Jennifer W. Kuan

Open Source Software as Consumer Integration Into Production

Open source software is emerging as a potentially important competitive force in the software industry, capturing the attention of venture capitalists and computing industry executives. Yet very little is known about how open source software, which is created collectively by individual volunteers, will compete with closed source software. This paper models open source software as consumer integration into production, in which users organize to produce a good for themselves. The model predicts that open source software will not compete in all product markets, but where it does, will be of higher quality than closed source software. An empirical study finds support for these predictions.

Does It Matter Who Your Buyer Is? The Role of Nonprofit Mission in the Market for Corporate Control of Hospitals

The hospital industry is one of this country’s largest mixed industries, with for‐profit, nonprofit, and government hospitals operating in the same local markets. But how do ownership types differ? Previous studies have compared costs among different hospitals. However, these studies have not been entirely successful because costs cannot be meaningfully compared without controlling for hard‐to‐measure quality of service. In this study, we look to the market for corporate control—or takeovers—for evidence of ownership‐related differences. We find that nonprofit and for‐profit firms pay different prices and that these differences relate to the nonprofit’s mission. Specifically, nonprofits and for‐profits pay the same price when buying for‐profits, but nonprofits pay less when buying a “like‐minded” nonprofit (so religious nonprofits pay less for other religious nonprofits, for example). The resulting dual‐price equilibrium suggests that nonprofits have a different objective than do for‐profits but also that nonprofits behave competitively and efficiently when interacting with for‐profits.

Supplier Innovation Strategy: Transactional Hazards and Innovation in the Automotive Supply Chain

Over the last few decades, innovation has doubled automobile performance at a time when outsourcing has increased. But outsourcing is subject to well-known contracting hazards that would also afflict outsourcing for innovation. In this paper, we examine how supplier firms generate innovation in the presence of such hazards, using a recent survey of the US automotive supply chain that contains new measures of innovative activity. Taking the supplier perspective on the traditionally buyer-framed make-or-buy problem pays surprising dividends. First, we identify three supplier innovation strategies — distinct combinations of various innovative activities. Next, we find evidence that each strategy represents a response to the transactional hazards associated with innovating in this environment. Finally, the coexistence of heterogeneous supplier strategies enhances our understanding of the buyer’s make-or-buy problem, providing a more complex picture of the various approaches to transactional hazards that buyers employ simultaneously.

What Goes on Under the Hood? How Engineers Innovate in the Automotive Supply Chain

The questions addressed in this volume are motivated by the recognition that engineers play an important role in generating innovation and economic growth. In this chapter, we seek to offer some description of engineering work by looking in detail at a specific manufacturing industry—firms that supply automakers—to gain insight into how engineers create innovation. Autos account for 5% of US GDP and in 2011, 70% of auto suppliers contributed design effort, a task typically performed by engineers, making the auto supply chain an important context in which to study engineering and innovation. Some highlights from our original survey data include a wide range in terms of size and strategies of supply chain companies; a majority was small- to medium-sized, often family-owned. We observed barriers to patenting for manufacturing firms developing process rather than product innovations. And interviews revealed the importance of customers for the innovative efforts of supplier firms. Certain Japanese customers were preferred because they shared expertise and helped suppliers improve, while other, American, customers were viewed as having unreasonable demands for regular, incremental price reductions and did not offer technical or organizational support.

Governance Heterogeneity and Performance at US Stock Exchanges: Evidence from Regulation NMS

Regulation NMS, announced in June 2005 by the SEC, was intended to generate competition with the New York Stock Exchange (NYSE). The NYSE had for many decades maintained a near monopoly on the trading of securities initially listed on the exchange. Reg. NMS allowed trades on electronic communications networks (ECNs) without considering prices on the NYSE trading floor. With Reg. NMS in place, the NYSE immediately began losing market share and average bid-ask spreads for NYSE-listed shares increased, sometimes getting significantly closer to the average spreads for shares listed on the traditionally more volatile Nasdaq. What explains this outcome? The conventional wisdom predicts that consumers (here, investors) would benefit as the profits of a monopoly producer (here, dealers executing trades) declined, but evidence of wider spreads suggests the opposite. The literature relies on a standard model of a member-governed non-profit in which broker-dealers own the exchange. But that standard model fails to capture the actual heterogeneity in governance structure: the Nasdaq fits this model, but the NYSE does not. Thus, we consider an alternative to the standard model in which underwriters are owners, for which there is anecdotal evidence. However, a statistical test is possible because of the starkly different objective function that underwriters would have as compared with dealers; for underwriters, efficient trading is an input to their production function where for dealers, trading is the primary source of profits. Using panel data of Corwin-Schultz bid-ask spreads, we measure differences in market quality between the NYSE and Nasdaq, which the new regulation allows because NYSE-listed shares trade on multiple new venues after Reg. NMS but Nasdaq-listed shares do not trade on the NYSE. A difference-in-differences test finds that spreads for NYSE-listed shares increased after Reg. NMS issue to resemble more closely spreads for Nasdaq-listed shares.

Institutional Heterogeneity Among Stock Exchanges: Implications for Market Efficiency

The current financial crisis is a crisis of theory as well. The dominant theory of financial markets, the efficient market hypothesis (EMH), states that in an efficient market the price of a financial asset reflects publicly available information about that asset. Competing theories, such as behavioral finance, argue that other factors, including irrational investor behavior, impact the price of financial assets. We argue, however, that an analysis of market institutions can help explain when and why the EMH works. Although not widely examined, we argue it is significant that until very recently the New York Stock Exchange (NYSE), whose listed companies’ price behavior inspired the EMH, was a nonprofit organization. Thus, we apply an economic theory of nonprofits to the NYSE, and NASDAQ, to identify the incentives of Exchange members and the various governance mechanisms they created in response. We find that the NYSE, which was organized by underwriters, generated mechanisms that made prices on the NYSE relatively well behaved, what we term synthetic inertia. The NASDAQ, on the other hand, was organized by traders who had polar opposite incentives with regard to disclosure. We hypothesize that NYSE demutualization - converting from nonprofit to for-profit - altered the incentives of the NYSE and undermined this synthetic inertia and thus informational efficiency. We test our hypothesis by comparing bid-ask spreads, a measure information quality, at the NYSE and NASDAQ and find that bid-ask spreads on the NYSE were consistently lower than the NASDAQ (suggesting better information quality at the NYSE) but that spreads converged after demutualization. We believe that our approach helps resolve an apparent tension between competing theories of market behavior and contributes an analytical framework from which to consider regulatory changes.