Ratcheting, Competition, and the Diffusion of Technological Change

Tomomichi  Amano; Hiroshi  Ohashi

Working Paper | HBS Working Paper Series | 2018

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

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; Technological Innovation; Competition; Quality; Governing Rules, Regulations, and Reforms; Policy;

Language: English

Format: Print

43 pages

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Citation:

Amano, Tomomichi, and Hiroshi Ohashi. "Ratcheting, Competition, and the Diffusion of Technological Change: The Case of Televisions Under an Energy Efficiency Program." Harvard Business School Working Paper, No. 19-021, September 2018.

Launched as a private brand in 1980 to counter the increasingly brand-conscious consumer in Japan, MUJI offered beautifully designed, fairly priced, no-frills quality goods. The once modest private label brand with 40 products had expanded significantly by 2019 to more than 7,000 products with more than half its 975 stores outside its home market in Japan. It had even expanded into the service industry, opening hotels. President Matsuzaki of Ryohin Keikaku, MUJI’s operating company, was charged with reorganizing the product portfolio and prioritizing new initiatives, tasks complicated by the absence of a clear definition of “MUJI-ness,” the meaning of which had always been intentionally left open.

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

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