Periodic Reporting for period 4 - EMBED (Embedded Markets and the Economy)
Reporting period: 2022-12-01 to 2023-05-31
EMBED is premised on the idea that business relationships underlie the production of goods and the functioning of the economy more generally. Better understanding these relationships at the micro level, and particularly at the level of the linkages connecting businesses, enables a fuller appreciation of the aggregate impact shocks can have.
Much production is built on an intricately linked web connecting specialized production units, each relying on the orderly flow of inputs from suppliers to produce their own output, which in turn is routed towards other production units. Shocks propagate through these supply networks. Recently the shortage of computer chips has reduced the availability of a range of consumer goods. By studying problems like this from a systemic perspective, EMBED seeks to better anticipate how shocks propagate and how production might be re-routed to mitigate the impact of shocks.
EMBED has developed theoretical modelling techniques for representing supply networks; algorithms and techniques for manipulating and visualising firm-to-firm transaction data as a supply network; and new measures that speak to the robustness of supply networks. Further contemporary questions that EMBED speaks to include:
• Under what conditions can we expect businesses to form robust supply networks?
• What kinds of shocks are different supply chains/networks most susceptible too?
• What rerouting of production is possible following a shock to a specific firm?
• How does globalization and specialization of production contribute to the fragility of the global economy?
• What will be the cost to countries imposing sanctions, given the equilibrium response to them?
• When do firms’ positions in supply chains/networks confer market power on them?
Much production is built on an intricately linked web connecting specialized production units, each relying on the orderly flow of inputs from suppliers to produce their own output, which in turn is routed towards other production units. Shocks propagate through these supply networks. Recently the shortage of computer chips has reduced the availability of a range of consumer goods. By studying problems like this from a systemic perspective, EMBED seeks to better anticipate how shocks propagate and how production might be re-routed to mitigate the impact of shocks.
EMBED has developed theoretical modelling techniques for representing supply networks; algorithms and techniques for manipulating and visualising firm-to-firm transaction data as a supply network; and new measures that speak to the robustness of supply networks. Further contemporary questions that EMBED speaks to include:
• Under what conditions can we expect businesses to form robust supply networks?
• What kinds of shocks are different supply chains/networks most susceptible too?
• What rerouting of production is possible following a shock to a specific firm?
• How does globalization and specialization of production contribute to the fragility of the global economy?
• What will be the cost to countries imposing sanctions, given the equilibrium response to them?
• When do firms’ positions in supply chains/networks confer market power on them?
EMBED has produced eleven peer-reviewed publications, including papers in the American Economic Review, the Journal of Political Economy, and the Review of Economic Studies.
A further nine working papers have been written, including one that is revise and resubmit at the Journal of Political Economy. In addition, a survey article in the Annual Review of Economics, a book chapter, and an overview piece on networks and policy in a special edition of the Oxford Review of Economic Policy have been produced.
Embed progressed four sub-projects on networked markets over the course of the study: (i) a theoretical analysis of dynamic relationships, (ii) a field experiment investigating relationship formation, (iii) a lab experiment investigating market efficiency, and (iv) a theoretical analysis of supply chain fragility. Sub projects (ii) and (iii) were significantly affected by the pandemic. In time subproject (ii) was able to successfully move to an online platform, unfortunately sub project (iii), despite various redesigns, was unable to overcome the impact of COVID in India. In contrast, the outputs attributable to subproject (iv) surpassed expectations.
A major contribution of EMBED has been to the understanding of the fragility of supply networks. An important output in the area, and one that was envisioned in the proposal, is our paper Supply Network Formation and Fragility (2022), published in the American Economic Review. This paper examined the incentives of firms embedded in complex production processes to form robust supply chains and found that firms’ investments in their supply relationships often leave supply chains fragile with respect to certain types of shocks.
This paper also provided new tools which EMBED has built on. For example, in Network Bottlenecks and Market Power (ongoing) we focus on capacity constraints in the supply network and show which firms that have market power conferred on them by their position in the supply network. The supply networks can be represented as goods flowing through the economy like water through pipes, and it firms located at bottlenecks in this system that have market power. Our relatively simple formulation of the problem allows these ideas to be applied at scale and permits us to find bottleneck firms on an economy-wide basis using firm-to-firm transaction data.
The results from EMBED outputs have been very widely disseminated though seminars and keynote talks at conferences in the US, Europe, the Middle East, Asia, and Australia. Dissemination has included talks to governments, international organizations, and videos that have been posted on Youtube. Coverage by the international press includes blogs and an article in the Economist.
A further nine working papers have been written, including one that is revise and resubmit at the Journal of Political Economy. In addition, a survey article in the Annual Review of Economics, a book chapter, and an overview piece on networks and policy in a special edition of the Oxford Review of Economic Policy have been produced.
Embed progressed four sub-projects on networked markets over the course of the study: (i) a theoretical analysis of dynamic relationships, (ii) a field experiment investigating relationship formation, (iii) a lab experiment investigating market efficiency, and (iv) a theoretical analysis of supply chain fragility. Sub projects (ii) and (iii) were significantly affected by the pandemic. In time subproject (ii) was able to successfully move to an online platform, unfortunately sub project (iii), despite various redesigns, was unable to overcome the impact of COVID in India. In contrast, the outputs attributable to subproject (iv) surpassed expectations.
A major contribution of EMBED has been to the understanding of the fragility of supply networks. An important output in the area, and one that was envisioned in the proposal, is our paper Supply Network Formation and Fragility (2022), published in the American Economic Review. This paper examined the incentives of firms embedded in complex production processes to form robust supply chains and found that firms’ investments in their supply relationships often leave supply chains fragile with respect to certain types of shocks.
This paper also provided new tools which EMBED has built on. For example, in Network Bottlenecks and Market Power (ongoing) we focus on capacity constraints in the supply network and show which firms that have market power conferred on them by their position in the supply network. The supply networks can be represented as goods flowing through the economy like water through pipes, and it firms located at bottlenecks in this system that have market power. Our relatively simple formulation of the problem allows these ideas to be applied at scale and permits us to find bottleneck firms on an economy-wide basis using firm-to-firm transaction data.
The results from EMBED outputs have been very widely disseminated though seminars and keynote talks at conferences in the US, Europe, the Middle East, Asia, and Australia. Dissemination has included talks to governments, international organizations, and videos that have been posted on Youtube. Coverage by the international press includes blogs and an article in the Economist.
While each of the EMBED outputs has contributed to knowledge and pushed the state of the art forward, I focus here on the contributions to technology that may be directly valuable to policy makers. An important evolution of EMBED in the later stages has been towards the practical use of the research, including:
1. The development of a technology (an algorithm) that can be deployed with the right data to (i) identify firms with market power due to their position in the supply network (which is of potential interest to antitrust authorities); (ii) anticipate the impact of sanctions; and (iii) stress-test supply networks.
2. A novel and simple measure of the short-run impact supply shocks will have has been proposed, and provides a contrasting picture to the existing widely used measure of the long-run impact.
3. An understanding of how internet platforms can distort competition in markets through the information they reveal to different firms about different consumers has been developed; potentially providing a starting point the regulate use of the data internet firms have collected.
4. A framework that brings together core ideas from management science into an economics framework, which can be used by antitrust authorities to guide them on conglomerate mergers. This helps to capture what has become known as “ecosystem effects” from mergers and acquisitions, where the existing industrial organization-based framework can struggle.
The interests of policy makers regarding these advancements are evidenced by the following:
• Discussions have been held with multiple governments about how the work in EMBED might be used to create an early warning system anticipating supply shortages
• We have worked with the Ugandan government, deploying our technology to help them better understand supply chain disruptions resulting from the COVID-19 pandemic.
• I have given a seminar on supply networks at the foreign office, which focused on disruptions and discussed how the potential impact of different sanctions could be anticipated.
• I have given a talk to Ofcom on the power of internet platforms to use their consumer data to affect market outcomes.
• At a recent competition policy event, Hans Zenger (Chief Economist at DG Comp) discussed our work on firm capabilities - A rough transcription of his comments are as follows: “I think, if we look in the future, we can't look at products, we have to look at capabilities and firms’ abilities in a developing space … I'm thinking of papers, like, you know, Matthew Elliott, from Cambridge has started to produce some research about ecosystems and capabilities. And I think that's very relevant… I think that lens of capabilities and scarce capabilities is a very useful one.”
At present discussions with policy makers are preliminary. Potentially though it could provide the foundations for new technology (broadly defined) that is of use to policy makers.
1. The development of a technology (an algorithm) that can be deployed with the right data to (i) identify firms with market power due to their position in the supply network (which is of potential interest to antitrust authorities); (ii) anticipate the impact of sanctions; and (iii) stress-test supply networks.
2. A novel and simple measure of the short-run impact supply shocks will have has been proposed, and provides a contrasting picture to the existing widely used measure of the long-run impact.
3. An understanding of how internet platforms can distort competition in markets through the information they reveal to different firms about different consumers has been developed; potentially providing a starting point the regulate use of the data internet firms have collected.
4. A framework that brings together core ideas from management science into an economics framework, which can be used by antitrust authorities to guide them on conglomerate mergers. This helps to capture what has become known as “ecosystem effects” from mergers and acquisitions, where the existing industrial organization-based framework can struggle.
The interests of policy makers regarding these advancements are evidenced by the following:
• Discussions have been held with multiple governments about how the work in EMBED might be used to create an early warning system anticipating supply shortages
• We have worked with the Ugandan government, deploying our technology to help them better understand supply chain disruptions resulting from the COVID-19 pandemic.
• I have given a seminar on supply networks at the foreign office, which focused on disruptions and discussed how the potential impact of different sanctions could be anticipated.
• I have given a talk to Ofcom on the power of internet platforms to use their consumer data to affect market outcomes.
• At a recent competition policy event, Hans Zenger (Chief Economist at DG Comp) discussed our work on firm capabilities - A rough transcription of his comments are as follows: “I think, if we look in the future, we can't look at products, we have to look at capabilities and firms’ abilities in a developing space … I'm thinking of papers, like, you know, Matthew Elliott, from Cambridge has started to produce some research about ecosystems and capabilities. And I think that's very relevant… I think that lens of capabilities and scarce capabilities is a very useful one.”
At present discussions with policy makers are preliminary. Potentially though it could provide the foundations for new technology (broadly defined) that is of use to policy makers.