nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒02‒13
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. Endogenous choice of price or quantity contract with upstream advertising By Qing Hu; Dan Li; Tomomichi Mizuno
  2. Repeated Trading: Transparency and Market Structure By Ayca Kaya; Santanu Roy
  3. Globalization and market power By Impullitti, Giammario; Kazmi, Syed
  4. Buyer Power and Exclusion: A Progress Report By Claire Chambolle; Clémence Christin; Hugo Molina
  5. Innovation and Competition: A Case Study Analysis By Kang, Minji
  6. Strategic Environmental Corporate Social Responsibility (ECSR) Certification and Endogenous Market Structure By Ajay Sharma; Siddhartha Rastogi
  7. Evaluating the Impact of Divestitures on Competition: Evidence from Alberta's Wholesale Electricity Market By Brown, David P.; Eckert, Andrew; Shaffer, Blake
  8. Market size, markups and international price dispersion in the cement industry By Leone, Fabrizio; Macchiavello, Rocco; Reed, Tristan
  9. Feedback and Contagion through Distressed Competition By Hui Chen; Winston Wei Dou; Hongye Guo; Yan Ji
  10. Price vs Market Share with Royalty Licensing: Incomplete Adoption of a Superior Technology with Heterogeneous Firms By Luca Sandrini
  11. Mergers, Foreign Competition, and Jobs: Evidence from the U.S. Appliance Industry By Felix Montag
  12. The anatomy of a hospital system merger: the patient did not respond well to treatment By Gaynor, Martin; Sacarny, Adam; Sadun, Raffaella; Syverson, Chad; Venkatesh, Shruthi
  13. Cheap Talk, Monitoring and Collusion By David Spector
  14. Long-run Effect of a Horizontal Merger and Its Remedial Standards By FUKASAWA Takeshi; OHASHI Hiroshi
  15. The Divergent Dynamics of Labor Market Power in Europe By Mr. Ippei Shibata; Mr. Davide Malacrino; Mr. Federico J Diez
  16. Price Authority and Information Sharing with Competing Principals By Enrique Andreu; Damien Neven; Salvatore Piccolo
  17. Investment and Patent Licensing in the Value Chain By Gerard Llobet; Damien Neven

  1. By: Qing Hu (Kushiro Public University of Economics); Dan Li (School of Management, Xi’an Polytechnic University); Tomomichi Mizuno (Graduate School of Economics, Kobe University)
    Abstract: We investigate a supply chain comprising a manufacturer engaged in advertising and two retailers who compete with differentiated products. We examine the endogenous choice between competing on quantity or price for the retailers. Our analysis reveals that, depending on the level of product substitutability, the range of possible outcomes is varied and includes Cournot, Bertrand, and Cournot-Bertrand under informative advertising. This result contradicts the established understanding that firms tend to engage in Cournot competition as their dominant strategy. Furthermore, we find that under persuasive advertising, Cournot or Bertrand outcomes may be optimal, but Cournot-Bertrand never arises as an equilibrium.
    Keywords: Exporting; endogenous competition mode, advertising, vertical relationship
    JEL: D43 L13 M21
    Date: 2023–01
  2. By: Ayca Kaya (University of Miami); Santanu Roy (Southern Methodist University)
    Abstract: We analyze the effect of transparency of past trading volumes in markets where an informed long-lived seller can repeatedly trade with short-lived uninformed buyers. Transparency allows buyers to observe previously sold quantities. In markets with intra-period monopsony (single buyer each period), transparency reduces welfare if the ex-ante expected quality is low, but improves welfare if the expected quality is high. The effect is reversed in markets with intra-period competition (multiple buyers each period). This discrepancy in the efficiency implications of transparency is explained by how buyer competition affects the seller's ability to capture rents, which, in turn, influences market screening.
    Keywords: Repeated sales, adverse selection, transparency, competition, market efficiency
    JEL: D82 C73 D61
    Date: 2023–01
  3. By: Impullitti, Giammario; Kazmi, Syed
    Abstract: Economic theory suggests that the markup is a key measure of market power and that its relationship with trade is rich and complex. Trade liberalisation can reduce markups via a decline in the residual domestic demand but also increase it via several channels. Trade-induced increases in competition leads to more concentrated markets via entry and exit, putting upward pressure on markups. Market shares reallocation toward larger, more powerful firms, increase the aggregate markup. We use a large episode of trade liberalisation in Spain to test this rich set of transmission mechanisms linking trade and markups. The overall effect of reductions in Spanish import tariffs on firm-level and aggregate markups is pro-competitive but we find evidence of offsetting effects via the other channels. In particular, we show that firms with high intangible investment experience a weaker reduction in markups. Sup-porting the theoretical insight that the feedback effect via concentration is stronger with higher barriers to entry. Increases in markups are also produced by reallocations effects but the results are weaker, suggesting that the link between trade and markups is mostly driven by changes at the intensive margin.
    Keywords: internationl trade; markups; oligopoly
    JEL: F12 F13 F14
    Date: 2022–08–26
  4. By: Claire Chambolle (UMR PSAE - Paris-Saclay Applied Economics - AgroParisTech - Université Paris-Saclay - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Clémence Christin (UNICAEN - Université de Caen Normandie - NU - Normandie Université); Hugo Molina (ALISS - Alimentation et sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This article presents recent advances in the analysis of buyer-seller networks, with a particular focus on the role of buyer power on exclusion. We first examine simple vertical structures and highlight that either upstream or downstream firms may have incentives to engage in exclusionary practices to counteract or leverage buyer power. We then review current work attempting to revisit this issue in "interlocking relationships". Based on an ongoing research project, we show that the same exclusion mechanism arises when retail substitution is soft.
    Keywords: Vertical relationships, Buyer power, Distribution network, Exclusion
    Date: 2022–12–15
  5. By: Kang, Minji (Korea Institute for Industrial Economics and Trade)
    Abstract: This paper identifies the processes to be considered in evaluating innovation and innovation outcomes. It also examines the existing economics literature on dynamic competition and summarizes other issues through an analysis of case studies in which corporate innovation competition was proven to be essential. The work also describes the implications for dynamic innovation competition evaluation policy carried by the findings of the research.
    Keywords: innovation; competition; market structure; dynamic competition; digitization; digitalization; digital technology; industrial organization; industrial structure; market dynamics; firm dynamics; competition policy; Korea
    JEL: D40 D47 D49 O25 O31 O33 O38
    Date: 2022–12–01
  6. By: Ajay Sharma; Siddhartha Rastogi
    Abstract: This paper extends the findings of Liu et al. (2015, Strategic environmental corporate social responsibility in a differentiated duopoly market, Economics Letters), along two dimensions. First, we consider the case of endogenous market structure a la Vives and Singh (1984, Price and quantity competition in a differentiated duopoly, The Rand Journal of Economics). Second, we refine the ECSR certification standards in differentiated duopoly with rankings. We find that optimal ECSR certification standards by NGO are the highest in Bertrand competition, followed by mixed markets and the lowest in Cournot competition. Next, NGO certifier will set the ECSR standards below the optimal level. Also, we show that given the ECSR certification standards, there is a possibility of both price and quantity contracts choices by the firms in endogenous market structure.
    Date: 2023–01
  7. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics); Shaffer, Blake (University of Calgary)
    Abstract: Asset divestitures play a central role in antitrust and competition policy. Despite their importance, empirical evidence on their impacts on market competition is limited. We analyze market power in Alberta's wholesale electricity market, where transitional arrangements that virtually divested generation assets from large incumbents were put in place during market restructuring in the early 2000's and expired at the end of 2020. Subsequently, average peak hour prices rose by 120% the year after their expiry. We demonstrate that nearly two-thirds of this increase can be explained by elevated market power from the large suppliers. Further, exploiting variation in the allocation of the divested assets across heterogeneous firms, we demonstrate that market power execution is elevated when the divested assets are controlled by large strategic firms. Our findings highlight the important role that asset divestitures and their allocations can have on market competition. Our analysis also raises concerns over the ability of restructured electricity markets to facilitate sufficient competition through entry and the potential need for regulatory intervention.
    Keywords: Electricity; Market Power; Competition Policy; Divestitures
    JEL: D43 L13 L50 L94 Q40
    Date: 2023–01–29
  8. By: Leone, Fabrizio; Macchiavello, Rocco; Reed, Tristan
    Abstract: Prices for several intermediate inputs, including cement, are higher in developing economies - particularly in Africa. Combining data from the International Comparison Program with a global directory of cement plants we estimate an industry equilibrium model to distinguish between drivers of international price dispersion: demand, costs, conduct, and entry. Developing economies feature both higher marginal costs and higher markups. African markets are not characterized by higher barriers to entry and, if anything, feature relatively more competitive conduct. The small size of many national markets, however, limits entry and competition and explains most of the higher markups. Policy implications are discussed.
    Keywords: international price dispersion; market power; market size; markup; cement; Africa
    JEL: E31 L13 L61 O12
    Date: 2022–07–19
  9. By: Hui Chen; Winston Wei Dou; Hongye Guo; Yan Ji
    Abstract: Firms tend to compete more aggressively in financial distress; the intensified competition in turn reduces profit margins, pushing themselves further into distress and adversely affecting other firms. To study such feedback and contagion effects, we incorporate strategic competition into a dynamic model with long-term defaultable debt, which generates various peer interactions like predation and self-defense. The feedback effect imposes an additional source of financial distress costs incurred for raising leverage, which helps explain the negative profitability-leverage relation across industries. Owing to the contagion effect, in a decentralized equilibrium, leverage is excessively high from an industry perspective, compromising industry's financial stability.
    JEL: C73 D43 G12 L13 O33
    Date: 2023–01
  10. By: Luca Sandrini (Research Centre of Quantitative Social and Management Sciences, Budapest University of Technology and Economics)
    Abstract: This article shows that the usual result of full adoption of a superior technology induced by pure royalty licensing may not hold when firms have different production technologies. By modeling a licensing game with an external innovator offering per-unit royalty contracts to downstream firms, this article shows that full adoption of the innovation occurs only if i) the new technology is sufficiently more efficient than the best one available in the market or ii) if the firms have similar efficiency levels. Moreover, I disentangle two distinct forces that influence the innovator's choice: a price effect (PE) and a market share effect (MSE). The former highlight the asymmetry in willingness to pay for the new technology. The inefficient firms, which benefit the most from the cost-reducing innovation, are willing to pay a higher price than their efficient rivals to become licensees. The latter illustrates the innovator's aim to maximize the volume of royalties collected by licensing to many firms. When PE dominates MSE, the patent holder sets a higher royalty rate and attracts fewer, less efficient firms. Otherwise, if MSE dominates, the patent holder lowers the royalty rate and attracts more firms to reach as many consumers as possible. From a policy perspective, I show that royalty licensing improves consumer surplus and that the positive effect increases with the number of licensees.
    Keywords: Innovation; Licensing; Royalties; Price Effect; Market Share Effect
    JEL: L13 L24 O31
    Date: 2023–01
  11. By: Felix Montag (Tuck School at Dartmouth)
    Abstract: Policy choices often entail trade-offs between workers and consumers. I assess how foreign competition changes the consumer welfare and domestic employment effects of a merger. I construct a model accounting for demand responses, endogenous product portfolios, and employment. I apply this model to the acquisition of Maytag by Whirlpool in the household appliance industry. I compare the observed acquisition to one with a foreign buyer. While a Whirlpool acquisition decreased consumer welfare by $250 million, it led to 1, 300 fewer domestic jobs lost. Jobs need to be worth above $220, 000 annually for domestic employment effects to offset consumer harm.
    JEL: F61 L13 L40
    Date: 2023–01–27
  12. By: Gaynor, Martin; Sacarny, Adam; Sadun, Raffaella; Syverson, Chad; Venkatesh, Shruthi
    Abstract: Despite the continuing US hospital merger wave, it remains unclear how mergers change, or fail to change, hospital behavior and performance. We open the "black box" of hospital practices through a mega-merger between two for-profit chains. Benchmarking the merger's effects against the acquirer's stated aims, we show they achieved some of their goals, harmonizing electronic medical records and sending managers to target hospitals. Post-acquisition managerial processes were similar across the merged chain. However, these interventions failed to drive detectable gains in performance. Our findings demonstrate the importance of organizations for merger research in health care and the economy more generally.
    Keywords: management
    JEL: I10 M12
    Date: 2022–04–07
  13. By: David Spector (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, PJSE - Paris Jourdan Sciences Economiques - 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)
    Abstract: Many collusive agreements involve the exchange of self-reported sales data between competitors, which use them to monitor compliance with a target market share allocation. Such communication may facilitate collusion even if it is unverifiable cheap talk and the underlying information becomes publicly available with a delay. The exchange of sales information may allow firms to implement incentive-compatible market share reallocation mechanisms after unexpected swings, limiting the recourse to price wars. Such communication may allow firms to earn profits that could not be earned in any collusive, symmetric pure-strategy equilibrium without communication.
    Date: 2022–03
  14. By: FUKASAWA Takeshi; OHASHI Hiroshi
    Abstract: This paper estimates a dynamic oligopoly model with firms’ continuous investment decisions to assess long-run consequences of a horizontal steel merger. It employs a novel simulation method to show that the merger improved social welfare. While the merger discouraged the merged firm from investing in capacity, it encouraged investment within non-merged firms, absent the efficiency gains of the merger. The paper also evaluates the remedial measure targeting asset divestiture that was endorsed by the competition authority. The paper finds that the effects of the merger remedy persisted for the 20 years after its implementation covered by this study, and the prescribed remedy differed considerably on the standpoint of either consumer or social welfare standards.
    Date: 2023–01
  15. By: Mr. Ippei Shibata; Mr. Davide Malacrino; Mr. Federico J Diez
    Abstract: We use firm-level data from 10 European countries to establish several new stylized facts about firms’ labor market power. First, we find the pervasive presence of labor market power across countries and sectors, measured by average and median markdowns above unity. Second, focusing on the dynamics, we find that weighted average markdowns have increased 1.3 percent between 2000 and 2017. However, median and unweighted average markdowns have actually decreased over the same time period, suggesting the existence of divergent paths across the markdown distribution. Third, we show that high-markdown firms tend to have a large footprint in both their product and input (labor) markets, and are most commonly listed and found among services sectors. Finally, a Melitz-Polanec decomposition of the change in weighted average markdown finds that the increase has been driven by a reallocation of resources towards high-markdown incumbents and by the extensive margin via the net entry of high-markdown firms while, in contrast, there was a decline in within-firm markdowns. Our findings highlight the importance of using granular and broad-based data for a thorough analysis of firms’ labor market power.
    Keywords: Monopsony; labor market power; markdowns; secular trends; high-markdown firm; weighted average markdown; high-markdown incumbent; markdown distribution; Labor markets; Employment; Services sector; Wages; Europe
    Date: 2022–12–09
  16. By: Enrique Andreu (Compass Lexecon); Damien Neven (IHEID, Graduate Institute of International and Development Studies, Geneva); Salvatore Piccolo (Bergamo University)
    Abstract: We characterize the degree of price discretion that competing principals award their agents in a framework where agents are informed about demand and seek to pass on their unveriÂ…able distribution costs to consumers at the principalsÂ’ expense. Principals learn demand probabilistically and may exchange this information on a reciprocal basis. While equilibria with full price delegation never exist, partial delegation equilibria exist with and without information sharing and feature binding price caps (list prices) that prevent agents from passing on their distribution costs to consumers. Yet, these equilibria are more likely to occur with than without information sharing. Moreover, while principals exchange information when products are sufficiently differentiated and downstream distribution costs are not too low, expected prices are unambiguously lower with than without information sharing. These results have potential implications for recent and ongoing antitrust investigations and damage claims in prominent sectors both in the US and the EU.
    Keywords: Competing Principals; Delegates Sales; Discretion; Information Sharing; List Prices
    JEL: L42 L50 L81
    Date: 2022–12–18
  17. By: Gerard Llobet (CEPR); Damien Neven (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: At which stage in the production chain should patent licensing takes place? In this paper we show that under realistic circumstances a patent holder would be better off by licensing downstream. This occurs when the licensing revenue can depend on the downstream value of the product either directly or through the use of ad-valorem royalties. We show that the results are similar when, instead, we assume that the downstream licensee is less informed about the validity of the patent. In most cases, downstream licensing increases allocative efficiency. However, it might reduce the incentives to invest by the manufacturers and thereby reduce welfare. We characterize the circumstances under which a conflict arises between the stage at which patent holders prefer to license their technology and the stage at which it is optimal from a social standpoint that licensing takes place.
    Keywords: Royalty Neutrality; Standard Setting Organizations; Patent Licensing; R&D Investment.
    JEL: L15 L24 O31 O24
    Date: 2022–12–22

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