Firm Chooses Research Articles

Strategic pricing under quality signaling and imitation behaviors in supply chains

We consider a firm producing and selling experience products over two periods with private quality information. Consumers strategically decide their purchasing timing driven by the imitation effect, and the firm chooses pricing policy (dynamic or preannounced) and equilibrium type (separating or pooling, through which true quality information is revealed). Results imply that the firm prefers preannounced pricing but consumers prefer dynamic pricing. Under both pricing schemes, the first-period price decreases but the second-period price increases with the imitation effect. A pooling-pooling equilibrium is always preferred, unless the firm is farsighted and the imitation effect is weak under dynamic pricing.

The Selection of Green Technology Innovations under Dual-Credit Policy

In the pressure of excessive resource consumption and serious environmental pollution, government in China proposed a dual-credit policy to promote the production of green vehicles, such as energy-saving fuel vehicle (FV) and electric vehicle (EV). This study explores the firm’s selection of green technology innovations (GTIs) under dual-credit policy, including the energy-saving technology for FV and the technology for producing EV. We found that the firm’s technology capacity of improving the energy-saving level of FV plays an important role in affecting the firm’s selections of GTIs. Specifically, when the technology capacity is moderate, the firm chooses both types of GTIs to produce both EV and energy-saving FV, otherwise he will choose one type only. Moreover, no matter which GTI is selected by the firm, its pricing and environmental efforts decisions keep the same. With the dual-credit policy, we found that it could encourage the production of the EV under certain conditions. Besides this, increasing the green credit of EV can align the economic and environmental interests while increasing standard energy consumption has conflicts in both interests. In particular, when the firm offers FV only or both EV and FV, increasing the price of credit has conflicting interests in economy and environment. However, when the firm offers EV only, increasing the price of credit could improve the firm’s profit without hurting the environment.

When Do Firms Choose Substantive Over Symbolic Compliance with Board Gender Quotas?

This study assesses whether and when the firms choose to use symbolic or substantive compliance strategies in response to exogenous shocks in their institutional environment. We theorize that the joint effect of a quota target for women on boards and the quality of the firm’s performance is such that firms with a high distance to the country’s quota target and are satisfied (v. dissatisfied) with their financial performance are more likely to use symbolic (v. substantive) compliance. While institutional theorists have often noted the use of symbolic compliance, ours is one of the first studies to provide conditions under which firms are more likely to prefer one or the other form of compliance. Further, by highlighting the preference of female CEOs for substantive compliance in all scenarios, we provide boundary conditions on institutional theory predictions. We contribute to literatures on institutional theory, behavioral theory and gender diversity on corporate boards.

Increasing Demand and a Tradeoff Between Speed-Cost Efficiencies and Total Profits

Recently, the resource-based view has achieved substantial progress in the strategic management literature by recognizing non-scale free property of resources. Building on this non-scale free resource logic, this paper examines how demand conditions within a market impact firms’ strategic decisions to trade off their speed-cost efficiencies for greater total profits. Demand conditions force this trade off by influencing the opportunity costs of deploying non-scale free resources. I use an analytical model to provide two propositions : (1) when product-market demand increases, the total profit from allocating a firm’s non-scale free resources to two projects becomes greater relative to that from fully using its non-scale free resources for one project, and (2) firm speed-cost efficiency is always lower when a firm chooses two inefficient projects over one efficient project. I provide three hypotheses based on these propositions in the context of liquefied natural gas industry in which demand increased rapidly resulting from energy market liberalization in 2000: (1) firms in the post-shock period (i.e., when product demand rapidly increased after 2000) have inferior speed-cost efficiencies as compared to firms in the pre-shock period (i.e., when product demand was steady and low before 2000); (2) post- shock firms lose more speed-cost efficiency as they conduct more projects; and (3) a firm’s decrease in speed-cost efficiency is associated with a firm’s performance increase in the post-shock period, whereas a firm’s increase in speed-cost efficiency is associated with a firm’s performance increase in the pre-shock period. Empirical tests corroborate all hypotheses.

Corporate social responsibility, vertical product differentiation, and privatization policy

In this paper, we consider that the public firm competes with a private firm caring about consumer surplus in vertically differentiated market. We explore the privatization policy, and the relationship between the optimal degree of privatization and the CSR degree of private firm. We find that if the public firm produces low-quality products, the government should adopt a policy of privatization, and the optimal degree of privatization is decreasing (increasing) in the CSR degree of private firm, if the cost difference of quality is sufficiently small (large). However, if the public firm produces high-quality products and the cost difference of quality is sufficiently large (small), the government should (not) adopt a policy of privatization. The government's privatization policy is related to the difference in quality and cost of the products produced by firms. We further analyze the endogenous selection of product quality between public firm and private firm and find that if the quality gap between high-quality products and low-quality products is sufficiently large, both firms will choose to produce high-quality products. If the product quality gap is of medium-intensity, the public firm chooses to produce low-quality products, and the private firm chooses to produce high-quality products. However, if the product quality gap is sufficiently small, there is no Nash equilibrium.

Capacity Choice in an International Mixed Triopoly

ABSTRACT This paper considers a mixed triopoly model where a state-owned firm, a domestic labor-managed firm and a foreign capitalist firm are allowed to pre-install capacity as a strategic commitment device. First, each firm can choose its capacity level simultaneously and independently. None of the firms can reduce or dispose of capacity. Second, each firm chooses its output level simultaneously and independently. The paper presents the equilibrium outcomes of the international triopoly model. We find that the equilibrium outcomes are not profitable for the foreign capitalist firm.

The effects of asset liquidity on dynamic sell-out and bankruptcy decisions

We develop a dynamic bankruptcy model with asset illiquidity. In the model, a distressed firm chooses between sell-out and default, as well as its timing under the assumption that sell-out is feasible only at Poisson jump times, where the arrival rate of acquirers stands for asset liquidity. With lower asset liquidity, the firm increases the sell-out region to mitigate the risk of not finding an acquirer until bankruptcy. Despite the larger sell-out region, lower asset liquidity increases the default probability and decreases the equity, debt, and firm values. In the optimal capital structure, with lower asset liquidity, the firm reduces leverage, but the cautious capital structure does not fully offset the increased default risk. The stock price reaction caused by sell-out depends on the sell-out timing. When the firm’s asset value is not sufficiently high, the stock price jump size is an inverted U-shape with the economic state variable. Lower asset liquidity increases the jump size due to greater surprise. These results fit empirical observations.

Asset redeployability and the choice between bank debt and public debt

A firm with less redeployable assets, which are assets that have fewer alternative uses outside the firm, is more likely to borrow from banks than issue public debt. These findings are consistent with firms with less redeployable assets valuing the ability to renegotiate bank debt contracts instead of selling assets in the event of default. Consistent with this mechanism, firms with lower asset redeployability sell fewer assets following covenant violations. Our results contribute to work on the determinants of which debt markets a firm chooses to borrow from and the role that banks play as intermediaries.

R&D Information sharing in a mixed duopoly and incentive subsidy for research joint venture competition

AbstractThis study investigates the incentives for R&D (research and development) information sharing in a mixed duopoly and finds a contrasting result that public firm chooses full sharing while private firm enjoys free‐riding. We then devise an agreement‐based incentive R&D subsidy scheme for RJV (research joint venture) competition, which can internalize R&D spillovers between firms and induce them to earn higher payoffs through full sharing of their R&D information. We also discuss welfare loss of the proposed R&D subsidy scheme, compare with production subsidy and provide some policy‐relevant implications on privatization.

Strategic CSR in Asymmetric Cournot Duopoly

We examine the strategic use of corporate social responsibility (CSR) in Cournot competition between two firms that differ in their marginal costs of production. The level of CSR determines the weight a firm puts on consumer surplus in its objective function before it decides upon supply. We show that the more efficient firm chooses a higher CSR level, reinforcing its dominant position. If there are sufficiently large fixed costs of CSR, only the more efficient firm will engage in CSR.

Learning the Best Price and Ordering Policy under Fixed Costs and Ambiguous Demand

We study joint inventory-price control in which a firm chooses among a finite number of prices to influence the demand to be realized; also, the firm’s ordering activities incur fixed setup costs. While intending to settle down on an optimal price and figure out an optimal ordering policy all catering to the long-run average criterion, the firm is ambiguous about the stationary distribution of the random demand that it is to face under each price. We propose an adaptive policy in which periods are grouped into intervals, with each being associated with one single price and one single ordering policy. Pricing is based on a learning-while-doing trade-off: a price with the least number of interval visits will be chosen when this number is below a threshold associated with the total number of interval visits under all prices; otherwise, the chosen price will be one with the most promising profit prospect estimated from past experiences. Interval-wise ordering relies on an (s,S) policy most suitable for the empirical distribution learned from past experiences under the chosen price. The power at which the policy’s regret grows in the horizon length T would be below (3 +√29)/10 ≃ 0.839 even when demand patterns are fairly ambiguous. When demand realizations are further confined to a finite support, the bound would be reducible to √2/2 ≃ 0.707.

Parallel imports in large developing countries

We formulate a two-stage game to examine the parallel import (PI) policies for large developing countries. Two countries, a developed (N) and a developing (S), make their PI policies in the first stage. A high-quality variety is produced in N by a monopoly firm, and a low-quality variety is produced in S by a lot of firms under perfect competition. The monopoly firm chooses the optimal pricing strategy in the second stage. We clarify how market outcomes and PI policies depend on the quality difference, the income differential, country sizes, and the weights of consumer surplus and firm profits in measuring the national welfare. Our results provide a theoretical base for developing countries to make their PI policies according to their market sizes. Discriminatory pricing is obtained when governments care about consumer surplus, while uniform pricing is obtained when governments care about firm profit.

Do firms choose overcapacity or undercapacity in a vertical structure?

This study investigates capacity choice in a vertical structure in which each downstream firm makes its capacity decision, then a monopolistic upstream firm proposes the input price or two‐part tariff contract. Finally, each downstream firm chooses its output (or price). Contrary to the conventional wisdom that both firms hold excess capacity in an Cournot competition, we find that each downstream firm always chooses undercapacity regardless of both the nature of goods and the competition modes. Second, we also show that capacity efficiency is higher under Cournot competition than under Bertrand competition. Third, even though there are double marginalization distortion and rent‐extracting effect, we can achieve the monopoly equilibrium of the vertically integrated firm though two‐part tariff contract.

The Economics of Data Externalities

I study a model of a firm that buys data from consumers. There are data externalities, whereby data of some consumers reveal information about others. I characterize data externalities that maximize or minimize consumer surplus and the firm’s profit. I use the results to solve an information design problem in which the firm chooses what information to collect from consumers, taking into account the impact of data externalities on the cost of buying data. The firm collects no less information than the efficient amount. In some cases, we can solve the firm’s problem using a two-step concavification method.

The Strategic Decentralization of Recruiting

We propose a model of strategic delegation in professional labor markets with heterogeneous workers. A big firm, competing with fringe firms, decides whether to exercise its market power to suppress wages. Alternatively, it may choose to delegate hiring to agents (divisions), thereby committing to bid more fiercely for workers. This reduces the incentive for fringe firms of going toe-to-toe with the big firm. In equilibrium, the big firm chooses to delegate unless (a) it is too large, (b) not productive enough, or (c) too productive. While a more productive big firm delegates more often, the optimal number of agents it delegates to decreases in the big firm's productivity. The presence of big firms does not substantially lower social welfare, unless its size exceeds the tipping point beyond which it chooses not to delegate. The introduction of a minimum wage in a professional labor market induces the big firm to delegate more aggressively, increasing match quality. Thus, social welfare may increase despite a drop in employment.

Browse or Experience

Consumers gain information about the evolving value of a product both prior to purchase and when owning a product. We consider a model where both these types of gaining information are possible. The information gained when owning the product may affect future product purchases. We characterize when the consumer chooses to purchase the product if the consumer does not own it, the expected interval of time between purchases, and the expected number of product purchases over time. We find that, keeping product duration fixed, the optimal fixed price is independent of the initial product valuation if that valuation is sufficiently low such that a consumer not owning the product does not purchase it immediately, and characterize how the price charged affects the consumer information gathering strategy. When the firm can also choose product duration and there are no costs of production, we find that the firm chooses an expected production duration that is infinitely small, and charges a flow price for the consumer to use the product. We also characterize how the extent of learning when owning and when not owning the product, the duration of the product, and the discount rate affect the optimal consumer and firm strategies.

Open Source or Closed Source? A Competitive Analysis with Software Security

Software security is an increasingly serious concern for users and ultimately impacts software firms’ choice of open source or closed source business models. However, the studies in this area are scarce, if not absent. This paper examines whether a software firm chooses open source or closed source in a competitive market when software security is taken into account. I construct a game-theoretic model in which two competitive firms first formulate their business models and then charge their prices for software products. I find that due to security concerns, two symmetric firms may choose a heterogeneous business model, in which one firm chooses open source and the other chooses closed source when the return of open source remains moderate. The two symmetric firms may be trapped in a prisoner’s dilemma with a moderate-high return of open source in which their equilibrium choices of business model, open source, lead to lower profits than when they switch to closed source. For two asymmetric firms in which only one has security concerns in its software products, I reveal that with a moderate return of open source, this firm follows closed source and the other without security concern employs open source. Interestingly, there never exists the other heterogeneous business model in equilibrium.

Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters

Using new data on currency invoicing for Belgian firms, we analyze how firms make their currency choice, for both exports and imports, and the implications of this choice for exchange rate pass-through into prices and quantities. We derive our estimating equations from a theoretical framework featuring variable markups, international input sourcing, and staggered price setting with endogenous currency choice. Our structural specification provides a new test of the allocative consequences of nominal rigidities, by estimating the treatment effect of foreign-currency price stickiness on the dynamic response of prices and quantities, controlling for the endogeneity of the firm's currency choice. We show that flexible-price determinants of exchange rate pass-through are also the key firm characteristics that determine currency choice. In particular, small non-importing firms tend to price their exports in euros (producer currency) and exhibit complete exchange-rate pass-through into destination prices at all horizons. In contrast, large import-intensive firms tend to denominate their exports in foreign currencies, especially in the US dollar, exhibiting a lower pass-through of the euro-destination exchange rate and a pronounced sensitivity to the dollar-destination exchange rate. The effects of foreign-currency price stickiness are still significant beyond the one-year horizon, but gradually dissipate in the long run.

Sequencing R&D decisions with a consumer-friendly firm and spillovers

This study considers a duopoly model in which both a consumer-friendly (CF) firm and a for-profit (FP) firm undertake cost-reducing R&D investments in an endogenous R&D timing game and then play Cournot output competition. When the CF firm chooses its profit-oriented consumer-friendliness, we show that the consumer-friendliness is non-monotone in spillovers under both simultaneous move and sequential move with FP firm’s leadership while it is decreasing under sequential move with CF firm’s leadership. We also show that a simultaneous-move outcome is a unique equilibrium when the spillovers are low and the CF firm invests higher R&D and obtains higher profits. When the spillovers are not low, two sequential-move outcomes appear and the CF firm might obtain lower profits with higher spillovers under the CF firm leadership.

Do Family Firms Choose Conservative Accounting Practices?

We investigate whether family firms are motivated to adopt conservative accounting practices, given their unique characteristics of high promoter holdings, less diversified equity, and long-term interest in the business. We examine whether heterogeneity within family firms, captured through family members’ involvement in management and the firm’s affiliation to a business group, drives conservative behavior. We test our model on a sample of 2534 listed Indian firms from 2006 to 2015. Our results indicate that family-controlled firms are more conditionally conservative in their accounting practices, especially when family members manage them and when they are affiliated with a business group. These findings are robust to alternative measures of conservatism and also after controlling for omitted variable bias and reverse causality.