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CORNING INCORPORATED
An Industrial Organization Perspective
Donald L. Palma
dlp8401@rit.edu
Industrial Organization
Profes...
1
INTRODUCTION
Corning Incorporated (NYSE:GLW) is a publicly traded MNC founded in 1851, and has
approximately 169 locatio...
2
Patents
In 2015, Corning Inc. was granted over 1,160 patents internationally. At the end of the
year, Corning owned over...
3
Research & Development
Corning spent $769 million on R&D in 2015, an 8% of net sales, slightly more than the
US average ...
4
Mergers and Acquisitions
Over the years, Corning has completed many vertical and horizontal acquisitions to
increase pro...
5
firms that were rivals and lose security of secret processes. This may have unpleasant
consequences for Corning, but it ...
6
2015 ended with a 20% decline in sales, $765 million, but analyst forecast that the display
industry will become a $155....
7
References
Ashenfelter, O., & Hosken, D. (2010). The Effect of Mergers on Consumer Prices: Evidence from Five
Mergers on...
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IO Term Paper

  1. 1. CORNING INCORPORATED An Industrial Organization Perspective Donald L. Palma dlp8401@rit.edu Industrial Organization Professor Jeffrey Wagner December 5, 2016
  2. 2. 1 INTRODUCTION Corning Incorporated (NYSE:GLW) is a publicly traded MNC founded in 1851, and has approximately 169 locations worldwide. It was originally named Corning Glass Works, went public in December 1936, and was renamed to Corning Incorporated on April 28, 1989 (Corning Incorporated, 2016). Corning Inc. is primarily a glass and ceramics manufacturing firm but it is involved in several industries, and may be considered a conglomerate (Green, 2016). Corning Inc. has five segments of business it operates in: display technologies, optical communication, environmental technologies, specialty materials and life sciences, and manufacturing and processing different products (Corning Incorporated, 2016). Display technologies manufactures glass substrates for Thin-Film Transistor LCD’s, used in televisions, and other electrical devices. This represents 34% of Corning’s sales in 2015. The optical communications unit works with optical fibers for both personal and commercial use, and accounts for 33% of sales in 2015. Environmental technologies manufacture’s emission filters and was 12% of sales in 2015. Life Sciences supplies scientific laboratory products and comprised 9% of sales in 2015. The final segment falls under “all other”, which is primarily a pharmaceutical technologies business and accounts for 1% of sales in 2015. Corning netted $9.1 billion in sales in 2015, a decrease of 6% from 2014 (Corning Incorporated, 2016). Three key qualities of industrial organization are demonstrated in Corning’s 2015 10-K. Patents, research and development, mergers and acquisitions. This report will expand on the association of these aspects in Corning to the study of industrial organizations.
  3. 3. 2 Patents In 2015, Corning Inc. was granted over 1,160 patents internationally. At the end of the year, Corning owned over 7,750 patents, and about 9,170 patent applications processing. 6% of them will expire between 2016 and 2017. These patents amounted to a book value of $5.6 million not including depreciation (Corning Incorporated, 2016). These patents are somewhat responsible for Corning becoming a dominant firm in a differentiated product oligopoly. They create a long run entry barrier for any potential rivals (Carlton & Perloff, 2005). This market structure gives Corning the option to decide price for the given output. Both the short run and long run goals will determine Corning’s pricing strategy. Corning recognizes its rivals will employ competitive pricing tactics and that it will need to be competitive with pricing as well (Corning Incorporated, 2016). This is evidence that Corning will likely not set the prices to maximize profits, but to minimize the market share it gives up. Diagram 1 shows the full range of prices Corning can charge for the quantity produced. The lowest price point, marginal revenue (MR) equals marginal cost (MC) to the highest price point, quantity supplied meets “Market Price yielding maximum profits”. Corning can minimize the total fringe to enter the market by setting their price between MR=MC and the given price for MC=Market Demand. The fringe cannot produce below MC=Demand and will shut down (Carlton & Perloff, 2005). Diagram 1: Monopoly/Oligopoly Pricing Model
  4. 4. 3 Research & Development Corning spent $769 million on R&D in 2015, an 8% of net sales, slightly more than the US average of 4% (Price Waterhose Cooper LLP, 2016). Corning’s R&D obtained prizes from the government with a 1.7% reduction on the U.S. corporate income tax rate (Corning Incorporated, 2016). Part of these reimbursements came from the Department of Defense assigning Corning to develop, what Defense Secretary Arthur Ash called flexible electronics. The innovation is intended to replicate human skin to apply on wounded soldiers (Lubold, 2015). The R&D conducted by Corning Inc. is important to society, the specific market, and its consumers. Said investment should bring about new ideas, and new production methods that lower the price of existing products by lowering MC (Carlton & Perloff, 2005). The hypothetical quantity produced by Corning (q1), and the available price range for said quantity. The prices Corning can employ are between MC1 and the competitive price (P1). Because Corning is an oligopolistic firm it can choose between exclusively passing the saving to the consumer, exclusively exploiting its dominance on the market, or a mixture of both. The monopolistic pricing would produce q2, where MR=MC2, but charge the price for market demand of q2. If these innovations are to benefit the consumers it will reduce the price and consequentially increase economic surplus. This may reduce profit in the short run because of the price drop, but it will increase profit in the long run because there is less fringe, if any, that can survive at the new price. Diagram 2: Innovation effect on MC
  5. 5. 4 Mergers and Acquisitions Over the years, Corning has completed many vertical and horizontal acquisitions to increase profitability, and at a greater pace in 2015 than 2014. Corning Inc. was involved in four acquisitions in 2015, iBwave Solutions, NovaSol, TR Manufacturing Inc., and completed the purchase of Samsung Electronics Co.’s fiber optics business (Green, 2016). The Hart-Scott- Rodino (HSR) Amendments to the Clayton Act delegates the duty of reviewing the economic consequence on the market, and the compliance of antitrust laws in these acquisitions, to the FTC (FTC, 2016). However, these findings can only predict the short run effect of the transaction with any certainty. These acquisitions may not benefit the consumer in the short run. All the costs involved in completing a transaction may temporarily raise prices (Focarelli & Panetta, 2003). However, in theory these transactions will raise efficiency and welfare in the long run. Diagram 2 shows us that MC1 will move down to MC2 and price will go up from P1 to P2, and the creation of deadweight loss. The red triangle is the deadweight loss, consumer lose the green triangle because of higher prices and the grey box is gained efficiency. The merger will be positive if the efficiency exceeds the deadweight loss. Acquisitions, and mergers will help gain market power, raise prices above competitive levels, but also can produce collusion and/or fixed prices (Ashenfelter & Hosken, 2010). Recently Corning Inc. plead guilty to price fixing charges and paid $66.5 million in fines (The United States Department of Justice, 2016). This is collusion, price fixing and arguably signs of a cartel. Another consequence is the information shared with the firms Corning acquires or merges with. Corning Inc. is also highly involved in merging with
  6. 6. 5 firms that were rivals and lose security of secret processes. This may have unpleasant consequences for Corning, but it will surely benefit the market with the dispersed information. Conclusion Corning Incorporated is an oligopolistic MNC with a strong hold of the glass and ceramics market, and working towards securing greater share of other markets it is involved in. One of the reasons for that strong hold and one of the strongest asset is its patent catalog. Reading a ranking of firms by number of U.S. patents, is a “who’s who” of firms, and Corning Inc. was ranked 91st in 2015 (Intellectual Property Owners Association, 2016). It is good for Corning because it offers some protection, but it can also be good for the market due to the information that becomes public, which can spark innovation in that market. Patent trials are a costly and a strong deterrent from a firm infringing on Corning’s properties. Corning must decide how valuable each patent is. The 6% that is on the verge of expiring has clearly lost its value or represented a false value. Per Moore’s research 13.3% of patents for US corporations expire at the first renewal fee (Moore, 2005). This is evidence that a little more than 10% of patents are worthless shortly after acquired. Corning has proven its ability to acquire firms that can enhance its ability to produce and distribute products. It is also gaining, applying and sharing knowledge from these acquisitions. The teams they work with to complete these acquisitions also demonstrate the aptitude to work within the guidelines of the Sherman Act and other antitrust regulations. The factor to consider is what market to invest in and what firm within that market? Corning should channel its energy on acquiring and merging with firms in the display technologies industry.
  7. 7. 6 2015 ended with a 20% decline in sales, $765 million, but analyst forecast that the display industry will become a $155.54 billion industry by 2020 at a CAGR of 6% (Rohan, 2015). Research and development is one of the main reasons Corning Inc. is in the position it is in today. Corning’s 10-K does not specify the dollar amount or square footage dedicated to each division, and it does not specify the cost of sales for each division. One option for Corning is to use those internal figures to determine the gross margin and the amount of R&D to invest in each division. The gross margin represents the percentage of sales revenue a firm retains after the directs costs of producing the good. The division with the lowest gross margin should get the higher rate of R&D dedicated to it. This should help both Corning and the market for said division. Another option would be to increase R&D in display technologies to enhance the suggested acquisition strategy earlier.
  8. 8. 7 References Ashenfelter, O., & Hosken, D. (2010). The Effect of Mergers on Consumer Prices: Evidence from Five Mergers on the Enforcement Margin. The Journal of Law & Economics, 417-466. Carlton, S. W., & Perloff, J. M. (2005). Modern Industrial Organization. Boston, MA: Pearson Addison Wesley. Corning Incorporated. (2016). Form 10-K Annual Report. Corning. Focarelli, D., & Panetta, F. (2003). Are mergers beneficial to consumers? Evidence from the market for bank deposits. The American Economic Review, 1152-1171. FTC. (2016). Merger Review. Retrieved from Federal Trade Commission: Protecting America's Consumers: https://www.ftc.gov/enforcement/merger-review Green, T. (2016). Company Overview. Retrieved from Hoovers: http://subscriber.hoovers.com/H/company360/overview.html?companyId=10409000000000 Intellectual Property Owners Association. (2016, June 29). Top 300 Organizations Granted. Retrieved from Intellectual Property Owners Association: http://www.ipo.org/wp- content/uploads/2016/06/2015-Top-300-Patent-Owners.pdf Lubold, G. (2015, August 28). Pursuing Electronics that Bend, Pentagon Advances Partnership with Tech Firms. Wall Street Journal. Moore, K. A. (2005). Worthless Patents. Berkeley Technology Journal, 1521-1552. Price Waterhose Cooper LLP. (2016). The Global Innovation 1000: Comparison of R&D Spending. Retrieved from Strategy &: http://www.strategyand.pwc.com/global/home/what-we- think/innovation1000/rd-intensity-vs-spend-2015 Rohan. (2015, May). Display Market by Type (Conventional, 3D, Transparent, Flexible), Technology (LED, OLED, LCD, E-Paper), Application (Consumer Electronics, Automotive, Retail & Banking, Medical & Industrial) & Geography - Trends & Forecast to 2020. Retrieved from Markets and Markets: http://www.marketsandmarkets.com/PressReleases/display.asp The United States Department of Justice. (2016, May 16). Justice News. Retrieved from The United States Department of Justice: https://www.justice.gov/opa/pr/corning-international-kabushiki- kaisha-pay-665-million-fixing-prices-automotive-parts

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