nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒03‒20
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. Downstream Cross-Holdings and Upstream Collusion By Konstantinos Charistos; Ioannis Pinopoulos; Panagiotis Skartados
  2. Strategic capacity investment with common ownership or cross holdings By Richard Ruble; Dimitrios Zormpas
  4. Cartel Damages Claims, Passing-On and Passing-Back By Garrod, Luke; Han, Tien-Der Jerry; Harvey, James; Olczak, Matthew
  5. A Theory of Monopolistic Competition with Horizontally Heterogeneous Consumers By Sergey Kokovin; Alina Ozhegova; Shamil Sharapudinov; Alexander Tarasov; Philip Ushchev; Sergey G. Kokovin
  6. (Sports) economics upside down? A comment on the Advocate General opinion in European Super League versus UEFA/FIFA By Budzinski, Oliver
  7. Quality, Vertical Integration and Adaptability By Nicolás Depetris-Chauvin; Marta Fernández Olmos; Juan Carlos Hallak; José Santiago Mosquera
  8. Labour market power and the dynamic gains to openness reforms By Priyaranjan Jha; Antonio Rodriguez-Lope; Adam Hal Spencer
  9. Consolidation of the US property and casualty insurance industry: Is climate risk a causal factor for mergers and acquisitions? By Dionne, Georges; Fenou, Akouété; Mnasri, Mohamed
  10. Why Economists Should Support Populist Antitrust Goals By Mark Glick; Gabriel A. Lozada; Darren Bush
  11. Monopsony in Professional Labor Markets: Hospital System Concentration and Nurse Wages By Sylvia A. Allegretto; Dave Graham-Squire
  12. Nonparametric estimation of sponsored search auctions and impacts of ad quality on search revenue By Dongwoo Kim; Pallavi Pal
  13. The Sequential Search Model: A Framework for Empirical Research By Raluca Ursu; Stephan Seiler; Elisabeth Honka
  14. Some Facts about Concentrated Labor Markets in the United States By Elizabeth Weber Handwerker; Matthew Dey
  15. Endogenous Production Networks with Fixed Costs By Emmanuel Dhyne; Ken Kikkawa; Xianglong Kong; Magne Mogstad; Felix Tintelnot
  16. Spatial Agglomeration, Innovation and Firm Survival for Italian Manufacturing Firms By Arnab Bhattacharjee; Ornella Maietta; Fernanda Mazzotta
  17. Off-Balance Sheet Activities and Scope Economies in U.S. Banking By Jingfang Zhang; Emir Malikov

  1. By: Konstantinos Charistos; Ioannis Pinopoulos; Panagiotis Skartados
    Abstract: We examine the effects of (passive) cross-holdings in the downstream market on the sustainability of upstream collusion. We consider two competing vertical chains with downstream Cournot and homogeneous goods. Each downstream firm holds a (symmetric) non-controlling share of its rival.
    Keywords: competing vertical chains; cross-holdings; passive ownership; tacit collusion
    JEL: D43 L13 L40 L81
    Date: 2023–02–05
  2. By: Richard Ruble; Dimitrios Zormpas
    Abstract: We study how overlapping ownership affects the timing and size of capacity investments in duopoly. In addition to standard accommodation and delay strategies, internalization allows a leader to block follower entry. Follower timing and capacity reactions are less aggressive, making outcomes less competitive ex-post. Positional competition is more intense, and entry occurs earlier in equilibrium. Internalization raises a leader's incentive to delay follower entry rather than accommodate, and we show with an example that this strategic shift can benefit consumers.
    Keywords: ownership, cross-ownership, dynamic competition, Stackelberg leadership, strategic capacity investment
    JEL: D25 G32 L13
    Date: 2022–09–23
  3. By: N. G. Korol (The Russian Presidential Academy Of National Economy And Public Administration); A. A. Kurdin (The Russian Presidential Academy Of National Economy And Public Administration); A. A. Morosanova (The Russian Presidential Academy Of National Economy And Public Administration)
    Abstract: Digital transformation of industries and markets remains a key challenge for the modern competition policy. Digital ecosystems are playing increasingly important roles in the structure of the economy. That is why their regulation is becoming an especially relevant problem for antitrust regulators. The goal of this preprint is to identify key specific factors of competition restraints on markets for goods and services in the spheres of digital ecosystems functioning. The authors of the research aggregate and compare main concepts and models of digital ecosystems with a focus on procompetitive and anticompetitive factors of their activities. The authors also summarize main issues raised in the process of market behavior qualification and market structure assessment for artificial intelligence (AI) intensive companies (ecosystem leaders). These issues include enhanced market concentration, risks of price discrimination and algorithmic collusion. The main research method in this regard is the legal and economic analysis, which is based on the economic assessment of Russian and foreign legal documents. The specific challenge in that sphere is the dependence of AI efficiency on big-data-based machine learning. This feature causes an increase in market concentration, strengthens the positions of market leaders, and potentially weakens the competitive environment. The results of the research include the systematization of digital ecosystem concepts, the detection of main factors for their modeling and the identification of presumptions and consequences of the modernization of antitrust regulation. Antitrust bodies are recommended to improve their own digital competencies and analytical capabilities to prevent the loss of control over the market, as well as the elimination of AI benefits.
    Keywords: competition policy, antitrust policy, ecosystem, digital economy, platform, network effects, artificial intelligence, machine learning
  4. By: Garrod, Luke; Han, Tien-Der Jerry; Harvey, James; Olczak, Matthew
    Abstract: Firms can mitigate the harm of an input cartel by passing on some of the overcharge to their customers through raising their own prices. Recent claims for damages have highlighted that firms may also respond by negotiating lower prices with their suppliers of other complementary inputs, thereby passing back some of the harm upstream. By analysing a model where downstream supply requires two inputs, we derive the equilibrium `passing-on' and `passing-back' effects when one input is cartelised. We show that the cartel causes a larger passing-back effect when there is greater market power in the complementary input sector. This reduces the passing-on effect. We find that the passing-back effect can inflict substantial harm on the complementary input suppliers and reduce the harm inflicted on direct and/or indirect purchasers.
    Keywords: damages, cartel overcharge, pass-on, complements, negotiation
    JEL: D4 K21 L13 L40
    Date: 2023
  5. By: Sergey Kokovin; Alina Ozhegova; Shamil Sharapudinov; Alexander Tarasov; Philip Ushchev; Sergey G. Kokovin
    Abstract: Our novel approach to modeling monopolistic competition with heterogeneous firms and consumers involves spatial product differentiation. Space can be interpreted either as a geographical space or as a space of characteristics of a differentiated good. In addition to price setting, each firm also chooses its optimal location in this space. We formulate conditions for positive sorting: more productive firms serve larger market segments and face tougher competition; and for the existence and uniqueness of the equilibrium. To quantify the role of the sorting mechanism, we calibrate the model using cross-sectional haircut market data and perform counterfactual analysis. We find that inequality in the distribution of the gains among consumers caused by positive market shocks can be substantial: the gains of consumers from more populated locations are 3-4 times higher.
    Keywords: firm heterogeneity, geographical space, product space, positive sorting, product niches
    JEL: F10 L11 L13
    Date: 2023
  6. By: Budzinski, Oliver
    Abstract: This comment addresses the opinion of the Advocate General (AG) of the European Court of Justice on the pending case European Super League versus UEFA/FIFA. It takes a critical perspective on selected aspects of the opinion's reasoning from a (sports) economics perspective. Highlighting the special characteristics of sports markets, the assessment of the AG Opinion raises questions such as (i) the (lack of) empirical evidence that the incumbent pursues and/or meets the legitimate objectives while the latter is still used as justifying reasons for anticompetitive conduct and arrangements (section III), (ii) the prohibitive entry barriers raised by the non-existence of a transparent and non-discriminatory authorization system preventing open competition for championships formats and organization by objective and effect (section IV), and (iii) the difficult search for a convincing theory of harm justifying the brutal enforcement of single-homing by the incumbent (section V).
    Keywords: European football, sports economics, antitrust, competition policy, Super League, Champions League, abuse of dominance, market power
    JEL: Z20 K21 L12 L40 L83
    Date: 2023
  7. By: Nicolás Depetris-Chauvin (HES-SO, HEG Genève); Marta Fernández Olmos (Universidad de Zaragoza); Juan Carlos Hallak (CONICET-IIEP); José Santiago Mosquera (Universidad de San Andrés)
    Abstract: As global competition increasingly focuses on product quality, firms need to ensure the quality of their inputs. A central question is then which organizational structure best enables them to achieve this objective. Numerous papers have found that firms that produce higher quality are more likely to integrate with their suppliers. However, their focus so far has been placed on quality unobservability as the driver of integration. In this paper, we confirm the empirical relationship between quality and vertical integration but uncover an alternative mechanism in a set up where quality unobservability is not relevant: a stronger need for high quality producers to adapt efficiently to uncertain events. Based on a survey of 688 Spanish wineries and using the probability of hail as a proxy measure of uncertainty and need for adaptation, we find that the relationship between product quality and vertical integration is stronger for wineries in locations subject to more climatic uncertainty. In those cases, vertical integration comes out as an organizational form that provides high quality producers with more adaptability to preserve input quality in response to unforseen events
    Keywords: Vertical Integration, Quality, Adaptation
    JEL: L14 L15 L22
    Date: 2023–03
  8. By: Priyaranjan Jha; Antonio Rodriguez-Lope; Adam Hal Spencer
    Abstract: We develop a dynamic general equilibrium framework with firm heterogeneity and monopsonistic labour markets, for quantification of the impact of trade and FDI liberalisation episodes. Firms make standard extensive margin investment choices into exporting and multinational statuses. The labour market features upward-sloping supply curves and love of variety in employment. These features interact with the variable-fixed cost tradeoff of outward activity. We calibrate the model to U.S. data and study the effect of reductions in tariffs and outward FDI taxes in both bilateral and unilateral contexts, examining steady state and transitional effects. We compare the predictions of this model with a more standard version with perfectly competitive labour markets. Our headline finding is that the model with labour market power gives substantially different quantitative estimates to the perfectly competitive version. For instance, a bilateral trade liberalisation gives welfare gains that are over 10 times larger in the presence of monopsony power. Significant quantitative differences persist with a variety of robustness exercises.
    Keywords: Monopsonistic labour market; Trade liberalisation; Love of firm variety; Dynamics; Foreign direct investment; Corporate taxation
    Date: 2023
  9. By: Dionne, Georges (HEC Montreal, Canada Research Chair in Risk Management); Fenou, Akouété (HEC Montreal, Canada Research Chair in Risk Management); Mnasri, Mohamed (HEC Montreal, Canada Research Chair in Risk Management)
    Abstract: This report analyzes the difference between mergers and acquisitions (M&As) of target insurers in the US life and non-life insurance sectors. We first document M&A transactions in the US insurance market between 1990 and 2021 and select the M&A transactions related to US target insurers. We then study the evolution of the life and non-life insurance sectors over time in order to determine whether there are parallel trends between the evolution of M&As of target insurers in these two sectors over time. We empirically test the difference between the M&As of the life and non-life insurance sectors by employing a natural experiment method and verify whether climate risk has been a causal factor in the observed difference in mergers and acquisitions between the two sectors after 2012. Our results do not support a causal link between climate risk and M&As during the period of analysis. Insurers choose other diversification sources of capital, including reinsurance, premium management, CAT bonds, and better capital management under stronger risk regulation.
    Keywords: Mergers and acquisition; US insurance industry; property and casualty insurance; life insurance; health insurance; climate risk; capital management; reinsurance; ILS; CAT bonds; premium management; risk regulation
    JEL: C10 C22 C23 C58 G22 G28 G52 H12
    Date: 2023–02–15
  10. By: Mark Glick (University of Utah); Gabriel A. Lozada (University of Utah); Darren Bush (University of Houston)
    Abstract: Antitrust economists have generally supported the Consumer Welfare Standard as a guide to antitrust policy questions because of its origins in Marshall's consumer surplus approach and the general economic surplus approach to welfare economics. But welfare economists no longer support the surplus approach because decades of research pertaining to the surplus approach have uncovered numerous inconsistencies and serious ethical challenges. However, the surplus approach to welfare survives in industrial organization textbooks and among industrial organization economists that specialize in antitrust. We argue in this paper that the Consumer Welfare Standard is not a reliable standard and should be abandoned. We cite several reasons: (1) it limits antitrust goals a priori without any defensible justification, (2) it considers all transfers of surplus between stakeholders in antitrust cases to be welfare neutral, (3) it is biased in favor of big business and the rich, and (4) the accumulation of inconsistencies and problems documented by welfare economists renders the theory completely unreliable. In a final section of the paper, we preliminarily contend that modern research in welfare economics concerning the factors that influence human welfare could be used to inform a more progressive standard for determining antitrust goals.
    Keywords: Consumer Welfare Standard, Consumer Surplus, Antitrust, Law and Economics, Compensating Variation, Equivalent Variation, Kaldor Hicks, Pareto Efficiency.
    JEL: K1 D61 L4
    Date: 2022–12–06
  11. By: Sylvia A. Allegretto (Center for Economic and Policy Research); Dave Graham-Squire (University of California San Francisco)
    Abstract: Rolling waves of consolidation have significantly decreased the number of hospital systems in the U.S. potentially affecting industry quality, prices, efficiency, wages and more. This research concerns the growth in hospital system consolidation in local labor markets and its effect on registered nurse wages. We first use a nonparametric preprocessing data step via matching methods to define MSA-specific samples of workers analogous to nurses outside of the hospital sector. This step enables an accounting of heterogeneous MSA-specific baseline wage growth, and yields a standardized measure of nurse wage growth across MSAs used to set up a multi-site quasi-experiment. We then run a parsimonious linear model; market size matters, for every 0.1 increase in consolidation in smaller-MSAs, real hourly nurse wage growth decreased by $0.70 (p-value of 0.038). Though not the primary aim of this study, a secondary finding is that real hourly wages for nurses grew less than that of comparable workers by $4.08.
    Keywords: monopsony, hospital consolidation, imperfect competition, matching methods for data preprocessing.
    JEL: C55 I11 J01 J42
    Date: 2023–01–05
  12. By: Dongwoo Kim; Pallavi Pal
    Abstract: This paper presents an empirical model of sponsored search auctions in which advertisers are ranked by bid and ad quality. We introduce a new nonparametric estimator for the advertiser’s ad value and its distribution under the ‘incomplete information’ assumption. The ad value is characterized by a tractable analytical solution given observed auction parameters. Using Yahoo! search auction data, we estimate value distributions and study the bidding behavior across product categories. We find that advertisers shade their bids more when facing less competition. We also conduct counterfactual analysis to evaluate the impact of score squashing (ad quality raised to power θ
    Date: 2023–03–06
  13. By: Raluca Ursu; Stephan Seiler; Elisabeth Honka
    Abstract: We provide a detailed overview of the empirical implementation of the sequential search model proposed by Weitzman (1979). We discuss the assumptions underlying the model, the identifica-tion of search cost and preference parameters, the necessary normalizations of utility parameters, counterfactuals that require a search model framework, and different estimation approaches. The goal of this paper is to consolidate knowledge and provide a unified treatment of various aspects of sequential search models that are relevant for empirical work.
    Keywords: sequential search model
    JEL: D43 D83 L13
    Date: 2023
  14. By: Elizabeth Weber Handwerker; Matthew Dey
    Abstract: /2022/ec220050.htm
    Date: 2022
  15. By: Emmanuel Dhyne; Ken Kikkawa; Xianglong Kong; Magne Mogstad; Felix Tintelnot
    Abstract: This paper presents a tractable model of endogenous production networks with fixed costs associated with the formation of links between firms. The model consists of a finite number of firm types producing differentiated products. Each firm is characterized by firm-specific parameters describing its CES production function, firm-specific domestic and foreign demand shifters, and a firm-specific set of potential suppliers and buyers. We consider versions of the model in which either the buyer or the supplier initiates the formation of links, and versions in which the production network can be cyclic or acyclic. Our main theoretical result is that the closed economy equilibrium is unique if the set of feasible networks consists only of networks that are acyclic and the buyer initiates the link formation while having full bargaining power in price negotiations with the supplier. We provide examples of multiple equilibria if the supplier initiates the link formation in both cyclic and acyclic feasible networks or if the buyer initiates the link formation in a cyclic production network. We take the acyclic production network model to Belgian data on firm-to-firm production networks and show that it approximates well the salient features of the network. The endogenous network model generates substantial churn in domestic firm-to-firm linkages in response to trade shocks. However, the endogenous network model generates only moderately different welfare changes compared to a model with fixed linkages, suggesting that exogenous production networks can approximate the welfare response to trade shocks reasonably well.
    JEL: E0 F1
    Date: 2023–02
  16. By: Arnab Bhattacharjee; Ornella Maietta; Fernanda Mazzotta
    Abstract: Innovativeness of a firm improves not only its own survival chances but can also generate externalities on its neighboring firms. We empirically examine the role of agglomeration economies in how innovativeness affects firm survival in Southern Italy, using spatial weights to model spillovers. Spatial Durbin probit model estimates confirm that innovation is a determinant of firm survival not only for firms that are themselves innovative but also ones located close to other innovative firms. Definition of spatial scale and weight plays an important role. Spillover benefits are enhanced by agglomeration economies, but only at a very local scale.
    Keywords: Firm survival, Spatial models, Innovation, Spillovers, Southern Italian SMEs
    JEL: L20 O3 D22 C21 C41
    Date: 2023–02
  17. By: Jingfang Zhang; Emir Malikov
    Abstract: Propelled by the recent financial product innovations involving derivatives, securitization and mortgages, commercial banks are becoming more complex, branching out into many "nontraditional" banking operations beyond issuance of loans. This broadening of operational scope in a pursuit of revenue diversification may be beneficial if banks exhibit scope economies. The existing (two-decade-old) empirical evidence lends no support for such product-scope-driven cost economies in banking, but it is greatly outdated and, surprisingly, there has been little (if any) research on this subject despite the drastic transformations that the U.S. banking industry has undergone over the past two decades in the wake of technological advancements and regulatory changes. Commercial banks have significantly shifted towards nontraditional operations, making the portfolio of products offered by present-day banks very different from that two decades ago. In this paper, we provide new and more robust evidence about scope economies in U.S. commercial banking. We improve upon the prior literature not only by analyzing the most recent data and accounting for bank's nontraditional off-balance sheet operations, but also in multiple methodological ways. To test for scope economies, we estimate a flexible time-varying-coefficient panel-data quantile regression model which accommodates three-way heterogeneity across banks. Our results provide strong evidence in support of significantly positive scope economies across banks of virtually all sizes. Contrary to earlier studies, we find no empirical corroboration for scope diseconomies.
    Date: 2023–02

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