Business Economics and Public Policy Papers
Public policy considerations occupy an increasing portion of managers’ time, especially in the global arena. The leaders of tomorrow must be able to perform policy analysis as well as integrate policy issues into their general management thinking. Bringing a wealth of theoretical tools and practical experience to bear on the relationship among business, government, and society, Wharton’s Business Economics and Public Policy Department has been an innovative force in research, teaching, and public service. Areas of faculty expertise include deregulation and privatization, technology, public and urban finance, and international industrial policy.
Members of the Business Economics and Public Policy faculty have held presidential appointments on federal regulatory commissions, been managers in large corporations, held research appointments and fellowships in government and not-for-profit think tanks, serve on the boards of many corporations, and provide consulting services to international and U.S. government agencies.
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Publication Beyond Plain Vanilla: Modeling Joint Product Assortment and Pricing Decisions(2009-06-01) Draganska, Michaela; Mazzeo, Michael J; Seim, KatjaThis paper investigates empirically the product assortment strategies of oligopolistic firms. We develop a framework that integrates product choice and price competition in a differentiated product market. The present model significantly improves upon the reduced-form profit functions typically used in the entry and location choice literature, because the variable profits that enter the product-choice decision are derived from a structural model of demand and price competition. Given the heterogeneity in consumers’ product valuations and responses to price changes, this is a critical element in the analysis of product assortment decisions. Relative to the literature on structural demand models, our results show that incorporating endogenous product choice is essential for policy simulations and may entail very different conclusions from settings where product assortment choices are held fixed.Publication Advertising Dynamics and Competitive Advantage(2007-08-01) Doraszelski, Ulrich; Markovich, SaritCan advertising lead to a sustainable competitive advantage? To answer this question, we propose a dynamic model of advertising competition where firms repeatedly advertise, compete in the product market, and make entry as well as exit decisions. Within this dynamic framework, we study two different models of advertising: in the first model, advertising influences the goodwill consumers extend toward a firm (“goodwill advertising”), whereas in the second model it influences the share of consumers who are aware of the firm (“awareness advertising”). We show that asymmetries may arise and persist under goodwill as well as awareness advertising. The basis for a strategic advantage, however, differs greatly in the two models of advertising. We show that tighter regulation or an outright ban of advertising may have anticompetitive effects and discuss how firms use advertising to deter and accommodate entry and induce exit in a dynamic setting.Publication A Dynamic Quality Ladder Model With Entry and Exit: Exploring the Equilibrium Correspondence Using the Homotopy Method(2012-06-01) Borkovsky, Ron N; Doraszelski, Ulrich; Kryukov, YaroslavThis paper explores the equilibrium correspondence of a dynamic quality ladder model with entry and exit using the homotopy method. This method is ideally suited for systematically investigating the economic phenomena that arise as one moves through the parameter space and is especially useful in games that have multiple equilibria. We briefly discuss the theory of the homotopy method and its application to dynamic stochastic games. We then present three main findings: First, the more costly and/or less beneficial it is to achieve or maintain a given quality level, the more a leader invests in striving to induce the follower to give up; the more quickly the follower does so; and the more asymmetric is the industry structure that arises. Second, the possibility of entry and exit gives rise to predatory and limit investment. Third, we illustrate and discuss the multiple equilibria that arise in the quality ladder model, highlighting the presence of entry and exit as a source of multiplicity.Publication Capacity Dynamics and Endogenous Asymmetries In Firm Size(2004-01-01) Besanko, David; Doraszelski, UlrichEmpirical evidence suggests that there are substantial and persistent differences in the sizes of firms in most industries. We propose a dynamic model of capacity accumulation that is consistent with the observed facts. The model highlights the mode of product market competition and the extent of investment reversibility as key determinants of the size distribution of firms in an industry. In particular, if firms compete in prices and the rate of depreciation is large, then the industry moves toward an outcome with one dominant firm and one small firm. Industry dynamics in this case resemble a preemption race. Contrary to the usual intuition, this preemption race becomes more brutal as investment becomes more reversible.Publication Market Segmentation Strategies of Multiproduct Firms(2006-03-01) Doraszelski, Ulrich; Draganska, MichaelaWe analyze a multiproduct duopoly and ask whether firms should offer general purpose products or tailor their offerings to fit specific consumer needs. Offering a targeted product has two effects: utility increases for some consumers due to increased fit, whereas utility decreases for others due to increased misfit. Previous work has not considered these two effects jointly and has therefore not been able to capture the tradeoff inherent in market segmentation. We show that in addition to the degree of fit and misfit, the intensity of competition and the fixed cost of offering an additional product determine firms' market segmentation strategies.Publication An R&D Race with Knowledge Accumulation(2003-01-01) Doraszelski, UlrichI develop a model of an R&D race with knowledge accumulation. My model does not inherit the memorylessness property of the exponential distribution that troubles existing models of R&D races. Hence, firms’ knowledge stocks are no longer irrelevant to their behavior during the R&D race, and knowledge accumulation has strategic implications. In this more general setting, I obtain results that stand in marked contrast to the previous literature. In particular, under some conditions, the firm that is behind in the race engages in catch-up behavior. This pattern of strategic interactions (action-reaction) is consistent with empirical research.Publication Longevity Risk Management in Singapore’s National Pension System(2011-12-01) Fong, Joelle H Y; Koh, Benedict S K; Mitchell, OliviaAlthough annuities are a theoretically appealing way to manage longevity risk, in the real world relatively few consumers purchase them at retirement. To counteract the possibility of retirees outliving their assets, Singapore's Central Provident Fund, a national defined contribution pension scheme, has recently mandated annuitization of workers’ retirement assets. More significantly, the government has entered the insurance market as a public-sector provider for such annuities. This article evaluates the money's worth of life annuities and discusses the impact of the government mandate and its role as an annuity provider on the insurance market.Publication The Health Insurance Reform Debate(2010-03-01) Harrington, Scott EThis article provides an overview of the U.S. health care reform debate and legislation, with a focus on health insurance. Following a synopsis of the main problems that confront U.S. health care and insurance, it outlines the health care reform bills in the U.S. House and Senate as of early December 2009, including the key provisions for expanding and regulating health insurance, and projections of the proposals' costs, funding, and impact on the number of people with insurance. The article then discusses (1) the potential effects of the mandate that individuals have health insurance in conjunction with proposed premium subsidies and health insurance underwriting and rating restrictions, (2) the proposed creation of a public health insurance plan and/or nonprofit cooperatives, and (3) provisions that would modify permissible grounds for health policy rescission and repeal the limited antitrust exemption for health and medical liability insurance. It concludes by contrasting the reform bills with market-oriented proposals and with brief perspective on future developments.Publication Price Dispersion in Mortgage Markets(2014-09-01) Allen, Jason; Clark, Robert; Houde, Jean-FrançoisUsing transaction-level data on Canadian mortgage contracts, we document an increase in the average discount negotiated off the posted price and in rate dispersion. Our aim is to identify the beneficiaries of discounting and to test whether dispersion is caused by price discrimination. The standard explanation for dispersion in credit markets is risk-based pricing. Our contracts are guaranteed by government-backed insurance, so risk cannot be the main factor. We find that lenders set prices that reflect consumer bargaining leverage, not just costs. The presence of dispersion implies a lack of competition, but our results show this to be consumer specific.Publication Corporate Leniency Programs When Firms Have Private Information: The Push of Prosecution and the Pull of Pre-emption(2013-03-01) Harrington, Joseph EA corporate leniency program provides relief from government penalties to the first member of a cartel to cooperate with the authorities. This study explores the incentives to apply for leniency when each cartel member has private information as to the likelihood that the competition authority will be able to convict them without a cooperating firm. A firm may apply for leniency because it fears being convicted (‘prosecution effect’) or because it fears another firm will apply (‘pre-emption effect’). Policies by the competition authority to magnify concerns about pre-emption—and thereby induce greater use of the leniency program—are also explored.