nep-com New Economics Papers
on Industrial Competition
Issue of 2020‒05‒11
23 papers chosen by
Russell Pittman
United States Department of Justice

  1. On the excess entry theorem in the presence of network effect-sensitive consumers By Tsuyoshi Toshimitsu
  2. Preferences, confusion and competition By Andreas Hefti; Shuo Liu; Armin Schmutzler
  3. Monopsony in labor markets: a review By Manning, Alan
  4. On the Existence of Positive Equilibrium Profits in Competitive Screening Markets By Yehuda John Levy; Andre Veiga
  5. R&D Spillovers and Welfare Effect of Privatization with an R&D Subsidy By Lee, Sang-Ho; Muminov, Timur
  6. Bilateral Information Disclosure in Adverse Selection Markets with Nonexclusive Competition By Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko
  7. Exclusionary contracts and incentives to innovate By Ulsaker, Simen A.
  8. Declining Market Competition in China By Daniel Berkowitz
  9. Per unit and ad valorem royalties in a patent licensing game By Marta Montinaro; Rupayan Pal; Marcella Scrimitore
  10. The Impact of Emerging Market Competition on Innovation and Business Strategy By Lorenz Kueng; Nicholas Li; Mu-Jeung Yang
  11. Multimarket Contact and Collusion in Online Retail By Poppius, Hampus
  12. Horizontal cooperation on investment: Evidence from mobile network sharing By Cojoc, Anca; Ivaldi, Marc; Maier-Rigaud, Frank P.; März, Oliver
  13. Systematization of antitrust risks in the passenger air transportation markets taking into account the peculiarities of airline business strategies By Markova, Olga (Маркова, Ольга); Meleshkina, Anna (Мелешкина, Анна)
  14. Partial privatization and subsidization in a time-consistent policy: output versus R&D subsidies By Lee, Sang-Ho; Muminov, Timur
  15. Effects of piracy on the American comic book market and the role of digital formats By Wojciech Hardy
  16. Association of Organizational Factors and Physician Practices’ Participation in Alternative Payment Models By Mariétou H. Ouayogodé; Taressa Fraze; Eugene C. Rich; Carrie H. Colla
  17. Durables and Lemons: Private Information and the Market for Cars By Richard Blundell; Ran Gu; Soeren Leth-Petersen; Hamish Low; Costas Meghir
  18. The evolution of EU antitrust policy: 1966-2017 By Ibáñez Colomo, Pablo; Kalintiri, Andriani
  19. Vertical Integration and Capacity Investment in the Electricity Sector By Brown, David P.; Sappington, David E.M.
  20. The Effects of Local Market Concentration and International Competition on Firm Productivity: Evidence from Mexico By Rodriguez Castelan, Carlos; López-Calva, Luis-Felipe; Barriga Cabanillas, Oscar
  21. Foreign Direct Investment and Industrial Agglomeration: Evidence from China By Hsu, Wen-Tai; Lu, Yi; Luo, Xuan; Zhu, Lianming
  22. Can the law fix the problems of fashion? An empirical study on social norms and imbalance of power in the fashion industry By Noto La Diega, Guido
  23. "Introducing and enhancing competition to improve solid waste management in Barcelona" By Germà Bel; Marianna Sebo

  1. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: We reconsider the gexcess entry theorem h in the case of a network product market. Heterogeneous consumers, who are sensitive to network effects, have passive expectations and Cournot oligopolistic competition prevails in the market. We demonstrate that if the network effect elasticity of network size in the equilibrium is sufficiently large, the number of firms under free entry is socially insufficient, compared with the second-best criteria. Otherwise, the socially excessive entry arises. Furthermore, we examine the case of responsive expectations and of network effect-insensitive consumers.
    Keywords: excess entry theorem; network effect-sensitive consumers; a fulfilled expectation; Cournot oligopoly
    JEL: D42 L12 L15
    Date: 2020–04
  2. By: Andreas Hefti; Shuo Liu; Armin Schmutzler
    Abstract: Do firms seek to make the market transparent,or do they confuse the consumers in their product perceptions? We show that the answer to this question depends decisively on preference heterogeneity. Contrary to the well-studied case of homogeneous goods, confusion is not necessarily an equilibrium in markets with differentiated goods. In particular, if the taste distribution is polarized, so that indifferent consumers are relatively rare, firms strive to fully educate consumers. By contrast, if the taste distribution features a concentration of indecisive consumers, confusion becomes part of the equilibrium strategies. The adverse welfare consequences of confusion can be more severe than with homogeneous goods, as consumers may not only pay higher prices, but also choose a dominated option, or inefficiently refrain from buying. Qualitatively similar insights obtain for political contests, in which candidates compete for voters with heterogeneous preferences.
    Keywords: Obfuscation, consumerconfusion, differentiated products, price competition, polarized/indecisive preferences, political competition
    JEL: D43 L13 M30
    Date: 2020–04
  3. By: Manning, Alan
    Abstract: There has been an increase in interest in monopsony in recent years. This paper reviews the accumulating evidence that employers have considerable monopsony power. It summarizes the application of this idea to explaining the impact of minimum wages and immigration, in anti-trust and in understanding how to model the determinants of earnings in matched-employer-employee data sets and the implications for inequality and the labor share.
    Keywords: Monospsony; Imperfect Competition
    JEL: J42
    Date: 2020–02–17
  4. By: Yehuda John Levy; Andre Veiga
    Abstract: We assume a fixed number of symmetric firms, competition in prices, constant returns to scale and frictionless consumer choices. Consumers differ in their preferences and profitability (e.g., due to heterogeneous risk aversion and loss probabilities), which creates adverse selection. Firms can offer multiple contracts to screen individuals, in equilibrium and in any deviation. We show that equilibrium profits vanish if each consumer has a unique optimizing bundle at equilibrium prices or, more generally, if there exists a linear ordering over of contracts that dictates the preferences of firms whenever consumers are indifferent between multiple optimal contracts. For instance, equilibrium profits vanish if the marginal rate of substitution of quality for price is sharper for profit than for utility. In particular, profit also vanishes if utility equals the sum of (negative) profit, and a surplus (eg, due to risk aversion). We provide examples of economies where there exists an equilibrium with strictly positive profit and show that these examples are robust (hold for an open set of economies).
    Keywords: Perfect Competition, Equilibrium, Screening
    JEL: D41 C62 D82 G22
    Date: 2020–01
  5. By: Lee, Sang-Ho; Muminov, Timur
    Abstract: We reexamine the results in Gil Molto et al. (2011) and compare the welfare effect of privatization policy in an R&D competition between a mixed duopoly and a private duopoly with an R&D subsidy. We show that an R&D subsidy with privatization policy is beneficial for society unless the spillovers rate is sufficiently low. Otherwise, public R&D leadership in a mixed market is socially superior.
    Keywords: Privatization; R&D subsidy; R&D spillovers; R&D leadership;
    JEL: H21 L13 L32
    Date: 2020–03
  6. By: Joseph E. Stiglitz; Jungyoll Yun; Andrew Kosenko
    Abstract: We study insurance markets with nonexclusive contracts, introducing bilateral endogenous information disclosure about insurance sales and purchases by firms and consumers. We show that a competitive equilibrium exists under remarkably mild conditions, and characterize the unique equilibrium outcome. With two types of consumers the outcome consists of a pooling contract which maximizes the well-being of the low risk type (along the zero profit pooling line) plus a supplemental (undisclosed and nonexclusive) contract that brings the high risk type to full insurance (at his own odds). We show that this outcome is extremely robust and constrained Pareto efficient. Consumer disclosure and asymmetric equilibrium information flows are critical in supporting the equilibrium.
    JEL: D43 D82 D86
    Date: 2020–04
  7. By: Ulsaker, Simen A. (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: The article considers a situation where several firms have the opportunity to sell an identical product to a set of buyers, and where each seller can invest in R&D to develop a higher quality version of the product in question. I consider the possibility of allowing the sellers to offer exclusionary contracts, prior to deciding how much to invest in R&D. In equilibrium every buyer will sign an exclusionary contract with the same seller. Since all buyers are locked to one seller, only this seller will have an incentive to invest in R&D. Whether or not banning exclusionary contracts increases the aggregate probability of successful innovation depends on the R&D technology. More specifically, banning exclusionary contracts will increase the aggregate probability of innovation and joint surplus of buyers and sellers only when the R&D technology exhibits sufficient diseconomies of scale.
    Keywords: Vertical relations; Exclusive contracts; Innovation
    JEL: L22 L42
    Date: 2020–04–27
  8. By: Daniel Berkowitz
    Abstract: Using methods in Hall and Jorgenson (1967) and Barkai (2020), we find that pure profitshares rose 25.6 percentage points in China during a period when reforms were enacted thatshould have strengthened market competition. Increases in firms' markups accounts for roughlyfive-sixths of the increase of pure profit shares in manufacturing. Firms that raised markupsoperated primarily in industries where state owned enterprises (SOEs) were pervasive, net entryof firms was slow, and there was a strong reallocation of market shares to SOEs and a weakreallocation to competitive firms. While there was an overall decline in market competition,markets became more competitive in industries where SOEs had small market shares.
    Date: 2020–01
  9. By: Marta Montinaro (University of Salento); Rupayan Pal (Indira Gandhi Institute of Development Research); Marcella Scrimitore (University of Salento)
    Abstract: In a context of product innovation, we study two-part tariff licensing between a patentee and a potential rival which compete in a differentiated product market characterized by network externalities. The latter are shown to crucially affect the relative profitability of Cournot vs. Bertrand when a per unit royalty is applied. By contrast, we find that Cournot yields higher profits than Bertrand under ad valorem royalties, regardless of the strength of network effects.
    Keywords: Licensing, Product Innovation, Bertrand, Cournot, Network Effects
    JEL: L13 L20 D43
    Date: 2020–04
  10. By: Lorenz Kueng (University of Lugano - Faculty of Economics; Swiss Finance Institute; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Northwestern University - Kellogg School of Management); Nicholas Li (University of Toronto - Department of Economics); Mu-Jeung Yang (University of Washington - Department of Economics)
    Abstract: How do firms in high-income countries adjust to emerging market competition? We estimate how a representative panel of Canadian firms adjusts innovation activities, business strategies, and exit in response to large increases in Chinese imports. Whether firms invest in process or product innovation matters: on average, the number of process innovations declines more strongly than the number of product innovations. In addition, firms that initially pursue process innovation strategies and survive have higher profits ex-post, but are ex-ante more likely to exit. In contrast, firms that initially pursue product innovation strategies have higher profits if they survive, without significant impact on exit. Both empirical patterns are consistent with our theory, which suggests that innovation strategies do not ensure insulation against competitive shocks, but instead increase risk.
    Keywords: International Competition, Innovation, Management Practices, Firm Performance
    JEL: F14 L2 O3
    Date: 2020–04
  11. By: Poppius, Hampus (Department of Economics, Lund University)
    Abstract: When firms meet in multiple markets, they can leverage punishment ability in one market to sustain collusion in another. This is the first paper to test this theory for multiproduct retailers that sell consumer goods online. With data on the universe of consumer goods sold online in Sweden, I estimate that multimarket contact increases prices. To more closely investigate what drives the effect, I employ a machine-learning method to estimate effect heterogeneity. The main finding is that multimarket contact increases prices to a higher extent if there are fewer firms participating in the contact markets, which is one of the theoretical predictions. Previous studies focus on geographical markets, where firms provide a good or service in different locations. I instead define markets as different product markets, where each market is defined by the type of good. This is the first paper to study multimarket contact and collusion with this type of market definition. The effect is stronger than in previously studied settings.
    Keywords: Tacit collusion; pricing; e-commerce; causal machine learning
    JEL: D22 D43 L41 L81
    Date: 2020–04–08
  12. By: Cojoc, Anca; Ivaldi, Marc; Maier-Rigaud, Frank P.; März, Oliver
    Abstract: We present a structural model to investigate the effects of horizontal cooperation on investment in the context of telecommunication networks. More specifically, we estimate the effect of network sharing in the mobile telecommunications industry on prices, network quality and consumer welfare. The presented framework allows estimating the effects of different types of sharing agreements including common ownership of shared assets in a joint venture company or collaboration via geographical separation (geo-split principle). The proposed identification strategy relies on differences in the costs of network deployment of shared versus non-shared network infrastructure, with different costs affecting operators’ optimal choice of price and network quality. We apply the structural model to estimate the effects of a network sharing agreement in the Czech Republic, using a combination of unique datasets on prices, network quality measured as average download speed and operator’s costs of network deployment. The results of our model indicate that horizontal cooperation on investments may be beneficial for consumers. Specifically, the network sharing agreement under study generated cost savings for the sharing parties, which were passed-on to consumers in the form of lower prices and higher average download speed. Our findings are of relevance to the assessment of network sharing agreements, which, considering the substantial investment cost associated with the 5G technology, are likely to play an even greater role in the telecommunications industry in the future. The findings are also of relevance to the general literature on horizontal cooperation on investments.
    Keywords: mobile telecommunication networks; network sharing; cooperation on investment; 4G; 5G; horizontal cooperation; empirical industrial organization
    JEL: L11 L40 L96
    Date: 2020–05
  13. By: Markova, Olga (Маркова, Ольга) (The Russian Presidential Academy of National Economy and Public Administration); Meleshkina, Anna (Мелешкина, Анна) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The article is devoted to the analysis of the reaction of competing airlines to the entry of a new player into the market. This problem is relevant in the light of discussions around methods to stimulate competition in the passenger air transportation markets. Decision urgent problems in the field of civil air transportation in relation to competition issues require reformatting of approaches to industry and antitrust policies. The regulator is faced with the question of balancing the interests of airlines, airport service providers and end-users - passengers. In this case, it is necessary to determine the direction of reform - deregulation or state subsidies. This study is an attempt to systematize the competitive strategies chosen by air carriers in response to changing competition conditions. The results of the analysis may be of interest from the point of view of building forecasts of airline behavior on different routes (markets) with deregulation of the industry and an increase in the number of competitors.
    Keywords: passenger air transportation, competitive strategies, barriers entry
    Date: 2020–03
  14. By: Lee, Sang-Ho; Muminov, Timur
    Abstract: This study revisits welfare comparisons between output and R&D subsidies for a mixed duopoly with partial privatization in a time-consistent policy framework. We show that an output subsidy is welfare-superior to an R&D subsidy policy only when the degree of privatization is high. We also show that the government has a lower incentive to privatize the public firm under the R&D subsidy but full nationalization with an R&D subsidy can decrease the welfare than full privatization with an output subsidy.
    Keywords: Partial privatization; R&D subsidy; Output subsidy; Time-consistenct policy
    JEL: H2 L13 L3
    Date: 2020–04
  15. By: Wojciech Hardy
    Abstract: Much like the music and movie industries before, the comic book industry has entered the digital markets and faces the unfair competition of unauthorized sources. I conduct a survey among comic book readers to infer whether the unpaid channels harm the sales of comic books from the top American publishers. My data allows me to construct a time panel of comics readers and calculate the substitution rate between the paid and unpaid channels of comics acquisition. Moreover, I show that the digital comics – both paid and unpaid – are typically considered as inferior by the readers. With the price of digitally released new comics set at the same level as their print versions, this suggests that readers who do not want to pay the full price for print copies are more likely to use pirate sources than to switch to legal digital channels. Indeed, among the surveyed sample, lowering the price of digital comics could help convert some of the unpaid acquisitions into paid digital ones.
    Keywords: comic books, media, digital formats, piracy, file-sharing
    JEL: C83 K42 O34 Z11
    Date: 2020–03
  16. By: Mariétou H. Ouayogodé; Taressa Fraze; Eugene C. Rich; Carrie H. Colla
    Abstract: Consolidation among physician practices and between hospitals and physician practices has accelerated in the past decade, resulting in higher prices in commercial markets.
    Keywords: physician practices, alternative payment models
  17. By: Richard Blundell (University College London and Institute for Fiscal Studies); Ran Gu (University of Essex and Institute for Fiscal Studies); Soeren Leth-Petersen (CEBI, Department of Economics, University of Copenhagen); Hamish Low (University of Oxford and Institute for Fiscal Studies); Costas Meghir (Yale University, NBER and Institute for Fiscal Studies)
    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: 2019–09–12
  18. By: Ibáñez Colomo, Pablo; Kalintiri, Andriani
    Abstract: This article describes, and puts in context, the evolution of the enforcement practice of the European Commission in the area of EU antitrust law (Articles 101 and 102 TFEU). It considers all formal decisions adopted in the period between 1966 – when the European Court of Justice delivered the two seminal rulings that marked the discipline – and the end of 2017. The article classifies Commission decisions in accordance with four enforcement paradigms. The descriptive statistics show that the cases that the Commission chooses to prioritise have changed over the years. First, enforcement has progressively moved towards the core and the outer boundaries of the system. Second, it has become policy-driven rather than law-driven. Third, the nature of the cases chosen by the Commission is consistent with its commitment to a ‘more economics-based approach’ to enforcement. Finally, these cases signal a move towards a more ambitious stage in the process of the integration of Member States’ economies.
    JEL: N0
    Date: 2020–03–01
  19. By: Brown, David P. (University of Alberta, Department of Economics); Sappington, David E.M. (University of Florida)
    Abstract: We examine the incentives for and the effects of vertical integration in the electricity sector. We find that vertical integration generally reduces retail prices and increases industry capacity investment, consumer surplus, and total welfare. Unilateral vertical integration is pro table, so it arises in equilibrium. However, ubiquitous vertical integration can reduce aggregate industry pro fit.
    Keywords: Vertical Integration; Capacity Investment; Electricity Sector
    JEL: L51 L94 Q28 Q40
    Date: 2020–04–27
  20. By: Rodriguez Castelan, Carlos (World Bank); López-Calva, Luis-Felipe (World Bank); Barriga Cabanillas, Oscar (University of California, Davis)
    Abstract: Although market concentration is one of the main impediments to productivity growth globally, data constraints have limited its analysis to developed countries or cross-country studies based on definitions of market concentration across nations and industries. This paper takes advantage of a database that is unusual by developing-country standards by means of leveraging the richness of five rounds of the Mexican Manufacturing Census between 1994 and 2014. The data allow estimation of the effects of local industry concentration on productivity. The main results show that a decline by 10 points in the Herfindahl-Hirschman index (on a 0-100 scale), a measure of market concentration, explains an increase by 1 percent in the total factor productivity of revenue. Local industry concentration also has heterogeneous effects on productivity across industries, while its impact on productivity varies by level of exposure to international markets. Results show that the effect of greater exposure to trade offsets and, in most cases, reverses the negative effects of local concentration on productivity. These results are robust to specifications based on the estimation of firm productivity using the panels of establishment data from the 2009 and 2014 rounds of the economic census, to controlling for a proxy of markups, and to using alternative indicators of local industry concentration.
    Keywords: productivity, market concentration, instrumental variables
    JEL: C26 D24 D4 F12 L1
    Date: 2020–04
  21. By: Hsu, Wen-Tai (School of Economics, Singapore Management University); Lu, Yi (Tsinghua University); Luo, Xuan (INSEAD); Zhu, Lianming (Osaka University)
    Abstract: This paper studies the effect of foreign direct investment (FDI) on industrial ag-glomeration. Using the differential effects of FDI deregulation in 2002 in China on different industries, we find that FDI actually affects industrial agglomeration neg-atively. As FDI brings technological spillovers and various agglomeration benefits, other forces must be at work to drive our empirical finding. We propose a simple theory that FDI may discourage industrial agglomeration due to fiercer competition pressure. We find various evidence on this competition mechanism. We also examine an alternative theory based on spatial political competition, but find no evidence sup-porting it. On industrial growth, we find that FDI deregulation is conducive, but the dispersion induced by FDI deregulation reduces the positive effect of FDI on growth rate by 16 to 19%.
    Keywords: FDI; deregulation; industrial agglomeration; competition; industrial growth; WTO; China
    Date: 2020–04–01
  22. By: Noto La Diega, Guido (University of Stirling)
    Abstract: The fashion industry is affected by an imbalance of power that goes beyond the outsourcing of part of the manufacture to developing countries. Said imbalance characterises the whole supply chain and hinders freedom of expression, freedom to conduct business and, hence, creativity and innovation. In order to understand fashion, IP lawyers and lawmakers need to take into account that the law is not the main device the regulating the relevant relationships. Indeed, fashion is a closed community, a family where complaining is rather frowned upon and where contracts do not reflect the actual relationships between the parties. In order to rebalance power, this article explores the possibility to treat good faith and inequality of bargaining power as unifying principles of contract law. However, in light of the evidence collected during a number of in-depth interviews with fashion stakeholders, it seems clear that social norms are the main source of regulation of relationships and, therefore, intervening at the level of the contracts may not be helpful. Competition law, in turn, may be of more help in rebalancing power; however, cases such as Coty v Parfümerie Akzente do not augur well. Moreover, competition law is useful when the relationship is over, but it is in all the stakeholders’ interest to keep the relationship alive while fixing its imbalance. This study confirms recent findings that social norms do not only have a positive impact on fields with low IP-equilibrium and it sheds light on the broader consequences of the reliance on social norms and on its relationship to power imbalance. This work makes a twofold recommendation. First, IP lawyers should engage more with the unfamiliar field of social norms. Second, advocates of a reform of IP aimed at transforming the industry in an IP-intensive one should be mindful that the effort may prove useless, in light of the role of social norms, especially if power is not distributed.
    Date: 2018–07–26
  23. By: Germà Bel (Department of Econometrics, Statistics and Applied Economics. John Keynes 1-11. 08034 Barcelona, Spain); Marianna Sebo (Department of Econometrics, Statistics and Applied Economics. John Keynes 1-11. 08034 Barcelona, Spain.)
    Abstract: Over the last two decades, Barcelona has implemented a far-reaching reform of the city’s solid waste management. In 2000, the city was divided in four zones, with four separate solid waste collection contracts being awarded to private firms, with none being allowed to obtain more than two zones, a rule that was revised in 2009 to just one contract per firm. This division of the market via exclusive territories sought to enhance competition in the expectation of the convergence of relative costs, efficiency and service quality throughout the city. Based on monthly observations of costs and outputs between 2015 and 2018, this paper analyzes and evaluates the creation of lots as a tool of competition. We find that firms producing in larger zones report higher costs, that increased competition was not sufficient to lead to converging costs, and that none of the firms operate under increasing returns to scale. As such, we recommend creating an additional zone. We further suggest that if one of the zones were to be subject to public production, and adopted a mixed delivery provision strategy, the ability of the regulator to deal with asymmetric information would improve and a more reliable system could be created.
    Keywords: Waste collection, Management, Privatization, Re-municipalization, Competition JEL classification: L32, L33, L38, Q53
    Date: 2020–04

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