nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒01‒10
25 papers chosen by
Russell Pittman
United States Department of Justice

  1. Single monopoly profits, vertical mergers, and downstream entry deterrence By Hunold, Matthias; Schad, Jannika
  2. We develop a model of vertical mergers with open auctions upstream. This setting may be appropriate for industries where inputs are procured via auction-like “requests for proposal.” For example, Drennan et al (2020) reports that a model of this type was used during the CVS-Aetna merger investigation. Our approach contrasts with a growing body of work on vertical mergers where input prices are determined through Nash bargaining. We discuss how the vertical merger effects of raising rivals’ costs and eliminating double markup might be quantified in our particular model. By Joseph U. Podwol; Alexander Raskovich
  3. This paper estimates how beer franchise laws and their interaction with restrictions on vertical integration between manufacturing and wholesaling impacted US craft brewers’ entry and production decisions. The effects are identified by exploiting variation in policies across states and time between 1980 and 2016. I find that beer franchise laws significantly reduced craft brewery entry and growth, leading to lower levels of breweries and craft beer production. The effects are largest in states that place restrictions on brewery/wholesaler integration. The findings in this paper indicate that contract termination restrictions, which were legislated to protect wholesalers from upstream brewers, had the effect of encouraging opportunism from wholesalers and inhibited the growth of smaller firms in the industry. By Jacob Burgdorf
  4. Platform Competition with Free Entry of Sellers By Federico Etro
  5. Hybrid Marketplaces with Free Entry of Sellers By Federico Etro
  6. The impacts of suppliers and mutual outsourcing on organizational forms By Yasuhiro Arai; Noriaki Matsushima
  7. Bank consolidation, interest rates, and risk: A post-merger analysis based on loan-level data from the corporate sector By Juranek, Steffen; Nilsen, Øivind A.; Ulsaker, Simen A.
  8. Lifetime employment and reaction functions of socially concerned firms under quantity competition By Ohnishi, Kazuhiro
  9. Collusive compensation schemes aided by algorithms By Martin, Simon; Schmal, W. Benedikt
  10. Pasaje de costos a precios: evidencia microeconómica para comercios minoristas en Uruguay By Pablo Blanchard
  11. Detecting Edgeworth Cycles By Timothy Holt; Mitsuru Igami; Simon Scheidegger
  12. Incorporating Search and Sales Information in Demand Estimation By Ali Hortaçsu; Olivia R. Natan; Hayden Parsley; Timothy Schwieg; Kevin R. Williams
  13. Minimum Wages in Concentrated Labor Markets By Martin Popp
  14. Evaluating the US pharmaceutical patent policy By Izhak, Olena; Saxell, Tanja; Takalo, Tuomas
  15. Language, internet and platform competition By Doh-Shin Jeon; Bruno Jullien; Mikhail Klimenko
  16. The Economics of Platforms: A Theory Guide for Competition Policy By Bruno Jullien; Wilfried Sand-Zantman
  17. Product market structure and monetary policy: evidence from the Euro Area By Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
  18. Market power and artificial intelligence work on online labour markets By Néstor Duch-Brown; Estrella Gomez-Herrera; Frank Mueller-Langer; Songül Tolan
  19. Effects of migration with endogenous labor supply and heterogeneous skills By M. Delogu; D. Paolini; G. Atzeni; LG Deidda
  20. Mobile Payments and Interoperability: Insights from the Academic Literature By Bianchi, Milo; Bouvard, Matthieu; Gomes, Renato; Rhodes, Andrew; Shreeti, Vatsala
  21. Multi-plant Coordination in the US Beef Packing Industry By Christopher C. Pudenz; Lee L. Schulz
  22. Occupational Licensing and Intra-MSA Effects: Massage Therapists in the US By Noah J. Trudeau
  23. Learning by litigating: An application to antitrust commitments By Andreea Cosnita-Langlais; Jean-Philippe Tropeano
  24. Optimal Price Targeting By Adam N. Smith; Stephan Seiler; Ishant Aggarwal
  25. The Destruction of Price-Representativeness By LEOGRANDE, ANGELO

  1. By: Hunold, Matthias; Schad, Jannika
    Abstract: We review the Chicago school's single monopoly profit theory whereby an upstream monopolist cannot increase its profits through vertical integration as it has sufficient market power anyways. In our model the dominant supplier has full bargaining power and uses observable two-part tariffs. We show that, by vertically integrating with a downstream incumbent, the supplier can profitably commit to pricing more aggressively if a downstream entrant refuses its supply contract. This can deter welfare-enhancing entry. The anti-competitive effects arise from the seemingly pro-competitive elimination of double marginalization. We relate our model to hybrid platforms and, in particular, Apple's App store.
    Keywords: double marginalization,entry deterrence,exclusive dealing,foreclosure,verticalmerger
    JEL: L22 L40 L42
    Date: 2021
  2. By: Joseph U. Podwol (U.S. Department of Justice); Alexander Raskovich (U.S. Department of Justice)
    Date: 2021–12
  3. By: Jacob Burgdorf (U.S. Department of Justice)
    Date: 2021–11
  4. By: Federico Etro
    Abstract: We study platforms setting access prices and commissions on revenues of sellers engaged in monopolistic competition with free entry, as the app providers on the app stores of Apple and Android devices. Competition to attract buyers and sellers induces the platforms to redistribute all the revenues through lower access prices and set the optimal commission rates from the point of view of consumers, taking into account the pass-through on the prices of sellers, the elasticities of demand and surplus for their services and the elasticity of entry with respect to profitability. We discuss the role of heterogeneous sellers, substitutability between sellers's products and the introduction of platforms's products, as well as some limitations of the basic alignment of interest of platforms and consumers due to direct channels for sellers and consumer myopia.
    Keywords: Digital platforms, Third-party Sellers, Commissions, Entry.
    JEL: L1 L4
    Date: 2021
  5. By: Federico Etro
    Abstract: We study a hybrid marketplace such as Amazon selling its own products and setting commissions on sellers engaged in monopolistic competition with free entry. For a large class of microfoundations based on a representative agent, the introduction of products by the marketplace is neutral on consumer welfare for a given commission, but exerts an ambiguous impact through its changes: a "demand substitution mechanism" pushes for a higher commission, but an "extensive margin mechanism" pushes for a lower commission aimed at attracting new sellers and more purchases on the marketplace. With constant demand elasticities, a hybrid marketplace sets a lower (higher) commission rate and increases (decreases) consumer welfare compared to a pure marketplace if its products face a less (more) elastic demand. We extend the analysis to alternative timing, Bertrand competition between sellers, endogenous product selection by the marketplace, specific commissions and ads for product discovery.
    Keywords: Hybrid marketplaces, 3P Sellers, Commissions, Entry, Monopolistic Competition.
    JEL: L1 L4
    Date: 2021
  6. By: Yasuhiro Arai; Noriaki Matsushima
    Abstract: We consider a downstream duopoly model with a monopolistic common supplier and mutual outsourcing between the two symmetric downstream firms. The market structure captures the recent procurement environment in the smartphone industry. We also incorporate managerial delegations into the duopoly model because deciding on organizational forms within a firm is critical to achieving better performance in almost all industries. There is an equilibrium in which only one of the firms delegates its downstream production to its sales manager. A delegating firm becomes less aggressive. The profits when both firms delegate can be higher than those when no firm delegates. The total surplus when both firms delegate is smaller than that when no firm delegates.
    Date: 2021–12
  7. By: Juranek, Steffen (Dept. of Business and Management Science, Norwegian School of Economics and Business Administration); Nilsen, Øivind A. (Dept. of Economics, Norwegian School of Economics and Business Administration); Ulsaker, Simen A. (Telenor research)
    Abstract: In this paper we analyse the bank merger between DnB and Gjensidige Bank in 2003, ranked by market share as number one and number three in the Norwegian bank market. Focusing on loans to firms, our difference-in-differences analysis shows no increase of concentration of new loans. The concentration in affected markets (markets where both merging parties were present) developed similarly to unaffected markets. Moreover, the interest rate tended to be lower in the affected markets relative to unaffected markets, but this relationship is weak and not statistically significant. The merger also affected the riskiness of loans only marginally. These weak effects could be the result of efficiency gains in the form of lower costs being pass-through to customers, and the increased market power (and consequently higher interest rates) cancelled each other out. The remedial measures imposed by the Norwegian Competition Authority on the two merging parties are also likely to explain some of the modest effects of the merger. The weak effects are largely coincident with international literature showing the effects of mergers and acquisitions in the banking sector to be modest.
    Keywords: banking; local competition; risk taking; firm behaviour
    JEL: D53 G21 L41
    Date: 2021–11–29
  8. By: Ohnishi, Kazuhiro
    Abstract: This paper considers a Cournot oligopoly model with a concave demand function where socially concerned firms can offer lifetime employment as a strategic commitment device. Each socially concerned firm maximizes its own profit plus a share of consumer surplus. The paper presents the reaction functions of socially concerned firms in the Cournot oligopoly model.
    Keywords: Cournot oligopoly model; Lifetime employment; Reaction functions; Socially concerned firms
    JEL: C72 D21 L20
    Date: 2021–11–30
  9. By: Martin, Simon; Schmal, W. Benedikt
    Abstract: Sophisticated collusive compensation schemes such as assigning future market shares or direct transfers are frequently observed in detected cartels. We show formally why these schemes are useful for dampening deviation incentives when colluding firms are temporary asymmetric. The relative attractiveness of each of these schemes is shaped by firms' ability to predict future market conditions, possibly aided by algorithms. Prices and profits are inverse u-shaped in prediction ability. Assigning future market shares is optimal when prediction ability is intermediate, and otherwise direct transfers are optimal. Competition authority's limited resources should be utilized to respond to these changing market conditions.
    Keywords: algorithmic collusion,market forecasting,prediction ability,firm asymmetry,compensation schemes
    JEL: D21 L41 L51
    Date: 2021
  10. By: Pablo Blanchard (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: In this paper, I estimate the pass-through rates of cost to prices in small and medium retail stores for rice, tomato pulp and flour in Uruguay using a structural model. A demand system for differentiated products is estimated using a logit model of random coefficients. I use the demand estimation jointly with pricing rules in order to recover marginal costs, profit margins and the pass-through rates. I found pass through rates ranging from 25% to 86% in median for the whole country under Nash-Bertrand price competition and ratios between 11% and 78% when collusion is assumed. I use information about prices and quantities sold to beneficiaries of a Uruguayan social program. The work presents two relevant limitations in terms of the information used: only the quantities acquired through the social program are available and there is no information available for the universe of the varieties of each product.
    Keywords: D43, L11, L81
    Date: 2021–11
  11. By: Timothy Holt; Mitsuru Igami; Simon Scheidegger
    Abstract: We propose algorithms to detect "Edgeworth cycles", asymmetric price movements that have caused antitrust concerns in many countries. We formalize four existing methods and propose six new methods based on spectral analysis and machine learning. We evaluate their accuracy in station-level gasoline-price data from Western Australia, New South Wales, and Germany. Most methods achieve high accuracy in the first two, but only a few can detect nuanced cycles in the third. Results suggest whether researchers find a positive or negative statistical relationship between cycles and markups, and hence their implications for competition policy, crucially depends on the choice of methods.
    Keywords: Edgeworth cycles, Fuel prices, Markups, Nonparametric methods
    JEL: C45 C55 L13 L41
    Date: 2021–11
  12. By: Ali Hortaçsu; Olivia R. Natan; Hayden Parsley; Timothy Schwieg; Kevin R. Williams
    Abstract: We propose an approach to modeling and estimating discrete choice demand that allows for a large number of zero sale observations, rich unobserved heterogeneity, and endogenous prices. We do so by modeling small market sizes through Poisson arrivals. Each of these arriving consumers then solves a standard discrete choice problem. We present a Bayesian IV estimation approach that addresses sampling error in product shares and scales well to rich data environments. The data requirements are traditional market-level data and measures of consumer search intensity. After presenting simulation studies, we consider an empirical application of air travel demand where product-level sales are sparse. We find considerable variation in demand over time. Periods of peak demand feature both larger market sizes and consumers with higher willingness to pay. This amplifies cyclicality. However, observed frequent price and capacity adjustments offset some of this compounding effect.
    JEL: C10 C11 C13 C18 L93
    Date: 2021–12
  13. By: Martin Popp
    Abstract: Economists increasingly refer to monopsony power to reconcile the absence of negative employment effects of minimum wages with theory. However, systematic evidence for the monopsony argument is scarce. In this paper, I perform a comprehensive test of monopsony theory by using labor market concentration as a proxy for monopsony power. Labor market concentration turns out substantial in Germany. Absent wage floors, a 10 percent increase in labor market concentration makes firms reduce wages by 0.5 percent and employment by 1.6 percent, reflecting monopsonistic exploitation. In line with perfect competition, sectoral minimum wages lead to negative employment e ects in slightly concentrated labor markets. This effect weakens with increasing concentration and, ultimately, becomes positive in highly concentrated or monopsonistic markets. Overall, the results lend empirical support to the monopsony argument, implying that conventional minimum wage e ects on employment conceal heterogeneity across market forms.
    Keywords: minimum wage, labor market concentration, monopsony, labor demand
    JEL: J42 J38 D41 J23
    Date: 2021–12
  14. By: Izhak, Olena; Saxell, Tanja; Takalo, Tuomas
    Abstract: The debate on whether COVID-19 vaccine patents are slowing down the pace of vaccination and the recovery from the crisis has brought the optimal design of pharmaceutical patent policy to the fore. In this paper we evaluate patent policy in the US pharmaceutical industry. We estimate the effect of patent length and scope on generic entry prior to the expiration of new drug patents using two quasi-experimental approaches: one based on changes in patent laws and another on the allocation of patent applications to examiners. We find that extending effective patent length increases generic entry whereas broadening protection reduces it. To assess the welfare effects of patent policy, we match these empirical results with a model of new drug development, generic entry, and patent length and scope. Optimal policy calls for shorter but broader pharmaceutical patents.
    JEL: I18 K20 L13 O34 O31
    Date: 2021–12–29
  15. By: Doh-Shin Jeon; Bruno Jullien (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Mikhail Klimenko
    Date: 2021–07
  16. By: Bruno Jullien (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Wilfried Sand-Zantman
    Date: 2021–03
  17. By: Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier
    Abstract: Monetary policy aims at affecting corporate borrowing by influencing the marginal costs of firms, but its potency can be conditioned by the degree of market competition. We first identify conditions under which changes in marginal costs may have different effects on credit constraints and output under different competitive environment, in a simple Cournot competition setting. We then exploit changes in monetary policy to examine whether the pass-through of borrowing costs is affected by market structure. First, we use as an experiment the announcement of the ECB Outright Monetary Transactions (OMT) program in a triple-differences specification. We show that small firms (which have low market power and higher credit constraints) in "stressed" countries (which benefited more from the policy) within less concentrated sectors experienced a larger reduction in credit constraints than similar firms in more concentrated sectors. Second, we exploit continuous state-of-the-art measures of monetary policy shocks to study how market structure affects pass-through to real variables, like investment and sales growth. We find evidence that firms with more market power respond less to monetary policy shocks. These results show that the interaction of borrowing capacity and market structure matters, and that concentration may have important effects on monetary policy transmission. JEL Classification: D4, E4, E5, L1
    Keywords: competition, credit constraints, marginal costs, monetary transmission, OMT
    Date: 2021–12
  18. By: Néstor Duch-Brown; Estrella Gomez-Herrera; Frank Mueller-Langer; Songül Tolan
    Abstract: The views are those of the authors and should not be regarded as stating an official position of the European Commission. Frank Mueller-Langer gratefully acknowledges financial support from a research grant of the University of the Bundeswehr Munich. We investigate three alternative but complementary indicators of market power on one of the largest online labour markets (OLMs) in Europe- (1) the elasticity of labour demand, (2) the elasticity of labour...
    Date: 2021–12
  19. By: M. Delogu; D. Paolini; G. Atzeni; LG Deidda
    Abstract: We analyze the effects of migration allowing for endogenous labor supply in a standard two-region model with monopolistically competitive producers and love for variety. We find that the welfare effects of migration depend on firms' market power in the final good markets. If market power is sufficiently high, migration of low-skill individuals positively affects the welfare of native high skill individuals in the destination region, while low skill individuals are unaffected. Natives of the origin region are always better off, irrespective of their skills. Differently, if market power is sufficiently low, low skill migration makes both high and low individuals native of the destination region better off.
    Keywords: Welfare Analysis;Monopolistic Competition;migration;Labor Supply
    Date: 2021
  20. By: Bianchi, Milo; Bouvard, Matthieu; Gomes, Renato; Rhodes, Andrew; Shreeti, Vatsala
    Abstract: We connect various streams of academic literature to shed light on how the degree of interoperability in mobile payments affects market outcomes and welfare. We organize our discussion around four dimensions of interoperability. First, we consider mobile network interoperability (whether clients of one telecom can access another telecom’s payment services) in connection with the IO literature on tying. Second, we discuss platform level interoperability (the ability to send money offnetwork) in light of the literature on compatibility. We also build on the behavioral IO literature to suggest how the effects of interoperability may be very heterogeneous across various types of firms and consumers, or even backfire. Third, we consider interoperability in the cash-in-cash-out agent network, in light of the literature on co-investment in network industries, and of more specific studies on ATMs’ interoperability. Fourth, we discuss how the literature in banking and on data ownership can be used to understand interoperability of data. We conclude with some broader remarks on policy implications and on possible directions for future research.
    Keywords: Mobile Payments, Interoperability, Financial Inclusion, Competition; Policy.
    JEL: L51 L96 G23 G28 O16
    Date: 2021–12–21
  21. By: Christopher C. Pudenz; Lee L. Schulz (Center for Agricultural and Rural Development (CARD) at Iowa State University)
    Abstract: U.S. beef packers openly began employing multi-plant coordination during the last decade. This paper adapts the Salop Circular City framework to demonstrate that beef packers effectively implementing multi-plant coordination can eliminate intra-firm forces causing correlation between downstream beef prices and upstream fed cattle prices. Taken together with market concentration, geography and transportation cost effects, alternative marketing arrangements, and cattle cycles and related beef packer capacity utilization, multi-plant coordination helps explain farm-to-wholesale beef price spreads that remain wide absent any obvious market shocks. Such beef price spread behavior has been observed in 2021, during which beef prices have been seemingly unhinged from fed cattle prices. We further demonstrate that adding a single strategically-located packing plant, owned by a different firm, can restore the correlation between beef prices and fed cattle prices. Overall, our results have implications for current policy and industry deliberations and also suggest avenues for future research.
    Date: 2021–12
  22. By: Noah J. Trudeau (West Virginia University, Department of Economics)
    Abstract: Occupational licensing has been shown to have many pervasive economic effects. Licensing restricts competition, which causes wage premiums, potentially induces rent seeking, and ultimately results in consumers having to pay high prices through both channels of reduced supply and producers passing on increased cost of doing business. Licensing laws are passed at the state level; and thus, there can be considerable variation across states. Should there be much economic activity at state borders, this would be inconsequential. Yet, the existence of metropolitan areas spanning state borders begs the question of what effects can restricting competition be when competitive substitutes are easily available. This theory is tested using major MSAs that cross state borders and data from the American Community Survey to show how the differing licensing schemes affect the incomes of practicing massage therapists. Ultimately, it appears that the effect of easily available substitutes of massage therapists in the border state mutes the effect of the wage premium that would be caused by a more restrictive licensure scheme. Not only do wage premiums not appear in geographically adjacent states, it is especially missing in border MSAs.
    Keywords: Occupational Licensing, Massage Therapists
    JEL: J44 K31
    Date: 2021–06
  23. By: Andreea Cosnita-Langlais; Jean-Philippe Tropeano
    Abstract: This paper examines the impact of commitment decisions on the efficiency of antitrust enforcement. We discuss the optimal use of commitments considering past rulings as a source of knowledge to better assess future similar antitrust cases. Our framework combines two key effects: the deterrence of the anticompetitive behavior by the different enforcement regimes, and the dynamic perspective through litigation as a source of learning. We show that if the level of penalty is high enough, the antitrust authorities undervalue the dynamic informational benefit of litigation and tend to over-use commitments.
    Keywords: antitrust, commitments, deterrence, legal learning
    JEL: L41 K21 D82
    Date: 2021
  24. By: Adam N. Smith; Stephan Seiler; Ishant Aggarwal
    Abstract: We examine the profitability of personalized pricing policies that are derived using different specifications of demand in a typical retail setting with consumer-level panel data. We generate pricing policies from a variety of models, including Bayesian hierarchical choice models, regularized regressions, and classification trees using different sets of data inputs. To compare pricing policies, we employ an inverse probability weighted estimator of profits that explicitly takes into account non-random price variation and the panel nature of the data. We find that the performance of machine learning models is highly varied, ranging from a 21% loss to a 17% gain relative to a blanket couponing strategy, and a standard Bayesian hierarchical logit model achieves a 17.5% gain. Across all models purchase histories lead to large improvements in profits, but demographic information only has a small impact. We show that out-of-sample hit probabilities, a standard measure of model performance, are uncorrelated with our profit estimator and provide poor guidance towards model selection.
    Keywords: targeting, personalization, heterogeneity, choice models, machine learning
    JEL: C11 C33 C45 C52 D12 L11 L81
    Date: 2021
    Abstract: The development of industry 4.0 and e-commerce destroy the traditional mechanism of price determination, the rigidity of supply in the short run and the idea of price representativeness. Industry 4.0 has changed the traditional view of price formation. Firms know the individual purchasing history of customers. Firms can extract the reserve price for each individual due to big data. Price is no more the encounter of supply and demand, but it is determinated considering the maximum amount that individuals can pay. The combination of data, dynamic pricing and price discrimination has destroyed one of the pillars of the mainstream economics: price representativeness. Dynamic pricing is the ability to change prices. Price discrimination is the ability to apply different prices for different customers for the same product or service.
    Keywords: Industry 4.0, Customer Behavior, Supply, Demand, Digital Economy, Nudge.
    JEL: E21 E31 E64 E69
    Date: 2021–12–25

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