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on Industrial Competition |
| By: | Javier D. Donna (The Ohio State University); Pedro Pereira; Tiago Pires (Department of Economics, University of North Carolina); André Trindade (FGV EPGE Brazilian School of Economics and Finance) |
| Abstract: | We empirically investigate the welfare implications of intermediaries in oligopolistic markets, where intermediaries offer additional services to differentiate their products from the ones of the manufacturers. Our identification strategy exploits the unique circumstance that, in the outdoors advertising industry, there are two distribution channels: consumers can purchase the product either directly from manufacturers, or through intermediaries. We specify a differentiated products’ equilibrium model, and estimate it using product-level data for the whole industry. On the demand side, the model includes consumers who engage in costly search with preferences that are specific to the distribution channel. On the supply side, the model includes two competing distribution channels. One features two layers of activity, where manufacturers and intermediaries bargain over wholesale prices, and intermediaries compete on final prices to consumers. The other is vertically integrated. The estimated model is sed to simulate counterfactual scenarios, where intermediaries do not offer additional services. We find that the presence of intermediaries increases welfare because the value of their services outweighs the additional margin charged. |
| Keywords: | Intermediaries, vertical markets, search frictions, bargaining, outdoor advertising |
| JEL: | L81 L42 D83 M37 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0103&r=all |
| By: | Dworczak, Pitor (Department of Economics, Northwestern University); Kominers, Scott Duke (Entrepreneurial); Akbarpour, Mohammad (Management Unit, Harvard Business School; Department of Economics, Center of Mathematical Sciences and) |
| Abstract: | When macroeconomic tools fail to respond to wealth inequality optimally, regulators can still seek to mitigate inequality within individual markets. A social planner with distributional preferences might distort allocative efficiency to achieve a more desirable split of surplus, for example, by setting higher prices when sellers are poor--effectively, using the market as a redistributive tool. In this paper, we seek to understand how to design goods markets optimally in the presence of inequality. Using a mechanism design approach, we uncover the constrained Pareto frontier by identifying the optimal trade-off between allocative efficiency and redistribution in a setting where the second welfare theorem fails because of private information and participation constraints. We find that competitive equilibrium allocation is not always optimal. Instead, when there is substantial inequality across sides of the market, the optimal design uses a tax-like mechanism, introducing a wedge between the buyer and seller prices, and redistributing the resulting surplus to the poorer side of the market via lump-sum payments. When there is significant within-side inequality, meanwhile, it may be optimal to impose price controls even though doing so induces rationing. |
| JEL: | D61 D63 D82 H21 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3763&r=all |
| By: | Zhiqi Chen (Department of Economics, Carleton University); Thomas W. Ross (Sauder School of Business, University of British Columbia) |
| Abstract: | While strategic alliances and joint ventures have become important organizational forms promising a variety of efficiency benefits for the economy, a body of research has been building showing that alliances between competitors can have significant anticompetitive consequences. This paper explores a particular kind of arrangement, here called a “buffer joint venture”, in which parent firms create an entity selling products located between their own locations in product or geographic space. Depending upon the governance structure of the joint venture and the timing of price-setting by the joint venture and its parents, the buffer joint venture mayreduce competition between the parents leading to higher prices and profits and lower social welfare. The presence of such a joint venture can also affect the incentives for, and the effects of, collusion by the parents. |
| Date: | 2019–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:19-01&r=all |
| By: | Dudley Cooke (University of Exeter); Ana P. Fernandes (University of Exeter); Priscila Ferreira (University of Minho, NIMA) |
| Abstract: | This paper presents novel empirical evidence for the prediction from Becker’s (1957) famous theory, that competition will drive discrimination out of the market. We use a comprehensive firm entry deregulation reform in Portugal as a quasi-natural experiment to study the effect of increased product market competition on gender discrimination. We use employer-employee data for the universe of private sector firms and workers, and exploit the staggered implementation of the reform across municipalities for identification. Increased competition following the deregulation reduces the gender pay gap for medium- and high-skill workers but not for the low-skilled. The gender pay gap is also reduced for workers in managerial positions, except for the CEO. We also find that the share of females in managerial positions increased in affected municipalities. Existing evidence has shown that gender discrimination reduces output; our findings suggest that deregulation can contribute to reduce inefficiencies arising from gender discrimination. |
| Keywords: | Deregulation, Discrimination, Entry, Gender Pay Gap, Product Market Competition, Wage Structure. |
| JEL: | J16 J31 J71 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0105&r=all |
| By: | Díez, Federico; Fan, Jiayue; Villegas-Sanchez, Carolina |
| Abstract: | Using a new firm-level dataset on private and listed firms from 20 countries, we document five stylized facts on market power in global markets. First, competition has declined around the world, measured as a moderate increase in average firm markups during 2000-2015. Second, the markup increase is driven by already high-markup firms (top decile of the markup distribution) that charge increasing markups. Third, markups increased mostly among advanced economies but not in emerging markets. Fourth, there is a non-monotonic relation between firm size and markups that is first decreasing and then increasing. Finally, the increase is mostly driven by increases within incumbents and also by market share reallocation towards high-markup entrants. |
| Keywords: | firm size; market power; Markups; TFP |
| JEL: | D2 D4 E2 L1 L4 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13696&r=all |
| By: | Pedro Carvalho |
| Abstract: | This paper presents empirical evidence on the impact of competition on firm productivity for the Portuguese economy. To that effect, firm-level panel data comprising information between 2010 and 2015 gathered from the Integrated Business Accounts System (Portuguese acronym: SCIE) is used. The database enables the construction of economic and financial indicators, which allow for isolating the impact of competition on firm-level productivity. We find a positive relationship between competition and both total factor productivity and labor productivity. This relationship is found to be robust to different specifications and in accordance with the results in the literature obtained for other countries. |
| Keywords: | Competition, Productivity, Portugal |
| JEL: | D40 D24 O47 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0108&r=all |
| By: | Filomena Garcia (Indiana University, & UECE); Jose Manuel Paz y Minõ (Indiana University); Gustavo Torrens (Indiana University) |
| Abstract: | We study the incentives of competition authorities to prosecute collusive practices of domestic and foreign firms. For that purpose, we develop a model of multi-market contact between two firms that can engage in collusion in two countries. In each country, there is a competition authority with a mandate to maximize national welfare. Each competition authority decides its prosecution policy at the beginning of time and commits to it. In equilibrium, the ownership distribution of the firms (domestic versus foreign) affects prosecution policies. The country that does not own the firms prosecutes them as soon as information of collusion becomes available. On the contrary, the country that owns the firms has an incentive to protect their profits in foreign markets delaying prosecution. This strategic delay is valuable because it contains the information spreading that could trigger prosecution in the foreign country. Prosecution delays, however, are not optimal from the point of view of global welfare, something that could be solved through the integration of the competition authorities. The country of origin of the firms would nevertheless oppose integration. Finally, in a multi-industry setting, both countries delay prosecuting domestic firms, which again is not optimal from the point of view of global welfare. Moreover, in a multi-industry setting, both countries can be better off under integration. |
| Keywords: | Multi-market Collusion, Antitrust Policy, Strategic Prosecution, International Antitrust Agreements |
| JEL: | F23 F53 L41 K21 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0104&r=all |
| By: | Berger, Philip G. (University of Chicago Booth School of Business); Choi, Jung Ho (Stanford Graduate School of Business); Tomar, Sorabh (Southern Methodist University Cox School of Business) |
| Abstract: | Does decomposing cost of goods sold entail significant competitive costs? We examine this question using a relaxation of disaggregated manufacturing cost disclosure requirements in Korea. Our survey evidence indicates managers perceive these disclosures to provide a competitive edge to competitors. Using archival data, we find firms with distinctive cost structures and high market shares are less willing to disclose, consistent with a desire to protect cost-leadership advantages embedded in production and sourcing. Firms experience higher gross profits and lower liquidity after withholding manufacturing cost details, suggesting these disclosure decisions involve trading off competitive costs (and not managers’ self-interests) against capital market benefits. At the aggregate level, industries with more nondisclosing firms subsequently experience greater profitability dispersion, suggesting uncertainty about competitors’ cost of goods sold helps drive the widely studied performance dispersion observed within industries. |
| JEL: | D40 D80 L15 M40 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3774&r=all |
| By: | Ding, Yucheng; Zhang, Tianle |
| Abstract: | We extend Stahl's (1989) model to a setting with differentiated products to study the effects of price-directed consumer search. Consumers engage in costly search to find out whether products meet their needs. Consumer search is directed by prices when they are observable before search, in contrast to the case in which prices are discovered only after search, where search is naturally random. The equilibrium under price-directed search differs substantially from that under random search, despite certain similarities. We show that as search costs decrease, sales become more likely and firms earn higher expected profits under price-directed search, whereas the opposite holds under random search. Moreover, compared with random search, under price-directed search firms' expected profits are always lower, but consumer surplus and total welfare are higher provided that the search cost is sufficiently small. |
| Keywords: | Consumer search, Observable price, Search cost |
| JEL: | D8 L1 |
| Date: | 2018–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93552&r=all |
| By: | Le Coq, Chloe (Stockholm Institute of Transition Economics); Schwenen, Sebastian (Technical University of Munich (School of Management)) |
| Abstract: | We study the use of fi nancial contracts as bid-coordinating device in multi-unit uniform price auctions. Coordination is required whenever firms face a volunteer's dilemma in pricing strategies: one firm (the "volunteer") is needed to increase the market clearing price. Volunteering, however, is costly, as inframarginal suppliers sell their entire capacity whereas the volunteer only sells residual demand. We identify conditions under which signing financial contracts solves this dilemma. We test our framework exploiting data on contract positions by large producers in the New York power market. Using a Monte Carlo simulation, we show that the contracting strategy is payoff dominant and provide estimates of the benefits of such strategy. |
| Keywords: | Auctions; Coordination; Volunteers dilemma; Forward markets; power market |
| JEL: | D21 D44 L41 |
| Date: | 2019–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hasite:0047&r=all |
| By: | Chen, Yongmin; Li, zhuozheng; Zhang, Tianle |
| Abstract: | The economics literature on consumer search has focused on inspection goods, the quality of which is observed before purchase. This paper studies a model of experience goods where consumers search for desired varieties but can observe product quality only after consumption. The model yields price and welfare results that are contrary to those for inspection goods. Specifically, we find that equilibrium price may rise even when search intensity is higher and, under plausible conditions, both consumer and social welfare are initially increasing in search cost. Our analysis shows that quality observability is a key determinant of how search markets function. |
| Keywords: | consumer search, experience goods, inspection goods, product quality, search cost |
| JEL: | D8 L1 |
| Date: | 2019–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93547&r=all |
| By: | Birge, John R. (Booth School of Business, University of Chicago); Candogan, Ozan (Booth School of Business, University of Chicago); Chen, Hongfan (Booth School of Business, University of Chicago); Saban, Daniela (Graduate School of Business, Stanford University) |
| Abstract: | Two salient features of most online platforms are that they do not dictate the transaction prices, and use commissions/subscriptions for extracting revenues. We consider a platform that charges commission rates and subscription fees to sellers and buyers for facilitating transactions, but does not directly control the transaction prices, which are determined by the traders. Buyers and sellers are divided into types, and we represent the compatibility between different types using a bipartite network. Traders are heterogeneous in terms of their valuations, and different types have possibly different value distributions. The platform chooses commissions-subscriptions to maximize its revenues. We provide a convex optimization formulation to calculate the revenue-maximizing commissions/subscriptions, and establish that, typically, different types should be charged different commissions/subscriptions depending on their network positions. We establish lower and upper bounds on the platform’s revenues in terms of the supply-demand imbalance across the network. Motivated by simpler schemes used in practice, we show that the revenue loss can be unbounded when all traders on the same side are charged the same commissions/subscriptions, and bound the revenue loss in terms of the supply-demand imbalance across the network. Charging only buyers or only sellers leads to a (bounded) revenue loss, even when different types on the same side can be charged differently. Under mild assumptions, we establish that a revenue-maximizing platform achieves at least 2/3 of the maximum achievable social welfare. Our results highlight the suboptimality of commonly used payment schemes, and showcase the importance of accounting for the compatibility between different user types. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3742&r=all |
| By: | Boehm, Johannes; Dhingra, Swati; Morrow, John |
| 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: | comparative advantage; Economies of scope; firm capabilities; Multiproduct Firms; size-based policies; vertical input linkages |
| JEL: | F11 L25 M2 O3 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13699&r=all |
| By: | Ait Ali, Abderrahman (Swedish National Road & Transport Research Institute (VTI)); Eliasson, Jonas (Linköping University) |
| Abstract: | In the last few decades, many railway markets (especially in Europe) have been restructured to allow competition between different operators. This survey studies how competition has been introduced and regulated in a number of different countries around the world. In particular, we focus on a central part of market regulation specific to railway markets, namely the capacity allocation process. Conflicting capacity requests from different train operators need to be regulated and resolved, and the efficiency and transparency of this process is crucial. Related to this issue is how access charges are constructed and applied. Several European countries have vertically separated their railway markets, separating infrastructure management from train services provisions, thus allowing several train operators to compete with different passengers and freight services. However, few countries have so far managed to create efficient and transparent processes for allocating capacity between competing train operators, and incumbent operators still have larger market-share in many markets. |
| Keywords: | Railway markets; Vertical separation; Competition; Capacity allocation; Access charges |
| JEL: | R40 |
| Date: | 2019–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:vtiwps:2019_001&r=all |
| By: | Runge, Julian (Humboldt University); Nair, Harikesh S. (Stanford University); Levav, Jonathan (Stanford University) |
| Abstract: | The “freemium†model for digital goods involves selling a base version of the product for free, and making premium product features available to users only on payment. The success of the model is predicated on the ability to profitably convert free users to paying ones. Price promotions (or “sales†) are often used in freemium to induce the conversion. However, the causal effect of exposing consumers to such inter-temporal price variation is unclear. While sales can generate beneficial short-run conversion, they may be harmful in the long-run if consumers inter-temporally substitute purchases to periods with low prices, or use them as signals of low product quality. These long-run concerns may be accentuated in freemium, where the base version is sold for free, so that sales form extreme price cuts on the overall product combination. We work with the seller of a free-to-play video game to randomize entering cohorts of users into treatment and control conditions in which promotions for in-game purchases are turned on or off. We observe complete user behavior for half a year, including purchases and consumption of in-game goods, which, in contrast to much of the extant literature, enables us to assess possible substitution over time in consumption directly. We find that conversion and revenue improve in the treatment group; and detect no evidence of harmful inter-temporal substitution or negative inferences about quality from exposure to price variation, suggesting that promotions are profitable. We conjecture that the zero price of the base product that makes its consumption virtually costless, combined with the complementarity between the base product and premium features can help explain this. To the extent that this holds across freemium contexts, the positive effects of promotions documented here may hold more generally. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3769&r=all |