nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒11‒20
sixteen papers chosen by
Russell Pittman, United States Department of Justice

  1. Assigning Default Position for Digital Goods: Competition, Regulation and Welfare By Marius Schwartz; Yongmin Chen
  2. Self-preferencing, Quality Provision, and Welfare in Mobile Application Markets By Xuan Teng
  3. Spatial multiproduct competition. By Moez Kilani; André de Palma
  4. Do larger firms exert more market power? Markups and markdowns along the size distribution By Matthias Mertens; Bernardo Mottironi
  5. Bank competition, cost of credit and economic activity: evidence from Brazil By Gustavo Joaquim; Bernardus Doornik; GJosé Renato Haas Ornelas
  6. On the effects of income heterogeneity in monopolistically competitive markets By Sergei Kichko; Pierre M. Picard
  7. Monopsony and Automation By Marina Chugunova; Klaus Keller; Jose Azar; Sampsa Samila
  8. Unified Merger List in the Container Shipping Industry from 1966: A Structural Estimation of the Transition of Importance of a Firm's Age, Tonnage Capacity, and Geographical Proximity on Merger Decision By Suguru Otani; Takuma Matsuda
  9. Price dispersion across online platforms: Evidence from hotel room prices in London (UK) By Debashrita Mohapatra; Debi Prasad Mohapatra; Ram Sewak Dubey
  10. From Doubt to Devotion: Trials and Learning-Based Pricing By Tan Gan; Nicholas Wu
  11. Strategic Inattention, Inflation Dynamics, and the Non-Neutrality of Money By Hassan Afrouzi
  12. Demand Estimation with Text and Image Data By Giovanni Compiani; Ilya Morozov; Stephan Seiler
  13. Impact of foreign ownership on market power: Do regional banks behave differently in ASEAN countries? By Canan Yildirim; Adnan Kasman; Fazelina Sahul Hamid
  14. Platforms as arbitrageurs and facilitators of arbitrage- a simple analysis By Waterson, Michael
  15. Reaching beyond the acquirer-Target Dyad in M&A – Linkages to External knowledge sources and target firm valuation By Christoph Grimpe; Katrin Hussinger; Wolfgang Sofka
  16. Big techs in finance By Sebastian Doerr; Jon Frost; Leonardo Gambacorta; Vatsala Shreeti

  1. By: Marius Schwartz (Department of Economics, Georgetown University); Yongmin Chen (Department of Economics, University of Colorado Boulder)
    Abstract: We analyze alternative ways to assign the default position for competing digital goods such as search engines. When two firms vie for the position through bidding, the higher-quality firm typically wins but delivers lower utility than the rival due to heightened monetization (e.g., unwanted ads), exploiting consumers' switching costs. Paradoxically, increasing via regulation the rival's default share tends to raise profit and harm consumers, at least in the short run. Delegating the default choice to consumers benefits them but harms the weaker firm. Our findings highlight the subtle welfare tradeoffs in default assignment, an important and controversial policy issue.
    Keywords: Default Position, Digital Goods, Competition, Regulation
    JEL: L1 L4
    Date: 2023–09–27
  2. By: Xuan Teng (LMU Munich)
    Abstract: Platforms often display their products ahead of third-party products in search. Is this due to consumers preferring platform-owned products or platforms engaging in self-preferencing by biasing search towards their own products? What are the welfare implications? I develop a structural model of mobile application markets to identify self-preferencing and quantify its welfare effects, taking into account third-party developers' quality adjustment. A new dataset on app downloads, prices, characteristics, and search rankings is used to estimate the model. Estimates indicate self-preferencing. Simulations show higher consumer welfare and third-party profits without self-preferencing.
    Keywords: competition policy; platform design; consumer search; endogenous product choice;
    JEL: D12 D83 L13 L86
    Date: 2023–10–23
  3. By: Moez Kilani; André de Palma
    Abstract: We analyze spatial competition on a circle between firms that have multiple outlets and face quadratic transport costs. The equilibrium is a two-stage Nash game: first, firms decide on their locations and then set their prices. We are able to solve analytically simple multi-outlet cases, but for the general case, we require an algorithm to enumerate all non-isomorphic configurations. While price equilibria are explicit and unique, solving the full two-stage game requires numerical methods. In the location game, we consider two scenarios: either firms cannot jump one outlet over a competitors’ outlet, or firms have the flexibility to locate outlets anywhere on the circle. The solution involves a balance between cannibalization, market protection, and spatial monopoly power. We compare prices, profits, and transport costs for all possible configurations. With flexible locations, the firms’ market areas are contiguous. In this case, surprisingly, each firm acts as a spatial monopoly. If regulations enforce that each firm must set the same price for its outlets, head-to-head competition prevails, leading to decreased profits for the firms but to a better-off situation for consumers.
    Keywords: Spatial competition, circle, multi-product oligopoly, price-location equilibria, coin change problem.
    JEL: L13 R32 R53
    Date: 2023
  4. By: Matthias Mertens; Bernardo Mottironi
    Abstract: Several models posit a positive cross-sectional correlation between markups and firm size, which characterizes misallocation, factor shares, and gains from trade. Accounting for labor market power in markup estimation, we find instead that larger firms have lower product markups but higher wage markdowns. The negative markup-size correlation turns positive when conditioning on markdowns, suggesting interactions between product and labor market power. Our findings are robust to common criticism (e.g., price bias, non-neutral technology) and hold across 19 European countries. We discuss possible mechanisms and resulting implications, highlighting the importance of studying input and output market power in a unified framework.
    Keywords: markups, markdowns, market power, firm size
    Date: 2023–09–21
  5. By: Gustavo Joaquim; Bernardus Doornik; GJosé Renato Haas Ornelas
    Abstract: We use heterogeneous exposure to large bank mergers to estimate the effect of bank competition on both financial and real variables in local Brazilian markets. Using detailed administrative data on loans and firms, we employ a difference-in- differences empirical strategy to identify the causal effect of bank competition. Following M&A episodes, spreads increase and there is persistently less lending in exposed markets. We also find that bank competition has real effects: a 1% increase in spreads leads to a 0.2% decline in employment. We develop a tractable model of heterogeneous firms and concentration in the banking sector. In our model, the semi-elasticity of credit to lending rates is a sufficient statistic for the effect of concentration on credit and output. We estimate this elasticity and show that the observed effects in the data and predicted by the model are consistent. Among other counterfactuals, we show that if the Brazilian lending spread were to fall to the world level, output would increase by approximately 5%.
    Keywords: bank competition, mergers and acquisitions, lending, spreads, output
    JEL: G21 G34 E44
    Date: 2023–10
  6. By: Sergei Kichko (University of Trento, IT); Pierre M. Picard (DEM, Université du Luxembourg)
    Abstract: This paper studies the market and welfare effects of income heterogeneity in monopo- listically competitive product markets in the context of nonhomothetic preferences. In a closed economy, where richer individuals' expenditures are less sensitive to price change compared to poorer ones', a mean-preserving contraction of income distribution entices firms to charge higher markups, reduce output, and fosters creation of new varieties. General equilibrium effects have a negative impact on poorer individuals and, in specific circumstances, on the whole population. In an open economy with free trade, lower in- come inequality in one country creates price divergence between trading countries. Lower inequality not only further decreases trade volumes and values but also creates a general equilibrium effect that may negatively affect poor individuals. Finally, general equilibrium effects are shown to be quantitatively nonnegligible.
    Keywords: Monopolistic competition, nonhomothetic additive preferences, income inequality, pricing-to-markets, welfare, trade.
    JEL: D43 L16 F12
    Date: 2023
  7. By: Marina Chugunova (Max Planck Institute for Innovation and Competition); Klaus Keller (Max Planck Institute for Innovation and Competition); Jose Azar (University of Navarra, School of Economics and Business and IESE Business School); Sampsa Samila (IESE Business School, University of Navarra.)
    Abstract: We examine the impact of labor market power on firms' adoption of automation technologies. We develop a model that incorporates labor market power into the task-based theory of automation. We show that, due to higher marginal cost of labor, monopsonistic firms have stronger incentives to automate than wage-taking firms, which could amplify or mitigate the negative employment effects of automation. Using data from US commuting zones, our results show that commuting zones that are more exposed to industrial robots exhibit considerably larger reductions in both employment and wages when their labor markets demonstrate higher levels of concentration.
    Keywords: automation; employment; labor market concentration; industrial robots; wage setting;
    JEL: J23 J30 J42 L11 O33
    Date: 2023–10–17
  8. By: Suguru Otani; Takuma Matsuda
    Abstract: We construct a novel unified merger list in the global container shipping industry between 1966 (the beginning of the industry) and 2022. Combining the list with proprietary data, we construct a structural matching model to describe the historical transition of the importance of a firm's age, size, and geographical proximity on merger decisions. We find that, as a positive factor, a firm's size is more important than a firm's age by 9.974 times as a merger incentive between 1991 and 2005. However, between 2006 and 2022, as a negative factor, a firm's size is more important than a firm's age by 0.026-0.630 times, that is, a firm's size works as a disincentive. We also find that the distance between buyer and seller firms works as a disincentive for the whole period, but the importance has dwindled to economic insignificance in recent years. In counterfactual simulations, we observe that the prohibition of mergers between firms in the same country would affect the merger configuration of not only the firms involved in prohibited mergers but also those involved in permitted mergers.
    Date: 2023–10
  9. By: Debashrita Mohapatra; Debi Prasad Mohapatra; Ram Sewak Dubey
    Abstract: This paper studies the widespread price dispersion of homogeneous products across different online platforms, even when consumers can easily access price information from comparison websites. We collect data for the 200 most popular hotels in London (UK) and document that prices vary widely across booking sites while making reservations for a hotel room. Additionally, we find that prices listed across different platforms tend to converge as the booking date gets closer to the date of stay. However, the price dispersion persists until the date of stay, implying that the "law of one price" does not hold. We present a simple theoretical model to explain this and show that in the presence of aggregate demand uncertainty and capacity constraints, price dispersion could exist even when products are homogeneous, consumers are homogeneous, all agents have perfect information about the market structure, and consumers face no search costs to acquire information about the products. Our theoretical intuition and robust empirical evidence provide additional insights into price dispersion across online platforms in different institutional settings. Our study complements the existing literature that relies on consumer search costs to explain the price dispersion phenomenon.
    Date: 2023–10
  10. By: Tan Gan; Nicholas Wu
    Abstract: An informed seller designs a dynamic mechanism to sell an experience good. The seller has partial information about the product match, which affects the buyer's private consumption experience. We characterize equilibrium mechanisms of this dynamic informed principal problem. The belief gap between the informed seller and the uninformed buyer, coupled with the buyer's learning, gives rise to mechanisms that provide the skeptical buyer with limited access to the product and an option to upgrade if the buyer is swayed by a good experience. Depending on the seller's screening technology, this takes the form of free/discounted trials or tiered pricing, which are prevalent in digital markets. In contrast to static environments, having consumer data can reduce sellers' revenue in equilibrium, as they fine-tune the dynamic design with their data forecasting the buyer's learning process.
    Date: 2023–11
  11. By: Hassan Afrouzi
    Abstract: This paper studies how competition affects firms’ expectations in a new dynamic general equilibrium model with rational inattention and oligopolistic competition where firms acquire information about their competitors’ beliefs. In the model, firms with fewer competitors are less attentive to aggregate variables—a novel prediction supported by survey evidence. A calibrated version of the model matches the relationship between firms’ numbers of competitors and their uncertainty about aggregate inflation as a non-targeted moment. A quantitative exercise reveals that firms’ strategic inattention to aggregates significantly amplifies monetary non-neutrality and shifts output response disproportionately towards less competitive oligopolies by distorting relative prices.
    JEL: E31 E32 E71
    Date: 2023–10
  12. By: Giovanni Compiani; Ilya Morozov; Stephan Seiler
    Abstract: We propose a demand estimation method that allows researchers to estimate substitution patterns from unstructured image and text data. We first employ a series of machine learning models to measure product similarity from products’ images and textual descriptions. We then estimate a nested logit model with product-pair specific nesting parameters that depend on the image and text similarities between products. Our framework does not require collecting product attributes for each category and can capture product similarity along dimensions that are hard to account for with observed attributes. We apply our method to a dataset describing the behavior of Amazon shoppers across several categories and show that incorporating texts and images in demand estimation helps us recover a flexible cross-price elasticity matrix.
    Keywords: demand estimation, unstructured data, computer vision, text models
    JEL: C10 C50 C81
    Date: 2023
  13. By: Canan Yildirim (ESC [Rennes] - ESC Rennes School of Business); Adnan Kasman (Adnan Menderes Üniversitesi); Fazelina Sahul Hamid (USM - Universiti Sains Malaysia)
    Abstract: The change in crossborder financial intermediation and rise in regional banking have consequences for competitive conduct in emerging countries' banking markets. Using data from the Association of Southeast Asian Nations countries' banks during 2011–2018, we examine the nexus between foreign ownership and banks' market power by controlling for the heterogeneity of foreign banks concerning their countries of origin (advanced vs. emerging and regional vs. nonregional). We find that the increasing presence of foreign banks from advanced countries is associated with lower bank market power because of higher marginal costs and lower price–cost margins of the domestic banks. However, the increasing presence of emerging countries' banks is associated with higher bank market power because of lower marginal costs and prices of domestic lenders. Our findings have implications for policies regarding bank competitiveness and promoting regional banking integration because domestic banks conduct differently under increased participation levels of advanced and emerging country foreign banks.
    Keywords: Bank market power, Foreign ownership, Regional banks, ASEAN
    Date: 2021–12
  14. By: Waterson, Michael (University of Warwick)
    Abstract: This paper analyses the consumer impacts of arbitrage focusing on the significant role of internet platforms as monopolistic arbitrageurs between essentially competitive sub-markets that have not been previously linked. As arbitrageurs, there is the potential for them to create consumer benefit, but for a series of reasons, we show that consumer welfare may not be enhanced and that particular sections of the community may be disadvantaged by their actions.
    Keywords: Arbitrage ; Consumer welfare ; Platforms ; Two-sided markets JEL Codes: D51 ; L81 ; L86 ; D47 ; F11
    Date: 2023
  15. By: Christoph Grimpe (CBS, DK - ZEW, DE); Katrin Hussinger (DEM, Université du Luxembourg); Wolfgang Sofka (CBS, DK - University of Liverpool, UK)
    Abstract: Access to unique knowledge of a target firm is the strategic rationale for many firm acquisitions with the expectation of improving the acquirer’s innovation performance. We argue that the ac- quisition price reflects opportunities for value creation through innovation and investigate whether acquirers pay not just for the target firm’s knowledge but also for the opportunity to access local- ized knowledge when targets are embedded in the knowledge flows of their region. Accordingly, we integrate embeddedness theory with literature on the expectations for knowledge-based value creation in M&A. We hypothesize that target firms that are highly embedded in local knowledge flows have higher acquisition prices. Using data on 520 technology-oriented firm acquisitions in Europe between 2001 and 2010, we find that the acquisition price increases with the target firm’s local embeddedness. The effects are weaker when an acquirer’s knowledge base is closely related to the localized knowledge and stronger when the target’s knowledge base is closely related to the localized knowledge, suggesting that local embeddedness conditions the ability of acquirer and
    Keywords: firm acquisitions, local embeddedness, localized knowledge, patents, knowledge relatedness.
    JEL: G34 O3 P48
    Date: 2023
  16. By: Sebastian Doerr; Jon Frost; Leonardo Gambacorta; Vatsala Shreeti
    Abstract: The entry of big tech companies into the financial services sector can bring significant benefits in terms of efficiency and financial inclusion. Yet big techs can also quickly dominate markets, engage in discriminatory behaviour, and harm data privacy. This leads to the emergence of new trade-offs between policy goals such as financial stability, competition and privacy. Regulators, both domestically and internationally, are actively working to address these trade-offs. This paper provides an overview over the state of the literature and the policy debate.
    Keywords: big techs, financial inclusion, competition, financial stability, data privacy
    JEL: E51 G23 O31
    Date: 2023–10

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