Symbiotic Competition and Intellectual Property, with David Rahman
According to Nordhaus, the optimal life of a patent T* trades off the “embarrassment” of monopoly with motivating innovation, given that imitators would otherwise copy inventions and, in competing with innovators, reduce their profit, hence their incentive to innovate. In this paper, we extend this argument through a semi-endogenous growth model with follow-on innovations, knowledge spillovers and imperfectly elastic labor supply. We calibrate this model to the US economy and find T* between 8 and 14 years, in contrast with the current global standard of 20. A decomposition of T* suggests that knowledge spillovers are quantitatively just as important as market power. We also find that optimal patent policy depends crucially on the distribution of spillovers across industries. As such, we argue for a macroeconomic approach to patent policy.
Perfectly competitive behavior can occur in individual markets that should not be competitive if only analyzed in isolation from the wider economy. To show that, I study an economy where consumers and workers have imperfect access to the firms, and these frictions imply that firms have market power in the labor and product markets. Suppose frictions are higher in the labor market than in the product market. In that case, the firms behave competitively in the product market: frictions in the labor market prevent the firms from altering supply to the degree required to exploit their market power.
Substantial price dispersion exists for transactions of physically identical goods, and in these markets, incumbent sellers sell at higher prices than entrants. This study develops a theory of dynamic competition that explains these facts as results from the same fundamental friction: buyers are imperfectly aware of which sellers are operating, and the degree of awareness about a seller is endogenous. The equilibrium is unique and approximately efficient, featuring randomized pricing strategies where incumbents post higher prices than entrants. The equilibrium converges to a stationary equilibrium. If buyers' awareness does not depreciate and the exit rate of sellers converges to zero, then the stationary equilibrium converges to perfect competition.
Market Microstructure and Informational Efficiency: The Role of Intermediation, with Brian Albrecht
The competitive market is informationally efficient; people only need to know prices to implement a competitive allocation. However, the standard formulation of competitive markets assumes that prices are not set by strategic agents but by "supply and demand" and thus neglects the underlying role of market microstructure. We show that if prices are determined by strategic agents, then intermediation is necessary for markets to achieve informational efficiency. We study two specific market microstructures: a model where trade is intermediated by market-makers and a model of random matching and bargaining. First, we show that an economy where competition among market-makers determines prices can approximate the informational efficiency of the competitive model. Second, we show that as the complexity of the economy increases, matching markets require infinitely more information than the competitive market.
This paper develops a dynamic model of price competition where buyers have constrained consideration sets due to unawareness. Awareness evolves over time and is influenced by word-of-mouth: if more buyers choose to shop at one seller, then unaware buyers are more likely to discover that seller. There are two sellers: an incumbent, who is initially more well known among buyers, and an entrant. In the unique equilibrium, both sellers randomize their pricing strategies, but one seller posts higher expected prices than the other. If the incumbent’s present actions change the future equilibrium path to a large enough degree then it has a strong incentive to undercut the entrant to reduce the growth of buyers’ awareness regarding the entrant. Thus, this model provides microfoundations to the concept of advantage denying motive and relate it to the empirical finding that it takes time for a seller’s demand to grow.
Works in progress
The Minimum Wage as an Instrument for Social Insurance, with Keyvan Eslami
We study the welfare effects of minimum wage policy from an optimal taxation perspective. In a competitive economy without labor frictions, we show that the minimum wage is an effective redistribution tool that cannot be replicated by a tax and transfer system, reiterating previous results. However, by incorporating labor market frictions into this environment via a random search protocol, we show that this result no longer holds: In a setting with labor market frictions, a tax on entrepreneurs and lump-sum rebates to employed workers can achieve the same redistribution effects as an increase of the minimum wage above the stationary equilibrium wage. In this case, the minimum wage is featured in an optimal redistribution policy only if it can be implemented at lower costs than a tax and transfer system.