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.

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 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.

Bryan Preston, CEO of the Back Office Cooperative, leads several large human service providers through the process of building a shared-services platform to leverage scale and efficiencies. This successful collaboration matches the business case for restructuring against the constraints of mission-driven enterprises.

This article extends antitrust analysis to two-sided markets in which a virtual
monopolist competes with local bricks-and-mortar dealers. The discussion
examines the market power of an Internet market maker as well as an Internet
matchmaker. The analysis shows that equilibrium in a two-sided market can be
characterized as a one-sided market in which transaction demand depends on
the bid-ask spread of the central market maker. This allows for a straightforward
extension of critical demand elasticity and critical loss analysis from
one-sided markets to two-sided markets, with antitrust tests based on the
hypothetical monopolist’s bid-ask spread. Antitrust analysis of a one-sided
market also carries over to a two-sided market with a matchmaker where
antitrust tests are based on the sum of participation fees.

We compare four datasets that researchers might use to study competition in the health insurance industry. We show that the two datasets most commonly used to estimate market concentration differ considerably from each other (both in levels and in changes over time), and reflect implausibly high volatility in market shares. By comparison, market share volatility is much lower in a private dataset gathered by a leading investment bank, and in state-level hospital discharge data. We also demonstrate that the outcome of regressions using these data vary considerably by the source used. We conclude that researchers should be cautious about using available data and recommend a new source be developed for public use.

There are many markets in which a seller simultaneously diagnoses a customer’s needs and recommends a product or service to meet them. Customers have limited information on which to judge the merits of the recommendation and may, as a result, agree to excessively costly or unnecessary services. Plumbers, auto mechanics, and lawyers are just a few of the sellers who face the resulting potential for conflict of interest. This asymmetry of information poses a theoretical conundrum. What prevents sellers from always exaggerating the value of their products? A simple but compelling answer is that consumers may choose not to purchase the product if the seller routinely exaggerates its value. A corollary of this is that consumers may choose not to patronize sellers who exaggerate.

In this paper, we examine whether the market does, in fact, punish overzealous sellers. We focus on the market for physician services, specifically, deliveries. Physicians may choose from one two possible modes of delivery: vaginal birth versus a more highly reimbursed alternative, cesarean section. Our aim is to test whether physicians who prescribe a disproportionate number of cesarean sections (compared to what might be expected based on patient characteristics) experience a decline in patient share.

Following Phelps (2003), who equates a physician’s predilection to perform a high cost procedure to that physician’s “practice style,” we measure the practice styles of obstetricians in several counties in Florida. We then estimate a model of consumer choice of provider, where one of the factors weighing on the patient’s choice is practice style of the provider. In most of the counties that we study, including the largest, we find that maternity patients prefer not to visit physicians with aggressive styles (i.e. physicians who overprescribe cesarean sections), ceteris paribus. The effect is most pronounced for high income patients and HMO patients, two segments of the market that might be very attractive to some obstetricians.

An industry adage held that “there are two types of rental car companies: those that lose money and Enterprise.” The company that would become Enterprise Rent-A-Car was started in 1957 in St. Louis, Missouri, by Jack Taylor. Taylor set up Enterprise offices in neighborhoods rather than at airports because he believed that Americans would welcome a local option for renting cars when their own vehicles were being repaired. In 2010 Enterprise had more than 6,000 rental locations in the United States and a fleet of 850,000 cars in service. Its parent, Enterprise Holdings (comprising Enterprise, National, and Alamo brands) accounted for nearly half of the car rental market and was more than twice the size of Hertz, the number two competitor. Enterprise’s competitive advantage was the result of the combination of its practices in hiring, training, compensation, organization, customer service, IT, and fleet management, among others.

The Hotel Perennial case puts students in the shoes of Dan Jameson, founder and CEO of a boutique real estate private equity firm called EL Investments (ELI), as he wrestles with the decision of whether or not to acquire the distressed Hotel Perennial, a 194-room hotel on the north side of Chicago, Illinois.
When making the investment decision, Jameson (and students) must consider various factors: What is ELI’s implicit investment strategy, and what are the firm’s core competencies? What are Jameson’s goals for growing ELI, and how might the acquisition of the Hotel Perennial fit with those goals? What opportunities and challenges might ELI face if it decides to acquire the hotel? How much would a buyer likely have to pay for the Hotel Perennial to achieve an attractive return?
In addition to containing a hotel valuation and modeling exercise, the Hotel Perennial case also exposes students to several real estate industry concepts and terminologies, including those regarding the hotel sector, equity sourcing, and distressed investing.
The case material assumes that students have taken an introductory real estate finance course or have relevant work experience.

Brazil is the only sizable economy to date to have developed a home-grown ubiquitously-retailed alternative to fossil fuels in road transportation: ethanol from sugar cane. Perhaps unsurprisingly, the uptake of flexible-fuel vehicles (FFVs) has been tremendous. Five years after their introduction, FFVs accounted for over 90% of new car sales and 30% of the car stock. We provide a stylized model of the sugar/ethanol industry which incorporates substitution by consumers, across ethanol and gasoline at the pump, and substitution by producers, across domestic regional and export markets for ethanol and sugar. We argue that the model stands up well to the empirical co-movement in prices at the pump in a panel of Brazilian states. The paper offers a case study of how agricultural and energy markets link up at the very micro level.

MentorMob had sprung from the passions—for web development and for online communities—of the company’s co-founders, Kris Chinosorn (CEO) and Vince Leung (COO). The company pursued the ambitious goals of reinventing the way people learn and becoming the world’s utility for learning about anything. The website leveraged a crowdsourcing model for information sharing, teaching, and learning. By enabling participants to learn—and to crowdsource from each other while learning—the site sought to both engage users at different stages of learning and to develop a compelling experience unobtainable without a crowd.

Chinosorn and Leung needed to prioritize in order to achieve the growth and scale needed to become world’s utility for learning. What should they do next to keep MentorMob’s growth on track? What issues should get their greatest attention?

We examine whether and to what extent consolidation in the U.S. health insurance industry is leading to higher employer-sponsored insurance premiums. We make use of a proprietary, panel dataset of employer-sponsored healthplans enrolling over 10 million Americans annually between 1998 and 2006 to explore the relationship between premium growth and changes in market concentration. We exploit the differential impact of a large national merger of two insurance firms across local markets to estimate the causal effect of concentration on market-level premiums. We estimate real premiums increased by 2 percentage points (in a typical market) due to the rise in concentration during our study period. We also find evidence that consolidation facilitates the exercise of monopsonistic power
vis a vis physicians, whose absolute employment and relative earnings decline in its wake.

Health insurance companies seek to influence the type of care patients receive in order to increase value in relation to cost. Traditional health insurance relies primarily on price mechanisms to affect patients' and doctors' choices, whereas managed care plans such as HMOs, as the name implies, affect choices directly thorough various forms of “managed care.” I investigate the effect of pecuniary and non-pecuniary incentives used by health insurance companies to influence prescription decisions in an important class of pharmaceuticals, cholesterol-lowering drugs called Statins, using a discrete-choice demand model on patient-level data. My results suggest that HMOs are significantly more successful at influencing drug choice than traditional indemnity insurers. In conjunction with volume-contingent discounts given by drug producers, this could explain part of the cost-effectiveness differential between HMOs and traditional indemnity insurers.

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

In this article, I define business method inventions and provide an economic framework to address the question of patentability raised in Bilski. A business method invention is the discovery of a commercial technique that firms can apply to address market opportunities. The initial implementation of a business method invention by firms is a Schumpeterian innovation. I advance several arguments in favor of business method patentability. Business method inventions are an important foundation for entrepreneurship and a channel for the commercialization of scientific and technological inventions. IP protections for business method inventions are essential for economic efficiency, including incentives for invention, efficient allocation of inventions, and transaction efficiencies in the market for discoveries. Business method inventions are significant because they are the foundation of what I term the “Business Revolution”: the augmentation and replacement of human effort in business transactions by computers, communications systems, and the Internet. I conclude that the patent system should continue to provide intellectual property protections for business method inventions just as it does for other types of inventions.
“The question in this case turns on whether a patent can be issued for a claimed invention designed for the business world.”
Bilski v. Kappos 561 U.S._(2010).

In December 2010, one U.S. legislative action was largely overlooked in the popular press: the one-year extension of the 45-cent-per-gallon Volumetric Ethanol Excise Tax Credit (VEETC), commonly known as the “blender’s credit.” Both proponents and opponents of the blender’s credit liked to cite data to support their positions. Proponents pointed out the number of jobs created by new ethanol plants, while opponents cited unfavorable energy balances from the use of ethanol and the overall budgetary impact of the blender’s credit. What was less clear—but potentially much more important than the selective data cited by advocates and critics of ethanol—was the overall impact of the blender’s credit on the U.S. economy. In particular, to what extent did the ethanol subsidy—by influencing the allocation of resources to the ethanol market—act as a drag on efficiency in the U.S. economy?

This case presents a history of ethanol in the U.S. and an overview of the market for ethanol-based motor fuel, including data on demand and supply fundamentals. It also discusses the broader U.S. energy market, as well as the U.S. market for corn. The case reviews other policy interventions besides the ethanol tax credit that have an impact on the market for ethanol-based motor fuel, such as tariffs and mandates. Finally, it surveys the ways other countries around the world, such as Brazil, have supported the use of ethanol-based fuel.

Founded in 1971 and acquired by CEO Howard Schultz in 1987, Starbucks was an American success story. In forty years it grew from a single-location coffee roaster in Seattle, Washington to a multibillion-dollar global enterprise that operated more than 17,000 retail coffee shops in fifty countries and sold coffee beans, instant coffee, tea, and ready-to-drink beverages in tens of thousands of grocery and mass merchandise stores. However, as Starbucks moved into new market contexts as part of its aggressive growth strategy, the assets and activities central to its competitive advantage in its retail coffee shops were altered or weakened, which made it more vulnerable to competitive threats from both higher and lower quality entrants. The company also had to make decisions on vertical integration related to its expansion into consumer packaged goods.

We evaluate the effect of tort reform on employer-sponsored health insurance premiums by exploiting state-level variation in the timing of reforms. Using a dataset of healthplans representing over 10 million Americans annually between 1998 and 2006, we find that caps on non-economic damages, collateral source reform, and joint and several liability reform reduce premiums by 1 to 2 percent each.  These reductions are concentrated in PPOs rather than HMOs, suggesting that can HMOs can reduce “defensive” healthcare costs even absent tort reform. The results are the first direct evidence that tort reform reduces healthcare costs in aggregate; prior research has focused on particular medical conditions.

Although the federal gasoline tax played multiple roles in financing surface transportation infrastructure in the United States, experts did not agree on the tax’s purpose. Some argued that it was essentially a fee for users of the nation’s federally supported highways. Others suggested that it should play a more prominent role in environmental, energy, and transportation policy by correcting for driving-related externalities. Still others suggested that it should be used to reduce the federal budget deficit. Finally, the tax itself had remained at the same level since 1993, and with the Highway Trust Fund virtually insolvent, many experts believed it was time for an increase. The case presents a background on the U.S. federal gasoline tax, an overview of the market for gasoline in the United States, and survey of gasoline taxes in U.S. states as well as several other countries around the world.

Government agencies employ a variety of mechanisms for securing goods and services from the private sector. These include posting prices, reimbursing for costs, and soliciting competitive bids. Procurement of healthcare services offers several unique challenges. The supplier can influence the quantity of services provided. It is often difficult to even specify in advance exactly what services are to be purchased. Lastly, quality is difficult to measure. Healthcare purchasers have deployed a variety of payment mechanisms to cope with these challenges. We apply the theory of procurement to the case of cataract surgery. We recommend implementing a system that combines a gatekeeper with competitive bidding among operating physicians who must perform all necessary services, including treatment for complications, within a global fee. We conclude by discussing the strengths and limitations of this proposal.

Great achievements in knowledge are produced by older innovators today than they were a century ago. Using data on Nobel Prize winners and great inventors, I find that the mean age at which noted innovations are produced has increased by 6 years over the 20th Century. I estimate shifts in life-cycle productivity and show that innovators have become especially unproductive at younger ages. Meanwhile, the later start to the career is not compensated for by increasing productivity beyond early middle age. I further show that the early life-cycle dynamics are closely related to variation in the age at Ph.D. and discuss a theory where accumulations of knowledge across generations lead innovators to seek more education over time. More generally, the results show that individual innnovators are productive over a narrowing span of their life-cycle, a trend that reduces, other things equal, the aggregate output of innovators. This drop in productivity is particularly acute if innovators’ raw ability is greatest when young.