nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒09‒09
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Optimal Search Segmentation Mechanisms for Online Platform Markets By Zhenzhe Zheng; R. Srikant
  2. Sequencing R&D decisions with a consumer-friendly firm and spillovers By Leal, Mariel; Garcia, Arturo; Lee, Sang-Ho
  3. Measuring rail market power in wheat transportation By Su, Chi; Nolan, James
  4. Granular Search, Market Structure, and Wages By Jarosch, Gregor; Nimczik, Jan Sebastian; Sorkin, Isaac
  5. Consumer Learning and Firm Dynamics By Zachary Mahone; Filippo Rebessi
  6. Quality Heterogeneity and Misallocation: The Welfare Benefits of Raising your Standards By Macedoni, Luca; Weinberger, Ariel
  7. Data-sharing in IoT Ecosystems from a Competition Law Perspective: The Example of Connected Cars By Wolfgang Kerber
  8. Consumer Uptake of Internet Banking, Endogenous Market Structure and Regional Integration in Europe By Bruce Lyons; Minyan Zhu
  9. The Herfindahl-Hirschman Index and the distribution of social surplus By Spiegel, Yossi
  10. Market Power in EU dairy processing: evidence from a stochastic frontier approach By Koppenberg, Maximilian; Hirsch, Stefan
  11. Dynamic Model of Mergers and Pricing in the Beer Industry By Richards, Timothy J.; Rickard, Bradley J.
  12. A Two-Stage Market Mechanism for Electricity with Renewable Generation By Nathan Dahlin; Rahul Jain
  13. Identification and Estimation of Forward-looking Behavior: The Case of Consumer Stockpiling By Andrew T. Ching; Matthew Osborne
  14. Multi-Brand Loyalty in Consumer Markets: A Qualitatively-Driven Mixed Methods Approach By Arifine, Ghizlane; Felix, Reto; Furrer, Olivier
  15. The relationship between announcements of complete mergers and acquisitions and acquirers' abnormal CDS spread changes By Benjamin Hippert
  17. What Strategies do Dairy Companies Realize? Using Content Analysis to Examine Realized Strategies in the Dairy Industry By Höhler, Julia; Kühl, Rainer
  18. Explaining the Interplay Between Merchant Acceptance and Consumer Adoption in Two-Sided Markets for Payment Methods By Kim Huynh; Gradon Nicholls; Oleksandr Shcherbakov
  19. Regulating Insurance Markets: Multiple Contracting and Adverse Selection By Attar, Andrea; Mariotti, Thomas; Salanié, François

  1. By: Zhenzhe Zheng; R. Srikant
    Abstract: Online platforms, such as Airbnb,, Amazon, Uber and Lyft, can control and optimize many aspects of product search to improve the efficiency of marketplaces. Here we focus on a common model, called the discriminatory control model, where the platform chooses to display a subset of sellers who sell products at prices determined by the market and a buyer is interested in buying a single product from one of the sellers. Under the commonly-used model for single product selection by a buyer, called the multinomial logit model, and the Bertrand game model for competition among sellers, we show the following result: to maximize social welfare, the optimal strategy for the platform is to display all products; however, to maximize revenue, the optimal strategy is to only display a subset of the products whose qualities are above a certain threshold. We extend our results to Cournot competition model, and show that the optimal search segmentation mechanisms for both social welfare maximization and revenue maximization also have simple threshold structures. The threshold in each case depends on the quality of all products, the platform's objective and seller's competition model, and can be computed in linear time in the number of products.
    Date: 2019–08
  2. By: Leal, Mariel; Garcia, Arturo; Lee, Sang-Ho
    Abstract: This study considers a duopoly model in which both a consumer-friendly (CF) firm and a for-profit (FP) firm undertake cost-reducing R&D investments in an endogenous R\&D timing game and then play Cournot output competition. When the CF firm chooses its profit-oriented consumer-friendliness, we show that the consumer-friendliness is non-monotone in spillovers under both simultaneous-move and sequential-move with FP firm’s leadership while it is decreasing under sequential-move with CF firm’s leadership. We also show that a simultaneous-move outcome is a unique equilibrium when the spillovers are low and the CF firm invests higher R&D and obtains higher profits. When the spillovers are not low, two sequential-move outcomes appear and the CF firm might obtain lower profits with higher spillovers under the CF firm leadership.
    Keywords: simultaneous R&D decisions; sequential R&D decisions; consumer-friendly firm; R&D spillovers
    JEL: L21 M21 O32
    Date: 2019–08
  3. By: Su, Chi; Nolan, James
    Abstract: Many previous studies of rail market power in bulk transportation either focus the analysis at a national level or apply methods to analyze railway market behavior that are not always reliable. While railroads often appear competitive over bulk movements when evaluated on a national level, we offer that any exertion of market or duopoly power by a railway—if present—would be most likely to occur in local or regional markets where there is limited to no intramodal or intermodal competition. In addition, much of the prior research on rail market behavior relies on estimated railroad (marginal) costs, which are themselves unreliable and in turn generate questionable assessments of actual railway market power. To help shed light on this issue with respect to U.S. wheat transportation, this research evaluates regional-level market structure changes in two separate, high-volume wheat transportation corridors served by a rail duopoly. These are: (1) wheat moving from North Dakota to Minnesota; and (2) wheat moving from Kansas/Oklahoma to Texas. By assessing the nature of duopoly market power in these particular rail markets, the analysis helps support and inform policies designed to improve transportation markets for more captive wheat and grain shippers.
    Keywords: Industrial Organization, Research Methods/ Statistical Methods
    Date: 2019–09–04
  4. By: Jarosch, Gregor (Princeton University); Nimczik, Jan Sebastian (European School of Management and Technology (ESMT)); Sorkin, Isaac (Stanford University)
    Abstract: We build a model where firm size is a source of labor market power. The key mechanism is that a granular employer can eliminate its own vacancies from a worker's outside option in the wage bargain. Hence, a granular employer does not compete with itself. We show how wages depend on employment concentration and then use the model to quantify the effects of granular market power. In Austrian micro-data, we find that granular market power depresses wages by about ten percent and can explain 40 percent of the observed decline in the labor share from 1997 to 2015. Mergers decrease competition for workers and reduce wages even at non-merging firms.
    Keywords: market power, labor share, search and matching
    JEL: J31 J42
    Date: 2019–08
  5. By: Zachary Mahone; Filippo Rebessi
    Abstract: We propose a general equilibrium model of industry where consumers learn about firms' unobserved product quality over time. Because consumers learn through purchase decisions, price setting is a crucial lever through which firms manipulate future demand. We map equilibrium policies to a range of empirical evidence on industry, firm, product and price dynamics. We then study how firms respond as consumer information varies. Specifically, we show that firms exacerbate information problems by constraining learning more aggressively in those markets where consumers are less informed. Developing an indicator of consumer information by product category, we find these are typically markets for consumer durables. Finally, the efficiency implications of this behavior and interaction with size-dependent policies are explored.
    Keywords: Learning; Firm Dynamics; Product Quality; Welfare
    JEL: E23 D83 L11
    Date: 2019–08
  6. By: Macedoni, Luca; Weinberger, Ariel
    Abstract: Inefficient allocation of production across heterogeneous firms is a major source of welfare loss, but frameworks generally ignore policies that reduce the misallocation. We study the welfare effects of policies that target the selection of surviving firms. As an example of such policies, we focus on product standards that force the small, low-quality firms to exit the market. Using data from Chile, we find that more restrictive standards are associated with a reallocation of domestic sales from small to large firms. Guided by this evidence, we study the welfare effects of standards in a model with monopolistically competitive, heterogeneous firms, and a general demand system. The standard improves welfare if low-quality firms over-produce in the market allocation relative to the efficient allocation. We estimate our model across Chilean industries and find that in several instances the imposed standard is too restrictive relative to a theoretical upper bound.​
    Keywords: Allocative efficiency, variable markups, product standards
    JEL: D6 F13 L11
    Date: 2019–06
  7. By: Wolfgang Kerber (Philipps University Marburg)
    Abstract: This paper analyses whether competition law can help to solve problems of access to data and interoperability in IoT ecosystems, where often one firm has exclusive control of the data produced by a smart device (and of the technical access to this device). Such a gatekeeper position can lead to the elimination of competition for after-market and other complementary services in such IoT ecosystems. This problem is analysed both from an economic and a legal perspective, and also generally for IoT ecosystems as well as for the much discussed problems of “access to in-vehicle data and resources†in connected cars, where the “extended vehicle†concept of the car manufacturers leads to such positions of exclusive control. The paper analyses, in particular, the competition rules about abusive behavior of dominant firms (Art. 102 TFEU) and of firms with “relative market power†(§ 20 (1) GWB) in German competition law. These provisions might offer (if appropriately applied and amended) at least some solutions for these data access problems. Competition law, however, might not be sufficient for dealing with all or most of these problems, i.e. that also additional solutions might be needed (data portability, direct data (access) rights, or sector-specific regulation).
    Keywords: data access, Internet of Things, data sharing, data access, competition, digital economy, connected cars
    JEL: K23 L62 L86 O33
    Date: 2019
  8. By: Bruce Lyons (School of Economics, University of East Anglia); Minyan Zhu (Department of Economics, University of Reading)
    Abstract: This paper examines how market structure influences the early introduction and consumer uptake of a digital service that is a convenient alternative to traditional service delivery. Digital provision also has "extended geographic reach" and "lower sunk costs" as compared with bricks-and-mortar service provision. We further examine how these affect market structure. Internet banking provides an important example that also allows us to separate regional integration and national concentration dimensions of market structure. We develop an econometric model of the effects of market structure on the introduction and consumer uptake of internet banking. We estimate using panel data for all EU Member States and find that both concentration and regionalisation bring these forward. Next, we examine how consumer uptake of the digital product then begins to impact on banking market structure. We find a substantial de-concentrating effect in large non-regionalised markets and indirect evidence of integration in previously regionalised markets. This is consistent with internet banking having enhanced competition in both integrated markets and, despite little change in national concentration, also in previously regionalised markets.
    Keywords: Internet Banking, Digital Markets, Endogenous Market Structure, Market Integration, Consumer Diffusion
    JEL: L11 O33 F15 G21 L81
    Date: 2019–04–25
  9. By: Spiegel, Yossi
    Abstract: I show that in a broad range of oligopoly models where firms have (not necessarily identical) constant marginal cost, HHI is an increasing function of the ratio of producers' surplus and consumers' surplus and therefore reflects the division of surplus between firms' owners and consumers.
    Keywords: Consumer surplus; HHI; oligopoly; producer surplus
    JEL: D43 L41
    Date: 2019–08
  10. By: Koppenberg, Maximilian; Hirsch, Stefan
    Keywords: Agribusiness
    Date: 2019–06–25
  11. By: Richards, Timothy J.; Rickard, Bradley J.
    Keywords: Industrial Organization
    Date: 2019–06–25
  12. By: Nathan Dahlin; Rahul Jain
    Abstract: We consider a two stage market mechanism for trading electricity including renewable generation as an alternative to the widely used multi-settlement market structure. The two stage market structure allows for recourse decisions by the market operator, which is not possible in today's markets. We allow for different generation cost curves in the forward and the real-time stage. We have considered costs of demand response programs, and black outs but have ignored network structure for the sake of simplicity. Our first result is to show existence (by construction) of a sequential competitive equilibrium (SCEq) in such a two-stage market. We then argue social welfare properties of such an SCEq. We then design a market mechanism that achieves social welfare maximization when the market participants are non-strategic.
    Date: 2019–09
  13. By: Andrew T. Ching (Johns Hopkins University); Matthew Osborne (University of Toronto)
    Abstract: Understanding how forward-looking consumers respond to price promotions in storable goods markets is an important area of research in empirical marketing and industrial organization. In prior work, researchers have assumed that consumers in these markets are very forward-looking, and calibrated their weekly discount factors to levels around 0.9995. This calibration has been used because earlier research has assumed that a consumer’s storage cost is a continuous func- tion of inventory, which rules out exclusion restrictions that can be used to identify the discount factor. We show that by properly modeling storage cost as a step function of inventory (be- cause storage cost depends on the number of packages stored, instead of the actual amount of inventory), natural exclusion restrictions arise that allow for the discount factor to be point identified. In an application to a storable good category, we find that weekly discount factors are very heterogeneous across consumers, and are on average 0.71. We show through a counter- factual exercise that if one used a model which fixed the discount factor to be consistent with the standard calibrated value, one would overpredict the effect of increased promotional depth for a product on its quantity sold by 18% in the short-term, and 15% in the long-term.
    Keywords: Discount Factor, Exclusion Restriction, Stockpiling, Dynamic Programming
    Date: 2019–08–16
  14. By: Arifine, Ghizlane; Felix, Reto; Furrer, Olivier
    Abstract: Purpose—Although multi-brand loyalty (MBL) in consumer markets has been identified in previous brand loyalty research, empirical studies have not yet explored the facets of its different types. This article seeks a deeper understanding of MBL by investigating its different types and facets. Design/methodology/approach—This study uses a sequential, qualitatively-driven mixed method design consisting of in-depth interviews and supplementary survey research. Findings—The findings of this study suggest that mood congruence, identity enhancement, unavailability risk reduction and market competition are the most important facets that explains the two types of MBL (complementary-based and product substitutes). Furthermore, the findings show that the family factor can motivate consumers to be multi-brand loyal by adding brands to an initially family-endorsed brand. Research limitations/implications—This study advances the conceptual foundations of MBL and extends previous research on brand loyalty. Some of the findings may be limited to the economic and cultural context of relatively affluent countries with an abundance of market offers. Practical implications—Marketing managers gain insights into how to manage brand loyalty as well as how to transition from MBL to single-brand loyalty. Originality/value—The study generates novel insights into the facets of different types of MBL
    Keywords: Multi-brand loyalty; relationship marketing; decision-making heuristics; mixed method design; grounded theory; thematic analysis
    JEL: M31
    Date: 2019–01–29
  15. By: Benjamin Hippert (University of Paderborn)
    Abstract: Employing a sample of 492 merger and acquisition (M&A) announcements from 284 acquirers across North America and Europe between 2005 and 2018, this study analyzes the impact of M&A announcements on an acquirers abnormal CDS spread changes. We find that spreads from CDS which are written on acquirers increase by 310 bps during a symmetric five-day event window suggesting that investors expect an increase in the acquirers credit risk exposure due to M&As. Next to this baseline finding, we conduct a large variety of sensitivity analyses to gain more insight into the driving factors of the rising risk perception of CDS investors due to M&A announcements.
    Keywords: credit default swaps, risk perception of CDS investors, mergers and acquisitions, event study
    JEL: G14 G34
    Date: 2019–08
  16. By: Manveen Singh (Jindal Global Law School, O.P. Jindal Global University)
    Abstract: Standards and standards-setting organizations (SSOs) have played a crucial role in shaping the innovation landscape for over three decades, especially in the information and communication technologies (ICT) sector. The advancement in mobile telecommunication and the Internet has led to a fundamental change in the way individuals communicate with each other. Devices such as smartphones, tablets, laptops and smart watches bear complex mechanical and technological features and perform multiple functionalities by connecting seamlessly. However, in order for the interoperability of these devices and their functionalities to come through, there is a requirement of a common set of specifications and interfaces, in the form of standards. Standards are widely acknowledged to be the mainstay of modern economy and can lead to an increase in the value of consumer products, as well as increased rates of innovation. The setting of standards and commercializing of innovation at large is facilitated by voluntary associations called SSOs. Competing firms come together under the auspices of SSOs to collaboratively select and adopt uniform technical standards. It is worth noting that the benefits brought about by these standards have a greater visibility in the ICT sector, primarily on account of two reasons. First, in order to make complex technologies work, there is a requirement of hundreds of thousands of patents. Second, there is a strong need for devices and networks to interoperate in the ICT sector, which makes it absolutely necessary to develop common technical standards.SSOs are further tasked with the responsibility of fostering a regime of rapid technological innovation by balancing the interests of their members; their membership comprising of patent owners or standard essential patent (SEP) holders on one hand and implementers or licensees on the other. While the patent owners are involved in research and development (R&D) and look to maximize their earnings from licensing out their SEPs, the implementers look to seek licenses from SEP holders on terms that are fair, reasonable and non-discriminatory (FRAND), in order to use the patented technology in the manufacturing of standard-compliant end-use products. There is yet, a third category of member companies that are vertically integrated and besides owning SEPs, also operate actively in the downstream market. As members of SSOs, these firms compete in the market on both, horizontal and vertical levels, which gives rise to a possible likelihood of collusion albeit theoretically. It is because of this aspect of standard-setting, that the role of SSOs becomes extremely important.A pertinent question that arises then is, what are SSOs and how do they function? Furthermore, what is the legality of SSOs and how have they helped in the evolution of industry standards? In an attempt to answer the aforementioned questions, the focus of this paper shall center around standardization and standard-setting organizations, while tracing the evolution of standards and standard-setting activities in the ICT sector.
    Keywords: Standards, standardization, SSO, patents, SEP, technology
    JEL: O30
    Date: 2019–07
  17. By: Höhler, Julia; Kühl, Rainer
    Abstract: A realized strategy can be understood as the sum of a company’s strategic actions over time. This concept of strategy is difficult to grasp empirically. However, the content analysis enables a systematic, dynamic, and theoretically sound recording of realized strategies. To demonstrate the potential of the method in capturing strategies, we encode 4,158 pieces of information about strategic actions of ten European dairy companies in the German market for over 11 years. Based on this, we suggest a mixed methods approach to learn more about the individual companies’ competitive moves and their realized strategies. The companies investigated differ in their adaptation to changing environmental conditions and in particular in their brand policy. Our approach can be applied to many questions in strategy research and promises new insights into the strategies of companies in the food industry.
    Keywords: Industrial Organization, Livestock Production/Industries, Research Methods/ Statistical Methods
    Date: 2019–08–26
  18. By: Kim Huynh; Gradon Nicholls; Oleksandr Shcherbakov
    Abstract: Recent consumer and merchant surveys show a decrease in the use of cash at point-of-sale (POS). Increasingly, consumers and merchants have access to a growing array of payment innovations as substitutes for cash. The market for payments is two-sided, meaning that a method of payment can be used only if both consumers and merchants adopt/accept it. This paper develops a model to assess how innovations affect consumers’ adoption and merchants’ acceptance of various payment instruments, and their usage patterns at the POS. We model this interdependence in two stages. First, consumers and merchants decide on which methods of payment to adopt and accept, respectively. Second, consumers and merchants meet at the POS, and the consumer chooses their preferred method of payment given what the merchant accepts. Estimates from our model suggest that both sides of the market can benefit from accepting all means of payment. Further, our model predicts that merchants are much more sensitive to an increase in their payment costs than consumers. We use our model to predict what would happen under three scenarios. First, increasing merchants’ cost of using credit cards would significantly reduce merchant acceptance of this payment instrument in favour of debit. Second, the cost of using cash would have to increase substantially on both sides of the market for cash usage to fall below 1 percent of transaction volume. Finally, even if all consumers/merchants adopted/accepted all methods of payment, cash would fall but would remain at 20 percent of transaction volume. These findings suggest a completely cashless society is unlikely in the foreseeable future.
    Keywords: Bank notes; Digital Currencies and Fintech; Econometric and statistical methods; Financial services
    JEL: C51 L13 L15 L81 L96
    Date: 2019–08
  19. By: Attar, Andrea; Mariotti, Thomas; Salanié, François
    Abstract: We study insurance markets in which privately informed consumers can purchase coverage from several firms whose pricing strategies are subject to an anti-dumping regulation. The resulting regulated game supports a single allocation in which each layer of coverage is fairly priced given the consumer types who purchase it. This competitive allocation cannot be Pareto-improved by a social planner who can neither observe consumer types nor monitor their trades with firms. Accordingly, we argue that public intervention under multiple contracting and adverse selection should penalize firms that cross-subsidize between contracts, while leaving consumers free to choose their preferred amount of coverage.
    Keywords: Insurance Markets, Regulation, Multiple Contracting, Adverse Selection.
    JEL: D43 D82 D86
    Date: 2019–08

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