nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒04‒22
24 papers chosen by
Russell Pittman
United States Department of Justice

  1. Anticompetitive Vertical Merger Waves By Johan Hombert; Jérôme Pouyet; Nicolas Schutz
  2. Revenue Management without Commitment: Dynamic Pricing and Periodic Flash Sales By Francesc Dilmé; Fei Li
  3. Price Setting on a Network By Toomas Hinnosaar
  4. Consumer Privacy and Serial Monopoly By V. Bhaskar; Nikita Roketskiy
  5. Pricing Inputs and Outputs: Market prices versus shadow prices, market power, and welfare analysis By Bhattacharyya, Aditi; Kutlu, Levent; Sickles, Robin C.
  6. Market Structures in Production Economics By Garcia, Devin; Kutlu, Levent; Sickles, Robert C.
  7. Efficiency in large markets with firm heterogeneity By Dhingra, Swati; Morrow, John
  8. Foreign Competition and the Durability of US Firm Investments By Philippe Fromenteau; Jan Schymik; Jan Tscheke
  9. The Comparative Advantage of Firms By Johannes Boehm; Swati Dhingra; John Morrow
  10. EU Merger Policy Predictability Using Random Forests By Pauline Affeldt
  11. A Decade of Competition Policy in Arab Countries: A De jure and De facto Assessment By Jala Youssef; Chahir Zaki
  12. Anatomy of public procurement By Jääskeläinen, Jan; Tukiainen, Janne
  13. Market Concentration and the Productivity Slowdown By Olmstead-Rumsey, Jane
  14. Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory By Akcigit, Ufuk; Ates, Sina T.
  15. A Theory of Falling Growth and Rising Rents By Aghion, Philippe; Bergeaud, Antonin; Boppart, Timo; Klenow, Peter J.; Li, Huiyu
  16. What Happened to U.S. Business Dynamism? By Akcigit, Ufuk; Ates, Sina T.
  17. Why is Productivity Correlated with Competition? By Matthew Backus
  18. Off-Balance Sheet Activities, Inefficiency and Market Power of U.S. Banks By Wheelock, David C.; Wilson, Paul W.
  19. Marketing Agencies and Collusive Bidding in Online Ad Auctions By Francesco Decarolis; Maris Goldmanis; Antonio Penta
  20. Trust, Investment and Competition: Theory and Evidence from German Car Manufacturers By Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad O. Stahl
  21. State-aided Price Coordination in the Dutch Mortgage Market By Mark Dijkstra; Maarten Pieter Schinkel
  22. Art Auctions By Ashenfelter, Orley C; Graddy, Kathryn
  23. The Evolution of Airline Partnerships in the U.S. Domestic Market By Aisling J. Reynolds-Feighan
  24. Price discovery in cryptocurrency markets By Makarov, Igor; Schoar, Antoinette

  1. By: Johan Hombert; Jérôme Pouyet; Nicolas Schutz
    Abstract: We develop a model of vertical merger waves and use it to study the optimal merger policy. As a merger wave can result in partial foreclosure, it can be optimal to ban a vertical merger that eliminates the last unintegrated upstream firm. Such a merger is more likely to worsen market performance when the number of downstream firms is large relative to the number of upstream firms, and when upstream contracts are nondiscriminatory, linear, and public. On the other hand, the optimal merger policy can be non-monotonic in the strength of synergies or in the degree of downstream product differentiation.
    Keywords: vertical mergers, vertical foreclosure, merger waves, merger policy
    JEL: L13
    Date: 2019–04
  2. By: Francesc Dilmé; Fei Li
    Abstract: A seller has a fixed number of goods to sell by a deadline. At each time, he posts a regular price and decides whether to hold a flash sale. Over time, buyers privately enter the market and strategically time their purchases. If a buyer does not purchase when she arrives, she can pay an attention cost to recheck the regular price afterwards, or she can wait for future flash sales where she may obtain a good at a discounted price. In the unique Markov perfect equilibrium, the seller sporadically holds flash sales to lower the stock of goods. A flash sale increases the willingness to pay of future buyers, but decreases the willingness to pay of buyers who arrive early in the game. When it is very likely that a buyer will obtain a good in a flash sale, the seller holds a “big†initial flash sale for all but one unit of the good.
    Keywords: revenue management, commitment power, dynamic pricing, flash sales, inattention frictions
    JEL: D82 D83
    Date: 2019–04
  3. By: Toomas Hinnosaar
    Abstract: Most products are produced and sold by supply chain networks, where an interconnected network of producers and intermediaries set prices to maximize their profits. I show that there exists a unique equilibrium in a price-setting game on a network. The key distortion reducing both total profits and social welfare is multiple-marginalization, which is magnified by strategic interactions. Individual profits are proportional to influentiality, which is a new measure of network centrality defined by the equilibrium characterization. The results emphasize the importance of the network structure when considering policy questions such as mergers or trade tariffs.
    Date: 2019–04
  4. By: V. Bhaskar; Nikita Roketskiy
    Abstract: We examine the implications of consumer privacy when preferences today depend upon past consumption choices, and consumers shop from different sellers in each period. Although consumers are ex ante identical, their initial consumption choices cannot be deterministic. Thus ex post heterogeneity in preferences arises endogenously. Consumer privacy improves social welfare, consumer surplus and the profits of the second-period seller, while reducing the profits of the first period seller, relative to the situation where consumption choices are observed by the later seller.
    Date: 2019–04
  5. By: Bhattacharyya, Aditi (Ernst and Young, LLP); Kutlu, Levent (U of Texas, Arlington); Sickles, Robin C. (Rice U)
    Date: 2018–09
  6. By: Garcia, Devin (Ernst and Young LLP, Houston); Kutlu, Levent (Georgia Institute of Technology); Sickles, Robert C. (Rice U)
    Date: 2018–04
  7. By: Dhingra, Swati; Morrow, John
    Abstract: Empirical work has drawn attention to the high degree of productivity differences within industries, and its role in resource allocation. In a benchmark monopolistically competitive economy, productivity differences introduce two new margins for allocational inefficiency. When markups vary across firms, laissez faire markets do not select the right distribution of firms and the market-determined quantities are inefficient. We show that these considerations determine when increased competition from market expansion takes the economy closer to the socially efficient allocation of resources. As market size grow large, differences in market power across firms converge and the market allocation approaches the efficient allocation of an economy with constant markups.
    Keywords: Efficiency; Productivity; Limit theorem; Market expansion; Competition
    JEL: D6 F1 L1
    Date: 2017–10–14
  8. By: Philippe Fromenteau; Jan Schymik; Jan Tscheke
    Abstract: How does the exposure to product market competition affect the investment horizon of firms? We study if firms have an incentive to shift investments towards more short-term assets when exposed to tougher competition. Based on a stylized firm investment model, we derive a within-firm estimator using variation across investments with different durabilities. Exploiting the Chinese WTO accession, we estimate the effects of product market competition on the composition of US firm investments. Firms that experienced tougher competition shifted their expenditures towards investments with a shorter durability. This effect is larger for firms with lower total factor productivity.
    Keywords: import competition, firm investment behavior, investment life-span, short-termism
    JEL: F14 F36 G32 L20 D22
    Date: 2019–04
  9. By: Johannes Boehm; Swati Dhingra; John Morrow
    Abstract: Multiproduct firms dominate production, and their product turnover contributes substantially to aggregate growth. Theories propose that multiproduct firms grow by diversifying into products which need the same know-how or capabilities, but are less clear on what these capabilities are. Input-output tables show firms co-produce in industries that share intermediate inputs, suggesting input capabilities drive multiproduct production patterns. We provide evidence for this in Indian manufacturing: the similarity of a firm's input mix to an industry's input mix predicts entry into that industry. We identify the direction of causality from the removal of size-based entry barriers in input markets which made firms more likely to enter industries that were similar in input use to their initial input mix. We rationalize this finding with a model of industry choice and economies of scope to estimate the importance of input capabilities in determining comparative advantage. Complementarities driven by input capabilities make a firm on average 5% (and up to 15%) more likely to produce in an industry. Entry barriers in input markets constrained the comparative advantage of firms and were equivalent to a 10.5 percentage point tariff on inputs.
    Keywords: multiproduct firms, firm capabilities, vertical input linkages, comparative advantage, economies of scope, size-based policies
    JEL: F11 L25 M2 O3
    Date: 2019–04
  10. By: Pauline Affeldt
    Abstract: I study the predictability of the EC’s merger decision procedure before and after the 2004 merger policy reform based on a dataset covering all affected markets of mergers with an official decision documented by DG Comp between 1990 and 2014. Using the highly flexible, non-parametric random forest algorithm to predict DG Comp’s assessment of competitive concerns in markets affected by a merger, I find that the predictive performance of the random forests is much better than the performance of simple linear models. In particular, the random forests do much better in predicting the rare event of competitive concerns. Secondly, postreform, DG Comp seems to base its assessment on a more complex interaction of merger and market characteristics than pre-reform. The highly flexible random forest algorithm is able to detect these potentially complex interactions and, therefore, still allows for high prediction precision.
    Keywords: Merger policy reform, DG Competition, Prediction, Random Forests
    JEL: K21 L40
    Date: 2019
  11. By: Jala Youssef (World Bank); Chahir Zaki
    Abstract: Despite its several benefits, competition policy seems to lack the attention it deserves in terms of public interest and in terms of research in Arab countries. In the 1990s, many of them started to adopt economic reform programs that were broadly market packages aiming at reducing the role of the state, whereas competition laws mostly appeared in the following wave of reforms in the 2000s. However, the adoption of law does not seem to be sufficient in its own and what really matters is its implementation and enforcement. To date, many Arab countries have at least ten years of experience in competition policy, which we believe is a sufficient and suitable experience for assessment. However, to our knowledge, there are no cross countries studies assessing the market outcomes of competition policy in this group of countries. Against this backdrop, the objective of this paper is twofold. First, the paper aims at assessing competition policy in Arab countries in terms of rules (de jure) and implementation (de facto). For both the rules and implementation, we construct indices assessing three categories: enforcement, advocacy and institutional effectiveness. Second, the paper analyses the association between competition policy rules (de jure) and implementation (de facto) and competition outcomes (factual-based and perception-based). This correlation exercise uses our own created indices and the World Bank Enterprise Surveys data (WBES). Our main findings show that, in general, the overall assessment of our group of Arab countries competition legislations seems to be broadly average. In particular, Egypt and Tunisia had better scores in their implementation index for 2012 compared to their corresponding rules index, while it is the inverse in the Jordanian and Moroccan cases. Moreover, the Djiboutian and the Yemeni legislations are the weakest among the group. As per factual based competition outcomes, our competition indices are in general negatively correlated with market power, pointing out the importance of the deterrence effect that competition policy can play in limiting market power. In addition, on the perception-based outcomes front, our indices are mostly positively associated with perceiving more competition.
    Date: 2019
  12. By: Jääskeläinen, Jan; Tukiainen, Janne
    Abstract: We provide novel stylized facts about competition, bidding, entry and bidders across a wide spectrum of public procurement auctions using comprehensive and rich Finnish data. Competition for publicly procured contracts is relatively low with a median bidder count of two (three conditional on receiving any bids). Bidders typically are very heterogeneous in size, which likely limits competition further. Competition seems to work roughly as expected as on average (standardized) bids mainly decrease with the number of actual and potential bidders. Using information on registrations as a good proxy for potential bidders, we show that the ratio of actual to potential bidders increases with the number of actual bidders. We also show that being present in the contracting authority's municipality or province correlates positively with registering, entry (bidding) and winning, but other firm characteristics matter less. While attracting more competition by means of contract and auction rule design is a desirable policy goal and we show suggestive evidence that the use of scoring rule can be an entry barrier, increasing competition may be in practice difficult. Therefore, reservation prices may be a more useful policy tool to alleviate issues associated with the lack of competition.
    Keywords: competition, entry, public procurement, Local public finance and provision of public services, D44, H57, H76, L11,
    Date: 2019
  13. By: Olmstead-Rumsey, Jane
    Abstract: Since around 2000, U.S. aggregate productivity growth has slowed and product market (sales) concentration has risen. At the same time, productivity differences among firms in the same sector appear to have risen dramatically. In this paper I propose a rich model of competition and innovation to explain the coincidence of these three observations. In the model a key parameter governing all three phenomena is the probability that innovating firms make radical innovations. Thus one explanation for rising concentration, slower productivity growth, and wider technology differences among firms is that the incidence of radical innovations has slowed relative to the 1990s, when the internet and other information technology radically transformed production and sales technology in many sectors.
    Keywords: Endogenous growth; market concentration; market power; productivity slowdown; superstar firms
    JEL: E23 L1 O3 O4
    Date: 2019–04–10
  14. By: Akcigit, Ufuk; Ates, Sina T.
    Abstract: In this paper, we review the literature on declining business dynamism and its implications in the United States and propose a unifying theory to analyze the symptoms and the potential causes of this decline. We first highlight 10 pronounced stylized facts related to declining business dynamism documented in the literature and discuss some of the existing attempts to explain them. We then describe a theoretical framework of endogenous markups, innovation, and competition that can potentially speak to all of these facts jointly. We next explore some theoretical predictions of this framework, which are shaped by two interacting forces: a "composition effect" that determines the market concentration and an "incentive effect" that determines how firms respond to a given concentration in the economy. The results highlight that a decline in "knowledge diffusion" between frontier and laggard firms could be a significant driver of empirical trends observed in the data. This study emphasizes the potential of growth theory for the analysis of factors behind declining business dynamism and the need for further investigation in this direction.
    Keywords: business dynamism; Competition; Innovation; knowledge diffusion; Market concentration; Markups; patenting
    JEL: E22 K20 L10 L41 O33 O34
    Date: 2019–04
  15. By: Aghion, Philippe (College de France); Bergeaud, Antonin (Banque de France); Boppart, Timo (IIES); Klenow, Peter J. (Stanford University); Li, Huiyu (Federal Reserve Bank of San Francisco)
    Abstract: Growth has fallen in the U.S., while firm concentration and profits have risen. Meanwhile, labor’s share of national income is down, mostly due to the rising market share of low labor share firms. We propose a theory for these trends in which the driving force is falling firm-level costs of spanning multiple markets, perhaps due to accelerating ICT advances. In response, the most efficient firms spread into new markets, thereby generating a temporary burst of growth. Because their efficiency is difficult to imitate, less efficient firms find their markets more difficult to enter profitably and innovate less. Even the most efficient firms do less innovation eventually because they are more likely to compete with each other if they try to expand further.
    Date: 2019–03–27
  16. By: Akcigit, Ufuk; Ates, Sina T.
    Abstract: In the past several decades, the U.S. economy has witnessed a number of striking trends that indicate a rising market concentration and a slowdown in business dynamism. In this paper, we make an attempt to understand potential common forces behind these empirical regularities through the lens of a micro-founded general equilibrium model of endogenous firm dynamics. Importantly, the theoretical model captures the strategic behavior between competing firms, its effect on their innovation decisions, and the resulting ``best versus the rest'' dynamics. We focus on multiple potential mechanisms that can potentially drive the observed changes and use the calibrated model to assess the relative importance of these channels with particular attention to the implied transitional dynamics. Our results highlight the dominant role of a decline in the intensity of knowledge diffusion from the frontier firms to the laggard ones in explaining the observed shifts. We conclude by presenting new evidence that corroborates a declining knowledge diffusion in the economy. We document a higher concentration of patenting in the hands of firms with the largest stock and a changing nature of patents, especially in the post-2000 period, which suggests a heavy use of intellectual property protection by market leaders to limit the diffusion of knowledge. These findings present a potential avenue for future research on the drivers of declining knowledge diffusion.
    Keywords: business dynamism; Competition; knowledge diffusion; Market concentration
    JEL: E22 E25 L12 O31 O33
    Date: 2019–04
  17. By: Matthew Backus
    Abstract: The correlation between productivity and competition is an oft–observed but ill–understood result. Some suggest that there is a treatment effect of competition on measured productivity, e.g. through a reduction of managerial slack. Others argue that greater competition makes unproductive establishments exit by reallocating demand to their productive rivals, raising observed average productivity via selection. I study the ready-mix concrete industry and offer three perspectives on this ambivalence. First, using a standard decomposition approach, I find no evidence of greater reallocation of demand to productive plants in more competitive markets. Second, I model the establishment exit decision and construct a semi-parametric selection correction to quantify the empirical significance of treatment and selection. Finally, I use a grouped IV quantile regression to test the distributional predictions of the selection hypothesis. I find no evidence for greater selection or reallocation in more competitive markets; instead, all three results suggest that measured productivity responds directly to competition. Potential channels include specialization and managerial inputs.
    JEL: L22 L23 L25 L61
    Date: 2019–04
  18. By: Wheelock, David C. (Federal Reserve Bank of St. Louis); Wilson, Paul W. (Clemson University)
    Abstract: The Lerner index is a well-established measure of firms’ market power, but estimation and interpretation present several challenges, especially for banks. We estimate Lerner indices for U.S. banks for 2001-2016 while (i) accounting for banks’ off-balancesheet activities, (ii) estimating cost and profit functions nonparametrically to avoid mis-specification inherent in parametric estimation of translog functions on banking data, and (iii) allowing for cost and profit inefficiency that can otherwise bias index estimates. We find that banks have more market power than previous studies found, and that failure to account for off-balance-sheet activities or inefficiency can seriously bias estimates of market power.
    Keywords: banks; concentration; market power; nonparametric regression
    JEL: C12 C13 C14 G21 L13
    Date: 2019–04–16
  19. By: Francesco Decarolis; Maris Goldmanis; Antonio Penta
    Abstract: The transition of the advertising market from traditional media to the internet has induced a proliferation of marketing agencies specialized in bidding in the auctions that are used to sell ad space on the web. We analyze how collusive bidding can emerge from bid delegation to a common marketing agency and how this can undermine the revenues and allocative effciency of both the Generalized Second Price auction (GSP, used by Google and Microsoft-Bing and Yahoo!) and the of VCG mechanism (used by Facebook). We nd that, despite its well-known susceptibility to collusion, the VCG mechanism outperforms the GSP auction both in terms of revenues and effciency.
    Keywords: Collusion, digital marketing agencies, facebook, Google, GSP, internet auctions, online advertising, VCG
    JEL: C72 D44 L81
    Date: 2019–04
  20. By: Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad O. Stahl
    Abstract: Based on data from a comprehensive benchmarking study on buyer-supplier relationships in the German automotive industry, we show that more trust in a relationship is associated with higher idiosyncratic investment by suppliers and better part quality|but also with more competition among suppliers. Both associations hold only for parts involving comparatively unsophisticated technology, and evaporate for parts involving sophisticated technology. We rationalize all these observations by means of a relational contracting model of repeated procurement with non-contractible, buyer-specific investments. In relationships involving higher trust, buyers are able to induce higher investment and more intense competition among suppliers|but only when the buyer has the bargaining power. This ability disappears when the bargaining power resides with the supplier(s).
    Keywords: Relational Contracts, Hold-up, Buyer-Supplier Contracts
    JEL: D86 L14
    Date: 2019–04
  21. By: Mark Dijkstra (Utrecht University); Maarten Pieter Schinkel (University of Amsterdam)
    Abstract: This paper shows how price leadership bans imposed, as part of the European Commission’ s State aid control, on all main mortgage providers but the largest bank shifted the Dutch mortgage market from a competitive to a collusive price leadership equilibrium. In May 2009, mortgage rates in The Netherlands suddenly rose against the decreasing funding cost trend to almost a full percentage point above the Eurozone average. We derive equilibrium best-response functions, identify the price leader, and estimate response adjustments in cointegrating equations on a large data set of daily mortgage rates 2004-2012. Consistent with the full coordination equilibrium, we find structural decreases in the leader’s cost pass-through and H-statistic, suggesting monopoly power, as well as much closer following of the leader’s price and strongly reduced transmission of common cost changes in to price followers mortgage rates. All the structural breaks are around the Spring of 2009, when the price leadership bans were negotiated. Predicted over charges are 125 basis points or 26% on average.
    Keywords: banking, competition, price leadership, collusion, State aid
    JEL: L11 G21 L85
  22. By: Ashenfelter, Orley C; Graddy, Kathryn
    Abstract: Works of art and culture are sold by many means. These include transactions between dealers and their customers, auctions with open outcry, internet auctions, and even, occasionally, sealed bid auctions. However, the standard procedure for establishing art valuations for the most expensive works is still most commonly the English auction, where prices ascend in open bidding. This paper describes how art auctions really work, along with the state of competition between auction houses. For expensive art, competition is dominated by the duopoly of Christie's and Sotheby's. The paper proceeds to describe various interesting features of art auctions, including the declining price anomaly, whether or not auctioneers provide accurate information, and anchoring effects in art auctions. The public auction system provides a valuable method for setting and determining values; it is probable that the inability of auctioneers to capture a significant part of the benefits of the information they produce leads to less use of the auction system than is optimal for society.
    Keywords: Art auctions
    JEL: D44 Z11
    Date: 2019–04
  23. By: Aisling J. Reynolds-Feighan
    Abstract: This paper describes the evolution of the four largest airlines in the U.S. domestic market and focuses on the relationships between the mainline airlines and sets of regional airlines that provide feeder services through contract arrangements. The paper traces the series of mergers occurring over the last 20 years that have resulted in the current industry structures and organization and shows the dominance of the top four carriers directly as well as through their relationships with the main regional airlines. The current structure reflects the impact of different types of contractual arrangements and agreements that have shaped relationships between large numbers of airlines in the domestic U.S. market since deregulation in 1978. The paper sets out the rationale for entering into these agreements, the nature of the relationships and the stages of development of current carrier arrangements. A number of public policy issues are highlighted.
    Keywords: Relationships of mainline and regional airlines; Airline dominance; U.S. market; Airline partnerships
    Date: 2018–11
  24. By: Makarov, Igor; Schoar, Antoinette
    JEL: F3 G3
    Date: 2019

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