nep-com New Economics Papers
on Industrial Competition
Issue of 2022‒12‒05
23 papers chosen by
Russell Pittman
United States Department of Justice

  1. Regulating big tech: From competition policy to sector regulation? By Budzinski, Oliver; Mendelsohn, Juliane
  2. Content Licensing with Endogenous Homing By Lu, Qiuyu
  3. Self-Preferencing, Quality Provision, and Welfare in Mobile Application Markets By Xuan Teng
  4. The Morality of Markets By Mathias Dewatripont; Jean Tirole
  5. How Communication Makes the Difference between a Cartel and Tacit Collusion: A Machine Learning Approach By Maximilian Andres; Lisa Bruttel; Jana Friedrichsen
  6. Measuring Horizontal and Vertical Differentiation in Intra-industry Trade By Dutta, Sourish
  7. The Impact of the More Economic Approach on EU Merger Decisions By Bernhardt, Lea; Dewenter, Ralf
  8. Mergers and Advertising in the Pharmaceutical Industry By Dubois, Pierre; Majewska, Gosia
  9. An Empirical Model of Mobile App Competition By Kawaguchi, Kohei; Kuroda, Toshifumi; Sato, Susumu
  10. Optimal regulation design of airports: Investment incentives and impact of commercial services By David Martimort; Guillaume Pommey; Jerome Pouyet
  11. Price subsidies may impair competition in retail market for natural gas By Atayev, Atabek; Hillenbrand, Adrian
  12. Strategic Interaction Between Wholesale and Ancillary Service Markets By Brown, David P.; Eckert, Andrew; Silveira, Douglas
  13. Ownership Diversification and Product Market Pricing Incentives By Albert Banal-Estañol; Jo Seldeslachts; Xavier Vives
  14. Competition among Russian Grocery Stores: Database on St. Petersburg, 2017–2021 By Dmitrii Tereshchenko
  15. Discreet Personalized Pricing By Benjamin R. Shiller
  16. The Effect of Labor Market Competition on Firms, Workers, and Communities By Dodini, Samuel; Løken, Katrine; Willén, Alexander
  17. Correlation-Savvy Sellers By Strausz, Roland
  18. Salience and Taxation with Imperfect Competition By Kroft Kory; Laliberté Jean-William P.; Leal Vizcaíno René; Notowidigdo Matthew J.
  19. Dynamic Inventory Management with Mean-Field Competition By Ryan Donnelly; Zi Li
  20. Endogenous Network Effects By Dewenter, Ralf; Löw, Franziska
  21. Product Mix and Firm Productivity Responses to Trade Competition By Thierry Mayer; Marc Melitz; Gianmarco Ottaviano
  22. Welfare-Enhancing Taxation and Price Discrimination By Anna D'Annunzio; Antonio Russo
  23. Competitive Dynamics of Physician Referrals in the Era of Accountable Care Organizations By Park, Sohyun; Funk, Russell; Karaca-Mandic, Pinar; Zaheer, Aks

  1. By: Budzinski, Oliver; Mendelsohn, Juliane
    Abstract: The European Commission has proposed a new regulatory tool for the governance of digital markets. The Digital Markets Act (DMA) intents to limit the market behavior of socalled gatekeeper companies to ensure contestable and fair digital markets. We review the provisions of the DMA both from a legal and from an economic perspective. Notwithstanding a number of benefits, we identify several issues with the current proposal. When looking at the core provisions of the proposal from an economic perspective, several issues of contention arise: many of the provisions seem to be quite narrow in scope and it seems difficult to extrapolate more general rules from them; the economic harm of some of the provisions is both uncertain and in principle debatable; the alleged distinction between different types of obligations cannot be verified; and, in addition, Art. 5-7 DMA seem to contain three distinct regulatory instruments; last but not least, while the DMA seeks to control existing gatekeepers, the 'tipping' of markets and the rise of further gatekeepers is not guaranteed by the proposed regulation, this in turn leads to a larger critical analysis of the gatekeeper as the DMA's norm addressee. While the goals and nature of the DMA have gained in clarity throughout the legislative process, its scope remains somewhat obtuse. On the one hand it seems set on regulating gatekeepers as they exist today, on the other, also wants to bring about systemic change in the digital single market. How it expects to achieve the latter is not entirely clear. In this light and by critically looking at the nature of ex ante and ex post measures in broader competition policy, we conclude that a reform of the competition policy regime would better suit the overalls aims of reining in big tech in future.
    Keywords: big tech,digital economy,digital ecosystems,GAFAM,competition policy,antitrust,Digital Markets Act (DMA),sector-specific regulation,law and economics
    JEL: K21 K23 K24 L40 L50 L81 L86
    Date: 2022
  2. By: Lu, Qiuyu
    Abstract: This paper examines the licensing strategy of a monopoly content provider that supplies horizontally differentiated content through downstream distributors to consumers who can potentially purchase from both distributors. When consumers' additional gain from the second purchase is high, the mismatch cost is low, and the quality of the extra content is high, some consumers purchase from both firms, which is called multi-homing. Apart from that, all consumers purchase from either distributor. When some consumers multi-home, the content provider always licenses to only one distributor. When all consumers single-home, the content provider either licenses to one distributor or shares the licensing.
    Keywords: Multi-homing, Licensing, Exclusive Dealing, Digital Content, Online Platform
    JEL: D43 L13 L42
    Date: 2022–11–09
  3. By: Xuan Teng
    Abstract: Platforms may give preferential treatment to their own products in search results. Whether and how to regulate this self-preferencing behavior is an intensely debated antitrust issue. This paper identifies self-preferencing and quantifies its equilibrium welfare effects in Apple App Store. I start by examining the effect of a change in the platform’s search algorithm that dropped several Apple’s apps from top positions. I find that the search algorithm change leads to significantly higher installations and update frequencies of independent apps that compete with Apple’s apps in the same categories. Then I develop an empirical model of consumer search and update competition allowing for potential self-preferencing. The model is estimated with aggregate data on consumer search and purchase, search ranking, and app characteristics. Estimation results point to self-preferencing: Apple’s apps are more likely to be ranked higher than independent apps conditional on app quality, price, ratings, and title match with search terms. Based on counterfactual simulations, I find that eliminating the identified self-preferencing modestly increases the quality of independent apps on average. Furthermore, the elimination improves consumer surplus by $2.2 million and profits of independent developers by $1.6 million per month.
    Keywords: search algorithm, consumer search, endogenous product characteristics, mobile application
    JEL: D12 D43 D83 L13 L41 L86
    Date: 2022
  4. By: Mathias Dewatripont; Jean Tirole
    Abstract: Scholars and civil society have argued that competition erodes supplier morality by offering consumer choice: "If I don't do it, someone else will". This paper establishes a robust irrelevance result, whereby intense market competition does not crowd out consequentialist ethics; it thereby issues a strong warning against the wholesale moral condemnation of markets and procompetitive institutions. Intense competition, while not altering the behavior of protable suppliers, however may reduce the standards of highly ethical suppliers or non-profits, raising the potential need to protect the latter in the marketplace.
    Keywords: Competition, consequentialism, replacement effect, non-profits,corporate social responsability, strategic complementarities, race to the ethical bottom.
    Date: 2022–11
  5. By: Maximilian Andres; Lisa Bruttel; Jana Friedrichsen
    Abstract: This paper sheds new light on the role of communication for cartel formation. Using machine learning to evaluate free-form chat communication among firms in a laboratory experiment, we identify typical communication patterns for both explicit cartel formation and indirect attempts to collude tacitly. We document that firms are less likely to communicate explicitly about price fixing and more likely to use indirect messages when sanctioning institutions are present. This effect of sanctions on communication reinforces the direct cartel-deterring effect of sanctions as collusion is more difficult to reach and sustain without an explicit agreement. Indirect messages have no, or even a negative, effect on prices.
    Keywords: cartel, collusion, communication, machine learning, experiment
    JEL: C92 D43 L41
    Date: 2022
  6. By: Dutta, Sourish
    Abstract: The development of research studies concerning the emergence of intra-industry trade is fruitful interaction between theoretical explanations and empirical methods to measure this phenomenon. The foundation of indicators to measure the intensity of intra-industry trading caused the rise of theoretical models explaining the determinants of these trade flows. It also contributed to the debate on the need to distinguish, in empirical analyses, intra-industry trade in horizontal differentiation from that in vertical differentiation.
    Date: 2022–06–02
  7. By: Bernhardt, Lea (Helmut Schmidt University, Hamburg); Dewenter, Ralf (Helmut Schmidt University, Hamburg)
    Abstract: This paper analyses all final merger decisions by the European Commission from the beginning of 1990 up to the end of 2019. We use a novel dataset, containing information about 6245 merger cases from all economic sectors and combining all sorts of decisions, inclusive of withdrawn and prohibited cases. Using text analyses techniques, we first analyse merger decisions documents in order to find trends and differences in language and wording with respect to the 2004 regulation. As a result, we find a shift in favour of terms associated with the More Economic Approach. On the contrary, the concept of dominance has decreased since 2004, indicating a strong decline in structural market parameters for merger reviews. While the tonality is found to be largely positive (especially for cleared cases), again, a change under different merger regimes seems to be evident. Second, accounting for differences in the usage of competition-related terms and by using simple OLS and logit regressions, we find that the duration of the merger review has increased significantly after the 2004 reform. At the same time, the probability of a merger being prohibited has not changed significantly.
    Keywords: Merger policy; Competition policy; Regulatory reform; EU Commission
    JEL: D78 K21 L40
    Date: 2022–08–23
  8. By: Dubois, Pierre; Majewska, Gosia
    Abstract: In many industries, market structure determines how firms not only compete in terms of prices but also utilize promotional activities. We study how price and advertising strategies change when firms merge in pharmaceutical markets in the US. We show that across all drug markets, although mergers indeed increase prices, advertising spending also decreases. Merger simulations not accounting for advertising reductions may thus obtain biased price eects. Considering the merger effects of two large pharmaceutical companies on an antimicrobial drug market, we estimate a structural model of supply and demand and simulate the merger effect. We find that the merger effect on prices is smaller given the reduction in the amount of advertising. We also provide a simple method through which to evaluate long-term welfare effects using some known value of the sensitivity of innovation to profits.
    Keywords: Merger; Advertising; Drugs; Welfare; Innovation;
    JEL: I10 L22 L41
    Date: 2022–11–07
  9. By: Kawaguchi, Kohei; Kuroda, Toshifumi; Sato, Susumu
    Abstract: This paper proposes an empirical model of mobile app competition, in which consumers decide downloads and usage time, and apps compete in price and advertising intensity. We estimate the model using data from Google Play in Japan from 2015 to 2017. We demonstrate merger simulation and the analysis of the vertical relation with Google Play. We find that a reduction of the fee imposed by Google Play can increase the price for game apps by inducing the shift of revenue source from advertising to downloads, highlighting the importance of considering two-sidedness and mixed business models.
    Date: 2022–09–28
  10. By: David Martimort (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, EHESS - École des hautes études en sciences sociales); Guillaume Pommey (Università degli Studi di Roma Tor Vergata [Roma]); Jerome Pouyet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, ESSEC Business School - Essec Business School)
    Abstract: Modern airports provide commercial services to passengers in addition to aeronautical services to airlines. We analyze how the airport's market power impacts the pricing of services when the airport also invests in the quality of its infrastructure. There is a need to regulate the airport and the optimal regulation can be implemented with a price-cap and a subsidy scheme targeted to the investment. The choice between a single-till and a dual-till approach does change neither the optimal regulation nor its implementation. We also investigate the consequences on the optimal regulation of the nature of the airport-airline relationship and of the observability of investment.
    Keywords: airports,regulation,commercial services,investment
    Date: 2022–10
  11. By: Atayev, Atabek; Hillenbrand, Adrian
    Abstract: Policymakers have been discussing various potential measures to cushion the impact of skyrocketing gas prices and prevent supply shortages. On 10 October 2022 an expert commission in Germany proposed a plan to keep natural gas affordable while also preventing shortages. The main element of the plan is a direct subsidy for gas-consuming households. This ZEW Policy Brief aims to warn that price subsidies in the retail market for natural gas could impair competition between providers by reducing incentives for customers to search for cheaper service plans.
    Date: 2022
  12. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics); Silveira, Douglas (University of Alberta, Department of Economics)
    Abstract: In electricity markets, system reliability requires the instantaneous balancing of supply and demand. In addition to the wholesale electricity market, the procurement of various ancillary services is vital in achieving this objective. An important design feature is whether ancillary service markets clear simultaneously or sequential with wholesale markets. We propose a model to study the strategic implications of simultaneous versus sequential timing when firms compete in the ancillary services and wholesale electricity markets. Considering the case where ancillary services markets clear before wholesale markets, we demonstrate that when firms face increasing marginal cost curves, a strategic incentive to reduce ancillary services output and, consequently, lower their marginal costs in the wholesale market arises. We employ data from Alberta’s electricity markets to demonstrate the quantitative implications of our findings. Our numerical results show that the strategic commitment effect has a small impact on wholesale market outcomes but a large impact on the equilibrium in the ancillary services market, elevating the market-clearing price.
    Keywords: ancillary services; electricity; market power; strategic commitment
    JEL: L13 L50 L94 Q40
    Date: 2022–10–19
  13. By: Albert Banal-Estañol; Jo Seldeslachts; Xavier Vives
    Abstract: We link investor ownership to profit loads on rival firms by the managers of a firm. We propose a theory model in which we distinguish between passive and active investors’ holdings, where passive investors are relatively more diversified. We find that if passive investors become relatively bigger, then common ownership incentives increase. We show that these higher incentives, in turn, are linked to higher firm markups. We empirically confirm these relationships for public US firms in the years 2004-2012, where the financial crisis coincides with passive investors’ rise. The found effects are small but non-negligible.
    Date: 2022–11
  14. By: Dmitrii Tereshchenko (National Research University Higher School of Economics)
    Abstract: The Russian grocery retail industry has developed dynamically over the past two decades. The accompanying changes in competition and consumer behaviour make it an interesting subject for analysis, but full-fledged empirical studies in this area have not yet been conducted. This is largely due to the difficulty of accessing data on retail, which are often subject to commercial secrecy. However, in recent years the situation has changed and some data have become available to researchers. In this paper, we describe the data we obtained for the study of the grocery retailing industry in St. Petersburg. Particularly, we describe three blocks of data, including (i) store location data, (ii) socioeconomic characteristics of local markets, and (iii) sales data. For each data block, we outline the stages of data collection and processing, and provide basic descriptive statistics and graphs. In addition, we discuss the potential uses of the collected data in further research.
    Keywords: retail industries, grocery sector, market studies
    JEL: L0 L81
    Date: 2022
  15. By: Benjamin R. Shiller
    Abstract: Emerging tracking data allow precise predictions of individuals’ reservation values. However, firms are reluctant to conspicuously implement personalized pricing because of concerns about consumer and regulatory reprisals. This paper proposes and applies a method which disguises personalized pricing as dynamic pricing. Specifically, a firm can sometimes tailor the “posted” price for the arriving consumer but privately commits to change price infrequently. Note such pricing may unintentionally arise through algorithmic pricing. I examine outcomes in four contexts: one empirical and three hypothetical distributions of consumer valuations. I find that this strategy is most intense and raises profits most for medium popularity products. Furthermore, improvements in the precision of individual-level demand estimates raise the range of popularities this strategy can be profitably applied to. I conclude that this is an auspicious strategy for online platforms, if not already secretly in use.
    Keywords: personalized pricing, algorithmic pricing, price discrimination, targeted pricing, behavioural pricing, dynamic pricing, sticky pricing
    JEL: L81 D40 L10
    Date: 2022
  16. By: Dodini, Samuel (Dept. of Economics, Norwegian School of Economics and Business Administration); Løken, Katrine (Dept. of Economics, Norwegian School of Economics and Business Administration); Willén, Alexander (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This paper isolates the impact of labor market competition on firms, workers, and communities. A shock to labor mobility from Sweden to Norway caused a substantial increase in labor competition for Swedish firms on the border with Norway. Using unique register data linked across the two countries, we show that Swedish firms respond by raising wages and reducing their workforces. The retained workers are of lower quality, resulting in a drop in value added and an increasing probability of market exit. Communities experience population flight, declining business activity, increased inequality, and increased support for worker protection parties. Norwegian firms benefit through cheaper labor costs, and there is evidence of Norwegian workers being displaced. The communities see increased support for anti-integration parties. We conclude that shocks to labor market competition, while benefiting certain workers, may have detrimental effects on local communities due to adverse effects on firm survival and business activity.
    Keywords: Labor Market Competition; Outside Options; Labor Mobility; Inequality; Community Development
    JEL: J24 J31 J42 J61 J62
    Date: 2022–11–11
  17. By: Strausz, Roland (HU Berlin)
    Abstract: A multi-product monopolist sells sequentially to a buyer who privately learns his valuations. Using big data, the monopolist learns the intertemporal correlation of the buyer’s valuations. Perfect price discrimination is generally unattainable—even when the seller learns the correlation perfectly, has full commitment, and in the limit where the consumption good about which the buyer has ex ante private information becomes insignificant. This impossibility is due to informational externalities which re- quires information rents for the buyer’s later consumption. These rents induce upward and downward distortions, violating the generalized no distortion at the top principle of dynamic mechanism design.
    JEL: D82 L52
    Date: 2022–11–10
  18. By: Kroft Kory; Laliberté Jean-William P.; Leal Vizcaíno René; Notowidigdo Matthew J.
    Abstract: This paper studies commodity taxation in a model featuring heterogeneous consumers, imperfect competition, and tax salience. We derive new formulas for the incidence and marginal excess burden of commodity taxation highlighting interactions between tax salience and market structure. We estimate the necessary inputs to the formulas by using Nielsen Retail Scanner and Consumer Panel data covering grocery stores and households in the U.S. and detailed sales tax data. We estimate a large amount of pass-through of taxes onto consumer prices and find that households respond more to changes in prices than taxes. We also estimate significant heterogeneity in tax salience across households. We calibrate our new formulas using these results and conclude that essentially all of the incidence of sales taxes falls on consumers, and the marginal excess burden of taxation is larger than estimates based on standard formulas that ignore imperfect competition and tax salience.
    Keywords: Sales taxes;Marginal Excess Burden;Incidence;Salience;Imperfect Competition
    JEL: D12 D22 D43 D60 L13 H25 H71
    Date: 2022–10
  19. By: Ryan Donnelly; Zi Li
    Abstract: Agents attempt to maximize expected profits earned by selling multiple units of a perishable product where their revenue streams are affected by the prices they quote as well as the distribution of other prices quoted in the market by other agents. We propose a model which captures this competitive effect and directly analyze the model in the mean-field limit as the number of agents is very large. We classify mean-field Nash equilibrium in terms of the solution to a Hamilton-Jacobi-Bellman equation and a consistency condition and use this to motivate an iterative numerical algorithm to compute equilibrium. Properties of the equilibrium pricing strategies and overall market dynamics are then investigated, in particular how they depend on the strength of the competitive interaction and the ability to oversell the product.
    Date: 2022–10
  20. By: Dewenter, Ralf (Helmut Schmidt University, Hamburg); Löw, Franziska (Helmut Schmidt University, Hamburg)
    Abstract: In contrast to traditional business models, two-sided platforms internalize indirect network effects that exist between different groups of platform participants. The strength of the network effects has a decisive influence on the success of the platform and its market position. Markets with particularly strong network effects are also often characterized by a high degree of concentration. However, the strength of the network effects is not exogenously given but can be influenced by targeted investment. This paper analyses how platforms can affect network effects by investing in appropriate infrastructure, data, or artificial intelligence. We derive optimal quantities, prices, profits, and investments depending on different types of investments.
    Keywords: two-sided markets; indirect network effects; endogenous network effects; optimal investment strategy
    JEL: D21 D42 L10
    Date: 2022–08–09
  21. By: Thierry Mayer (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, CEPR - Center for Economic Policy Research - CEPR); Marc Melitz (Department of Economics, Harvard University - Harvard University [Cambridge], NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research, CEPR - Center for Economic Policy Research - CEPR); Gianmarco Ottaviano (Bocconi University [Milan, Italy], CEP - LSE - Centre for Economic Performance - LSE - London School of Economics and Political Science, CEPR - Center for Economic Policy Research - CEPR)
    Abstract: We document how demand shocks in export markets lead French multiproduct exporters to reallocate the mix of products sold in those destinations. In response to positive demand shocks, French firms skew their export sales toward their best-performing products. We develop a theoretical model of multiproduct firms and derive the specific demand conditions (with endogenous price elasticities) needed to generate these product-mix reallocations. Under those demand conditions, the increased competition from demand shocks in export markets also induces productivity changes within the firm. We empirically test for this connection between demand shocks and the productivity of multiproduct firms. We find that this connection is economically substantial.
    Date: 2021–12–02
  22. By: Anna D'Annunzio; Antonio Russo
    Abstract: We analyze the effects of commodity taxation in markets where suppliers implement second-degree price discrimination schemes, such as offering different package sizes and quality-differentiated versions of the same product. In these markets, suppliers distort the quantity (or quality) intended for all types of consumers, except for those with the highest marginal willingness to pay. We show that differentiated ad valorem taxes can alleviate this distortion, and thus increase government revenue as well as welfare, provided the tax rate increases with the size (or quality) of the good supplied.
    Keywords: commodity taxation, tax incidence, price discrimination
    JEL: D40 H21 H22 L10
    Date: 2022
  23. By: Park, Sohyun; Funk, Russell; Karaca-Mandic, Pinar; Zaheer, Aks
    Abstract: Advocates of healthcare reform are hopeful that accountable care organizations (ACOs) will not only help to bend the healthcare spending curve, but also lead to better quality, through reduced care fragmentation, enhanced care coordination, and overall improved collaboration among providers. In this paper, we propose an alternative view to evaluating ACO outcomes: examining how ACOs may affect care spending and quality through changes in market structure and concentration of referrals between healthcare providers. Such a perspective promises to provide fresh insights on unpacking the extent to which ACOs have fulfilled the expectations that predicated their creation. We approach this question by creating a novel, referral-based measure of market concentration. We combine several datasets, including patient referral data, data on ACOs in the Medicare Shared Savings Program, and data on regional healthcare markets. We find a complex, contingent relationship between ACO entry and referralbased market concentration. Whereas increases in the number of ACOs is negatively associated with concentration, the percentage of local providers participating in ACOs mitigates such association, suggesting that the competitive implications of ACOs depend on the nature of ACO entry. Our results also point to market structure as an important mechanism through which ACOs affect healthcare spending. Further, while referral-based market concentration is negatively associated with healthcare spending, the negative association is mitigated by the nature of ACO entry. In addition, the association between the percentage of local providers in ACOs and healthcare spending also depends on the number of ACOs established.
    Date: 2022–05–30

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