nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒08‒14
twenty-two papers chosen by
Russell Pittman
United States Department of Justice

  1. Supplier Encroachment with Mutual Outsourcing By Chrysovalantou Milliou; Konstantinos Serfes
  2. Demand Estimation with Infrequent Purchases and Small Market Sizes By Ali Hortacsu; Olivia R. Natan; Hayden Parsley; Timothy Schwieg; Kevin R. Williams
  3. Selling Multiple Complements with Packaging Costs By Simon Finster
  4. Uncertainty and Market Power: An Empirical Investigation By Kazakis, Pantelis
  5. Uncertainty and Firm Price Setting (Japanese) By MORIKAWA Masayuki
  6. The Incidence of Adverse Selection: Theory and Evidence from Health Insurance Choices By Michael Geruso; Timothy Layton; Adam Leive
  7. Farm Milk Pricing and Seller Market Power in the U.S. Dairy Industry By Bolotova, Yuliya
  8. Organizational Structure and Pricing: Evidence from a Large U.S. Airline By Ali Hortacsu; Olivia R. Natan; Hayden Parsley; Timothy Schwieg; Kevin R. Williams
  9. Competition in generative artificial intelligence foundation models By Christophe Carugati
  10. Concentration, Market Power, and Misallocation: The Role of Endogenous Customer Acquisition By Hassan Afrouzi; Andres Drenik; Ryan Kim
  11. Pricing with bargain hunting consumers By Gentry, Matthew; Pesendorfer, Martin
  12. Oligopolistic Competition, Price Rigidity, and Monetary Policy By Kozo Ueda; Kota Watanabe
  13. Striking evidence: The impact of railway strikes on competition from intercity bus services in Germany By Beestermöller, Matthias Gerhard; Jessen-Thiesen, Levke; Sandkamp, Alexander-Nikolai
  14. The Digital Markets Act and the Whack-A-Mole Challenge By Jens-Uwe Franck; Martin Peitz
  15. Globalisation and automation as sources of labour-market competition, and support for European Union unemployment insurance By Brian Burgoon; Gregorio Buzzelli; Francesco Nicoli; Stefano Sacchi
  16. The (Ir)Relevance of the Cooperative Form By Tirole, Jean; Moisson, Paul-Henri; Dubois, Pierre
  17. Globalisation of sports By Dilger, Alexander
  18. Value Design in Optimal Mechanisms By Anja Prummer; Francesco Nava
  19. Cross-Platforms Merger Effects By Paudel, Ujjwol
  20. The impact of macroeconomic activity and yield valuation on mergers and acquisitions in Europe By Röhrer, Fabio E.G.; Proano, Christian R.; Mateane, Lebogang
  21. Complex dynamics in a nonlinear duopoly model with heuristic expectation formation and learning behavior By Mignot, Sarah; Tramontana, Fabio; Westerhoff, Frank H.
  22. The fall and rebound of average establishment size in West Germany By Kovalenko, Tim; Sauerbier, Timo; Schröpf, Benedikt

  1. By: Chrysovalantou Milliou; Konstantinos Serfes
    Abstract: We examine the incentives and implications of supplier encroachment, when final good produc-tion requires the use of multiple complementary inputs and the entry of a supplier into the final good market gives rise to mutual outsourcing of inputs between the encroaching supplier and the incumbent. We show that, post encroachment, mutual outsourcing between the competing final good producers is indeed the equilibrium. We also show, contrary to existing results, that encroachment can raise the input price paid by the incumbent and reduce consumer surplus. Nevertheless, the incumbent can benefit from encroachment due to the generation of a new profits source: input sales to the encroaching supplier. It can benefit even without enjoying a cost or a first mover advantage. This would have been impossible in an environment with a single input and without mutual outsourcing. Our analysis yields novel managerial, empirical and policy implications.
    Keywords: supplier encroachment, complementary inputs, mutual outsourcing, outsourcing, input pricing, market entry
    JEL: D43 L11 L21 L22 L23
    Date: 2023
  2. By: Ali Hortacsu (University of Chicago and NBER); Olivia R. Natan (University of California, Berkeley); Hayden Parsley (University of Texas, Austin); Timothy Schwieg (University of Chicago, Booth); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: We propose a demand estimation method that allows for a large number of zero sale observations, rich unobserved heterogeneity, and endogenous prices. We do so by modeling small market sizes through Poisson arrivals. Each of these arriving consumers solves a standard discrete choice problem. We present a Bayesian IV estimation approach that addresses sampling error in product shares and scales well to rich data environments. The data requirements are traditional market-level data as well as a measure of market sizes or consumer arrivals. After presenting simulation studies, we demonstrate the method in an empirical application of air travel demand.
    Keywords: Discrete Choice Modeling, Demand Estimation, Zero-Sale Observations, Bayesian Methods, Airline Markets.
    JEL: C11 C18 L93
    Date: 2021–11
  3. By: Simon Finster
    Abstract: I consider a package assignment problem where multiple units of indivisible items are allocated among individuals. The seller specifies allocation preferences as cost savings on packages. I propose a social welfare maximising, sealed-bid auction with a novel cost function graph to express seller preferences. It facilitates the use of linear programming to find anonymous, competitive, package-linear prices. If agents bid truthfully, these prices support a Walrasian equilibrium. I provide necessary and sufficient conditions, and additional sufficient conditions, for the existence of Walrasian equilibria. The auction guarantees fair and transparent pricing and admits preferences over the market concentration.
    Date: 2023–06
  4. By: Kazakis, Pantelis
    Abstract: Recent academic research documents a sharp increase in global market power. Using newly created and more precise data on aggregate market power (see De Loecker and Eeckhout, 2021), we add to the literature on the determinants of market power by investigating whether and how uncertainty may have played a role in its increase. Using a global sample of the world’s major economies, we find that uncertainty is associated with more market power. In addition, we find that higher levels of democracy and a better functioning political system, are negatively associated with market power.
    Keywords: uncertainty; economic fluctuations; market power; market share; barriers to entry
    JEL: D80 L10 L11
    Date: 2023–05–30
  5. By: MORIKAWA Masayuki
    Abstract: This study presents observations on firms’ sale price and purchase price uncertainty using order-made aggregate data from the Short-Term Economic Survey of Enterprises in Japan (Bank of Japan). The results show that, first, sale and purchase price uncertainty increased markedly in the second half of 2008, when the global financial crisis hit, after a surge in resource and energy prices, but subsequently remained relatively stable and remained low even during the COVID-19 crisis. Second, sales price uncertainty is strongly associated with purchase price uncertainty, and the relationship is more pronounced than its relationship with demand uncertainty. Third, purchase price uncertainty suppresses firms’ sales prices.
    Date: 2023–05
  6. By: Michael Geruso; Timothy Layton; Adam Leive
    Abstract: Existing research on selection in insurance markets focuses on how adverse selection distorts prices and misallocates products across people. This ignores the distributional consequences of who pays the higher prices. In this paper, we show that the distributional incidence depends on the correlations between income, expected costs, and insurance demand. We discuss the general implications for the design of subsidies and mandates when policymakers value both equity and efficiency. Then, in an empirical case study of a large employer, we show that the incidence of selection falls on higher-income employees, who are more likely to choose generous health insurance plans.
    JEL: D31 D8 D82 H22 I13
    Date: 2023–07
  7. By: Bolotova, Yuliya
    Keywords: Marketing, Agribusiness, Agricultural and Food Policy
    Date: 2023
  8. By: Ali Hortacsu (University of Chicago and NBER); Olivia R. Natan (University of California, Berkeley); Hayden Parsley (University of Texas, Austin); Timothy Schwieg (University of Chicago, Booth); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: Firms facing complex objectives often decompose the problems they face, delegating different parts of the decision to distinct sub-units. Using comprehensive data and internal models from a large U.S. airline, we establish that airline pricing is not well approximated by a model of the Þrm as a unitary decision-maker. We show that observed prices, however, can be rationalized by account-ing for organizational structure and the decisions by departments that are tasked with supplying inputs to the observed pricing heuristic. Simulating the prices the Þrm would charge if it were a rational unitary decision-maker results in lower welfare than we estimate under observed practices. Finally, we discuss why counterfactual estimates of welfare and market power may be biased if prices are set through decomposition, but we instead assume that they are set by unitary decision-makers.
    Keywords: Dynamic Pricing, Pricing Heuristics, Organizational Structure, Revenue Management, Behavioral IO, Airlines
    JEL: C11 C53 D22 D42 L10 L93
    Date: 2021–11
  9. By: Christophe Carugati
    Abstract: This working paper examines how competition in foundation models (FMs) works.
    Date: 2023–07
  10. By: Hassan Afrouzi; Andres Drenik; Ryan Kim
    Abstract: This paper explores how different margins of market share are related to markups. Using merged microdata on producers and consumers, we document that a firm’s market share is mainly related to its number of customers, while its price-cost markup is associated only with its average sales per customer. We develop a new model that reflects this empirical evidence and the endogenous nature of customer acquisition. When calibrated, this model predicts a higher degree of markup dispersion, which suggests greater efficiency losses due to customer misallocation. An analysis of the efficient allocation in this model reveals that compared with the equilibrium, aggregate TFP and output are 10.8% and 14% higher, respectively.
    JEL: D24 D43 D61 E22
    Date: 2023–06
  11. By: Gentry, Matthew; Pesendorfer, Martin
    Abstract: A single-product retailer faces bargain hunting consumers whose willingness to pay incorporates sensations of gain and loss driven by differences between the observed price and prices they rationally expect in the spirit of Koszegi and Rabin (2006). We examine the Bayesian Nash equilibrium (non-commitment) pricing solution in which (i) the retailer maximizes profit given consumers' beliefs and (ii) consumers' beliefs are consistent with the retailer's choice. We show two novel results: First, a pure-strategy, uniform-price, equilibrium does not exist when consumers are bargain hunters who value gains more than losses. Second, in this case there exists a mixed strategy equilibrium and all mixed strategy equilibria involve the same retailer profit. The equilibrium retailer profit is (weakly) lower than in the absence of reference effects.
    Keywords: bargain hunting; pricing; reference effects
    JEL: J1
    Date: 2021–09–01
  12. By: Kozo Ueda (Waseda University); Kota Watanabe (Canon Institute for Global Studies and University of Tokyo)
    Abstract: This study investigates how strategic and heterogeneous price setting influences the real effect of monetary policy. Japanese data show that firms with larger market shares exhibit more frequent and larger price changes than those with smaller market shares. We then construct an oligopolistic competition model with sticky prices and asymmetry in terms of competitiveness and price stickiness, which shows that a positive cross superelasticity of demand generates dynamic strategic complementarity, resulting in decreased price adjustments and an amplified real effect of monetary policy. Whether a highly competitive firm sets its price more sluggishly and strategically than a less competitive firm depends on the shape of the demand system, and the empirical results derived from the Japanese data support Hotelling's model rather than the constant elasticity of substitution preferences model. Dynamic strategic complementarity and asymmetry in price stickiness can substantially enhance the real effect of monetary policy.
    Date: 2023–07
  13. By: Beestermöller, Matthias Gerhard; Jessen-Thiesen, Levke; Sandkamp, Alexander-Nikolai
    Abstract: This paper investigates the impact of the largest rail strikes in German history on intercity buses - a then newly liberalised market. Using unique booking data of bus services, we exploit variation in rail service cancellations across routes to show that the disruption in rail transport increases bus ticket sales. Crucially, the effect persists beyond the strike, indicating that travellers do not return to their originally preferred mode of transport. It is particularly pronounced for passengers travelling on weekends. The findings suggest that customers were previously under-experimenting. Beyond transportation, our results highlight the importance of service reliability, as temporary disruptions can cause customers to permanently switch to competitors.
    Keywords: Experimentation, inter-modal substitution, learning, optimisation, strike, switching costs, transport
    JEL: C81 D83 L92 R41
    Date: 2023
  14. By: Jens-Uwe Franck; Martin Peitz
    Abstract: The article addresses the implementation of the Digital Market Act’s rules on ‘anticircumvention’. We present an effects-based approach and propose a three-step procedure to identify whether a certain practice should be conceptualized as circumventing an obligation. We apply this approach to several practices suspected of circumventing the ban on parity clauses and analyse how our results fit into the Digital Market Act’s concept and instruments for avoiding circumvention. Moreover, we elaborate on the role that the anticircumvention rules may play in safeguarding the effectiveness of the restrictions on bundling and self-preferencing in ranking, thus illustrating how they may operate to future-proof the Digital Markets Act but also where their limitations lie.
    Keywords: Digital Markets Act, anti-circumvention, antitrust law, price parity clauses, bundling, self-preferencing
    JEL: K21
    Date: 2023–07
  15. By: Brian Burgoon; Gregorio Buzzelli; Francesco Nicoli; Stefano Sacchi
    Date: 2023–07
  16. By: Tirole, Jean; Moisson, Paul-Henri; Dubois, Pierre
    Abstract: It is puzzling that cooperatives, which stand for the interests of their users, do not occupy more space in the market for corporate forms. This paper unveils a new impediment to their formation. It shows that equilibrium free-riding handicaps cooperatives in their competition with alternative institutions, notably the for-profits. The irrelevance of cooperatives is a remarkably robust result. The paper then analyzes desirable government interventions in the corporate market.
    Keywords: Cooperatives; free-riding; competing corporate forms
    JEL: D23 D71 D8 L22
    Date: 2023–07–03
  17. By: Dilger, Alexander
    Abstract: Globalisation affects not only politics and the economy, but also sport, which has become significantly more international, competitive and financially powerful. This is particularly advantageous for most consumers or spectators. Especially top athletes benefit, while not so good athletes can suffer from the greater competitive pressure. The same applies to event organisers and the mass media, from which the best and largest in particular benefit. Poorer nations can more easily enter and win international competitions, although richer nations retain advantages. All in all, globalisation of sports is not a zero-sum game, but the benefits outweigh the costs.
    Keywords: Competition, Globalisation, Media, Olympics, Sports
    JEL: F69 L83 Z20
    Date: 2023
  18. By: Anja Prummer; Francesco Nava
    Abstract: A principal allocates a single good to one of several agents whose values are privately and independently distributed, employing an optimal mechanism. The principal shapes the distribution of the agents' values within general classes of constraints. Divisive product designs, which are either highly favored or met with indifference, can simultaneously enhance surplus and diminish information rents by making agents' values more readily discernible. However, such designs also reduce competition among agents. Divisive designs are optimal under various design constraints, as the main drivers of revenue lie in increasing surplus and minimizing information rents, while competition plays a secondary role.
    Keywords: Value Design, Mechanism Design, Differentiation
    JEL: D82 D46 L15
    Date: 2023–07
  19. By: Paudel, Ujjwol
    Keywords: Agribusiness, Productivity Analysis, Research Methods/Statistical Methods
    Date: 2023
  20. By: Röhrer, Fabio E.G.; Proano, Christian R.; Mateane, Lebogang
    Abstract: We examine the macroeconomic determinants of mergers and acquisitions (M&A) using panel data over 2006:Q1 - 2022:Q2 for 21 European Union (EU) countries. Across di§erent model specifications we find that bond yields and past real GDP growth are robust quantitatively and statistically significant determinants of M&A even after controlling for inflation and short-term global financial uncertainty. Additionally, we investigate the effect of the earnings before interest, taxes, depreciation and amortization multiple as an additional explanatory variable. A crucial novelty of our study is that bond yields reduce M&A activity because other investors are shifting their portfolios out of bonds and into riskier assets such as equities. We denote this as a "perverse valuation effect" making M&A more expensive. This interpretation and channel is unique to our study.
    Keywords: Mergers and Acquisitions, Financial markets, Macroeconomy, European Union
    JEL: E00 E02 G15 G34
    Date: 2023
  21. By: Mignot, Sarah; Tramontana, Fabio; Westerhoff, Frank H.
    Abstract: We develop a nonlinear duopoly model in which the heuristic expectation formation and learning behavior of two boundedly rational firms may engender complex dynamics. Most importantly, we assume that the firms employ different forecasting models to predict the behavior of their opponent. Moreover, the firms learn by leaning more strongly on forecasting models that yield more precise predictions. An eight-dimensional nonlinear map drives the dynamics of our approach. We analytically derive the conditions under which its unique steady state is locally stable and numerically study its out-of-equilibrium behavior. In doing so, we detect multiple scenarios with coexisting attractors at which the firms' behavior yields distinctively different market outcomes.
    Keywords: Duopoly model, heuristic expectation formation, learning behavior, nonlinear dynamics, stability and bifurcation analysis, coexisting attractors
    JEL: C73 D43 L12
    Date: 2023
  22. By: Kovalenko, Tim; Sauerbier, Timo; Schröpf, Benedikt
    Abstract: In West Germany, the average size of establishments declined during the 1990s and started to increase again in the late 2000s, while the employer size wage premium followed the opposite trajectory. In this paper, we show that these two developments are interrelated. More precisely, our results suggest that variations in the employer size wage premiums induced establishments to vary their employment level, consistent with monopsony power on the labor market. Moreover, our regional analyses show that average establishment size correlates positively with GDP per capita. We rationalize these findings with a heterogeneous firms model with monopsonistic competition in the labor market, stemming from the household's love-of-variety preferences for employers. Both empirics and theory reveal that higher size wage premiums decrease average establishment size by downsizing incumbent establishments and triggering the entry of small establishments, thus also negatively affecting aggregate productivity.
    Keywords: Establishment Size, Size Wage Premium, Productivity, Labor Market Power, Germany
    JEL: E24 J31 J42 L25
    Date: 2023

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