nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒08‒16
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Profitability of behavior based price discrimination By Sumit Shrivastav
  2. Strategic inattention and divisionalization in duopoly By Promit Kanti Chaudhuri
  3. Price discrimination with imperfect consumer recognition By Sumit Shrivastav
  4. Consumer Search and Choice Overload By Volker Nocke; Patrick Rey
  5. Strategic delegation in spatial price discrimination mixed duopoly; Nash is consistent at the presence of a public firm By Michelacakis, Nickolas
  6. A Buyer Power Theory of Exclusive Dealing and Exclusionary Bundling By Claire Chambolle; Hugo Molina
  7. Intermediaries in the Online Advertising Market By Anna D'Annunzio; Antonio Russo
  8. A Model of Oligopoly By Hernán Vallejo
  9. A Characterization of the Herfindahl Hirschman Index and its use in the Horizontal Merger Guidelines By Hernán Vallejo
  10. Inertia, Market Power, and Adverse Selection in Health Insurance: Evidence from the ACA Exchanges By Evan Saltzman; Ashley Swanson; Daniel Polsky
  11. An Experimental Study on Information Acquisition and Disclosure in a Cournot Duopoly Market By Kazunori Miwa
  12. Data-driven mergers and personalization By Zhijun Chen; Chongwoo Choe; Jiajia Cong; Noriaki Matsushima
  13. Relational Contracts and Trust in a High-Tech Industry By Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad O. Stahl
  14. Buying Data from Consumers: The Impact of Monitoring Programs in U.S. Auto Insurance By Yizhou Jin; Shoshana Vasserman
  15. Technology Competition, Cumurative Innovation, and Technological Development Scheme By Masahito Ambashi
  16. Concentration and Resilience in the U.S. Meat Supply Chains By Meilin Ma; Jayson L. Lusk
  17. Renegotiation and Discrimination in Symmetric Procurement Auctions By Leandro Arozamena; Juan-José Ganuza; Federico Weinschelbaum
  18. What do Firms Gain from Patenting? The Case of the Global ICT Industry By Dimitrios Exadaktylos; Mahdi Ghodsi; Armando Rungi
  19. Demand price elasticity of mobile voice communication: A comparative firm level data analysis By Fayçal Sawadogo

  1. By: Sumit Shrivastav (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we analyze the profitability of price discrimination based on recognition of consumers' brand preferences, in a duopoly model with switching costs. We show that, in contrast to existing studies, price discrimination results into higher profits than uniform pricing if consumers are heterogeneous in terms of brand preferences and the extent of such heterogeneity is sufficiently high.
    Keywords: BBPD, Consumer recognition, Price discrimination
    JEL: D43 L13
    Date: 2021–07
  2. By: Promit Kanti Chaudhuri (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, a differentiated product economy is modeled where firms strategically set up autonomous rival divisions and the divisions play the quantity competition game `a la Cournot or by means of monopolistic competition, where the divisions are unaware of the impact of their output either on the firm's total output or on the total industry output. This case of divisions being unaware of the impact of their outputs on the firm's aggregate output or on the industry total output is termed as `Strategic Inattention'. The incentive to divisionalize still remains within the firms even in the case of the `Strategic Inattention', but the incentive is lower than the case of normal Cournot competition. Next in a duopoly, the firms play a three stage game. In the first stage, the firms decide whether to let their divisions utilize or ignore the information on the impact of their individual output on the firm's total output or industry total output. In the second stage the firms strategically decide on the number of divisions and in the final stage the divisions compete against each other in terms of quantity. It is seen that one firm deciding to be inattentive to the information available and the other firm using that information, is the equilibrium outcome. Thus inattentive and attentive firms coexist in a Subgam Perfect Nash Equilibrium. This result is in sharp contrast to the findings of Cellini et al. (2020).
    Keywords: Divisionalization, information, Monopolistic competition, Oligopoly, Strategic interaction
    JEL: D43 L11 L13
    Date: 2021–07
  3. By: Sumit Shrivastav (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we analyze the competitive and welfare effects of imperfect consumer recognition, in a duopoly model with switching costs. We demonstrate that the impact of consumer recognition on firms' pricing strategies, industry profits, and welfare crucially depends on the accuracy of consumer recognition. When the extent of correct recognition is greater than that of incorrect recognition equilibrium profits decrease with correct recognition and increase with incorrect recognition Consumer surplus increases with correct recognition and falls with incorrect recognition. Welfare decreases with correct recognition, while impact of incorrect recognition on welfare is non-monotonic On the other hand, when the extent of correct recognition is less than that of incorrect recognition, the reverse happens with equilibrium profits. The effect of correct recognition on consumer surplus is ambiguous, and it increases with incorrect recognition. Welfare increases with correct recognition and may increase or decrease with incorrect recognition.
    Keywords: BBPD, Consumer recognition, Price discrimination, Imperfect information
    JEL: D43 D80 L13 L40
    Date: 2021–06
  4. By: Volker Nocke; Patrick Rey
    Abstract: We study a model in which a monopoly seller decides which among a set of heterogeneous products to offer, and what prices to charge, and consumers engage in costly (random) sequential search to learn prices and valuations. We show that the equilibrium exhibits choice overload: The larger the product line, the fewer consumers start searching. We provide conditions under which the equilibrium size of the product line is socially excessive (or insufficient). We also characterize equilibria when the seller can position products, thereby allowing the possibility of directed search, and disclose product identity. We show that the best equilibrium for the seller may involve randomizing over product positioning and inducing inefficient search. Finally, we extend our analysis to that of a platform choosing which sellers to host.
    Keywords: sequential consumer search, product variety, choice overload, multiproduct firm, platform
    JEL: L12 L15 D42
    Date: 2021–08
  5. By: Michelacakis, Nickolas
    Abstract: We consider a mixed ownership duopoly delegation model with spatial price discrimination and constant, albeit different, marginal production costs. In contrast to what holds true for a private duopoly, the Nash equilibrium, absent delegation, for a mixed duopoly with discriminatory pricing according to location is both consistent and socially optimal. We find that under Nash conjectures, in most cases, firm owners have a strong incentive to delegate location decisions to managers. In such cases, firms locate closer to each other. The intensity of the competition leads to lower prices, lower profits, for both firms, and increased surplus for the consumer.
    Keywords: mixed duopoly; delegation; spatial competition; consistent conjectures; Nash equilibrium
    JEL: D43 L13 L21 L22 R32
    Date: 2021–08
  6. By: Claire Chambolle (ALISS - Alimentation et sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Hugo Molina (ALISS - Alimentation et sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We develop a unified theory of exclusive dealing and exclusionary bundling. In a framework with two competing manufacturers which supply their product(s) through a monopolist retailer, we show that buyer power restores the profitability of such practices involving inefficient exclusion. The mechanism underlying this exclusion is that the compensation required by the retailer to renounce selling the rival product erodes with its buyer power. Among others, we further show that our theory holds when the buyer power differs across manufacturers or when the retailer can strategically narrow (or expand) its product assortment.
    Keywords: Vertical relations,Buyer power,Exclusive dealing,Exclusionary Bundling,Nash-in-Nash bargaining with Threat of Replacement
    Date: 2021–05–21
  7. By: Anna D'Annunzio; Antonio Russo
    Abstract: A large share of the ads displayed by digital publishers (e.g., newspapers and blogs) are sold via intermediaries (e.g., Google), that have large market power and reportedly allocate the ads in an opaque way. We study the incentives of an intermediary to disclose consumer information to advertisers when auctioning ad impressions. We show that disclosing information that enables advertisers to optimize the allocation of ads on multi-homing consumers is profitable to the intermediary only if advertising markets are sufficiently thick. In turn, we study how disclosure affects the incentives of publishers to outsource the sale of their ads to an intermediary, and relate these incentives to the extent of consumer multi-homing, the competitiveness of advertising markets and the ability of platforms to profile consumers. We show that, even when most consumers multi-home, the publishers may be worse off by outsourcing to the intermediary, in particular if they operate in thin advertising markets. Finally, we study how the intermediary responds to policies designed to enhance transparency or consumer privacy, and the implications of these policies for the online advertising market.
    Keywords: online advertising, intermediary, multi-homing, privacy, transparency
    JEL: D43 D62 L82 M37
    Date: 2021
  8. By: Hernán Vallejo
    Abstract: This article builds a simple model of oligopoly and uses it to make a detailed characterization of the equilibrium prices; quantities; mark-ups; price elasticities of market demand; price elasticities of residual demand; and welfare, all in terms of the parameters of the model. This is done under five different conjectures -Collusion, Threat, Cournot, Stackelberg and Bertrand-. The results of the model are used do comparative statics.
    Keywords: Oligopoly, Collusion, Threat, Cournot, Stackelberg, Bertrand, mark-up
    JEL: C70 C71 D43 L13
    Date: 2021–07–27
  9. By: Hernán Vallejo
    Abstract: This article characterizes the Herfindahl Hirshman Index and its use by the Department of Justice and the Federal Trade Commission of the United States, in their Horizontal Merger Guidelines. The characterization maps ranges of the index with the level of market concentration and its changes due to horizontal mergers and acquisitions, in terms of the number of firms operating in the market and the market share of the largest active firm. The article aims to provide alternative and graphic approaches that may contribute to analyze horizontal mergers and acquisitions in an easier and expedited way, from a market concentration perspective and before there are any changes in strategic interactions or market equilibria.
    Keywords: Horizontal Merger Guidelines, Herfi ndahl Hirshman Index, Market Concentrationand Enhanced Market Power
    JEL: L11 L22
    Date: 2021–07–21
  10. By: Evan Saltzman; Ashley Swanson; Daniel Polsky
    Abstract: We study how inertia interacts with market power and adverse selection in managed competition health insurance markets. We use consumer-level data to estimate a model of the California ACA exchange, in which four firms dominate the market and risk adjustment is in place to manage selection. We estimate high inertia costs, equal to 44% of average premiums. Although eliminating inertia exacerbates adverse selection, it significantly reduces market power such that average premiums decrease 13.2% and annual per-capita welfare increases $902. These effects are substantially smaller in settings without market power and/or risk adjustment. Moreover, converting the ACA's premium-linked subsidies to vouchers mitigates the impact of inertia by reducing market power, whereas reducing high consumer churn in the ACA exchanges increases the impact of inertia by enhancing market power. The impact of inertia is not sensitive to provider network generosity, despite greater consumer attachment to plans with more differentiated provider networks.
    JEL: G22 I11 I13 L1
    Date: 2021–07
  11. By: Kazunori Miwa (Graduate School of Economics, Osaka University)
    Abstract: This study experimentally investigates the interaction between firms f information acquisition decisions and disclosure. In particular, I focus on a Cournot duopoly market under industry-wide demand uncertainty. The results demonstrate that acquiring industry-wide demand information improves firms f production decisions in that firms can adjust their quantity levels depending on the market demand. However, disclosure diminishes a firm fs incentive to acquire such information. This is because once the information, which a firm acquired at a cost, is subsequently disclosed, a rival firm can take a free ride on the disclosed information and make a more informed decision. Hence, disclosure decreases the benefit of acquiring information for the disclosing firm. Taken together, although acquiring information improves production decisions, disclosure decreases the incentive to do so and thus, deteriorates a firm fs internal information environment. This leads to inefficient production, which in turn might have a substantial impact on market outcomes.
    Keywords: Information acquisition; Disclosure; Duopoly; Experiment
    JEL: L13 M41 M48
    Date: 2021–08
  12. By: Zhijun Chen; Chongwoo Choe; Jiajia Cong; Noriaki Matsushima
    Abstract: This paper studies tech mergers that involve a large volume of consumer data. The merger links the markets for data collection and data application through a consumption synergy. The merger-specific efficiency gains exist in the market for data application due to the consumption synergy and data-enabled personalization. Prices fall in the market for data collection due to the merged firm's incentives to expand its outreach in the market for data application. But in the market for data application, prices generally rise as the efficiency gains are extracted away through personalized pricing, rather than being passed on to consumers. When the consumption synergy is large enough, the merger can result in monopolization of both markets, with further consumer harm when stand-alone competitors exit in the long run. We discuss policy implications including various merger remedies.
    Date: 2021–11
  13. By: Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad O. Stahl
    Abstract: We study how informal buyer-supplier relationships in the German automotive industry affect procurement. Using unique data from a survey focusing on these, we show that more trust, the belief that the trading partner acts to maintain the mutual relationship, is associated with both higher quality of the automotive parts and more competition among suppliers. Yet both effects hold only for parts involving unsophisticated technology, not when technology is sophisticated. We rationalize these findings within a relational contracting model that critically focuses on changes in the bargaining power, due to differences in the costs of switching suppliers.
    Keywords: Relational Contracts, Hold-up, Buyer-Supplier Contracts, Bargaining Power
    JEL: D86 L14 L62 O34
    Date: 2021–08
  14. By: Yizhou Jin; Shoshana Vasserman
    Abstract: New technologies have enabled firms to elicit granular behavioral data from consumers in exchange for lower prices and better experiences. This data can mitigate asymmetric information and moral hazard, but it may also increase firms’ market power if kept proprietary. We study a voluntary monitoring program by a major U.S. auto insurer, in which drivers accept short-term tracking in exchange for potential discounts on future premiums. Using a proprietary dataset matched with competitor price menus, we document that safer drivers self-select into monitoring, and those who opt in become yet 30% safer while monitored. Using an equilibrium model of consumer choice and firm pricing for insurance and monitoring, we find that the monitoring program generates large profit and welfare gains. However, large demand frictions hurt monitoring adoption, forcing the firm to offer large discounts to induce opt-in while preventing the unmonitored pool from unraveling given the competitive environment. A counterfactual policy requiring the firm to make monitoring data public would thus further reduce the firm’s incentive to elicit monitoring data, leading to less monitoring and lower consumer welfare in equilibrium.
    JEL: L0
    Date: 2021–07
  15. By: Masahito Ambashi (Institute of Economic Research, Kyoto University)
    Abstract: This paper investigates which technological development scheme is desirable in technology competition and cumulative innovation with significant uncertainty included in the follow-on innovation. Technology competition is likely to generate a socially overincentive for innovation especially when consumer surplus is negligible. This paper first finds that grant-back clause combined with an appropriate distribution of expected profits mitigates the socially overinvestments in both the initial and follow-on technologies, and therefore, improves social welfare. In particular, this paper shows that if a government authority can specify a particular distribution of expected profits between the firms, the socially optimal investment in the initial technology can be realized. On the other hand, assuming significantly positive consumer surplus instead, this paper reveals that competition in the follow-on technology creates higher social welfare as consumer surplus is large.
    Keywords: technology competition, cumulative innovation, initial and follow-on technologies, technological development scheme, grant-back clause
    JEL: L24 O32 O34
    Date: 2021–08
  16. By: Meilin Ma; Jayson L. Lusk
    Abstract: Supply chains for many agricultural products have an hour-glass shape; in between a sizable number of farmers and consumers is a smaller number of processors. The concentrated nature of the meat processing sectors in the United States implies that disruption of the processing capacity of any one plant, from accident, weather, or as recently witnessed – worker illnesses from a pandemic – has the potential to lead to system-wide disruptions. We explore the extent to which a less concentrated meat processing sector would be less vulnerable to the risks of temporary plant shutdowns. We calibrate an economic model to match the actual horizontal structure of the U.S. beef packing sector and conduct counter-factual simulations. With Cournot competition among heterogeneous packing plants, the model determines how industry output and producer and consumer welfare vary with the odds of exogenous plant shutdowns under different horizontal structures. We find that increasing odds of shutdown results in a widening of the farm-to-retail price spread even as packer profits fall, regardless of the structure. Results indicate that the extent to which a more diffuse packing sector performs better in ensuring a given level of output, and thus food security, depends on the exogenous risk of shutdown and the level of output desired; no horizontal structure dominates. These results illustrate the consequences of policies and industry efforts aimed at increasing the resilience of the food supply chain and highlight that there are no easy solutions to improving the short-run resilience by changing the horizontal concentration of meat packing.
    JEL: L11 Q11 Q19
    Date: 2021–07
  17. 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: C72 D44 D82
    Date: 2021–07–29
  18. By: Dimitrios Exadaktylos; Mahdi Ghodsi; Armando Rungi
    Abstract: This study investigates the relationship between patenting activity, productivity, and market competition at the firm level. We focus on the Information and Communication Technology (ICT) industry as a particular case of an innovative sector whose contribution to modern economies is pivotal. For our purpose, we exploit financial accounts and patenting activity in 2009-2017 by 179,660 companies operating in 39 countries. Our identification strategy relies on the most recent approaches for a difference-in-difference setup in the presence of multiple periods and with variation in treatment time. We find that companies being granted patents increase on average market shares by 11%, firm size by 12%, and capital intensity by 10%. Notably, we do not register a significant impact of patenting on firms' productivity after challenging results for reverse causality and robustness checks. Findings are robust after we consider ownership structures separating patents owned by parent companies and their subsidiaries. We complement our investigation with an analysis of market allocation dynamics. Eventually, we argue that policymakers should reconsider the trade-off between IPR protection and market competition, especially when the benefits to firms' competitiveness are not immediately evident.
    Date: 2021–08
  19. By: Fayçal Sawadogo (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne, FERDI - Fondation pour les Etudes et Recherches sur le Développement International)
    Abstract: This study estimates the price elasticity of mobile voice communication in developed and developing countries using quarterly operator data from 2000 to 2017. Using a dynamic panel model through system-GMM, the study finds that the demand price elasticity is higher for operators in developed countries. Controlling for cross-price elasticity with internet data prices reveals that voice communication is a substitute for internet data usage in developed countries. Another important finding is that, for operators in developing countries, the price elasticity decreases with market development level, whereas it increases for those in developed countries. Demand for mobile voice communication is thus more sensitive to price changes in the less penetrated markets in developing countries and the mature markets in developed countries. Furthermore, over time, price elasticity has decreased across operators in developing countries, highlighting the need for updating regulatory frameworks for the telecommunications sector to reflect the sector's various developments. In addition, when formulating regulatory policies, some important economic factors, such as income level and domestic market characteristics, should be considered to avoid losses in consumer welfare. The high estimated price elasticities suggest that operators do not have an obvious interest in engaging in collusive behavior that would hinder competition. Moreover, since there is no differential effect due to operators' positions or market shares, asymmetric regulation of the dominant operators should be avoided.
    Keywords: Econometric demand model,Dynamic panel analysis,Telecommunications services,Comparative analysis
    Date: 2021

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