nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒05‒09
nineteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Collusion Between Non-differentiated Two-Sided Platforms By Martin Peitz; Lily Samkharadze
  2. The Impact of Product Differentiation on Retail Bundling in a Vertical Market By Angelika Endres-Fröhlich; Burkhard Hehenkamp; Joachim Heinzel
  3. The Impact of Product Qualities on Downstream Bundling in a Distribution Channel By Angelika Endres-Fröhlich; Joachim Heinzel
  4. Performative Power By Moritz Hardt; Meena Jagadeesan; Celestine Mendler-D\"unner
  5. Resale Price Maintenance Guidance in Ireland: A Paradox? By Gorecki, Paul; O'Toole, Francis
  6. Pro-competition regulation in the digital economy: the United Kingdom’s Digital Markets Unit By Dunne, Niamh
  7. The Impact of Product Differentiation on the Channel Structure in a Manufacturer-Driven Supply Chain By Angelika Endres-Fröhlich
  8. Non-equilibrium phase transitions in competitive markets caused by network effects By Andrew Lucas
  9. Imitative Pricing: the Importance of Neighborhood Effects in Physicians’ Consultation Prices By Benjamin Montmartin; Marcos Herrera-Gómez
  10. Firm's Static Behavior under Dynamic Demand By Takeshi Fukasawa
  11. Nonparametric Identification of Differentiated Products Demand Using Micro Data By Steven T. Berry; Philip A. Haile
  12. Moldy Lemons and Market Shutdowns By Jin-Wook Chang; Matt Darst
  13. Umgekehrte Preisbildung – das Gesetz ÉGalim in Frankreich By Philippe Boyer; Marita Wiggerthale
  14. Net Neutrality and Universal Service Obligations By Axel Gautier; Jean-Christophe Poudou; Michel Roland
  15. The Welfare Effects of Mobile Internet Access - Evidence from Roam-Like-at-Home By Martin Quinn; Miguel Godinho de Matos; Christian Peukert
  16. Data Collection by an Informed Seller By Smolin, Alex; Ichihashi, Shota
  17. Automation, Market Concentration, and the Labor Share By Hamid Firooz; Zheng Liu; Yajie Wang
  18. Investments in R&D and Production Capacity with Uncertain Breakthrough Time : Private versus Social Incentives By Ketelaars, Martijn; Kort, Peter
  19. Industries, Mega Firms, and Increasing Inequality By Haltiwanger, John C.; Hyatt, Henry R.; Spletzer, James R.

  1. By: Martin Peitz; Lily Samkharadze
    Abstract: Platform competition can be intense when offering non-differentiated services. However, competition is somewhat relaxed if platforms cannot set negative prices. If platforms collude they may be able to implement the outcome that maximizes industry profits. In an infinitely repeated game with perfect monitoring, this is feasible if the discount factor is sufficiently large. When this is not possible, under some condition, a collusive outcome with one-sided rent extraction along the equilibrium path can be sustained that leads to higher profits than the non-cooperative outcome.
    Keywords: Two-sided markets, tacit collusion, cartelization, price structure, platform competition
    JEL: L41 L13 D43
    Date: 2022–01
  2. By: Angelika Endres-Fröhlich (Paderborn University); Burkhard Hehenkamp (Paderborn University); Joachim Heinzel (Paderborn University)
    Abstract: We study the effects of product differentiation on the bundling incentives of a two-product retailer. Two monopolistic manufacturers each produce a differentiated good. One sells it to both retailers, while the other only supplies a single retailer. Retailers compete in prices. Retail bundling is profitable when the goods are close substitutes. Only then is competition so intense that the retailer uses bundling to relax competition both within and across product markets, despite an aggravation of the double marginalization problem. Our asymmetric market structure arises endogenously for the case of close substitutes. In this case, bundling reduces social welfare.
    Keywords: retail bundling; upstream market power; double marginalization; product differentiation
    JEL: D43 L13 L42
    Date: 2022–04
  3. By: Angelika Endres-Fröhlich (Paderborn University); Joachim Heinzel (Paderborn University)
    Abstract: Research has found that downstream bundling aggravates the problem of double marginalization in a decentralized channel, but reduces the intensity of downstream price competition when trading homogeneous goods. We study the validity of those results in a set-up where the traded goods have heterogeneous product qualities. We find that the quality relation between the goods determines whether the competition reduction effect of bundling outweighs the aggravation of double marginalization in a decentralized channel. Thus, the quality relation between the goods determines the profitability of downstream bundling. The underlying market consists of a distribution channel with two downstream firms and two price-setting monopolistic upstream producers. One upstream firm sells good 1 exclusively to one downstream firm and the other upstream firm sells good 2 to both downstream firms. The downstream firms compete in prices and the two-product downstream firm has the option to bundle both goods. In particular, we find bundling to be profitable for the two-product downstream firm only when the quality of good 2 exceeds the quality of good 1. However, we find bundling always to be profitable when the production process is controlled by the downstream industry. The impact on total welfare is ambiguous and depends on the distribution of market power in the channel and the quality levels of the goods.
    Keywords: double marginalization; downstream bundling; leverage theory; quality differentiation
    JEL: D21 D61 L11 L15
    Date: 2022–04
  4. By: Moritz Hardt; Meena Jagadeesan; Celestine Mendler-D\"unner
    Abstract: We introduce the notion of performative power, which measures the ability of a firm operating an algorithmic system, such as a digital content recommendation platform, to steer a population. We relate performative power to the economic theory of market power. Traditional economic concepts are well known to struggle with identifying anti-competitive patterns in digital platforms--a core challenge is the difficulty of defining the market, its participants, products, and prices. Performative power sidesteps the problem of market definition by focusing on a directly observable statistical measure instead. High performative power enables a platform to profit from steering participant behavior, whereas low performative power ensures that learning from historical data is close to optimal. Our first general result shows that under low performative power, a firm cannot do better than standard supervised learning on observed data. We draw an analogy with a firm being a price-taker, an economic condition that arises under perfect competition in classical market models. We then contrast this with a market where performative power is concentrated and show that the equilibrium state can differ significantly. We go on to study performative power in a concrete setting of strategic classification where participants can switch between competing firms. We show that monopolies maximize performative power and disutility for the participant, while competition and outside options decrease performative power. We end on a discussion of connections to measures of market power in economics and of the relationship with ongoing antitrust debates.
    Date: 2022–03
  5. By: Gorecki, Paul; O'Toole, Francis
    Abstract: In 2021 the Competition and Consumer Protection Commission (CCPC), Ireland’s competition agency, advanced the proposition that, in effect, minimum, fixed and, although it appears inadvertent, maximum resale price maintenance (RPM) are per se breaches of competition law. Such a position is inconsistent with the European Commission’s Vertical Block Exemption Regulation and Guidance, past CCPC decisional practice and the efficiency provisions of both EU and Irish competition law. Prior to the introduction of civil fines for breaches such as RPM, as part of the implementation of the ECN+ Directive in 2022, the CCPC should state whether it views minimum and fixed RPM as per se breaches of competition law and why; or as seems more likely, that given the hardcore characterisation of minimum and fixed RPM by the European Commission, the CCPC envisages it would be difficult but not impossible for the efficiency defence to be successfully employed to justify such forms of RPM. The agency also needs to clearly articulate its position on maximum RPM, which it also appears to treat – inappropriately – in the same way as minimum and fixed RPM.
    Keywords: Resale price maintenance; per se; by object; by effect; Competition & Consumer Protection Commission; Competition Act 2002; Article 101(3); Section 4(5); Vertical Block Exemption Regulation; and Guidance.
    JEL: L11 L42
    Date: 2022–04–20
  6. By: Dunne, Niamh
    Abstract: The United Kingdom, like many jurisdictions, is introducing more demanding ex ante regulation for the digital economy. Centered on the work of a Digital Markets Unit located within the existing copetition authority, the U.K. proposals are defined by an explicit commitment to “pro-competition” regulation. This article traces the evolution and emerging design of the forthcoming U.K. regime. It then explores the notion of pro-competition regulation in greater detail. While the concept increasingly transcends its domestic origins, this article argues that the balancing act between conventional competition law and traditional regulation that it reflects can be fully understood only when located within the distinctive circumstances of the wider U.K. regulatory landscape.
    Keywords: digital economy; competition law; UK law; pro-competition; Sage deal
    JEL: F3 G3
    Date: 2022–03–21
  7. By: Angelika Endres-Fröhlich (Paderborn University)
    Abstract: We study the impact of product differentiation on different distribution systems in a supply chain. Our market is characterized by an asymmetric supply chain with two retailers and three manufacturers that each produce one differentiated good. We determine that a non-exclusive distribution system is a Nash equilibrium for all degrees of product differentiation between the three goods. Furthermore, we assess the welfare implications of various distribution systems. We identify that the non-exclusive equilibrium channel structure provides the highest social welfare and highest consumer surplus for all degrees of product differentiation. Aside from that, we find a strong incentive for the manufacturers to form an exclusive selling cartel for close substitutes, which would cause a Pareto improvement for all firms but harm overall welfare.
    Keywords: product differentiation; endogenous markets; supply chains
    JEL: D21 D47 L22
    Date: 2022–04
  8. By: Andrew Lucas
    Abstract: Network effects are the added value derived solely from the popularity of a product in an economic market. Using agent-based models inspired by statistical physics, we propose a minimal theory of a competitive market for (nearly) indistinguishable goods with demand-side network effects, sold by statistically identical sellers. With weak network effects, the model reproduces conventional microeconomics: there is a statistical steady state of (nearly) perfect competition. Increasing network effects, we find a phase transition to a robust non-equilibrium phase driven by the spontaneous formation and collapse of fads in the market. When sellers update prices sufficiently quickly, an emergent monopolist can capture the market and undercut competition, leading to a symmetry- and ergodicity-breaking transition. The non-equilibrium phase simultaneously exhibits three empirically established phenomena not contained in the standard theory of competitive markets: spontaneous price fluctuations, persistent seller profits, and broad distributions of firm market shares.
    Date: 2022–04
  9. By: Benjamin Montmartin (SKEMA Business School, Université Côte-d'Azur); Marcos Herrera-Gómez (IEDLE-UNSa/CONICET)
    Abstract: During the last 30 years in France, concerns about healthcare access have grown as physician fees have increased threefold. In this paper, we developed an innovative structural framework to provide new insights into free-billing physician pricing behavior. We test our theoretical framework using a unique geolocalized database covering more than 4,000 private practitioners in three specializations (ophthalmology, gynecology and pediatrics). Our main findings highlight a low price competition environment driven by local imitative pricing between physicians, which increases with competition density. This evidence in the context ofgrowing spatial concentration and an increasing share of free-billing physicians calls for new policies to limitadditional fees.
    Keywords: Imitative pricing, Health care access, Local competition, Spatial eects.
    JEL: H51 C21 I11 I18
    Date: 2022–03
  10. By: Takeshi Fukasawa (Graduate School of Economics, The University of Tokyo and Junior Research Fellow, Research Institute for Economics and Business Administration, Kobe University, JAPAN)
    Abstract: This study investigates in what cases a firm's dynamic price-setting behavior can be approximated as static under dynamic demand, by developing a dynamic discrete choice model. Under dynamic demand with random utility shock following Gumbel distribution, this study shows that an oligopolistic firm's optimal price-setting behavior is well approximated by the static one with no strategic consideration, when consumers' conditional choice probabilities (CCPs) of choosing the firm's product are small for all consumer types and state variables. If the condition does not hold, the firm's behavior might be far from static.
    Keywords: Dynamic demand; Dynamic price-setting behavior; Static approximation; Monopolistic competition; Dynamic discrete choice
    Date: 2022–04
  11. By: Steven T. Berry; Philip A. Haile
    Abstract: We examine identification of differentiated products demand when one has "micro data" linking individual consumers' characteristics and choices. Our model nests standard specifications featuring rich observed and unobserved consumer heterogeneity as well as product/market-level unobservables that introduce the problem of econometric endogeneity. Previous work establishes identification of such models using market-level data and instruments for all prices and quantities. Micro data provides a panel structure that facilitates richer demand specifications and reduces requirements on both the number and types of instrumental variables. We address identification of demand in the standard case in which non-price product characteristics are assumed exogenous, but also cover identification of demand elasticities and other key features when product characteristics are endogenous. We discuss implications of these results for applied work.
    Date: 2022–04
  12. By: Jin-Wook Chang; Matt Darst
    Abstract: This paper studies competitive market shutdowns due to adverse selection, where sellers post nonexclusive menus of contracts. We first show that the presence of the worst type of agents (moldy lemons) causes markets to fail only if their mass is sufficiently large. We then show that a small mass of moldy lemons can lead to a large cascade of exits when buyers possess outside options. Our results suggest a parsimonious way of generating sudden market shutdowns without relying on institutional details or imposing additional structure on the model. Thus, the simple insights on the properties of market shutdowns we consider are applicable to many different markets and contexts.
    Keywords: Asymmetric information; Market unraveling; Non-exclusive contracting
    JEL: D52 D53 D82 E44 G32
    Date: 2022–03–23
  13. By: Philippe Boyer (Académie d'Agriculture de France); Marita Wiggerthale
    Keywords: trade relations,foof chain,competition law,relations commerciales,chaîne alimentaire,réglementation de la concurrence
    Date: 2022–01
  14. By: Axel Gautier (LCII - Liège Competition and Innovation Institute, HEC Liège); Jean-Christophe Poudou; Michel Roland (CREATE - ULaval - Université Laval [Québec], ULaval - Université Laval [Québec])
    Abstract: This paper analyzes whether repealing net neutrality (NN) improves or decreases the capacity of a regulator to make internet service providers (ISPs) extend broadband coverage through universal service obligations (USOs). We model a two-sided market where a monopolistic ISP links content providers (CPs) to end users with a broadband network of a given bandwidth. A regulator determines whether to submit the ISP to NN or to allow it to supply paid priority (P) services to CPs. She can also impose a broadband USO to the ISP, i.e. she can mandate the broadband market coverage. We show that the greater is the network bandwidth, the more likely the repeal of net neutrality increases ISP profits and social welfare. Regulation can still be necessary, however, as there are bandwidth ranges for which the ISP would benefit from a repeal of NN while such a repeal is detrimental to society.
    Keywords: L96,Internet,Net Neutrality,Universal Service Obligations,Prioritization,Regulation JEL: D21,K23,L12,L51
    Date: 2022–03–07
  15. By: Martin Quinn; Miguel Godinho de Matos; Christian Peukert
    Abstract: We evaluate the welfare effects of the Roam-Like-At-Home regulation, which drastically re-duced the price of accessing the mobile internet for EU residents when traveling abroad in the European Economic Area. Estimates from individual-level usage data suggest that consumer surplus increased by 2.77 EUR/user/travel day. A decomposition shows the heterogeneous impact of the regulation on different user segments. We estimate that around half of the gains stem from a reduction in deadweight loss, i.e., new users accessing the mobile internet. We further show that the impact of the regulation varies with usage intensity abroad and at home, by the nature of the trip (leisure vs. business), and by content type. We discuss implications for content providers and other policy areas such as net neutrality.
    Keywords: Telecom, mobile data, roaming, regulation, consumer surplus
    JEL: L96 L51 O33 D62
    Date: 2022
  16. By: Smolin, Alex; Ichihashi, Shota
    Abstract: A seller faces a consumer with an uncertain value for the product. The seller has imperfect private information about the value and requests additional data to set the price. The consumer can decline any request. The consumer’s willingness to provide data depends on his belief about the seller’s type which in turn depends on the request. We show that the type uncertainty limits the scope of data collection: All equilibrium payoffs are spanned by fully pooling equilibria in which the seller collects the same data regardless of the type. The seller’s private information lowers efficiency and profits, but benefits the consumer by fueling his skepticism and preventing excessive data collection. Having less private information may enable the seller to collect more data directly from the consumer and may lower the overall consumer welfare.
    Keywords: consumer privacy; data collection; information design; mechanism design; price discrimination
    JEL: D42 D82 D83
    Date: 2022–04–19
  17. By: Hamid Firooz; Zheng Liu; Yajie Wang
    Abstract: Since the early 2000s, a rising share of production has been concentrated in a small number of superstar firms. We argue that the rise of automation technologies and the cross-sectional variation of robot use rates have contributed to the increases in industrial concentration. Motivated by empirical evidence, we build a general equilibrium model with heterogeneous firms, endogenous automation decisions, and variable markups. Firms choose between two types of technologies, one uses workers only and the other uses both workers and robots subject to an idiosyncratic fixed cost of robot operation. Larger firms are more profitable and are thus more likely to choose the automation technology. A decline in the cost of robot adoption increases the relative automation usage by large firms, raising their market share of sales. However, the employment share of large firms does not increase as much as the sales share because the expansion of large firms relies more on robots than on workers. Our calibrated model predicts a cross-sectional distribution of automation usage in line with firm-level data. The model also implies that a decline in automation costs reduces the labor income share and raises the average markup, both driven by between-firm reallocation, consistent with empirical evidence.
    Keywords: automation; market concentration; labor share; markup; reallocation; heterogeneous firms
    JEL: E24 L11 O33
    Date: 2022–04–01
  18. By: Ketelaars, Martijn (Tilburg University, Center For Economic Research); Kort, Peter (Tilburg University, Center For Economic Research)
    Keywords: research and development; welfare; Innovation; Subsidies; monopolist; government
    Date: 2022
  19. By: Haltiwanger, John C. (University of Maryland); Hyatt, Henry R. (U.S. Census Bureau); Spletzer, James R. (U.S. Census Bureau)
    Abstract: Most of the rise in overall earnings inequality is accounted for by rising between-industry dispersion from about ten percent of 4-digit NAICS industries. These thirty industries are in the tails of the earnings distribution, and are clustered especially in high-paying high-tech and low-paying retail sectors. The remaining ninety percent of industries contribute little to between-industry earnings inequality. The rise of employment in mega firms is concentrated in the thirty industries that dominate rising earnings inequality. Among these industries, earnings differentials for the mega firms relative to small firms decline in the low-paying industries but increase in the high-paying industries. We also find that increased sorting and segregation of workers across firms mainly occurs between industries rather than within industries.
    Keywords: inequality, firm size, industry, wage differentials, sorting, segregation, pay premium
    JEL: J31 J21
    Date: 2022–03

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