nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒10‒23
eleven papers chosen by
Russell Pittman, United States Department of Justice

  1. Platform Competition and Information Sharing By Georgios Petropoulos; Bertin Martens; Geoffrey Parker; Marshall Van Alstyne
  2. e-Commerce Platforms and Self-preferencing By Federico Etro
  3. How Does Competition Affect Incentives for Market Research? By Ahmed, Rafayal; Shopp, Colin
  4. Outsourcing without Cost Advantages By Chrysovalantou Milliou
  5. Trade with Search Frictions: Identifying New Gains from Trade By Tomohiro Ara
  6. Buyer-Optimal Algorithmic Consumption By Shota Ichihashi; Alex Smolin
  7. Monopsony Power and Labor Income Inequality in Mexico By Cazzuffi, Chiara; Pereira-López, Mariana; Rosales, Irving; Soloaga, Isidro
  8. Patents, Innovation, and Market Entry By Dominik Jurek
  9. Serving consumers in an uncertain world: A credence goods experiment By Loukas Balafoutas; Helena Fornwagner; Rudolf Kerschbamer; Matthias Sutter; Maryna Tverdostup
  10. When firms may benefit from sticking with an old technology By Li, Xu
  11. Provider Payment Incentives: Evidence From The U.S. Hospice Industry By Norma Coe; David A. Rosenkranz

  1. By: Georgios Petropoulos; Bertin Martens; Geoffrey Parker; Marshall Van Alstyne
    Abstract: Digital platforms, empowered by artificial intelligence algorithms, facilitate efficient interactions between consumers and merchants that allow the collection of profiling information which drives innovation and welfare. Private incentives, however, lead to information asymmetries resulting in market failures. This paper develops a product differentiation model of competition between two platforms to study private and social incentives to share information. Sharing information can be welfare-enhancing because it solves the data bottleneck market failure. Our findings imply that there is scope for the introduction of a mandatory information sharing mechanism from big tech to their competitors that help the latter to improve their network value proposition and become more competitive in the market. The price of information in this sharing mechanism matters. We show that price regulation over information sharing like the one applied in the EU jurisdiction increases the incentives of big platforms to collect and analyze more data. It has ambiguous effects on their competitors that depend on the exact relationship between information and network value.
    Keywords: information sharing, digital platforms, data bottleneck, data portability
    JEL: D47 D82 K21 L21 L22 L40 L41 L43 L51 L86
    Date: 2023
  2. By: Federico Etro
    Abstract: I survey the literature on eCommerce platforms with particular emphasis on the antitrust debate on self-preferencing by Amazon. The business model of hybrid marketplaces is based on monetization through commissions on third party sellers hosted on the platform and direct margins on own products. Recent theoretical and empirical work on endogenous marketplace structures has analyzed the welfare impact of the dual mode and of recommendation algorithms that have been associated with self-preferencing strategies. The trade offs are complex and one cannot easily conclude that Amazon entry is biased to expropriate third party sellers or that a ban on dual mode, self-preferencing or copycatting would benefit consumers.
    Keywords: eCommerce, Endogenous marketplace structures, Business models, Self-preferencing.
    JEL: L1 L4
    Date: 2023
  3. By: Ahmed, Rafayal; Shopp, Colin
    Abstract: We analyze firms’ incentives to acquire information about market demand in a differentiated goods duopoly setting. We find two distinct benefits of having better information. Firstly, with better information, each firm can better match its price to demand. This benefit is decreasing in the level of market competition. Secondly, better information allows each firm to coordinate their prices with each other in different states, and each firm can make better use of its own information if the other firm acquires better information. This benefit is inverse u-shaped in the level of competition. Based on which effect dominates, each firm’s total benefit from information can either be decreasing, or inverse u-shaped in the level of competition. Given endogenous information acquisition decisions by firms, the effect of competition on consumer welfare is ambiguous.
    Keywords: Information acquisition, Bertrand duopoly, signals, competition.
    JEL: D43 D81 D84 L13
    Date: 2022–06
  4. By: Chrysovalantou Milliou
    Abstract: This paper explores why competing firms can choose to outsource to an external common supplier that does not have a cost advantage in input production. The supplier, through its contract offers, manages to generate asymmetry, to alter product market competition, and to extract profits from the competing .rms. Two-part tariffs and sequential contracting are both crucial for the emergence of outsourcing. The supplier purposefully avoids industry pro.t maximization to enlarge its profits share. Both consumer and total welfare benefit from the presence of an otherwise redundant supplier in the market.
    Keywords: outsourcing, strategic outsourcing, make-or-buy, two-part tariffs, common supplier, sequential contracting
    JEL: D43 L11 L22 L23 L24
    Date: 2023
  5. By: Tomohiro Ara
    Abstract: This paper develops a dynamic industry model to study the effect of search frictions on industry structure and aggregate welfare. We consider a search-theoretic setting with two types of agents, firms and suppliers. To customize inputs, each firm needs to find a supplier but search is costly and does not always end in success. Matched firms use customized inputs obtained from matched suppliers to enhance production efficiency, while unmatched firms use generic inputs obtained from a competitive input market. In equilibrium the number of unmatched and matched firms is endogenous. We use this model to contrast the implications of two forms of economic integration: integration of final-good markets allowing firms to export varieties to another market, and integration of matching markets allowing firms to seek suppliers from another market. We show that the former form of integration can amplify the welfare gains from trade by improving firms’ matching frequency associated with resource reallocations from unmatched firms to matched firms. In contrast, the latter might cause welfare losses by hindering the resource-reallocation process of firms.
    Date: 2023–08
  6. By: Shota Ichihashi (Queen's University, Department of Economics, 94 University Avenue, Kingston, Canada); Alex Smolin (Toulouse School of Economics, University of Toulouse Capitole and CEPR, 1 Esp. de l'Universite, 31000 Toulouse, France)
    Abstract: We analyze a bilateral trade model in which the buyer's value for the product and the seller's costs are uncertain, the seller chooses the product price, and the product is recommended by an algorithm based on its value and price. We characterize an algorithm that maximizes the buyer's expected payoff and show that the optimal algorithm under-recommends the product at high prices and over-recommends at low prices. Higher algorithm precision increases the maximal equilibrium price and may increase prices across all of the seller's costs, whereas informing the seller about the buyer's value results in a mean-preserving spread of equilibrium prices and a mean-preserving contraction of the buyer's payoff.
    Keywords: data, algorithm, pricing, recommendation, mechanism design, information design
    JEL: D42 D82 D83
    Date: 2023–09
  7. By: Cazzuffi, Chiara; Pereira-López, Mariana; Rosales, Irving; Soloaga, Isidro
    Abstract: We examine the impact of changes in local labor market concentration on two components of income inequality in Mexico: local wage shares and labor income inequal-ty. Combining data from the Economic Census and the Population and Housing Censuses, we analyze the mechanisms that drive the relationship between concentration and labor income inequality by considering heterogeneities across groups of workers (skilled and unskilled) and sectors. In line with previous studies for developed countries and with the emerging literature on monopsony power, we first show that a higher level of concentration is associated with reductions in skilled and un-skilled workers wages. Furthermore, the elasticities are relatively similar. Second, there is sectoral heterogeneity as, for manufacturing, unskilled workers' wages decrease more, while skilled workers do not exhibit any reduction. On the other hand, for services, the effects are similar for the two groups. Third, unionization plays a countervailing role against monopsony power, as in highly-unionized sectors, the effect of higher concentration on wages is null, and this is consistent with a higher level of bargaining power. Even though the effects of labor market concentration on inequality are not sizeable, the impact on wages for skilled and unskilled workers is significant.
    Keywords: Inequality;Monopsony;Labor markets
    JEL: J23 J31 J42
    Date: 2023–08
  8. By: Dominik Jurek
    Abstract: Do patents facilitate market entry and job creation? Using a 2014 Supreme Court decision that limited patent eligibility and natural language processing methods to identify invalid patents, I find that large treated firms reduce job creation and create fewer new establishments in response, with no effect on new firm entry. Moreover, companies shift toward innovation aimed at improving existing products consistent with the view that patents incentivize creative destruction.
    Keywords: intellectual property rights, creative destruction, entry, job creation, Alice decision, natural language processing
    Date: 2023–09
  9. By: Loukas Balafoutas; Helena Fornwagner; Rudolf Kerschbamer; Matthias Sutter; Maryna Tverdostup
    Abstract: Credence goods markets are prone to fraudulent behavior and market inefficiencies due to informational asymmetries between sellers and customers. We examine experimentally the effects of diagnostic uncertainty and insurance coverage on the information acquisition and provision decisions by sellers and the trading decisions by consumers. Our results reveal that diagnostic uncertainty is a major source of inefficiency by decreasing efficient service provision. Insurance coverage has a positive net effect on market efficiency, despite making information acquisition and efficient service provision less likely. We also examine the role of -s and of sellers’ prosociality in shaping service provision and information acquisition.
    Keywords: Credence goods, diagnostic uncertainty, insurance coverage, experiment
    JEL: C91 D82 G22
    Date: 2023
  10. By: Li, Xu
    Abstract: Research Summary How should firms respond to technological discontinuities in order to achieve greater performance? In contrast to most studies that advocate a timely transition from the old to the new technology, this paper posits that in markets where a discontinuous technology exposes customers' latent preference heterogeneity for certain old technology attributes, firms may ultimately experience a performance surge by adhering to the old technology during technological change. Explicitly, I theorize a U-shaped relationship within such a market between competitors' increasing adoption of the new technology and the performance of firms that stick with the old technology. This prediction is thoroughly examined using comprehensive data from the traditional Chinese medicine industry in China during the 1990s and receives robust empirical support. Managerial Summary In some markets, the rise of a discontinuous technology, besides posing a substitute threat to the old technology, further exposes niche segments where customers continue to favor the old technology. This paper predicts that within such a market, as competitors increasingly adopt the new technology for varied motives, firms sticking with the old technology may see their performance declining before rebounding and potentially reaching new heights. Analyses using archival data from the traditional Chinese medicine industry in China during the 1990s provide robust support for this prediction. The arguments and findings of this paper offer an “existence proof” that when confronted with a technological discontinuity, adhering to the old technology may also represent an effective strategy that ultimately improves firm performance.
    Keywords: demand heterogeneity; firm performance; old technology; technological discontinuity; Wiley deal
    JEL: J50
    Date: 2023–09–21
  11. By: Norma Coe; David A. Rosenkranz
    Abstract: Moral hazard and provider-induced demand may contribute to overutilization of scarce health care resources. The U.S. health care system includes several compensatory cost-containment mechanisms, but their effects depend on how patients and providers respond. We investigate hospice programs’ responses to a cap in the Medicare hospice benefit on their average annual payments per patient. We estimate their intensive margin responses to the cap by leveraging variation in cap-related financial incentives generated by the policy’s nonlinear design and the transition between fiscal years. We find that programs on track to exceed the cap in the last three months of a fiscal year raise their enrollment rates by 5.7% and their live discharge rates by 4.3% on average, reducing their cap liabilities. The marginal enrollees have longer average remaining lifetimes and are less likely to have been recently hospitalized. Their hospice spells are also more likely to be fragmented by subsequent live discharges. On the extensive margin, we find that cap liabilities are associated with terminations of Medicare provider certification numbers, suggesting that the cap impacts market structure. Current policy discussions about reducing the cap should consider its potential effect on market structure.
    JEL: I0 I1 I11 I18
    Date: 2023–09

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.