nep-com New Economics Papers
on Industrial Competition
Issue of 2020‒10‒12
thirteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Self-Preferencing in Markets with Vertically-Integrated Gatekeeper Platforms By Jorge Padilla; Joe Perkins; Salvatore Piccolo
  2. Consumer switching costs in a market with legal and pirate providers By Wojciech Hardy
  3. Two-Sided Platforms and Biases in Technology Adoption By Jay Pil Choi; Doh-Shin Jeon
  4. Market share transparency, signaling and welfare: Cournot and Bertrand By David Spector
  5. On the Risk of Using a Firm-Level Approach to Identify Relevant Markets By Timo Autio; Jorge Padilla; Salvatore Piccolo; Pekka Sääskilahti; Lotta Väänänen
  6. Preferential Trade Liberalization with Endogenous Cartel Discipline: Implications for Welfare and Optimal Trade Policies By Agnosteva, Delina; Syropoulos, Constantinos; Yotov, Yoto
  7. The Competitive Effects of Declining Entry Costs over Time: Evidence from the Static Random Access Memory Market By An-Hsiang Liu; Ralph Siebert
  8. Does local competition make a difference for store profitability?: An empirical study of 168 Swedish supermarkets By Hernant, Mikael; Julander, Claes-Robert
  9. Regulating Platform Fees under Price Parity By Renato Gomes; Andrea Mantovani
  10. Organization of environmental R&D in a duopoly under unequal costs and asymmetric information By Shiraj, Molla Mursaleen
  11. The Price Effects of Milk Supply Control in the U.S. Dairy Industry By Bolotova, Yuliya
  12. Does Competition for Energy Conservation Rebates Work? By Ta, Chi L.
  13. Market Power in Norwegian Salmon Industry By Jamali Jaghdani, Tinoush; Čechura, Lukáš; Ólafsdóttir, Guðrún; Thakur, Maitri

  1. By: Jorge Padilla (Compass Lexecon); Joe Perkins (Compass Lexecon); Salvatore Piccolo (Università di Bergamo, Compass Lexecon and CSEF)
    Abstract: The competitive strategies of 'gatekeeper' platforms are subject to enhanced scrutiny. For instance, Apple and Google are being accused of charging excessive access fees to app providers and privileging their own apps. Some have argued that such allegations make no economic sense when the platform's business model is to sell devices. In this paper, we build a model in which a gatekeeper device-seller facing potentially saturated demand for its device has the incentive and the ability to exclude from the market third-party suppliers of a service that consumers buy via its devices. Foreclosure is more likely if demand growth for the platform's devices is slow or negative, and can harm consumers if the device-seller's services are inferior to those offered by the third parties.
    Keywords: Durable Goods, Foreclosure, Gatekeeper Platforms, Self-Preferencing, Vertical Integration.
    JEL: D43 K21 L41 L81
    Date: 2020–10–02
  2. By: Wojciech Hardy
    Abstract: Despite a rich literature on switching costs in traditional markets, little has been said on the context of competition between pirate and legal providers. With a sizeable literature on the effects of piracy and its determinants, it is crucial to understand the specific barriers that may prevent consumers from diverting to unauthorised consumption in the first place. Basing on existing switching cost typologies, literature on piracy and new empirical evidence, I provide a first thorough categorisation of different switching costs in a market with legal and pirate providers. I discuss the implications for consumer retention strategies.
    Keywords: switching costs, piracy, competition, digital goods, file-sharing
    JEL: D4 L1 M2
    Date: 2020–08
  3. By: Jay Pil Choi; Doh-Shin Jeon
    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 advertising side. We consider innovations that affect the two sides in an opposite way. We compare private incentives with social incentives and find that the bias in technology 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: D40 L10 L50
    Date: 2020
  4. By: David Spector (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PSE - Paris School of Economics)
    Abstract: When demand is noisy and firms' costs are uncertain, the availability of market share data increases the accuracy of each firm's information, and it creates incentives for signaling. Taking both effects into account, we find that under quantity competition with a homogeneous good, the availability of market share data has a positive impact on total surplus and an ambiguous one on consumer surplus. Under price competition with differentiated substitutes, it has a negative impact on consumer surplus and an ambiguous one on total surplus. If the cost difference is small, the effect of first-period signaling dominates the effect of second-period full information. Accordingly, in this case, the availability of market share data causes total and consumer surplus to increase in the case of quantity competition and to decrease in the case of price competition.
    Date: 2020–09
  5. By: Timo Autio (Compass Lexecon); Jorge Padilla (Compass Lexecon); Salvatore Piccolo (Università di Bergamo, Compass Lexecon and CSEF); Pekka Sääskilahti (Compass Lexecon); Lotta Väänänen (Compass Lexecon)
    Abstract: In a recent influential paper Coate et al. (2020) have criticized the standard firm-level approach to market definition in merger review. They argue why a market-level approach to critical loss is more appropriate than a firm-level critical loss analysis. Their conclusion is that under certain plausible demand scenarios - i.e., non-linearity of demand functions - a diversion-based firm-level analysis could easily reach the wrong answer on market definition. We extend their analysis by showing that in standard environments used by the most recent theoretical and empirical academic work on merger analysis (namely CES and logit demand functions), a firm level approach actually leads to an excessively narrow market definition as opposed to a market-level approach, thereby increasing the risk of type I errors.
    Keywords: Critical Loss Analysis, Firm- and Market-level approach, Mergers, Non-linear Demand.
    JEL: D43 G34 L4 L13
    Date: 2020–09–26
  6. By: Agnosteva, Delina (Department of Economics); Syropoulos, Constantinos (School of Economics Drexel University LeBow College of Business); Yotov, Yoto (School of Economics Drexel University LeBow College of Business)
    Abstract: We consider an international cartel whose members interact repeatedly in their own as well as in third-country segmented markets. Cartel discipline--an inverse measure of the degree of competition between firms--is endogenously determined by the cartel's incentive compatibility constraint (ICC), which links strategically markets that are seemingly unrelated. Owing to this linkage, trade cost reductions induce cartel members to adjust their sales, not only due to direct effects, but also due to spillover effects related to cartel discipline. We apply these ideas to preferential trade agreements (PTAs) and show that the indirect effects can give rise to trade diversion. We also characterize the welfare effects of preferential tariff cuts for all countries under various circumstances regarding the determination of external PTA trade policy. A persistent finding is that, in the absence of appropriate regulation, preferential trade liberalization can be welfare-reducing even when external policy is jointly optimal.
    Keywords: multimarket contact; repeated interactions; constrained collusion; intra-industry trade; welfare; optimal trade policies
    JEL: D43 F10 F12 F13 F15 L12 L13
    Date: 2020–08–24
  7. By: An-Hsiang Liu; Ralph Siebert
    Abstract: We focus on the estimation of market entry costs that are declining over time and evaluate their impact on competition and market performance. We employ a dynamic oligopoly model in which firms make entry, exit, and production decisions in the presence of declining entry costs and learning by doing effects. Focusing on the static random access memory industry, we show that entry costs drastically decline by more than 80 percent throughout the life cycle. This corresponds to entry cost reductions of $30 million per quarter. To show the relevance of declining entry cost, we perform three counterfactuals in which a social planner can (a) regulate entry, (b) charge a tax on entry, and (c) provide a subsidy to promote entry. Our simulations show that declining entry costs can lead to excessive entry costs that result from too early entries by firms. Tax and entry regulation policy can reduce the excessive entry problem having a positive effect on total surplus while reducing consumer welfare. In contrast, a subsidy policy intensifies the problem of excessive entry at early periods but it increases consumer welfare.
    Keywords: dynamic efficiency gains, entry costs, entry protection, entry regulation, market entry, market structure, semiconductor industry, social planner, subsidies, taxes
    JEL: C10 L10 L60 O30
    Date: 2020
  8. By: Hernant, Mikael (Högskolan i Skövde (HIS), Institutionen för Handel och Företagande); Julander, Claes-Robert (Center for Retailing)
    Abstract: Much of what we know about the effects of competition on store performance emanate from SCP studies of grocery retail stores located in different geographical markets. These studies have provided empirical support for the notion that low competition endows firms with market power, enabling them to set higher prices compared to firms located in more competitive markets. However, to what extent the effect of competition on prices translates into higher gross margins and higher profits and profitability on the store level appears to be an unanswered question. One reason being that valid and reliable data on the profitability of individual stores never or very seldom are disclosed for research by retail companies. This study takes previous empirical research on the effects of local competition in retailing one step further, by investigating the relationships between competition and various aspects of economic performance of 168 supermarkets, all owned and managed by individual retailers affiliated to the voluntary ICA chain in Sweden. A unique database has been created by pooling data from income statements and balance sheets with details on local competition. Local competition is depicted in three dimensions: concentration, horizontal vs. intertype competition, and spatial monopoly. The main contribution of this study is that it establishes an empirical relationship between competition and bottom-line economic performance. The results show that competition has a significant effect on conduct and financial performance. In more competitive markets, supermarkets price lower, conduct “more” on non-price attributes, and achieve lower profitability compared to stores facing little competition. This study thus validates the SCP-paradigm and it explicitly shows that market power opportunities on the local market level is translated into higher profitability performance of stores. As such, the study has important implications for competition authorities’ actions as well as for retail management decisions.
    Keywords: Retailing; Competition; store profitability
    Date: 2020–09–28
  9. By: Renato Gomes (Toulouse School of Economics, 1, Esplanade de l’Université, 31080, Toulouse, France); Andrea Mantovani (Toulouse Business School, 1, Place Alphonse Jourdain, 31068, Toulouse, France)
    Abstract: Online marketplaces, such as Amazon, or online travel agencies, such as, greatly expand consumer information about market offers, but also raise firms’ marginal costs by charging high commissions. To prevent show-rooming, platforms adopted price parity clauses, which restrict sellers’ ability to offer lower prices in alternative sales channels. Whether to uphold, reform, or ban price parity has been at the center of the policy debate, but so far little consensus has emerged. In this paper, we investigate a natural alternative to lifting price parity; namely, we study how to optimally cap platforms’ commissions. The optimal cap reflects the Pigouvian precept according to which the platform should not charge fees greater than the externality that its presence generates on other market participants. Employing techniques from extreme-value theory, we are able to express the optimal cap in terms of observable quantities. In an application to online travel agencies, we find that current average fees are welfare increasing only if platforms at least double consumers’ consideration sets (relative to alternative ways of gathering information online). This suggests that, in some markets, regulation capping commissions should bind if optimally set.
    Keywords: platforms, price parity, regulation, commission caps, extreme value theory.
    JEL: D83 L10 L41
    Date: 2020–09
  10. By: Shiraj, Molla Mursaleen
    Keywords: Resource/Energy Economics and Policy, Industrial Organization
    Date: 2020–07
  11. By: Bolotova, Yuliya
    Keywords: Industrial Organization, Marketing, Agribusiness
    Date: 2020–07
  12. By: Ta, Chi L.
    Keywords: Resource/Energy Economics and Policy, Institutional and Behavioral Economics
    Date: 2020–07
  13. By: Jamali Jaghdani, Tinoush; Čechura, Lukáš; Ólafsdóttir, Guðrún; Thakur, Maitri
    Keywords: Industrial Organization, Agribusiness
    Date: 2020–09–18

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