nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒06‒14
twenty-two papers chosen by
Russell Pittman
United States Department of Justice

  1. Mergers with Differentiated Products: Where do we Stand? By Valletti, Tommaso; Zenger, Hans
  2. Concentration Screens for Horizontal Mergers By Nocke, Volker; Whinston, Michael
  3. Platform Mergers: Lessons from a Case in the Digital TV Market By Ivaldi, Marc; Zhang, Jiekai
  4. The Economics of Platforms: A Theory Guide for Competition Policy By Jullien, Bruno; Sand-Zantman, Wilfried
  5. Relative Performance Evaluation, Sabotage and Collusion By Bloomfield, Matthew J.; Marvao, Catarina; Spagnolo, Giancarlo
  6. Downstream Subsidization and Upstream Privatization with a Vertically Integrated Foreign Firm By Zhang, Chuyuan; Lee, Sang-Ho
  7. Privacy, Competition, and Multi-Homing By Jean-Marc Zogheib; Marc Bourreau
  8. Strict Liability, Scarce Generic Input and Duopoly Competition By Gérard Mondello
  9. Identification of Firms' Beliefs in Structural Models of Market Competition By Aguirregabiria, Victor
  10. Stackelberg Independence By Hinnosaar, Toomas
  11. When the Threat is Stronger than the Execution: Trade and Welfare under Oligopoly By Leahy, Dermot; Neary, J Peter
  12. Measuring Quality Effects in Equilibrium By Seth Richards-Shubik; Mark S. Roberts; Julie M. Donohue
  13. Capital Buffers in a Quantitative Model of Banking Industry Dynamics By Dean Corbae; Pablo D'Erasmo
  14. Do Firms with Specialized M&A Staff Make Better Acquisitions? By Gokkaya, Sinan; Liu, Xi; Stulz, Rene M.
  15. The Impact of Alternative Forms of Bank Consolidation on Credit Supply and Financial Stability By Mayordomo, Sergio; Pavanini, Nicola; Tarantino, Emanuele
  16. Wage Theft, Economic Conditions, and Market Power: The Case of H-1B Workers By DeVaro, Jed; Norlander, Peter
  17. Bid coordination in sponsored search auctions: Detection methodology and empirical analysis By Francesco Decarolis; Maris Goldmanis; Antonio Penta; Ksenia Shakhgildyan
  18. Controlling Fake Reviews By Yasui, Yuta
  19. Corporate Leniency in a Dynamic Context: The Preemptive Push of an Uncertain Future By Gaertner, Dennis
  20. Post-merger Restructuring of the Labor Force By Gehrke, Britta; Maug, Ernst; Obernberger, Stefan; Schneider, Christoph
  21. Inside the white box: Unpacking the determinants of quality and vertical specialization By Esteban Jaimovich; Boryana Madzharova; Vincenzo Merella
  22. Asymmetric Demand Response when Prices Increase and Decrease: The Case of Child Healthcare By Toshiaki Iizuka; Hitoshi Shigeoka

  1. By: Valletti, Tommaso; Zenger, Hans
    Abstract: On the occasion of the 10th anniversary of the 2010 U.S. Horizontal Merger Guidelines, this article provides an overview of the state of economic analysis of unilateral effects in mergers with differentiated products. Drawing on our experience with merger enforcement in Europe, we discuss both static and dynamic competition, with a special emphasis on the calibration of competitive effects. We also discuss the role of market shares and structural presumptions in differentiated product markets.
    Keywords: differentiated products; mergers; Unilateral Effects
    JEL: L11 L13 L40 L41
    Date: 2020–07
  2. By: Nocke, Volker; Whinston, Michael
    Abstract: Concentration-based screens for horizontal mergers, such as those employed in the US DOJ and FTC Horizontal Merger Guidelines, play a central role in merger analysis. However, the basis for these screens, in both form and level, remains unclear. We show that there is both a theoretical and an empirical basis for focusing solely on the change in the Herfindahl index, and ignoring its level, in screening mergers for whether their unilateral effects will harm consumers. We also argue, again both theoretically and empirically, that the levels at which the presumptions currently are set may be too lax, especially with regards to safe harbors.
    Keywords: Herfindahl index; Horizontal Merger; Market concentration; market power; oligopoly
    JEL: D43 L13 L40
    Date: 2020–07
  3. By: Ivaldi, Marc; Zhang, Jiekai
    Abstract: This paper contributes to the analysis of mergers in two-sided markets, notably those in which a platform provides its service for free on one side but obtains all its revenues from the other, as in the digital TV industry. Specifically, we assess a decision of the French competition authority which approved the merger of the broadcasting services of the TV channels involved but imposed a behavioral remedy prohibiting the merger of their respective advertising sales services. To do so, we build a structural model allowing for multi-homing of advertisers and, using a comprehensive dataset, we estimate the demand of viewers and advertisers. Our evaluation provides evidence that the remedy has been ineffective at limiting the increase in prices and amounts of advertising, due to the cross-side externalities between viewers and advertisers. Without resulting in significant positive effects on the viewers' surplus, the remedy has also drastically increased the advertisers' total cost. Nevertheless, the remedy has benefited the competitors of the merging channels. The main lesson of our analysis is that, in the process of designing competition or regulatory policy for two-sided markets, ignoring the interaction between the two sides of platforms can result in unexpected outcomes.
    Keywords: advertising; competition policy; platform merger; TV market; two-sided market
    JEL: K21 L10 L40 L82 M37
    Date: 2020–06
  4. By: Jullien, Bruno; Sand-Zantman, Wilfried
    Abstract: We propose an analysis of platform competition based on the academic literature with a view toward competition policy. First, we discuss to which extent competition can emerge in digital markets and show which forms it can take. In particular, we underline the role of dynamics, but also of platform differentiation, consumers multihoming and beliefs to allow competition in platform markets. Second, we analyze competition policy issues and discuss how rules designed for standard markets can perform in two-sided markets. We show that multi-sided externalities create new opportunities for anti-competitive conducts, often related to pricing and contractual imperfections.
    Keywords: competition policy; networks; platforms; two-sided markets
    JEL: D82 L13 L41 L86
    Date: 2020–07
  5. By: Bloomfield, Matthew J.; Marvao, Catarina; Spagnolo, Giancarlo
    Abstract: We examine whether the potential for costly sabotage is a deterrent to firms' use of relative performance evaluation ("RPE") in CEO pay plans. We exploit illegal cartel membership as a source of variation in the potential for costly sabotage and document that firms are more likely to use RPE if they are currently cartel members. Moreover, firms frequently drop RPE from their CEOs' pay plans immediately after their cartels are detected. We further provide suggestive evidence that the potential for costly sabotage explains these patterns; cartel membership severs the empirical association between RPE and competitive aggression.
    Keywords: cartels; Collusion; Compensation; Relative Performance Evaluation; Sabotage
    JEL: G34 L22
    Date: 2020–07
  6. By: Zhang, Chuyuan; Lee, Sang-Ho
    Abstract: This study constructs a model with a vertical structure in which a state-owned enterprise (SOE) in an upstream market and a private firm in a downstream market compete with a vertically integrated foreign firm (VIFF). Given a cost-inefficient SOE, we examine the strategic entry decision of a VIFF that can enter either the upstream, or the downstream market, or both, under downstream subsidization and upstream privatization policies. We find that when the government implements a subsidy policy, the VIFF enters only the downstream market if the cost inefficiency is low and enters both markets otherwise; however, the social welfare of the later is always higher than that of the former. We also find that reducing the cost inefficiency might cause welfare loss when ex-ante inefficiency is intermediate, below which the VIFF might change its entry decision. Finally, we show that an upstream privatization policy reduces welfare either when the cost inefficiency ex-post privatization decreases to a lesser degree or when the ex-ante inefficiency is relatively low.
    Keywords: Downstream Subsidization · Upstream Privatization · Vertically Integrated Foreign Firm · Cost Inefficiency · Entry Decision · Mixed Market
    JEL: D43 H21 L13
    Date: 2021–06
  7. By: Jean-Marc Zogheib; Marc Bourreau
    Abstract: Two firms compete in prices and information disclosure levels. Firms derive revenues from two possible channels, i.e., by selling their service to consumers and by exploiting user data, sold to a monopoly data broker. A consumer signing up to one firm's service decides on the amount of personal information to provide. In a single-homing framework, firms engage in either a strict privacy regime with no information disclosure and high prices or a flexible privacy regime with positive disclosure levels and low prices, depending on consumer valuations. With the possibility of multi-homing, firms face issues in the monetization of multi-homing user data, which affects privacy regimes. On top of consumer valuations, the incentives to multi-home and product differentiation also impact firms' strategies. Firms may even end up engaging in a zero-privacy regime with maximal disclosure levels if monetization issues on multi-homing user data are not too significant.
    Keywords: competition, online privacy, information disclosure, multi-homing.
    JEL: D11 D40 L21 L41
    Date: 2021
  8. By: Gérard Mondello (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: This paper analyzes the impact of strict liability on imperfect competition and shows first that it is not an obstacle to achieving a socially optimal level of care. Second, this result is compromised when firms face a scarce generic asset. Under this asset limitation, this paper shows that competition (here a Cournot-Nash duopoly) leads to a lower level of prevention even if more product at lower price is supplied at the equilibrium. Introducing standards linked to operating permits improves the economy's safety level but may lead firms to exit.
    Keywords: Tort Law, Strict Liability, Negligence Rule, Imperfect Competition, Oligopoly, Cournot Competition
    JEL: D43 L13 L52 K13
    Date: 2021–05
  9. By: Aguirregabiria, Victor
    Abstract: Firms make decisions under uncertainty and differ in their ability to collect and process information. As a result, in changing environments, firms have heterogeneous beliefs on the behavior of other firms. This heterogeneity in beliefs can have important implications on market outcomes, efficiency, and welfare. This paper studies the identification of firms' beliefs using their observed actions -- a revealed preference and beliefs approach. I consider a general structural model of market competition where firms have incomplete information and their beliefs and profits are nonparametric functions of decisions and state variables. Beliefs may be out of equilibrium. The framework applies both to continuous and discrete choice games and includes as particular cases models of competition in prices or quantities, auction models, entry games, and dynamic investment games. I focus on identification results that exploit a natural exclusion restriction in models of competition: an observable variable that affects a firm's cost (or revenue) but does not have a direct effect on other firms' profits. I present identification results under three scenarios --- common in empirical IO --- on the data available to the researcher.
    Keywords: identification; Non-equilibrium beliefs; Revealed beliefs approach; Structural models of competition
    JEL: C57 D81 D83 D84 L13
    Date: 2020–06
  10. By: Hinnosaar, Toomas
    Abstract: The standard model of sequential capacity choices is the Stackelberg quantity leadership model with linear demand. I show that under the standard assumptions, leaders' actions are informative about market conditions and independent of leaders' beliefs about the arrivals of followers. However, this Stackelberg independence property relies on all standard assumptions being satisfied. It fails to hold whenever the demand function is non-linear, marginal cost is not constant, goods are differentiated, firms are non-identical, or there are any externalities. I show that small deviations from the linear demand assumption may make the leaders' choices completely uninformative.
    Keywords: Oligopolies; Sequential Games; Stackelberg leadership model
    JEL: C72 C73 D43 L13
    Date: 2020–07
  11. By: Leahy, Dermot; Neary, J Peter
    Abstract: We compare trade liberalization under Cournot and Bertrand competition in reciprocal markets. In both cases, the critical level of trade costs below which the possibility of trade affects the domestic firm's behavior is the same; trade liberalization increases trade volume monotonically; and welfare is U-shaped under reasonable conditions. However, welfare is typically greater under Bertrand competition; for higher trade costs the volume of trade is greater under Cournot competition, implying a "van-der-Rohe Region" in parameter space; and, for even higher trade costs, there exists a "Nimzowitsch Region", where welfare is higher under Bertrand competition even though no trade takes place.
    Keywords: Cournot and Bertrand Competition; Cross-Hauling; Nimzowitsch Region; Oligopoly and trade; trade liberalization
    JEL: F12 L13
    Date: 2020–07
  12. By: Seth Richards-Shubik; Mark S. Roberts; Julie M. Donohue
    Abstract: Unlike demand studies in other industries, models of provider demand in health care often must omit a price or any other factor that equilibrates the market. Estimates of the consumer response to quality may consequently be attenuated, if the limited capacity of individual providers prevents some consumers from obtaining higher quality. We propose a tractable method to address this problem by adding a congestion effect to standard discrete-choice models. We show analytically how this improves forecasts of the consumer response to quality. We then apply this method to the market for heart surgery, and find that the attenuation bias in estimated quality effects can be important empirically.
    JEL: C31 I11 L15
    Date: 2021–05
  13. By: Dean Corbae; Pablo D'Erasmo
    Abstract: We develop a model of banking industry dynamics to study the quantitative impact of regulatory policies on bank risk taking and market structure. Since our model is matched to U.S. data, we propose a market structure where big banks with market power interact with small, competitive fringe banks as well as non-bank lenders. Banks face idiosyncratic funding shocks in addition to aggregate shocks which affect the fraction of performing loans in their portfolio. A nontrivial bank size distribution arises out of endogenous entry and exit, as well as banks' buffer stock of capital. We show the model predictions are consistent with untargeted business cycle properties, the bank lending channel, and empirical studies of the role of concentration on financial stability. We find that regulatory policies can have an important impact on banking market structure, which, along with selection effects, can generate changes in allocative efficiency and stability.
    Keywords: Macroprudential policy; Bank size distribution; Industry dynamics with imperfect competition
    JEL: E44 G21 L11
    Date: 2021–05–26
  14. By: Gokkaya, Sinan (Ohio U); Liu, Xi (Miami U); Stulz, Rene M. (Ohio State U and ECGI)
    Abstract: We open the black box of the M&A decision process by constructing a comprehensive sample of US firms with specialized M&A staff. We investigate whether specialized M&A staff improves acquisition performance or facilitates managerial empire building instead. We find that firms with specialized M&A staff make better acquisitions when acquisition performance is measured by stock price reactions to announcements, long-run stock returns, operating performance, divestitures, and analyst earnings forecasts. This effect does not hold when the CEO is powerful, overconfident, or entrenched. Acquisitions by firms without specialized staff do not create value, on average. We provide evidence on mechanisms through which specialized M&A staff improves acquisition performance. For identification, we use the staggered recognition of inevitable disclosure doctrine as a source of exogenous variation in the employment of specialized M&A staff.
    JEL: G14 G24 G30 G34
    Date: 2021–04
  15. By: Mayordomo, Sergio; Pavanini, Nicola; Tarantino, Emanuele
    Abstract: Between 2009 and 2011, the Spanish banking system underwent a restructuring process based on consolidation of savings banks. The program's design allows us to study how alternative forms of consolidation affect credit supply and financial stability. We show that banks consolidating via mergers or business groups are ex-ante comparable in terms of local market's overlap, financial and economic characteristics. We find that, relative to business groups, the market power of merged banks produces a contraction in credit supply, higher interest rates, but also a reduction in non-performing loans. To determine the welfare effects of consolidation, we estimate a structural model of credit demand and supply. In our framework, banks compete on interest rates and can ration borrowers. We also allow borrower surplus to depend on banks' survival. Through counterfactuals, we quantify cost efficiencies and improvements in financial stability that consolidation should deliver to outweigh welfare losses from reduced credit supply.
    Date: 2020–07
  16. By: DeVaro, Jed; Norlander, Peter
    Abstract: This study explores what determines employers' violations of the wage contracts of workers on H-1B temporary work visas, which occur when firms pay those workers below the promised prevailing or "market" wage. A theoretical framework is proposed that predicts more violations during economic downturns, fewer violations when firms have more labor-market power, and more violations by subcontractor firms. Empirical analysis is based on a firm-level matched dataset of wage and hour violations and the firms that sponsor H-1Bs. Higher labor market power, measured by the Herfindahl-Hirschman Index, is associated with fewer violations. Higher unemployment rates and subcontractor firms are associated with more violations. The effects of the unemployment rate and labor market power are amplified in subcontractor firms.
    Keywords: wage theft,guest workers,H-1B workers,labor market competition,wage and hour laws,monopsony labor market
    JEL: J31 J38 J42 J44
    Date: 2021
  17. By: Francesco Decarolis; Maris Goldmanis; Antonio Penta; Ksenia Shakhgildyan
    Abstract: Bid delegation to specialized intermediaries is common in the auction systems used to sell internet advertising. When the same intermediary concentrates the demand for ad space from competing advertisers, its incentive to coordinate client bids might alter the functioning of the auctions. Using proprietary data from auctions held on a major search engine, this study develops a methodology to detect bid coordination. It also presents a strategy to estimate a bound on the search engine revenue losses imposed by coordination relative to a counterfactual benchmark of competitive bidding. In the data, coordination is detected in 55 percent of the cases of delegated bidding observed and the associated upper bound revenue loss for the search engine ranges between 5.3 and 10.4 percent.
    Keywords: online advertising, sponsored search auctions, delegation, common agency
    JEL: C72 D44 L81
    Date: 2021–05
  18. By: Yasui, Yuta
    Abstract: This paper theoretically analyzes fake reviews on a platform market using models where a seller creates fake reviews through incentivized transactions, and its sales depend on its rating based on a review history. The platform can control the incentive for fake reviews by changing the parameters of the rating system, such as weights placed on old and new reviews and its filtering policy. At equilibrium, the number of fake reviews increases as quality increases but decreases as reputation improves. Since fake reviews have a positive relationship with a product’s underlying quality, rational consumers find a rating more informative when fake reviews exist, while credulous consumers suffer from a bias caused by boosted reputation. A stringent filtering policy can decrease the expected amount of fake reviews and the bias of credulous consumers, but at the same time, it can decrease the informativeness of a rating system for rational consumers. In terms of the weight placed on the review history, rational consumers benefit from higher weights on past reviews than from optimal weights without fake reviews.
    Keywords: fake review, reputation, rating design
    JEL: D49 D82 L51 M37
    Date: 2021–05–14
  19. By: Gaertner, Dennis
    Abstract: This paper investigates how leniency programs can induce collusive offenders to self report in a dynamic setting, where the risk of independent detection evolves stochastically over time. We show how this uncertainty about the future can push firms into preemptive application, and how these preemptive incentives may unravel to the point where firms apply long before the risk of independent detection is in any way imminent. The analysis sheds light on factors and policy instruments which favor such an unraveling effect. These include: little discontinuity in time and state, firms’ patience, and a relatively harsh treatment of firms which fail to preempt others. In contrast, the described effects do not necessarily require a very high absolute level of leniency reduction, or even rewards.
    Keywords: cartel, collusion, leniency program, preemption, dynamics
    JEL: D43 D84 K21 K42 L41
    Date: 2021–06
  20. By: Gehrke, Britta (University of Rostock); Maug, Ernst (University of Mannheim); Obernberger, Stefan (Erasmus University Rotterdam); Schneider, Christoph (University of Münster)
    Abstract: We study the restructuring of the labor force after mergers and acquisitions. Overall restructuring is large. Net employment of targets declines by more than half within two years after acquisitions relative to a matched sample, and is concentrated in targets that close all establishments. There is a substantial increase in employee turnover. We place our analysis within a framework in which acquirers seek growth options from targets and provide managerial capabilities to organize production more efficiently. Consistent with this framework, we show that growth and turnover are both higher for managers, and that firms become more hierarchical if they grow and if they become more diversified. Acquirers have a better-educated, better-paid, and more qualified workforce than targets, and they adapt the workforce by hiring new employees who are much younger and less expensive. Mergers create internal labor markets, which are more active if firms have more managerial capacities. However, most hiring is external, especially for managers.
    Keywords: M&A, restructuring, employment, internal labor markets
    JEL: G30 G34 J24 J31 M51
    Date: 2021–06
  21. By: Esteban Jaimovich (University of Surrey); Boryana Madzharova (Friedrich Alexander University of Erlangen); Vincenzo Merella (Università degli Studi di Cagliari)
    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, modellevel 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: 2021–05
  22. By: Toshiaki Iizuka (The University of Tokyo); Hitoshi Shigeoka (Simon Fraser University and NBER)
    Abstract: This study tests whether demand responds symmetrically to price increases and decreases—a seemingly obvious proposition under conventional demand theory that has not been rigorously tested. Exploiting rapid expansion in municipal subsidies for child healthcare in a difference-in-differences framework, we find evidence against it: when coinsurance, our price measure, increases from 0% to 30%, the demand response is more than twice that to a price decrease from 30% to 0%. This result indicates that, while economists and policymakers pay little attention, the price change direction matters, and that welfare analysis should incorporate this direction.
    Keywords: Asymmetric demand Response, Patient Cost-Sharing, Child Healthcare, Conventional Demand Theory
    JEL: I18 I13 I11 J13
    Date: 2021–06

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