nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒08‒22
thirteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Alternative Forms of Buyer Power in a Vertical Duopoly: Implications for profits and consumer welfare By Aditya Bhattacharjea; Srishti Gupta
  2. Inequality and concentration: Are the poor more exposed to concentrated markets? By Stephen Davies; Franco Mariuzzo
  3. Do the poor pay more for increasing market concentration? A study of retail petroleum By Franco Mairuzzo; Peter Ormosi
  4. Brand bidding restraints revisited – What is the appropriate economic and legal framework for the antitrust analysis of vertical online search advertising restraints? By Elias Deutscher
  5. Endogenous market structures, product liability, and the scope of product differentiation By Eric Langlais; Andreea Cosnita-Langlais
  6. Tech Platforms and Market Power: What?s the Optimal Policy Response? By Lambert, Thomas
  7. Comments on competition policy and labour markets By Marcel Boyer
  8. Branded Websites and Marketplace Selling: Competing during COVID-19 By Oksana Loginova
  9. Personalized pricing with heterogeneous mismatch costs By Noriaki Matsushima; Tomomichi Mizuno; Cong Pan
  10. Information Asymmetry and Search Intensity By Atabek Atayev
  11. Banning Volume Discounts to Curb Excessive Consumption: A Cautionary Tale By Farasat A.S. Bokhari; Paul W. Dobson
  12. How Do Insurers Price Medical Malpractice Insurance? By Black, Bernard; Traczynski, Jeffrey; Udalova, Victoria
  13. Dynamic Budget Throttling in Repeated Second-Price Auctions By Zhaohua Chen; Chang Wang; Qian Wang; Yuqi Pan; Zhuming Shi; Chuyue Tang; Zheng Cai; Yukun Ren; Zhihua Zhu; Xiaotie Deng

  1. By: Aditya Bhattacharjea (Department of Economics, Delhi School of Economics); Srishti Gupta (Department of Economics, Delhi School of Economics)
    Abstract: We derive several variations of a model in which two upstream firms supply a differentiated product to two downstream firms under exclusive contracts of different kinds. We first derive a benchmark model with upstream first-mover pricing. We then compare its outcomes with four other types of vertical arrangements representing different modes of exploiting buyer power: downstream first mover pricing; Nash bargaining, alternatively with linear and two-part tariffs; and vertical integration. In each case, we show how the equilibrium values of wholesale and retail prices as well as downstream firms’ profits are affected by changes in the exogenous parameters (degree of product differentiation, bargaining power, and production costs). We evaluate the various vertical regimes from the perspective of downstream firms’ profits as well as consumer welfare, and show how more powerful downstream firms can benefit consumers by exercising “countervailing power” against upstream firms. Key Words: Buyer power, Bertrand duopoly, Vertical contracts, Nash bargaining, Vertical integration. JEL Codes: D43, L13, L22
    Date: 2022–07
  2. By: Stephen Davies (Centre for Competition Policy and School of Economics, University of East Anglia); Franco Mariuzzo (Centre for Competition Policy and School of Economics, University of East Anglia)
    Abstract: This paper contributes to the empirical literature on the distributional impact of competition. Using a novel combination of the national survey of household expenditure and the business structure database for the UK, it establishes two descriptive facts. First, the poor are relatively more dependent than the rich on their product purchases and services supplied by more concentrated markets. Second, it sends a significant negative correlation across products and services between the income elasticity of demand and the concentration of the industries supplying those products. At this stage, we draw no inferences from these results. However, this analysis points to some interesting research questions and policy issues concerning the nature of competition in those industries which supply the necessities in consumption.
    Keywords: Concentration, Inequality
    Date: 2022–07–08
  3. By: Franco Mairuzzo (Centre for Competition Policy and School of Economics, University of East Anglia); Peter Ormosi (Centre for Competition Policy and Norwich Business School, University of East Anglia)
    Abstract: One of the central tenets of industrial organisation is that increasing/decreasing market concentration is likely to lead to increased/reduced markups. But does this affect every consumer to the same extent? Previous literature agrees that there can be significant price dispersion even in the case of homogeneous goods, which is at least partially due to the heterogeneity in how much consumers engage with the market. We link this heterogeneity to the impact of changing market concentration on markups. For this purpose, we employ a combination of 18 years of station-level motor fuel price data from Western Australia and a rich set of information on local market concentration. We summon a non-parametric causal forest approach to explore the heterogeneity in the effect of market exit/entry. The paper offers evidence of the distributional effect of changing market concentration. Areas with lower income experience a larger increase in petrol stations’ price margin as a result of market exit. On the other hand, entry does not benefit the same low-income areas with a larger reduction in the margin than in high-income areas. We argue that these findings are due to differences in how much consumers in different demographic groups engage with the market. Our findings give support to the argument that antitrust could help address inequality while staying true to its mission of promoting competition, provided that priorities are given to not only fixing supply-side problems but also to exploring demand-side remedies.
    Keywords: inequality, market concentration, income, consumer search, causal forests, petrol
    Date: 2022–07–08
  4. By: Elias Deutscher (Centre for Competition Policy and School of Law, University of East Anglia)
    Abstract: This paper explores the law and economics of brand bidding restraints. By means of this novel type of restraints, brand owners restrict how their licensed retailers use their brand names and trademarks as keywords in paid search advertising. The paper tests and critically reflects on the restrictive approach European competition watchdogs have recently adopted towards brand bidding restraints. It contends that this harsh antitrust treatment of brand bidding restraints is not sufficiently grounded in the economic analysis of vertical restraints. In proposing a comprehensive framework for the legal and economic analysis of brand bidding restraints, the paper makes three principal contributions. First, it asserts that brand bidding restraints can have a number of procompetitive effects by internalising advertising-related externalities, addressing free-riding on display and traditional advertising and facilitating fixed cost recovery through price discrimination. Second, the paper considers different ways through which brand bidding restraints may harm competition and consumer welfare when they disproportionately affect infra-marginal consumers, prevent meaningful intra- and inter-brand comparisons or result in price discrimination on the basis of search costs rather than brand preferences. Moreover, brand bidding restraints are of particular concern when adopted in the context of dual distribution systems where vertically integrated brand owners have an incentive to raise their retailers’ costs to prevent them from cannibalising their own sales channel. Third, the paper explores various legal filters to disentangle and balance the anti- and procompetitive effects of brand bidding restraints. In this respect, the paper makes a number of policy recommendations for the future antitrust analysis of brand bidding restraints. These proposals could also inform the ongoing revision of the Vertical Block Exemption Regulation and Vertical Guidelines in the EU and in the UK.
    Keywords: Antitrust, online advertising, restraints
    Date: 2022–07–08
  5. By: Eric Langlais; Andreea Cosnita-Langlais
    Abstract: The paper considers how product liability may shape firm size, product specification choices and market structure. We introduce a spatial Cournot duopoly on the linear market, where firms make an initial decision of product differentiation, then invest in precaution, before competing in quantity. Our main results are fourfold; 1) with full coverage of the market by the duopoly, there exist two equilibria (in pure strategies): central agglomeration (which is stable for low liability costs), and dispersion (which is stable for not too large liabiliy costs); 2) for larger liability costs, a mixed market structure duopoly/monopoly sustains a unique equilibrium with product differentiation; 3) this equilibrium enables a scope of differentiation higher (smaller) than the full duopoly (the social optimum); 4) the impact of liability costs on firms size and profits is complex, since it depends on the impact on both product differentiation and market structure. Finally, we show that consumer surplus and social welfare are both higher under the mixed market structure than under the full duopoly in an equilibrium with product differentiation.
    Keywords: horizontal differentiation, Cournot competition, spatial model, endogenous market structures, product liability, strict liability, negligence
    JEL: L41 K21 D82
    Date: 2022
  6. By: Lambert, Thomas (Mercury Publication)
    Abstract: Specific Questions: What are the relative merits of antitrust versus direct regulation for addressing market power concerns on digital platforms. Relevance: As digital platforms like Facebook, Google, and Amazon have grown, policy makers have been considering regulatory options?beyond prevailing antitrust standards?for stemming the dominant platforms? market power. Timeliness: The House Judiciary Committee recently released a report calling for a number of ex ante rules to govern digital platforms. Other governmental agencies (e.g., the UK?s Competition and Markets Authority) and research organizations (e.g., the University of Chicago?s Stigler Center) have similar called for such an approach. Legislative proposals are likely on the horizon.
    Date: 2021–11–01
  7. By: Marcel Boyer
    Abstract: Traditionally, labour concerns have not been top-of-mind when considering competition policy, but the current approach to wage-fixing, anti-poaching, and anti-mobility agreements between firms has been one of the main reasons behind recent Parliamentary attention to competition policy and labour markets. Key stakeholders in academic and policy circles have called for more robust enforcement regarding monopsony / oligopsony power in labour markets, when assessing mergers and acquisitions for example, as well as regarding market power in labour representation (unions) and certification as entry barriers in labour markets. The objective here is to identify the numerous challenges and pitfalls in assessing the level of competition on labour markets, both supply and demand, and in addressing remedies if necessary.
    Keywords: Competition,Cartels,Prices,Salaries,Certification,Market power,Mergers and acquisitions,Creative destruction,
    JEL: D43 K21 L12 L44
    Date: 2022–07–26
  8. By: Oksana Loginova (Department of Economics, University of Missouri)
    Abstract: I consider a market for differentiated products with an online marketplace (the platform) and two types of firms. Marketplace firms sell through the platform. Branded firms sell to consumers directly and, if they choose, through the platform. When a branded firm joins the platform, the firm expands its reach beyond its branded website/physical store(s) to consumers who visit the platform for all their purchases. The drawback is that the firm has to pay a referral fee for all sales on the platform, some of which are from its loyal consumers who would otherwise have purchased from the firm directly. I investigate the role of the firm composition in determining the equilibrium outcome. Interestingly, a higher fraction of branded firms translates into more firms on the platform and intense price competition. In the midst of the COVID-19 pandemic, consumers who used to shop at physical stores turn to the platform. I show that if they do (do not) consider other products, more (fewer) branded firms will join the platform in equilibrium.
    Keywords: price competition, online marketplace platform, brands, consumer shopping behavior, COVID-19
    JEL: C72 D43 L11 L13 M31
    Date: 2022–01–21
  9. By: Noriaki Matsushima; Tomomichi Mizuno; Cong Pan
    Abstract: Personalized pricing has become a reality through digitization. We examine firms' incentives to adopt one of the three pricing schemes: uniform, personalized, or group pricing in a Hotelling duopoly model. There are two types of consumer groups that are heterogeneous in their mismatch costs. We show that both firms employ personalized pricing in equilibrium regardless of the heterogeneity of consumer groups. If the consumer groups' heterogeneity is significant, the profits are higher when both firms use personalized pricing than when they employ uniform pricing; otherwise, the latter profits are higher than the former. Profits are highest when firms employ group pricing among the three cases. The ranking of consumer welfare among the three cases is opposite to that of profits.
    Date: 2022–08
  10. By: Atabek Atayev
    Abstract: The existing studies on consumer search agree that consumers are worse-off when they do not observe sellers' production marginal cost than when they do. In this paper we challenge this conclusion. Employing a canonical model of simultaneous search, we show that it may be favorable for consumer to not observe the production marginal cost. The reason is that, in expectation, consumer search more intensely when they do not know sellers' production marginal cost than when they know it. More intense search imposes higher competitive pressure on sellers, which in turn benefits consumers through lower prices.
    Date: 2022–06
  11. By: Farasat A.S. Bokhari (Centre for Competition Policy and School of Economics, University of East Anglia); Paul W. Dobson (Centre for Competition Policy and Norwich Business School, University of East Anglia)
    Abstract: Volume discounts encourage consumers to buy more. Banning such discounts should then lead to consumers buying less. This is the thinking behind banning multiple-unit discounts, including multibuy price promotions, to curb harmful excessive consumption of alcohol and high fat, sugar and salt (HFSS) foods. However, our analysis questions the validity of this thinking, which ignores the possible restraining effect of volume discounts. We found that such a ban for retailing alcohol in Scotland increased rather than reduced sales. Retailers switched to using more straight (single unit) discounts, which encouraged high consumption households to increase their shopping frequency and buy more.
    Keywords: Volume discounts, excessive consumption, multibuy, alcohol
    Date: 2022–07–08
  12. By: Black, Bernard (Northwestern University); Traczynski, Jeffrey (Federal Deposit Insurance Corporation); Udalova, Victoria (U.S. Census Bureau)
    Abstract: We study the factors that predict medical malpractice ("med mal") insurance premia, using national data from Medical Liability Monitor over 1990 to 2017. A number of core findings are not easily explained by standard economic theory. First, we estimate long run elasticities of premia to insurers' direct cost (payouts plus defense costs), allowing for lags of up to four years, of only around +0.40, when one might expect elasticities near one. Second, state caps on malpractice damages predict a roughly 50% higher ratio of premia to direct costs even though, in competitive markets, a damages cap should affect premia primarily through effect on cost. A difference-in-differences analysis of the "new cap" states that adopted caps during the early 2000's provides evidence supporting a causal link between cap adoption and the ratio of premium to direct cost. Third, the premium-to-cost ratio, which one might expect to be fairly constant over time, instead varies widely both across states at a given time and within states across time. Our results suggest that insurance companies do not fully adjust revenues to changes in direct costs even over long time periods. Insurers in new-cap states have been able to charge apparently supra-competitive prices for a sustained period.
    Keywords: insurance premium, medical malpractice, physicians
    JEL: D22 G22 K13
    Date: 2022–06
  13. By: Zhaohua Chen; Chang Wang; Qian Wang; Yuqi Pan; Zhuming Shi; Chuyue Tang; Zheng Cai; Yukun Ren; Zhihua Zhu; Xiaotie Deng
    Abstract: Throttling is one of the most popular budget control methods in today's online advertising markets. When a budget-constrained advertiser employs throttling, she can choose whether or not to participate in an auction after the advertising platform recommends a bid. This paper focuses on the dynamic budget throttling process in repeated second-price auctions from a theoretical view. An essential feature of the underlying problem is that the advertiser does not know the distribution of the highest competing bid upon entering the market. To model the difficulty of eliminating such uncertainty, we consider two different information structures. The advertiser could obtain the highest competing bid in each round with full-information feedback. Meanwhile, with partial information feedback, the advertiser could only have access to the highest competing bid in the auctions she participates in. We propose the OGD-CB algorithm, which involves simultaneous distribution learning and revenue optimization. In both settings, we demonstrate that this algorithm guarantees an $O(\sqrt{T\log T})$ regret with probability $1 - O(1/T)$ relative to the fluid adaptive throttling benchmark. By proving a lower bound of $\Omega(\sqrt{T})$ on the minimal regret for even the hindsight optimum, we establish the near optimality of our algorithm. Finally, we compare the fluid optimum of throttling to that of pacing, another widely adopted budget control method. The numerical relationship of these benchmarks sheds new light on the understanding of different online algorithms for revenue maximization under budget constraints.
    Date: 2022–07

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