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

  1. On the Welfare Effects of Adverse Selection in Oligopolistic Markets By Marco de Pinto; Laszlo Goerke; Alberto Palermo
  2. Ownership diversification and product market pricing Incentives By Albert Banal-Estañol; Jo Seldeslachts; Xavier Vives
  3. Do Institutional Directors Matter? By Heng Geng; Harald Hau; Roni Michaely; Binh Nguyen
  4. Information, Capacity Constraints and Quality on Firms Competition By Chen, You-hua; Chen, Liu-man; Mishra, Ashok K.
  5. The Price and Employment Response of Firms to the Introduction of Minimum Wages By Link, Sebastian
  6. Desirable Banking Competition and Stability By Jonathan Benchimol; Caroline Bozou
  7. Bank competition and bargaining over refinancing By Marina Emiris; François Koulischer; Christophe Spaenjers
  8. CCI and Regulation of Digital Platforms and Blockchain: Will it take a Rule of Reason; Per Se or a Schizophrenic Approach? By Dalvi, Manoj; Gadkari, Ahan
  9. Entry and Competition of Retail Pharmacies: A Case Study of OTC Drugs Sales and Ownership Deregulation By Matúš Bilka; António Portugal Duarte; Martin Lábaj
  10. Firms' Involvement in Standardization and Average Total Costs per Patent Family By Gamarra, Yanis; Friedl, Gunther
  11. We've been here before – New and old in anti-trust regulation for global web platforms and future regulatory policy By Forge, Simon
  12. Travel Circle: A Model of Supply Chains By Lau, C. Oscar
  13. Cournot vs. Bertrand competition in the international transport market with environmental standards By Marie-Laure Cabon-Dhersin
  14. The Economic Costs of Structural Separation, Line of Business Restrictions, and Common Carrier Regulation of Online Platforms and Marketplaces: A Quantitative Evaluation By Dippon, Christian M.; Hoelle, Matthew D.
  15. The relationship between Competition, Tourism and Sustainable Development: three interdependent topics By Fotis, Panagiotis; Korre, Maria
  16. Does Industry Agglomeration Attract Productive Firms? The role of product markets in adverse selection By René BELDERBOS; FUKAO Kyoji; IKEUCHI Kenta; KIM Young Gak; KWON Hyeog Ug
  17. Consumer sovereignty in the digital society By Alexandre Chirat

  1. By: Marco de Pinto; Laszlo Goerke; Alberto Palermo
    Abstract: We consider a principal-agent relationship with adverse selection. Principals pay informational rents due to asymmetric information and sell their output in a homogeneous Cournot-oligopoly. We find that asymmetric information may mitigate or more than compensate the welfare reducing impact of market power, irrespective of whether the number of firms is given exogenously or determined endogenously by a profit constraint. We further show that welfare in a setting with adverse selection may be higher than the maximized welfare level attainable in a world with perfect observability.
    Keywords: adverse selection, oligopoly, welfare
    JEL: D43 D82 L51
    Date: 2022
  2. 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
  3. By: Heng Geng (Victoria University of Wellington); Harald Hau (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)); Roni Michaely (The University of Hong Kong; ECGI); Binh Nguyen (RMIT University Vietnam)
    Abstract: The large increase in common institutional ownership raises significant antitrust concerns, even if the precise channel of any potential influence on market outcomes is unclear. Using a novel dataset on shareholders’ board representation, we examine the role of common institutional directors (i.e., joint board representation by institutional shareholders) as one such potential channel with three main findings. First, institutional board representation is extremely low relative to extensive institutional ownership. Second, common institutional directors on rival firm boards are rare. Third, common institutional directors show no incremental effect on market outcomes amidst the positive relationship between common ownership and firm profitability.
    Keywords: Common ownership, institutional board representation, competition policy
    JEL: G32 G34 L4
    Date: 2022–11
  4. By: Chen, You-hua; Chen, Liu-man; Mishra, Ashok K.
    Keywords: Agribusiness
    Date: 2021
  5. By: Link, Sebastian (Ifo Institute for Economic Research)
    Abstract: This paper studies the price and employment response of firms to the introduction of a nation-wide minimum wage in Germany. Widely throughout the economy, affected firms responded by rapidly and frequently increasing prices without cutting employment. These decisions are strongly interrelated: Firms that increased prices relatively more often also showed a less negative employment response. The relative importance of both adjustment margins is associated with product market competition and the specific economic situation firms face during the treatment period. Hence, understanding the role of price pass-through appears to be key for explaining employment effects of minimum wages.
    Keywords: minimum wage, price pass-through, employment, interrelation of firms' choices
    JEL: E31 E24 J38 J31
    Date: 2022–11
  6. By: Jonathan Benchimol (Bank of Israel); Caroline Bozou (Centre d'Économie de la Sorbonne)
    Abstract: Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may lower markups and foster bank risk-taking, controlled banking concentration systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. Oligopolistic competition and concentration amplify the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. According to financial stability and social welfare objectives, the desirable banking market structure is determined. Depending on policymakers' preferences, the banking concentration of five to seven banks balances social welfare and bank stability objectives.
    Keywords: Banking Concentration, Imperfect Competition, Financial Stability, Welfare Analysis, DSGE Model
    JEL: D43 E43 E51 G21
    Date: 2022–10
  7. By: Marina Emiris (: Economics and Research Department, National Bank of Belgium); François Koulischer (University of Luxembourg); Christophe Spaenjers (Leeds School of Business, University of Colorado Boulder)
    Abstract: We model mortgage refinancing as a bargaining game involving the borrowing household, the incumbent lender, and an outside bank. In equilibrium, the borrower’s ability to refinance depends both on the competitiveness of the local banking market and on the cost of switching banks. We find empirical support for the key predictions of our model using a unique data set containing the population of mortgages in Belgium. In particular, households’ refinancing propensities are positively correlated with the number of local branches and negatively correlated with local mortgage market concentration. Moreover, households are more likely to refinance externally if they already have a relation with more than one bank, but the effect is mitigated if their current mortgage lender has a branch locally.
    Keywords: mortgage markets; refinancing; bargaining; bank competition; switching costs
    Date: 2022–10
  8. By: Dalvi, Manoj; Gadkari, Ahan
    Abstract: India's choice to control its markets was executed in two stages: one for each phase of the country's industrial strategy and philosophy towards resource allocation and market functioning. Between 1950 and 1991, the first phase was defined by a socialist ideology exhibited via a mixed economy and a propensity for government engagement in economic activities. During this time, policymakers were more concerned with avoiding economic power concentration than with stimulating competition. As the Indian economy modernised policymakers moved from preventing concentration of economic power as symbolised by the Monopolies and Restrictive Trade Practices Act (MRTP) of 1969 to the Competition Act 2002 ("Act"), to regulate anti-competitive agreements that have the potential to have a material adverse effect on competition in the Indian economy. In the modern Indian economy, the Competition Commission of India (CCI) has shown inconsistency in its enforcement on platform dominance; this inconsistency may now extend to blockchain as well. The purpose of this paper is to evaluate the necessity of new antitrust tools in the evolving economy of an emergent market and to push for more certainty in the CCI's enforcement of anti-competition laws in India. The increasing digitization of global and Indian markets in recent years, facilitated by the emergence of platforms such as Amazon, Apple, Google, and Facebook have raised questions about the Act's appropriateness and its applications. The CCI has received several complaints over the past few years about creative, technology-driven, two-sided marketplaces that have become a vital element of the Indian economy. In such situations, it becomes easier for certain platforms to practice deep discounting, cash-back offers and other schemes to constantly attract newer users. There is widespread agreement that CCI's reaction to these dynamic markets leaves much to be desired. Since technology has now evolved from the "platform" to "blockchain"; new challenges arise and it has also raised questions if the Act itself needs to be suitably updated to meet the challenges unique to these markets.
    Date: 2022
  9. By: Matúš Bilka (University of Economics in Bratislava, Faculty of Economics, Department of National Economy); António Portugal Duarte (Univ of Coimbra, CeBER, Faculty of Economics); Martin Lábaj (University of Economics in Bratislava, Faculty of Economics, Department of National Economy)
    Abstract: This paper provides new empirical evidence on entry and competition in the Portuguese market of retail pharmacies after its deregulation in 2004. We estimate the market-size thresholds required for pharmacies to enter the market and analyse the toughness of competition in the market. There are three main findings in the paper. First, entry thresholds decreased over the years, which led to better coverage and availability of pharmaceutical services. Second, the toughness of competition among pharmacies increased and the deregulation of over-the-counter drug sales contributed to the expansion of services provided by pharmacies. Third, population restrictions that prevailed in the market were too restrictive and should be reconsidered by regulation authorities..
    Keywords: Entry model, market competition, regulation, retail pharmacy.
    Date: 2022–11
  10. By: Gamarra, Yanis; Friedl, Gunther
    Abstract: Technology standards such as the Wi-Fi or 5G mobile communication standard rely on standard-essential patents (SEPs). Increasing licensing revenues and several disputes between owners and users of SEPs raise the question about the patenting behavior of firms developing standardized technologies. A better understanding of this patenting behavior can help to improve the standard-setting process and standard adoption. We propose the average total costs per patent family as an economic assessment criterion and an indicator of patenting behavior for technology standards. Using this criterion, we examine how increasing SEP family portfolios and their ownership concentration are associated with firms' patenting behavior. We find that increasing ownership concentration of SEP families is negatively associated with firms' average total costs per patent family, suggesting that decreasing competition around SEP families might decrease firms' investments per patent family. We conclude that policy makers and standardsetting organizations (SSOs) should discourage blanket declarations since increasing SEP transparency could improve comparability across standard-setting processes and reduce uncertainties in subsequent standard adoption for SEP holders and implementers. SSOs should further closely monitor how increasing (decreasing) ownership concentration of SEPs affects their standard-setting processes.
    Keywords: Average total costs,standardization,standard-essential patents,patenting,R&D
    JEL: L15 L96 O32 O34
    Date: 2022
  11. By: Forge, Simon
    Abstract: The global scale web platforms coming to dominate key parts of the world economy seem to be a phenomenon that is less than a decade old, or perhaps slightly more, really starting from 2000-2005. In reality their origins in terms of their business models can be traced to the evolution of the software and computing industries more generally, over the three preceding decades1 2 3. But it does not stop there. Going further back to the late 1890's, useful regulatory models can be drawn today from the prior anti-trust regulation against what was "big tech" then - and was used throughout the first parts of the twentieth century. For example, the concept of reversing acquisitions in the past has been standard practice under the USA's original anti-trust law and has been proposed in the USA Senate recently, by Senator Elizabeth Warren. The paper briefly sketches the relevant directions in anti-trust regulation today, today with the return to the earlier views of terminating abuses of significant market power (SMP) in oligopoly and monopoly. It contrasts today's perspective with the regulatory climate that the "digital tech giants" grew up in, shaped by the monetarist Chicago School (of Friedman's 1970 paper and Judge Bork's 1978 thesis) that USA anti-trust principles should consider large (dominant) enterprises as beneficial for consumer price protection. Essentially it is a regulatory theory which argues for preserving monopolies. Combined with corporate lobbying and its politics, it has reduced anti-trust use over 1998 - 2018 to effectively screen the USA's web platform owners from regulatory oversight, preserving global market dominance. So the new problems are to some extent old problems often with some new malpractices for an online marketplace. However, unfortunately regulators and especially governments have been slow to recognise this and so shape effective action. This raises two key research questions in this area. The first question is practical - what do recent major tech platform anti-trust cases indicate on which legal arguments and approaches are successful and what fails today in recent judgements. Many cases have not been successful and so reasons and context for any positive results are of vital interest. If there is a failure, where does the problem lie - is it with the regulation itself, confusion over the defendant's market position or infringement of consumer or competitor rights and /or with the relevant court's interpretation of that, including a flawed presentation of arguments. Key areas in forming a successful action need to be identified, especially for the more recent cases over the last year or so, to provide guidance in the current climate in which much uncertainty reigns. Analysis here would also anticipate the possible impacts of new legislation, especially that from the EU in the DMA and DSA and the possibilities presented by six different proposals before the USA Congress. The second key question draws on how to form a reasonable solution for reducing SMP abuse through spin-offs, and/or demergers, both vertically and horizontally - ie just how to shape future regulation today. However there are some significant new factors with the march of globalisation since 2000 that were not present in previous decades. They are especially challenging for the effectiveness of the current and proposed regulation in the EU and the USA. Thus, the latest crop of dominant firms harvest and depend on success from what may be termed a 'trialogue' of more novel economic factors. These feed the phenomenal financial and market success for the half dozen main players across today's major economic vertical sectors, leading to Apple's breakthrough to the level of a US$3 Trillion market capitalisation in early 2022. How these platforms may be treated in terms of regulatory ex ante, or ex post, legislation is of key interest. It is in this direction that solutions for SMP abuse lie, with the new generation of European antitrust Acts. Hopefully the paper will offer practical inputs on the fundamental question of the comparative chances of long term success for a regulatory action at all and thus in increasing competition in the subject market. The methodology used is based on drawing together evidence from the markets and judicial procedures to produce the analysis for the two research questions, with insights, including those economic factors in reconfiguration of the firm for increasing digital markets competition.
    Date: 2022
  12. By: Lau, C. Oscar
    Abstract: Travel circle is a metaphor for supply chains: in travel circle, travelers are transported by carriers in multiple legs from the center to diverse destinations on the circumference; in supply chains, goods are transformed in multiple stages by firms from natural resources into differentiated products. The model is generated using only three cost parameters. At the start of supply chains, a few firms mass-produce standardized commodities at low unit costs; at the end, many firms produce distinctive products in small scales at high unit costs. As an extension, the circle’s size is endogenized to account for consumers’ preferences for varieties.
    Keywords: Product differentiation, Scale economies, Entry game
    JEL: L11 L13 L23 L25
    Date: 2022–11–06
  13. By: Marie-Laure Cabon-Dhersin (LERN - Laboratoire d'Economie Rouen Normandie - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université)
    Abstract: We revisit the classic comparison of Bertrand and Cournot competition by studying how the form of competition between shipping companies affects transport prices, international trade, consumer and producer surplus, and social welfare in two countries that coordinate their environmental policies. We show that the standard Bertrand-Cournot ranking only prevails when pollution abatement technologies are sufficiently efficient.
    Date: 2022
  14. By: Dippon, Christian M.; Hoelle, Matthew D.
    Abstract: Online platforms and marketplaces are services that bring consumers and producers together via the internet by providing consumers direct and instantaneous access to an extensive array of global goods and services and by enabling producers to reach consumers largely untethered by size and geographic reach. The popularity of online platforms and marketplaces attests to the societal benefits these services offer to consumers and producers alike. However, some US lawmakers and competition authorities believe that the growth of these platforms is a threat to competition. To remedy this perceived threat, some lawmakers in the House of Representatives and the Senate introduced several bills that would effectively subject certain companies to common carrier, structural separation, and line of business restrictions. The proposed bills differ in several important aspects, but they all seek to regulate online platforms and marketplaces larger than a certain size threshold. Although there is extensive media coverage and public debate on these bills, no one has addressed the actual scope and economic impact on consumers, businesses, and the overall US economy. Our analysis demonstrates that if the bills are enacted they would impose $319 billion in costs on Google, Apple, Facebook, Amazon, and Microsoft. These companies, in turn, would pass these costs through to consumers and business users via higher retail prices and reduced service offerings. Consumer effects are analyzed using a consumer survey to measure the lost consumer welfare for one illustrative service, Amazon Prime membership. We find that consumers would lose $22 billion in consumer welfare per year if Amazon would be forced to discontinue or reduce the services presently included in the Amazon Prime membership to comply with the bills. Our analysis also demonstrates that the bills impact far more companies than the primary targets-Google, Apple, Facebook, Amazon, and Microsoft. Rather, the bills would directly constrain at least 13 additional companies that operate online platforms in the short term. The proposed legislation would impact foreign companies doing business in the United States significantly less than US companies given the US-specific nature of the bills' primary size thresholds. Thus, the total economic costs of the bills stand to far exceed the numbers we calculated for the primary targets. Moreover, we find that adjusting the size threshold for inflation does not reduce the bills' economic costs. The market capitalization of the largest US publicly traded companies has historically grown much faster than inflation, which largely obviates any adjustment, and implies that over the next decade there could be well over 100 US companies that must change their strategies and business models because of these bills. The bills would not achieve the stated goals of their proponents as they would have no beneficial effect on inflation and likely deleterious effects on innovation. With regards to inflation, 96 percent of the most influential economists at leading US universities do not agree with the claim that antitrust interventions could successfully reduce US inflation over the next 12 months. The overwhelming consensus among economists is that regulatory measures in the proposed bills would be a poor substitute for fiscal and monetary policy and therefore unlikely to have any significant effect on inflation.
    Keywords: online platform regulation,competition analysis,international competitiveness,regulation
    JEL: L11 L12 L41 O31 J18 L86
    Date: 2022
  15. By: Fotis, Panagiotis; Korre, Maria
    Abstract: In recent years, there has been considerable interest in examining the relationship between tourism and sustainable development. For firms to act friendly against the environment, competition authorities (CA’s) must provide them with the appropriate legal certainty they need to make the necessary investments towards sustainability. Policy implications should be strengthened towards more installation of renewable energy and a convergence of environmental policies towards more efficient energy use among EU countries. Energy intensity flows must be kept up more closely since the empirical results point out its substantially positive contribution in terms of air pollution.
    Keywords: Competition (Antitrust) policy; Sustainable Development; Tourism
    JEL: K21 L83 Q01
    Date: 2022–11–06
  16. By: René BELDERBOS; FUKAO Kyoji; IKEUCHI Kenta; KIM Young Gak; KWON Hyeog Ug
    Abstract: Do high or low productivity firms self-select into locations characterized by high industry agglomeration? On the one hand, productive firms may benefit more from the availability of specialized (labour) inputs and they are also more likely to survive heightened competition. On the other hand, productive firms face greater risks of knowledge dissipation to collocated rival firms, as they may contribute more than they receive in terms of knowledge spillovers. We examine location decisions for new plant establishments by firms in Japan with established productivity records (multi-plant firms) at the fine-grained level of towns, wards, and cities where knowledge spillovers are most likely to occur. We find that the adverse selection effects of industry agglomeration–the process of agglomerated areas attracting weaker rather than stronger firms–dominate if knowledge spillovers are most harmful to productive entrants when the focal firm and local incumbent establishments target the same (domestic) product market. We conclude that negative sorting processes do occur, but that these can only be uncovered in a more fine-grained analysis that takes into account ex ante measures of firm heterogeneity and the nature of product markets.
    Date: 2022–11
  17. By: Alexandre Chirat
    Abstract: Do uses of digital technologies in the framework of early 21st century capitalism promote or reduce the expression of consumer sovereignty ? This paper addresses this question through the lens of John Kenneth Galbraith’s theory of consumption. First, I recall the main stakes of his theory. Second, I highlight the main differences between traditional advertising and online behavioral advertising. Third, I explain how online behavioral advertising strengthens the “dependence effect” and “revised sequence” depicted by Galbraith within the context of the industrial society. Fourth, I discuss some normative challenges raised by digital platform corporations to individual sovereignty. Lastly, I argue that platform capitalism appear as a mature form of the “new industrial state”, one important difference being that digital platform corporations, rather than traditional industrial corporations, largely preside over the allocation of resources in the economy.
    Keywords: Consumer sovereignty – online behavioral advertising - digital economics – platform capitalism
    JEL: B2 P1 M3 L2
    Date: 2022

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