nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒06‒21
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. The impact of targeting technologies and consumer multi-homing on digital platform competition By Evensen, Charlotte Bjørnhaug; Haugen, Atle
  2. The Impact of Online Grocery Shopping on Retail Competition and Profit Sharing: an Empirical Evidence of the French Soft Drink Market By Bonnet, Céline; Etcheverry, Clara
  3. Dynamics of Markups, Concentration and Product Span By Helpman, Elhanan; Niswonger, Benjamin
  4. How does market competition affect firm innovation incentives in emerging countries? Evidence from Latin American firms. By Benavente, Jose Miguel; Zuniga, Pluvia
  5. Market Power and the Incentive to Innovate: A Return to Schumpeter and Arrow By Todorova, Tamara
  6. Monopoly strategy with purchase dependent preferences and endogenous preference change By Stéphane Lemarié; Cecilia Vergari
  7. Measuring Market Power in the IPO Underwriter By Yue Cai
  8. Coinsurance vs. copayments: reimbursement rules for a monopolistic medical product with competitive health insurers By Cremer, Helmuth; Lozachmeur, Jean-Marie
  9. Obfuscation in competitive markets By Ernst Fehr; Keyu Wu
  10. Backward Versus Forward Integration of Firms in Global Value Chains By Peter H. Egger; Katharina Erhardt; Gerard Masllorens
  11. R&D intensity and Vertical Differentiation By Ricardo D. Brito; Eduardo Correia de Souza, Rodrigo Moita
  12. Platform Design and Innovation Incentives: Evidence from the Product Ratings System on Apple's App Store By Benjamin T. Leyden
  13. Solving Strong-Substitutes Product-Mix Auctions By Baldwin, Elizabeth; Goldberg, Paul; Klemperer, Paul; Lock, Edwin
  14. The effectiveness of innovation policy and the moderating role of market competition: Evidence from Latin American firms By Benavente, Jose Miguel; Zuniga, Pluvia
  15. Leveraging Standard Essential Patents for Capturing Innovation Rents: The Strategic Disclosure of License Rules By Dong HUO; Jianwei DANG; MOTOHASHI Kazuyuki
  16. Bargaining over a divisible good in the market for lemons By Gerardi, Dino; Maestri, Lucas; Monzon, Ignacio
  17. Gathering round Big Tech: how the market for acquisitions reinforces regional inequalities in the US By Feldman, Maryann; Guy, Frederick; Iammarino, Simona; Ioramashvili, Carolin
  18. Impact of M&A by foreign companies on innovation activities of acquired companies (Japanese) By SUZUKI Shinya; INUI Tomohiko; IKEDA Yuya
  19. Optimal Pricing Schemes for an Impatient Buyer By Yuan Deng; Jieming Mao; Balasubramanian Sivan; Kangning Wang
  20. Evaluating the Impact of Online Market Integration - Evidence from the EU Portable PC Market By Duch-Browne, Nestor; Grzybowski, Lukasz; Romahn, André; Verboven, Frank
  21. Unravelling the markups changes: the role of demand elasticity and concentration By Michał Gradzewicz; Jakub Mućk

  1. By: Evensen, Charlotte Bjørnhaug (Dept. of Economics, Norwegian School of Economics and Business Administration); Haugen, Atle (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: Abstract In this paper, we address how targeting and consumer multi-homing impact platform competition and market equilibria in two-sided markets. We analyze platforms that are financed by both advertising and subscription fees, and let them adopt a targeting technology with increasing performance in audience size: a larger audience generates more consumer data, which improves the platforms’ targeting ability and allows them to extract more ad revenues. Targeting therefore increases the importance of attracting consumers. Previous literature has shown that this could result in fierce price competition if consumers subscribe to only one platform (i.e. single-home). Surprisingly, we find that pure single-homing possibly does not constitute a Nash equilibrium. Instead, platforms might rationally set prices that induce consumers to subscribe to more than one platform (i.e. multi-home). With multi-homing, a platform’s audience size is not restricted by the number of subscribers on rival platforms. Hence, multi-homing softens the competition over consumers. We show that this might imply that equilibrium profit is higher with than without targeting, in sharp contrast to what previous literature predicts.
    Keywords: Two-sided markets; digital platforms; targeted advertising; incremental pricing; consumer multi-homing.
    JEL: D11 D21 L13 L82
    Date: 2021–06–10
  2. By: Bonnet, Céline; Etcheverry, Clara
    Abstract: The online distribution channel expands in many sectors, and the food industry is not left out. This paper analyzes the impact of ecommerce on French grocery shopping. Using purchase data, we develop a structural econometric model of demand and supply to estimate the effect of the emergence of online distribution channels on prices, profit, consumer surplus, and profit-sharing between retailers and manufacturers in the soft drink sector. We find that e-commerce leads to market expansion, and the effect on the retailers’ profits depends on their online strategy. The retailers which developed independent warehouses for the online distribution channel get higher market shares, retail margins, and profits. The retailers which develop the online services in the existing stores or adjoined warehouses get lower downstream margins, market shares, and profits with e-commerce. Our results also suggest that the introduction of the online grocery channel is profitable to most manufacturers due to an increase in wholesale margins. This increase with the introduction of e-commerce comes from the higher retailers’ fear of risking a bargaining breakdown compared to accepting a concession to its trading partner.
    Keywords: E-commerce; grocery; online shopping; bargaining; profit sharing
    JEL: L13 L63 L81
    Date: 2021–06
  3. By: Helpman, Elhanan; Niswonger, Benjamin
    Abstract: We develop a model with a finite number of multi-product firms that populate an industry together with a continuum of single-product firms, and study the dynamics of this industry that arises from investments in the invention of new products. Consistent with the available evidence, the model predicts rising markups and concentration and a declining labor share. We then examine the dynamics of market shares and product spans in response to improvements in the technologies of the multi-product and single-product firms, and the impact of these changes on the steady state distribution of market shares and product spans. Our model predicts the possibility of an inverted-U relationship between labor productivity and product span in the cross-section of firms, for which we provide suggestive evidence. It also predicts that rising entry costs of single-product firms may flatten the relationship between labor productivity and market shares of the large multi-product firms.
    Keywords: Firm Dynamics; industry dynamics; Market Share; markup; product span; single- and multi-product firms
    JEL: D43 L11 L13 L25
    Date: 2020–06
  4. By: Benavente, Jose Miguel (Inter-American Development Bank (IADB)); Zuniga, Pluvia (UNU-MERIT)
    Abstract: The role of market competition on firm innovation remains a controversial policy question, especially in the context of developing countries. This paper presents new empirical evidence about the impact of market competition on firm innovation engagement in Colombian and Chilean manufacturing industries. We correct for the endogeneity of market competition using instruments proxying entry costs and policy interventions (i.e. competition decisions and entry law reforms), our results are like those of developed countries. Market competition increases firm propensity to invest in innovation in manufacturing enterprises and this relationship is linear in Chilean while in Colombian industries it takes the form of an inversed-U shape relation. The impact of competition is decreasing with the level of sector asymmetry -as preconised in the literature, while the impact of firm distance to the frontier affects firm innovation engagement differently in the two countries. In Chile, competition raises innovation incentives for the third and fourth productivity quartiles while no impact is found for firms in the first (bottom) two quartiles. In contrast, in Colombia market competition raises innovation engagement across regardless their firm productivity position but effects are stronger in the medium range (second and third quartiles). Our main results are robust to controlling for past innovation engagement, import competition and business dynamics.
    Keywords: Market Competition, Innovation, Technology Purchasing, Productivity, Latin American Firms
    JEL: O32 D41 O47 D24
    Date: 2021–05–19
  5. By: Todorova, Tamara
    Abstract: Using a simple linear demand and marginal cost function, we demonstrate that both competition and monopoly have incentives to innovate since this increases their profit levels. However, our results show that perfect competition is more motivated to innovate since the increase in the profit is greater with the same cost reduction and the same innovation. We also conclude that a more drastic innovation brings greater rent to the monopolist and reduces the advantages of perfect competition over monopoly. It could be presumed that monopoly firms would be attracted to more substantive innovations rather than non-drastic ones.
    Keywords: competition, monopoly, innovation, profit
    JEL: D41 D42 O31 O32
    Date: 2021
  6. By: Stéphane Lemarié; Cecilia Vergari
    Abstract: We study the optimal monopoly pricing when consumers may buy one or two units of a good over two successive periods and their preferences evolve depending on past purchases and preference persistence. If the monopolist cannot discriminate between past and new buyers, he refrains from intertemporal price discrimination. Selling over two periods improves the monopoly profit as compared to the benchmark one-period equilibrium only for high preference persistence. Conversely, if the monopoly can discriminate between second period buyers, behavior-based price discrimination becomes profitable only for low preference persistence.
    Keywords: Repeated purchases, monopoly dynamic pricing, vertical differentiation
    JEL: L10 Q10
    Date: 2021–03–01
  7. By: Yue Cai (Waseda University)
    Abstract: This paper study underwriter’s competitive behavior in the Japanese IPO underwriting markets. We use demand estimation techniques to obtain marginal costs, and empirically compare several models of conduct. We find that differentiated product Bertrand, partially collusive models are rejected against the perfectly collusive models. We conclude that spreads in the Japanese IPO underwriting markets are consistent with the collusive pricing behavior. Underwriters seem to internalize the effect of their spread on their rivals.
    Date: 2021–05
  8. By: Cremer, Helmuth; Lozachmeur, Jean-Marie
    Abstract: This paper studies a market for a medical product in which there is perfect competition among health insurers, while the good is sold by a monopolist. Individuals di¤er in their severity of illness and there is ex post moral hazard. We consider two regimes: one in which insurers use coinsurance rates (ad valorem reimbursements) and one in which insurers use copayments (specic reimbursements). We show that the induced equilibrium with copayments involves a lower producer price and a higher level of wel- fare for consumers. This results provides strong support for a reference price based reimbursement policy.
    Keywords: Ex post moral hazard; health insurance competition; copayments; imper-; fect competition
    JEL: I11 I13 I18
    Date: 2021–05
  9. By: Ernst Fehr; Keyu Wu
    Abstract: In many markets, firms make their products complex through add-ons, thus making them difficult to evaluate and compare. How does this product obfuscation affect competition, sellers’ profits, and buyers’ welfare? We study these questions in a competitive experimental market in which sellers have the opportunity to obfuscate by add-on features, and buyers endogenously decide how much time to spend on searching for the best product. We show that stable obfuscation levels emerge that reduce buyers’ welfare by ensuring that total prices are substantially above marginal cost and by inducing buyers to make mistakes and to waste their time searching. Competition operates through lowering salient headline prices, but sellers are able to appropriate a considerable share of the surplus with expensive add-on features. In contrast, prices quickly converge to marginal cost if we remove obfuscation opportunities. We thus provide direct causal evidence that obfuscation mitigates competition and generates positive profits because buyers typically search only a small share of the product space. Our results also suggest that purely exploitative obfuscation tends to be much less stable than obfuscation by surplus-enhancing add-on features because buyers’ aversion to complicated products may have a non-negligible impact on sellers’ obfuscation decisions.
    Date: 2021–06
  10. By: Peter H. Egger; Katharina Erhardt; Gerard Masllorens
    Abstract: Production processes are increasingly organized in international value-chain networks. The involved firms can be operating at arm’s length or be vertically integrated. Both the incidence and the direction of integration (backward or forward in the value chain) depend on specific characteristics of the firms and their economic environment. We propose a simple model of vertical integration in a supplier-producer relationship that is rooted in the property-rights theory to learn about the determinants of forward versus backward integrations. Generally, the profitability and direction of integration depend on the relative investment intensity of the producer and the supplier so as to align investment incentives and maximize joint surplus. Moreover, the organizational form depends on the fixed costs of firm integration and the market environment in the input market as well as the relative importance of the specific input for the final output. These results are strongly confirmed in a large panel of worldwide directed ownership linkages.
    Keywords: firm integration, global value chains, investment
    JEL: L14 L22 L23 L24
    Date: 2021
  11. By: Ricardo D. Brito; Eduardo Correia de Souza, Rodrigo Moita
    Abstract: Product market characteristics vary considerably across R&D intensity-based “technology levels†of the OECD-STI taxonomy, as well as across categories of the Rauch (1999) classification. Both higher technology and more differentiated products display lower price elasticity of demand and longer quality ladders. However, variety proliferation decreases with the technology level and increases with the Rauch category, while price dispersion increases with technology but not with the Rauch. Additionally, Rauch categories do not differ in factor intensities, while higher tech industries are more capital intensive than lower tech ones. From this evidence, we conclude that R&D intensity is an appropriate measure of vertical differentiation, while the Rauch classification mainly captures horizontal differentiation.
    Keywords: R&D intensity; Product differentiation; Product market characteristics
    JEL: L10 F14
    Date: 2021–06–14
  12. By: Benjamin T. Leyden
    Abstract: A lack of platform-level competition among digital marketplaces can result in socially inefficient platform design and meaningful welfare losses, even independent of actively anticompetitive behavior. To illustrate the first-order effects platform design can have on competitive outcomes, I investigate how the longstanding design of the product ratings system on Apple’s App Store affected innovative behavior by platform participants. I leverage an exogenous change in this system to show that for nearly a decade, the design of the App Store’s product ratings system led to less frequent product updating by high-quality products. I provide suggestive evidence that this policy resulted in lost, as opposed to simply delayed, innovation.
    Date: 2021
  13. By: Baldwin, Elizabeth; Goldberg, Paul; Klemperer, Paul; Lock, Edwin
    Abstract: This paper develops algorithms to solve strong-substitutes product-mix auctions: it finds competitive equilibrium prices and quantities for agents who use this auction's bidding language to truthfully express their strong-substitutes preferences over an arbitrary number of goods, each of which is available in multiple discrete units. Our use of the bidding language, and the information it provides, contrasts with existing algorithms that rely on access to a valuation or demand oracle. We compute market-clearing prices using algorithms that apply existing submodular minimisation methods. Allocating the supply among the bidders at these prices then requires solving a novel constrained matching problem. Our algorithm iteratively simplifies the allocation problem, perturbing bids and prices in a way that resolves tie-breaking choices created by bids that can be accepted on more than one good. We provide practical running time bounds on both price-finding and allocation, and illustrate experimentally that our allocation mechanism is practical.
    Keywords: bidding language; Competitive Equilibrium; convex optimisation; product-mix auction; strong substitutes; submodular minimisation; Walrasian Equilibrium
    JEL: D44
    Date: 2020–06
  14. By: Benavente, Jose Miguel (Inter-American Development Bank (IADB)); Zuniga, Pluvia (UNU-MERIT)
    Abstract: The objective of this paper is to evaluate whether market competition matters for the effectiveness of innovation policies. Using data for Chilean and Peruvian manufacturing firms, we implement propensity matching techniques combined with differences-in-differences estimation to evaluate the impact of innovation subsidies on the post-treatment innovation investment effort of firms and test whether such impact differs according to the intensity of competition. We corroborate the existence of "crowding-in" effects in beneficiaries when compared to a control group of untreated firms. The subsidy impact is found either only significant in highly competitive sectors or larger in more competition-intensive industries -compared to low competition ones. Thus, we confirm that market competition plays a moderating role in the effectiveness of innovation policies to stimulate firm innovation investment. The results are robust to different matching and estimation methods. Our results therefore suggest that market contexts should be considered in the design of innovation policies.
    Keywords: Innovation Subsidies, Innovation Policy, Market Competition Latin American firms
    JEL: O38 O31 R38 H71
    Date: 2021–05–19
  15. By: Dong HUO; Jianwei DANG; MOTOHASHI Kazuyuki
    Abstract: A general view of standard essential patents (SEPs) is that they provide profiting opportunities by licensing-out, in general, under the FRAND (Fair, reasonable and non-discriminatory) terms. However, a large part of SEPs holders declares "generous" free-license terms, thus abandon direct profiting opportunities. A patent can be used not only for appropriating rent from itself, but also for using it as a leverage to sustain the patent holder's competitive position in the market. This paper empirically addresses the determinants of such motivation for patenting (leverage strategy), by using the license terms of SEPs (free vs. royalty-bearing, and the inclusion of reciprocal terms). Using intellectual property rights disclosure data of IETF, a standard development organization, this paper investigates both firm-level and patent-level factors in shaping the license terms based on three-stage estimation of structural equations. Two types of strategy, "generic" leveraging against all potential competitors in a technology market and "specific" leveraging for keeping firm's competitive position to specific competitor as a licensee, are identified, and it is found that the former motivation works stronger for SEPs holders.
    Date: 2021–03
  16. By: Gerardi, Dino; Maestri, Lucas; Monzon, Ignacio
    Abstract: We study bargaining with divisibility and interdependent values. A buyer and a seller trade a durable good divided into finitely many units. The seller is privately informed about the good's quality, which can be either high or low. Gains from trade are positive and decreasing in the number of units traded by the parties. In every period, the buyer makes a take-it-or-leave-it offer that specifies a price and a number of units. Divisibility introduces a new channel of competition between the buyer's present and future selves. The buyer's temptation to split the purchases of the high-quality good is detrimental to him. As bargaining frictions vanish and the good becomes arbitrarily divisible, the high-quality good is traded smoothly over time and the buyer's payoff shrinks to zero.
    Keywords: Bargaining; Coase conjecture; divisible objects; gradual sale; interdependent valuations; market for lemons
    Date: 2020–06
  17. By: Feldman, Maryann; Guy, Frederick; Iammarino, Simona; Ioramashvili, Carolin
    Abstract: Are the agglomeration economies of technology hubs augmented by a localized market for start-ups – acquisitions, and IPOs? How does this affect the ability of places outside of those hubs to foster digital startups as a tool of local economic development? We study this with a particular focus on acquisitions by the seven largest American digital platforms – Amazon, Alphabet [Google], Apple, Microsoft, Facebook, Oracle and Adobe, which we call, collectively, Big Tech. We cover the years 2001-2020. We show that firms acquired by Big Tech are, disproportionately to the sectors in which they operate, concentrated in major tech clusters, and particularly in the Silicon Valley (San Francisco/San Jose). Foreign acquisitions by Big Tech also show a marked concentration in a few countries, and particular places in those countries. NASDAQ IPOs of firms in relevant sectors are similarly concentrated. Acquisition, or the less common alternative, IPO, is the second major phase of financing for a digital start up. The first phase is commonly associated with venture capital (VC), and location proximate to venture capital companies has often been seen as a motivation for locating in a tech cluster. We find, however, that neither VC funding, nor funding an investor located in the Silicon Valley, predicts either acquisition by Big Tech, or IPO. Funding by any of the VCs that helped launch the Big Tech firms, however, is strongly associated with Big Tech acquisition. This suggests an important role for social networks in both the first and second phases of financing, but not necessarily a geographical role in the first phase. We argue that the acquisition market – and its effects on both the major tech hubs and the left behind rest – depends crucially on the proprietary control of access to various digital network products. Regulation of these markets, particularly in the form of common carrier status and open standards, could achieve a considerable re-balancing.
    Keywords: tech giats; market power; start-ups; acquisitions; regional inequality
    JEL: R12
    Date: 2021–05–01
  18. By: SUZUKI Shinya; INUI Tomohiko; IKEDA Yuya
    Abstract: In recent years, the number of acquisitions of Japanese companies by foreign companies has been increasing. In addition, M&As for technology acquisition are becoming more important, especially in industries such as automobiles and semiconductors, where radical technological changes such as electrification and autonomous driving are occurring. There is a possibility that R&D activities and technological resources are reorganized within the corporate group after the implementation of international M&As. In this study, we examine how the R&D activities of Japanese companies acquired by foreign companies change using a panel dataset at the firm level. The results show that R&D expenditures of an acquired company tend to decrease after the acquisition by a foreign company. However, R&D expenditures do not decrease after the acquisition in industries such as transportation machinery and electronic machinery. Furthermore, the effects of an acquisition on R&D expenditures of the acquired company vary depending on the nationality of the acquiring company.
    Date: 2021–03
  19. By: Yuan Deng; Jieming Mao; Balasubramanian Sivan; Kangning Wang
    Abstract: A patient seller aims to sell a good to an impatient buyer (i.e., one who discounts utility over time). The buyer will remain in the market for a period of time $T$, and her private value is drawn from a publicly known distribution. What is the revenue-optimal pricing-curve (sequence of (price, time) pairs) for the seller? Is randomization of help here? Is the revenue-optimal pricing-curve computable in polynomial time? We answer these questions in this paper. We give an efficient algorithm for computing the revenue-optimal pricing curve. We show that pricing curves, that post a price at each point of time and let the buyer pick her utility maximizing time to buy, are revenue-optimal among a much broader class of sequential lottery mechanisms: namely, mechanisms that allow the seller to post a menu of lotteries at each point of time cannot get any higher revenue than pricing curves. We also show that the even broader class of mechanisms that allow the menu of lotteries to be adaptively set, can earn strictly higher revenue than that of pricing curves, and the revenue gap can be as big as the support size of the buyer's value distribution.
    Date: 2021–06
  20. By: Duch-Browne, Nestor; Grzybowski, Lukasz; Romahn, André; Verboven, Frank
    Abstract: We develop a framework to evaluate the impact of market integration, accounting for spillovers between multiple distribution channels. Our adaptation of the standard random coefficients logit demand model allows for substitution between distribution channels and incorporates consumer arbitrage across countries. We apply our framework to the European portable PC market, where geo-blocking practices that restrict online trade have recently been banned. The total consumer and welfare gains from reducing cross-border arbitrage costs are relatively modest, and entirely due to increased product choice rather than reduced price discrimination. At the same time, the distributional effects from the cross-country price convergence are substantial. Consumers in high income countries gain most, while consumers in medium and low income countries are only marginally better or even worse off.
    Keywords: geoblocking; market integration; online trade restrictions; PC industry
    Date: 2020–06
  21. By: Michał Gradzewicz (Narodowy Bank Polski and SGH Warsaw School of Economics); Jakub Mućk (Narodowy Bank Polski and SGH Warsaw School of Economics)
    Abstract: We propose a framework allowing to identify sources changes in aggregate markups. Our approach derives from the conjectural variation theory and allows to evaluate the role of price elasticity of demand as well as concentration in shaping the markups. In the empirical part, we show that a decline in the aggregate markups in Poland, showed by Gradzewicz and Muck (2019), can be explained to a large extent by rising demand elasticity, while rising concentration has mitigated this effect. We also document that at the industry level the globalization trends, e.g. international fragmentation, increasing standardization and tighter integration with global economy, affect both demand elasticity and markups but in a theory-consistent, inverse way. Besides, we identify factors which are specific to demand elasticity (product varieties and a home bias) and the markups (import content of exports).
    Keywords: markups, price elasticity of demand, globalization
    JEL: C23 D22 D4 F61 L11
    Date: 2020

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