nep-com New Economics Papers
on Industrial Competition
Issue of 2020‒01‒06
thirteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Cartel Formation with Quality Differentiation By Bos, Iwan; Marini, Marco A.; Saulle, Riccardo
  2. Collusion through market sharing agreements: Evidence from Quebec's road paving market By de Leverano, Adriano
  3. Modeling market power on a constrained electricity network By Dahlke, Steven
  4. Quality Selection in Two-Sided Markets: A Constrained Price Discrimination Approach By Ramesh Johari; Bar Light; Gabriel Weintraub
  5. The impact of pharmaceutical tendering on prices and market concentration in South Africa over a 14-year period By Wouters, Olivier J.; Sandberg, Dale M.; Pillay, Anban; Kanavos, Panos G.
  6. Prices versus Auctions in Large Markets By Zhang, Hanzhe
  7. How disruptive are disruptive operators? By Pierre Vialle; Jason Whalley; Xavier Parisot
  8. Compatible Mergers: Assets, ServiceAreas, and Market Power By Tetsuji OKAZAKI; Ken ONISHI; Naoki WAKAMORI
  9. Endogenous Quality and Firm Entry By Rui Faustino
  10. Technology Adoption in Input-Output Networks By Xingtong Han; Lei Xu
  11. A discrete choice model for partially ordered alternatives By Eleni Aristodemou; Adam Rosen
  12. Public Goods Provision by a Private Cartel By Maarten Pieter Schinkel; Lukas Toth
  13. The ignorant monopolist redux By Roger Koenker

  1. By: Bos, Iwan; Marini, Marco A.; Saulle, Riccardo
    Abstract: Research on collusion in vertically differentiated markets is conducted under one or two potentially restrictive assumptions. Either there is a single industry-wide cartel or costs are assumed to be independent of quality or quantity. We explore the extent to which these assumptions are indeed restrictive by relaxing both. For a wide range of coalition structures, profit-maximizing cartels of any size price most of their lower quality products out of the market as long as production costs do not increase too much with quality. If these costs rise sufficiently, however, then market share is maintained for all product variants. All cartel sizes may emerge in equilibrium when exclusively considering individual deviations, but the industry-wide cartel is the only one immune to deviations by coalitions of members. Overall, our findings suggest that firms have a strong incentive to coordinate prices when the products involved are vertically differentiated.
    Keywords: Cartel Formation, Collusion, Vertical Differentiation, Endogenous Coalition Formation, Industry-wide Cartel, Partial Cartels.
    JEL: C70 C71 C72 D0 D01 D02 D04 D4 D42 D43
    Date: 2019–12–23
  2. By: de Leverano, Adriano
    Abstract: I study a case of market sharing agreements to provide evidence of coordination between colluding firms on the degree to which they compete against each other (henceforth referred to as head-to-head competition) and their bidding behavior. I also quantify the impact that coordinating head-to-head competition has on procurement costs. My focus is on the two largest rms bidding in provincial road paving procurement auctions in Quebec between 2007 and 2015. I use the police investigation into collusion and corruption in the Quebec construction industry launched in October 2009 to capture the end of this cartel. I find that after this date, the two suspected firms i) were more likely to bid in the same auction and ii) submitted significantly lower bids when they competed in the same auction. A structural model of entry and bidding shows that if the firms had kept competing head-to-head at the same rate as in the collusive period but had stopped colluding on bids, bids would have increased by about 3.86% with respect to the competitive scenario observed after the police investigation began. This finding suggests that there were additional procurement costs associated with firms coordinating on the degree of head-to-head competition.
    Keywords: Auction,Bidding ring,Collusion,Public procurement
    JEL: D44 H57 L22 L74
    Date: 2019
  3. By: Dahlke, Steven
    Abstract: A closed electricity network with three markets is modeled to illustrate the impacts of transmission constraints and market power on prices and economic welfare. Four scenarios are presented, the first two assume perfect competition with and without transmission constraints, while the second two model market power with and without transmission constraints. The results show that transmission constraints reduce total surplus relative to the unconstrained case. When firms exercise market power their profits increase, while consumer surplus and total surplus decrease. Some results are counter intuitive, such as price exceeding the marginal cost of the most inefficient generator in a market with perfect competition, caused by transmission constraints and Kirchoff’s voltage law governing power flows. The GAMS code used to solve the models is included in the appendix. Next steps for research involve building the model to replicate a real-world market, to simulate impacts of proposed market restructuring or to identify areas of deregulated markets at high-risk of market power abuse.
    Date: 2019–05–28
  4. By: Ramesh Johari; Bar Light; Gabriel Weintraub
    Abstract: Online platforms collect rich information about participants, and then share this information back with participants to improve market outcomes. In this paper we study the following information disclosure problem of a two-sided market: how much of its available information about sellers' quality should the platform share with buyers to maximize its revenue? One key innovation in our analysis is to reduce the study of optimal information disclosure policies to a {\em constrained price discrimination} problem. The information shared by the platform induces a "menu" of equilibrium prices and sellers' expected qualities. Optimization over feasible menus yields a price discrimination problem. The problem is constrained because feasible menus are only those that can arise in the equilibrium of the two sided-market for some information disclosure policy. We analyze this constrained price discrimination problem, and apply our insights to two distinct two-sided market models: one in which the platform chooses prices and sellers choose quantities (similar to ride-sharing), and one in which sellers choose prices (similar to e-commerce). We provide conditions under which a simple information structure of banning a certain portion of sellers from the platform, and not sharing any information about the remaining participating sellers maximizes the platform's revenue.
    Date: 2019–12
  5. By: Wouters, Olivier J.; Sandberg, Dale M.; Pillay, Anban; Kanavos, Panos G.
    Abstract: Objective: We investigated the South African tendering system for medicines to (a) evaluate its impact on prices and market concentration over a 14-year period and (b) analyze the accuracy of government forecasts of drug demand. Methods: We calculated Herfindahl-Hirschman indexes to measure market concentration levels based on all pharmaceutical tender contracts issued by the South African government between 2003 and 2016 (n = 8,701). We estimated price indexes to track changes in medicine costs over this period. We compared prices set through tenders in the public health care system to the corresponding prices in the private system. We also analyzed government data on procurement in selected drug classes to assess the accuracy of demand forecasts. Findings: Between 2003 and 2016, the prices of medicines in most tender categories in the public health care system dropped by around 40% or more. The prices of medicines procured for the public system through tenders were almost always lower than those sold in the private system. Tenders generally remained moderately to highly competitive over time (i.e., Herfindahl-Hirschman indexes
    Keywords: South Africa; generic medicines; generic drugs; prices; competition; tendering; procurement; pharmaceutical policy
    JEL: I11 I18
    Date: 2018–11–23
  6. By: Zhang, Hanzhe (Michigan State University, Department of Economics)
    Abstract: This paper studies the use of posted prices versus auctions in a large dynamic market with many short-lived sellers and long-lived buyers. Although a reserve-price auction maximizes the expected revenue, the optimal revenue decreases when the market becomes more buyer-friendly; namely, when buyers survive longer, face fewer competitors, and become more patient. As the market becomes more buyer-friendly, the revenue advantage from a reserve-price auction over posting a price reduces, but using posted prices would lead to sale and allocative inefficiencies.
    Keywords: optimal sales mechanism; reserve-price auction; posted price
    JEL: D44
    Date: 2019–12–17
  7. By: Pierre Vialle (LITEM - Laboratoire en Innovation, Technologies, Economie et Management - UEVE - Université d'Évry-Val-d'Essonne - IMT-BS - Institut Mines-Télécom Business School, MMS - Département Management, Marketing et Stratégie - IMT - Institut Mines-Télécom [Paris] - TEM - Télécom Ecole de Management - IMT-BS - Institut Mines-Télécom Business School); Jason Whalley (Newcastle University Business School, MMS - Département Management, Marketing et Stratégie - IMT - Institut Mines-Télécom [Paris] - TEM - Télécom Ecole de Management - IMT-BS - Institut Mines-Télécom Business School); Xavier Parisot (IKI-SEA - The Institute for Knowledge and Innovation South East Asia (Bangkok University))
    Abstract: The issue of disruptive operators has recently gained interest among researchers and regulators. From a regulator's perspective, disruptive operators can increase competitive rivalry in markets dominated by a handful of large companies, thus allowing consumers to obtain more benefits in terms of price and quality. However, the "disruptive" qualification of an operator in related studies does not rely on a precise definition of disruption. The disruption theory, as developed by Christensen, provides such a definition but may be too restrictive. In addition, it may not be adapted to the analysis of disruption in regulated industries such as telecommunications. In this paper, we aim at deepening our understanding of disruption in the case of the Telecommunications industry, by analysing cases of mobile operators who entered the industry thanks to 3G or 4G licences. To this end we first analyse the disruption theory literature and highlight its characteristics and limitations. It allows us to propose an eclectic analytical framework of disruptive innovations that does not restrict to Christensen's theory. We then apply it to different cases of disruptive mobile operators in order to identify the level and pattern of disruption inherent to each case, and to compare them. We conclude by discussing our findings and further research perspectives.
    Keywords: Disruption,Innovation,Telecommunications,Regulated Industries,Business Model,Strategy,Policy
    Date: 2018
  8. By: Tetsuji OKAZAKI; Ken ONISHI; Naoki WAKAMORI
    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
  9. By: Rui Faustino
    Abstract: During economic expansions the net product creation and average product quality increase as firms introduce new products with higher quality.The introduction of new products with higher quality producesa quality bias in price level measures. In this paper I develop a firm-entry model with endogenous qualityof consumer goods. Following a TFP shock, the price level increases not only due to a larger number of varieties but also due to a higher average quality.Simultaneously, the channel of endogenous quality actsas a propagation mechanism to other variables in the economy, amplifying their response to shocks. This channel can also be either contractionary or shut down, depending on how consumers derive utility from quality.
    Keywords: Firm-entry, business cycle, quality, prices.
    JEL: E32 E20 L11
    Date: 2019–12
  10. By: Xingtong Han; Lei Xu
    Abstract: We study how input-output networks affect the speed of technology adoption. In particular, we model the decision to adopt the programming language Python 3 by software packages. Python 3 provides advanced features but is not backward compatible with Python 2, which implies it comes with adoption costs. Moreover, packages are dependent on other packages, meaning one package’s adoption decision is affected by the adoption decisions of other packages because many packages are linked to each other. We build a dynamic model of technology adoption that incorporates an input-output network and estimate it using a complete dataset of Python packages. We are among the first to link the literature of dynamic discrete choice models to network analysis. We also contribute to the literature on technology adoption by showing the adverse effects that input-output networks can have on how technology is adopted in a dynamic setting. We show that a package’s adoption decision is significantly affected by the adoption decisions of its dependency packages. We conduct counterfactual analyses of cost subsidies that target a community level and show that network structure is crucial to determining an optimal policy of cost subsidy.
    Keywords: Economic models; Firm dynamics; Productivity
    JEL: C61 L23 L86 O14 O33
    Date: 2019–12
  11. By: Eleni Aristodemou (Institute for Fiscal Studies and University College London); Adam Rosen (Institute for Fiscal Studies and Duke University)
    Abstract: In this paper we analyze a discrete choice model for partially ordered alternatives. The alternatives are di?erentiated along two dimensions, the ?rst an unordered “horizontal” dimension, and the second an ordered “vertical” dimension. The model can be used in circumstances in which individuals choose amongst products of di?erent brands, wherein each brand o?ers an ordered choice menu, for example by o?ering products of varying quality. The unordered-ordered nature of the discrete choice problem is used to characterize the identi?ed set of model parameters. Following an initial nonparametric analysis that relies on shape restrictions inherent in the ordered dimension of the problem, we then provide a specialized analysis for a parametric generalization of the ordered probit model. Conditions for point identi?cation are established when the distribution of unobservable heterogeneity is known, but remain elusive when the distribution is instead restricted to the multivariate normal family with parameterized variance. Rather than invoke the restriction that the distribution is known, or simply assume that model parameters are point identi?ed, we consider the use of inference methods that allow for the possibility of set identi?cation, and which are therefore robust to the possible lack of point identi?cation. A Monte Carlo analysis is provided in which inference is carried out using a method proposed by Chen, Christensen, and Tamer (2018), which is insensitive to the possible lack of point identi?cation and is found to perform adequately. An empirical illustration is then conducted using consumer purchase data in the UK to study consumers’ choice of razor blades in which each brand has product o?erings vertically di?erentiated by quality.
    Date: 2019–11–18
  12. By: Maarten Pieter Schinkel (University of Amsterdam); Lukas Toth (University of Amsterdam)
    Abstract: To stimulate companies to take corporate social responsibility collectively, for example for fair trade or the environment, their agreements may be exempted from cartel law. To qualify, the public benefits must compensate consumers for higher prices of the private good. We study the balancing involved in assessing a public interest-cartel in a public goods model. The required compensating public good level decreases in each consumer's willingness to pay, which is contrary to the Samuelson condition. The cartel will provide minimal public good for maximal overcharges. Nevertheless it is typically not sustainable, since those consumers that are damaged most by the cartel price increase, by self-selection also have the lowest appreciation for the public good. The information necessary to tell the rare genuine public interest-defense from cartel greenwashing allows the government to provide first-best itself.
    Keywords: cartel, public good, corporate social responsibility, sustainability, greenwashing
    JEL: H41 K21 L40
    Date: 2019–12–24
  13. By: Roger Koenker (Institute for Fiscal Studies and UCL)
    Abstract: The classical problem of the monopolist faced with an unknown demand curve is considered in a simple stochastic setting. Sequential pricing strategies designed to maximize discounted pro?ts are shown to converge su?ciently rapidly that they leave the monopolist ignorant about all but the most local features of demand. The failure of the monopolist to “learn” his demand curve would seem to call into question some standard assumptions about agents’ grasp of their economic environment.
    Date: 2019–10–30

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