nep-com New Economics Papers
on Industrial Competition
Issue of 2021‒09‒20
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Competition and Mergers with Strategic Data Intermediaries By David Bounie; Antoine Dubus; Patrick Waelbroeck
  2. On the pro-competitive effects of passive partial backward ownership By Alipranti, Maria; Petrakis, Emmanuel; Skartados, Panagiotis
  3. The Competitive Effects of Vertical Integration in Platform Markets By Jérôme Pouyet; Thomas Trégouët
  4. Asymmetric Information and Differentiated Durable Goods Monopoly: Intra-period versus intertemporal price discrimination By Didier Laussel; Ngo Van Long; Joana Resende
  5. Dynamic Games in Empirical Industrial Organization By Victor Aguirregabiria; Allan Collard-Wexler; Stephen P. Ryan
  6. Contracts as a Barrier to Entry: Impact of Buyer's Asymmetric Information and Bargaining Power By David Martimort; Jérôme Pouyet; Thomas Trégouët
  7. Strategic Inventories in a Supply Chain with Downstream Cournot Duopoly By Xiaowei Hu; Jaejin Jang; Nabeel Hamoud; Amirsaman Bajgiran
  8. Anticompetitive Vertical Merger Waves By Johan Hombert; Jérôme Pouyet; Nicolas Schutz
  9. Renegotiation and Discrimination in Symmetric Procurement Auctions By Leandro Arozamena; Juan José Ganuza; Federico Weinschelbaum
  10. Improving recycling: How far should we go? By Belleflamme, Paul; Ha, Huan
  11. Global Value Chains and Unequal Exchange- Market Power and Monopoly Power By Deepankar Basu; Ramaa Vasudevan
  12. Churning and profitability in the U.S. Corporate Sector By Leila Davis; Joao de Souza
  13. How to Regulate Airports? By David Martimort; Guillaume Pommey; Jerome Pouyet
  14. Collusion among autonomous pricing algorithms utilizing function approximation methods By Jeschonneck, Malte
  15. Reducing uncertainty in price regulation for fibre-based, open-access platforms By Beltrán, Fernando
  16. Towards Profitable Growth in E-Grocery Retailing - the Role of Store and Household Density By Paul, J.; Agatz, N.A.H.; Fransoo, J.C.
  17. Pollution Permits in Oligopolies: The role of abatement technologies By Clémence Christin; Jean-Philippe Nicolaï; Jérôme Pouyet
  18. Incentives for Collective Innovation By Gregorio Curello

  1. By: David Bounie (IP Paris - Institut Polytechnique de Paris); Antoine Dubus (ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]); Patrick Waelbroeck (Télécom Paris)
    Abstract: We analyze competition between data intermediaries collecting information on consumers, which they sell to firms for price discrimination purposes. We show that competition between data intermediaries benefits consumers by increasing competition between firms, and by reducing the amount of consumer data collected. We argue that merger policy guidelines should investigate the effect of the data strategies of large intermediaries on competition and consumer surplus in related markets.
    Date: 2021–09–07
  2. By: Alipranti, Maria; Petrakis, Emmanuel; Skartados, Panagiotis
    Abstract: We consider a vertically related market in which an upstream monopolist supplier trades, via interim observable two-part tariff contracts, with two differentiated goods' downstream Cournot competitors. We show that passive partial backward ownership (PPBO) may be pro-competitive and welfare enhancing. PPBO exacerbates the upstream's commitment problem and yields lower wholesale prices, and higher industry output, consumers surplus, and welfare than in the absence of PPBO.
    Keywords: Passive Partial Backward Ownership; Vertical Relations; Two-Part Tariffs; Interim Observable Contracts
    JEL: D43 L13 L14
    Date: 2021–09–14
  3. By: Jérôme Pouyet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, ESSEC Business School - Essec Business School); Thomas Trégouët (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: We analyze vertical integration between platforms providing operating systems to manufacturers of devices in presence of indirect network effects between buyers of devices and developers of applications. Vertical integration creates market power over non-integrated manufacturers and application developers. That market power provides the merged entity with the ability to coordinate pricing decisions across both sides of the market, which allows to better internalize network effects. Vertical integration does not systematically lead to foreclosure and can benefit all parties, even in the absence of efficiency gains. Its competitive impact depends on the strength and the structure of indirect network effects.
    Keywords: vertical integration,platform markets,network effects,foreclosure
    Date: 2021–08–30
  4. By: Didier Laussel; Ngo Van Long; Joana Resende
    Abstract: A durable good monopolist faces a continuum of heterogeneous customers who make purchase decisions by comparing present and expected price-quality offers. The monopolist designs a sequence of price-quality menus to segment the market. We consider the Markov Perfect Equilibrium (MPE) of a game where the monopolist is unable to commit to future price-quality menus. We obtain the novel results that (a) under certain conditions, the monopolist covers the whole market in the first period (even when a static Mussa-Rosen monopolist would not cover the whole market), because this is a strategic means to convince customers that lower prices would not be offered in future periods, and that (b) this can happen only under the stage-wise Stackelberg leadership assumption (whereby consumers base their expectations on the value of the state variable at the end of the period). Conditions under which MPE necessarily involve sequentially trading are also derived. Un monopoleur de biens durables fait face à un continuum de clients hétérogènes qui prennent des décisions d'achat en comparant les offres qualité-prix actuelles et attendues. Le monopole conçoit une séquence de menus qualité-prix pour segmenter le marché. Nous considérons l'équilibre parfait de Markov (MPE) d'un jeu où le monopoleur est incapable de s'engager sur les futurs menus de qualité-prix. Nous prouvons que (a) dans certaines conditions, le monopoleur couvre l'ensemble du marché dans la première période (même lorsqu'un monopoleur statique de Mussa-Rosen ne couvrirait pas l'ensemble du marché), car c'est un moyen stratégique de convaincre les clients que des prix plus bas ne seraient pas proposés dans les périodes futures, et que (b) cela ne peut se produire que sous l'hypothèse de leadership par étapes de Stackelberg (dans laquelle les consommateurs fondent leurs attentes sur la valeur de la variable d'état à la fin de la période). Les conditions dans lesquelles le MPE implique nécessairement des échanges séquentiels sont également dérivées.
    Keywords: Intertemporal price discrimination,Durable goods monopoly,Product quality,Markov perfect equilibrium, Discrimination tarifaire intertemporelle,Monopoleur des biens durables,La qualité des produits,équilibre parfait de Markov
    JEL: C73 D42 L12 L15
    Date: 2021–09–07
  5. By: Victor Aguirregabiria; Allan Collard-Wexler; Stephen P. Ryan
    Abstract: This survey is organized around three main topics: models, econometrics, and empirical applications. Section 2 presents the theoretical framework, introduces the concept of Markov Perfect Nash Equilibrium, discusses existence and multiplicity, and describes the representation of this equilibrium in terms of conditional choice probabilities. We also discuss extensions of the basic framework, including models in continuous time, the concepts of oblivious equilibrium and experience-based equilibrium, and dynamic games where firms have non-equilibrium beliefs. In section 3, we first provide an overview of the types of data used in this literature, before turning to a discussion of identification issues and results, and estimation methods. We review different methods to deal with multiple equilibria and large state spaces. We also describe recent developments for estimating games in continuous time and incorporating serially correlated unobservables, and discuss the use of machine learning methods to solving and estimating dynamic games. Section 4 discusses empirical applications of dynamic games in IO. We start describing the first empirical applications in this literature during the early 2000s. Then, we review recent applications dealing with innovation, antitrust and mergers, dynamic pricing, regulation, product repositioning, advertising, uncertainty and investment, airline network competition, dynamic matching, and natural resources. We conclude with our view of the progress made in this literature and the remaining challenges.
    Keywords: Dynamic games; Industrial organization; Market competition; Structural models; Estimation; Identification; Counterfactuals
    JEL: C57 C63 C73 L11 L13
    Date: 2021–09–03
  6. By: David Martimort (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, EHESS - École des hautes études en sciences sociales); Jérôme Pouyet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, ESSEC Business School - Essec Business School); Thomas Trégouët (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: An incumbent seller contracts with a buyer and faces the threat of entry. The contract stipulates a price and a penalty for breach if the buyer later switches to the entrant. Sellers are heterogenous in terms of the gross surplus they provide to the buyer. The buyer is privately informed on her valuation for the incumbent's service. Asymmetric information makes the incumbent favor entry as it helps screening buyers. When the entrant has some bargaining power vis-à-vis the buyer and keeps a share of the gains from entry, the incumbent instead wants to reduce entry. The compounding effect of these two forces may lead to either excessive entry or foreclosure, and possibly to a fixed rebate for exclusivity given to all buyers.
    Keywords: foreclosure,excessive entry,exclusionary behavior,incomplete information
    Date: 2021–08–30
  7. By: Xiaowei Hu; Jaejin Jang; Nabeel Hamoud; Amirsaman Bajgiran
    Abstract: The inventories carried in a supply chain as a strategic tool to influence the competing firms are considered to be strategic inventories (SI). We present a two-period game-theoretic supply chain model, in which a singular manufacturer supplies products to a pair of identical Cournot duopolistic retailers. We show that the SI carried by the retailers under dynamic contract is Pareto-dominating for the manufacturer, retailers, consumers, the channel, and the society as well. We also find that retailer's SI, however, can be eliminated when the manufacturer commits wholesale contract or inventory holding cost is too high. In comparing the cases with and without downstream competition, we also show that the downstream Cournot duopoly undermines the profits for the retailers, but benefits all others.
    Date: 2021–09
  8. By: Johan Hombert (HEC Paris - Ecole des Hautes Etudes Commerciales); Jérôme Pouyet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, ESSEC Business School - Essec Business School); Nicolas Schutz (Universität Mannheim [Mannheim])
    Abstract: We develop a model of vertical merger waves and use it to study the optimal merger policy. As a merger wave can result in partial foreclosure, it can be optimal to ban a vertical merger that eliminates the last unintegrated upstream firm. Such a merger is more likely to worsen market performance when the number of downstream firms is large relative to the number of upstream firms,
    Date: 2020–02–05
  9. By: Leandro Arozamena (Universidad Torcuato Di Tella / CONICET); Juan José Ganuza (Universitat Pompeu Fabra / Barcelona GSE); Federico Weinschelbaum (Universidad Torcuato Di Tella / CONICET)
    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) evenwhen 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: 2021–08
  10. By: Belleflamme, Paul (Université catholique de Louvain, LIDAM/CORE, Belgium); Ha, Huan (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: We analyze the strategic interaction between competing firms that source their inputs from either primary or recycled material. Because the manufacturers’ primary production today serves as input for the recyclers’ production tomorrow, manufacturers can limit the recyclers’ scale of operation by reducing their output. Improving the recycling process generates then two opposite effects: it reduces primary production tomorrow by exposing manufacturers to stronger competition from recyclers, but it also lowers the manufacturers’ incentives to reduce their primary production today. Making the recycling process too efficient might then be counterproductive for the environment. This intuition equally applies to remanufacturing.
    Keywords: Recycling, remanufacturing, circular economy, strategic entry accommodation
    JEL: L13 L72 O13 Q58
    Date: 2021–07–01
  11. By: Deepankar Basu (Department of Economics, University of Massachusetts Amherst); Ramaa Vasudevan (Department of Economics, Colorado State University.)
    Abstract: We revisit the hypotheses of unequal exchange and deteriorating terms of trade in the specific context of import-intensive, export- led strategies of developing countries which rely on integration into GVCs for access to markets in developed countries using a stylized two-country two-commodity Classical- Marxian trade model. Two sources of asymmetry can be distinguished: market power arising from the competition between suppliers that depresses the prices at which the final good is supplied; and monopoly power arising from the lead firms control and ownership of intangible assets including brand and design. The model explores some implications of these two sources of asymmetry.
    Keywords: Unequal Exchange, Global Value Chains, Classical Trade Model
    JEL: F02 F23 O19
    Date: 2021
  12. By: Leila Davis (Department of Economics, University of Massachusetts Boston); Joao de Souza (Department of Economics, University of Massachusetts Boston)
    Abstract: This paper establishes that entry and exit regulate the top half of the profitability distribution in the post-1970 U.S. economy. We, first, document stability in the distribution of total profits earned on tangible, intangible, and financial capital. Whereas a narrower measure of returns on tangible capital, instead, suggests rising dispersion, it fails to capture post-1970 growth in intangible and financial assets. Second, we use quantile decompositions to show that churning – specifically, exit for cause – regulates median and top-end profitability. Thus, the process by which competition drives out unprofitable firms acts to stabilize profit rates in the U.S. economy.
    Keywords: Profit rates, competition, entry and exit dynamics
    JEL: B5 L1
    Date: 2021
  13. By: David Martimort (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, EHESS - École des hautes études en sciences sociales); Guillaume Pommey (Università degli Studi di Roma Tor Vergata [Roma]); Jerome Pouyet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, ESSEC Business School - Essec Business School)
    Abstract: Modern airports provide commercial services to passengers in addition to aeronautical services to airlines. We analyze how the airport's market power impacts the pricing of services when the airport also invests in the quality of its infrastructure. There is a need to regulate the airport and the optimal regulation can be implemented with a price-cap and a subsidy scheme targeted to the investment. The choice between a single-till and a dual-till approach does change neither the optimal regulation nor its implementation. We also investigate the consequences on the optimal regulation of the nature of the airport-airline relationship and of the observability of investment.
    Keywords: airports,regulation,commercial services,investment
    Date: 2021–08–30
  14. By: Jeschonneck, Malte
    Abstract: The increased prevalence of pricing algorithms incited an ongoing debate about new forms of collusion. The concern is that intelligent algorithms may be able to forge collusive schemes without being explicitly instructed to do so. I attempt to examine the ability of reinforcement learning algorithms to maintain collusive prices in a simulated oligopoly of price competition. To my knowledge, this study is the first to use a reinforcement learning system with linear function approximation and eligibility traces in an economic environment. I show that the deployed agents sustain supra-competitive prices, but tend to be exploitable by deviating agents in the short-term. The price level upon convergence crucially hinges on the utilized method to estimate the qualities of actions. These findings are robust to variations of parameters that control the learning process and the environment.
    Date: 2021
  15. By: Beltrán, Fernando
    Date: 2021
  16. By: Paul, J.; Agatz, N.A.H.; Fransoo, J.C.
    Abstract: Despite the continued growth of e-grocery sales, few companies actually make any profits in this retail segment. Increasing market shares and associated drop densities may render profitable operations possible, but higher delivery fees seem essential to achieving profitability. Yet such higher fees may put e-groceries at a disadvantage as compared with the traditional store channel, which remains highly competitive. This study models customer choice between the e-grocery channel and the store channel as well as the effects of that choice on those channels’ operational costs and market shares. We identify conditions under which e-grocery retail can be profitable, and we estimate our model’s parameters using secondary industry data. Our results indicate that e-grocery is profitable when household density is high and store density is low. When customer valuation of the e-grocery channel increases substantially, the result may be cannibalization of the store channel’s sales to the extent that stores encounter losses. Thus there are three paths to e-grocery profitability:(i) a substantial increase in the relative consumer valuation of the online channel; (ii) a focus on areas with high household density and low store density; (iii) a long-term subsidy of the online channel until stores begin to close.
    Keywords: E-Grocery, Customer-channel model, Channel cannabalization
    Date: 2021–09–15
  17. By: Clémence Christin (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - CNRS - Centre National de la Recherche Scientifique); Jean-Philippe Nicolaï (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Jérôme Pouyet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, ESSEC Business School - Essec Business School)
    Abstract: This paper examines, under imperfect competition, the effect of a cap-and-trade system on industry profits and the interaction between cap-and-trade system and the evolution of the market structure, both depending on the type of abatement technologies used by firms. Two extreme types are considered: end-of-pipe abatement technology-meaning, filtration and other mechanisms that are largely independent of production decisionsand process-integrated technology, which entails integrating cleaner or more energy-efficient methods into production. This paper prescribes that the distribution of free allocation should depend on the kind of abatement technologies. Finally, a reserve of pollution permits for new entrants is justified when the industry uses a process-integrated abatement technology, while a system with a preemption right may be justified in the case of end-of-pipe abatement technology.
    Keywords: cap-and-trade system,imperfect competition,end-of-pipe abatement,process-integrated abatement,reserve for entrants
    Date: 2021–08–30
  18. By: Gregorio Curello
    Abstract: Innovators with shared interests face a dynamic collective-action problem with two special features: uncertainty about the returns to (research) effort, and an exploration-exploitation trade-off in which exploitation becomes more attractive as discoveries accumulate. I study this problem in a general model with long-lived firms that exert effort to obtain improvements of random size in a technology they share. The firms' flow payoffs grow as the technology improves, but so does the marginal cost of effort. In (the unique symmetric Markov) equilibrium, small discoveries may hurt all firms simultaneously as they drastically reduce effort. Allowing each firm to discard the innovations it obtains (after observing their size) yields uniformly higher effort and welfare in equilibrium. If firms may instead conceal innovations from the others for a period of time, under linear payoffs, there exists an equilibrium in which improvements are kept secret until they reach a cutoff, and effort stops after disclosure. Although concealment is inefficient due to forgone benefits and the risk of redundancy, firms may be better off compared to the baseline equilibrium with forced disclosure.
    Date: 2021–09

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