nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒04‒17
twelve papers chosen by
Russell Pittman
United States Department of Justice

  1. Compatibility Choices, Switching Costs and Data Portability By Doh-Shin Jeon; Domenico Menicucci; Nikrooz Nasr
  2. Killer Acquisitions: Evidence from EC Merger Cases in Digital Industries By Ivaldi, Marc; Petit, Nicolas; Unekbas, Selçukhan
  3. Price Competition and Endogenous Product Choice in Networks: Evidence from the US Airline Industry By Bontemps, Christian; Gualdani, Cristina; Remmy, Kevin
  4. Negative Tax Incidence with Multiproduct Firms By Anna D’Annunzio; Antonio Russo
  5. Collusion and Artificial Intelligence: A computational experiment with sequential pricing algorithms under stochastic costs By Gonzalo Ballestero
  6. Asymmetric Information and Differentiated Durable Goods Monopoly: Intra-Period Versus Intertemporal Discrimination By Didier Laussel; Ngo van Long; Joana Resende
  7. Pricing of myopic multi-sided platforms: theory and application to carpooling By Guillaume Monchambert
  8. Sponsored Search Auction and the Revenue- Maximizing Number of Ads per Page By Pallavi Pal
  9. Information Technology, Firm Size, and Industrial Concentration By Erik Brynjolfsson; Wang Jin; Xiupeng Wang
  10. On the Role of Product Quality in Product Reallocation and Macroeconomic Dynamics. By Ako Viou Bahun-Wilson
  11. A Subgame Perfect Approach to a Multi-Period Stackelberg Game with Dynamic, Price-Dependent, Distributional-Robust Demand By Fakhrabadi, Mahnaz; Sandal, Leif K.
  12. Production Technology, Market Power, and the Decline of the Labor Share By Agustin Velasquez

  1. By: Doh-Shin Jeon (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse 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); Domenico Menicucci (UniFI - Università degli Studi di Firenze = University of Florence); Nikrooz Nasr (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse 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)
    Abstract: We study mix-and-match compatibility choices of firms selling complementary products in a dynamic setting. Contrary to what happens in a static setting where symmetric firms choose compatibility (Matutes and Régibeau, 1988), when switching costs are high and firms make price discrimination based on past purchases, symmetric firms choose incompatibility to soften future competition if the discount factor is large, which harms consumers. Interoperability increases consumer surplus at least for high switching costs. Data portability, by reducing switching costs, induces the firms to choose compatibility more often but, given a compatibility regime, benefits consumers only if a non-negative pricing constraint binds.
    Keywords: Compatibility, Switching Cost, Data Portability, Interoperability, Cloud computing
    Date: 2023
  2. By: Ivaldi, Marc; Petit, Nicolas; Unekbas, Selçukhan
    Abstract: Do established firms buy new businesses to take out future competition? Recent works in economics literature use “killer acquisitions” as a graphic concept to describe these transactions. How concerned should competition policy be? The answer to this question hinges on how much the “theory” of killer acquisitions explains. To gain insights on this, the paper studies a sample of past cases composed of all merger transactions reviewed by the European Commission (“EC”) in ICT industries. In line with the predictions of the theory, some of these cases might constitute “killer acquisitions”. Hence, the paper asks: did they lead to a reduction of competition? By focusing on perceptions of the competitors of the acquired entity as reported in financial disclosures, the paper shows that one could not observe a disappearance of the target’s products, a weakening of competing firms, and/or a post-merger lowering or absence of entry and innovation. In other words, the paper finds no factual evidence supporting the killer acquisition theory. Whilst based on small number of observations, the paper’s findings are strong. Indeed the paper’s methodology overcomes the inherent problem of lack of observing the post-merger activities of the target, and addresses the inference problem that stems from the fact that even if the target’s products are discontinued in the buyer’s firm, it is non sequitur to infer from this a post-merger weakening of competition.
    Keywords: Killer Acquisition; Dynamic Competition; Mergers and Acquisitions; Innovation
    JEL: G34 L41 L86 O31
    Date: 2023–03
  3. By: Bontemps, Christian; Gualdani, Cristina; Remmy, Kevin
    Abstract: We develop a two-stage game in which competing airlines first choose the networks of markets to serve in the first stage before competing in price in the second stage. Spillovers in entry decisions across markets are allowed, which accrue on the demand, marginal cost, and fixed cost sides. We show that the second-stage parameters are point identified, and we design a tractable procedure to set identify the first-stage parameters and to conduct inference. Further, we estimate the model using data from the domestic US airline market and find significant spillovers in entry. In a counterfactual exercise, we evaluate the 2013 merger between American Airlines and US Airways. Our results highlight that spillovers in entry and post-merger network readjustments play an important role in shaping post-merger outcomes.
    Keywords: Endogenous market structure; Networks; Airlines; Oligopoly; Product repositioning; Mergers; Remedies
    Date: 2023–03–09
  4. By: Anna D’Annunzio (TBS Business School, CSEF (University Federico II) and Toulouse School of Economics); Antonio Russo (University of Sheffield and CESifo)
    Abstract: A fundamental result in the theory of commodity taxation is that taxes increase consumer prices and reduce supply, aggravating the distortions caused by market power. This result hinges on the assumption that each firm provides a single product. We study the effects of commodity taxes in presence of multiproduct firms that have market power. We consider a monopolist providing two goods and obtain simple conditions such that differentiated ad valorem tax reduce the prices and increases the supply of both goods, thereby increasing total surplus. We show that these conditions can hold in a variety of settings, including add-on pricing, multiproduct retailing with price advertising, intertemporal models with switching costs and two-sided markets. Differentiated unit taxes can induce prices to decrease (as the Edgeworth’s paradox states), but the quantity of the taxed good always decreases.
    Keywords: Commodity taxation; tax incidence; multi-product firms
    JEL: D42 H21 H22
    Date: 2023–03
  5. By: Gonzalo Ballestero (Department of Economics, Universidad de San Andres)
    Abstract: Firms increasingly delegate their strategic decisions to algorithms. A potential con- cern is that algorithms may undermine competition by leading to pricing outcomes that are collusive, even without having been designed to do so. This paper investigates whether Q-learning algorithms can learn to collude in a setting with sequential price competition and stochastic marginal costs adapted from Maskin and Tirole (1988). By extending a previous model developed in Klein (2021), I find that sequential Q-learning algorithms leads to supracompetitive profits despite they compete under uncertainty and this finding is robust to various extensions. The algorithms can coordinate on focal price equilibria or an Edgeworth cycle provided that uncertainty is not too large. However, as the market environment becomes more uncertain, price wars emerge as the only possible pricing pattern. Even though sequential Q-learning algorithms gain supracompetitive profits, uncertainty tends to make collusive outcomes more difficult to achieve.
    Keywords: Competition Policy
    Date: 2021–11
  6. By: Didier Laussel (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Ngo van Long (Department of Economics [McGill University] - McGill University = Université McGill [Montréal, Canada], Hitotsubashi Institute for Advanced Study); Joana Resende (Cef.up, Economics Department, University of Porto)
    Abstract: A durable good monopolist faces a continuum of heterogeneous customers who make purchase decisions by comparing present and expected price-quality offers. The monopolist designs a sequence of price-quality menus to segment the market. We consider the Markov perfect equilibrium (MPE) of a game where the monopolist is unable to commit to future price-quality menus. We obtain the novel results that: (a) under certain conditions, the monopolist covers the whole market in the first period (even when a static Mussa–Rosen monopolist would not cover the whole market), because this is a strategic means to convince customers that lower prices would not be offered in future periods and that (b) this can happen only under the stage-wise Stackelberg leadership assumption (whereby consumers base their expectations on the value of the state variable at the end of the period). Conditions under which MPE necessarily involves sequentially trading are also derived.
    Keywords: Product quality, Durable good monopoly, Second-degree price discrimination, Coase conjecture
    Date: 2022–06
  7. By: Guillaume Monchambert (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 investigates pricing decisions when a monopolistic multi-sided platform is myopic, that is unable to distinguish between two agents who participate on the same side of the platform but produce different externalities. We find that the structure of prices is the same for profit- and welfare-maximizing platforms. The unique price supplied to the two undistinguishable agents is a weighted average of the perfect information prices, where the weights depend on demand elasticities and externalities produced by the other undistinguishable agent. The prices supplied to the distinguishable agents are also affected by information asymmetry through an extra term than can be positive or negative. Introducing Hotelling competition does not affect results. We apply the model to a monopolistic short-distance carpooling platform with and without HOV lane, and show that the profit-maximizing platform does not subsidize efficiently the "good" side of the market, leading to very little traffic reduction. These results call for a discussion of the regulation of myopic platforms in general, and those of carpooling in particular.
    Keywords: Network effect, Information asymmetry, Externality, Working Papers du LAET
    Date: 2023–02–14
  8. By: Pallavi Pal
    Abstract: In this paper, I derive a new method to identify the distribution of the advertiser’s ad-value in the sponsored search auction, explicitly looking at weighted Generalized Second Price auction (GSPw henceforth). Compared to previous literature, this method incorporates a weaker and more realistic assumption of ‘incomplete information’ on advertisers’ private information. Additionally, I evaluate how much the advertisers shade their bid below their value, defined as bid shading amount. The results show that the bid shading is very small; the 50th percentile of the bid shading upper bound is below by 0.2% of their value. The low amount of bid shading is due to high competition intensity in the online ad market as the number of competing bids in the online ad market is very large. The bid shading calculation can also shed light on how the change of ad auction will impact the ad revenue.
    Date: 2023
  9. By: Erik Brynjolfsson; Wang Jin; Xiupeng Wang
    Abstract: Information flows, and thus information technology (IT) are central to the structure of firms and markets. Using data from the U.S. Census Bureau, we provide firm-level evidence that increases in IT intensity are associated with increases in firm size and concentration in both employment and sales. Results from instrumental variables and long-difference models suggest that the effect is likely causal. The effect of IT on size is more pronounced for sales than employment, which leads to a decline in the labor share, consistent with the “scale without mass” theory of digitization. Furthermore, we find that IT provides greater benefits to larger firms by increasing their capability to replicate their operations across establishments, markets, and industries. Our findings provide empirical evidence suggesting that the substantial rise in IT investment is one of the main driving forces for the increase in firm size, decline of labor share, the growth of superstar firms, and increased market concentration in recent years.
    JEL: L10 O3 O30
    Date: 2023–03
  10. By: Ako Viou Bahun-Wilson (Université de Sherbrooke)
    Abstract: Recent empirical investigations by Argente et al. (2018) reveal that product reallocation, i.e. creation and destruction of products, happens through two leading margins: entry and exit of production modules within firms, the so-called "extensions", and changes in the characteristics of products within incumbent production modules, the so-called "improvements". This paper develops a DSGE model in which product reallocation involves these two margins and examines the impact on macroeconomic dynamics. I show that relative to the standard model that only accounts for extensions, the model augmented with product improvements does a better job at explaining the dynamics of production modules within firms and the firm-level TFP. A recession facilitates the production of low-quality/low-cost products, which allows the survival of low-productivity modules that would not survive in a fixed quality environment. As the recessionary shock dissipates, the share of high-quality products increases, eliminating low-productivity and low-quality modules and increasing the firm-level TFP. My results illustrate the importance of recognizing the dynamics of product characteristics within firms’ production lines in addition to the dynamics of production lines per se to understand business cycles.
    Keywords: product creation and destruction, multi-line firm, quality switching, business cycles.
    JEL: D24 E23 E32 L15 L60
    Date: 2022–03
  11. By: Fakhrabadi, Mahnaz (Dept. of Business and Management Science, Norwegian School of Economics); Sandal, Leif K. (Dept. of Business and Management Science, Norwegian School of Economics)
    Abstract: This paper investigates a multi-periodic channel optimization facing uncertain, price dependent, and dynamic demand. The picture of the market uncertainty is incomplete, and only the price and time-dependent mean and standard deviation are known and may depend on the price history. The actual demand distribution itself is unknown as is typically the case in real world problems. An algorithm finding the optimized decentralized channel equilibrium is developed when the downstream member optimizes her expected profit stream by a distributional-robust approach, and the upstream member (leader) considers it as the follower’s reaction function. The algorithm allows for strategic decisions whereby the current demand is scaled by the previous price setting.
    Keywords: Multi-Periodic problem; Stochasticity; Stackelberg Game; Subgame Perfect Distributional-Robust Approach; Supply Chain Management; Price-History Dependent Dynamic Demand
    JEL: C61 C62 C63 C72 C73 D81
    Date: 2023–03–22
  12. By: Agustin Velasquez
    Abstract: The labor share has been declining in the United States, and especially so in manufacturing. This paper investigates the role of capital accumulation and market power in explaining this decline. I first estimate the production function of 21 manufacturing sectors along time series and including time-varying markups. The elasticities of substitution for most sectors are estimated below one, implying that capital deepening cannot explain the labor share decline. I then track the long-run evolution of the labor share using the estimated production technology parameters. I decompose aggregate labor share changes into sector re-weights, capital-labor substitution, and market power effects. I find that the increase in market power, as reported in recent studies, can account for, at least, 76 percent of the labor share decline in manufacturing. Absent the rise in market power, the labor share would have remained constant in the second half of the 20th century.
    Keywords: Labor share; elasticity of substitution; capital accumulation; market power; labor share decline; market power effects; capital-labor substitution; market power narrative; markup series; capital share; Manufacturing; Income
    Date: 2023–02–10

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