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This paper studies access pricing under three regimes: regulated access (VSR), negotiated access with discriminatory pricing (VSD) and negotiated access with non-discriminatory pricing (VSN). We compare each regime along three metrics: network quality, consumer surplus, and social welfare. To do so, we use a three-stage game, in which the regulator can commit to the access tariff under VSR and the network firm and the transport operators need to bargain over the access tariff under VSD and VSN. Each approach is second best, resulting in equilibrium qualities and quantities that are less than first-best levels, and the comparison between regulated and negoitated access is ambiguous. However, under a wide range of circumstances VSD and VSN result in greater investment to upgrade network quality than VSR. Computational analysis reveals that if the bargaining power of the network firm under negotiated access is sufficiently strong, VSD tends to result in higher social welfare than VSR. However, VSR often results in higher consumer surplus.

This chapter introduces a finite-horizon (three-period) model of corporate campaigns in which an activist targets a single firm. The activist cares solely about the social benefits generated by the private regulation the firm is capable of undertaking. A firm can undertake costly effort in each period to improve its reputation in the subsequent period. The activist could undertake costly effort to impair the firm's reputation. As compared to a setting in which the firm faced no activist, the firm chooses a higher level of private regulation in the first period and, in expectation, a higher level of private regulation in the second period as well. The authors interpret this increase as self-insurance against reputational harm. The activist has a strategic effect on the firm in the second period: if the campaign impairs the firm's reputation, the firm will undertake more private regulation than it would have had its reputation remained the same or even improved.

This chapter models the interaction between a firm and activist using an infinite-horizon dynamic stochastic game. The firm enhances its reputation through private regulation, but the firm has an incentive to coast on its reputation by private regulation as its reputation grows. The activist can harm the firm’s reputation through criticism, which impairs the firm’s reputation on the margin, and confrontation, which can trigger a crisis that can severely damage the firm’s reputation. Criticism and confrontational activity are shown to be imperfect substitutes. The more patient the activist, or the more passionate about externality reduction, the more likely the activist is to rely on confrontation. The more patient the firm, the more likely that it will be targeted by an activist that relies on confrontation. The chapter also explores whether the activist might reward the firm with praise.

In recent years, many activists have concluded that public processes, such as new legislation, regulatory enforcement, or lawsuits, respond too slowly and can be blocked too easily by special interests. In response they have turned to private politics instead. Private politics refers to actions by private interests, such as activists and nongovernmental organizations (NGOs), that target private agents, typically firms. This chapter describes two key elements of private politics: corporate campaigns and private regulation. It discusses the logic of corporate campaigns, how firms endeavor to respond to them, and empirical evidence on the consequences of campaigns. It then turns to private regulation, and its close counterpart, corporate social responsibility. The chapter raises a puzzle about corporate social responsibility that the models in later chapters will help resolve. The chapter concludes by providing an overview of the remainder of the book.

This chapter summarizes each preceding chapter and then offers lessons for scholars and practitioners. Scholars should note the value of dynamic modeling in understanding interactions between activists and firms in the realm of private politics. Activists and firms can use the insights of the model to approach corporate campaigns more strategically. For example, for activists, the framework suggests that efforts aimed at hurting the reputations of firms can do more than serve an ideological aim at making companies look bad, or as a device to threaten harm. Activists can play the role of private regulators when effective public regulation is missing. For leaders of firms, the analysis highlights that corporate social responsibility and other initiatives can serve to enhance a firm’s reputation, but they can also be viewed as a form of risk management in the face of activist pressures that can potentially harm reputation.

This chapter extends the model to include two potential targets for campaigns. Activists targeting firms in different industries are shown to be likely to focus on the firm with the weaker reputation or greater sensitivity to reputation. The latter finding rationalizes the practice of secondary targeting in which an activist targets a consumer-facing company that cares a lot about its reputation rather than the companies in its supply chain creating the harm. In the case of two potential targes in the same industry, the competitive interdependence between the two firms affects the targeting decision. When it is weak—e.g., when firms sell differentiated products—the activist tends to target the firm whose characteristics predispose it to engage in more private regulation than its rival (e.g., the more patient firm, the market leader). When competitive interdependence is strong—as in commodities industries—the activist targets the firm predisposed toward less private regulation.

This book presents a theory of corporate campaigns in which activists use campaigns as a means of harming a firm’s reputation in hope of motivating it to increase its private regulation—corporate social responsibility (CSR) activities aimed at reducing negative externalities or other forms of social harm caused by the firm. The analysis is dynamic in nature because interactions between activists and firms unfold over time. This captures the idea that a firm’s reputation is an asset that can be built or harmed over time. As a firm’s reputation grows, the firm tends to coast on its reputation by reducing its private regulation. This explains why a pragmatic activist—one who cares about the outcome of private regulation and not about the firm’s reputation per se—would find it worthwhile to harm the firm’s reputation. Chapter 2 lays out a three-period model of corporate campaigns to build intuition about the interaction of the activist and the firm. Chapter 3 extends the model to an infinite horizon and allows the activist to use various tactics: criticism, which has a potentially mild impact on the firm’s reputation; confrontation, which can cause a reputational crisis in which the firm’s reputation can be dramatically impaired; and rewards, which increase a firm’s reputation. Chapter 4 analyzes whether the presence of the activist increases or diminishes social welfare. Chapter 5 explores how the activist would choose among potential target firms in the context of different forms of competition between firms. Chapter 6 summarizes and offers lessons for scholars and practitioners.

Using the three-period model from Chapter 2, this chapter explores whether the presence of activists enhances or harms social welfare. Campaigns have both static and dynamic effects which have fairly different but complementary effects on social welfare. The canonical case in which an activist campaign increases welfare involves a firm that cares intensely about protecting itself against reputation loss, an activist that is not excessively passionate, and a campaign aimed at addressing a high-stakes negative externality. A sufficiently high marginal benefit from private regulation is necessary for an activist to be socially beneficial, while campaigns resulting in private regulation that is essentially redistributive necessarily reduce social welfare.

We present a model in which health insurance allows liquidity-constrained patients access to otherwise unaffordable treatments. A monopolist's profit-maximizing price for an insured treatment is greater (for any cost sharing) than it would be if the treatment was not covered. Consumer surplus may also be less. These results are based on a different mechanism than would operate in a standard moral hazard model. Our model also provides an economic rationale for the common claim that pharmaceutical firms set prices that exceed the value their products create. We show this problem is exacerbated when health insurance covers additional monopoly-provided services.

Describes market experiments conducted by a major credit card issuer. In a typical experiment, the issuer sends out hundreds of thousands of solicitations based on information received from credit reporting agencies (e.g., credit score, past delinquencies, etc.). Selection bias is striking: the average risk profile of those responding to higher interest rates is significantly worse than that of respondents to lower rates. Tracking respondents for 27 months after the experiment, respondents to higher rates displayed significantly higher delinquency and bankruptcy rates. Based on a research paper by Larry Ausubel.

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.The case can be used to discuss the incidence of the gasoline tax, as well as its role as a Pigouvian tax to deal with negative externalities related to gasoline consumption and driving. There is sufficient data in the case to enable students to analyze the incidence of the federal gasoline tax and to determine the socially efficient level of the tax in light of externalities related to gasoline consumption and driving.

Rede Alta Velocidade, SA (RAVE), the state-owned company responsible for planning and developing a major high-speed rail project in Portugal, must persuade both public officials and lenders that the project is worth undertaking. It must also make a recommendation on the appropriate organizational form for the enterprise. Specifically, it must determine the role of the Portuguese government in financing and operating the high-speed rail network, with options ranging from full development and management of the project by the public sector to completely private development and management. Lying in between these two polar cases were a variety of hybrid models, often referred to as public-private partnerships (PPPs). Using data in the case, students have the opportunity to perform a benefit-cost analysis of the project. They also must think carefully about the optimal role of the government in a major new infrastructure project.After analyzing and discussing the case, students will be able to: Understand the nature of a global public good Perform a back-of-the-envelope benefit-cost analysis of polio eradication Discuss the appropriate strategy for eradicating an infectious disease Apply game theory to analyzing which countries would be likely to contribute funds toward global polio eradication Discuss the role of private organizations in the provision of global public goods

The years 2011, 2012, and 2013 witnessed both significant developments and setbacks in global polio eradication efforts. On the positive side, January 13, 2012, marked a full year since India had detected a case of wild poliovirus. On the negative side, polio continued to be endemic in three countries-Pakistan, Afghanistan, and Nigeria-and in those countries the goal of eliminating polio seemed more challenging than ever. Between December 2012 and January 2013, sixteen polio workers were killed in Pakistan, and in February 2013, nine women vaccinating children against polio in Kano, Nigeria, were shot dead by gunmen suspected of belonging to a radical Islamist sect. In addition, after a 95 percent decline in polio cases in 2010, the number of cases in Nigeria rebounded in 2011. Recognizing that polio was unlikely to be eliminated in these countries in the near term, the Global Polio Eradication Initiative moved its target date for eradication from 2013 to 2018.These setbacks sparked a debate about the appropriate strategy for global eradication of polio. Indeed, some experts believed that recent setbacks were not caused by poor management but were instead the result of epidemiological characteristics and preconditions that might render polio eradication unachievable. These experts argued that global health efforts should focus on the control or elimination of polio rather than on the eradication of the disease.This case presents an overview of polio and the Global Polio Eradication Initiative and recounts the successful effort to eradicate smallpox. The case enables a rich discussion of the current global strategy to eradicate polio, as well as the issue of whether eradication is the appropriate global public health objective. More generally, the case provides a concrete example of a particular type of global public good, namely infectious disease eradication.After analyzing and discussing the case, students will be able to: Understand the nature of a global public good Perform a back-of-the-envelope benefit-cost analysis of polio eradication Discuss the appropriate strategy for eradicating an infectious disease Apply game theory to analyzing which countries would be likely to contribute funds toward global polio eradication Discuss the role of private organizations in the provision of global public goods

Motorola invented mobile telephones and by the end of the 1980s came to dominate the mobile handset market with more than an 80% market share. A few years later, Motorola faced a key strategic choice of whether to focus its considerable resources on consolidating its dominance of the analog handset market or to shift these resources to emerging digital handset technologies. This decision shaped the handset industry and the role Motorola will play in it for the next decade.To illustrate incumbents' puzzling inertia toward initiating and participating in disruptive technologies.

In 1996, the St. Louis-based manufacturer Zoltek launched a massive expansion of capacity to produce commercial-grade carbon fiber, a composite material used to produce a wide variety of end products ranging from sporting goods to windmill blades. Zoltek's goal was to become the dominant firm in a market whose growth was expected to be spectacular starting in the late 1990s. Describes Zoltek's major strategic moves in the mid-1990s and provides a possible example of the Stackelberg leadership model from oligopoly theory.To explore the economic logic of a major capacity commitment.

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.Provides a vehicle for teaching the basic economic model of government subsidies using supply and demand curves. Enable students to determine the deadweight loss of the ethanol tax credit for the year 2006. Enables discussion of the possible benefits of the ethanol tax credit including reducing reliance on foreign oil and reducing carbon emissions. Careful interpretation of the economic evidence in the case is essential for students to develop a coherent point of view on these potential benefits.

In May 2009 the Office of the Chief Actuary for the U.S. Social Security Administration projected that by 2016 the Social Security Trust Fund would begin to spend more money than it took in through tax revenue. Further, by 2037 the balance in the Trust Fund would be down to zero, necessitating cuts in benefits to retirees. The U.S. Social Security system thus faced a long-term financial problem that needed to be addressed sooner rather than later. The experience of other countries in reforming their own systems of old-age insurance might provide some guidance for U.S. policymakers as they attempt to deal with the long-run fiscal challenges facing the U.S. Social Security system. This case focuses on reforms of old-age insurance systems in three countries: Australia, Mexico, and Sweden.This case gives students the opportunity to debate the variety of approaches that could be used to reform the U.S. Social Security system. It also gives insight into how countries around the world have structured their old-age insurance systems.

The case describes the competitive advantages that U.S. farmers enjoy in the global cotton industry and the subsidies they receive from the U.S. federal government. Arguments for and against the subsidies are presented in the context of global competition. The case includes the data needed to estimate a supply curve for 2004 cotton production and predict the average 2004 cotton price using total cotton consumption for 2004. Students can also estimate the result of eliminating the U.S. cotton subsidies on the average 2004 cotton price.Students have the opportunity to learn about the history and structure of U.S. cotton subsidies as well as their impact on global cotton prices. Students also are able to practice building and interpreting an industry supply curve.

Considers the competitive strategy of the Channel Tunnel just prior to the time it opened for business in 1994. Focusing specifically on the tunnel's Le Shuttle service for freight and passenger traffic, gives students an opportunity to explore whether Le Shuttle should follow a premium pricing strategy relative to the cross-channel ferries, match the ferries' prices, or undercut the ferries' prices. Following a section on the history of the tunnel's construction, provides an in-depth discussion of the cross-channel ferry business and the Le Shuttle services. Concludes by posing the question: What pricing strategy should Le Shuttle follow?To illustrate the key drivers of price competition in a differentiated products industry: differences in marginal cost; vertical differentiation among competitors; the degree of horizontal differentiation in the market; and the sources and sustainability of competitive advantage.

Between May 2000 and January 2001, the recently deregulated electricity market in the state of California experienced what many commentators have characterized as a meltdown. Over that period, wholesale electricity prices increased over 500%, power emergencies and the threat of rolling blackouts became daily occurrences, and the state's largest investor-owned utility was thrust into bankruptcy. Details California's attempt to deregulate its wholesale and retail electricity markets.To identify the drivers of increases in the wholesale price of electricity in California and to provide an opportunity to diagnose the causes of California's crisis.

In early 2000, Asahi's senior management was under considerable pressure to launch its own brand of happoshu, a low-end form of beer that enjoyed certain tax benefits under Japanese law. Unlike its major rivals, all of whom had launched happoshu brands in the previous few years, Asahi steadfastly refused to enter the happoshu category.To explore the economic logic of Asahi's strategy. To study how the entry of a new product affects price competition across two closely related product categories (beer and happoshu) and how an anticipated change in price competition might affect the economics of the launch decision.

This paper compares alternative ways of structuring competition in a railway system: vertical separation (VS) and horizontal separation (HS). We compare each structure in terms of its impact on network quality, consumer surplus and social welfare. To do so, we use a two-stage game under HS and a three-stage game under VS to derive Nash equilibrium network qualities, consumer surplus and social welfare, respectively. We highlight four distinct incentive effects that shape network quality under each structure, and we point out that, on balance, they tend to favor higher network quality under HS. However, intensity of transport service competition under each system also plays a critical role in shaping consumer surplus and social welfare. The best case for HS occurs when there is a moderate amount of price competition between the vertically integrated systems, while the best case for VS occurs when there is intense price competition between transport operators. Using computational analysis, we show that it is more likely that HS dominates VS on all three performance metrics.

To detect the presence of predatory pricing, antitrust authorities and courts routinely ask whether a firm sacrifices current profit in exchange for the expectation of higher future profit following the exit of its rival. Because predatory pricing is an inherently dynamic phenomenon, we show in this paper how to construct sacrifice tests for predatory pricing in a modern industry-dynamics framework along the lines of Ericson and Pakes (1995). In particular, we adapt the definitions of predation due to Ordover and Willig (1981) and Cabral and Riordan (1997) to this setting and construct the corresponding sacrifice tests.

We study government optimal subsidy policies for research programs in the face of servere information asymmetry---when firms have private information about the likelihood of project viability but the government cannot form a unique prior belief about this likelihood. The paper makes two contributions. First, we show that the way in which RD under R&D competition, the first-best outcome can also be achieved through a simple combination of a matching subsidy and an unrestricted subsidy. If the shadow cost of public funds is positive, an ex post equilibrium in general does not exist either under monopoly or competition. We then consider two alternative policy decision criteria that are appropriate for belief-free games: rationalizability and max-min criteria. We argue that the max-min criteria is preferable in our context, and by way of doing so establish that the set of max-min subsidy policies under either monopoly or competitive R&D consists entirely of simple pure matching subsidies. We further establish that allowing firms to form an R&D consortium reduces the matching rate for the highest max-min subsidy, suggesting that cooperative R&D has the potential to economize on the shadow costs of public funding of subsidies.

Provides a narrative description of the price war in the U.S. airline industry that broke out in Spring 1992.To use in competitive strategy or microeconomics classes to explore the root causes of price wars.

This paper studies access pricing under three regimes: regulated access (VSR), negotiated access with discriminatory pricing (VSD) and negotiated access with non-discriminatory pricing (VSN). We compare each regime along three metrics: network quality, consumer surplus, and social welfare. To do so, we use a three-stage game, in which the regulator can commit to the access tariff under VSR and the network firm and the transport operators need to bargain over the access tariff under VSD and VSN. Each approach is second best, resulting in equilibrium qualities and quantities that are less than first-best levels, and the comparison between regulated and negoitated access is ambiguous. However, under a wide range of circumstances VSD and VSN result in greater investment to upgrade network quality than VSR. Computational analysis reveals that if the bargaining power of the network firm under negotiated access is sufficiently strong, VSD tends to result in higher social welfare than VSR. However, VSR often results in higher consumer surplus.

Predatory pricing--a deliberate strategy of pricing aggressively in order to eliminate competitors--is one of the more contentious areas of antitrust policy and its existence and efficacy are widely debated. The purpose of this paper is to formally characterize predatory pricing in a modern industry dynamics framework. We endogenize competitive advantage and industry structure through learning-by-doing. We first show that predation-like behavior arises routinely in our model. Equilibria involving predation-like behavior typically coexist with equilibria involving much less aggressive pricing. To disentangle predatory pricing from mere competition for efficiency on a learning curve we next decompose the equilibrium pricing condition. Our decomposition provides us with a coherent and flexible way to develop alternative characterizations of a firm’s predatory pricing incentives, some of which are motivated by the existing literature while others are novel. We finally measure the impact of the predatory pricing incentives on industry structure, conduct, and performance. We show that forcing a firm to ignore these incentives in setting its price can have a large impact and that this impact stems from eliminating equilibria with predation-like behavior. Along with the predation-like behavior, however, a fair amount of competition for the market is eliminated. Overall, the distinction between predatory pricing and pricing aggressively to pursue efficiency is closely related to the distinction between the advantage-building and advantage-denying motives that our decomposition of the equilibrium pricing condition isolates and measures.

This paper analyzes the relationship between network quality and organizational structure in railway systems. We consider two options: vertical separation and horizontal separation. We derive the Nash equilibrium network qualities in a two-stage game. In general, the comparison of network quality between the two organizational structures is ambiguous. However, unless the regulated access fee under vertical separation is sufficiently large, horizontal separation is likely to dominate vertical separation. This is reinforced if horizontal separation enables service complementarities.

This paper compares R&D competition and cooperation when firms can devote resources to a ‘safe’ investment or a risky R&D investment. When the discovery of a new product creates positive externalities on non-discovering firms, equilibrium investment flow, ex ante investment, and welfare under R&D competition are less than or equal to what they are under research cooperation. With negative externalities, R&D cooperation results in the same or lower ex ante investment than under R&D competition, and social welfare may also be less. Our results have relevance for empirical studies of the impact of R&D cooperation on R&D outcomes.

We present a model in which prospective patients are liquidity constrained, and thus health insurance allows patients access to treatments and services that they otherwise would have been unable to afford. Consistent with large expansions of insurance in the U.S. (e.g., the Affordable Care Act), we assume that policies expand the set of services that must be covered by insurance. We show that the profit-maximizing price for an innovative treatment is greater in the presence of health insurance than it would be for an uninsured population. We also show that consumer surplus is less than it would be if the innovation was not covered. These results show that even in the absence of moral hazard, there are channels through which insurance can negatively affect consumer welfare. Our model also provides an economic rationale for the claim that pharmaceutical firms set prices that exceed the value their products create. We empirically examine our model's predictions by studying the pricing of oncology drugs following the 2003 passage of Medicare Part D. Prior to 2003, drugs covered under Medicare Part B had higher prices than those that would eventually be covered under Part D. In general, the trends in pricing across these categories were similar. However, after 2003 there was a far greater increase in prices for products covered under Part D, and as result, products covered by both programs were sold at similar prices. In addition, these prices were quite high compared to the value created by the products---suggesting that the forced bundle of Part D might have allowed firms to capture more value than their products created.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We model the interaction between a profit-maximizing firm and an activist using an infinite-horizon dynamic stochastic game. The firm enhances its reputation through “self-regulation”: voluntary provision of an abatement activity that reduces a negative externality. We show that in equilibrium the externality-reducing activity is subject to decreasing marginal returns, which can cause the firm to “coast on its reputation,” that is, decrease the level of externality-reducing activity as its reputation grows. The activist, which benefits from increases in the externality-reducing activity, can take two types of action that can harm the firm’s reputation: criticism, which can impair the firm’s reputation on the margin, and confrontation, which can trigger a crisis that may severely damage the firm’s reputation. The activist changes the reputational dynamics of the game by tending to keep the firm in reputational states in which it is highly motivated to invest in externality-reducing activity. Criticism and confrontational activity are shown to be imperfect substitutes. The more patient the activist or the more passionate it is about externality reduction, the more likely it is to rely on confrontation. The more patient the firm and the more important corporate citizenship is to firm’s brand equity, the more likely that it will be targeted by an activist that relies on confrontation.

Even mature industries seldom settle down into a long-run steady state. Fluctuations in demand disrupt the status quo and call for firms to adjust their capacities on an ongoing basis. We construct a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment decisions. In addition to uncertainty about the evolution of demand, a firm faces strategic uncertainty concerning the decisions of its rivals. We numerically solve the model for its Markov-perfect equilibria. For one set of parameter values, three equilibria exist, and while all of them have simple, intuitive structures, they exhibit widely varying patterns of response to demand shocks. At one extreme, one firm dominates the industry almost as a monopolist and changes its capacity to accommodate demand. At the other extreme, the larger firm keeps its capacity nearly constant while the smaller firm acts as the swing producer.

Psychological and experimental evidence, as well as a wealth of anecdotal examples, suggests that firms may confound fixed, sunk, and variable costs, leading to distorted pricing decisions. This article investigates the extent to which market forces and learning eventually eliminate these distortions. We envision firms that experiment with cost methodologies that are consistent with real-world accounting practices, including ones that confuse the relevance of variable, fixed, and sunk costs to pricing decisions. Firms follow “naive” adaptive learning to adjust prices and reinforcement learning to modify their costing methodologies. Costing and pricing practices that increase profits are reinforced. In some market structures, but not in others, this process of reinforcement causes pricing practices of all firms to systematically depart from standard equilibrium predictions.

This paper studies the choice of organizational forms in a multi-task principal-agent model. We compare a functional organization in which the firm is organized into functional departments such as marketing and R&D to a product-based organization in which the firm is organized into product lines. Managers' compensation can be based on noisy measures of product-line profits. Measures of a functional area's contribution to total profits are not available, however. This effect favours the product organization. However, if there are significant asymmetries between functional area contributions to organizational success and cross-product externalities within functions, organizing along functional lines may dominate the product organization. We also consider the effects of diseconomies of span of control and cross-functional complementarities. Diseconomies of span of control sometimes favours the product organization and sometimes favour the functional organization. Cross-functional complementaries tend to make the product organization relatively more profitable.

In this paper we describe the pass-through behavior of a major U.S. supermarket chain for 78 products across 11 categories. Our data set includes retail prices and wholesale prices for stores in 15 retail price zones for a one-year period. For the empirical model, we use a reduced-form approach that focuses directly on equilibrium prices as a function of exogenous supply- and demand-shifting variables. The reduced-form approach enables us to identify the theoretical pass-through rate without specific assumptions about the form of consumer demand or the conduct of a category-pricing manager. Thus, our measurements of pass-through are not constrained by specific structure on the underlying economic model. The empirical pricing model includes costs of all competing products in the category on the right-hand side (not only the cost of the focal brand) and yields estimates of both own-brand and cross-brand pass-through rates. Our results provide a rich picture of the retailer's pass-through behavior. We find that pass-through varies substantially across products and across categories. Own-brand pass-through rates are, on average, more than 60% for 9 of 11 categories, a finding that is at odds with the claims of manufacturers about retailers in general. Importantly, we find substantial evidence of cross-brand pass-through effects, indicating that retail prices of competing products are adjusted in response to a change in the wholesale price of any given product in the category. We find that cross-brand pass-through rates are both positive and negative. We explore determinants of own-brand and cross-brand pass-through rates and find strong evidence in multiple categories of asymmetric retailer response to trade promotions on large versus small brands. For example, brands with larger market shares, and brands that contribute more to retailer profits in the category, receive higher pass-through. We also find that trade promotions on large brands are less likely than small brands to generate positive cross-brand pass-through, i.e., induce the retailer to reduce the retail price of competing smaller products. On the other hand, small share brands are disadvantaged along three dimensions. Trade promotions on small brands receive low own-brand pass-through and generate positive cross-brand pass-through for larger competing brands. Moreover, small share brands do not receive positive cross pass-through from trade promotions on these larger competitors. We also find that store brands are similarly disadvantaged with respect to national brands.

This paper analyzes electric utility stock price reactions to events preceding the passage of the Energy Policy Act of 1992, a development that precipitated the onset of competition in the wholesale sector of the electric utility industry and accelerated the pace toward state-level deregulation of the retail sector. For the industry as a whole, we find that, at worst, investors had neutral reactions to events preceding wholesale deregulation. However, stock price reactions vary systematically with differences in incumbent utilities' marginal costs, though not with differences in fixed costs or purchased power costs. These results are consistent with the notion that new technologies have substantially reduced barriers to entry into the electric power generation industry, rendering capital cost advantages of incumbent utilities vulnerable to being neutralized by new entrants. However, marginal cost advantages are more likely to be sustainable because they are likely to be driven by inimitable locational advantages. Copyright 2001 by the University of Chicago.