nep-com New Economics Papers
on Industrial Competition
Issue of 2024‒03‒04
nineteen papers chosen by
Russell Pittman, United States Department of Justice

  1. Private labels and platform competition By Saruta, Fuyuki
  2. Buyer Power and the Effect of Vertical Integration on Innovation By Claire Chambolle; Morgane Guignard
  3. Vertical product differentiation, prominence, and costly search By Rozzi, Roberto; Schmitt, Stefanie Y.
  4. Postal Platform Pricing with Limited Consumer Attention By Christian Bach; Robert Edwards; Christian Jaag
  5. Mark ups and pass-through in small and medium retailers for rice, tomato sauce and oil By Pablo Blanchard
  6. Competition and Artificial Intelligence: An Australian Policy Perspective By Leigh, Andrew
  7. The Rise of Specialized Firms By Lorenz K.F. Ekerdt; Kai-Jie Wu
  8. Local and national concentration trends in jobs and sales: the role of structural transformation By Autor, David; Patterson, Christina; Van Reenen, John
  9. The Anatomy of Concentration: New Evidence From a Unified Framework By Kenneth R. Ahern; Lei Kong; Xinyan Yan
  10. Regulation of Algorithmic Collusion By Jason D. Hartline; Sheng Long; Chenhao Zhang
  11. Multi-agent Deep Reinforcement Learning for Dynamic Pricing by Fast-charging Electric Vehicle Hubs in ccompetition By Diwas Paudel; Tapas K. Das
  12. What Do Shareholders Want? Consumer Welfare and the Objective of the Firm By Keith Marzilli Ericson
  13. The Economics of Information in a World of Disinformation: A Survey Part 2: Direct Communication By Joseph E. Stiglitz; Andrew Kosenko
  14. Declining Responsiveness at the Establishment Level: Sources and Productivity Implications By Russell W. Cooper; John Haltiwanger; Jonathan L. Willis
  15. Deposit market concentration and monetary transmission: evidence from the euro area By Kho, Stephen
  16. Bank Market Power and Monetary Policy Transmission: Evidence from Loan-Level Data By Nadezhda Ivanova; Svetlana Popova; Konstantin Styrin
  17. Mainstream Formation and Competitive Dynamics in the Computer Graphics Industry: Topic modeling analysis of US patents By WATANABE Ichiro; SHIMIZU Hiroshi
  18. Customer data access and fintech entry: early evidence from open banking By Babina, Tania; Bahaj, Saleem; Buchak, Greg; De Marco, Filippo; Foulis, Angus; Gornall, Will; Mazzola, Francesco; Yu, Tong
  19. Platform Information Provision and Consumer Search: A Field Experiment By Lu Fang; Yanyou Chen; Chiara Farronato; Zhe Yuan; Yitong Wang

  1. By: Saruta, Fuyuki
    Abstract: This study examines the degree and manner by which first-party selling by a platform affects the profits of a third-party seller and a competing platform. After developing a model in which a third-party seller distributes goods through two competing platforms, with only one platform able to have a private label, we analyze first-party selling effects in both monopoly and duopoly platform cases. Our findings demonstrate the following. In a monopoly case, a platform consistently reduces the seller fee when introducing a private label. In a duopoly case, the two platforms will jointly raise or lower fees upon private label introduction. Additionally, first-party selling can either positively or negatively affect the competing platform's profit. Results suggest that competition among platforms might upset the influence of first-party selling on commission fees. Consequently, platforms might opt for first-party selling as a strategy to weaken commission fee competition and retail competition.
    Keywords: First-party selling; Platform competition; Marketplaces; Agency contracts; Wholesale contracts
    JEL: D21 L13 L22
    Date: 2023–12–27
  2. By: Claire Chambolle; Morgane Guignard
    Abstract: Our article investigates the impact of vertical integration (without foreclosure) on innovation. We compare cases where either (i) two manufacturers or (ii) a manufacturer and a vertically integrated retailer invest. Then, the independent manufacturer( s) and the retailer bargain over non-linear contracts before selling to consumers. We show that vertical integration always increases the incentives to invest on the integrated product which stifles (resp. spurs) the investment of the independent manufacturer when spillovers are low (resp. high). In contrast, when investments are sequential, if the buyer power is high, the leader independent manufacturer invests more (resp. less) to discourage the integrated retailer’s investment when spillovers are low (resp. high). Furthermore, vertical integration is always profitable even when it is not desirable for the industry and welfare. Overall, vertical integration is only desirable for the industry when the buyer power is high and may damage welfare when both the buyer power and spillovers are low.
    Keywords: Vertical integration, Investment, Buyer power, Spillovers
    JEL: L13 L14 L42
    Date: 2024
  3. By: Rozzi, Roberto; Schmitt, Stefanie Y.
    Abstract: In many markets, firms offering low-quality goods are more prominent than firms offering high-quality goods. Then, consumers are perfectly informed about the good of the prominent low-quality firm but incur search costs to bring the high-quality good of a competitor to mind. We analyze under which circumstances the less-prominent firm has an incentive to invest in high quality. We investigate two scenarios: (i) homogeneous and (ii) heterogeneous search costs. If search costs are homogeneous, the less-prominent firm produces highquality goods for sufficiently low search costs, and an increase in search costs reduces the range of values for which the less-prominent firm invests in high quality. In contrast, if search costs are heterogeneous, the less-prominent firm produces high-quality goods for sufficiently high search cost heterogeneity, and an increase in average search costs expands the range of values for which the less-prominent firm invests in high quality.
    Keywords: consideration sets, duopoly, prominence, search costs, vertical product differentiation
    JEL: D43 D83 L13
    Date: 2024
  4. By: Christian Bach; Robert Edwards; Christian Jaag
    Abstract: We introduce limited consumer attention into a two-sided market model to investigate optimal platform pricing for the postal mail sector. Two types of senders – advertisers and nonadvertisers – derive value from attention paid to their mail. Consumers pay more attention to each mail item if they receive less mail and pay more attention to advertising mail if they receive more non-advertising mail. We show that a postal monopolist subsidises non-advertising prices, which increases the value of mail to advertisers, thus inflating advertising prices. Advertisers that are most nuisance or attention-consuming for recipients face high prices. Competitive entry for delivering advertising mail cannibalises the advertising mail market and the cross-subsidisation of prices is shut down. However, if the entrant price-matches rather than competes, all postal operators, mail senders and recipients can benefit. This insight suggests that competition amongst postal operators does not necessarily benefit consumers, especially if the entrant is more efficient. Based on our findings, we argue that Universal Service Obligation policies are not as demanding as traditionally viewed.
  5. By: Pablo Blanchard (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)
    Abstract: In this paper, we recover and decompose markups, and estimate the pass-through rates from cost to prices in small and medium retail stores for oil, tomato sauce, and rice in Uruguay using a structural model of demand and assumptions about the competitive behavior of producers. The market power for these products has been under the Commission of Promotion and Defence of Competence study since 2016, and the proposed methodology allows for deepening in the measure and the understanding of the origin of that market power. In addition to providing a fundamental input for competition defense policies in Uruguay, this study enhances the international academic literature by contributing evidence on cost-to-price pass-through in a developing economy with potentially greater market power than that found in developed countries. The markups for oil and tomato sauce are around 25% for Nash Bertrand competition assumption, and 50% for the collusion assumption, while for rice are 36% and 75% respectively. For its part, about 65% of the market power under Nash Bertrand assumption is explained by the ability of firms to differentiate products and 35% for the ownership structure in the case of oil and sauce. In the case of rice, 49% are explained for differentiation and 51% for ownership structure. Finally, the pass-through rates are low for the three products, being under both behavioral assumptions lower than 55% for the three products.
    Keywords: market power, cost pass-through, discrete choice models, product differentiation
    JEL: D43 L11 L81
    Date: 2023–11
  6. By: Leigh, Andrew (Parliament of Australia)
    Abstract: Artificial intelligence has the potential to be a valuable competitive force in product and service markets. Yet AI may also pose competitive problems. I identify five big challenges that AI poses for competition. (1) Costly chips. (2) Private data. (3) Network effects. (4) Immobile talent. (5) An 'open-first, closed-later' model. These are not just issues for our competition regulators, but also for competition reformers. Just as antitrust laws needed to be updated to deal with the misbehaviour of the oil titans and rail barons of nineteenth century America, so too we may need to make changes in competition laws to address the challenges that AI poses.
    Keywords: competition, antitrust, artificial intelligence
    JEL: L40 L63
    Date: 2024–02
  7. By: Lorenz K.F. Ekerdt; Kai-Jie Wu
    Abstract: This paper studies firm diversification over 6-digit NAICS industries in U.S. manufacturing. We find that firms specializing in fewer industries now account for a substantially greater share of production than 40 years ago. This reallocation is a key driver of rising industry concentration. Specialized firms have displaced diversified firms among industry leaders—absent this reallocation concentration would have decreased. We then provide evidence that specialized firms produce higher-quality goods: specialized firms tend to charge higher unit prices and are more insulated against Chinese import competition. Based on our empirical findings, we propose a theory in which growth shifts demand toward specialized, high-quality firms, which eventually increases concentration. We conclude that one should expect rising industry concentration in a growing economy.
    JEL: L25 O33 F14 L11 O47
    Date: 2024–02
  8. By: Autor, David; Patterson, Christina; Van Reenen, John
    Abstract: National U.S. industrial concentration rose between 1992-2017. Simultaneously, the Herfindhahl Index of local (six-digit-NAICS by county) employment concentration fell. This divergence between national and local employment concentration is due to structural transformation. Both sales and employment concentration rose within industry-by-county cells. But activity shifted from concentrated Manufacturing towards relatively un-concentrated Services. A stronger between-sector shift in employment relative to sales explains the fall in local employment concentration. Had sectoral employment shares remained at their 1992 levels, average local employment concentration would have risen by 9% by 2017 rather than falling by 7%.
    Keywords: employment concentration; sales concentration; local labor markets; structural transformation; POID
    JEL: L11 L60 O31 O34 P33 R3
    Date: 2023–04–19
  9. By: Kenneth R. Ahern; Lei Kong; Xinyan Yan
    Abstract: Concentration is a single summary statistic driven by two opposing forces: the number of firms in a market and the evenness of their market shares. This paper introduces a generalized measure of concentration that allows researchers to vary the relative importance of each force. Using the generalized measure, we show that the widely-cited evidence of increasing industrial employment concentration is driven by the Herfindahl Index's over-weighting of evenness and under-weighting of firm counts. We propose an alternative, equally-weighted measure that has an equivalent economic meaning as the Herfindahl Index, but possesses superior statistical attributes in typical firm size distributions. Using this balanced measure, we find that employment concentration decreased from 1990 to 2020. Finally, decomposing aggregate diversity into meaningful geographic and industry subdivisions reveals that concentration within regional markets has fallen, while concentration between markets has risen.
    JEL: C46 D40 L11
    Date: 2024–01
  10. By: Jason D. Hartline; Sheng Long; Chenhao Zhang
    Abstract: Consider sellers in a competitive market that use algorithms to adapt their prices from data that they collect. In such a context it is plausible that algorithms could arrive at prices that are higher than the competitive prices and this may benefit sellers at the expense of consumers (i.e., the buyers in the market). This paper gives a definition of plausible algorithmic non-collusion for pricing algorithms. The definition allows a regulator to empirically audit algorithms by applying a statistical test to the data that they collect. Algorithms that are good, i.e., approximately optimize prices to market conditions, can be augmented to contain the data sufficient to pass the audit. Algorithms that have colluded on, e.g., supra-competitive prices cannot pass the audit. The definition allows sellers to possess useful side information that may be correlated with supply and demand and could affect the prices used by good algorithms. The paper provides an analysis of the statistical complexity of such an audit, i.e., how much data is sufficient for the test of non-collusion to be accurate.
    Date: 2024–01
  11. By: Diwas Paudel; Tapas K. Das
    Abstract: Fast-charging hubs for electric vehicles will soon become part of the newly built infrastructure for transportation electrification across the world. These hubs are expected to host many DC fast-charging stations and will admit EVs only for charging. Like the gasoline refueling stations, fast-charging hubs in a neighborhood will dynamically vary their prices to compete for the same pool of EV owners. These hubs will interact with the electric power network by making purchase commitments for a significant part of their power needs in the day-ahead (DA) electricity market and meeting the difference from the real-time (RT) market. Hubs may have supplemental battery storage systems (BSS), which they will use for arbitrage. In this paper, we develop a two-step data-driven dynamic pricing methodology for hubs in price competition. We first obtain the DA commitment by solving a stochastic DA commitment model. Thereafter we obtain the hub pricing strategies by modeling the game as a competitive Markov decision process (CMDP) and solving it using a multi-agent deep reinforcement learning (MADRL) approach. We develop a numerical case study for a pricing game between two charging hubs. We solve the case study with our methodology by using combinations of two different DRL algorithms, DQN and SAC, and two different neural networks (NN) architectures, a feed-forward (FF) neural network, and a multi-head attention (MHA) neural network. We construct a measure of collusion (index) using the hub profits. A value of zero for this index indicates no collusion (perfect competition) and a value of one indicates full collusion (monopolistic behavior). Our results show that the collusion index varies approximately between 0.14 and 0.45 depending on the combinations of the algorithms and the architectures chosen by the hubs.
    Date: 2024–01
  12. By: Keith Marzilli Ericson
    Abstract: Shareholders want a firm's objective function to place some weight on consumer welfare, motivated by both self-interested and altruistic motivations. Firms have a unique technology for improving consumer welfare: lowering inefficient price markups, which increases consumer welfare more than it lowers profits. Optimal pricing formulas can be adapted to account for shareholders' marginal rate of substitution between profits and consumer welfare. Calibrations from preference parameters show many shareholders should place non-trivial weights on consumer welfare. A survey experiment on a representative sample elicits how shareholders would vote on resolutions giving strategic guidance to firms on what objective to pursue. Only 7% would vote for pure profit maximization. The median individual is indifferent between $0.44 in profits or $1 in consumer surplus, with those owning stocks preferring a lower weight on consumer welfare than non-stockholders.
    JEL: D21 D91 G30 L21 M14
    Date: 2024–01
  13. By: Joseph E. Stiglitz; Andrew Kosenko
    Abstract: The paper surveys the recent work on economics of information with endogenous information structures where individuals can directly communicate information with each other. We consider the theoretical work on cheap talk, Bayesian persuasion, and information design, and review the implications of information control and information abundance for mis and disinformation. The relationship between information and market power is particularly important when social media can amplify and maintain harmful fictions that lead to polarization and undermine not only markets, but democratic discourse. We review both the “rational” decision-making paradigm, as well as departures from it, such as cases where decision makers can choose what to know, can allocate their attention in different ways or have behavioral biases that influence their information processing. We note some important connections to legal and media studies and highlight key messages in nontechnical language.
    JEL: D82 D86 D9
    Date: 2024–01
  14. By: Russell W. Cooper; John Haltiwanger; Jonathan L. Willis
    Abstract: This paper studies competing sources of declining dynamism. Evidence shows that an important component of this decline is accounted for by the reduction in the response of employment to shocks in US establishments. Using a plant-level dynamic optimization problem as a framework for analysis, four potential reasons for this decline are studied: (i) a change in exogenous processes for profits, (ii) an increase in impatience, (iii) increased market power, and (iv) increasing adjustment costs. We identify and quantity the contribution of each of these factors building on a simulated method of moments estimation of our structural model. Our results indicate that the reduction in responsiveness largely reflects increased costs of employment adjustment. Changes in market power, as captured by changes in the curvature of the revenue function, play a minimal role. But, in the presence of rising adjustment costs, measured sales-weighted markups using the recently popular indirect production approach rise substantially, along with rising dispersion and skewness of such measured markups.
    Keywords: declining dynamism; adjustment costs; employment
    JEL: E24 E32 J23
    Date: 2024–02–14
  15. By: Kho, Stephen
    Abstract: I study the transmission of monetary policy to deposit rates in the euro area with a focus on asymmetries and the role of banking sector concentration. Using a local projections framework with 2003-2023 country-level and bank-level data for thirteen euro area member states, I find that deposit rates respond symmetrically to an unexpected tightening or easing of monetary policy. However, more concentrated domestic banking sectors do pass-on unexpected monetary tightening (easing) more slowly (quickly) than less concentrated banking sectors, which contributes to a temporary divergence of deposit rates across the euro area. These results suggest that heterogeneity in the degree of banking sector concentration matters for the transmission of monetary policy to deposit rates, which in turn may affect banking sector profitability. JEL Classification: D40, E43, E52, G21
    Keywords: banking sector, deposit rates, market power, monetary policy
    Date: 2024–01
  16. By: Nadezhda Ivanova (Bank of Russia, Russian Federation); Svetlana Popova (Bank of Russia, Russian Federation); Konstantin Styrin (Bank of Russia, Russian Federation)
    Abstract: This paper asks the following questions. How does market structure reshape the transmission of monetary policy to bank lending? How are loan characteristics such as loan volume, maturity, lending rate, risk, and the extensive margin of lending affected? Is there a trade-off between financial stability and the strength of monetary transmission? We find that, on more concentrated markets, the effect of monetary policy on lending rate and risk taking is amplified whereas the effect on loan volume is muted. Our current findings may imply the existence of a trade-off between the strength of monetary policy transmission and financial stability, but are subject to further investigation.
    Keywords: Monetary policy transmission; Market concentration.
    JEL: E44 E52 G21 C14
    Date: 2024–01
  17. By: WATANABE Ichiro; SHIMIZU Hiroshi
    Abstract: This study conducts a quantitative analysis of the relationship between mainstream formation and competition in technological fields. The process of determining the dominant design is crucial in analyzing mainstream formation within specific technological fields, and numerous studies have explored this process. The quantitative analysis conducted in this study indicates that, during the process in which the dominant design is determined, the dominant category, a broader framework than the dominant design, is also established. In this study, we use topic modeling analysis to examine the relationship between the convergence of research and development (R&D) trends among organizations and the number of organizations publishing patents in the computer graphics processing systems industry. Specifically, the number of organizations publishing patents in the industry increased when the degree of convergence among the R&D trends of each organization was relatively low, whereas it decreased when the degree of convergence among R&D trends of each organization was relatively high. Further, the change in the degree of convergence occurred before the change in the number of organizations. These observations suggest that the formation of a mainstream within the industry, which is associated with the convergence of R&D tendencies of specific organizations, affects the competitive environment within the industry.
    Date: 2024–02
  18. By: Babina, Tania (Columbia University); Bahaj, Saleem (Bank of England); Buchak, Greg (Stanford University); De Marco, Filippo (Bocconi University); Foulis, Angus (Bank of England); Gornall, Will (University of British Columbia); Mazzola, Francesco (ESCP Business School); Yu, Tong (Imperial College London and Financial Conduct Authority)
    Abstract: Open banking (OB) empowers bank customers to share transaction data with fintechs and other banks. 49 countries have adopted OB policies. Consumer trust in fintechs predicts OB policy adoption and adoption spurs investment in fintechs. UK microdata shows that OB enables: i) consumers to access both financial advice and credit; and ii) small and medium‑sized enterprises to establish new fintech lending relationships. In a calibrated model, OB universally improves welfare through entry and product improvements when used for advice. When used for credit, OB promotes entry and competition by reducing adverse selection, but higher prices for costlier or privacy-conscious consumers partially offset these benefits
    Keywords: Open banking; entrepreneurship; fintech; financial innovation; data access; data rights; data portability; Big Data; financial regulation; financial sector; banks
    JEL: G21 G28
    Date: 2024–02–08
  19. By: Lu Fang; Yanyou Chen; Chiara Farronato; Zhe Yuan; Yitong Wang
    Abstract: Despite substantial efforts to help consumers search in more intuitive ways, text search remains the predominant tool for product discovery online. In this paper, we explore the effects of visual and textual cues for search refinement on consumer search and purchasing behavior. We collaborate with one of the largest e-commerce platforms in China and study its roll out of a new search tool. When a customer searches for a general term (e.g., “headphones”), the tool suggests refined queries (e.g., “bluetooth headphones” or “noise-canceling headphones”) with the help of images and texts. The search tool was rolled out with a long-run experiment, which allows us to measure its short-run and long-run effects. We find that, although there was no immediate effect on orders or total expenditures, the search tool changed customers’ search and purchasing behavior in the long-run. Customers with access to the new tool eventually increased orders and expenditures compared to those in the control group, especially for non top-selling products. The purchase increase comes from more effective searches, rather than an increase in activity on the platform. We also find that the effect is not only driven by the direct value of suggested searches, but also by customers indirectly learning to perform more effective searches on their own.
    JEL: D81 D83 L2 L81 L86
    Date: 2024–02

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