nep-com New Economics Papers
on Industrial Competition
Issue of 2024‒04‒15
eighteen papers chosen by
Russell Pittman, United States Department of Justice

  1. Employer Market Power in Silicon Valley By Matthew Gibson
  2. Product Design in a Cournot Duopoly By Daniel;
  3. Inequality and Market Power in Latin America and the Caribbean By Eslava, Marcela; García-Marín, Alvaro; Messina, Julián
  4. Are Supply Networks Efficiently Resilient? By Agostino Capponi; Chuan Du; Joseph E. Stiglitz
  5. Algorithmic Collusion and Price Discrimination: The Over-Usage of Data By Zhang Xu; Mingsheng Zhang; Wei Zhao
  6. The Cooperation Paradox By Eric K Clemons; Maximilian Schreieck; Sebastian Hermes; Frantz Rowe; Helmut Krcmar
  7. Equitable Pricing in Auctions By Simon Finster; Patrick Loiseau; Simon Mauras; Mathieu Molina; Bary Pradelski
  8. Profit Margins and Cost Pass-Through in Türkiye By H. Burcu Gurcihan Yunculer; Cagri Sarikaya
  9. Corporate criminals in a market context: enforcement and optimal sanctions By Emmanuelle Auriol; Erling Hjelmeng; Tina Søreide
  10. Market Exit and Minimax Regret By Gisèle Umbhauer
  11. The Effect of Price Caps on Pharmaceutical Advertising: Evidence from the 340b Drug Pricing Program By Sylvia Hristakeva; Julie Holland Mortimer; Eric Yde
  12. Contagious stablecoins? By van Buggenum, Hugo; Gersbach, Hans; Zelzner, Sebastian
  13. Public procurement can hinder innovation By Krieger, Bastian; Pruefer, Malte; Strecke, Linus
  14. Spikes in Power Prices: Unravelling Grid Congestion By Majah-Leah Ravago; Michael R. M. Abrigo; Patrizia Benedicto; Nastasha Brigitte Kuan; J. Kathleen Magadia; Charlotte Marjorie Relos; James Roumasset
  15. Banks in Space By Ezra Oberfield; Esteban Rossi-Hansberg; Nicholas Trachter; Derek T. Wenning
  16. The 'Must Stock' Challenge in Academic Publishing: Pricing Implications of Transformative Agreements By W. Benedikt Schmal
  18. The impact of bank market competition and stability on bank total factor productivity changes: evidence from a panel of European Union banks By Cândida Ferreira

  1. By: Matthew Gibson (Williams College and IZA)
    Abstract: Adam Smith alleged that employers often secretly combine to reduce labor earnings. This paper examines an important case of such behavior: illegal no-poaching agreements through which information-technology companies agreed not to compete for each other’s workers. Exploiting the plausibly exogenous timing of a U.S. Department of Justice investigation, I estimate the effects of these agreements using a difference-in-difference design. Data from Glassdoor permit the inclusion of rich employer- and job-level controls. On average the no-poaching agreements reduced salaries at colluding firms by 5.6 percent, consistent with considerable employer market power. Stock bonuses and job satisfaction were also negatively affected.
    Keywords: No-poach agreement, employer market power, Silicon Valley, tech companies, Glassdoor, compensation
    JEL: J42 K42 L41 K21
    Date: 2024–03
  2. By: Daniel (University of Pavia);
    Abstract: Product design is studied in a simple duopoly where firms compete à la Cournot, goods are hedonically differentiated and consumers have preferences defined over characteristics. What we find is that, in equilibrium, firms choose the same product’s design. This results in horizontal product differentiation being minimal.
    Keywords: Hedonic Product Differentiation, Horizontal Differentiation, Product Design, Cournot Competition
    JEL: D43 L13 L20
    Date: 2024–03
  3. 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 LACs 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: 2023–10
  4. By: Agostino Capponi; Chuan Du; Joseph E. Stiglitz
    Abstract: We show that supply networks are inefficiently, and insufficiently, resilient. Upstream firms can expand their production capacity to hedge against supply and demand shocks. But the social benefits of such investments are not internalized due to market power and market incompleteness. Upstream firms under-invest in capacity and resilience, passing-on the costs to down-stream firms, and drive trade excessively towards the spot markets. There is a wedge between the market solution and a constrained optimal benchmark, which persists even without rare and large shocks. Policies designed to incentivize capacity investment, reduce reliance on spot markets, and enhance competition ameliorate the externality.
    JEL: D21 D24 D25 D43 D85 E23 L13
    Date: 2024–03
  5. By: Zhang Xu; Mingsheng Zhang; Wei Zhao
    Abstract: As firms' pricing strategies increasingly rely on algorithms, two concerns have received much attention: algorithmic tacit collusion and price discrimination. This paper investigates the interaction between these two issues through simulations. In each period, a new buyer arrives with independently and identically distributed willingness to pay (WTP), and each firm, observing private signals about WTP, adopts Q-learning algorithms to set prices. We document two novel mechanisms that lead to collusive outcomes. Under asymmetric information, the algorithm with information advantage adopts a Bait-and-Restrained-Exploit strategy, surrendering profits on some signals by setting higher prices, while exploiting limited profits on the remaining signals by setting much lower prices. Under a symmetric information structure, competition on some signals facilitates convergence to supra-competitive prices on the remaining signals. Algorithms tend to collude more on signals with higher expected WTP. Both uncertainty and the lack of correlated signals exacerbate the degree of collusion, thereby reducing both consumer surplus and social welfare. A key implication is that the over-usage of data, both payoff-relevant and non-relevant, by AIs in competitive contexts will reduce the degree of collusion and consequently lead to a decline in industry profits.
    Date: 2024–03
  6. By: Eric K Clemons (University of Pennsylvania); Maximilian Schreieck (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université, TUM - Technische Universität Munchen - Technical University Munich - Université Technique de Munich); Sebastian Hermes (TUM - Technische Universität Munchen - Technical University Munich - Université Technique de Munich); Frantz Rowe (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Nantes Univ - IAE Nantes - Nantes Université - Institut d'Administration des Entreprises - Nantes - Nantes Université - pôle Sociétés - Nantes Univ - Nantes Université, SKEMA Business School); Helmut Krcmar (TUM - Technische Universität Munchen - Technical University Munich - Université Technique de Munich)
    Abstract: Dominant American online platforms like Amazon Alexa or Google Assistant have become Life Control Interfaces (LCIs), which facilitate consumers' online interactions and influence what consumers do and do not see and buy. These platforms operate outside of EU regulation, and create significant costs for traditional European firms in a wide range of industries. These platforms can reduce firms' access to customers, can charge for enabling access to customers, or can charge for access to essential data on firms' customers. Since these platforms enjoy monopoly power there is little restraint on their charges, which indirectly increase consumers' prices. We propose that regulators encourage the formation of a consortium to offer a single integrated EU-based Life Control Interface (EuLCI). This consortium would increase the number of EuLCIs from zero to one, and thus would actually increase consumer choice. We call cooperation that enhances rather than limits choice The Cooperation Paradox.
    Keywords: Life control interfaces, Online competition, Online cooperation and consortia, Online gateways, Online monopoly regulation, Online platform regulation JEL classification D40
    Date: 2022–03–15
  7. By: Simon Finster; Patrick Loiseau; Simon Mauras; Mathieu Molina; Bary Pradelski
    Abstract: We study how pricing affects the division of surplus among buyers in auctions for multiple units. Our equity objective may be important, e.g., for competition concerns in downstream markets, complementing the long-standing debate on revenue and efficiency. We study a canonical model of auctions for multiple indivisible units with unit demand buyers and valuations with a private and a common component and consider all pricing rules that are a mixture (i.e., a convex combination) of pay-as-bid and uniform pricing. We propose the winners' empirical variance (WEV), the expected empirical variance of surplus among the winners, as a metric for surplus equity. We show that, for a range of private-common value proportions, a strictly interior mix of pay-as-bid and uniform pricing minimizes WEV. From an equity perspective, auctions with a higher private value component benefit from more price discrimination, whereas only auctions with a sufficiently high common value justify a more uniform pricing rule. We provide a criterion under which strictly mixed pricing dominates uniform pricing, a partial ranking of different mixed pricing formats, and bounds on the WEV-minimizing pricing under the assumption of log-concave signal distributions. In numerical experiments, we further illustrate the WEV-minimal pricing as a function of the private-common-value mix.
    Date: 2024–03
  8. By: H. Burcu Gurcihan Yunculer; Cagri Sarikaya
    Abstract: This paper investigates the link between profit margins and cost pass-through to producer prices for the manufacturing sector in Türkiye. Using sector-level panel data, we show that pass-through is lower in industries with higher profit margins in line with the theory that predicts that stronger competition leads to greater pass-through. The impact of cost shocks is found to be more muted for export-oriented industries. In contrast, it is stronger for industries with higher import intensity and foreign currency leverage. We also test the significance of market concentration measures in explaining cost pass-through as alternative indicators of market power. While the dispersion of profit rates is found to be an important source of the differentiation in cost pass-through across sectors, market concentration measures do not have significant impact.
    Keywords: Producer prices, Cost pass-through, Profit margins, Market power, Market concentration
    JEL: C23 D40 E31
    Date: 2024
  9. By: Emmanuelle Auriol (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); Erling Hjelmeng (UiO - University of Oslo, Norwegian School of Economics and Business Administration - Norwegian School of Economics and Business Administration); Tina Søreide (Norwegian School of Economics and Business Administration - Norwegian School of Economics and Business Administration)
    Abstract: By combining approaches from the economic theory of crime and of industrial organization, this paper analyzes optimal enforcement for three different forms of corporate misconduct that harm competition. The analysis shows why corporate crime is more harmful in large markets, why governments have a disinclination to sanction firms whose crime materializes abroad, and why leniency for those who self-report their crime is a complement, and not a substitute, to independent investigation and enforcement. As public authorities rely increasingly on self-reporting by companies to detect cartels, the number of leniency applications is likely to decline, and this is borne out by data. Upon a review of 50 cases of corporate liability from five European countries, competition law enforcement, governed by a unified legal regime, is more efficient than enforcement in bribery and money laundering cases, governed by disparate criminal law regimes. Sanction predictability and transparency are higher when governments cooperate closely with each other in law enforcement, when there are elements of supra-national authority, and when the offense is regulated by a separate legal instrument. Given our results, Europe would benefit from stronger supra-national cooperation in regulation and enforcement of transnational corporate crime, especially for the sake of deterrent penalties against crime committed abroad.
    Keywords: Corporate liability, Corruption, Collusion, Antitrust, Money Laundering, Deterrence, Sanctions, Litigation
    Date: 2023
  10. By: Gisèle Umbhauer (BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This paper shows how minimax regret sheds new light on an old economic topic, market-exit games. It focuses on wars of attrition, namely overcrowded duopoly markets where the strategic variable is the exit time. The only symmetric Nash equilibrium (NE) of the game studied is a mixed-strategy equilibrium that leads to a null expected payoff, i.e., the payoff a firm gets when it immediately exits the market. This result is not convincing, both from a behavioral and from a strategic viewpoint. The minimax regret approach that builds upon opposite regrets — exiting the market too late and exiting the market too early — is more convincing and ensures that both firms obtain a strictly positive expected payoff.
    Keywords: War of attrition, Minimax regret, Mixed-strategy Nash equilibrium, Maximin payoff, Overcrowded market
    Date: 2022–12–11
  11. By: Sylvia Hristakeva; Julie Holland Mortimer; Eric Yde
    Abstract: We study the effect of price caps on the provision of costly effort by pharmaceutical firms using variation in drug discounts generated by a price regulation program that allows eligible hospitals to purchase outpatient drugs at steep discounts. These discounts directly affect drug manufacturers’ markups, and may change firms’ incentives to exert promotional effort targeted towards physicians at these hospitals. We find that the effects of price regulation on pharmaceutical firm effort depend crucially on the design of the regulations. Using detailed data on marketing payments from pharmaceutical firms to physicians, we observe that physicians receive 12% fewer promotional payments after their hospitals take up the program. The design of the price caps imply that discounts tend to increase with a drug’s age. Consistent with theoretical predictions, we find that pharmaceutical firms shift promotional payments away from older drugs and towards newer drugs, which are less affected by the price caps.
    JEL: I1 I11 L0 L2 M30 M37 M39
    Date: 2024–03
  12. By: van Buggenum, Hugo; Gersbach, Hans; Zelzner, Sebastian
    Abstract: Can competing stablecoins produce efficient and stable outcomes? We study competition among stablecoins pegged to a stable currency. They are backed by interest-bearing safe assets and can be redeemed with the issuer or traded in a secondary market. If an issuer sticks to an appropriate investment and redemption rule, its stablecoin is invulnerable to runs. Since an issuer must pay interest on its stablecoin if other issuers also pay interest, competing interest-bearing stablecoins, however, are contagious and can render the economy inefficient and unstable. The efficient allocation is uniquely implemented when regulation prevents interest payments on stablecoins.
    Keywords: Stablecoins, currency competition, free banking, private money, digital money
    JEL: E4 E5 G1 G2
    Date: 2024
  13. By: Krieger, Bastian; Pruefer, Malte; Strecke, Linus
    Abstract: Public procurement accounts for 15 to 20 percent of global GDP and is considered an effective innovation policy. However, the detrimental effects of non-innovative public procurement - public procurement tenders awarded solely based on their price - on firm innovations have been largely neglected, even though it represents the majority of all tenders. We contribute by i) developing a comprehensive theory on the effects of winning non-innovative public procurement tenders as a firm and ii) empirically testing our theory by combining representative German data with two-way fixed effect difference-in-differences estimations. In total, the estimations demonstrate winning non-innovative public procurement reduces firms' product and process innovations on the one hand, and increases firms' focus on their established products and services on the other hand. These results confirm our theory and empirically hold at the level of the individual firm and the German enterprise sector.
    Keywords: Public procurement, Firm innovation, Demand side
    JEL: O31 O32 O38 H57
    Date: 2024
  14. By: Majah-Leah Ravago (Department of Economics, Ateneo de Manila University); Michael R. M. Abrigo (Philippine Institute of Development Studies); Patrizia Benedicto (ACERD); Nastasha Brigitte Kuan (ACERD); J. Kathleen Magadia (ACERD); Charlotte Marjorie Relos (ACERD); James Roumasset (University of Hawaii)
    Abstract: How do congestion and disruptions in transmission impact electricity prices? We investigate the impact of congestion on the wholesale spot market prices and the impact of disruption on residential electricity prices. We utilize time-series transmission node-level data on congestion market prices and combine it with other information on the market network data from the independent electricity market operator for our congestion analysis. Treating congestion as an aberration in the system, we apply impulse response analysis to examine the dynamic and cumulative impact of congestion on wholesale electricity spot prices. To examine the impact of disruption on prices, we use distribution unit data submitted to the industry regulator of the Philippines. We exploit an incident in the Visayas that cuts transmission capacity in half causing a disruption in the system as a natural experiment. We employ a synthetic difference-in-differences methodology and examine the effect of this disruption on consumer electricity prices and market concentration. We find that congestions greatly impact market nodal prices, and the effect persists beyond the time of congestion. The impact of the disruption varies by region at the distribution level, possibly explained by the region’s resources and endowment.
    Keywords: Congestion, transmission, electricity prices, Philippines, impulse response function, difference-in-difference
    JEL: C99 C13 L14 L94 Q40 Q41
    Date: 2024–03
  15. By: Ezra Oberfield; Esteban Rossi-Hansberg; Nicholas Trachter; Derek T. Wenning
    Abstract: We study the spatial expansion of banks in response to banking deregulation in the 1980s and 90s. During this period, large banks expanded rapidly, mostly by adding new branches in new locations, while many small banks exited. We document that large banks sorted into the densest markets, but that sorting weakened over time as large banks expanded to more marginal markets in search of locations with a relative abundance of retail deposits. This allowed large banks to reduce their dependence on expensive wholesale funding and grow further. To rationalize these patterns we propose a theory of multi-branch banks that sort into heterogeneous locations. Our theory yields two forms of sorting. First, span-of-control sorting incentivizes top firms to select the largest markets and smaller banks the more marginal ones. Second, mismatch sorting incentivizes banks to locate in more marginal locations, where deposits are abundant relative to loan demand, to better align their deposits and loans and minimize wholesale funding. Together, these two forms of sorting account well for the sorting patterns we document in the data.
    JEL: D20 G21 G24 L23 L25 R12 R19
    Date: 2024–03
  16. By: W. Benedikt Schmal
    Abstract: The high relevance of top-notch academic journals turns them into 'must stock' products that assign its often commercial owners with extraordinary market power. Intended to tackle this, university consortia around the globe negotiate so-called 'transformative agreements' with many publishing houses. It shall pave the way towards standard open-access publishing. While several contract designs exist, the 'publish-and-read' (PAR) scheme is the one that comes closest to the ideal of an entirely open access environment: Publishers are paid a fixed case-by-case rate for each publication, which includes a fee for their extensive libraries. In turn, all subscription payments are waived. I theoretically derive that this contract design benefits the included publishers regardless of whether the number of publications in these publishers' journals grows or declines. Consequently, widespread PAR contracts are likely to raise entry barriers for new (open-access) competitors even further. Intending to lower costs for the universities, their libraries, and, ultimately, the taxpayers, this PAR fee contract design of transformative agreements might cause the opposite.
    Date: 2024–03
  17. By: Justin C. Wiltshire (Department of Economics, University of Victoria)
    Abstract: We present the first causal analysis of recent large minimum wage increases, focusing on 47 large U.S. counties that reached $15 or more by 2022q1. Using novel stacked county-level synthetic control estimators, we find substantial pay growth and no disemployment effects. Our research design allows us to reduce selection and attenuation effects—by excluding counties with local minimum wages or those with high wages. We then find significant and larger positive employment effects, as the monopsony model predicts. We go on to document the presence of monopsony in the restaurant industry. We show that minimum wages reduce restaurant workers’ separation rates and that they caused McDonald’s workers’ wages to grow faster than the prices of Big Macs, suggesting the presence of monopsony power and positive economic profits. The fast food industry’s monopsony power allowed it to accommodate large minimum wage increases and raise employment.
    Date: 2023–09–01
  18. By: Cândida Ferreira
    Abstract: This paper contributes to the literature using first a Data Envelopment Analysis (DEA) approach to measure bank efficiency and the results provided by the Malmquist indices to analyse the evolution of the technical, technological, and scale efficiency changes, in a panel including 784 relevant banks of all the 27 European Union (EU) countries, between 2006 and 2021. In the second stage, the study uses panel dynamic Generalised Method of Moments (GMM) estimations to analyse the impact on the total productivity changes of bank market competition (measured with the estimated Boone indicator) and bank stability (proxied with the estimated Z-score), while controlling for some relevant bank activities, economic growth and the influence of the relevant crises that affected the EU banking sector during the considered period. The main findings reveal that while bank market competition looks like promoting the banks’ total factor productivity change, bank loans, bank deposits and short-term funding, as well as bank market stability and economic growth do not contribute to the banks’ total factor productivity changes.
    Keywords: European Union banking sector; Malmquist indices; bank total factor productivity changes; Z-score; Boone indicator.
    JEL: C33 D53 F36 G21
    Date: 2024–03

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