nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒04‒03
seventeen papers chosen by
Russell Pittman
United States Department of Justice

  1. Is List Pricing and Discounting Procompetitive? Tacit Collusion in a Bertrand-Edgeworth Duopoly. By Roman Fossati; Roberto Hernan González; Praveen Kujal
  2. Search and Competition Under Product Quality Uncertainty By Chen, Yongmin
  3. Rivals’ Exit and Vertical Merger Evaluation By Javier D. Donna; Pedro Pereira
  4. Product Innovation with Vertical Differentiation: Is a Monopolist's Incentive Weaker? By Serge Moresi; Marius Schwartz
  5. Repeated Trading: Transparency and Market Structure By Ayca Kaya; Santanu Roy
  6. Competition, regulation and growth in a digitized world: Dealing with emerging competition issues in digital markets By Giuseppe Nicoletti; Cristiana Vitale; Carolina Abate
  7. An Empirical Analysis of Optimal Nonlinear Pricing By Soheil Ghili; Russ Yoon
  8. Revisiting the effect of search frictions on market concentration By Jules Depersin; B\'ereng\`ere Patault
  9. The Emergence of China’s Mergers and Acquisitions Market By Chen, Chien-Hsun
  10. A Mechanism for Destabilizing Cartels By Soumen Banerjee
  11. Q-Learning algorithms in a Hotelling model By Lucila Porto
  12. Platform Models and Strategic Interaction on a Multi-Agent Transport Network By Jolian McHardy
  13. Endogenous Production Networks with Fixed Costs By Emmanuel Dhyne; Ayumu Ken Kikkawa; Xianglong Kong; Magne Mogstad; Felix Tintelnot
  14. Ensayo analítico sobre los orígenes de la teoría de la competencia imperfecta By Martín Alejandro Basso; Isabel del Valle Gulli
  15. Market power in the Argentine liquid fuels wholesale chain. By María T. Verónica Culós; María Florencia Gabrielli; Marcos Herrera Gómez
  16. Does Offshoring Shape Labor Market Imperfections? A Comparative Analysis of Belgian and Dutch Firms By Dobbelaere, Sabien; Fuss, Catherine; Vancauteren, Mark
  17. Evaluating horizontal mergers in Swedish district courts using plant capacity concepts: with a focus on nonconvexity By Xiaoqing Chen; Kristiaan Kerstens

  1. By: Roman Fossati; Roberto Hernan González; Praveen Kujal
    Abstract: List-pricing and discounting is a common practice in retail and wholesale markets. Under this pricing mechanism, a posted list price is offered to sellers in a prior stage which can then de discounted at a later in a second stage. The practice of list pricing and discounting is viewed as collusive theoretically, however, its interpretation amongst competition authorities varies from being pro-competitive to being a collusion facilitating device. We experimentally test how list pricing and discounting impact prices in a capacity constrained Bertrand-Edgeworth duopoly with symmetric and asymmetric firms. We find evidence of collusion under list pricing and discounting with symmetric as well as with asymmetric firms relative to a baseline case without the discounting stage.
    JEL: C9 L0 L1 L4 L11 L13
    Date: 2022–11
  2. By: Chen, Yongmin
    Abstract: I review models of consumer search and competition when product quality is uncertain and differs across firms. Although firms are vertically---and possibly also horizontally---differentiated, an appropriate symmetric price equilibrium with optimal consumer search can be neatly characterized. I propose a "random-quality" framework that unifies these models and discuss their insights on the operation of consumer search markets, focusing on (i) online advertising and search through platforms, (ii) the welfare effects of entry in search markets, and (iii) the role of quality observability under search frictions. I suggest directions for further research on these and related topics.
    Keywords: consumer search, search cost, competition, product quality, firm quality, platform, entry, inspection goods, experience goods, quality observability.
    JEL: D8 L1
    Date: 2023–03–06
  3. By: Javier D. Donna (University of Florida); Pedro Pereira (Instituto Universitário de Lisboa)
    Abstract: We discuss a subset of vertical mergers, where the exercise of market power and the efficiencies enabled by a vertical merger reduce rivals’ profits, making rivals’ exit a potentially serious concern. Rivals’ exit can fundamentally alter the welfare analysis of vertical mergers due to the reduction in product variety to consumers and the reduction in the number of competitors that would otherwise exert downward pricing pressure. An exit-inducing vertical merger might reduce welfare even if it is a welfare-enhancing merger absent exit. We present a theoretical framework to analyze vertical mergers that focuses on the possibility and consequences of exit, discuss the antitrust implications for merger evaluation, and provide examples. We argue that the possibility of rivals’ exit should be an integral part of the analysis of vertical mergers.
    Keywords: Antitrust, Vertical Mergers, Rivals’ Exit, Double Marginalization, Merger Evaluation, Competition Policy.
    JEL: K21 K41 L42 L44 L52
    Date: 2023–03
  4. By: Serge Moresi (Charles River Associates, Inc.); Marius Schwartz (Department of Economics, Georgetown University)
    Abstract: Extant literature shows that Arrow’s famous result—a secure monopolist gains less from a nondrastic process innovation than would a competitive firm—does not always extend to nondrastic product innovations. If the new product is horizontally differentiated, the monopolist can have a greater incentive to add the new product than a firm that would face competition from the old product; but the monopolist’s incentive to add the new product cannot be greater if the new product is vertically differentiated with higher quality than the old. This paper compares the incentives when the new product is vertically differentiated but of lower quality, a common case empirically. We show that, as with horizontal differentiation, the monopolist can have the greatest incentive to add the new product. However, in all the cases analyzed, consumer welfare (though not total welfare) is lower under monopoly, even when only the monopolist would add the new product. Our analysis also helps clarify why the ranking of incentives depends on the type of product differentiation and on whether the market is covered or not.
    Keywords: Product Innovation Incentives, Vertical Differentiation, Monopoly vs. Competition
    JEL: L1 L4
    Date: 2023–01–22
  5. 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
  6. By: Giuseppe Nicoletti; Cristiana Vitale; Carolina Abate
    Abstract: Digital markets have raised a number of new competition challenges. Ex-post competition policy appears not to be able to address them in their entirety and with the necessary speed. There is considerable consensus, among academics and policy-makers, that ex-ante regulatory policies are needed to avoid competition being stifled in these markets, with a negative impact on productivity and innovation. As a result, major OECD economies are discussing or have approved regulatory proposals with the aim to foster contestability and fair trade in digital markets.
    Keywords: Competition, Digital Economy, Digital Market Act, Digital Markets, Gatekeepers, Platforms, Product Market Regulation, Productivity, Regulation
    JEL: D4 K3 L1 L2 L4 L5
    Date: 2023–03–20
  7. By: Soheil Ghili; Russ Yoon
    Abstract: In "continuous choice" settings, consumers decide not only on whether to purchase a product, but also on how much to purchase. As a result, firms should optimize a full price schedule rather than a single price point. This paper provides a methodology to empirically estimate the optimal schedule under multi-dimensional consumer heterogeneity. We apply our method to novel data from an educational-services firm that contains purchase-size information not only for deals that materialized, but also for potential deals that eventually failed. We show that the optimal second-degree price discrimination (i.e., optimal nonlinear tariff) improves the firm's profit upon linear pricing by about 7.9%. That said, this second-degree price discrimination scheme only recovers 7.4% of the gap between the profitability of linear pricing (i.e., no price discrimination) and that of infeasible first degree price discrimination. We also conduct several further counterfactual analyses (i) comparing the role of demand- v.s. cost-side factors in shaping the optimal price schedule, (ii) examining third-degree price discrimination, and (iii) empirically quantifying the magnitude by which incentive-compatibility constraints impact the optimal pricing and profits.
    Date: 2023–02
  8. By: Jules Depersin; B\'ereng\`ere Patault
    Abstract: Search frictions can impede the formation of optimal matches between consumer and supplier, or employee and employer, and lead to inefficiencies. This paper revisits the effect of search frictions on the firm size distribution when challenging two common but strong assumptions: that all agents share the same ranking of firms, and that agents meet all firms, whether small or large, at the same rate. We build a random search model in which we relax those two assumptions and show that the intensity of search frictions has a non monotonic effect on market concentration. An increase in friction intensity increases market concentration up to a certain threshold of frictions, that depends on the slope of the meeting rate with respect to firm size. We leverage unique French customs data to estimate this slope. First, we find that in a range of plausible scenarios, search frictions intensity increases market concentration. Second, we show that slopes have increased over time, which unambiguously increases market concentration in our model. Overall, we shed light on the importance of the structure of frictions, rather than their intensity, to understand market concentration.
    Date: 2023–03
  9. By: Chen, Chien-Hsun
    Abstract: In China, mergers and acquisitions (M&As) have had a long-run impact on companies’ operational and financial rearrangements in the process of the country’s economic restructuring and rebalancing. The vibrancy of China’s M&A market is reflected in the gradual maturity of Chinese companies and the massive commercial opportunities that arose following the phenomenal growth of China’s economy. The initial motives behind Chinese domestic M&As were to save poorly governed state-owned enterprises in what may be termed the “rescue mission”. Most M&As involve state-owned enterprises that play a dominant role in China’s capital markets. The success of Japanese keiretsu and South Korean chaebols has prompted China to develop business groups in its economy to enhance the competitive advantage of Chinese companies through economies of scale and improved company performance. Foreign inbound M&As can monopolize positions in certain industries and destroy a fair competitive environment. This in turn has seriously threatened the existence and growth of Chinese companies.
    Keywords: China; mergers and acquisitions; business strategies; state-owned enterprises
    JEL: M10 M31 M38
    Date: 2023–03–09
  10. By: Soumen Banerjee
    Abstract: Attention has recently been focused on the possibility of artificially intelligent sellers on platforms colluding to form cartels to limit output and raise prices. Such cartels, however, feature an incentive for individual sellers to deviate from the prescribed quantities and prices (cheating) to increase their own profits. Stabilizing such cartels therefore requires credible threats of punishments such as price wars. In this paper, I propose a mechanism to destabilize cartels by protecting any cheaters from a price war by guaranteeing a stream of profits which is unaffected by arbitrary punishments. This method applies to the sale of differentiated goods on (multiple) platforms or homogeneous goods through direct sales. This method for destabilizing cartels operates purely off-equilibrium, induces no welfare losses, features very low informational requirements (sale price and quantity data suffices) and does not depend on the choice of discount factors.
    Date: 2023–03
  11. By: Lucila Porto
    Abstract: What if Q-Learning algorithms set not only prices but also the degree of differentiation between them? In this paper, I tackle this question by analyzing the competition between two Q-Learning algorithms in a Hotelling setting. I find that most of the simulations converge to a Nash Equilibrium where the algorithms are playing non-competitive strategies. In most simulations, they optimally learn not to differentiate each other and to set a collusive price. An underlying deviation and punishment scheme sustains this implicit agreement. The results are robust to the enlargement of the action space and the introduction of relocalization costs.
    JEL: L1 L4
    Date: 2022–11
  12. By: Jolian McHardy (Department of Economics, University of Sheffield, UK)
    Abstract: Strategic price interaction on networks with rival and interchangeable services are well-known to produce damaging externalities with which the number of agents acting independently can interact in non-linear ways. We examine how varying the number of independent agents can impact the relative performance of platform models on a transport network whose design can mitigate some of the damaging externalities in the 2-agent setting. We show that increasing the number of agents can preserve or enhance some of the benefits of the platform models under some circumstances but the platform structure, that abates damaging externalities with 2-agents, can constrain beneficial competitive forces with more agents, damaging relative performance.
    Keywords: Platform; Strategic Interaction; Multi-operator; Transport Network; Pricing; Welfare
    JEL: D43 L13 L91 R40
    Date: 2023–03
  13. By: Emmanuel Dhyne (Economics and Research Department, National Bank of Belgium); Ayumu Ken Kikkawa (University of Sauder School of Business, UBC); Xianglong Kong (University of Chicago); Magne Mogstad (University of Chicago and NBER); Felix Tintelnot (University of Chicago and NBER)
    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
    Keywords: production networks, endogenous formation, fixed costs
    JEL: E0 F1
    Date: 2023–03
  14. By: Martín Alejandro Basso; Isabel del Valle Gulli
    Abstract: En el presente trabajo se analiza la crítica de Sraffa a la competencia perfecta, el alcance de su obra y cómo ésta contribuyó al desarrollo de la teoría de la competencia imperfecta. Se destacan las contribuciones más importantes de Robinson y la trascendencia de su aporte; en particular, se muestra cómo la conclusión que ella considera más relevante, a saber, que el trabajo es explotado en la mayoría de las situaciones, no fue un tema muy tenido en cuenta por economistas posteriores. Asimismo, se efectúan algunos comentarios de la obra de Chamberlin, la cual fue desarrollada sobre el mismo tema, presentando en forma independiente y simultánea resultados similares.
    JEL: B13 B21 D41 D43
    Date: 2022–11
  15. By: María T. Verónica Culós; María Florencia Gabrielli; Marcos Herrera Gómez
    Abstract: The liquid fuels market in Argentina is characterized by a high level of concentration, especially in local geographic areas. This paper studies the demand of the liquid fuels wholesale chain in Argentina, using the discrete choice approach, based on the premise that different firms offer differentiated goods, by virtue of the intrinsic characteristics of the good, and that such differentiation gives them the power to set prices above marginal production costs. The difference between prices and marginal costs determines the firms market power. Using a novel dataset, we provide new empirical evidence that quantifies market power across firms and regions.
    JEL: C52 L13
    Date: 2022–11
  16. By: Dobbelaere, Sabien (Vrije Universiteit Amsterdam); Fuss, Catherine (National Bank of Belgium); Vancauteren, Mark (Universiteit Hasselt and Statistics Netherlands)
    Abstract: We study the relationship between offshoring and the prevalence and intensity of labor market imperfections at the firm level in Belgium and the Netherlands. Wage-markup pricing stemming from workers' monopoly power is more prevalent than wage-markdown pricing originating from firms' monopsony power in both countries. Offshoring benefits firms in that imports of final as well as intermediate goods are associated with a higher prevalence and intensity of wage markdowns. The widening effect of offshoring on wage markdowns arises from an increase in productivity that is only imperfectly passed through into an increase in wages. Offshoring is negatively related to the prevalence of wage markups. This also holds for the intensity of wage markups measured by workers' bargaining power in Belgium.
    Keywords: wage markdowns, wage markups, firm-level offshoring
    JEL: F14 F16 J42 J50
    Date: 2023–02
  17. By: Xiaoqing Chen (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique); Kristiaan Kerstens (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This contribution investigates the effects of horizontal mergers and acquisitions on the plant capacity utilisation of the Swedish district courts over the periods 2000-2017. More specifically, we empirically demonstrate the decomposition of input-oriented and output-oriented technical efficiency by incorporating several concepts of plant capacity utilisation. Moreover, we also explore the impact of convexity on input-oriented and output-oriented measures of plant capacity in the short-run scenario in an attempt to discover the potential rationale behind the merger wave. To the best of our knowledge, we are the first to assess horizontal mergers by employing plant capacity utilisation concepts. The results indicate that the horizontal mergers improve capacity utilisation. Furthermore, the nonconvex frontier method provides a more conservative estimate of plant capacity changes of this merger wave.
    Keywords: Data envelopment analysis, free disposal hull, plant capacity utilisation, horizontal mergers and acquisitions
    Date: 2022–11–19

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