nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒03‒22
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Vertical Mergers with Input Substitution: Double Marginalization, Foreclosure and Welfare By Marius Schwartz; Serge Moresi
  2. Size-based input price discrimination under endogenous inside options By Evensen, Charlotte B.; Foros, Øystein; Haugen, Atle; Kind, Hans Jarle
  3. Market Definition in the Platform Economy By Jens-Uwe Franck; Martin Peitz
  4. Asset Bubbles and Product Market Competition By Francisco Queirós
  5. The effects of personal information on competition: Consumer privacy and partial price discrimination By Clavorà Braulin, Francesco
  6. Random Encounters and Information Di§usion about Product Quality By Gabszewicz, Jean; Marini, Marco A.; Zanaj, Skerdilajda
  7. Competition in French hospital: Does it impact the patient management in healthcare? By Carine Milcent
  8. What affects bank market power in the Euro area? A structural model approach By Paolo Coccorese; Claudia Girardone; Sherrill Shaffer
  9. Licensing Life-Saving Drugs for Developing Countries: Evidence from the Medicines Patent Pool By Alberto Galasso; Mark Schankerman
  10. Duopolistic competition and monetary policy By Kozo Ueda
  11. WP 07-20 - Les branches clés de la R&D en Belgique - Évolutions structurelles et stratégie d’entreprise By Bernadette Biatour; Michel Dumont; Chantal Kegels
  12. Repurchase Options in the Market for Lemons By Saki Bigio; Liyan Shi
  13. Impact of Vertical Integration By H. Luke, Erin
  14. A Welfare Analysis of Competitive Insurance Markets with Vertical Differentiation and Adverse Selection By W. Bentley MacLeod
  15. Revenue Maximization for Buyers with Outside Options By Yannai A. Gonczarowski; Nicole Immorlica; Yingkai Li; Brendan Lucier
  16. Because of Monopolies, Income Inequality Significantly Understates Economic Inequality By James A. Schmitz
  17. The Impact of the Agency Model on E-book Prices: Evidence from the UK By Maximilian Maurice Gail; Phil-Adrian Klotz
  18. Competition in Signaling By Federico Vaccari
  19. Progressive Participation By Dirk Bergemann; Philipp Strack
  20. Interest Rates, Market Power, and Financial Stability By David Martinez-Miera; Rafael Repullo
  21. The “Matthew effect” and market concentration: Search complementarities and monopsony power By Jesús Fernández-Villaverde; Federico Mandelman; Yang Yu; Francesco Zanetti

  1. By: Marius Schwartz (Department of Economics, Georgetown University); Serge Moresi (Charles River Associates, Inc.)
    Abstract: We consider differentiated duopolists that face symmetric linear demands and produce using identical or different Cobb-Douglas technologies with a monopolized input and a competitively supplied input. A merger between the input monopolist and either firm eliminates double marginalization but—unlike with fixed-proportions technologies in the same setting—can lead to foreclosure and reduce consumer welfare and total welfare. The same can occur under a CES technology with greater input substitutability than Cobb-Douglas. When firms use identical Cobb-Douglas technologies, the merged firm raises the rival’s cost by more, and the welfare effects are worse, when the input it controls constitutes a low rather than high share of downstream input costs. If that share is sufficiently low then consumer welfare and total welfare decline, while rising elsewhere despite foreclosure. With different Cobb-Douglas technologies, the input monopolist may foreclose completely either firm pre-merger. A merger’s welfare effects then can be non-monotonic in the monopoly input’s share of costs. Classification-L4, L41, L42
    Keywords: Vertical Mergers, Foreclosure, Input Substitution, Antitrust
    Date: 2021–03–14
  2. By: Evensen, Charlotte B. (Dept. of Economics, Norwegian School of Economics and Business Administration); Foros, Øystein (Dept. of Economics, Norwegian School of Economics and Business Administration); Haugen, Atle (Dept. of Economics, Norwegian School of Economics and Business Administration); Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: Individual retailers may choose to invest in a substitute to a dominant supplier’s products (inside option) as a way of improving its position towards the supplier. Given that a large retailer has stronger investment incentives than a smaller rival, the large retailer may obtain a selective rebate (size-based price discrimination). Yet, we often observe that suppliers do not price discriminate between retailers that differ in size. Why is this so? We argue that the explanation may be related to the competitive pressure among the retailers. The more fiercely the retailers compete, the more each retailer cares about its relative input prices. Other things equal, this implies that the retailers will invest more in the substitute the greater the competitive pressure. We show that if the competitive pressure is sufficiently strong, the supplier can profitably incentivize the retailer to reduce its investments in substitutes by committing to charge a uniform input price. Furthermore, we show that under uniform input pricing, the large retailer may induce smaller rivals to exit the market by strategically underinvesting in inside options.
    Keywords: Input price discrimination; size asymmetries; retail competition; inside options; entry; exit.
    JEL: D21 L11 L13
    Date: 2021–03–11
  3. By: Jens-Uwe Franck; Martin Peitz
    Abstract: The article addresses the role market definition can play for EU competition practice in the platform economy. The focus is on intermediaries that bring together two (or more) groups of users whose decisions are interdependent and which therefore are commonly referred to as “two-sided platforms”. We address challenges to market definition that accompany these cross-group network effects, assess current practice in a number of cases with the European Commission and Member States’ competition authorities, and provide guidance on how practice is to be adapted to properly account for the economic forces shaping markets with two-sided platforms. Owing to the complementarities of services provided to the user groups the platforms cater to, the question arises whether and when a single market can be defined that encompasses both sides. We advocate a multi-markets approach that takes account of cross-market linkages, acknowledges the existence of zero-price markets, and properly accounts for the homing behaviour of market participants.
    Keywords: antitrust law, EU competition practice, market definition, market power, Market Definition Notice, two-sided platforms, digital markets, network effects, matching platforms, zero-price markets, homing decisions, SSNIP test
    JEL: K21
    Date: 2021–03
  4. By: Francisco Queirós (Università di Napoli Federico II and CSEF)
    Abstract: This paper studies the interactions between asset bubbles and competition. I first document a negative industrylevel relationship between measures of stock market overvaluation and indicators of market power: larger overvaluation is associated with an increase in the number of firms, lower markups and a higher probability of negative earnings. I then construct multi-industry growth model featuring imperfect competition and rational bubbles that sheds light on these findings. By providing an entry or production subsidy, bubbles stimulate competition and reduce monopoly rents. When they are sufficiently large they can, however, lead to excessive entry and competition. I also show that imperfect competition depresses the interest rate, thereby relaxing the conditions for the emergence of rational bubbles.
    Keywords: Rational Bubbles, Competition, Market Power, British Railway Mania, Dotcom Bubble
    JEL: E44 L13 L16
    Date: 2021–03–17
  5. By: Clavorà Braulin, Francesco
    Abstract: This article studies the effects of consumer information on the intensity of competition. In a two dimensional duopoly model of horizontal product differentiation, firms use consumer information to price discriminate. I contrast a full privacy and a no privacy benchmark with intermediate regimes in which the firms target consumers only partially. No privacy is traditionally detrimental to industry profits. Instead, I show that with partial privacy firms are always better-off with price discrimination: the relationship between information and profits is hump-shaped. Consumers prefer either no or full privacy in aggregate. However, even though this implies that privacy protection in digital markets should be either very hard or very easy, the effects of information on individual surplus are ambiguous: there are always winners and losers. When an upstream data seller holds partially informative data, an exclusive allocation arises. Instead, when data is fully informative, each competitor acquires consumer data but on a different dimension.
    Keywords: price discrimination,data broker,consumer information,privacy
    JEL: D43 L11 L13
    Date: 2021
  6. By: Gabszewicz, Jean; Marini, Marco A.; Zanaj, Skerdilajda
    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 profit-maximizing firms. 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 Diffusion, Country Size, Product Quality
    JEL: D8 F2 F22 L1 L13 L15 L22
    Date: 2021–02–07
  7. By: Carine Milcent (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 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)
    Abstract: We explore the competition impact on patient management in healthcare (length of stay and technical procedure's probability to be performed) by difference-indifference , exploiting time variations in the intensity of local competition caused by the French pro-competition reform (2004-2008). Models are estimated with hospital fixed effects to take into account hospital unobserved heterogeneity. We use an exhaustive dataset of in-hospital patients over 35 admitted for a heart attack. We consider the period before the reform from 2001 to 2003 and a period after the reform from 2009 to 2011. Before the reform, there were two types of reimbursement systems. Hospitals from private sector, were paid by fee-for-service. Hospitals from public sector were paid by global budget. They had no current activity's link, and a weak competition incentive. After the DRG-based payment reform, all hospitals compete with each other to attract patients. We find the reform a sizeable positive competition effect on high-technical procedure for the private sector as well as a negative competition effect on the length of stay for public hospitals. However, the overall local competition effect of the reform explained a very marginal part of the explanatory power of the model. Actually, this period is characterised by two contradictory components: a competition effect of the reform and in-patients who are more concentrated. Results suggest that if competition impacted management patient's change, it is through a global competition included in a global trend much more than a local competitive aspect of the reform.
    Keywords: Competition,Hospital ownership,Policy evaluation,Length of stay,High-tech procedure,Difference-in-difference,Measure of market structure,Heart attack competition
    Date: 2021–03
  8. By: Paolo Coccorese; Claudia Girardone; Sherrill Shaffer
    Abstract: In this study we explore market power in 13 EU banking sectors for the years 2007 to 2019 by estimating a structural model with demand and supply equations, where the mark-up of price over marginal cost is parameterized as a measure of banks’ conduct that depends on selected factors. Our evidence indicates that EU banks enjoy a significant degree of market power, which shows a decreasing trend over time and some difference across countries. More competition is associated with higher bank density, lower bank capitalization, more efficient and stable banking systems, and better macroeconomic conditions. Finally, a clear convergence pattern emerges in the behaviour of EU banks.
    Keywords: Banking, Market power, European integration
    JEL: C36 F36 G21 L10
    Date: 2021–01
  9. By: Alberto Galasso; Mark Schankerman
    Abstract: We study the effects of an institution that pools patents across geographical markets on the licensing and adoption of life-saving drugs in low- and middle-income countries. Using data on licensing and sales for HIV, hepatitis C and tuberculosis drugs, we show that there is an immediate and large increase in licensing by generic firms when a patent is included in the Medicines Patent Pool (MPP). The effect is heterogeneous across countries. The findings are robust to identification strategies to deal with endogeneity of MPP patents and countries. The impact on actual entry and sales, however, is much smaller than on licensing, which is due to geographic bundling of licenses by the MPP. More broadly, the paper highlights the potential of pools in promoting technology diffusion in developing countries.
    JEL: I18 O31 O34
    Date: 2021–03
  10. By: Kozo Ueda
    Abstract: A standard macroeconomic model based on monopolistic competition (Dixit-Stiglitz) does not account for the strategic behaviors of oligopolistic firms. In this study, we construct a tractable Hotelling duopoly model with price stickiness to consider the implications for monetary policy. The key feature is that an increase in a firm’s reset price increases the optimal price set by the rival firm in the following periods, which, in turn, influences its own optimal price in the current period. This dynamic strategic complementarity leads to the following results. (1) The steady-state price level depends on price stickiness. (2) The real effect of monetary policy under duopolistic competition is larger than that in a Dixit-Stiglitz model, but the difference is not large. (3) A duopoly model with heterogeneous transport costs can explain the existence of temporary sales, which decreases the real effect of monetary policy considerably. These results show the importance of understanding the competitive environment when considering the effects of monetary policy.
    Keywords: Duopoly, monetary policy, strategic complementarities, New Keynesian model
    JEL: D43 E32 E52
    Date: 2021–01
  11. By: Bernadette Biatour; Michel Dumont; Chantal Kegels
    Abstract: Has the production process of the industries that do the most R&D in Belgium changed over the last 10 years? This analysis attempts to answer this question using both sectoral and company data.
    Keywords: R&D, Concentration, Production process, Firm strategy
    JEL: L16 L22 L23 O32
    Date: 2020–12–22
  12. By: Saki Bigio (UCLA); Liyan Shi (EIEF)
    Abstract: We study repurchase options (repo contracts) in a competitive asset market with asymmetric information. Gains from trade emerge from a liquidity need, but private information about asset quality prevents the full realization of trade. We obtain a unique equilibrium, which features a pooling repo contract and full participation among borrowers. The equilibrium repo contract resolves adverse selection: the embedded repurchase option prevents the market unraveling that occurs in asset-sale markets. However, the contract is inefficient due to cream skimming. Competition to attract high-quality borrowers through the terms of the repurchase option inefficiently lowers liquidity. The equilibrium contract has a closed form and is portable to many applications.
    Date: 2020
  13. By: H. Luke, Erin
    Abstract: Vertical integration is a powerful, and complex business strategy that when used under the right conditions can positively impact an organization. A company’s strategists need to understand what dimensions of integration to use, and the best time to use it. De Beers is a company with a controversial history of being an anti-competitive monopoly. By strategizing into a vertical integrated company De beers has added value to its company by not only targeting the retail, and industrial market, but also the I.T. industry. Forward and backward integration has helped organizations like De Beers maintain control over its inputs and outputs. Rather than just buying all diamond mines, and stock piling the material in order to control the prices, De Beers has embraced change by focusing on new emerging industries. Through vertical strategy and new ownership De Beers is turning its company around in a very competitive luxury industry. Organizations should be aware of the costs of vertical integration when exploring its potential. Bureaucratic costs, and companies becoming too large and inflexible under certain environments can become a problem. Vertical integration is a powerful strategy, but it must always be under scrutiny, and redesigned when the external and internal environment deems change necessary.
    Keywords: Bureaucratic costs; Competitive Advantage; De Beers; Vertical integration; Ownership
    JEL: A10 A19 L00
    Date: 2021–03–07
  14. By: W. Bentley MacLeod
    Abstract: A feature of many insurance markets is that they combine vertical differentiation (all consumers prefer high to low-coverage policies) and adverse selection (high cost customers prefer high-coverage plans). Building on Novshek and Sonnenschein (1978) and Azevedo and Gottlieb (2017), this paper characterizes the competitive equilibria in a vertically differentiated market characterized by adverse selection. This provides a simple, dynamic model of the market, along with their welfare consequences over time in response to policy changes. The model makes predictions consistent with recent evidence on the ACA exchange in the US (Frean et al. (2017)). Moreover, it provides a complete characterization of the health insurance “death spiral”. The death spiral leads to an inefficient outcome, but does not lead to a complete breakdown of the market. Rather, it predicts a large number of plans, with coverage that falls with an individual’s willingness to pay. It is shown that introducing a minimum coverage standard combined with an insurance mandate cannot restore efficiency. The optimal system depends on both the valuation of public funds and the social value of insurance. Depending on these parameters, a number of different types of systems may be optimal, including a single payer system with mandatory participation for all, such as the Canadian system, a mixed private-public system, as one sees in many countries, or a pure, free market system.
    JEL: D01 D21 D41 I11 I13 L15
    Date: 2021–03
  15. By: Yannai A. Gonczarowski; Nicole Immorlica; Yingkai Li; Brendan Lucier
    Abstract: We study mechanisms for selling a single item when buyers have private values for their outside options, which they forego by participating in the mechanism. This substantially changes the revenue maximization problem. For example, the seller can strictly benefit from selling lotteries already in the single-buyer setting. We bound the menu size and the sample complexity for the optimal single-buyer mechanism. We then show that posting a single price is in fact optimal under the assumption that the item value distribution has decreasing marginal revenue or monotone hazard rate. Moreover, when there are multiple buyers, we show that sequential posted pricing guarantees a large fraction of the optimal revenue when the item value distribution has decreasing marginal revenue.
    Date: 2021–03
  16. By: James A. Schmitz
    Abstract: In social science research, household income is widely used as a stand-in for, or approximation to, the economic well-being of households. In a parallel way, income-inequality has been employed as a stand-in for inequality of economic well-being, or for brevity, "economic-inequality." But there is a force in market economies, ones with extensive amounts of monopoly, like the United States, which leads income-inequality to understate economic-inequality. This force has not been recognized before and derives from how monopolies behave. Monopolies, of course, raise prices. This reduces the purchasing power of households, or the value of their income. But monopolies, in fact, reduce the purchasing power of low-income households much more than high-income households. What has not been recognized is that, in many markets, as monopolies raise the prices for their goods, they simultaneously destroy substitutes for their products, low-cost substitutes that are purchased by low-income households. In these markets, then, while high-income households face higher prices, low-income households are shut out of markets, markets for goods and services that are extremely important for their economic well-being. It often leaves them with extremely poor alternatives, and sometimes none, for these products. Some of the markets we discuss include those for housing, financial services, and K-12 public education services. We also discuss markets for legal services, health care services, used durable equipment and repair services. Monopolies that infiltrate public institutions to enrich members, including those in foster care services, voting institutions and antitrust institutions, are also discussed.
    Keywords: Inequality; Well-being; Income inequality; Consumption inequality; Monopoly; Antitrust; Housing crisis; Public education; Credit cards; Repair services; Sabotage
    JEL: D22 D42 K0 K21 L0 L12
    Date: 2021–03–09
  17. By: Maximilian Maurice Gail (Justus Liebig University Giessen); Phil-Adrian Klotz (Justus Liebig University Giessen)
    Abstract: This paper empirically analyzes the effect of the widely used agency model on the retail prices of e-books in United Kingdom. Using a unique cross-sectional data set of e-book prices for a large sample of book titles across all major publishing houses, we exploit cross-genre and cross-publisher variation to identify the mean effect of the agency model on e-book prices. Since the genre information is ambiguous and even missing for some titles in our original dataset, we use a Latent Dirichlet Allocation (LDA) approach to determine detailed book genres based on the book's descriptions. We find that e-book prices for titles that are sold under the agency model are 36% cheaper than titles sold under the wholesale model on average. Our results are robust to different specifications, a Lewbel instrumental variable approach, and machine learning techniques.
    Keywords: e-books, agency, resale price maintenance, Amazon, double machine learning, Latent Dirichlet allocation
    JEL: D12 D22 L42 L81 L82 Z11
    Date: 2021
  18. By: Federico Vaccari
    Abstract: I study a multi-sender signaling game between an uninformed decision maker and two senders with common private information and conflicting interests. Senders can misreport information at a cost that is tied to the size of the misrepresentation. The main results concern the amount of information that is transmitted in equilibrium and the language used by senders to convey such information. Fully revealing and pure-strategy equilibria exist but are not plausible. I first identify sufficient conditions under which equilibria are essentially unique, robust, and always exist, and then deliver a complete characterization of these equilibria. As an application, I study the informative value of different judicial procedures.
    Date: 2021–03
  19. By: Dirk Bergemann (Cowles Foundation, Yale University); Philipp Strack (Cowles Foundation, Yale University)
    Abstract: A single seller faces a sequence of buyers with unit demand. The buyers are forward-looking and long-lived. The arrival time and the valuation is private information of each buyer. Any incentive compatible mechanism has to induce truth-telling about the arrival time and the evolution of the valuation. We derive the optimal stationary mechanism in closed form and characterize its qualitative structure. As the arrival time is private information, the buyer can choose the time at which he reports his arrival. The truth-telling constraint regarding the arrival time can be represented as an optimal stopping problem. The stopping time determines the time at which the buyer decides to participate in the mechanism. The resulting value function of each buyer cannot be too convex and must be continuously di?erentiable everywhere, reflecting the option value of delaying participation. The optimal mechanism thus induces progressive participation by each buyer: he participates either immediately or at a future random time.
    Keywords: Dynamic Mechanism Design, Observable Arrival, Unobservable Arrival, Repeated Sales, Interim Incentive Constraints, Interim Participation Constraints, Stopping Problem, Option Value, Progressive Participation
    JEL: D44 D82 D83
    Date: 2019–08
  20. By: David Martinez-Miera (Universidad Carlos III de Madrid); Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper shows the relevance of market power to assess the effects of safe interest rates on financial intermediaries' risk-taking decisions. We consider an economy where (i) intermediaries have market power in granting loans, (ii) intermediaries monitor borrowers which lowers their probability of default, and (iii) monitoring is costly and unobservable which creates a moral hazard problem with uninsured depositors. We show that lower safe rates lead to lower intermediation margins and higher risk-taking when intermediaries have low market power, but the result reverses for high market power. We examine the robustness of this result to introducing non-monitored market finance, heterogeneity in monitoring costs, and entry and exit of intermediaries. We also consider the effect of replacing uninsured by insured deposits, market power in raising deposits, and funding with both deposits and capital.
    Keywords: Imperfect competition, intermediation margins, bank monitoring, bank risk-taking, monetary policy.
    JEL: G21 L13 E52
    Date: 2020–07
  21. By: Jesús Fernández-Villaverde; Federico Mandelman; Yang Yu; 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: 2021–02

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