Myopic Firms Research Articles

R&D network formation with myopic and farsighted firms

We study the formation of R&D networks when firms can be either myopic or farsighted. Stability leads to R&D networks consisting of either asymmetric components or nearly symmetric components. Farsighted firms have in average more collaborations but myopic firms can be central for spreading the innovation. We introduce yes-firms that form links subject to the constraint of non-negative profits. Yes-firms stabilize R&D networks that maximize social welfare. Finally, the evolution of R&D networks shows that nearly symmetric R&D networks will be rapidly dismantled, socially optimal R&D networks will persist many periods, while asymmetric R&D networks will persist forever.

Managing quality and pricing during a product recall: An analysis of pre-crisis, crisis and post-crisis regimes

Product recalls are often consequences of quality failures. While such failures are related to a manufacturer’s or supplier’s design quality, the perceived quality of products may be severely damaged when a product harm crisis occurs. However, most often, such a crisis will not last forever, and a firm at fault eventually recovers. Considering an optimal control model, we investigate the optimal pricing decisions, advertising and quality efforts of a firm while it anticipates a product recall and a subsequent recovery. We show that the decisions and profits of the manufacturer vary widely with the stochastic parameters: crisis likelihood, recovery likelihood, crisis impact and recovery intensity. We illustrate that myopic firms are more severely affected by a product recall than farsighted firms when the impact of recall is high. However, it might not be so detrimental to take myopic decisions for low impact recalls. In the absence of recovery, a product recall can lead to bankruptcy. High initial perceived quality may not insulate a firm against bankruptcy.

Cournot competition with hyperbolic learning and myopic firms: A note

In this note, we provide a Cournot oligopoly model of learning-by-doing that incorporates both learning spillovers and organizational forgetting, relaxing the commonly made assumption of linear learning by considering a hyperbolic learning curve that depends on both own and rivals’ experience. The analysis is conducted under the assumption of myopic firms. We show that conditions exist under which more competition, captured by an increase in the number of firms, worsens both productive and allocative efficiency at the steady-state equilibrium.

Myopic Management Theory and R&D Investment Decisions

This study attempts to asses firms’ financial conditions to explain why they use myopic R&D cuts. Contrary to prior literature, this study shows that the current financial indicators of firms are also significant determinants of R&D myopic management along with stock market. Financial indicators such as Leverage, cash holding, earned-to-capital ratio, market-to-book ratio, sales growth, dividend, tangibility, age, and size of firms significantly influence the probability of being myopic firms and R&D investment decisions. Further, we show that U-shaped and inverted U-shaped relationship of different determinants of R&D investments provide a better description for mix results of prior literature.

Share Repurchases and Myopia: Implications on the Stock and Consumer Markets

Investor demand has promoted share repurchases to the dominating payout instrument for U.S. firms. However, critics worry that the repurchase boom leads to firms neglecting long-term investments. Even worse, scholars have shown that investor pressure also motivates firms to cut marketing investments with the aim of boosting short-term income, a practice called myopic marketing management. Extant theory still lacks an understanding of whether and how the co-occurrence of share repurchases and myopic marketing affects firm stakeholders such as investors and consumers. Using a large-scale cross-industry sample, the authors reveal that there is a higher share of firms cutting marketing investments among repurchasing firms than among nonrepurchasing firms. Furthermore, investors immediately respond negatively to myopic firms that also repurchase shares. Finally, repurchases and myopic marketing are also associated with an increase in product recalls. This first study to assess share repurchases through a marketing lens hence reveals negative effects on both the stock and the consumer markets.

R&D Network Formation with Myopic and Farsighted Firms

We study the formation of R&D networks when each firm benefits from the research done by other firms it is connected to. Firms can be either myopic or farsighted when deciding about the links they want to form. We propose the notion of myopic-farsighted stable set to determine the R&D networks that emerge in the long run. When the majority of firms is myopic, stability leads to R&D networks consisting of either two asymmetric components with the largest component comprises three-quarters of firms or two symmetric components of nearly equal size with the largest component having only myopic firms. But, once the majority of firms becomes farsighted, only R&D networks with two asymmetric components remain stable. Firms in the largest component obtain greater profits, with farsighted firms having in average more collaborations than myopic firms that are either loose-ends or central for spreading the innovation within the component. Besides myopic and farsighted firms, we introduce yes-firms that always accept the formation of any link and never delete a link subject to the constraint of non-negative profits. We show that yes-firms can stabilize R&D networks consisting of a single component that maximize the social welfare. Finally, we look at the evolution of R&D networks and we find that R&D networks with two symmetric components will be rapidly dismantled, single component R&D networks will persist many periods, while R&D networks consisting of two asymmetric components will persist forever.

Who pays for switching costs?

Earlier work characterized pricing with switching costs as a dilemma between a short-term 'harvesting' incentive to increase prices versus a long-term 'investing' incentive to decrease prices. This paper shows that small switching costs may reduce firm profits and provide short-term incentives to lower rather than raise prices. We provide a simple expression which characterizes the impact of the introduction of switching costs on prices and profits for a general model. We then explore the impact of switching costs in a variety of specific examples which are special cases of our model. We emphasize the importance of a short term 'compensating' effect on switching costs.When consumers switch in equilibrium, firms offset the costs of consumers that are switching into the firm. If switching costs are low, this compensating effect of switching costs causes even myopic firms to decrease prices. The incentive to decrease prices is even stronger for forward looking firms.

Culture and its Effect on Management Myopia and Financial Performance: A Comparison of Firms from Short-term and Long-term Oriented Cultures

Myopic management has been defined as making decisions based on short-term profitability as opposed to the long-term value. Myopic firms typically cut expenditures in advertising and R&D which result in the destruction of the long-term value of the firm. This paper reports the findings of a study that investigated the impact of culture on myopic management, i.e., do firms from cultures that are short-term oriented behave more myopically than firms from cultures that are long-term oriented? The findings support the hypotheses that firms from long-term oriented cultures spend more on R&D and advertising than firms from short-term cultures which then translates to higher profitability for firms from long-term oriented cultures in comparison to firms from short-term oriented cultures.

Experimental evidence on dynamic pollution tax policies

This paper uses laboratory experiments to provide primary empirical evidence on dynamic pollution tax policies. In particular, we investigate a setting where a regulator with incomplete information uses a pollution tax mechanism with a simple, endogenous tax rate adjustment rule to cost-effectively meet a pollution standard. This mechanism provides the opportunity for firms to strategically abate in order to reduce future tax rates. The experiments vary important policy design features such as the type of tax (ambient or emissions), the initial tax rate, and the tax rate adjustment speed. We find that in equilibrium the pollution standard is met on average for each of these settings. The observed long-run tax rates vary considerably across policy designs, which can be explained with a theory that allows for a mix of strategic and myopic firms, along with the recognition that the incentives generated by the policy design can influence whether an agent plays myopically or strategically.

Do Firms Compensate Switching Consumers?

Earlier work characterized pricing with switching costs as a dilemma between a short-term 'harvesting' incentive to increase prices versus a long-term 'investing' incentive to decrease prices. This paper shows that small switching costs may reduce firm profits and provide short-term incentives to lower rather than raise prices. We provide a simple expression which characterizes the impact of the introduction of switching costs on prices and profits for a general model. We then explore the impact of switching costs in a variety of specific examples which are special cases of our model. We emphasize the importance of a short term 'compensating' effect on switching costs.When consumers switch in equilibrium, firms offset the costs of consumers that are switching into the firm. If switching costs are low, this compensating effect of switching costs causes even myopic firms to decrease prices. The incentive to decrease prices is even stronger for forward looking firms.

Dynamics of brand competition: Effects of unobserved social networks

Brand competition is modelled using an agent based approach in order to examine the long run dynamics of market structure and brand characteristics. A repeated game is designed where myopic firms choose strategies based on beliefs about their rivals and consumers. Consumers are heterogeneous and can observe neighbour behaviour through social networks. Although firms do not observe them, the social networks have a significant impact on the emerging market structure. Presence of networks tends to polarize market share and leads to higher volatility in brands. Yet convergence in brand characteristics usually happens whenever the market reaches a steady state. Scale-free networks accentuate the polarization and volatility more than small world or random networks. Unilateral innovations are less frequent under social networks.

Myopic Marketing Management: Evidence of the Phenomenon and Its Long-Term Performance Consequences in the SEO Context

Managers often have incentives to artificially inflate current-term earnings by cutting marketing expenditures, even if it comes at the expense of long-term profits. Because investors rely on current-term accounting measures to form expectations of future-term profits, inflating current-term results can lead to enhanced current-term stock price. We present evidence that some firms engage in this type of “myopic marketing management” at the time of a seasoned equity offering (SEO). In particular, a greater proportion of firms than is typical report earnings higher than normal and marketing expenditures lower than normal at the time of their SEO. Although they realize that firms might be undertaking strategies to artificially inflate current-term earnings, the financial markets are not adequately identifying and properly valuing the firms doing so. Our results indicate that myopic firms are able to temporarily inflate their stock market valuation, but in the long run, as the consequences of cutting marketing spending become manifest, they have inferior stock market performance. We propose some actions that might reduce the incentives for myopic behavior.

Small scale entry versus acquisitions of small firms: Is concentration self-reinforcing?

We consider a reduced form model with acquisitions and entry. There are two investors and several small non-investing firms. One investor can acquire a small firm, the other investor decides about market entry. After that all firms play an oligopoly game. We derive conditions under which increasing market concentration arises with myopic firms. We apply the framework to a Cournot model with cost synergies and a Bertrand model where acquisitions extend the product spectrum of a firm.

Flexibility choices and oligopolistic competition in an evolutionary environment

We study the problem of the endogenous choice of technology when the level of demand is uncertain. Firms can choose either a ‘flexible’ technology, which allows them to vary the cost structure, or a ‘rigid’ technology, which in periods of high demand is more efficient. Firms tend to adopt the (ex ante) more rewarding technology. We develop a full dynamic model with given number of firms as well as with entry and exit, and with perfect foresight as well as with myopic firms. We show that firms with different technologies can coexist in the market in a permanent way, and characterise the parameter configurations leading to such results.

Acquisitions versus Entry: The Evolution of Concentration

We consider market dynamics in a reduced form model. In the simplest version, there are two investors and several small noninvesting firms. In each period, one investor can acquire a small firm, the other investor decides about market entry. After that all firms play an oligopoly game. We derive conditions under which increasing market concentration arises with myopic firms, we show that a model with forward-looking firms and with arbitrary numbers of investors yield similar results. We apply the framework to a Cournot model with cost synergies and a Bertrand model where acquisitions extend the product spectrum of a firm.

Competition, collusion, and chaos

In this paper, we present results which show that cartel formation can still be observed in a completely deterministic model where myopic firms compete through price in finite time. The firms are spatially differentiated and take turns with their neighboring firms in setting prices. Among the different possible dynamic scenarios, we focus attention on those where cooperative and competitive behavior continue to coexist throughout time. The continual interaction of cooperative and competitive behavior results in complex dynamic regimes. Because the set of prices which firms choose will be discrete, a formal equivalence is established between the model's dynamics and the theory of cellular automata.