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on Industrial Competition |
| By: | Zhijun Chen; pch346; Chongwoo Choe; Jiajia Cong; Noriaki Matsushima |
| Abstract: | Recent years have seen growing cases of data-driven tech mergers such as Google/Fitbit, in which a dominant digital platform acquires a relatively small firm possessing a large volume of consumer data. The digital platform can consolidate the consumer data with its existing data set from other services and use it for personalization in related markets. We develop a theoretical model to examine the impact of such mergers across the two markets that are related through a consumption synergy. The merger links the markets for data collection and data application, through which the digital platform can leverage its market power and hurt competitors in both markets. Personalization can lead to exploitation of some consumers in the market for data application. But insofar as competitors remain active, the merger increases total consumer surplus in both markets by intensifying competition. When the consumption synergy is large enough, the merger can result in monopolization of both markets, leading to further consumer harm when stand-alone competitors exit in the long run. Thus there is a tradeoff where potential dynamic costs can outweigh static benefits. We also discuss policy implications by considering various merger remedies. |
| Keywords: | big data, personalization, tech mergers |
| JEL: | D43 L13 L41 K21 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2020-16&r=all |
| By: | Louis Kaplow |
| Abstract: | The flow of resources across sectors to their best use, with concomitant entry and exit, is central to the functioning and welfare properties of a market economy. Nevertheless, most industrial organization research, including applications to competition policy, undertakes partial equilibrium analysis in a single sector, often with a fixed number of firms. This article examines competition policy in a simple, multi-sector, general equilibrium model with free entry and exit. Even partial equilibrium analysis yields some lessons, such as that accounting for free entry often makes strengthening competition policy more rather than less attractive. When admitting flows between sectors, familiar prescriptions readily reverse. But such results may be partially offset or overturned yet again when incorporating free entry and exit in nontargeted sectors. Finally, the analysis of efficiencies also changes qualitatively with free entry because even fixed costs are fully borne by consumers in equilibrium. |
| JEL: | D43 D51 D61 K21 L13 L40 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28482&r=all |
| By: | Stefano Castriota (University of Pisa, Department of Political Science); Alessandro Fedele (Free University of Bolzano‐Bozen, Faculty of Economics and Management) |
| Abstract: | We investigate the effect of product excellence on firm profitability in a competitive market with vertical and horizontal differentiation. We develop a theoretical model and derive conditions under which the effect of excellence on profitability, the latter defined as the ratio of equilibrium profits to the invested capital, can be either positive, zero, or negative. We test our theoretical predictions by examining a sample of 1,052 Italian wineries over the period 2006-2015. Using different econometric methodologies, we find that excellence, proxied by firm reputation for quality, has no significant impact on profitability, measured by the return on invested capital (ROIC). We conclude by discussing policy and managerial implications. (NOTE: This paper is a radically revised version of the paper "Does Excellence Pay Off? Evidence from the Wine Market", published in this series as BEMPS49) |
| Keywords: | product excellence; firm profitability; vertical and horizontal differentiation; reputation for quality; wine market |
| JEL: | L15 L14 L66 L13 Q1 D21 D22 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:bzn:wpaper:bemps77&r=all |
| By: | Kondor, Peter; Zawadowski, Adam |
| Abstract: | We present a novel entry-game with endogenous information acquisition to study the welfare effects of opacity and competition. Potential entrants to an opaque market are uncertain about their competitive advantage relative to other investors, i.e. their type. They construct optimal costly signals to learn about their types, where the marginal cost of learning captures the opacity of the market. In general, the individually optimal entry and learning decisions are socially suboptimal. Players over-invest in learning and more opaque markets are associated with more crowding. Nevertheless, more opaque markets might still lead to higher welfare by implying a better trade-off between the degree of crowding and the total cost of learning. Similarly, decreasing the share of smart investors in the market might also improve welfare. However, fierce competition is always detrimental to welfare as it leads to more wasteful learning without changing the level of crowding. |
| Keywords: | crowded markets; inattention |
| JEL: | G10 |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:101378&r=all |
| By: | BOUCKAERT, Jan; VAN MOER, Geert |
| Abstract: | This paper investigates joint bidding when firms have incentives to sign subcontracts with each other after competing in the bidding stage. A bidding consortium affects the horizontal subcontracting market and, through backward induction, alters firms’ bids. Our findings challenge the current legal practice that consortia without efficiencies must pass the “no-solo-bidding test”, requiring that its members could not bid stand-alone. Our framework predicts that the formation of a temporary consortium, which has the feature that it dissolves after submitting a losing bid, benefits the procurer. The winning bid is more competitive with a temporary as compared to a structural consortium. |
| Keywords: | Joint bidding, Horizontal subcontracting, buyer power |
| JEL: | D43 L13 L14 L41 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2021001&r=all |
| By: | André De Palma; Simon P. Anderson (Université de Cergy-Pontoise, THEMA) |
| Abstract: | We link fundamental technological and taste distributions to endogenous economic distributions of prices and firm size (output, profit) generated under monopolistic competition with heterogeneous productivities as per recent Trade and IO models. We new derive properties for monopoly pricing and equivalence properties on demand curvature, profit functions, and marginal revenue, which we use to ensure distributions of cost, price, output, and profit can be matched under monopolistic competition. Demand and one distribution determine the rest. We provide constructive proofs to recover demand and all distributions from just two (e.g., price and cost distributions uncover demand form), and derive consistency conditions that distribution pairs must satisfy. We then extend to include mark-up distributions. |
| Keywords: | Primitive and economic distributions, monopoly, monopolistic competition, pass-through and demand recovery, mark-up, price and profit dispersion |
| JEL: | L13 F12 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2021-03&r=all |
| By: | André De Palma; Mogens Fosgerau; Julien Monardo (Université de Cergy-Pontoise, THEMA) |
| Abstract: | We propose the Inverse Product Differentiation Logit (IPDL) model, a structural (inverse) demand model for differentiated products that captures market segmentation with segments that may overlap in any way. The IPDL model generalizes the nested logit model to allow richer substitution patterns, including complementarity in demand, and can be estimated by linear instrumental variable regression using aggregate data. We use the IPDL model to estimate the demand for cereals in Chicago. We then extend it to a general demand model that is consistent with a utility model of heterogeneous, utilitymaximizing consumers. |
| JEL: | C26 D11 D12 L |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2021-04&r=all |
| By: | Xiang Hui; Tobias J. Klein; Konrad Stahl |
| Abstract: | Anonymous markets would be very difficult to successfully operate without the possibility that buyers rate the seller. Yet many empirical results yield that ratings are non-random and concentrate on extreme experiences. We develop a model of rating decisions in which the buyer is willing to share publicly her opinion about a transaction, if its realized quality differs much from the quality expected by her, where expected quality is influenced by an aggregate of the seller’s past ratings. We demonstrate our results empirically using raw data from eBay. In spite of the non-randomness of responses, unweighted rating aggregates appear to rather well reflect reported buyer experience as long as expectations are not extreme. |
| Keywords: | Online Markets, Rating, Reputation |
| JEL: | D83 L12 L13 L81 |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2021_267&r=all |
| By: | Mouré, Christopher |
| Abstract: | According to the capital as power framework, pecuniary earnings, or profits, are a symbolic representation of the struggle for power between different capitalist groups. In this struggle, capitalists measure their own power differentially - that is, relative to other capitalist entities. The focus on differential power, expressed in differential earnings, leads firms to try to beat an average rate of return. In order for the profits of one firm to beat the average, others must be prevented from accessing the same earnings. In an environment with hundreds, thousands or even millions of similar sized firms, it would be difficult if not impossible to empirically isolate the relationship between shifts in power between any two firms. However, in most industries, only a handful of firms dominate, theoretically making the microanalysis of such a relationship much more feasible. It is my contention that this is largely true for the computer technology industry in the US. Within the computer technology industry, Microsoft and Google stand out as two of the most profitable and most powerful firms. As such, it is logical to assume that in differential power terms, Google's rapid rise poses a direct threat to Microsoft's dominance. Moreover, in recent years both companies have expanded beyond their respective core profitable businesses, coming into more and more direct competition. [. . .] The purpose of this paper is to show that, despite the fact that Google and Microsoft currently derive the majority of their profits from separate businesses, competition between them can be empirically observed in the way each firm pursues the differential accumulation of power. |
| Keywords: | capital as power,differential accumulation,Google,Microsoft |
| JEL: | M1 G P16 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:capwps:202101&r=all |
| By: | Graef, Inge (Tilburg University, Center For Economic Research); Prüfer, Jens (Tilburg University, Center For Economic Research) |
| Keywords: | Data sharing; data-driven markets; economic governance; competition law; data protection; regulation |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:tiu:tiucen:81ca5cc3-d384-4bc4-af82-d2c6969aee43&r=all |
| By: | Jean Gabszewicz (CORE, Université Catholique de Louvain); Marco A. Marini (Department of Social Sciences and Economics, Sapienza University of Rome); Skerdilajda Zanaj (DEM, University of Luxembourg.) |
| Abstract: | This paper explores how social interactions among consumers shape markets. In a two-country model, consumers meet and exchange information about the quality of the goods. As information spreads, the demands evolve, affecting the prices and quantities manufactured by profi?t-maximizing ?rms. We show that market prices with informational frictions reach the duopoly price with full information, at the limit. However, this convergence can take two different paths depending on the size asymmetry between countries. In particular, when countries are of very different sizes, the single market does not immediately turn into a duopoly and monopoly prices may persist for several periods. Hence, the price-reducing trade effects may take longer to appear. In view of an intense globalization process, understanding how social meetings affect market outcomes is critical for understanding the performance of international economic integration. |
| Keywords: | Consumer Encounters, Information Di¤usion, Country Size, Product Quality. |
| JEL: | D42 D43 D83 F15 L13 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:3/21&r=all |
| By: | Bernhardt, Dan (University of Illinois and University of Warwick); Koufopoulos, Kostas (University of York); Trigilia, Giulio (University of Rochester) |
| Abstract: | We provide theoretical foundations for positive lender profits in competitive credit markets with asymmetric information, where potential borrowers have scarce collateralizable assets. Strikingly, when some borrowers have negative net present value projects, an equilibrium always exists in which lenders make positive profits, despite their lack of `soft' information and free entry of competitors. We then establish that greater access to collateral for borrowers reduces lender profits, and we relate our findings to the empirical evidence on micro-credit, payday lending, and, more broadly, retail and small business financing. JEL Classification: D82 ; D86 |
| Keywords: | Adverse selection ; positive profits ; collateral ; free entry ; market breakdown ; credit markets |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1328&r=all |
| By: | Jacopo Bizzotto (Oslo Business School - OsloMet); Bård Harstad (Universitetet i Oslo) |
| Abstract: | For markets to work, buyers must know when products are of high quality. This paper provides a theoretical framework for studying the consequences of the certifier's identity, the characteristics of the best certifier, and the identity of the equilibrium certifier. A certifier that cares about quality and externalities (such as an NGO) motivates firms to invest in their capacities to provide quality; a certifier concerned with the firms' profits (such as an industry association) motivates more firms to enter the market in the first place. The relative importance of externalities, investments, and entry determines the socially optimal certification authority but also the type of certifier that is most likely to enter in equilibrium. The theory's predictions are empirically testable and shed light on the variety of certifiers across markets and over time. |
| Keywords: | Certification, delegation, entry of firms, investments in quality, private politics |
| JEL: | G24 L15 L31 |
| Date: | 2020–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:oml:wpaper:202007&r=all |
| By: | Tomaso Duso; Mattia Nardotto; Jo Seldeslachts |
| Abstract: | We provide an evaluation of the impact of public subsidy schemes that aimed to support the development of basic broadband infrastructure in rural areas of Germany. Such subsidies are subject to state aid control by the European Commission (EC). While the EC increasingly recognises the role of economic analysis in controlling public aid to companies, there are to date no full retrospective studies performed on state aid control, especially assessing the so-called balancing test. In this study, we do not only analyse whether the aid was effective in solving a market failure – low broadband coverage in rural areas – but also study its impact on competitive outcomes, on both rival firms and consumers. We adopt a difference-in-differences framework after using a matching procedure to account for selection on observables. We find that the aid significantly increased broadband coverage. More importantly, we find that the number of internet providers has significantly increased in the municipalities receiving aid. This additional entry decreased average prices. Therefore, the subsidies complied with EU state aid rules, both in terms of effectiveness and competition. |
| Keywords: | state aid, ex-post evaluation, broadband, coverage, entry, competition, prices |
| JEL: | C23 D22 L10 L40 L64 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8892&r=all |
| By: | Roy, Sunanda; Singh, Rajesh; Weninger, Quinn |
| Abstract: | We present a model of firm entry in an industry that is managed with an aggregate production quota or cap-and-trade (CAT) regulation. Firms are heterogeneous in productivity; each knows its own costs of production but is uncertain about where its costs rank among an entrant population. Entry is modeled as a simultaneous move game with incomplete information. Under CAT, firms compete to secure shares of a fixed number of production permits. Entry payoffs are determined by own and rival entrant productivity. We derive the Bayesian Nash entry equilibrium and show conditions under which placement uncertainty leads to excess entry relative to full information. We derive conditions where the reverse, inefficiency due to under entry, occurs. Whereas the behavioral IO literature has attributed over-entry and over-investment to bias, i.e., entrepreneurs are overconfident believing that they are better than average, we show that rational uncertainty regarding post entry competition is sufficient. Our results offer a new explanation for often-observed rational exuberance and for rational pessimism in investment by entrepreneurs. |
| Date: | 2021–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:202102240800001096&r=all |
| By: | Petar Jolakoski; Branimir Jovanovic (The Vienna Institute for International Economic Studies, wiiw); Joana Madjoska; Viktor Stojkoski; Dragan Tevdovski |
| Abstract: | If firm profits rise to a level far above than what would have been earned in a competitive economy, this might give the firms market power, which might in turn influence the activity of the government. In this paper, we perform a detailed empirical study on the potential effects of firm profits and markups on government size and effectiveness. Using data on 30 European countries for a period of 17 years and an instrumental variables approach, we find that there exists a robust relationship between firm gains and the activity of the state, in the sense that higher firm profits reduce government size and effectiveness. Even in a group of developed countries, such as the European countries, firm power may affect state activity. |
| Keywords: | firm profits, government size, government effectiveness |
| JEL: | C23 H11 H50 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:194&r=all |
| By: | Elizabeth Baldwin (Dept of Economics, Oxford University); Martin Bichler (Dept of Computer Science, Technical University of Munich); Maximilian Fichtl (Dept of Computer Science, Technical University of Munich); Paul Klemperer (Dept of Economics, Oxford University) |
| Abstract: | We show the Strong Substitutes Product-Mix Auction (SSPMA) bidding language provides an intuitive and geometric interpretation of strong substitutes as Minkowski differences between sets that are easy to identify. We prove that competitive equilibrium prices for agents with strong substitutes preferences can be computed by minimizing the difference between two linear programs for the positive and the negative bids with suitably relaxed resource constraints. This also leads to a new algorithm for computing competitive equilibrium prices which is competitive with standard steepest descent algorithms in extensive experiments. |
| Keywords: | Competitive equilibrium, Walrasian equilibrium, Strong substitutes, Product-Mix auction, Envy-free prices, Indivisible goods, Equilibrium computation, DC programming, Auction theory, Algorithms |
| Date: | 2021–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:2102&r=all |
| By: | Francesc Dilmé (University of Bonn) |
| Abstract: | This paper analyzes a continuous-time Coase setting with finite horizon, interdependent values, and different discount rates. Our full characterization of equilibrium behavior permits studying how patience shapes the bargaining outcome. We obtain that (i) the seller’s commitment problem persists even when she is fully patient, (ii) making the seller more impatient may increase equilibrium prices, (iii) when adverse selection is not strong, the buyer is ex-post better off when he is more impatient, and (iv) when discounting is time-dependent, episodes where the seller or the buyer have a high discount rate feature a large probability of trade, but only periods with high buyer discounting lead to a fast price decline. |
| Keywords: | Bargaining, one-sided offers, different discount factors |
| JEL: | C78 D82 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:063&r=all |
| By: | Md. Main Uddin; Liang Choon Wang; Russell Smyth |
| Abstract: | We conduct an Online randomized controlled experiment in Australia in order to examine whether government initiatives to encourage the use of energy comparison sites increase consumer search and result in lower prices. Despite significant price variations across energy retailers, our experiment indicates that while providing information about the potential gains from using the governmentowned Victoria Energy Compare (VEC) website encourages participants to visit the website, it is not effective in inducing them to contact, or switch, retailers who are providing better offers. Moreover, the availability of a $50 bonus associated with using the VEC website reduces the likelihood that lowincome participants contact, or switch retailers, in order to lower their electricity prices, leading to an increase in their electricity expenditure. Our findings imply that government-initiated comparison sites are not sufficient to promote competition and that providing consumers with financial incentives for using these sites in order to encourage competition may potentially backfire. |
| Keywords: | VEC, Financial incentive, Energy price, Field experiment, Australia |
| JEL: | H24 H31 Q43 Q48 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2020-11&r=all |
| By: | Roman Inderst; Eftichios Sartzetakis; Anastasios Xepapadeas |
| Date: | 2021–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:aue:wpaper:2103&r=all |
| By: | Vladimir Asriyan; Dana Foarta; Victoria Vanasco |
| Abstract: | We study the joint determination of product quality and complexity in a rational setting. We introduce a novel notion of complexity, which affects how costly it is for an agent to acquire information about product quality. In our model, an agent can accept or reject a product proposed by a designer, who can affect the quality and the complexity of the product. Examples include banks that design financial products that they offer to retail investors, or policymakers who propose policies for approval by voters. We find that complexity is not necessarily a feature of low quality products. While an increase in alignment between the agent and the designer leads to more complex but better quality products, higher product demand or lower competition among designers leads to more complex and lower quality products. Our findings produce novel empirical implications on the relationship between quality and complexity, which we relate to evidence within the context of financial products and regulatory policies. |
| Keywords: | complexity, information acquisition, signaling, regulation, financial products |
| JEL: | D82 D83 G18 P16 D78 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp20155&r=all |
| By: | Astrid Martínez Ortiz |
| Abstract: | En este concepto experto se analiza, en primer lugar, la evolución de la teoría y práctica de la política pública de la competencia en los mercados en Estados Unidos y Europa, en particular en cuanto a la promoción de la competencia y la eficiencia, así como en cuanto a la protección del consumidor. En segundo lugar, se examina la política de competencia en Colombia desde 1959 y se encuentra un adecuado desarrollo institucional y oportunidades de mejora en cuanto al fortalecimiento de la Superintendencia de Industria y Comercio, SIC, como autoridad única de competencia. Se examina la regulación en cuanto a las integraciones empresariales, las conductas anticompetitivas y el abuso del poder dominante y se concluye que ha avanzado en línea con desarrollo internacional. Se recomienda continuar con el diseño de instrumentos que disuadan a los agentes de incurrir en prácticas contra la competencia y que fortalezcan la protección del consumidor. Se puede examinar también la experiencia de otros países de la región y la posibilidad de crear instancia para la apelación de las decisiones de la SIC. |
| Keywords: | Política de Competencia, Competencia, Proyecto de Ley 180 de 2020, Política Pública, Promoción de la Competencia, Desarrollo Institucional, Colombia |
| JEL: | D41 L38 O17 |
| Date: | 2020–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:col:000124:018894&r=all |
| By: | Esteban Jaimovich; Boryana Madzharova; Vincenzo Merella |
| Abstract: | This paper explores patterns of quality differentiation and specialization relying on model-level panel data of retail sales and prices of refrigerators across 23 countries in the European Union. Unlike customs data aggregated at the product category, typically used in the literature, model-level data allow us to test for the presence of nonhomotheticities by comparing market shares of identical models across different markets. We measure quality at the model level, account for varying willingness-to-pay for quality at different levels of income, and link quality measures to objective model attributes. Using originally assembled data on the country of manufacture of each model, we study patterns of quality specialization by brands with plants in multiple countries. We find that firms locate the production of their higher-quality models in richer countries, and argue that such patterns of quality specialization are driven mainly by a home-market effect linked to nonhomothetic preferences. |
| Keywords: | inferred quality, nonhomothetic CES, home-market effect, quality specialization |
| JEL: | F10 F14 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8898&r=all |
| By: | Jesús Fernández-Villaverde; Federico Mandelman; Yu Yang; Francesco Zanetti |
| Abstract: | This paper develops a dynamic general equilibrium model with heterogeneous firms that face search complementarities in the formation of vendor contracts. Search complementarities amplify small differences in productivity among firms. Market concentration fosters monopsony power in the labor market, magnifying profits and further enhancing high-productivity firms’ output share. Firms want to get bigger and hire more workers, in stark contrast with the classic monopsony model, where a firm aims to reduce the amount of labor it hires. The combination of search complementarities and monopsony power induces a strong “Matthew effect” that endogenously generates superstar firms out of uniform idiosyncratic productivity distributions. Reductions in search costs increase market concentration, lower the labor income share, and increase wage inequality. |
| Keywords: | market concentration, superstar firms, search complementarities, monopsony power in the labor market |
| JEL: | C63 C68 E32 E37 E44 G12 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8897&r=all |