Garth Saloner

Converters, Compatibility, and the Control of Interfaces

Converters, emulators, or adapters can often make one technology partially compatible with another. The authors analyze the equilibrium market adoption of otherwise incompatible technologies when such converters are available and the incentives to provide them. While market outcomes without converters are often inefficient, the availability of converters can actually make matters worse. The authors also find that when one of the technologies is supplied only by a single firm, that firm may have an incentive to make conversion costly. This may lend some theoretical support to allegations of anticompetitive disruption of interface standards. Copyright 1992 by Blackwell Publishing Ltd.

Standardization and variety

Abstract In the tradeoff between standardization and variety, there can be too much or too little variety. The latter possibility can only happen if there are several equilibria.

Leadership style and incentives

We study the relationship between a firms environment and its optimal leadership style. We use a model in which contracts between the firm and managers are incomplete so that providing incentives to subordinates is not straightforward. Leadership style, whether based on organizational culture or on the personality of the leader, then affects the incentive contracts that can be offered to subordinates. We show that leaders who empathize with their employees adopt a participatory style and that shareholders gain from appointing such leaders when the firm has the potential for exploiting numerous innovative ideas. By contrast, when the environment is poor in new ideas, shareholders benefit from hiring a more selfish i.e., more profit maximizing leader whose style is more autocratic.

Predation, Monopolization and Antitrust

Publisher Summary This chapter discusses a wide range of strategies that can be employed by incumbent firms either to protect or to extend their market shares against competitive attacks by actual and potential entrants. The hallmark of these strategies is that, invariably, they reduce the expected level of profits that incumbents rivals—present and future—can hope to earn. As such, they differ from those types of conduct whose aim is to implement and enforce collusive arrangements among market participants. Unlike many collusive strategies, these hostile and exclusionary strategies that include low prices, output expansions, introductions of new products, redesigns of the existing products, and promotions are difficult to distinguish from area part and parcel of market rivalry that economists find salutary for economic welfare, that policy-makers wish to promote, and that business leaders often deplore.

Predation, mergers, and incomplete information

This article examines the strategic pricing of duopolists in anticipation of a takeover of one by the other. In equilibrium the acquiring firm may expand its output to signal that it is a low-cost rival and thereby improve the takeover terms. If the merged form will face potential entry, a premerger expansion of output may be necessary to deter entry and to make the merger profitable. In that case the acquiring firms output expansion increases industry concentration by facilitating the takeover and by deterring entry. This establishes the rationality of predatory output expansions, even when a merger or a takeover is possible and, indeed, anticipated.

Collusive Price Leadership

The authors study the pattern of pricing in which price changes are first announced by one firm and then matched by its rivals. In their model, this price leadership facilitates collusion under asymmetric information. In equilibrium, the leader earns higher profits than the follower. Nonetheless, if information is sufficiently asymmetric, the less informed firm prefers to follow the better-informed firm, so the leader can emerge endogenously. The authors show that the follower can benefit from price rigidity so that prices may be changed infrequently. They also show that overall welfare may be lower under collusive price leadership than under overt collusion. Copyright 1990 by Blackwell Publishing Ltd.

The Cyclical Behavior of Strategic Inventories

This paper presents a model in which inventories are used by a duopoly to deter deviations from an implicitly collusive arrangement. Higher inventories allow firms to punish cheaters more strongly and can thus help to maintain collusion. We show that when demand is high, the incentive to deviate increases so that increases in inventories may be optimal for the duopoly. This rationalizes the observed positive correlation between inventories and sales. In our empirical section we show that, as our model predicts, this correlation is more important in concentrated industries. We also provide several examples where inventories have been a factor in cartel behavior.

Tariffs vs. Quotas with Implicit Collusion

The authors consider an infinite-horizon setting in which domestic and foreign firms achieve collusive outcomes by threatening to punish deviators. They show that, in this setting, the standard results of Jagdish Bhagwhati (1965) can be reversed in that quotas promote competition while tariffs do not.

Overt Interfunctional Conflict (and its Reduction Through Business Strategy)

We study why production and sales departments tend to disagree, with the former wanting long production runs and the latter wanting a broad product line. We then analyze why these disagreements lead to overt conflict in which functional areas fight with each other by presenting arguments that damage each others position. We show how the firm benefits from the information generated by this conflict. In spite of these benefits, the equilibrium conflict can exceed its profit-maximizing level. Finally, we show that concentrating innovative talent in only one department can help reduce interfunctional conflict.

The role of obsolescence and inventory costs in providing commitment

This paper modifies the Cournot and Stackelberg models to allow the firms to sell less than they have produced and to store the unsold portion of their output as inventory. Even if one of the firms can choose its output before the other, if it is costless to carry unsold goods forward then the Cournot outcome emerges. We show, however, that costs of carrying the inventory forward endow the firms with a limited degree of commitment to sell what they have produced. This partially restores the first-mover advantage. If the firms choose their outputs simultaneously, the Cournot outcome emerges and has locally consistent conjectures.