nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒04‒19
sixteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Double Marginalization and Vertical Integration By Philippe Choné; Laurent Linnemer; Thibaud Vergé
  2. Competition between physical and electronic content retailers By Yuta Kittaka; Noriaki Matsushima; Fuyuki Saruta
  3. Entry Regulations and Product Variety in Retail By Orth, Matilda; Maican, Florin
  4. Myopic Oligopoly Pricing By Iwan Bos; Marco A. Marini; Riccardo D. Saulle
  5. Trade and Market Power in Product and Labor Markets By Gaelan MacKenzie
  6. Concentration in International Markets: Evidence from US Imports By Alessandra Bonfiglioli; Rosario Crinò; Gino Gancia
  7. Multiproduct Intermediaries By Makoto Watanabe; Jidong Zhou
  8. Competitive attention, Superstars and the Long Tail By Andreas Hefti; Julia Lareida
  9. The performance impact of core component outsourcing: insights from the LCD TV industry By Viswanathan, Madhu; Mukherji, Prokriti; Narasimhan, Om; Chandy, Rajesh
  10. Demand-pull and technology-push: What drives the direction of technological change? -- An empirical network-based approach By Kerstin H\"otte
  12. Characterization of Nash equilibria in Cournotian oligopolies with interdependent preferences By Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
  13. Spectrum Concentration and Performance of the U.S. Wireless Industry By Woroch, GA
  14. The impact of informational and emotional television ad content on online search and sales By Ivan Guitart; Stefan Stremersch
  15. Mapping a Sector’s Scope Transformation and the Value of Following the Evolving Core By Nicola Cetorelli; Michael G. Jacobides; Samuel Stern
  16. What is in a price? Evidence on quality signaling for experience goods By Daniela Rroshi; Michael Weichselbaumer

  1. By: Philippe Choné; Laurent Linnemer; Thibaud Vergé
    Abstract: Asymmetric information in procurement entails double marginalization. The phenomenon is most severe when the buyer has all the bargaining power at the production stage, while it vanishes when the buyer and suppliers’ weights are balanced. Vertical integration eliminates double marginalization and reduces the likelihood that the buyer purchases from independent suppliers. Conditional on market foreclosure, the probability that final consumers are harmed is positive only if the buyer has more bargaining power when selecting suppliers than when negotiating over quantities and intermediate prices. The buyer’s and consumers’ interests are otherwise aligned.
    Keywords: antitrust policy, vertical merger, asymmetric information, bargaining, double marginalization, procurement mechanism
    JEL: L10 L40 D40 D80
    Date: 2021
  2. By: Yuta Kittaka; Noriaki Matsushima; Fuyuki Saruta
    Abstract: We investigate a model in which a monopoly supplier distributes two types of its product through a traditional retailer with a wholesale price contract and an online retailer with an agency contract. Because such an agency contract eliminates the double marginalization problem, the online retailer has a cost advantage over the traditional retailer. Given the advantage of the online retailer, we also consider a possible request by the traditional retailer: the retail price of the online retailer is not smaller than the wholesale price for the traditional retailer. We obtain the following results. An increase in the online retailer's bargaining power over the supplier benefits the two retailers but harms the supplier. Under the request to protect the traditional retailer, the wholesale price is strictly higher than that in the baseline model. The retailers' equilibrium prices are also strictly higher than those in the baseline model. The request benefits the supplier and the online retailer, but harms the traditional retailer.
    Date: 2021–03
  3. By: Orth, Matilda (Research Institute of Industrial Economics (IFN)); Maican, Florin (Department of Economics, University of Gothenburg,)
    Abstract: This paper estimates a dynamic model of store adjustments in product variety that considers multiproduct service technology to evaluate the impact of entry regulations on variety and long-run profits in Swedish retail. Using rich data on stores and product categories, we find that more liberal entry regulation increases productivity and decreases the adjustment costs of variety. Counterfactual simulations of modest liberalizations of entry incentivize incumbents to offer more product categories to consumers while increasing efficiency and long-run profits. Regional differences are reduced as consumers and incumbents obtain more benefits in markets with restrictive regulation. Generous liberalizations of entry induce net exit of product categories and harm incumbents in markets with limited demand.
    Keywords: Retail markets; Entry regulation; Product variety; Productivity; Competition
    JEL: L11 L13 L81
    Date: 2021–04–01
  4. By: Iwan Bos (Department of Organisation, Strategy and Entrepreneurship, Maastricht University); Marco A. Marini (Department of Social and Economic Sciences, Sapienza University of Rome); Riccardo D. Saulle (Department of Economics and Management, University of Padova)
    Abstract: This paper examines capacity-constrained oligopoly pricing with sellers who seek myopic improvements. We employ the Myopic Stable Set stability concept and establish the existence of a unique pure-strategy price solution for any given level of capacity. This solution is shown to coincide with the set of pure-strategy Nash equilibria when capacities are large or small. For an intermediate range of capacities, it predicts a price interval that includes the mixed-strategy support. This stability concept thus encompasses all Nash equilibria and offers a pure-strategy solution when there is none in Nash terms. In particular, it provides a behavioral rationale for different types of pricing dynamics, including real-world economic phenomena such as Edgeworth-like price cycles, price dispersion and supply shortages.
    Keywords: Behavioral IO, Bounded Rationality, Capacity Constraints, Oligopoly Pricing, Myopic Stable Set
    JEL: C72 D43 L13
    Date: 2021–04
  5. By: Gaelan MacKenzie
    Abstract: This paper studies the effects of endogenous firm-level market power in input and product markets on equilibrium prices and wages as well as the gains from trade using a general equilibrium model with heterogeneous firms. Firm-level prices and wages are functions of two endogenous distortions: (i) a markup of price over marginal cost that depends on product market shares and (ii) a markdown of wages relative to marginal revenue product that depends on labor market shares. Both distortions cause large firms to be too small relative to local labor market competitors compared to a setting with perfect competition in input and product markets. Opening product markets up to trade reallocates market shares in product and labor markets towards countries' large firms, which can reduce misallocation but also increases the labor market power of these firms. After estimating the structural parameters of the model using Indian plant-level data, I show that accounting for endogenous labor market power implies only small welfare losses due to misallocation and therefore a negligible increase in the gains from trade. Trade has significantly larger effects on firms' markups than on their markdowns. Nevertheless, because of the increase in large firms' input market power, there is a redistribution of the gains from trade from wages to firm profits.
    Keywords: Economic models; Labour markets; Market structure and pricing; Productivity; Trade integration
    JEL: D43 F12 J L13
    Date: 2021–04
  6. By: Alessandra Bonfiglioli; Rosario Crinò; Gino Gancia
    Abstract: We use transaction-level data to study changes in the concentration of US imports. Concentration has fallen in the typical industry, while it is stable by industry and origin country. The fall in concentration is driven by the extensive margin: the number of exporting firms has grown, and the number of exported products has fallen relatively more for top firms. Instead, average revenue per product of top firms has increased. At the industry level, top firms are converging, but top firms within country are diverging. Finally, higher concentration from an origin country is associated with a fall in prices, foreign entry and industry growth. These facts suggest that intensified competition in international markets coexists with growing concentration among national producers.
    Keywords: superstar firms, concentration, US imports, firm heterogeneity, international trade
    JEL: E23 F12 F14 L11 R12
    Date: 2021
  7. By: Makoto Watanabe (Department of Economics VU Amsterdam); Jidong Zhou (Cowles Foundation, Yale University)
    Abstract: This paper develops a new framework for studying multiproduct intermediaries when consumers demand multiple products and face search frictions. We show that a multiproduct intermediary is profitable even when it does not improve consumer search efficiency. In its optimal product selection, it stocks high-value products exclusively to attract consumers to visit, then profits by selling non-exclusive products which are relatively cheap to buy from upstream suppliers. However, relative to the social optimum, the intermediary tends to be too big and stock too many products exclusively. As applications we use the framework to study the optimal design of a shopping mall, and the impact of direct-to-consumer sales by upstream suppliers on the retail market.
    Keywords: Intermediaries, Multiproduct demand, Search, Direct-to-consumer sales, Product range, Exclusivity
    JEL: D83 L42 L81
    Date: 2020–11
  8. By: Andreas Hefti; Julia Lareida
    Abstract: We propose a model of competitive attention based on two key premises: i) People have limited information processing capacities and ii) consideration sets are formed according to relative salience. The equilibrium predictions we obtain can help to understand, and connect, diverse empirical phenomena, such as the Paradox of Choices, the Power Law dispersions of key market data (sales, profits, online clicks,...), the relation between advertising expenditures and market shares, the evolution of market inequality, or why evidence favoring a “Long Tail” effect is mixed at best.
    Keywords: Attention, choice overload, consideration sets, Power Law, Superstar, Long Tail, Matthew Effect
    JEL: D91 D40 D43 E71 L11 M37
    Date: 2021–04
  9. By: Viswanathan, Madhu; Mukherji, Prokriti; Narasimhan, Om; Chandy, Rajesh
    Abstract: Firms in technology markets often outsource the manufacture of core components – components that are central to product performance and comprise a substantial portion of product costs. Despite the strategic importance of core component outsourcing, there is little empirical evidence (and many conflicting opinions) about its impact on consumer demand. We address this gap with an examination of panel data from the flat panel television industry, across key regions globally. Results from our estimation indicate that core component outsourcing reduces the firm’s ability to be on the technological frontier; this hurts demand, because our estimates suggest that consumers care about firms being on the frontier. On the other hand, such outsourcing also reduces costs. Finally, we find that outsourcing increases the intensity of competition in the marketplace. We assess these (often opposing) effects, and conduct thought experiments to quantify the performance impact of core component outsourcing.
    Keywords: high technology markets; outsourcing; technology frontier
    JEL: R14 J01
    Date: 2021–03–31
  10. By: Kerstin H\"otte
    Abstract: Demand-pull and technology-push are linked to an empirical two-layer network-based on coupled cross-industrial input-output (IO) and patent citation links among 155 4-digit (NAICS) US-industries in 1976-2006 to study the evolution of industry hierarchies and link formation. Both layers co-evolve, but differently: The patent network became denser and increasingly skewed, while market hierarchies are balanced and sluggish in change. Industries became more similar by patent citations, but less by IO linkages. Having similar R&D capabilities as other big industries is positively related to innovation and growth, but relying on the same market inputs is unfavorable but may incite industries to explore other technological pathways. A tentative interpretation is the non-rivalry of intangible knowledge. This may strengthen existing R&D trajectories. Growth in the market is constrained by competition and market pressure may trigger a re-direction in both layers. This work is limited by its reliance on endogenously evolving classifications.
    Date: 2021–04
  11. By: Lindgren, Charlie (Dalarna University, Falun, Sweden); Daunfeldt, Sven-Olov (Institute of Retail Economics (Handelns Forskningsinstitut)); Rudholm, Niklas (Institute of Retail Economics (Handelns Forskningsinstitut))
    Abstract: Price comparison websites, where consumers can compare prices at a search cost that is close to zero, have become increasingly common around the world. Using daily information on prices, click-throughs, and the number of retailers for a sample of consumer electronics and durable goods over a period of 62 months, we investigate the effects of the increased use of the Swedish price comparison website PriceSpy on prices and price dispersion. We find that increased use by consumers created potential savings of 290 million SEK in 2016, while increased use by retailers created potential savings of approximately 2.9 billion SEK. Reduced prices due to increased use of the price comparison website thus resulted in total potential consumer savings of nearly 3.2 billion SEK (289 million EUR) for the year 2016 alone. Price comparison websites thus place downward pressure on prices, thereby increasing economic efficiency. We also find that the increased use of the price comparison website by retailers resulted in increased price dispersion, while the effect of more consumers using the website was mixed.
    Keywords: Consumer search; price dispersion; information; e-tailing; e-commerce
    JEL: D21 D22 D83 L11 L81
    Date: 2021–03–31
  12. By: Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
    Abstract: We study the effects on the Nash equilibrium of the presence of a structure of social interdependent preferences in a Cournot oligopoly, described in terms of a game in which the network of interactions reflects on the utility functions of firms through a combination of weighted profits of their competitors as in [7]. Taking into account the channels of social and market interactions, we detail the consequence of preference interdependence on the best response of a firm, focusing on both direct and high degree of interdependence effects between two given firms. We characterize the Nash equilibrium in terms of social and market interactions among firms, through a Bonacich-like centrality measure and a scalar index describing the degree of competitiveness that characterizes an oligopoly with interdependent preferences. Finally, we study the equilibrium of some scenarios described by regular structures of interaction.
    Keywords: Cournot Game, Preference interdependence, Nash Equilibrium
    JEL: D43 C62 C70
    Date: 2021–03
  13. By: Woroch, GA
    Abstract: This paper estimates the empirical relationship between concentration in mobile carriers’ holdings of radio spectrum and the performance of the U.S. wireless industry. Reduced-form regressions that use a 2012–2013 cross-section of approximately 700 Cellular Market Areas reveal a robust inverted-U relationship between spectrum HHIs and subscriber penetration rates—a measure of consumer welfare. The marginal effect of spectrum concentration is positive throughout the range of sampled markets—contrary to the conventional concentration-performance hypothesis. This pattern persists when spectrum concentration is separately measured for bands below 1 GHz and for rural areas. It is also shown not to be biased by the potential endogeneity of spectrum HHIs. This paper is distinguished by relating subscriber penetration rates to the quality and coverage of operator networks that supports efficiency explanations for operator size, and hence the benefits of structural concentration. These findings cast doubt on federal policies adopted as early as the 1927 Radio Act that attempt to equalize ownership of spectrum. Instead, our empirical results recommend measures that promote investment in wireless infrastructure and other non-spectrum factors.
    Keywords: Spectrum concentration, Industry performance, Mobile wireless services, Applied Economics, Economics
    Date: 2020–02–01
  14. By: Ivan Guitart (emlyon business school); Stefan Stremersch
    Abstract: This article documents how informational and emotional appeals in more than 2,000 television ads for 144 car models, aired over four years, influence online search and sales. Increasing the emotional content of ads leads to increases in online search, but increasing the informational content does not. Both informational and emotional content positively influence sales. However, increases in informational content lead to more incremental sales for low-price and low-quality cars than for high-price and high-quality cars. In turn, increases in emotional content generate more incremental sales for high-price cars than for low-price cars. Analyses of the results suggest that managers of high-price and high-quality cars should prioritize emotional rather than informational content in ads. However, managers of low-price and low-quality cars should emphasize emotional content if their objective is to increase online search and informational content if their objective is to increase sales.
    Keywords: Advertising content,Advertising effectiveness,automotive industry,online search,purchase funnel,Television advertising
    Date: 2021–04–01
  15. By: Nicola Cetorelli; Michael G. Jacobides; Samuel Stern
    Abstract: A surprisingly neglected facet of sector evolution is the evolutionary analysis of firms’, and thus a sector’s, scope. Defining a sector as a group of firms that can change their scope over time, we study the transformation of U.S. banking firms. We undertake a sectoral, population-wide study of business-scope transformation, with particular focus on which segments banks expand into. As financial intermediation evolved, a continuously shifting set of activities became associated with “core banking,” with scope changing and relatedness itself (measured through coincidence) evolving over the banking sector’s history. Banks that expand scope while staying close to this evolving core attain net performance benefits. Identification tests show that the benefits of following the evolving core are robust to endogeneity.
    Keywords: scope; relatedness; diversification; industry evolution; expansion
    JEL: G21 L23 D22
    Date: 2021–04–01
  16. By: Daniela Rroshi (Department of Economics, Vienna University of Economics and Business); Michael Weichselbaumer (Department of Economics, Vienna University of Economics and Business)
    Abstract: We study the effect of quality disclosure on prices using quality tests released by the main consumer protection agency in Germany. Both durable and non-durable consumer products are covered, representing about 5 percent of weighted expenditures for all products in the German CPI. Cross-section results of the price-quality relation before quality disclosure show that higher prices are positively correlated with higher quality for durable goods, and negatively correlated for non-durable goods; both results are in line with theoretical models of price signaling. In the dynamic analysis, we employ a RD-type approach around publication of the quality evaluation for identification. Results show a positive effect of quality disclosure on prices for high quality durable products and a negative effect for low quality products suggesting that the information improves matching. Opposite results hold for non-durable products. Survival estimates show that products of low quality leave the market earlier.
    Keywords: Asymmetric Information, Consumer Protection, Quality Disclosure
    JEL: L15 D18 D22
    Date: 2021–03

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