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on Industrial Competition |
| By: | Federico Etro |
| Abstract: | I study a merger between producers of complement inputs facing potential entry, with investment by the incumbents in deterministic cost reduction and by the entrants in probabilistic innovation, and then competition in prices. The merger solves Cournot complementarity problems in investment and pricing, which is what makes it profitable but also potentially anti-competitive. When the demand is inelastic the merger harms consumers by reducing R&D of the entrants if the incumbents are efficient enough (always when bundling is adopted). Instead, with a demand elastic enough, the merger increases consumer surplus (even with bundling). |
| Keywords: | Mergers, R&D, Cournot complementarity, bundling, antitrustin high-tech industries. |
| JEL: | L1 L4 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2019_15.rdf&r=all |
| By: | Federico Innocenti; Domenico Menicucci |
| Abstract: | This paper examines competition in an oligopoly with multiproduct firms when some firms bundle but other firms sell their products separately, whereas the existing literature on competitive bundling focuses on the extreme cases of competition among bundles or among individual products. Our analysis reveals each firm’s individual incentive to bundle, and allows to study a two-stage game in which first each firm chooses its pricing strategy (bundling or independent pricing), then price competition occurs given the price regime each firm has selected at stage one. When firms are ex ante symmetric, we find that bundling is weakly dominated by independent pricing. In a setting in which a firm’s products have higher quality than its rivals’ products, individual incentives to bundle emerge (eventually for all firms) if the quality difference is large. |
| Keywords: | Oligopoly, Pure bundling, Independent Pricing, Competitive bundling |
| JEL: | D43 L13 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2019_16.rdf&r=all |
| By: | Heiko Karle; Martin Peitz; Markus Reisinger |
| Abstract: | For many products, platforms enable sellers to transact with buyers. We show that the competitive conditions among sellers shape the market structure in plat form industries. If product market competition is tough, sellers avoid competitors by joining different platforms. This allows platforms to sustain high fees and ex plains why, for example, in some online markets, several homogeneous platforms segment the market. Instead, if product market competition is soft, agglomeration on a single platform emerges, and platforms fight for the dominant position. These insights give rise to novel predictions. For instance, market concentration and fees are negatively correlated in platform industries, which inverts the standard logic of competition. |
| Keywords: | intermediation, two-sided markets, market structure, price competition, endogenous segmentation |
| JEL: | L13 D43 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2019_101&r=all |
| By: | Soeiro, Renato; Adrego Pinto, Alberto |
| Abstract: | We show that in a duopoly with homogeneous consumers, if these are negatively influenceable by each other behavior (e.g. congestion/ snob/ Veblen/ network effects), a pure price equilibrium with positive profits for both firms exists. Furthermore, even in the case products are undifferentiated, an equilibrium where firms charge different (positive) prices and have different profits exists. Thus, when firms engage in uniform price competition, heterogeneity, and in particular non-atomicity in the distribution of preferences, is neither a necessary condition to ensure existence, nor to achieve asymmetries. We further show that in the case products are differentiated, social differentiation overcomes the effect of standard differentiation in creating price asymmetries. |
| Keywords: | Social influence; Bertrand duopoly; Bertrand competition; network effects; product differentiation; homogeneous products; pure price equilibrium; linear demand. |
| JEL: | C72 D00 D01 D03 D40 D43 L00 L13 |
| Date: | 2019–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94271&r=all |
| By: | Paul Belleflamme; Martin Peitz |
| Abstract: | We consider two-sided platforms with the feature that some users on one or both sides of the market lack information about the price charged to participants on the other side of the market. With positive cross-group external effects, such lack of price information makes demand less elastic. A monopoly platform does not benefit from opaqueness and optimally reveals price information. By contrast, in a two-sided singlehoming duopoly, platforms benefit from opaqueness and, thus, do not have an incentive to disclose price information. In competitive bottleneck markets, results are more nuanced: if one side is fully informed (for exogenous reasons), platforms may decide to inform users on the other side either fully, partially or not at all, depending on the strength of cross-group external effects and the degree of horizontal differentiation. |
| Keywords: | price transparency, two-sided markets, competitive bottleneck, platform competition, price information, strategic disclosure |
| JEL: | D43 L12 L13 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2019_99&r=all |
| By: | Ralph Sonenshine |
| Abstract: | The recent increase in trade tensions between the US and its primary trading partners has resulted in the imposition of tariffs and retaliatory tariffs. Economic theory would suggest the imposition of tariffs would result in price inflation and lower import volumes. However, there are a variety of other factors, such as product differentiation and imperfect competition that influence tariff rate pass-through levels. This study sheds light on the factors impacting tariff rate pass through by assessing the tariff rate elasticity of imports from 1996 to 2015 in two key manufacturing segments, electrical machinery and passenger vehicles. We find tariff rate pass-through rates are lower in more concentrated domestic product-markets as monopsony power enables buyers to lower the tariff pass-through rate or to push the burden of the tariff onto foreign suppliers. In addition, lower tariff rate pass-through rates prevail in more differentiated domestic product-markets, as quality variations reduce the likelihood that foreign sellers can fully pass along the tariff in terms of higher prices. |
| Keywords: | tariff, market power, product differentiation |
| JEL: | G02 G12 G18 G34 |
| URL: | http://d.repec.org/n?u=RePEc:amu:wpaper:2019-04&r=all |
| By: | de Pinto, Marco (IAAEU, University of Trier); Goerke, Laszlo (IAAEU, University of Trier) |
| Abstract: | In a Cournot-oligopoly with free but costly entry and business stealing, output per firm is too low and the number of competitors excessive, assuming labor productivity to depend on the number of employees only or to be constant. However, a firm can raise the productivity of its workforce by paying higher wages. We show that such efficiency wages accentuate the distortions occurring in oligopoly. Specifically, excessive entry is aggravated and the welfare loss due to market power rises. |
| Keywords: | oligopoly, efficiency wages, excessive entry, welfare |
| JEL: | D43 J31 L13 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12351&r=all |
| By: | Paolo Bertoletti; Federico Etro |
| Abstract: | We study monopolistic competition equilibria with free entry and social planner solutions under symmetric Generalized Additively Separable preferences (that encompass known cases such as additive, homothetic, translog and other preferences). This setting can jointly produce competition and selection effects of entry, incomplete pass-through of cost changes and pricing to market. We characterize the inefficiencies of the market equilibrium under Gorman-Pollak preferences and show its optimality under implicit CES preferences. We propose a new specification of generalized translated power preferences for trade and macroeconomic applications. |
| Keywords: | Monopolistic competition, GAS preferences, Heterogeneous firms |
| JEL: | D1 D4 E3 L1 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2019_17.rdf&r=all |
| By: | de Ridder, Maarten |
| Abstract: | Productivity growth has stagnated over the past decade. This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I hypothesize that intangibles cause a shift from variable costs to endogenous fixed costs, and use a new measure to show that the share of fixed costs in total costs rises when firms increase ICT and software investments. I then develop a quantitative framework in which intangibles reduce marginal costs and endogenously raise fixed costs, which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. Paradoxically, the presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.6 percentage point decline in long-term productivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, though markups overstate the increase in firm profits. |
| Keywords: | Business Dynamism; Growth; Intangibles; Productivity; Market Power |
| JEL: | J1 |
| Date: | 2019–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:100946&r=all |
| By: | Quint Wiersma (Vrije Universiteit Amsterdam, The Author-Name: Sabien Dobbelaere; Vrije Universiteit Amsterdam, The Netherlands) |
| Abstract: | This paper examines the impact of WTO membership on the extensive and intensive margins of product and labor market power of Chinese manufacturing firms during the period 1999--2006. We first identify a firm's regime of competitiveness, corresponding to a combination of a product market setting and a labor market setting, at any point in time through implementing the testing procedure of Kodde and Palm (1986), the distance test. Our descriptive differences-in-differences analysis shows that an industry's dominant regime of competitiveness is stable over time. Exploiting variation in input and output tariff reductions after WTO accession across industries, we then show that on the extensive margin, reducing tariffs on intermediate inputs decreases the likelihood of shifting firms away from an imperfectly competitive labor market setting where the marginal employee is paid a real wage either above or below her marginal product (i.e.\ wage markup or markdown). In contrast, falling tariffs on final goods increases the likelihood of switching firms away from setting wage markdowns. On the intensive margin, trade liberalization via input tariff reductions is found to increase a firm's price-cost markup but to decrease the degree of wage-setting power that a firm possesses. Such joint responses of firms' pricing behavior to trade policy changes are important for understanding increased inter-firm wage disparities. |
| Keywords: | Rent sharing, monopsony, price-cost markups, trade liberalization, firm panel data, hypothesis testing, inequality restrictions |
| JEL: | L20 C12 J30 |
| Date: | 2019–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20190037&r=all |
| By: | Creane, Anthony |
| Abstract: | In his textbook Tirole (1988, pp. 291-294) presents a model of advertising with Hotelling duopolists. It has been inferred (e.g., Bagwell, 2007) that in the competitive equilibrium derived, there can be socially too little advertising. It is shown that given the assumptions in Tirole (1988), there cannot be socially too little advertising for this equilibrium. |
| Keywords: | informative advertising, existence, welfare |
| JEL: | D83 L13 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94572&r=all |
| By: | FUJII Daisuke; SAITO Yukiko |
| Abstract: | This paper examines how transaction relationships are correlated with firm performance focusing on differences between supplier and customer relationships. In theory, both suppliers and customers positively affect sales and profit but their channels are different. A supplier set affects a firm's productivity lowering its marginal cost of production whereas a customer set only expands the size without affecting productivity. We consider a simple model of production with intermediate inputs, and examine whether theoretical implications are consistent with empirical evidence by estimating panel regressions using Japanese inter-firm transaction network data. We find that sales elasticities of in- and out-degree are positive. In- and out-degrees exhibit complementarity on sales implying that the marginal benefit of having more suppliers increases with the number of customers, and vice versa. Also, the elasticity of in-degree increases with size while that of out-degree is constant. This is also consistent with the theory, which predicts a leveraged effect of lowering a marginal cost when the scale is large. |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:19032&r=all |
| By: | Stöhr, Annika; Noskova, Victoriia; Kunz-Kaltenhäuser, Philipp; Gänßle, Sophia; Budzinski, Oliver |
| Abstract: | This paper provides an economic analysis of recent vertical and horizontal mergers in the U.S. industry for audiovisual media content, including the AT&T-Time Warner and the Disney-Fox mergers. Using a theory-driven approach, we examine economic effects of these types of mergers on market competition, focusing on digital media content distribution. In doing so, we address three research questions: (i) Is the current development of analyzing industry with its recent merger activity concerning? (ii) Would vertical or horizontal integration be more preferable for overall welfare and competition in this industry? (iii) What are implications for antitrust policy? We conclude from our analysis that in the already highly horizontally concentrated U.S. market for audiovisual content the process of further vertical integration creates concerns from a competition policy perspective. Moreover, even though horizontal concentration on some of the market stages may be anticompetitive as well, vertical integration is likely to be more harmful. As a consequence, we recommend a stricter approach to vertical merger control in this industry, as well as a more active abuse control against already vertically-integrated media companies. |
| Keywords: | competition policy,antitrust,industrial economics,digitization,media economics,institutional economics,industrial organization,mergers,vertical integration,horizontal integration |
| JEL: | L42 L41 K21 K23 L82 L86 L13 D43 L51 L96 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuiedp:126&r=all |
| By: | Junichiro Ishida; Tsuyoshi Takahara |
| Abstract: | This paper analyzes the optimal content regulation of direct-to-consumer advertisement (DTCA) in a pharmaceutical market, with particular focus on the distinction between product and enlightenment advertisement. Firms are allowed to freely promote their own specific products under product DTCA, whereas they can only advertise the presence of a disease and its typical subjective symptoms under enlightenment DTCA. The content regulation changes the nature of market competition and the incentive to invest in advertisement, thereby yielding substantial welfare and policy implications. The overall welfare impact of the content regulation is ambiguous and depends, among other things, on the cost effectiveness of advertisement and the market-size distortion induced by product DTCA. We also analyze the effect of free market pricing and argue that a less stringent advertisement regulation, i.e., product DTCA, is often complementary to a less stringent price regulation. |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1058&r=all |
| By: | Geoffrey T. Sanzenbacher; Gal Wettstein |
| Abstract: | Medicare Part D was established to expand outpatient prescription drug coverage to all seniors. An obvious effect of Part D was to improve the well-being of those who gained coverage by reducing their exposure to drug costs. But, the law also boosted demand for drugs used by those ages 65 and over, and extended the bargaining power enjoyed by commercial plans vis a vis drug manufacturers to the Part D market. Both these changes could give branded drug manufacturers extra incentive to protect their products’ monopoly status through so-called “evergreening,” with unforeseen impacts on the generic drug market and ultimately on prices. While work to date has generally found that Part D decreased prices through increased insurer bargaining power, that literature focused on the few years after Part D launched, a time before the effect of increased evergreening or decreased generic entry could be felt. This paper takes a longer view of how Part D has affected evergreening, generic entry, and ultimately drug prices in a difference-in differences design that compares these outcomes for drugs used frequently by those ages 65 and over to those used infrequently by this population. The results show that Part D increased evergreening and reduced generic entry, and suggest that these effects are associated with higher prices. However, Part D’s overall effect on drug prices is still negative, as the impact of insurer bargaining power apparently more than offsets the effect of more limited supply-side competition. |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:crr:crrwps:wp2019-8&r=all |
| By: | Luís Sá; Luigi Siciliani; Odd Rune Straume |
| Abstract: | We develop a dynamic model of hospital competition where (i) waiting times increase if demand exceeds supply; (ii) patients choose a hospital based in part on waiting times; and (iii) hospitals incur waiting time penalties. We show that, whereas policies based on penalties will lead to lower waiting times, policies that promote patient choice will instead lead to higher waiting times. These results are robust to different game-theoretic solution concepts, designs of the hospital penalty structure, and patient utility specifications. Furthermore, waiting time penalties are likely to be more effective in reducing waiting times if they are designed with a linear penalty structure, but the counterproductive effect of patient choice policies is smaller when penalties are convex. These conclusions are partly derived by calibration of our model based on waiting times and elasticities observed in the English NHS for a common treatment (cataract surgery). |
| Keywords: | hospital competition, waiting times, patient choice, differential games |
| JEL: | C73 H42 I11 I18 L42 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7661&r=all |
| By: | Bar-Nahum, Ziv; Finkelshtain, Israel; Kan, Iddo |
| Abstract: | We integrate a differentiated goods oligopoly model with a political-economy model to assess the effectiveness of the partial price-ceiling policy in the Israeli fluid-milk market. We estimate minor political influence of the industry on regulators with respect to the price ceilings, and find markups in the regulated segment considerably lower than those in the unregulated one. Compared to a simulated unregulated industry, the prevailing partial price-ceiling regulation is found reducing market prices by 22% and markups by 78%, and increasing social welfare by 12%. The hypothesis of collusion in the unregulated segment is statistically rejected. We show that the combined estimates of political influence and demand substitution across products turn collusion in the laissez-faire segment an inferior strategy from the industry’s perspective. |
| Keywords: | Demand and Price Analysis, Livestock Production/Industries |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ags:huaedp:290055&r=all |