nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒05‒29
eleven papers chosen by
Russell Pittman
United States Department of Justice

  1. Consumer Search, Steering and Coice Overload By Volker Nocke; Patrick Rey
  2. Internalizing Peer Firm Proprietary Costs: Evidence from Supply Chain Relations By Afrin, Farzana; Kim, Jinhwan; Roychowdhury, Sugata
  3. Game-theoretic analysis of Net Neutrality effects By Taipov Mikhail
  4. Search Theory of Imperfect Competition with Decreasing Returns to Scale By Guido Menzio
  5. Documento de Trabalho 03/2021 - Ex post mergers evaluation: Evidence from the Brazilian airline industry By Lílian Santos Severino; Guilherme Mendes Resende; Ricardo Carvalho de Andrade Lima
  6. Enjoying a quiet life even during a great recession? Evidence from the Greek olive oil industry By Keramidou, Ioanna; Mimis, Angelos
  7. Socioemotional Wealth and Product Differentiation in the Informal Economy: A Simple Theroetical Model By Augendra Bhukuth; Damien Bazin; Abir Khribich
  8. Welfare Economics and Neoliberalism: Interpreting the ideal type of perfect competition general equilibrium By Clément Carbonnier
  9. Incorporating Theory-Consistent Endogenous Markups into Applied General-Equilibrium Models By James R. Markusen
  10. Covid-19 Crisis and Shifts in the Corporate Competitive Landscape: Comparisons with Previous Economic Crises By Yoon, Sang-Ha; Baek, Yaein; Han, Wontae; Lee, Yoonsoo; Kim, Daisoon
  11. Theories of market selection: a survey By Luca Fontanelli

  1. By: Volker Nocke; Patrick Rey
    Abstract: We develop a model of within-firm sequential, directed search and study a firm’s ability and incentive to steer consumers. We find that the firm often benefits from adopting a noisy positioning strategy, which limits the information available to consumers. This induces consumers to keep searching but discourages some of them from visiting the firm. This occurs even though the firm and the consumers have in common the interest of maximizing the probability of trade. Because of such noisy positioning, an increase in the size of the product line further discourages consumers from visiting the firm—consistent with choice overload.
    Keywords: Consumer Search, Sequential Search, Directed Search, Product Variety, Coice Overload, Multiproduct Firm, Platform, Steering
    JEL: L12 L15 D42
    Date: 2023–04
  2. By: Afrin, Farzana (Boston College); Kim, Jinhwan (Stanford U); Roychowdhury, Sugata (Northwestern U)
    Abstract: We examine whether the proprietary costs of economically linked peers influence focal firms' merger and acquisition (M&A) decisions, which often involve extensive transfers of proprietary information across merging entities. Using data on supply chain relations, we find that a one-standard-deviation increase in customers' proprietary cost concerns--proxied by the customers' text-based product market similarity with rivals--reduces suppliers' M&A likelihood with the rivals of their customers as well as with the suppliers to the rivals by 16.1%. The effect is more pronounced when the customers possess sensitive information and have greater bargaining power over their suppliers. These findings are consistent with suppliers internalizing the proprietary costs of their customers and avoiding M&As that can leak customers' proprietary information, especially when the customers are economically important to the supplier. Using plausibly exogenous variation in the common ownership between customers and their rivals as a shock to customers' proprietary cost concerns, we conclude that the negative link between customers' proprietary costs and the supplier's M&A activity is likely causal. These findings suggest that the proprietary costs of disclosure can spill over to the investment and strategic decisions of economically related firms.
    JEL: D22 D62 D83 G34 L14 M41
    Date: 2022–08
  3. By: Taipov Mikhail (Department of Economics, Lomonosov Moscow State University)
    Abstract: Net Neutrality imposes many restrictions on the work of Internet service providers, which can significantly affect their profits and the welfare of other economic agents in the ISP market. This article analyzes the following rules established by the Net Neutrality: “zero price” rule and the prohibition of exclusive deals between ISPs and content providers. To study the implications of Net Neutrality, a game-theoretic model of the ISP market is being created, the unique feature of which is that content providers are divided into two following types: one large content provider that creates a large cross-network effect for consumers and is able to strike exclusive deals with ISPs in the absence of Net Neutrality; and many small content providers that create a small crossnetwork effect and aren’t able to influence the prices set by ISPs. This model allowed me to draw the following conclusions about the effects of Net Neutrality: Net Neutrality increases the profits of Internet service providers and reduces the profits of a large content provider; increases the total social welfare if a large content provider joins both ISPs in the absence of Net Neutrality. The impact of net neutrality on consumer surplus and profits of small content providers depends on the exclusivity of a large content provider in the absence of net neutrality.
    Keywords: net Neutrality, content providers, exclusivity, platforms, social welfare
    JEL: C65 C79
    Date: 2023–05
  4. By: Guido Menzio
    Abstract: I study a version of the search-theoretic model of imperfect competition by Burdett and Judd (1983) in which sellers face a strictly increasing rather than a constant marginal cost of production. The equilibrium exists and is unique, and its structure depends on the extent of search frictions. If search frictions are large enough, the price distribution is non-degenerate and atomless. If search frictions are neither too large nor too small, the price distribution is non-degenerate with an atom at the lowest price. If search frictions are small enough, the price distribution is degenerate. The equilibrium is efficient if and only if the price distribution is degenerate and, hence, if and only if search frictions are small enough. In contrast, in Burdett and Judd (1983), the equilibrium price distribution is always non-degenerate and atomless and the equilibrium is always efficient. As in Burdett and Judd (1983), the equilibrium goes from monopolistic to competitive as search frictions decline.
    JEL: D43 D83 J31
    Date: 2023–04
  5. By: Lílian Santos Severino (Conselho Administrativo de Defesa Econômica (Cade), Departamento de Estudos Econômicos); Guilherme Mendes Resende (Conselho Administrativo de Defesa Econômica (Cade), Departamento de Estudos Econômicos); Ricardo Carvalho de Andrade Lima (Ministério Público Federal)
    Abstract: Competition policy aims to preserve market competition by, for example, preventingmergers that harm consumers. Mergers can diminish competition by facilitating either tacit orexplicit collusion or may creating a unilateral incentive to increase price. While thesepossibilities provide an economic rationale for merger enforcement, mergers might be relatedto improving how markets function. Maldonado and Severino (2019) show that moreproductive firms acquire target firms that are more productive, which indicates the synergythat M&A can bring. Generally, Antitrust Authorities (AAs) analyze cases of M&A and potentialanticompetitive conducts, such as collusion. In this study, we will focus on the decisionscarried out by the Brazilian Antitrust Authority, the Administrative Council for EconomicDefense (CADE), regarding M&A's in the Brazilian airline sector in recent years. The Brazilianairline sector has a fundamental role in the economic development. In 2019, it representedapproximately 1% of the global GDP and faced a growth of 3.3% in air transport expensesregarding to the previous year (IATA, 2019b). In Brazil, Section 88 of the Law 12529/2011 regulates the M&A cases which must bereviewed by Cade. During reviews, the Antitrust Authority studies the impacts that theoperation can have on the market. Some well-known international methodologies, such asthe Upward Pricing Pressure (UPP) and mergersimulations, are commonly used to identify thelikelihood of a merging firm raising prices after the operation – which can be widespread tothe entire market. If prices are expected to rise, consumers will be adversely affected by themerger; thus, to prevent it, CADE can clear a transaction subject to remedies, or block it. Onthe other hand, if the deal does not pose any competition issues, Cade may clear thetransaction unconditionally. Nowadays, many studies indicate the importance of evaluating mergers outcome, especially within the Antitrust Authorities, since "ex-post evaluations can help to determine ifan intervention (or non-intervention) has achieved its objectives and, if not, the reasons itfailed to do so" (OECD, 2016). In response to this demand, the Competition Division of theOECD published a Guide for ex post evaluation to advise authorities on the importance ofmonitoring the outcome of their decisions, which can help to better design futureinterventions. Furthermore, it is worth noting that by carrying out and disclosing ex postmerger evaluations, the antitrust authorities present more transparency towards society and highlight the importance of competition enforcement. In 2019, for instance, Cade publishedits first ex post merger evaluation, which analyzed the impact on products prices of a mergerbetween two firms of the food industry – namely the Sadia-Perdigão case (Severino, Resende, Bispo, 2019). The present study aims to analyze the effects on the average airfare on domestic routesby two mergers cleared by Cade in this sector (GOL and Webjet; and Azul and Trip). This studycontributes to monitoring the competition policy in Brazil in the airline industry, a key sectorfor the country's economic development, by estimating difference in differences (DID) modelsconsidering as dependent variables fare prices and seats sold from July 2010 to December2019. The results indicate a reduction of about 8% in GOL's fare on routes in which GOL andWebjet operated before the merger (overlap routes) and an increase of approximately 38% inthe number of seats sold by GOL in those same routes after the merger. On the other hand, in the merger case of Azul and Trip, we did not find a statistically significant effect on the fare, but we found an increase of nearly 27% in the number of seats sold by Azul on overlap routesafter the transaction. These results present relevant implications. First, we cannot find anticompetitive effectsresulting from these mergers in the Brazilian airline sector; at the international field, similarresults were found by Carlton et al. (2019) during the analysis of three legacy mergers in theUnited States (namely Delta-Northwest, The United-Continental, and The American-USAirways). Secondly, these two mergers were cleared by the Brazilian authority subject toconditions related to the efficiency of the Santos Dumont airport; thus, it is possible to statethat Cade achieved its purpose of protecting competition for the benefit of consumers. Finally, we must take into consideration that these were e specific mergers in a particular period, whichdoes not indicate that these results should be found in every transaction in the airline sector.
    Keywords: Fusões e Aquisições, Política de defesa da concorrência, Avaliações ex post
    Date: 2021–09
  6. By: Keramidou, Ioanna; Mimis, Angelos
    Abstract: The research investigates the link between market concentration and efficiency by analyzing the Greek olive oil industry data from 2006 to 2014. Unlike previous research on this issue, which focused on the impact of overall company efficiency on market power, we study the association between the three types of firm efficiency (profit, technical, and scale) and market concentration. Our theoretical framework and research assumptions were not predefined but were generated by modelling the data from the Greek oil olive sector through data mining techniques. The predicted causal relationships constructed in the preceding stage were investigated using partial least squares path modeling (PLS-PM) regression. The results show a significant negative relationship between market concentration and technical and profit efficiency. The paucity of completion resulted in prolonged firm inefficiencies, demonstrating that Greek enterprises, even during a severe recession, refrained from rigorous efforts to enhance technical and profit efficiency as they would in a competitive market, preferring instead to live a quiet life (QL). This study has several policy implications for regulators and policymakers, such as extending antitrust rules, which may enhance company efficiency and competitiveness.
    Keywords: Efficiency, industrial concentration, Quiet life hypothesis, Greece, Partial least squares path modeling, Bayesian network
    JEL: L13 L25 L44 L5 L52 L6 L66
    Date: 2023–04–20
  7. By: Augendra Bhukuth (Ieseg Management School, France); Damien Bazin (Université Côte d'Azur; GREDEG CNRS); Abir Khribich (Université Côte d'Azur, CNRS, GREDEG, France; Faculty of Economic Sciences and Management of Nabeul, University of Carthage, Tunisia; LEGI, Tunisia Polytechnic School)
    Abstract: In this article we develop a simple product differential model in which the input, socioemotional wealth, takes the form of knowledge sharing between employees. Competition in the informal economay depends on product differentiation, and our model shows that when micro family enterprises in the informal economy rely on family workers to differentiate their products from those of their competitors, they increase their productivity, remain competitive, and sustain their activities in a highly competitive market. Micro family enterprises reward the loyalty of family workers by providing them with social benefits, whereas the wage depends on the knowledge shared between workers.
    Keywords: informal economy, know-how (savoir-faire), micro-small enterprises, product differentiation, SEW
    JEL: D21 D29 L21 L23 L25
    Date: 2022–03
  8. By: Clément Carbonnier (LED - Laboratoire d'Economie Dionysien - UP8 - Université Paris 8 Vincennes-Saint-Denis, LIEPP - Laboratoire interdisciplinaire d'évaluation des politiques publiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: Both institutional economists preparing public policies and academic economists evaluating them keep the premise of perfect competition markets as reference, despite market failures are broadly acknowledged. Actually, a large bunch of economic research has explored deviations from the ideal-type (imperfect competition or information, positive or negative exter- nalities, poverty traps, bounded rationality...). Yet, this large literature keeps the ideal-type of perfect competition general equilibrium as the reference to which are compared more realistic models and toward which are supposed to tend actual economic organizations, thanks to the proposed public policies. Mainly, the virtual reference of perfect competition markets is considered as efficient, but not attained because of market failures: the aim of public policies is then to intervene to close the gap between actual market allocation and this supposed efficiency. The present article aims at understanding the characteristics of this dominant ideal-type, and specifically what is called efficiency. It analyzes: i. the way the concept of Pareto optimum is interpreted as an efficiency criterium; ii. the mechanisms through which the market process is supposed to lead to a Pareto optimal situation; iii. which one is selected amid the multiple potentially Pareto optimal situations. It allows to conclude to a false interpretation of efficiency of perfect competition, which is essentially a mechanism of gathering information by weighting individual preferences in proportion to their purchasing power. The use of perfect competition as reference and the limit of the concept of efficiency are illustrated through examples of public policies, notably green taxes.
    Keywords: economic methodology, Government policy, Provision and effects of Welfare programs, Comparative analysis of economic systems
    Date: 2023–04–06
  9. By: James R. Markusen
    Abstract: The incorporation of increasing returns and imperfect competition into applied general-equilibrium (AGE) models, beginning with Harris (1984), led to much larger welfare effects from changes such as trade liberalization. But the imperfect competition side of these IO developments has often failed to incorporate meaningful strategic behavior, largely ruling out firm-level productivity and scale effects. I show here that the incorporation of theory-based endogenous markups into AGE models is not difficult in spite of the added simultaneity of the system. I first derive the optimal markup equations for Nash Cournot and Nash Bertrand competition in a CES environment with free entry and exit. Then I code a simple numerical model using non-linear complementarity. Three alternatives are considered: large-group monopolistic competition (LGMC), small-group Cournot (SGC) and small-group Bertrand (SGB). Growth in the economy is the experiment used to compare these specifications. While the overall effects of growth on welfare are qualitatively similar, the gains to initially small economies are much larger under either small-group assumption relative to LGMC, but diminish relative to LGMC as economies grow large. Secondly I show how the contributions of variety (entry), firm scale (productivity), and markups (distortions) to welfare changes differ substantially among the three alternatives.
    JEL: C02 F12 F17
    Date: 2023–04
    Abstract: In terms of economic fluctuations, it is well recognized that the effects of an economic crisis have a detrimental impact on the entry, growth, decline, and exit of firms. In addition, the magnitude of the impact varies both within and between industries depending on the size and other characteristics of the firm. The economy is going through significant changes due to the emergence of new industries and the decline or disappearance of current ones.This study looks at how big economic events like the COVID-19 pandemic and the global financial crisis have affected businesses and industries. After completing a study at several levels of top international corporations, larger domestic enterprises, and domestic small and medium-sized businesses, it attempts to draw policy implications.First, it is necessary to foster and support top-tier companies to defend against global economic fluctuations and strengthen international competitiveness. In particular, the institution in charge of competition policies domestically and the institution that helps companies improve their competitiveness are different and the focus of policies is distinctive, so comprehensive attention and perspective of policymakers are needed.Second, it is urgent to respond to new issues related to competition policy in the domestic market. The behavior of emerging big tech and platform companies is different from monopoly companies in the past, so consumer welfare is not impaired, but it burdens nearby and other market participants. Therefore, a view that deviates from the focus on monopoly pricing is also essential for competition policy.Third, measures to support global corporate growth and countermeasures against changes in the industrial landscape should be prepared. Investment and R&D expansion at the corporate level is essential for corporate growth, and measures are needed to boost investment in recently emerging intangible assets. In addition, it is important to revitalize the movement of economic resources to cope with changes in the inter-industry landscape accompanied by the crisis.Fourth, policies to revitalize start-ups and closures are required. The decline in new companies' market entry and exit rates is a symtom of an aging economy contributing to the overall decrease in productivity. Therefore, enhancing the revitalization of the corporate ecosystem and expanding the size of enterprises are essential to enhance the dynamics of the economy.(the rest ormitted)
    Keywords: Covid-19 Crisis; Corporate Competitive Landscape
    Date: 2023–04–13
  11. By: Luca Fontanelli
    Abstract: We provide a survey of the main mechanisms of market selection used in economics. We gather them in three theoretical paradigms (rational equilibrium, Simonesque and evolutionary), that we try to reconcile in terms of underlying laws of selection. We show that the three paradigms have been converging in their focus on firm heterogeneity and increasing returns. These selec- tion mechanisms are however fostered by theories which differ in terms of sources of increasing returns, generating mechanisms of firm heterogeneity, firm rationality and emphasis on equilibrium states vis-a-vis out-of-equilibrium dynamics. Our discussion suggests that the convergence between the three theoretical paradigms is taking place in the direction of research, which is aimed at the replication of empirical patterns related to firm heterogeneity, rather than in the theory underlying selection mechanisms.
    Keywords: Selection; competition; monopolistic competition; quasi-replicator; Gibrat's Law.
    Date: 2023–05–15

This nep-com issue is ©2023 by Russell Pittman. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.