Research

- Private Contracts in Two-Sided Platforms (with Gastón Llanes), forthcoming in RAND Journal of Economics

We study a platform that connects buyers and sellers, and signs private contracts with sellers. Secret contracting implies interrelated hold-up problems for buyers and sellers that reduce platform profits and welfare. We find that by increasing its control over sellers’ prices, the platform is able to increase price transparency and commit not to behave opportunistically, which increases platform profits and welfare. Therefore, enhancing the market power of a dominant platform may increase welfare, which implies that policy prescriptions for dealing with contractual secrecy are reversed in the case of two-sided platforms. Our results explain the widespread use (and social desirability) of price-forcing contracts, the subscription-based, retailer, and merchant business models, and vertical integration by platforms. We also find that a platform may benefit from an erosion of its market power on one side of the market if this raises the surplus it can offer to the other side. This result obtains when buyers are less informed than sellers about platform prices, in which case an improvement in sellers’ information may lead to worse outcomes for the platform and society.

- Entry into Complementary Good Markets with Network Effects (with Gastón Llanes and Andrea Mantovani), Strategy Science, 2019, 4(4), 262-282

Network effects and complementarities are salient features of the digital economy. We examine whether complementarities can help a firm enter a market with strong network effects and incumbency advantages. We provide conditions under which bundling the network good with a complementary good can be an optimal entry strategy, and we show that this strategy should not be subject to anticompetitive concerns (both in the short and in the long term). When product complementarity is weak enough, we also show that an entrant may prefer a more cooperative approach not based on bundling but rather on extending the complementarity benefits to the incumbent's network good.

- Equivalence Results when Firms Compete in Prices/Quantities and Innovation Effort, Economics Letters, 2019, 181, 208-210

I consider the classical oligopoly game in which firms choose prices or quantities at the same time each chooses an innovation effort that directly establishes its (constant) marginal cost of production. I show how this game can be viewed as completely equivalent to a standard oligopoly game in which firms simply choose prices or quantities given a strictly concave cost of producing output. Hence, the effect of changing parameters unrelated to technology (e.g., the number of competing firms, the size of the market, or the number of merging firms) can be studied with no loss in a setting in which firms cannot innovate and produce using an increasing marginal returns technology. Exactly the same equivalence persists when performing welfare analysis, so the comparison between welfare benchmarks and equilibrium outcomes is the same as when firms choose prices or quantities given a strictly concave cost of producing output.

- Experimenting to Learn about Demand in Duopoly with Forward-Looking Consumers, Journal of Industrial Economics, 2019, 67(2), 279-327 (Online Appendix)

Using a two-period model, I show that competition between two symmetric duopolists trying to learn about unknown features of demand results in an informationally suboptimal process. Because a firm's marginal return to price experimentation equals zero if the rival's price is matched in the first period, myopic symmetric pricing arises in equilibrium even though a firm's expected second-period profit attains a local minimum. Furthermore, forward-looking consumers suffer from ratcheting because their first-period purchase decisions partly reveal their preferences, which exacerbates the informational suboptimality of the firms' experimentation process without affecting their pricing. The role of firm asymmetries is also analyzed.

- Competitive Intensity and its Two-Sided Effect on the Boundaries of Firm Performance (with Joao Montez and Michael Ryall), Management Science, 2018, 64(6), 2716-2733 (Online Appendix)

The new perspective emerging from strategy's value-capture stream is that the effects of competition are twofold: competition for an agent bounds its performance from below, while that for its transaction partners bounds from above. Thus, assessing the intensity of competition on either side is essential to understanding firm performance. Yet, the literature provides no formal notion of "competitive intensity" with which to make such assessments. Rather, some authors use added value as their central analytic concept, others the core. Added value is simple but misses the crucial, for-an-agent side of competition. The core is theoretically complete but difficult to interpret and empirically intractable. This paper formalizes three, increasingly general notions of competitive intensity, all of which improve on added value while avoiding the complexity of the core. We analyze markets characterized by disjoint networks of agents (e.g., supply chains), providing several insights into competition and new tools for empirical work.

- Specialist vs. Generalist Positioning: Demand Heterogeneity, Technology Scalability, and Endogenous Market Segmentation (with Ron Adner and Peter Zemsky), Strategy Science, 2016, 1(3), 184-206

At the heart of competitive strategy is the question of where firms choose to position themselves within an industry. We characterize when generalists desegment markets, and when they are "stuck in the middle" because they are outcompeted by specialists. In our formal equilibrium model, firms face a positioning trade-off between cost and quality that is moderated by a choice of technologies that vary in their scalability. On the demand side, we incorporate consumer heterogeneity via two segments that vary in their willingness to pay for quality. Specialists in our model correspond to Porter's generic strategies, with a "cost leader" targeting the lowend segment and a "differentiator" targeting the high-end segment. Generalists target both segments and hence have greater ability to exploit economies of scale. Central to our analysis is the interplay between the extent of demand heterogeneity and technology scalability. We show that this interplay determines when a Generalist is stuck in the middle; when it dominates from the middle with an intermediate quality level that outcompetes Specialist firms optimally positioned for cost leadership and differentiation; and when it dominates from above with a quality level greater than even that of a Differentiator. We explicitly link positioning on a cost-quality frontier to the value-bar analysis that is widely used in strategy teaching, and show how cost allocation rules impact positioning choices and competitive outcomes.

- Keeping Secrets: The Economics of Access Deterrence (with Emeric Henry), American Economic Journal: Microeconomics, 2016, 8(3), 95-118 (Online Appendix)

Keeping valuable secrets requires costly protection efforts. Breaking them requires costly search efforts. In a dynamic model in which the value of the secret decreases with the number of those holding it, we examine the secret holders' protection decisions and the secret breakers' timing of entry, showing that the original secret holder's payoff can be very high, even when protection appears weak, with implications for innovators' profits from unpatented innovations. We show that the path of entry will be characterized by two waves, the first of protected entry followed by a waiting period, and a second wave of unprotected entry.

- When Do Switching Costs Make Markets More or Less Competitive?, International Journal of Industrial Organization, 2016, 47, 121-151 (Online Appendix)

In a two-period duopoly setting in which switching costs are the only reason why products may be perceived as differentiated, we provide necessary and sufficient conditions for switching costs to lead to higher prices in the first period as well as to higher overall profitability. We show that this happens if and only if switching costs are not too large. We present the only treatment up to date of how switching costs (and only switching costs) affect competition based on the assumption that switching costs differ across consumers, which allows us to illustrate the undesired byproduct of assuming that products exhibit substantial horizontal differentiation. Not only do we draw implications for the classical literature on competition with switching costs, but also for the more recent one that rests upon such an assumption too.

- Equilibrium Innovation Ecosystems: The Dark Side of Collaborating with Complementors (with Andrea Mantovani), Management Science, 2016, 62(2), 534-549 (Online Appendix)

We provide a rationale for the recent burst in the amount of collaborative activities among firms selling complementary products, highlighting factors that may result in a lower profitability for such firms overall. To this end, we examine a game-theoretic model in which firms can collaborate with producers of complementary goods to enhance the quality of the systems formed by their components. Collaboration makes it cheaper to enhance such quality, so building innovation ecosystems results in firms investing more than if collaboration were impossible. In markets reaching saturation, firms are trapped in a prisoner's dilemma: the greater investments create more value, but this does not translate into greater value capture because the value created relative to competitors does not change. We also examine the (dis)advantages for a firm of having open or closed interfaces for the component it sells when the environment is competitive as well as how this is related to the endogenous emergence of two-sided platforms.

- Preemptive Investments under Uncertainty, Credibility and First Mover Advantages, International Journal of Industrial Organization, 2016, 44, 123-137

We present a continuous-time game in which two firms must decide at each instant of time whether to be in or out of a market that expands up to a random maturity date and declines thereafter. Firms are initially inactive, and they differ only in the opportunity costs of using their assets (e.g., owing to different redeployment or resale values). After characterizing the unique Markov perfect equilibrium of the entry and exit game under demand uncertainty, we challenge the result that the threat of preemption can partially or even totally dissipate a first mover advantage. When post-entry profits can be negative, the preemption threat of a firm may become weaker because its rival may force it out of the market after entering. As a result, there may be little or no dissipation of the first mover advantage when post-investment profits are not assumed to be always positive.

- Irreversible Investment in Stochastically Cyclical Markets (with Jianjun Wu), Journal of Economics & Management Strategy, 2012, 21(3), 801-847

This paper studies entry and exit decisions in markets whose demand alternates between growth and decline phases at uncertain times. We introduce a stochastic process that captures these features of random market evolution, and we provide key mathematical results related to first passage times which make the characterization of entry and exit behavior quite simple and straightforward (even when the process is subject to an endogenously determined upper or lower barrier). We characterize entry and exit patterns in a dynamic competitive equilibrium, and we show why our results differ from those obtained if demand follows a diffusion process (e.g., a Geometric Brownian Motion). Despite the stochastic process of the underlying variable has a continuous sample path in both cases, we demonstrate in our setting that positive rates of entry and exit discontinuously fall to zero owing to informational overshooting. Another advantage of our framework is that it can explain discontinuities in firm values even if sample paths are continuous. Our framework is also amenable to empirical implementations (as we show using Corts' 2008 offshore oil drilling application), and to an intuitive interpretation of optimal (dis) investment rules based on Bernanke's (1983) "bad news principle of irreversible investment."

- Real Options with Unknown-Date Events (with Óscar Gutiérrez), Annals of Finance, 2011, 7(2), 171-198

The real options literature has provided new insights on how to manage irreversible capital investments whose payoffs are uncertain. Two of the most important predictions from such theory are: (i) greater risk delays a firm's investment timing, and (ii) greater risk increases the option value of waiting. This paper challenges such conclusions in a setting in which the relevant random variable is the arrival time of an unfavorable event. In particular, we model situations in which a firm must choose the time at which to invest in a project whose profit grows at a known rate until a random date is reached and decays thereafter, which may be representative of stochastic product or industry life cycles. This is a novel framework in which a firm can update its beliefs about the profitability of an investment opportunity by simply waiting to invest. Thus, a wait-and-see approach allows the firm to capitalize on favorable market evolutions and avoid adverse ones to some extent. Our framework is simple and does not require using stochastic calculus, which allows for an economic interpretation of optimal investment policies for the cases of one-time and sequential investments.

- Entry Patterns over the Product Life Cycle (with Óscar Gutiérrez), The Manchester School, 2009, 77(5), 594-610 (Online Appendix)

We study a game-theoretic real options model of new market entry based on empirical evidence of demand for a new product growing over time and eventually falling. Yet, firms do not know ex ante when this will occur, which creates incentives to update information by delaying irreversible entry. By assuming that the construction of a new productive plant takes some time and is unobservable in the meantime, while operation in the market is not, we show that entry rates increase or decrease under certain conditions related to the rate at which flow profits decrease as more firms enter the industry.