nep-com New Economics Papers
on Industrial Competition
Issue of 2020‒04‒27
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Patents to Products: Product Innovation and Firm Dynamics By David Argente; Salomé Baslandze; Douglas Hanley; Sara Moreira
  2. Unions, Tripartite Competition and Innovation By Alex Bryson; Harald Dale-Olsen
  3. Price-cost margins and fixed costs By Filip Abraham; Yannick Bormans; Jozef Konings; Werner Roeger
  4. Vertical Integration as a Source of Hold-up: an Experiment By Marie-Laure ALLAIN; Claire CHAMBOLLE; Patrick REY; Sabrina TEYSSIER
  5. Entry decisions and asymmetric competition between non-profit and for-profit homes in the long-term care market By Iris Grant; Iris Kesternich; Johannes Van Biesebroeck
  6. Market for Information and Selling Mechanisms By David Bounies; Antoine Dubus; Patrick Waelbroeck
  7. Pricing Stallion Seasons for an Individual Stallion: The Existence of Top Tier Pricing and Market Power By Losey, Robert; Lambert, Thomas
  8. A small volume reduction that melts down the market: Auctions with endogenous rationing By Ehrhart, Karl-Martin; Hanke, Ann-Katrin; Ott, Marion
  9. Profit-enhancing entries in mixed oligopolies By Haraguchi, Junichi; Matsumura, Toshihiro
  10. R&D or R vs. D? Firm Innovation Strategy and Equity Ownership By James Driver; Adam Kolasinski; Jared Stanfield
  11. Some Unpleasant Markup Arithmetic: Production Function Elasticities and their Estimation from Production Data By Steve Bond; Arshia Hashemi; Greg Kaplan; Piotr Zoch
  12. Competition in the German Electricity Retail Business: Innovation and Growth Strategies By Amelung, Torsten
  13. Value creation and value appropriation In innovative coopetition projects By Paul Chiambaretto; Jonathan Maurice; Marc Willinger
  14. Do preferences for private labels respond to supermarket loyalty programs? By Flórez, J
  15. Approximation algorithms for product framing and pricing By Gallego, Guillermo; Li, Anran; Truong, Van-Anh; Wang, Xinshang

  1. By: David Argente; Salomé Baslandze; Douglas Hanley; Sara Moreira
    Abstract: We study the relationship between patents and actual product innovation in the market, and how this relationship varies with firms’ market share. We use textual analysis to create a new data set that links patents to products of firms in the consumer goods sector. We find that patent filings are positively associated with subsequent product innovation by firms, but at least half of product innovation and growth comes from firms that never patent. We also find that market leaders use patents differently from followers. Market leaders have lower product innovation rates, though they rely on patents more. Patents of market leaders relate to higher future sales above and beyond their effect on product innovation, and these patents are associated with declining product introduction on the part of competitors, which is consistent with the notion that market leaders use their patents to limit competition. We then use a model to analyze the firms' patenting and product innovation decisions. We show that the private value of a patent is particularly high for large firms as patents protect large market shares of existing products.
    Keywords: patent value; productivity; creative destruction; patents; product innovation; growth
    JEL: O3 O4
    Date: 2020–04–17
  2. By: Alex Bryson (University College London); Harald Dale-Olsen (Institute for Social Research)
    Abstract: We present theoretical and empirical evidence challenging results from early studies that found unions were detrimental to workplace innovation. Under our theoretical model, which extends the Cournot duopoly innovation model, local union wage bargaining is more conducive to innovation - particularly product innovation - than competitive pay setting. We test the theory with workplace data for Britain and Norway. Results are consistent with the theory: local union bargaining is positively associated with product innovations in both countries. In Norway, local union bargaining is also positively associated with process innovation.
    Keywords: product innovation; process innovation; trade unions; collective bargaining
    JEL: J28 J51 J81 L23
    Date: 2020–04–01
  3. By: Filip Abraham; Yannick Bormans; Jozef Konings; Werner Roeger
    Abstract: This paper introduces a new method which allows to simultaneously estimate price-cost margins and fixed costs in production, using standard production data on expenditures of inputs and revenue at the firm level. In particular, we exploit properties of the primal and dual price based and cost based Solow residual, in which we allow not only for the flexible treatment of capital (either fixed, variable or a combination of both) but also for the flexible treatment of other input factors, such as labor and intermediate inputs. We use a 30 year long firm level panel of Belgian firms to estimate price-cost margins and fixed costs as a share of revenue to show the following key results: Ignoring fixed costs in production, as in most of the literature, underestimates price-cost margins and overestimates excess profit margins. We also find that fixed costs as well as price-cost margins decline in the last three decades, pushing excess profit margins downwards, suggesting highly competitive markets in Belgium.
    Keywords: Price-cost margins, fixed costs, excess profits, market power, firm level data
    JEL: D21 L13 L16
    Date: 2020–04
  4. By: Marie-Laure ALLAIN (CREST, CNRS, Ecole Polytechnique, Institut Polytechnique de Paris, Palaiseau, France); Claire CHAMBOLLE (Université Paris-Saclay, INRAE, UR ALISS, 94205, Ivry-sur-Seine, France; CREST, Institut Polytechnique de Paris); Patrick REY (Toulouse School of Economics, University Toulouse Capitole, Toulouse, France); Sabrina TEYSSIER (Univ. Grenoble Alpes, INRA, CNRS, Grenoble INP, GAEL, 38000 Grenoble, France)
    Abstract: In a vertical chain in which two rivals invest before contracting with one of two competing suppliers, partial vertical integration may create hold-up problems for the rival. We develop an experiment to test this theoretical prediction in two setups, in which suppliers can either pre-commit ex ante to appropriating part of the joint profit, or degrade ex post the support they provide to their customer. Our experimental results confirm that vertical integration creates hold-up problems in both setups. However, we observe more departures from theory in the second one. Bounded rationality and social preferences provide a rationale for these departures.
    Keywords: Vertical Integration, Hold-up, Experimental Economics, Bounded Rationality, Social Preferences.
    JEL: C91 D90 L13 L41 L42
    Date: 2020–03–13
  5. By: Iris Grant; Iris Kesternich; Johannes Van Biesebroeck
    Abstract: Mostly due to population aging, the demand for long-term care (LTC) services is growing strongly. Historically, non-profit nursing homes dominated the German LTC market, but the recent entry wave was tilted towards for-profit competitors. Using a rich administrative dataset on all LTC facilities in Germany, we examine strategic interaction between these two ownership types in a static entry model. The estimates of competitive effects imply that non-profit and for-profit homes are substitutes, but competition is much stronger within-type, suggesting that they provide differentiated products. For-profit homes in particular act as if they operate in a different market segment, but over time their entry behavior has converged to that of the more established non-profits. Counterfactual simulations of proposed changes in government policy suggest a large impact on the fraction of markets that remain unserved or only served by a single type.
    Date: 2020–04–01
  6. By: David Bounies; Antoine Dubus; Patrick Waelbroeck
    Abstract: We investigate the strategies of a data intermediary selling consumer information to firms for price discrimination purpose. We analyze how the mechanism through which the data intermediary sells information influences how much consumer information she will collect and sell to firms, and how it impacts consumer surplus. We consider three selling mechanisms tailored to sell consumer information: take it or leave it, sequential bargaining, and auctions. We show that the more information the intermediary collects, the lower consumer surplus. Consumer information collection is minimized, and consumer surplus maximized under the take it or leave it mechanism, which is the least profitable mechanism for the intermediary. We discuss two regulatory tools { a data minimization principle and a price cap { that can be used by data protection agencies and competition authorities to limit consumer information collection, increase consumer surplus, and ensure a fair access to information to firms.
    Date: 2020–04
  7. By: Losey, Robert; Lambert, Thomas
    Abstract: This paper is an academic treatment of the pricing of stallion seasons (a “season ” confers the right to breed a mare to a stallion) The commercial stallion seasons market can be represented schematically as a triangle that normally has a single-digit number of stallions offering high-priced seasons in the narrow apex, a moderate number of stallions composing the middle section, and over 150 in the $5,000-$10,000 range. We argue that it is logical for profit-maximizing stallion managers, most especially those in the apex of the stallion seasons triangle, to charge different prices for different groups of buyers of the same stallion seasons. Some of the reasons are straightforward: seasons are worth less as the breeding season progresses because foals produced later in year from those seasons are worth less. Other reasons have more to do with the somewhat monopolistic nature of the market for stallion seasons as explained in this paper. This market power, in turn, creates multiple demand curves for different market segments. As for artificial insemination (AI), the economics of this analysis suggests that breeders significantly benefit from the introduction of AI because costs tend to fall and the choices of potential stallions available to mares would be expanded as better stallions breed more mares. Though the average breeder would benefit, there would be losers from a change in the status quo. Not surprisingly, those who stand to would lose from a move to AI argue against such a move.
    Keywords: artificial insemination, breeding, competition, monopolistic competition, monopoly, oligopoly, seasons contracts.
    JEL: L1 L8 Q12 Q19
    Date: 2020–04–17
  8. By: Ehrhart, Karl-Martin; Hanke, Ann-Katrin; Ott, Marion
    Abstract: Auctions with endogenous rationing have been introduced to stimulate competition. Such (procurement) auctions reduce the volume put out to tender when competition is low. This paper finds a strong negative effect of endogenous rationing on participation when bid-preparation is costly, counteracting the aim to stimulate competition. For multiple auctioneer's objectives mentioned in directives, we derive optimal mechanisms, which differ due to different evaluation of the tradeoff between participation and bid-preparation costs. Thus, the auctioneer needs to decide on an objective. However, reducing bid-preparation costs improves the optimal values of multiple objective functions.
    Keywords: auction,participation,market design,optimal mechanism,renewable energy support
    JEL: D82 Q48 D47 D44
    Date: 2020
  9. By: Haraguchi, Junichi; Matsumura, Toshihiro
    Abstract: Mixed oligopolies are characterized by private and public enterprises. Entry into these markets was restrictive, but has now been relaxed by deregulations; as a result, private firms have entered mixed oligopolies. An increase in the number of private firms increases competition among private firms and reduces the profit of incumbent private firms, given the privatization policy remains unchanged. However, an increase in the number of private firms may in turn affect privatization policy, and thus, indirectly affect private firms' profits. Therefore, the overall effect on private firms' profit is ambiguous. In this study, we thus investigate how the number of private firms affects the profit of each private firm in mixed oligopolies. For this end, we use a linear-quadratic production cost function, which covers two popular model formulations in the mixed oligopoly literature. We show that, if the degree of privatization is exogenous, the profit of each private firm is decreasing in the number of private firms. However, if the degree of privatization is endogenous, the relationship between the number of private firms and profit takes an inverted-U shape under a plausible range of cost parameters. Our results imply that there can exist multiple equilibria in free-entry markets with different degrees of privatization.
    Keywords: optimal degree of privatization, profit-enhancing entry, multiple long-run stable equilibria
    JEL: D43 H44 L33
    Date: 2020–04–17
  10. By: James Driver; Adam Kolasinski; Jared Stanfield
    Abstract: We analyze a unique dataset that separately reports research and development expenditures for a large panel of public and private firms. Definitions of “research” and “development” in this dataset, respectively, correspond to definitions of knowledge “exploration” and “exploitation” in the innovation theory literature. We can thus test theories of how equity ownership status relates to innovation strategy. We find that public firms have greater research intensity than private firms, inconsistent with theories asserting private ownership is more conducive to exploration. We also find public firms invest more intensely in innovation of all sorts. These results suggest relaxed financing constraints enjoyed by public firms, as well as their diversified shareholder bases, make them more conducive to investing in all types of innovation. Reconciling several seemingly conflicting results in prior research, we find private-equity-owned firms, though not less innovative overall than other private firms, skew their innovation strategies toward development and away from research.
    Date: 2020–04
  11. By: Steve Bond; Arshia Hashemi; Greg Kaplan; Piotr Zoch
    Abstract: The ratio estimator of a firm’s markup is the ratio of the output elasticity ofThe ratio estimator of a firm’s markup is the ratio of the output elasticity ofa variable input to that input’s cost share in revenue. This note raises issues thatconcern identification and estimation of markups using the ratio estimator. Concerningidentification: (i) if the revenue elasticity is used in place of the output elasticity, thenthe estimand underlying the ratio estimator does not contain any information aboutthe markup; (ii) if any part of the input bundle is either used to influence demand, or isneither fully fixed nor fully flexible, then the estimand underlying the ratio estimatoris not equal to the markup. Concerning estimation: (i) even with data on outputquantities, it is challenging to obtain consistent estimates of output elasticities whenfirms have market power; (ii) without data on output quantities, as is typically thecase, it is not possible to obtain consistent estimates of output elasticities when firmshave market power and markups are heterogeneous. These issues cast doubt overwhether anything useful can be learned about heterogeneity or trends in markups,from recent attempts to apply the ratio estimator in settings without output quantitydata.
    Keywords: Markups, Output Elasticity, Revenue Elasticity, Production Functions
    JEL: D2 D4 L1 L2
    Date: 2020–04–20
  12. By: Amelung, Torsten
    Abstract: In Europe and especially in Germany short-term price adjustments by retail companies are led by behavioral patterns that follow the logic of the prisoner’s dilemma. In order to escape this short-term competitive pressure, an increasing number of retail companies focus on the diversification of their activities by offering new product lines such as distributed energy solutions. Moreover, there is a trend towards investing in the development of a brand to increase customer loyalty.
    Keywords: short term price competition,second-mover-advantage,product versioning,diversification,distributed energy solutions,brand strategy,digitalization,affiliate marketing
    Date: 2020
  13. By: Paul Chiambaretto (MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UM3 - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School - UM - Université de Montpellier); Jonathan Maurice (TSM - Toulouse School of Management Research - UT1 - Université Toulouse 1 Capitole - CNRS - Centre National de la Recherche Scientifique - TSM - Toulouse School of Management - UT1 - Université Toulouse 1 Capitole); Marc Willinger (CEE-M - Centre d'Economie de l'Environnement - Montpellier - FRE2010 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This article provides a formal model of the value creation-appropriation dilemma in the coopetition for innovation, i.e., alliances among competing firms. The model determines the levels of cooperation that maximize the profit of each firm in an innovative coopetition agreement regardless of the number of firms and their respective budget endowments dedicated to the coopetitive project. We answer the following questions. Within an innovative coopetition agreement, will the partners cooperate more or less when their budget endowments change? What is the impact on profit? When is it profitable to accept a new partner into the agreement? What happens to the remaining firms when a partner withdraws from the agreement? We show that when the coopetitive budget of the focal firm increases, the focal firm allocates a larger part of this budget to value creation activities and increases its profit. In contrast, when a partnering firm increases its coopetitive budget, the focal firm reduces its budget for value creation activities to maintain a sufficient budget for value appropriation activities. We also show that the addition of a competitor with a large coopetitive budget to the innovative coopetition agreement decreases the cooperation of the focal firm but increases the profit of the initial partnering firms. In contrast, the exit of a partnering firm with a large coopetitive budget from the agreement intensifies the cooperation among the remaining firms but reduces their profit
    Keywords: game theory,value appropriation,value creation,coopetition,innovative coopetition projects
    Date: 2020
  14. By: Flórez, J
    Abstract: This paper examines the effects of supermarket loyalty programs on the demand for private labels (PLs). Using transaction level data on grocery purchases and individual level information on the membership of loyalty programs, I estimate a model of demand in which membership may affect the consumers’ valuation for PLs, their sensitivity to price changes and have spillover effects on both named brands (NBs) and rivals’ PLs. My identification strategy of the membership effect exploits observed variation in shopping patterns at the consumer level over time and across customer types (i.e., members and non-members) in each period to control for as much exogenous variation as possible, and includes a control function using characteristics of loyalty programs as instrumental variables to account for a potential selection bias related to unobserved factors of the membership decision. I find a significant effect of loyalty programs on consumer preferences for PLs. Compared to non-members, membership reduces consumers’ price sensitivity for the products sold by the supermarket they are members of, but increases it for products sold by supermarkets they are not members of. These effects are weaker for households that are members of the loyalty programs of multiple supermarkets. Counterfactual simulations show that when a supermarket modifies its loyalty program while competitors keep their own unchanged, it loses about 19% of customers to its rivals, on average. Furthermore, if loyalty programs were changed altogether, the demand for PLs would considerably decrease, while the demand for NBs would increase.
    Keywords: Supermarket chains, loyalty programs, private labels, discrete choice models, random coefficients, control function approach
    JEL: D12 L13 L66
    Date: 2020–04–01
  15. By: Gallego, Guillermo; Li, Anran; Truong, Van-Anh; Wang, Xinshang
    Abstract: We propose one of the first models of “product framing” and pricing. Product framing refers to the way consumer choice is influenced by how the products are framed, or displayed. We present a model where a set of products are displayed, or framed, into a set of virtual web pages. We assume that consumers consider only products in the top pages, with different consumers willing to see different numbers of pages. Consumers select a product, if any, from these pages following a general choice model. We show that the product framing problem is NP-hard. We derive algorithms with guaranteed performance relative to an optimal algorithm under reasonable assumptions. Our algorithms are fast and easy to implement. We also present structural results and design algorithms for pricing under framing effects for the multi- nomial logit model. We show that for profit maximization problems, at optimality, products are displayed in descending order of their value gap and in ascending order of their markups.
    Keywords: analysis of algorithms; choice models; marketing; pricing
    JEL: J50
    Date: 2020–01–07

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