nep-com New Economics Papers
on Industrial Competition
Issue of 2020‒11‒02
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Market Investigations for Digital Platforms: Panacea or Complement? By Amelia Fletcher
  2. Welfare Implications of Sequential Entry with Heterogeneous Firms By Hattori, Keisuke; Yamada, Mai
  3. Competition, Profit Share and Concentration By J. BOUSSARD; R. LEE
  4. Product switching, market power and distance to core competency By R. MONIN; M. SUAREZ CASTILLO
  5. Passive backward acquisitions and downstream collusion By Shekhar, Shiva; Thomes, Tim Paul
  6. Transactional fairness and unfair price discrimination in consumer markets By Bruce Lyons; Robert Sugden
  7. Rules of Origin and Market Power By Chung, Wanyu; Perroni, Carlo
  8. Fixed Costs and the Division of Labor By Zhou, Haiwen
  9. A paradoxical convergence: French economists and the policy towards cartels from the 1870s to the eve of the Great Depression By David Spector
  10. Raising markups to survive: small Spanish firms during the Great Recession By Pilar García-Perea; Aitor Lacuesta; Pau Roldan-Blanco
  11. Asymmetric general oligopolistic equilibrium By Quint, Ansgar F.; Rudsinske, Jonas F.
  12. Concentration of the Mobile Telecommunications Markets and Countries' Competitiveness By David Bardey; Danilo Aristizábal; Bibiana Sáenz; Santiago Gómez
  13. Complementary bidding and the collusive arrangement: Evidence from an antitrust investigation By Clark, Robert; Coviello, Decio; de Leverano, Adriano
  14. Effect of Public Procurement Regulation on Competition and Cost-Effectiveness By Bedri Kamil Onur Tas
  15. Survival and the ergodicity of corporate profitability By Mundt, Philipp; Alfarano, Simone; Milaković, Mishael
  16. Does Open Source Pay off in the Plug-in Hybrid and Electric Vehicle Industry? A Study of Tesla's Open-Source Initiative By Yihan Yan
  17. Identifying the Distribution of Random Coefficients in BLP Demand Models Using One Single Variation in Product Characteristics By Wang, Ao
  18. The correspondence between Baumol and Galbraith (1957–1958) - An unsuspected source of managerial theories of the firm By Alexandre Chirat

  1. By: Amelia Fletcher (Centre for Competition Policy and Norwich Business School, University of East Anglia)
    Abstract: There is a growing international consensus that standard competition law is inadequate for addressing the panoply of competition problems arising in digital platform markets. Alongside a proposal for ex ante regulation in this arena, the European Commission is considering the introduction of a ‘New Competition Tool’ which is broadly modelled on the UK Market Investigation instrument. This paper abstracts from the specifics of the EU situation and considers the pros and cons of market investigations in the context of the UK regime. It concludes that the tool is a valuable addition to the standard competition law toolkit, and that this is likely to be true also at EU level, both for digital platforms and more widely. However, because the tool is potentially so powerful and flexible, it merits strong procedural checks and balances, to guard against confirmation bias or politicisation. The tool also has important limitations and thus should not be viewed as a full solution to the issues raised by digital platforms, but rather as a valuable complementary tool alongside new ex ante regulation. Interoperability is discussed as one example where the tools could valuably be used alongside each other
    Date: 2020–10–01
  2. By: Hattori, Keisuke; Yamada, Mai
    Abstract: Does free entry result in the socially preferred order of market entry for heterogeneous firms? This paper examines the welfare effects of sequential market entry by using a simple entry-deterrence model with heterogeneities in fixed and variable production costs among firms. In particular, we consider the question of whether a less or more efficient firm should be the first entrant into a new market from a welfare perspective. We show that the order of entry whereby a more efficient firm enters the market first may lead to welfare loss due to the less aggressive entry deterrence efforts made by the first entrant. Our findings have important policy implications with regard to the welfare consequences of free entry markets and the privatization of public monopolies through auctions.
    Keywords: Entry deterrence; Sequential entry; Firm heterogeneity;
    JEL: D42 L12
    Date: 2020–10–10
  3. By: J. BOUSSARD (Banque de France); R. LEE (Insee- Crest)
    Abstract: This paper investigates the distributional impact of ’winner-takes-most’ competition and its role in shaping recent macroeconomic trends in advanced economies. We document a positive correlation between variations in industry labor and capital shares, and a positive correlation between variations in industry profit shares and industry concentration levels. However using micro-based industry data on firm-level profit margins, we find a negative correlation between industry concentration and a wide range of moments from the distribution of profit shares. We propose a dynamic general equilibrium model with heterogeneous firms, in which an increase in competition, whereby consumers become more price-sensitive and firm markups decrease, leads to a rise in concentration, a decrease in firm-level profit shares but an increase in industry-level profit shares. We study the effect of a change in the competitive environment on the Balanced Growth Path (BGP). In contrast with representative firm models, competition reduces the probability of successful entry and product diversity. If consumers value product diversity, we show that output growth, the natural interest rate, and welfare decrease with competition.
    Keywords: Competition, growth, labor share, markup.
    JEL: E10 E22 E25
    Date: 2020
  4. By: R. MONIN (Insee); M. SUAREZ CASTILLO (Insee - Crest)
    Abstract: Within-firm product switching is recognised as an important source of growth. We examine how portfolio dynamics is related to product market power, product efficiency and within-firm differentiation. We derive perproduct markup and marginal cost following De Loecker et al. (2016) on a large panel of French manufacturers over 2009-2017 and build three novel measures of product similarity. We find that selection based on performance is a leading driver of the performance gap between entrant and incumbent products. Markups are as important as marginal costs in explaining selection patterns. Our results suggest that firms renew their portfolio using trial and error and select the best performing products, closer to their core competency. However at the firm level, most of markup growth is accounted for by a reallocation toward best performing products, with a minor role for product entry and exit in the short run.
    Keywords: Multiproduct firms; Product dynamics; Product portfolio; Markups
    JEL: D2 D4 L1
    Date: 2020
  5. By: Shekhar, Shiva; Thomes, Tim Paul
    Abstract: We investigate the effects of passive backward acquisitions in their efficient upstream supplier on downstream firms' ability to collude in a dynamic game of price competition with homogeneous goods. We find that passive backward acquisitions impede downstream collusion. The main driver of our finding is that a passive backward acquisition secures an acquirer from zero continuation profits after a breakdown of collusion. This anti-collusive effect cannot be outweighed by a lower collusive price that is set by the cartel to increase the acquirer's profit from its claim on the upstream margin.
    Keywords: Tacit collusion,passive backward acquisitions,Bertrand competition
    JEL: D43 L13 L40 L81
    Date: 2020
  6. By: Bruce Lyons (Centre for Competition Policy and School of Economics, University of East Anglia); Robert Sugden (Centre for Competition Policy and School of Economics, University of East Anglia)
    Abstract: There is growing public concern about the ‘unfairness’ of many pricing practices that have become common in consumer, particularly digital, markets (e.g. auto-renewal at a high price, expensive default add-ons). Industrial and behavioural economists have developed theories that explain the conditions under which these practices are profitable for firms, and their implications for consumer welfare. We argue that there is a mismatch between the welfare economic principles on which this theoretical work is grounded and the normative perspective in which the pricing strategies in question are viewed as unfair. As a result, when regulators look to economics for guidance about fair pricing, they struggle to reconcile two fundamentally different normative approaches. We develop a concept of ‘transactional fairness’, grounded in the normative approach of Sugden’s ‘Community of Advantage’, that is reflective of public concerns. Transactional fairness requires satisfaction of ‘no deception’, ‘no hindrance’ and ‘public explanation’ criteria. It is complementary to established welfare criteria of economic efficiency and distributional equity, but is based entirely on the relationship between individual buyer and seller. Transactional fairness establishes clear principles with realistic information requirements that are appropriate for compliance by firms. The approach potentially helps restore public faith in markets without either deterring the emergence of (non-deceptive and non-hindering) business models, or requiring frequent ad hoc fire-fighting interventions by regulators.
    Keywords: Price discrimination, unfair pricing, consumer law, competition policy
    JEL: D61 D63 K21 K23 L40 L51
    Date: 2020–10–01
  7. By: Chung, Wanyu (University of Birmingham and CEPR); Perroni, Carlo (University of Warwick and CESifo)
    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 Classification: F12, F13, F14, D43
    Date: 2020
  8. By: Zhou, Haiwen
    Abstract: How market size and the level of coordination costs determine the degree of specialization is studied in an infinite horizon model with the amount of capital determined endogenously. Firms producing the same intermediate good engage in oligopolistic competition and choose the degree of specialization of their technologies to maximize profits. A more specialized technology is a technology with a lower marginal cost, but a higher fixed cost. Interestingly, the relationship between the level of coordination costs and a firm’s degree of specialization is ambiguous. A firm in a country with a larger market size, more patient citizens, or a higher amount of knowledge will choose more specialized technologies and this country will have a higher wage rate and a higher capital stock. If fixed costs decrease, firms will choose more flexible manufacturing.
    Keywords: The division of labor, market size, fixed costs, flexible manufacturing, coordination costs
    JEL: D43 L13 O14
    Date: 2020–10–19
  9. 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: Just like in other industrial countries, cartelization was widespread in France after the 1870 decade. Cartels, and the public policy towards them, were frequently addressed in the public debate. This article deals with the stance taken by French economists on this subject until the Great Depression. Although they were divided in several groups that were in sharp disagreement on most scientific and policy issues, French economists were almost united in their lack of support for anti-cartel policy. The liberal economists'opposition stemmed from their general hostility to government intervention. Unlike in the English-speaking world, where many economists otherwise critical of government gradually became supportive of antitrust after mounting evidence had revealed the scope of certain kinds of exclusionary behavior, the French liberal economists remained constant in their opposition. The more reform-minded university professors, as well as the sociologists-economists of the Durkheimian school, were unenthusiastic about policies meant to safeguard competition because they viewed ‘excessive' market competition as destabilizing and wasteful. Finally, the most prominent experts in industrial economics, who were employed by large companies or professional organizations, also advocated a hand-off approach, in accordance with their employers'preferences.
    Date: 2020–10
  10. By: Pilar García-Perea (Banco de España); Aitor Lacuesta (Banco de España); Pau Roldan-Blanco (Banco de España)
    Abstract: A recent literature documents a secular increase in the sales-weighted markups in the United States, a phenomenon that was driven by large and productive firms at the top of the profit distribution. Using rich balance-sheet data, this paper documents the behavior of markups in Spain before, during, and in the aftermath of the Great Recession. We document that markups rose during the financial crisis. Unlike in the U.S., these dynamics were led by small firms: in response to a drop in sales, these firms were unable to increase their productive efficiency when average costs increased. As a consequence, and in order to escape a sharp decline in profit rates, they increased their markups. Simultaneously, large firms were able to increase efficiency, and their markups remained relatively constant. We argue that the increase of relative markups by small firms came at the expense of losing market share, which in the very short run proved to be preferred than exiting the market.
    Keywords: markups, market power, average costs, labour market, firm size
    JEL: D2 D4 E2 E3 J3 L1
    Date: 2020–10
  11. By: Quint, Ansgar F.; Rudsinske, Jonas F.
    Abstract: We develop an asymmetric general oligopolistic equilibrium (AGOLE) model, which extends the range of possible applications in general oligopolistic equilibrium modelling. The AGOLE allows to incorporate endogenous and asymmetric marginal utilities of income across countries.As a first exemplary application, we analyze the effects of asymmetric labor market policies. When one country increases its labor supply per capita, it is optimal for its firms to supply a part of the additional production to the other country at reduced prices to artificially inflate domestic prices. This results in a spillover effect letting consumption increase abroad due to a change in the terms of trade. In AGOLE, oligopolistic competition can induce asymmetric price reactions that shift real income and demand between the two countries. We argue that incorporating this cross-country demand channel is crucial for analyzing asymmetric countries or policies in presence of firms with market power.
    Keywords: general oligopolistic equilibrium,strategic trade,international trade and labor market interactions,factor income distribution
    JEL: F12 D51 L13 F16 D33
    Date: 2020
  12. By: David Bardey; Danilo Aristizábal; Bibiana Sáenz; Santiago Gómez
    Abstract: Developing a database that includes 59 countries, our study sheds light on the role of mobile telecommunications markets' concentration on countries' competitiveness. Performing several estimations and using an instrumental variable that aims to explain the degree of concentration in mobile phone markets, we find that the higher is the concentration in this industry, the lower is the use of the information technology and communication (ICT). On the other hand, we also find that the use of ITC is positively correlated to countries' competitiveness. Thus, our results reveal positive spillover effects of the mobile phone industry on countries' competitiveness and suggest that all policies that aim to reduce concentration and market power in the mobile phone industry is welcomed.
    Keywords: Market structure, Concentration, Competitiveness, Telecommunications industry.
    JEL: L11 O33
    Date: 2020–10–16
  13. By: Clark, Robert; Coviello, Decio; de Leverano, Adriano
    Abstract: A number of recent papers have proposed that a pattern of isolated winning bids may be associated with collusion. In contrast, others have suggested that bid clustering, especially of the two lowest bids, is indicative of collusion. In this paper, we present evidence from an actual procurement cartel uncovered during an anticollusion investigation that reconciles these two points of view and shows that both patterns arise naturally together as part of a cartel arrangement featuring complementary bidding. Using a difference-in-difference approach, we compare the extent of winning-bid isolation and clustering of bids in Montreal's asphalt industry before and after the investigation to patterns over the same time span in Quebec City, whose asphalt industry has not been the subject of collusion allegations. Our findings provide causal evidence that the collusive arrangement featured both clustering and isolation. We use information from testimony of alleged participants in the cartels to explain how these two seemingly contradictory patterns can be harmonized.
    Keywords: Auction,Bidding ring,Collusion,Complementary bidding,Clustered bids,Missing bids,Public procurement
    JEL: L22 L74 D44 H57
    Date: 2020
  14. By: Bedri Kamil Onur Tas
    Abstract: This study empirically investigates the impact of public procurement regulation quality on the competition for tenders and the cost-effectiveness of awarded contracts, by employing the World Bank’s Benchmarking Public Procurement and EuroPAM Public Procurement quality scores. Using extensive data on public procurement in the European Economic Area, Switzerland, and Macedonia, the analysis in this paper shows that higher quality public procurement regulatory regimes are associated with higher levels of competition and cost-effectiveness. Improved regulation quality significantly increases the number of bidders and the probability that the procurement price is lower than the estimated cost.
    Keywords: Public Procurement, Regulation, Competition
    JEL: H57 L51 O52
    Date: 2020–05
  15. By: Mundt, Philipp; Alfarano, Simone; Milaković, Mishael
    Abstract: The cross-sectional variation in corporate profitability has occupied research across fields as diverse as strategic management, industrial organization, finance, and accounting. Prior work suggests that industry affiliation as well as different forms of corporate idiosyncrasies are important determinants of profitability, but it disagrees widely on the quantitative importance of particular effects. This paper shows that industry and corporate specificities become irrelevant in the long run because profitability is ergodic conditional on survival, implying that there is a uniform, time-invariant regularity in profitability that applies across firms. Conditional on survival, we cannot reject the hypothesis that corporations are on average equally profitable and also experience equally volatile fluctuations in their profitability, irrespective of their individual characteristics. The same is not true for shorter-lived firms, even for up to 20 years after entry or before exit, and would explain the contradictory findings in the extant literature, which usually considers samples containing heterogeneous mixtures of surviving and shorter-lived companies. Therefore the mere fact of survival, rather than any previously suggested set of variables, becomes the only relevant information for corporate profitability in the long run.
    Keywords: performance,dynamic competition,corporate strategy,stochastic differential equation
    JEL: C14 L10 D21 E10
    Date: 2020
  16. By: Yihan Yan
    Abstract: In June 2014, Tesla, a leading manufacturer of electric vehicles, announced it would make its software and hardware available for free to other automakers. This paper analyzes the effect of Tesla's open source initiative on the plug-in hybrid and electric vehicle (PHEV) industry in the US. On the one hand, open source allows PHEV manufacturers to use the advanced technology of Tesla, which could lead to lower investment costs and a higher incentive to invest. Open source also partially removes the entry barriers and could attract more entrants and induce economies of scale, leading to decreased manufacturing costs. On the other hand, underinvestment of Tesla's rivals may occur as a result of free riding, which could result in slower quality improvements in the industry. I quantify these impacts by estimating a dynamic structural model, where players make investment and entry decisions to maximize discounted future returns. My results show that Tesla's initiative was beneficial for the industry and Tesla. I find a 60% drop in investment cost, and a decrease of 100 million in entry cost into the PHEV industry. Counterfactual analysis shows that, had Tesla not provided open source, the industry would have had 33% fewer PHEVs and Tesla would have had one billion less in profit.
    Keywords: Open Source, Dynamics, Quality, Differentiated Products, Discrete Choice, Automobile Industry
    JEL: L11 L15 L62
    Date: 2020–10
  17. By: Wang, Ao (University of Warwick)
    Abstract: Recent advances on the identification of the Berry, Levinsohn and Pakes (BLP,1995) random coefficient demand models focus on the structural demand functions. Yet, this does not automatically imply the identification of the distribution of the random coefficients. The latter is often necessary for counter factuals where the new values of product characteristics do not belong to the support in the factual scenario ( prices after mergers) or the structural demand functions change ( products are added). This paper provides novel arguments to identify the distribution of the random coefficients using one single variation in product characteristics.In a leading case where the random coefficients only include a random coefficient on price and individual-and product-specific random intercepts, observing market outcomes at two different price vectors already suffices to identify the distribution of the random coefficients. In theory, these arguments greatly weaken the usual requirements on the regressors or the moments of the random coefficients. In practice, these results are particularly useful when there is little (or limited) variation in product characteristics across markets.
    Keywords: Identification ; Random Coecients ; BLP Model ; Demand JEL codes: C4
    Date: 2020
  18. By: Alexandre Chirat (CRESE, Univ. Bourgogne Franche-Comté)
    Abstract: Baumol’s impact on the development of managerial theories of the firm is investigated here through material found in Galbraith’s archives. In 1957 Galbraith published a paper claiming that the impact of macroeconomic policies varies with market structures (competitive versus oligopolistic). This publication prompted Baumol (1958b) to send Galbraith a manuscript dealing extensively with a crucial question of managerial theories of the firm, namely, the “trade-off” between sales and profits. I argue that Baumol’s critiques and Galbraith’s answers largely explain the way Baumol (1958a, 1959) framed his alternative model of the behavior of big corporations. He reasoned in terms of maximization of sales with a profit constraint as their main objective. In return, Business Behavior, Value and Growth fostered the development of Marris’s (1964) and Galbraith’s (1967) theories of the corporation. Contrary to the narrative by Tullock (1978) in which the sales maximization hypothesis has two main branches – Baumol for the one and Galbraith-Marris for the other – I argue here that these branches are at least partially connected.
    JEL: B21 B22 D21 D43
    Date: 2020–10

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