nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒07‒15
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Antitrust and Innovation: Welcoming and Protecting Disruption By Giulio Federico; Fiona Scott Morton; Carl Shapiro
  2. Advertising and Markups: The Case of the German Brewing Industry By Simon Pröll; Giannis Karagiannis; Klaus Salhofer
  3. Integration and Competition for Innovations in Science-Based Industries By Tapas Kundu; Seongwuk Moon
  4. A Theory of Gazelle Growth: Competition, Venture Capital Finance and Policy By Persson, Lars; Kaya, Mehmet Caglar
  5. The Impact of Merger Legislation on Bank Mergers By Carletti, Elena; Ongena, Steven; Siedlarek, Jan-Peter; Spagnolo, Giancarlo
  6. Innovation, Competition, and Incentives: Evidence from Uruguayan Firms By Ramiro de Elejalde; Carlos J. Ponce; Flavia Roldán
  7. The Impact of Stricter Merger Control on Bank Mergers and Acquisitions. Too-Big-To-Fail and Competition By Carletti, Elena; Ongena, Steven; Siedlarek, Jan-Peter; Spagnolo, Giancarlo
  8. Price Dispersion and the Role of Stores By Espen Moen; Fredrik Wulfsberg; Øyvind Aas
  9. Steering in Online Markets: The Role of Platform Incentives and Credibility By Moshe A. Barach; Joseph M. Golden; John J. Horton
  10. Innovación en la Extracción de Petróleo y Estabilidad del Cartel de la OPEP By Eduardo H. Saavedra; Mauricio R. Stern
  11. Costly auction entry, royalty payments, and the optimality of asymmetric designs By Bernhardt, Dan; Liu, Tingjun; Sogo, Takeharu
  12. Prices under Innovation: Evidence from Manufacturing Firms By Jordi Jaumandreu; Shuheng Lin
  13. Do Increasing Markups Matter? Lessons from Empirical Industrial Organization By Steven T. Berry; Martin Gaynor; Fiona Scott Morton
  14. The effects of zero rating By OECD
  15. Who Benefits from Pharmaceutical Price Controls? Evidence from India By Emma Boswell Dean
  16. The Failure of Free Entry By Germán Gutiérrez; Thomas Philippon
  17. Examining the Impact of E-Procurement in Ukraine By Artur Kovalchuk; Charles Kenny; Mallika Snyder
  18. Business Culture: The Role of Personal and Impersonal Business Relationships on Market Efficiency By Munoz-Herrera, Manuel; Reuben, Ernesto

  1. By: Giulio Federico; Fiona Scott Morton; Carl Shapiro
    Abstract: The goal of antitrust policy is to protect and promote a vigorous competitive process. Effective rivalry spurs firms to introduce new and innovative products, as they seek to capture profitable sales from their competitors and to protect their existing sales from future challengers. In this fundamental way, competition promotes innovation. We apply this basic insight to the antitrust treatment of horizontal mergers and of exclusionary conduct by dominant firms. A merger between rivals internalizes business-stealing effects arising from their parallel innovation efforts and thus tends to depress innovation incentives. Merger-specific synergies, such as the internalization of involuntary spillovers or an increase in the productivity of R&D, may offset the adverse effect of a merger on innovation. We describe the possible effects of a merger on innovation by developing a taxonomy of cases, with reference to recent U.S. and E.U. examples. A dominant firm may engage in exclusionary conduct to eliminate the threat from disruptive firms. This suppresses innovation by foreclosing disruptive rivals and by reducing the pressure to innovative on the incumbent. We apply this broad principle to possible exclusionary strategies by dominant firms.
    JEL: L1 L10 L12 L13 L4 O3
    Date: 2019–06
  2. By: Simon Pröll (University of Natural Resources and Life Sciences Vienna, Institute of Sustainable Economic Development); Giannis Karagiannis (University of Macedonia, Department of Economics); Klaus Salhofer (University of Natural Resources and Life Sciences Vienna, Institute of Sustainable Economic Development)
    Abstract: The beer market in Germany may be described as a monopolistic competition with many breweries supplying a very large variety of different beer styles and brands. Advertising is one means of differentiating a product and increasing prices over marginal costs. Based on production data obtained from a sample of 197 German breweries and thirteen years of observation, we derive firm-specific markups, profit ratios and prices in each year and relate those to their advertising expenditures and firm size. We are able to show that advertising expenditures are positively correlated to a brewery’s markup, profit ratio and price while firm size is negatively correlated.
    Keywords: advertising, markup, imperfect competition, brewing
    JEL: D22 L11 L66
    Date: 2019–07
  3. By: Tapas Kundu (Oslo Business School, Oslo Akershus University College of Applied Sciences, School of Business and Economics, UiT the Arctic University of Norway); Seongwuk Moon (Sogang University Graduate School of Management of Technology)
    Abstract: We develop a model to understand how competition for innovation affects the organization of research activity and property-rights allocation in science-based industries. We consider a vertical production process with a division of labour between research and commercialization. We analyze firms’ incentive for integration in the presence of upstream competition for innovation. Integration adversely affects an integrated firm’s R&D investment and creates positive externality for the independent firms. For a sufficiently strong externality, a semiintegrated structure appears in equilibrium. The model can thus explain the coexistence of integrated and independent research firms and conforms to the evidence of R&D competition in science-based industries. Interestingly, a non-integrated arrangement can sometime appear in equilibrium even though a semi-integrated arrangement has higher innovation probability and aggregate industry payoff. This is because those who gain from integration cannot commit to compensate the losing parties at the contracting stage. We analyze the effects of resource constraints and inter-customer licensing on the industry structure and their implications for the competition for innovation.
    Keywords: R&D contest; Innovation, Vertical integration; Science-based Industry.
    JEL: L22 O31 O32
    Date: 2017–09–21
  4. By: Persson, Lars (Research Institute of Industrial Economics (IFN)); Kaya, Mehmet Caglar (Department of Economics)
    Abstract: This paper proposes a theory of gazelle growth in which gazelles can either grow organically or by acquisitions. In the model, there are three types of firms: incumbent, target, and gazelle. We show that the lower cost of organic growth can increase the incentives for acquisition growth. The reason for this is that the incumbent understands that if it acquires the target firm, the gazelle will then invest organically anyway to grow, and therefore, the acquisition will not be sufficient to protect the incumbent's market power. The gazelle could then acquire the target firm at a good price. We also show that financial support for the organic growth of gazelles can increase gazelles' growth by acquisitions since incumbents' preemptive motives are reduced.
    Keywords: Gazelles; Acquisitions; Organic growth; Entrepreneurial policy; Venture capital; Financial support
    JEL: G24 G34 G38 L10 L26
    Date: 2019–07–02
  5. By: Carletti, Elena (Bocconi University, IGIER, and CEPR); Ongena, Steven (University of Zurich, the Swiss Finance Institute, KU Leuven, and CEPR); Siedlarek, Jan-Peter (Federal Reserve Bank of Cleveland); Spagnolo, Giancarlo (SITEStockholm School of Economics, the University of Rome Tor Vergata, EIEF, and CEPR)
    Abstract: We fi nd that the introduction of stricter merger control legislation in the European Union in the period 1986–2007 increases the abnormal announcement returns of targets in bank mergers by 7 percentage points. In searching for potential explanations, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions.
    Keywords: banks; mergers and acquisitions; merger control; antitrust;
    JEL: G21 G34 K21 L40
    Date: 2017–07–19
  6. By: Ramiro de Elejalde (Departamento de Economía, Universidad Alberto Hurtado); Carlos J. Ponce (Departamento de Economía, Universidad Alberto Hurtado); Flavia Roldán (Universidad ORT Uruguay)
    Abstract: Using a sample of manufacturing firms in Uruguay, this paper studies the eect of product market competition on innovative activities, labor practices and the provision of incentives within firms. Our estimates show that a higher level of product market competition: (i) decreases innovative expenditures, (ii) increases the number of innovations per dollar spent on innovative activities, and: (iii) leads firms to implement incentive payment schemes based on employee performance. These results suggest that, in developing economies, firms react to a higher level of product market competition by providing internal incentives that ultimately lead to significant increases in the productivity of their innovative outlays.
    Keywords: Competition, Innovation, Innovative Productivity, Incentives.
    Date: 2019–03
  7. By: Carletti, Elena (Bocconi University, IGIER, and CEPR); Ongena, Steven (University of Zurich, the Swiss Finance Institute, KU Leuven, and CEPR); Siedlarek, Jan-Peter (Federal Reserve Bank of Cleveland); Spagnolo, Giancarlo (SITE-Stockholm School of Economics, the University of Rome Tor Vergata, EIEF, and CEPR)
    Abstract: The effect of regulations on the banking sector is a key question for financial intermediation. This paper provides evidence that merger control regulation, although not directly targeted at the banking sector, has substantial economic effects on bank mergers. Based on an extensive sample of European countries, we show that target announcement premia increased by up to 16 percentage points for mergers involving control shifts after changes in merger legislation, consistent with a market expectation of increased profitability. These effects go hand-in-hand with a reduction in the propensity for mergers to create banks that are too-big-to-fail in their country.
    Keywords: banks; regulation; mergers and acquisitions; merger control; antitrust;
    JEL: G21 G34 K21 L40
    Date: 2019–07–05
  8. By: Espen Moen (BI Norwegian Business School); Fredrik Wulfsberg (Oslo Business School, Oslo Akershus University College of Applied Sciences); Øyvind Aas (Université libre de Bruxelles)
    Abstract: This paper studies price dispersion in the Norwegian retail market for 766 products across 4297 stores over 60 months. Price dispersion for homogeneous products is significant and persistent, with a coefficient of variation of 37% for the median product. Price dispersion differs between product categories and over time. Store heterogeneity accounts for 30% of the observed variation in prices for the median product-month and for around 50% for the sample as a whole. Price dispersion is still prevalent after correcting for store heterogeneity.
    Keywords: Price dispersion, retail prices, store heterogeneity
    JEL: D2 D4 E3
    Date: 2017–08–09
  9. By: Moshe A. Barach; Joseph M. Golden; John J. Horton
    Abstract: Platform marketplaces can potentially steer buyers to certain sellers by recommending or guaranteeing those sellers. Money-back guarantees—which create a direct financial stake for the platform in seller performance—might be particularly effective at steering, as they align buyer and platform interests in creating a good match. We report the results of an experiment in which a platform marketplace—an online labor market—guaranteed select sellers for treated buyers. The presence of a guarantee strongly steered buyers to these guaranteed sellers, but offering guarantees did not increase sales overall, suggesting financial risk was not determinative for the marginal buyer. This preference for guaranteed sellers was not the result of their lower financial risk, but rather because buyers viewed the platform’s decision to guarantee as informative about relative seller quality. Indeed, a follow-up experiment showed that simply recommending the sellers that the platform would have guaranteed was equally effective at steering buyers.
    JEL: D02 D22 D82
    Date: 2019–06
  10. By: Eduardo H. Saavedra (Universidad Alberto Hurtado, Tribunal de Defensa de la Libre Competencia de Chile); Mauricio R. Stern (Estudiante de Doctorado en Economía, Universidad de Texas)
    Abstract: Este trabajo desestima que el desplome del precio del barril de petróleo en 2014-15 se explique por la desarticulación del cartel de la OPEP. Por el contrario, este fenómeno se explica principalmente por la mayor producción de shale oil y otras innovaciones extractivas de crudo fuera del cartel. La racionalidad de este resultado se sustenta en un modelo teórico que caracteriza a un mercado con estructura productiva dual, donde productores cartelizados compiten con productores precio aceptante (fringe). Para efectos de la calibración empírica, se supone que el fringe consta tanto de productores no estratégicos como de otros que tienen la capacidad de innovar y así, de tener éxito, expandir su producción. Como es incierto si las eventuales caídas en el precio del petróleo se deben a desviaciones del acuerdo, shocks de demanda y/o incrementos en la oferta del fringe,, no necesariamente una caída en su precio romperá el acuerdo colusivo. El modelo es calibrado para dos escenarios posibles: producción cartelizada de los miembros de la OPEP y competencia a la Cournot de estos, ambos tomando en cuenta la competencia e innovaciones del fringe. Los precios y producción observados entre 2000 y 2017 son consistentes con una oferta dominada por el cartel de la OPEP, siendo razonable que la caída del precio del crudo se deba a la fuerte expansión de la oferta de shale oil de Estados Unidos entre 2011 y 2014
    Keywords: Cartel, Estabilidad, Fringe, Innovación, Petróleo, Shale Oil, OPEP
    Date: 2018–12
  11. By: Bernhardt, Dan (University of Illinois & University of Warwick); Liu, Tingjun (The University of Hong Kong); Sogo, Takeharu (Osaka University of Economics)
    Abstract: We analyze optimal auction mechanisms when bidders base costly entry decisions on their valuations, and bidders pay with a fixed royalty rate plus cash. With sufficient valuation uncertainty relative to entry costs, the optimal mechanism features asymmetry so that bidders enter with strictly positive but different (ex-ante) probabilities. When bidders are ex-ante identical, higher royalty rates—which tie payments more closely to bidder valuations—increase the optimal degree of asymmetry in auction design, further raising revenues. When bidders differ ex-ante in entry costs, the seller favors the low cost entrant ; whereas when bidders have different valuation distributions, the seller favors the weaker bidder if entry costs are low, but not if they are high. Higher royalty rates cause the seller to favor the weaker bidder by less, and the strong bidder by more.
    Keywords: Auctions with participation costs : Royalty payments ; Optimal auctions ; Asymmetric auctions ; Heterogeneous bidders
    JEL: D44 G3
    Date: 2019
  12. By: Jordi Jaumandreu; Shuheng Lin
    Keywords: price indices, marginal cost, markup, innovation
    JEL: D43 L11 L16 O31
    Date: 2018–09–01
  13. By: Steven T. Berry; Martin Gaynor; Fiona Scott Morton
    Abstract: This paper considers the recent literature on firm markups in light of both new and classic work in the field of Industrial Organization. We detail the shortcomings of papers that rely on discredited approaches from the “structure-conduct-performance” literature. In contrast, papers based on production function estimation have made useful progress in measuring broad trends in markups. However, industries are so heterogeneous that careful industry specific studies are also required, and sorely needed. Examples of such studies illustrate differing explanations for rising markups, including endogenous increases in fixed cost associated with lower marginal costs. In some industries there is evidence of price increases driven by mergers. To fully understand markups, we must eventually recover the key economic primitives of demand, marginal cost, and fixed and sunk costs. We end by discussing the various aspects of antitrust enforcement that may be of increasing importance regardless of the cause of increased markups.
    JEL: L0 L1 L4
    Date: 2019–06
  14. By: OECD
    Abstract: This report analyses the effects of zero rating, i.e. when a predetermined type of traffic received by consumers is not counted against the download allowance of the Internet access service. The report looks at the economics of zero rating and issues such as the effects of zero rating on competition and innovation. It also compares regulatory approaches across several countries. In terms of economics, the welfare effects of zero rating on consumers can be favourable or unfavourable. While case by case analyses are almost indispensable, the different approaches which regulators and policy makers around the world are taking to zero rating exhibits substantial variation. Nevertheless, it is desirable that regulators and policy makers are alive to both the benefits and the risks associated with zero rating practices, and that in deciding their approach they have regard to the level of competition in both content and ISP markets.
    Date: 2019–07–15
  15. By: Emma Boswell Dean (University of Miami)
    Abstract: With the goal of driving down drug costs, governments across the globe have instituted various forms of pharmaceutical price control policies. Understanding the impacts of such policies is particularly important in low- and middle-income countries, where lack of insurance coverage means that prices can serve as a barrier to access for patients. In this paper, we examine the theoretical and empirical effects of one implementation of pharmaceutical price controls, in which the Indian government placed price ceilings on a set of essential medicines. We find that the legislation resulted in broadly declining prices amongst both directly impacted products and competing products. However, the legislation also led to decreased sales of price-controlled and closely related products, preventing trade that would have otherwise occurred. The sales of small, local generics manufacturers were most impacted by the legislation, seeing a 14.5 percent decrease in market share and a 5.3 percent decrease in sales. These products tend to be inexpensive, but we use novel data to show that they are also of lower average quality. We provide evidence that the legislation impacted consumer types differentially. The benefits of the legislation were largest for quality-sensitive consumers, while the downsides largely affected poor and rural consumers, two groups already suffering from low access to medicines.
    Date: 2019–04–23
  16. By: Germán Gutiérrez; Thomas Philippon
    Abstract: We study the entry and exit of firms across U.S. industries over the past 40 years. The elasticity of entry with respect to Tobin’s Q was positive and significant until the late 1990s but declined to zero afterwards. Standard macroeconomic models suggest two potential explanations: rising entry costs or rising returns to scale. We find that neither returns to scale nor technological costs can explain the decline in the Q- elasticity of entry, but lobbying and regulations can. We reconcile conflicting results in the literature and show that regulations drive down the entry and growth of small firms relative to large ones, particularly in industries with high lobbying expenditures. We conclude that lobbying and regulations have caused free entry to fail.
    JEL: D4 D6 E22 E23 K2 L0 O3 O4
    Date: 2019–06
  17. By: Artur Kovalchuk (Kyiv School of Economics); Charles Kenny (Center for Global Development); Mallika Snyder (Center for Global Development)
    Abstract: This paper examines the impact of Ukraine’s ambitious procurement reform on outcomes amongst a set of procurements that used competitive tendering. The ProZorro system placed all of the country’s government procurement online, introduced an auction approach as the default procurement method, and extended transparency. The reform was introduced with a dramatic increase in the proportion of government procurement that was conducted competitively. This paper examines the impact of ProZorro and reform on contracts that were procured competitively both prior to and after the introduction of the new system. It finds some evidence of impact of the new system on increasing the number of bidders, cost savings, and reduced contracting times.
    Keywords: E-procurement, Transparency, Competition
    JEL: H57 D73
    Date: 2019–06–11
  18. By: Munoz-Herrera, Manuel (New York University, Abu Dhabi); Reuben, Ernesto (New York University, Abu Dhabi)
    Abstract: In this paper, we study the effects of business culture on market efficiency. We exogenously vary the type of business culture between business-is-business cultures, which consist on impersonal relationships where financial matters are paramount, and business-is-family cultures, which comprise of cohesive personal relationships where financial matters and personal attachments are intertwined. We use a laboratory experiment to assess the effect of business cultures in environments with different degrees of contract enforceability and competition. Our main results indicate that business-is-family cultures are more effective when contracts are unverifiable because they help market participants overcome problems of trust. On the other hand, we find that business-is-business cultures are more effective in competitive settings because they facilitate the severance of ties with unproductive partners.
    Keywords: trust, contracts, competition, business culture, communication, social ties
    JEL: D91 L22 M14
    Date: 2019–06

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