nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒07‒08
23 papers chosen by
Russell Pittman
United States Department of Justice

  1. Competitive differential pricing By Chen, Yongmin; Li, Jianpei; Schwartz, Marius
  2. Local search markets and external competition By Patrick Legros; Konrad O. Stahl
  3. Bundling in a Distribution Channel with Retail Competition By Joachim Heinzel
  4. Cooperating in R&D and Advertising By Parisa Pourkarmi; Gamal Atallah
  5. Welfare-enhancing trade unions in an oligopoly with excessive entry By Marco de Pinto; Laszlo Goerke
  6. Net neutrality regulation: Much ado about nothing? By Vogelsang, Ingo
  7. Vertical Mergers: Ex Post Evidence and Ex Ante Evaluation Methods By Slade, Margaret E.
  8. Development and construction of a competitive model of the Russian market of ferrous and non-ferrous metals By Kaukin, Andrey (Каукин, Андрей); Pavlov, Pavel (Павлов, Павел)
  9. Common Values, Unobserved Heterogeneity, and Endogenous Entry in U.S. Offshore Oil Lease Auctions By Giovanni Compiani; Philip A. Haile; Marcelo Sant'Anna
  10. The Dark Side of Prudential Measures By PAulo Roberto Scalco; Benjamin M. Tabak; Anderson Mutter Teixeira
  11. Pricing Patterns in Wholesale Electricity Markets: Unilateral Market Power or Coordinated Behavior? By Brown, David P.; Eckert, Andrew
  12. The Industrial Revolution in Services By Chang-Tai Hsieh; Esteban Rossi-Hansberg
  13. Markups and Inequality By Corina Boar; Virgiliu Midrigan
  14. Entry games for the airline industry By Christian Bontemps; Bezerra Sampaio
  15. Acquisition Prices and the Measurement of Intangible Capital By Michael Ewens; Ryan H. Peters; Sean Wang
  16. "Blockchain Disables Real-World Governance" By Hitoshi Matsushima
  17. Asset-based lending By Suzanne H. Bijkerk; Casper G. de Vries
  18. Price Discrimination and Salient Thinking By Nana Adrian
  19. The effects of private damage claims on cartel stability: Experimental evidence By Bodnar, Olivia; Fremerey, Melinda; Normann, Hans-Theo; Schad, Jannika
  20. Beating Coase at Monopoly By Lluis Bru; Daniel Cardona; Jozef Sakovics
  21. “On the modal shift from motorway to high-speed rail: evidence from Italy” By Daniel Albalate; Mattia Borsati
  22. Imperfect Competition, Compensating Differentials and Rent Sharing in the U.S. Labor Market By Thibaut Lamadon; Magne Mogstad; Bradley Setzler
  23. Pricing by international airline alliances: a retrospective study using supplementary foreign-carrier fare data By Jan K. Brueckner; Ethan Singer

  1. By: Chen, Yongmin; Li, Jianpei; Schwartz, Marius
    Abstract: This paper analyzes welfare under differential versus uniform pricing across oligopoly markets that differ in costs of service. We establish necessary and sufficient conditions on demand properties---cross/own elasticities and curvature---for differential pricing by symmetric firms to raise aggregate consumer surplus, profit, and total welfare. The analysis reveals intuitively why differential pricing is generally beneficial though not always---including why profit can fall, unlike for monopoly---and why it is more beneficial than oligopoly third-degree price discrimination. When firms have asymmetric costs, however, differential pricing can reduce profit or consumer surplus even with `simple' demands such as linear.
    Keywords: differential pricing, price discrimination, demand curvature, cross-price elasticity, pass-through, oligopoly
    JEL: D4 D43 L1 L11 L13 L4
    Date: 2019–05–11
  2. By: Patrick Legros; Konrad O. Stahl
    Abstract: Increased competition tends to benefit all buyers with increasing product variety and decreasing prices. However, if local and external market channels compete for the same class of products, increased competition from the external market crowds out local variety. Under local monopoly, local buyer surplus co-moves with external buyer surplus. Under local free entry oligopoly, buyer surplus is U-shaped. If buyer surplus in the external market is low, local surplus is better provided by local oligopoly, but moves against external surplus; if it is high, local and external surplus co-move, and local surplus is better provided by local monopoly.
    Keywords: global competition, monopoly, oligopoly, search
    JEL: D83 L12 L13 L81
    Date: 2019
  3. By: Joachim Heinzel (Paderborn University)
    Abstract: We analyze the incentives for retail bundling and the welfare effects of retail bundling in a decentralized distribution channel with two retailers and two monopolistic manufacturers. One manufacturer exclusively sells his good to one retailer, whereas the other manufacturer sells his good to both retailers. Thus, one retailer is a monopolist for one product but competes with the other retailer in the second product market. The two-product retailer has the option to bundle his goods or to sell them separately. We find that bundling aggravates the double marginalization problem for the bundling retailer. Nevertheless, when the retailers compete in prices, bundling can be more profitable than separate selling for the retailer as bundling softens the retail competition. The ultimate outcome depends on the manufacturers’ marginal costs. Given retail quantity competition, however, bundling is in no case the retailer’s best strategy. Furthermore, we show that profitable bundling reduces consumer and producer surplus in the equilibrium.
    Keywords: retail bundling, leverage theory, double marginalization
    JEL: L11 L13 L41 M31
    Date: 2019–06
  4. By: Parisa Pourkarmi (Department of Economics, Carleton University, Ottawa, ON); Gamal Atallah (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper studies the impact of cooperative R&D and advertising on innovation and welfare in a duopolistic industry. The model incorporates two symmetric firms producing differentiated products. Firms invest in R&D and advertising in the presence of R&D spillovers and advertising spillovers. Advertising spillovers may be positive or negative. Four cooperative structures are studied: no cooperation, R&D cooperation, advertising cooperation, R&D and advertising cooperation. R&D spillovers and advertising spillovers always increase innovation and welfare if products are highly differentiated and/or spillovers are sufficiently high. The ranking of cooperation settings in terms of R&D, profits and welfare depends on product differentiation, R&D spillovers and advertising externalities. Firms always prefer cooperation on both dimensions, which is socially beneficial only when advertising and R&D spillovers are sufficiently high.
    Keywords: R&D, Advertising, Cooperation, Spillovers, Product differentiation, Innovation, Marketing.
    JEL: D43 L13 O32
    Date: 2019
  5. By: Marco de Pinto; Laszlo Goerke
    Abstract: Trade unions are often argued to cause allocative inefficiencies and to lower welfare. We analyze whether this evaluation is also justified in a Cournot-oligopoly with free but costly entry. If input markets are competitive and output per firm declines with the number of firms (business stealing), there is excessive entry into such oligopoly. If trade unions raise wages above the competitive level, output and profits per firm decline, which could deter entry and thus improve welfare. We find that an increase in the union's bargaining power raises welfare if the (inverse) demand curve is (sufficiently) concave. We also show that collective bargaining loosens the linkage between business stealing and excessive entry.
    Keywords: endogenous entry, oligopoly, trade union, welfare
    JEL: D43 J51 L13
    Date: 2019
  6. By: Vogelsang, Ingo
    Abstract: The economics literature on Net Neutrality (NN) has been largely critical of NN regulation on the basis of theoretical findings that NN violations can be both welfare improving and welfare deteriorating, depending on the circumstances of the case in question. Thus, an ex post competition policy approach would be preferable to a strict ex ante prohibition of NN violations. In contrast, the current paper argues that NN regulation is largely ineffective, in particular, when it comes to the prohibition of fast lanes and other quality of service (QoS) differentiations, and to a lesser extent, when it comes to the zero price rule. NN regulation is effective only in preventing the blocking of specific content and in preventing the favoring of ISP owned content and in preventing some price discriminations. These are also areas where NN regulations are more likely to be welfare-enhancing. Where they are ineffective, NN regulations are likely to create inefficiencies through the cost and allocative inefficiencies caused by NN bypass. The paper ends with a call for theoretical and empirical economic analyses of NN circumvention techniques.
    Keywords: net neutrality (NN),quality of service (QoS),price discrimination,content delivery network (CDN),zero-rating,throttling
    JEL: L50 L96
    Date: 2019
  7. By: Slade, Margaret E.
    Abstract: This article assesses recent empirical evidence on efficiencies and competitive harm that are associated with vertical mergers. It evaluates both ex post or retrospective empirical studies that rely on post merger data and ex ante or forecasting techniques that use premerger data. It develops the idea that, although there is a need for vertical merger screening tools, there are a number of problems that are associated with attempts to adapt horizontal screens to the vertical context. Mergers in the technology, media, and telecom sectors are emphasized because they tend to dominate contested vertical mergers.
    JEL: D22 K21 L11
    Date: 2019–06–25
  8. By: Kaukin, Andrey (Каукин, Андрей) (The Russian Presidential Academy of National Economy and Public Administration); Pavlov, Pavel (Павлов, Павел) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: A methodology for assessing the level of market power of metallurgical products producers was deveoped in the paper with the use of aggregated industry-level data. The first chapter of the paper presents an overview of theoretical and empirical approaches to modeling competition and assessing the level of market power in the metallurgical products market. The second chapter presents the characteristics of the Russian ferrous and non-ferrous metals markets. The third chapter describes the characteristics of the database, which was used to estimate the demand-supply system for metallurgical products market. The fourth chapter presents the results of econometric estimates of the level of market power in the market of ferrous and non-ferrous metals (the latter is examined on the example of products of the aluminum industry).
    Keywords: ferrous metals, non-ferrous metals, competition models, level of market power, demand function, supply function, arbitrage limits, micro-level data, industry-level data.
    Date: 2019–06
  9. By: Giovanni Compiani (University of California, Berkeley, Haas School of Business); Philip A. Haile (Cowles Foundation, Yale University); Marcelo Sant'Anna (FGV EPGE)
    Abstract: In a "common values" environment, some market participants have private information relevant to others' assessments of their own valuations or costs. Economic theory shows that this type of informational asymmetry can have important implications for market performance and market design. Yet even for the classic example of an oil lease auction, formal evidence on the presence and strength of common values has been limited by the problem of auction-level unobserved heterogeneity that is likely to affect both participation in an auction and bidders' willingness to pay. Here we develop an empirical approach for first-price sealed bid auctions with affiliated values, unobserved heterogeneity, and endogenous bidder entry. We show that important features of the model are nonparametrically identified and apply a semiparametric estimation approach to data from U.S. offshore oil and gas lease auctions. Our empirical results show that common values, affiliated private information, and unobserved heterogeneity - three distinct phenomena with different implications for policy and empirical work - are all present. Failing to account for unobserved heterogeneity obscures the empirical evidence of common values. We examine the implications of our estimates for the classic revenue ranking of sealed bid auction designs, and for the interaction between affiliation, the winner's curse, and the number of bidders in determining the aggressiveness of bidding and seller revenue.
    Date: 2018–06
  10. By: PAulo Roberto Scalco (FACE-UFG); Benjamin M. Tabak; Anderson Mutter Teixeira (FACE/UFG)
    Abstract: In the aftermath of the financial crisis of 2008 and 2009, there is a series of changes in the scenario of financial regulation. Globally, several macroprudential measures that seek to limit systemic risk are currently in use. We evaluated the e ect of these measures on the market power of banks in the Brazilian case, in which there was a process of great banking concentration that coexists with high bank spreads. Using an innovative methodology, we show that the e ect of macroprudential measures is to reduce bank competition by increasing the market power of banks. It is essential that financial regulators consider this adverse effect in the design of a financial regulation that not only aims at financial stability but also a more competitive banking system.
    Keywords: Bank Regulation, Prudential Measures, Market Power, Lerner Index, Stochastic Frontier.
    Date: 2019–06
  11. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics)
    Abstract: We examine allegations that firms in Alberta's electricity industry manipulated public information to coordinate in the wholesale market. We investigate whether bids by firms who employed unique pricing patterns were consistent with unilateral expected profit maximization. Our results suggest that these firms could have increased expected profits through unilateral deviations. For one firm, the potential to increase profits is greater on days when certain offer patterns are observed, providing support for the claim that such patterns may have assisted coordination on high-priced outcomes. These results suggest that regulators should exercise caution when designing information disclosure policies in concentrated electricity markets.
    Keywords: Electricity; Market Power; Information; Regulation; Antitrust
    JEL: D43 L40 L51 L94 Q48
    Date: 2019–06–26
  12. By: Chang-Tai Hsieh; Esteban Rossi-Hansberg
    Abstract: The rise in national industry concentration in the US between 1977 and 2013 is driven by a new industrial revolution in three broad non-traded sectors: services, retail, and wholesale. Sectors where national concentration is rising have increased their share of employment, and the expansion is entirely driven by the number of local markets served by firms. Firm employment per market has either increased slightly at the MSA level, or decreased substantially at the county or establishment levels. In industries with increasing concentration, the expansion into more markets is more pronounced for the top 10% firms, but is present for the bottom 90% as well. These trends have not been accompanied by economy-wide concentration. Top U.S. firms are increasingly specialized in sectors with rising industry concentration, but their aggregate employment share has remained roughly stable. We argue that these facts are consistent with the availability of a new set of fixed-cost technologies that enable adopters to produce at lower marginal costs in all markets. We present a simple model of firm size and market entry to describe the menu of new technologies and trace its implications.
    JEL: E23 E24 L11 L22 L25 R11 R12
    Date: 2019–06
  13. By: Corina Boar; Virgiliu Midrigan
    Abstract: We study the aggregate and distributional impact of product market interventions and profit taxes using a model of firm dynamics, credit constraints and incomplete markets. A key ingredient of our model is that markups are endogenous so that the markup a producer charges depends on the amount of competition it faces. We show that size-dependent subsidies that remove the distortions due to markup dispersion lead to sizable welfare gains and reduce inequality, even though they increase firm concentration and long-run misallocation. In contrast, policies that reduce concentration lead to large output, TFP and welfare losses and increase inequality. A tax on profits greatly depresses the incentives to create new firms, reducing labor demand, after-tax wages and welfare.
    JEL: D4 E2 L1
    Date: 2019–06
  14. By: Christian Bontemps (ENAC - Ecole Nationale de l'Aviation Civile); Bezerra Sampaio
    Abstract: In this paper we review the literature on static entry games and show how they can be used to estimate the market structure of the airline industry. The econometrics challenges are presented, in particular the problem of multiple equilibria and some solutions used in the literature are exposed. We also show how these models, either in the complete information setting or in the incomplete information one, can be estimated from i.i.d. data on market presence and market characteristics. We illustrate it by estimating a static entry game with heterogeneous firms by Simulated Maximum Likelihood on European data for the year 2015.
    Keywords: multiple equilibria,airlines,estimation,industrial organization,entry
    Date: 2019–05–22
  15. By: Michael Ewens; Ryan H. Peters; Sean Wang
    Abstract: We use 1,521 acquisition purchase price allocations to estimate intangible capital stocks. The estimated depreciation of knowledge capital (R&D) is 32%, some 28% of SG&A represents investment in organizational capital and parameter estimates exhibit significant industry variation. Aggregating these accounts, 75% of intangibles come from organizational capital, and total stocks are 10% smaller versus stocks using prior parameters. Adjusting for intangibles, average market-to-book falls from 1.74 to an average of one. Relative to existing approaches, our stocks improve the explanatory power of enterprise value, human capital and brand rankings, while exhibiting the expected correlations with patent valuations and investment rates.
    JEL: G30 G32 G34 O3 O34
    Date: 2019–06
  16. By: Hitoshi Matsushima (Faculty of Economics, The University of Tokyo)
    Abstract: This study indicates that the improper uses of a public blockchain disable real-world governance in organizations and marketplaces. By using any basic application of smart contracts, such as escrow transactions, along with a revelation mechanism outside the blockchain, individuals can execute illegal cartel acts in a self-enforcing and non-judicial manner. Cartel members can then implement collective deviations without help from trusted intermediaries or any requirements on reputation or word-of-honor. We show that a first price auction is vulnerable to cartel threats even if the seller can hide bidders' prices because bidders take a countermeasure to hidden prices by using blockchain.
    Date: 2019–05
  17. By: Suzanne H. Bijkerk; Casper G. de Vries
    Abstract: Asset-based lending, the supply of loans based on floating collateral, is an important source of funding for small .rms. We analyze the effect of competition on asset-based loan markets on interest rate distributions and the mobility of small firms. Close monitoring of collateral by lenders results in an informational advantage for the incumbent lender and third-degree price discrimination. We find that adverse selection results in a unique equilibrium in which lenders randomize interest rates and firms switch lender with positive probability. Increased competition between lenders does not benefit firms through lower expected interest rates, neither does it improve their mobility.
    Keywords: asset-based lending, floating, collateral, adverse selection
    JEL: D53 D82
    Date: 2019
  18. By: Nana Adrian
    Abstract: This paper generalizes the price discrimination framework of Mussa and Rosen (1978) by considering salience-driven consumer preferences in the sense of Bordalo et al. (2013b). Consumers with salience-driven preferences give a higher weight to attributes that vary more. This reduces the monopolist's propensity to treat different types of consumers differently. The paper's main result characterizes the conditions under which the monopolist induces consumers to focus on price rather than on quality.
    Keywords: Salience, price discrimination, monopolist
    JEL: D11 D42 D91 L11
    Date: 2019–06
  19. By: Bodnar, Olivia; Fremerey, Melinda; Normann, Hans-Theo; Schad, Jannika
    Abstract: Private damage claims against cartels may have negative effects on leniency: whereas whistleblowers obtain full immunity regarding the public cartel fines, they have no or only restricted protection against private third-party damage claims. This may stabilize cartels. We run an experiment to study this issue. Firms choose whether to join a cartel, may apply for leniency afterwards, and then potentially face private damages. We find that the implementation of private damage claims decreases cartel formation but makes cartels indeed more stable. The overall impact of private damage claims is positive: cartel prevalence declines.
    Keywords: private damage claims,cartel stability,laboratory experiment,leniency
    JEL: C90 L41 L44
    Date: 2019
  20. By: Lluis Bru; Daniel Cardona; Jozef Sakovics
    Abstract: We study how a buyer unable to price discriminate should satisfy his demand in the presence of diseconomies of scale in production. Defying the Coase Conjecture, we show that auctioning contracts for lots (block sourcing) followed by setting a price to realize (part of) the residual gains from trade a ways leads to higher buyer surplus than simply setting a price.
    Keywords: block sourcing, lot auction, monopoly, procurement, residual market, split awards
    JEL: D42 D44 L12
    Date: 2019–06
  21. By: Daniel Albalate (Dept. of Econometrics, Statistics and Applied Economics, University of Barcelona, Spain.); Mattia Borsati (Dept. of Economics and Management, University of Trento, Italy.)
    Abstract: The development of high-speed rail (HSR) has had a notable impact on modal market shares on the routes on which its services have been implemented. The aim of this study is to analyse whether the HSR expansion in Italy has led to a modal shift from motorway to HSR. We empirically test i) whether HSR openings adjacent to motorway sectors have reduced the total km travelled by light vehicles on these sectors during the period 2001-2017; and ii) whether this reduction has been persistent or even more evident after the opening of on-track competition between two HSR operators. To do so, we carried out a generalized difference-in-differences estimation, using a unique panel dataset that exploits the heterogeneous traffic data within all tolled motorway sectors in a quasi-experimental setting. Our findings reveal that neither HSR openings nor the opening of on-track competition led to a modal shift from motorway to HSR services, as the two transport modes are non-competing. Conversely, both phenomena had a slightly positive impact on motorway traffic. The extent to which HSR demand could be the result of a modal shift from motorways is a relevant issue in any cost-benefit analysis of HSR investments.
    Keywords: High-speed rail, Motorways, Inter-modal competition. JEL classification:D78, L92, R41, R58.
    Date: 2019–06
  22. By: Thibaut Lamadon; Magne Mogstad; Bradley Setzler
    Abstract: The primary goal of our paper is to quantify the importance of imperfect competition in the U.S. labor market by estimating the size of rents earned by American firms and workers from ongoing employment relationships. To this end, we construct a matched employer-employee panel data set by combining the universe of U.S. business and worker tax records for the period 2001-2015. We describe several important features of the U.S. labor market, including the size of firm-specific wage premiums, the sorting of workers to firms, the production complementarities between high ability workers and productive firms, and the pass-through of firm and market shocks to workers' wages. Guided by these empirical results, we develop, identify and estimate an equilibrium model of the labor market with two-sided heterogeneity where workers view firms as imperfect substitutes because of heterogeneous preferences over non-wage job characteristics. The model allows us to draw inference about imperfect competition, compensating differentials and rent sharing. We also use the model to quantify the relevance of non-wage job characteristics and imperfect competition for inequality and tax policy, to assess the economic determinants of worker sorting, and to offer a unifying explanation of key empirical features of the U.S. labor market.
    JEL: J20 J30 J42
    Date: 2019–06
  23. By: Jan K. Brueckner; Ethan Singer
    Abstract: This study provides further empirical evidence on pricing by international airline alliances. The paper covers a long sample period, which runs from 1997 to 2016, and it supplements the usual USDOT fare data with confidential fare data reported by the foreign alliance partners of US carriers. The empirical results for connecting service match earlier findings, with alliances charging lower fares than nonaligned carriers. The GTG results imply that, in the latter part of the sample period, granting antitrust immunity to two previously nonaligned carriers is equivalent to removing a competitor, with a consequent increase in fares (an effect seldom seen in previous work).
    Date: 2019

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