Packet - Economics - Johns Hopkins University

Essays on Mergers, Collusion, and Innovation
Wei Zhao
1 Estimating Dynamic Merger Efficiencies with an Application to the
1997 Boeing-McDonnell Douglas Merger (job market paper)
This paper evaluates the welfare effects of the 1997 merger between Boeing and McDonnell
Douglas in the medium-sized wide-bodied aircraft industry. I develop an empirical model
of multi-product firms, allowing for both learning-by-doing and product innovation in the
dynamicgametoquantifymergerefficiency. Mergerefficiencyfromlearning-by-doingisthen
disentangled from impact of innovation and market power effect. The results show that the
primary benefits from the 1997 Boeing-McDonnell Douglas merger come from accelerated
learning-by-doing. Taking account of all static and dynamic effects, net consumer surplus
is found to have increased by as much as $1.57 billion. In contrast, a static model ignoring
dynamic learning-by-doing and innovation predicts a consumer loss of about $20 billion.
These results show that ignoring dynamic effects can lead to biased results and erroneous
conclusions with regard to the welfare impact of a merger.
2 Signaling and Tacit Collusion in an Infinitely Repeated Prisoners’
Dilemma (with Joseph E. Harrington, Jr.), Mathematical Social Sciences,
64(2012) 277-289
In the context of an infinitely repeated Prisoners’ Dilemma, we explore how cooperation is
initiated when players signal and coordinate through their actions. There are two types of
players - patient and impatient - and a player’s type is private information. An impatient
type is incapable of cooperative play, while if both players are patient types - and this is
common knowledge - then they can cooperate with a grim trigger strategy. We find that the
longer that players have gone without cooperating, the lower is the probability that they’ll
cooperate in the next period. While the probability of cooperation emerging is always
positive, there is a positive probability that cooperation never occurs.
3 Vertical Relation and Endogenous Innovation in a Dynamic Stochastic
Game (in progress)
Motivated by firms expanding to adjacent vertically related markets as has recently occurred
in the markets for smartphone and tablets, I develop an infinite-horizon dynamic
stochastic model to analyze the relationship between innovation and vertical structure in
high-technology industries. The stochastic model serves to examine dynamic interactions
of firm innovation and imitation. In this model, upstream firms decide on investment for
innovation and the degree of compatibility, while downstream firms dynamically choose
their technology suppliers based on realized switching cost. Bargaining power between the
upstream and downstream firms is modeled as a division of the downstream profit. Vertical
integration removes uncertainty about downstream firm commitment for the innovators,
but is also likely to decrease imitation and compatibility as well as encourage downstream
firms to switch (which may facilitate upstream entry). The model provides a framework
for empirical dynamic studies and can be used to analyze the impact of vertical structure,
bargaining power and switching costs on innovation and consumer welfare.