nep-com New Economics Papers
on Industrial Competition
Issue of 2020‒10‒26
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Competition in a spatially-differentiated product market with negotiated prices By Howard Smith; Walter Beckert; Yuya Takahashi
  2. Upstream competition, exclusive content provision, and vertical integration in media markets By Kiho Yoon
  3. The New Economics and Regulation of Digital Platforms: Lessons from the Old World of Regulation? By Dasgupta, Kalyan; Williams, Mark
  4. Common factors of withdrawn and prohibited mergers in the European Union By Bernhardt, Lea
  5. The Limits of Marketplace Fee Discrimination By Mark J. Tremblay
  6. On the Private and Social Value of Consumer Data in Vertically-Integrated Platform Markets By Jorge Padilla; Salvatore Piccolo; Helder Vasconcelos
  7. Competition Effects of Airport Slot-Swap: An Analysis of the Delta/US Airways Deal By Yongjoon Park
  8. Lessons from Innovation Economics for Digital Platform Policy By Bauer, Johannes M.; Prado, Tiago S.
  9. An Empirical Analysis of Mergers: Efficiency Gains and Impact on Consumer Prices By Céline Bonnet; Jan Philip Schain
  10. The Contrasting Approaches to Power of the Modern State and the Antitrust Laws: Lessons for Platform Regulation By Woodcock, Ramsi
  11. Banking Concentration and Financial Crises By Ray Barrell; Dilruba Karim
  12. Competing for Search Traffic in Query Markets: Entry Strategy, Platform Design, and Entrepreneurship By Wei Zhou; Zidong Wang
  13. Mobile market performance and market structure in Europe during the 4G era By Abate, Serafino; Bahia, Kalvin; Castells, Pau
  14. An Open Video System (OVD) to Overcome Market Power in Online Video Platforms By Noam, Eli M.
  15. On excess capacity in a monopoly market with network externalities By Tsuyoshi Toshimitsu
  16. Local Power Markets By Pio Baake; Sebastian Schwenen; Christian von Hirschhausen
  17. Pricing and waiting time decisions in a health care market with private and public provision By Alves, Vasco
  18. The impact of network sharing on competition: the challenges posed by early versus mature 5G By Pápai, Zoltán; McLean, Aliz; Nagy, Péter; Szabó, Gábor; Csorba, Gergely
  19. Competition and Public Policy in Sharing Economy: A Survey By Noriyuki Doi
  20. Analysis of the effectiveness of public procurement procedures based on game-theoretic models By Zhemkova, Aleksandra (Жемкова, Александра)

  1. By: Howard Smith; Walter Beckert; Yuya Takahashi
    Abstract: In many markets the buyer pays an individually-negotiated price. Theo­retically, relative to uniform-pricing, this has an ambiguous impact on market power and the effects of merger. To analyze competition in the UK brick indus-try—where individually-negotiated pricing is used, and the market is highly con-centrated—we develop a model of negotiated pricing and discrete-choice demand which permits alternative specifications for how the buyer's runner-up product affects price negotiations. We derive a likelihood for observed choices and prices and estimate the model using transaction-level data. We use the model to re­ject the hypothesis of price-taking buyers, calculate the distribution of markups, and measure the effect on markups of multi-product ownership and buyer loca­tion. A counterfactual policy of uniform pricing increases average markups by about one-third, harms most buyers, and magnifies the price-increasing effect of merger. Average markups increase because uniform pricing is intrinsically less competitive and because it imposes buyer price-taking.
    Keywords: individualized pricing, bargaining, price discrimination, spatial dif¬ferentiation, merger analysis, construction supplies
    Date: 2020–10–16
  2. By: Kiho Yoon (Department of Economics, Korea University 145 Anam-ro, Seongbuk-gu, Seoul, Korea 02841)
    Abstract: With a multilateral vertical contracting model, we examine the contractual form and the vertical structure in media markets. We analyze the trade of content by the Nash bargaining solution and the downstream competition by the Hotelling location model. We show that the possibility of exclusive contracts rises when the value of the premium content increases, the degree of horizontal differentiation in the downstream market decreases, the importance of advertising revenue decreases, and the relative bargaining power of upstream firm decreases. We also show that vertical separation (full vertical integration, respectively) is plausible when the relative bargaining power of upstream firm is strong (weak, respectively).
    Keywords: content provision, exclusive contract, vertical integration, media market, video programming.
    JEL: D43 L42 L82
    Date: 2020
  3. By: Dasgupta, Kalyan; Williams, Mark
    Abstract: This paper casts the economic and regulatory debate around digital platforms in a broader and more historical context. We emphasise that despite the considerable theoretical and policy-making discussion that focuses on the specific attributes of platforms-the presence of indirect network effects, economies of scale and difficulties of consumer coordination-that the challenge confronting policy-makers is an inherent tension between the desire to see "competitive" markets characterised by entry or by multiple competing firms, and other economic objectives such as efficiency and incentives to innovate. We note that similar challenges have been confronted in areas such as innovation policy and in network industries where sunk set-up costs and the resulting scale economies potentially limit the scope for efficient entry. Recent work by Weyl and White (2014; 2016) in fact emphasises the similarities between digital platforms and natural monopolies, and argues that even though unregulated platforms will not provide the socially optimal level and quality of service, any distortions created by platforms' profit-maximising behaviour are not efficiently corrected by introducing more competition. They argue that such competition is likely to inefficiently fragment platforms and reduce the level of network effects that they deliver to consumers, and propose that a natural monopoly philosophy of regulation may be more appropriate. In this paper, we focus on the historic experience of the telecommunications industry and its regulators in attempting to balance the desire to introduce competition with the natural constraints posed by the production technologies used in the industry. Telecom regulation has, at various times, had a "marketmitigating" character and at other times has had a "market-shaping" character. The former type of regulation is familiar natural monopoly regulation, which attempts to protect consumers against the consequences of a concentrated market structure, while recognising or accepting that the market structure may be difficult to change and may even have efficiency benefits. The latter type of regulation has involved regulatory efforts to affect market structure through tools such as wholesale access regulation justified by reference to "stepping stone" or "ladder of investment" theories, or vertical unbundling of incumbents. Examining the regulatory history of the US and UK we find that marketshaping intervention has had limited success in creating new entry, and that in both countries, the most important long-term driver of competition appears to be competition from new technologies, e.g., cable and mobile networks in the past and new fibre-based entrants in the present. The experience of telecoms regulation-which we plan to expand to include the experience of additional jurisdictions besides the US and the UK-suggests that the production technology of an industry remains a powerful determinant of market structure. In the case of platform industries, network effects and scale economies may limit the extent of competition in the efficient delivery of platform services. If the experience of telecoms is anything to go by, efforts to engineer more competition in the primary platform market may encounter a high chance of failure or irrelevance in the face of underlying economic forces and technological progress. There may be merit in exploring a regulatory approach that attempts to mitigate market failures that result from concentrated market structures, as proposed by Weyl and White, and competition policy may play an important role in preventing the leveraging of market power from primary platform markets to adjacent services markets. However, policies aimed at increasing direct competition to existing digital platforms may encounter difficulties similar to those encountered by market-shaping policies in telecoms regulation.
    Date: 2020
  4. By: Bernhardt, Lea (Helmut Schmidt University, Hamburg)
    Abstract: In this paper, we analyse the final decisions for merger cases prepared by the European Commission (EC) since 1990 and build a unique subsample for all non-cleared cases. These incorporate all merger notifications which were either withdrawn by the notifying parties or have been prohibited by the European Commission.We find a sudden decline in prohibitions and withdrawals of cases since 2002 and explore three judicial defeats of the European Commission as determining factors behind these developments. We also find a higher likelihood of withdrawal or prohibition if cases are registered in sectors which incorporate firms in the business of information and communication or transportation and storage. When classifying the documents with a supervised machine learning algorithm, we are able to automatically identify the cleared versus the non-cleared cases with over 90% accuracy. Finally, we find that network effects, high market shares and the risk of collusion are the main competitive concerns which contribute to prohibition decisions in the information and communications sector.
    Keywords: mergers; competition policy; EU Commission; classification; network effects
    JEL: G34 K21 L40
    Date: 2020–10–08
  5. By: Mark J. Tremblay (Miami University, Farmer School of Business, Department of Economics, 800 E. High St., Oxford, OH 45056)
    Abstract: Platforms often use fee discrimination within their marketplace (e.g., Amazon, eBay, and Airbnb specify a variety of merchant fees). To better understand the impact of marketplace fee discrimination, we develop a model that allows us to determine platform equilibrium fee, category, and retail entry decisions that depend on the extent of fee discrimination available to the platform. Isolating the effects of fee discrimination (by not allowing the platform to enter into commerce), we find that greater fee discrimination allows the platform to serve more markets in its marketplace but also worsens double marginalization in the high surplus markets. However, if the platform enters into retail, then the platform reduces its fees and generates greater retail competition. These effects mitigate distortions from fee discrimination and improve welfare. In terms of policy, we show that (1) banning fee discrimination and platform entry is detrimental to welfare, (2) a vertical merger within a retail market mitigates double marginalization but is often worse than an equilibrium with platform entry into retail, and (3) taxing the platform in retail (not merchants) levels the retail playing field and can generate a Pareto improvement upon a policy that bans platform retail entry.
    Keywords: Platforms, platform retail entry, price discrimination, vertical integration, intermediary
    JEL: L11 L12 L40 H21 L50
    Date: 2020–10
  6. By: Jorge Padilla (Compass Lexecon); Salvatore Piccolo (Università di Bergamo, Compass Lexecon and CSEF); Helder Vasconcelos (Porto University and Compass Lexecon)
    Abstract: We characterize and compare the private and social incentives to collect consumer data by a vertically-integrated online intermediary who competes with third-party sellers listed on its platform and is required by regulation to share with rivals all the information it gathers. With linear intermediation fees and price competition, the intermediary over-invests in accuracy compared to the social optimum when the intra-platform competition is sufficiently weak and when demand is not too responsive to quality. By contrast, the intermediary tends to under-invest in accuracy when the intra-platform competition is strong enough, and demand is sufficiently responsive to quality. With quantity competition, the intermediary always over-invests in accuracy. Importantly, when consumers exhibit privacy concerns, the over-investment problem worsens, whereas the under-investment problem mitigates. We also investigate the impact of alternative (non-linear) contractual arrangements.
    Keywords: Consumer Data, Competition, Information Accuracy, Platforms, Privacy, Value of Information, Vertical Integration.
    JEL: D47 D85 L5 L81 M3
    Date: 2020–10–11
  7. By: Yongjoon Park (University of Massachusetts Amherst, Department of Resource Economics, Stockbridge Hall, 80 Campus Center Way, Amherst, MA, 01003)
    Abstract: Carriers often exchange airport slots (a so-called slot swap) in order to expand their hub networks, but the exchange is often faced with competition-related concerns. In this study, I estimate an airline entry model that can analyze the effects of a slot swap on market competition, focusing on the deal between Delta and US Airways in 2011 at Ronald Reagan Washington Airport (DCA) and LaGuardia New York Airport (LGA). Counterfactual analysis suggests that a slot swap deal incentivizes carriers to change their network by actively adding/removing routes and hence has distributional effect on passengers in different routes. Also, remedies that force the exchanging party to give up some of their slots to rivals may increase consumer surplus, but excessive remedies may harm consumers.
    Keywords: Airport Slot Swap; Endogenous Entry; Static Games; Airlines; Network Effects
    JEL: C54 L44 L13 L93
    Date: 2020–09
  8. By: Bauer, Johannes M.; Prado, Tiago S.
    Abstract: This paper relates to current concerns about the high concentration of digital platform markets and the effects of large companies such as Amazon, Facebook, Google, and Microsoft, on innovation. Several stakeholders and analysts assert that digital platforms have become so dominant that they slow the speed of innovation and that regulatory and antitrust intervention is needed to protect the public interest. Despite the strong claims, few systematic studies have examined the positive and negative effects of digital platforms on innovation. This paper seeks to contribute to closing this gap by pursuing three overarching objectives. First, it develops a theoretical framework to deepen our understanding of the multi-faceted relations between digital platforms and innovation. Second, it discusses which empirical evidence could be used to examine the multitude of potential, positive and negative, impacts. Third, the paper discusses the implications of these largely conceptual arguments for the design of policies toward digital platforms. In contrast to traditional regulatory theory and practice, which often uses static economic optimization models, much of innovation economics emphasizes that incentives to introduce new processes, create new products, services, designs, and business models are strongest in out-of-equilibrium processes. However, there are conditions under which market power and the interests of large companies do not align well with the broader goals of vibrant innovation. The paper argues that the most promising instruments to address these issues affect the constitution of digital markets.
    Keywords: Digital platforms,innovation economics,innovation ecosystems,market power,regulation,competition policy
    JEL: L86 L96
    Date: 2020
  9. By: Céline Bonnet (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); Jan Philip Schain (DUCE - Dusseldorf Institute for Competition Economics - Heinrich-Heine-Universität Düsseldorf [Düsseldorf])
    Abstract: In this article, we extend the literature on merger simulation models by incorporating its potential synergy gains into structural econometric analysis. We present a three-step integrated approach. We estimate a structural demand and supply model, as in Bonnet and Dubois (2010). This model allows us to recover the marginal cost of each differentiated product. Then we estimate potential efficiency gains using the Data Envelopment Analysis approach of Bogetoft and Wang (2005), and some assumptions about exogenous cost shifters. In the last step, we simulate the new price equilibrium post merger taking into account synergy gains, and derive price and welfare effects. We use a homescan dataset of dairy dessert purchases in France, and show that for two of the three mergers considered, synergy gains could offset the upward pressure on prices post. Some mergers could then be considered as not harmful for consumers.
    Date: 2020–03
  10. By: Woodcock, Ramsi
    Abstract: If the state is a force monopolist, as Max Weber famously claimed, then the law is a kind of antitrust policy, with criminal law securing the state’s monopoly on force and constitutional law regulating the exercise of the force monopolist’s power primarily through the right to vote, which makes of the state the equivalent of a consumer cooperative dedicated to the production of security. One consequence of the cooperative approach is that the state’s approach to vertical integration—in this context state ownership of enterprise—has mirrored antitrust’s own approach to the vertical integration of private firms: to authorize integration only where it is likely to benefit consumers, which is rarely when the monopolist sells security, but often in the case of most products sold by private enterprise. Another consequence, low tax rates, differs greatly from antitrust’s own approach to private enterprise, which broadly exempts the charging of high prices from liability. This difference in approach offers a useful lesson for antitrust policy, particularly in the area of digital platforms: that the heart of monopoly power is price, and the best way to dull the power of the platform monopolist is to regulate the prices it can charge and leave the question whether to permit it to integrate vertically to be decided on efficiency grounds. This suggests that the rule proposed by Senator Elizabeth Warren, that no big firm should be allowed to compete on its own platform, which amounts to a prohibition on vertical integration, is likely to be unhelpful. A better approach would be to regulate the fees platforms charge competitors and consumers and allow the tech giants to integrate when doing so would benefit consumers.
    Date: 2020–10–03
  11. By: Ray Barrell; Dilruba Karim
    Abstract: Policy makers need to know if the structure of competition and the degree of banking market concentration change the incidence of financial crises. Previous studies have not always come to clear conclusions. We use a new dataset of 19 countries where we include capital adequacy and house price growth as factors affecting crisis incidence, and we find a positive role for bank concentration in reducing incidence. In addition, we look at New Industrial Economics indicators of market structure and find that increased market power also reduces crisis incidence. We conclude that attempts to increase competition in banking, although welcome for welfare reasons, should be accompanied by increases in capital standards.
    Keywords: Financial Stability, Bank Competition, Banking Crises, Macroprudential Policy
    JEL: E44 G01 G18
    Date: 2020–10
  12. By: Wei Zhou (Eller College of Management, University of Arizona); Zidong Wang (Alibaba Group)
    Abstract: E-commerce platforms guide consumers’ search traffic toward online retailers that are classified into different product categories. An online retailer can either list itself under a broad category to reap larger search traffic, or choose a narrow category, often a subcategory of a broad category, to target a niche audience. In collaboration with, China’s largest e-commerce platform, we exploit a change in the platform’s search algorithm to study online retailors’ location decisions in the digital world. In our framework, each market is defined by a search query, which matches an online retailer’s product either closely or distantly. The platform allocates search traffic into different categories, and online retailers compete for the search traffic in each product category with heterogeneous abilities to convert search traffic into revenue. Using detailed data on search queries, search exposure, and seller revenue, we find that an online retailer faces a tradeoff between market size and competition intensity, and a retailer is better at converting closely matched search traffic into revenues. By refining a broader category into narrow subcategories, the e-commerce platform gives retailers the flexibility to forgo higher volumes of search traffic in order to gain a better conversion rate. Eliminating category refinement would lead to about 17% revenue losses for sellers in product categories we study, with incidence mostly on sellers that specialize in niche products. Our results suggest that e-commerce platforms as entrepreneurial incubators can help small business owners thrive on the platform through targeted search traffic allocation.
    Keywords: E-commerce, Search, Entry, Platform Design, Entrepreneurship
    JEL: D83 L11 L26 L81
    Date: 2020–10
  13. By: Abate, Serafino; Bahia, Kalvin; Castells, Pau
    Abstract: This study evaluates the impact of competition on quality, innovation and price in Europe's mobile communications market during the 4G era (2011-18). Our results indicate that European mobile users in more concentrated markets benefitted the most from higher network quality, particularly with regard to download speeds. We find that dispersion of fixed costs and assets among a greater number of players can result in diseconomies of scale and a less efficient use of resources, which translates into lower network performance, to the detriment of consumers. We also find evidence of investment per operator being greater in markets with higher profit margins, which are also typically more concentrated markets.
    JEL: K20 L10 L40 L96
    Date: 2020
  14. By: Noam, Eli M.
    Date: 2020
  15. By: Tsuyoshi Toshimitsu (School of Economics,Kwansei Gakuin University)
    Abstract: Using a capacity-then-production choice model, we consider whether excess capacity results hold in a monopoly market with network externalities. We demonstrate that if consumers form expectations of network sizes after (before) the capacity-scale decision, the capacity scale is larger than (equal to) the production quantity. Furthermore, we examine the first-best and second-best policies and find that excess capacity results hold (do not hold) in the second-best (first-best) policy, irrespective of the timing of consumer expectations.
    Keywords: consumer expectation; capacity-then-production choice; network externality; monopoly
    JEL: D42 L12 L15
    Date: 2020–10
  16. By: Pio Baake; Sebastian Schwenen; Christian von Hirschhausen
    Abstract: In current power markets, the bulk of electricity is sold wholesale and transported to consumers via long-distance transmission lines. Recently, decentralized local power markets have evolved, often as isolated networks based on solar generation. We analyze strategic pricing, investment, and welfare in local power markets. We show that local power markets with peer-to-peer trading are competitive and provide efficient investment incentives, even for a small number of participating households. We identify positive network externalities that make larger markets more attractive but lead to inefficiencies where networks compete. Collectively, our results present a set of positive efficiency results for peer-to-peer electricity markets.
    Keywords: Market design, networks, peer-to-peer markets, electricity
    JEL: D47 L94
    Date: 2020
  17. By: Alves, Vasco
    Abstract: This paper describes a duopoly market for healthcare where one of the two providers is publicly owned and charges a price of zero, while the other sets a price so as to maximize its profit. Both providers are subject to congestion in the form of an M/M/1 queue, and they serve patient-consumers who have randomly distributed unit costs of time. Consumer demand (as market share) for both providers is obtained and described. The private provider’s pricing decision is explored, equilibrium existence is proven, and conditions for uniqueness presented. Comparative statics for demand are presented. Social welfare functions are described and the welfare maximizing condition obtained. More detailed results are then obtained for cases when costs follow uniform and Kumaraswamy distributions. Numerical simulations are then performed for these distributions, employing several parameter values, demonstrating the private provider’s pricing decision and its relationship with social welfare.
    Keywords: Waiting times; queueing; private health care; competition
    JEL: D43 I11 L13
    Date: 2019–04–08
  18. By: Pápai, Zoltán; McLean, Aliz; Nagy, Péter; Szabó, Gábor; Csorba, Gergely
    Abstract: The rollout of fifth generation mobile networks is progressing around the world, but 5G looks especially expensive compared to previous generations. Network sharing between two or more mobile operators is an obvious way to attain significant cost savings, but may also raise competition concerns. This paper first distinguishes between early and mature 5G, and then discusses the expected changes mature 5G brings to the assessment of active mobile network sharing agreements from a competition policy point of view. We focus on the three main concerns where 5G may bring the most significant changes in the evaluation compared to 4G: service differentiation, cost commonality between the parties and the parties' ability and incentives to grant access to critical inputs to downstream competitors. For each of these concerns, we show that they are not easy to substantiate and in some cases the concerns may even become less grave than under 4G.
    Keywords: mobile telecommunications,network sharing,competition policy,competitive assessment,5G
    Date: 2020
  19. By: Noriyuki Doi (School of Economics, Research Center for Oligopolistic Competition and Innovation and Inovation System Research Center, Kwansei Gakuin University)
    Abstract: Sharing economy is emerging as one of business model innovation, which is among dominant online business in industrial structure. The economy has been expanded in particular in US, Europe, China and India, and has affected consumption pattern of goods and services, existing business fields, labor markets and others. As a result, the expansion raises various issues such as the definition, effects on competition, and public policies. This paper shows future major problems in research and policy on sharing economy, focusing on definition, business model, economic effects and public policy, through surveying existing studies, available findings of the business, and relevant practical policies.
    Keywords: sharing economy, platform business, P2P business, competition policy, public regulation, private regulation
    JEL: D43 L42 L43 L44 L86
    Date: 2020–10
  20. By: Zhemkova, Aleksandra (Жемкова, Александра) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The paper proposes an approach for modeling and evaluating the process of public procurement from the basis of key findings of auction theory. The study has the following structure: the first chapter provides a literature review devoted to modeling and empirical evaluation of the effectiveness of auctions and the public procurement market. The second chapter provides a brief characteristic of the current state and legal foundations of procurement practices in Russia. The third chapter proposes an empirical assessment of a model of determinants of choosing a public procurement procedure by an auctioneer, and a model for evaluating the effectiveness (by the price of a contract) of existing public procurement procedures. The fourth chapter analyzes the main measures of economic policy in the field of procurement regulation, as well as the applicability of these measures in Russia. At the end of the paper, the main findings of the study and recommendations formed on their basis are presented.
    Keywords: public procurement, game theory, game theory models, auctions, competition, dishonest behavior.
    Date: 2020–05

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