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

  1. Platform Price Parity Clauses and Segmentation By Joan Calzada; Ester Manna; Andrea Mantovani
  2. Global giants and local stars: How changes in brand ownership affect competition By Vanessa Alviarez; Keith Head; Thierry Mayer
  3. Data Sharing and Market Power with Two-Sided Platforms By Rishabh Kirpalani; Thomas Philippon
  4. Dog Eat Dog: Measuring Network Effects Using a Digital Platform Merger By Chiara Farronato; Jessica Fong; Andrey Fradkin
  5. Drip pricing and its regulation: Experimental evidence By Rasch, Alexander; Thöne, Miriam; Wenzel, Tobias
  6. Firms' ownership, employees' altruism, and competition By Ester Manna
  7. Ad Clutter, Time Use and Media Diversity By Simon P. Anderson; Martin Peitz
  8. Start-up Acquisitions and Innovation Strategies By Schmutzler, Armin; Letina, Igor; Seibel, Regina
  9. Import Competition and Firm Productivity: Evidence from German Manufacturing By Slavtchev, Viktor; Bräuer, Richard; Mertens, Matthias
  10. Naive Analytics Equilibrium By Berman, Ron; Heller, Yuval
  11. Dynamic Pricing of New Products in Competitive Markets: A Mean-Field Game Approach By Régis Chenavaz; Corina Paraschiv; Gabriel Turinici
  12. Platform-Mediated Competition By Quitz\'e Valenzuela-Stookey
  13. Perishability, dynamic pricing and price discrimination: evidence from flower markets in Bogotá By Ortiz, Santiago; Castelblanco, Geraldine; Mantilla, Cesar
  14. Does the Fundamental Transformation Deter Trade? An Experiment By Christoph Engel; Eric Helland
  15. Inefficiency and Regulation in Credence Goods Markets with Altruistic Experts By Farukh, Razi; Kerkhof, Anna; Loebbing, Jonas

  1. By: Joan Calzada (Universitat de Barcelona); Ester Manna (Universitat de Barcelona); Andrea Mantovani (University of Bologna)
    Abstract: We investigate how the adoption of price parity clauses (PPCs) by established platforms affects the listing decisions of suppliers. PPCs have been widely adopted by online travel agencies (OTAs) to force client hotels not to charge lower prices in alternative sales channels. We find that OTAs adopt PPCs when they are perceived as highly substitutable, and in order to prevent showrooming. PPCs allow OTAs to charge hotels higher commission fees. However, hotels can respond by delisting themselves from some OTAs. Hence, our analysis reveals that the removal of PPCs enables more hotels to resort to OTAs. This is beneficial for consumers, as prices decrease in absence of PPCs.
    Keywords: Price parity clauses, Online travel agencies, Segmentation, Vertical relations.
    JEL: D40 L42 L81
    Date: 2019
  2. By: Vanessa Alviarez; Keith Head; Thierry Mayer
    Abstract: We assess the consequences for consumers in 76 countries of multinational acquisitions in beer and spirits. Outcomes depend on how changes in ownership affect markups versus efficiency. We find that owner fixed effects contribute very little to the performance of brands. On average, foreign ownership tends to raise costs and lower appeal. Using the estimated model, we simulate the consequences of counterfactual national merger regulation. The US beer price index would have been 4-7% higher without divestitures. Up to 30% savings could have been obtained in Latin America by emulating the pro-competition policies of the US and EU.
    Keywords: mergers;markups;globalisation;competition
    JEL: F12 F23 L13
    Date: 2020–11
  3. By: Rishabh Kirpalani; Thomas Philippon
    Abstract: We study an economy in which consumers and merchants (sellers) interact on a two-sided platform. Consumers can share data about their tastes for different varieties of a single good with the platform which in turn sells this data to merchants. Data sharing increases gains from trade by improving match quality but gives more market power to the platform relative to the merchants which can reduce entry and consequently consumer welfare. This leads to an externality not internalized by consumers thus leading to more data sharing than is efficient. We highlight two reasons why more precise information increases the market power of the platform. The first is a copycat (private label) externality that increases the outside option for the platform of selling the good directly to consumers. The second is a consumer access externality that reduces the outside option of the merchants when information gets more precise, as more buyers are able to find their desired variety on the platform. Our model explains the qualitative differences between traditional retail platforms (physical stores) and digital online platforms and why the latter are more likely to require regulatory interventions that the former.
    JEL: D2 D4 D42 D43 L11 L12
    Date: 2020–10
  4. By: Chiara Farronato; Jessica Fong; Andrey Fradkin
    Abstract: Digital platforms are increasingly the subject of regulatory scrutiny. In comparison to multiple competitors, a single platform may increase consumer welfare if network effects are large or may decrease welfare due to higher prices or reduction in platform variety. We study the net effect of this trade-off in the context of the merger between the two largest platforms for pet-sitting services. We exploit variation in pre-merger market shares and a difference-in-differences approach to causally estimate network effects at the platform and market level. We find that consumers are, on average, not substantially better off with a single combined platform than with two separate and competing platforms. On one hand, users of the acquiring platform benefited from the merger because of network effects. On the other hand, users of the acquired platform experienced worse outcomes. Our results highlight the importance of platform differentiation even when platforms enjoy network effects.
    JEL: D22 D43 L12 L41 L81 M21
    Date: 2020–11
  5. By: Rasch, Alexander; Thöne, Miriam; Wenzel, Tobias
    Abstract: Drip pricing is the business practice of decomposing the price into multiple components which are presented sequentially to buyers. We experimentally examine the effects of this practice on seller strategies and buyer behavior as well as the implications for regulation. Sellers set two prices: a base price and a drip price. At first, buyers only observe the base prices and make a tentative purchase decision. Revealing the sellers' drip prices, however, comes at a cost. We find that sellers only compete in base prices and set the highest possible drip price. This makes the base price a reliable indicator for the lowest total price, and few consumers invest in drip-price search. A comparison with Bertrand competition reveals significant effects: With drip pricing, consumer surplus is lower, and seller profits are higher. When there is uncertainty over possible drip sizes, sellers also compete over drips, and consumers more frequently fail to identify the cheapest offer. Bertrand competition also leads to higher consumer surplus and lower firm profits in this case. Hence, our results point to positive effects of drip-price regulation.
    Keywords: Drip pricing,Search,Regulation
    JEL: L13 M3 C9
    Date: 2020
  6. By: Ester Manna (Universitat de Barcelona and BEAT)
    Abstract: The paper investigates how product market competition affects the firms' decision to hire altruistic or selfish employees in a mixed duopoly where a public and a private firm compete against each other on prices and quality. When firms offer similar services, so that product competition is fierce, both firms benefit from hiring altruistic employees even if it leads to lower prices. Conversely, when firms offer sufficiently differentiated services, the private firm prefers to hire selfish employees as starting a price war with the public firm is not profitable. However, the private firm would hire altruistic employees if it faced another private firm. Therefore, when firms offer differentiated products, customers may benefit from the privatization of the public firm, especially when the employees' degree of altruism is high.
    Keywords: Firms’ ownership, Altruism, Hiring Decision, Quality Choice, Privatization, Vertical and Horizontal Differentiation.
    JEL: D03 D21 L13
    Date: 2019
  7. By: Simon P. Anderson; Martin Peitz
    Abstract: We introduce advertising congestion along with a time-use model of consumer choice among media. Both consumers and advertisers multi-home. Higher equilibrium adver- tising levels ensue on less popular media platforms because platforms treat consumer attention as a common property resource: smaller platforms internalize less the conges- tion from advertising and so advertise more. Platform entry raises the ad nuisance price to consumers and diminishes the quality of the consumption experience on all platforms. With symmetric platforms, entry still leads to higher consumer bene ts. However, entry of less attractive platforms can increase ad nuisance levels so much that consumers are worse off.
    Keywords: media economics, advertising clutter, limited attention, information congestion, two-sided markets
    JEL: D43 L13
    Date: 2020–07
  8. By: Schmutzler, Armin; Letina, Igor; Seibel, Regina
    Abstract: This paper provides a theory of strategic innovation project choice by incumbents and start-ups. We apply this theory to identify the effects of prohibiting start-up acquisitions. We differentiate between killer acquisitions (when the incumbent does not commercialize the acquired start-up's technology) and acquisitions with commercialization. A restrictive acquisition policy reduces the variety of research approaches pursued by the firms and thereby the probability of discovering innovations. Furthermore, it leads to strategic duplication of the entrant's innovation by the incumbent. These negative innovation effects of restrictive acquisition policy have to be weighed against the pro-competitive effects of preserving potential competition.
    Keywords: innovation,acquisitions,mergers,competition,start-ups
    JEL: O31 L41 G34
    Date: 2020
  9. By: Slavtchev, Viktor; Bräuer, Richard; Mertens, Matthias
    Abstract: This study analyzes empirically the effects of import competition on firm productivity (TFPQ) using administrative firm-level panel data from German manufacturing. We find that only import competition from high-income countries is associated with positive incentives for firms to invest in productivity improvement, whereas import competition from middle- and low-income countries is not. To rationalize these findings, we further look at the characteristics of imports from the two types of countries and the effects on R&D, employment and sales. We provide evidence that imports from high-income countries are relatively capital-intensive and technologically more sophisticated goods, at which German firms tend to be relatively good. Costly investment in productivity appears feasible reaction to such type of competition and we find no evidence for downscaling. Imports from middle- and low-wage countries are relatively labor-intensive and technologically less sophisticated goods, at which German firms tend to generally be at disadvantage. In this case, there are no incentives to invest in innovation and productivity and firms tend to decline in sales and employment.
    Keywords: productivity,multi-product firms,import competition
    JEL: F14 L25 D22 D24 F61
    Date: 2020
  10. By: Berman, Ron; Heller, Yuval
    Abstract: We study interactions with uncertainty about demand sensitivity. In our solution concept (1) firms choose seemingly-optimal strategies given the level of sophistication of their data analytics, and (2) the levels of sophistication form best responses to one another. Under the ensuing equilibrium firms underestimate price elasticities and overestimate advertising effectiveness, as observed empirically. The misestimates cause firms to set prices too high and to over-advertise. In games with strategic complements (substitutes), profits Pareto dominate (are dominated by) those of the Nash equilibrium. Applying the model to team production games explains the prevalence of overconfidence among entrepreneurs and salespeople.
    Keywords: Advertising, pricing, data analytics, strategic distortion, strategic complements, indirect evolutionary approach.
    JEL: C73 D43 M37
    Date: 2020–10–28
  11. By: Régis Chenavaz (LTCI - Laboratoire Traitement et Communication de l'Information - Télécom ParisTech - IMT - Institut Mines-Télécom [Paris] - CNRS - Centre National de la Recherche Scientifique); Corina Paraschiv (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche); Gabriel Turinici (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche)
    Abstract: Dynamic pricing of new products has been extensively studied in monopolistic and oligopolistic markets. But, the optimal control and differential game tools used to investigate the pricing behavior on markets with a finite number of firms are not well-suited to model competitive markets with an infinity of firms. Using a mean-field games approach, this paper examines dynamic pricing policies in competitive markets, where no firm exerts market power. The theoretical setting is based on a diffusion modeì a la Bass. We prove both the existence and the uniqueness of a mean-field game equilibrium, and we investigate mean tendencies and firms dispersion in the market. Numerical simulations show that the competitive market splits into two separate groups of firms depending on their production experience. The two groups differ in price and profit. Thus, high prices and profits do not have to signal anticompetitive practices, stimulating the debate on market regulation.
    Keywords: competitive markets,mean-field games,Dynamic pricing,new products diffusion
    Date: 2020–11–01
  12. By: Quitz\'e Valenzuela-Stookey
    Abstract: Cross-group externalities and network effects in two-sided platform markets shape market structure and competition policy, and are the subject of extensive study. Less understood are the within-group externalities that arise when the platform designs many-to-many matchings: the value to agent $i$ of matching with agent $j$ may depend on the set of agents with which $j$ is matched. These effects are present in a wide range of settings in which firms compete for individuals' custom or attention. I characterize platform-optimal matchings in a general model of many-to-many matching with within-group externalities. I prove a set of comparative statics results for optimal matchings, and show how these can be used to analyze the welfare effects various changes, including vertical integration by the platform, horizontal mergers between firms on one side of the market, and changes in the platform's information structure. I then explore market structure and regulation in two in-depth applications. The first is monopolistic competition between firms on a retail platform such as Amazon. The second is a multi-channel video program distributor (MVPD) negotiating transfer fees with television channels and bundling these to sell to individuals.
    Date: 2020–11
  13. By: Ortiz, Santiago; Castelblanco, Geraldine; Mantilla, Cesar
    Abstract: Perishable products traded in informal markets might be subject to price variations in two opposite directions. Whereas the absence of posted prices opens the door for price discrimination based on some buyers' attributes, the reduction in quality over time might decrease prices to secure a transaction. We use an audit experiment to detect these pricing patterns in the informal flower markets nearby the cemeteries of Bogotá, Colombia. We analyze 441 price quotations. We interpret the lower prices in the afternoon than in the morning as evidence of dynamic pricing. Regarding price discrimination, we find that women are quoted a higher price than men, whereas attire (formal versus informal) does not affect prices. The price variations associated with the time of the day and the gender of the buyer appear to be independent of each other.
    Date: 2020–11–04
  14. By: Christoph Engel (Max Planck Institute for Research on Collective Goods); Eric Helland (Claremont McKenna College)
    Abstract: Oliver Williamson has coined the term “fundamental transformation”. It captures the following situation: before they strike a deal, buyer and seller are protected by competition. Yet thereafter they find themselves in a bilateral monopoly. With common knowledge of standard preferences, both sides conclude the contract regardless if its expected value exceeds their outside options. We run an experiment to test whether additional behavioral reasons deter mutually beneficial trade. If the risk materializes, another individual makes a windfall profit. She does so by intentionally exploiting the first individual. The first individual is let down, although she has knowingly exposed herself to this risk. Participants sell the opportunity to enter the contractual relationship at a price below its expected value. This effect is driven by risk aversion, and already present if the risk is stochastic. Behavioral effects are heterogeneous. About a quarter of participants exhibit the hypothesized additional deterrent effect.
    Keywords: fundamental transformation, bilateral monopoly, sunk cost, Oliver Williamson, windfall profit, exploitation, let down aversion
    JEL: B21 C91 D22 D43 K12 L12 L14
    Date: 2020–09
  15. By: Farukh, Razi; Kerkhof, Anna; Loebbing, Jonas
    Abstract: We study a credence goods problem - that is, a moral hazard problem with non-contractible outcome - where altruistic experts (the agents) care both about their income and the utility of consumers (the principals). Experts' preferences over income and their consumers' utility are convex, such that experts care less for consumers when their financial situation is bad. In a market setting with multiple consumers per expert, a cross-consumer externality arises: one consumer's payment raises the expert's income, which makes the non-selfish part of preferences more important and thereby induces the expert to provide higher quality services to all consumers. The externality renders the market outcome inefficient. Price regulation partially overcomes this inefficiency and Pareto-improves upon the market outcome. If market entry of experts is endogenous, price regulation should be accompanied by licensing arrangements that cap the number of experts in the market. Our theory provides a novel rationale for the wide-spread use of price regulation and licensing in real-world markets for expert services.
    Keywords: altruism,asymmetric information,common agency,credence goods,expert services,externality,inefficiency,moral hazard,regulation
    JEL: D64 D82 D86 L15 L51
    Date: 2020

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