Ratcheting, Competition, and the Diffusion of Technological Change: The Case of Televisions Under an Energy Efficiency Program

41 Pages Posted: 11 Sep 2018

See all articles by Tomomichi Amano

Tomomichi Amano

Harvard University - Business School (HBS)

Hiroshi Ohashi

University of Tokyo - Faculty of Economics

Date Written: June 25, 2018

Abstract

In differentiated goods markets with societal implications, quality standards are commonly implemented to avoid the under-provision of innovation. Firms have clear incentives to engage in strategic behavior because policymakers use market outcomes as a benchmark in designing regulation. This study examines a unique energy efficiency standard for television sets, under which future minimum efficiency standards are explicitly a function of current product offerings. The setting illustrates firms’ dual incentives at work: A firm better differentiates products under a looser standard, but may want to induce a tighter standard if it can benefit from raising rivals’ costs. These incentives drive firms to ratchet quality. We develop a structural model of product entry that illustrates how the regulator’s standard setting rule affects a firm’s product quality decision. Counterfactual simulations illustrate that ratcheting down was prevalent in this market and that incentives to ratchet up did not exist. The results suggest that in many commonly regulated markets in which firms share similar cost structures, firms are likely to experience incentives to ratchet down and delay the introduction of innovative products. The study highlights the importance of understanding supply side incentives, such as ratcheting, in designing and assessing policy.

Keywords: Product Differentiation, Energy Efficiency Standards, Ratcheting, Diffusion of Innovation

JEL Classification: L22, M31, Q58

Suggested Citation

Amano, Tomomichi and Ohashi, Hiroshi, Ratcheting, Competition, and the Diffusion of Technological Change: The Case of Televisions Under an Energy Efficiency Program (June 25, 2018). Columbia Business School Research Paper No. 18-71. Available at SSRN: https://ssrn.com/abstract=3241157 or http://dx.doi.org/10.2139/ssrn.3241157

Tomomichi Amano (Contact Author)

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Boston, MA 02163
United States

Hiroshi Ohashi

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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