nep-com New Economics Papers
on Industrial Competition
Issue of 2024‒01‒29
seventeen papers chosen by
Russell Pittman, United States Department of Justice

  1. Vertical Differentiation through Product Design By Riegel, Max
  2. The Market for Lemons and the Regulator's Signalling Problem By Roy Long
  3. Does the US Tax Code Encourage Market Concentration? An Empirical Analysis of the Effect of the Corporate Tax Structure on Profit Shares and Shareholder Payouts By Hager, Sandy Brian; Baines, Joseph
  4. Distribution and Competition Policy in the Japanese Machine Tool Industry: A Survey By Noriyuki Doi
  5. Cournot competition in an integerconstrained electricity market model By Devine, Mel; Lynch, Muireann Ã
  6. Market power in banking By Carletti, Elena; Leonello, Agnese; Marquez, Robert
  7. Retail Sale in Non-Specialised Stores in the Czech Republic By Michal Madr; Radek Naplava
  8. Immigration, monopsony and the distribution of firm pay By Michael Amior; Jan Stuhler
  9. Venture capital and methods of payment in mergers and acquisitions By Giang Nguyen; Hung Pham
  10. The economics of new product launches and access to pharmaceutical products in the EU: A perspective on the EC’s proposed reform of the EU pharmaceutical legislation By Margaret Kyle; Sinan Corus; Julia Tanndal
  12. The effect of branching deregulation on finance wage premium By Taskin, Ahmet Ali; Yaman, Firat
  13. The Impact of Preference Programs in Public Procurement: Evidence from Veteran Set-Asides By Rodrigo Carril; Audrey Guo
  14. Globally and Universally Convergent Price Adjustment Processes By Herings, P.J.J.
  15. Poor Substitutes? Counterfactual Methods in IO and Trade Compared By Keith Head; Thierry Mayer
  16. The Impact of Negative Income Shocks on the Relative Prices of Private Label Products: The Covid-19 Episode By Serdar Yurek

  1. By: Riegel, Max
    Abstract: I study pricing and product design choices of multiproduct firms in a model of directed search. Product design introduces vertical differentiation à la Gabszewicz and Thisse (1979) as well as Shaked and Sutton (1982). While all consumers have a preference for a more niche product design, consumers with lower search costs benefit relatively more. Firms gain from dispersion in tastes through product design and choose maximum differentiation in equilibrium. The firm with the broader product design sets a lower price and attracts consumers with high search costs.
    Keywords: product design; vertical differentiation; consumer search; directed search; search cost heterogeneity
    JEL: D43 D83 L15
    Date: 2023–12–06
  2. By: Roy Long
    Abstract: The Market for Lemons is a classic model of asymmetric information first studied by Nobel Prize economist George Akerlof. It shows that information asymmetry between the seller and buyer may result in market collapse or some sellers leaving the market. "Lemons" in the used car market are cars of poor quality. The information asymmetry present is that the buyer is uncertain of the cars' true quality. I first offer a simple baseline model that illustrates the market collapse, and then examine what happens when regulation, ie. a DMV is introduced to reveal (signal) the true car quality to the buyer. The effect on the market varies based on the assumptions about the regulator. The central focus is on the DMV's signal structure, which can have interesting effects on the market and the information asymmetry. I show that surprisingly, when the DMV actually decreases the quality of their signal in a well constructed way, it can substantially increase their profit. On the other hand, this negatively effects overall welfare.
    Date: 2023–12
  3. By: Hager, Sandy Brian; Baines, Joseph
    Abstract: EXECUTIVE SUMMARY *** Concerns about the market power of large corporations are growing. There are good reasons why monopoly now features so prominently on the political and economic agenda. Mounting evidence shows that corporate concentration stifles innovation and investment, resulting in lower-quality goods and services and less economic dynamism. Concentration is also a catalyst for rising wealth and income inequality, as monopolistic firms are able to suppress workers’ wages and charge consumers higher prices. *** Most of the public policy debate has been focused on the role of antitrust law in combating the monopolistic practices of large corporations. But recently, the focus has shifted somewhat, as more and more people come to recognize the role of federal and state-level taxation in understanding corporate concentration in the US. Yet, there are still many questions about the effect of taxation on market structure: Is there a tax advantage associated with bigness, as measured by revenues? If so, is this advantage confined to a few “bad apples” or is it widespread among large corporations? What role do the domestic and foreign tax systems play in encouraging monopoly power? What does an analysis of the relationship between tax and monopoly tell us about wider macroeconomic shifts in the US economy over the past few decades? *** The purpose of this brief is to address these questions by analyzing and comparing the overall effects of the US tax code on the profit share of large and smaller corporations. *** Our analysis reveals a striking tax advantage for big business in the US. Specifically, we find that the total post-tax profit share of the top 10 percent of listed corporations since the mid-1980s is consistently and significantly higher than their total pre-tax profit share, indicating that the overall tax structure (domestic and foreign) fuels profit concentration at the top of the corporate hierarchy. For example, in the most recent period covered in our analysis, 2019–2022, the overall tax structure has boosted the post-tax profit share of large corporations by 2.32 percentage points relative to their pre-tax share. We then assess the contribution of different tax jurisdictions to concentration by estimating the pre-tax and post-tax profit shares of large corporations, domestically and internationally. Here, our analysis reveals that the domestic tax structure is especially influential in driving concentration. Over the past four decades, the domestic post-tax profits of large corporations have been much larger than their pre-tax share, with the domestic tax structure augmenting the profit share of large corporations by 3.79 percentage points in 2019–2022. The effect of the foreign tax structure on profit concentration is more ambiguous. In most periods it is either slightly positive or slightly negative. For 2019–2022, the foreign post-tax profit share of large corporations was 0.87 percentage points higher than their pre-tax share. Based on these findings, we argue that the tax structure, especially the domestic tax structure, plays a crucial but still underappreciated role in exacerbating the monopoly problem. *** We go on to consider the wider consequences for the US economy of big business’s tax advantage. The political justification for corporate tax cuts—including those that were part of the Tax Cuts and Jobs Act (TCJA) of 2017—is that they would free up money for companies to invest in productive capacity, in turn generating higher employment and wages. But as our analysis shows, the capital expenditures of large corporations tend to decrease, not increase, when their tax advantage grows. Instead of fueling productive investment, the tax savings of large corporations are principally used to pay out dividends and buy back their own stock. This means that large corporations are less disposed to investments that may indirectly benefit ordinary workers and more disposed to shareholder value enhancement that directly benefits the asset-rich. Overall, we find that the tax system contributes in crucial ways to rising corporate concentration and to widening inequality among households. *** With the objective of leveling the playing field, our findings offer powerful justification for the restoration of graduated statutory corporate income tax rates in the US alongside a global minimum effective tax rate of 25 percent and a graduated excise tax on share buybacks. The monopoly problem has become endemic to US capitalism, and corporate tax reform on its own will not solve it. Yet one clear advantage of taxation is that it has a direct, and therefore much more easily discernible, effect on distributive outcomes compared to other policy measures. A more holistic approach, combining corporate tax reform with more robust antitrust regulation, the strengthening of workers’ rights, and increased public ownership in key sectors, is needed to build an economy based on equity, fairness, and prosperity for all.
    Keywords: big business, centralization, concentration, corporation, distribution, dominant capital, production, inequality, power, profit, shareholders, tax, United States
    JEL: P P1 P12 H2 H23 D4 D43 L L11 M
    Date: 2023
  4. By: Noriyuki Doi (Innovation System Research Center, Kwansei Gakuin University)
    Abstract: Nowadays, producer goods occupy an important position in a country's industrial structure. It is therefore necessary to discuss the links between competition, competitiveness and public policy in the industries. Then it is noteworthy that in Japan producer goods users often procure through 'trading companies'. The trading companies may have an influence on the efficiency of distribution networks vertical firm relations, and competition at the stages of supply chain. However, there has not been much 'economic analysis' of trading companies or the distribution network in the industries. This paper examines the competition mechanism in the machine tool industry, one of major producer goods in Japan particularly focusing on the distribution system of a trading company, one of the main features of the industry, from the perspective of economics, and then to clarify its relation to competition policy. It also summarizes the theoretical and policy issues that need to be addressed in the examination.
    Keywords: producer goods, machine tool, competition, distribution network, competition policy
    JEL: L14 L41 L42 L52 L64
    Date: 2024–01
  5. By: Devine, Mel; Lynch, Muireann Ã
    Date: 2023
  6. By: Carletti, Elena; Leonello, Agnese; Marquez, Robert
    Abstract: Bank market power, both in the loan and deposit market, has important implications for credit provision and for financial stability. This article discusses these issues through the lens of a simple theoretical framework. On the asset side, banks choose the quality and quantity of loans. On the liability side, they may be subject to depositor runs whenever they offer demandable contracts. This structure allows us to review the literature on the role of market power for credit provision and stability and also highlight the interactions between the two sides of banks’ balance sheets. Our approach identifies relevant channels that deserve further analysis, especially given the rising importance of bank market power for monetay policy transmission and the the rise of the digital economy. JEL Classification: G01, G21, G28
    Keywords: balance sheet interactions, bank runs, credit provision, digital economy, monetary policy transmission
    Date: 2024–01
  7. By: Michal Madr (Department of Economics, Faculty of Business and Economics, Mendel university in Brno, Czech Republic); Radek Naplava (Department of Economics, Faculty of Business and Economics, Mendel university in Brno, Czech Republic)
    Abstract: The analysis of retail sales in non-specialised stores was carried out from 2005 to 2021. The market share of the six most important competitors (by ownership structure) was 75% in 2021. There has been a gradual increase in market concentration over the long term. The market structure can be characterised as an asymmetric oligopoly, the most common market structure within the European Union. Regarding the number of significant firms and the degree of concentration, the Czech market has a structure similar to the retail markets in Estonia, Germany, and the UK. Within the European comparison, the Czech retail market reaches a medium level, as evidenced by the fact that there are markets with a lower (Hungary and Poland) and higher degree of concentration (Austria and Slovakia) among the neighbouring countries. According to the Herfindahl-Hirschman Index, this market changed from an unconcentrated to a moderately concentrated market after 2013. There were 15 mergers and acquisitions in the period under review. However, only one (the merger of REWE Group with PLUS - DISCOUNT in 2008) was likely to lead to a significant increase in market share (by 3.5 percentage points to 13%), i.e., an increase in market concentration. The market development was very successful for the two foreign owners, the Schwarz-Gruppe (Kaufland and Lidl) and the REWE Group (Billa and Penny), whose subsidiaries had the highest market share growth. At the same time, these four companies include hypermarkets (Kaufland), supermarkets (Billa) and discount stores (Lidl and Penny). The Schwarz-Gruppe's share increased from 13% to 28%, and REWE's rose from 7% to 15%. Trading margins have been relatively stable since 2005; the average level of these indicators has increased slightly, especially from 2015 to 2021. Gross profits and gross operating margins of the largest companies have increased over time. From a company-by-company perspective, gross margins have (with minor exceptions) ranged from 1-4.5%. Sales and gross profits of the largest companies grew faster than inflation, with gross profit growth outpacing sales growth. The evolution of the market for retail sales in non-specialised stores, showing a change in market shares and the relatively low average gross margins of individual market players and their changes, clearly show this is a competitive market.
    Keywords: retail sales, market structure, market concentration, performance of companies, Czechia
    JEL: D43 L81 M20
    Date: 2024–01
  8. By: Michael Amior; Jan Stuhler
    Abstract: We argue that the arrival of immigrants with low reservation wages can strengthen the monopsony power of firms. Firms can exploit "cheap" migrant labor by offering lower wages, though at the cost of forgoing potential native hires who demand higher wages. This monopsonistic trade-off can lead to large negative effects on native employment, which exceed those in competitive models, and which are concentrated among low-paying firms. To validate these predictions, we study changes in wage premia and employment across the firm pay distribution, during a large immigration wave in Germany. These adverse effects are not inevitable and may be ameliorated through policies which constrain firms' monopsony power over migrants.
    Keywords: immigration, monopsony, firms
    Date: 2024–01–04
  9. By: Giang Nguyen (EM - emlyon business school); Hung Pham
    Abstract: "We find evidence that venture capital (VC)-backed targets receive more stock as the method of payment in mergers and acquisitions than non-VC-backed targets do, even after controlling for self-selection bias, differences of characteristics between transactions of VC-backed and non-VC-backed targets and VC information bridge-building. VC-backed targets prefer stock of acquirers that are small, young, risky or invest intensively. In addition, we document that the ratio of stock is larger when the targets are financed by reputable VCs, a syndicate of VCs or VCs with low fund maturity. Overall, our findings suggest that VCs strategically hold shares of the acquirers that meet their investment preferences."
    Keywords: Venture capital, Merger and acquisition, Method of payment
    Date: 2023–09–10
  10. By: Margaret Kyle (CERNA i3 - Centre d'économie industrielle i3 - Mines Paris - PSL (École nationale supérieure des mines de Paris) - PSL - Université Paris sciences et lettres - I3 - Institut interdisciplinaire de l’innovation - CNRS - Centre National de la Recherche Scientifique); Sinan Corus; Julia Tanndal
    Abstract: One goal of the European Commission's proposed reform to existing regulations is to increase patient access to innovative medicines across the European Union. We describe the economic impact of this policy change. Because of the incentives created by other policies, particularly external reference pricing and parallel trade, these reforms may have an adverse impact on competition in the pharmaceutical sector and reduce the attractiveness of Europe as an incubator for pharmaceutical innovation. Changes to bargaining power are likely to favour large, established firms. These reforms also increase the uncertainty of the length of market exclusivity, potentially undermining innovation incentives.
    Abstract: L'un des objectifs de la réforme des réglementations existantes proposée par la Commission européenne est d'améliorer l'accès des patients aux médicaments innovants dans toute l'Union européenne. Nous décrivons l'impact économique de ce changement de politique. En raison des incitations créées par d'autres politiques, en particulier celles relatives aux prix de référence externes et au commerce parallèle, ces réformes peuvent avoir un impact négatif sur la concurrence dans le secteur pharmaceutique et réduire l'attrait de l'Europe en tant qu'incubateur de l'innovation pharmaceutique. L'évolution des rapports de force est susceptible de favoriser les grandes entreprises établies. Ces réformes augmentent également l'incertitude quant à la durée de l'exclusivité commerciale, ce qui pourrait nuire aux incitations à l'innovation.
    Date: 2023
  11. By: Kasyanova, Ksenia (Касьянова, Ксения) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The Russian wholesale electricity market is divided into two price zones: the European (first) price zone and the Siberian (second) price zone. The pricing mechanisms in the first and second price zones are the same: within each price zone, there is a free competition market between producers, which is provided by a significant transmission capacity of the electrical network. At the same time, the flow between the price zones is insignificant, and the equilibrium prices differ to a large extent, since competitive bidding for electricity and capacity is held separately for each price zone. During the analysis of the spot prices by the price zones a two-level model of stochastic volatility was developed. It was already shown that the dynamics of electricity prices are significantly different in the European and Siberian price zones. The transition to the analysis of reginal prices allows to identify the possible causes of these differences. In particular, one of the analysis tools is the construction of linear regressions of estimates of the coefficients of the stochastic volatility model (calculated for each node/region) on the permanent region’s characteristics (geographical location of the region, shares of TPPs, NPPs and HPPs in the power generation structure, shares TPPs operating on gas and coal, the share of the main sectors of GRP). As a result of evaluating the models for the region-averaged node prices, the differences in average prices, weekly price dynamics, the effect size of holidays, heating degree-days and volumes of industrial production on prices between regions were explained. Analysis of node prices based on regional maps makes it possible to detect weaknesses in the infrastructure of the electric power industry and regions with anomalous dynamics of electricity prices.
    Keywords: Electricity prices, spot energy market, Bayesian inference, stochastic volatility
    Date: 2022–11–10
  12. By: Taskin, Ahmet Ali; Yaman, Firat
    Abstract: What is the role of financial deregulation on rising finance wage premium in the US? This study makes use of the Interstate Banking and Branching Efficiency Act of 1994 as an exogenous shift to local banking markets and investigates the effect of deregulation induced competition on relative wages in finance. We find that the finance wage premium increased significantly in deregulated states. Our estimates suggests that the deregulation explains about a quarter of the increase in finance wage premium between 1994 and 2008.
    Date: 2023
  13. By: Rodrigo Carril; Audrey Guo
    Abstract: Veteran-owned businesses are given preferential treatment in the allocation of procurement contracts from the U.S. Department of Veterans Affairs -currently the largest civilian federal agency in terms of procurement spending. We exploit a 2016 Supreme Court ruling that significantly increased the scope of these set-asides, to study the impacts of preference programs on both the targeted businesses and procurement out- comes. The policy change increased the share of contracts awarded to the target population, service-disabled veteran-owned small businesses, and led to significant entry of new vendors, including those who had previously failed to win contracts. New entrants were also more likely to win future contracts, and the policy led to an increase in survival for targeted firms. We find no evidence of relevant spillovers to awards by other federal agencies, no decline in competition for awards, and no deterioration of contract execution performance by vendors. These findings suggest that VA set-asides have successfully improved outcomes for the target population without imposing significant costs on the government.
    Keywords: Procurement, set-asides, veterans, competition
    JEL: D44 H57 L14
    Date: 2023–12
  14. By: Herings, P.J.J. (Tilburg University, Center For Economic Research)
    Keywords: General equilibrium; price adjustment; universal convergence; differential topology
    Date: 2024
  15. By: Keith Head (UBC - University of British Columbia, CEPR - Center for Economic Policy Research - CEPR); Thierry Mayer (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPII - Centre d'études prospectives et d'informations internationales, CEPR - Center for Economic Policy Research - CEPR)
    Abstract: Constant elasticity of substitution (CES) demand for monopolistically competitive firm-varieties is a standard tool for models in international trade and macroeconomics. Inter-variety substitution in this model follows a simple share proportionality rule. In contrast, the standard toolkit in industrial organization (IO) estimates a demand system in which cross-elasticities depend on similarity in observable attributes. The gain in realism from the IO approach comes at the expense of requiring richer data and greater computational challenges. This paper uses the data generating process of Berry et al. (1995), BLP, who established the modern IO method, to simulate counterfactual trade policy experiments. We use the CES model as an approximation of the more complex underlying demand system and market structure. Although the CES model omits key elements of the data generating process, the errors are offsetting, allowing it to fit BLP-based predictions closely. For aggregate outcomes, it turns out that incorporating non-unitary pass-through matters more than fixing oversimplified substitution patterns.
    Keywords: Constant Elasticity of Substitution, Industrial Organization, Oligopoly, Trade, Tariffs, Counterfactual analysis
    Date: 2023
  16. By: Serdar Yurek
    Abstract: In this study, we show the relationship between households’ income and the relative prices of private label products (relative to the prices of national brand products), known as lower quality and cheaper alternatives to national brands. By employing retail-product level micro price data from nine different supermarket chains in Türkiye, we exploit the sudden and unexpected income losses caused by Covid-19 measures within a difference in differences setting. Our results show that when households experience income shocks, the relative prices of private label products increase significantly. Therefore, our results indicate that the relative prices of lower quality products are significantly affected by households’ income.
    Keywords: Difference-in-Differences, Private label products, Supermarket prices, Covid-19, Lower quality products
    JEL: C21 D22 E21 E31
    Date: 2023
  17. By: Rostislav, Konstantin (Ростислав, Константин) (The Russian Presidential Academy of National Economy and Public Administration); Ponomarev, Yuriy (Пономарев, Юрий) (The Russian Presidential Academy of National Economy and Public Administration); Radchenko, Darina (Радченко, Дарина) (The Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The development of agglomerations in Russia is a priority of spatial policy. To enhance agglomeration effects and accelerate the growth of the Russian economy it is necessary to understand the mechanisms of agglomeration effects. To compare the strength of Marshall agglomeration effects using the Ellison-Glaser-Kerr approach, the degree of concentration of Russian industries was measured using data on all organizations without exception as of January 1, 2020. The estimates show that pairs of industries in Russia tend to be dispersed relative to each other: most industries have significantly lower concentration than would be expected based on the overall location of these industries. On average, of the three external benefits of concentration according to Marshall, Russia's large labor market is the most important. Proximity to suppliers/buyers, their diversity is least related to the placement of industries in the same areas. The example of Kaliningrad region shows that regardless of the method of selection of organizations for comparison, there is no truncation of the distribution traits. Although the choice of the geographical unit of observation determines the estimation of the strength or even direction of the net agglomeration effects, the general conclusion about the lack of selection of enterprises, which we could take for the benefit of concentration, was unchanged. To verify this conclusion, we used various methods of territorial grouping of enterprises and the boundaries of clusters (agglomerations) of enterprises were estimated using the DBSCAN method. The resulting estimates of the relationship of concentration to various sources of its external benefits support those public policies that seek to encourage the development of large urban agglomerations with large and constant markets for skilled labor. When forming particularly dense clusters, it is advisable to set activity requirements for areas with a special entrepreneurial regime, which would be consistent with estimates of the intensity of possible knowledge exchange between industries.
    Keywords: agglomerations, agglomeration effects, mechanisms, boundary delimitation, machine learning
    JEL: R1 C02
    Date: 2022–11–10

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