Industrial Organization.

• Author: Rose, Nancy L.

Nancy L. Rose [*]

The NBER's Program on Industrial Organization (IO) celebrates its tenth anniversary this year. The program has grown to include 34 members who are engaged in research on a wide range of topics. Rather than attempting an exhaustive review of program activity, this report provides an overview of the most active research areas since the last program report in 1997. These areas include e-commerce, restructured electricity markets, firm behavior in oligopoly markets, and the organization of firms and vertical relationships. Reviews of the substantial body of research on technology and technical change are deferred to reports of the NBER's Program on Productivity and Technological Change and the NBER's Working Group on Industrial Technology and Productivity. The NBER website http://www.nber.org/programs/io/io.htm1 contains links to the full body of research done under the auspices of this and other NBER research programs.

E-Commerce Initiative

The NBER sponsored a yearlong research project on the organizational and competitive implications of e-commerce. The results of that project, which was organized by Garth Saloner and Severin Borenstein, were discussed at a two-day meeting in January 2001. The following month, key findings were showcased at an industry/academic conference held at Stanford University. This project focused on three themes: the impact of electronically mediated commerce on vertical relationships between firms; the effect of e-commerce on pricing behavior; and Internet auction performance. Later this year, the Journal of Industrial Economics will publish major results from this project in a special volume edited by NBER Faculty Research Fellow David Genesove. This project complements other work done by NBER associates on the development, use, and impact of e-commerce. [1]

Vertical Relations between Firms

Work by Luis Garicano and Steven N. Kaplan suggests that Internet-based transactions between firms may yield substantial efficiencies and improve matching of buyers and sellers. [2] But complex vertical relationships that have developed among manufacturers or vendors and their downstream retailers may impede the diffusion of Internet-based technologies. Robert H. Gertner and Robert Stillman find that apparel vendors that were vertically integrated into retailing before the development of the Internet were first to develop Internet retail sites for their products. Those retailers that sold primarily through department stores were slower to move online, and their Internet sites were less functional. [3] Gertner and Stillman attribute these differences to the demands of managing vertical relationships. Dennis W. Carlton and Judith A. Chevalier conclude that manufacturers in the fragrance and DVD markets carefully control online retail sales of those products that may be most susceptible to "free riding" on the promotional efforts of individual retailers. These manufacturers make sure that Internet sites price their products relatively high to mitigate adverse effects on other sales outlets. [4]

Competition and Price Effects

In the early days of e-commerce, many analysts predicted that Internet competition would reduce both price levels and price dispersion for goods marketed online. Austan Goolsbee shows that PC buyers perceive online sellers to be effective competitors of local retailers and respond to high local PC prices by shifting demand to those online sellers. [5] Even when sales are transacted locally, Internet technologies may reduce consumer prices. Fiona M. Scott Morton, Florian Zettelmeyer, and Jorge Silva Risso report that consumers who used an online auto referral service saved an average of about 2 percent on the purchase price of a new car, relative to those who purchased without a referral. [6] Goolsbee and Jeffrey R. Brown find that the introduction of Internet comparison-shopping sites for life insurance is associated with significant decreases in the prices of these policies. These decreases are consistent with the expected effect of lower search costs for buyers and increased competition among insurance sel lers. [7] However, low-cost search using Internet retailers has not eliminated price dispersion, even for "standardized" products. For example, competition among online booksellers is associated with reduced average prices for the most popular books. Still, considerable price variation across sellers persists in this market, according to Karen Clay, Ramayya Krishnan, and Eric Wolff. [8] Research by Michael D. Smith and Erik Brynjolfsson suggests that this dispersion may be attributable, at least in part, to consumer preferences for particular "branded" online booksellers, even when their nominal delivered prices are higher. [9]

Internet Auctions

Online auction sites such as eBay are among the most profitable retail applications on the Internet. NBER researchers have studied online auction markets in a variety of contexts. [10] Recently they have directed their attention to the operation of the eBay market, focusing particularly on how the institutional characteristics of this market influence its acceptance and performance. Paul Resnick and Richard Zeckhauser explore how eBay's feedback system facilitates honest trade among participants, who do not know each other and cannot verify the goods to be traded before engaging in the transaction. [11] In their comparison of eBay and Amazon auction sites, Alvin E. Roth and Axel Ockenfels explain how differences in auction rules can lead to significant changes in bidders' behavior. [12] Rama Katkar and David Lucking-Reiley explore the impact of secret reserve prices on bidders' participation and on selling prices in eBay auctions. [13]

Electricity Market Restructuring

Until recently, electric utilities throughout the world were structured as state-owned monopolies or regulated-franchise monopolies. During the past decade, vertical restructuring typically has not changed regulatory oversight of distribution and of some transmission networks, but it has led to divestiture of generation to unregulated companies that sell to wholesale power pools at market-based prices. This reform and restructuring has become a more visible and politically charged topic over the past year. The re-regulation of substantial parts of the electricity market in England and Wales, the crisis in California's market, and concerns about...