nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒03‒01
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. An Instrumental Variable Approach to Dynamic Models By Steven T. Berry; Giovanni Compiani
  2. Improved Information in Search Markets By Jidong Zhou
  3. Market Effects of Loyalty and Cost Factors in a Price Discrimination Environment By Theja Tulabandhula; Aris Ouksel
  4. Price Signaling and Quality Monitoring in Markets for Credence Goods By Philippe Mahenc; Alexandre Volle
  5. The Leniency Rule Revisited: Experiments on Cartel Formation with Open Communication By Maximilian Andres; Lisa Bruttel; Jana Friedrichsen
  6. Market Concentration and Uniform Pricing: Evidence from Bank Mergers By João Granja; Nuno Paixao
  7. Public vs. Private Investments In Network Industries By Jean-Marc Zogheib; Marc Bourreau
  8. The Retail Gasoline Price-Fixing Cartel in Québec By Marcel Boyer
  9. Pricing decisions under manufacturer's component open supply strategy with customer behavior and market spillover By Peiya Zhu; Xiaofei Qian; Xinbao Liu; Shaojun Lu
  10. Open Banking: Credit Market Competition When Borrowers Own the Data By Zhiguo He; Jing Huang; Jidong Zhou
  11. Governance of Data Sharing : a Law & Economics Proposal By Graef, Inge; Prüfer, Jens
  12. Mergers and Acquisitions in the Markets for Diagnostic Services: Evidence from the Finnish Private Health Care Sector By Mikko Nurminen
  13. Economic properties of data and the monopolistic tendencies of data economy: policies to limit an Orwellian possibility By Hoi Wai Jackie Cheng
  14. Designing Advance Market Commitments for New Vaccines By Michael Kremer; Jonathan D. Levin; Christopher M. Snyder
  15. Free Riding in Products with Positive Network Externalities: Empirical Evidence from a Large Mobile Network By Belo, Rodrigo; Ferreira, Pedro

  1. By: Steven T. Berry (Yale University - Department of Economics & Cowles Foundation; NBER); Giovanni Compiani (University of Chicago - Booth School of Business)
    Abstract: We present a new class of methods for identification and inference in dynamic models with serially correlated unobservables, which typically imply that state variables are econometrically endogenous. In the context of Industrial Organization, these state variables often reflect econometrically endogenous market structure. We propose the use of Generalized Instrument Variables methods to identify those dynamic policy functions that are consistent with instrumental variable (IV) restrictions. Extending popular “two-step†methods, these policy functions then identify a set of structural parameters that are consistent with the dynamic model, the IV restrictions and the data. We provide computed illustrations to both single-agent and oligopoly examples. We also present a simple empirical analysis that, among other things, supports the counterfactual study of an environmental policy entailing an increase in sunk costs.
    Date: 2020
  2. By: Jidong Zhou (Cowles Foundation, Yale University)
    Abstract: This paper studies how an improved information environment affects consumer search and ï¬ rm competition. We ï¬ nd conditions for information improvement to have unambiguous impacts on search duration, price and consumer welfare. In many cases consumers beneï¬ t from information improvement regardless of how it affects the market price, but there are also cases where information improvement raises price signiï¬ cantly so that consumers suffer from it. Our model provides a uniï¬ ed way to consider the market implications of various types of information improvement such as search advertising, personalized recommendations, ï¬ ltering, and VR shopping technology.
    Keywords: Consumer search, Price competition, Information improvement
    JEL: D43 D83 L13
    Date: 2020–11
  3. By: Theja Tulabandhula; Aris Ouksel
    Abstract: Product cost heterogeneity across firms and loyalty models of customers are two topics that have garnered limited attention in prior studies on competitive price discrimination. Costs are generally assumed negligible or equal for all firms, and loyalty is modeled as an additive bias in customer valuations. We extend these previous treatments by considering cost asymmetry and a richer class of loyalty models in a game-theoretic model involving two asymmetric firms. Here firms may incur different non-negligible product costs, and customers can have firm-specific loyalty levels. We characterize the effects of loyalty levels and product cost difference on market outcomes such as prices, market share and profits. Our analysis and numerical simulations shed new light on market equilibrium structures arising from the interplay between product cost difference and loyalty levels.
    Date: 2021–02
  4. By: Philippe Mahenc (CEE-M - Centre d'Economie de l'Environnement - Montpellier - UMR 5211 - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Alexandre Volle (DRM - Dauphine Recherches en Management - CNRS - Centre National de la Recherche Scientifique - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres)
    Abstract: We explore the interplay between price signaling and independent monitoring for communicating information about the credence attribute of a good, such as environmental quality. We augment the standard model of price signaling allowing consumers to use the results of noisy monitoring as a complementary source of information. We show that monitoring restores the credibility of price signaling by saving partly or fully the signaling cost borne by green rms to deter cheating. A key reason for this is that monitoring compensates for the lack of information resulting from arbitrary beliefs based on surprising prices. The more accurate monitoring, the cheaper price signaling. The signaling behavior of green rms also depends on their number. We determine which proportion of rms choose to improve environmental quality.
    Keywords: credence good,fraud,monitoring,signaling.
    Date: 2021–01–05
  5. By: Maximilian Andres (University of Potsdam); Lisa Bruttel (University of Potsdam); Jana Friedrichsen (WZB, Humboldt-Universität zu Berlin, DIW Berlin)
    Abstract: The experimental literature on antitrust enforcement provides robust evidence that communication plays an important role for the formation and stability of cartels. We extend these studies through a design that distinguishes between innocuous communication and communication about a cartel, sanctioning only the latter. To this aim, we introduce a participant in the role of the competition authority, who is properly incentivized to judge communication content and price setting behavior of the firms. Using this novel design, we revisit the question whether a leniency rule successfully destabilizes cartels. In contrast to existing experimental studies, we find that a leniency rule does not affect cartelization. We discuss potential explanations for this contrasting result.
    Keywords: cartel, judgment of communication, corporate leniency program, price competition, experiment
    JEL: C92 D43 L41
    Date: 2021–02
  6. By: João Granja; Nuno Paixao
    Abstract: We show that U.S. banks price deposits almost uniformly across their branches and that this pricing practice is crucial to explain the deposit rate dynamics following bank mergers. We find a strong and sharp post-merger convergence between the deposit rates of the acquired branches and the median deposit rate of the acquirer. This pattern is almost fully explained by adjustments in the deposit rates of the acquired branches, irrespective of whether their rates were above or below those practiced by the acquirer. Acquired branches lose deposits and local market share, especially when they decrease their rates due to uniform pricing. Local competitors respond to changes in deposit rates at the acquired branches by adjusting their own deposit rates in the same direction. We find that pre-merger differences in deposit rates between merged entities explain more of the post-merger evolution of deposit rates than the predicted changes in local market concentration induced by the merger. This result indicates that competition authorities would be well advised to review the potential impact of pre-merger pricing differences in evaluating a merger within an industry with strong uniform pricing practices.
    Keywords: Financial institutions; Financial system regulation and policies; Market structure and pricing
    JEL: D4 G34 L11
    Date: 2021–02
  7. By: Jean-Marc Zogheib; Marc Bourreau
    Abstract: We study the competition between a private firm and public firms on prices andinvestment in new infrastructures. While the private firm maximizes its profits,public firms maximize the sum of their profits and consumer surplus, subject to abudget constraint. We consider two scenarios of public intervention, with a nationalpublic firm and with local public firms. In a monopoly benchmark, we find that thenational public firm has the highest coverage and charges a uniform price allowingcross-subsidies between high-cost and low-cost areas. Moreover, the private firmcovers as much as local public firms. In a mixed duopoly, a stronger competitivepressure drives firms' prices up while it drives down (up) the national public (private)firm's coverage.
    Keywords: public firms, investment, network industries, mixed duopoly.
    JEL: D43 H44 L20 L33
    Date: 2021
  8. By: Marcel Boyer
    Abstract: Prosecution of the retail gasoline price-fixing cartel in Québec was the largest and most successful criminal investigation in the history of the Competition Bureau of Canada. In June 2008 the first charges were brought against 38 individuals and 14 companies under Section 45 of the pre-2010 Competition Act. Pre-2010 means that the public prosecutor had to show that the cartel not only existed but also had the effect of “unduly lessening competition.” As an expert witness and author of the crucial economic report in the case, I review here the main challenges I faced and how I dealt with them to credibly conclude that the cartel did successfully increase prices in markets under investigation. Price data, namely the dynamic standard deviation of prices across retailers, indicated that the cartel began in early 2001, while the accusation made it start in early 2004. The best estimate of damages the city-based cartels imposed on customers ranges from $18.5M to $42.0M for the period 2001–2006, and from $6.7M to $20.9M for the period 2004–2006. Following several stays of proceedings, out-of-court settlements, and trials in criminal court, individuals pleading or found guilty were fined and received conditional prison sentences, while companies pleading or found guilty were fined.
    Keywords: Retail Gasoline Markets,Price-Fixing Cartel,Undue Lessening of Competition,
    Date: 2021–02–22
  9. By: Peiya Zhu; Xiaofei Qian; Xinbao Liu; Shaojun Lu
    Abstract: Faced with huge market potential and increasing competition in emerging industries, product manufacturers with key technologies tend to consider whether to implement a component open supply strategy. This study focuses on a pricing game induced by the component open supply strategy between a vertically integrated manufacturer (who produces key components and end products) and an exterior product manufacturer (who produces end products using purchased key components) with different customer perceived value and different cost structure. This study first establishes a three stage pricing game model and proposes demand functions by incorporating relative customer perceived value. Based on the demand functions, we obtain feasible regions of the exterior manufacturer's sourcing decision and the optimal price decision in each region. Then the effects of relative customer perceived value, cost structure, and market structure on price decisions and optimal profits of the vertically integrated manufacturer are demonstrated. Finally, as for the optimal component supply strategy, we present a generalized closed supply Pareto zone and establish supply strategy Pareto zones under several specific configurations.
    Date: 2021–02
  10. By: Zhiguo He (University of Chicago - Booth School of Business; NBER); Jing Huang (University of Chicago - Booth School of Business); Jidong Zhou (Yale University - School of Business)
    Abstract: Open banking facilitates data sharing consented by customers who generate the data, with a regulatory goal of promoting competition between traditional banks and challenger fintech entrants. We study lending market competition when sharing banks’ customer data enables better borrower screening or targeting by fintech lenders. Open banking could make the entire financial industry better off yet leave all borrowers worse off, even if borrowers could choose whether to share their data. We highlight the importance of equilibrium credit quality inference from borrowers’ endogenous sign-up decisions. When data sharing triggers privacy concerns by facilitating exploitative targeted loans, the equilibrium sign-up population can grow with the degree of privacy concerns.
    Keywords: Open banking, data sharing, banking competition, digital economy, winner’s curse, privacy, precision marketing
    Date: 2020
  11. By: Graef, Inge (Tilburg University, TILEC); Prüfer, Jens (Tilburg University, TILEC)
    Keywords: Data sharing; data-driven markets; economic governance; competition law; data protection; regulation
    Date: 2021
  12. By: Mikko Nurminen (Turku School of Economics, FI-20014 University of Turku, Finland)
    Abstract: Health care markets in developed countries have become increasingly concentrated, while at the same time there has been an increasing trend of mergers and acquisitions (M&As) in these markets. I study the impact of M&As in the diagnostic procedure market, a market that is an important part of the health care industry and patient care, but has received little attention in this context. I use detailed nationwide register data from the Finnish private health care sector. My difference-in-difference estimates show that M&As increased prices in blood tests in both the acquiring and acquired units, but not in X-rays and MRIs. I additionally estimate a patient demand model that reveals that prices have little impact on the choice of provider while the referring physician's influence is large, potentially contributing to the firms' ability to increase their price margins.
    Keywords: Diagnostic Services, Mergers and Acquisitions, Market Power, Private Health Care
    JEL: L11 I11 J21 K21
    Date: 2021–01
  13. By: Hoi Wai Jackie Cheng
    Abstract: The potential of data for supporting development is bounded only by the amount and variety of data that can be collected and analyzed, which is to say it is almost infinite. However, if data’s vast benefits are disproportionately captured by few in the society, leaving no one behind – an overarching principle of the Sustainable Development Goals – would be difficult to attain, even when everyone benefits from the use of data. This paper discusses key data properties and dynamics in data economy that create the tendencies for monopolies to emerge, reinforcing unbalanced power between corporates and other actors and generating negative distributional implications. If mismanaged, transformation toward the data economy could end up being an unequalizing force in an already highly-unequal world. In the context of data economy, this paper presents critiques of the common approaches to deal with monopolies. Self-correction in market is unlikely to happen fast enough but breaking up or nationalizing data monopolies are undesirable from effectiveness and innovation perspectives. Strengthening data ownership is key to rebalancing the power asymmetry between corporates and digital subjects, but difficulty of data valuation needs to be overcome. Analyses in this paper support further exploring the idea of setting up an independent, accountable and forward-looking Digital Authority that has both competition and non-competition goals.
    Keywords: Data economy, Data properties, Market competition, Monopoly, Inequality, Consumer protection
    JEL: D18 D42 L4 O33
    Date: 2020–05
  14. By: Michael Kremer (University of Chicago - Department of Economics; NBER); Jonathan D. Levin (Stanford University - Graduate School of Business; NBER); Christopher M. Snyder (Dartmouth College - Department of Economics; NBER)
    Abstract: Advance market commitments (AMCs) provide a mechanism to stimulate investment by suppliers of products to low-income countries. In an AMC, donors commit to a fund from which a specified subsidy is paid per unit purchased by low-income countries until the fund is exhausted, strengthening suppliers' incentives to invest in research, development, and capacity. Last decade saw the launch of a $1.5 billion pilot AMC to distribute pneumococcal vaccine to the developing world; in the current pandemic, variations on AMCs are being used to fund COVID-19 vaccines. This paper undertakes the first formal analysis of AMCs. We construct a model in which an altruistic donor negotiates on behalf of a low-income country with a vaccine supplier after the supplier has sunk investments. We use this model to explain the logic of an AMC—as a solution to a hold-up problem—and to analyze alternative design features under various economic conditions (cost uncertainty, supplier competition). A key finding is that optimal AMC design differs markedly depending on where the product is in its development cycle.
    JEL: D02 I18 O19 O31
    Date: 2020
  15. By: Belo, Rodrigo; Ferreira, Pedro
    Abstract: We study the effect of peer influence on products that exhibit positive network externalities to non-adopters, i.e., products that benefit adopters' friends even if they do not adopt. Contrary to products that exhibit positive network externalities upon adoption, this structure of incentives likely results in negative peer influence: the more friends that adopted the product, the smaller the incentives to adopt. We measure this effect empirically by using observational data from a large mobile carrier serving 5.7 million users. We estimate the effect of peer influence across five different products of this type. A naive approach to do so results in a positive estimate for peer influence due to unobserved homophily. We follow two approaches to address this issue. First, we suggest using the number of friends that end up adopting the product as a proxy for unobserved user fixed effects. Second, we control for homophily by applying a shuffle test, i.e., we compare the effect of peer influence from the original data with the effect obtained from comparable randomly generated data without peer influence. We get negative estimates from both approaches, which provides robustness to our findings. Finally, we show that even for these products, the effect of peer influence associated with the first friends that adopt the product is positive, which arises because they still convey useful information about reducing uncertainty. The negative effect of peer influence arises only for the subsequent friends that adopt the product. These friends are unlikely to convey new information about the product, but each of them decreases the economic incentive to adopt, resulting in a negative aggregate effect of peer influence.
    Date: 2021–02–14

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