nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒04‒10
twenty papers chosen by
Russell Pittman
United States Department of Justice

  1. Licensing a product innovation in a Cournot industry By Antelo, Manel; Bru, Lluís
  2. Regulatory costs and market power By Singla, Shikhar
  3. Comparison Shopping: Learning Before Buying From Duopolists By Brian C. Albrecht; Mark Whitmeyer
  4. Product quality and product compatibility in network industries By Domenico Buccella; Luciano Fanti; Luca Gori
  5. Was Robert Gibrat Right? A Test Based on the Graphical Model Methodology By Guerzoni, Marco; Riso, Luigi; Vivarelli, Marco
  6. Who Pays for Your Rewards? Redistribution of the Credit Card Market By Mr. Andrea F Presbitero; Sumit Agarwal; Andre Silva; Carlo Wix
  7. The price of cost-effectiveness thresholds By Brekke, Kurt R.; Dalen, Dag Morten; Straume, Odd Rune
  8. Imperfect bank competition, borrower adverse selection, and the transmission of monetary policy By Miguel Cantillo
  9. Optimal Insurance: Dual Utility, Random losses and Adverse Selection By Alex Gershkov; Benny Moldovanu; Philipp Strack; Mengxi Zhang
  10. A Framework for the Estimation of Demand for Differentiated Products with Simultaneous Consumer Search By Josè L. Moraga González; Zsolt Sándor; Matthijs Wildenbeest
  11. Demographics, labor market power and the spatial equilibrium By Furbach, Nina
  12. The Simple Math of Royalties and Drug Competition During the 180-Day Generic Exclusivity Period By Keith M. Drake; Thomas McGuire
  13. Strategic product compatibility in network industries By Domenico Buccella; Luciano Fanti; Luca Gori
  14. Nonparametric Estimation of Sponsored Search Auctions and Impacts of AD Quality on Search Revenue By Dongwoo Kim; Pallavi Pal
  15. Open Innovation and Coopetition By Sea Matilda Bez; Frédéric Le Roy
  16. Examining Competitive Strategy of Manufacturing Firms in Digital Evolution with Platform Theory (Japanese) By MOTOHASHI Kazuyuki
  17. The Impact of University Patent Ownership on Innovation and Commercialization By Jun Wang; Yi Qian
  18. Political Connections, Business Groups and Innovation By Commander, Simon; Estrin, Saul; De Silva, Thamashi
  19. Exporting and endogenous workplace amenities under monopsonistic competition By Abashishvili, Avtandil
  20. A Human Capital Theory of Who Escapes the Grasp of the Local Monopsonist By Matthew E. Kahn; Joseph Tracy

  1. By: Antelo, Manel; Bru, Lluís
    Abstract: We study how a firm licenses a product improvement innovation to its rival in the final market. Contrary to what happens with fixed-fee licensing or per-unit royalty licensing, pure ad-valorem royalty licensing is optimal but is welfare reducing. On welfare grounds, fixed-fee licensing dominates per-unit royalty agreements, but has the disadvantage that firms sometimes fail to reach an agreement if licensing deals are restricted to feature fixed fees. A simple rule for a second-best optimal policy on technology licensing is proposed.
    Keywords: Product innovation, licensing, Cournot competition, welfare
    JEL: D43 D45
    Date: 2023–01–10
  2. By: Singla, Shikhar
    Abstract: Industry concentration and markups in the US have been rising over the last 3- 4 decades. However, the causes remain largely unknown. This paper uses machine learning on regulatory documents to construct a novel dataset on compliance costs to examine the effect of regulations on market power. The dataset is comprehensive and consists of all significant regulations at the 6-digit NAICS level from 1970-2018. We find that regulatory costs have increased by $1 trillion during this period. We document that an increase in regulatory costs results in lower (higher) sales, employment, markups, and profitability for small (large) firms. Regulation driven increase in concentration is associated with lower elasticity of entry with respect to Tobin's Q, lower productivity and investment after the late 1990s. We estimate that increased regulations can explain 31-37% of the rise in market power. Finally, we uncover the political economy of rulemaking. While large firms are opposed to regulations in general, they push for the passage of regulations that have an adverse impact on small firms.
    Keywords: Market Power, Competition, Concentration, Machine Learning, Regulations
    JEL: L51 L11 C45 D4
    Date: 2023
  3. By: Brian C. Albrecht; Mark Whitmeyer
    Abstract: We explore a model of duopolistic competition in which consumers flexibly learn about the fit--both relative and absolute--of each competitor's product. When information is cheap, increasing the cost of information decreases consumer welfare; but when information is expensive, this relationship flips: cheaper information hurts consumers. As information frictions vanish, the limiting equilibrium is ex post efficient, in contrast to the monopoly model studied by Ravid, Roesler, and Szentes (2022).
    Date: 2023–02
  4. By: Domenico Buccella; Luciano Fanti; Luca Gori
    Abstract: Making use of an appropriate game-theoretic approach, this article develops a two-stage game in a Cournot duopoly in network industries, in which firms strategically choose whether to produce compatible goods. Quality differentiation significantly affects the sub-game perfect Nash equilibrium (SPNE) of the game: (i) the network effect acts differently between low- and high-quality firms depending on their compatibility choice; (ii) the unique SPNE is to produce compatible (resp. incompatible) goods if the network externality is positive (resp. negative); however, this equilibrium can be Pareto inefficient, and the high-quality firm is worse off; (iii) there is room for a side payment from the high- to the low-quality firm to deviate towards incompatibility (resp. compatibility) under positive (resp. negative) network externality. The social welfare outcomes corresponding to the SPNE are also pinpointed.
    Keywords: Network externality, Product compatibility, Cournot duopoly, Quality differential
    JEL: L1 L2 D4
    Date: 2023–03–01
  5. By: Guerzoni, Marco (Università degli Studi di Milano-Bicocca); Riso, Luigi (Catholic University Milan); Vivarelli, Marco (Università Cattolica del Sacro Cuore)
    Abstract: Using both regression analysis and an unsupervised graphical model approach (never applied before to this issue), we confirm the rejection of the Gibrat's law when our firm-level data are considered over the entire investigated period, while the opposite is true when we allow for market selection. Indeed, the growth behavior of the re-shaped (smaller) population of the survived most efficient firms is in line with the Law of Proportionate Effect; this evidence reconciles early and current literature testing Gibrat's law and may have interesting implications in terms of both applied and theoretical research.
    Keywords: Gibrat's Law, firm survival, market selection, firm growth
    JEL: L11
    Date: 2023–03
  6. By: Mr. Andrea F Presbitero; Sumit Agarwal; Andre Silva; Carlo Wix
    Abstract: We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit cards, incurring higher costs. Banks incentivize the use of reward cards by offering lower interest rates than on comparable cards without rewards. We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.
    Keywords: household finance; credit cards; financial sophistication; rewards
    Date: 2023–03–10
  7. By: Brekke, Kurt R. (Dept. of Economics, Norwegian School of Economics and Business Administration); Dalen, Dag Morten (BI Norwegian Business School); Straume, Odd Rune (University of Minho and University of Bergen)
    Abstract: Health systems around world are increasingly adopting cost-effectiveness (CE) analysis to inform decisions about access and reimbursement. We study how CE thresholds imposed by a health plan for granting reimbursement affect drug producers pricing incentives and patients access to new drugs. Analysing a sequential pricing game between an incumbent drug producer and a potential entrant with a new drug, we show that CE thresholds may have adverse effects for payers and patients. A stricter CE threshold may induce the incumbent to switch pricing strategy from entry accommodation to entry deterrence, limiting patients access to the new drug. Otherwise, irrespective of whether entry is deterred or accommodated, a stricter CE threshold is never pro-competitive and may in fact facilitate a collusive outcome with higher prices of both drugs. Compared to a laissez-faire policy, the use of CE thresholds can only increase the surplus of a health plan if it leads to entry deterrence in which the price reduction by the incumbent necessary to deter entry outweighs the health loss to patients not getting access to the new drug.
    Keywords: Pharmaceuticals; Health Plans; Cost-effectiveness analysis; ICER; Therapeutic competition
    JEL: I11 I18 L13 L65
    Date: 2023–03–13
  8. By: Miguel Cantillo (Universidad de Costa Rica)
    Abstract: This paper studies bank competition with borrower adverse selection. In the model, expected non-performing loan costs are high when credit is granted in booms, when risk free rates are low, or when competition is strong. I prove that full competition is suboptimal due to this last effect; that more competition improves the transmission of monetary policy, and that lending rates are always pro-cyclical. The paper examines the relative plausibility of sequential and simultaneous bank competition. I show that with asymmetric costs, bank market shares are always inversely related to their efficiency, and that bank entry does not always lower lending rates.
    Keywords: Bank competition, transmission of monetary policy, Cournot competition, adverse selection in credit markets.
    Date: 2023–03
  9. By: Alex Gershkov; Benny Moldovanu; Philipp Strack; Mengxi Zhang
    Abstract: We study a generalization of the classical monopoly insurance problem under adverse selection (see Stiglitz [1977]) where we allow for a random distribution of losses, possibly correlated with the agent’s risk parameter that is private information. Our model explains patterns of observed customer behavior and predicts insurance contracts most often observed in practice: these consist of menus of several deductible-premium pairs, or menus of insurance with coverage limits-premium pairs. The main departure from the classical insurance literature is obtained here by endowing the agents with risk-averse preferences that can be represented by a dual utility functional (Yaari [1987]).
    Keywords: digital platforms, Big Tech, market definition, multi-markets approach, German Competition Act, 19a designations, competition law
    JEL: K21
    Date: 2023–03
  10. By: Josè L. Moraga González (Vrije Universiteit Amsterdam); Zsolt Sándor (Sapientia Hungarian University); Matthijs Wildenbeest (University of Arizona)
    Abstract: We propose a tractable method for estimation of a simultaneous search model for differentiated products that allows for observed and unobserved heterogeneity in both preferences and search costs. We show that for type I extreme value distributed search costs, expressions for search and purchase probabilities can be obtained in closed form. We show that our search model belongs to the generalized extreme value (GEV) class, which implies that it has a full information discrete-choice equivalent, and hence search data are necessary to distinguish between the search model and the equivalent full information model. We allow for price endogeneity when estimating the model and show how to obtain parameter estimates using a combination of aggregate market share data and individual level data on search and purchases. To deal with the dimensionality problem that typically arises in search models due to a large number of consideration sets we propose a novel Monte Carlo estimator for the search and purchase probabilities. Monte Carlo experiments highlight the importance of allowing for sufficient consumer heterogeneity when doing policy counterfactuals and show that our Monte Carlo estimator is accurate and computationally fast. Finally, a behavioral assumption on how consumers search provides a micro-foundation for consideration probabilities widely used in the literature.
    Keywords: demand estimation, price endogeneity, simultaneous search, differentiated products
    JEL: C14 D83 L13
    Date: 2023–03–20
  11. By: Furbach, Nina
    Abstract: This paper studies how demographics affect aggregate labor market power, the urban wage premium and the spatial concentration of population. I develop a quantitative spatial model in which labor market competitiveness depends on the demographic composition of the local workforce. Using highly disaggregated administrative data from Germany, I find that firms have more labor market power over older workers: The labor supply elasticity decreases from more than 2 to 1 from age 20 to 64. Calibrating the model with the reduced-form elasticity estimates, I find that differences in labor supply elasticities across age groups can explain 4% of the urban wage premium and 2% of the spatial concentration of population. Demographics and skill together account for 10% of the urban wage premium and 2% of agglomeration.
    Keywords: Monopsonistic competition, urban wage premium, demographics, Germany, spatial equilibrium
    JEL: J11 J31 J42 R23
    Date: 2023
  12. By: Keith M. Drake; Thomas McGuire
    Abstract: In agreements settling patent challenges in the drug industry, the plaintiff brand commonly licenses the defendant generic to sell prior to patent expiry. Some agreements require the generic to pay the brand royalties. Despite the superficial flow of profits, royalty terms may function as part of an anticompetitive “reverse payment” made to the generic in exchange for delayed entry. Typically, the brand launches its own authorized generic (AG) during the first-to-file generic’s 180-day exclusivity period so there are two initial generic competitors. A royalty structure that deters the brand’s AG launch reduces the number of entrants to one, conveying net value to the generic and potentially inducing it to delay its entry. Our simple model shows that royalties usually have no place in a brand-generic agreement between rational actors. However, when royalties are conditioned on the brand’s AG launch, a range of royalty rates exists that both conveys net value to the generic and deters the brand from rationally introducing an AG. Declining royalty terms in a brand’s settlement with a first-to-file generic thus raise a red flag that the agreement is a pay-for-delay. Although the numbers are small, empirical analysis based on publicly available materials corroborates this conclusion.
    JEL: D22 D43 K21 L41
    Date: 2023–03
  13. By: Domenico Buccella; Luciano Fanti; Luca Gori
    Abstract: The degree of compatibility is a crucial feature of network goods. This article considers the degree of product compatibility as a strategic variable in a Cournot duopoly with network consumption externalities. For doing this, it develops a non-cooperative “compatibility decision game” (CDG) in which choosing whether letting products being (in)compatible occurs at the first stage. When compatibility is costless, the unique (Pareto efficient) sub-game perfect Nash equilibrium (SPNE) of the CDG predicts that both firms choose product compatibility. When there exist quasi-fixed costs of compatibility, the spectrum of SPNE of the CDG greatly increases. The equilibrium outcomes change depending on whether the extent of product compatibility is endogenous (i.e., it is a profit-maximising variable) or exogenous (e.g., it is given by technical constraints) on the firm side. In the former case, the emerging SPNE implies ranging from a unique regime to multiple regimes of (in)compatibility allowing the emergence of different scenarios: deadlock, prisoner’s dilemma and coordination game. In the latter case, the CDG can also become an anti-coordination game. This allows us to provide a novel explanation for the well-known and widespread case according to which Apple products in the computer market (based on macOS) can also be used with Windows OS, but Microsoft products (based on Windows OS) cannot be used with macOS. The article also pinpoints the welfare outcomes corresponding to the SPNE.
    Keywords: Network externality, Product compatibility, Cournot duopoly, Quasi-fixed costs
    JEL: L1 L3 D4
    Date: 2023–03–01
  14. 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
    Keywords: sponsored search links, generalized second price auction, incomplete information, nonparametric estimation, bid shading, score quashing
    JEL: C57 D44 L86 M37
    Date: 2023
  15. By: Sea Matilda Bez (UM - Université de Montpellier, Labex Entreprendre - UM - Université de Montpellier, MRM - Montpellier Research in Management - UM1 - Université Montpellier 1 - UPVM - Université Paul-Valéry - Montpellier 3 - UM2 - Université Montpellier 2 - Sciences et Techniques - UPVD - Université de Perpignan Via Domitia - Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School); Frédéric Le Roy
    Abstract: While the open innovation literature has always acknowledged the competitor as a source of innovative knowledge — i.e. to increase the breadth of open innovation practices — competitors have been relatively neglected relative to other sources such as universities, suppliers, customers, and employees. Growing research in open innovation includes more and more of this counter-intuitive partner and acknowledges that the drivers and management of the open innovation practice with competitors are specific relative to the one with a non-competitive partner. In parallel and independently from the open innovation literature, the research on coopetition and coopetitive innovation has grown and explored when, why, and how a competitor is a relevant partner for innovation. These frameworks develop by the coopetition literature brought into the open innovation research generate new insights and a whole research agenda. The main one is: coopetitive open innovation defined as open innovation with competitors embracing a "coopetitive mindset" and specific managerial principles (i.e. cooperation and competition should be simultaneously pursued and the competition dimension should not be reduced).
    Keywords: open innovation, coopetition, competitors, co-creation, coopetition mindset
    Date: 2023–11–08
  16. By: MOTOHASHI Kazuyuki
    Abstract: As the use of AI and big data advances in the manufacturing industry, we are seeing changes in manufacturing, including the shift to digital services. In this paper, we used platform theory to examine the current state of digital innovation in the manufacturing industry and competitive strategies with other industries, including Internet platformers like GAFA. The IoT applications of existing companies such as Komatsu and GE are not in a position to directly compete with B2C Internet platformers, but the network effect of the platform economy will use the power to rapidly transform the industrial structure. As a manufacturing company, it is essential to promote the development of digital services that utilize customer data. In addition, the importance of strategies that focus on building an ecosystem that includes companies in other industries is increasing, and the ability to predict the future through scenario analysis and the ability to respond flexibly to changes in circumstances is required.
    Date: 2023–03
  17. By: Jun Wang; Yi Qian
    Abstract: This paper contributes to the literature on innovation policies and institutional theory on conditions for effective institutional changes. The "three rights" reform of 26 universities and the mixed ownership reform of Southwest Jiaotong University are important explorations made by China in recent years to promote innovations and the commercialization of patents in universities. The two reforms have adopted different models in the allocation of university patent ownership. The former completely allocated the patent ownership to universities, while the latter allocated 70% of the patent ownership to the inventors. Based on Chinese patent data and university statistical data, we empirically test the effects of these two university-patent ownership allocation models on innovations and the commercialization of patents. We find that the institutional environment caused unexpected effects in both reform models. The "three rights" reform has a significant impact on patent-licensing in 26 universities. The mixed ownership reform has significantly increased the number of patent transfers and patent applications of Southwest Jiaotong University, yet has tilted R&D toward experimental research with relatively low creativity. The findings yield broader implications for organization and innovation.
    JEL: K11 O30 O32 O38
    Date: 2023–03
  18. By: Commander, Simon (IE Business School, Altura Partners); Estrin, Saul (London School of Economics); De Silva, Thamashi (Capital Economics)
    Abstract: It has been argued that Asia's remarkable economic achievements of the past 50 years build on institutional arrangements very different from the West, notably the central role of business groups (BGs). As Asian economies move from extensive to intensive growth, we enquire whether the business group organsational format will be as effective going forward. We argue that the ubiquity of BGs has been associated with the accretion of major market power, as well as overall concentration. Our empirical work, drawing on a sample of more than 9000 Asian firms, finds that while BGs are more innovative than non-affiliates, this is unsurprising given their access to additional resources. However, when we look at innovation at the country level, we find that the wider consequences of BGs on innovation may be negative.
    Keywords: innovation, R&D, Asian business groups, market power, overall concentration
    JEL: L22 O30 O53
    Date: 2023–03
  19. By: Abashishvili, Avtandil
    Abstract: This paper introduces endogenous workplace quality choice into an international trade model with a monopsonistically competitive labour market, in which firms compete for potential employees by offering them a combination of monetary and non-monetary benefits. To attract the workers required to produce for the foreign market in addition to the domestic market, exporting firms have to offer more attractive compensation to their employees than comparable non-exporting firms, which is why they are not only paying higher wages but also offering better workplace amenities. The gains from trade, therefore, not only materialise in terms of a higher purchasing power but also in terms of a higher average workplace quality. Welfare metrics, which exclusively focus on real income gains, might underestimate the gains from globalisation.
    Keywords: Monopsonistic competition, workplace quality, wages, exporting, gains from trade
    JEL: F12 F16 F23
    Date: 2023
  20. By: Matthew E. Kahn; Joseph Tracy
    Abstract: Over the last thirty years, there has been a rise in several empirical measures of local labor market monopsony power. The monopsonist has a profit incentive to offer lower wages to local workers. Mobile high skill workers can avoid the lower monopsony wages by moving to other more competitive local labor markets featuring a higher skill price vector. We develop a Roy Model of heterogeneous worker sorting across local labor markets that has several empirical implications. Monopsony markets are predicted to experience a “brain drain” over time. Using data over four decades we document this deskilling associated with local monopsony power. This means that observed cross-sectional wage gaps in monopsony markets partially reflects sorting on worker ability. The rise of work from home may act as a substitute for high-skill worker migration from monopsony markets.
    JEL: J42
    Date: 2023–03

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