Heterogeneous Firm Responses to Technological Change: Market Structure and Long-Run Dynamics

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2018

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Abstract

Adaptation or Death? Bookstore Chains Meet Online Competition

E-commerce is the fastest growing subsector within retail trade, yet the exact nature of competition between physical stores and the online channel is thinly studied empirically. Following a period of rapid growth, national aggregate establishment counts for the bookstore industry declined by over 40 % between 1994 to 2012. I measure the differential effect of online competition on brick-and-mortar bookstores, using unique establishment-level data between 1987 to 2012 combined with measures of e-commerce levels from Forrester Research's Technographics Survey. To trace out the impact of e-commerce, I exploit geographic and temporal variation in the level of online activities. I find that online competition has a larger negative effect on large chain stores than on single-unit stores. Furthermore, bookstores that were the most insulated from online competition are precisely the stores that sell a wide array of products outside of books, such as food, gift cards, and clothing. In response to surging online competition, stores have expanded their non-book product offerings over time. However, the largest bookstores chains were still most negatively impacted given that they were relative inefficient at non-book retailing. I develop a dynamic oligopoly model of the bookstore industry to quantify the effect of online retail on equilibrium market structure. One implication of the model is that the rise of online competition has disproportionately reduced long-run profitability for the large chains by over 30 % in the last time period of study, despite their non-book presence increasing the most over time.

Do Merger Opportunities Spur Hard Drive Firms to Innovate More?

The hard drive industry, the primary supplier of storage devices in the digital world, is an industry with rapid technological progress \ has been called the extreme sport of the technological industry. Through a series of mergers and consolidations, the number of hard drive manufacturers shrunk from 10 overall in 1997 to 4 by 2010. Despite the series of mergers and consolidations which industry insiders speculate would soften competition and raise the returns to R & D, there appears to be a decline in capacity growth, the main innovation outcome measure. This paper assesses whether the increase in market power through successive merger opportunities enhances or diminishes innovation incentives. A second goal is to assess the dynamic efficiency of mergers. Consumer surplus, producer surplus, and aggregate surplus in industries with mergers are compared against counterfactual worlds with no merger.

To disentangle the effects that the expectation of mergers and possible decline in R & D productivity have on innovation outcome, I develop a model of firm's investment behavior with endogenous mergers. The investment framework incorporates endogenous mergers in a setting where, when a merger opportunity arises, firms in the merger pair agrees to the Nash Bargaining Solution with equal bargaining power. I implement an approximate dynamic programming algorithm to compute the equilibrium investment strategies for the computational dynamic model.

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Wu, Sherry (2018). Heterogeneous Firm Responses to Technological Change: Market Structure and Long-Run Dynamics. Dissertation, Duke University. Retrieved from https://hdl.handle.net/10161/17442.

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