Entry Incentives Research Articles

The quality of innovation and the extent of the market

Abstract I present a comprehensive model of international trade in technology that considers both the demand for inventions and the supply of inventions. On the demand side, domestic and foreign firms make strategic technology adoption decisions. On the supply side, inventors compete to sell licenses for their technology to domestic and foreign firms. Countries benefit from international trade in technology because they obtain the best invention from a larger pool of inventions. International trade in technology increases the extent of the market for inventions and thereby improves the quality of innovation. Technology trade lowers prices, increases outputs, and increases the volume of trade in differentiated products. When traded products are not close substitutes, international markets for technology generate gains from trade. The results of the analysis are robust to the possibility of technology transfer either through expropriation or imitation. Protection of intellectual property rights preserves incentives for entry of inventors and improves the quality of innovation.

The Problem of Shared Social Cost

This paper presents a mechanism for regulating pollution when industry harm--but not individual firms' contributions--is observable. The mechanism is based on a modification of Cooter and Porat's Total Liability for Excessive Harm (TLEH). We propose an alternative mechanism of Shared Social Costs (SSC), where firms share the total cost of industry harm and abatement costs. In cases where the abatement costs for each firm are verifiable, SSC may provide an efficient alternative to TLEH. The mechanisms are largely equivalent, but require different types of information for the regulator. For a legal target to be set in TLEH, it requires either knowing the cost functions of individual firms or accommodating error costs by gradually reducing the legal target until the efficient level is found. On the other hand, SSC requires observing individual firms' actual abatement expenditures as opposed to knowing their cost functions. Both rules provide efficient incentives for abatement, and require being able to observe and monetize industry level harm. We show that SSC leads to efficient incentives for entry and exit, has appealing incentives for innovation, and can be applied advantageously to remediation. In markets with heterogeneous firms, we propose weighting cost-sharing by firms' market shares.

The Entry Incentives of Complementary Producers: A Simple Model with Implications for Antitrust Policy

We model competition between two firms in a vertical upstream-downstream relationship. Each firm can pay a sunk cost to enter the other's market. For equilibria in which both firms enter, the downstream price can be lower than the joint profit maximizing level, and coordination (e.g., through merger) is anticompetitive.

The danger of in-kind drug donations to the Global Fund

In-kind drug donations to the Global Fund to fight AIDS, tuberculosis, and malaria (GFATM) could greatly distort market incentives for entry of generic drugs, and thus delay the development of a more competitive market for priority drugs. Donations can be detrimental to market incentives for generic competition because they reduce the size of the residual market for a particular drug, create uncertainty about future market effects of donations of other drugs, change the risk–benefit ratio with respect to patent-related issues, registration barriers, and costs of negotiating a distribution system, and reduce the market-pull advantage of an identifiable, sizeable, and sustained source of secure financing.

Monopoly Power and Endogenous Product Variety: Distortions and Remedies

The inefficiencies related to endogenous product creation and variety under monopolistic competition are two-fold: one static—the mis-alignment between consumers and producers regarding the value of a new variety; and one dynamic—time variation in markups. When production factors (labor and physical capital ) are elastic and traded in competitive markets, further distortions appear. Appropriate taxation schemes can restore optimality if they preserve entry incentives. Quantitatively, the welfare costs of each distortion by itself amounts to 2 to 5 percent of consumption. But their overall cost when jointly present is greatly magnified, and generates up to a 25 percent welfare loss. (JEL D21, D43, H21, H25, H32, L13)

The Problem of Shared Social Cost

This paper presents a mechanism for regulating pollution when industry harm - but not individual firm's contributions - is observable. The mechanism is based on a modification of Cooter and Porat's Total Liability for Excessive Harm (TLEH). We propose an alternative mechanism of Shared Social Costs (SSC), where firms share the total cost of industry harm and abatement costs. In cases where the abatement costs for each firm are verifiable, SSC may provide an efficient alternative to TLEH. The mechanisms are largely equivalent, but require different types of information for the regulator. For a legal target to be set in TLEH, it requires either knowing the cost functions of individual firms or accommodating error costs by gradually reducing the legal target until the efficient level is found. On the other hand, SSC requires observing individual firms actual abatement expenditures as opposed to knowing their cost functions. Both rules provide efficient incentives for abatement, and require being able to observe and monetize industry level harm. We show that SSC leads to efficient incentives for entry and exit, has appealing incentives for innovation, and can be applied advantageously to remediation. In markets with heterogeneous firms, we propose weighting cost-sharing by firms' market shares.

What factors inspire the high entry flow in Taiwan's manufacturing industries–A count entry model approach

Why is the entry flow of the manufacturing sector extremely high in Taiwan, and does it contribute to the prevailing entrepreneurship? This article aims to explore what factors inspire potential entrants to go into an industry. Based on a theoretical formulation of the Poisson probability entry model, a count data model is employed to investigate the determinants of entry flows. The empirical results reveal that traditional entry barriers indeed lower the entry flow. The entry incentives, including price cost margin and industry growth, play a lesser role at attracting new firms, while alternatively the market size acts as a better proxy of an entry incentive in explaining entry flows. Incumbents’ responses to entry, R&D and advertising intensity are found to be associated with a significant negative impact on entry flows. This article also finds that there is a higher bound of covariate of entry, about 10%, that can be attributed to the immeasurable personality of entrepreneurs–entrepreneurship. Rather be the chicken's beak than be the cow's behind.1 1 This proverb explains in terms the concept of choosing jobs as how one would like to be a leader of a small firm rather than an employee in a large enterprise. The trade that might cause life hazard will be dealt, while the trade that might cause a loss will not be dealt. Two traditional Chinese proverbs

Heterogeneity among Zimbabwes rural micro-enterprises and the determinants of their inclination to agro-dealership

Rural micro-enterprises play a pivotal role in developing country agriculture as the major sources of inputs and ready markets for agricultural produce. This makes an understanding of their diversity and dynamism vital to issues of sustainable food security and poverty alleviation. This paper uses cluster analysis and a logit regression model to establish the factors underlying the heterogeneity of microenterprise firms with a view to unearth the reasons behind their inclination towards agro-dealership. Rural micro-enterprises were found to vary greatly due to size, firm life, capital intensity and their motives for entry into business. Capital intensity in tern determines firm size, willingness to expand and the firm’s likelihood to stay in business. Larger firms with a long firm life and a high capital base were found to have a greater tendency to deal in agribusiness commodities as opposed to small firms with lower capital intensity and a short firm life. It was concluded that firm proclivity to agro dealership could be increased through increasing capital base and provision of incentives for voluntary entry into business.

Credibility and Credulity: How Beliefs about Beliefs Affect Entry Incentives

In this note we investigate the infringement (entry) decision for a firm facing an incumbent patent holder with uncertain patent rights. The entrant risks a dispute by entering, resulting in either a settlement (licensing) or litigation and trial. Using the litigation model described by Priest and Klein, we investigate the expected dispute resolution and its impacts on the entrant's pre-dispute behavior. The primary contribution is to show that the entrant's expectations about the patent holder's beliefs about patent enforceability are a driving factor behind the entry decision. We develop a simple taxonomy of entrant and incumbent types to explain the entry decision.

Policy convergence under approval and plurality voting: the role of policy commitment

Proponents of Approval Voting argue that this electoral rule leads to more centrist outcomes compared to Plurality Voting. This claim has been substantiated by scholarly work using spatial models of political competition. We revisit this issue in the context of a model of political competition in which 1) candidates are policy-motivated; 2) candidacy decisions are endogenous; and 3) candidates can credibly commit to implementing any policy. Under these assumptions we find the opposite to be true - Plurality Voting yields convergence to the median voter's ideal policy but Approval Voting may not. We argue that this result is driven by the differential incentives for candidate entry under the two voting rules. Our results suggest that whether Approval Voting yields more centrist outcomes vis-a-vis Plurality Voting depends on the possibility of policy commitment on the part of the candidates.

Should uniform pricing constraints be imposed on entrants?

This paper analyzes uniform pricing, coverage constraints and price caps in markets newly opened to competition, e.g. broadband services. We show that the requirement of uniform pricing has strong repercussions on coverage decisions. Imposed on incumbents only it may distort their coverage decision downward to avoid duopoly entry. If also imposed on entrants it increases the likelihood that entry leads to independent monopolies rather than competition. A sufficiently large coverage constraint on incumbents reestablishes incentives for duopoly entry, but may lead to higher prices.

Network Unbundling, Ownership Structure and Oligopolies: A Case Study for the Belgian Electricity Market

This paper studies how different types of unbundling – accounting, management, legal and ownership unbundling – influence the electricity wholesale market. Starting from the current market situation as observed in many countries, with imperfect competition in generation and imperfect regulation of the network operator, it is not obvious that any kind of unbundling will result in a better outcome in terms of efficiency and welfare. With the imperfections just mentioned, unbundling can create better incentives for entry in the generation market, but it can also create a double marginalisation problem. We study the effect of unbundling in a numerical model that captures two kinds of ownership interactions between the generation and the transmission sector. Passive ownership – or legal unbundling – where the generation firm simply cashes its share of the transmission firm's profit without having a direct impact on its decision process, and active ownership – or management unbundling – where the generator still has a direct influence on the transmission firm's decision process. Simulations, calibrated on Belgian electricity market data, show that the fastest road towards a more efficient electricity market is a road that implies a welfare reduction at an intermediate stage. The results also strongly suggest that the current European electricity directive, imposing legal unbundling, is not sufficient. European legislation should move further and impose ownership unbundling if a level playing field and a competitive electricity market is the objective.

Modeling market power in Korea's emerging power market

The Korean power market is being formed from the unbundled generation, transmission and distribution assets of Korea Electric Power Corporation. The KEPCO generation has been allocated to six independent gencos with a combined generating capacity of 46,629 MW in 2002. This gave an 11% margin over the peak load that year (41,921 MW). One of the concerns for any power market is whether individual participants can increase profits (and prices) by withholding generation from the market. To address this concern, a Cournot-based model of Korean power system was created and applied to a set of loads representing the load duration curve for Korea's system loads in 2002. Our simulation results show a strong possibility for exercise of market power to increase market price in Korean market. Under tight market conditions, even 1 GW of withholding can cause a large increase in market price. If loads unexpectedly grow faster than the 5% recent experience, the gencos will have the collective ability and incentive to spike prices further. Vesting contracts can reduce the incentive to act strategically. Requiring that the gencos offer 50% of their capacity in long-term forward contracts greatly reduces the payoff to act strategically, and requiring vesting for 75% of their capacity results in prices that are essentially the same as the competitive equilibrium. Depending on the price for the vesting contracts, this policy can reduce the incentives to add new generation by gencos or the competitive fringe. Another approach to reducing the effects of market power is establishing demand–response programs, simulated here by increasing the elasticity of overall demand. These programs can reduce the incentives to withhold capacity, but to a lesser degree than vesting contracts. The genco with the greatest ability to influence prices through withholding is the largest, KNHP. However, acting on its own, without the support of the other gencos, its ability to raise prices is limited. This applies even more for the other gencos; alone their ability to run up prices by withholding is limited. Only when they reinforce each other's withholding by further withholding do we see the extreme prices of the Cournot equilibrium. In the long run, the high prices from the Cournot equilibrium create a strong incentive for entry of new generating capacity. While the gencos that do the most withholding in the Cournot solution do not gain by adding new generation, several of the gencos that do relatively less withholding would gain net revenues from adding capacity that is likely to exceed the cost of new capacity. For participants on the competitive fringe, the incentives to add new generating capacity are much stronger. They do not have a stake in maintaining the high Cournot solution prices and benefit from increased withholding by the incumbent gencos. The projected net revenues from new baseload and peaking capacity greatly exceed the thresholds needed to recover investment costs. With freedom for new entrants to add capacity, the Cournot equilibrium prices cannot be sustained.

Fancy a Stay at the ‘Hotel California’? The Role of Easy Entry and Exit for FDI

SummaryInvestment incentives targeted at attracting multinational firms have been extensively researched, and empirical evidence has shown them to be influential. The same is not true of exit restrictions. Yet, as recent theory suggests, there may be a trade‐off between entry incentives and ease of exit. This paper focuses on that trade‐off in the case of US multinationals in 33 host countries. An indicator of labour market regulations is used as a measure of ease of exit. Results suggest that both entry incentives and labour market regulations are important and ignoring the latter neglects an important dimension in firms' location decision.

Contest for Attention in a Quality-Ladder Model of Endogenous Growth

This paper develops a quality-ladder model of endogenous growth to study the interplay between in-house R&D and marketing expenditure. Although promotional activity is modelled as purely wasteful competition among firms for attention, it unambiguously fosters innovation activity of firms, and possibly, leads to faster growth. This result rests on two premises which are consistent with empirical evidence. First, if firms incur higher sunk costs for marketing, concentration and firm sizes rise. Second, firm size and R&D expenditure are positively related. As a result, R&D investments per firm may even become excessive, whereas being inefficiently low in the benchmark case without marketing. This has non-trivial consequences for the socially optimal policy design with respect to R&D subsidies and entry incentives.

Competition and Regulation Issues in the Pharmaceutical Industry

The pharmaceutical sector is a dynamic, research-intensive industry that is fundamentally influenced by a web of regulations designed to a) promote research and innovation in the design and production of drugs, b) protect consumers from potentially harmful effects of drugs, and c) to control public and private expenditure on drugs. These objectives are sometimes in conflict and may require a balancing of the interests of producers and consumers. Since most consumers have some form of health insurance, their incentives to control their purchasers of pharmaceuticals or to purchase from the most efficient pharmacist are limited. Health insurers seek to control pharmaceutial expenditure through various policies such as co-payments, lists of approved drugs and maximum reimbursement levels for different drugs. If reimbursement levels for pharmacists are set at a national or regional level, incentives for entry by new pharmacists are excessive in certain locations, typically leading to restrictions on the establishment of new pharmacies. Wellthought out reform of this industry has the potential to reduce pharmaceutical expenditures while maintaining the quality of the drugs consumed.

Competition and Regulation Issues in the Pharmaceutical Industry

This document (of 401 pages) comprises the proceedings of an OECD roundtable on competition and regulation issues in the pharmaceutical industry. The pharmaceutical sector is a dynamic, research-intensive industry that is fundamentally influenced by a web of regulations designed to (a) promote research and innovation in the design and production of drugs, (b) protect consumers from potentially harmful effects of drugs, and (c) to control public and private expenditure on drugs. These objectives are sometimes in conflict and may require a balancing of the interests of producers and consumers. Since most consumers have some form of health insurance, their incentives to control their purchasers of pharmaceuticals or to purchase from the most efficient pharmacist are limited. Health insurers seek to control pharmaceutial expenditure through various policies such as co-payments, lists of approved drugs and maximum reimbursement levels for different drugs. If reimbursement levels for pharmacists are set at a national or regional level, incentives for entry by new pharmacists are excessive in certain locations, typically leading to restrictions on the establishment of new pharmacies. Well-thought out reform of this industry has the potential to reduce pharmaceutical expenditures while maintaining the quality of the drugs consumed. This document includes a background paper by the Secretariat, submissions from 16 OECD countries and a summary of the oral discussion.

Entry auctions and strategic behavior under cross-market price constraints

We examine how universal service provisions and price restrictions across markets impact strategic entry and pricing. We develop a simple multi-market model with an oligopolistic (profitable) urban market and entry auctions for (unprofitable) rural service. Cross-market price restrictions induce a firm operating in both markets to become a ‘softer’ competitor, thus placing the firm at a strategic disadvantage. When we account for entry incentives and strategic bidding, the downstream strategic disadvantage becomes advantageous, leading to higher prices and profits. Price restrictions may also put outside firms, even relatively inefficient ones, at a strategic advantage.

Product liability, entry incentives and market structure

The article characterizes the entry incentives provided by increases in product liability under various forms of competition. It is demonstrated that the entry of small, high-cost firms is likely to occur in imperfectly competitive markets when the average damage increases with industry output. Special cases are considered, including Cournot–Nash oligopoly and dominant firm-competitive fringe.

Network Access Pricing and Deregulation

The paper addresses the question of rising access to the network facilities of an incumbent firm after deregulation. Network access pricing continues to be regulated in such industries as telecommunications, railroads, electric power and natural gas. We emphasize that access prices should be set such that they satisfy an individual rationality condition for the incumbent firm so that access is granted voluntarily. We examine the effects of the voluntary access condition on incentives for entry and show that properly chosen access prices provide incentives for efficient entry using several alternative competition models: Bertrand-Nash, Cournot-Nash and Chamberlin competition with differentiated products. Copyright 1997 by Oxford University Press.