nep-com New Economics Papers
on Industrial Competition
Issue of 2019‒12‒23
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Competitive Imperfect Price Discrimination and Market Power By Paul Belleflamme; Wing Man Wynne Lam; Wouter Vergote
  2. Communication and Market Sharing: An Experiment on the Exchange of Soft and Hard Information By Freitag, Andreas; Roux, Catherine; Thöni, Christian
  3. Third-degree Price Discrimination Versus Uniform Pricing By Dirk Bergemann; Francisco Castro; Gabriel Weintraub
  4. Overlapping Ownership, Endogenous Quality,and Welfare By Duarte Brito; Ricardo Ribeiro; Helder Vasconcelos
  5. The Curse of Knowledge: Having Access to Customer Information Can be Detrimental to Monopoly’s Profit By Laussel, Didier; Long, Ngo Van; Resende, Joana
  6. A general model of price competition with soft capacity constraints By Marie-Laure Cabon-Dhersin; Nicolas Drouhin
  7. Does Electrification Cause Industrial Development? Grid Expansion and Firm Turnover in Indonesia By Dana Kassem
  8. Vertically Differentiated Cournot Oligopoly: Effects of Market Expansion and Trade Liberalization on Relative Markup and Product Quality By Ngo Van Long; Zhuang Miao
  9. When does it pay off to participate in markets for technology? By Adrián Kovács
  10. The Impact of E-Commerce on Relative Prices and Consumer Welfare By Yoon J. Jo; Misaki Matsumura; David E. Weinstein
  11. Free Entry under Common Ownership By Sato, Susumu; Matsumura, Toshihiro
  12. Maximizing Strategic Alliances in the Multi-Sided Platform Firms By Santoso, Adhi Setyo
  13. An alternative to natural monopoly By Oriol Carbonell-Nicolau
  14. Studying the banking industrys stability trought market concentration indices By Pushkareva, Lyudmila; Kuzmin, Evgeny Anatol'evich; Chunikhin, Sergey
  15. Multimarket Contact in Banking Competition in The United States By David Coble
  16. Medicare Part D’s Effect on Evergreening, Generics, and Drug Prices By Geoffrey T. Sanzenbacher; Gal Wettstein
  17. Common ownership and market entry: Evidence from the pharmaceutical industry By Melissa Newham; Jo Seldeslachts; Albert Banal-Estanol
  18. Cost Pass-through in the British Wholesale Electricity Market: Implications of Brexit and the ETS reform By Guo, B.; Castagneto Gissey, G.
  19. Durables and Lemons: Private Information and the Market for Cars By Hamish Low; Richard Blundell; Ran Gu; Soren Leth-Petersen; Costas Meghir
  20. Compétitivité du secteur agroalimentaire à l’heure du commerce électronique By JoAnne Labrecque; Maurice Doyon; Raymond Dupuis; Geneviève Dufour
  21. Asymmetric Double Pareto Distributions: Maximum Likelihood Estimation with Application to the Growth Rate Distribution of Firms. By Halvarsson, Daniel

  1. By: Paul Belleflamme; Wing Man Wynne Lam; Wouter Vergote
    Abstract: Two duopolists compete in price on the market for a homogeneous product. They can ‘profile’ consumers, i.e., identify their valuations with some probability. If both firms can profile consumers but with different abilities, then they achieve positive expected profits at equilibrium. This provides a rationale for firms to (partially and unequally) share data about consumers, or for data brokers to sell different customer analytics to competing firms. Consumers prefer that both firms profile exactly the same set of consumers, or that only one firm profiles consumers, as this entails marginal cost pricing (so does a policy requiring list prices to be public). Otherwise, more protective privacy regulations have ambiguous effects on consumer surplus.
    Keywords: price discrimination, price dispersion, Bertrand competition, privacy, big data
    JEL: D11 D18 L12 L86
    Date: 2019
  2. By: Freitag, Andreas (University of Basel); Roux, Catherine (University of Basel); Thöni, Christian
    Abstract: We study the role of communication in collusive market sharing. In a series of Cournot oligopoly experiments with multiple markets and repeated interaction, we vary the types of information that firms can exchange. We distinguish between hard information-verifiable information about past conduct-and soft information- unbinding information about future conduct. We find that the effect of communication on the firms' ability to collude depends on the type of information available: market prices increase only slightly when hard information allows perfect monitoring of rivals' past actions, but the price raise due to soft information, however, is substantial. The explicit consent of each cartel member to a common collusive strategy, even if stated only once, drives this strong effect. Our results point to the types and contents of communication that should be of particular concern to antitrust authorities.
    Keywords: Collusion ; market sharing ; cournot oligopoly ; information; Cmmunication, experiments
    JEL: C91 L13 L41
    Date: 2019–11–29
  3. By: Dirk Bergemann (Cowles Foundation, Yale University); Francisco Castro (Anderson School of Management, UCLA); Gabriel Weintraub (Graduate School of Business, Stanford University)
    Abstract: We compare the revenue of the optimal third-degree price discrimination policy against a uniform pricing policy. A uniform pricing policy offers the same price to all segments of the market. Our main result establishes that for a broad class of third-degree price discrimination problems with concave revenue functions and common support, a uniform price is guaranteed to achieve one half of the optimal monopoly proï¬ ts. This revenue bound obtains for any arbitrary number of segments and prices that the seller would use in case he would engage in third-degree price discrimination. We further establish that these conditions are tight, and that a weakening of common support or concavity leads to arbitrarily poor revenue comparisons.
    Keywords: First Degree Price Discrimination, Third Degree Price Discrimination, Uniform Price, Approximation, Concave Demand Function, Market Segmentation
    JEL: C72 D82 D83
    Date: 2019–12
  4. By: Duarte Brito (Universidade Nova de Lisboa, Faculdade de Ciências e Tecnologia and CEFAGE); Ricardo Ribeiro (Universidade Católica Portuguesa, Católica Porto Business School and CEGE); Helder Vasconcelos (Universidade do Porto, Faculdade de Economia and CEF.UP)
    Abstract: This paper investigates how overlapping ownership affects quality levels, consumer surplus, firms' profits and welfare when the industry is a vertically differentiated duopoly and quality choice is endogenous. This issue is particularly relevant since recent empirical evidence suggests that overlapping ownership constitutes an important feature of a multitude of vertically differentiated industries. We show that overlapping ownership while detrimental for welfare, may increase or decrease the quality gap, consumer surplus and firms' profits. In particular, when the overlapping ownership structure is such that the high quality firm places a positive weight on the low quality firm's profits, the incentives of the high quality firm to compete aggressively reduce. This may increase the equilibrium quality of the low quality firm, which in turn may lead to higher consumer surplus, despite higher prices.
    Keywords: Overlapping Ownership, Vertical Di¤erentiation.
    JEL: L13 L41
    Date: 2019–12
  5. By: Laussel, Didier; Long, Ngo Van; Resende, Joana
    Abstract: We show that a monopolist's profit is higher if he refrains from collecting coarse information on his customers, sticking to constant uniform pricing rather than recognizing customers' segments through their purchase history. In the Markov-perfect equilibrium with coarse information collection, after each commitment period, a new introductory price is offered to attract new customers, creating a new market segment for price discrimination. Eventually, the whole market is covered. Shortening the commitment period results in lower profits. These results sharply differ from the ones obtained when the firm can uncover the exact willingness-to-pay of each previous customer.
    Keywords: curse of knowledge, customers information, intertemporal price discrimination, Coase conjecture, price personalization
    JEL: L12 L15
    Date: 2019–12
  6. By: Marie-Laure Cabon-Dhersin (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); Nicolas Drouhin (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We propose a general model of oligopoly with firms relying on a two factor production function. In a first stage, firms choose a certain fixed factor level (capacity). In the second stage, firms compete on price, and adjust the variable factor to satisfy all the demand. When the factors are substitutable, the capacity constraint is " soft " , implying a convex cost function in the second stage. We show that there is a unique equilibrium prediction in pure strategies, whatever the returns to scale, characterized by a price that increases with the number of firms up to a threshold. The main propositions are established under the general assumption that the production function is quasi-concave but the paper provides a general methodology allowing the model to be solved numerically for special parametrical forms.
    Keywords: limit pricing strategy,capacity con- straint,price competition,tacit collusion,convex cost,returns to scale,capacity con-straint
    Date: 2019
  7. By: Dana Kassem
    Abstract: I ask whether electrification causes industrial development. I combine newly digitized data from the Indonesian state electricity company with rich manufacturing census data. To understand when and how electrification can cause industrial development, I shed light on an important economic mechanism - firm turnover. In particular, I study the effect of the extensive margin of electrification (grid expansion) on the extensive margin of industrial development (firm entry and exit). To deal with endogenous grid placement, I build a hypothetical electric transmission grid based on colonial incumbent infrastructure and geographic cost factors. I find that electrification causes industrial development, represented by an increase in the number of manufacturing firms, manufacturing workers, and manufacturing output. Electrification increases firm entry rates, but also exit rates. Empirical tests show that electrification creates new industrial activity, as opposed to only reorganizing industrial activity across space. Higher turnover rates lead to higher average productivity and induce reallocation towards more productive firms in electrified areas. This is consistent with electrification lowering entry costs, increasing competition and forcing unproductive firms to exit more often. Without the possibility of entry or competitive effects of entry, the effects of electrification are likely to be smaller.
    JEL: D24 L60 O13 O14 Q41
    Date: 2019–07
  8. By: Ngo Van Long; Zhuang Miao
    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.
    JEL: L1 L2 F15
    Date: 2019–12–13
  9. By: Adrián Kovács
    Abstract: This paper examines the contribution of different technology acquisition strategies to the market value of firms. I exploit a large consolidated dataset on publicly listed US-firms to distinguish between the contributions of patented inventions that these firms acquired via acquisitions of other firms – embodied technology acquisition – and via the outright purchase of standalone technology – disembodied technology acquisition. I develop hypotheses relating firms ability to benefit from both strategies to the size of their internal knowledge stock and their degree of familiarity with the acquired technology. In line with my predictions, I find a positive contribution of embodied technology acquisition on market value, which increases with the size of firms’ internal knowledge stock as well as their familiarity with the acquired technology. Contrary to my predictions, I find a negative contribution of disembodied technology acquisition, except for firms having the largest internal knowledge stocks in my sample. Interestingly, my results reveal that firms are most likely to benefit from the acquisition of familiar technology via the embodied mode whilst at the same time indicating that the negative association between market value and the acquisition of standalone technology is most pronounced when this technology is novel to the acquiring firm. Overall, my findings suggest that the benefits associated with acquiring technology from external sources are only realized when firms possess a minimum degree of absorptive capacity, with the minimum needed to benefit from technology acquisition being significantly higher for technology acquired via the disembodied mode.
    Keywords: Markets for Technology, Patent Assignments, Mergers and Acquisitions, Market Value
    Date: 2019–06–17
  10. By: Yoon J. Jo; Misaki Matsumura; David E. Weinstein
    Abstract: This paper examines the impact of e-commerce on pricing behavior and welfare. Using Japanese data, we find that the entry of e-commerce firms significantly raised the rate of intercity price convergence for goods sold intensively online, but not for other goods. E-commerce also lowered relative inflation rates for goods sold intensively online. We overcome data challenges using long data series and historical catalog sales as an instrument for e-commerce sales intensity. We estimate that reductions in price dispersion raised welfare by 0.3 percent. E-commerce also lowered variety-adjusted prices on average by 0.9 percent, and more in cities with highly educated populations.
    JEL: F14 L86 R32
    Date: 2019–11
  11. By: Sato, Susumu; Matsumura, Toshihiro
    Abstract: This study investigates the equilibrium and welfare properties of free entry under common ownership. We formulate a model in which incumbents under common ownership choose whether to enter a new market. We find that an increase in common ownership reduces entries, which may or may not improve welfare. Welfare has an inverted-U shaped relationship with the degree of common ownership. However, if firms do not have common ownership before the entry, after entry common ownership harms welfare.
    Keywords: Overlapping ownership; Free entry, Insufficient entry, Excessive entry, Circular markets
    JEL: L13 L22
    Date: 2019–12–11
  12. By: Santoso, Adhi Setyo
    Abstract: The growth of multi-sided platform (MSP) firms, especially those with high Internet utilization such as Uber, Tokopedia, Go-Jek as well as other sharing economy firms, started to catch the attention of strategic management scholars. Since multi-sided platforms have more than one distinct user side with various role in the business ecosystem, the strategic alliances between the MSP and its platform members may play a significant role in increasing the user base as well as the value of the platform itself. However, there are still few researches that discuss the strategic alliances within the MSP. For this reason, this conceptual article aims at mapping the strategic alliances literature relevant to the MSP context through in-depth literature review. Two case analyses from high growth MSP firms in Indonesia are presented to explain this phenomenon.
    Date: 2018–01–31
  13. By: Oriol Carbonell-Nicolau (Rutgers University)
    Abstract: We consider a shared ownership arrangement among consumers/owners as a means to organize production with an underlying decreasing average cost function typical of natural monopolies. The resulting output allocation yields a lower deadweight loss than the monopoly allocation, and is, in some cases, efficient.
    Keywords: natural monopoly, deaweight loss from monopoly, decreasing average costs
    JEL: L12 L13
    Date: 2019–12–15
  14. By: Pushkareva, Lyudmila; Kuzmin, Evgeny Anatol'evich; Chunikhin, Sergey
    Abstract: The optimal market structure is one of the fundamental issues of economic theory. At that, companies’ efficiency in the market is associated with resource availability as a whole and finance resources, in particular. The structure of the banking market in terms of commercial loans determines a number of parameters of the economic system, such as its stability, growth potential, entrepreneurial activity, the state of commodity markets, the competitiveness of companies, etc. A comparative analysis of countries in terms of the ratio of commercial loans to GDP allows us to identify promising markets and strategic avenues for the development of the global banking industry and investment policy. However, a lack of regular and timely statistical reviews often impedes the identification. With the view to performing a comparative analysis for the EA/ЕU macroregion, the authors attempt to establish the types of the banking market in Russia based on a fuzzy rank approach using the probability theory. Using the data for 2009–2018, the authors assess bank concentration in Russia by a number of indicators. During the period under review, the volume of commercial banking lending in Russia experienced a steady increase. At the same time, there is a clear downward trend in the number of banks; several local “breakdowns” happen once every two years, i.e. the compression rate is reducing. Within the framework of the accepted gradation, the values of concentration indices taken separately do not allow arriving at a firm conclusion, since they indicate contradictory statuses of the sectoral market type. The integrated approach proposed in the paper helped find that, despite a relatively large number of participants in the Russian banking market, it should be primarily identified with a monopoly. At that, the values of the Herfindahl-Hirschman Index (HHI) and standard concentration fall within the oligopoly boundaries. This indicates the fuzzy nature of the sectoral market. The empirical results obtained are of use when analyzing competition, developing antimonopoly regulation measures, adjusting the banking sector development strategy and investment policy.
    Keywords: sectoral concentration; competition; stability; banking industry; commercial lending; economic growth; Russia; EA/ЕU macroregion
    JEL: D40 G21 M20
    Date: 2019
  15. By: David Coble
    Abstract: In this paper, I present a structural discrete-choice model for deposit services. This model produces estimates of different supply functions at the MSA and bank levels. Combining this information with detailed cost data per bank at the national level, I trace the degree of competition in the banking system and perform compensatory analysis. I derive and estimate the model under three different assumptions: Nash-Bertrand competition, perfect collusion, and partially collusive equilibrium. The findings show that multimarket contacts in the US banking system lead to highly competitive behavior. Also, I measure the variation in consumer welfare as if there was a Nash-Bertrand competition vis-à-vis the identified market equilibrium. I show this change to be between 1.5 to 3.8 cents per dollar deposited, which is equivalent to an increase in (stock) welfare of about 0.65 percent points of a one year US GDP.
    Date: 2019–11
  16. By: Geoffrey T. Sanzenbacher; Gal Wettstein
    Abstract: The launch of Medicare Part D in 2006 expanded prescription drug coverage to all seniors. Its obvious effect has been to improve the well-being of those who gained coverage by reducing their exposure to drug costs. But the law has also boosted demand for drugs and given insurers who provide Part D coverage more leverage over drug manufacturers. Both of these changes could give manufacturers of brand-name drugs an extra incentive to protect their monopoly status, with unforeseen impacts on the generic drug market and, ultimately, on prices. This brief, based on a new study, explores these impacts by first looking at whether Part D made manufacturers more likely to make small changes to their drugs to maintain monopoly power – a practice known as “evergreening.” The analysis then assesses any impacts of Part D on generic entry and, ultimately, drug prices. The brief proceeds as follows. The first section provides background on Part D and evergreening, and discusses how they could affect generic entry and drug prices. The second section describes the data. The third section looks at trends in the drug market before and after Medicare Part D was enacted. The fourth section presents the main results on the effect of Part D on evergreening, generic entry, and prices. The final section concludes that, while Part D increased evergreening and decreased generic entry, drug prices overall were lower than they would have been without Part D, likely as a result of the increased insurer bargaining power. Still, since the results also show that evergreened drugs saw price increases relative to other drugs, policymakers may want to consider the costs and benefits of regulating this behavior.
    Date: 2019–09
  17. By: Melissa Newham; Jo Seldeslachts; Albert Banal-Estanol
    Abstract: Common ownership - where two rms are at least partially owned by the same investor - and its impact on product market outcomes has recently drawn a lot of attention from scholars and practitioners alike. Theoretical and empirical research suggests that common ownership can lead to higher prices. This paper focuses on implications for market entry. To estimate the e ect of common ownership on entry decisions, we focus on the pharmaceutical industry. In particular, we consider the entry decisions of generic pharmaceutical rms into drug markets opened up by the end of regulatory protection in the US. We rst provide a theoretical framework that shows that a higher level of common ownership between the brand rm (incumbent) and potential generic entrant reduces the generic's incentives to entry. We provide robust evidence for this prediction. The e ect is large: a one-standard-deviation increase in common ownership decreases the probability of generic entry by 9-13%. We extend our basic theoretical framework and allow for multiple entrants. Our model shows that for su ciently high levels of common ownership, the classical idea of entry decisions being strategic substitutes can be reversed into being strategic complements. Our empirical results provide some support for these predictions.
    Keywords: Market Entry, Ownership Structure, Pharma
    Date: 2018–05–31
  18. By: Guo, B.; Castagneto Gissey, G.
    Abstract: This Cost pass-through rates give a useful perspective of market competition. This paper studies how generation costs are passed through to electricity wholesale prices in Great Britain, both theoretically and empirically, between 2015 and 2018. Our empirical results fail to reject the null of 100% pass-through rates for gas prices, carbon prices, and exchange rates, indicating a competitive GB wholesale electricity market. We observe higher pass-through rates in peak compared to off-peak periods, and argue this results from generators bidding at a lower rate during off-peak periods and supplying at minimum load to avoid the cost of shutting down and starting up. We extend the analysis by assessing generators’ bidding behaviour. The study also considers how two key events occurred during the examined period – the 2016 Brexit referendum, and major reformation of the EU Emission Trading System – have affected electricity costs to a typical domestic household, showing they have increased average annual bills by £41 p.a., constituting a 7% rise.
    Keywords: Electricity market, Cost pass-through, Competition, Carbon price, VECM
    JEL: L13 Q48 D41 H23 C32
    Date: 2019–12–05
  19. By: Hamish Low; Richard Blundell; Ran Gu; Soren Leth-Petersen; Costas Meghir
    Abstract: We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and second-hand cars over their life-cycle. Private information induces a transaction cost and distorts the market reducing the value of a car as a savings instrument. We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.
    Keywords: Lemons penalty, car market, estimated life-cycle equilibrium model
    JEL: D82 E21
    Date: 2019–12–06
  20. By: JoAnne Labrecque; Maurice Doyon; Raymond Dupuis; Geneviève Dufour
    Abstract: L’introduction et la pénétration des appareils mobiles à la fin de la première décennie des années 2000 ont agi comme un élément déclencheur d’une révolution attendue du secteur du commerce de détail. La part des ventes en ligne américaines sur l’ensemble des ventes au détail atteignait près de 10 % (9,8 %) en 2018 et devrait s’élever à 15,1 % en 2022. Les ventes en ligne canadiennes suivent une progression semblable. Elles totalisaient 9,2 % des ventes au détail en 2018 et devraient se hisser à 15,3 % en 2022. La progression des ventes en ligne de produits alimentaires affiche un décalage en comparaison au portrait de l’ensemble du secteur commerce de détail. Les ventes en ligne américaines de produits alimentaires et d’alcool capturaient 1,8 % des achats alimentaires en 2018 et devraient croître à 4,4 % en 2020. Puisque le marché canadien suit les tendances américaines, cette croissance de la part des achats alimentaires effectués en ligne accélérera les changements dans les pratiques courantes des acteurs des secteurs bioalimentaire et de la distribution. Ce rapport analyse les enjeux qui découlent de cette transformation pour les acteurs de cette chaîne de valeur, notamment les manufacturiers agroalimentaires.
    Keywords: , distribution alimentaire,commerce électronique,achats alimentaires en ligne,compétitivité secteur agroalimentaire,ventes en ligne d’épicerie,plateformes électroniques,manufacturiers alimentaires
    Date: 2019–12–10
  21. By: Halvarsson, Daniel (The Ratio Institute)
    Abstract: This paper considers a flexible class of asymmetric double Pareto distributions (ADP) that allows for skewness and asymmetric heavy tails. The inference problem is examined for maximum likelihood. Consistency is proven for the general case when all parameters are unknown. After deriving the Fisher information matrix, asymptotic normality and efficiency are established for a restricted model with the location parameter known. The asymptotic properties of the estimators are then examined using Monte Carlo simulations. To assess its goodness of fit, the ADP is applied to companies’ growth rates, for which it is unequivocally favored over competing models
    Keywords: Distribution Theory; Double Pareto Distribution; Maximum Likelihood; Firm Growth
    JEL: C16 C46
    Date: 2019–12–18

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