Date: 2018
  23. By: Méndez Ortega, Carles,; Teruel, Mercedes
    Abstract: The aim of this paper is to analyse the impact of Mergers and Acquisitions on firm growth for Software firms located in Catalonia. We investigate firms which are targeting, or are themselves the target of an acquisition and we find that the impact on is heterogeneous; there appear to be positive and negative impacts on productivity and sales growth rate. This paper contributes to the understanding of the M&A process in this young industry characterised by an exponential growth and how such activity interacts with the growth and productivity of the firms involved. Keywords: Software industry, Mergers and acquisitions, firm growth, Catalonia. JEL Codes: D22, C33, L86, O30
    Keywords: Conducta organitzacional, Programari -- Indústria i comerç, Empreses -- Creixement -- Catalunya, 33 - Economia,
    Date: 2018
  24. By: Lutz, Stefan Heinz Hermann
    Abstract: Economic theory implies that research and development (R&D) efforts increase firm productivity and ultimately profits. In particular, R&D expenses lead to the development of intellectual property (IP) and IP commands a return that increases overall profits of the firm. This hypothesis is investigated for the North American automotive supplier industry by analyzing a panel of 5000 firms for the years 1950 to 2011. Results indicate that R&D expenses in fact increase profitability at the firm level. In particular, increases in the R&D expense to sales ratio lead to increases in the profit contribution of intangible assets relative to sales. This indicates that more R&D intensive IP should command higher royalty rates per sales when licensed to third parties and within multinational enterprises alike.
    Keywords: productivity,intellectual property,royalties,MNE,transfer pricing
    JEL: D24 L20 L62 M21
    Date: 2018

This nep-com issue is ©2018 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.