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Article

William Megginson, Herber Farnsworth, and Bing (Violet) Xu

Defined as a single industrial sector, the global production, distribution, and consumption of energy is the world’s largest in terms of annual capital investment (US$1.83 trillion in 2019, the last prepandemic year for which full data are available) and the second largest nonfinancial industry in terms of sales revenue (US$4.51 trillion). Production and consumption of more than 100 million barrels of oil occurs each day—with 70% being traded across borders. Each of the world’s 7.5 billion citizens consumes an average of 3,181 kilowatt-hours per year, although per capita energy consumption varies enormously and is much higher in rich than in poor countries. Properly analyzing the financial economics of the global energy industry requires focusing on both the physical aspects of production and distribution—how, where, and with what type of fuel energy is produced and consumed—and the capital investment required to support each energy segment. The global energy “industry” can be broadly categorized into two main segments: (a) provision of fuels for transportation and production and (b) distribution of electricity for residential and industrial consumption. The fuels sector encompasses the production; processing; and distribution of crude oil and its refined products, mostly gasoline, kerosene (which becomes jet fuel), diesel, gas oil, and residual fuel oil. The electric power sector includes four related businesses: generation, transmission, distribution, and supply. Two imperatives drive the ongoing transformation of the global energy industry. These are (a) meeting rising demand due to population growth and rising wealth and (b) addressing climate change through greener energy policies and massive capital investments by corporations and governments. The pathway to decarbonizing electricity production and distribution by 2050 is fairly straightforward technologically; however, doing so will require both scientific innovations (particularly regarding scalable battery storage) and sustained multitrillion dollar annual investments for the next three decades. Decarbonizing transportation is a far more difficult and expensive proposition, which will require fundamental breakthroughs in multiple technologies, coupled with unusually farsighted policy action. Extant academic research already provides useful guidance for policymakers in many areas, but far more is required to help shape the future policy agenda.

Article

Alessandra Bonfiglioli, Rosario Crinò, and Gino Gancia

International trade is dominated by a small number of very large firms. Models of trade with heterogeneous firms have been developed to study the causes and consequences of this observation. The canonical model of trade with heterogeneous firms shows that trade leads to between-firm reallocations and selection: It shifts employment toward firms with the best attributes and forces marginal firms to exit. The model also illustrates the role of heterogeneity, and its various sources, in explaining the volume of trade and the firm-level margins of adjustment. Consistent with the model, the empirical literature has documented that exporting is a rare activity, that exporting firms are larger and more productive than other firms, and that trade liberalization reallocates market shares toward the best-performing firms in various countries. Studies using transaction-level data have unveiled additional salient features of trade flows. First, sales by foreign firms are very heterogeneous and highly concentrated. Second, both the extensive margin (number of exporting firms) and the intensive margin (average export per firm) are important in explaining the level of exports and its changes over time. More heterogeneity in sales across firms is associated with a higher volume of trade along both margins. Third, increased foreign competition reallocates market shares toward top firms and hence can increase concentration from any country of origin. Numerous extensions of the benchmark model have been proposed to study other important aspects, such as the relevance of multi-product and multinational firms, the import behavior of firms, and the extent to which heterogeneity is endogenous to firms’ choices, but some open challenges still remain.

Article

The interrelationships between upstream supplier firms and downstream customer firms—popularly referred to as supply-chain relationships—constitute one of the most important linkages in the economy. Suppliers not only provide production inputs for their customers but, increasingly, also engage in R&D and innovation activity that is beneficial to the customers. Yet, the high degree of relationship specificity that such activities involve, and the difficulty of writing complete contracts, expose suppliers to potential hold-up problems. Mechanisms that mitigate opportunism have implications for the origins of such relationships, firm boundary, and organizational structure. Smaller supplier firms benefit from relationships with large customer firms in many ways, such as knowledge sharing, operational efficiency, insulation from competition, and reputation in capital markets. However, customer bargaining power, undiversified customer base, and innovation strategy also expose suppliers to disruption risk. Relationship specificity of investment, customer bargaining power, and customer concentration associated with a less diversified customer base have important consequences for financing decisions of suppliers and customers, such as capital structure choice and the provision and role of trade credit. Changes in the risk of disruption (e.g., bankruptcy filings, takeover activity, and credit market shocks) have spillover effects along the supply chain. The correlation of economic fundamentals of suppliers and customers and the co-attention that they receive from market participants translate to return predictability (with implications for trading strategies), information diffusion along the supply chain, and stock-price informativeness of supply-chain partners.

Article

Daniel Greene, Omesh Kini, Mo Shen, and Jaideep Shenoy

A large body of work has examined the impact of corporate takeovers on the financial stakeholders (shareholders and bondholders) of the merging firms. Since the late 2000s, empirical research has increasingly highlighted the crucial role played by the non-financial stakeholders (labor, suppliers, customers, government, and communities) in these transactions. It is, therefore, important to understand the interplay between corporate takeovers and the non-financial stakeholders of the firm. Financial economists have long viewed the firm as a nexus of contracts between various stakeholders connected to the firm. Corporate takeovers not only play an important role in redefining the broad boundaries of the firm but also result in major changes to corporate ownership and structure. In the process, takeovers can significantly alter the contractual relationships with non-financial stakeholders. Because the firm’s relationships with these stakeholders are governed by implicit and explicit contracts, circumstances can arise that allow acquiring firms to fully or partially abrogate these contracts and extract rents from non-financial stakeholders after deal completion. In contrast, non-financial stakeholders can also potentially benefit from a takeover if they get to share in any efficiency gains that are generated in the deal. Given this framework, the ex-ante importance of these contractual relationships can have a bearing on the efficacy of takeovers. The ability to alter contractual relationships ex post can affect the propensity of a takeover and merging firms’ shareholders and, in turn, impact non-financial stakeholders. Non-financial stakeholders will be more vested in post-takeover success if they can trust the acquiring firm to not take actions that are detrimental to them. The big picture that emerges from the surveyed literature is that non-financial stakeholder considerations affect takeover decisions and post-takeover outcomes. Moreover, takeovers also have an impact on non-financial stakeholders. The directions of all these effects, however, depend on the economic environment in which the merging firms operate.

Article

The origins of modern technological change provide the context necessary to understand present-day technological transformation, to investigate the impact of the new digital technologies, and to examine the phenomenon of digital disruption of established industries and occupations. How these contemporary technologies will transform industries and institutions, or serve to create new industries and institutions, will unfold in time. The implications of the relationships between these pervasive new forms of digital transformation and the accompanying new business models, business strategies, innovation, and capabilities are being worked through at global, national, corporate, and local levels. Whatever the technological future holds it will be defined by continual adaptation, perpetual innovation, and the search for new potential. Presently, the world is experiencing the impact of waves of innovation created by the rapid advance of digital networks, software, and information and communication technology systems that have transformed workplaces, cities, and whole economies. These digital technologies are converging and coalescing into intelligent technology systems that facilitate and structure our lives. Through creative destruction, digital technologies fundamentally challenge existing routines, capabilities, and structures by which organizations presently operate, adapt, and innovate. In turn, digital technologies stimulate a higher rate of both technological and business model innovation, moving from producer innovation toward more user-collaborative and open-collaborative innovation. However, as dominant global platform technologies emerge, some impending dilemmas associated with the concentration and monopolization of digital markets become salient. The extent of the contribution made by digital transformation to economic growth and environmental sustainability requires a critical appraisal.

Article

Peter Sivey and Yijuan Chen

Quality competition between alternative providers is an increasingly important topic in the health economics literature. This literature includes theoretical and empirical studies that have been developed in parallel to 21st-century policies to increase competition between doctors or hospitals. Theoretical studies have clarified how competitive markets can give healthcare providers the incentive to improve quality. Broadly speaking, if providers have an incentive to attract more patients and patients value quality, providers will raise quality until the costs of raising quality are equal to the additional revenue from patients attracted by the rise in quality. The theoretical literature has also investigated how institutional and policy parameters determine quality levels in equilibrium. Important parameters in models of quality competition include the degree of horizontal differentiation, the level of information about provider quality, the costs of switching between providers, and the time-horizon of quality investment decisions. Empirical studies have focused on the prerequisites of quality competition (e.g., do patients choose higher quality providers?) and the impact of pro-competition policies on quality levels. The most influential studies have used modern econometric approaches, including difference-in differences and instrumental variables, to identify plausibly causal effects. The evidence suggests that in most contexts, quality is a determinant of patient choice of provider, especially after greater patient choice is made available or information is published about provider quality. The evidence that increases in competition improve quality in healthcare is less clear cut. Perhaps reflecting the economic theory of quality competition, showing that different parameter combinations or assumptions can produce different outcomes, empirical results are also mixed. While a series of high-quality studies in the United Kingdom appear to show strong improvements in quality in more competitive areas following pro-competition reforms introducing more choice and competition, other studies showed that these quality improvements do not extend to all types of healthcare or alternative measures of quality. The most promising areas for future research include investigating the “black box” of quality improvement under competition, and behavioral studies investigating financial and nonfinancial motivations for quality improvements in competitive markets.

Article

The rise in obesity and other food-related chronic diseases has prompted public-health officials of local communities, national governments, and international institutions to pay attention to the regulation of food supply and consumer behavior. A wide range of policy interventions has been proposed and tested since the early 21st century in various countries. The most prominent are food taxation, health education, nutritional labeling, behavioral interventions at point-of-decision, advertising, and regulations of food quality and trade. While the standard neoclassical approach to consumer rationality provides limited arguments in favor of public regulations, the recent development of behavioral economics research extends the scope of regulation to many marketing practices of the food industry. In addition, behavioral economics provides arguments in favor of taxation, easy-to-use front-of-pack labels, and the use of nudges for altering consumer choices. A selective but careful review of the empirical literature on taxation, labeling, and nudges suggests that a policy mixing these tools may produce some health benefits. More specifically, soft-drink taxation, front-of-pack labeling policies, regulations of marketing practices, and eating nudges based on affect or behavior manipulations are often effective methods for reducing unhealthy eating. The economic research faces important challenges. First, the lack of a proper control group and exogenous sources of variations in policy variables make evaluation very difficult. Identification is challenging as well, with data covering short time periods over which markets are observed around slowly moving equilibria. In addition, truly exogenous supply or demand shocks are rare events. Second, structural models of consumer choices cannot provide accurate assessment of the welfare benefits of public policies because they consider perfectly rational agents and often ignore the dynamic aspects of food decisions, especially consumer concerns over health. Being able to obtain better welfare evaluation of policies is a priority. Third, there is a lack of research on the food industry response to public policies. Some studies implement empirical industrial organization models to infer the industry strategic reactions from market data. A fruitful avenue is to extend this approach to analyze other key dimensions of industrial strategies, especially decisions regarding the nutritional quality of food. Finally, the implementation of nutritional policies yields systemic consequences that may be underestimated. They give rise to conflicts between public health and trade objectives and alter the business models of the food sector. This may greatly limit the external validity of ex-ante empirical approaches. Future works may benefit from household-, firm-, and product-level data collected in rapidly developing economies where food markets are characterized by rapid transitions, the supply is often more volatile, and exogenous shocks occur more frequently.

Article

Ching-to Albert Ma and Henry Y. Mak

Health services providers receive payments mostly from private or public insurers rather than patients. Provider incentive problems arise because an insurer misses information about the provider and patients, and has imperfect control over the provider’s treatment, quality, and cost decisions. Different provider payment systems, such as prospective payment, capitation, cost reimbursement, fee-for-service, and value-based payment, generate different treatment quality and cost incentives. The important issue is that a payment system implements an efficient quality-cost outcome if and only if it makes the provider internalize the social benefits and costs of services. Thus, the internalization principle can be used to evaluate payment systems across different settings. The most common payment systems are prospective payment, which pays a fixed price for service rendered, and cost reimbursement, which pays according to costs of service rendered. In a setting where the provider chooses health service quality and cost reduction effort, prospective payment satisfies the internalization principle but cost reimbursement does not. The reason is that prospective payment forces the provider to be responsible for cost, but cost reimbursement relieves the provider of the cost responsibility. Beyond this simple setting, the provider may select patients based on patients’ cost heterogeneity. Then neither prospective payment nor cost reimbursement achieves efficient quality and cost incentives. A mixed system that combines prospective payment and cost reimbursement performs better than each of its components alone. In general, the provider’s preferences and available strategies determine if a payment system may achieve internalization. If the provider is altruistic toward patients, prospective payment can be adjusted to accommodate altruism when the provider’s degree of altruism is known to the insurer. However, when the degree of altruism is unknown, even a mixed system may fail the internalization principle. Also, the internalization principle fails under prospective payment when the provider can upcode patient diagnoses for more favorable prices. Cost reimbursement attenuates the upcoding incentive. Finally, when the provider can choose many qualities, either prospective payment and cost reimbursement should be combined with the insurer’s disclosure on quality and cost information to satisfy the internalization principle. When good healthcare quality is interpreted as a good match between patients and treatments, payment design is to promote good matches. The internalization principle now requires the provider to bear benefits and costs of diagnosis effort and treatment choice. A mixed system may deliver efficient matching incentives. Payment systems necessarily interact with other incentive mechanisms such as patients’ reactions against the provider’s quality choice and other providers’ competitive strategies. Payment systems then become part of organizational incentives.

Article

In the last several decades obesity rates have risen significantly. In 2014, 10.8% and 14.9% of the world’s men and women, respectively, were obese as compared with 3.2% and 6.4% in 1975. The obesity “epidemic” has spread from high-income countries to emerging and developing ones in every region of the world. The rising obesity rates are essentially explained by a rise in total calorie intake associated with long-term global changes in the food supply. Food has become more abundant, available, and cheaper, but food affluence is associated with profound changes in the nutritional quality of supply. While calories have become richer in fats, sugar, and sodium, they are now lower in fiber. The nutrition transition from starvation to abundance and high-fat/sugar/salt food is thus accompanied by an epidemiological transition from infectious diseases and premature death to chronic diseases and longer lives. Food-related chronic diseases have important economic consequences in terms of human capital and medical care costs borne by public and private insurances and health systems. Technological innovations, trade globalization, and retailing expansion are associated with these substantial changes in the quantity and quality of food supply and diet in developed as well as in emerging and rapidly growing economies. Food variety has significantly increased due to innovations in the food production process. Raw food is broken down to obtain elementary substances that are subsequently assembled for producing final food products. This new approach, as well as improvements in cold chain and packaging, has contributed to a globalization of food chains and spurred an increase of trade in food products, which, jointly with foreign direct investments, alters the domestic food supply. Finally, technological advancements have also favored the emergence of large supermarkets and retailers, which have transformed the industrial organization of consumer markets. How do these developments affect population diets and diet-related diseases? Identifying the contribution of supply factors to long-term changes in diet and obesity is important because it can help to design innovative, effective, and evidence-based policies, such as regulations on trade, retailing, and quality or incentives for product reformulation. Yet this requires a correct evaluation of the importance and causal effects of supply-side factors on the obesity pandemic. Among others, the economic literature analyzes the effect of changes in food prices, food availability, trade, and marketing on the nutrition and epidemiological transitions. There is a lack of causal robust evidence on their long-term effects. The empirical identification of causal effects is de facto challenging because the dynamics of food supply is partly driven by demand-side factors and dynamics, like a growing female labor force, habit formation, and the social dynamics of preferences. There are several important limitations to the literature from the early 21st century. Existing studies cover mostly well-developed countries, use static economic and econometric specifications, and employ data that cover short periods of time unmarked by profound shifts in food supply. In contrast, empirical research on the long-term dynamics of consumer behavior is much more limited, and comparative studies across diverse cultural and institutional backgrounds are almost nonexistent. Studies on consumers in emerging countries could exploit the rapid time changes and large spatial heterogeneity, both to identify the causal impacts of shocks on supply factors and to document how local culture and institutions shape diet and nutritional outcomes.

Article

“Antitrust” or “competition law,” a set of policies now existing in most market economies, largely consists of two or three specific rules applied in more or less the same way in most nations. It prohibits (1) multilateral agreements, (2) unilateral conduct, and (3) mergers or acquisitions, whenever any of them are judged to interfere unduly with the functioning of healthy markets. Most jurisdictions now apply or purport to apply these rules in the service of some notion of economic “efficiency,” more or less as defined in contemporary microeconomic theory. The law has ancient roots, however, and over time it has varied a great deal in its details. Moreover, even as to its modern form, the policy and its goals remain controversial. In some sense most modern controversy arises from or is in reaction to the major intellectual reconceptualization of the law and its purposes that began in the 1960s. Specifically, academic critics in the United States urged revision of the law’s goals, such that it should serve only a narrowly defined microeconomic goal of allocational efficiency, whereas it had traditionally also sought to prevent accumulation of political power and to protect small firms, entrepreneurs, and individual liberty. While those critics enjoyed significant success in the United States, and to a somewhat lesser degree in Europe and elsewhere, the results remain contested. Specific disputes continue over the law’s general purpose, whether it poses net benefits, how a series of specific doctrines should be fashioned, how it should be enforced, and whether it really is appropriate for developing and small-market economies.