Darren Filson

Equity Links and Information Acquisition in Biotechnology Alliances

We use a simple model of collaborative innovation to structure an empirical analysis of minority equity links in biotechnology alliances between clients and R&D firms. In the model, an equity link is an investment in information acquisition: it improves the ability of the client to learn about the R&D firms ability and the alliance projects quality. The model generates several testable hypotheses about how the R&D firms project characteristics and previous alliances affect the use of equity links in new alliances. We test the hypotheses using a large data set of biotechnology alliances and find empirical support.

Product and process innovations in the life cycle of an industry

Abstract Filson [Rev. Econ. Dyn. 4 (2001)] uses industry-level data on firm numbers, price, quantity and quality along with an equilibrium model of industry evolution to estimate the nature and effects of quality and cost improvements in the personal computer industry and four other new industries. This paper studies the personal computer industry in more detail and shows that the model explains some peculiar patterns that cannot be explained by previous life-cycle models. The model’s estimates are evaluated using historical studies of the evolution of the personal computer industry and patterns that require further model development are described.

The Impact of E-Commerce Strategies on Firm Value: Lessons from Amazon.com and its Early Competitors

Which strategies generate value in e-commerce environments? In a step towards answering this question, this paper estimates the impacts of several competitive strategies on the values of the well-known Internet retailer Amazon.com and three of its early competitors, BarnesandNoble.com, CDNOW, and N2K, from their IPO dates until exit or the end of 2001. The strategies analyzed include alliance formation, offline expansion, pricing, product line expansion, and service improvement. The results provide insight into the usefulness of various ways of competing online and could be applied in other settings where firms enter new environments about which they have little information.

Sensitivity to Costs of Fighting versus Sensitivity to Losing the Conflict

Nations differ in their tolerance for costs of fighting and in their willingness to make concessions. We use a bargaining model of war to analyze these sensitivities. Incentives created by heightened sensitivity to costs often—but not always—contradict those created by heightened sensitivity to making concessions. The results establish the effects of the two sensitivities on key conflict variables such as the frequency with which nations initiate conflicts, are targeted, engage in long or short wars, or receive favorable or unfavorable settlements. It is often asserted that democratic leaders are more sensitive to costs and conflict outcomes than autocrats. If so, then our model suggests that when the two sensitivities reinforce each other, empirical work will yield robust effects of regime type on conflict variables, but when the two sensitivities counter each other, estimated effects will be more ambiguous unless researchers consider which sensitivity dominates.

Horizontal mergers and exit in declining industries

Previous work on exit in declining industries has neglected mergers. This paper examines a simple model that illustrates how mergers can affect the order of exit. The model also predicts which declining industries experience horizontal mergers. Mergers are more likely if (1) the inverse demand curve is steep at high levels of output and flat at low levels of output; (2) the industry declines slowly early on and rapidly later on; and (3) market concentration is high. The conditions that make mergers privately profitable also tend to make them socially optimal.

Group consumption, free-riding, and informal reciprocity agreements

We examine conditions under which group consumption is likely to involve informal reciprocity agreements rather than a price system. Our model shows that reciprocity agreements are used when transactions costs are high, the good is inexpensive, demand is inelastic, the group continues to interact over time, the consumers are patient, the time between interactions is short, and the group is small and homogeneous. Further, the results suggest that reciprocity agreements are likely to involve goods that are consumed along with other group benefits, such as companionship. We use the model to analyze overlapping social networks and investments in social capital.

The Dynamics of Bargaining and War

Filson and Werner (2002) introduce a formal model of bargaining and war to explore conditions under which states that can negotiate settlements choose to initiate and terminate violence. Filson and Werner (2004) apply the model to obtain testable hypotheses about the impact of regime type on war onset, duration, and outcomes. The model could provide a basis for a formal rational actor model of power transition with economic and political variables. However, additional dynamic structure would have to be added; Filson and Werner (2002, 2004) focus on simple environments. In this paper we begin to consider more complex dynamic environments using computational techniques. In doing so, we explore the conditions under which wars endure. The results clarify how the initial distribution of resources (power) and benefits, beliefs, and regime type affect whether wars begin, how quickly they end, and what deals are made.

The impacts of the rise of Paragraph IV challenges on startup alliance formation and firm value in the pharmaceutical industry

Court decisions in 1998 encouraged generic producers to pursue Paragraph IV patent challenges. A follow-up decision in 2000 marked the first successful challenge involving a blockbuster and brought further attention to this pathway for generic entry. We consider the impacts of these decisions on R&D-based startups, and we focus on the propensity to form alliances as a primary channel of impact. We find substantial negative impacts on alliance formation and firm value, and only the first events impacts are restricted to small molecules. The results suggest that policy analyses in settings with R&D-based startups should consider impacts on alliance formation.

The dynamics of resource allocation in research organizations

As a first step towards understanding the evolution of small groups in firms, this paper develops and tests a simple decision-theoretic model of research-unit evolution in which, as managers resolve their uncertainty over time, they shut down under-performing units and remove under-performing unit heads. The selection process generates several testable hypotheses about how unit and head characteristics affect the assignment of heads to units and resource allocation within the firm. Data on research units in firms is used to test the model and estimate the relative importance of the different effects on resource allocation.

Price indexes for personal computers (1976-88)

This paper estimates quality-adjusted price indexes for personal computers for the years 1976-88 using the method proposed by Berndt, Griliches, and Rappaport (1995). Indexes for the 1976-82 period may be combined with indexes provided by previous authors to obtain quality-adjusted price indexes for the entire history of the personal computer industry. In the early years, the number of observations is small, and quality and cost improvements, which are often embodied in new models, occur rapidly. It is suggested that in this type of environment, adjacent-year regressions may be more useful for obtaining constant-quality price indexes than alternative methods.