This paper introduces a comprehensive model of the market for inventions that examines how both supply-side competition and demand-side competition affect the incentive to invent. Supply-side competition refers to competition among inventors and demand-side competition refers to competition among producers in the downstream product market. The main results are as follows. Competing inventors have greater average expected returns to invention when the downstream market is competitive than when the downstream product market is monopolistic, so downstream competition increases the incentive to invent. A multi-project monopoly inventor has greater incremental expected returns to invention when the downstream market is competitive than when it is monopolistic, so downstream competition again increases the incentive to invent. On the supply side, competition among inventors generates more R&D projects than a multi-project monopoly inventor, when the demand side of the market for inventions is a competitive. The reason for this result is that when the downstream market is competitive, the average expected returns to invention with competition among inventors are greater than the incremental expected returns to invention with a multi-project monopoly inventor.

We investigate how gasoline prices a ffect automobile purchases. We find that the adjustment of equilibrium market shares and prices in response to changes in usage cost varies dramatically between new and used markets. In the new car market, the adjustment is primarily in market shares, while in the used car market, the adjustment is primarily in prices. The e ffects are largest for the most- and least-fuel efficient cars. We argue that the di fference in how gasoline costs aff ect new and used automobile markets can be explained by di fferences in the supply characteristics of new and used cars.

The case opens with the Ford Motor Company seemingly on the path toward bankruptcy. Ford had been bleeding red ink for more than ten years when it decided in 2006 that continuing the same turnaround attempts was not going to right the ship. The company was facing significant external challenges, such as intense competition and changing consumer preferences, as well as internal challenges, such as quality and design issues and a stifling level of corporate complexity.

As the case begins, CEO Bill Ford has taken the unusual step of hiring an auto industry outsider as his replacement. Alan Mulally, a thirty-seven-year Boeing veteran and principal architect of the venerable airplane manufacturer’s own massive and successful turnaround, wasted little time in getting about the business of remaking Ford. He developed a plan to:

• Focus on the Ford brand and divest the numerous other brands the company had acquired over the years
• Simplify and streamline the company’s manufacturing operations
• Remake the corporate culture from one of fiefdoms and false optimism to collaboration and facing reality

With an ardent belief in the plan’s viability, Mulally raised nearly $24 billion and began to put his plan into motion.

The case explores the many causes of this once-great company’s decline and the steps it took to beat the odds and get back on the path of profitability.

BHP, an Australian mining company, threatens to enter the potash mining industry through a hostile takeover of the Potash Corporation of Saskatchewan. Complicating matters is the fact that the Canadian potash industry has operated as a legal cartel in which the provincial government has a stake. This case enables students to assess BHP’s strategy in terms of value creation and value capture, how it relates to its existing investments in the industry, and the risks and rewards of alternatives to BHP’s strategy

Regulators and firms often use incentive schemes to attract skillful agents and to induce them to put forth effort in pursuit of the principals’ goals. Incentive schemes that reward skill and effort, however, may also punish agents for adverse outcomes beyond their control. As a result, such schemes may induce inefficient behavior, as agents try to avoid actions that might make it easier to directly associate a bad outcome with their decisions. In this paper, we study how such caution on the part of individual agents may lead to inefficient market outcomes, focusing on the context of natural gas procurement by regulated public utilities. We posit that a regulated natural gas distribution company may, due to regulatory incentives, engage in excessively cautious behavior by foregoing surplusincreasing gas trades that could be seen ex post as having caused supply curtailments to its customers. We derive testable implications of such behavior and show that the theory is supported empirically in ways that cannot be explained by conventional price risk aversion or other explanations. Furthermore, we demonstrate that the reduction in efficient trade caused by the regulatory mechanism is most severe during periods of relatively high demand and low supply, when the benefits of trade would be greatest

That collusion among sellers is detrimental to buyers is a central tenet in economics. In the context of trade, we provide an oligopoly model, using only standard ingredients, in which collusion can raise consumer surplus. A differentiated-product duopoly operates in two geographically-separated markets. Each market is home to a single firm, but can import from the foreign firm. Since shipping across markets is costly, every firm has a cost advantage in its home market. Consumers treat the two goods as horizontally-differentiated substitutes and their preferences are identical in both markets. Under duopolistic competition, the markup on the imported variety is low relative to the home good: there are conditions in which a perfect cartel raises the price of the import and lowers the price of the home good, raising welfare for most consumers. A similar consumer-surplus-enhancing possibility result applies to autarky. We also outline settings, other than the spatial one, where our analysis may be relevant.

In December 2011 the Lego Group (TLG) announced the launch of Lego Friends, the company’s sixth attempt to market a product to girls. Lego Friends, which was supported by a $40 million global marketing campaign, was designed to introduce the fun of building with Lego bricks to girls, who represented less than 10 percent of Lego’s audience.

The company’s poorly executed brand extensions and move from free-form building sets to story-driven kits had nearly cost it its independence in 2004, so the launch of Lego Friends was strategically important. However, within hours of the product’s appearance it was heavily criticized for reinforcing gender stereotypes and damaging the valuable Lego brand.

Jørgen Vig Knudstorp, CEO since 2004, had saved TLG and ushered in an era of sales growth with a series of successful strategic initiatives. Would Lego Friends be another addition to TLG’s graveyard of failed products for girls, or would it prove popular and finally enable the company to double its sales and profits by reaching this segment?

We analyze a rational-expectations model of price formation in an intermediate-good market under uncertainty. There is a continuum of firms, each consisting of a party who can reduce production cost and a party who can discover information about demand. Both parties can make specific investments at private cost, and there is a machine that either party can control. As in incomplete-contracting models, different governance structures (i.e., different allocations of control of the machine) create different incentives for the parties’ investments. As in rational-expectations models, some parties may invest in acquiring information, which is then incorporated into the market-clearing price of the intermediate good by these parties’ production decisions. The informativeness of the price mechanism affects the returns to specific investments and hence the optimal governance structure for individual firms; meanwhile, the governance choices by individual firms affect the informativeness of the price mechanism.  In equilibrium the informativeness of the price mechanism can induce ex ante homogeneous firms to choose heterogeneous governance structures.

We examine whether and to what extent consolidation in the U.S. health insurance industry has contributed to higher employer-sponsored insurance premiums. We exploit the differential impact across local markets of a large national merger of two insurers to identify the causal effect of concentration on premiums. Using data for large groups, we estimate premiums in the average market were approximately 7 percentage points higher by 2007 due to increases in local concentration between 1998 and 2006. We also find evidence that consolidation facilitates the exercise of monopsonistic power vis-a-vis physicians, leading to reductions in their absolute employment and earnings relative to other healthcare workers.

This is the third in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This technical note explains how to choose predictor variables to include in regression. The note begins by explaining the many virtues of parsimony. Sometimes analysts include predictors simply because they are in the available data. Including such "junk" predictors increases the chances of obtaining confusing or misleading results. The note also explores multicollinearity, a favorite topic in some statistics classes that is rarely a problem in real world empirical work. The note concludes by explaining how to work with groups of related variables and describes how to implement the partial F test for joint significance.

This is the tenth in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This note uses the theory of "supplier-induced demand" from health economics to illustrate key issues including reverse causality, the role of instrumental variables in establishing causality, and the characteristics of good instruments.

This is the first in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.

This technical note introduces students to the essential elements of convincing empirical research using regression. Students who read this note will be prepared to perform an unstructured research project. The note presents ten essential steps in research, starting with model development and ending with presentation of results. Coverage is given to important subjects such as identification and model robustness.

This is the ninth in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This note returns to the topic of endogeneity, explaining how a predictor variable can be endogenous (and therefore its coefficient can be biased) if causality is in doubt. Through an extended example of the learning curve in medicine, the note introduces the concept of instrumental variables (IV), provides an intuitive explanation for why instruments solve the causality problem, and explains how to estimate IV and two-stage least squares regressions. The note describes statistical tests for the validity of instruments.

This is the fifth in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This technical note discusses fixed effects models. Though a unified example, the note shows how omitted variable bias can plague estimates in cross-section regressions and how focusing attention on intragroup ("within") variation over time can allow for identification of regression coefficients that are free of potential bias. The note demontrates the mathematical principles behind fixed effects modeling and also explains why, in some cases, it may be preferable not to include fixed effects.

This is the eleventh in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
Using an extended example on hospital lengths of stay, the note explains how to "deconstruct" a regression in order to parse out how each variable contributes to the overall result. Regression is viewed as an exercise in "benchmarking"—explaining why some observations in the data "outperform" or "underperform" others. The residual is viewed as a potential measure of managerial effectiveness, albeit one that must be treated with caution. The note provides step-by-step instructions for using regression for benchmarking.

This is the fourth in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This technical note introduces the concept of endogeneity bias with specific coverage of omitted variable bias. Students who read this note will understand why omitting key predictors can sometimes bias the coefficients of included variables. The note illustrates omitted variable bias by means of an extended example and offers practical advice for model building that balances the desire for parsimony developed in a previous note with the need to limit omitted variable bias.

This is the seventh in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This note explains how to choose between log and linear specification. The note emphasizes the economic interpretation of a log model and how to interpret coefficients in a log regression. The note concludes by explaining how to choose between log and linear specifications on econometric grounds, including an explanation of the Box-Cox test.

This is the eighth in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.This technical note discusses maximum likelihood estimation (MLE). The note explains the concept of goodness of fit and why MLE is a powerful alternative to R-squared. The note follows a simple example that develops the intuition of MLE as well as the computation of the likelihood score and the algorithm used to estimate coefficients in MLE models.

This is the sixth in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This note begins by describing the problems that arise when variables are measured with noise. The note progresses to explain how to test for and correct heteroskedasticity. It also explains why it is necessary to adjust standard errors when working with grouped data.

This is the second in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This technical note reviews the basic elements of regression analysis. Students who read this note will be able to explain the fundamental principals of regression, including (1) regression as an alegbraic equation; (2) dummy variables and nonlinear terms; (3) R-squared and goodness of fit; and (4) reporting the significance and economic importance of regression coefficients. Having completed this note, students will be prepared to study the special topics in regression that are covered in other notes in this series.

This is the twelfth in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This technical note discusses time-series data. The note explains the concept of a time trend and how to capture the trend using regression. Most of the note is devoted to the problem of autocorrelation. The note concludes by discussing the use of leads and lags as predictor variables.

This case highlights a recent and important type of new sustainability project for existing buildings commonly referred to as an integrated energy retrofit (IER) project. Anthony Malkin of Malkin Holdings, owner of the Empire State Building (ESB), acknowledged the importance of making the existing building stock, particularly in New York City, more energy efficient, as it comprises a large part of the real estate in most cities. Taking a bold leadership position, Malkin vowed to make the ESB the most energy-efficient, sustainable, “green” pre-war office building through an IER project that examined several facets of the building’s systems, operations, and tenant behaviors. In addition to making the ESB a green icon in Manhattan, Malkin also stated the importance of making the project transparent and economical so other pre-war buildings could copy the model. This case study examines in depth the process that Malkin Holdings underwent in attaining its goal of establishing the ESB as a leader in existing building sustainability.

Deltas, Salvo and Vasconcelos (2012) develop a model of geographically separated markets with differentiated goods in which collusion (or merger to monopoly), by restricting trade relative to duopolistic competition, is beneficial for society and can be beneficial for consumers. In this chapter, we provide additional results as well as an extension of that model. We show that a social planner would further restrict trade than the perfect cartel would, and how the socially optimal market allocation can be induced through a system of taxes and subsidies, or through "anti-dumping" regulation. We generalize the model to allow for home biased consumer tastes and show that our original analysis is robust. We also consider whether autarky can improve social welfare over market-based trade regimes, in the spirit of Brander and Krugman (1983).

Tacit knowledge affects the trade-off between entrepreneurship and technology transfer. I present a formal model in which an inventor and the existing firm engage in a strategic innovation game by choosing whether to compete or to cooperate through technology transfer. The model highlights how the problem of tacit knowledge affects the inventor's R&D investment and the existing firm's investment in absorptive capacity. The inventor's tacit knowledge implies that benefits from own-use through entrepreneurship can exceed the benefits from technology transfer. In equilibrium, higher-quality inventions result in entrepreneurship and lower-quality inventions result in technology transfer. R&D investment and absorption investment are strategic substitutes in the innovation game with the option of entrepreneurship. The possibility of entrepreneurship increases R&D investment and reduces absorption investment. The equilibrium probability of entrepreneurship is decreasing in the costs of R&D, increasing in the costs of absorption, and decreasing in the set-up costs of new firms.

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This case explores the turnaround and corporate renewal of the Chicago Blackhawks professional hockey team, which transformed from one of the worst-run organizations in all of professional sports in 2007 to one that won the Stanley Cup (the National Hockey League championship trophy) in 2010.

W. Rockwell "Rocky" Wirtz was faced with making critical decisions shortly after inheriting the team from his father, who was the individual most associated with the organization's decline. The team faced financial trouble and had narrowly avoided missing payroll; the previous customer relations strategy (which included refusing to televise home games or to conduct effective marketing) had resulted in significantly diminished brand value; and management and player personnel were devoid of effective leadership. At its nadir, the team was named "The Worst Franchise in Professional Sports" by ESPN in 2004. After assuming control, Rocky embarked on an ambitious corporate renewal strategy that included the following components:
• Leadership: Install a new management team with clear goals and creative ideas about how to turn around the organization
• Culture: Reward players for accomplishing their goals and establish a performance-based culture
• Financial: Seek new corporate sponsorships and increase ticket prices once the team established a winning record
• Brand and Marketing: Send a clear message that the team was intent upon winning the championship and design a customer-focused marketing strategy

The analysis obtains a complete characterization of the optimal agency contract with moral hazard, risk neutrality, and limited liability. We introduce a “critical ratio” that indicates the returns to providing the agent with incentives for effort in each random state. The form of the contract is debt (a capped bonus) when the critical ratio is increasing (decreasing) in the state. An increasing critical ratio in the state-space setting corresponds to the hazard rate order for the reduced-form distribution of output, which we term the “decreasing hazard rate in effort property” (DHREP). The critical ratio also yields insights into agency with adverse selection.

In its recent report entitled “The Evolving IP Marketplace,” the Federal Trade Commission (FTC) advances a far-reaching regulatory approach (Proposal) whose likely effect would be to distort the operation of the intellectual property (IP) marketplace in ways that will hamper the innovation and commercialization of new technologies. The gist of the FTC Proposal is to rely on highly non-standard and misguided definitions of economic terms of art such as “ex ante” and “hold-up,” while urging new inefficient rules for calculating damages for patent infringement. Stripped of the technicalities, the FTC Proposal would so reduce the costs of infringement by downstream users that the rate of infringement would unduly increase, as potential infringers find it in their interest to abandon the voluntary market in favor of a more attractive system of judicial pricing. As the number of nonmarket transactions increases, the courts will play an ever larger role in deciding the terms on which the patents of one party may be used by another party. The adverse effects of this new trend will do more than reduce the incentives for innovation; it will upset the current set of well-functioning private coordination activities in the IP marketplace that are needed to accomplish the commercialization of new technologies. Such a trend would seriously undermine capital formation, job growth, competition, and the consumer welfare the FTC seeks to promote.

In this paper, we examine how these consequences play out in the context of standard-setting organizations (SSOs), whose activities are key to bringing standardized technologies to market. If the FTC’s proposed definitions of “reasonable royalties” and “incremental damages” become the rules for calculating damages in patent infringement cases, the stage will be set to allow the FTC and private actors to attack, after the fact, all standard pricing methods through some combination of antitrust litigation or direct regulation on the ground that such time-honored royalty arrangements involve the use of monopoly power by patent licensors. In consequence, the FTC’s Proposal, if adopted, could well encourage potential licensees to adopt the very holdout strategies the FTC purports to address and that well-organized SSOs routinely counteract today. Simply put, the FTC’s proposal for regulating IP by limiting the freedom of SSOs to set their own terms would replace private coordination with government hold-up. The FTC should instead abandon its preliminary recommendations and support the current set of licensing tools that have fueled effective innovation and dissemination in the IP marketplace. FTC forbearance from its unwise Proposal will improve bargaining incentives, reduce administrative costs, and remove unnecessary elements of legal uncertainty in the IP system, thereby allowing effective marketplace transactions to advance consumer welfare.