nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒05‒23
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Personalized Pricing and Competition By Rhodes, Andrew; Zhou, Jidong
  2. Value Creation by Ad-Funded Platforms By Gregor Langus; Vilen Lipatov
  3. Industries, Mega Firms, and Increasing Inequality By John C. Haltiwanger; Henry R. Hyatt; James Spletzer
  4. Monopsony in the Labor Market: New Empirical Results and New Public Policies By Orley Ashenfelter; David Card; Henry S. Farber; Michael R. Ransom
  5. Pharmacy Benefit Managers and Vertical Relationships in Drug Supply: State of Current Research By Zarek C. Brot-Goldberg; Catherine Che; Benjamin R. Handel
  6. Estimating Equilibrium in Health Insurance Exchanges: Price Competition and Subsidy Design under the ACA By Pietro Tebaldi
  7. Search Algorithm and Sales on Online Platforms: Evidence from Food Delivery Platforms By Yangguang Huang
  8. Dynamic demand for differentiated products with fixed-effects unobserved heterogeneity By Victor Aguirregabiria
  9. Does Entry Remedy Collusion? Evidence from the Generic Prescription Drug Cartel By Amanda Starc; Thomas G. Wollmann
  10. Documento de Trabalho 003/2021 - Ex post mergers evaluation: Evidence from the Brazilian airline industry By Lílian Santos Severino; Guilherme Mendes Resende; Ricardo Carvalho de Andrade Lima
  11. Conflicts of interest, ethical standards, and competition in legal services By BOUCKAERT, Jan; STENNEK, Johan
  12. Copyright Protection in the Digital Single Market By Frank Stähler; Leander Stähler
  13. Regulation through Reference Prices By Alfredo Salgado
  14. When rivals team up in procurement: does it distort competition? By BOUCKAERT, Jan; VAN MOER, Geert
  15. India’s Cartel Penalty Practices, Optimal Restitution and Deterrence By Aditya Bhattacharjea; Oindrila De
  16. Multi sided platforms in competitive B2B networks with varying governmental influence – a taxonomy of Port and Cargo Community System business models By Tessmann, R.; Elbert, R.
  17. Efficient Level of SEPs Licensing By Gregor Langus; Vilen Lipatov
  18. International Protection of Consumer Data By Yongmin Chen; Xinyu Hua; Keith E. Maskus
  19. Information chasing versus adverse selection By Pintér, Gábor; Wang, Chaojun; Zou, Junyuan
  20. Entry, exit and market structure in a changing climate By Cascarano, Michele; Natoli, Filippo; Petrella, Andrea
  21. Managing Paradoxical Tensions in a Coopetitive Context Horizontal Multiple-Firm Coopetition By Julien Granata; Katherine Gundolf; Pierre Marques

  1. By: Rhodes, Andrew; Zhou, Jidong
    Abstract: We study personalized pricing (or first-degree price discrimination) in a general oligopoly model. In the short-run, when the market structure is fixed, the impact of personalized pricing hinges on the degree of market coverage (i.e., how many consumers buy). If coverage is high (e.g., because the production cost is low, or the number of firms is large), personalized pricing intensifies competition and so harms firms but benefits consumers, whereas the opposite is true if coverage is low. However in the long-run, when the market structure is endogenous, personalized pricing always benefits consumers because it induces the socially optimal level of firm entry. We also study the asymmetric case where some firms can use consumer data to price discriminate while others cannot, and show it can be worse for consumers than when either all or no firms can personalize prices.
    JEL: D43 D82 L13
    Date: 2022–05–09
  2. By: Gregor Langus; Vilen Lipatov
    Abstract: We identify features of interactions on online platforms that make an ad-funded business model attractive for the platform, but also for consumers. We then show that ad-funded platforms heavily rely on data for their ability to create value for their users. Formally, we show that data restrictions may trigger a switch away from ad-funded to fee-funded model, resulting in a loss of consumer welfare. We also argue that restricting the effort to increase data quality weakens competition to the detriment of consumers.
    Keywords: ad-funded business model, data aggregation restrictions, targeted advertising, platform competition, merchant competition, transaction costs
    JEL: K21 L22 L40 M37
    Date: 2022
  3. By: John C. Haltiwanger; Henry R. Hyatt; James Spletzer
    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.
    JEL: J21 J31
    Date: 2022–04
  4. By: Orley Ashenfelter (Princeton University); David Card (UC Berkeley); Henry S. Farber (Princeton University); Michael R. Ransom (Brigham Young University)
    Abstract: This paper summarizes the results of nearly a dozen new papers presented at the Sundance Conference on Monopsony in Labor Markets held in October 2018. These papers, to be published as a special issue of the Journal of Human Resources, study various aspects of monopsony and failures of competition in labor markets. It also reports on the new developments in public policies associated with widespread concerns about labor market competition and efforts to ameliorate competitive failures. The conference papers range from studies of the labor supply elasticity individual firms face to studies of local labor market concentration to studies of explicit covenants suppressing labor market competition. New policies range from private and public antitrust litigation to concerns about the effect of mergers and interfirm agreements on labor market competition. We provide a detailed discussion of the mechanics of the Silicon Valley High Tech Worker conspiracy to suppress competition based on Court documents in the case. Noncompete agreements, which are not enforceable in three states already, have also come under scrutiny.
    Keywords: Monopsony, Labor Market Power
    JEL: J0 J2 J3 L4
    Date: 2021–10
  5. By: Zarek C. Brot-Goldberg; Catherine Che; Benjamin R. Handel
    Abstract: Despite their importance to the supply of prescription drugs, there has been limited research on pharmacy benefit managers (PBMs) and their vertical relationships to insurers and drug manufacturers. This paper provides an overview of the current state of research on this topic, motivates why further research is needed, and discusses promising theoretical and empirical directions for that research.
    JEL: I11 I13 L1 L42
    Date: 2022–04
  6. By: Pietro Tebaldi
    Abstract: In government-sponsored health insurance, subsidy design affects market outcomes. First, holding premiums fixed, subsidies determine insurance uptake and average cost. Insurers then respond to these changes, adjusting premiums. Combining data from the first four years of the California ACA marketplace with a model of insurance demand, cost, and insurers’ competition, I quantify the impact of alternative subsidy designs on premiums, enrollment, costs, public spending, and consumer surplus. Younger individuals are more price sensitive and cheaper to cover. Increasing subsidies to this group would make all buyers better off, increase market participation, and lower average costs and average subsidies.
    JEL: I13 I18 L98
    Date: 2022–03
  7. By: Yangguang Huang (Department of Economics, The Hong Kong University of Science and Technology)
    Abstract: One prominent feature of online sales is that buyers rely on the search tools offered by platforms to process information when searching for products. We develop a model that captures how the search algorithm affects buyers’ search process, which influences the market equilibrium and welfare. The development of online platforms can reduce buyers’ search costs and promote competition among sellers, but a platform may design a search algorithm that is too “selective†from the social welfare perspective, which causes consumers to consider fewer options and suppresses competition. By using data from food delivery platforms, we provide empirical evidence that search algorithms deeply affect restaurant revenues. Markets with more chain restaurants with established brands tend to have more concentrated sales. This is partly caused by search algorithms being biased towards large restaurant chains.
    Keywords: online platform, search algorithm, consideration set, food-delivery platform
    JEL: D83 L11 L13 L42
    Date: 2021–01
  8. By: Victor Aguirregabiria
    Abstract: This paper studies identification and estimation of a dynamic discrete choice model of demand for differentiated product using consumer-level panel data with few purchase events per consumer (i.e., short panel). Consumers are forward-looking and their preferences incorporate two sources of dynamics: last choice dependence due to habits and switching costs, and duration dependence due to inventory, depreciation, or learning. A key distinguishing feature of the model is that consumer unobserved heterogeneity has a Fixed Effects (FE) structure -- that is, its probability distribution conditional on the initial values of endogenous state variables is unrestricted. I apply and extend recent results to establish the identification of all the structural parameters as long as the dataset includes four or more purchase events per household. The parameters can be estimated using a sufficient statistic - conditional maximum likelihood (CML) method. An attractive feature of CML in this model is that the sufficient statistic controls for the forward-looking value of the consumer's decision problem such that the method does not require solving dynamic programming problems or calculating expected present values.
    Keywords: Structural dynamic discrete choice models; Dynamic demand of differentiated products; Panel data; Fixed effects; Habits; Switching costs; Storable products; Durable products
    JEL: C23 C25 C51 D12
    Date: 2022–05–08
  9. By: Amanda Starc; Thomas G. Wollmann
    Abstract: Entry represents a fundamental threat to cartels engaged in price fixing. We study the extent and effect of this behavior in the largest price fixing case in US history, which involves generic drugmakers. To do so, we link information on the cartel’s internal operations to regulatory filings and market data. We find that collusion induces significant entry, which in turn reduces prices. However, regulatory approvals delay most entrants by 2-4 years. We then estimate a structural model to assess counterfactual policies. We find that reducing regulatory delays by just 1-2 years equates to consumer compensating variation of $597 million-$1.52 billion.
    JEL: L11 L41 L65
    Date: 2022–03
  10. By: Lílian Santos Severino (Conselho Administrativo de Defesa Econômica (Cade), Departamento de Estudos Econômicos); Guilherme Mendes Resende (Conselho Administrativo de Defesa Econômica (Cade), Departamento de Estudos Econômicos); Ricardo Carvalho de Andrade Lima (Ministério Público Federal)
    Abstract: Competition policy aims to preserve market competition by, for example, preventingmergers that harm consumers. Mergers can diminish competition by facilitating either tacit orexplicit collusion or may creating a unilateral incentive to increase price. While thesepossibilities provide an economic rationale for merger enforcement, mergers might be relatedto improving how markets function. Maldonado and Severino (2019) show that moreproductive firms acquire target firms that are more productive, which indicates the synergythat M&A can bring. Generally, Antitrust Authorities (AAs) analyze cases of M&A and potentialanticompetitive conducts, such as collusion. In this study, we will focus on the decisionscarried out by the Brazilian Antitrust Authority, the Administrative Council for EconomicDefense (CADE), regarding M&A's in the Brazilian airline sector in recent years. The Brazilianairline sector has a fundamental role in the economic development. In 2019, it representedapproximately 1% of the global GDP and faced a growth of 3.3% in air transport expensesregarding to the previous year (IATA, 2019b). In Brazil, Section 88 of the Law 12529/2011 regulates the M&A cases which must bereviewed by Cade. During reviews, the Antitrust Authority studies the impacts that theoperation can have on the market. Some well-known international methodologies, such asthe Upward Pricing Pressure (UPP) and mergersimulations, are commonly used to identify thelikelihood of a merging firm raising prices after the operation – which can be widespread tothe entire market. If prices are expected to rise, consumers will be adversely affected by themerger; thus, to prevent it, CADE can clear a transaction subject to remedies, or block it. Onthe other hand, if the deal does not pose any competition issues, Cade may clear thetransaction unconditionally. Nowadays, many studies indicate the importance of evaluating mergers outcome,especially within the Antitrust Authorities, since "ex-post evaluations can help to determine ifan intervention (or non-intervention) has achieved its objectives and, if not, the reasons itfailed to do so" (OECD, 2016). In response to this demand, the Competition Division of theOECD published a Guide for ex post evaluation to advise authorities on the importance ofmonitoring the outcome of their decisions, which can help to better design futureinterventions. Furthermore, it is worth noting that by carrying out and disclosing ex postmerger evaluations, the antitrust authorities present more transparency towards society and highlight the importance of competition enforcement. In 2019, for instance, Cade publishedits first ex post merger evaluation, which analyzed the impact on products prices of a mergerbetween two firms of the food industry – namely the Sadia-Perdigão case (Severino, Resende,Bispo, 2019). The present study aims to analyze the effects on the average airfare on domestic routesby two mergers cleared by Cade in this sector (GOL and Webjet; and Azul and Trip). This studycontributes to monitoring the competition policy in Brazil in the airline industry, a key sectorfor the country's economic development, by estimating difference in differences (DID) modelsconsidering as dependent variables fare prices and seats sold from July 2010 to December2019. The results indicate a reduction of about 8% in GOL's fare on routes in which GOL andWebjet operated before the merger (overlap routes) and an increase of approximately 38% inthe number of seats sold by GOL in those same routes after the merger. On the other hand,in the merger case of Azul and Trip, we did not find a statistically significant effect on the fare,but we found an increase of nearly 27% in the number of seats sold by Azul on overlap routesafter the transaction. These results present relevant implications. First, we cannot find anticompetitive effectsresulting from these mergers in the Brazilian airline sector; at the international field, similarresults were found by Carlton et al. (2019) during the analysis of three legacy mergers in theUnited States (namely Delta-Northwest, The United-Continental, and The American-USAirways). Secondly, these two mergers were cleared by the Brazilian authority subject toconditions related to the efficiency of the Santos Dumont airport; thus, it is possible to statethat Cade achieved its purpose of protecting competition for the benefit of consumers. Finally,we must take into consideration that these were e specific mergers in a particular period, whichdoes not indicate that these results should be found in every transaction in the airline sector.
    Keywords: Fusões e Aquisições, Política de defesa da concorrência, Avaliações ex post
    Date: 2021–09
  11. By: BOUCKAERT, Jan; STENNEK, Johan
    Abstract: We study how the legal profession manages representational conflicts of interest. Such conflicts arise when the same law firm represents clients with adverse interests. They may compromise the legal process, ultimately jeopardizing social welfare. We argue that current ethical standards, emphasizing disqualification over Chinese walls, may actually worsen the clients’ situation. Instead, the clients’ interests are today mainly protected by law firms being small. Despite low market concentration, law firms enjoy high earnings as representational conflicts create negative network externalities at the firm level. These profits are not eroded even in the long run as entry occurs through firm splitups.
    Keywords: Law firms, Professional services, Dual representation, Representational conflicts of interest, Ethical standards, Chinese walls, Recusals, Negative network externalities, Competition, Self-regulation
    JEL: K40 L13 L22 L44 L84
    Date: 2022–04
  12. By: Frank Stähler; Leander Stähler
    Abstract: This paper scrutinizes the effects of the European Directive on Copyright in the Digital Single Market on platform competition in media markets. Platforms that are Online Content-Sharing Service Providers must have a license agreement with collective management organizations that control the content platform users may (or must not) upload to the platform. The paper shows that the new directive may imply market concentration and an aggregate welfare loss. The reason is that only users of the large platform will be allowed to upload content if the content asset controlled by a collective management organization is sufficiently valuable and if network effects are strong.
    Keywords: copyright protection, IPRs, content platforms, trade in services, digital services
    JEL: D43 F12 L86
    Date: 2022
  13. By: Alfredo Salgado
    Abstract: This paper theoretically analyzes the role of reference prices on competition and welfare in a context of a circular city model with free entry and reference prices, in which paying market prices above a reference negatively affects the utility of consumers. Agents interact in a three-stage game: 1. A policymaker chooses a reference price to maximize consumer welfare. 2. Firms make their entry decision. 3. Firms compete in prices and consumers make their consumption decisions. We find that in equilibrium the market price and the optimal reference price chosen by the policymaker always coincide. In addition, it is shown that the use of reference prices reduces market equilibrium prices compared with the case without reference prices, which implies a net welfare gain for consumers. These gains could be higher in less competitive environments and lower in the presence of higher marginal costs.
    JEL: C7 D4 D9 L1 L2 L5
    Date: 2022–03
  14. By: BOUCKAERT, Jan; VAN MOER, Geert
    Abstract: The purpose of this article is to offer insights to courts and competition authorities on how to assess horizontal agreements to team up in a procured project. We argue that agreements which are specified in advance of bidding should be evaluated against the counterfactual whereby firms negotiate subcontracts after bidding has ended. Following this approach, we challenge the commonly held viewpoint that joint bidding distorts competition if the bidding consortium members could each bid solo. We also question the need for bidding consortium members to integrate their operations.
    Date: 2022–04
  15. By: Aditya Bhattacharjea; Oindrila De (Institute of Economic Growth, Delhi)
    Abstract: We analyze the cartel penalty regime in India in light of the literature on optimal penalty for restitution and deterrence, as well as current penalty practices in different jurisdictions. Our analysis reveals that though India’s Competition Act allows for a much harsher penalty than other jurisdictions in cartel cases, the actual practices followed by the Competition Commission of India (CCI) are often inconsistent and non-transparent, resulting in a large number of court cases and very low penalty recovery. This inconsistency also weakens the leniency programme adopted by the CCI in order to induce cartelists to come forward with evidence. Our analysis reveals that in the majority of cases, penalties fall short of restitution and deterrence benchmarks suggested by some earlier literature. We suggest that in order to enhance both punishment and deterrence, CCI should adopt a consistent profit and durationbased penalty regime already prescribed in the law, and issue penalty guidelines taking into account the lack of profit/turnover data, aggravating and mitigating factors, as well as aberrations such as the role trade associations in the Indian context.
    Keywords: Cartel penalty, Leniency, Optimal deterrence
    JEL: L40 L41 L44
    Date: 2021–03
  16. By: Tessmann, R.; Elbert, R.
    Date: 2022–04–26
  17. By: Gregor Langus; Vilen Lipatov
    Abstract: We study the question whether a holder of standard essential patents (SEPs) should be allowed to choose the level in the value chain at which to offer a FRAND license to its SEPs. We give a pos-itive answer to this question for two reasons. First, the SEP holder and the social planner tend to choose the licensing level that, other things being equal, minimizes transaction costs. Second, the SEP holder maximizes total output, which is often aligned with social welfare maximization by the planner. These two factors make it likely that the SEP holder chooses the efficient level of SET licensing.
    Keywords: standard-essential patents, SEP licensing, FRAND, telecommunications, royalty base, licensing level, alignment of incentives
    JEL: K21 L40 O34
    Date: 2022
  18. By: Yongmin Chen (University of Colorado Boulder); Xinyu Hua (Hong Kong University of Science and Technology); Keith E. Maskus (University of Colorado Boulder)
    Abstract: We study the international protection of consumer data in a model where data from product sales generate additional revenue to firms but disutility to consumers. When data usage lacks transparency, a firm suffers a commitment problem and overuses consumer data. As transparency increases, the firm may adjust prices inefficiently across countries with different privacy preferences. Contrary to the result in the single-country case, more transparency can exacerbate data-usage and output distortions in the global economy, and unilaterally-imposed regulation on data usage may reduce global welfare. There can be substantial gains from international coordination – though not necessarily uniformity – of data regulations.
    Keywords: consumer data, privacy, multinational Örm, regulation, data localization, international coordination
    JEL: F23 D18 L15
    Date: 2020–11
  19. By: Pintér, Gábor (Bank of England); Wang, Chaojun (The Wharton School); Zou, Junyuan (INSEAD)
    Abstract: Contrary to the prediction of the classic adverse selection theory, a more informed trader could receive better pricing relative to a less informed trader in over‑the‑counter financial markets. Dealers chase informed orders to better position their future quotes and avoid winner’s curse in subsequent trades. When dealers are perfectly competitive and risk averse, their incentive of information chasing dominates their fear of adverse selection. In a more general setting, information chasing can dominate adverse selection when dealers face differentially informed speculators, while adverse selection dominates when dealers face differentially informed trades from a given speculator. These two seemingly contrasting predictions are supported by empirical evidence from the UK government bond market.
    Keywords: Information chasing; adverse selection; over-the-counter; price efficiency
    JEL: D82 G14 G18
    Date: 2022–04–08
  20. By: Cascarano, Michele; Natoli, Filippo; Petrella, Andrea
    Abstract: Climate change has long run effects on the size and composition of a country's corporate sector. Using administrative data on the universe of Italian firms, we find that an increase in the incidence of very hot days over a multiyear period persistently reduces the growth rate of active firms in the market. This is due to a drop in firm entry and an increase in firm exit, with relocation playing a minor role. A firm-level investigation reveals a dichotomy between smaller firms, which suffer from high temperatures, and larger firms that successfully adapt, increasing production and net revenues. According to an average climatic scenario, the projected evolution of local temperatures will impact corporate demography further, also exacerbating the divergent effects across warmer and colder areas over the current decade.
    Keywords: climate change; temperatures; firm dynamics
    JEL: D22 Q54 R12
    Date: 2022–04–26
  21. By: Julien Granata; Katherine Gundolf; Pierre Marques (IRG - Institut de Recherche en Gestion - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12 - UPEM - Université Paris-Est Marne-la-Vallée)
    Abstract: The paradox that unifies cooperation and competition may be at the root of several tensions (Gnyawali and Park, 2009). The multiplication of partners enhances both coopetition complexity and the tensions related to that multiplication. Consequently, the management of tensions is essential for coopetition to evolve over time. Our exploratory study investigates a case of horizontal multiple-firm coopetition to understand the evolution of tensions and their management. In this article, we identify the paradoxical tensions of coopetition as they develop over time and the related risks. The coopetitors multiply their coopetition strategies to overcome tensions. Additionally, we note that the management of paradoxical tensions contributes to the evolution of coopetitive relationships and allows partners to benefit from coopetition opportunities. Last, the case reveals the existence of a coopetitive portfolio for coopetitive managers.
    Abstract: Le paradoxe qui unit la coopération et la compétition peut être à l'origine de plusieurs tensions (Gnyawali et Park, 2009). La multiplication des partenaires accroît à la fois la complexité de la coopétition et les tensions liées à cette multiplication. Par conséquent, la gestion des tensions est essentielle pour que la coopétition évolue dans le temps. Notre étude exploratoire examine un cas de coopétition horizontale multi-entreprises pour comprendre l'évolution des tensions et leur gestion. Dans cet article, nous identifions les tensions paradoxales de la coopétition au fil du temps et les risques associés. Les coopétiteurs multiplient leurs stratégies de coopétition pour surmonter les tensions. De plus, on note que la gestion des tensions paradoxales contribue à l'évolution des relations coopétitives et permet aux partenaires de bénéficier d'opportunités de coopétition. Enfin, le cas révèle l'existence d'un portefeuille coopétitif pour les managers en charge de la coopétition.
    Keywords: coopetition management,paradoxical tensions,horizontal multiple firms,coopetitive portfolio,wine,wine coopetition management
    Date: 2021

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