Maryland Smith’s Pellegrino Wins Western Finance Association’s Best Paper Award

Maryland Smith’s Bruno Pellegrino won the 2021 Charles River Associates Award for the best paper on corporate finance, announced June 17 at the Western Finance Association’s annual conference. Pellegrino’s research looks at the rise of oligopolies in the United States with a groundbreaking new model for economists to more accurately measure competition in U.S. markets and the consequences for consumers.

Pellegrino’s model takes advantage of a dataset (developed by two former Maryland Smith professors) that text-mines Securities and Exchange Commission filings from public companies. He uses companies’ descriptions of their products to create a new economic model that, for the first time, incorporates a better map of the U.S. competitive landscape – one that shows which companies compete with each other.

Economists measure in dollars the value produced by companies to society at large as “total surplus”: this gets split into profits (the share that goes to producers) and consumer surplus (the share that goes to consumers). Pellegrino’s model is the first to give economists a picture of both these measures across multiple industries, allowing them to measure the cost of oligopoly to consumers.

Pellegrino’s findings clearly show that U.S. companies are not producing as much value for the consumer as they could, and part of the reason is the lack of competition. Economic activity is consolidated among a few large companies. When firms have fewer competitors, they withhold production and charge higher prices. This negatively affects consumer welfare. They also end up earning a bigger piece of the smaller pie. The higher the oligopoly power of the firms, the bigger the share of surplus that goes to the producers as opposed to the consumer.

“In a nutshell, American consumers are capturing a smaller slice of a shrinking pie,” Pellegrino says.

A different way to put it is that the economy is moving closer to a monopoly, and further away from an ideal competition, he says. His research also traces the causes and finds that a potential explanation can be offered by the secular decline of initial public offerings (IPOs).

“The last few decades have seen tremendous growth in the number of venture capital-backed startups,” he says. “The problem is that most of them end up being acquired – as opposed to going public – and do not end up competing with incumbent firms.”

According to Pellegrino’s model, the startups’ secular shift from IPOs to acquisition can account for a large fraction of the observed decline in consumer surplus.

“This paper contributes to a bigger antitrust debate about whether we should start to worry about these startup acquisitions,” Pellegrino says. “Many of these startup acquisitions fall under the reporting threshold for antitrust, so basically, these transactions are never scrutinized by antitrust authorities.”

“Product Differentiation and Oligopoly: a Network Approach,” is a working paper.