nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒01‒28
twenty-six papers chosen by
Russell Pittman
United States Department of Justice

  1. Exchange Competition, Entry, and Welfare By Giovanni Cespa; Xavier Vives
  2. Patent Pools, Vertical Integration, and Downstream Competition By Markus Reisinger; Emanuele Tarantino
  3. Price Dispersion and Informational Frictions: Evidence from Supermarket Purchases By Pierre Dubois; Helena Perrone
  4. You Are Judged by the Company You Keep: Reputation Leverage in Vertically Related Markets By Jay Pil Choi; Martin Peitz
  5. Cheap Trade Credit and Competition in Downstream Markets By Mariassunta Giannetti; Nicolas Serrano-Velarde; Emanuele Tarantino
  6. Data Governance in Connected Cars: The Problem of Access to In-vehicle Data By Wolfgang Kerber
  7. Buyer-Optimal Robust Information Structures By Stefan Terstiege; Cédric Wasser
  8. Nowhere Else to Go: The Determinants of Bank-Firm Relationship Discontinuations after Bank Mergers By Oliver Rehbein; Santiago Carbo-Valverde
  9. Creating and Developing Competition in the Banking Sector of the Republic of Serbia By Ivana Marinovic Matovic
  10. Intellectual Property and Taxation in Digital Platforms By Juan Manuel Sanchez-Cartas
  11. Platform Competition: Who Benefits from Multihoming? By Dana Kassem
  12. The Effect of Horizontal Mergers, When Firms compete in Prices and Investments By Massimo Motta; Emanuele Tarantino
  13. Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy By Ben Mermelstein; Volker Nocke; Mark A. Satterthwaite; Michael D. Whinston
  14. Striking a Balance of Power between the Court of Justice and the EU Legislature: The Law on Competition Damages Actions as a Paradigm By Jens-Uwe Franck
  15. Heterogeneous Impacts of Cost Shocks, Strategic Bidding and Pass-Through: Evidence from the New England Electricity Market By Harim Kim
  16. The Multiplier Effect in Two-Sided Markets with Bilateral Investments By Benny Moldovanu; Deniz Dizdar; Nora Szech
  17. Cheap talk, monitoring and collusion By David Spector
  18. Estimating Consumer Inertia in Repeated Choices of Smartphones By Lukasz Grzybowski; Ambre Nicolle
  19. Extra costs of integrity: Pharmacy markups and generic substitution in Finland By Izhak, Olena
  20. May the force be with you: Exit barriers, governance shocks, and profitability sclerosis in banking By Koetter, Michael; Müller, Carola; Noth, Felix; Fritz, Benedikt
  21. Does sequential decision-making trigger collective investment in automobile R&D? Experimental evidence By Buchmann, Tobias; Haering, Alexander; Kudic, Muhamed; Rothgang, Michael
  22. Not all price endings are created equal: Price points and asymmetric price rigidity By Levy, Daniel; Snir, Avichai; Gotler, Alex; Chen, Haipeng (Allan)
  23. The competition effect of the French reform on Hospital quality By Laurent Gobillon; Carine Milcent
  24. Common Ownership in America: 1980-2017 By Matthew Backus; Christopher Conlon; Michael Sinkinson
  25. The Origins of Firm Heterogeneity: A Production Network Approach By Andrew B. Bernard; Emmanuel Dhyne; Glenn Magerman; Kalina Manova; Andreas Moxnes
  26. Sales and Markup Dispersion: Theory and Empirics By Monika Mrázová; J. Peter Neary; Mathieu Parenti

  1. By: Giovanni Cespa; Xavier Vives
    Abstract: We assess the consequences for market quality and welfare of different entry regimes and exchange pricing policies in a context of limited market participation. To this end we integrate a two-period market microstructure model with an exchange competition model with entry in which exchanges supply technological services, and have market power. We find that technological services can be strategic substitutes or complements in platform competition. Free entry of platforms delivers a superior outcome in terms of liquidity and (generally) welfare compared to the case of an unregulated monopoly. Controlling entry or, even better typically, platform fees may further increase welfare. The market may deliver excessive or insufficient entry. However, if the regulator is constrained to not making transfers to platforms then there is never insufficient entry.
    Keywords: market fragmentation, welfare, endogenous market structure, platform competition, Cournot with free entry, industrial organization of exchanges
    JEL: G10 G12 G14
    Date: 2018
  2. By: Markus Reisinger; Emanuele Tarantino
    Abstract: Patent pools are commonly used to license technologies to manufacturers. Whereas previous studies focused on manufacturers active in independent markets, we analyze pools licensing to competing manufacturers, allowing for multiple licensors and non-linear tariffs. We find that the impact of pools on welfare depends on the industry structure: Whereas they are procompetitive when no manufacturer is integrated with a licensor, the presence of vertically integrated manufacturers triggers a novel trade-off between horizontal and vertical price coordination. Specifically, pools are anticompetitive if the share of integrated firms is large, procompetitive otherwise. We then formulate information-free policies to screen anticompetitive pools.
    Keywords: patent pools and horizontal pricing agreements, complementary patents, vertical integration and restraints, antitrust policy
    JEL: K11 L41 L42 O34
    Date: 2018–11
  3. By: Pierre Dubois; Helena Perrone
    Abstract: Traditional demand models assume that consumers are perfectly informed about product characteristics, including price. However, this assumption may be too strong. Unannounced sales are a common supermarket practice. As we show, retailers frequently change position in the price rankings, thus making it unlikely that consumers are aware of all deals o¤ered in each period. Further empirical evidence on consumer behavior is also consistent with a model with price information frictions. We develop such a model for horizontally di¤erentiated products and structurally estimate the search cost distribution. The results show that in equilibrium, consumers observe a very limited number of prices before making a purchase decision, which implies that imperfect information is indeed important and that local market power is potentially high. We also show that a full information demand model yields severely biased price elasticities.
    Keywords: imperfect information, price dispersion, sales, search costs, product differentiation, consumer behavior, demand estimation, price elasticities
    JEL: D4 D83 L11 L66
    Date: 2018–10
  4. By: Jay Pil Choi; Martin Peitz
    Abstract: This paper analyzes a mechanism through which a supplier of unknown quality can overcome its asymmetric information problem by selling via a reputable downstream firm. The supplier’s adverse-selection problem can be solved if the downstream firm has established a reputation for delivering high quality with the supplier. The supplier may enter the market by initially renting the downstream firm’s reputation. The downstream firm may optimally source its input externally, even though sourcing internally would be better in terms of productive efficiency. Since an entrant in the downstream market may lack reputation, it may suffer from a reputational barrier to entry arising from higher input costs–this constitutes a novel theory of downstream barriers to entry.
    Keywords: Adverse Selection, Certification Intermediary, Incumbency Advantage, Barriers to Entry, Outsourcing, Branding
    JEL: D4 L12 L4 L43 L51 L52
    Date: 2018–09
  5. By: Mariassunta Giannetti; Nicolas Serrano-Velarde; Emanuele Tarantino
    Abstract: Using a unique dataset with information on 20 million inter-firm transactions, we provide evidence that suppliers offer cheap trade credit to ease competition in downstream markets. We show theoretically that trade credit allows suppliers to transfer surplus to high-bargaining-power customers while preserving sales to other buyers. Suppliers optimally choose a trade credit limit up to which customers can purchase on account. This contractual feature allows suppliers to target infra-marginal units and to leave unaffected customers' marginal costs. Empirically, we find that suppliers grant trade credit to high-bargaining-power customers only when they fear the cannibalization of sales to other low-bargaining-power customers. Exploiting a law that lowered the cost of offering trade credit, we show that higher provision of trade credit to high-bargaining-power customers leads to an expansion of the suppliers' customer base and higher growth of sales to low-bargaining-power customers.
    Keywords: Trade credit, competition, input prices, supply chains
    JEL: G3 D2 L1
    Date: 2018–12
  6. By: Wolfgang Kerber
    Abstract: Through the application of the technological solution of the “extended vehicle” concept the car manufacturers can capture exclusive control of the data of connected cars leading to serious concerns about negative effects on competition, innovation and consumer choice on the markets for aftermarket and other complementary services in the ecosystem of connected and automated driving. Therefore a controversial policy discussion has emerged in the EU about access to in-vehicle data and the connected car for independent service providers in the automotive industry. This paper claims that this problem should be seen as part of the general question of the optimal governance of data in the ecosystem of connected and automated mobility. The paper offers an overview about this policy discussion and analyzes this problem from an economic perspective by using a market failure analysis. Besides competition problems (esp. on markets for aftermarket and other services in the connected car) also market failures in regard to technological choice (extended vehicle vs. interoperable on-board application platform) and information and privacy problems (“notice and consent” solutions) can emerge, leading to the question of appropriate regulatory solutions. The paper discusses solutions through data portability, data rights, competition law, and recommends a sector-specific regulatory approach.
    Keywords: data governance, connected cars, data economy, data access
    JEL: K23 L62 L86 O33
    Date: 2018
  7. By: Stefan Terstiege; Cédric Wasser
    Abstract: We study buyer-optimal information structures under monopoly pricing. The information structure determines how well the buyer learns his valuation and affects, via the induced distribution of posterior valuations, the price charged by the seller. Motivated by the regulation of product information, we assume that the seller can disclose more if the learning is imperfect. Robust information structures prevent such disclosure, which is a constraint in the design problem. Our main result identifies a two-parameter class of information structures that implements every implementable buyer payoff. An upper bound on the buyer payoff where the social surplus is maximized and the seller obtains just her perfect-information payoff is attainable with some, but not all priors. When this bound is not attainable, optimal information structures can result in an inefficient allocation.
    Keywords: information design, monopoly, regulation
    JEL: D42 D82 D83 L51
    Date: 2018–07
  8. By: Oliver Rehbein; Santiago Carbo-Valverde
    Abstract: The decision to change or terminate a bank-firm relationship has been demonstrated to be crucial for firm performance following bank mergers. We find both competition and the available firm collateral to be important factors in enabling firms to switching banks, instead of dropping their bank relationships. We also provide novel evidence that firms who are able to \textit{add} a bank relationship following a merger exhibit much stronger post-merger performance. Our findings are consistent with the interpretation that bank-mergers cause a reduction in lending to most firms, leading them to search for alternative sources of finance.
    Keywords: bank mergers, relationship banking, competition
    JEL: G21 G34
    Date: 2018–09
  9. By: Ivana Marinovic Matovic (University of Nis)
    Abstract: The significance of the banking sector in the Republic of Serbia has grown over the last 20 years, as a result of a huge increase of market importance and, consequently, deregulation in this and other sectors. Deregulation and liberalization processes are followed by the processes of integration (mergers and acquisitions) of banks. The banking sector in the Republic of Serbia is characterized by a relatively large number of banks. Competition in general, and especially in the banking sector, is complicated and difficult to measure, for which there are no generally accepted and best indicators. Using the Concentration Ratio index (CR) and Herfindahl-Hirschman index (HHI), the author tries to determine the degree of concentration, for the purpose of evaluation the competition in the banking sector of the Republic of Serbia. The degree of concentration was checked on the basis of the financial statements of banks in the Republic of Serbia in the period 2008-2017. The results of the research will point to the current state and the best perspectives for creating and developing competitive conditions in the banking sector of the Republic of Serbia.
    Keywords: Banking sector, Republic of Serbia, concentration, competition, CR index, HHI index
    Date: 2018–11
  10. By: Juan Manuel Sanchez-Cartas
    Abstract: I study the impact of competition and taxation on the openness and the intellectual property policies of two-sided digital platforms. I model a market in which two platforms compete for users and developers. First, I find that higher competition shortens the period of exclusivity granted to developers but does not influence the degree of openness of a platform. However, the higher the degree of differentiation in the developers market, the less open the platforms are. Second, I analyze two types of taxes, ad valorem and unit taxes. Ad-valorem taxes have no effect on the length of the exclusivity period. However, they increase the degree of openness of the platform when levied on users. Unit taxes instead limit the degree of openness and increase the period of exclusivity when levied on the developers market. Lastly, I find that multi-homing reduces the exclusivity period, but does not change the qualitative effects of taxation. My findings suggest that the new digital tax proposed by the European Commission, that should come into force in 2020, may reduce openness and innovation levels in the European Union.
    Keywords: Two-sided markets, Digital Platforms, Taxation, Intellectual Property, Openness
    JEL: H22 L13 L51 L86 O34
    Date: 2019
  11. By: Dana Kassem
    Abstract: I ask whether electrification causes industrial development. I combine newly digitized data from the Indonesian state electricity company with rich manufacturing census data. To understand when and how electrification can cause industrial development, I shed light on an important economic mechanism - firm turnover. In particular, I study the effect of the extensive margin of electrification (grid expansion) on the extensive margin of industrial development (firm entry and exit). To deal with endogenous grid placement, I build a hypothetical electric transmission grid based on colonial incumbent infrastructure and geographic cost factors. I find that electrification causes industrial development, represented by an increase in the number of manufacturing firms, manufacturing workers, and manufacturing output. Electrification increases firm entry rates, but also exit rates. Empirical tests show that electrification creates new industrial activity, as opposed to only reorganizing industrial activity across space. Higher turnover rates lead to higher average productivity and induce reallocation towards more productive firms in electrified areas. This is consistent with electrification lowering entry costs, increasing competition and forcing unproductive firms to exit more often. Without the possibility of entry or competitive effects of entry, the effects of electrification are likely to be smaller.
    JEL: D24 L60 O13 O14 Q41
    Date: 2018–11
  12. By: Massimo Motta; Emanuele Tarantino
    Abstract: We study the effects of mergers when firms offer differentiated products and compete in prices and investments. Since it is in principle ambiguous, we use aggregative game theory to sign the net effect of the merger: We find that only if it entailed sufficient efficiency gains, could the merger raise total investments and consumer surplus. We also prove there exist classes of models for which the results obtained with cost-reducing investments are equivalent to those with quality-enhancing investments. Finally, we show that, from the consumer welfare point of view, a R&D cooperative agreement is superior to any consumer-welfare reducing merger.
    Keywords: horizontal mergers, innovation, investments, research joint ventures, competition
    JEL: K22 D43 L13 L41
    Date: 2018–11
  13. By: Ben Mermelstein; Volker Nocke; Mark A. Satterthwaite; Michael D. Whinston
    Abstract: We study optimal merger policy in a dynamic model in which the presence of scale economies implies that firms can reduce costs through either internal investment in building capital or through mergers. The model, which we solve computationally, allows firms to invest or propose mergers according to the relative profitability of these strategies. An antitrust authority is able to block mergers at some cost. We examine the optimal policy for an antitrust authority who cannot commit to its future policy rule and approves or rejects mergers as they are proposed, considering both consumer value and aggregate value as its possible objectives. We find that the optimal policy can differ substantially from what would be best considering only welfare in the period the merger is proposed. In general, antitrust policy can greatly affect firms' optimal investment behavior, and firms' investment behavior can in turn greatly affect the antitrust authority's optimal policy. Moreover, externalities imposed by mergers on rivals can have significant effects on firms' investment incentives and thereby shape the optimal policy.
    Keywords: Horizontal merger, merger policy, investment, scale economies, antitrust
    JEL: L13 L40
    Date: 2018–08
  14. By: Jens-Uwe Franck
    Abstract: The framework of EU law on cartel damages actions consists in part of rules established by the ECJ based on arts 101 and 102 TFEU in conjunction with the principle of effectiveness. These rules are an integral part of EU primary law. The notion of institutional balance, however, requires the Court to consider its own inherent limits on democratic legitimacy, accountability and expertise. In particular, the Court has to ensure that adequate scope remains for the EU legislature to exercise its legislative power pursuant to art.103 TFEU. It is argued that the ECJ has disregarded these restrictions and overstretched the principle of effectiveness––for instance, in its adjudication on liability for umbrella pricing and on access to leniency files, respectively. Consequently, the EU legislature must not consider itself bound by these standards.
    Keywords: Institutional balance; Principle of effectiveness; Democratic legitimacy; EU competition damages law; Courage v Crehan; Directive 2014/104; Access to leniency documents
    JEL: K21
    Date: 2018–08
  15. By: Harim Kim
    Abstract: Industry-wide shocks can have heterogeneous impacts on firms’ costs due to different firm characteristics. The heterogeneity in these impacts is crucial for understanding the passthrough of the shock, because of its implications on strategic competition. In the context of the gas price shock in the electricity market, I develop a method to identify heterogeneous impacts of the shock and show with a structural analysis that the heterogeneous feature of the shock induces markup adjustments of firms. Pass-through that is estimated without incorporating heterogeneous impacts fails to reflect the change in competition arising from the shock, and is, on average, underestimated.
    Date: 2018–11
  16. By: Benny Moldovanu; Deniz Dizdar; Nora Szech
    Abstract: Agents in a finite two-sided market are matched assortatively, based on costly investments. Besides signaling private, complementary types, investments generate direct benefits for partners. We explore quantitative properties of the equilibrium investment behavior. The bilateral external benefits induce an investment multiplier effect. This multiplier effect depends in a complex way on agents’ uncertainty about their own rank and about the types and investments of potential partners. We characterize how the multiplier effect hinges on market size, and how it interacts with other important factors such as the costs of investment and the signaling incentives induced by competition.
    Keywords: two-sided matching, signaling, investment, multiplier effect
    JEL: C78 D44 D82
    Date: 2018–07
  17. By: David Spector (PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Many collusive agreements involve the exchange of self-reported sales data between competitors, which use them to monitor compliance with a target market share allocation. Such communication may facilitate collusion even if it is unverifiable cheap talk and the underlying information becomes publicly available with a delay. The exchange of sales information may allow firms to implement incentive-compatible market share reallocation mechanisms after unexpected swings, limiting the recourse to price wars. Such communication may allow firms to earn profits that could not be earned in any collusive, symmetric pure-strategy equilibrium without communication.
    Date: 2019–01
  18. By: Lukasz Grzybowski; Ambre Nicolle
    Abstract: In this paper, we use a unique dataset on switching between mobile handsets in a sample of about 8,623 subscribers using tariffs without handset subsidies from a single mobile operator on a monthly basis between July 2011 and December 2014. We estimate a discrete choice model in which we account for disutility from switching to different operating systems and handset brands and for unobserved time-persistent preferences for operating systems and brands. Our estimation results indicate the presence of significant inertia in the choices of operating systems and brands. We find that it is harder for consumers to switch from iOS to Android and other operating systems than from Android and other operating systems to iOS. Moreover, we find that there is significant time-persistent heterogeneity in preferences for different operating systems and brands, which also leads to state-dependent choices. We use our model to simulate market shares in the absence of switching costs and conclude that the market shares of Android and smaller operating systems would increase at the expense of the market share of iOS.
    Keywords: smartphones, consumer inertia, switching costs, mixed logit, iOS, Android
    JEL: L13 L50 L96
    Date: 2018
  19. By: Izhak, Olena
    Abstract: I evaluate how the probability of substitution of a prescribed drug in a pharmacy depends on the pharmacists' profits and patients' out of pocket costs. I use Finnish population-wide data covering all prescriptions of three popular antidepressants. I find that one euro increase in the total markup difference between the prescribed drug and its cheapest available substitute is associated with 1.7 percentage points decrease in the probability of substitution. This result is driven by brand-name drugs. An increase in the patients' out of pocket cost differential yields a 0.6 percentage points increase in the probability of accepting the substitution. My findings offer novel evidence that pharmacists' incentives are instrumental for prescription drug cost savings and overall cost effectiveness of the health care system.
    Keywords: Generic substitution,Pharmacies,Prescription drugs
    JEL: D78 I11 I18 L11 L65
    Date: 2019
  20. By: Koetter, Michael; Müller, Carola; Noth, Felix; Fritz, Benedikt
    Abstract: We test whether limited market discipline imposes exit barriers and poor profitability in banking. We exploit an exogenous shock to the governance of governmen-owned banks: the unification of counties. County mergers lead to enforced governmen-owned bank mergers. We compare forced to voluntary bank exits and show that the former cause better bank profitability and efficiency at the expense of riskier financial profiles. Regarding real effects, firms exposed to forced bank mergers borrow more at lower cost, increase investment, and exhibit higher employment. Thus, reduced exit frictions in banking seem to unleash the economic potential of both banks and firms.
    Keywords: political frictions,governance,excess capacity,banking,market exit
    JEL: G21 G29 O16
    Date: 2018
  21. By: Buchmann, Tobias; Haering, Alexander; Kudic, Muhamed; Rothgang, Michael
    Abstract: We conduct a framed laboratory experiment to gain in-depth insights on factors that drive collective research and development efforts among firms located along the automotive value chain. In particular, we employ a public goods experiment and analyze the influence of sequential decision-making on the willingness to engage in cooperation and on economic welfare. By using a linear value chain setting with three suppliers and one OEM, we analyze vertical R&D cooperation. Our results reveal that contributions increase in situations with sequential decision-making and that sequential decisions increase the overall welfare, even in case of unequally distributed R&D budgets.
    Keywords: public goods experiment,collective innovation,automobile industry,value chain,innovation barriers,sequential decision making
    JEL: C92 D79 O31
    Date: 2018
  22. By: Levy, Daniel; Snir, Avichai; Gotler, Alex; Chen, Haipeng (Allan)
    Abstract: We document an asymmetry in the rigidity of 9-ending prices relative to non-9-ending prices. Consumers have difficulty noticing higher prices if they are 9-ending, or noticing price-increases if the new prices are 9-ending, because 9-endings are used as a signal for low prices. Price setters respond strategically to the consumer-heuristic by setting 9-ending prices more often after price-increases than after price-decreases. 9-ending prices, therefore, remain 9-ending more often after price-increases than after price-decreases, leading to asymmetric rigidity: 9-ending prices are more rigid upward than downward. These findings hold for both transaction-prices and regular-prices, and for both inflation and no-inflation periods.
    Keywords: Asymmetric Price Adjustment, Sticky/Rigid Prices, 9-Ending Prices, Psychological Prices, Price Points, Regular/Sale Prices
    JEL: C91 C93 D01 D12 D22 D4 D40 D83 E12 E31 E52 E58 L11 L16 L21 L81 M21 M31
    Date: 2019–01–03
  23. By: Laurent Gobillon (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Carine Milcent (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Date: 2018
  24. By: Matthew Backus; Christopher Conlon; Michael Sinkinson
    Abstract: When competing firms possess overlapping sets of investors, maximizing shareholder value may provide incentives that distort competitive behavior, affecting pricing, entry, contracting, and virtually all strategic interactions among firms. We propose a structurally consistent and scaleable approach to the measurement of this phenomenon for the universe of S&P 500 firms between 1980 and 2017. Over this period, the incentives implied by the common ownership hypothesis have grown dramatically. Contrary to popular intuition, this is not primarily associated with the rise of BlackRock and Van- guard: instead, the trend in the time series is driven by a broader rise in diversified investment strategies, of which these firms are only the most recent incarnation. In the cross-section, there is substantial variation that can be traced, both in the theory and the data, to observable firm characteristics – particularly the share of the firm held by retail investors. Finally, we show how common ownership can theoretically give rise to incentives for expropriation of undiversified shareholders via tunneling, even in the Berle and Means (1932) world of the “widely held firm.”
    JEL: G34 L0 L13 L21
    Date: 2019–01
  25. By: Andrew B. Bernard; Emmanuel Dhyne; Glenn Magerman; Kalina Manova; Andreas Moxnes
    Abstract: This paper quantifies the origins of firm size heterogeneity when firms are interconnected in a production network. Using the universe of buyer-supplier relationships in Belgium, the paper develops a set of stylized facts that motivate a model in which firms buy inputs from upstream suppliers and sell to downstream buyers and final demand. Larger firm size can come from high production capability, more or better buyers and suppliers, and/or better matches between buyers and suppliers. Downstream factors explain the vast majority of firm size heterogeneity. Firms with higher production capability have greater market shares among their customers, but also higher input costs and fewer customers. As a result, high production capability firms have lower sales unconditionally and higher sales conditional on their input prices. Counterfactual analysis suggests that the production network accounts for more than half of firm size dispersion. Taken together, our results suggest that multiple firm attributes underpin their success or failure, and that models with only one source of firm heterogeneity fail to capture the majority of firm size dispersion.
    JEL: F10 F12 F16 L23 L25
    Date: 2019–01
  26. By: Monika Mrázová; J. Peter Neary; Mathieu Parenti
    Abstract: We derive exact conditions relating the distributions of firm productivity, sales, output, and markups to the form of demand in monopolistic competition. Applications include a new “CREMR” demand function (Constant Revenue Elasticity of Marginal Revenue): it is necessary and sufficient for the distributions of productivity and sales to have the same form (whether Pareto, lognormal, or Fréchet) in the cross section, and for Gibrat’s Law to hold over time; it implies a new class of distributions well-suited to capture the dispersion of markups; and it provides a parsimonious fit for the distributions of sales and markups superior to most widely-used alternatives.
    Keywords: CREMR demands, Gibrat’s Law, heterogeneous firms, Kullback-Leibler divergence, lognormal versus Pareto distributions, sales and markup distributions
    JEL: F15 F23 F12
    Date: 2018

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