nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒05‒03
23 papers chosen by
Russell Pittman
United States Department of Justice

  1. Search and Competition with Flexible Investigations By Vasudha Jain; Mark Whitmeyer
  2. History-Based Price Discrimination with Imperfect Information Accuracy and Asymmetric Market Shares By Stefano Colombo; Clara Graziano; Aldo Pignataro
  3. Behavior-Based Price Discrimination under Endogenous Privacy By Heiny, Friederike; Li, Tianchi; Tolksdorf, Michel
  4. Strategic Leaks in First-Price Auctions and Tacit Collusion: The Case of Spying and Counter-Spying By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  5. Taxation and strategic reaction: A comparison of Cournot, Stackelberg and collusion By Todorova, Tamara; Vatoci, Besar
  6. Common Ownership of Competing Firms: Evidence from Australia By Leigh, Andrew; Triggs, Adam
  7. The More the Merrier? On the Optimality of Market Size Restrictions By Colin von Negenborn
  8. Technology, Market Structure and the Gains from Trade By Giammario Impullitti; Omar Licandro; Pontus Rendahl
  9. Quality Misallocation, Trade, and Regulations By Luca Macedoni; Ariel Weinberger
  10. Measuring of Concentration and Competition: Serbian Banking Sector By Bukvić, Rajko
  11. What sustains informality?: A study of the interactions between formal- and informal-sector firms By Ajit Mishra
  12. Distressed Acquisitions: Evidence from European Emerging Markets By Ichiro Iwasaki; Evžen Kocenda; Yoshisada Shida
  13. Where to Refuel: Modeling On-the-way Choice of Convenience Outlet By Ari Pramono; Harmen Oppewal
  14. The German Facebook Case: The Law and Economics of the Relationship between Competition and Data Protection Law By Wolfgang Kerber; Karsten K. Zolna
  15. Sequential Search Models: A Pairwise Maximum Rank Approach By Jiarui Liu
  16. Similarity assessment in the design of graphic marketing messages: the case of drain cleaner packaging By Jerzy Grobelny; Rafal Michalski
  17. Product Cycles and Prices: a Search Foundation By Mei Dong; Toshiaki Shoji; Yuki Teranishi
  18. Quantifying Market Power and Business Dynamism in the Macroeconomy By Jan de Loecker; Jan Eeckhout; Simon Mongey
  19. Dynamic Pricing in a Digitized World By Spann, Martin; Skiera, Bernd
  20. Coins with benefits: On existence, pricing kernel and risk premium of cryptocurrencies By Chen, Yi-Hsuan; Vinogradov, Dmitri V.
  21. Essays on microeconomic theory By Wang, Xiaoyu
  22. A Gaussian Process Model of Cross-Category Dynamics in Brand Choice By Ryan Dew; Yuhao Fan
  23. Effectiveness of loyalty programs By Bombaij, Nick

  1. By: Vasudha Jain; Mark Whitmeyer
    Abstract: We modify the standard model of price competition with horizontally differentiated products, imperfect information, and search frictions by allowing consumers to flexibly acquire information about a product's match value during their visits. We characterize a consumer's optimal search and information acquisition protocol and analyze the pricing game between firms. Notably, we establish that in search markets there are fundamental differences between search frictions and information frictions, which affect market prices, profits, and consumer welfare in markedly different ways. Although higher search costs beget higher prices (and profits for firms), higher information acquisition costs lead to lower prices and may benefit consumers. We discuss implications of our findings for policies concerning disclosure rules and hidden fees.
    Date: 2021–04
  2. By: Stefano Colombo; Clara Graziano; Aldo Pignataro
    Abstract: The paper considers a duopoly model in which firms inherited asymmetric market shares and history-based price discrimination is viable. However, firms can identify only a share of their own consumers depending to the degree of information accuracy. We derive the pricing strategies and we analyze the relationship between information accuracy and asymmetric market shares, showing under which circumstances there exists an equilibrium in pure strategies. We show that history-based price discrimination makes the dominant firm’s profits always lower than those of the rival, with an ambiguous effect of the information accuracy on industry profits. Moreover, we prove that the level of information accuracy has a decreasing effect on social welfare, while it affects consumer surplus non-monotonically, according to the size of asymmetry in the inherited market shares.
    Keywords: history-based price discrimination, information accuracy, asymmetric market shares
    JEL: D80 D43 L10
    Date: 2021
  3. By: Heiny, Friederike (HU Berlin); Li, Tianchi (HU Berlin); Tolksdorf, Michel (TU Berlin)
    Abstract: This paper analyzes consumers’ privacy choice concerning their private data and firms’ ensuing pricing strategy. The General Data Protection Regulation passed by the European Union in May 2018 allows consumers to decide whether to reveal private information in the form of cookies to an online seller. By incorporating this endogenous decision into a duopoly model with behavior-based pricing, we find two contrasting equilibria. Under revelation to both firms, consumers disclose their information. Under revelation to only one firm, consumers hide their information. Based on the model, we design a laboratory experiment. We find that there is a large share of consumers who reveal their private data. Particularly, less privacy-concerned subjects and subjects in the setting where only one firm receives information are more likely to reveal information.
    Keywords: behavior-based pricing; privacy; laboratory experiment;
    JEL: C91 D11 D43 L13
    Date: 2020–01–20
  4. By: Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
    Abstract: We analyze strategic leaks due to spying out a rival’s bid in a first-price auction. Such leaks induce sequential bidding, complicated by the fact that the spy may be a counterspy who serves the interests of the spied at bidder and reports strategically distorted information. This ambiguity about the type of spy gives rise to a non-standard signaling problem where both sender and receiver of messages have private information and the sender has a chance to make an unobserved move. Whereas spying without counterspy exclusively benefits the spying bidder, the potential presence of a counterspy yields a collusive outcome, even if the likelihood that the spy is a counterspy is arbitrarily small. That collusive impact shows up in all equilibria and is strongest in the unique pooling equilibrium which is also the payoff dominant equilibrium.
    Keywords: auctions, tacit collusion, espionage, second-mover advantage, signaling, incomplete information
    JEL: L12 L13 L41 D43 D44 D82
    Date: 2021
  5. By: Todorova, Tamara; Vatoci, Besar
    Abstract: We study the effect of distortionary taxes on three types of market structure: Cournot duopoly, Stackelberg duopoly, and a monopoly under a collusive agreement between the two rival firms in the industry. We investigate different tax regimes such as a per unit tax, an ad valorem tax and a tax on total revenue. A unit tax rate reduces optimal output and profits for firms while market price rises with the imposition of the tax. Interestingly, the optimal tax rate is the same for all three market structures. The ad valorem tax is imposed on the value of the product and is mostly borne by the Stackelberg follower who ends up producing a greater output than what he would produce in the absence of a tax. The ad valorem tax increases firm output and reduces market price. The total revenue decreases output and increases industry price like the unit tax.
    Keywords: Cournot duopoly, Stackelberg game, optimal tax rate, Lerner index
    JEL: D42 D43 H21 L12 L13
    Date: 2020–06–01
  6. By: Leigh, Andrew (Australian National University); Triggs, Adam (Australian National University)
    Abstract: We provide the first estimates of the extent of common ownership of competing firms in Australia. Combining data on market shares and substantial shareholdings, we calculate the impact of common ownership on effective market concentration. Among firms where we can identify at least one owner, 31 percent share a substantial owner with a rival company. Analysing 443 industries, we identify 49 that exhibit common ownership, including commercial banking, explosives manufacturing, fuel retailing, insurance and iron ore mining. Across the Australian economy, common ownership increases effective market concentration by 21 percent. Our estimates imply that if listed firms seek to maximise the value of their investors' portfolios, then they place the same value on $3.70 of their competitors' profits as on $1 of their own profits. We discuss the limitations of the available data, and the potential implications of common ownership for competition in Australia.
    Keywords: horizontal shareholding, market concentration, Herfindahl-Hirschman Index, Modified Herfindahl-Hirschman Index, antitrust, competition
    JEL: L11 L12 D42 D43
    Date: 2021–04
  7. By: Colin von Negenborn (HU Berlin)
    Abstract: This paper provides a novel rationale for the regulation of market size when heterogeneous firms compete. A regulator seeks to maximize total welfare by choosing the number of firms allowed to enter the market, e.g. by issuing a certain number of licenses. Opening up the market for more firms has a two-fold effect: it increases competition and thus welfare, but at the same time, it also attracts more cost-intensive firms, driving down average production efficiency. The regulator hence faces a trade-off between raising beneficial competition and detrimental costs. If goods are sufficiently substitutable, the latter effect can outweigh the former. It is then optimal to restrict the market size, rationalizing a limit to competition. This result holds even in the absence of entry costs, search costs or increasing returns to scale, which previous literature required.
    Keywords: regulation; imperfect competition; oligopolies;
    JEL: D43 L13 L51
    Date: 2019–09–18
  8. By: Giammario Impullitti; Omar Licandro; Pontus Rendahl
    Abstract: We study the gains from trade in a model with oligopolistic competition, heterogeneous firms and innovation, and provide a formula to decompose the mechanism. The new insight we provide is that market concentration can be a welfare-relevant feature of market power above and beyond markup dispersion. Trade liberalisation increases foreign competition and reduces the number of active firms in the market, thereby increasing concentration. A more concentrated economy is more efficient due to increasing returns in production. Moreover, higher concentration produces a scale effect on firms’ incentives to innovate, which increases welfare via productivity improvements. In the calibrated version of the model we show that a trade-induced increase in concentration contributes substantially to the gains from trade, mostly via its stimulating effect on innovation. Sizeable gains also come from the reduction of the inefficiency produced by trade in identical goods; i.e. through a reduction in reciprocal dumping. Changes in markup dispersion, in contrast, have only negligible effects.
    Keywords: gains from trade, heterogeneous firms, oligopoly, innovation, endogenous markups, market concentration
    JEL: F12 F13 O31 O41
    Date: 2021
  9. By: Luca Macedoni; Ariel Weinberger
    Abstract: Recent trade agreements have shifted their focus to non-tariff barriers such as regulations and product standards, which have been traditionally treated as pure domestic policies. The imposition of such standards reallocates production from small to large, high quality firms. We model regulations as a fixed cost that any firm selling to an economy must pay, consistent with stylized facts that we present. The fixed cost improves allocative efficiency, by reallocating production towards high-quality firms, who under-produce in the market allocation. Furthermore, the fixed cost generates a positive externality on the rest of the world as it induces entry of high-quality firms, but unilateral regulation lowers the terms of trade of the imposing country. The result justifies international cooperation based on the fact that such cooperation can improve welfare, rather than preventing negative consequences of tariff wars. We estimate our model and apply its gravity formulation to quantify the welfare consequences of imposing the optimal regulation, the extent of the positive externalities across countries, and the effects of cooperation.
    Keywords: allocative efficiency, regulations, quality standards, variable markups, trade policy
    JEL: F12 F13 L11
    Date: 2021
  10. By: Bukvić, Rajko
    Abstract: The author in this paper considers the question of the use of indices of concentration and competition in the banking market. As example he chose the Serbian banking sector during the second half of the 2010s. The analyses are based on the data of bank financial statements for relevant years, as well as the results of other researchers. Тhe traditional concentration indicators (CRn and HH indices) are used, as well as the Gini coefficients and Rosenbluth and Tideman-Hall index and coefficient of entropy. At the end author calculated Linda Indices, the rarely used indicators not only in Serbia, and new Svetunkov’s approach and coefficients of the model based on Gauss exponential curve. The concentration degree in all cases is calculated based on five variables: total assets, deposits, capital, bank operating income and loans. Although these variables are highly correlated, the results show relatively important differences of its use. In the case of such variable as capital, the Linda indices suggested the existence of an oligopoly structure. In conclusion, it was demonstrated that in the case of the relatively large number of banks in Serbia, the existing concentration degree is generally moderately low, which provides suitable conditions for the development of healthy competition among them. At the end, there is necessary to emphasize different capability of information respective indicators and its different discriminative power. In future research this is fact that is it undoubtedly necessary particularly not to ignore.
    Keywords: concentration, competition, banking sector, SCP paradigm, Serbia, Linda indices, Gini coefficient, Herfindahl-Hirschman index, Rosenbluth index, Tideman-Hall index, entropy index, concentration ratio, oligopoly
    JEL: C38 G21 L10
    Date: 2020
  11. By: Ajit Mishra
    Abstract: We consider two vertical links between informal- and formal-sector firms and study their implications. In one case, the final products produced by the formal- and informal-sector firms are vertically differentiated in terms of quality, and the size of the informal sector demand is related to the income distribution. Our paper studies the implications of this quality choice for the size of the informal sector. In the other case, the informal-sector firm produces an intermediate good as an input for the formal-sector firm.
    Keywords: Informal sector, Income distribution, Supply and demand, Quality of products, Output, Choice
    Date: 2021
  12. By: Ichiro Iwasaki; Evžen Kocenda; Yoshisada Shida
    Abstract: We analyze factors behind 23,213 distressed acquisitions in European emerging markets from 2007–2019. Besides the impact of financial ratios, legal form, ownership structure, firm size, and age, we emphasize the role of institutions and channels of their propagation. We show that the quality and enforcement of insolvency laws are linked with the lower probability of distressed acquisitions, followed by corruption control and progress in banking reforms. The impact of institutions is larger in less-advanced countries as compared to economically stronger ones. The effect of institutions increased after the financial crisis but declined as the economic situation improved.
    Keywords: distressed acquisitions, mergers, European emerging markets
    JEL: C35 D02 D22 E02 G34 K20 L22
    Date: 2021
  13. By: Ari Pramono; Harmen Oppewal
    Abstract: This paper introduces on-the-way choice of retail outlet as a form of convenience shopping. It presents a model of on-the-way choice of retail outlet and applies the model in the context of fuel retailing to explore its implications for segmentation and spatial competition. The model is a latent class random utility choice model. An application to gas station choices observed in a medium-sized Asian city show the model to fit substantially better than existing models. The empirical results indicate consumers may adopt one of two decision strategies. When adopting an immediacy-oriented strategy they behave in accordance with the traditional gravity-based retail models and tend to choose the most spatially convenient outlet. When following a destination-oriented strategy they focus more on maintaining their overall trip efficiency and so will tend to visit outlets located closer to their main destination and are more susceptible to retail agglomeration effects. The paper demonstrates how the model can be used to inform segmentation and local competition analyses that account for variations in these strategies as well as variations in consumer type, origin and time of travel. Simulations of a duopoly setting further demonstrate the implications.
    Date: 2021–04
  14. By: Wolfgang Kerber (University of Marburg); Karsten K. Zolna (University of Marburg)
    Abstract: Can competition law also take into account effects on privacy or should privacy concerns of data-collecting behaviour only be dealt with by data protection law? In this paper we are analysing the German Facebook case, in which certain terms of service (that force consumers to give consent for merging personal data collected through Facebook services with those collected from tracking and third-party websites) were prohibited as exploitative abuse of a dominant firm. We show from an economic perspective that due to the simultaneous existence of two market failures (market dominance, information and behavioral problems) and complex interaction effects between both market failures and both policies in digital markets, the traditional approach of a strict separation of both policies is not possible any more, leading to the need for more collaboration and alignment of both policies. With respect to the substantive question of protecting a minimum level of choice options for consumers regarding personal data vis-a-vis dominant digital platform firms, the recent decision of the German Federal Court of Justice in the Facebook case and the proposed Digital Market Act have opened new perspectives for dealing with privacy concerns in competition law and regulation.
    Keywords: competition law, Facebook, digital platforms, privacy, data protection law
    JEL: K21 K24 L40 L50
    Date: 2021
  15. By: Jiarui Liu
    Abstract: This paper studies sequential search models that (1) incorporate unobserved product quality, which can be correlated with endogenous observable characteristics (such as price) and endogenous search cost variables (such as product rankings in online search intermediaries); and (2) do not require researchers to know the true distribution of the match value between consumers and products. A likelihood approach to estimate such models gives biased results. Therefore, I propose a new estimator -- pairwise maximum rank (PMR) estimator -- for both preference and search cost parameters. I show that the PMR estimator is consistent using only data on consumers' search order among one pair of products rather than data on consumers' full consideration set or final purchase. Additionally, we can use the PMR estimator to test for the true match value distribution in the data. In the empirical application, I apply the PMR estimator to quantify the effect of rankings in Expedia hotel search using two samples of the data set, to which consumers are randomly assigned. I find the position effect to be \$0.11-\$0.36, and the effect estimated using the sample with randomly generated rankings is close to the effect estimated using the sample with endogenous rankings. Moreover, I find that the true match value distribution in the data is unlikely to be N(0,1). Likelihood estimation ignoring endogeneity gives an upward bias of at least \$1.17; misspecification of match value distribution as N(0,1) gives an upward bias of at least \$2.99.
    Date: 2021–04
  16. By: Jerzy Grobelny; Rafal Michalski
    Abstract: One of the crucial functions of packaging is communication with a potential client which shapes the customer product perception. Thus, knowledge on which factors and how influence buyers could be critical in gaining market share. In the face of high market competitiveness, companies are struggling to provide distinctive marketing messages. On the other hand, they may also face unfair activities from manufacturers trying to use packaging similar to those of a well-established brand. The present paper examines similarities of packaging products from companies that newly entered the market with packaging designs of a well-known drain cleaner. We take advantage of the cognitive psychology based methodology proposed by Luce (1963), determine consumers’ perceived similarities, and estimate probabilities of correct and incorrect selections for all pairs of nine examined products (n = 50). The results show that three products decidedly exceed recommended level of similarity. We also provide practical suggestions about possible interpretations of the outcomes. The presented methodology along with obtained findings could be theoretically and practically applied in various types of marketing activities, especially related to the design of graphical marketing messages.
    Keywords: marketing message; unfair competition; digital presentation; correct identification; multidimensional scaling
    JEL: D01 D03 D40 D81 D83 D87 D91 L15 L81 L82 L86 M31 M37
    Date: 2020
  17. By: Mei Dong; Toshiaki Shoji; Yuki Teranishi
    Abstract: This paper develops a price model with product cycles characterized by product entries and exits. Through a frictional product market with search and matching frictions, an endogenous product cycle is accompanied by a price cycle. This model nests the New Keynesian Phillips curve as a special case and generates several new phenomena in business cycle moments with product cycles. Using product-level micro data in Japan, we show that our price model well captures the observed features among product entry, number of products, demand, and price. Our model with a frictional product market replicates correlations between product matching probability and other variables. In a general equilibrium model for the Japanese economy, an endogenous product entry increases a price variation by 23 percent. This number increases to 35 percent with a price discounting after a first price. All results suggest that product cycles and search frictions play fundamental roles in describing price dynamics.
    Date: 2021–04
  18. By: Jan de Loecker; Jan Eeckhout; Simon Mongey
    Abstract: We propose a general equilibrium model with oligopolistic output markets where two channels can cause a change in market power: (i) technology, via changes to productivity shocks and the cost of entry, (ii) market structure, via changes to the number of potential competitors. First, we disentangle these narratives by matching data on markups, labor reallocation and costs, finding that both channels are necessary to account for the data. Second, we show that changes in technology and market structure yield positive welfare effects through reallocation and selection, but off-setting negative effects from dead-weight loss and overhead. Overall, welfare is 9 percent lower in 2016 than in 1980. Third, the changes we identify explain and decompose cross-sectional patterns in declining business dynamism, declining equilibrium wages and labor force participation via reallocation toward larger, more productive firms.
    Keywords: business dynamism, market power in the aggregate economy, technological change, market structure, reallocation, Endogenous markups, wage stagnation, labor share, passthrough
    JEL: C6 D4 D5 L1
    Date: 2021–04
  19. By: Spann, Martin (LMU Munich); Skiera, Bernd (Goethe University Frankfurt)
    Abstract: Digital technologies favor the use of dynamic pricing, i.e., prices that vary unannounced for a product that basically remains unchanged. However, different forms of dynamic pricing are often mixed in the public discussion, which makes a meaningful analysis of the advantages and disadvantages of dynamic pricing difficult. The aim of this paper is to present the economic foundations of dynamic pricing as well as to discuss and to classify its design options. In addition, the paper assesses dynamic pricing from a buyer and seller perspective. Finally, the paper discusses implications for business research.
    Keywords: Dynamic pricing; price differentiation; price discrimination; digitization;
    JEL: M30 D40 D10
    Date: 2020–06–21
  20. By: Chen, Yi-Hsuan; Vinogradov, Dmitri V.
    Abstract: Cryptocurrencies come with benefits, such as anonymity of payments and positive network effects of user adoption, and transaction risks including unconfirmed transactions, hacks, and frauds. They compete with central-bank-regulated money but consumers may prefer one currency over the other. In our arbitrage-free world utility from consumption depends on benefits, which are governed by distinct stochastic processes, implying incomplete markets and distinct pricing kernels. We characterize the cryptocurrency kernels, evaluate the otherwise unobservable benefits, and show their contribution to pricing. The model explains both the co-existence of the two currencies and the high volatility of the cryptocurrency price.
    Keywords: Bitcoin,cryptocurrency,pricing kernel,currency competition
    JEL: A1 D0 E21 G12
    Date: 2021
  21. By: Wang, Xiaoyu (Tilburg University, School of Economics and Management)
    Date: 2021
  22. By: Ryan Dew; Yuhao Fan
    Abstract: Understanding individual customers' sensitivities to prices, promotions, brand, and other aspects of the marketing mix is fundamental to a wide swath of marketing problems, including targeting and pricing. Companies that operate across many product categories have a unique opportunity, insofar as they can use purchasing data from one category to augment their insights in another. Such cross-category insights are especially crucial in situations where purchasing data may be rich in one category, and scarce in another. An important aspect of how consumers behave across categories is dynamics: preferences are not stable over time, and changes in individual-level preference parameters in one category may be indicative of changes in other categories, especially if those changes are driven by external factors. Yet, despite the rich history of modeling cross-category preferences, the marketing literature lacks a framework that flexibly accounts for \textit{correlated dynamics}, or the cross-category interlinkages of individual-level sensitivity dynamics. In this work, we propose such a framework, leveraging individual-level, latent, multi-output Gaussian processes to build a nonparametric Bayesian choice model that allows information sharing of preference parameters across customers, time, and categories. We apply our model to grocery purchase data, and show that our model detects interesting dynamics of customers' price sensitivities across multiple categories. Managerially, we show that capturing correlated dynamics yields substantial predictive gains, relative to benchmarks. Moreover, we find that capturing correlated dynamics can have implications for understanding changes in consumers preferences over time, and developing targeted marketing strategies based on those dynamics.
    Date: 2021–04
  23. By: Bombaij, Nick (Tilburg University, School of Economics and Management)
    Date: 2021

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