This paper addresses a longstanding puzzle involving the unbundling of services that has occurred over more than two decades in the U.S. advertising agency industry: How can the shift from the bundling to the unbundling of services be explained and what accounts for the slow pace of change? Using a cost-based theoretical framework of bundling due to Evans and Salinger (2005, 2008), we develop a simple model of an advertising agency's decision to unbundle its services as a tradeoff between the fixed cost to the advertiser of establishing and maintaining a relationship with an advertising agency and pecuniary economies of scale available in providing media services. The results from an econometric analysis of cross-sectional and pooled data collected by the U.S. Census Bureau for quinquenial censuses conducted between 1982 and 2002 support the key predictions of the model. We find that advertising agency establishments are more likely to unbundle if they are large and diversified in their service offerings and are less likely to do so with increasing age and greater geographical scope. We also find a strong trend toward unbundling over time, a result that is partially explained by increases in media prices over time.
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Concentration Levels in the U.S. Advertising and Marketing Services Industry: Myth vs. Reality
August 2009
Working Paper Number:
CES-09-16
We analyze changes in concentration levels in the U.S. Advertising and Marketing Services industry using data from the U.S. Census Bureau's quinquennial Economic Census and the Service Annual Survey. Heretofore largely ignored, these data allow us to redress some of the measurement problems surrounding estimates found in the existing literature Firm level concentration as measured by the Herfindahl-Hirschman Index varies across the sectors comprising the industry, but all are within the range generally considered as indicative of a competitive industry. At the holding company level, the four largest organizations account for about a quarter of the industry's total revenue, a share lower by an order of magnitude than that frequently cited in the trade press.
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Residual Claims and Incentives in Restaurant Chains
July 2006
Working Paper Number:
CES-06-18
I examine the relationship between ownership and production activities using a new dataset of restaurant chains. Production in restaurant chains provides an opportunity to examine the effects of residual claims on incentives because production is decentralized and fairly uniform across restaurants in the same chain. Yet the allocation of residual claims varies between company-owned and franchised units, affecting the strength of incentives for restaurantlevel activities. The decision to own or franchise each restaurant reflects the value of either withholding or allocating residual claims for performing these activities. I find that more complex production activities are systematically correlated with company ownership. Onsite food production raises the likelihood of company ownership by 28% relative to offsite food production. Table service raises the likelihood of company ownership by 26% relative to counter service. The results are not consistent with straightforward effort-promoting effects of residual claims in simple principal agent models. They are consistent with the view that residual claims can generate unbalanced incentives across diverse tasks.
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NEW EVIDENCE ON EMPLOYER PRICE-SENSITIVITY OF OFFERING HEALTH INSURANCE
January 2014
Working Paper Number:
CES-14-01
Economic incentives such as the preferential tax treatment of premiums and economies of scale encourage employers to provide health insurance through the workplace. The employer's decision to offer health insurance depends on how much workers value insurance relative to wages, and that value is likely to vary, given the composition of the establishment's workforce. Using the 2008-2010 MEPS Insurance Component augmented with information from other data sources, we generate new estimates of employers' price-sensitivity of offering insurance. Our results suggest that employers are sensitive to changes in the tax price of insurance, with very small employers exhibiting the largest price-sensitivity. Employer size, workforce composition, and local labor market conditions also influence the employer's decision to offer insurance. New evidence can inform policy discussions about the implications of broad-based reforms that change marginal tax rates as well as targeted strategies that address the tax-exempt status of premiums.
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The Rise of Specialized Firms
February 2024
Working Paper Number:
CES-24-06
This paper studies firm diversification over 6-digit NAICS industries in U.S. manufacturing. We find that firms specializing in fewer industries now account for a substantially greater share of production than 40 years ago. This reallocation is a key driver of rising industry concentration. Specialized firms have displaced diversified firms among industry leaders'absent this reallocation concentration would have decreased. We then provide evidence that specialized firms produce higher-quality goods: specialized firms tend to charge higher unit prices and are more insulated against Chinese import competition. Based on our empirical findings, we propose a theory in which growth shifts demand toward specialized, high-quality firms, which eventually increases concentration. We conclude that one should expect rising industry concentration in a growing economy.
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Where Do Manufacturing Firms Locate Their Headquarters?
October 2005
Working Paper Number:
CES-05-17
Firms' headquarters [HQ] support their production activity, by gathering information and outsourcing business services, as well as, managing, evaluating, and coordinating internal firm activities. In search of locations for these functions, firms often separate the HQ function physically from their production facilities and construct stand-alone HQs. By locating its HQ in a large, service oriented metro area away from its production facilities, a firm may be better able to out-source service functions in that local metro market and also to gather information about market conditions for their products. However if the firm locates the HQ away from its production activity, that increases the coordination costs in managing plant activities. In this paper we empirically analyze the trade-off of these two considerations.
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The Structure Of Technology, Substitution, And Productivity In The Interstate Natural Gas Transmission Industry Under The NGPA Of 1978
August 1992
Working Paper Number:
CES-92-09
The structure of production in the natural gas transmission industry is estimated using the dual restricted cost function based on panel data for twenty four firms. A standard translog variable cost function with firm fixed effects is augmented with controls for capacity utilization, technical change, and shifting regulatory regimes. During the implementation of the Natural Gas Policy Act (NGPA), 1978-1985, the industry exhibited no significant increase in productivity, largely attributable to the decline in output for the industry. Regulatory efforts to promote voluntary non-contract transmission appear to have enabled some firms to mitigate the overall industry productivity stagnation. The NGPA instituted a complex schedule of partial and gradual decontrol of natural gas prices at the well head. This form of deregulation costs natural gas producers over $100 billion in lost revenues, relative to immediate and full price deregulation. However, the transmission firms benefited by paying $1.5 billion less for natural gas than they would have under total deregulation. The benefits to consumers, totaling $98.7 billion, were unevenly distributed. On average, for the 1978-1985 period, utilities, commercial, and industrial users paid less for their gas than they would have under total decontrol and residential users paid $8.6 billion more. The NGPA and Federal Regulatory Commission oversight practices allow the transmission industry to price discriminate among customers.
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Intra-Firm Spillovers? The Stock and Flow Effects of Collocation
January 2015
Working Paper Number:
CES-15-01
We examine the impact of collocation on local within-firm performance, or intra-firm spillovers, by decomposing spillovers into one-time stock and recurring flow effects. Stock effects include one-time learning effects. Flow effects include ongoing resource sharing as well as cannibalization. Using data on the population of U.S. hotels and restaurants from 1977-2007, we exploit changes in the number of collocated establishments owned by the same firm to estimate the relative importance of stock and flow benefits. We find that collocation improves the productivity of new and existing establishments by 1-2%, even when correcting for endogenous sorting into collocation. The results, in conjunction with our field work, suggest that collocation generally facilitates the transfer of knowledge within the firm, but that flow effects of collocation are more sensitive to the broader economic environment.
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The Dynamics of Market Structure and Market Size in Two Health Services Industries
October 2007
Working Paper Number:
CES-07-26
The relationship between the size of a market and the competitiveness of the market has been of long-standing interest to IO economists. Empirical studies have used the relationship between the size of the geographic market and both the number of firms in the market and the average sales of the firms to draw inferences about the degree of competition in the market. This paper extends this framework to incorporate the analysis of entry and exit flows. A key implication of recent entry and exit models is that current market structure will likely depend upon history of past participation. The paper explores these issues empirically by examining producer dynamics for two health service industries, dentistry and chiropractic services. We find that the number of potential entrants and past number of incumbent firms are correlated with current market structure. The empirical results also show that as market size increases the number of firms rises less than proportionately, firm size increases, and average productivity increases. However, the magnitude of the correlations are sensitive to the inclusion of the market history variables.
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Re-engineering Key National Economic Indicators
July 2019
Working Paper Number:
CES-19-22
Traditional methods of collecting data from businesses and households face increasing challenges. These include declining response rates to surveys, increasing costs to traditional modes of data collection, and the difficulty of keeping pace with rapid changes in the economy. The digitization of virtually all market transactions offers the potential for re-engineering key national economic indicators. The challenge for the statistical system is how to operate in this data-rich environment. This paper focuses on the opportunities for collecting item-level data at the source and constructing key indicators using measurement methods consistent with such a data infrastructure. Ubiquitous digitization of transactions allows price and quantity be collected or aggregated simultaneously at the source. This new architecture for economic statistics creates challenges arising from the rapid change in items sold. The paper explores some recently proposed techniques for estimating price and quantity indices in large scale item-level data. Although those methods display tremendous promise, substantially more research is necessary before they will be ready to serve as the basis for the official economic statistics. Finally, the paper addresses implications for building national statistics from transactions for data collection and for the capabilities and organization of the statistical agencies in the 21st century.
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Scale Economies and Consolidation in Hog Slaughter
March 2000
Working Paper Number:
CES-00-03
We use establishment based panel data to estimate a cost function which identifies the role of scale economies in hog slaughter consolidation. We find modest by extensive technological scale economies in the 1990s, and they became more important over time. But wages rose sharply with plant size through the 1970s and those wage premiums generated a pecuniary scale diseconomy that largely offset the effects of technological scale economies. The size-wage relation disappeared in the 1980; with growing technological scale economies and disappearing pecuniary diseconomies, large plants realized growing cost advantages over smaller plants, and production shifted to larger plants.
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