Markets & Organizations

Programme director: Prof. dr. R. Sloof

The research group Markets & Organizations (M&O) within the Amsterdam School of Economics joins researchers interested in studying the effective functioning of markets and organizations.

It unites the former Industrial Organization and Organizational Economics group with researchers affiliated with the Amsterdam Center for Law and Economics (ACLE) –in particular those in the subdomain on Competition & Regulation– and researchers belonging the Amsterdam Center for Entrepreneurship (ACE) – in particular those working in economics. The satellite organizations ACLE and ACE are much broader than their intersection with the M&O group.

M&O

Objectives

Broadly defined, the research program on Markets & Organizations aims to improve our understanding of the working of markets and organizations in capturing the economic benefits from collective action and to identify as well as evaluate (policy) interventions that may improve market or organizational performance.

Motivation

The field of Markets and Organizations is very broad. Given the nature of the constituent groups that make up the new M&O section, research is centered around four different – but closely interrelated – strands of research: (1) Industrial Organization, (2) Competition Policy & Regulation, (3) Organizational Economics and (4) Economics of Entrepreneurship.

The first line of research studies the working of imperfectly competitive markets, in particular how firms compete with each other on these. The natural focus here is on oligopolies where firms have at least some market power. Topics of interest include pricing strategies, (tacit) collusion, locational choice, research and development, inter-firm relationships, , market design, auctions, two-sided markets and network industries.

In the second interest area, Competition Policy & Regulation, the effects of policy interventions aimed at affecting market performance are studied. One focus is on economic analysis in competition policy and the design of regulation. Another area of research are enforcement tools that are at the disposal of the agencies, such as detection, fines and other sanctions, leniency programs, and settlement.

The third strand of research within M&O on Organizational Economics is concerned with studying the effective internal functioning of organizations in capturing these benefits. Within economics organizations can be viewed as a means of achieving the benefits of collective action in situations where the price system fails. The key focus is on problems that may arise from coordinating and motivating the members of an organization to create economic value through superior organizational performance and to study potential remedies for these problems.

The fourth  line of research on the Economics of Entrepreneurship is concerned with the role of entrepreneurship in the effective functioning of labor and financial markets. Entrepreneurs are often credited with innovating new products, discovering new markets, and displacing aging incumbents in a process of “creative destruction”. Yet it is also recognized that if entrepreneurs face constraints in terms of human or financial capital, then these economic benefits might not be realized. This has prompted governments to devise public policy to encourage entrepreneurship. A key focus is on studying the choices, behavior and performance of entrepreneurs and on whether and how government policy may be effective in fostering entrepreneurship. 

Methods

Within the M&O program a there is an emphasis on both sound empirical work and on applied theory. Empirical analyses primarily focus on the detection and measurement of unbiased effects, either through the use of naturally occurring field data (by means of ‘quasi experiments’ and instrumental variables techniques), field experiments or laboratory experiments. Applied theory typically concerns using the tools from microeconomics and applied game theory to evaluate the impact of either government policy or organizational interventions intended to improve efficiency. Often these models are enriched by incorporating insights from behavioral economics, as empirical evidence has mounted that people do not always satisfy the rationality assumptions made in traditional economic models. Research within the M&O group is always done with a keen eye towards societal relevance, ranging from competition policy, practical auction design in procurement, to the effectiveness of entrepreneurship education in stimulating entrepreneurial intentions.

Four projects, each with focus areas

A wide variety of topics and questions is studied within the M&O research program, which by and large can be divided along the three different lines of research outlined above. Each of these can be can be further subdivided into a number of different research projects.

1. Industrial Organization

1.1 Behavioral industrial organization

Empirical and experimental evidence has mounted that people do not always comply with the assumptions of traditional economic models of ‘optimal’ behavior. These “anomalies” gave rise to the ever growing subfield of behavioral economics. A next important avenue of research in behavioral economics is whether firms in specific market contexts can and do exploit the bounded rationality of consumers. For example, can firms sell more or soften competition by increasing the number of product that serves no purpose except for confusing buyers. In current research, group members empirically investigate the use of gift certificates (VVV Cadeaubon) by Dutch consumers: Do people spend gift certificates they receive differently than they spend monetary gifts, and does it matter whether they received the certificate from friends or from their employer? In another project, a series of experiments will be set up to study the relationship between competition, the size of a loss and firm profits in insurance markets.

1.2 Research and development

Research cooperation is key for businesses to successfully innovate and prosper, and firms increasingly rely on extensive networks to achieve their goals. It is, however, still poorly understood how these R&D cooperatives are formed, how they evolve, what their impact is on R&D activities, and what should constitute an optimal R&D policy. These questions drive several research lines. For instance, group members are developing a theoretical framework of research network formation. This framework is tested against a database that includes all large research collaborations in the U.S. Other group members work on dynamic models of R&D, the novelty being here the application of bifurcation methods. This allows for a global analysis, including (transitory) parameter configurations that preclude single-stage equilibria. Yet other group members assess the welfare implications of sustaining R&D cooperatives. Again, the fundamental trade-off between static and dynamic efficiency is addressed, giving additional insights as to what should constitute an optimal R&D-stimulating policy.

1.3 Auctions

In the past few decades, the study of auctions has become one of the most active research areas in economic sciences. We aim at answering questions such as: How to prevent cartel formation in auctions? What is the effect of limited liability on bidding behavior? How to design auctions of multiple objects? What are optimal mechanisms in quasi-markets such as welfare-to-work markets and health care markets? What is the effect of license auctions on the performance of markets? For example, groups members have studied experimentally the impact leniency programs on the collusive properties of different auction types. Others have studied fundraising mechanisms on charitable giving in a door-to-door fundraising field experiment. The starting point here is that people are not purely selfish because if they were they would donate nothing to charity.

2. Competition Policy & Regulation

2.1 Economics Analysis in Competition Cases

Increasingly does economic analysis play a decisive role in competition law enforcement. In competition cases, economic arguments in market definition, for example in two-sided markets, the theory of harm, or an efficiency defense can be decisive in the finding of an infringement and de design of remedies. Since business strategies constantly evolve, the thinking about possible anticompetitive aspects of them is under constant development as well. Topics studies in this research focus range from quantifying the efficiency defense in merger control and the identification of abuse of dominance strategies, to analyzing the effects of State aid remedies and the calculation of cartel damages.

2.2 Detection of Anticompetitive Behavior

Since 2005, group members have collected detailed price information on the Dutch market for retail gasoline. With these data, the competitive effects of the governmental program of auctioning licenses to operate gasoline sites at highways have been quantified. Currently, the data are used to develop an automated procedure to identify regional clusters of low price variation, an indicator of possible collusive practices. Other current empirical projects on competition policy deal with potential deterrence effects of merger policy tools, based on data from the U.S. Department of Justice and the U.S. Federal Trade Commission. Furthermore, group members investigate whether firms that collaborate in research joint ventures, use these collaborations to collude in product markets. Also the impact of antitrust policy at larges was investigated. This was done by further refining the methodologies to estimate price cost margins and by applying the methodology to data from the Indonesian economy. In addition to the nation-wide impact of the introduction of antitrust policy, also the change in the behavior of targeted firms was investigated by a difference in difference method.

2.3 Enforcement Tools

To enforce the competition laws, the agencies have a range of sophisticated tools at their disposal. Leniency programs, for example, aim to destabilize collusion by incentivizing cartel members to break out and report the cartel. Settlement procedures provide agencies with a short-track decision process, in return for a reduction in penalties. And the empowerment of victims of anticompetitive behavior to recover the damages they sustained adds another layer of deterrence. In this focus area, the interplay and effectiveness of these and other tools in the agencies tool box are studies. One important perspective is that they should be understood as a game of cat & mouse. Another is the  interaction between public and private enforcement.

2.4 Regulation

Regulation is a wide area of government intervention in decision making that has effects on many dimensions. In this focus area, the effectiveness of different designs of economic regulation is studied. Public choice theories shed light on how regulation comes about in the interaction between various private interests. Where a certain aim for regulation is determined, for example access and price regulation on a specific network, economics has an important role in the creation of tools to make such regulation effective, such as Ramsey pricing or price capping. Existing regulation can be evaluated with frameworks for regulatory impact assessment, findings of which can help advise regulatory reform.

3. Organizational Economics

3.1 Decision rights and internal organization

A key feature of organizational architecture is the division of tasks and responsibilities within organizations: who does and decides on what? Employees lower in the organizational chart  typically have better knowledge to take operational decisions, but at the same time have objectives that (may) differ from the interests of the firm. Within this project the tradeoffs that arise in delegating decision authority –like a loss of control versus a loss of initiative–  are studied. The focus is in particular on behavioral biases that may affect these tradeoffs; especially when it comes to authority and monitoring non-monetary motives have been found to play a prominent role. Another topic concerns whether (procedural) preferences regarding the way in which decisions are taken affects how efficiently these taken decisions are subsequently implemented.

3.2 Performance measurement and reward systems

A second set of projects within the domain of Organizational Economics is concerned with the design of good performance measures and of appropriate reward systems. Performance measures are for instance evaluated empirically in terms of their noise and their distortions. The research on reward systems focuses predominantly on (among other things) pay-for-performance contracts, career opportunities and promotions, returns to investments in skills acquisition and the interaction between explicit and implicit incentives. Also here a behavioral approach is typically taken, as people often care about how well they fare relative to others.

4. Economics of Entrepreneurship

4.1 The selection and performance of entrepreneurs

Are entrepreneurs born or made? And if entrepreneurs can be ‘nurtured’, what are the (human capital) factors that enhance the likelihood of (successful) entrepreneurship? Moreover, nowadays the majority of entrepreneurial ventures are started up by teams, rather than by single individuals. What is the effective composition of teams with broad and complex tasks such as is the case for ventures? In our studies, we try to measure and understand the impact on selection and performance of, for instance, parental background, cognitive and non-cognitive skills, education, gender, ethnicity or role models for individuals and teams. Theories are tested empirically based on the results of ‘quasi’, field or laboratory experiments.

4.2 Evaluation of entrepreneurship programs

Public policy has increasingly proposed and implemented programs to encourage entrepreneurship. Most of these programs are designed to decrease human and financial capital constraints. We aim at measuring the causal effect of these programs, with a focus on entrepreneurship education, on the intended outcomes by using field experiments.

4.3 Entrepreneurship and behavioral economics

This research aims to identify the defining behavioral traits of entrepreneurs and to establish to what extent these differ from managers. The relevant traits studied include, among other things, attitudes towards risk and losses, overconfidence, willingness to compete and willingness to cooperate in a team. Established entrepreneurs and managers participate in online incentivized tasks designed to measure the relevant traits. We are building a database of entrepreneurs and managers that can be approached for this purpose bi-annually. Moreover, also students in entrepreneurship and management are included, as to determine whether the potential differences we find between entrepreneurs and managers are born or made.

Published by  ASE-RI

28 November 2016