Job Market Paper

Spinoffs and (dis)Economies of Scope in the U.S. Medical Laser Industry  [Draft]
solo-authored
presented at: Eastern Economics Association (EEA) Annual Conference 2024; Triangle Micro Conference 2024

[Abstract] I provide an empirical framework to study firm's decision to spin off their division as semi-autonomous units that is driven by product and quality differences between the firm's origin and branch markets. I estimate the two forces with a novel dataset in the U.S. Medical Laser Industry, in which quality and product type differences between markets are reasonably well-defined from the wavelength ranges of each products and the demand estimation coefficient of three key characteristics of each laser products (irradiance, diameter, and output). I construct a market-level entry model similar to Mazzeo, Seim, and Varela (2018), in which firms, endowed with technology level and its market of origin, can choose which markets to operate on, how much to invest, and whether or not to spin off one of their markets as a separate entity. The fragmented nature of medical laser markets across wavelength range allows me to mute potential market power shifts as a result of the spinoff decisions and attribute them solely to the operational cost of producing in multiple markets with or without spinoffs. Estimation shows that, without spinning off, firms incur additional 70 percent of their fixed cost to produce products of different quality level outside their respective origin market, which often overshadows a 10 percent discount of fixed cost they enjoy in producing in branch markets of similar type to their origin market. Counterfactuals simulating a no-spinoff scenario reveal a 17.9 percent drop in total firm profit and a 7.6 percent decrease in overall welfare. At the market level, spinoffs are crucial for facilitating entry and competition in markets with one or no origin firms, as these experience a 9.3 percent decrease in consumer surplus when spinoffs are prohibited. In a monopolist setting, firm profit drops by 5.73 percent, while the fixed cost accrued increases by 59.1 percent.