nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒09‒26
eleven papers chosen by
Russell Pittman
United States Department of Justice

  1. Market Power of Digital Platforms By Jens-Uwe Franck; Martin Peitz
  2. Competition, Alignment, and Equilibria in Digital Marketplaces By Meena Jagadeesan; Michael I. Jordan; Nika Haghtalab
  3. Concentration in Product Markets By Benkard, C. Lanier; Yurukoglu, Ali; Zhang, Anthony Lee
  4. The Steering Incentives of Gatekeepers in the Telecommunications Industry By Brian McManus; Aviv Nevo; Zachary Nolan; Jonathan W. Williams
  5. Do competition and market structure matter for sensitivity of bank profitability to business cycle? By Ma³gorzata Olszak; Iwona Kowalska
  6. Foreign Competition, Skill Premium, and Product Quality: Impact of Chinese Competition on Mexican Plants By Banh, Thi Hang; Caselli, Mauro
  7. Search Costs and Diminishing Sensitivity By Heiko Karle; Florian Kerzenmacher; Heiner Schumacher; Frank Verboven
  8. Cost of the mission of transport and delivery of printed press: theory and evidence By Cremer, Helmuth; Muller-Vibes, Catherine
  9. Amazon's Three Major Lines of Business By Snyder, Edward A.; Canaday, Jason; Hughes, Marley
  10. Bidding for Contracts under Uncertain Demand: Skewed Bidding and Risk Sharing By Yao Luo; Hidenori Takahashi
  11. Does bank competition matter for the effects of macroprudential policy on procyclicality of lending? By Ma³gorzata Olszak; Iwona Kowalska

  1. By: Jens-Uwe Franck; Martin Peitz
    Abstract: Digital platforms have reshaped many product markets and play an increasingly important role in economies around the globe. Some of these platforms have become powerful players and may possess a lot of market power. Economists use a number of indicators to assess market power. In this article we discuss to which extent these indicators are helpful in the context of digital platforms. In particular, we focus on assessing entrenched market power and the role of potential competition to constrain this power. Finally, we discuss some cross-border issues of platform market power.
    Keywords: market power, digital platforms, Big Tech, potential competition, Brussels effect
    JEL: K21 L40 L13
    Date: 2022–08
  2. By: Meena Jagadeesan; Michael I. Jordan; Nika Haghtalab
    Abstract: Competition between traditional platforms is known to improve user utility by aligning the platform's actions with user preferences. But to what extent is alignment exhibited in data-driven marketplaces? To study this question from a theoretical perspective, we introduce a duopoly market where platform actions are bandit algorithms and the two platforms compete for user participation. A salient feature of this market is that the quality of recommendations depends on both the bandit algorithm and the amount of data provided by interactions from users. This interdependency between the algorithm performance and the actions of users complicates the structure of market equilibria and their quality in terms of user utility. Our main finding is that competition in this market does not perfectly align market outcomes with user utility. Interestingly, market outcomes exhibit misalignment not only when the platforms have separate data repositories, but also when the platforms have a shared data repository. Nonetheless, the data sharing assumptions impact what mechanism drives misalignment and also affect the specific form of misalignment (e.g. the quality of the best-case and worst-case market outcomes). More broadly, our work illustrates that competition in digital marketplaces has subtle consequences for user utility that merit further investigation.
    Date: 2022–08
  3. By: Benkard, C. Lanier; Yurukoglu, Ali; Zhang, Anthony Lee
    Abstract: This paper uses new data to reexamine trends in concentration in U.S. markets from 1994 to 2019. The paper's main contribution is to construct concentration measures that reflect narrowly defined consumption-based product markets, as would be defined in an antitrust setting, while accounting for cross-brand ownership, and to do so over a broad range of consumer goods and services. Our findings differ substantially from well established results using production data. We find that 42.2% of the industries in our sample are "highly concentrated" as defined by the U.S. Horizontal Merger Guidelines, which is much higher than previous results. Also in contrast with the previous literature, we find that product market concentration has been decreasing since 1994. This finding holds at the national level and also when product markets are defined locally in 29 state groups. We find increasing concentration once markets are aggregated to a broader sector level. We argue that these two diverging trends are best explained by a simple theoretical model based on Melitz and Ottaviano (2008), in which the costs of a firm supplying adjacent geographic or product markets falls over time, and efficient firms enter each others' home product markets.
    Keywords: Concentration,Product markets
    JEL: L11 L40 D43
    Date: 2021
  4. By: Brian McManus; Aviv Nevo; Zachary Nolan; Jonathan W. Williams
    Abstract: We study trade-offs faced by multiple-system operators (MSOs), the gatekeepers in the provision of internet service, when setting prices and quality for internet access and TV service. In response to improvements in over-the-top video (OTT), MSOs choose between accommodating OTT to share in the surplus it provides consumers, or steering consumers towards TV. We augment the standard mixed bundling model to show that in some cases MSOs have incentives to steer consumers towards TV, but that these incentives vary with the available pricing tools. We then estimate the distribution of model parameters using household panel data on subscription choices and internet usage. Our estimates imply that if MSOs can set different prices for different internet content, under many cost circumstances MSOs discount the OTT usage price. Furthermore, we find that the ability to charge prices based on internet usage strengthens the MSOs' incentive to improve OTT quality.
    JEL: L11 L13 L96
    Date: 2022–08
  5. By: Ma³gorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management)
    Abstract: The aim of this paper is to determine what is the effect of competition on cyclicality of bank profitability. To answer this question we apply robust fixed effects estimator to unbalanced panel of individual bank level data covering the period of 2004-2015 in over 100 countries. In our study we control for market power and market structure, as proxies for competitive environment and for net interest margin (NIM), return on assets (ROA) and return on equity (ROE) to proxy bank profitability. Our results show that decreased competition is related with an increase in procyclicality of net interest margin. This effect, however, does not hold in high-income countries. As for the ROA and ROE we find comparable results, but the effect is not always statistically significant. Market structure does affect profitability in a statistically signficant way, but seems to be important for procyclicality of ROA and ROE. We also find that the link between competition and procyclicality of profitability is non-linear and inversely U-shaped. Thus, both high and low competition intensity may reduce procyclicality of profitability.
    Keywords: profitability, procyclicality, competition, market structure
    JEL: E32 G21 G28 G32
    Date: 2021
  6. By: Banh, Thi Hang; Caselli, Mauro
    Abstract: This paper analyses the effect of rising competition from Chinese exports on the skill premium of Mexican plants. Using detailed product-plant-level production data from Mexico and bilateral product-level trade data for 1994-2007, we provide evidence that Mexican plants reduce their skill premium in response to increasing competition from Chinese exports, and the effect is more pronounced among non-exporting plants. Thus, we develop a model linking competition and wage inequality between skilled and unskilled workers by introducing these two types of labour to a model with heterogeneous firms and quality differentiation. Our model predicts that tougher competition leads plants to downgrade quality, which induces a decline in the wage difference between skilled and unskilled workers. We investigate this hypothesis empirically by analysing the effect of Chinese competition on the product quality of Mexican plants. Consistent with the fall in the skill premium, we document a downgrading impact of China's rise on Mexican plants' product quality and this quality downgrading is less intense for products sold in the foreign market. These findings provide empirical support for the predictions of our model.
    Keywords: product quality,Chinese competition,skill premium,Mexico,heterogeneous firms
    JEL: D21 D22 F12 F14
    Date: 2022
  7. By: Heiko Karle; Florian Kerzenmacher; Heiner Schumacher; Frank Verboven
    Abstract: Empirical search cost estimates tend to increase in the size of the transaction, even if search can be done conveniently online. To assess this pattern systematically, we conduct an online search experiment in which we manipulate the price scale while keeping the physical search effort for each price quote constant. Based on a standard search model, we confirm that search cost estimates indeed increase considerably in the price scale. We then modify the search model to allow for diminishing sensitivity, i.e., the tendency that people become less sensitive to price variations of fixed size when the price of the good increases. With the modified model, we find substantial degrees of diminishing sensitivity and obtain search cost estimates that are scale-independent. We show that these search cost estimates correspond well to subjects’ true opportunity costs of time and that the consumer welfare loss from diminishing sensitivity can be quite substantial.
    Keywords: consumer search, diminishing sensitivity, search costs
    JEL: C90 D12 D83
    Date: 2022
  8. By: Cremer, Helmuth; Muller-Vibes, Catherine
    Abstract: In the first part, we examine from a theoretical perspective how the cost of the mission of postal transport and delivery of newspapers should be defined and by which factors it is determined. In particular we show that a crucial ingredient in the determination of this cost is the variation in aggregate demand induced by an increase in the uniform transportation and delivery rate. In the second part, we empirically analyze the French print media market by modeling the existence of a reciprocal effect between the size of the readership and the amount of advertising. For this two-sided platform, we model the impact of the readership on the level of advertising demand and the intensity of advertising on the number of periodicals sold.
    Keywords: Cost of public service mission; delivery of printed press; internet; advertisement; two sided market
    Date: 2022–08–31
  9. By: Snyder, Edward A.; Canaday, Jason; Hughes, Marley
    Abstract: Since its founding in 1995 Amazon has become a leader in eCommerce, cloud computing services, and interactive devices for individuals and homes. In this study, we document the critical steps in Amazon's development in each line of business. Our review yields insights on (i) how Amazon responded to changes in demand, (ii) the importance of economies of scale, economies of scope, and network effects in Amazon's efforts to build out its lines of business, and (iii) interrelationships among these three apparently distinct commercial operations. This case study thereby provides insights how Amazon's Firm Specific Advantages (FSAs) contributed to its successes within and across lines of business. Our analysis further suggests that Amazon developed Dynamic Capabilities (DCs) capabilities that contributed to Amazon's superior performance. Our analysis is, however, necessarily interim in nature. Given changing market and regulatory conditions, whether Amazon will be able to sustain its performance in which lines of business and in which countries is uncertain.
    Keywords: entrepreneurship and business strategy,transaction cost economics,market entry,market power,dynamic capabilities,firm specific advantages
    JEL: L26 L7 L86 M21
    Date: 2022
  10. By: Yao Luo; Hidenori Takahashi
    Abstract: Procurement projects often involve substantial uncertainty in inputs at the time of contracting. Whether the procurer or contractor assumes such risk depends on the specific contractual agreement. We develop a model of auction contracts where bidders have multidimensional private information. Bidders balance skewed bidding and risk exposure; both efficient and inefficient bidders submit a low bid via skewed bidding. We document evidence of i) risk-balancing behavior through bid portfolio formation and ii) opportunistic behavior via skewed bidding using auction data. Counterfactual experiments suggest the onus of bearing project risk should fall on the procurer (contractor) when project risk is large (small).
    Keywords: Contract, Unit-Price, Fixed-Price, Portfolio, Cost Overrun, Procurement, Scoring Auction
    JEL: L5
    Date: 2022–09–01
  11. By: Ma³gorzata Olszak (Department of Banking and Money Markets, Faculty of Management, University of Warsaw); Iwona Kowalska (Department of Mathematics and Statistical Methods, Faculty of Management)
    Abstract: Competition is an inherent and natural environment under which banks operate and extend loans. Despite the extensive debate on the impact of bank competition on risk-taking and procyclicality, there is no evidence of its role in the effects of macroprudential policy on loans’ growth and on the sensitivity of lending to the business cycle. Using over 70,000 bank-level observations in 109 countries in 2004-2015 we find that increased competition strengthens the countercyclical effects of MPI in terms of reduced loans’ growth. Bank lending is procyclical in perfectly competitive industry. However, any decrease in the intensity of competition in countries not applying macroprudential policy instruments is related with increased procyclicality of lending. Sensitivity of lending to business cycle in countries implementing macroprudential policy depends on the type of macroprudential policy instrument and on the length of the use of instruments. We show that extended duration of use of cyclical macroprudential instruments is associated with increased procyclicality of lending. In a perfectly competitive environment we find increased procyclicality of credit in countries using cyclical instruments and decreased procyclicality of credit in countries applying balance-sheet oriented instruments. Under imperfectly competitive banking sector we find the opposite effects of macroprudential instruments on procyclicality of credit.
    Keywords: loans growth, macroprudential policy, competition intensity, procyclicality of lending
    JEL: E32 G21 G28 G32
    Date: 2021

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