nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒06‒12
fifteen papers chosen by
Russell Pittman
United States Department of Justice

  1. Beyond "Horizontal" and "Vertical": The Welfare Effects of Complex Integration By Margaret Loudermilk; Gloria Sheu; Charles Taragin
  2. Network Goods, Price Discrimination, and Two-sided Platforms By Paul Belleflamme; Martin Peitz
  3. How to Apply the Self-Preferencing Prohibition in the DMA By Martin Peitz
  4. Price Discrimination with Redistributive Concerns By Daniel M A Barreto; Alexis Ghersengorin; Victor Augias
  5. Incorporating Theory-Consistent Endogenous Markups into Applied General-Equilibrium Models By James R. Markusen
  6. Suspecting Collusion By Ceesay, Muhammed
  7. Endogenous privacy and heterogeneous price sensitivity By Masuyama, Ryo
  8. Why Fixed-Price Policy Prevails: The Effect of Trade Frictions and Competition By Selcuk, Cemil; Gokpinar, Bilal
  9. "The Effect of Competition on Language Diversity in the Movie-Theatre Industry". By Bernat Mallén Alberdi
  10. Antitrust and (Foreign) Innovation: Evidence from the Xerox Case By Robin Mamrak
  11. Communicating Preferences to Improve Recommendations By Amir Habibi
  12. The Monetization of Innovation By Missaka Warusawitharana
  13. Why firms should care for consumers: Complementary goods By Ohnishi, Kazuhiro
  14. The optimal reinsurance strategy with price-competition between two reinsurers By Liyuan Lin; Fangda Liu; Jingzhen Liu abd Luyang Yu
  15. Assessing Market Rigidity: Leave It to Physicians. By Philippe Mouillot; Rémy Park

  1. By: Margaret Loudermilk; Gloria Sheu; Charles Taragin
    Abstract: We study the welfare impacts of mergers in markets where some firms are already vertically integrated. Our model features logit Bertrand competition downstream and Nash Bargaining upstream. We numerically simulate four merger types: vertical mergers between an unintegrated retailer and an unintegrated wholesaler, downstream "horizontal" mergers between an unintegrated retailer and an integrated retailer/wholesaler, upstream "horizontal" mergers between an unintegrated wholesaler and an integrated retailer/wholesaler, and integrated mergers between two integrated retailer/wholesaler pairs. We find that mergers that have both horizontal and vertical characteristics typically harm consumers. We apply the model to the Republic/Santek merger as a real-world example.
    Keywords: Bargaining models; Merger simulation; Vertical markets; Vertical mergers
    JEL: L13 L40 L41 L42
    Date: 2023–01–18
  2. By: Paul Belleflamme; Martin Peitz
    Abstract: A monopolist selling a network good to heterogeneous users is shown to become a twosided platform if it can condition prices on some user characteristics or if it cannot but induces user self-selection by offering screening contracts. This shows that the availability of sophisticated pricing instruments is essential to make a platform two-sided, not the ability to distinguish separate user groups. The use of freemium strategies (which consists of offering a base version at zero price and a premium version at a positive price) emerges as a special case of versioning.
    Keywords: Network goods, two-sided platforms, platform pricing, group pricing, versioning, freemium
    JEL: D21 D42 L12 L14
    Date: 2023–03
  3. By: Martin Peitz
    Abstract: Platforms in dual mode are concerned about the well-functioning of the ecosystem they manage. A regulator imposing a certain behaviour on platforms, which may amount to picking a particular market design, runs the risk of not acting in the best interest of consumers, especially in the long term, which is the ultimate goal of market contestability. When applying Art 6(5) DMA, the European Commission must make a judgement on the meaning and scope of self-preferencing; and has a discretionary power as to which possible/potential violations of the prohibition it will examine at all. This paper provides some guidance on how to determine which practices would fall under Art 6(5) DMA.
    Keywords: self-preferencing, contestability, fairness, Digital Markets Act
    JEL: K21 K23
    Date: 2023–05
  4. By: Daniel M A Barreto (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique); Alexis Ghersengorin (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Victor Augias (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Consumer data can be used to sort consumers into different market segments, allowing a monopolist to charge different prices at each segment. We study consumer-optimal segmentations with redistributive concerns, i.e., that prioritize poorer consumers. Such segmentations are efficient but may grant additional profits to the monopolist, compared to consumer-optimal segmentations with no redistributive concerns. We characterize the markets for which this is the case and provide a procedure for constructing optimal segmentations given a strong redistributive motive. For the remaining markets, we show that the optimal segmentation is surprisingly simple: it generates one segment with a discount price and one segment with the same price that would be charged if there were no segmentation.
    Keywords: Third-degree price discrimination, Information design, Redistribution, Inequality, Welfare
    Date: 2022–11–11
  5. 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: F12 D58
    Date: 2023
  6. By: Ceesay, Muhammed
    Abstract: When collusion is analyzed for Independent private value auctions, it is implicitly assumed that ring presence is commonly known to colluding and non-colluding bidders. We drop this assumption and analyze a simple model of a first price Independent Private Value auction with uniformly distributed values where a single bidder knows privately of the existence of collusion by others. We show that this knowledge leads him to bid shading (weakly) in the first price auction compared to what he would have bid otherwise. This in turn yields the result that the second price auction dominates the first price auction in terms of seller revenue. This contrasts results from the literature showing that under our framework, when bidding is done while the presence of colluding bidders is common knowledge, the first price auction dominates the second price auction.
    Keywords: Almost-All-Inclusive-Ring, Informational Structures
    JEL: D44
    Date: 2023
  7. By: Masuyama, Ryo
    Abstract: This study analyzes a model in which two firms, one with profiling technology and one without, compete for old and new markets. In the old market, consumers leave their personal information online, whereas, in the new market, consumers do not. When a firm with profiling technology observes consumers' personal information, it sets personalized prices for them. Additionally, consumers can conceal their personal information by paying privacy costs. We introduce heterogeneity in price sensitivities among consumers into our model. We obtain the following result. For greater heterogeneity in price sensitivities, consumer and total surpluses are maximized with no privacy cost; for lower heterogeneity, a sufficiently high privacy cost is desirable for consumers and society; for intermediate heterogeneity, while consumers prefer no privacy cost, total surplus is maximized at a sufficiently high privacy cost. Therefore, when deciding on privacy policy, authorities should consider the heterogeneity in price sensitivities.
    Keywords: personalized pricing; privacy; personal information; heterogeneous consumers; Hotelling model
    JEL: D43 L10 L13
    Date: 2023–05–14
  8. By: Selcuk, Cemil; Gokpinar, Bilal
    Abstract: Fixed-price selling is common in today's markets. While previous research in marketing and economics literatures provide several intuitive reasons for the emergence of fixed-price selling (e.g. clarity and simplicity of managing the fixed-price process, reduced coordination and information costs) our study offers an entirely different rationale---based on market competition and trade frictions---that explains the prevalence of fixed-price selling. Using a market equilibrium approach, and employing a novel competitive search framework to account for a fully competitive and dynamic market, we offer a new and micro-founded account for the widespread use of fixed pricing policy. Considering three important market characteristics---customer risk aversion, the degree of trade frictions and the level of market competition---we explore the strategic choice between the fixed-price, best-offer, and over-the-sticker pricing policies. Unlike the standard models in the literature, which are based Hotelling, Cournot, Bertrand frameworks, the competitive search framework enables us to model competition with a large number of buyers and sellers, and to vary the degree of competition accordingly. We find that fixed pricing emerges as the unique or the de-facto selling rule in most parameter regions. Indeed, the only region where haggling matters is the case in which customers are risk neutral and trade frictions are significant and market competition is moderate.
    Keywords: fixed-price selling, haggling, risk aversion, trade friction, competition
    JEL: D40
    Date: 2023
  9. By: Bernat Mallén Alberdi (AQR-IREA, University of Barcelona, Spain.)
    Abstract: In this paper I investigate the effect of competition on language diversity in a cultural market, the movies market, in which language is a relevant characteristic of the good. I analyse the case of the bilingual region of Catalonia to empirically test the effect of competition in two stages of the supply chain – the distribution and the exhibition – on the availability of films in the weaker language. I create a unique data set of all the screenings in the region over 10 months from different sources using advanced web-scraping techniques. I find that the concentration at the distribution level reduces the percentage of films in Catalan by 4.04 percentage points compared with the counterfactual of perfect competition. The effect of the concentration at the exhibition level is not significant. This implies that without such market failure, the total supply of films in Catalan would be 96% greater. I also look for heterogeneous effects disentangling two types of audiences: children-targeted films and adult-targeted films. I find that children have higher preference intensity over the language because the market is more responsive to them; the concentration at the exhibition level matters when it comes to this type of consumer.
    Keywords: Language diversity, Movie theatres, Dubbing, Bilingualism, Cultural market. JEL classification: D43, L13, L82, Z13.
    Date: 2023–05
  10. By: Robin Mamrak (LMU Munich)
    Abstract: How does antitrust enforcement against patent-based monopolies affect innovation? I address this question by empirically studying the US antitrust case against Xerox, the monopolist in the market for plain-paper copiers. In 1975, Xerox was ordered to license all its copier-technology patents in the US and abroad. I show that this promoted innovation by other firms in the copier industry, measured by a disproportionate increase in patenting in technologies where Xerox patents became available for licensing. This positive effect is driven by increased innovation by Japanese competitors. They started developing smaller desktop copiers and their innovation became more diverse.
    Keywords: antitrust; innovation; patents; compulsory licensing; Japan; Xerox;
    JEL: O30 O34 L41 K21
    Date: 2023–05–12
  11. By: Amir Habibi (HU Berlin)
    Abstract: I study a cheap talk model between a buyer and a seller with two goods for sale. There is two-sided (independent) private information with sequential, two-way communication. In the first stage, the buyer communicates her private preferences to the seller. In the second stage, the seller communicates the quality of the goods to the buyer. When the buyer’s preference is about which attribute common to both goods she prefers, the seller strictly benefits from the buyer communicating her preferences. Whereas when the buyer’s preference is about which good she prefers, this is never the case.
    Keywords: cheap talk; strategic communication; product recommendations;
    JEL: D82 L15
    Date: 2023–05–10
  12. By: Missaka Warusawitharana
    Abstract: We develop a dynamic model for digital service firms, which invest in monetization to generate revenues from services provided to customers for free. Our model captures and explains why such firms often build a large customer base and become highly valued while continuing to suffer losses—traditional models would struggle to explain this pattern. Counterfactual analysis reveals that monetization uncertainty slows technological advancement by diverting resources away from innovation. We also show that regulation aimed at protecting user privacy has sizable adverse effect on firm size and the quality of the offered service but, perhaps surprisingly, makes firms less unprofitable. On the other hand, regulation encouraging competition supports innovation.
    Keywords: monetization; data privacy; digital service firms; innovation; regulation
    JEL: O32 O31 G31 D21
    Date: 2022–12
  13. By: Ohnishi, Kazuhiro
    Abstract: Corporate social responsibility (CSR) is a business approach that cares about social and environmental issues, and customer orientation (CO) is a business strategy that centres on the needs and wishes of customers in all decision-making. This paper examines two games of Cournot duopoly where two profit-maximizing firms produce complementary goods. The first game is that both firms consider the surplus of all consumers (CSR) as corporate culture, and the second game is that both firms care only for their own customers (CO). This paper presents the respective optimal levels of CSR and CO. Furthermore, the paper shows that all the profits in these optimal levels are equal.
    Keywords: Complementary goods; Consumer surplus; Cournot model; Customer surplus
    JEL: C72 D21
    Date: 2023–05–12
  14. By: Liyuan Lin; Fangda Liu; Jingzhen Liu abd Luyang Yu
    Abstract: We study optimal reinsurance in the framework of stochastic game theory, in which there is an insurer and two reinsurers. A Stackelberg model is established to analyze the non-cooperative relationship between the insurer and reinsurers, where the insurer is considered as the follower and the reinsurers are considered as the leaders. The insurer is a price taker who determines reinsurance demand in the reinsurance market, while the reinsurers can price the reinsurance treaties. Our contribution is to use a Nash game to describe the price-competition between two reinsurers. We assume that one of the reinsurers adopts the variance premium principle and the other adopts the expected value premium principle. The insurer and the reinsurers aim to maximize their respective mean-variance cost functions which lead to a time-inconsistency control problem. To overcome the time-inconsistency issue in the game, we formulate the optimization problem of each player as an embedded game and solve it via a corresponding extended Hamilton-Jacobi-Bellman equation. We find that the insurer will sign propositional and excess loss reinsurance strategies with reinsurer 1 and reinsurer 2, respectively. When the claim size follows exponential distribution, there exists a unique equilibrium reinsurance premium strategy. Our numerical analysis verifies the impact of claim size, risk aversion and interest rates of the insurer and reinsurers on equilibrium reinsurance strategy and premium strategy, which can help to understand competition in the reinsurance market
    Date: 2023–04
  15. By: Philippe Mouillot (Université de Poitiers, CEREGE - Centre de Recherche en Gestion - IAE Poitiers - Institut d'Administration des Entreprises (IAE) - Poitiers - Université de Poitiers - Université de Poitiers - ULR - La Rochelle Université - Excelia Group | La Rochelle Business School); Rémy Park
    Abstract: Among the various marketing tools author Michael Porter has created, the "Five Forces" certainly remains one of the most famous diagrams that all business teachers have taught their students. Easy to both understand and use, the Five Forces certainly help organisations make a first opinion about a market's accessibility. Yet, while many do consider the tool an outdated device, we believe the opposite. Here, we propose to consider "forces" for what they firstly mean, a strength or energy as an attribute of physical action or movement. In order to try and give a second chance to Porter's Five Forces, we have invited Physics to collaborate with Marketing and came up with a quantitative formula, which could make the difference when assessing any market's rigidity.
    Keywords: Market intensity, 5 Forces Diagram, Industry, Competition
    Date: 2023

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