Essays on Competition, Digitization, and Innovation

This dissertation comprises three studies on competition, digitization, and innovation. The first study investigates the impact of entry of new competitors on incumbent firms in platform markets, focusing on the heterogeneous effects of firm quality and platform maturity.,The second study examines the causal impact of pricing on firm reputation./nIn particular, online consumer review systems have gained prominence in recent decades, and this study focuses on how these ratings are generated and which factors influence consumer reviews. The third paper focuses on innovation and the impact of individual-level decision-making and characteristics on which patents are issued and the direction of innovation./nIn Chapter 1, I study the effect of entry on incumbent firms in platform markets. The entry of firms into a platform has an ambiguous effect on the profitability of incumbent firms operating on the platform: While entry increases competitive pressure on incumbents, supply-side expansion may attract new consumers---effectively increasing total platform size and presumably benefiting all firms. The paper develops a simple model and explores how firm entry affects incumbents’ outcomes in a two-sided market./nI focus on Yelp Transactions Platform, an online platform that connects consumers with local services. I study a quasi-exogenous increase in firms on the platform and exploit geographic variation to employ a difference-in-differences research design. I find that, on average, market expansion favors incumbents, though the average effect masks substantial heterogeneities: High-quality incumbent firms experience a positive effect, whereas low-quality firms perform unambiguously worse. Using a structural model, my analysis finds a non-monotonic relationship between market expansion and firm performance. Lastly, I use YTP’s granular data on consumer and incumbent behavior to explore other market outcomes, main mechanisms, and firms' strategic responses./nThe results of Chapter 1 highlight the growing importance of perceived firm quality and standardized ratings on firms’ performance. In Chapter 2, I (along with Mike Luca) explore the causal impact of pricing on firm reputation as measured by online ratings. We again use data from YTP on prices, orders, and ratings. Looking at narrow windows around the timing of menu price changes, we find that online reviews are influenced by price changes and that increasing prices tends to harm a firm’s reputation;/na 1\% increase in the price of an item leads to a decrease of approximately 5\% in the ratings left by users. Consistent with this, the distribution of ratings for cheaper restaurants is similar to that of more expensive restaurants. We also find that these effects are not driven by consumer retaliation against price changes, but rather by changes in absolute price levels. Finally, we derive implications to consumers, firms' strategies, and the design of reputation systems./nIn Chapter 3, I (along with Abhay Aneja and Gauri Subramani) study how differences in persistence contribute to the gender ``innovation gap,'' i.e. that women are much less likely to receive patents than men. To provide causal evidence of a persistence channel, we use exogenous variation in the likelihood of early-stage adverse decisions about patentability claims that arises from the random assignment of applications to patent examiners. We find that majority-female innovator teams are less likely than majority-male teams to either appeal or amend applications that receive rejections within the patent prosecution process. Roughly 1/2 of the overall gender gap in awarded patents can be accounted for by the differential propensity of women to exit the application process after a rejection of patent claims at the first stage of the prosecution process. We also provide evidence that firms and other organizations can mediate the gender gap in persistence: The persistence gap is reduced for women-led applications that have the backing of firms. We find that examiner identity has little to do with differential persistence across genders.

Advisor: Tadelis, Steven
Morgan, John