nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒10‒17
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Price-Directed Search, Product Differentiation and Competition By Martin Obradovits; Philipp Plaickner
  2. Market Effects of Sponsored Search Auctions By Massimo Motta; Antonio Penta
  3. Competition with limited attention to quality differences By Schmitt, Stefanie Y.
  4. Information vs Competition: How Platform Design Affects Profits and Surplus By Amedeo Piolatto; Florian Schuett
  5. A process of demand discovery from a smithian perspective. By Michele Bee; Juan Pablo Gama
  6. Vertical Control Change and Platform Organization under Network Externalities By Jorge Padilla; Salvatore Piccolo; Shiva Shekhar
  7. Competition under Incomplete Contracts and the Design of Procurement Policies By Rodrigo Carril; Andres Gonzalez-Lira; Michael S. Walker
  8. Cursed Consumers and the Effectiveness of Consumer Protection Policies By Ispano, Alessandro; Schwardmann, Peter
  9. Platform Liability and Innovation By Doh-Shin Jeon; Yassine Lefouili; Leonardo Madio
  10. Common Owners as Active Monitors: A Theory of Rational Neglect By Rötzer, Sebastian
  11. Externality Control and Endogenous Market Structure under Uncertainty: the Price vs. Quantity dilemma By Luca Di Corato; Yishay D. Maoz
  12. Looking Backward, Innovating Forward: A Theory of Competitive Cascades By Kevin Lim; Daniel Trefler; Miaojie Yu
  13. Antitrust and Digital Platforms By World Bank
  14. Employer power and employment in developing countries By Nancy H. Chau; Ravi Kanbur; Vidhya Soundararajan
  15. The Rise of Nonbanks and the Quality of Financial Services: Evidence from Consumer Complaints By Ahmet Degerli; Jing Wang
  16. Zero-Ending Prices, Cognitive Convenience, and Price Rigidity By Avichai Snir; Haipeng (Allan) Chen; Daniel Levy
  17. 100 years of rising corporate concentration By Kwon, Spencer Y.; Ma, Yueran; Zimmermann, Kaspar
  18. Optimal Non-Linear Pricing with Data-Sensitive Consumers By Krähmer, Daniel; Strausz, Roland
  19. Financial exposure and bank mergers: micro and macro evidence from the EU By Lebastard, Laura
  20. Prédiction algorithmique : enjeux en termes de protection du consommateur et de la concurrence. Les enseignements de la pratique décisionnelle de la Federal Trade Commission américaine By Frédéric Marty

  1. By: Martin Obradovits; Philipp Plaickner
    Abstract: Especially in many online markets, consumers can readily observe prices, but may need to further inspect products to assess their suitability. We study the effects of product differentiation and search costs on competition and market outcomes in a tractable model of price-directed consumer search. We find that (i) firms' equilibrium pricing always induces efficient search behavior, (ii) for relatively large product differentiation, welfare distortions still occur because some consumers (may) forgo consumption, and (iii) lower search costs lead to stochastically higher prices, increasing firms' expected profits and decreasing their frequency of sales. Consumer surplus often falls when search costs decrease.
    Keywords: Consumer Search, Price-Directed Search, Product Differentiation, Price Competition, Mixed-Strategy Pricing, Search Costs
    JEL: D43 D83 L13
    Date: 2022
  2. By: Massimo Motta; Antonio Penta
    Abstract: We investigate the market effects of brand search advertising, within a model where two firms simultaneously choose the price of their (differentiated) product and the bids for the advertising auction which is triggered by own and rival's brand keywords search; and where there exist sophisticated/attentive consumers (who look for any available information on their screen) and naive/inattentive consumers (who only look at the top link of their screen), both aware of either brand's characteristics and price. Relative to a benchmark where only organic search exists, in any symmetric equilibrium each firm wins its own brand auction, and advertising has detrimental effects on welfare: (i) the sponsored link crowds out the rival's organic link, thus reducing competition and choice, and leading to price increases; (ii) the payment of the rival's bid (may) raise marginal cost, also contributing to raise market prices. Under extreme asymmetry (there is an incumbent and an unknown new entrant), we do find that the market effect of brand bidding might be beneficial, if the search engine does not list the entrant's link in organic search, and the share of the sophisticated consumers in the economy is large enough for an equilibrium in which the entrant wins the advertising auction on the search for the incumbent's brand to exist.
    Keywords: digital advertising, auctions, oligopoly, search engines, brands, horizontal agreements
    JEL: D44 L13 L4
    Date: 2022–06
  3. By: Schmitt, Stefanie Y.
    Abstract: I analyze the implication of consumers' limited attention to quality differences on market outcomes and welfare. I model this limited attention to quality differences with a perception threshold: Consumers only perceive quality differences between goods that exceed the consumers' perception threshold. The model allows for two types of equilibria: equilibria with distinguishable and equilibria with indistinguishable qualities. I show that horizontal product differentiation, which gives firms market power, affects equilibrium selection. If firms are horizontally differentiated, firms produce goods with indistinguishable qualities. Then, limited attention harms consumers and benefits firms. In contrast, if firms are not horizontally differentiated, firms produce goods with distinguishable qualities. Then, limited attention has no effect on consumers' welfare or firms' profits.
    Keywords: Limited Attention,Perception Threshold,Product Differentiation,Product Quality
    JEL: D43 D91 L13
    Date: 2022
  4. By: Amedeo Piolatto; Florian Schuett
    Abstract: We study the design of online platforms that aggregate information and facilitate transac tions. Two different designs can be observed in the market: revealing platforms that disclose the identity of transaction partners (e.g. Booking) and anonymous platforms that do not (e.g. Hotwire). To analyse the implications of this design choice for profits and surplus, we develop a model in which consumers differ in their location as well as their preferred product variety. Sellers offer their products for sale both directly (`offline') and indirectly via the platform (`online') but are unable to credibly disclose the product variety they offer when selling offline. The model gives rise to a novel trade-off associated with the anonymous platform design: offline, consumers observe location but not variety; online, they observe variety but not location. While the revealing design leads to more informed consumers and better matches, the anonymous design allows sellers to price discriminate and introduces competition between sellers whose markets would otherwise be segmented. We show that the comparison between the designs depends crucially on the relative importance of information about location vis-à-vis information about variety. For an intermediate range, the anonymous design outperforms the revealing design in terms of both profits and welfare.
    Keywords: anonymous information platforms, opaque products, horizontal competition, experience goods, mismatch costs
    JEL: D02 D21 D43 D61 D83 L11 L13 L15
    Date: 2022–03
  5. By: Michele Bee (CEDEPLAR/UFMG); Juan Pablo Gama (CEDEPLAR/UFMG)
    Abstract: We propose a theoretical representation of how agents estimate demand through a market learning process. To this end, we model a traditional marketplace by interpreting Smith’s theory of the convergence of the market price to the natural price, understood as the reserve price. In this model, natural price is obtained through a bargaining process between consumers and producers. We use a repeated multi-period game with producers deciding their offers and both, consumers and producers, in an imperfect type of competition. Producers estimate the demand at the reserve price thanks to information provided by competition as rivalry between consumers and between producers. But the stronger this competition is, the slower the discovery process.
    Keywords: Demand discovery, natural price, rivalry, imperfect competition
    JEL: B12 C72 C73 D43
    Date: 2022–09
  6. By: Jorge Padilla; Salvatore Piccolo; Shiva Shekhar
    Abstract: In this paper, we examine how the introduction of network externalities impact an open and vertically integrated platform’s post-merger contractual relationship with third-party sellers distributing through its marketplace. Regardless of whether the platform uses linear contracts or two-part tariffs, we find that, provided these contracts are public, the platform has no incentive to exclude its non-integrated rivals and that the latter’s market share rises as network effects gain importance. Vertical integration serves as a commitment device that open platforms can use to convince potential users (e.g., consumers and developers) that their ecosystem will be large and compelling. Interestingly, when the open platform competes with a closed rival, i.e., with a fully integrated ecosystem, it may find it profitable to subsidize independent third-party sellers to strategically steer demand away from the competing ecosystem. These results have novel managerial implications on the incentives of a platform to open up its ecosystem to third-party sellers, as well as for the regulation of vertical integration in the presence of network effect and when different platforms operate alternative business models.
    Keywords: open ecosystems, network externalities, platforms, vertical integration
    JEL: L22 L41 L51
    Date: 2022
  7. By: Rodrigo Carril; Andres Gonzalez-Lira; Michael S. Walker
    Abstract: We study the effects of intensifying competition for contracts in the context of U.S. Defense procurement. Conceptually, opening contracts up to bids by more participants leads to lower awarding prices, but may hinder buyers’ control over non-contractible characteristics of prospective contractors. Leveraging a regulation that mandates agencies to publicize certain contract opportunities, we document that expanding the set of bidders reduces award prices, but deteriorates post-award performance, resulting in more cost overruns and delays. To further study the scope of this tension, we develop and estimate a model in which the buyer endogenously chooses the intensity of competition, invited sellers decide on auction participation and bidding, and the winner executes the contract ex-post. Model estimates indicate substantial heterogeneity in ex-post performance across contractors, and show that simple adjustments to the current regulation that account for adverse selection could provide 2 percent of savings in procurement spending, or $104 million annually.
    Keywords: Procurement, competition, auctions, incomplete contracts
    JEL: D22 D44 D73 H57 L13 L14
    Date: 2022–03
  8. By: Ispano, Alessandro (CY Cergy Paris Université, CNRS and THEMA); Schwardmann, Peter (LMU Munich)
    Abstract: We model firms’ quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that cursed consumers are exploited in duopoly markets if firms are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common consumer protection policies that work under monopoly, i.e. mandatory disclosure, third party disclosure and consumer education, may all increase exploitation and decrease welfare. Even where these policies improve overall welfare, they often lead to a reduction in consumer surplus. We show that our conclusions hold in extensions with endogenous quality choice and horizontal differentiation.
    Keywords: naive; cursed; disclosure; consumer protection; labeling; competition;
    JEL: C72 D03 D82 D83
    Date: 2021–12–01
  9. By: Doh-Shin Jeon (Toulouse School of Economics, University of Toulouse Capitole and CEPR); Yassine Lefouili (Toulouse School of Economics, University of Toulouse Capitole); Leonardo Madio (Department of economics and management †Marco Fanno†, University of Padova and CESifo)
    Abstract: We study a platformâs incentives to delist IP-infringing products and the effects of holding the platform liable for the presence of such products on innovation and consumer welfare. For a given number of buyers, platform liability increases innovation by reducing the competitive pressure faced by innovative products. However, there can be a misalignment of interests between innovators and buyers. Furthermore, platform liability can have unintended consequences, which overturn the intended effect on innovation. Platform liability tends to increase (decrease) innovation and consumer welfare when the elasticity of participation of innovators is high (low) and that of buyers is low (high).
    Keywords: platform, liability, intellectual property, innovation
    JEL: K40 K42 K13 L13 L22 L86
    Date: 2022–09
  10. By: Rötzer, Sebastian
    Abstract: I propose a novel mechanism of how common ownership affects product market competition. Internalization of shareholders' portfolio interests into managers' objective functions is no longer necessary if owners can provide active monitoring that affects firms' ability to compete. Whenever product market externalities cause common owners to neglect monitoring, firms are less competitive compared to a counterfactual where shareholder interests are aligned with firm value maximization. I formally prove this intuition in a static model of active monitoring with common ownership that allows for heterogeneous firms and portfolio allocations. Based on the game's unique Nash equilibrium, I derive empirical predictions that link unobserved active monitoring to observed product market outcomes. I conclude with a brief analysis of two policy interventions aimed at curbing the anti-competitive effects of common ownership.
    Keywords: Common ownership, corporate governance, industrial organization, product markets
    JEL: G34 L13
    Date: 2022–08–07
  11. By: Luca Di Corato (Department of Economics, University Of Venice CÃ Foscari); Yishay D. Maoz (The Open University of Israel)
    Abstract: In a competitive industry where production entails a negative externality, a welfare-maximizing regulator considers, as control instruments, setting a cap on the industry output or levying an output tax. We embed this scenario within a dynamic setup where market demand is stochastic and market entry is irreversible. We firstly determine the industry equilibrium under each policy and then determine the cap level and the tax rate which maximize welfare in each case. We show that a first-best outcome can be achieved through the tax policy while the cap policy may only qualify as a second-best alternative.
    Keywords: Investment, Uncertainty, Caps, Taxes, Competition, Externalities, Welfare
    JEL: C61 D41 D62
    Date: 2022
  12. By: Kevin Lim; Daniel Trefler; Miaojie Yu
    Abstract: Innovation depends on exporting and, in particular, on scale and competition in export markets. We develop a theory featuring (1) quality-segmented markets, (2) step-by-step innovation that moves firms forward along the quality ladder, and (3) escape-the-competition motives for innovation. We derive four predictions about the impact on innovation of scale and competition: a firm with a large and less-competitive quality segment ahead or forward of it will have strong incentives to innovate into this profitable segment, while a firm with a small and more-competitive quality segment behind it will also have strong incentives to innovate for fear of facing firms in this segment in the future. We take these predictions to Chinese firm-level data during a period of explosive export growth (2000-2006). Using information about scale and competition by quality segment in China's export markets, we confirm all four hypotheses. By implication, and unlike in standard CES models, the impact of trade on innovation depends critically on how it drives scale and competition in high- versus low-quality segments.
    JEL: F01 F12 F14 O3
    Date: 2022–09
  13. By: World Bank
    Keywords: Information and Communication Technologies - Digital Divide Law and Development - Private Sector Development Law Private Sector Development - Competitiveness and Competition Policy Private Sector Development - E-Business Private Sector Development - Legal Regulation and Business Environment
    Date: 2021–09
  14. By: Nancy H. Chau; Ravi Kanbur; Vidhya Soundararajan
    Abstract: The issue of employer power is underemphasized in the development literature. The default model is usually one of competitive labour markets. This assumption matters for analysis and policy prescription. There is growing evidence that the competitive labour markets assumption is not valid for employment in developing countries. Our objective in this paper is to review this evidence, to present theoretical and policy perspectives that follow from it, and to highlight areas for further research.
    Keywords: Employer power, Employment, Developing countries
    Date: 2022
  15. By: Ahmet Degerli; Jing Wang
    Abstract: We show that as nonbanks' market share increases in a local residential mortgage market, the quality of mortgage services in the market improves. Two instrumental variable analyses exploiting (1) stress tests conducted by the Federal Reserve, and (2) mortgage industry surety bonds required by each state confirm this finding. We find evidence that as nonbanks grow their market share, they develop a specialty in servicing lower-income borrowers and increase investment in technology, leading to improved service quality. This improvement in service quality is more salient in counties with a higher percentage of minority populations.
    Keywords: Product quality; Mortgage lending; Banks; Nonbanks
    JEL: G21 G28 L13 L15
    Date: 2022–09–01
  16. By: Avichai Snir (Department of Economics, Bar-Ilan University, Israel); Haipeng (Allan) Chen (Gatton College of Business and Economics, University of Kentucky, USA); Daniel Levy (Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; International School of Economics, Tbilisi State University, Georgia; International Centre for Economic Analysis; Rimini Centre for Economic Analysis)
    Abstract: We assess the role of cognitive convenience in the popularity and rigidity of 0-ending prices in convenience settings. Studies show that 0-ending prices are common at convenience stores because of the transaction convenience that 0-ending prices offer. Using a large store-level retail CPI data, we find that 0-ending prices are popular and rigid at convenience stores even when they offer little transaction convenience. We corroborate these findings with two large retail scanner price datasets from Dominick’s and Nielsen. In the Dominick’s data, we find that there are more 0-endings in the prices of the items in the front-end candies category than in any other category, even though these prices have no effect on the convenience of the consumers’ check-out transaction. In addition, in both Dominick’s and Nielsen’s datasets, we find that 0-ending prices have a positive effect on demand. Ruling out consumer antagonism and retailers’ use of heuristics in pricing, we conclude that 0-ending prices are popular and rigid, and that they increase demand at convenience settings, not only for their transaction convenience, but also for the cognitive convenience they offer.
    Keywords: Cognitive Convenience, Transaction Convenience, Price Rigidity, Price Stickiness, Sticky Prices, Rigid Prices, 0-Ending Prices, Round Prices, Convenient Prices, 9-Ending Prices, Just Below Prices, Psychological Prices, Price Points
    JEL: E31 L16 D90 E70 M30
    Date: 2022–10
  17. By: Kwon, Spencer Y.; Ma, Yueran; Zimmermann, Kaspar
    Abstract: We collect data on the size distribution of all U.S. corporate businesses for 100 years. We document that corporate concentration (e.g., asset share or sales share of the top 1%) has increased persistently over the past century. Rising concentration was stronger in manufacturing and mining before the 1970s, and stronger in services, retail, and wholesale after the 1970s. Furthermore, rising concentration in an industry aligns closely with investment intensity in research and development and information technology. Industries with higher increases in concentration also exhibit higher output growth. The long-run trends of rising corporate concentration indicate increasingly stronger economies of scale.
    Keywords: Corporate concentration,economies of scale
    JEL: E23 E01 N12
    Date: 2022
  18. By: Krähmer, Daniel (University of Bonn); Strausz, Roland (HU Berlin)
    Abstract: We introduce consumers with intrinsic privacy preferences into the monopolistic non-linear pricing model. Next to classical consumers, there is a share of data-sensitive consumers who incur a privacy cost if their purchase reveals information to the monopolist. The monopolist discriminates between privacy types using privacy mechanisms which consist of a direct mechanism and a privacy option, targeting, respectively, classical and data-sensitive consumers. We show that a privacy mechanism is optimal if privacy costs are large and that it yields classical consumers a higher utility than data-sensitive consumers with the same valuation. If, by contrast, privacy preferences are public information, data-sensitive consumers with a low valuation obtain a strictly higher utility than classical consumers. With public privacy preferences, data-sensitive consumers and the monopolist are better off, whereas classical consumers are worse off. Our results are relevant for policy measures that target the data-awareness of consumers, such as the European GDPR.
    Keywords: optimal non-linear pricing; privacy; monopolistic screening;
    Date: 2021–11–19
  19. By: Lebastard, Laura
    Abstract: This paper studies for the first time the links between interbank liability and equity markets (financial exposure), and mergers and acquisitions (M&As) in the European banking sector, both at the micro and macro level. Using a binary logit model, the paper first examines – at the micro level – how financial exposures between banks affect the probability of M&A. It finds that financial interlinkages significantly increase the chances of them taking place. Using a gravity model, the paper then investigates – at the macro level – whether the micro results hold. Not only do financial links are positively and significantly correlated with the number of M&As between countries, but they are also a better predictor than trade – traditionally used in the macro literature on M&A. Since the Capital Market Union would help to geographically diversify banks’ portfolio, it would therefore also foster cross-border M&As. Finally, the paper builds a M&A compatibility index for each pair of EU countries. The study highlights strong M&As prospects linked to high financial interlinkages in core Europe, which could be the sign of a future asymmetrical financial integration in the EU. JEL Classification: G21, G34, F21, F34, F36
    Keywords: Bank consolidation, financial exposure, gravity model, logit model
    Date: 2022–09
  20. By: Frédéric Marty (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur)
    Abstract: Le développement de l'intelligence artificielle passe par la maîtrise de flux de données massives, renouvelées en temps réel, variées et susceptibles d'être croisées. L'avantage lié au contrôle de ces flux peut se traduire par un avantage algorithmique qui peut placer un opérateur économique en position de force vis-à-vis de ses concurrents mais également de ses utilisateurs. Le contrôle des données a donc un aspect déterminant dans la concurrence. Se basant sur l'analyse de la pratique décisionnelle de la Federal Trade Commission américaine notre contribution envisage deux dimensions de cette question. Premièrement, dans quelle mesure peut-on extraire indûment des données au détriment de ses utilisateurs et quels sont les risques qui en découlent pour ces derniers ? Secondement, ces stratégies peuvent-elles être à la source d'un avantage concurrentiel déloyal et le cas échéant comment y remédier ?
    Keywords: données personnelles,intelligence artificielle,plateformes numériques,distorsions de concurrence
    Date: 2022–06–10

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