nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒04‒04
seventeen papers chosen by
Russell Pittman
United States Department of Justice
  1. The Evolution of U.S. Retail Concentration By Dominic A. Smith; Sergio Ocampo
  2. Personalized Pricing, Competition and Welfare By Harold Houba; Evgenia Motchenkova; Hui Wang
  3. Information vs Competition : How Platform Design Affects Profits and Surplus By Piolatto, A.; Schuett, Florian
  4. Unilateral Practices, Antitrust Enforcement and Commitments By Rey, Patrick; Polo, Michele
  5. Competition under incomplete contracts and the design of procurement policies By Rodrigo Carril; Andres Gonzalez-Lira; Michael S. Walker
  6. Monopolies amplify demand shocks By Flavio M. Menezes; John Quiggin
  7. Market Power and Market Structure: An Analysis of Costa Rican Banking since 2008 By Miguel Cantillo; José Cascante; Guillermo Pastrana
  8. Alcohol prohibition and pricing at the pump By Fischer, Kai
  9. Collusion by algorithm: The role of unobserved actions By Martin, Simon; Rasch, Alexander
  10. Gender and collusion By Haucap, Justus; Heldman, Christina; Rau, Holger A.
  11. "Selection and Sorting of Heterogeneous Firms through Competitive Pressures" Abstract To understand theoretically how competitive pressures affect selection and sorting of firms with different productivity, we study the Melitz (2003) model under the H.S.A. (Homothetic with a Single Aggregator) class of demand systems. H.S.A. is tractable due to its homotheticity and to its single aggregator that serves as a sufficient statistic for competitive pressures, which acts as a magnifier of firm heterogeneity. It is also flexible enough to allow for the choke price, the 2nd law of demand--“a higher price leads to a higher price elasticity†--, and the 3rd law of demand--“a higher price leads to a smaller rate of change in the price elasticity.†We show, among others: i) More productive firms have higher profits and revenues; they have higher markup rates under the 2nd law and lower pass-through rates under the 3rd law. Employments are not monotone in firm productivity; they are hump-shaped under the 2nd and 3rd laws. The 2nd law also implies the procompetitive effect and strategic complementarity in pricing. ii) A lower entry cost leads to more competitive pressures, which reduces the markup rates of all firms under the 2nd law and raises the pass-through rates of all firms under the 3rd law. The profits of all firms decline (at faster rates among less productive firms under the 2nd law), which leads to a tougher selection. The revenues of all firms also decline (at faster rates among less productive firms under the 3rd law). A lower overhead cost has similar effects when the employment is decreasing in firm productivity, which occurs under the 2nd and the 3rd laws for a sufficiently high overhead cost. iii) Larger market size also leads to more competitive pressures, reducing the markup rates of all firms under the 2nd law and raises the pass-through rates of all firms under the 3rd law. The profits among more productive firms increase, while those among less productive decline under the 2nd law, which leads to a tougher selection. The revenues among more productive firms also increase, while those among less productive decline under the 3rd law at least when the overhead cost is not too large. iv) The impacts on the masses of entrants and of active firms depend, often crucially, on whether the elasticity of the distribution of the marginal cost is increasing or decreasing with Pareto-distributed productivity being the knife-edge case. v) Both a lower entry cost and larger market size may cause an increase in the average markup rate under the 2nd law and a decline in the average pass-through under the 3rd law due to the composition effect, since they also lead to a tougher selection, forcing less productive firms with lower markup rates and higher pass-through rates to shrink and to exit. This suggests that a rise of the markup may occur due to increased competitive pressures, causing a shift from the less productive/smaller to the more productive/larger. vi) In a multi-market setting, competitive pressures are stronger in larger markets. And more productive firms sort themselves into larger markets under the 2nd law. Due to this composition effect, the average markup (pass-through) rates can be higher (lower under the 3rd Law) in larger (thus more competitive) markets. This result suggests a caution when interpreting the evidence that compares the average markup and pass-through rates across markets with different sizes. By Kiminori Matsuyama; Philip Ushchev
  12. Decomposing the Rise in Markups By van Vlokhoven, Has
  13. Explaining excess entry in winner-take-all markets By Vincent Laferriere; David Staubli; Christian Thoeni
  14. Market Power and Artificial Intelligence Work on Online Labour Markets By DUCH BROWN Nestor; GOMEZ-HERRERA Estrella; MUELLER-LANGER Frank; TOLAN Songul
  15. Monopoly, Product Quality, and Flexible Learning By Jeffrey Mensch; Doron Ravid
  16. Cournot duopoly games with isoelastic demands and diseconomies of scale By Xiaoliang Li
  17. The Firm Size-Leverage Relationship and Its Implications for Entry and Business Concentration By Satyajit Chatterjee; Burcu Eyigungor
  1. By: Dominic A. Smith; Sergio Ocampo
    Abstract: Increases in national concentration have been a salient feature of industry dynamics in the U.S. and have contributed to concerns about increasing market power. Yet, local trends may be more informative about market power, particularly in the retail sector where consumers have traditionally shopped at nearby stores. We find that local concentration has increased almost in parallel with national concentration using novel Census data on product-level revenue for all U.S. retail stores. The increases in concentration are broad based, affecting most markets, products, and retail industries. We implement a new decomposition of the national Herfindahl Hirschman Index and show that despite similar trends, national and local concentration reflect different changes in the retail sector. The increase in national concentration comes from consumers in different markets increasingly buying from the same firms and does not reflect changes in local market power. We estimate a model of retail competition which links local concentration to markups. The model implies that the increase in local concentration explains one-third of the observed increase in markups.
    Keywords: Retail, Local Markets, Concentration, Herfindahl-Hirschman Index
    JEL: L8
    Date: 2022–03
    URL: http://d.repec.org/n?u=RePEc:cen:wpaper:22-07&r=
  2. By: Harold Houba (Vrije Universiteit Amsterdam); Evgenia Motchenkova (Vrije Universiteit Amsterdam); Hui Wang (Beijing Zhengjiang Science and Technology Co.)
    Abstract: Data-driven AI pricing algorithms in on-line markets collect consumer information and use it in their pricing technologies. In the simplest symmetric Hotelling's model such technologies reduce prices and profits. We extend Hotelling's model with vertically differentiated products, cost asymmetries and arbitrary adjustment costs. We provide a characterization of competition in personalized pricing: Sellers compete in offering consumer surplus, personalized prices are constrained monopoly prices and social welfare is maximal. For linear adjustment costs, adopting personalized pricing technology is a dominant strategy for both sellers. We derive conditions under which the most efficient seller increases her profit through personalized pricing. While aggregate consumer surplus increases, consumers with high switching costs may be hurt. Finally, we discuss several extensions of our approach such as oligopoly.
    JEL: L1 D43 L13
    Date: 2022–02–24
    URL: http://d.repec.org/n?u=RePEc:tin:wpaper:20220020&r=
  3. By: Piolatto, A. (Tilburg University, TILEC); Schuett, Florian (Tilburg University, TILEC)
    Keywords: anonymous information platforms; opaque products; horizontal competition; experience goods; mismatch costs
    Date: 2022
    URL: http://d.repec.org/n?u=RePEc:tiu:tiutil:43e43ee1-c784-4b60-9d62-e49a7964ffd4&r=
  4. By: Rey, Patrick; Polo, Michele
    Abstract: This paper analyses the impact of commitments on antitrust enforcement. These tools, introduced in Europe by the Modernization reform of 2003, are now used intensively by the European Commission and by National Competition Agencies. We consider a setting where a firm can adopt a practice that is either pro- or anti-competitive; the firm knows the nature of the practice whereas the enforcer has only prior beliefs about it. If the firm adopts the practice, the enforcer then decides whether to open a case. When commitments are available, the firm can offer a commitment whenever a case is opened; the enforcer then decides whether to accept it or run a costly investigation that may or may not bring supporting evidence. We show that introducing commitments weakens enforcement when the practice is likely to be anti-competitive. The impact of commitments is however more nuanced when the practice is less likely to be anti-competitive.
    Keywords: Antitrust enforcement ; Commitment ; Remedies ; Deterrence
    JEL: L40 K21 K42
    Date: 2022–03–14
    URL: http://d.repec.org/n?u=RePEc:tse:wpaper:126713&r=
  5. By: Rodrigo Carril; Andres Gonzalez-Lira; Michael S. Walker
    Abstract: We study the effects of intensifying competition for contracts in the context of U.S. Defense procurement. Conceptually, opening contracts up to bids by more participants leads to lower awarding prices, but may hinder buyers' control over non-contractible characteristics of prospective contractors. Leveraging a regulation that mandates agencies to publicize certain contract opportunities, we document that expanding the set of bidders reduces award prices, but deteriorates post-award performance, resulting in more cost overruns and delays. To further study the scope of this tension, we develop and estimate a model in which the buyer endogenously chooses the intensity of competition, invited sellers decide on auction participation and bidding, and the winner executes the contract ex-post. Model estimates indicate substantial heterogeneity in ex-post performance across contractors, and show that simple adjustments to the current regulation that account for adverse selection could provide 2 percent of savings in procurement spending, or $104 million annually
    Keywords: Procurement, competition, auctions, incomplete contracts
    JEL: D22 D44 D73 H57 L13 L14
    Date: 2022–03
    URL: http://d.repec.org/n?u=RePEc:upf:upfgen:1824&r=
  6. By: Flavio M. Menezes (School of Economics, University of Queensland, Brisbane, Australia); John Quiggin (School of Economics, University of Queensland, Brisbane, Australia)
    Abstract: The central point of this note is that the relationship between market power and inflation depends crucially on the source of inflationary shocks. To the extent that inflation is driven by demand shocks, firms with market power are likely to respond by increasing margins, and thereby amplifying the inflationary impact of higher demand. By contrast, imperfectly competitive markets typically display only partial cost pass-through. This analysis is relevant to debates about the role of monopoly power in recent US inflation.
    Date: 2022–02
    URL: http://d.repec.org/n?u=RePEc:qld:uq2004:653&r=
  7. By: Miguel Cantillo (Universidad de Costa Rica); José Cascante (Carlos III University); Guillermo Pastrana (Toulouse School of Economics)
    Abstract: This paper analyzes the evolution of the Lerner index for Costa Rican banks between 2008 and 2019. We document a significant drop in market power during this period, which we relate to less concentration in loans and deposits. The market became less consolidated as a fringe of 29 small banks gained market share at the expense of large and medium banks. We find that for individual banks, a greater market share of loans, and greater loan specialization are related to higher profitability, while a greater market share of deposits and greater size are related to lower profit margins.
    Keywords: Banking structure, Latin American banking sector, Market power, Imperfect competition, Lerner index, Umbrella pricing.
    Date: 2022–03
    URL: http://d.repec.org/n?u=RePEc:fcr:wpaper:202202&r=
  8. By: Fischer, Kai
    Abstract: Firms often sell a transparent base product and a valuable add-on product. If only some consumers are aware of the latter, the add-on's effect on the base product's price will be ambiguous. Cross-subsidization between products to bait uninformed consumers might lower, intrinsic utility from the add-on for informed consumers might raise the price. We study this trade-off in the gasoline market by exploiting an alcohol sales prohibition at stations as an exogenous shifter of add-on availability. Gasoline margins drop by 5% during the prohibition. The effect is mediated by shop variety and local competition. Implications for gasoline market definition arise.
    Keywords: Off-Premise Alcohol Prohibition,Gasoline Market,Multi-Product Firms
    JEL: L11 L91 R41
    Date: 2022
    URL: http://d.repec.org/n?u=RePEc:zbw:dicedp:386&r=
  9. By: Martin, Simon; Rasch, Alexander
    Abstract: We analyze the effects of better algorithmic demand forecasting on collusive profits. We show that the comparative statics crucially depend on the whether actions are observable. Thus, the optimal antitrust policy needs to take into account the institutional settings of the industry in question. Moreover, our analysis reveals a dual role of improving forecasting ability when actions are not observable. Deviations become more tempting, reducing profits, but also uncertainty concerning deviations is increasingly eliminated. This results in a u-shaped relationship between profits and prediction ability. When prediction ability is perfect, the "observable actions" case emerges.
    Keywords: Algorithm,Collusion,Demand forecasting,Unobservable actions,Secretprice cutting
    JEL: L41 L13 D43
    Date: 2022
    URL: http://d.repec.org/n?u=RePEc:zbw:dicedp:382&r=
  10. By: Haucap, Justus; Heldman, Christina; Rau, Holger A.
    Abstract: Many cartels are formed by individual managers of different firms, but not by firms as collectives. However, most of the literature in industrial economics neglects individuals' incentives to form cartels. Although oligopoly experiments reveal important insights on individuals acting as firms, they largely ignore individual heterogeneity, such as gender differences. We experimentally analyze gender differences in prisoner's dilemmas, where collusive behavior harms a passive third party. In a control treatment, no externality exists. To study the influence of social distance, we compare subjects' collusive behavior in a within-subjects setting. In the first game, subjects have no information on other players, whereas they are informed about personal characteristics in the second game. Results show that guilt-averse women are significantly less inclined to collude than men when collusion harms a third party. No gender difference can be found in the absence of a negative externality. Interestingly, we find that women are not sensitive to the decision context, i.e., even when social distance is small they hardly behave collusively when collusion harms a third party.
    Keywords: Collusion,Cartels,Competition Policy,Antitrust,Gender Differences
    JEL: C92 D01 D43 J16 K21 L13 L41
    Date: 2022
    URL: http://d.repec.org/n?u=RePEc:zbw:dicedp:380&r=
  11. "Selection and Sorting of Heterogeneous Firms through Competitive Pressures" Abstract To understand theoretically how competitive pressures affect selection and sorting of firms with different productivity, we study the Melitz (2003) model under the H.S.A. (Homothetic with a Single Aggregator) class of demand systems. H.S.A. is tractable due to its homotheticity and to its single aggregator that serves as a sufficient statistic for competitive pressures, which acts as a magnifier of firm heterogeneity. It is also flexible enough to allow for the choke price, the 2nd law of demand--“a higher price leads to a higher price elasticity†--, and the 3rd law of demand--“a higher price leads to a smaller rate of change in the price elasticity.†We show, among others: i) More productive firms have higher profits and revenues; they have higher markup rates under the 2nd law and lower pass-through rates under the 3rd law. Employments are not monotone in firm productivity; they are hump-shaped under the 2nd and 3rd laws. The 2nd law also implies the procompetitive effect and strategic complementarity in pricing. ii) A lower entry cost leads to more competitive pressures, which reduces the markup rates of all firms under the 2nd law and raises the pass-through rates of all firms under the 3rd law. The profits of all firms decline (at faster rates among less productive firms under the 2nd law), which leads to a tougher selection. The revenues of all firms also decline (at faster rates among less productive firms under the 3rd law). A lower overhead cost has similar effects when the employment is decreasing in firm productivity, which occurs under the 2nd and the 3rd laws for a sufficiently high overhead cost. iii) Larger market size also leads to more competitive pressures, reducing the markup rates of all firms under the 2nd law and raises the pass-through rates of all firms under the 3rd law. The profits among more productive firms increase, while those among less productive decline under the 2nd law, which leads to a tougher selection. The revenues among more productive firms also increase, while those among less productive decline under the 3rd law at least when the overhead cost is not too large. iv) The impacts on the masses of entrants and of active firms depend, often crucially, on whether the elasticity of the distribution of the marginal cost is increasing or decreasing with Pareto-distributed productivity being the knife-edge case. v) Both a lower entry cost and larger market size may cause an increase in the average markup rate under the 2nd law and a decline in the average pass-through under the 3rd law due to the composition effect, since they also lead to a tougher selection, forcing less productive firms with lower markup rates and higher pass-through rates to shrink and to exit. This suggests that a rise of the markup may occur due to increased competitive pressures, causing a shift from the less productive/smaller to the more productive/larger. vi) In a multi-market setting, competitive pressures are stronger in larger markets. And more productive firms sort themselves into larger markets under the 2nd law. Due to this composition effect, the average markup (pass-through) rates can be higher (lower under the 3rd Law) in larger (thus more competitive) markets. This result suggests a caution when interpreting the evidence that compares the average markup and pass-through rates across markets with different sizes.
    By: Kiminori Matsuyama (Department of Economics, Northwestern University and Faculty of Economics, The University of Tokyo); Philip Ushchev (Faculty of Economics, HSE University,)
    URL: http://d.repec.org/n?u=RePEc:tky:fseres:2022cf1189&r=
  12. By: van Vlokhoven, Has (Tilburg University, Center For Economic Research)
    Keywords: markups; market power; Decomposition; reallocation
    Date: 2022
    URL: http://d.repec.org/n?u=RePEc:tiu:tiucen:0b616f62-13a7-46f2-b285-9c4788dcb952&r=
  13. By: Vincent Laferriere; David Staubli; Christian Thoeni
    Abstract: We report experimental data from standard market entry games and winner-take-all games. At odds with traditional decision making models with risk aversion, the winner-take-all condition results in substantially more entry than the expected-payoff-equivalent market entry game. We explore three candidate explanations for excess entry: blind spot, illusion of control, and joy of winning, none of which receive empirical support. We provide a novel theoretical explanation for excess entry based on Cumulative Prospect Theory and test it empirically. Our results suggest that excess entry into highly competitive environments is not caused by a genuine preference for competing, but driven by probability weighting. Market entrants overweight the small probabilities associated with the high payoff outcomes in winner-take-all markets, while they underweight probable failures.
    Keywords: Winner-take-all market, Market entry game, Excess entry, Cumulative Prospect Theory, Probability weighting, Experiment
    JEL: C92 D81 D91
    Date: 2022–03
    URL: http://d.repec.org/n?u=RePEc:lau:crdeep:22.02&r=
  14. By: DUCH BROWN Nestor (European Commission - JRC); GOMEZ-HERRERA Estrella; MUELLER-LANGER Frank; TOLAN Songul (European Commission - JRC)
    Abstract: 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 supply, and (3) the concentration of market shares. We explore how these indicators relate to an exogenous change in platform policy. In the middle of the observation period, the platform made it mandatory for employers to signal the rates they were willing to pay as given by the level of experience required to perform a project, i.e., entry, intermediate or expert level. We find a positive labour supply elasticity ranging between 0.06 and 0.15, which is higher for expert-level projects. We also find that the labour demand elasticity increased while the labour supply elasticity decreased after the policy change. Based on this, we argue that market-designing platform providers can influence the labour demand and supply elasticities on OLMs with the terms and conditions they set for the platform. We also explore the demand for and supply of AI-related labour on the OLM under study. We provide evidence for a significantly higher demand for AI-related labour (ranging from +1.4% to +4.1%) and a significantly lower supply of AI-related labour (ranging from -6.8% to -1.6%) than for other types of labour. We also find that workers on AI projects receive 3.0%-3.2% higher wages than workers on non-AI projects.
    Keywords: Online labour markets, artificial intelligence, market power, exogenous change in platform policy
    Date: 2022–02
    URL: http://d.repec.org/n?u=RePEc:ipt:decwpa:202110&r=
  15. By: Jeffrey Mensch; Doron Ravid
    Abstract: A seller offers a buyer a schedule of transfers and associated product qualities, as in Mussa and Rosen (1978). After observing this schedule, the buyer chooses a flexible costly signal about his type. We show it is without loss to focus on a class of mechanisms that compensate the buyer for his learning costs. Using these mechanisms, we prove the quality always lies strictly below the efficient level. This strict downward distortion holds even if the buyer acquires no information or when the buyer's posterior type is the highest possible given his signal, reversing the ``no distortion at the top'' feature that holds when information is exogenous.
    Date: 2022–02
    URL: http://d.repec.org/n?u=RePEc:arx:papers:2202.09985&r=
  16. By: Xiaoliang Li
    Abstract: In this discussion draft, we investigate five different models of duopoly games, where the market is assumed to have an isoelastic demand function. Moreover, quadratic cost functions reflecting decreasing returns to scale are considered. The games in this draft are formulated with systems of two nonlinear difference equations. Existing equilibria and their local stability are analyzed by symbolic computations. In the model where a gradiently adjusting player and a rational (or a boundedly rational) player compete with each other, diseconomies of scale are proved to have an effect of stability enhancement, which is consistent with the similar results found by Fisher for homogeneous oligopolies with linear demand functions.
    Date: 2022–03
    URL: http://d.repec.org/n?u=RePEc:arx:papers:2203.09972&r=
  17. By: Satyajit Chatterjee; Burcu Eyigungor
    Abstract: Larger firms (by sales or employment) have higher leverage. This pattern is explained using a model in which firms produce multiple varieties, acquire new varieties from their inventors, and borrow against the future cash flow of the firm with the option to default. A variety can die with a constant probability, implying that firms with more varieties (bigger firms) have a lower variance of sales growth and, in equilibrium, higher leverage. In this setup, a drop in the risk-free rate increases the value of an acquisition more for bigger firms because of their higher leverage: They can (and do) borrow a larger fraction of their future cash flow. The drop causes existing firms to buy more of the new varieties arriving into the economy, resulting in a lower startup rate and greater concentration of sales.
    Keywords: Startup rates; concentration; leverage; firm dynamics
    JEL: E22 E43 E44 G32 G33 G34
    Date: 2022–03–17
    URL: http://d.repec.org/n?u=RePEc:fip:fedpwp:93850&r=
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