nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒08‒26
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. The Impact of Product Qualities on Downstream Bundling in a Distribution Channel By Angelika Endres; Joachim Heinzel
  2. From Mad Men to Maths Men: Concentration and Buyer Power in Online Advertising By Decarolis, Francesco; Rovigatti, Gabriele
  3. Guiding Principles in Setting Cartel Sanctions By Marcel Boyer; Anne Catherine Faye; Éric Gravel; Rachidi Kotchoni
  4. Competition and Pass-Through: Evidence from Isolated Markets By Genakos, Christos D.; Pagliero, Mario
  5. Mergers on Networks By Dubovik, Andrei
  6. From Local to Global Competitors on the Beer Market By Erik Strøjer Madsen
  7. Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership By Schmitz, Patrick W.
  8. Electronic markets with multiple submodular buyers By Allan Borodin; Akash Rakheja
  9. Nonparametric Identification of First-Price Auction with Unobserved Competition: A Density Discontinuity Framework By Emmanuel Guerre; Yao Luo
  10. Another Look at “Bank Competition and Financial Stability: Much Ado about Nothing?” By Samangi Bandaranayake; Kuntal K. Das; W. Robert Reed
  11. Nonlinear Pricing with Average-Price Bias By Martimort, David; Stole, Lars
  12. Moral Hazard and the Property Rights Approach to the Theory of the Firm By Schmitz, Patrick W.
  13. If You Think 9-Ending Prices Are Low,Think Again By Daniel Levy; Avichai Snir
  14. Farmers, Traders, and Processors: Estimating the Welfare Loss from Double Marginalization for the Indonesian Rubber Sector By Kopp, Thomas; Sexton, Richard J.
  15. Competition, Land Prices, and City Size By Sergey Kichko

  1. By: Angelika Endres (Paderborn University); Joachim Heinzel (Paderborn University)
    Abstract: We study the impact of exogenous product qualities on a downstream firm’s decision to bundle and the welfare effects of downstream bundling. We consider a distribution channel with two downstream firms and two price-setting monopolistic upstream producers. One upstream firm sells its good 1 exclusively to one downstream firm and the other upstream firm sells its good 2 to both downstream firms. The downstream firms compete in prices and the two-product downstream firm has the option to bundle its goods. We find that downstream bundling aggravates the problem of double marginalization in the channel, but reduces the intensity of downstream competition. Finally, bundling is profitable for the two-product downstream firm only when the quality of good 2 exceeds the quality of good 1. However, bundling is always profitable when the production process is controlled by the downstream industry. The impact on total welfare is ambiguous and depends on the distribution of market power in the channel and the quality levels of the goods.
    Keywords: channel conflicts; double marginalization; downstream bundling; leverage theory; quality differentiation
    JEL: D21 D61 L11 L15
    Date: 2019–08
  2. By: Decarolis, Francesco; Rovigatti, Gabriele
    Abstract: This paper analyzes the impact of intermediaries' concentration on the allocation of revenues in online platforms. We study sponsored search - the sale of ad space on search engines through online auctions - documenting how advertisers increasingly bid through a handful of specialized intermediaries. This enhances automated bidding and data pooling, but lessens competition whenever the intermediary represents competing advertisers. Using data on nearly 40 million Google's keyword-auctions, we first apply machine learning algorithms to cluster keywords into thematic groups serving as relevant markets. Then, through an instrumental variable strategy, we quantify a negative and sizeable impact of intermediaries' concentration on platform's revenues.
    Keywords: Buyer Power; Concentration; online advertising; platforms; Sponsored Search
    JEL: C72 D44 L81
    Date: 2019–07
  3. By: Marcel Boyer; Anne Catherine Faye; Éric Gravel; Rachidi Kotchoni
    Abstract: We discuss various theoretical and empirical hurdles that antitrust authorities and courts must overcome to determine appropriate cartel sanctions, namely regarding the probability of detection, cartel dynamics, cartel duration, and cartel overcharge. Nous discutons les enjeux et embûches théoriques et empiriques auxquels les autorités de concurrence et les tribunaux font face pour sanctionner les cartels, à savoir la probabilité de détection, la dynamique de cartel, la durée de l’impact et le surprix.
    Keywords: Cartels,Fines,Competition Policy,Antitrust, Cartels,Amendes,Politique de concurrence,Antitrust
    Date: 2019–08–16
  4. By: Genakos, Christos D.; Pagliero, Mario
    Abstract: We measure how pass-through varies with competition in isolated oligopolistic markets with captive consumers. Using daily pricing data from gas stations, we study how unanticipated and exogenous changes in excise duties (which vary across different petroleum products) are passed through to consumers in markets with different numbers of retailers. We find that pass-through increases from 0.44 in monopoly markets to 1 in markets with four or more competitors and remains constant thereafter. Moreover, the speed of price adjustment is about 60% higher in more competitive markets. Finally, we show that geographic market definitions based on arbitrary measures of distance across sellers, often used by researchers and policy makers, result in significant overestimation of the pass-through when the number of competitors is small.
    Keywords: Competition; gasoline; market structure; Pass-Through; Tax Incidence
    JEL: H22 L1
    Date: 2019–07
  5. By: Dubovik, Andrei
    Abstract: I study mergers where each firm owns multiple shops across a country. Presently, the European Commission views every shop, together with the shops from its catchment area, as an isolated market. Such an approach is internally inconsistent. I show how to extend the European Commission's approach to consistently take overlaps in catchment areas into account. My model is a specialization of the existing network theory that is aimed to be feasible in real merger cases. As a demonstration, I study a past merger case and I find that neglecting overlaps in catchment areas can result in substantial biases.
    Keywords: mergers, networks, spatial competition, consumer demand
    JEL: D43 D85 L13 L14 L40
    Date: 2018–06–09
  6. By: Erik Strøjer Madsen (Department of Economics and Business Economics, Aarhus University)
    Abstract: Liberalization of trade has been high on the political agenda after the Second World War. First through the international corporation in GATT and WTO and later the creation of the internal market in Western Europe and the opening up of Eastern Europe and China. The breweries respond to these changes in institution by a global M&A strategy and the following concentration of ownership among breweries increased the large breweries’ global market share dramatically. Why does this concentration in ownership take place, and was there some pay off to the breweries of this strategy? We will examine the market power hypothesis, how the increasing concentration has affected the growth of global brands and the beer prices. First, we examine where the increasing global concentration is reflected in a concentration of ownership in local markets. Next, we examine the effects of ownership concentration on the level of beer prices. Finally, we examine the effects of the global ownership on the market share of the global beer brand.
    Keywords: Branding, Brewing industry, Global market power
    JEL: L11 L66 M37
    Date: 2019–08–20
  7. By: Schmitz, Patrick W.
    Abstract: The property rights approach to the theory of the firm is the most prominent application of the incomplete contracting paradigm. A central conclusion of the standard model says that joint ownership is suboptimal. In this note, we analyze a modified version of the standard model that is tailored to the organization of R&D activities, where one of the parties is wealth-constrained and protected by limited liability. It turns out that joint ownership can be optimal, since it avoids wasteful rent-seeking activities when limited liability rents are necessary to induce high effort. Our results are in line with the fact that R&D activities are often conducted in research joint ventures.
    Keywords: Incomplete Contracts; joint ownership; limited liability; Property rights; rent seeking
    JEL: D23 D86 L24 L25 O32
    Date: 2019–07
  8. By: Allan Borodin; Akash Rakheja
    Abstract: We discuss the problem of setting prices in an electronic market that has more than one buyer. We assume that there are self-interested sellers each selling a distinct item that has an associated cost. Each buyer has a submodular valuation for purchasing any subset of items. The goal of the sellers is to set a price for their item such that their profit from possibly selling their item to the buyers is maximized. Our most comprehensive results concern a multi copy setting where each seller has m copies of their item and there are m buyers. In this setting, we give a necessary and sufficient condition for the existence of market clearing pure Nash equilibrium. We also show that not all equilibria are market clearing even when this condition is satisfied contrary to what was shown in the case of a single buyer in [2]. Finally, we investigate the pricing problem for multiple buyers in the limited supply setting when each seller only has a single copy of their item.
    Date: 2019–07
  9. By: Emmanuel Guerre; Yao Luo
    Abstract: We consider nonparametric identification of independent private value first-price auction models, in which the analyst only observes winning bids. Our benchmark model assumes an exogenous number of bidders $N$. We show that, if the bidders observe $N$, the resulting discontinuities in the winning bid density can be used to identify the distribution of $N$. The private value distribution can be identified in a second step. A second class of models considers endogenously-determined $N$, due to a reserve price or an entry cost. If bidders observe $N$, these models are also identifiable using winning bid discontinuities. If bidders cannot observe $N$, however, identification is not possible unless the analyst observes an instrument which affects the reserve price or entry cost. Lastly, we derive some testable restrictions for whether bidders observe the number of competitors and whether endogenous participation is due to a reserve price or entry cost. An application to USFS timber auction data illustrates the usefulness of our theoretical results for competition analysis, showing that nearly one bid out of three can be non competitive. It also suggests that the risk aversion bias caused by a mismeasured competition can be large.
    Date: 2019–08
  10. By: Samangi Bandaranayake; Kuntal K. Das (University of Canterbury); W. Robert Reed (University of Canterbury)
    Abstract: This study replicates Zigraiova and Havranek’s (2016) meta-analysis of banking competition and financial stability. It performs multiple types of replications: a “Reproduction” replication where Z&H’s data and code are verified to reproduce the results of their study; a “Repetition” replication where the studies used by Z&H are independently recoded and then re-analyzed; an “Extension” replication where additional studies on banking competition and stability are analyzed; and a “Robustness Analysis” where we check Z&H’s results using an alternative empirical procedure. Our analysis strongly confirms Z&H’s main finding that competition in the banking sector has an economically negligible effect on financial stability. This result is consistently confirmed across a variety of replication analyses. Most impressively, we confirm their finding even when we analyze a completely independent set of 35 studies not included in Z&H’s meta-analysis. Our results for Z&H’s other findings are less supportive. As the first comprehensive replication of a meta-analysis, this study also provides insights into the robustness of meta-analysis. We find that meta-regression analysis, where estimated effects are related to data, estimation, and study characteristics, is sensitive to how data are coded and to the choice of estimation procedure; and that this sensitivity extends to “best practice” estimates.
    Keywords: Bank competition, financial stability, Bayesian model averaging, meta-analysis, publication selection, replication
    JEL: C41 G21 G28 L11
    Date: 2019–08–01
  11. By: Martimort, David; Stole, Lars
    Abstract: Empirical evidence suggests that consumers facing complex nonlinear pricing often make choices based on average (not marginal) prices. Given such behavior, we characterize a monopolist's optimal nonlinear price schedule. In contrast to the textbook setting, nonlinear prices designed for ``average-price bias'' distort consumption downward for consumers at the top, may produce efficient consumption for consumers at the bottom, and typically feature quantity premia rather than quantity discounts. These properties arise because the bias replaces consumer information rents with curvature rents. Whether or not a monopolist prefers consumers with average-price bias depends upon underlying preferences and costs.
    Keywords: average-price bias; curvature rents; Nonlinear Pricing; price discrimination
    JEL: D82
    Date: 2019–07
  12. By: Schmitz, Patrick W.
    Abstract: In the Grossman-Hart-Moore property rights theory, there are no frictions ex post (i.e., after non-contractible investments have been sunk). In contrast, in transaction cost economics ex-post frictions play a central role. In this note, we bring the property rights theory closer to transaction cost economics by allowing for ex-post moral hazard. As a consequence, central conclusions of the Grossman-Hart-Moore theory may be overturned. In particular, even though only party A has to make an investment decision, B-ownership can yield higher investment incentives. Moreover, ownership matters even when investments are fully relationship-specific (i.e., when they have no impact on the parties' disagreement payoffs).
    Keywords: Incomplete Contracts; Investment incentives; moral hazard; Ownership rights; relationship specificity
    JEL: D23 D86 G34 L23 L24
    Date: 2019–07
  13. By: Daniel Levy (International School of Economics at Tbilisi State University, Georgia; Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; The Rimini Centre for Economic Analysis, Italy); Avichai Snir (Department of Banking and Finance Netanya Academic College, Netanya, ISRAEL)
    Abstract: 9-ending prices are a dominant feature of many retail settings, which according to the existing literature, is because consumers perceive them as being relatively low. Are 9-ending prices really lower than comparable non 9-ending prices? Surprisingly, the empirical evidence on this question is scarce. We use 8 years of weekly scanner price data with over 98 million price observations to document four findings. First, at the category level, 9-ending prices are usually higher, on average, than non 9-ending prices. Second, at the product level, in most cases, 9-ending prices are, on average, higher than prices with other endings. Third, sale prices are more likely to be non-9 ending than the corresponding regular prices. Fourth, among sale prices, 9-ending prices are often lower, on average, than comparable non 9-ending prices. The first three findings imply that although consumers may associate 9-ending prices with low prices, the data indicates otherwise. The fourth finding offers a possible explanation for this misperception. Retailers may be using 9-ending prices to draw consumers’ attention to particularly large price cuts during sales, which perhaps conditions the shoppers to associate 9-ending prices with low prices.
    Keywords: Behavioral Pricing, Psychological Prices, Price Perception, Image Effect, 9-Ending Prices, Price Points, Regular Prices, Sale Prices
    Date: 2019
  14. By: Kopp, Thomas; Sexton, Richard J.
    Keywords: Industrial Organization
    Date: 2019–06–25
  15. By: Sergey Kichko
    Abstract: Larger cities typically give rise to two opposite effects: tougher competition among firms and higher production costs. Using an urban model with substitutability of production factors and pro-competitive effects, I study the response of the market outcome to city size, land-use regulations, and commuting costs. For industries with low input shares of land, larger cities host more firms setting lower prices whereas for sectors with intermediate land shares larger cities accommodate more firms charging higher prices. Softer land-use regulations and/or lower commuting costs reinforce pro-competitive effects, making larger cities more attractive for residents via lower prices and broader product diversity.
    Keywords: land prices, pro-competitive effects, city size, product diversity, land-use regulations
    JEL: L11 L13 R13 R32 R52
    Date: 2019

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