Justin P. Johnson

Targeted Advertising and Advertising Avoidance

I examine how the increasing ability of firms to target their advertisements to particular individuals influences market outcomes when consumers have access to advertising avoidance tools. While firms generally benefit from increased targeting, consumers need not. I also show that there may be too little blocking of advertisements in equilibrium, and consider the role of targeted advertising when niche firms compete for ad inventory against mass-market firms.

Leasing, Lemons, and Buybacks

In his seminal article of 1970, Akerlof argued that the used-car market is not efficient because adverse selection causes too little trade. We construct a competitive model of the new- and used-car markets and investigate the relationship between new-car leasing and adverse selection. Our analysis yields a number of interesting results, including that new-car leasing reduces the adverse-selection problem, and that buybacks also increase efficiency in the secondhand market. We also discuss alternative explanations for new-car leasing and an explanation for the growth in new-car leasing during the last fifteen years. Copyright 2003 by the RAND Corporation.

Collaboration, Peer Review and Open Source Software

Open source software development may be superior to proprietary development because the open source organizational form naturally minimizes transactions costs associated with privately distributed information. This manifests itself in the ability of open source communities to encourage critical peer review and the sharing of ideas. When these activities are important, the open source organizational form may do better than a proprietary organizational form. My results suggest why open source is particularly powerful when maintainability of software is critical, and also suggest that the founder of a software project may be more likely to choose open source if there is an existing dominant proprietary software project. 2006 Elsevier B.V. All rights reserved. JEL classification: H4; L2; M5

The Agency Model and MFN Clauses

I provide an analysis of vertical relations in markets with imperfect competition at both layers of the supply chain and where exchange is intermediated either with wholesale prices or revenue-sharing contracts. Revenue-sharing is extremely attractive to firms that are able to set the revenue shares but often makes the firms that set retail prices worse off. This is so whether revenue-sharing lowers or raises industry profits. These results are strengthened when a market moves from “the wholesale model” of sales to “the agency model” of sales, which results in retailers setting revenue shares and suppliers setting retail prices. I also show that retail price-parity restrictions raise industry prices. These results provide a potential explanation for why many online retailers have adopted the agency model and retail price-parity clauses.

Leasing, Lemons, and Moral Hazard

A number of recent papers have analyzed leasing in the new‐car market as a response to the adverse‐selection problem in the used‐car market originally explored in the seminal 1970 paper by George Akerlof. In this paper we consider a model characterized by both adverse selection, as in these earlier papers, and moral hazard concerning the maintenance choices of new‐car drivers. We show that this approach provides explanations for a number of empirical findings concerning real‐world new‐ and used‐car markets, including that leasing has become more popular over time, very high income new‐car drivers lease more, and used cars that were leased when new sell for more than used cars that were purchased when new. We also compare and contrast our approach to new‐car leasing with alternative approaches.

The Agency and Wholesale Models in Electronic Content Markets

I analyze a model of dynamic competition between retail platforms which exhibit consumer lock-in. Two different revenue models are considered, one in which platforms set final retail prices and one in which the suppliers set final retail prices. Platforms have long-term (or strategic) pricing incentives but suppliers do not, which implies that the inter-temporal price path faced by consumers depends on the revenue model in place. When suppliers set prices instead of platforms, prices may be higher in early periods but lower in later periods, suggesting that appropriate antitrust enforcement ought to consider more than initial price changes when an industry shifts to the agency model. Indeed, consumers may (but need not) prefer the agency model even when prices increase in initial periods. A potential downside of the agency model is that it may align the incentives of suppliers and platforms and thereby encourage platforms to lower the competitiveness of the supplier market, harming consumers; no such incentives exist under the wholesale model. I relate my results to events in the market for electronic books.

Adverse Selection and Partial Exclusive Dealing

I reconcile a disagreement in the literature regarding the impact of downstream price competition on anti-competitive exclusive dealing, and then extend the exclusive dealing literature to accommodate adverse selection. Adverse selection expands the scope of inefficient exclusion, and may also explain policies of partial exclusion, in which an incumbent pro ts by locking up select retailers even though the entrants product is still competitively supplied in equilibrium. I relate my results to recent antitrust cases against Intel.

The Role and Growth of New-Car Leasing: Theory and Evidence

There has been substantial growth in rates of new-car leasing over the last few decades. Building on recent theoretical research, we construct a model of the leasing decision in which leasing mitigates adverse selection and reduces transaction costs, but moral hazard limits its use. In our model, the prevalence of leasing is related to new-car reliability, which suggests that the recent growth in leasing is at least partly due to improvements in new-car reliability. We use this model to derive testable implications and then conduct an empirical analysis to investigate whether the operation of the new- and used-car markets is consistent with the predictions of this theoretical approach. Our empirical results support the theoretical predictions of our model. In particular, we provide direct evidence that leasing mitigates adverse selection and that an important factor in the growth in new-car leasing rates has indeed been the growth of new-car reliability.

Unplanned Purchases and Retail Competition

I propose a framework in which asymmetric multiproduct retailers compete for one-stop shoppers who have biased beliefs about their future purchase probabilities (and so make unplanned purchases). One firm carries a full portfolio of products while the other carries an incomplete but endogenous one. Using this framework, I examine the phenomenon of loss leading, the optimal product portfolio of the smaller firm, and the effects of banning loss leading. Among other results, I show that there is a nonpredatory (and possibly procompetitive) justification for the observation that such larger firms may charge below cost on the core product lines of their smaller rivals.

Who Posts the Reputational Bond? Advertising and Cobranding in Vertical Relationships

I identify and explore the relationship between two views of brands and advertising, one emphasizing their role in assuring quality and the other emphasizing their role in shifting rents across firms in the supply chain. I show that in the presence of moral hazard, the identity of the reputational bondposter matters, and that both the upstream and the downstream prefer to be the bondposter. I determine the welfare costs of bondposter identity, and who would pay more (or be willing to advertise more) to become the bondposter.