nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒08‒09
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Our product is unique: A note on a delegation game with differentiated products By Clemens Buchen; Sven A. Hartmann; Alberto Palermo
  2. Strategic Pricing and Ratings By Anton Sobolev; Konrad Stahl; André Stenzel; Christoph Wolf
  3. The Optimality of Upgrade Pricing By Dirk Bergemann; Alessandro Bonatti; Andreas Haupt; Alex Smolin
  4. "Mixed oligopoly and predatory public firms". By Joan-Ramon Borrell; Carlos Suarez
  5. The R&D investment decision game with product differentiation By Domenico Buccella; Luciano Fanti; Luca Gori
  6. Horizontal Foreclosure with Vertically Shared Large Value: Qualcomm's License Fee Contracts and Anti-Monopoly Decisions by Government in China's Smartphone Integrated Circuits Market, 2011-2014 By WATANABE Mariko
  7. Concentration, Retail Markups, and Countervailing Power: Evidence from Retail Lotteries By Giroldo, Renato; Hollenbeck, Brett
  8. The regulation of interconnection and regulatory alignment in the Southern African Development Community By Grace Nsomba
  9. Selling Impressions: Efficiency vs. Competition By Dirk Bergemann; Tibor Heumann; Stephen Morris
  10. The Positive Case for a CBDC By Andrew Usher; Edona Reshidi; Francisco Rivadeneyra; Scott Hendry
  11. Inattention vs switching costs: An analysis of consumers' inaction in choosing a water tariff By Heiss, Florian; Ornaghi, Carmine; Tonin, Mirco
  12. Equilibrium of a Search Model with Non-unit Demand By Buisson, Florent
  13. Pricing Art and the Art of Pricing : On Returns and Risk in Art Auction Markets By Li, Yuexin; Ma, X.; Renneboog, Luc
  14. The Ultimate Coasian Commitment: Estimating and Explaining Artist-Specific Death Effects By Heinrich Ursprung; Katarina Zigova
  15. Revealing Private Information in a Patent Race By Pavel Kocourek
  16. Renegotiation and discrimination in symmetric procurement auctions By Leandro Arozamena; Juan José Ganuza; Federico Weinschelbaum
  17. “An Elephants’ Graveyard”: the Deregulation of American Industry in the Late Twentieth Century By Richard N. Langlois
  18. Heavy Tailed, but not Zipf: Firm and Establishment Size in the U.S. By Illenin O. Kondo; Logan T. Lewis; Andrea Stella
  19. The Impact of Foreign Direct Investment on Innovation: Evidence from Patent Filings and Citations in China By Chen, Yongmin; Jiang, Haiwei; Liang, Yousha; Pan, Shiyuan
  20. The Impact of Mergers and Acquisitions on Top Income Shares By Niklas Uliczka

  1. By: Clemens Buchen (WHU – Otto Beisheim School of Management); Sven A. Hartmann (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University); Alberto Palermo (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University)
    Abstract: We analyze a Cournot duopoly market with differentiated goods and the separation between ownership and control. We consider a delegation game, for which the owner of a firm hires a manager who acts as if the good has a lower degree of substitutability than it really has. This is so either because managers are biased and perceive the good in this way, or because firms design an incentive scheme accordingly, which leads the manager to act in this way. Both firms rely on delegation. We discuss conditions, which lead one firm to increase its profit implying that the usual result of a prisoners’ dilemma is avoided.
    Keywords: Strategic Delegation, Managerial Incentives, Oligopoly
    JEL: D21 D62 L13
    Date: 2021–02
  2. By: Anton Sobolev; Konrad Stahl; André Stenzel; Christoph Wolf
    Abstract: A seller serving two generations of short lived heterogeneous consumers sells a product under uncertain demand. We characterize the seller's optimal pricing, taking into account that the current period's price affects the information transmission to the next period consumers via consumer ratings. While the seller always prefers to generate more information, it is not necessarily in the consumers' interest. We characterize situations in which consumer surplus and welfare are decreasing in additional information. We provide conditions under which aggregate consumer surplus and welfare are lower with than without a rating system.
    Keywords: Online Markets, Rating, Reputation
    JEL: D83 L12 L13 L81
    Date: 2021–07
  3. By: Dirk Bergemann (Cowles Foundation, Yale University); Alessandro Bonatti (MIT); Andreas Haupt (Institute for Data, Systems, and Society, MIT); Alex Smolin (Dept. of Economics, Yale University)
    Abstract: We consider a multiproduct monopoly pricing model. We provide sufficient conditions under which the optimal mechanism can be implemented via upgrade pricing—a menu of product bundles that are nested in the strong set order. Our approach exploits duality methods to identify conditions on the distribution of consumer types under which (a) each product is purchased by the same set of buyers as under separate monopoly pricing (though the transfers can be different), and (b) these sets are nested. We exhibit two distinct sets of sufficient conditions. The first set of conditions is given by a weak version of monotonicity of types and virtual values, while maintaining a regularity assumption, i.e., that the product-by-product revenue curves are singlepeaked. The second set of conditions establishes the optimality of upgrade pricing for type spaces with monotone marginal rates of substitution (MRS)—the relative preference ratios for any two products are monotone across types. The monotone MRS condition allows us to relax the earlier regularity assumption. Under both sets of conditions, we fully characterize the product bundles and prices that form the optimal upgrade pricing menu. Finally, we show that, if the consumer’s types are monotone, the seller can equivalently post a vector of single-item prices: upgrade pricing and separate pricing are equivalent.
    Keywords: Revenue Maximization, Mechanism design, Strong duality, Upgrade pricing
    JEL: D42 D82
    Date: 2021–07
  4. By: Joan-Ramon Borrell (Universitat de Barcelona.); Carlos Suarez (Universidad Jorge Tadeo Lozano, Universitat Barcelona.)
    Abstract: In this paper, we propose a mixed duopoly model in which the public company aims to maximize a weighted function of profits and a function of its production scale. We found that if the weight to the scale of production is high the public firms may exclude its rivals from the market (exercising predatory prices). We also find that the profit sacrifice by the public firm to get this exclusion is higher if there are marked differences between the cost efficiency of private and public firms.
    Keywords: Mixed Oligopoly, Predatory prices, Public firm. JEL classification: L13, L94, C10.
    Date: 2021–07
  5. By: Domenico Buccella; Luciano Fanti; Luca Gori
    Abstract: This article extends the classical d'Aspremont and Jacquemin's (1988, 1990) cost-reducing R&D model with spill-overs to allow quantity-setting firms (Cournot rivalry) to play the non-cooperative R&D investment decision game with horizontal product differentiation. Unlike Bacchiega et al. (2010), who identify a parametric region – defined by the extent of technological spill-overs and the efficiency of R&D activity – in which the game is a prisoner's dilemma (self-interest and mutual benefit of cost-reducing innovation conflict), this work shows that product differentiation changes the game into a deadlock (self-interest and mutual benefit do not conflict), irrespective of the parameter scale (thus, holding also in the absence of spill-over effects). The social welfare when the degree of product differentiation is high enough and a deadlock characterises investing in cost-reducing R&D is larger than when firms do not invest in R&D, irrespective of the technological spillovers extent and the R&D activity's efficiency. These findings suggest that investing in R&D challenges the improvement of interventions aimed at favouring product differentiation. These results also hold for pricesetting firms (Bertrand rivalry).
    Keywords: Process innovation, Nash equilibrium, Social welfare
    JEL: D43 L13 O31
    Date: 2021–07–01
  6. By: WATANABE Mariko
    Abstract: In 2015, the Chinese competition authority announced a sanction against Qualcomm, a leading semiconductor manufacturer in the United States. This study investigates whether Qualcomm's pricing strategy limited competition with its rivals. The study estimated two demand functions for handsets and integrated circuit (IC) chips, as well as the marginal cost of smartphones. It then factored in the price of IC chips. Based on the estimated prices of chips and demand parameters, the study identified the competitive relationship regarding the IC chips at the product level. The following were the results of the analysis; the cost of smartphone handsets with Qualcomm's chipset installed is lower than those of rival products. Meanwhile, Qualcomm's chip generates a higher willingness to pay (WTP) by engaging in transactions with increasing numbers of handset assemblers. Qualcomm did not commit vertical foreclosures since its products are not exclusive but the company expanded their customer bases and contributed to the improvement of their customers' ability to set higher WTP and higher prices for their products. However, the company committed horizontal foreclosures, as evident from the pricing of its licensing, where Qualcomm limits competition by raising the cost for rivals; this observation is consistent with the authority's determination. This form of anti-competitive conduct is most severe in the CDMA2000 market in China.
    Date: 2021–07
  7. By: Giroldo, Renato; Hollenbeck, Brett
    Abstract: In this note, we investigate the causal link between market concentration and markups in a retail setting. We study the Washington retail cannabis industry, which features exogenous variation in market concentration that resulted from retail licenses being awarded via lotteries. We observe markups directly. We find a negative causal relationship between markups and concentration, where more concentrated markets have significantly lower markups and wholesale prices. The results provide direct evidence of countervailing buyer power by retailers. These results highlight the value of using industry specific data and rich models of competition to advance the debate on concentration and markups.
    Keywords: markups, market concentration, retail, countervailing buyer power, cannabis policy
    JEL: E20 L13 L16 L22 L41 L81 M31 R12 R32
    Date: 2021–07–31
  8. By: Grace Nsomba
    Abstract: This paper analyses interconnection in telecommunications markets in the Southern African Development Community (SADC) region, focusing on cross-border roaming as well as international interconnection. These issues have been identified as critical for cross-border integration and regulatory alignment. The paper argues for a greater alignment of regulatory approaches across the SADC region to promote competition, lower prices, and innovation.
    Keywords: Southern African Development Community, Competition, Regulation, Telecommunication
    Date: 2021
  9. By: Dirk Bergemann (Cowles Foundation, Yale University); Tibor Heumann (Pontificia Universidad Católica de Chile); Stephen Morris (Dept. of Economics, MIT)
    Abstract: In digital advertising, a publisher selling impressions faces a trade-off in deciding how precisely to match advertisers with viewers. A more precise match generates efficiency gains that the publisher can hope to exploit. A coarser match will generate a thicker market and thus more competition. The publisher can control the precision of the match by controlling the amount of information that advertisers have about viewers. We characterize the optimal trade-off when impressions are sold by auction. The publisher pools premium matches for advertisers (when there will be less competition on average) but gives advertisers full information about lower quality matches.
    Keywords: Second Price Auction, Conflation, Digital Advertising, Impressions, Bayesian Persuasion, Information Design
    JEL: D44 D47 D83 D84
    Date: 2021–07
  10. By: Andrew Usher; Edona Reshidi; Francisco Rivadeneyra; Scott Hendry
    Abstract: In this paper we discuss the competition and innovation arguments for issuing a central bank digital currency (CBDC). A CBDC could be an effective competition policy tool for payments. On innovation, we argue that a CBDC could be necessary to support the vibrancy of the digital economy by helping solve market failures and fostering competition and innovation in new digital payments markets. Overall, competition and innovation are supporting arguments for issuing a CBDC.
    Keywords: Digital currencies and fintech; Financial institutions; Financial stability
    JEL: E58 L5
    Date: 2021–07
  11. By: Heiss, Florian; Ornaghi, Carmine; Tonin, Mirco
    Abstract: This paper studies consumers' choice between two different water tariffs. We document a large inaction in a novel setting where customers face a binary decision and receive simple, detailed and personalized information about the financial savings they would obtain if they were to switch water tariff. Our empirical framework separates two sources of inertia: inattention and switching costs. The model estimates that half of the 50 thousand customers in our sample are not aware of the opportunity they are offered and that, conditional on paying attention, median switching costs are £89. A model where all customers are assumed to pay attention instead delivers implausibly high switching costs, with a median of £482. Looking at the characteristics of the households, our results confirm previous findings that areas where households have higher levels of education or the proportion of minorities is lower, display a higher responsiveness to potential savings. The new insight offered by our analysis is that it is the level of attention, and not the switching costs, that differ across levels of education and ethnicity. Our findings suggest that policies aimed at increasing attention can play a central role in fostering competition among suppliers and reducing inequalities.
    Keywords: inattention,switching costs,tariffs,water
    JEL: D12 L95 Q25
    Date: 2021
  12. By: Buisson, Florent
    Abstract: In this article, I prove the existence of an equilibrium in a search model with non-unit demand.
    Keywords: search
    JEL: D83 L13
    Date: 2021–07–27
  13. By: Li, Yuexin (Tilburg University, School of Economics and Management); Ma, X. (Tilburg University, School of Economics and Management); Renneboog, Luc (Tilburg University, School of Economics and Management)
    Date: 2021
  14. By: Heinrich Ursprung; Katarina Zigova
    Abstract: To extract part of their monopoly rent, Coase (1972) famously claimed that durable goods monopolists require some institutional device that allows them to restrict their output stream in a credible manner. We empirically test this proposition by applying it to the production of visual art. The ultimate commitment device in artistic production is the artist’s death. As living artists cannot commit to a pattern of restrained production, the prices of artwork increase when the artist dies. We identify with the help of a toy model the drivers of this so-called death effect and estimate individual death effects of a sample of famous visual artists who died between 1985 and 2011. Using data from art auctions that took place in a narrow bandwidth around the artists’ death, we apply several variations of the classical regression discontinuity design. The heterogeneity in death effects across artists turns out to be substantial. Up to 40% of the variation can be explained by age and reputation at death.
    Keywords: Coase conjecture; Art auction prices; Death effect; Reputation; Regression discontinuity
    JEL: C21 L12 Z11
    Date: 2021–07–29
  15. By: Pavel Kocourek
    Abstract: In this paper I investigate the role of private information in a patent race. Since firms often do their research in secrecy, the common assumption in patent race literature that firms know each other’s position in the race is questionable. I analyze how the dynamics of the game changes when a firm’s progress is its private information, and I address the question whether revealing it might be to a firm’s advantage. I find that a firm has an incentive to reveal its breakthrough only if its rival has not done so, and only if the research is costly.
    Keywords: : Patent Race; R&D Investment; Race; Optimal Effort; Revealing Private Information;
    Date: 2021–07
  16. By: Leandro Arozamena; Juan José Ganuza; Federico Weinschelbaum
    Abstract: In order to make competition open, fair and transparent, procurement regulations often require equal treatment for all bidders. This paper shows how a favorite supplier can be treated preferentially (opening the door to home bias and corruption) even when explicit discrimination is not allowed. We analyze a procurement setting in which the optimal design of the project to be contracted is unknown. The sponsor has to invest in specifying the project. The larger the investment, the higher the probability that the initial design is optimal. When it is not, a bargaining process between the winning firm and the sponsor takes place. Profits from bargaining are larger for the favorite supplier than for its rivals. Given this comparative advantage, the favored firm bids more aggressively and then, it wins more often than standard firms. Finally, we show that the sponsor invests less in specifying the initial design, when favoritism is stronger. Underinvestment in design specification is a tool for providing a comparative advantage to the favored firm.
    Keywords: auctions, favoritism, auction design, renegotiation, corruption
    JEL: I12 J13 H31 H24
    Date: 2021–07
  17. By: Richard N. Langlois (University of Connecticut)
    Abstract: This paper is an excerpt from a larger book project called The Corporation and the Twentieth Century, which chronicles and interprets the institutional and economic history – the life and times, if you will – of American business in the twentieth century. This excerpt examines the era of industrial deregulation of the late twentieth century. As had been the case with financial deregulation, it argues, industrial deregulation and the internationalization of trade were largely a manifestation of the misalignment of the postwar regulatory regime with the realities of economic growth. This misalignment created profit opportunities for entrepreneurs not only in the realm of technology but also, and perhaps more crucially, in the realm of institutions. In some cases, entrepreneurs would expend resources in order to foment political change. In other cases, technological and institutional innovation, aided at times by the depredations of the regulation itself, would so reduce the available rents of a regulatory regime that its supporting coalition would collapse
    Keywords: Deregulation; institutional innovation; technological change; antitrust
    JEL: D23 K21 L4 L51 L52 L6 L9 N42 N62 N72 N82 O3 P12 P P16
    Date: 2021–07
  18. By: Illenin O. Kondo; Logan T. Lewis; Andrea Stella
    Abstract: Heavy tails play an important role in modern macroeconomics and international economics. Previous work often assumes a Pareto distribution for firm size, typically with a shape parameter approaching Zipf’s law. This convenient approximation has dramatic consequences for the importance of large firms in the economy. But we show that a lognormal distribution, or better yet, a convolution of a lognormal and a non-Zipf Pareto distribution, provides a better description of the U.S. economy, using confidential Census Bureau data. These findings hold even far in the upper tail and suggest heterogeneous firm models should more systematically explore deviations from Zipf’s law.
    Keywords: Firm size distribution, TFP distribution, Lognormal, Pareto, Zipf’s law, Granularity
    JEL: L11 E24
    Date: 2021–07
  19. By: Chen, Yongmin; Jiang, Haiwei; Liang, Yousha; Pan, Shiyuan
    Abstract: This paper studies how foreign direct investment (FDI) affects innovation in the host country, using matched firm-level patent data of Chinese firms. The data contain multidimensional information about patent counts and citations which, together with an identification strategy based on Lu et al. (2017), allows us to measure innovation comprehensively and to uncover the causal relationship. Our empirical analysis shows that FDI has positive intra-industry effects on the quantity and quality of innovation by Chinese firms. We show that these positive effects are driven by increases in competition, rather than by knowledge spillover from FDI which is measured by patent citations between domestic firms and foreign invested enterprises (FIEs). We further investigate the inter-industry effects of FDI and find that FDI has positive vertical effects on innovation in upstream sectors.
    Keywords: FDI; Innovation; Patent; Competition; Spillover
    JEL: F2 L5 O3
    Date: 2021–07–26
  20. By: Niklas Uliczka
    Abstract: Each successfully completed M&A transaction generates lucrative income opportunities to specific parties involved in deal-making due to compensation mechanisms linked to the transaction value. In theory, this transactional channel of M&A activity might relate to income inequality. The main objective of this study is to provide the first empirical analysis on the relationship between M&A and income shares at the very top of the income distribution. Using an unbalanced panel design with country-year observations from 46 countries allows exploiting cross-sectional along with temporal variation. Methodologically, the Driscoll and Kraay estimator is applied as it is heteroskedasticityconsistent and robust to nonparametric forms of serial and cross-sectional dependence. This study finds statistical evidence for a positive and non-linear association pattern between changes in M&A activity and changes in top income shares, indicating pro-rich effects. Additionally, periods of systematic banking crises significantly intensify the relationship between M&A activity and increasing income concentration.
    Date: 2021–07

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