nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒04‒29
ten papers chosen by
Russell Pittman
United States Department of Justice

  1. The Comparative Advantage of Firms By Johannes Boehm; null null; John Morrow
  2. Consumer Privacy and Serial Monopoly By Bhaskar, Venkataraman; Roketskiy, Nikita
  3. Strategic Complements in Two Stage, 2 × 2 Games By Yue Feng; Tarun Sabarwal
  4. Optimal Destabilization of Cartels By Ludwig von Auer; Tu Anh Pham
  5. Marketing agencies and collusive bidding in online ad auctions By Francesco Decarolis; Maris Goldmanis; Antonio Penta
  6. Endogenous Public and Private Leadership with Diverging Social and Private Marginal Costs By Haraguchi, Junichi; Matsumura, Toshihiro
  7. Product patents and access to innovative medicines in a post-trips-era By Watal, Jayashree; Dai, Rong
  8. Patent protection, innovation, and technology transfer in a Schumpeterian economy By Huang, Chien-Yu; Yang, Yibai; Zheng, Zhijie
  9. The Production Relocation and Price Effects of U.S. Trade Policy: The Case of Washing Machines By Aaron B. Flaaen; Ali Hortaçsu; Felix Tintelnot
  10. The Effects of Subsidies and Mandates: A Dynamic Model of the Ethanol Industry By Lawell, Cynthia Lin; Yi, Fujin; Thome, Karen E

  1. By: Johannes Boehm (Département d'économie); null null (Centre for Economic Performance); John Morrow (King‘s College London [London])
    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
  2. By: Bhaskar, Venkataraman; Roketskiy, Nikita
    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.
    Keywords: consumer privacy; dynamic demand; endogenous screening; Nonlinear Pricing
    JEL: D11 D43 L13
    Date: 2019–04
  3. By: Yue Feng (Department of Economics, The University of Kansas); Tarun Sabarwal (Department of Economics, University of Kansas)
    Abstract: Strategic complements are well understood for normal form games, but less so for extensive form games. Indeed, there is some evidence that extensive form games with strategic complemen- tarities are a very restrictive class of games (Echenique (2004)). We explore the extent of this restrictiveness in the context of two stage, 2×2 games. We find that the restrictiveness imposed by quasisupermodularity and single crossing property is particularly severe, in the sense that the set of games in which payoffs satisfy these conditions has measure zero. In contrast, the set of games that exhibit strategic complements (in the sense of increasing best responses) has infinite measure. This enlarges the scope of strategic complements in two stage, 2 × 2 games (and provides a basis for possibly greater scope in more general games). Moreover, the set of subgame perfect Nash equilibria in the larger class of games continues to remain a nonempty, complete lattice.
    Keywords: Strategic complements, extensive form game, two stage game
    JEL: C61 C70
    Date: 2019–03
  4. By: Ludwig von Auer; Tu Anh Pham
    Abstract: The literature on cartel stability sidelines antitrust policy, whereas the literature on antitrust policy tends to neglect issues of cartel stability. This paper attempts to connect these two interrelated aspects in the context of an augmented quantity leadership model. The cartel is the Stackelberg quantity leader and the fringe firms are in Cournot competition with respect to the residual demand. The antitrust authority decides on its own investigative effort and on the size of the fine that cartel members have to pay when they are detected. For testifying cartel members a leniency program is implemented. Our framework takes into account that these antitrust policy instruments are not costless for society. Our model demonstrates that the optimal antitrust policy exploits the inherent instability of a cartel to reduce its size.
    Keywords: antitrust, stability, Cournot fringe, oligopoly, leniency
    JEL: L13 L41
    Date: 2019
  5. 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 efficiency 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 find that, despite its well-known susceptibility to collusion, the VCG mechanism outperforms the GSP auction both in terms of revenues and efficiency.
    Keywords: Collusion, digital marketing agencies, facebook, google, GSP, internet auctions, online advertising, VCG
    JEL: C72 D44 L81
    Date: 2019–04
  6. By: Haraguchi, Junichi; Matsumura, Toshihiro
    Abstract: We investigate endogenous timing in a mixed duopoly with price competition and with social marginal cost differing from private marginal costs. We find that any equilibrium timing patterns--Bertrand, Stackelberg with private leadership, Stackelberg with public leadership, and multiple Stackelberg equilibria-- emerge. When the foreign ownership share in a private firm is less than 50%, public leadership more likely emerges than private leadership. Conversely, private leadership can emerge in a unique equilibrium when the foreign ownership share in a private firm is large. These results may explain recent policy changes in public financial institutions in Japan. We also find a nonmonotone relationship between the welfare advantage of public and private leadership and the difference between social and private marginal costs for a private firm. A nonmonotone relationship does not emerge in profit ranking.
    Keywords: public financial institutions, differentiated products, Bertrand, Stackelberg, payoff dominance
    JEL: H42 L13
    Date: 2019–04–20
  7. By: Watal, Jayashree; Dai, Rong
    Abstract: This WTO working paper studies availability and affordability of new and innovative pharmaceuticals in a post-TRIPS era. The WTO's TRIPS Agreement (TRIPS) makes it obligatory for WTO members − except least-developed country members (LDCs) - to provide pharmaceutical product patents with a 20-year protection term. Developing country members, other than LDCs, were meant to be compliant with this provision of TRIPS by 2005. This study investigates two questions in this context: (1) How does the introduction of product patents in pharmaceuticals affect the likelihood of pharmaceutical firms to launch new and innovative medicines in those markets? (2) For launched new and innovative medicines, how much do patent owners or generic pharmaceutical firms adjust their prices to local income levels? Using launch data from 1980 to 2017 covering 70 markets, the study finds that introduction of product patent for pharmaceuticals in the patent law has a positive effect on launch likelihood, especially for innovative pharmaceuticals. However, this effect is quite limited in low-income markets. Also, innovative pharmaceuticals are launched sooner than non-innovative ones, irrespective of the patent regime in the local market. Using a panel data set of originator and generic prices from 2007 to 2017, the study finds evidence of differential pricing for both originator and generic products. Overall, originators differentiate by about 11% and generics by about 26%. Differential pricing is larger for pharmaceuticals to treat infectious diseases, particularly for HIV/AIDs medicines, than for non-communicable diseases. However, pharmaceutical prices are far from being fully adjusted to local income levels in either case. However, competition, especially that within a particular medicine market, can effectively drive down prices in both originator and generic markets.
    Keywords: intellectual property rights,patents,TRIPS,pharmaceuticals,pharmaceutical prices,differential pricing,developing countries
    JEL: O34 I11 I19 F19
    Date: 2019
  8. By: Huang, Chien-Yu; Yang, Yibai; Zheng, Zhijie
    Abstract: This paper analyzes the effects of intellectual property rights (IPR) protection on innovation and technology transfer in a North-South quality-ladder model with innovative Northern R&D and adaptive Southern R&D. The degree of IPR protection in two countries differs in terms of patent breadth, which determines the markups of Northern firms and their Southern affiliates, respectively. In this model, stronger IPR protection in the South leads to a permanent decrease in the North-South wage gap, a temporary increase in the Northern innovation rate, and a permanent increase in technology transfer. By contrast, stronger IPR protection in the North leads to a permanent increase in the North-South wage gap, ambiguous effects on the Northern innovation rate, and a permanent decrease in technology transfer. Finally, we perform a quantitative analysis by calibrating the model to the US-China data, and the numerical results support these policy implications.
    Keywords: Intellectual property rights protection, Schumpeterian innovation, multinational firms, technology transfer
    JEL: F12 F23 F43 O31 O34
    Date: 2019–03
  9. By: Aaron B. Flaaen; Ali Hortaçsu; Felix Tintelnot
    Abstract: We analyze several rounds of U.S. import restrictions against washing machines. Using retail price data, we estimate the price effect of these import restrictions by comparing the price changes of washers with those of other appliances. We find that in response to the 2018 tariffs on nearly all source countries, the price of washers rose by nearly 12 percent; the price of dryers—a complementary good not subject to tariffs—increased by an equivalent amount. Factoring in the effect of dryers and price increases by domestic brands, our estimates for the 2018 tariffs on washers imply a tariff elasticity of consumer prices of between 110 and 230 percent. The 2016 antidumping duties against China—which accounted for the overwhelming majority of U.S. imports—led to minor price movements due to subsequent production relocation to other export platform countries. Perhaps surprisingly, the 2012 antidumping duties against Korea led to relocation of production to China, actually resulting in lower washer prices in the United States. We find that our measure of the tariff elasticity of consumer prices may differ in sign and magnitude from conventional pass-through estimates which are based on a regression of country-specific import price changes on country-specific tariff changes. Production relocation effects, price changes by domestic brands, and price changes of complementary goods all contribute to the differences between these measures.
    JEL: F12 F13 F23 L23 L68
    Date: 2019–04
  10. By: Lawell, Cynthia Lin; Yi, Fujin; Thome, Karen E
    Abstract: This paper analyzes the effects of government subsidies and the Renewable Fuel Standard (RFS) on the U.S. ethanol industry. The authors first develop a stylized theory model of subsidies in which they examine which types of subsidies are more cost-effective for inducing investment in firm capacity, and how the presence of a mandate affects the relative cost-effectiveness of different types of subsidies. The authors then empirically analyze how government subsidies and the Renewable Fuel Standard affect ethanol production, investment, entry, and exit by estimating a structural econometric model of a dynamic game that enables us to recover the entire cost structure of the industry, including the distributions of investment costs, entry costs, and exit scrap values. The authors use the estimated parameters to evaluate three different types of subsidy: a production subsidy, an investment subsidy, and an entry subsidy, each with and without the RFS. While conventional wisdom and some of the previous literature favor production subsidies over investment subsidies, and while historically the federal government has used production subsidies to support ethanol, our results show that, for the ethanol industry, investment subsidies and entry subsidies are more cost-effective than production subsidies for inducing investment that otherwise would not have occurred.
    Keywords: Engineering
    Date: 2017–11–01

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