nep-com New Economics Papers
on Industrial Competition
Issue of 2023‒12‒11
eighteen papers chosen by
Russell Pittman, United States Department of Justice

  1. Product market competition, creative destruction and innovation By Rachel Griffith; John Van Reenen
  2. Dinámica de la Concentración de Mercados: simulaciones Basadas en el Enfoque de Gibrat By Ramírez Mordán, Nerys; Rodríguez Núñez, Juan Bautista
  3. El Rol del Análisis Económico en el Derecho de la Competencia By Gómez, Liverca Altagracia; Rodríguez Núñez, Juan Bautista; Mesa Candelario, Nathanael; Morbán Gómez, Fernando Miguel; García Read, Zoraya Esther
  4. A Model of Behavioral Manipulation By Daron Acemoglu; Ali Makhdoumi; Azarakhsh Malekian; Asuman Ozdaglar
  5. Information asymmetry and search intensity By Atayev, Atabek
  6. Estimating very large demand systems By Joshua Lanier; Jeremy Large; John Quah
  7. Inequality and market power in Latin America and the Caribbean By Eslava, Marcela; García-Marín, Alvaro; Messina, Julián
  8. Rent sharing, wage floors, and development By Joshua Budlender; Ihsaan Bassier
  9. The effects of Minimum Wage in the presence of Monopsonic power in Latin America: A study case for Mexico By Rodriguez, Francisco Javier Valverde
  10. The benefits of auctioneer competition: Merging auctions and adding auctioneers By Heczko, Alexander; Kittsteiner, Thomas; Ott, Marion
  11. Trade, renewable energy, and market power in power markets By Kurt R. Brekke; Odd Rune Straume; Lars Sørgard
  12. Exploring the link between corruption and innovation: the moderating role of institutional context and competitive pressure By Iorio, Roberto; Segnana, Maria Luigia
  13. Ramsey Pricing Revisited: Natural Monopoly Regulation with Evaders By Martin Besfamille; Nicolás Figueroa; Léon Guzmán
  14. Resilience in Vertical Supply Chains By Gene M. Grossman; Elhanan Helpman; Alejandro Sabal
  15. Platform lending and innovation By Leonardo Gambacorta; Leonardo Madio; Bruno Maria Parigi
  16. The determination of the price of capital goods: A differential game approach By Guerrazzi, Marco; Candido, Giuseppe
  17. Designing Incentive Regulation in the Electricity Sector By Brown, David P.; Sappington, David E. M.
  18. Partially Adaptive Econometric Methods and Vertically Integrated Majors in the Oil and Gas Industry By Scott Alan Carson; Wael M. Al-Sawai; Scott A. Carson

  1. By: Rachel Griffith; John Van Reenen
    Abstract: We examine the economic analysis of the relationship between innovation and product market competition. First, we give a brief tour of the intellectual history of the area. Second, we examine how the Aghion-Howitt framework has influenced the development of the literature theoretically and (especially) empirically, with an emphasis on the "inverted U": the idea that innovation rises and then eventually falls as the intensity of competition increases. Thirdly, we look at recent applications and development of the framework in the areas of competition policy, international trade and structural Industrial Organization.
    Keywords: competition, innovation, creative destruction
    Date: 2021–11–29
  2. By: Ramírez Mordán, Nerys; Rodríguez Núñez, Juan Bautista
    Abstract: This document employs simulation techniques (of what kind) to attempt to replicate the market's behavior under various conditions associated with its competitive structure and the potential existence of entry barriers. The aim is to connect these simulations with theoretical and empirical findings identified in the literature. The results indicate that the individual dynamics of each company tend to generate historical variations in the level of market concentration, typically converging towards increased concentration over time. However, as the probabilities of entry increase, markets tend to be less concentrated, particularly when there is no company with a high level of market share. This effect on competition is contingent upon the persistence in the participation level of the leading companies. It has been observed that the impact of a higher probability of entry on the level of market concentration is lower in those markets where the leading company maintains a higher level of participation over time, as well as in markets where there is a higher likelihood of exit.
    Keywords: Microeconomics, Competition Policy, Entry Barriers, Simulations, Industrial Organization
    JEL: C63 D22 D43 L10 L13
    Date: 2023–11–01
  3. By: Gómez, Liverca Altagracia; Rodríguez Núñez, Juan Bautista; Mesa Candelario, Nathanael; Morbán Gómez, Fernando Miguel; García Read, Zoraya Esther
    Abstract: Antitrust law plays a fundamental role in promoting efficient markets and safeguarding consumer interests. In this regard, economic analysis has become a crucial tool for assessing firms' conduct and the potential anticompetitive effects of their actions in markets and consumer welfare. This essay will examine the significance of economic analysis in competition law, emphasizing its relevance in detecting and evaluating anticompetitive practices policymaking and regulation decision-making.
    Keywords: Antitrust law, Economic Analysis, Anticompetitive Practices
    JEL: D4 D40 K21 L4 P16
    Date: 2023–11–01
  4. By: Daron Acemoglu; Ali Makhdoumi; Azarakhsh Malekian; Asuman Ozdaglar
    Abstract: We build a model of online behavioral manipulation driven by AI advances. A platform dynamically offers one of n products to a user who slowly learns product quality. User learning depends on a product’s “glossiness, ’ which captures attributes that make products appear more attractive than they are. AI tools enable platforms to learn glossiness and engage in behavioral manipulation. We establish that AI benefits consumers when glossiness is short-lived. In contrast, when glossiness is long-lived, users suffer because of behavioral manipulation. Finally, as the number of products increases, the platform can intensify behavioral manipulation by presenting more low-quality, glossy products.
    JEL: D83 D90 D91 L86
    Date: 2023–11
  5. By: Atayev, Atabek
    Abstract: In markets where sellers' marginal costs of production have a common component, they have informational advantage over buyers regarding those costs. This information asymmetry between sellers and buyers is especially relevant in markets where buyers have to uncover prices through costly search. We propose a theoretical model of simultaneous search that accounts for such information asymmetry. Our main finding is that informing buyers about marginal costs may harm them by deterring search and, hence, softening competition. This result has important implications on policy regulations and voluntary information sharing.
    Keywords: Information Asymmetry, Consumer Search, Price Competition
    JEL: D43 D83 L13
    Date: 2023
  6. By: Joshua Lanier; Jeremy Large; John Quah
    Abstract: We present a discrete choice, random utility model and a new estimation technique for analyzing consumer demand for large numbers of products. We allow the consumer to purchase multiple units of any product and to purchase multiple products at once (think of a consumer selecting a bundle of goods in a supermarket). In our model each product has an associated unobservable vector of attributes from which the consumer derives utility. Our model allows for heterogeneous utility functions across consumers, complex patterns of substitution and complementarity across products, and nonlinear price effects. The dimension of the attribute space is, by assumption, much smaller than the number of products, which effectively reduces the size of the consumption space and simplifies estimation. Nonetheless, because the number of bundles available is massive, a new estimation technique, which is based on the practice of negative sampling in machine learning, is needed to sidestep an intractable likelihood function. We prove consistency of our estimator, validate the consistency result through simulation exercises, and estimate our model using supermarket scanner data.
    Date: 2022–06–27
  7. By: Eslava, Marcela; García-Marín, Alvaro; Messina, Julián
    Abstract: Firms’ market power may exacerbate income inequality. We investigate this relationship among firms in Latin America and the Caribbean (LAC), where this phenomenon remains understudied. We use firm-level data for formal firms in 16 countries in LAC and 31 peer economies with similar levels of GDP per capita but much less inequality. We study 1) The extent and dispersion of market power among LAC’s firms compared to firms in peer economies; 2) the relationship between market power and the labor share of revenue at the firm level; and 3) the implications of that relationship for the aggregate labor share of income, which depends on the joint distribution (across firms) of market power, the labor share, and firms’ size. Markups (markdowns) measure product (labor) market power. Our results indicate that the average markup in the region is 20 percent above marginal costs, while average wages are 46 percent below the marginal revenue product of labor. The negative relationship at the firm level between the labor share and combined market power is driven by labor rather than product market power. Finally, we show that labor market power is more pronounced among larger firms, magnifying the effect of market power on the aggregate labor share and income distribution. However, there is no indication that market power is more acute or dispersed in LAC than in its peers, nor does it appear to induce more inequality than in those countries.
    Keywords: labor market power; product market power; markups; markdowns; Latin America and the Caribbean
    JEL: J31 J42 E25
    Date: 2023–11–01
  8. By: Joshua Budlender; Ihsaan Bassier
    Abstract: Faced with more favourable demand conditions, many firms raise wages. However, we show that firms with labour market power, lower productivity, and binding wage floors will absorb these positive revenue productivity shocks as excess profits instead of increasing wages or employment. Our prediction follows from a simple but novel theoretical insight under a standard framework of monopsonistic competition, and we empirically test this theory in South Africa using firm-level administrative data.
    Keywords: Rent-sharing, Monopsony, Minimum wage, Firm productivity
    Date: 2023
  9. By: Rodriguez, Francisco Javier Valverde
    Abstract: This dissertation studies how minimum wage changes affect labor market outcomes (employment and wages) when taking into account the effect of monopsonic power from employers. We explore the case of a labor market with high levels of informality and wage inequality such as Mexico. We use data from the Mexican Economic Census and employment surveys to estimate a Herfindahl-Hirschman concentration index for urban labor markets. This measure is used to evaluate the effect of the change in minimum wage policy from the government, which started increasing the minimum wage significantly from 2016 onward. We use the concentration index in several regressions with interaction between minimum wage and the index, including lineal and quantile regressions. Our main findings are that the minimum wage has a small but positive marginal effects on labor market outputs, and these effects increase with market concentration. Spillover effects range from 0.01 to 0.14\% overall, and are bigger for informal than for formal workers. Employment effects range from -0.42 to -0.74\%. We consider the monopsony theory explains these findings. Additionally, the spillover effects are greater for the lowest percentiles of the wage distribution, and disappear around the 10th percentile. This is consistent with previous evidence about minimum wage impacts. The results are robust for alternative definitions of market concentration and for a placebo test. These results provide evidence on the effectiveness of minimum wage in reducing poverty and wage inequality, and the necessity of pro-worker regulation to reduce the market power of firms.
    Date: 2023–09–05
  10. By: Heczko, Alexander; Kittsteiner, Thomas; Ott, Marion
    Abstract: In a lab experiment, we analyze the benefits of increasing competition on auction platforms hosting multiple auctioneers of a homogeneous good. We find that increasing competition by merging separated individual auctions increases market efficiency and also buyers' payoffs, while there is no evidence of an increase in the auctioneers' expected revenues. Furthermore, competing auctioneers decrease reserve prices significantly when the number of competitors increases. Then, auctioneers' revenues decrease whereas buyers' payoffs and efficiency are enhanced. Different to previous findings for the monopolistic seller case, competing auctioneers do not increase reserve prices significantly when the number of buyers increases. For our theoretical model, we provide closed-form equilibrium reserve-price functions of competing auctioneers.
    Keywords: Competing auctions, merging markets, parallel auctions, reserve price, experiment
    JEL: D44 D47 D82
    Date: 2023
  11. By: Kurt R. Brekke (Norwegian School of Economics (NHH), Department of Economics,); Odd Rune Straume (NIPE/Center for Research in Economics and Management, University of Minho, Portugal; and Department of Economics, University of Bergen, Norway); Lars Sørgard (Norwegian School of Economics (NHH), Department of Economics, Helleveien 30, 5045 Bergen, Norway; and Centre for Applied Research at NHH)
    Abstract: Energy markets are undergoing a radical shift towards renewable energy and network integration. We study the effects of integrating regions with storable (hydro) and intermittent (wind) energy sources in the presence of market power. Based on a two-period model with price fluctuations in the wind power region and bottlenecks in transmission of energy between regions, we show that a dominant firm (facing a competitive fringe) has an incentive to reallocate more hydropower production to the low-price period in order to induce higher prices in the high-price period. This incentive might be so strong that the bottleneck in the low-price period is removed and the two regions become de facto integrated. Paradoxically, we find that higher hydropower production capacity and/or larger transmission capacity can lead to higher (average) prices in the hydropower region due to the strategic responses by the dominant firm. Moreover, we find that the presence of market power in many cases enables the dominant firm to appropriate a larger share of the surplus from trade without harming domestic consumers, implying that stronger competition in the hydropower region might not be welfare improving.
    Keywords: Hydropower, trade, market power
    JEL: L13 L94 Q41
    Date: 2023
  12. By: Iorio, Roberto (CELPE - CEnter for Labor and Political Economics, University of Salerno, Italy); Segnana, Maria Luigia (Department of Economics and Management - University of Trento, Italy)
    Abstract: This paper originates from the endless question about whether corruption “greases or sands the wheels” of growth. Focusing on innovation at the firm level, the question becomes whether corruption hampers or enhances innovation. To explore this link we use a panel data obtained merging two BEEPS surveys (2012-2014 and 2018-2019) with 3916 units located in 24 countries in Eastern Europe and Central Asia. We suggest that, to deeply understand the nexus between corruption and innovation, it is needed to go beyond the average effect. In fact, the intensity as well as the direction of this link is clearly affected by two factors: the institutional context, particularly the country’s level of control of corruption, and the market context or the degree of market competition that firms face. The empirical analysis leads to the following conclusions: • the link between corruption and innovation is reinforced by the poor quality of the institutions; • the link between corruption and innovation is non linearly connected with the degree of competition. Its intensity is particularly strong when firms face a high competitive pressure, coming from a multitude of even informal firms. This implies that in some scenarios, characterized by low control of corruption and high competitive pressure, corruption is a way to “grease the wheels” of the innovation; in other contexts, with high control of corruption and moderate competitiveness, the link becomes weak if not negative, resembling the “sanding the wheels” hypothesis. From a policy point of view, as in the countries under inspection the impact of corruption on innovation differs over different competitive markets and institutional characteristics, it follows that uniform restrictions are not appropriate.
    Keywords: innovation; corruption; bribery; market competition
    JEL: O12 O31 P27 P51
    Date: 2023–11–24
  13. By: Martin Besfamille; Nicolás Figueroa; Léon Guzmán
    Abstract: We consider a model featuring a single-product natural monopoly, which faces evaders, i.e., individuals that may not pay the price. By exerting a costly effort, the firm can deter evasion. To maximize the total surplus, a regulator sets the price, the level of deterrence effort, and socially costly transfers to ensure the monopoly’s participation. We obtain a modified Ramsey formula, which clearly shows that the mere existence of evaders dampens the use of the price as a mean to finance the firm’s deficit. The regulated price is always below the monopoly price and, under sufficient conditions, also below marginal cost. Then, we generalize the model to incorporate moral hazard. Finally, we undertake an empirical application of our results, which shows quantitatively that the downward tendency of regulated prices in a context of high evasion is significant.
    Keywords: regulation, natural monopoly, evasion and marginal cost of public funds
    JEL: D42 H20 L43 L51
    Date: 2023
  14. By: Gene M. Grossman (Princeton University); Elhanan Helpman (Harvard University); Alejandro Sabal (Princeton University)
    Abstract: Forward-looking investments determine the resilience of firms' supply chains. Such investments confer externalities on other firms in the production network. We compare the equilibrium and optimal allocations in a general equilibrium model with an arbitrary number of vertical production tiers. Our model features endogenous investments in resilience, endogenous formation of supply links, and sequential bargaining over quantities and payments between firms in successive tiers. We derive policies that implement the first-best allocation, allowing for subsidies to input purchases, network formation, and investments in resilience. The first-best policies depend only on production function parameters of the pertinent tier. When subsidies to transactions are infeasible, the second-best subsidies for resilience and network formation depend on production function parameters throughout the network, and subsidies are larger upstream than downstream whenever the bargaining weights of buyers are non-increasing along the chain.
    Keywords: Firms, Resilience, Vertical Supply Chains
    JEL: D21 D62
    Date: 2023–09
  15. By: Leonardo Gambacorta; Leonardo Madio; Bruno Maria Parigi
    Abstract: We analyse the impact of platform lending on innovation and e-commerce vendors' surplus. The platform generates revenues from both lending and marketplace fees, and can use lending to price discriminate vendors, thereby leading to higher marketplace fees and below-market interest rates. While platform lending can encourage innovation by providing access to subsidised credit, it can harm vendors who do not have financial needs. A sufficient condition for platform lending to be welfare-enhancing is that innovators would not receive funding from banks otherwise. However, if innovators would receive funding from banks, platform lending may reduce the overall vendor surplus. Cream skimming arises when the platform has better information than the bank about the prospects of the innovators' projects. To address the potential negative effects of platform lending on vendors' surplus, we also explore the impact of different regulatory instruments.
    Keywords: platform lending, big tech, online platforms, credit, innovation
    JEL: G20 L86 O31
    Date: 2023–11
  16. By: Guerrazzi, Marco; Candido, Giuseppe
    Abstract: In this paper, building upon a q-model of investment with adjustment costs, we address the strategic determinants of the price of newly installed productive capacity. Specifically, we develop a differential game in which a competitive producer of consumption goods deals with a seller of capital goods endowed with market power. From a theoretical perspective, we show that an open-loop Stackelberg equilibrium with non-cooperative features requires the producer of consumption goods to be more impatient than the seller of capital goods. Thereafter, relying on some numerical simulations, we show that our theoretical setting is able to replicate the countercyclical pattern of the relative price of capital goods as well as its negative relationship with the investment-output ratio.
    Keywords: Price of capital goods; Tobin's q; Internal and external adjustment costs; Differential games.
    JEL: C72 D24 E22 G31
    Date: 2023–11–10
  17. By: Brown, David P. (University of Alberta, Department of Economics); Sappington, David E. M. (University of Florida)
    Abstract: In industries with extensive infrastructure needs and pronounced scale economies, consumers can be better served by well-designed regulation than by competition. Regulation that replicates the discipline of competitive markets can enhance the welfare of electricity consumers. However, replicating competitive discipline is challenging when regulators have limited knowledge of relevant industry conditions and when the regulators’ policy instruments are restricted. Incentive regulation attempts to harness the regulated firm’s superior knowledge of industry conditions to achieve regulatory objectives. This paper reviews key principles of incentive regulation, and examines how incentive regulation can be designed to enhance performance in the electricity sector.
    Keywords: Incentive Regulation; Electricity
    JEL: L51 L94 Q40 Q48
    Date: 2023–11–16
  18. By: Scott Alan Carson; Wael M. Al-Sawai; Scott A. Carson
    Abstract: Regression model error assumptions are essential to estimator properties. Least squares model parameters are consistent and efficient when the underlying error terms are normally distributed but yield inefficient estimators when errors are not normally distributed. Partially adaptive and M-estimation are alternatives to least squares when regression model errors are not normally distributed. Vertically Integrated firms in the oil and gas industry is one industrial sector where error mis-specification is consequential. Equity returns are a common area where returns are not normally distributed, and inappropriate error distribution specification has substantive effect when estimating capital costs. Vertically Integrated Major equity returns and accompanying regression model error terms are not normally distributed, and this study considers error returns for Integrated oil and gas producers. Vertically Integrated firm returns and their regression model error are not normally distributed, and alternative estimators to least squares have desirable properties.
    Keywords: partially adaptive regression models, oil and gas industry, Integrated Majors, vertical integration
    JEL: G12 L71 L72 Q40 Q41
    Date: 2023

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