Discounts as a Barrier to Entry

with Juan-Pablo Montero and Nicolás Figueroa
American Economic Review, Vol. 106, No. 7, July 2016, pp. 1849-1877

To what extent can an incumbent manufacturer use discount contracts to foreclose efficient entry? We show that off-list-price rebates that do not commit buyers to unconditional transfers--like the rebates in EU Commission v. Michelin II, for instance--cannot be anticompetitive. This is true even in the presence of cost uncertainty, scale economies, or intense downstream competition, all three market settings where exclusion has been shown to emerge with exclusive dealing contracts. The difference stems from the fact that, unlike exclusive dealing provisions, rebates do not contractually commit retailers to exclusivity when signing the contract.

Monopolization with Must-Haves

with Juan-Pablo Montero
American Economic Journal: Microeconomics, Vol. 16, No. 3, August 2024, pp. 284-320

An increasing number of monopolization cases have been constructed around the notion of “must-have” items: products that distributors must carry to “compete effectively.” Motivated by these cases, we consider a multiproduct setting where upstream suppliers sell their products through competing distributors offering one stop-shopping convenience to consumers. We show the emergence of products that distributors cannot afford not to carry if their rivals do. A supplier of such products can exploit this must-have property, along with tying and exclusivity provisions, to monopolize adjacent, otherwise competitive markets. Policy interventions that ban tying or exclusivity provisions may prove ineffective or even backfire.

Dual Moral Hazard and the Tyranny of Success

American Economic Journal: Microeconomics, Vol. 16, No. 4, November 2024, pp. 154-191

I explain why current success can undermine an organization's ability to innovate. I consider a standard bandit problem between a safe and a risky arm with two modifications. First, a principal allocates resources. Second, an agent must install the risky arm, which is not contractible. If the principal cannot commit to a resource policy, a dual moral hazard problem emerges: The agent's pay must be tied to the risky arm's success to encourage installation, inducing the principal to stop experimenting with the arm prematurely. This problem intensifies as the safe arm becomes more profitable, potentially leaving the organization worse off.

Artificial Intelligence in the Knowledge Economy

with Eduard Talamàs. Last update: May 2024 - EC'24  - R&R Journal of Political Economy

This paper provides a new framework for studying the impact of Artificial Intelligence (AI) on the organization of knowledge work. We incorporate AI into an economy where humans endogenously form hierarchical firms: Less knowledgeable agents become “workers” solving routine problems, while more knowledgeable agents become “solvers” handling exceptions. We model AI as an algorithm that uses compute to mimic humans. We compare the equilibrium before and after AI’s introduction, distinguishing between “basic” AI (with knowledge equivalent to pre-AI workers) and “advanced” AI (with knowledge equivalent to pre-AI solvers). We show that basic AI increases the knowledge content of human work, leading to smaller, less productive, and less decentralized firms. In contrast, advanced AI decreases the knowledge content of human work, resulting in larger, more productive, and more decentralized firms. In any case, the most knowledgeable humans benefit from AI, while the least knowledgeable benefit only when AI is sufficiently advanced. We discuss how these effects depend on AI’s autonomy and the availability of compute.

Upcoming Presentations:  LBS (Nov 20), Pompeu Fabra (Nov 22), Econometric Society Australasia Meeting (Dec 4-6), Boston University (Dec 12), HEC Paris AI and Entrepreneurship Workshop (Dec 14).

The Turing Valley: How AI Capabilities Shape Labor Income

with Eduard Talamàs. Last update: August 2024

Do improvements in Artificial Intelligence (AI) benefit workers? We study how AI capabilities influence labor income in a competitive economy where production requires multidimensional knowledge, and firms organize production by matching humans and AI-powered machines in hierarchies designed to use knowledge efficiently. We show that advancements in AI in dimensions where machines underperform humans decrease total labor income, while advancements in dimensions where machines outperform humans increase it. Hence, if AI initially underperforms humans in all dimensions and improves gradually, total labor income initially declines before rising. We also characterize the AI that maximizes labor income. When humans are sufficiently weak in all knowledge dimensions, labor income is maximized when AI is as good as possible in all dimensions. Otherwise, labor income is maximized when AI simultaneously performs as poorly as possible in the dimensions where humans are relatively strong and as well as possible in the dimensions where humans are relatively weak. Our results suggest that choosing the direction of AI development can create significant divisions between the interests of labor and capital. 

Upcoming Presentations: Google (Jan 9), HEC Paris (Feb 4).

Cross-Market Mergers with Common Customers:
When (and Why) Do They Increase Negotiated Prices?

Last update:  February 2024 - R&R Economic Journal

I examine the implications of cross-market mergers of suppliers to intermediaries that bundle products for consumers. These mergers are controversial. Some argue that suppliers’ products will be substitutes for intermediaries, despite not being substitutes for consumers. Others contend that because bundling makes products complements for consumers, products must be complements for intermediaries. I contribute to this debate by showing that two products can be complements for consumers but substitutes for intermediaries when the products serve a similar role in attracting consumers to purchase the bundle. This result leads to new recommendations and helps explain why cross-market hospital mergers raise prices.