nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒08‒29
twenty-one papers chosen by
Russell Pittman
United States Department of Justice

  1. Pricing Power in Advertising Markets: Theory and Evidence By Matthew Gentzkow; Jesse M. Shapiro; Frank Yang; Ali Yurukoglu
  2. Dollar Store Entry By Richards, Timothy J.; Chenarides, Lauren; Çakir, Metin
  3. Improved Information in Search Markets By Jidong Zhou
  4. City and Regional Demand for Vaccines Whose Supply Arises from Competition in a Bertrand Duopoly By Batabyal, Amitrajeet; Beladi, Hamid
  5. Декомпозиција промена у концентрацији у сектору осигурања у Србији 2011–2020: утицај промена у структури тржишта и броју друштава за осигурање By Bukvić, Rajko
  6. Pricing of new pharmaceuticals and price regulation in India By Vasudha Wattal
  7. A Cointegration-based cartel screen for detecting collusion By Kurdoglu, Berkay; Yucel, Eray
  8. Concentration and Diversification in a Small Island Economy: Mauritius By Stephen Davies
  9. The Economics of Platform Liability By Yassine Lefouili; Leonardo Madio
  10. Price cap versus tariffs: The case of the EU-Russia gas market By Ehrhart, Karl-Martin; Schlecht, Ingmar; Wang, Runxi
  11. Research Joint Ventures: The Role of Financial Constraints By Philipp Brunner; Igor Letina; Armin Schmutzler
  12. The End of Tourist Traps: A Natural Experiment on the Impact of Tripadvisor on Quality Upgrading By Dante Donati
  13. When Do Consumers Talk? By Ishita Chakraborty; Joyee Deb; Aniko Oery
  14. Flexibility and risk transfer in electricity markets By Crampes, Claude; Renault, Jérôme
  15. Optimal Tariffs on a Monopoly Platform in Two-sided Markets By KAO Kuo-Feng; MUKUNOKI Hiroshi
  16. Building Reputations via Summary Statistics By Harry Pei
  17. Ownership Networks and Earnings Inequality By Federico Huneeus; Borja Larrain; Mauricio Larrain; Mounu Prem
  18. How Should We Think About Employers’ Associations? By Alex Bryson; Paul Willman
  19. On Market Clearing of Day Ahead Auctions for European Power Markets: Cost Minimisation versus Social Welfare Maximisation By Ioan Alexandru Puiu; Raphael Andreas Hauser
  20. Role of Advance Notice on High-priced Hours: Critical peak pricing on industrial demand By ISOGAWA Daiya; OHASHI Hiroshi; ANAI Tokunari
  21. Price Pass-Through and Event Impacts in the U.S. Beef Industry By McKendree, Melissa G. S.; Tonsor, Glynn T.; Dong, Zekuan

  1. By: Matthew Gentzkow; Jesse M. Shapiro; Frank Yang; Ali Yurukoglu
    Abstract: Existing theories of media competition imply that advertisers will pay a lower price in equilibrium to reach consumers who multi-home across competing outlets. We generalize and extend this theoretical result and test it using data from television and social media advertising. We find that television outlets whose viewers watch more television charge a lower price per impression to advertisers. This finding helps rationalize well-known stylized facts such as a premium for younger and more male audiences on television. Also consistent with the theory, we show that social media advertising markets feature a premium for older audiences. A quantitative version of our model whose only free parameter is a scale normalization can explain 35 percent of the variation in price per impression across owners of television networks, and aligns with recent trends in television advertising revenue. We use the model to quantify the impact of mergers, the effect of competition on incentives to produce content, and the effect of Netflix ad carriage on prices for linear television advertising.
    JEL: L10 L82 M37
    Date: 2022–07
  2. By: Richards, Timothy J.; Chenarides, Lauren; Çakir, Metin
    Keywords: Marketing, Agribusiness, Research Methods/Statistical Methods
    Date: 2022–08
  3. By: Jidong Zhou (Cowles Foundation, Yale University)
    Abstract: How will an improved information environment affects competition and market performance when consumers face search frictions? This paper provides a unified way to model information improvement that makes the search pool more ``selective" (e.g., due to personalized recommendations), or more ``informative" (e.g., due to the availability of more detailed product information). Information improvement tends to induce consumers to search less, intensify price competition and benefit consumers, if the search friction is small, or if information improvement truncates the match utility distribution from below. More generally, however, it is also possible for information improvement to raise the market price and harm consumers.
    Keywords: consumer search, personalized recommendations, information improvement, price competition
    JEL: D43 D83 L13
    Date: 2020–11
  4. By: Batabyal, Amitrajeet; Beladi, Hamid
    Abstract: We study a one-period model of an aggregate economy composed of cities and regions that demand vaccines designed to fight a pandemic such as Covid-19. The supply of vaccines is the outcome of Bertrand competition between two firms A and B. The marginal cost of producing the vaccine for both firms is stochastic and drawn from a uniform distribution. In this setting, we perform three tasks. First, we describe the equilibrium pricing strategies of the two firms and then we compute their mean ex ante profits. Second, we permit both firms to conduct risky R&D and then determine the conditions under which only one firm engages in R&D and conditions under which both do. Finally, we introduce a way of mimicking the effect of increased competition and then analyze the impact of this increased competition on the incentives to conduct R&D faced by the two firms.
    Keywords: Bertrand Duopoly, City, Innovation, R&D, Region, Vaccine
    JEL: L13 O32 R11
    Date: 2022–01–09
  5. By: Bukvić, Rajko
    Abstract: Serbian. У раду се анализирају утицаји структуре тржишта (распореда тржишних удела) и броја друштава за осигурање на степен концентрације (и конкуренције) у сектору осигурања у Србији )без Косова и Метохије) у току десетогодишњег периода 2011–2020. Као основа за анализу послужио је обрачун већег броја одговарајућих коефицијената концентрације, извршен у претходном ауторовом истраживању (Буквић 2021), на основу укупне премије осигурања. Разграничење утицаја наведених фактора извршено је према познатој декомпозицији Хиршман-Херфиндаловог индекса на две компоненте, у којима фигуришу наведени фактори. Показано је да су варијације иначе релативно високог степена концентрације биле под утицајем тржишне структуре (варијансе тржишних удела), с којом постоји позитивна иако и умерена корелација, али не и броја друштава за осигурање, с којим су остварена дивергентна и готово у потпуности некорелисана кретања. English. The paper analyses the impacts of the market structure (the distribution of market shares) and number of insurance companies on the degree of concentration (and competition) in insurance sector in Serbia (without Kosovo and Metohia) during the ten years period 2011–2020. As basis for the analysis the calculation of the many appropriated concentration indices was taken, which was made in previous author's research (Буквић 2021), on the basis of total premium. Separation of the impacts of two cited factors is made according the famous of Hirschmann-Herfindahl index to two components, in them these factors figure. It was demonstrated that relative high values of concentration indices were under the influence of market structure (variance of the market shares), with them there is positive although the moderate correlation, but no of number of insurance companies, with them the divergent and in whole no correlated moves was registered.
    Keywords: концентрација, конкуренција, осигурање, Србија, показатељи, декомпозиција, тржишни удели, број компанија, concentration, competition, insurance, Serbia, indicators, decomposition, market shares, number of companies
    JEL: C38 D43 G22 L11 L84
    Date: 2022
  6. By: Vasudha Wattal (Centre for Competition Policy and School of Economics, University of East Anglia)
    Abstract: How does restricting a firm’s ability to raise prices in the future affect the introductory price of new products? This paper considers this question for new molecules launched in the Indian pharmaceutical market. The empirical results from the Indian market show higher launch prices for originators of chronic drugs that were introduced after the regulatory announcement. However, there appears no significant effect on competitor prices. I show that these findings align with a theoretical framework where originators of repeat purchase products increase introductory prices. While the originator secures a higher second period price, the competitor offers significant price cuts to capture new consumers. Overall, these results suggest that regulation delays welfare gains from new drugs, as initially more consumers are left out. The significance of this finding depends on the importance of these new introductions.
    Keywords: regulation, oligopoly, price setting, pharmaceuticals
    Date: 2022–07–08
  7. By: Kurdoglu, Berkay; Yucel, Eray
    Abstract: In this article, we propose a new empirical screen for detecting cartels, using the cointegration as our basis of modeling. The proposed screen is capable of identifying potential cartel behavior, indicating the strength of price adjustment among firms, and providing a basis for assessing structural change. The screen is applied to the Turkish cement market for an initial demonstration of use; we obtain promising results.
    Keywords: Antitrust; Cartel; Detection; Empirical screen
    JEL: D43 L41
    Date: 2022–07–26
  8. By: Stephen Davies (Centre for Competition Policy and School of Economics, University of East Anglia)
    Abstract: The objectives of this paper are partly to add to the worldwide literature on contemporary levels of concentration – but in our case for a small island economy, and partly to provide a reference study which yields a concise and accessible source for anyone interested in gaining a quick picture of the state of concentration and diversification of the leading firms in Mauritius. In the main, we have confined ourselves to fact-finding at this stage, and the novelty of the work lies in the descriptive statistical framework within which it is presented. Nevertheless, it is inevitably policy relevant. In our opinion it suggests the need for continuing vigilance of concentration in individual markets, but also more research in the potential competition implications of the fact that the very largest firms have leading, possibly dominant, market shares in more than one industry – is such diversification a cause for competition concern?
    Keywords: Concentration
    Date: 2022–07–08
  9. By: Yassine Lefouili (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Leonardo Madio (Universita degli Studi di Padova)
    Abstract: Public authorities in many jurisdictions are concerned about the proliferation of illegal content and products on online platforms. One often discussed solution is to make the platform liable for third parties' misconduct. In this paper, we first identify platform incentives to stop online misconduct in the absence of liability. Then, we provide an economic appraisal of platform liability that highlights the intended and unintended effects of a more stringent liability rule on several key variables such as prices, terms and conditions, business models, and investments. Specifically, we discuss the impact of the liability regime applying to online platforms on competition between them and the incentives of third parties relying on them. Finally, we analyze the potential costs and benefits of measures that have received much attention in recent policy discussions.
    Keywords: Liability rules,Online platform,Illegal content and products,Intellectual property
    Date: 2022–06
  10. By: Ehrhart, Karl-Martin; Schlecht, Ingmar; Wang, Runxi
    Abstract: To counter rising gas prices and corresponding Russian profits, many scholars point to import tariffs on Russian gas as a preferred policy instrument. While this makes sense in the case of oil, for the case of gas we observe the opposite. This is due to the structure of the EU-Russia gas market, where Russia holds a monopoly over the EU’s residual gas demand and the EU, if it would engage in joint procurement, has market power itself potentially acting as monopsony. However, it has not yet chosen to exercise its market power. Under these conditions, an external price cap for Russian gas can be considered to be the more appropriate policy instrument, because a price cap tends to take away economic incentives for Russia to use its market power, increasing gas prices through decreasing supply. Under such circumstances, we show that an external price cap is superior to a tariff in the sense that for any tariff there exists a price cap that makes both the EU and Russia better off. Consequently, the EU can always design a price cap that gives Russia the same welfare (so it is equally likely to accept), but makes the EU better off compared to imposing a tariff.
    Keywords: price cap,Russia,gas market,tariff,sanctions
    Date: 2022
  11. By: Philipp Brunner; Igor Letina; Armin Schmutzler
    Abstract: This paper provides a novel theory of research joint ventures for financially constrained firms. When firms choose R&D portfolios, an RJV can help to coordinate research efforts, reducing investments in duplicate projects. This can free up resources, increase the variety of pursued projects and thereby increase the probability of discovering the innovation. RJVs improve innovation outcomes when market competition is weak and external financing conditions are bad. An RJV may increase the innovation probability and nevertheless lower total R&D costs. RJVs that increase innovation tend to be profitable, but innovation-reducing RJVs also exist. Finally, we compare RJVs to innovation-enhancing mergers.
    Date: 2022–07
  12. By: Dante Donati
    Abstract: Asymmetric information can distort market outcomes. I study how the online disclosure of information affects consumers’ behavior and firms’ incentives to upgrade product quality in markets where information is traditionally limited. I first build a model of consumer search with firms’ endogenous quality decisions. In this model, lower search costs reallocate demand toward higher-quality producers, raising firms’ incentives to upgrade quality, and more so for firms selling ex-ante lower-quality products. I then use the access to online reviews to proxy for reductions in consumers’ search costs and estimate its impact on the restaurant industry in Rome, exploiting the abolition of mobile roaming charges in the EU in 2017 for identification. Based on a unique dataset combining monthly information from Tripadvisor with administrative social-security records, I find that, after the policy, revenues and total employment in mid- and high-rating restaurants grow by 3-10%. In turn, the probability for low-rating restaurants to exit the market doubles compared to the pre-policy period, while surviving low- and mid-rating establishments hire workers with higher wages and better curricula, eventually improving their Tripadvisor ratings. Overall, the share of low-rating restaurants in the most tourist areas decreases by 2.5 pp. My findings have implications for the role of review platforms in the performance of offline industries under asymmetric information.
    Keywords: review platforms, asymmetric information, search costs, service industry, quality
    JEL: D82 D83 L15 L80
    Date: 2022
  13. By: Ishita Chakraborty (Yale School of Management); Joyee Deb (Cowles Foundation, Yale University); Aniko Oery (Cowles Foundation, Yale University)
    Abstract: The propensity of consumers to engage in word-of-mouth (WOM) can di?er after good versus bad experiences, resulting in positive or negative selection of user-generated reviews. We study how the propensity to engage in WOM depends on information available to customers through di?erent marketing channels. We develop a model of WOM in which a target customer makes a purchase decision based on his private brand association, public product-speci?c information (e.g. from advertising or past reviews) and WOM content, and an early adopter of the new product engages in WOM only if her information is instrumental to the target customer’s purchase decision. We de?ne brand image to be the distribution of the customers’ brand associations, and strength of the brand image to be the precision of this distribution. We show that if the brand image is strong, then in equilibrium only negative WOM can arise. In contrast, with a weak brand image, positive WOM must occur. Moreover, holding product quality ?xed, a positive advertising signal realization leads to a more positive WOM selection. We use restaurant review data from to motivate our model assumptions and validate the predictions. For example, a textual analysis of reviews is consistent with prevalence of an instrumental motive for WOM. Further, a review rating for national established chain restaurant locations, where the brand image is strong, is almost 1-star lower (on a 5-star scale) than a review rating for a comparable independent restaurant, controlling for reviewer and restaurant characteristics.
    Keywords: Brand image, Costly communication, Recommendation engines, Review platforms, Word of mouth
    Date: 2020–08
  14. By: Crampes, Claude; Renault, Jérôme
    Abstract: The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of both demand and production from renewables. We analyse upward and downward flexibility in a two-stage decision process where firms compete in quantities produced ex ante at low cost and ex post at high cost to supply a random residual demand. We first compute the first best and competitive outcomes, then we determine the subgame perfect equilibria corresponding to two market designs: one where all trade occurs in a spot market with known demand, the other where a day-ahead market with random demand is added to the ex-post market, first in a general setting, then using a quadratic specification. We show that being inflexible can be more profitable than being flexible. We also show that adding a day-ahead market to the spot market increases welfare but transfers risks from firms to consumers.
    Keywords: flexibility; electricity; market design; risk transfer
    JEL: C72 D24 D47 L23 L94
    Date: 2022–07–28
  15. By: KAO Kuo-Feng; MUKUNOKI Hiroshi
    Abstract: This study investigates how countries set import tariffs on a monopoly platform’s product in a two-sided market. Consumers and service providers interact through the platform’s product, wherein service providers’ entries spur product demand and larger demand invokes more entries. Optimal import policies for importing countries are subsidies when network externalities and the number of importing countries are large, while they are tariffs when they are small. There is a case where optimal non-cooperative policies are import tariffs, but optimal cooperative policies are import subsidies. These results suggest that promoting digital trade and cooperative actions in tariff settings is important to advance trade liberalization for the platform’s products.
    Date: 2022–07
  16. By: Harry Pei
    Abstract: A patient seller interacts with a sequence of myopic consumers. Each consumer decides whether to trust the seller after she observes the number of times that the seller took each of his actions in the last K periods, but not the order with which these actions were taken. I assume that the seller's effort and consumers' trust are strategic complements, and that with positive probability, the seller is a commitment type who exerts the highest effort in every period. I show that the seller sustains his reputation for exerting the highest effort in all equilibria if and only if K is below some cutoff. Although a larger K allows more consumers to observe the seller's opportunistic behavior, it weakens consumers' incentives to punish the seller after they observe opportunistic behaviors. This effect undermines the seller's reputational incentives and lowers consumers' welfare. I also show that coarsening the summary statistics observed by the consumers may encourage the seller to sustain his reputation and may improve consumers' welfare.
    Date: 2022–07
  17. By: Federico Huneeus; Borja Larrain; Mauricio Larrain; Mounu Prem
    Abstract: We use matched employer-employee data together with data on the ownership networks of Chilean firms to document a novel relationship between inequality in labor income and ownership structures. Exploiting transitions of firms in and out of networks, we show that network afiliation is associated with higher inequality along two dimensions. First, network firms pay higher average wages than stand-alone firms, increasing between-firm inequality. Second, the dispersion of wages within a network firm is higher than within a stand-alone firm, increasing within-firm inequality. The effects are driven by increases in the wages of top workers, and by the entry of new top workers. Our findings shed light on the relationship between ownership structures and the distribution of labor income in the economy.
    Date: 2022–03
  18. By: Alex Bryson (University college London); Paul Willman (London School of Economics)
    Abstract: We maintain that employer associations are a specific form of employer collusion that is overt, formal and labour market focused which encompasses but is by no means confined to collective bargaining. We consider the conditions under which this form of collusion might emerge, and how it might develop. Since the context is the decline of employers’ associations in collective bargaining, we look at how collective bargaining involvement (and its disappearance) might relate to the growth or decline of other forms of collusion in areas such as product and financial markets, and political influence. Our central contention is that employers’ associations continue to perform an important role in helping employers set the terms of trade, albeit one that has adapted to the demise of sectoral bargaining.
    Keywords: employers’ associations; collusion; collective bargaining
    JEL: J50 J52
    Date: 2022–07–01
  19. By: Ioan Alexandru Puiu; Raphael Andreas Hauser
    Abstract: For the case of inflexible demand and considering network constraints, we introduce a Cost Minimisation (CM) based market clearing mechanism, and a model representing the standard Social Welfare Maximisation mechanism used in European Day Ahead Electricity Markets. Since the CM model corresponds to a more challenging optimisation problem, we propose four numerical algorithms that leverage the problem structure, each with different trade-offs between computational cost and convergence guarantees. These algorithms are evaluated on synthetic data to provide some intuition of their performance. We also provide strong (but partial) analytical results to facilitate efficient solution of the CM problem, which call for the introduction of a new concept: optimal zonal stack curves, and these results are used to devise one of the four solution algorithms. An evaluation of the CM and SWM models and their comparison is performed, under the assumption of truthful bidding, on the real world data of Central Western European Day Ahead Power Market during the period of 2019-2020. We show that the SWM model we introduce gives a good representation of the historical time series of the real prices. Further, the CM reduces the market power of producers, as generally this results in decreased zonal prices and always decreases the total cost of electricity procurement when compared to the currently employed SWM.
    Date: 2022–07
  20. By: ISOGAWA Daiya; OHASHI Hiroshi; ANAI Tokunari
    Abstract: This paper evaluates the impact of advance notice of demand curtailment events on inter-temporal consumption patterns of industrial electricity consumers. The empirical analysis focuses on a demand-response program offered in Japan, which has the same incentive structure as critical peak pricing (CPP). CPP imposes known higher prices at times that are not announced ahead of time, but the uncertainty of high-priced hours presumably limits the extent to which demand flexibly responds to the price intervention. Estimates of inter-temporal constant-elasticity-substitution preference indicate that advance notice weakens, not strengthens, the effectiveness of CPP for those industrial users who have lower rates of intra-day substitution of electricity consumption. The electricity demand turns significantly less elastic when the timings of CPP are announced in advance, compared to when they are kept unknown. This is largely because industrial electricity users in the Japanese manufacturing sector prioritize stable utilization of production facilities. Finally, the estimates imply that providing advance notice would encourage the participation of the demand curtailment program.
    Date: 2022–07
  21. By: McKendree, Melissa G. S.; Tonsor, Glynn T.; Dong, Zekuan
    Keywords: Marketing, Production Economics, Agricultural Finance
    Date: 2022–08

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