This dissertation explores the relationship between vertical integration and market structure formation. It does so by combining the empirical industrial organization literature on vertical integration with that on market entry. The first empirical essay, Chapter 2, explores the motives for vertical integration in the US generic pharmaceutical industry. The industry is made up of numerous drug markets that open up to competition among generic manufacturers at different points in time. Each market consists of an upstream segment that manufactures active pharmaceutical ingredients, and a downstream segment that processes the active pharmaceutical ingredients into finished formulations and supplies them to final consumers. The econometric analysis shows that vertical integration in the generic drug industry is characterized by bandwagon behavior. While bandwagon effects have been widely discussed in the vertical integration literature, this study is one of the first to present empirical evidence on its existence. The analysis also indicates that vertical integration is partly driven by the need for a particular form of relationship-specific non-contractible investment -- the early development of active pharmaceutical ingredients by upstream units. The relationship-specificity of such investments is greater in markets where generic firms try to enter by challenging the patents held by originator pharmaceutical companies. I find that in such markets, individual firms have a higher propensity to vertically integrate.

The second empirical essay, presented as Chapter 3, introduces an econometric model of a vertical entry game. The model is used to estimate rival effects -- the effect of rival entry on the post-entry profits of individual firms. These estimates allow us to make inferences about the competitive effects of vertical integration. Application of the model to the generic pharmaceutical industry yields the following result: vertical integration has significant efficiency effects that benefit unintegrated downstream firms. This implies that vertical integration is likely to be procompetitive from a static point of view. The parameter estimates are used to simulate the impact of a hypothetical policy that bans vertically integrated entry. The results indicate that such a ban tends to reduce the equilibrium number of downstream entrants. This suggests that the effect of vertical integration on market structure formation is also procompetitive.

The patent system of the People’s Republic of China has only a history of about 30 years, yet it has

undergone three major policy changes to keep up with the tremendous pace of economic and technological

progress in China. Once a country in which technological advance relies primarily on copying

and imitating foreign innovations, China is gradually shifting towards a regime that emphasizes on

strong intellectual property and indigenous innovation. It is fascinating, therefore, to witness this transition.

It is important to enhance my understanding of the patent regime as a mechanism to promote

innovation and the dissemination of knowledge, as is the purpose of the thesis.

Both of the chapters in this dissertation focus on patent applicants’ preference for how quickly they

want their patent applications to be processed. This is nontrivial primarily due to heterogeneity in firm

characteristics, nature of invention, market structure, technology backgrounds and many unobservable

factors. I propose two factors that partially determine an inventor’s preference for speed of patenting:

the inter-temporal value patents of their invention and the speed of technological progress.

The first chapter investigates the heterogeneous inter-temporal patterns of inventions’ value flow

and the associated applicants’ patenting strategies for a small set of United States patents. To measure

the characteristics of different inventions’ inter-temporal value flow, we exploit a policy lever provided

by the Chinese government that allows patent applicants to freely choose between one patent

protection of short examination delay, short protection period and another patent protection of long

examination delay, long protection period. We find that the majority of applicants that favor the former

protection (short&shot) have Electronics and Mechanics inventions, whereas applicants that favor

the latter (long&long) are mostly within Pharmaceuticals and Drugs. We then exploit this variation

in patent choices under the Chinese regime with applicants’ patenting strategies in the U.S., for identical

inventions. The empirical results suggest the short&short Chinese patent holders have a strong

tendency of pursuing early U.S. patent issuance whereas the long&long patent holders have a strong

tendency of maintaining their U.S. patents for long periods. The results are robust with or without

technology field fixed effects.

The second chapter analyze the effect of faster technology development on firms patenting strategy.

Using a dataset with information about patent applications in both China and the US, I find that

firms are willing to secure early patent grants when technology moves ahead faster. The conventional

wisdom that a patent secures a flow of monopoly profits that depreciates at a constant speed over time

is not consistent with my empirical findings. Faster technology progress shifts the profits towards the

early periods, making early grants more important. The empirical results suggest that a more flexible

patent regime which offers options for speed is more efficient.

This thesis is about estimation of classic and modified versions of the rational expectations competitive storage model in the tradition of Gustafson (1958) (the storage model for short), an important economic theory of price determination of storable primary commodities.

The first chapter proposes and evaluates a procedure for approximating the optimal instruments under the context of the classic storage model. This procedure involves calibrating the unknown, true conditional variance function of price disturbance in the optimal instrument using the counterpart of an auxiliary storage model. Monte Carlo simulation suggests that this procedure brings small-sample efficiency gain relative to the benchmark Generalized Method of Moments (GMM) estimator of Deaton and Laroque (1992) and a few other alternatives at the sample size of 100. Its performance is also robust to parameterizations of the auxiliary model within moderate range from the true. This chapter also studies the estimators that require no preliminary estimation, which provide preliminary estimates for the proposed and other infeasible estimators. I find that a well-performing preliminary estimator does not contain instruments of lagged-more-than-one price or increasing transformations of lag prices, and does not use estimated optimal weighting matrix or adopt the continuous-updating approach of Hansen, Heaton and Yaron (1996). Therefore, an instrument of a constant plus reciprocal of lag one price and an identity weighting matrix in general form a good preliminary estimator.

Chapter 2 addresses two concerns about the usefulness of the theory of storage. While commodity speculators can induce serial dependence in price, Deaton and Laroque (1992, 1995 and 1996) argue that speculation explains only a small fraction of the observed autocorrelation in the actual data. Furthermore, the expected rate of return on storage implied by previous econometric estimates is implausibly small. This chapter addresses these two concerns about the validity of the theory of speculative storage by recognizing the downward trend in real price. The existence of a unique non-stationary equilibrium is proved for a rational-expectations competitive-storage model with a trend, and testable implications of the model are also derived. I show that, when a downward price trend in part or all of the sample is ignored, the autocorrelation coefficient in price tends to be overestimated while the expected rate of return tends to be underestimated. Finally, I offer an empirical illustration of the trending storage model using annual corn price over the period from 1961 to 2005.

Chapter 3 discusses the empirical implications of the distributional misspecification of two nonlinear least squares estimators of a modified storage model with unbounded prices. The existence of infrequent, extremely low harvest generates extremely high cutoff price which is difficult to pass in finite periods. Meanwhile, due to the tiny chance of such events, it is easy for the practitioners to ignore them during the estimation and apply a false storage model with relatively low cutoff price. This chapter studies how such misspecification can affect the empirical implications of estimating the storage model. Surprisingly, I find that misspecified econometric models yield better estimates for the real interest rate; and the estimated cutoff price, actually captures the sharp turning point of the equilibrium price function. Therefore, though misspecified, the estimates are practically useful. Nevertheless, it is also emphasized that such interesting property of the two estimators should by no means be understood as a defense of ignoring the infrequent influential event in the asset pricing problems.

Mathematical proofs for general results and further discussions of a few econometric issues can be found in the Appendices. While a few theoretical results have been derived, this thesis relies heavily on Monte Carlo simulation and numerical functional approximation. Numerical methods turn out to be a convenient and many times necessary tools to study small-sample econometric problems when asymptotic results cannot provide an accurate approximation to the exact sampling.

One of the main purposes of the patent system is to facilitate the flow of knowledge by ensuring access to information related to inventions. In the United States, the patent applicant has a legal duty to disclose knowledge of relevant prior art in the form of citations, thus placing the innovation in context and enhancing knowledge of this prior art. However, the applicant might miss relevant prior art due to ignorance, or conceal it for strategical reasons, which could reduce the value of public information generated by the applications and also reduce the accuracy of patent grant decisions. Patent examiners can add citations not known to the applicant, because they supposedly have less barrier in accessing knowledge from different regions. The examiners, specialized in a given technical area, might also identify and add prior art that are deliberately omitted by applicants thus tend to render the patent obvious or non-novel. Prior literature generally agrees the examiner citation is more important than applicant citation as a signal of patent value or knowledge flow. Using US patents granted since 2001, I test the hypothesis that examiner citations contain more important information on patent value and knowledge flow than applicant citations. Surprisingly, on a variety of measures, I find evidence to support the contrary. I also show that the evidence supporting the current hypothesis was attained by a model mis-specification. The findings shed light on many innovation studies that rely on patent citations, and also have important policy implications regarding the operation of the patent office and in general the patent examination system.

This dissertation is an exhibition of applied microeconomic theory in political and resource economics. As three examples, I investigate three different questions, respectively: Does polarization of beliefs always intensify political gridlock in collective decision making? Will input-efficiency improvement in water use, e.g., adoption of more-efficient irrigation technologies and investment in water-conveyance systems, definitely decrease the demand for water-storage capacities, e.g., dams and reservoirs? Is collectivism, rather than individualism, generally helping society overcome the collective action problem? Using the game-theory or stochastic-control approach, I theoretically challenge conventional wisdoms about these questions, and illustrate the empirical relevance of my challenges, qualitatively or quantitatively, in different contexts, e.g., the Chinese transition from the planned economy, World War II and Operation Market--Garden, the irrigation water-inventory management of the California State Water Project, and the histories of collective action in China and Europe.

Borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk-averse party subject to endowment shocks. The surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties, including any other competitive agents who are potential lenders to the sovereign. The sole punishments consist of renegotiation-proof changes in the path of future payments. We show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever. That is, borrowing and lending are possible under anarchy, and are supported by punishments that consist of cheating any cheater. Long-term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short-term loans. The analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved.

Inefficiencies in accessing intellectual property (IP) appear to be hindering otherwise valuable research and development (R&D) in horticultural crop varieties. While leading private sector agricultural biotechnology firms with strong IP positions and commercial freedom to operate (FTO) see insufficient incentives in the small, fractured markets of horticultural products, researchers with public-sector support for horticultural projects but weak IP positions may find that the best way of gaining FTO and moving forward is to band together and provide mutual access to one another’s technologies. The Public Intellectual Property Resource for Agriculture (PIPRA), headquartered at UC Davis, is a new coalition of U.S. universities and foundations committed to this strategy.