nep-com New Economics Papers
on Industrial Competition
Issue of 2024‒04‒01
23 papers chosen by
Russell Pittman, United States Department of Justice

  1. Competition and the Industrial Challenge for the Digital Age By Jean Tirole
  2. Monopolistic Competition and Quality Innovation with Variable Demand Elasticity By Gilad Sorek
  3. Cross-ownership in duopoly: Are there any incentives to divest? By Rupayan Pal; Emmanuel Petrakis
  4. Economic Principles for the Enforcement of Abuse of Dominance Provisions By Chiara Fumagalli; Massimo Motta
  5. Small Price Changes, Sales Volume, and Menu Cost By Doron Sayag; Avichai Snir; Daniel Levy
  6. The impact of price comparison tools on electricity retailer choices By Peter Gibbard; Kevin Remmy
  7. Innovation: The Bright Side of Common Ownership? By Miguel Antón; Florian Ederer; Mireia Giné; Martin C. Schmalz
  8. Inequality and Market Concentration: New Evidence from Australia By Lachlan Hotchin; Andrew Leigh
  9. Taxation when Markets are not Competitive: Evidence from a Loan Tax By Brugués, Felipe; De Simone, Rebeca
  10. Cross-Market Mergers with Common Customers: When (and Why) Do They Increase Negotiated Prices? By Enrique Ide
  11. Privacy regulation, cognitive ability, and stability of collusion By Rupayan Pal; Sumit Shrivastav
  12. Companhias a\'ereas s\~ao todas iguais? A converg\^encia dos modelos de neg\'ocios no transporte a\'ereo By Renan P. de Oliveira; Alessandro V. M. Oliveira
  13. Multi-unit auctions with uncertain supply and single-unit demand By Edward Anderson; Pär Holmberg
  14. Global Labor Market Power By Amodio, Francesco; Brancati, Emanuele; Brummund, Peter; de Roux, Nicolás; Di Maio, Michele
  15. Regret in Durable-Good Monopoly By Rumen Kostadinov
  16. Evolution of Markups in the Manufacturing Industry of Turkiye By Eren Gürer; Pınar Derin Güre
  17. Business model digitalization, competition, and tax savings By Casi, Elisa; Lisowsky, Petro; Stage, Barbara M. B.; Todtenhaupt, Maximilian
  18. Bargaining with Binary Private Information By Francesc Dilmé
  19. Firms and Unions By Sezer, Ayse Hazal; Uras, Burak
  20. Supply contracting under dynamic asymmetric cost information By Luca Di Corato; Michele Moretto
  21. Price and quantity discovery without commitment By Stefan Bergheimer; Estelle Cantillon; Mar Reguant
  22. Bandit Profit-maximization for Targeted Marketing By Joon Suk Huh; Ellen Vitercik; Kirthevasan Kandasamy
  23. Is There Information in Corporate Acquisition Plans? By Sinan Gokkaya; Xi Liu; René M. Stulz

  1. By: Jean Tirole (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: Tech giants' dominance does not confront us with an unpalatable choice between laissez-faire and populist interventions. This article takes stock of available knowledge, considers desirable adaptations of regulation in the digital age, and draws some conclusions for policy reform.
    Keywords: Regulation, Antitrust, Fairness, Industrial policy, Contestability, Mergers
    Date: 2023–09
  2. By: Gilad Sorek
    Abstract: I study product-quality innovation under monopolistic competition with variable demand elasticity preferences and variable marginal cost. I characterize the free-entry equilibrium and the market size effect on product quality and markups. I then compare these results with the ones obtained in related studies of markets with process innovation and show that the market size effect on equilibrium markups depends on innovation type. Lastly, I show that the normative properties of the market equilibrium depend solely on the preferences characteristics, as in the canonical monopolistic competition framework with no innovation.
    Keywords: Quality Innovation; Variable Demand Elasticity; Monopolistic Competition
    JEL: L1 O30
    Date: 2024–03
  3. By: Rupayan Pal (Indira Gandhi Institute of Development Research); Emmanuel Petrakis (Departamento de Econom¡a, Universidad Carlos III de Madrid)
    Abstract: This paper shows that in a duopoly a firm has no incentives to divest its passive shares in its rival when firms' strategies are strategic complements. This holds independently whether goods are substitutes or complements and whether firms engage in simultaneous or sequential move product market competition. However, if firms' strategies are strategic substitutes and are engaged in simultaneous move competition, it is optimal for both firms to fully divest their shares in their rivals under a private placement mechanism via independent intermediaries or under competitive bidding. Yet, in the sequential move game only the follower has such incentives. Notably, under a private placement mechanism via a common intermediary, there are circumstances under which there are partial or no firms' divestment incentives, highlighting that the divestment mechanism employed by firms may have a crucial role on their divestment incentives.
    Keywords: Cross-ownership, passive shares, strategic substitutes and complements, divestment incentives, market competition
    JEL: L13 L41 L2 D43
    Date: 2024–02
  4. By: Chiara Fumagalli; Massimo Motta
    Abstract: The European Commission (EC) has recently announced its intention to issue Guidelines on exclusionary abuses. In this paper, we explain how economics can and should be used to inform a sound and effects-based approach in the enforcement of Article 102 TFEU. In particular, the EC should be guided only by a consumer welfare standard; exclusive dealing and exclusivity rebates should be subject to a (rebuttable) presumption of harm; price-cost tests are meaningful only for predation and other practices which do not reference rivals; essentiality of the input should not be a requirement for vertical foreclosure cases of any type, but such cases should be limited only to dominant firms that satisfy certain criteria.
    JEL: K21 L12 L13 L41
    Date: 2024–02
  5. By: Doron Sayag (Department of Economics, Bar-Ilan University, Israel); Avichai Snir (Department of Economics, Bar-Ilan University, Israel); Daniel Levy (Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; ICEA; ISET, TSU; Rimini Centre for Economic Analysis)
    Abstract: The finding of small price changes in many retail price datasets is often viewed as a puzzle. We show that a possible explanation for the presence of small price changes is related to sales volume, an observation that has been overlooked in the existing literature. Analyzing a large retail scanner price dataset that contains information on both prices and sales volume, we find that small price changes are more frequent when products’ sales volume is high. This finding holds across product categories, within product categories, and for individual products. It is also robust to various sensitivity analyses such as measurement errors, the definition of “small” price changes, the inclusion of measures of price synchronization, the size of producers, the time horizon used to compute the average sales volume, the revenues, the competition, shoppers’ characteristics, etc.
    Keywords: Menu cost, (S, s) band, price rigidity, sticky prices, small price changes, small price adjustments, sales volume
    JEL: E31 E32 L16 L81 M31
    Date: 2024–03
  6. By: Peter Gibbard; Kevin Remmy
    Abstract: We estimate a structural model of electricity retailer choices accommodating various sources of consumer inertia, including inattention, limited information, switching costs, and product differentiation. The model disentangles the relative importance of different frictions. We estimate our model using individual-level data of all retailer switches and queries on a price comparison website in New Zealand. We find that price comparison tools strongly impact market structure and consumer surplus. However, mandating all consumers search for alternatives has stronger effects on market structure and consumer surplus gains. Our results help policymakers design policies that improve consumer choices and effective competition in retail markets.
    Keywords: consumer inertia, consumer search, retail electricity markets, structural demand estimation
    JEL: D12 D83 L13 L94
    Date: 2024–03
  7. By: Miguel Antón; Florian Ederer; Mireia Giné; Martin C. Schmalz
    Abstract: Firms have inefficiently low incentives to innovate when other firms benefit from their inventions and the innovating firm therefore does not capture the full surplus of its innovations. We show that common ownership of firms mitigates this impediment to corporate innovation. By contrast, without technological spillovers, innovation has the effect of stealing market share from rivals; in that case, more common ownership reduces innovation. Empirically, the association between common ownership and innovation inputs and outputs decreases with product market proximity and increases with technology proximity. The sign and magnitude of the overall relationship between common ownership and corporate innovation thus varies considerably across the universe of firms depending on their relative proximity in technology and product market space. These results persist if we use only variation from BlackRock's acquisition of BGI. Our results inform the debate about the welfare effects of increasing common ownership among U.S. corporations.
    JEL: G30 L20 L40 O31
    Date: 2024–03
  8. By: Lachlan Hotchin; Andrew Leigh
    Abstract: Are excessively concentrated markets inequitable as well as inefficient? We explore this issue by analyzing the degree of market concentration in the industries where Australia’s wealthiest made their fortunes. Compared with the economy at large, we find that top wealth holders have tended to make their fortunes in industries with a higher-than-average degree of market concentration. Top wealth shares have grown substantially, and from 1990 to 2020, there appears to have been an increase in the propensity of top wealth holders to make their fortunes in highly concentrated industries.
    Keywords: income distribution, competition, market power
    JEL: D31 L12 L41
    Date: 2024
  9. By: Brugués, Felipe; De Simone, Rebeca
    Abstract: We study the interaction of market structure and tax-and-subsidy strategies utilizing pass-through estimates from the unexpected introduction of a loan tax in Ecuador, a quantitative model, and a comprehensive commercial-loan dataset. Our model generalizes bank competition theories, including Bertrand-Nash competition, credit rationing, and joint-maximization. While we find the loan tax is distortionary, neglecting the possibility of non-competitive lending inflates estimated tax deadweight loss by 80% because non-competitive banks internalize some of the burden. Conversely, subsidies are less effective in non-competitive settings. If competition were stronger, tax revenue would be 10% lower. The findings suggest that policymakers should consider market structure in tax-and-subsidy strategies.
    Keywords: Banks;Government regulation of banks;Taxation and subsidies;market structure;firm strategy;market performance
    JEL: G21 G28
    Date: 2024–02
  10. By: Enrique Ide
    Abstract: I examine the implications of cross-market mergers of suppliers to intermediaries that bundle products for consumers. These mergers are controversial. Some argue that suppliers' products will be substitutes for intermediaries, despite not being substitutes for consumers. Others contend that because bundling makes products complements for consumers, products must be complements for intermediaries. I contribute to this debate by showing that two products can be complements for consumers but substitutes for intermediaries when the products serve a similar role in attracting consumers to purchase the bundle. This result leads to new recommendations and helps explain why cross-market hospital mergers raise prices.
    Date: 2024–02
  11. By: Rupayan Pal (Indira Gandhi Institute of Development Research); Sumit Shrivastav (Indian Institute of Science Education and Research Bhopal)
    Abstract: This article analyzes implications of privacy regulation on stability of tacit collusion. It shows that privacy regulation is likely to hurt consumers' economic benefits, through its competition dampening effect. A more effective broad scope privacy regulation makes collusion more likely to be stable, regardless of the level of consumers' cognitive ability. Whereas, if the scope of privacy regulation is narrow, (a) its effectiveness positively (does not) affect collusion stability under limited (unlimited) cognitive ability of consumers and (b) the likelihood of collusion stability is decreasing in the level of consumers' cognitive ability. Our insights are relevant for designing privacy regulation.
    Keywords: Privacy regulation, Limited cognitive ability, Behavior-based price discrimination, Stability of collusion, Level-k Thinkin
    JEL: D43 L13 L88 L86
    Date: 2024–03
  12. By: Renan P. de Oliveira; Alessandro V. M. Oliveira
    Abstract: This study discusses the literature on the convergence of business models of airlines in Brazilian air transport, focusing on the formation of flight networks. Initially, it analyzes the determinants of the network formation patterns of the "fundamental" business models (archetypes) of airlines in the first years after the sector's deregulation. Then, it discusses how the business models of Brazilian companies resemble these patterns. The literature highlights convergences between the network formation strategies of full-service companies in relation to older low-cost companies, in addition to business model redirections after mergers and acquisitions.
    Date: 2024–02
  13. By: Edward Anderson; Pär Holmberg
    Keywords: Multi-unit auction, single-unit demand, uniform pricing, pay-as-bid, asymmetric information, publicity effect
    JEL: C72 D44 D82
    Date: 2023–05
  14. By: Amodio, Francesco (McGill University); Brancati, Emanuele (Sapienza University); Brummund, Peter (University of Alabama); de Roux, Nicolás (Universidad de los Andes); Di Maio, Michele (Sapienza University)
    Abstract: We estimate the labor market power of over 13, 000 manufacturing establishments across 82 low and middle-income countries around the world. Within local labor markets, larger and more productive firms have higher wage markdowns and pay lower wages. Labor market power across countries exhibits a mild non-linear relationship with GDP per capita, entirely driven by a strong hump-shaped relationship with the share of self-employed workers. Labor market institutions fully account for the hump shape: in countries with unemployment protection, wage markdowns increase with the share of self-employment while the opposite is true in countries without it. We explain this finding through the lens of a simple oligopsonistic labor market model with frictions. Self-employment prevalence correlates with the elasticity of labor supply to the wage paid, and labor market institutions can change the sign of this relationship.
    Keywords: labor market power; self-employment; development; labor market institutions.
    JEL: J20 J30 J42 L11
    Date: 2024–03–11
  15. By: Rumen Kostadinov
    Abstract: I study a dynamic model of durable-good monopoly where the seller cannot commit to future prices and is uncertain about the buyer’s value. I adopt a prior-free approach where the seller minimises lifetime regret against the worstcase type of the buyer. In the unique equilibrium the seller’s worst-case regret against types who purchase at any given time equals the worst-case regret against types who purchase at any other time. The seller cannot profitably deviate even if he could commit to his deviation. Despite this, the equilibrium does not match the commitment outcome. This is because the seller’s objective is endogenously determined by his optimal counterfactual behaviour against each type, which is time-inconsistent. The Coase conjecture holds: in the frequent-offer limit the good is sold immediately at a price equal to the lowest value.
    Keywords: durable-good monopoly; Coase conjecture; regret
    JEL: C73 D81
    Date: 2024–03
  16. By: Eren Gürer (Department of Economics, Middle East Technical University, Ankara, Turkey); Pınar Derin Güre (Department of Economics, Middle East Technical University, Ankara, Turkey)
    Abstract: In this study, we aim to estimate the labor markups along with the evolution of labor and profit shares in the manufacturing industry of Turkiye over 2007-2021 via an administrative firm-level dataset, Entrepreneurship Information System (EIS), covering the universe of firms and containing detailed balance sheet information. We employ the recently popularized technique, the production function approach developed by De Loecker and Warzynski (2012), to estimate markups. Until 2016, there is a general decline in the level of markups. Concurrently, the gross profit rate slightly increases, and labor share in value added remains relatively stable. However, since 2016, which corresponds to the era of high inflation, there has been a notable surge in gross profit rates alongside a significant decrease in the labor share. The primary catalyst for these post-2016 shifts is attributed to firms positioned in the upper percentiles of the markup distribution, which successfully increased their markups and their share in total value-added during this period. As such, it may be fruitful for the competition policy to delve deeper into the root causes of the post-2016 surge in the markups of the high markup firms as well as the changing market composition.
    Keywords: markup, market power. profits
    JEL: D22 D43
    Date: 2024–03
  17. By: Casi, Elisa (Dept. of Business and Management Science, Norwegian School of Economics); Lisowsky, Petro (Questrom School of Business, Boston University); Stage, Barbara M. B. (WHU - Otto Beisheim School of Management); Todtenhaupt, Maximilian (Institute of Public Finance, Leibniz University Hannover)
    Abstract: We examine the effect of business model digitalization on competition and how corporate tax savings through digitalization may augment this relationship. Global policymakers express concern that digitalization-related tax savings unfairly benefit the competitive standing of rival firms over their competitors. Using textual analysis techniques to identify firms’ business models, we show that rivals’ adoption of a digital business model leads to negative economic effects on the performance of their non-digitalizing competitors. We estimate that a one standard deviation increase in the share of digitalized rivals in a market reduces a competitor’s market share by 4.6%. Suggesting significant tax savings from digitalizing, we also find that digitalizing rivals substantially reduce their effective tax rates, mostly by increased use of tax havens. However, when we test whether the detected competitive externalities vary depending on the share of digitalizing rivals with versus without substantial digitalization-related tax savings, we find the economic magnitudes of their effects are quantitatively similar. Therefore, contrary to policymakers’ concerns of digitalization-related tax savings unfairly shaping competition, our findings suggest that tax savings from digitalization is not a key driver of altering competition between digitalized and non-digitalized firms.
    Keywords: Digital; Tax; Product Market; Competition; Business Model
    JEL: D40 H25 H26 L22 O33
    Date: 2024–03–13
  18. By: Francesc Dilmé
    Abstract: This paper studies bargaining between a seller and a buyer with binary private valuation. Because the setting is more tractable than the case of general valuation distributions (studied in Gul et al., 1986), we are able to explicitly construct the full set of equilibria via induction. This lets us provide a simple proof of the Coase conjecture and obtain new results: The seller extracts all surplus as she becomes more patient, and the equilibrium outcome converges to the perfect-information outcome as private information vanishes. We also fully characterize the case where there is a deadline: We establish that if the probability that the buyer’s valuation is high is large enough, then the seller charges a high price at all times, there are trade bursts at the outset and the deadline, and trade occurs at a constant rate in between.
    Keywords: Bargaining, private information, one-sided offers.
    JEL: C78 D82
    Date: 2024–03
  19. By: Sezer, Ayse Hazal (Tilburg University, Center For Economic Research); Uras, Burak (Tilburg University, Center For Economic Research)
    Keywords: Firm Size; Productivity; Wages; Scalability; Industry Dynamics; Automation; Unions
    Date: 2024
  20. By: Luca Di Corato (Department of Economics, Ca Foscari University of Venice); Michele Moretto (Department of Economics and Management, University of Padova, Fondazione Eni Enrico Mattei and Centro Studi Levi-Case)
    Abstract: We consider a long-term contractual relationship in which a buyer procures a fixed quantity of a product from a supplier and then sells it on the market. The production cost is private information and evolves randomly over time. The solution to this dynamic principal-agent problem involves a periodic two-part payment. The fixed part of the payment depends on the initial supplier’s cost type while the other is contingent on the current cost type. A notable feature is that, by using the information about the initial cost type, the buyer can reduce the burden of information rents paid for the revelation of the future cost type. We show that the distortion, resulting from information asymmetry, remains constant over time and decreases with the initial type. Lastly, we show that our analysis immediately applies also when input prices are private information and evolve randomly over time.
    Keywords: Dynamic Principal-Agent model, Supply contracting, Continuous time, Two-part payment
    JEL: C61 D82 D86
    Date: 2024–02
  21. By: Stefan Bergheimer; Estelle Cantillon; Mar Reguant
    Abstract: Wholesale electricity markets solve a complex allocation problem: electricity is not storable, demand is uncertain, and production involves dynamic cost considerations and indivisibilities. The New Zealand wholesale electricity market attempts to solve this complex allocation problem by using an indicative price and quantity discovery mechanism that ends at dispatch. Can such a market mechanism without commitment provide useful information? We document that indicative prices and quantities are increasingly informative of the final prices and quantities and that bid revisions are consistent with information-based updating. We argue that the reason why the predispatch market is informative despite the lack of commitment is that it generates private benefits in terms of improved intertemporal optimization of production plans.
    Keywords: Electricity markets, Price discovery, Pre-play communication, Non-trading mechanisms, Coordination, Intertemporal optimization
    Date: 2023–02–01
  22. By: Joon Suk Huh; Ellen Vitercik; Kirthevasan Kandasamy
    Abstract: We study a sequential profit-maximization problem, optimizing for both price and ancillary variables like marketing expenditures. Specifically, we aim to maximize profit over an arbitrary sequence of multiple demand curves, each dependent on a distinct ancillary variable, but sharing the same price. A prototypical example is targeted marketing, where a firm (seller) wishes to sell a product over multiple markets. The firm may invest different marketing expenditures for different markets to optimize customer acquisition, but must maintain the same price across all markets. Moreover, markets may have heterogeneous demand curves, each responding to prices and marketing expenditures differently. The firm's objective is to maximize its gross profit, the total revenue minus marketing costs. Our results are near-optimal algorithms for this class of problems in an adversarial bandit setting, where demand curves are arbitrary non-adaptive sequences, and the firm observes only noisy evaluations of chosen points on the demand curves. We prove a regret upper bound of $\widetilde{\mathcal{O}}\big(nT^{3/4}\big)$ and a lower bound of $\Omega\big((nT)^{3/4}\big)$ for monotonic demand curves, and a regret bound of $\widetilde{\Theta}\big(nT^{2/3}\big)$ for demands curves that are monotonic in price and concave in the ancillary variables.
    Date: 2024–03
  23. By: Sinan Gokkaya; Xi Liu; René M. Stulz
    Abstract: For many firms, the acquisition process begins with the development of an acquisition plan that is communicated to investors. We construct a comprehensive sample of acquisition plans to provide novel perspectives on the acquisition process and find that acquisition plans are informative to investors and incrementally predict subsequent acquisition activity. These results are more pronounced for firms announcing their commitment to acquisitions from an internal pipeline. Acquisition plans improve acquisition performance due to learning from market feedback and alleviate acquisition-related market uncertainty. Communication of acquisition plans does not increase takeover premiums but is less common in more competitive industries.
    JEL: G14 G24 G30 G34
    Date: 2024–03

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