nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒02‒27
eighteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Anticompetitive bundling when buyers compete By Taylor, Greg
  2. Cheap Talk, Monitoring and Collusion By David Spector
  3. A Capability Approach to Merger Review By Boa, I.; Elliott, M.; Foster, D.
  4. Data and Competition: A Simple Framework By de Cornière, Alexandre; Taylor, Greg
  5. The Optimality of Constant Mark-Up Pricing By Dirk Bergemann; Tibor Heumann; Stephen Morris
  6. Welfare Cost of Mobile Spectrum (Mis)allocation By Aimene, Louise; Guiffard, Jean-Baptiste; Ivaldi, Marc; Liang, Julienne
  7. What Drive HSR' Prices and Frequencies? An Analysis of Intermodal Competition and Multiproduct Incumbent's Strategies in the French Market By Thierry Blayac; Patrice Bougette; Florent Laroche
  8. Limit Pricing and Entry Game of Renewable Energy Firms into the Energy Sector By Semmler Willi; Di Bartolomeo Giovanni; Fard Behnaz Minooei; Braga Joao Paulo
  9. Circular Business Models: Product Design and Consumer Participation By Stefan Buehler; Rachel Chen; Daniel Halbheer
  10. Matching and Information Design in Marketplaces By Elliott, M.; Galeotti, A.; Koh, A.; Li, W.
  11. Competition in supply functions and conjectural variations: a unified solution By Flavio M. Menezes; John Quiggin
  12. Shelving or developing? The acquisition of potential competitors under financial constraints By Chiara Fumagalli; Massimo Motta; Emanuele Tarantino
  13. Bank Market Power and Interest Rate Setting: Why Consolidated Banking Data Matte By Théo Nicolas.
  14. Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged By Rüdiger Bachmann; Christian Bayer; Heiko Stüber; Felix Wellschmied
  15. Regulating Insurance Markets: Multiple Contracting and Adverse Selection By Andrea Attar; Thomas Mariotti; François Salanié
  16. Certification Design for a Competitive Market By Andreas A. Haupt; Nicole Immorlica; Brendan Lucier
  17. Industry Linkages from Joint Production By Xiang Ding
  18. Green product innovation in industrial networks: a theoretical model By Dugoua, Eugenie; Dumas, Marion

  1. By: Taylor, Greg
    Abstract: We study the profitability of bundling by an upstream firm who licenses com-plementary technologies to downstream competitors, and who faces a superior competitor for one of its technologies. In an otherwise standard “Chicago-style” model, we show that the existence of downstream competition can make inefficient bundling profitable. Forcing downstream firms to use a less efficient technology can soften competition, thus allowing the upstream firm to extract more profit through the licensing of its monopolized technology. Bundling is more likely to be profitable if downstream competition is intense and if technologies are strongly complementary. The mechanism requires a public commitment to bundling (e.g. technical bundling) and the unobservability of the contracts offered to downstream firms. A similar logic can make it profitable for the upstream firm to degrade the interoperability between its technologies and those of its rivals, even without foreclosing competition.
    Date: 2023–01–31
  2. 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
  3. By: Boa, I.; Elliott, M.; Foster, D.
    Abstract: Merger analysis typically focuses on possible strategic price effects in markets where there is existing competition between the merging firms. We refer to this as the product based approach. This paper proposes a complementary approach based on an assessment of the merging firms’ capabilities that can provide insights on potential merger effects, including in circumstances where the product based approach offers little practical guidance to antitrust authorities. Our approach is rooted in the resource-based view of business strategy that starts from the premise that it is a firm’s capabilities (sometimes called core competencies), which drive its competitive advantage across markets. We argue that mergers in which firms’ capabilities are less overlapping are more pro-competitive on several dimensions: immediate competition in overlapping markets, immediate competition in other markets, long-run competition and innovation.
    Date: 2023–02–03
  4. By: de Cornière, Alexandre; Taylor, Greg
    Abstract: Does enhanced access to data foster or hinder competition among firms? Using a competition-in-utility framework that encompasses many situations where firms use data, we model data as a revenue-shifter and identify two opposite effects: a mark-up effect according to which data induces firms to compete harder, and a surplus-extraction effect. We provide conditions for data to be pro- or anti-competitive, requiring neither knowledge of demand nor computation of equilibrium. We apply our results to situations where data is used to recommend products, monitor insuree behavior, price-discriminate, or target advertising. We also revisit the issue of data and market structure.
    JEL: L1 L4 L5
    Date: 2023–01–31
  5. By: Dirk Bergemann (Yale University); Tibor Heumann (Yale University); Stephen Morris (Cowles Foundation, Yale University)
    Abstract: We consider a nonlinear pricing environment with private information. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible distributions of willingness to pay of the buyers. With a constant elasticity cost function, constant markup pricing provides the optimal revenue guarantee across all possible distributions of willingness to pay and the lower bound is attained under a Pareto distribution. We characterize how profits and consumer surplus vary with the distribution of values and show that Pareto distributions are extremal. We also provide a revenue guarantee for general cost functions. We establish equivalent results for optimal procurement policies that support maximal surplus guarantees for the buyer given all possible cost distributions of the sellers.
    Date: 2023–01
  6. By: Aimene, Louise; Guiffard, Jean-Baptiste; Ivaldi, Marc; Liang, Julienne
    Abstract: Conditions under which spectrum is allocated are significant in determining the market structure in the telecom sector which in turn affects the prices and the quality of mobile services. In a more concentrated market, the quantity of spectrum is less diluted, and operators can offer higher quality to their customers; In a more competitive market, consumers can benefit from a lower price but at the expense of less quality for each operator. To address this trade-off, we first fit a demand model of mobile telecommunications services on a unique panel database of 23 European MNOs; we then conduct counterfactual simulations to measure the effect on consumer surplus of different schemes of spectrum allocation in Germany. Reallocating additional spectrum to three instead of four operators is consumer welfare improving as increasing prices is compensated by larger improvement in quality.
    Keywords: spectrum allocation; network investment; market structure; investment and; competition
    JEL: L40 L96 L11
    Date: 2023–02
  7. By: Thierry Blayac (CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier); Patrice Bougette (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); Florent Laroche (LAET - Laboratoire Aménagement Économie Transports - UL2 - Université Lumière - Lyon 2 - ENTPE - École Nationale des Travaux Publics de l'État - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper provides an empirical analysis of the determinants of service prices and frequencies of conventional high-speed rail (HSR) in France. We use original data for the period 09/2019-03/2020 and consider the intensity of intermodal competition and the diversification strategy of the incumbent rail operator. The main econometric results show that the determinants of the price per kilometer of conventional HSR services (1st and 2nd class) are partly common (especially for the variables explaining the technical characteristics of the routes and the alternative offer) and partly specific (competitive environment, economic and demographic environment). Frequencies depend mainly on travel time. On the routes for which the conventional HSR does not provide a quality service (frequency and/or price), a complementary alternative offer compensates the low frequency of conventional HSR services.
    Keywords: HSR, Intermodal competition, Multiproduct firms' strategies, Low-cost transportation, France, Working Papers du LAET
    Date: 2023
  8. By: Semmler Willi; Di Bartolomeo Giovanni; Fard Behnaz Minooei; Braga Joao Paulo
    Abstract: Governments attempt to incentivize the energy sector to replace old technologies with new ones based on renewable energy as the most effective way to combat climate change. Yet, in the energy sector prevail fossil fuel incumbents, which inhibit renewable energy entrants. Our paper provides a game-theoretic stylization of competition between those two types of firms. Incumbents set prices, and entrants respond with quantity adjustments. In the context of a dynamic limit pricing model, we study the entry dynamics in a market in which the dominant firms (fossil fuel energy suppliers) face the entry of a group of competitive fringe firms (renewable energy suppliers) when the dominant firms have easier access to financial markets. Still, the fringe firms finance their expansion with internal finance. We also investigate the effect of the public support of renewable energy firms through subsidies. Our model is built on Judd and Peterson (1986, JET), but our solutions are obtained through a non-linear model predictive control algorithm. By this technique, we can predict the outcome of the competition between incumbents and entrants and the impact of financial and fiscal policies considering moving-horizon strategies.
    Date: 2022–01
  9. By: Stefan Buehler (HSG - University of St.Gallen); Rachel Chen (UC - University of California); Daniel Halbheer (HEC Paris - Ecole des Hautes Etudes Commerciales)
    Abstract: This paper develops an analytical framework to study how firms should design a product by choosing its recyclability and price in a market where consumers adopt a life-cycle approach and decide whether to recycle an end-of-life product. We show that the firm offers a non-recyclable product in the absence of a reverse supply chain even if consumers care about recyclability – the linear take-make-dispose model. By operating a reverse supply chain, the firm generates revenue from both sales and recycling, and determines recyclability by balancing the marginal changes in the consumers' expected end-of-life utility and the unit production cost net of the expected value of the recovered resources. We identify conditions under which the firm offers a fully recyclable product and all consumers return the product for recycling – the fully circular model. In addition, we show that stronger concerns about recyclability and a higher market value of the recovered resources increase recyclability, but have an ambiguous impact on price, demand, profit, and the overall waste footprint of the firm. Further, we characterize the conditions under which transitioning from a linear to a circular business model is profitable and socially desirable. Finally, we show when a deposit-refund system, product buyback, and retaining product ownership are effective tools to boost circularity.
    Keywords: Circular business model, waste footprint, resource footprint, recycling, reverse supply chain, pricing
    Date: 2022–12–30
  10. By: Elliott, M.; Galeotti, A.; Koh, A.; Li, W.
    Abstract: There are many markets that are networked in these sense that not all consumers have access to (or are aware of) all products, while, at the same time, firms have some information about consumers and can distinguish some consumers from some others (for example, in online markets through cookies). With unit demand and price-setting firms we give a complete characterization of all welfare outcomes achievable in equilibrium (for arbitrary buyer-seller networks and arbitrary information structures), as well as the designs (networks and information structures) which implement them.
    Date: 2023–02–04
  11. By: Flavio M. Menezes (Australian Institute for Business and Economics, University of Queensland, Brisbane, Australia); John Quiggin (School of Economics, University of Queensland, Brisbane, Australia)
    Abstract: This paper reconciles the concepts of ex ante and ex post supply function equilibria of, respectively, Klemperer and Meyer (1989) and Menezes and Quiggin (2020) with the conjectural variations equilibrium of Bowley (1924) and Bresnahan (1981). We show that under appropriate conditions, the ex ante and ex post equilibrium supply curves coincide with each other and with the consistent conjectural equilibrium solution. Further, this is a dominant strategy equilibrium for both ex ante and ex post games, and represents the case in which players are indifferent regarding move order. We explore the implications of our results for empirical work.
    Keywords: Imperfect competition, games in supply functions, conjectural variations
    JEL: D43 L13
    Date: 2023–02–04
  12. By: Chiara Fumagalli; Massimo Motta; Emanuele Tarantino
    Abstract: A start-up and an incumbent negotiate over an acquisition price under asymmetric information about the start-up’s ability to succeed in the market. The acquisition may result in the shelving of the start-up’s project or the development of a project that would otherwise never reach the market because of financial constraints. Despite this possible pro-competitive effect, the optimal merger policy commits to standards of review that prohibit high-price takeovers, even if they may be welfare-beneficial ex post. Ex ante this pushes the incumbent to acquire startups lacking the financial resources to develop independently, and increases expected welfare. Keywords: Optimal merger policy, selection effect, nascent competitors. JEL Classification: L41, L13, K21
    Date: 2022
  13. By: Théo Nicolas.
    Abstract: The literature on the effects of bank market power on access to credit has produced many results that are sometimes contradictory. Yet, all of these studies are based on unconsolidated data that ignore the national market power of banking groups. This results in an underestimation bias that this paper proposes to correct. Using a panel of more than 55, 000 French firms covering the period 2006–2017, I consider a set of structural and non-structural measures of bank market power both at the unconsolidated and consolidated levels. My results strongly support the market power hypothesis which emphasizes the virtues of competition on interest rate setting. I find that bank market power increases the interest rate charged, but only when using my consolidated measures. This effect is stronger for small and risky firms and is concentrated on long-term loans. My findings highlight the need to take into account the capital linkages of subsidiaries within the same banking group in order to fully assess the implications of bank market power. Yet, the vices of greater bank market power need to be put into perspective with its costs and benefits on financial stability, which goes beyond the cost of this paper <p> La littérature sur l’effet du pouvoir de marché des banques sur l'accès au crédit des entreprises a abouti à des résultats parfois contradictoires. Toutefois, cet article montre que les mesures traditionnelles du pouvoir de marché des banques sont toutes problématiques car elles s’appuient sur des données non consolidées et ignorent par la même le pouvoir de marché national des groupes bancaires. Il en résulte une sous-estimation que je propose de corriger. En utilisant un panel de plus de 55 000 entreprises françaises couvrant la période 2006-2017, je considère un ensemble de mesures structurelles et non structurelles du pouvoir de marché des banques à la fois au niveau non consolidé et consolidé. Mes résultats corroborent l’hypothèse du pouvoir de marché bancaire qui met en avant les vertus de la concurrence sur la fixation des taux d'intérêt. Alors que les mesures non consolidées du pouvoir de marché des banques n'affectent pas le coût du crédit, je constate que les mesures consolidées augmentent le taux d'intérêt pratiqué. Cet effet est plus fort pour les petites entreprises et les entreprises risquées et se concentre sur les prêts à long terme. Ces résultats soulignent la nécessité de prendre en compte les liens capitalistiques des filiales issues d’un même groupe bancaire pour évaluer pleinement les implications du pouvoir de marché des banques. Les avantages d'un plus grand pouvoir de marché des banques doivent toutefois être mis en perspective avec les coûts et les avantages pour la stabilité financière, ce qui dépasse le cadre de cette recherche.
    Keywords: Cost of Credit, Bank Competition, Bank Concentration, Relationship Lending.; coût du crédit, compétition bancaire, concentration bancaire, relation bancaire
    JEL: E43 E51 G01 G21
    Date: 2023
  14. By: Rüdiger Bachmann; Christian Bayer; Heiko Stüber; Felix Wellschmied
    Abstract: When employers face a trade-o between being large and paying low wages|and in this sense have monopsony power|some productive employers decide to acquire few customers, forgo sales, and remain small. These decisions have adverse consequences for aggregate labor productivity. Using high-quality administrative data from Germany, we document that East German plants (compared to West German ones) face steeper size-wage curves, invest less into marketing, remain smaller, and are less productive. A model with labor market monopsony, product market power, and customer acquisition matching these features of the data predicts ten percent lower aggregate labor productivity in East Germany.
    Keywords: aggregate productivity, plant heterogeneity, unions, monopsony power, size-wage curve, customer capital, size distortions
    JEL: E20 E23 E24 J20 J42 J50
    Date: 2023–02
  15. By: Andrea Attar (TSE-R - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Thomas Mariotti (TSE - Unité de recherche Transformation des Systèmes d'Élevage - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); François Salanié (TSE - Unité de recherche Transformation des Systèmes d'Élevage - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: We study insurance markets in which privately informed consumers can purchase coverage from several firms whose pricing strategies are subject to an anti-dumping regulation. The resulting regulated game supports a single allocation in which each layer of coverage is fairly priced given the consumer types who purchase it. This competitive allocation cannot be Pareto-improved by a social planner who can neither observe consumer types nor monitor their trades with firms. Accordingly, we argue that public intervention under multiple contracting and adverse selection should penalize firms that cross-subsidize between contracts, while leaving consumers free to choose their preferred amount of coverage.
    Keywords: Insurance Markets, Regulation, Multiple Contracting, Adverse Selection., Insurance Markets Regulation Multiple Contracting Adverse Selection. JEL Classification: D43 D82 D86, Adverse Selection. JEL Classification: D43, D82, D86
    Date: 2022–08
  16. By: Andreas A. Haupt; Nicole Immorlica; Brendan Lucier
    Abstract: Motivated by applications such as voluntary carbon markets and educational testing, we consider a market for goods with varying but hidden levels of quality in the presence of a third-party certifier. The certifier can provide informative signals about the quality of products, and can charge for this service. Sellers choose both the quality of the product they produce and a certification. Prices are then determined in a competitive market. Under a single-crossing condition, we show that the levels of certification chosen by producers are uniquely determined at equilibrium. We then show how to reduce a revenue-maximizing certifier's problem to a monopolistic pricing problem with non-linear valuations, and design an FPTAS for computing the optimal slate of certificates and their prices. In general, both the welfare-optimal and revenue-optimal slate of certificates can be arbitrarily large.
    Date: 2023–01
  17. By: Xiang Ding
    Abstract: I develop a theory of joint production to quantify aggregate economies of scope. In US manufacturing data, increased export demand in one industry raises a firm’s sales in its other industries that share knowledge inputs like R&D and software. I estimate that knowledge inputs contribute to economies of scope through their scalability and partial non-rivalry within the firm. On average a 10 percent increase in output in one industry lowers prices in other industries by 0.4 percent. Such economies of scope manifest disproportionately among knowledge proximate industries and imply large spillover impacts of recent US-China trade policy on producer prices.
    Date: 2023–01
  18. By: Dugoua, Eugenie; Dumas, Marion
    Abstract: Previous studies have modeled green technological change as innovations in the process of production (e.g., abatement technologies or energy sources). But greening the economy also requires changing products. The automotive industry, for example, needs to massively deploy alternative-fuel vehicles. Product manufacturing occurs within supply-chain networks, and developing new products typically requires complementary investments by suppliers. We study the incentives for green product innovation in industrial networks and how policies can affect them. We follow the industrial organization theory of product differentiation, and model green product innovations as upgrades in product quality where inputs from suppliers are essential for upgrading quality. We show that suppliers can be innovation bottlenecks and render policy instruments less effective. We provide an explicit mechanism for the role of institutions that help actors coordinate on the long-term direction of innovation. We discuss how our results help organize several findings from case studies in the automotive industry.
    Keywords: green products; innovation; production networks; buyer-supplier relationships; supply chains
    JEL: Q55 Q58 L52 O31
    Date: 2021–05–01

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