Hong Luo is an Assistant Professor of Business Administration in the Strategy Unit. She teaches the Strategy course in the MBA required curriculum.
Professor Luo’s research explores how innovators develop and commercialize their ideas, with an emphasis on how far an entrepreneur should develop an idea before selling it. Her findings have strategic implications both for the entrepreneurs and for the firms or investors who acquire their ideas.
Professor Luo received her Ph.D. in Economics from Stern School of Business, New York University, where she was a recipient of the Kauffman Dissertation Fellowship in Entrepreneurship Research. A native of China, she earned an MA in Economics from Beijing University and a BA in Finance from Renmin University of China.
When to Sell Your Idea: Theory and Evidence from the Movie Industry
How completely should an innovator develop his idea before selling it? In the context of selling original movie ideas, I present a model that features the writer's private information on the idea's value, different protection levels associated with different development stages, as well as costly buyer participation. The empirical results are consistent with the model's predictions: Inexperienced writers are excluded from the market for earlier-stage ideas, restricting their choices to developing the idea fully or abandoning it; writers who have a choice select better ideas to sell at a later stage and sell worse ideas at an earlier stage.
When to Sell Your Idea: Theory and Evidence from the Movie Industry
I study a model of investment and sale of ideas and test its empirical implications using a novel data set from the market for original movie ideas. Consistent with the theoretical results, I find that buyers are reluctant to meet unproven sellers for early-stage ideas, which restricts sellers to either developing the ideas fully (to sell them later) or abandoning them. In contrast, experienced sellers can attract buyers at any stage and they sell worse ideas sooner and better ideas later. These results have important managerial implications for buyers and sellers and show that, in such contexts, policy interventions that discourage buyer participation—such as stronger intellectual-property protection—may diminish the market for ideas and hurt inexperienced sellers.
Entertainment and Recreation Industry;
Invest in Information or Wing It? A Model of Dynamic Pricing with Seller Learning
Pricing idiosyncratic products is often challenging because the seller, ex ante, lacks information about the demand for individual items. This paper develops a model of dynamic pricing for idiosyncratic products that features the optimal stopping structure and a seller that learns about item-specific demand through the selling process. The model is estimated using novel panel data of a leading used-car dealership. Policy experiments are conducted to quantify the value of the demand information that the dealer obtains through the initial assessment and subsequent learning in the selling process. With the dealer's average net profit per car in the estimation sample being around $1150, the initial assessment is worth around $101, and the subsequent learning in the selling process helps improve the dealer's profit by at least $269. These estimates suggest a potentially high return to taking the "information-based" approach to pricing idiosyncratic products.
Keywords: dynamic pricing;
active seller learning;
the value of information;
Demand and Consumers;
Copyright Enforcement: Evidence from Two Field Experiments
Copyright infringement is an increasingly important challenge, leading creators to invest in methods of detection and enforcement. We study different enforcement methods using a novel dataset generated from two experiments run by a stock-photography agency. We find that a substantial reduction in the requested amount generates a small increase in settlement. In contrast, given the same reduced request, a message that informs infringers of the price reduction and acknowledges the possibility of unintentionality generates a large increase in settlement. Including a deadline further increases the response. The higher settlement rate avoids additional legal action, reducing social costs of dispute resolution.
Keywords: Lawsuits and Litigation;
Patent Publication and the Market for Ideas
In this paper, we study the effect of invention disclosure through patent publication on the market for ideas. We do so by analyzing the effects of the American Inventor’s Protection Act of 1999 (AIPA)— which required US patent applications to be published 18 months after their filing date rather than at patent grant—on the timing of licensing deals in the biomedical industry. We find that post-AIPA US patent applications are significantly more likely to be licensed before patent grant and shortly after 18- month publication. Licensing delays are reduced by about ten months, on average, after AIPA’s enactment. These findings suggest a hitherto unexplored benefit of the patent system: by requiring inventions to be published through a credible, standardized, and centralized repository, it mitigates information costs for buyers and sellers and, thus, facilitates transactions in the market for ideas.
Keywords: Market Transactions;
Innovation and Invention;
Hagiu, Andrei, and Hong Luo. "Getty Images." Harvard Business School Teaching Note 714-476, March 2014. View Details
CarMax: Disrupting the Used-Car Market
In 2012, CarMax was the leading retailer of secondhand cars in the United States and a fast-growing competitor in the used car auction market. After its founding in 1993 by Circuit City's management, CarMax had grown rapidly. The company had been profitable since 2000 and independent from its parent company since 2002. While Circuit City went bankrupt in 2009 under pressure from Best Buy and challenging economic conditions, CarMax flourished and expanded through the economic crisis. Fiscal 2012 revenue reached $10.5 billion and net income, a record $413 million. However, CarMax still only accounted for less than 3% of the fragmented secondhand car market. Additionally, it was keen to avoid the fate of its parent and to stay ahead of copycat competitors. What should CarMax do to grow its market position and continue its success in used car retailing and auctioning?
Keywords: Product Positioning;
Business Growth and Maturation;
Insolvency and Bankruptcy;
Growth and Development Strategy;
Hagiu, Andrei, and Hong Luo. "Getty Images."
Harvard Business School Case 713-515, March 2013. (Revised March 2014.) View Details
Timing and the Selling of Ideas
Most entrepreneurs need to cooperate with another party in order to commercialize their ideas. Professor Luo explores how far entrepreneurs should develop their ideas before selling them. The stakes are high: without this understanding, many promising ideas could be wasted, and investors could falter in bringing entrepreneurs’ ideas to market.
While Professor Luo studies this issue in the context of the U.S. film industry, her findings have broad strategic applicability to a variety of sectors, including research alliances, technology licensing, and venture-capital financing. In Hollywood, a screenwriter must decide whether to sell a storyline for a movie or a complete script – that is, to time the sale early or late in the development process. In her analysis, Professor Luo has employed a model that incorporates key features of a market for ideas. She then tested the model’s predictions against a novel data set of original movie ideas sold in Hollywood over an eight-year period. The empirical findings mirror the model’s predictions. Inexperienced screenwriters are excluded from the market for earlier-stage ideas (storylines), so their only options are to develop their ideas into complete scripts or to abandon them. Experienced writers with more choice develop their best ideas to sell as scripts and market the rest as storylines.