nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒07‒11
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Exclusive Contracts and Multihoming Agents in Two-sided Markets By Fuyuki Saruta
  2. Pareto-Improving Data-Sharing By Ronen Gradwohl; Moshe Tennenholtz
  3. Globalization and market power By Giammario Impullitti; Syed Kazmi
  4. Does Employer Concentration Reduce Labor Force Participation? By Geoffery T. Sazenbacher; Gal Wettstein
  5. Marshall Lecture 2020: the measure of monopsony By Langella, Monica; Manning, Alan
  6. Cutting Out the Middleman: The Structure of Chains of Intermediation By Matthew Grant; Meredith Startz
  7. Simplifying the Measure of Concentration from Common Ownership: A Note By Antonio Estache; Maxime Katté; Christophe Kieffer
  8. Mergers, Foreign Entry, and Jobs: Evidence from the U.S. Appliance Industry By Montag, Felix
  9. Covid-19 and market power in local credit markets: the role of digitalization By Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Solange Maria Guerra
  10. Copper to fibre migration: Regulated access fees incentivising migration By Eltges, Fabian; Fourberg, Niklas; Wiewiorra, Lukas
  11. Firm Competition and Cooperation with Norm-Based Preferences for Sustainability By Inderst, Roman; Sartzetakis, Eftichios S.; Xepapadeas, Anastasios
  12. The Growth of Firms, Markets and Rents: Evidence from China By Daniel Berkowitz
  13. Optimal Information Design of Online Marketplaces with Return Rights By Jonas von Wangenheim
  14. The Institutional environment as a factor of the protection and the development of economic competition By Fedorov Sergei
  15. Identification of Auction Models Using Order Statistics By Yao Luo; Ruli Xiao
  16. Innovation Begets Innovation and Concentration: The Case of Upstream Oil & Gas in the North Sea By Michele Fioretti; Alessandro Iaria; Aljoscha Janssen; Cl\'ement Mazet-Sonilhac; Robert K. Perrons
  17. Dynamic monopoly and consumers profiling accuracy By Didier Laussel; Ngo Van Long; Joana Resende
  18. Abuse of dominance in intraday coupled electricity markets/ Impact onmarket integration of renewables By Podlesnaya Alina
  19. The Dynamic Impact of Market Integration: Evidence from renewable energy expansion in Chile By Luis E. GONZALES; ITO Koichiro; Mar REGUANT
  20. Horizontal and Vertical Intra-industry Trade By Dutta, Sourish
  21. Credit market concentration and systemic risk in Europe By Merike Kukk; Alari Paulus; Nicolas Reigl

  1. By: Fuyuki Saruta (Faculty of Commerce, Doshisha University and Junior Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: We investigate a two-sided market model in which two platforms compete for sellers and buyers who can participate in multiple platforms (multihoming), and one of the two platforms can make exclusive contracts with sellers. The platform faces a trade-off when it enters into exclusivity agreements with sellers, which gives it an advantage when competing for buyers but reduces its revenue from the seller side. In addition, we expect that the existence of multihoming buyers weakens the platform’s incentive to have an exclusive contract with sellers. Even when buyers can multihome, does a platform have an incentive to make exclusive contracts with sellers? If so, how does exclusive dealing affect social welfare? We obtain the following results. First, in equilibrium, the platform makes exclusive contracts with all sellers or not at all. It offers exclusive contracts to all sellers if the revenue from the buyer side is expected to be somewhat higher than the revenue from the seller side; if sellers' network externality on buyers is sufficiently large (small), it chooses fully exclusive dealing (nonexclusive dealing). Second, exclusive dealing is preferable (detrimental) to social welfare when the network externality is sufficiently large (small). Exclusive dealing encourages the multihoming of buyers, which allows agents to have more interactions on one platform and prompts more buyers to obtain stand-alone benefits from multiple platforms.
    Keywords: Matching; Exclusive contracts; Two-sided markets; Multihoming; Platform competition
    JEL: D43 D62 L13 L14
    Date: 2022–06
  2. By: Ronen Gradwohl; Moshe Tennenholtz
    Abstract: We study the effects of data sharing between firms on prices, profits, and consumer welfare. Although indiscriminate sharing of consumer data decreases firm profits due to the subsequent increase in competition, selective sharing can be beneficial. We show that there are data-sharing mechanisms that are strictly Pareto-improving, simultaneously increasing firm profits and consumer welfare. Within the class of Pareto-improving mechanisms, we identify one that maximizes firm profits and one that maximizes consumer welfare.
    Date: 2022–05
  3. By: Giammario Impullitti; Syed Kazmi
    Abstract: Economic theory suggests that the markup is the most appropriate measure of market power and that its relationship with trade is rich and complex. Trade liberalisation can reduce markups via a decline in the residual domestic demand but also increase it via several channels. First, the incomplete pass-through of the cost reductions produced by lower input tariffs. Second, trade leads to more concentrated markets via entry and exit, putting upward pressure on markups. Third, market shares reallocation toward larger, more powerful firms, increase the aggregate markup. We propose a simple model of trade under oligopoly which incorporates all these channels. Using a large episode of trade liberalisation in Spain, we test this rich set of mechanisms linking trade and markups. The overall effects of trade on firm level and aggregate markups is pro-competitive but we find evidence of offsetting effects via the other channels. In particular, we show that firms protected by higher barriers to entry, measured as high intangible investment, R&D spending and patents, experience a weaker reduction in markups. Supporting a new theoretical insight emerging from our model that the feedback effect on trade-induced concentration on markups is stronger with higher barriers to entry.
    Keywords: international trade; markups; oligopoly
    Date: 2022
  4. By: Geoffery T. Sazenbacher; Gal Wettstein
    Abstract: The labor force participation of prime-age workers has been declining steadily over the past two decades. One possible factor in lower labor force participation may be the concentration of employers in local labor markets. An accumulation of evidence suggests that when firms possess greater bargaining power, they can drive down wages, which might, in turn, discourage labor force participation. The evidence has begun to filter through to policy, with a recent presidential executive order instructing the Federal Trade Commission to consider labor-market concentration, in addition to product-market concentration, when evaluating mergers. This brief, which is based on a recent paper, examines whether markets with higher employer concentration are associated with lower labor force participation rates and whether the relationship is weaker for employees with more bargaining power, such as those covered by unions. The analysis fills in a missing link between employer concentration and lower wages by directly estimating the correlations between concentration and labor force participation, and between concentration and employment. The discussion proceeds as follows. The first section provides background on employer concentration. The second section describes the data and methods for the analysis. The third section presents the results. The final section concludes that employer concentration is strongly negatively correlated with labor force participation, but only weakly correlated with employment. Union coverage mitigates – but does not fully offset – the negative correlation between concentration and labor force participation.
    Date: 2022–05
  5. By: Langella, Monica; Manning, Alan
    Abstract: There has been increasing interest in recent years in monopsony in the labour market. This paper discusses how we can measure monopsony power by combining insights from models based on both frictions and idiosyncrasies. It presents some evidence from the United Kingdom and the United States about how monopsony power varies across the wage distribution within markets, over the business cycle and over time.
    Keywords: monopsony; labour market competition; 834455
    JEL: I21
    Date: 2021–12–01
  6. By: Matthew Grant; Meredith Startz
    Abstract: Distribution of goods often involves multiple intermediaries engaged in sequential buying and reselling. Why do these chains of intermediation exist, and what are their implications for consumers? We show that multi-intermediary chains arise in response to internal economies of scale in trade costs. This suggests that chains will be longer on average in developing countries, and can account for empirical patterns in firm size and prices that we document using original data on imported consumer goods in Nigeria. While policy wisdom often calls for shortening chains, we show that this has ambiguous welfare implications. Equilibrium distribution structures are not generally efficient, and policies and technologies that lead to shorter chains will not necessarily benefit consumers, even when intermediaries hold market power. Instead, there is a fundamental trade-off: shorter chains have lower marginal cost but also fewer sellers, which can reduce competition, product availability, and access to retailers. We embed this insight in a quantifiable model of endogenous intermediation chains, which we calibrate for distribution of Chinese-made apparel in Nigeria, and describe changes in chain structure in response to counterfactual changes in regulation and e-commerce technologies. We find that cutting out middlemen has heterogeneous welfare impacts but may harm remote consumers.
    JEL: F1 F12 F14 O1
    Date: 2022–06
  7. By: Antonio Estache; Maxime Katté; Christophe Kieffer
    Abstract: The note presents a simpler alternative to the Modified Herfindahl-Hirschman Index to measure the risks of market concentration in the presence of common owners such as institutional investors owning shares in multiple firms expected to compete in the same market. This new measure, the Amplified Herfindahl-Hirschman Index, delivers the same insights as the MHHI but is less data intensive and less sensitive to outliers. It thus offers a more “user friendly” and more precise alternative to competition and regulatory agencies as a decision trigger for more detailed investigations of market power risks associated with the growing presence of common ownership.
    Keywords: Antitrust, Common Ownership, Institutional Investors, Market Power, Modified Herfindahl-Hirschman Index
    Date: 2022–06
  8. By: Montag, Felix
    Abstract: Proponents of industrial policy argue that merger control should consider domestic employment. I propose a model to assess how a product market merger affects rival product entry, consumer welfare, and domestic employment. Firms endogenously decide which products to offer. Domestic jobs depend on production locations and equilibrium quantities in the product market. I estimate the structural parameters of this model for the U.S. home appliance industry. Using the structural model, I examine the impact of Whirlpool’s acquisition of Maytag and compare it to the impact of a counterfactual acquisition by a foreign buyer with no prior presence in the U.S. market. Four key findings emerge from the comparison of these two acquisitions: First, rival product entry is mostly independent of the acquirer. Second, a Whirlpool acquisition leads to the removal of more merging party products. Third, it always leads to lower consumer welfare. Fourth, a Whirlpool acquisition leads to a smaller decrease in U.S. employment. I use these results to estimate the job value necessary for domestic employment effects to offset consumer welfare losses.
    Keywords: merger, jobs, Appliance Industry
    Date: 2022–06
  9. By: Thiago Christiano Silva; Sergio Rubens Stancato de Souza; Solange Maria Guerra
    Abstract: This paper investigates how COVID-19 and digitalization affected the market power in local Brazilian credit markets. We first propose a novel methodology to estimate bank market power at the local level. We design a data-intensive local version of the Lerner index by developing heuristics to allocate national-level banks' inputs, products, and costs across their branches using large-scale datasets from many sources. We then exploit the exogenous variation in COVID-19 intensity across Brazilian localities to analyze how the pandemic influenced local market power through the effective price and marginal cost channels. Despite reducing the economic activity, COVID-19 did not impact the effective price channel: bank branches offset the decrease in credit income by reducing credit concessions. However, bank branches more affected by COVID-19 experienced increased marginal costs as they could not rapidly adjust their cost factors in response to the decrease in credit concessions. Consequently, COVID-19 reduced banks' local market power via the marginal cost channel. More digitalized bank branches enjoy cost and lending flexibility: they experience less stickiness in their cost structure and complement the reduced credit concessions in localities more affected by COVID-19 by extending credit to borrowers in remote localities less affected. Consequently, more digitalized banks improve their market power compared to traditional banks. This paper provides new insights into how crises can affect local market power in non-trivial ways.
    Keywords: COVID-19, market power, digitalization, information technology, Lerner index
    JEL: C58 D22 D40 G21 I19 O31
    Date: 2022–05
  10. By: Eltges, Fabian; Fourberg, Niklas; Wiewiorra, Lukas
    Abstract: To shed more light on consumer-sided demand migration, we adapt Chen & Riordan's (2007) Spokes Model of spatial competition to a duopolistic-multi-product firm setting in which both firms simultaneously offer fibre and copper products comparable to Brito & Tselekounis (2017). Our model will be designed as a 2x2-product Spokes Model where two operators, an Incumbent and an Entrant, offer each a fibre and a copper based end customer internet product, with the Entrant paying an access fee for the latter one. Deriving operators' profits given demand shifts induced by asymmetric pricing strategies, we find that both operators experience trade-offs in the wholesale access fees, with the trade-off of the Incumbent being more binding as he has the higher interest in keeping demand in the copper network high. We characterise the relation of fibre take-up and welfare by finding out that fibre take-up and welfare both increase simultaneously in the copper wholesale access fee up to a critical threshold. Beyond this threshold, additional take-up will be paid by loss of total welfare.
    Date: 2021
  11. By: Inderst, Roman; Sartzetakis, Eftichios S.; Xepapadeas, Anastasios
    Abstract: We analyze firms incentives to coordinate on the introduction of a more sustainable product variant when consumers preferences for greater sustainability depend on the perceived social norm, which in turn is shaped by average consumption behavior. Such preferences lead to multiple equilibria. If the more sustainable variant allows firms to sufficiently expand their aggregate market share, when a lenient legal regime makes this feasible they will coordinate on the more sustainable outcome. If their aggregate market share however does not expand sufficiently under the more sustainable variant, coordination can forestall a more sustainable outcome. Our analysis thus both confirms and qualifies the notion of a sustainability first-mover disadvantage as a justification for an agreement between competitors, which has gained traction in antitrust. We also provide empirical evidence for norm-based sustainability preferences.
    Keywords: Sustainability,Antitrust,Firm Cooperation
    Date: 2022
  12. By: Daniel Berkowitz
    Abstract: During 1995-2007, China enacted reforms fostering competition including acceding to theWorld Trade Organization (WTO) and encouraging entry of non-state firms. While there isevidence that firms reduced markups, there is competing evidence that incumbent firms gainedrents. We estimate the impact of net entry on rents at the market level using US trade uncertaintyand colonial treaty ports as excluded and included instruments for net entry. Wedocument that: 1) rents existed; 2) rents arose from a market expansion that was faster thannet entry; 3) rents grew most rapidly outside of treaty ports and in low-trade uncertainty sectors.
    Date: 2022–01
  13. By: Jonas von Wangenheim
    Abstract: Customer data enables online marketplaces to identify buyers’ preferences and provide individualized product information. Buyers learn their product value only after contracting when the product is delivered. I characterize the impact of such ex-ante information on buyer surplus and seller surplus, when the seller sets prices and refund conditions in response to the ex-ante information. I show that efficient trade and an arbitrary split of the surplus can be achieved. For the buyer-optimal signal low-valuation buyers remain partially uninformed. Such a signal induces sellers to sell at low prices without refund options, resulting in commonly observed practices of opaque sales.
    Keywords: information disclosure, sequential screening, information design, strategic learning, Bayesian persuasion, mechanism design, platform economics, consumer protection
    JEL: D82 D86 D18
    Date: 2022–05
  14. By: Fedorov Sergei (Department of Economics, Lomonosov Moscow State University)
    Abstract: The protection and the development of economic competition always take place in the context of the institutional environment. In particular, the influence of this context manifests itself in the form of differences in approaches to industrial regulation, in variations of the administrative barriers to economic activity, and in distortions of antitrust practicies after their cross-country transplantation. This article analyzes the impact exerted by institutional environment on the economic competition by combining two approaches within the framework of the New institutional economics («social orders» by D. North et al. and O. Williamson's «mechanisms of governance»). The analysis allows us to conclude that the opportunism of politicians, along with the opportunism of market players, can cause restrictions on economic competition.
    Keywords: protection and development of competition, institutional environment, mechanisms of governance
    JEL: L50 L51 L40
    Date: 2022–05
  15. By: Yao Luo; Ruli Xiao
    Abstract: Auction data often contain information on only the most competitive bids as opposed to all bids. The usual measurement error approaches to unobserved heterogeneity are inapplicable due to dependence among order statistics. We bridge this gap by providing a set of positive identification results. First, we show that symmetric auctions with discrete unobserved heterogeneity are identifiable using two consecutive order statistics and an instrument or three consecutive ones. Second, we extend the results to ascending auctions with unknown competition and unobserved heterogeneity.
    Date: 2022–05
  16. By: Michele Fioretti; Alessandro Iaria; Aljoscha Janssen; Cl\'ement Mazet-Sonilhac; Robert K. Perrons
    Abstract: We investigate the effect of technology adoption on competition by leveraging a unique dataset on production, costs, and asset characteristics for North Sea upstream oil & gas companies. Relying on heterogeneity in the geological suitability of fields and a landmark decision of the Norwegian Supreme Court that increased the returns of capital investment in Norway relative to the UK, we show that technology adoption increases market concentration. Firms with prior technology-specific know-how specialize more in fields suitable for the same technology but also invest more in high-risk-high-return fields (e.g., ultra-deep recovery), diversifying their technology portfolio and ultimately gaining larger shares of the North Sea market. Our analyses illustrate how technology adoption can lead to market concentration both directly through specialization and indirectly via experimentation.
    Date: 2022–05
  17. By: Didier Laussel (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université); Ngo Van Long (McGill University = Université McGill [Montréal, Canada]); Joana Resende (Universidade do Porto = University of Porto)
    Abstract: Using a Markov-perfect equilibrium model, we show that the use of customer data to practice intertemporal price discrimination will improve monopoly profit if and only if information precision is higher than a certain threshold level. This U-shaped relationship lends support to a popular view that knowledge is good only if it is sufficiently refined. When information accuracy can only be achieved through costly investment, we find that investing in profiling is profitable only if this allows to reach a high enough level of information precision. Consumers expected surplus being a hump-shaped function of information accuracy, we show that consumers have an incentive to lobby for privacy protection legislation which raises the cost of monopoly's investment in information accuracy. However, this cost should not dissuade firms to collect some information on customers' tastes, as the absence of consumers' profiling is actually detrimental to consumers.
    Keywords: big data,consumers' collective action on privacy protection legislation,consumers profiling,dynamic monopoly,endogenous investment in profiling capability
    Date: 2022
  18. By: Podlesnaya Alina (Department of Economics, Lomonosov Moscow State University)
    Abstract: Electricity market coupling aimed at reducing electricity price differential by optimizing cross-border capacity allocation is the main mechanism of the EU electricity market integration. The paper considers the problem of the abuse of dominance in intraday coupled electricity markets and the consequences of this abuse for the market integration of renewables. The paper found that the abuse of dominance in coupled markets could occur when the owner of essential facilities (i.e. power exchange) prohibits his competitors access to the infrastructure necessary for the intraday coupled auctions (i.e. shared order book). Since intraday coupled auctions combine two main instruments of market integration of renewables, i.e. close to real time trading and optimization of cross-border capacity allocation, distortion of competition in intraday coupled electricity markets can prevent efficient market integration of renewables and the greening of the power industry.
    Keywords: market coupling, intraday electricity market, renewables, abuse of dominance
    JEL: K21 L40 L41 Q20
    Date: 2022–04
  19. By: Luis E. GONZALES; ITO Koichiro; Mar REGUANT
    Abstract: Effective and economical expansion of renewable energy is one of the most urgent and important challenges in addressing climate change. However, many countries are facing a problem because existing network infrastructures (i.e., transmission networks) were not originally built to accommodate renewables, which creates disconnected networks between demand centers and renewable supply sources. In this paper, we study the static and dynamic impacts of market integration on renewable energy expansion. Our theory highlights that statically, market integration improves allocative efficiency through gains from trade, and dynamically, it incentivizes new entry of renewable power plants. Using two recent grid expansions in the Chilean electricity market, we empirically test our theoretical predictions and show that the commonly-used event study estimation underestimates the dynamic benefits if renewable investments occur in anticipation of market integration. We build a structural model of power plant entry and show how to correct for such bias. We find that market integration resulted in price convergence across regions, increases in renewable generation, and decreases in generation cost and emission of pollutants. Furthermore, a substantial amount of renewable entry would not have occurred in the absence of market integration. We show that ignoring this dynamic effect would substantially understate the benefits of transmission investments.
    Date: 2022–05
  20. By: Dutta, Sourish
    Abstract: From the beginning of the 1980s, the first theoretical analysis of intra-industry trade showed that the determinants and consequences of this type of trade are different, depending on whether the traded products differ in quality. When the products are subject to intra-industry trade between two countries with distinct quality, this trade is vertically differentiated. Otherwise, it is called horizontal differentiation. There is a method for distinguishing intra-industry trade between two countries in vertical differentiation from those in horizontal differentiation. This method compares the unit value of exports to that of imports for each industry's intra-industry trade. It considers the intra-industry trading carried out in this industry as vertical differentiation when the unit value of exports differs significantly from that of imports.
    Keywords: Intra-Industry Trade, Horizontal Differentiation, Vertical Differentiation
    JEL: F10 F11 F12 F14
    Date: 2022–05
  21. By: Merike Kukk; Alari Paulus; Nicolas Reigl
    Abstract: We assess empirically the relationship between credit market concentration and a novel country-level systemic risk indicator that has been developed at the European Central Bank. We find a weakly U-shaped relationship between market concentration and systemic risk for Western European countries, where very low and high levels of market concentration are associated with higher systemic risk. Cumulative estimates with dynamic models show that systemic risk has a persistent negative response to an increase in market concentration from low and median levels of concentration. Local projection estimates for the period preceding the global financial crisis also suggest that an increase in market concentration may have further added to systemic risk at a time when it was building up in countries with high banking concentration, demonstrating the complexity of the relationship between systemic risk and market concentration
    Keywords: systemic risk, financial stability, credit institutions, credit growth, market concentration
    JEL: G10 G21 E58 C22 C54
    Date: 2022–03–24

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