nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒06‒13
thirteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Excessive Competition on Headline Prices By Inderst, Roman; Obradovits, Martin
  2. Personalized Pricing and Competition By Rhodes, Andrew; Zhou, Jidong
  3. Loss Leading as a Threat to Brands By Inderst, Roman; Obradovits, Martin
  4. Multiproduct Mergers and the Product Mix in Domestic and Foreign Markets By Jackie M.L. Chan; Michael Irlacher; Michael Koch
  5. A Tale of Two Networks: Common Ownership and Product Market Rivalry By Florian Ederer; Bruno Pellegrino
  6. Evaluating Horizontal Mergers in Swedish District Courts Using Plant Capacity Concepts: With a Focus on Nonconvexity By Kristiaan KERSTENS; Xiaoqing CHEN
  7. Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged By Bachmann, Rüdiger; Bayer, Christian; Stüber, Heiko; Wellschmied, Felix
  8. AI Adoption in a Competitive Market By Joshua S. Gans
  9. CK Telecoms and the New Frame of Reference for the Analysis of Unilateral Effects in EU Merger Control By Elias
  10. A Class of Behavioral Models for the Profit-Maximizing Firm By Philippe Choné; Laurent Linnemer
  11. AI Adoption in a Monopoly Market By Joshua S. Gans
  12. Machine Learning based Framework for Robust Price-Sensitivity Estimation with Application to Airline Pricing By Ravi Kumar; Shahin Boluki; Karl Isler; Jonas Rauch; Darius Walczak
  13. Gender Discrimination in Competitive Markets By Sugata Marjit; Reza Oladi

  1. By: Inderst, Roman; Obradovits, Martin
    Abstract: In a variety of purchasing situations, consumers may focus primarily on headline prices, ignoring the full costs associated with acquiring and maintaining a product or service contract. Even when this is the case, it is widely believed that intense competition would adequately protect consumers (the so-called “waterbed effect”). However, in a tractable model of imperfect competition and vertical differentiation, we show that when consumers exhibit context-dependent preferences, competition may rather exacerbate their and society’s harm. Then, consumer protection policy must sufficiently constrain hidden costs and fees so that competition, along with high-quality firms’ incentives to educate consumers, can restore efficiency.
    Keywords: shrouded charges,hidden fees,price competition,shopping,salience,unshrouding
    JEL: D11 D18 D21 D43 D60 L11 L13 L15
    Date: 2021
  2. 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.
    Keywords: personalized pricing, competition, price discrimination, consumer data
    JEL: D43 D82 L13
    Date: 2022–05
  3. By: Inderst, Roman; Obradovits, Martin
    Abstract: Manufacturers frequently resist heavy discounting of their products by retailers, especially when they are used as so-called loss leaders. Since low prices should increase demand and manufacturers could simply refuse to fund deep price promotions, such resistance is puzzling at first sight. We explain this phenomenon in a model in which price promotions cause shoppers to potentially reassess the relative importance of quality and price, as they evaluate these attributes relative to a market-wide reference point. With deep discounting, quality can become relatively less important, eroding brand value and the bargaining position of brand manufacturers. This reduces their profits and potentially even leads to a delisting of their products. Linking price promotions to increased one-stop shopping and more intense retail competition, our theory also contributes to the explanation of the rise of store brands.
    Keywords: loss leading,relative thinking,reference-depending preferences,product positioning,vertical differentiation,price competition,price promotion
    JEL: D11 D22 D43 L11 L15
    Date: 2021
  4. By: Jackie M.L. Chan; Michael Irlacher; Michael Koch (Aarhus University)
    Abstract: This paper investigates the effects of mergers on the product mix of multiproduct firms. Thus, we open the black box of post-merger efficiency improvements to reveal a new margin of adjustment along the product dimension. We analyze horizontal mergers in a theoretical model where oligopolistic firms employ a flexible manufacturing technology and allocate assets between differentiated varieties. After a merger, acquirers drop products from their consolidated domestic product portfolio and reallocate assets towards core varieties. We further demonstrate that such merger-induced efficiency gains imply greater activity in foreign markets. Using detailed Danish register data, we document novel facts regarding mergers and multiproduct firms and find empirical evidence strongly supporting the model’s predictions. Our results show that the number of domestic products of the post-merger acquirer falls relative to the sum of the premerger acquirer and target, that skewness of domestic sales rises towards core products, and that export activity increases.
    Keywords: Multiproduct firms; Horizontal mergers; Flexible manufacturing; Exports; Product mix; Event Study
    JEL: F12 F14 G34 L22 L25
    Date: 2022–04
  5. By: Florian Ederer; Bruno Pellegrino
    Abstract: We study the welfare implications of the rise of common ownership in the United States from 1994 to 2018. We build a general equilibrium model with a hedonic demand system in which firms compete in a network game of oligopoly. Firms are connected through two large networks: the first reflects ownership overlap, the second product market rivalry. In our model, common ownership of competing firms induces unilateral incentives to soften competition. The magnitude of the common ownership effect depends on how much the two networks overlap. We estimate our model for the universe of U.S. public corporations using a combination of firm financials, investor holdings, and text-based product similarity data. We perform counterfactual calculations to evaluate how the efficiency and the distributional impact of common ownership have evolved over time. According to our baseline estimates the welfare cost of common ownership, measured as the ratio of deadweight loss to total surplus, has increased nearly tenfold (from 0.3% to over 4%) between 1994 and 2018. Under alternative assumptions about governance, the deadweight loss ranges between 1.9% and 4.4% of total surplus in 2018. The rise of common ownership has also resulted in a significant reallocation of surplus from consumers to producers.
    JEL: D43 D85 E23 G23 G34 L16 L21
    Date: 2022–04
  6. By: Kristiaan KERSTENS (Univ. Lille, CNRS, IESEG School of Management, UMR 9221 - LEM - Lille Économie Management, F-59000 Lille, France); Xiaoqing CHEN (School of Economics and Management, Southeast University, Nanjing, Jiangsu, China, and IESEG School of Management, 3 rue de la Digue, F-59000 Lille, France)
    Abstract: This contribution investigates the effects of horizontal mergers and acquisitions on the plant capacity utilisation of the Swedish district courts over the periods 2000-2017. More specifically, we empirically demonstrate the decomposition of input-oriented and output-oriented technical efficiency by incorporating several concepts of plant capacity utilisation. Moreover, we also explore the impact of convexity on input-oriented and output-oriented measures of plant capacity in the short-run scenario in an attempt to discover the potential rationale behind the merger wave. To the best of our knowledge, we are the first to assess horizontal mergers by employing plant capacity utilisation concepts. The results indicate that the horizontal mergers improve capacity utilisation. Furthermore, the nonconvex frontier method provides a more conservative estimate of plant capacity changes of this merger wave.
    Keywords: : Data Envelopment Analysis, Free Disposal Hull, Plant capacity utilisation, Horizontal mergers and acquisitions
    JEL: O13 O47 P28
    Date: 2022–05
  7. By: Bachmann, Rüdiger (University of Notre Dame); Bayer, Christian (University of Bonn); Stüber, Heiko (University of Erlangen-Nuremberg); Wellschmied, Felix (Universidad Carlos III de Madrid)
    Abstract: When employers face a trade-off between growing large and paying low wages—that is, when they have monopsony power—some productive employers will decide to acquire fewer customers, forgo sales, and remain small. These decisions have adverse consequences for aggregate labor productivity. Using high-quality administrative data from Germany, we document that East German plants (compared to West German ones) face a steeper size-wage curve, invest less into marketing, and remain smaller. A model with labor market monopsony, product market power, and customer acquisition matching these features of the data predicts 10 percent lower aggregate labor productivity in East Germany.
    Keywords: aggregate productivity, plant heterogeneity, unions, monopsony power, size-wage curve, monopolistic competition, customer capital, size distortions
    JEL: E20 E23 E24 J20 J42 J50
    Date: 2022–05
  8. By: Joshua S. Gans
    Abstract: Economists have often viewed the adoption of artificial intelligence (AI) as a standard process innovation where we expect that efficiency will drive adoption in competitive markets. This paper models AI based on recent advances in machine learning that allow firms to engage in better prediction. Using prediction of demand, it is demonstrated that AI adoption is a complement to variable inputs whose levels are directly altered by predictions and use is economised by them (that is, labour). It is shown that, in a competitive market, this increases the short-run elasticity of supply and may or may not increase average equilibrium prices. There are generically externalities in adoption with this reducing the profits of non-adoptees when variable inputs are important and increasing them otherwise. Thus, AI does not operate as a standard process innovation and its adoption may confer positive externalities on non-adopting firms. In the long-run, AI adoption is shown to generally lower prices and raise consumer surplus in competitive markets.
    JEL: D21 D41 D81 O31
    Date: 2022–04
  9. By: Elias (Centre for Competition Policy and School of Law, University of East Anglia)
    Abstract: In the recent CK Telecoms (Case T-399/16) judgment, the General Court annulled the European Commission’s decision to block the 4-to-3 telecom merger Hutchison3G UK/Telefónica UK. This watershed case is set to curtail the Commission’s ability to challenge future mergers in concentrated markets and proposes a fundamental reshape of the analysis of unilateral effects in the absence of dominance. This article shows that CK Telecoms advances six propositions that form the foundations of a new frame of reference for the analysis of unilateral effects under the EU Merger Regulation. This new framework has been welcomed by commentators as a long-overdue recognition that ‘the law’ trumps the Commission’s administrative discretion and as a vindication of the ‘more economic approach’. Based on a thorough review of 15 years of merger enforcement in the mobile telecommunication sector, this article challenges this account by debunking both the ‘rule of law’ and the ‘more economic approach’ arguments in support of the new framework. It instead demonstrates that each of the six principles advanced by CK Telecoms neither constitutes a reaffirmation of the ‘law’, nor aligns EU merger enforcement with the economic analysis of unilateral effects. In critically reflecting on the new framework laid down in CK Telecoms, this article formulates a number of policy proposals as building blocks for an alternative frame of reference that would preserve the effectiveness of EU merger enforcement in unilateral effects cases while enhancing its legal certainty.
    Keywords: Competition Law, Antitrust, Compliance, Cartels.
    Date: 2022–06–06
  10. By: Philippe Choné; Laurent Linnemer
    Abstract: We study the behavior of a firm that consistently maximizes a misspecified profit function. We provide an equilibrium concept where the misspecification error remains undetected. We examine the uniqueness and stability of the equilibria. The model of the price-taking firm belongs to this class. In one of these models, the cost-taking firm, the equilibrium price increases with fixed costs. The behavioural price can be lower or higher than the rational price, meaning consumers can benefit from the lack of rationality. Finally in a long-run perspective where the cost is endogenous, we show that the behavioral and rational firms end with the same level of output.
    Keywords: behavioural model of a firm, misspecified profit function, fixed costs
    JEL: L12 L21 L23 L25 M41
    Date: 2022
  11. By: Joshua S. Gans
    Abstract: The adoption of artificial intelligence (AI) prediction of demand by a monopolist firm is examined. It is shown that, in the absence of AI prediction, firms face complex trade-offs in setting price and quantity ahead of demand that impact on the returns of AI adoption. Different industrial environments with differing flexibility of prices and/or quantity ex post, also impact on AI returns as does the time horizon of AI prediction. While AI has positive benefits for firms in terms of profitability, its impact on average price and quantity, as well as consumer welfare, is more nuanced and critically dependent on environmental characteristics.
    JEL: D21 D81 O31
    Date: 2022–04
  12. By: Ravi Kumar; Shahin Boluki; Karl Isler; Jonas Rauch; Darius Walczak
    Abstract: We consider the problem of dynamic pricing of a product in the presence of feature-dependent price sensitivity. Based on the Poisson semi-parametric approach, we construct a flexible yet interpretable demand model where the price related part is parametric while the remaining (nuisance) part of the model is non-parametric and can be modeled via sophisticated ML techniques. The estimation of price-sensitivity parameters of this model via direct one-stage regression techniques may lead to biased estimates. We propose a two-stage estimation methodology which makes the estimation of the price-sensitivity parameters robust to biases in the nuisance parameters of the model. In the first-stage we construct the estimators of observed purchases and price given the feature vector using sophisticated ML estimators like deep neural networks. Utilizing the estimators from the first-stage, in the second-stage we leverage a Bayesian dynamic generalized linear model to estimate the price-sensitivity parameters. We test the performance of the proposed estimation schemes on simulated and real sales transaction data from Airline industry. Our numerical studies demonstrate that the two-stage approach provides more accurate estimates of price-sensitivity parameters as compared to direct one-stage approach.
    Date: 2022–05
  13. By: Sugata Marjit; Reza Oladi
    Abstract: We propose a competitive general equilibrium theory of gender discrimination in labor market where male and female workers are equally productive, but the female workers are deliberately paid less than the male due to subjective discrimination. Pioneering works of Becker (1957) and Arrow (1973), in terms of partial equilibrium models, have argued that the forces of competition would restrict subjective discrimination which leads to increasing cost for a firm and reduce the return to capital. In contrast, using a general equilibrium framework as in Jones (1965), we show that discrimination can perpetuate even in perfectly competitive markets. We also show that the return to capital can increase with discrimination if the capital intensive sector is also female worker dominated. If international trade policy, or any competitive price shock, reduces return to capital, increasing discrimination may be attempted to compensate the capital. Thus, policy intervention may be essential to contain discrimination in competitive markets.
    Keywords: gender discrimination
    JEL: J16 J70
    Date: 2022

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