nep-com New Economics Papers
on Industrial Competition
Issue of 2020‒01‒13
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Horizontal mergers on platform markets: cost savings v. cross-group network effects? By Baranes, Edmond; Cortade, Thomas; Cosnita-Langlais, Andreea
  2. Platform competition and incumbency advantage under heterogeneous switching cost — exploring the impact of data portability By Siciliani, Paolo; Giovannetti, Emanuele
  3. Voluntary Disclosure and Personalized Pricing By S. Nageeb Ali; Greg Lewis; Shoshana Vasserman
  4. Corporate self-regulation of imperfect competition. By Herve Cres; Mich Tvede
  5. Firms as problem solvers: economics meets computer science By Kim, Minseong
  6. 'Hybrid' competition, innovation outcomes and regulation: A duopoly model By Thomas Le Texier; Ludovic Ragni
  7. Core strength or Achilles’ heel : Organizational competencies and the performance of R&D collaborations By de Groot, Harmke
  8. How to Draw the Line: A Note on Local Market Definition By Dieter Pennerstorfer; Biliana Yontcheva
  9. The Unexpected Consequences of Generic Entry By Micael Castanheira De Moura; Georges Siotis; Carmine Ornaghi
  10. How Does Competition Affect Reputation Concerns? Theory and Evidence from Airbnb By Michelangelo Rossi
  13. Why do banks close? The geography of branch pruning By Paolo Emilio Mistrulli; Luca Antelmo; Maddalena Galardo; Iconio Garrì; Dario Pellegrino; Davide Revelli; Vito Savino
  14. Consumer Information and Price Transmission: Empirical Evidence By Jens-Peter Loy; Dieter Pennerstorfer; Daniela Rroshi; Christoph Weiss; Biliana Yontcheva
  15. Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry By Kyle F. Herkenhoff; Gajendran Raveendranathan

  1. By: Baranes, Edmond; Cortade, Thomas; Cosnita-Langlais, Andreea
    Abstract: We study the impact of cost savings on the outcome of horizontal mergers between two-sided platforms. We consider four symmetrically differentiated platforms located equidistantly on the unit circle and competing in membership fees. Users on both sides single-home, and we allow for both positive and negative cross-group externalities. We find that the impact of merger cost savings on prices is generally not monotonic, and that synergies are necessary for horizontal platform mergers to be Pareto-improving. Furthermore, the merger may benefit users on one side while harming users on the opposite side, which raises some interesting questions for the enforcement of merger control on two-sided markets.
    Keywords: horizontal merger, two-sided markets, cost savings, indirect network effects, merger control
    JEL: D43 K21 L41
    Date: 2019–05
  2. By: Siciliani, Paolo (Bank of England and UCL Laws); Giovannetti, Emanuele (Anglia Ruskin University & Hughes Hall, University of Cambridge)
    Abstract: The paper develops a static model to explore how, under platform competition, heterogeneous levels of switching costs can give rise to an incumbency advantage. The key condition required for the coexistence of both platforms on the market, to have effective competition, relies on the relative strength of switching costs over the network effects. Only when switching costs are stronger than cross-group network benefits is market tipping avoided. The same condition also underpins the presence of a material incumbency advantage vis-à-vis the entrant platform. Therefore, regulatory intervention aimed at facilitating switching, for example by imposing data portability, might worsen entry condition as the incumbent platform is less accommodative. Besides the standard configuration with exogenous singlehoming, we also fully characterise the model with endogenous multihoming on both sides. Partial multihoming occurs only on one side, the one with comparatively lower switching costs. However, in contrast to the seminal ‘competition bottleneck’ model, on the opposite side, where singlehoming arises endogenously, agents face higher prices than under exogenous singlehoming. Therefore, the incumbent platform would normally opt for this regime, whereas we show that the entrant is basically indifferent between the two.
    Keywords: two-sided markets; platform competition; switching costs; multihoming
    JEL: L11 L13
    Date: 2019–12–20
  3. By: S. Nageeb Ali; Greg Lewis; Shoshana Vasserman
    Abstract: A concern central to the economics of privacy is that firms may use consumer data to price discriminate. A common response is that consumers should have control over their data and the ability to choose how firms access it. Since firms draw inferences based on both the data seen as well as the consumer's disclosure choices, the strategic implications of this proposal are unclear. We investigate whether such measures improve consumer welfare in monopolistic and competitive environments. We find that consumer control can guarantee gains for every consumer type relative to both perfect price discrimination and no personalized pricing. This result is driven by two ideas. First, consumers can use disclosure to amplify competition between firms. Second, consumers can share information that induces a seller---even a monopolist---to make price concessions. Furthermore, whether consumer control improves consumer surplus depends on both the technology of disclosure and the competitiveness of the marketplace. In a competitive market, simple disclosure technologies such as "track / do-not-track" suffice for guaranteeing gains in consumer welfare. However, in a monopolistic market, welfare gains require richer forms of disclosure technology whereby consumers can decide how much information they would like to convey.
    Date: 2019–12
  4. By: Herve Cres (New York University in Abu Dhabi); Mich Tvede (University of East Anglia)
    Abstract: We consider Cournot competition in general equilibrium. Decisions in firms are taken by majority voting. Naturally, interests of voters–shareholders or stakeholders–depend on their endowments and portfolios. We introduce two notions of local Cournot-Walras equilibria to overcome difficulties arising from non-concavity of profit functions and multiplicity of equilibrium prices. We show existence of local Cournot-Walras equilibria, and characterize distributions of voting weights for which equilibrium allocations are Pareto optimal. We discuss the performance of various governances and highlight the importance of financial markets in regulating large firms.
    Keywords: Cournot-Walras equilibrium Majority voting Pareto optimality Shareholder governance Stakeholder democracy Walrasian equilibria
    JEL: D41 D43 D51 D61 D71
    Date: 2020–01–02
  5. By: Kim, Minseong
    Abstract: A theory of the firm based on the idea that firms are problem solvers is developed. A network of firms and hierarchical structure of an individual firm are analyzed in terms of distributed and parallel computing. This framework, based on notions of computer science, allows us a simple answer to why a network of firms exists instead of a network of individuals.
    Keywords: theory of the firm; vertical integration; parallel computing; distributed computing; synchronization
    JEL: D20 D40 L20
    Date: 2019–12–01
  6. By: Thomas Le Texier (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); Ludovic Ragni (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur - CNRS - Centre National de la Recherche Scientifique, UCA - Université Côte d'Azur)
    Abstract: This paper presents a duopoly model in which a commercial organization and a community compete by providing digital products while being able to share their innovation outputs to develop their own activities. The commercial organization always benefits from either a ‘closed' or an ‘open' institutional regime shift. Our numerical analysis evidences that the ‘closed' shift provides the best levels of innovation and welfare whereas it is not found to be profit-improving when product differentiation is small. This result partially qualifies the conventional idea according to which public policies may be designed to defend commercial interests rather than public ones.
    Abstract: Cet article présente un modèle de duopole dans lequel une firme et une communauté se concurrencent en produisant des produits/services numériques tout en ayant la possibilité de partager leurs innovations pour développer leurs propres activités. Nous montrons que la firme bénéficie toujours d'un changement de régime 'ouvert' ou 'fermé' d'innovation. Notre analyse numérique souligne que, si un 'basculement fermé' est favorable au bien-être social et à l'innovation agrégée, celui-ci n'est pas systématiquement profitable à la firme. Ces observations exposent clairement une défaillance de marché potentielle, tout en nuançant les vertus du paradigme d'innovation ouverte en matière de maximisation des profits.
    Keywords: Firm,Community,Closed innovation,Open innovation,Appropriation,Firme,Communauté,Innovation fermée,Innovation ouverte
    Date: 2019–10–17
  7. By: de Groot, Harmke (Tilburg University, School of Economics and Management)
    Abstract: The three essays collected in this dissertation advance our understanding of how organizational competencies and R&D objectives are related with partner selection and R&D performance at the project level. The first essay shows how the organizational competencies and R&D prime objective of the focal firm are related with who is seen as the most important partner in the R&D project. The second essay examines how organizational competencies affect the innovation performance of companies when collaborating with an external R&D organization. The third essay focuses on the relationship of absorptive capacity and knowledge distance with new product development performance.
    Date: 2019
  8. By: Dieter Pennerstorfer; Biliana Yontcheva (WU Wien)
    Abstract: This article presents a novel method of market delineation, which generates virtually isolated residential clusters using data on the spatial distribution of population. The performance of this approach is evaluated by contrasting it with traditional delineation techniques based on municipal boundaries. The estimation of simple entry models for five industries shows that markets defined using micro-level residence information perform better in terms of reducing cross-border spatial spillovers and predicting the equilibrium number of firms on the market more accurately. Additionally, the estimated entry threshold ratios using this method successfully reflect our expectations based on ex-ante knowledge about the investigated industries.
    Keywords: market definition, entry models, spatial competition
    JEL: L13 L11 R32
    Date: 2019–10
  9. By: Micael Castanheira De Moura; Georges Siotis; Carmine Ornaghi
    Abstract: Generic drugs are sold at a fraction of the original brand price. Yet, generic entry typically produces a drop in the quantity market share of the molecule losing exclusivity. This effect is economically and statistically significant for a large dataset covering hundreds of prescription drugs sold in the US during the period 1994Q1–2003Q4. This paper proposes the first systematic analysis of what appears to be a market anomaly.We propose a model to characterize the market equilibrium before and after generic entry. We identify precise conditions under which entry reduces the quantity market share of the molecule. Intriguingly, this is more likely to occur when the remaining patent-protected molecules feature low horizontal differentiation. We test this and other theoretical predictions of the model and find they are validated empirically.
    Keywords: Non-price competition; Pharmaceutical industry; Consumer choice; Generic entry
    JEL: D22 I11 L13
    Date: 2019–12–01
  10. By: Michelangelo Rossi
    Abstract: I show how changes in competition affect the power of reputation to induce sellers to exert effort. The impact of competition on sellers’ incentives is theoretically ambiguous. More com-petition disciplines sellers, but, at the same time, it erodes reputational premia. This paper identifies empirically whether one effect dominates the other using data from Airbnb. To guide the empirical analysis, I develop a model of reputation where the relative number of hosts and guests affects the value of building a reputation through effort. In this framework, more competition depresses hosts’ profits and leads hosts to reduce effort. I test the model’s predic-tion exploiting a change in regulation for Airbnb listings effective in San Francisco in 2017. I identify a negative causal effect of competition on effort. As the number of competitors sur-rounding each listing increases by 10 percent, ratings about hosts’ effort decrease by more than one standard deviation. These findings suggest that more competition may erode incentives for high-quality services in markets where sellers’ performances depend on reputation.
    Keywords: reputation, competition, digitization
    JEL: D82 D83 L50 L81
    Date: 2019
  11. By: Widayati, Ratna; Amelia, Rizki
    Abstract: The development in the banking industry as well as opening the era of free information has contributed to greater competition between banks. Competition led to similar companies competing to create a strategy to win the competition, one of which is the marketing strategy. PT. Bank Tabungan Negara (Persero) Tbk. Padang Branch Office conduct marketing activities of deposit products using the marketing mix strategy into the programs created. In the banking service products are components of the marketing mix, namely Product, Price, Place, and Promotion, which is in development now, has undergone additions into: People, Process, and Phisical Evidence. Seven of the marketing mix is able to support customers' purchasing decisions. It is seen from the achievement of the target product, namely fund raising savings, deposits, and current accounts.
    Date: 2019–02–15
  12. By: Widayati, Ratna
    Abstract: Advertising is one form of marketing products and services which are very well known in the community. But so many forms of advertising that actually banned, just a lot shown on television. As the use of physicians, health professionals, or the actor who plays a doctor or health worker in drug advertising. Doctors use the drug ads will only mislead the public as consumers, because doctors are more competent when it comes to drug problems. Directly with the public will believe that drugs advertised although there is no guarantee they can cure. Furthermore it will cause unfair competition among the manufacturers of drugs, because every manufacturer will race to put on doctors or the actor who played the doctor to advertise their drug products. Thus the independence of physicians as if mortgaged or disadvantaged by side with a particular product or brand, while also able to mislead the public as users / consumers of the product.
    Date: 2019–03–12
  13. By: Paolo Emilio Mistrulli (Bank of Italy); Luca Antelmo (Bank of Italy); Maddalena Galardo (Bank of Italy); Iconio Garrì (Bank of Italy); Dario Pellegrino (Bank of Italy); Davide Revelli (Bank of Italy); Vito Savino (Bank of Italy)
    Abstract: In the aftermath of the Great Recession, the number of bank branches declined in most of developed countries. In this paper, we investigate how banks have downsized their branch networks in Italy, by comparing the pre and post crisis spatial distribution of branches. By using a detailed dataset that includes a wide set of controls for the characteristics of each bank branch, we estimate the probability of a branch being closed as a function of its distance from both proprietary and competitors’ branches. We find that banks are more prone to close branches in those areas where other proprietary branches are closer and also where competitors’ branches are closer. This indicates that, since the start of the crisis, banks have closed branches especially in those areas where their proprietary network was relatively more populated and competition was fiercer.
    Keywords: Bank Branch, Geographical Location, Market Structure
    JEL: G21 L10 R3
    Date: 2019–12
  14. By: Jens-Peter Loy; Dieter Pennerstorfer; Daniela Rroshi; Christoph Weiss; Biliana Yontcheva
    Abstract: We investigate how consumer information affects price adjustment in the Austrian retail gasoline market. Our measure of consumer information is obtained from detailed census data on commuting behavior, as commuters can freely sample prices on their commuting route and are thus better informed about prices. A threshold error-correction model suggests that prices adjust more quickly if cost shocks exceed certain thresholds. Parametric and semiparametric regressions show that a larger share of informed consumers increases both transmission speed and pass-through elasticity. Better informed consumers reduce the asymmetry in thresholds, but have no effect on the asymmetry in the speed of adjustment.
    Keywords: Price Transmission, Consumer Information, Commuters, Gasoline Market, Threshold Error-Correction Model
    JEL: D43 D83 L13
    Date: 2019–12
  15. 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 D60 E21 E44 G21
    Date: 2019–12

This nep-com issue is ©2020 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.