nep-com New Economics Papers
on Industrial Competition
Issue of 2018‒11‒26
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. Pricing algorithms in oligopoly: theory and antitrust implications By Jacques THEPOT
  2. Verifying High Quality: Entry for Sale By Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger
  3. When is Double Marginalization a Problem? By Staahl Gabrielsen, Tommy; Johansen, Bjørn Olav; Shaffer, Greg
  4. The I.O. of ethics and cheating when consumers do not have rational expectations By Thanassoulis, John
  5. In-House and Arm's Length: Productivity Heterogeneity and Variation in Organizational Form By Arturs Kalnins; Stephen F. Lin; Catherine Thomas
  6. Network Formation with Local Complements and Global Substitutes: The Case of R&D Networks By Hsieh, Chih-Sheng; König, Michael; Liu, Xiaodong
  7. Free-on-board and uniform delivered pricing strategies in pure and mixed spatial duopolies: the strategic role of cooperatives By Panagiotou, Dimitrios; Stavrakoudis, Athanassios
  8. Employment Adjustment over the Business Cycle: The Impact of Competition in the Labor Market By Webber, Douglas A.
  9. Cartel Sentencing in Ireland: Criminal Standards of Proof, But Civil Sanctions By Gorecki, Paul
  10. Seemingly Exploitative Contracts By Pei-Cheng Yu
  11. Transfer Pricing and the Arm's Length Principle under Imperfect Competition By Jay Pil Choi; Taiji Furusawa; Jota Ishikawa
  12. Diverging Trends in National and Local Concentration By Rossi-Hansberg, Esteban; Sarte, Pierre-Daniel; Trachter, Nicholas
  13. Bargaining Power between Food Processors and Retailers: Evidence from Japanese Milk Transactions By Hayashida, K.
  14. Market Liberalization: Price Dispersion, Price Discrimination and Consumer Search in the German Electricity Markets By Gugler, Klaus; Heim, Sven; Janssen, Maarten; Liebensteiner, Mario
  15. Can we measure banking sector competition robustly? By Andrei Dubovik; Natasha Kalara
  16. Substitution Between Online Distribution Channels: Evidence from the Oslo Hotel Market By Cazaubiel, Arthur; Cure, Morgane; Johansen, Bjørn Olav; Vergé, Thibaud
  17. Network effects at retail payments market: evidence from Russian merchants By Egor Krivosheya

  1. By: Jacques THEPOT (LaRGE Research Center, Université de Strasbourg)
    Abstract: Pricing algorithms are computerized procedures that a seller may use to adapt instantaneously its price to market conditions, including to prices quoted by its rivals. These algorithms are related to the extensive use of web-collectors which contribute in many industries to identifying the best price. In such settings, price competition operates between algorithms, no longer between executives of brick and mortar companies. In this context, the question is to know whether economic efficiency is achieved as implicit forms of collusion may arise between the sellers. This paper is aimed at discussing this conceptual issue in a price-setting homogeneous product oligopoly with decreasing returns to scale where algorithms implement downward and upward matching policies. Using fixed point argument akin to general equilibrium theory, we find a multiplicity of equilibria with prices located between collusion and Cournot, if matching is allowed upward and downward. When matching operates only for price undercutting, this multiplicity is extended up to a bottom value of the market price, close to the competitive price. This bypasses the Bertrand-Edgeworth paradox. As a result, pricing algorithms may contribute to the stability of the market and also to welfare improvement.
    Keywords: oligopoly, antitrust law, cost structure.
    JEL: K21 L13 L41
    Date: 2018
  2. By: Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger
    Abstract: When and how do entrepreneurs sell their inventions? To address this issue, we develop an endogenous entry-sale asymmetric information oligopoly model. We show that low quality inventions are sold directly or used for own entry. Inventors who sell post-entry use entry to credibly reveal information on quality. Incumbents are then willing to pay high prices for high-quality inventions to preempt rivals from obtaining them. Using Swedish data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under preemptive bidding competition, post entry.
    Keywords: Acquisitions; Innovation; ownership; patents; Quality; start-ups; Verification
    JEL: G24 L1 L2 M13 O3
    Date: 2018–09
  3. By: Staahl Gabrielsen, Tommy (University of Bergen, Department of Economics); Johansen, Bjørn Olav (University of Bergen, Department of Economics); Shaffer, Greg (University of Rochester)
    Abstract: Double marginalization refers to the distortion caused by the successive markups of independent firms in a distribution channel. The implication that this both reduces firm profits and harms consumers is known as the double-marginalization problem. Many solutions have been proposed to help sellers mitigate this pricing problem, and it is arguably one of the main reasons why quantity discounts in the distribution channel are as prevalent as they are. Surprisingly, however, the implication that end-user prices will be distorted upward has only been shown under a very restrictive set of circumstances (successive monopoly). Whether and under what conditions double marginalization is a problem in other, more realistic settings is generally unknown. In this paper, we show that double marginalization need not be a problem when an upstream firm sells its product through competing intermediaries and shelf space is costly. When this is the case, we find that there will often be a role for slotting fees, minimum resale price maintenance (min RPM), and minimum advertised pricing (MAP) policies.
    Keywords: slotting fees; resale price maintenance; distribution channels
    JEL: L11 L42
    Date: 2018–08–31
  4. By: Thanassoulis, John
    Abstract: I study the incentive of firms to be unethical in competitive markets, by conducting practices which illicitly harm stakeholders (consumers, workers, the environment) so as to raise profits. I offer a theoretical analysis which embeds consistent philosophical concerns (utilitarian, Kantian, and in some settings, Rawlsian) to evaluate the moral dilemma managers face of cheating stakeholders for profit in a model of competition with regulatory oversight. I characterise sufficiency conditions which apply broadly and which yield the result that more competition raises the equilibrium level of malpractice in Nash Equilibria of the competition game. If agents reason more deontologically, professing a duty-ethic, then oligopoly is linked to malpractice. I explore how firm level changes impact equilibrium malpractice drawing predictions for some aspects of FDI and for behavioural changes as firms approach the technological frontier.
    Keywords: Competition; Ethics; Malpractice; Moral Dilemma
    Date: 2018–09
  5. By: Arturs Kalnins; Stephen F. Lin; Catherine Thomas
    Abstract: This paper analyzes how firms are organized in the U.S. hotel management industry. For most hotel brands, properties with intermediate room occupancy rates are relatively more likely to be managed by company employees rather than by independent franchisees. Properties with the lowest and the highest occupancy rates tend to be managed by franchisees, at arm's length from the hotel chain. This variation in organizational form is consistent with a model in which the incentives embodied in management contracts vary with property-level productivity. We infer that most hotel chains franchise low productivity relationships to keep property-level fixed costs low and franchise the most productive relationships to create high-powered incentives for franchisees. Franchisees of high-productivity properties work harder than the managers of both chain-managed properties and low-productivity franchises because the performance incentives in franchise contracts are proportional to hotel revenues and complement the incentives arising from having control over the property.
    Keywords: firm heterogeneity, firm structure, incomplete contracts, outsourcing
    JEL: D23 F12 L23 D22
    Date: 2018–10
  6. By: Hsieh, Chih-Sheng; König, Michael; Liu, Xiaodong
    Abstract: We introduce a stochastic network formation model where agents choose both actions and links. Neighbors in the network benefit from each other's action levels through local complementarities and there exists a global interaction effect reflecting a strategic substitutability in actions. We provide a complete equilibrium characterization in the form of a Gibbs measure, and show that the model is consistent with empirically observed networks. We then use our equilibrium characterization to show that the model can be conveniently estimated even for large networks. The policy relevance is demonstrated with examples of firm exit, mergers and subsidies in R&D collaboration networks.
    Keywords: key player; mergers and acquisitions; network formation; peer effects; Subsidies; technology spillovers
    JEL: C11 C63 C73 D83 L22
    Date: 2018–09
  7. By: Panagiotou, Dimitrios; Stavrakoudis, Athanassios
    Abstract: The present work analyzes free-on-board against uniform delivered strategic prices in pure and mixed duopolistic spatial markets with reference to the food sector. Along with investor owned firms (IOFs) that maximize profits, we introduce member welfare maximizing cooperatives (COOPs) and examine their impact on the strategic pricing choices. Demand is price responsive. We use a two stage game between two IOFs, between an IOF and a COOP, and between two COOPs. The findings indicate that the introduction of COOPs acts as a disciplinary factor regarding the pricing behavior of the IOFs. As competition in the spatial market escalates, we move from the quasi--collusive (FOB,FOB) Nash equilibrium, where there are only IOFs in the market, to the more aggressive (UD,UD) strategic pricing configuration where COOPs replace one or both IOFs in the market.
    Keywords: oligopoly spatial competition; mixed; free-on-board; uniformly delivered
    JEL: C72 D40 L13 Q13
    Date: 2018
  8. By: Webber, Douglas A. (Temple University)
    Abstract: Using linked employer-employee data which covers the majority of U.S. employment, I examine how frictions in the labor market have evolved over time. I estimate that the labor supply elasticity to the firm declined by approximately 0.19 log points (1.20 to 1.01) since the late 1990's, with the steepest declines occurring during the financial crisis. I find that this decline in labor market competition cost workers about 4 percent in lost earnings. I also find evidence that relatively monopsonistic firms smooth their employment behavior, growing at a rate lower than relatively competitive firms in good economic climates and slightly higher during poor economic climates. This conforms with the predictions of recent macroeconomic search models which suggest that frictions in the economy may actually reduce employment fluctuations.
    Keywords: monopsony, Great Recession, adjustment costs
    JEL: J21 J42 J64
    Date: 2018–10
  9. By: Gorecki, Paul
    Abstract: On 20 June 2018 the Court of Appeal in Ireland’s first bid-rigging case determined that the €7,500 fine imposed by the lower court on a corporate officer was unduly lenient. It was increased to €45,000. The €10,000 fine on the undertaking was not varied. The effect of the Court’s judgment, if followed in future cartel cases, is that for cartels in Ireland the criminal standard of proof remains, but the only sanction is a fine, what in many EU jurisdictions is regarded as a civil sanction. No gaol sentence was imposed and no justification provided. This is likely to undermine the effectiveness of the Cartel Immunity Programme, a vital tool for cartel detection and prosecution. Fines based on the cartel induced price rise are not only seriously underestimated by the Court, by a factor of around five, but imposed on the wrong target (i.e. the corporate officer not the undertaking). Ignorance as a defence has been revived. Victims are blamed. Bid-rigging cartels appear – unjustifiably - to be of lesser importance than other types of hard core cartels. Major arguments made by the Director of Public Prosecutions in the appeal were simply ignored by the Court with no explanation offered. The prospect for competition law enforcement in Ireland is grim, particularly with respect to bid-rigging cartels which the Competition and Consumer Protection Commission has made an enforcement priority.
    Keywords: Bid-rigging cartel; commercial flooring; Competition Act 2002; unduly lenient; sentencing competition law; cartels.
    JEL: D43 K21 L13 L41
    Date: 2018–11–01
  10. By: Pei-Cheng Yu (School of Economics, UNSW Business School, UNSW Sydney)
    Abstract: This paper studies sequential price discrimination of sophisticated present-biased consumers in the credit market. The optimal contract utilizes present bias to improve screening by inducing certain consumers to over-consume and over-accumulate debt without the presence of naivete. This shows that the optimal contract can have seemingly exploitative features that cause certain consumers to experience ex-post welfare losses even when they are sophisticated. This has important policy implications. If the intention of firms is to screen and not exploit consumers, then financial regulations aimed at protecting consumers by eliminating seemingly exploitative features could introduce additional distortions. I also analyze the optimal contract for naive consumers. The main difference between contracts for sophisticated and naıve consumers is the lack of a commitment mechanism in exploitative contracts, while the presence of teaser rates, late fees or overdraft fees does not necessarily make contracts exploitative.
    Keywords: Credit contract, Financial regulations, Non-linear pricing, Present bias, Sequential screening
    JEL: D18 D82 D86 G28
    Date: 2018–10
  11. By: Jay Pil Choi; Taiji Furusawa; Jota Ishikawa
    Abstract: This paper analyzes incentives of a multinational enterprise to manipulate an internal transfer price to take advantage of corporate-tax differences across countries under both monopoly and oligopoly. We examine “cost plus” and “comparable uncontrollable price” as two alternative implementations of the so-called arm’s length principle (ALP) to mitigate this problem. Tax-induced foreign direct investment (FDI) may entail inefficient internal production. We show how the mechanisms behind such inefficient FDI differ between alternative implementation schemes of the ALP and explore implications of the ALP for welfare and dual sourcing incentives. We also develop a novel theory of vertical foreclosure as an equilibrium outcome of strategic transfer pricing.
    Keywords: foreign direct investment, multinational enterprise, corporate tax, transfer pricing, arm’s length principle, vertical foreclosure
    JEL: F12 F23 H26 L12 L13 L51 L52
    Date: 2018
  12. By: Rossi-Hansberg, Esteban; Sarte, Pierre-Daniel; Trachter, Nicholas
    Abstract: Using U.S. NETS data, we present evidence that the positive trend observed in national product-market concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment.
    JEL: E23 L11 R12
    Date: 2018–09
  13. By: Hayashida, K.
    Abstract: Since the 1990s, several studies have pointed out that Japanese retailers exert buyer power over upstream firms in milk transactions (the buyer power hypothesis), despite the high level of competition between supermarkets and between milk suppliers. The conventional new empirical industrial organization approach, which assumes price-taking behavior on either side of players, is not appropriate for this market. Instead, we use the bilateral Nash bargaining model. Using purchase data for the period June 2012--December 2014, we estimate a structural bargaining model for each market in order to identify the relative bargaining strength of the respective agents. The results show that retailers tend to have stronger bargaining power than processors, even in the case of low market concentration. Therefore, these results support the buyer power hypothesis for wholesale milk transactions. In addition, we show the local small and medium-sized supermarkets have moderate bargaining power in the case of NB milk, whereas top-share supermarkets, discounters, and drugstores attempt almost take-it-or-leave-it offers. Finally, we identify the regional differences in the bargaining power of each brand and retailer, highlighting the differences for COOP milk in each region and in the market strategies of large supermarkets. Acknowledgement : I am grateful to Nao Koike for his kindness in providing me with the data used in this study. I would also like to thank Nobuhiro Suzuki for his support, and Takeshi Sato for his critical reviews of the first draft of this paper. Any errors or omissions are author's responsibility.
    Keywords: Agricultural and Food Policy
    Date: 2018–07
  14. By: Gugler, Klaus; Heim, Sven; Janssen, Maarten; Liebensteiner, Mario
    Abstract: We study how consumer search affects pricing in markets with incumbents and entrants using panel data on German electricity retail markets. Consumers observe the baseline price of the incumbent and decide whether or not to search. Incumbent providers can price discriminate between searching and loyal consumers. Empirically we show that local incumbents increase their baseline rate while entrants decrease their tariffs if consumer search increases. Moreover, the incumbent price discriminates more strongly in markets with more consumer search. Using a theoretical model, we show that these pricing patterns are consistent with the strategic interaction of profit-maximizing firms.
    Keywords: electricity; price discrimination; price dispersion; search
    JEL: D43 D83 L11 L13 Q40
    Date: 2018–09
  15. By: Andrei Dubovik (CPB Netherlands Bureau for Economic Policy Analysis); Natasha Kalara (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: We discuss existing measures of banking competition along with their advantages and disadvantages. For the Panzar and Rosse H-statistic,we further investigate the robustness of its estimates. Specifically, we consider how the estimates vary with respect to modelling and data choices along the following dimensions: bank types consolidation codes time periods outliers econometric models We construct a robust H-statistic estimate following a modified DerSimonian and Laird procedure. We find that no robust conclusions can be drawn regarding the relative competitiveness of the banking industries in European countries, nor regarding the development of the aggregate level of competition in Europe over the past twenty years. This finding illustrates why there is little consensus about the H-statistic estimates despite numerous publications on the topic. Additionally, we check which dimensions are most important in driving the differences between the estimates and find that the choice of model speci cation plays the largest role.
    JEL: G21 L13 L80
    Date: 2018–11
  16. By: Cazaubiel, Arthur (CREST, ENSAE ParisTech); Cure, Morgane (CREST, ENSAE ParisTech); Johansen, Bjørn Olav (University of Bergen, Department of Economics); Vergé, Thibaud (CREST, ENSAE ParisTech and University of Bergen, Department of Economics)
    Abstract: Using an exhaustive database of bookings in one large chain of hotels active in Oslo (2013-2016), we estimate a nested-logit demand model that allows us to evaluate substitution patterns between online distribution channels. Making use of the chains’ decision to delist from Expedia’s platform, we can then compare simulated and actual effects of such an event on prices and market shares and identify ways to improve on simulated counterfactual outcomes.
    Keywords: Multi-channel distribution; Pricing; Structural demand estimation; Online substitution
    JEL: D22 D43 L11 L81
    Date: 2018–08–01
  17. By: Egor Krivosheya (Moscow school of management SKOLKOVO, National Research University Higher School of Economics, Russian Federation)
    Abstract: This research examines the role of network externalities in card acceptance by merchants on the retail payments market in Russia. The work empirically tests the effects of both direct and indirect network externalities for the merchants? card acceptance probability based on the representative survey of 800 traditional (offline) merchants from all Russian regions. The main finding of this study is that the probability of cashless payments acceptance by merchants increases with the presence of direct and indirect or both types of network externalities, controlling for a large set of control variables, including merchants? characteristics and location-specific differences between the retailers. The results are robust to the changes in measures of network externalities and inclusion of shadow economy controls. The findings are significant both statistically and economically.
    Keywords: Retail payments; payment cards; network effects; merchants' acceptance; financial services
    JEL: G21 E42
    Date: 2018–10

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