Essays on Competition, Innovation, and Procurement

Abstract

This dissertation examines how organizational structures and procurement institutions affect competition and welfare. Combining novel data with structural models, the three chapters analyze the consequences of ownership change, dynamic procurement, and renegotiation for costs, prices, learning, innovation, and surplus.

In Chapter 1, I investigate the effects of production facility divestitures that follow private equity (PE) buyouts in a U.S. consumer packaged goods (CPG) industry. I find that the acquired firm's prices rise after the divestiture of a major production facility. I estimate the demand and supply of the CPG product and find that Nash-Bertrand own profit maximization fits the data better than alternative conduct models, with no evidence of a post-buyout change in conduct. Using the estimated marginal costs, I show that the firm's marginal costs increase by 20% after the divestiture. I identify the divestiture as a likely reason. I show that the firm's marginal costs increase immediately following the divestiture, rise sharply in exposed markets, and exhibit little change in control markets. Using the estimated model, I conduct a counterfactual simulation in which the firm's marginal costs are not affected by the divestiture and post-buyout advertising is held fixed at the pre-buyout level. The simulation results indicate that the divestiture reduces consumer surplus by 8%.

In Chapter 2, Andrew Sweeting, Chenyu Yang, and I estimate a dynamic model of the U.S. space launch industry. The model allows past launches to improve rocket reliability and lower launch costs. It also allows the government to make forward-looking procurement choices. We use the model to analyze policy-relevant issues in the recent history of the industry: the 2006 United Launch Alliance "merger-to-monopoly" and the effects of efficiencies in the form of learning synergies; innovations, such as SpaceX's Falcon 9 and ULA's recent introduction of Vulcan Centaur; the costs and benefits of forward-looking procurements; and, the trade-offs between the advantages of centralized control and possible inefficiencies.

In Chapter 3, I study how renegotiation interacts with competition in innovation contests using the Navy SBIR program. Renegotiation provides ex post flexibility, but it also changes firms' ex ante investment incentives, so its welfare effects are empirical. I combine Navy SBIR award records with FPDS contract modification histories. The data show that firms engaging in renegotiation are more likely to win the delivery contract, especially in multiple-firm contests. I build a structural model in which firms choose base effort while anticipating a renegotiation opportunity. Renegotiation allows additional effort but requires an adaptation cost. The estimates imply that renegotiation-induced effort is more productive than base effort. Yet counterfactual simulations show that allowing renegotiation lowers expected social surplus by 9% because firms shift investment from the base stage to the renegotiation stage, exacerbating the hold-up problem. Renegotiation also reduces the surplus gain from additional competitors, but stronger incentives in the delivery contract attenuate these losses.