nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒02‒04
thirty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Managing Competition on a Two-Sided Platform By Paul Belleflamme; Martin Peitz
  2. An Aggregative Games Approach to Merger Analysis in Multiproduct-Firm Oligopoly By Volker Nocke; Nicolas Schutz
  3. All-Pay Oligopolies: Price Competition with Unobservable Inventory Choices By Joao Montez; Nicolas Schutz
  4. Platform Competition: Who Benefits from Multihoming? By Paul Belleflamme; Martin Peitz
  5. A Fresh Look at Zero-Rating By Jan Krämer; Martin Peitz
  6. Collusion with intertemporal price dispersion By de Roos, Nicholas; Smirnov, Vladimir
  7. Entering a foreign market: Exports, FDI or strategic alliance? By Morasch, Karl
  8. Cost Efficiencies and Upward Pricing Pressure By Jessica Dutra; Tarun Sabarwal
  9. Come Together: Firm Boundaries and Delegation By Laura Alfaro; Nick Bloom; Paola Conconi; Harald Fadinger; Patrick Legros; Andrew F. Newman; Raffaella Sadun; John Van Reenen
  10. Deception and Competition in Search Markets By Tobias Gamp; Daniel Kraehmer
  11. Time-inconsistent Output Subsidy/Tax Policies in Free-entry Mixed Markets By Chen, Jiaqi; Lee, Sang-Ho; Muminov, Timur
  12. Timing of R&D Decisions and Output Subsidies in a Mixed Duopoly with Spillovers By Lee, Sang-Ho; Muminov, Timur; Chen, Jiaqi
  13. Increasing differences between firms: market power and the macro-economy By Van Reenen, John
  14. Toward a coherent policy on cartel damages By Jens-Uwe Franck; Martin peitz
  15. Consumer Search with and without Tracking By Marcel Preuss
  16. Rent Sharing and Inclusive Growth By Bell, Brian; Bukowski, Pawel; Machin, Stephen
  17. On the Microfoundation of Linear Oligopoly Demand By Bos, Iwan; Vermeulen, Dries
  18. Foreign expansion, competition and bank risk By Faia, Ester; Laffitte, Sebastien; Ottaviano, Gianmarco I. P.
  19. In-house and arm’s length: productivity heterogeneity and variation in organizational form By Kalnins, Arturs; Lin, Stephen F.; Thomas, Catherine
  20. Cheap talk, monitoring and collusion By David Spector
  21. Ownership Unbundling of Electricity Distribution Networks By Nillesen, P.; Pollitt, M.
  22. U.S. Competition Policy and the Free Market Philosophy: A Moral Justification By Bos, Iwan
  23. Monetary policy, product market competition and growth By Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
  24. Labour market power and the distorting effects of international trade By Mertens, Matthias
  25. Technology, market structure and the gains from trade By Impullitti, Giammario; Licandro, Omar; Rendhal, Pontus
  26. Not all price endings are created equal: Price points and asymmetric price rigidity By Daniel Levy; Avichai Snir; Alex Gotler; Haipeng (Allan) Chen
  27. Two Stage 2 × 2 Games With Strategic Substitutes and Strategic Heterogeneity By Tarun Sabarwal; Hao VuXuan
  28. The Origins of Firm Heterogeneity: A Production Network Approach By Andrew B. Bernard; Emmanuel Dhyne; Glenn Magerman; Kalina B. Manova; Andreas Moxnes
  29. Cartel stability in experimental auctions By Jeroen (J.) Hinloopen; Sander (A.M.) Onderstal; Leonard Treuren
  30. Online Reputation Mechanisms and the Decreasing Value of Chain Affliation By Hollenbeck, Brett
  31. The division of labor and the extent of the market By Zhou, Haiwen

  1. By: Paul Belleflamme; Martin Peitz
    Abstract: On many two-sided platforms, users on one side not only care about user participation and usage levels on the other side, but they also care about participation and usage of fellow users on the same side. Most prominent is the degree of seller competition on a platform catering to buyers and sellers. In this paper, we address how seller competition affects platform pricing, product variety, and the number of platforms that carry trade.
    Keywords: Network effects, two-sided markets, platform competition, intermediation, pricing, imperfect competition
    JEL: D43 L13 L86
    Date: 2018–07
  2. By: Volker Nocke; Nicolas Schutz
    Abstract: Using an aggregative games approach, we analyze horizontal mergers in a model of multiproduct-firm price competition with nested CES or nested logit demands. We show that the Herfindahl index provides an adequate measure of the welfare distortions introduced by market power, and that the induced change in the naively-computed Herfindahl index is a good approximation for the market power effect of a merger. We also provide conditions under which a merger raises consumer surplus, and conditions under which a myopic, consumer-surplus-based merger approval policy is dynamically optimal. Finally, we study the aggregate surplus and external effects of a merger.
    Date: 2018–06
  3. By: Joao Montez; Nicolas Schutz
    Abstract: We study a class of games where stores source unobservable inventories in advance, and then simultaneously set prices. Our framework allows for firm asymmetries, heterogeneous consumer tastes, endogenous consumer information through advertising, and salvage values for unsold units. The payoff structure relates to a complete-information all-pay contest with outside options, non-monotonic winning and losing functions, and conditional investments. In the generically unique equilibrium, stores randomize their price choice and, conditional on that choice, serve all their targeted demand—thus, some inventories may remain unsold. As inventory costs become fully recoverable, the equilibrium price distribution converges to an equilibrium of the associated Bertrand game (where firms first choose prices and then produce to order). This suggests that with production in advance, the choice between a Cournot analysis and a Bertrand-type analysis, as properly generalized in this paper, should depend on whether or not stores observe rivals’ inventories before setting prices.
    Keywords: Oligopoly, inventories, production in advance, all-pay contests, Bertrand convergence
    JEL: L13 D43
    Date: 2018–05
  4. By: Paul Belleflamme; Martin Peitz
    Abstract: Competition between two-sided platforms is shaped by the possibility of multihoming. If initially both sides of platform singlehome, each platform provides users on one side exclusive access to its users on the other side. If then one side multihomes, platforms compete on the singlehoming side and exert monopoly power on the multihoming side. This paper explores the allocative effects of such a change from single- to multihoming. Our results challenge the conventional wisdom, according to which the possibility of multihoming hurts the side that can multihome, while benefiting the other side. This in not always true, as the opposite may happen or both sides may benefit.
    Keywords: Network effects, two-sided markets, platform competition, competitive bottleneck, multihoming
    JEL: D43 L13 L86
    Date: 2018–01
  5. By: Jan Krämer; Martin Peitz
    Abstract: We provide an economic assessment of zero-rating offers in the context of mobile internet access services and draw six lessons: (1) Zero-rating can have several different characteristics that crucially affect their economic and welfare assessment. Thus, regulatory interventions must be based on a careful case-by-case analysis. (2) In the context of zero-rating offers, it is often crucial to evaluate the extent to which users are able to activate and deactivate a (throttled) zero-rated tariff option. If activation/deactivation is easy and instantaneous, a sound economic theory of harm for consumers will in many cases be hard to establish. (3) Similarly, if access to zero-rated partner programs is non-discriminatory and entails low barriers to entry, a sound theory of harm for content providers will usually not be given. (4) Zero-rating can be beneficial for consumers and (legal) content providers alike by contributing to a reduction of illegal content. Combined with throttling it can mitigate congestion problems. However, by requiring all content belonging to the same content category to be treated equally with respect to throttling, independent of whether a content provider opted for zero-rating or not, the existing regulation creates a negative externality on those content providers that do not wish to be zero-rated for some reason. (5) Particular attention should be paid to the impact of throttled zero-rating tariffs on the competition between mobile network operators (MNOs) and MVNOs. The latter may not be able to compete on equal footing with MNOs, because they benefit less from the traffic management aspects of zero-rating. (6) Competition among (infrastructure-based) ISPs provides a safeguard against severe rent extraction and, thus, an abuse of throttling and zero-rating as an exploitative device. Therefore, regulators should carefully account for the competitive environment and the existing tariff portfolio and options before deciding to intervene. Competition policy, rather than ex-ante regulation, may be more suitable for this task.
    Keywords: Zero-rating, net neutrality, throttling, traffic management, mobile communications
    JEL: L51 L86
    Date: 2018–06
  6. By: de Roos, Nicholas; Smirnov, Vladimir
    Abstract: We develop a theory of optimal collusive intertemporal price dispersion. Dispersion clouds consumer price awareness, encouraging firms to coordinate on dispersed prices. Our theory generates a collusive rationale for price cycles and sales. Patient firms can support optimal collusion at the monopoly price. For less patient firms, monopoly prices must be punctuated with fleeting sales. The most robust structure involves asymmetric price cycles resembling Edgeworth cycles. Low consumer attentiveness enhances the effectiveness of price dispersion by reducing the payoff to deviations involving price reductions. However, for sufficiently low attentiveness, price rises are also a concern, limiting the power of obfuscation.
    Keywords: Collusion; obfuscation; price dispersion.
    Date: 2019–01
  7. By: Morasch, Karl
    Abstract: The decision over exports vs. foreign direct investment (FDI) is usually discussed in an extension of the so-called Melitz model where firms with heterogeneous costs compete in a monopolistically competitive industry. The present paper starts from a situation where a potential foreign entrant would be just indifferent between exports and FDI in such a setting. However, by assuming oligopolistic interaction, strategic considerations are also taken into account. It is shown how the strategic impact of lower marginal cost makes FDI more attractive in a Cournot setting while exports are preferable under price competition in a market with differentiated goods. Beyond that it is also explored how a strategic alliance with a local incumbent could be a superior alternative for market entry.
    Keywords: Entry strategies,Trade,FDI,Alliances,Oligopoly
    JEL: D43 L11 L41
    Date: 2018
  8. By: Jessica Dutra (Department of Economics, The University of Kansas); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: We investigate the accuracy of UPP as a tool in antitrust analysis when there are cost efficiencies from a horizontal merger. We include model-based, merger-specific cost efficiencies in a tractable manner and extend the standard UPP formulation to account for these efficiencies. The efficacy of the new UPP formulations is analyzed using Monte Carlo simulation of 40,000 mergers (8 scenarios, 5,000 mergers in each scenario). We find that the new UPP formulations yield substantial gains in prediction of post-merger prices, as compared to existing practice, and there are substantial gains in merger screening accuracy as well. Moreover, the new UPP formulations outperform the standard UPP formulation at higher thresholds for all the standard cases in the paper. The results support the inclusion of model-based cost efficiencies in the standard UPP formulation for more accurate antitrust decision-making.
    Keywords: upward pricing pressure, merger efficiency, monte carlo, UPP, mergers, antitrust, unilateral effects, cost efficiencies
    JEL: L11 L41 L13
    Date: 2018–12
  9. By: Laura Alfaro; Nick Bloom; Paola Conconi; Harald Fadinger; Patrick Legros; Andrew F. Newman; Raffaella Sadun; John Van Reenen
    Abstract: Little is known theoretically, and even less empirically, about the relationship between firm boundaries and the allocation of decision rights within firms. We develop a model in which firms choose which suppliers to integrate and whether to delegate decisions to integrated suppliers. We test the predictions of the model using a novel dataset that combines measures of vertical integration and delegation for a large set of firms from many countries and industries. In line with the model’s predictions, we obtain three main results: (i) integration and delegation co-vary positively; (ii) producers are more likely to integrate suppliers in input sectors with greater productivity variation (as the option value of integration is greater); and (iii) producers are more likely to integrate suppliers of more important inputs and to delegate decisions to them.
    Keywords: Vertical integration, delegation, real options, supply assurance
    JEL: D2 L2
    Date: 2018–05
  10. By: Tobias Gamp; Daniel Kraehmer
    Abstract: We study the interplay between deception and consumer search in a search market where firms may deceive some naive consumers with inferior products that display hidden (bad) attributes. We derive an equilibrium in which both superior and inferior quality is offered and show that as search frictions vanish, superior goods are entirely driven out of the market. Deception harms sophisticated consumers, as it forces them to search longer to find a superior product. We argue that policy interventions that reduce search frictions such as the standardization of price and package formats may harm welfare. In contrast, reducing the number of naive consumers through transparency policies and education campaigns as well as a minimum quality standard can improve welfare.
    Keywords: Deceptive product, Inferior product, Naivete, Consumer Search
    JEL: D18 D21 D43 D83
    Date: 2018–05
  11. By: Chen, Jiaqi; Lee, Sang-Ho; Muminov, Timur
    Abstract: This paper considers time-inconsistent output subsidy/tax policies in free-entry mixed markets and compares committed and non-committed regimes under different competition modes. In a committed regime where the subsidy is determined before the private firms enter the market, the optimal rate is zero in either Cournot game or Stackelberg game when the public firm is a follower, while it is negative in Stackelberg game with public leadership. However, in the non-committed regime where the subsidy is not determined before entry, the optimal rate is always positive. Finally, we show that private leadership is the best for social welfare regardless of the timing of output subsidy/tax policies.
    Keywords: Free-entry mixed market, Committed policy, Non-committed policy, Output subsidy
    JEL: H20 H42 L13
    Date: 2019–01–14
  12. By: Lee, Sang-Ho; Muminov, Timur; Chen, Jiaqi
    Abstract: This study considers a mixed duopoly with research spillovers and examines the interplay between firms’ R&D decisions and government’s output subsidies. We investigate and compare the timing of the game between ex-ante R&D and ex-post R&D decisions where the R&D decisions are chosen before the output subsidy is determined in the former case while the order is reversed in the latter case. We show that the equilibrium outcomes can be opposite between the two cases because both public and private firms have different objectives in choosing R&D investments, but the spillovers rate is a key factor that determines their incentives. In particular, we show that the output subsidy is smaller (larger) and the welfare is larger (smaller) under the ex-ante R&D decisions for a higher (lower) degree of spillovers rate. Finally, privatization increases the welfare in both cases only when spillovers rate is weak.
    Keywords: Mixed duopoly; Research spillovers, Ex-ante R&D; Ex-post R&D, Output subsidy
    JEL: H21 L13 L32
    Date: 2019–01–14
  13. By: Van Reenen, John
    Abstract: A rich understanding of macro-economic outcomes requires taking into account the large (and increasing) differences between firms. These differences stem in large part from heterogeneous productivity rooted in managerial and technological capabilities that do not transfer easily between firms. In recent decades the differences between firms in terms of their relative sales, productivity and wages appear to have increased in the US and many other industrialized countries. Higher sales concentration and apparent increases in aggregate markups have led to the concern that product market power has risen substantially which is a potential explanation for the falling labor share of GDP, sluggish productivity growth and other indicators of declining business dynamism. I suggest that this conclusion is premature. Many of the patterns are consistent with a more nuanced view where many industries have become “winner take most/all” due to globalization and new technologies rather than a generalized weakening of competition due to relaxed anti-trust rules or rising regulation.
    Keywords: firm differences; concentration; market power; policy
    JEL: L2 M2 O14 O33
    Date: 2018–09
  14. By: Jens-Uwe Franck; Martin peitz
    Abstract: The focus of cartel damages law is on the recovery of the cartel overcharge. Parties other than purchasers are often neglected, not only as a matter of judicial practice, but also due to legal restrictions. We argue that a narrow concept of standing—which excludes parties that supply either the cartel or the firms that purchase from the cartel with complementary product components—falls short of achieving effective antitrust enforcement and corrective justice in the best possible way. We provide a framework with two complementary products and show that under neither competition nor cartelization do the allocation and the distribution of surpluses depend on whether producers of complements purchase from the cartel or supply the cartel or the cartel’s customers. Thus, we argue that prima facie producers of complements should be treated alike, regardless of their position in the supply chain. Moreover, based on various factors that determine the enforcement effect of antitrust damages claims and their role as an instrument to achieve corrective justice, we show that a broad concept of standing is, indeed, the preferable legal solution. While its implementation would require a change in position by the U.S. federal courts, we submit that it would amount to a consistent completion of the legal framework within the E.U.
    Keywords: Cartel damages, antitrust standing, pass-on, suppliers, complementary goods
    JEL: K21
    Date: 2018–03
  15. By: Marcel Preuss
    Abstract: In this paper, I develop a tractable framework with sequential consumer search to address the effect of tracking on market outcomes. Tracking search histories is informative about consumers’ valuations because different consumer types have different stopping probabilities. With tracking, the unique equilibrium price path is increasing whereas without tracking, an average uniform price prevails. Welfare effects largely depend on how tracking affects consumers’ search persistence. For intermediate search costs, tracking based price discrimination exacerbates the holdup problem and leads to inefficiently low search persistence. For high search costs instead, tracking prevents a market breakdown as low prices conditional on short search histories secure consumers a positive surplus from search. Tracking prevails endogenously when consumers can dynamically opt out from tracking. This holds since disclosing their search history is always individually rational for consumers, irrespective of the overall effect on consumer surplus.
    Keywords: consumer search, privacy, dynamic price discrimination
    JEL: D11 D18 D83 L13 L86
    Date: 2018–05
  16. By: Bell, Brian (King's College London); Bukowski, Pawel (Central European University); Machin, Stephen (London School of Economics)
    Abstract: The long-run evolution of rent sharing is empirically studied. Based upon a comprehensive and harmonized panel of the top 300 publicly quoted British companies over thirty five years, the paper reports evidence of a significant fall over time in the extent to which firms share rents with workers. It confirms that companies do share their profits with employees, but at much smaller scale today than they did during the 1980s and 1990s. This is a robust finding, corroborated with industry-level analysis for the US and EU. The decline in rent sharing is coincident with the rise of product market power that has occurred as worker bargaining power has dropped. Although firms with more market power previously shared more of their profits, they experienced a stronger fall in rent sharing after 2000.
    Keywords: rent sharing, inclusive growth
    JEL: J30
    Date: 2018–12
  17. By: Bos, Iwan (Organisation and Strategy); Vermeulen, Dries (QE / Operations research)
    Abstract: We critically assess the representative consumer model that forms the foundation of a well-known class of linear oligopoly demand structures. It is argued that this approach has several limitations. We present an alternative microeconomic foundation by deriving the same demand system directly from a population of heterogeneous buyers. Our approach can be easily adapted to different demand specifications.
    Keywords: microfoundations, oligopoly theory, product differentiation, representative consumer models
    JEL: B40 L10
    Date: 2019–01–28
  18. By: Faia, Ester; Laffitte, Sebastien; Ottaviano, Gianmarco I. P.
    Abstract: Using a novel dataset on the 15 European banks classified as G-SIBs from 2005 to 2014, we find that the impact of foreign expansion on risk is always negative and significant for most individual and systemic risk metrics. In the case of individual metrics, we also find that foreign expansion affects risk through a competition channel as the estimated impact of openings differs between host countries that are more or less competitive than the source country. The systemic risk metrics also decline with respect to expansion, though results for the competition channel are more mixed, suggesting that systemic risk is more likely to be affected by country or business models characteristics that go beyond and above the differential intensity of competition between source and host markets. Empirical results can be rationalized through a simple model with oligopolistic/oligopsonistic banks and endogenous assets/liabilities risk.
    Keywords: banks’ risk-taking; systemic risk; geographical expansion; gravity; diversification; competition; regulatory arbitrage
    JEL: G21 G32 L13
    Date: 2018–08
  19. By: Kalnins, Arturs; Lin, Stephen F.; Thomas, Catherine
    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: D2 D23 F12 L23
    Date: 2018–10
  20. By: David Spector (PSE - Paris School of Economics, 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: 2017–12
  21. By: Nillesen, P.; Pollitt, M.
    Abstract: Traditional restructuring of power markets has focused on legally separating monopolistic transmission and distribution infrastructure, with sufficient regulatory oversight to ensure non-discriminatory access to networks, and transparent and cost-reflective tariffs. There is consensus that ownership separation for transmission assets is beneficial for competition and transparency. However, at the distribution level the benefits are questionable. This paper reviews the theoretical arguments for ownership unbundling and summarises the findings from 23 academic papers and consulting reports. In addition, this paper empirically demonstrates that forced distribution ownership unbundling in New Zealand (from 1998) and the Netherlands (from 2009) did not increase retail competition (and reduced it in New Zealand), did not increase network quality, but did result in significant one-off and structural costs. The pros and cons of DSO ownership unbundling is topical given current policy discussions in Denmark and the more general changes to the operating environment of DSOs with increasingly active networks due to decentralised renewables production and bi-directional power flows. Policymakers should therefore consider alternative policy measures to increase retail competition and network quality.
    Keywords: electricity distribution, ownership unbundling
    JEL: L94
    Date: 2019–01–19
  22. By: Bos, Iwan (Organisation and Strategy)
    Abstract: Few today would doubt the need for competition rules in a free, marked-based society like the United States of America. From a free market philosophy perspective, however, there is something inherently paradoxical about the presence of competition policy. After all, the competition laws that are intended to combat restraints of trade are, in fact, themselves restraints of trade and their enforcement implies extensive government intervention. It is argued that competition policy is nevertheless compatible with the free market philosophy when the free market system would effectively disappear without it and it is shown that this possibility was considered real in the history of U.S. competition law enforcement. U.S. competition policy stimulates free market survival by shaping market structure and by promoting the free market spirit. Both make American competition policy consistent with the free market philosophy and consequently provide a moral justification for its presence.
    Keywords: industrial organization
    Date: 2019–01–28
  23. By: Aghion, Philippe; Farhi, Emmanuel; Kharroubi, Enisse
    Abstract: In this paper we argue that monetary easing fosters growth more in more credit-constrained environments, and the more so the higher the degree of product market competition. Indeed when competition is low, large rents allow firms to stay on the market and reinvest optimally, no matter how funding conditions change with aggregate conditions. To test this prediction, we use industrylevel and firm-level data from the Euro Area to look at the effects on sectoral growth and firm-level growth of the unexpected drop in long-term government bond yields following the announcement of the Outright Monetary Transactions program (OMT) by the ECB. We find that the monetary policy easing induced by OMT, contributed to raising sectoral (firm-level) growth more in more highly leveraged sectors (firms), and the more so the higher the degree of product market competition in the country (sector).
    Keywords: growth; financial conditions; firm leverage; competition
    JEL: E32 E43 E52
    Date: 2018–12
  24. By: Mertens, Matthias
    Abstract: This article examines how trade shocks shape labour market imperfections that create market power in labour markets and prevent an efficient allocation of labour. I develop a framework for measuring such labor market distortions in monetary terms and document large degrees of those distortions in Germany's manufacturing sector. Import competition can only exert labor market disciplining effects when firms rather than workers have labour market power. Otherwise, export demand and import competition shocks tend to fortify existing distortions by amplifying labour market power structures. This diminishes the gains from trade compared to a model with perfectly competitive labour markets.
    Keywords: international trade,market power,labor markets,allocative efficiency
    JEL: D24 F14 F16 J50 L13 L60
    Date: 2019
  25. By: Impullitti, Giammario; Licandro, Omar; Rendhal, Pontus
    Abstract: We study the gains from trade in a new model with oligopolistic competition, firm heterogeneity, and innovation. Lowering trade costs reduces markups on domestic sales but increases markups on export sales, as firms do not pass the entire reduction in trade costs onto foreign consumers. Trade liberalisation can also reduce the number of firms competing in each market, thereby increasing markups on both domestic and export sales. For the majority of exporters, however, the pro- competitive effect prevails and their average markups decline. The incomplete pass-though and the reduction in the number of competitors instead dominate for top-exporters – the top 0.1% of firms – which end up increasing their markup. In a quantitative exercise we find that the aggregate effect of trade-induced markup changes is pro-competitive and accounts for the majority of the welfare gains from trade. Trade-induced changes in competition affect survival on domestic and export markets and firms’ decision to innovate. All exporters, and especially the top exporters, increase their market size after liberalisation which, in turn, encourages them to innovate more. Hence, top exporters contribute negatively to welfare gains by increasing their markups but positively by increasing innovation and productivity. Firms’ innovation response accounts for a small but non-negligible share of the welfare gains while the contribution of selection is U-shaped, being negative for small liberalisations and positive otherwise. A more globalised economy is therefore populated by larger, fewer and more innovative firms, each feature representing an important source of the gains from trade.
    Keywords: gains from trade; heterogeneous firms; oligopoly; innovation; endogenous markups; endogenous market structure
    JEL: F12 F13 O31 O41
    Date: 2018–12
  26. By: Daniel Levy (International School of Economics at Tbilisi State University; Department of Economics, Bar-Ilan University; Department of Economics, Emory University; The Rimini Centre for Economic Analysis, Wilfrid Laurier University, Waterloo, ON, CANADA;); Avichai Snir (Department of Banking and Finance, Netanya Academic College, Netanya 42365, ISRAEL); Alex Gotler (Department of Education and Psychology, Open University, Raanana 43107, ISRAEL); Haipeng (Allan) Chen (Gatton College of Business and Economics, University of Kentucky, Lexington, KY 40506, USA)
    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 transactionprices 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
    Date: 2019
  27. By: Tarun Sabarwal (Department of Economics, University of Kansas); Hao VuXuan (Department of Economics, The University of Kansas)
    Abstract: Feng and Sabarwal (2018) show that there is additional scope to study strategic complements in extensive form games, by investigating in detail the case of two stage, 2×2 games. We show the same for two stage, 2 × 2 games with strategic substitutes and with strategic heterogeneity. We characterize strategic substitutes and strategic heterogeneity in such games, and show that the set of each class of games has infinite Lebesgue measure. Our conditions are easy to apply and yield uncountably many examples of such games, indicating greater possibilities for the manifestation and study of these types of interactions. In contrast to the case for strategic complements, we show that generically, the set of subgame perfect Nash equilibria in both classes of games is totally unordered (no two equilibria are comparable). Consequently, with multiple equilibria, some nice features of strategic complements that depend on the complete lattice structure of the equilibrium set may not transfer to the case of strategic substitutes or strategic heterogeneity.
    Keywords: Strategic substitutes, strategic complements, strategic heterogeneity, two stage game, extensive form game
    JEL: C60 C70
    Date: 2018–12
  28. By: Andrew B. Bernard; Emmanuel Dhyne; Glenn Magerman; Kalina B. 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.
    Keywords: production networks, productivity, firm size heterogeneity
    JEL: F10 F12 F16
    Date: 2019
  29. By: Jeroen (J.) Hinloopen (University of Amsterdam; CPB); Sander (A.M.) Onderstal (University of Amsterdam); Leonard Treuren (University of Amsterdam)
    Abstract: Using laboratory experiments, we compare the stability of bidding rings in the English auction and the first-price sealed-bid auction in a heterogeneous-value setting. In both a re-matching condition and a fixed-matching condition, we observe that biddings rings are more stable in the English auction than in the first-price sealed-bid auction. In both conditions, the first-price sealed-bid auction dominates the English auction in terms of average revenue and the revenue spread. The English auction outperforms the first-price sealed-bid auction in terms of efficiency.
    Keywords: Cartel stability; English auction; First-price sealed-bid auction; Laboratory experiments
    JEL: C92 D44 L41
    Date: 2019–01–27
  30. By: Hollenbeck, Brett
    Abstract: This paper investigates the value of branding and how it is changing in response to a large increase in consumer information provided by online reputation mechanisms. As an application of umbrella branding, theory suggests much of the value to firms of chain affiliation results from asymmetric information between buyers and sellers. As more information becomes available, consumers should rely less on brand names as quality signals and the ability for firms to extend reputations across heterogenous outlets should decrease. To examine this empirically, this paper combines a large, 15 year panel of hotel revenues with millions of online reviews from multiple platforms and performs a machine learning analysis of review text to recover latent, time-varying dimensions of firm quality. I find that branded, or chain-affiliated, hotels earn substantially higher revenues than equivalent independent hotels, but that this premium has declined by over 50% from 2000 to 2015. I find that this can be largely attributed to an increase in online reputation mechanisms, and that this affect is largest for low quality and small market firms. Numerous measures of the information content of online reviews show that as information has increased, independent hotel revenue grows substantially more than chain hotel revenue. Finally, the correlation between firm revenue and brand-wide reputation is decreasing and the correlation with individual hotel reputation is replacing it.
    Keywords: Online Reviews, Branding, Text Analysis, Franchising
    JEL: L15 L22
    Date: 2018–10
  31. By: Zhou, Haiwen
    Abstract: A firm’s degree of specialization is modeled as the number of different goods it produces. When a firm chooses its degree of specialization, it faces a tradeoff between the fixed cost and the marginal cost of production. A firm’s degree of specialization is shown to increase with the extent of the market. Meanwhile, the real wage rate, as a measure of the extent of the market, is endogenously determined in the model and is shown to increase with the division of labor.
    Keywords: Division of labor, Extent of the market, Specialization, Increasing returns to scale
    JEL: A10
    Date: 2019–01–22

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