nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒12‒16
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Merger Policy in Digital Markets: An Ex-Post Assessment By Elena Argentesi; Paolo Buccirossi; Emilio Calvano; Tomaso Duso; Alessia Marrazzo; Salvatore Nava
  2. Organizational Structure and Technological Investment By Inés Macho-Stadler; Noriaki Matsushima; Ryusuke Shinohara
  3. The Surprising Hybrid Pedigree of Measures of Diversity and Economic Concentration By Paolo M. Adajar; Ernst R. Berndt; Rena M. Conti
  4. Hospital Competition Under Patient Inertia: Do Switching Costs Stimulate Quality Provision? By Luís Sá
  5. The Effect of Leniency Rule on Cartel Formation and Stability: Experiments with Open Communication By Maximilian Andres; Lisa Bruttel; Jana Friedrichsen
  6. Die Neue E.ON auf dem deutschen Strommarkt - Wettbewerbliche Auswirkungen der innogy-Übernahme By Stöhr, Annika; Budzinski, Oliver; Jasper, Jörg
  7. The Effect of Horizontal Mergers on Efficiency and Market Power: An Application to the Argentine Hamburger Market By Germán Coloma
  8. The Specialness of Zero By Joshua S. Gans
  9. The Choice of When to Buy and When To Sell By Amihai Glazer; Refael Hassin; Irit Nowik
  10. Rockets and Feathers Revisited: Asymmetric Retail Fuel Pricing in the Era of Market Transparency By Emmanuel Asane-Otoo; Bernhard Dannemann
  11. Mergers and Innovation Portfolios By José Luis Moraga-González; Evgenia Motchenkova; Saish Nevrekar
  12. Screening by Mode of Trade By Juan Beccuti; Marc Moeller
  13. Telecommunication Competition and Interconnection By Haryadi, Sigit; Riani, Westi
  14. "Compatible Mergers: Assets, Service Areas, and Market Power" By Tetsuji Okazaki; Ken Onishi; Naoki Wakamori
  15. Spillover Effects of IP Protection in the Inter-war Aircraft Industry By Walker Hanlon; Taylor Jaworski
  16. Bidding on price and quality: An experiment on the complexity of scoring auctions By Riccardo Camboni; Luca Corazzini; Stefano Galavotti; Paola Valbonesi
  17. Measuring distortions in international markets: The semiconductor value chain By OECD
  18. Pengaruh Merger Terhadap Return Saham Perusahaan Pengakuisisi Yang Terdaftar di Bursa Efek Jakarta Dengan Kinerja Keuangan Sebagai Variabel Intervening By Simbolon, Ramadona
  19. Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry By Kyle F. Herkenhoff; Gajendran Raveendranathan
  20. L’applicazione dell’unbundling contabile al settore idrico: analisi del triennio 2016 - 2018 By Mattia Falcomer
  21. Firms' Labor Market Power and Aggregate Instability By Nicolas Abad

  1. By: Elena Argentesi; Paolo Buccirossi; Emilio Calvano; Tomaso Duso; Alessia Marrazzo; Salvatore Nava
    Abstract: This paper presents a broad retrospective evaluation of mergers and merger decisions in the digital sector. We first discuss the most crucial features of digital markets such as network effects, multi-sidedness, big data, and rapid innovation that create important challenges for competition policy. We show that these features have been key determinants of the theories of harm in major merger cases in the past few years. We then analyse the characteristics of almost 300 acquisitions carried out by three major digital companies –Amazon, Facebook, and Google – between 2008 and 2018. We cluster target companies on their area of economic activity and show that they span a wide range of economic sectors. In most cases, their products and services appear to be complementary to those supplied by the acquirers. Moreover, target companies seem to be particularly young, being four-years-old or younger in nearly 60% of cases at the time of the acquisition. Finally, we examine two important merger cases, Facebook/Instagram and Google/Waze, providing a systematic assessment of the theories of harm considered by the UK competition authorities as well as evidence on the evolution of the market after the transactions were approved. We discuss whether the CAs performed complete and careful analyses to foresee the competitive consequences of the investigated mergers and whether a more effective merger control regime can be achieved within the current legal framework.
    Keywords: Digital Markets, Mergers, Network Effects, Big Data, Platforms, Ex-post, Antitrust
    JEL: L4 K21
    Date: 2019
  2. By: Inés Macho-Stadler; Noriaki Matsushima; Ryusuke Shinohara
    Abstract: We analyze firms' decisions to adopt a vertical integrated or decentralized structure taking into account the characteristics of both the final good competition and the R&D process. We consider two vertical chains, where R&D is conducted by upstream sectors. R&D investment determines the production costs of the downstream sector and has spillovers on the rivals' costs. In a general setup, we show that equilibrium organizational structure depends on whether the situation considered belongs to one of four possible cases and we study how final good market competition, spillover, and incentives in innovation interact to determine the optimal vertical structure.
    Date: 2019–11
  3. By: Paolo M. Adajar; Ernst R. Berndt; Rena M. Conti
    Abstract: Measures of economic concentration, such as the k-firm concentration index and the Hirschman-Herfindahl Index (HHI) are commonly used to ascertain the competitiveness of a product market. Within a Cournot model industry equilibrium, it is known a relationship exists between the HHI and the gap between industry price and marginal cost, but the economic theory foundations and intuition underlying the HHI formula are seemingly arbitrary. Here we document that there are indeed powerful and intuitive theoretical foundations to the HHI, but those foundations emanate from outside economics, namely, ecology, where the HHI is known as Simpson’s Diversity Index. We discuss the origins of the HHI and Simpson’s Diversity Index, summarize other measures of concentration, and link them to common measures of inequality. Based on a priori reasoning, we conclude there is little on which to base a choice between the HHI and non-HHI measures of market concentration. We empirically illustrate the implementation of the HHI and other concentration indexes as the statin drug LipitorTM lost patent protection and faced generic competition in 2012; we find very similar empirical trends and high correlations among them. Our research provides support for the continued use of HHI as a measure of concentration, provided one recognizes its link to market power is equivocal.
    JEL: B4 C43 D22 D4 I1 K21 L1 L4 L5
    Date: 2019–11
  4. By: Luís Sá (NIPE and Department of Economics, University of Minho)
    Abstract: Recent empirical evidence establishes previous use as a strong predictor of patient choice of hospital and indicates that switching costs explain a significant share of inertia in the hospital industry. In a model of competition between two semi-altruistic and horizontally differentiated hospitals with inherited demand, I investigate the effect of lower switching costs on quality provision and show that it depends on the hospitals' production technology and degree of altruism. If cost substitutability (complementarity) between quality and output is sufficiently weak (strong) relative to altruism, lower switching costs reduce quality at the high-volume hospital, average quality, and patient welfare. While milder patient preferences increase the scope for an increase in quality at both hospitals, it can only occur if hospitals are semi-altruistic. Finally, I show that the distribution of patients between hospitals matters. Even if hospital-level quality and patient welfare increase, lower switching costs may lead to lower average quality.
    Keywords: Hospital competition; quality; switching costs; patient choice; volume-outcome effects; altruism.
    JEL: I11 I18 L13 L51
    Date: 2019
  5. By: Maximilian Andres; Lisa Bruttel; Jana Friedrichsen
    Abstract: Cartels can severely harm social welfare. Competition authorities introduced leniency rules to destabilize existing cartels and hinder the formation of new ones. Empirically, it is difficult to judge the success of these measures because functioning cartels are unobservable. Existing experimental studies confirm that a leniency rule indeed reduces cartelization. We extend these studies by having a participant in the role of the competition authority actively participating in the experiment. Based on chat communication content and price setting behavior, this authority judges whether firms formed a cartel and decides on fines in real time. We find that a leniency rule does not affect cartelization in this setup.
    Keywords: Cartels, corporate leniency programs, Bertrand competition, experiments
    JEL: C92 D43 L41
    Date: 2019
  6. By: Stöhr, Annika; Budzinski, Oliver; Jasper, Jörg
    Abstract: Der Deal der beiden größten deutschen Energielieferanten RWE und E.ON zum Tausch verschiedener Geschäftseinheiten, welcher Mitte September 2019 genehmigt wurde, wird den deutschen Energiemarkt wesentlich umstrukturieren und sowohl im Bereich Erzeugung als auch im Vertrieb zu jeweils einem dominanten Wettbewerber führen. E.ON wird dabei durch die Übernahme der innogy Geschäfte im Bereich des klassischen Energievertriebs und der Ladeinfrastruktur für Elektrofahrzeuge wesentliche Wettbewerbsvorteile erhalten. Dazu zählt unter anderem der Zugang zu einer Vielzahl an Messstellen und damit Datensätzen im Bereich des Haushalts- und Geschäftskundenvertriebs. Die Auswertung und Nutzung dieser Datensätze eröffnet dem zusammengeschlossenen Unternehmen neue Geschäftsfelder, aber auch Möglichkeiten die dominante Stellung auf dem Markt zu missbrauchen. Dieser Beitrag widmet sich den potenziellen Auswirkungen der innogy-Übernahme durch E.ON in den Bereichen klassischer Vertrieb und E-Mobilität, in welchen die angesprochenen Aspekte der Datenökonomik eine wesentliche Rolle spielen. Des Weiteren werden die Auswirkungen der Marktumstrukturierung auf den Konzessionsmarkt betrachtet und die politökonomische Dimension des Zusammenschlusses erläutert. Wir schließen mit einer Kurzanalyse der Erlaubnisentscheidung und der damit verbundenen Auflagen und kommen zu dem Schluss, dass diese nicht geeignet sind, die erheblichen anti-kompetitiven Auswirkungen des Zusammenschlusses einzudämmen oder zu verhindern.
    Keywords: Wettbewerbspolitik,Fusionskontrolle,Energieökonomik,Datenökonomik,Preisdiskriminierung,Industrieökonomik,competition policy,merger control,energy economics,data economics,price discrimination,industrial economics
    JEL: Q40 Q41 Q48 K21 K23 K32 L41 L42 L43
    Date: 2019
  7. By: Germán Coloma
    Abstract: This paper analyzes the behavior of the Argentine hamburger market during the period 2013-2018, to see if an important merger that occurred by the end of 2015 (the BRF/MRP merger) had any discernable market-power or efficiency effects. To do this, we run an econometric demand-and-supply model, and we find that there is an appreciable cost reduction that more than counterbalances the price increases induced by the merger. This implies that total consumers’ surplus may have grown as a consequence of the merger.
    Keywords: Merger, hamburger, Argentina, market power, efficiency
    JEL: C32 L13 L41 L66
    Date: 2019–12
  8. By: Joshua S. Gans
    Abstract: A model is provided whereby a monopolist firm chooses to price its product at zero. This outcome is shown to be driven by the assumption of ‘free disposal’ alongside selection markets (where prices impact on a firm’s costs). Free disposal creates a mass point of consumers whose utility from the product is zero. When costs are negative, the paper shows that a zero price equilibrium can emerge. The paper shows that this outcome can be socially optimal and that, while a move from monopoly to competition can result in a negative price equilibrium, this can be welfare reducing. The conclusion is that zero can be a ‘special zone’ with respect to policy analysis such as in antitrust.
    JEL: L11 L41
    Date: 2019–11
  9. By: Amihai Glazer; Refael Hassin; Irit Nowik
    Abstract: A consumer who wants to consume a good at a particular period may nevertheless attempt to buy it earlier if he is concerned that the good will otherwise be sold. We analyze the behavior of consumers in equilibrium and the price a profit-maximizing firm would charge. We show that a firm profits by not selling early. If, however, the firm is obligated to also offer the good early, then the firm may maximize profits by setting a price which induces consumers to all arrive early, or all arrive late, depending on the good's value to the customer.
    Date: 2019–12
  10. By: Emmanuel Asane-Otoo (University of Oldenburg, Department of Economics); Bernhard Dannemann (University of Oldenburg, Department of Economics)
    Abstract: In this paper, we revisit the empirical observation that prices rise like rockets when input costs increase but fall like feathers when input costs decrease. The analysis draws on a novel dataset that include daily retail prices of gasoline and diesel from virtually all fuel stations in Germany over the period from January 1, 2014 to December 31, 2018. Our findings from the national, state-specific and station-level analyses based on an asymmetric error correction model indicate that asymmetric pricing is the norm rather than exception. Specifically, we find empirical evidence that points to a pervasive rockets-and-feathers pattern. We also find that asymmetric pricing in the German retail fuel market might partly be the consequence of tacit collusion among competitors as well as disparate search intensity on the part of consumers. We further show that temporal aggregation of station-level price data might lead to inaccurate inferences and could account for the contradictory findings in the extant literature.
    Keywords: Asymmetric Pricing, Market Transparancy, Search Intensity, Tacit Collusion
    Date: 2019–10
  11. By: José Luis Moraga-González (Vrije Universiteit Amsterdam); Evgenia Motchenkova (Vrije Universiteit Amsterdam); Saish Nevrekar (Universidad Carlos III de Madrid)
    Abstract: This paper studies mergers in markets where firms invest in a portfolio of research projects of different profitability and social value. The portfolio nature of the investment problem brings about novel insights on the external effects of firms’ investments. The investment of a firm in one project imposes a negative business-stealing externality on the rival firms because it lowers the probability they win the innovation contest for that project; however, the investment of a firm in one project also exerts a positive business-giving externality on the rival firms because it increases the likelihood they win the contest for the alternative project.
    Keywords: innovation portfolios, R&D contests, mergers
    JEL: O32 L13 L22 O31
    Date: 2019–12–08
  12. By: Juan Beccuti; Marc Moeller
    Abstract: This paper proposes a mechanism design approach, capable of endogenizing a monopolist’s choice between selling and renting in a non-anonymous durable goods setting with short-term commitment. Allowing for mechanisms that determine the good’s allocation not only at the beginning but also at the end of a given period, we show that the profit-maximizing mechanism features screening by mode of trade. By selling to high types while renting to low types, the monopolist overcomes the obstacles encountered by intertemporal price discrimination and induces immediate separation of types for arbitrary low priors.
    Keywords: Durable goods; Dynamic mechanism design; Coase problem; Ratchet effect; Screening
    JEL: D82 D86 D42
    Date: 2019–11
  13. By: Haryadi, Sigit (Institut Teknologi Bandung); Riani, Westi
    Abstract: This paper describes the theory and practice of interconnection and competition in the field of Telecommunications. In detail, the chapter on competition will promote the Haryadi Index to replace the Herfindahl-Hirschman Index, and on the description of the interconnection described the advantages and disadvantages of the Interconnection method compared to the Net Neutrality Law.
    Date: 2018–03–12
  14. By: Tetsuji Okazaki (The University of Tokyo); Ken Onishi (Federal Reserve Board); Naoki Wakamori (The University of Tokyo)
    Abstract: This paper empirically examines the discrepancy between the incentive of firms to merge and the social value of mergers using detailed data on merger waves in the pre-WWII Japanese electricity industry when a competition authority did not yet exist. We find that firms could enjoy cost synergies when merging with firms with greater differences in production asset composition and/or reachable customers. Such mergers resulted in increases in capital utilization and total output. However, the sources of these cost synergies did not affect the merger decision of firms; instead, geographical proximity increased the likelihood of mergers. These results imply that the merger incentive may not align with social welfare and thus policy intervention to allow selective mergers for particular combinations of firms may help increase social welfare.
    Date: 2019–12
  15. By: Walker Hanlon; Taylor Jaworski
    Abstract: Can granting IP protection to producers of one good affect the innovation rate in other related goods? To answer this question we exploit a unique policy experiment in the inter-war military aircraft industry. Airframe designs had little IP protection before 1926, but changes passed by Congress in 1926 provided airframe manufacturers with enhanced property rights over the new designs they produced. We show that granting property rights to airframe producers increased innovation in airframes, but slowed down innovation in aero-engines, a complementary good where there was no change in the availability of IP protection. We propose and test a simple theory that explains these patterns.
    JEL: N72 O34
    Date: 2019–11
  16. By: Riccardo Camboni (DSEA, University of Padova); Luca Corazzini (Department of Economics, University of Venice "Ca' Foscari"); Stefano Galavotti (DEMDI, University of Bari); Paola Valbonesi (DSEA, University of Padova and HSE-NRU, Moscow)
    Abstract: We run an experiment on procurement auctions in a setting where both quality and price matter. We compare two unidimensional treatments in which the buyer fixes one dimension (quality or price) and sellers compete on the other, with three bidimensional treatments (with different strategy spaces) in which sellers submit a price-quality bid and the winner is determined by a score that linearly combines the two offers. We find that, with respect to the theoretical predictions, the bidimensional treatments significantly underperform, both in terms of efficiency and buyer's utility. We attribute this result to the higher strategic complexity of these treatments and test this intuition by fitting a structural Quantal Response Equilibrium model with risk aversion to our experimental data. We find very similar estimates for the risk aversion parameter across all treatments; instead, the error parameter, which captures deviations between the observed bids and the payoff-maximizing ones, is larger in the bidimensional treatments than in the unidimensional ones. Our evidence suggests that increasing the dimensionality and the size of the suppliers' strategy space increases their tendency to make suboptimal offers, thus undermining the theoretical superiority of more complex mechanisms.
    Keywords: scoring auctions, multidimensional auctions, complexity, bidding behaviour, Quantal Response Equilibrium
    JEL: D44 H11 H57
    Date: 2019–12
  17. By: OECD
    Abstract: This report builds on the OECD’s longstanding work measuring government support in agriculture, fossil fuels, fisheries, and more recently in the aluminium value chain in order to estimate producer support and related market distortions in the semiconductor value chain. Results for 21 large firms operating across the semiconductor value chain indicate that total government support has exceeded USD 50 billion over the period 2014-18. Government support provided in the form of below-market debt and equity appears to be particularly large in the context of the semiconductor industry and concentrated in one jurisdiction. Other types of support identified include support for R&D and investment incentives, which benefitted all firms studied in this report. The report also discusses the implications that these findings have for trade rules, and in particular for subsidy disciplines in a context of growing government involvement in semiconductor production and poor transparency of support measures.
    Keywords: government support, market distortions, R&D policy, semiconductors, subsidies, trade
    JEL: F23 G32 H25 H81 L33 L63
    Date: 2019–12–12
  18. By: Simbolon, Ramadona
    Abstract: Penelitian ini bertujuan untuk menguji secara empiris pengaruh merger terhadap return saham dan menguji pengaruh merger terhadap return saham perusahaan pengakuisisi dengan kinerja keuangan sebagai variabel intervening. Pengujian hipotesis diuji dengan menggunakan derajat signifikan 5%. Populasi terdiri dari 334 perusahaan yang terdaftar di Bursa Efek Indonesia. Metode pengambilan sampel menggunakan purpossive sampling. Jumlah sampel dalam penelitian ini adalah sebanyak 34 perusahaan dengan periode pengamatan 6 (enam) tahun yaitu periode 2000-2006. Pengujian hipotesis dilakukan dengan menggunakan analisis jalur dan uji t. Hasil penelitian menunjukkan bahwa merger berpengaruh terhadap return saham perusahaan pengakuisisi yang berarti merger berpengaruh langsung terhadap return saham perusahaan pengakuisisi. Dengan demikian hipotesis yang menyatakan bahwa merger berpengaruh terhadap return saham didukung secara empiris atau diterima. Hasil penelitian juga menunjukkan bahwa merger tidak berpengaruh terhadap return saham dengan kinerja keuangan sebagai variabel intervening. Dengan demikian hipotesis yang menyatakan bahwa merger berpengaruh terhadap return saham perusahaan pengakuisisi melalui kinerja keuangan sebagai variabel intervening tidak didukung secara empiris atau ditolak.
    Date: 2018–03–29
  19. By: Kyle F. Herkenhoff; Gajendran Raveendranathan
    Abstract: How are the welfare costs from monopoly distributed across U.S. households? We answer this question for the U.S. credit card industry, which is highly concentrated, charges interest rates that are 3.4 to 8.8 percentage points above perfectly competitive pricing, and has repeatedly lost antitrust lawsuits. We depart from existing competitive models by integrating oligopolistic lenders into a heterogeneous agent, defaultable debt framework. Our model accounts for 20 to 50 percent of the spreads observed in the data. Welfare gains from competitive reforms in the 1970s are equivalent to a one-time transfer worth between 0.24 and 1.66 percent of GDP. Along the transition path, 93 percent of individuals are better off. Poor households benefit from increased consumption smoothing, while rich households benefit from higher general equilibrium interest rates on savings. Transitioning from 1970 to 2016 levels of competition yields welfare gains equivalent to a one-time transfer worth between 1.87 and 3.20 percent of GDP. Lastly, homogeneous interest rate caps in 2016 deliver limited welfare gains.
    Keywords: Welfare costs of monopoly; consumer credit; competition; welfare
    JEL: D14 D43 D60 E21 E44 G21
    Date: 2019–12
  20. By: Mattia Falcomer (Dipartimento di Management, Università Ca' Foscari Venezia)
    Abstract: A partire dall’esercizio 2016 i gestori del servizio idrico integrato sono stati chiamati alla predisposizione e all’invio dei Conti Annuali Separati, in applicazione dei criteri di separazione contabile introdotti da ARERA con la deliberazione 137/2016/R/com. I dati raccolti permettono all’Autorità di Regolazione di elaborare i costi standard, misurare l’efficienza operativa, analisi di benchmark e di redditività tra i vari operatori del settore.
    Keywords: unbundling, idrico, ARERA
    Date: 2019–11
  21. By: Nicolas Abad (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université, UNIROUEN - Université de Rouen Normandie - NU - Normandie Université)
    Abstract: This work proposes to study the emergence of aggregate instability, in the form of macroeconomic fluctuations due to the volatility of agents' expectations, caused by imperfect competition on the labor market. We consider that firms have some monopsony power which is introduced by a) considering that firms face a finite elasticity of labor supply, b) there is a finite number of firms operating under Cournot competition on the labor market. We show that given a free-entry and zero profit conditions, we obtain local indeterminacy when the elasticity of the sectoral labor supply is sufficiently low and factors are substitutable enough. We illustrate numerically our results with some empirical estimates for OECD countries and we conclude that expectation-driven fluctuations is obtained for plausible values.
    Keywords: Monopsony power,local indeterminacy,expectation-driven business cycles
    Date: 2019–10–23

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