nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒12‒09
twelve papers chosen by
Russell Pittman
United States Department of Justice

  1. Consumer Information and the Limits to Competition By Mark Armstrong; Jidong Zhou
  2. Product Liability, Multidimensional R&D and Innovation By Lin, Ping; Zhang, Tianle
  3. Vertically Differentiated Cournot Oligopoly : Effects of Market Expansion and Trade Liberalization on Relative Markup and Product Quality By Long, Ngo Van; Miao, Zhuang
  4. On the Disclosure of Promotion Value in Platforms with Learning Sellers By Yonatan Gur; Gregory Macnamara; Daniela Saban
  5. The origins of firm heterogeneity: a production network approach By Bernard, Andrew; Dhyne, Emmanuel; Manova, Kalina; Magerman, Glenn; Moxnes, Andreas
  6. American Gothic: How Chicago Economics Distorts `Consumer Welfare` in Antitrust By Mark Glick
  7. Duopolistic Competition On a Plane By Davit Maskharashvilia
  8. Which Access to Which Assets for an Effective Liberalization of the Railway Sector? By Patrice Bougette; Axel Gautier; Frédéric Marty
  9. Media competition, information provision and political participation:Evidence from French local newspapers and elections, 1944–2014 By Julia Cage
  10. Productivity Dynamics: The Role of Competition in a Service Industry By Breda, Thomas; Bryson, Alex; Forth, John
  11. Consumer-benefiting transport cost: The role of product innovation in a vertical structure By Kazuhiro Takauchi; Tomomichi Mizuno
  12. Restructuring Saudi Arabia’s Power Generation Sector: Model-Based Insights By Bertrand Rioux; Axel Pierru; Nader AlKathiri

  1. By: Mark Armstrong; Jidong Zhou
    Abstract: This paper studies competition between firms when consumers observe a pri-vate signal of their preferences over products. Within the class of signal structures which allow pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal signal structure amplifies the underlying product differentiation, thereby relax¬ing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens dif¬ferentiation, which intensifies competition, but induces some consumers with weak preferences between products to buy their less-preferred product. The analysis sheds light on the limits to competition when the information possessed by con¬sumers can be designed flexibly.
    Keywords: Information design, Bertrand competition, product differentiation, online platforms
    JEL: D43 D47 D83 L13 L15
    Date: 2019–11–28
  2. By: Lin, Ping; Zhang, Tianle
    Abstract: We study the effect of product liability on the incentives of product and safety innovation. We first develop a monopoly model in which a firm chooses both product novelty and safety in an innovation stage followed by a production stage. A greater product liability directly increases the marginal benefit of producing a safer product and thus increases product safety. However, as product liability increases, product novelty may increase or decrease, depending on the relative strengths of demand-shifting and cross-R&D effects identified in the model. Consequently, a greater product liability may decrease consumer welfare and thus total welfare. We extend the results to an oligopoly model with differentiated products and study the effects of competition measured by the number of firms and the degree of product substitutability. We find that equilibrium product novelty and safety decrease with the number of firms but exhibit non-monotonic relationships with the degree of product substitutability.
    Keywords: Product Liability, Safety, Novelty, Innovation Incentive
    JEL: D4 K13 L13
    Date: 2019–11
  3. By: Long, Ngo Van; Miao, Zhuang
    Abstract: We model an oligopoly where firms are allowed to freely enter and exit the market and choose the quality level of their products by incurring different set-up costs. Using this framework, we study the mix of firms in the long-run Cournot-Nash equilibrium under different cost structures and the effects of market size on market outcomes. Specifically, we consider two alternative specifications of cost structure. In the first specification, quality upgrading requires a large increment in the set-up cost or R&D investment. Under this cost structure, we show that in the Nash equilibrium, each firm specializes in a single quality level, and an increase in the market size leads to (i) an increase in the fraction of firms that specialize in the high quality product, (ii) an increase in the market share of the high quality product, and (iii) a reduction in firms'markups and in markup dispersion. Under the second type of cost structure where quality upgrading only requires higher marginal cost, we find that all firms will produce both types of product, and the value share of the high-quality product increases as the market expands, but in quantity terms, the market share of the high quality product does not change. Finally, we find that trade liberalization has broadly similar effects to that of a market expansion, but the supply of the high-quality product from the smaller economy may decrease.
    Keywords: Multiproduct firms, Cournot competition, Vertical product differentiation, Cost structure, Market size, Trade liberalization
    JEL: L1 L2 F15
    Date: 2019–11
  4. By: Yonatan Gur; Gregory Macnamara; Daniela Saban
    Abstract: We consider a platform facilitating trade between sellers and buyers with the objective of maximizing consumer surplus. In many such platforms prices are set by revenue-maximizing sellers, but the platform may influence prices through its promotion policy (e.g., increasing demand to a certain product by assigning to it a prominent position on the webpage), and the information it reveals about the additional demand associated with being promoted. Identifying effective joint information design and promotion policies for the platform is a challenging dynamic problem as sellers can sequentially learn the promotion "value" from sales observations and update prices accordingly. We introduce the notion of confounding promotion polices, which are designed to prevent a Bayesian seller from learning the promotion value (at the cost of diverting consumers away from the best product offering). Leveraging this notion, we characterize the maximum long-run average consumer surplus that is achievable by the platform when the seller is myopic. We then establish that long-run average optimality can be maintained by optimizing over a class of joint information design and promotion policies under which the platform provides the seller with a (random) information signal at the beginning of the horizon, and then uses the best confounding promotion policy, which prevents the seller from further learning. Additionally, we show that myopic pricing is a best response to such a platform strategy, thereby establishing an approximate Bayesian Nash equilibrium between the platform and the seller. Our analysis allows one to identify practical long-run average optimal platform policies in a broad range of demand models and evaluate the impact of the search environment and the design of promotions on consumer surplus.
    Date: 2019–11
  5. By: Bernard, Andrew; Dhyne, Emmanuel; Manova, Kalina; Magerman, Glenn; Moxnes, Andreas
    Abstract: This paper quantifies the origins of firm size heterogeneity when firms are interconnected in a production network. Using the universe of buyer-supplier relationships in Belgium, the paper develops a set of stylized facts that motivate a model in which firms buy inputs from upstream suppliers and sell to downstream buyers and final demand. Larger firm size can come from high production capability, more or better buyers and suppliers, and/or better matches between buyers and suppliers. Downstream factors explain the vast majority of firm size heterogeneity. Firms with higher production capability have greater market shares among their customers, but also higher input costs and fewer customers. As a result, high production capability firms have lower sales unconditionally and higher sales conditional on their input prices. Counterfactual analysis suggests that the production network accounts for more than half of firm size dispersion. Taken together, our results suggest that multiple firm attributes underpin their success or failure, and that models with only one source of firm heterogeneity fail to capture the majority of firm size dispersion.
    Keywords: production networks; productivity; firm size heterogeneity
    JEL: F10 F12 F16
    Date: 2019–01
  6. By: Mark Glick (University of Utah)
    Abstract: Since the publication of Robert Bork`s The Antitrust Paradox, lawyers, judges, and many economists have defended `Consumer welfare` (CW) as a standard for decisions about antitrust goals and enforcement priorities. This paper argues that the CW is actually an empty concept and is an inappropriate goal for antitrust. Welfare economists concede that there is no credible measurable link between price and output and human well-being. This means that the concept of CW does not legitimate limited antitrust enforcement, nor does it justify the exclusion of other antitrust goals that require more active enforcement practices. This paper contends that antitrust policy is not welfare based at all, and that if it were, antitrust policy and enforcement would differ significantly from the Chicago School vision. Without the fiction that economists can establish that in the short run lower price and higher output measurably increases welfare more than other goals, recent defenses of the CW standard resolve down to arguments based on unsupported assumptions.
    Keywords: U.S. Consumer Welfare, Goal of Antitrust Law, New Brandeis School, Chicago School of Economics.
    JEL: K21 L40 N12
  7. By: Davit Maskharashvilia (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: The paper models duopolistic competition in so called monotowns: towns with one big factory where most of the citizens are employed. Workers after job go to one of the competitor shops, buy the product and bring it home. Nash equilibrium is found for linear and two-dimensional cases. The principle of maximum differentiation is refuted.
    Keywords: spatial competition, two-dimensional city
    JEL: C72 D43 L13 R32
    Date: 2019–02
  8. By: Patrice Bougette (Université Côte d'Azur; GREDEG CNRS); Axel Gautier (HEC Liège, University of Liège, LCII; CORE (UCLouvain; CESifo (Munich)); Frédéric Marty (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: In the European rail industry, the market liberalization limited to the opening of the essential facilities (the train path) to new entrants is not enough to enable competition. For an efficient and effective entry, temporary access to quasi-essential complementary assets like rolling stock, mechanical maintenance workshops, data, schedules, etc. is also required. Like in all network industries, the deregulation process faces anticompetitive practices undertaken by the incumbents or may be thwarted by their market power. Several observed anticompetitive practices involve distorted access to these quasi-essential facilities. Therefore, competition agencies must deal with litigation between the incumbent and new entrants. Most cases have been settled, resulting in commitments from the incumbent. We argue that such transitory and case-by-case remedies fail to produce favorable conditions for a secure and efficient entry. Thus, we propose to systematize such remedies through asymmetric and enduring ex-ante regulation.
    Keywords: rail, liberalization, essential facility, anticompetitive practices, asymmetric regulation
    JEL: K21 L51 L92 L98
    Date: 2019–11
  9. By: Julia Cage (Département d'économie)
    Abstract: This paper investigates the impact of increased media competition on the quantity and quality of news provided and, ultimately, on political participation. I build a new county-level panel dataset of local newspaper presence, newspapers' number of journalists, costs and revenues and political turnout in France, from 1944 to 2014. I estimate the effect of newspaper entry by comparing counties that experience entry to similar counties in the same years that do not. Both sets of counties exhibit similar trends prior to entry, but those with entry experience substantial declines in the average number of journalists. An increased number of newspapers is also associated with fewer articles and less hard news provision. Newspaper entry, and the associated decline in information provision, is ultimately found to decrease voter turnout at local elections. Exploiting the long time span covered by my data, I discuss a number of mechanisms that may drive these empirical findings. First, I examine the relationship between increased competition and media capture in the aftermath of WW2, when newspapers were biased and the advertising market was underdeveloped. I then show that in the recent period the effects are stronger in counties with more homogeneous populations, as predicted by a vertical product differentiation framework, whereas there is little impact in counties with more heterogeneous populations.
    Keywords: Media Competition; Newspaper Content; Size of the newsroom; Hard News; Soft News; Political Participation; Media Capture; Governance
    JEL: D72 L11 L13 L82
    Date: 2019–11
  10. By: Breda, Thomas (Paris School of Economics); Bryson, Alex (University College London); Forth, John (Cass Business School)
    Abstract: Using panel data for nearly all service providers in a single industry sector, we examine productivity responses to changes in competition in the United States. The sector offers workplace employee representation through trade union branches which compete with one another for union members whose subscriptions they depend on to cover costs. As such, they have an interest in maximising productivity. Ours is the first study to measure service industry productivity using both price and quantity metrics. Consistent with manufacturing studies, we find market entrants have lower prices and higher Total Factor Productivity (TFP) than incumbents. Increased competition from new entrants leads incumbents to reduce the price of union membership; exit rates then rise among incumbents with the lowest prices who are constrained in adjusting their prices downwards. Those with higher TFP have higher survival probabilities. However, increased competition does not induce incumbents to raise their TFP. These findings are consistent with a market in which incumbents learn about market conditions but face high switching costs limiting their ability to invest in the new techniques that underpin the higher TFP of new entrants.
    Keywords: competition, productivity, TFP, trade unions, survival
    JEL: J5 L1 L2 L3
    Date: 2019–11
  11. By: Kazuhiro Takauchi (Faculty of Business and Commerce,Kansai University); Tomomichi Mizuno (Graduate School of Economics, Kobe University)
    Abstract: Contrary to the standard belief, we show that a positive transport cost can maximize consumer's surplus if exporting firms engage in product R&D and use their domestic inputs.
    Date: 2019–11
  12. By: Bertrand Rioux; Axel Pierru; Nader AlKathiri (King Abdullah Petroleum Studies and Research Center)
    Abstract: Saudi Arabia plans to reform and privatize its power generation sector as part of the Kingdom’s Vision 2030. To provide analytical insights, we developed a model that simulates the restructuring of the electricity market, along with reforming fuel prices to an energy equivalent of $3/MMBtu.
    Keywords: Capacity Price, Economic Modeling, Electricity Market, Electricity Market Design, Energy Demand, Energy Price Reform, Fuel Prices, Fuel Subsidies, Power Generation, Price Manipulation, Production Capacity, Vision 2030
    Date: 2017–12–20

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