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on Industrial Competition |
| By: | Mark J. TREMBLAY; Takanori ADACHI; Susumu SATO |
| Abstract: | Firms in traditional markets often compete in output `a la Cournot. In this paper, we consider Cournot platform competition in two-sided markets with single-, multi-, and mixed-homing allocations and find that the markup and markdown terms are distorted toward zero for (i) greater levels of platform competition and (ii) greater levels of singlehoming. Furthermore, we develop side specific conduct parameters that depend on the underlying platform conduct as well as the homing allocation; these effectively extend the monopoly platform Lerner indices from Armstrong (2006) and Weyl (2010) to the general case of platform competition. Finally, we show that, in utter contrast to the welfare results in traditional Cournot markets, greater Cournot platform competition often decreases welfare across all feasible homing allocations. |
| Keywords: | Two-sided markets, conduct parameter, network externality, Lerner index,single-homing, multi-homing, mixed-homing. |
| JEL: | D40 L10 L20 L40 |
| URL: | http://d.repec.org/n?u=RePEc:kue:epaper:e-21-004&r= |
| By: | Robin S. Lee; Michael D. Whinston; Ali Yurukoglu |
| Abstract: | This chapter presents an overview of advances in the structural analysis of contracting in vertical markets over the past fifteen years. We provide a discussion of theoretical models of contracting and bargaining that form the basis of recent empirical work, and then present common approaches used by researchers to take these models to the data. We also briefly survey the structural empirical literature on topics in vertical markets (including horizontal and vertical mergers, price discrimination, and nonlinear and exclusionary contracts), and conclude with a discussion of potential topics for future research. |
| JEL: | L1 L13 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29282&r= |
| 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. |
| JEL: | C01 L0 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29291&r= |
| By: | Steven T. Berry; Philip A. Haile |
| Abstract: | Demand elasticities and other features of demand are critical determinants of the answers to most positive and normative questions about market power or the functioning of markets in practice. As a result, reliable demand estimation is an essential input to many types of research in Industrial Organization and other fields of economics. This chapter presents a discussion of some foundational issues in demand estimation. We focus on the distinctive challenges of demand estimation and strategies one can use to overcome them. We cover core models, alternative data settings, common estimation approaches, the role and choice of instruments, and nonparametric identification. |
| JEL: | C36 D12 L20 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29305&r= |
| By: | Todorova, Tamara |
| Abstract: | We stress some efficiency aspects of monopolistic competition justifying it on account of its tendency to innovate and the questionable excess capacity paradigm. Some further efficiency aspects revealed are product variety and transaction cost savings. We view the monopolistically competitive firm as an essential source of technological innovation, product variety and cost economies. While perfect competition is universally considered a benchmark and a social optimum, we consider it a strongly unrealistic theoretical setup where the monopolistically, rather than the perfectly, competitive firm turns out to be the true type of competition and social optimum in the real world of positive transaction costs. The monopolistically competitive firm not only offers product variety and innovation but is the optimal institutional arrangement under positive transaction costs. |
| Keywords: | efficiency; innovation; variety; monopolistic competition; perfect competition; transaction costs |
| JEL: | D23 D24 D43 L13 O3 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109919&r= |
| By: | Atabek Atayev |
| Abstract: | In many markets buyers are poorly informed about which firms sell the product (product availability) and prices, and therefore have to spend time to obtain this information. In contrast, sellers typically have a better idea about which rivals offer the product. Information asymmetry between buyers and sellers on product availability, rather than just prices, has not been scrutinized in the literature on consumer search. We propose a theoretical model that incorporates this kind of information asymmetry into a simultaneous search model. Our key finding is that greater product availability may harm buyers by mitigating their willingness to search and, thus, softening competition. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.15211&r= |
| By: | Atabek Atayev |
| Abstract: | We analyze competition on nonlinear prices in homogeneous goods markets with consumer search. In equilibrium firms offer two-part tariffs consisting of a linear price and lump-sum fee. The equilibrium production is socially efficient as the linear price of equilibrium two-part tariffs equals to the production marginal cost. Firms thus compete in lump-sum fees, which are dispersed in equilibrium. We show that sellers enjoy higher profit, whereas consumers are worse-off with two-part tariffs than with linear prices. The competition softens because with two-part tariffs firms can make effective per-consumer demand less elastic than the actual demand. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.15198&r= |
| By: | Atabek Atayev; Maarten Janssen |
| Abstract: | Consumers can acquire information through their own search efforts or through their social network. Information diffusion via word-of-mouth communication leads to some consumers free-riding on their "friends" and less information acquisition via active search. Free-riding also has an important positive effect, however, in that consumers that do not actively search themselves are more likely to be able to compare prices before purchase, imposing competitive pressure on firms. We show how market prices depend on the characteristics of the network and on search cost. For example, if the search cost becomes small, price dispersion disappears, while the price level converges to the monopoly level, implying that expected prices are decreasing for small enough search cost. More connected societies have lower market prices, while price dispersion remains even in fully connected societies. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.15288&r= |
| By: | Zehao Chen; Yanchen Zhu; Tianyang Shen; Yufan Ye |
| Abstract: | Most online markets establish reputation systems to assist building trust between sellers and buyers. Sellers' reputations not only provide guidelines for buyers but may also inform sellers their optimal pricing strategy. In this research, we assumed two types of buyer: informed buyers and uninformed buyers. Informed buyers know more about the reputation about the seller but may incur a search cost. Then we developed a benchmark model and a competition model. We found that high reputation sellers and low reputation sellers adapt different pricing strategy depending on the informativeness of buyers and the competition among sellers. With a large proportion of informed buyers, high reputation sellers may charge lower price than low reputation sellers, which exists a negative price premium effect, in contrast to conclusions of some previous studies. Empirical findings were in consistence with our theoretical models. We collected data of five categories of products, televisions, laptops, cosmetics, shoes, and beverages, from Taobao, a leading C2C Chinese online market. Negative price premium effect was observed for TVs, laptops, and cosmetics; price premium effect was observed for beverages; no significant trend was observed for shoes. We infer product value and market complexity are the main factors of buyer informativeness. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2109.12477&r= |
| By: | Chongwoo Choe (Department of Economics, Monash University); Jiajia Cong (School of Management, Fudan University); Chengsi Wang (Department of Economics, Monash University) |
| Abstract: | We study how a data-rich firm can benefit by unilaterally sharing its customer data with a data-poor competitor when the data can be used for price discrimination. By sharing data on consumers that are more loyal to the competitor while keeping the data on the competitor's most loyal consumers to itself, the firm can induce the competitor to raise its price for consumers it does not have data on. This makes both firms better off than without data sharing. |
| Keywords: | customer data sharing, price discrimination |
| JEL: | L11 L13 L40 M30 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2021-10&r= |
| By: | Bernadette A. Minton; Alvaro G. Taboada; Rohan Williamson |
| Abstract: | We examine the effects of bank merger and local market characteristics on local small business lending. Mergers involving small, in-state acquirers are positively associated with small business loan (SBL) originations in counties where target banks are located. Conversely, mergers involving large, out-of-state acquirers are associated with fewer SBL originations. The analysis suggests that the results are driven by acquirer’s choice of target. Small and in-state acquirers target banks that focus more on SBL and targets with strong relationships while large, out-of-state acquirers pursue better performing banks with stronger balance sheets and less focus on SBL. Results are particularly strong in counties with a large number of small firms. Post-merger activity supports banks expanding on their acquisition strategy decisions. The findings suggest that acquirer strategy is important for evaluating the impact of acquisitions on local community development and that one-size-fits-all policy solutions for bank mergers may not produce common local outcomes. |
| JEL: | G21 G34 O1 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29284&r= |
| By: | Ulrich Doraszelski; João F. Gomes; Felix Nockher |
| Abstract: | Access to capital markets plays a key role for the evolution of an industry over time. We develop a benchmark theoretical setting that integrates core corporate finance insights about the impact of financial frictions on investment with those from industrial organization on dynamic competition and industry evolution under perfect capital markets. Using state of the art computational tools to systematically detect and evaluate multiple equilibria and to thoroughly explore the parameter space of our model, we show how, depending on key industry characteristics such as market size, financial frictions impact firms' pricing and investment strategies and the degree of industry concentration. |
| JEL: | G3 L1 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29310&r= |
| By: | Koski, Heli |
| Abstract: | Abstract The report’s main objective is to assess the role that competition has played in the weak development of R&D investments in the Finnish corporate sector in the 2010s. The data suggest that the degree of competition relates to differences in Finland’s industry-level R&D-intensity developments in the 2010s. Industries with declining R&D intensity were mainly concentrated, and the degree of competition in their markets weakened. In competitive industries, R&D intensity did not decrease, or it even increased. In these industries, profitability decreased mainly due to the decline in the profitability of continuing companies, but the impact of the structural change on profitability was positive. These findings reflect that competition was getting fiercer. Thus, the intensified competition in the 2010s increased companies’ R&D investments or, at least, prevented them from shrinking in relation to the value-added produced. We further assessed the relationship between firms’ returns to R&D and found that a decline in the R&D intensity of the Finnish business sector in the 2010s was not directly related to the returns to R&D investments. |
| Keywords: | R&D investments, Competition, Innovation policy |
| JEL: | D22 L0 O3 O31 |
| Date: | 2021–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:rif:report:117&r= |
| By: | Takanori ADACHI; Michal Fabinger |
| Abstract: | This paper provides a comprehensive analysis of welfare effects of taxation under imperfect competition. Specifically, in relation to tax pass-through, we provide “sufficient statistics” formulas for two welfare measures under a fairly general class of demand, production cost, and market competition. The measures are (i) marginal value of public funds (i.e., the marginal loss of social welfare due to an increase in government revenue), and (ii) incidence (i.e., the ratio of a marginal change in consumer surplus to a marginal change in producer surplus). We begin with the case of symmetric firms facing both unit and ad valorem taxes to derive a simple and empirically relevant set of formulas. Then, we provide a substantial generalization of these results to encompass firm heterogeneity by using the idea of tax revenue specified as a general function parameterized by a vector of tax parameters. |
| Keywords: | Imperfect Competition; Pass-through; Marginal Value of Public Funds; Incidence;Sufficient Statistics |
| JEL: | D43 H22 L13 |
| URL: | http://d.repec.org/n?u=RePEc:kue:epaper:e-21-003&r= |
| By: | Hélia Costa; Giuseppe Nicoletti; Mauro Pisu; Christina von Rueden |
| Abstract: | Despite the rising importance and economy-wide effects of online platforms, the paucity of cross-country comparable data still hampers understanding of the structural and policy determinants of their diffusion. This study contributes to the understanding of multi-sided online platforms in three main ways. First, we build a harmonised international dataset of online platforms and their use across 43 OECD and G20 countries, covering the 2013-19 period and nine areas of activity. Second, we describe main trends in the use of platforms in the past years, and third, we investigate the structural and policy determinants of online platforms diffusion across countries and over time. |
| Keywords: | Data collection, digitalisation, online platforms |
| JEL: | C80 M20 O33 |
| Date: | 2021–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:1683-en&r= |
| By: | Karolis Liaudinskas; Kristina GrigaitÄ— |
| Abstract: | We explore Lithuanian credit register data and two bank closures to provide a novel estimate of firms’ bank-switching costs and a novel identification of the hold-up problem. We show that when a distressed bank’s closure forced firms to switch, these firms started borrowing at lower interest rates immediately and permanently. This suggests that firms were held up and overcharged exante, and reveals the lower bound of their ex-ante switching costs. Opaquer firms were overcharged more, which suggests that information asymmetries significantly contribute to switching costs. In line with banks’ reputational concerns, a healthy bank’s closure revealed no overcharging. To policy-makers, our results suggest potential benefits of distressed banks’ closures. |
| Keywords: | switching costs, lending relationships, hold-up, asymmetric information, bank closures, financial distress |
| JEL: | D82 E51 G21 G33 L14 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2021_4&r= |
| By: | Zheng, Han |
| Abstract: | This paper shows that the shipping industry could hamper the endogenous firm selection into production which is conducive to the overall productivity enhancement and welfare gains, through its discriminatory price. Naturally, if the shipping industry charges a higher transport price to the more productive manufacturing firms, sabotaging their competitive edges, those productive firms would not be capable of expanding as well as they otherwise would do under uniform transport fees, leaving enough space for the less productive firms to survive. Therefore, the effect from another source of gains from trade, firm selection is dampened. Elimination of this discriminatory practice could potentially increase the gains from trade. |
| Keywords: | Price discrimination, Shipping industry, Heterogeneous firms, The gains from trade |
| JEL: | F12 L91 R13 R41 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-113&r= |
| By: | Zheng, Han; Fujii, Daisuke |
| Abstract: | Recent empirical research documented that there exists a nonlinear pricing phenomenon in the shipping industry. This paper strives to show how this empirical regularity would alter conventional results in trade literature. This paper also shows that when nonlinear pricing in the shipping industry is considered, while the average productivity is higher conducive to the higher welfare level, the gains from trade are generally lower than the situation without. In addition, the model built in this paper offers micro foundations for the additive trade cost and features an endogenous response of shipping charges to the iceberg trade cost, an empirical finding emphasized in Hummels et al. (2009). In a much broader sense, this paper argues that the heterogeneous firm model offers a lens through which traditional results on some interesting objects, for example, gains from trade, could be altered. |
| Keywords: | Nonlinear pricing, Shipping industry, Heterogeneous firms, The gains from trade |
| JEL: | F12 F14 L25 L91 R41 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hiasdp:hias-e-112&r= |
| By: | Sebastiaan Wijsman |
| Abstract: | This paper presents a game-theoretical model to assess whether banks will introduce negative interest rates to household deposits. This is modelled as a game of incomplete information between two banks which can decrease their interest rates to enhance their interest margins. Savers can decide to stay at their bank, switch to another bank against switching costs, or to use their savings alternatively, such as for investments. We find that banks are more likely to decrease their interest rates if switching costs are higher and the alternatives for savings accounts are less attractive. Surprisingly, we also find that higher switching costs and less attractive alternatives are not necessarily beneficial for banks’ profitability. High switching costs hinder banks to attract savers from competitors and unattractive alternatives may lead to an expensive war of attrition between banks. |
| Keywords: | Retail banking, Bank interest margin, Low interest rate environment, Bank profitability, Switching behavior,, Bank competition |
| Date: | 2021–08–30 |
| URL: | http://d.repec.org/n?u=RePEc:ete:msiper:679825&r= |
| By: | Xiaoqing Chen (School of Economics and Management, Southeast University, Nanjing, Jiangsu, China, and IESEG School of Management, 3 rue de la Digue, F-59000 Lille, France); Kristiaan Kerstens (Univ. Lille, CNRS, IESEG School of Management, UMR 9221 - LEM - Lille Economie Management, F-59000 Lille, France); Qingyuan Zhu (Nanjing University of Aeronautics & Astronautics, College of Economics and Management, Nanjing, China) |
| Abstract: | Swedish district courts have undergone a major mergers and acquisitions program between 2000 and 2010 to centralize activity in larger and fewer courts. The purpose of this contribution is to conduct an efficiency analysis of these courts to identify the eventual efficiency gains. Distinguishing mainly between technical and scale efficiency and determining the returns to scale of individual observations, we try to find the potential rationales behind this merger wave. We are to the best of our knowledge the first to combine traditional convex with nonconvex nonparametric frontier methods to calculate efficiency before and after the mergers. It turns out that the nonconvex methods provide a more cogent ex post explanation of this merger wave. |
| Keywords: | Horizontal merger, Technical efficiency, Scale efficiency, Data Envelopment Analysis, Free Disposal Hull |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ies:wpaper:e202107&r= |