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  5. Corporate Finance: Networks and Firm Productivity
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Corporate Finance: Networks and Firm Productivity

Paper Session

Friday, Jan. 6, 2023 2:30 PM - 4:30 PM (CST)

Sheraton New Orleans, Napoleon D
Hosted By: American Finance Association
  • Chair: Claudia Robles-Garcia, Stanford University

Product Differentiation and Oligopoly: A Network Approach

Bruno Pellegrino
,
University of Maryland

Abstract

Industry concentration and corporate profit rates have increased, in the United States, over the past two decades. This paper investigates the welfare implications of economic activity concentrating within a few firms that hold market power. I develop a general equilibrium model that features granular firms that compete in a network game of oligopoly, alongside a competitive fringe of atomistic firms with endogenous entry. To capture the degree of product differentiation among the oligopolists, I introduce a Generalized Hedonic-Linear (GHL) demand system. I show how to identify this demand system using a publicly-available dataset that measures product similarity among all public corporations in the US. Using my model, I estimate a large deadweight loss from oligopolistic behavior, equal to 11% of the total surplus produced by public firms. This loss would increase to 20% if all these firms were allowed to collude. The distributional effects of oligopoly are quantitatively important as well: under perfect competition, consumer surplus would double with respect to the oligopolistic equilibrium. I also estimate that the deadweight loss has increased by at least 2.5 percentage points since 1997. The share of surplus that accrues to producers as profits also has increased. Finally, I show how the dramatic rise in startups' proclivity to sell off to incumbents (rather than go public) may have contributed to these trends.

Style Over Substance? Advertising, Innovation, and Endogenous Market Structure

Laurent Cavenaile
,
University of Toronto
Murat Celik
,
University of Toronto
Pau Roldan-Blanco
,
Bank of Spain
Xu Tian
,
University of Georgia

Abstract

Firms use both innovation and advertising to increase their profits, markups, and market
shares. While they serve the same purpose from the firms’ perspective, their broader implications
vary substantially. In this paper, we study the interaction between these two intangible inputs
and analyze the implications for competition, industry dynamics, economic growth, and social
welfare. To this end, we develop an oligopolistic general-equilibrium growth model with firm
heterogeneity in which market structure is endogenous, and firms’ production, innovation,
and advertising decisions strategically interact. We estimate the model to fit the non-linear
relationship between innovation, advertising, and competition observed in the data. We find
that advertising has significant macroeconomic effects: it improves static allocative efficiency
through reducing misallocation, but it also depresses economic growth through a substitution
effect with R&D. On the net, advertising is found to be welfare-improving. It is responsible for
one third of the observed average net markup, and a quarter of its dispersion. We next study the
optimal linear taxation/subsidization of advertising. We find that the optimal advertising tax is
quite high. Such taxation could simultaneously increase dynamic efficiency, contain excessive
spending on advertising due to inefficient “rat race”, and raise revenue while still maintaining
most of the benefits of advertising via improving efficiency in resource allocation.

Propagation and Amplification of Local Productivity Spillovers

Xavier Giroud
,
Columbia University
Simone Lenzu
,
New York University
Quinn Maingi
,
New York University
Holger Mueller
,
New York University

Abstract

This paper shows that local productivity spillovers can propagate throughout the economy through the plant-level networks of multi-region firms. Using confidential Census plant-level data, we find that large manufacturing plant openings not only raise the productivity of local plants but also of distant plants hundreds of miles away, which belong to multi-region firms that are exposed to the local productivity spillover through one of their plants. To quantify the significance of plant-level networks for the propagation and amplification of local productivity shocks, we develop and estimate a quantitative spatial model in which plants of multi-region firms are linked through shared knowledge. Our model features heterogeneous regions as well as rich within-region, across-plant heterogeneity in productivity, wages, and employment. Counterfactual exercises show that while knowledge sharing through plant-level networks amplifies the aggregate effects of local productivity shocks, it can widen economic disparities between workers and regions in the economy.

Discussant(s)
German Gutierrez
,
New York University
Yueyuan Ma
,
University of Pennsylvania
Federico Huneeus
,
Central Bank of Chile
JEL Classifications
  • G3 - Corporate Finance and Governance