nep-com New Economics Papers
on Industrial Competition
Issue of 2020‒09‒28
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. Patterns of competitive interaction By armstrong, Mark; Vickers, John
  2. Collusion between two-sided platforms By Yassine Lefouili; Joana Pinho
  3. Competing for Time: A Study of Mobile Applications By Han Yuan
  4. Price-setting mixed duopoly, subsidization and the order of firms’ moves: an irrelevance result By Ohnishi, Kazuhiro
  5. Two-Sided Platforms and Biases in Technology Adoption By Choi, Jay Pil; Jeon, Doh-Shin
  6. Search, Information, and Prices By Dirk Bergemann; Benjamin Brooks; Stephen Morris
  7. R&D Spillovers through RJV Cooperation By Albert Banal-Estañol; Tomaso Duso; Jo Seldeslachts; Florian Szücs
  8. Rules of Origin and Market Power By Wanyu Chung; Carlo Perroni
  9. IKEA entry - Effects on firms in retail and hospitality By Nilsson, Helena
  10. Entry of malls and exit of stores - The role of distance and economic geography By Klaesson, Johan; Nilsson, Helena
  11. When the Threat Is Stronger Than the Execution: Trade and Welfare under Oligopoly By Dermot Leahy; J. Peter Neary
  12. Creating platforms by hosting rivals By Andrei Hagiu; Bruno Jullien; Julian Wright
  13. Firm profits and government activity: An empirical investigation By Tevdovski, Dragan; Madjoska, Joana; Jolakoski, Petar; Jovanovic, Branimir; Stojkoski, Viktor
  14. Constructing the Customer Journey Map of Competitive Brands: A Complex Time-series Analysis By MIZUNO Makoto; AOYAMA Hideaki; FUJIWARA Yoshi
  15. When Tariffs Disturb Global Supply Chains By Gene M. Grossman; Elhanan Helpman
  16. Learning from Data and Network Effects: The Example of Internet Search By Maximilian Schäfer; Geza Sapi
  17. Spatial Distribution of Supply and the Role of Market Thickness: Theory and Evidence from Ride Sharing By Soheil Ghili; Vineet Kumar

  1. By: armstrong, Mark; Vickers, John
    Abstract: We explore patterns of price competition in an oligopoly where consumers vary in the set of firms they consider for their purchase and buy from the lowest-priced firm they consider. We study a pattern of consideration, termed "symmetric interactions", that generalises models used in existing work (duopoly, symmetric firms, and firms with independent reach). Within this class, equilibrium profits are proportional to a firm's reach, firms with a larger reach set higher average prices, and a reduction in the number of firms (either by exit or by merger) harms consumers. We go on to study patterns of consideration with asymmetric interactions. In situations with disjoint reach and with nested reach we find equilibria in which price competition is "duopolistic": only two firms compete within each price range. We characterize equilibria in the three-firm case, and show how entry and merger can affect patterns of price competition in novel ways.
    Keywords: Price competition, Consideration sets, Mixed strategies, Entry and mergers
    JEL: D43 D83 L13 L4
    Date: 2020–09
  2. By: Yassine Lefouili (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Joana Pinho (Universidade Católica Portuguesa [Porto])
    Abstract: We study the price and welfare effects of collusion between two-sided platforms and show that they depend on whether collusion occurs on both sides or a single side of the market, and whether users single-home or multi-home. Our most striking result is that one-sided collusion leads to lower (resp. higher) prices on the collusive (resp. competitive) side if the cross-group externalities exerted on the collusive side are positive and sufficiently strong. One-sided collusion may, therefore, benefit the users on the collusive side and harm the users on the competitive side. Our findings have implications regarding cartel detection and damages actions.
    Keywords: Collusion,Two-sided markets,Cross-group externalities
    Date: 2020–09
  3. By: Han Yuan
    Abstract: A smartphone user allocates her time to multiple mobile applications. To study the competitive relationship among apps, I develop a discrete-continuous model of time allocation with a binding time constraint and estimate it with a weekly panel of app usage in China. If two apps are often used together, it is because either they are complements or the preferences of the two apps are positively correlated. To disentangle complementarity (substitutability) from correlation in preferences, I use the exclusion restriction that updates of an app should affect the utility of this app but not those of other apps. I estimate the model on three pairs of apps (substitutes, complements, and independent apps). I recover a reasonable competition pattern and simulate mergers of the three pairs of apps. I find that a seemingly innocuous merger of independent apps can hurt consumers due to the binding time constraint. My results confirm that users and firms can both benefit from a merger of complements. I also find that usage-based pricing leads to higher profits and total surplus compared with subscription pricing because it enables price discrimination based on usage.
    JEL: L11 L40 M31
    Date: 2020–09–18
  4. By: Ohnishi, Kazuhiro
    Abstract: This paper examines price-setting duopoly games with production subsidies and shows that the optimal production subsidy, profits and economic welfare are identical irrespective of whether (i) a public firm and a private firm simultaneously and independently set prices, (ii) the public firm acts as a Stackelberg leader, or (iii) both firms behave as profit-maximizers.
    Keywords: Mixed duopoly model; Price competition; Subsidization
    JEL: C72 D21 L32
    Date: 2020–08
  5. By: Choi, Jay Pil; Jeon, Doh-Shin
    Abstract: We investigate the relationship between market structure and platforms'incentives to adopt technological innovations in two-sided markets, where platforms may find it optimal to charge zero price on the consumer side and to extract surplus on the ad- vertising side. We consider innovations that a¤ect the two sides in an opposite way. We compare private incentives with social incentives and find that the bias in tech- nology adoption depends crucially on whether the non-negative pricing constraint binds or not. Our results provide a rationale for a tougher competition policy to curb concentration if competition authorities put more weight on consumer surplus in welfare calculations.
    Keywords: Technology Adoption, Two-Sided Platforms, Non-Negative Pricing Constraint, Pass-through
    JEL: D4 L1 L5
    Date: 2020–09
  6. By: Dirk Bergemann (Department of Economics, Grandiose University); Benjamin Brooks (Department of Economics, Grandiose University); Stephen Morris (Department of Finance, Massachusetts Institute of Technology)
    Abstract: Consider a market with many identical firms offering a homogenous good. A consumer obtains price quotes from a subset of firms and buys from the firm offering the lowest price. The Òprice countÓ is the number of Þrms from which the consumer obtains a quote. For any given ex ante distribution of the price count, we obtain a tight upper bound (under Þrst-order stochastic dominance) on the equilibrium distribution of sale prices. The bound holds across all models of ÞrmsÕ common-prior higher-order beliefs about the price count, including the extreme cases of complete information ( Þrms know the price count exactly) and no information ( Þrms only know the ex ante distribution of the price count). A qualitative implication of our results is that even a small ex ante probability that the price count is one can lead to dramatic increases in the expected price. The bound also applies in a wide class of models where the price count distribution is endogenized, including models of simultaneous and sequential consumer search.
    Keywords: Search, Price Competition, Bertrand Competition, "Law of One Price", Price Count, Price Quote, Information Structure, Bayes Correlated Equilibrium
    JEL: D41 D42 D43 D83
    Date: 2020
  7. By: Albert Banal-Estañol; Tomaso Duso; Jo Seldeslachts; Florian Szücs
    Abstract: We investigate the dimensions through which R&D spillovers are propagated across firms via cooperation through Research Joint Ventures (RJVs). We build on the framework developed by Bloom et al. (2013) which considers the opposing effects of technology spillovers and product market rivalry, and extend it to account for RJVs. Our main findings are that the adverse effects of product market rivalry are mitigated if firms cooperate in RJVs and that R&D spending is reduced among technologically close RJV participants.
    Keywords: spillovers, R&D, research joint ventures, market value, patents
    JEL: L24 L44 K21 O32
    Date: 2020
  8. By: Wanyu Chung; Carlo Perroni
    Abstract: We study how domestic content requirements in Free Trade Areas (FTAs) affect market power and market structure in concentrated intermediate goods markets. We show that content requirements increase oligopolistic markups beyond the level that would obtain under an equivalent import tariff, and we document patterns in Canadian export data and US producer price data that align with the model’s predictions: producers of intermediate goods charge comparatively higher prices when the associated final goods producers are more constrained by FTA origin requirements and by Most Favoured Nation (MFN) tariffs for both intermediate and final non-FTA goods.
    Keywords: free trade areas, content requirements, market power
    JEL: F12 F13 F14 D43
    Date: 2020
  9. By: Nilsson, Helena (Institute of Retail Economics (Handelns Forskningsinstitut))
    Abstract: This study examines the entry effects of a durable goods big box, IKEA, on incumbent firms in the retail, accommodation and restaurant sectors in Sweden. Using a difference-in-difference approach combined with matching, the effects of IKEA entry on the net turnover and employment of incumbent firms located at varying distances from the new IKEA store are examined. The results show that entry by IKEA increases the net turnover of retail firms near the entry site that sell complement goods, indicating that IKEA entry causes demand spillovers due to multipurpose shopping. IKEA entry also increases the net turnover of accommodation firms in the region, which indicates that the entrant has a positive effect on the attractivity of the area. The estimations reveal no effects on retail firms located in the affected city centers, which suggests that retail in central places may have a certain resilience to competition from out-of-town retail clusters. No robust effects on substitute goods retailers or restaurants are found.
    Keywords: IKEA; retail; hospitality; agglomeration economies; competition; difference-in-difference
    JEL: C33 D22 L81 L83
    Date: 2020–08–31
  10. By: Klaesson, Johan (Center for Entrepreneurship and Spatial Economics); Nilsson, Helena (Institute of Retail Economics (Handelns Forskningsinstitut))
    Abstract: The empirical literature on the effects of external malls on incumbent stores is inconclusive, and quantitative research on this topic is limited. In an attempt to add to the literature, this study examines the effect of the entry of external retail malls on store survival. Using a full firm population panel dataset at the store level covering the period 2000-2014, we examine the effect of a change in the distance to an external retail mall on the probability of retail store exit. In doing this we explicitly model the economic geography. We measure the economic activity in the location where these stores are situated using a market potential measure to gauge the economic density. The main result of this study is that the effects differ depending on where the incumbent firm is located. The effects on firms located in low-density areas and those on firms located in high-density areas differ dramatically. In low-density areas we find complementary effects which means that the probability of incumbent store exit is lesser. In high-density areas the estimated effect is the opposite, the entry of a new external mall increases the probability of incumbent store exit. The strength of the effects is dependent on the distance between the incumbent firm and the newly established external mall. Additionally, the size of effects differs between different parts of the retail sector. Effects remain over a number of years after entry of external malls but become smaller over time.
    Keywords: external shopping malls; complements; retail; panel-data; firm-exit; market potential
    JEL: C33 D22 L81 P25
    Date: 2020–08–31
  11. By: Dermot Leahy; J. Peter Neary
    Abstract: We compare trade liberalization under Cournot and Bertrand competition in reciprocal markets. In both cases, the critical level of trade costs below which the possibility of trade affects the domestic firm’s behavior is the same; trade liberalization increases trade volume monotonically; and welfare is U-shaped under reasonable conditions. However, welfare is typically greater under Bertrand competition; for higher trade costs the volume of trade is greater under Cournot competition, implying a “van-der-Rohe Region” in parameter space; and, for even higher trade costs, there exists a “Nimzowitsch Region”, where welfare is higher under Bertrand competition even though no trade takes place.
    Keywords: Cournot and Bertrand Competition, Nimzowitsch Region, oligopoly and trade, trade liberalization, van-der-Rohe Region
    JEL: L13 F12
    Date: 2020
  12. By: Andrei Hagiu (BU - Boston University [Boston]); Bruno Jullien (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Julian Wright (NUS - National University of Singapore)
    Abstract: We explore conditions under which a multiproduct firm can profitably turn itself into a platform by "hosting rivals," i.e. by inviting rivals to sell products or services on top of its core product. Hosting eliminates the additional shopping costs to consumers of buying a specialist rival's competing version of the multiproduct firm's non-core product. On the one hand, this makes it easier for the rival to compete on the non-core product. On the other hand, hosting turns the rival from a pure competitor into a complementor: the value added by its product now helps raise consumer demand for the multi-product firm's core product. As a result, hosting can be both unilaterally profitable for the multi-product firm and jointly profitable for both firms.
    Keywords: multi-sided platforms,shopping costs,bundling,competition,complementarity.
    Date: 2020–07
  13. By: Tevdovski, Dragan; Madjoska, Joana; Jolakoski, Petar; Jovanovic, Branimir; Stojkoski, Viktor
    Abstract: Recent studies suggest that firm profits have risen to a level far above than what would have been earned in a competitive economy. It has been hypothesized that these profits, generated by market power, allow firms to influence the activity of the government. However, despite an abundance of theoretical investigations, the empirical examinations for the validity of this hypothesis have been largely neglected. Against this background, here we perform a detailed empirical study on the potential effects of firm profits and markups on government size and effectiveness. Using data on 30 European countries for a period of 17 years and an Instrumental Variables approach, we find that there exists a robust and stable negative relationship between firm gains and the activity of the state. Our results indicate that, even in such a homogeneous group of countries, firm power may dictate the decline in state activity and, successively, lead to emergence and persistence of inefficient states.
    Keywords: government activity; europe; public economics
    JEL: H10
    Date: 2020–09–05
  14. By: MIZUNO Makoto; AOYAMA Hideaki; FUJIWARA Yoshi
    Abstract: In today's rapidly evolving consumer markets, obtaining a quantitative grasp of the customer journey (the sequence of touch points where customers and brands meet, which is important for marketing strategy) requires analysis of extremely high-dimensional data. Existing studies ignore the effects of touch points of multiple brands that are mutually competitive. We propose to apply a novel method called complex Hilbert principal component analysis (CHPCA) to allow unbiased, model-free analysis, and construct a synchronization network using Hodge decomposition. We apply this method to Japanese beer market data and show that it is suitable for the construction of the customer journey map both within-brand and across brands, the latter reflecting competition among firms. Furthermore, we capture customer heterogeneity by calculating the coordinates of each customer in the space derived from the results of CHPCA. Lastly, we discuss the policy and managerial implications, the limitations, and further development of the proposed method.
    Date: 2020–08
  15. By: Gene M. Grossman; Elhanan Helpman
    Abstract: We study unanticipated tariffs on imports of intermediate goods in a setting with firm-to-firm supply relationships. Firms that produce differentiated products conduct costly searches for potential input suppliers and negotiate bilateral prices with those that pass a reservation level of match productivity. Global supply chains are formed in anticipation of free trade. Once they are in place, the home government surprises with an input tariff. This can lead to renegotiation with initial suppliers or new search for replacements. We identify circumstances in which renegotiation generates improvement or deterioration in the terms of trade. The welfare implications of a tariff are ambiguous in this second-best setting, but plausible parameter values suggest a welfare loss that rises rapidly at high tariff rates.
    JEL: F1 F13
    Date: 2020–08
  16. By: Maximilian Schäfer; Geza Sapi
    Abstract: The rise of dominant firms in data driven industries is often credited to their alleged data advantage. Empirical evidence lending support to this conjecture is surprisingly scarce. In this paper we document that data as an input into machine learning tasks display features that support the claim of data being a source of market power. We study how data on keywords improve the search result quality on Yahoo!. Search result quality increases when more users search a keyword. In addition to this direct network effect caused by more users, we observe a novel externality that is caused by the amount of data that the search engine collects on the particular users. More data on the personal search histories of the users reinforce the direct network effect stemming from the number of users searching the same keyword. Our findings imply that a search engine with access to longer user histories may improve the quality of its search results faster than an otherwise equally efficient rival with the same size of user base but access to shorter user histories.
    Keywords: Competition, network effects, search engines, Big Data
    JEL: L12 L41 L81 L86
    Date: 2020
  17. By: Soheil Ghili (Cowles Foundation & School of Management, Yale University); Vineet Kumar (School of Management, Yale University)
    Abstract: This paper studies the e ects of economies of density in transportation markets, focusing on ridesharing. Our theoretical model predicts that (i) economies of density skew the supply of drivers away from less dense regions, (ii) the skew will be more pronounced for smaller platforms, and (iii) rideshare platforms do not nd this skew ecient and thus use prices and wages to mitigate (but not eliminate) it. We then develop a general empirical strategy with simple implementation and limited data requirements to test for spatial skew of supply from demand. Applying our method to ride-level, multi-platform data from New York City (NYC), we indeed nd evidence for a skew of supply toward busier areas, especially for smaller platforms. We discuss the implications of our analysis for business strategy (e.g., surge pricing) and public policy (e.g., consequences of breaking up or downsizing a rideshare platform).
    Keywords: Spatial Markets, Transportation, Economies of Density, Market Thickness, Ridesharing
    JEL: L13 R41 D62
    Date: 2020–01

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