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on Industrial Competition |
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Issue of 2024‒07‒15
twenty-one papers chosen by Russell Pittman, United States Department of Justice |
| By: | Vives, Xavier; Vravosinos, Orestis |
| Abstract: | We examine the effects of overlapping ownership among existing firms deciding whether to enter a product market. We show that in most cases—and especially when overlapping ownership is already widespread, an increase in the extent of overlapping ownership will harm welfare by softening product market competition, reducing entry, thereby (in contrast to standard results) inducing insufficient entry, and magnifying the negative impact of an increase of entry costs on entry. Overlap-ping ownership can mostly be beneficial only under substantial increasing returns to scale, in which case industry consolidation (induced by overlapping ownership) leads to sizable cost efficiencies. |
| JEL: | D43 L11 L13 L21 L41 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129418&r= |
| By: | Tsuritani, Ryosuke |
| Abstract: | Price discrimination has substantial social and policy implications and has received attention in the literature. However, prior research on input price discrimination has largely been limited to single-input situations. We explore the strategic desirability of uniform pricing, fill gaps in the prior literature regarding the “nondiscriminatory” aspect of input price discrimination, and contribute to the growing literature on perfectly complementary inputs in ver- tical markets. This study considers a vertically related market in which two symmetric upstream firms provide perfectly complementary inputs for two downstream manufacturers, one of which has a non-controlling interest in its rival. Each upstream firm can choose between two pricing regimes: discrim- inatory or uniform. This study shows that, although uniform pricing limits pricing flexibility, one upstream firm voluntarily chooses uniform pricing, and the other chooses discriminatory pricing in equilibrium. To our knowledge, this study is the first to demonstrate such an asymmetric pricing equilibrium. Furthermore, our findings have implications for policymakers deciding whether to prohibit discriminatory pricing. |
| Keywords: | uniform price; input price discrimination; complementary inputs; hori- zontal shareholding; self-regulation |
| JEL: | D43 G34 L11 L40 |
| Date: | 2023–10–26 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121176&r= |
| By: | Massimo Motta; Volker Nocke; Martin Peitz |
| Abstract: | With the increased risks of international trade frictions and geopolitical disruptions merger control that does not account for such risks may be too lenient. This article provides a proposal on how competition authorities should systematically assess mergers based on a risk assessment and how they should adjust their market share and UPP analysis. The authors also argue that the approach fits well into recent developments of merger analyses in the European Union. |
| Keywords: | merger control, market shares, UPP, resilience, geopolitical risks |
| JEL: | K21 L40 L13 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_568&r= |
| By: | Peter B. Dixon; Maureen T. Rimmer |
| Abstract: | Since the 1990s, there have been rapid increases in concentration ratios in many industries in the U.S., Australia and, we suspect, in other countries. Despite this, applications of GTAP (the world's most widely used global economic model) continue to be based on pure competition or Melitz-style Large-Group Monopolistic Competition (LGMC). In either case, all firms are small, there is free entry, and industries make zero pure profits. Markusen challenges modellers to move to Small-Group Monopolistic Competition (SGMC) in which industries have high levels of concentration and firms are aware of the likely behaviour of their rivals. We create a version of GTAP in which some industries are modelled as SGMC. We make two generalization of earlier Melitz-LGMC specifications. First, we treat the perceived elasticity of demand by firms in SGMC industries as a variable. In our SGMC specification, mark-ups over marginal costs, which depend on perceived elasticities, fall when these elasticities are reduced by pro-competition policies. Second, we allow for sticky adjustment of the number of firms in an industry, and simulate situations in which entry is blocked and incumbent firms make excess profits. |
| Keywords: | Small-group monopolistic competition, GTAP, Melitz and Markusen, Wage rates and pure profits |
| JEL: | D43 D33 D58 C68 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:cop:wpaper:g-347&r= |
| By: | Yann Delaprez; Morgane Guignard |
| Abstract: | This paper analyzes a merger of large manufacturers with divestiture in the French coffee market. In contrast to previous approaches used to study the effects of upstream divestitures on prices and welfare, we model the vertical market structure. First, our results show that the standard policy recommendation to require divestiture to small recipient firms may not hold when asymmetric bargaining power between firms is considered. Second, we show that previous models significantly overestimate costs. We estimate costs that are 41 percent lower, and find that divestiture can lead to marginal cost savings for the buyer of the divested brand. |
| Keywords: | Merger, remedies, divestiture, vertical markets, bargaining power |
| JEL: | D12 L11 L51 L40 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:diw:diwwpp:dp2088&r= |
| By: | Zachary Knauss (Department of Economics, New School For Social Research, USA) |
| Abstract: | The profit-investment puzzle, characterized by the disconnect between rising corporate profits and stagnant capital investment, has become a focal point in recent economic research. This paper argues that the traditional pro-competitive policy framework, which attributes this phenomenon primarily to anti-trust failures, is insufficient for a comprehensive understanding. Instead, it posits that the post-Keynesian tradition, particularly the work of Josef Steindl, provides a more robust theoretical foundation for analyzing the relationship between market concentration and investment behavior. Steindl's insights into oligopoly dynamics and their impact on capacity utilization and investment decisions are applied to recent trends in U.S. industries. The paper includes both theoretical exploration and empirical analysis, employing econometric tests on data from 1972 to 2017. The results support Steindl's hypothesis of a pro-cyclical relationship between deviations in normal and actual capacity utilization rates and industry-wide investment rates, suggesting that increased market concentration leads to persistent underutilization of capacity and stagnation. This comprehensive analysis challenges the prevailing view that simply enhancing anti-trust enforcement can resolve the profit-investment gap, emphasizing instead the need for nuanced policies that address both market structures and broader economic dynamics. |
| Keywords: | Secular stagnation, capacity utilization, market concentration, oligopoly |
| JEL: | D43 E22 L13 L40 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:new:wpaper:2409&r= |
| By: | Dirk Bergemann (Yale University); Benjamin Brooks (University of Chicago); Stephen Morris (Massachusetts Institute of Technology) |
| Abstract: | Producers of heterogeneous goods with heterogeneous costs compete in prices. When producers know their own production costs and the consumer knows their values, consumer surplus and total surplus are aligned: the information structure and equilibrium that maximize consumer surplus also maximize total surplus. We report when alignment extends to the case where either the consumer is uncertain about their own values or producers are uncertain about their own costs, and we also give examples showing when it does not. Less information for either producers or consumer may intensify competition in a way that benefits the consumer but results in inefficient production. We also characterize the information for consumer and producers that maximizes consumer surplus in a Hotelling duopoly. |
| Date: | 2024–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2373r1&r= |
| By: | Emanuele Bacchiega (Department of Computer Science and Engineering, University of Bologna, Italy); Elias Carroni (Department of Economics, University of Bologna, Italy); Alessandro Fedele (Faculty of Economics and Management, Free University of Bozen-Bolzano, Italy) |
| Abstract: | The Hotelling model is the workhorse for analyzing platform competition in two-sided markets. In this setup, the degree of platform differentiation must be high relative to cross-group benefits to eschew the alleged non-existence of Nash equilibria. The present paper shows instead that Nash equilibria exist even for relatively low differentiation; at such equilibria, platforms avoid competition by replicating a collusive outcome. This result widens our knowledge of the two-sided Hotelling model and is relevant for a large array of markets --especially digital ones-- where platforms operate in relatively low-differentiation environments. |
| Keywords: | Hotelling model; Platform competition; Two-sided markets; Equilibrium existence. |
| JEL: | L13 C72 D21 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bzn:wpaper:bemps106&r= |
| By: | Evan Calford |
| Abstract: | This paper documents a policy proposal that improves consumer welfare in the sports betting industry by changing the framing of betting odds. On the demand side the proposal increases price salience, particularly for multibets, and acts as a classic behavioral nudge. On the supply side, the same change in framing increases the dimension of the pricing vector and, therefore, introduces a new dimension of price competition. In particular, the policy change introduces price competition into the market for multibets, reduces the current extraordinarily high profit margin on multibets, reduces non-price competition, and decreases demand for advertising from sports betting firms. |
| Keywords: | Sports betting, transparent pricing, nudges, market structure |
| JEL: | D47 D91 Z28 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:acb:cbeeco:2024-700&r= |
| By: | Heresi, Rodrigo |
| Abstract: | While there is widespread evidence of increasing markups in the United States and other developed economies in the last several decades, little is known about that evolution in developing economies, particularly Latin American countries. Using a harmonized dataset on listed firms from 70 countries in the period 2000-2022, I document four stylized facts about market power--measured as price-cost markups--in the six largest Latin American economies from a worldwide perspective. First, average markups in LAC are high relative to other emerging and developed economies, although they have slightly declined from prevailing levels during the commodity boom period. Second, aggregate markup dynamics are primarily driven by already high-markup firms in the top decile of the markup distribution, with little changes in the market power measured for the remaining nine deciles. Third, in contrast to the prediction of most theories about endogenously variable markups, I document a nonlinear relationship between firm-level markups and size, which is significantly negative for most of the size distribution and significantly positive for very large corporations. Fourth, the relationship between markups and investment depends heavily on the markup level. For a typical firm with median market power, a 1% increase in its markup implies a 0.86% rise in the investment rate. In contrast, for firms at the 99th percentile of the markup distribution, a 1% increase in its markup implies a -0.44% reduction in investment. |
| Keywords: | Market power;pricing;Firm size;TFP |
| JEL: | D22 D24 L11 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13610&r= |
| By: | Chad Syverson |
| Abstract: | The North Dakota Railroad War of 1905, which pitted a potential entrant (the Soo Line) against an established monopolist incumbent (the Great Northern Railway), offers a lucid empirical example of strategic behavior, and in particular the potential for entry deterrence through product proliferation. I use detailed geographic data and historical records to examine the profitability of both the incumbent’s and entrant’s potential and chosen strategies. I find that the incumbent could have likely profitably deterred entry. It did not, however, waiting instead to respond only once the entrant began building. This simultaneous entry arguably led to over expansion in the market. I investigate whether the chosen strategies may have ultimately ended up being both unprofitable for the firms involved as well as, potentially, socially wasteful. |
| JEL: | L1 L9 N7 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32549&r= |
| By: | Aleksandra Boutin |
| Abstract: | This thesis contains three papers focusing on firms' behaviors in complex interactions. The first paper focuses on the pricing of complements, for example, patents in a patent pool. In such a situation, firms might face multi-marginalization problems of such magnitude that the equilibrium prices lead to an aggregate price higher than the monopoly price. In such a situation, by coordinating their prices, firms would lower the aggregate price for technology. However, firms might also coordinate to increase their prices in some situations. Whether firms’ price coordination in the presence of complements increases or lowers prices depends on demand characteristics and the pattern of technology complementarity, which are difficult to assess by competition agencies. In a seminal paper, Lerner and Tirole (2004) propose independent licensing as an information-free device to ensure that only efficient patent pools form. The first paper of this thesis shows that independent licensing is insufficient to restore patent pool efficiency. A cap on the level of independent licenses should complement such independent licensing. The second paper assesses another situation in which firms could cooperate in ways that could benefit or harm consumers. In this paper, firms could repeatedly coordinate on a dimension close to providing a public good, such as energy-efficient technology, which benefits society. However, they could also collude on prices, which harms consumers. The second paper assesses whether a second, pro-competitive, dimension of coordination increases the likelihood of price collision. The third paper analyzes the consequences of input standardization on vertical integration and entry of firms. Standards facilitate compatibility between input providers and are a substitute for adapting the inputs to the needs of the final good producer. Without a standard, inputs are less compatible, and adaptation becomes more important for generating profits. When profits are high, this creates a motive for vertical integration to facilitate adaptation. Adaptation becomes less important with standards, and the motive for vertical integration weakens. Standardization improves the overall fit of inputs to the need of specialized producers and total welfare when contracting happens. Still, because standardization increases the cost to suppliers, it leads to contractual failure when downstream profits are low. |
| Keywords: | Competition; Complements; Integration; Patents; Cooperation |
| Date: | 2024–05–16 |
| URL: | https://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/373473&r= |
| By: | Maija Halonen-Akatwijuka (University of Bristol); Carol Propper (Imperial College London, Monash University, IFS and CEPR) |
| Abstract: | This paper examines the implications of consumer heterogeneity for the choice of competition and monopoly in public services delivery. In a setting with motivated providers who favour one type of service user over another, we show that competition can raise average quality. However, this may be at the expense of the minority type of user if the providers favour the majority type. Then an inequity averse regulator may protect the minority by not introducing competition. Alternatively, if the providers favour the minority type, the regulator may introduce competition to incentivize the providers to pay attention to the less rewarding majority type. |
| Keywords: | Public services, Competition, Quality, Inequity aversion |
| JEL: | H11 I11 I14 I24 L31 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:mhe:chemon:2024-03&r= |
| By: | Tom\'as Aguirre |
| Abstract: | As frontier AI models progress, policy proposals for safe AI development are gaining increasing attention from researchers and policymakers. This paper evaluates the present landscape of integration within the AI supply chain, emphasizing vertical relations and strategic partnerships, with the goal of laying the groundwork to further understand the implications of various governance interventions, including antitrust. The study has two main contributions. First, it maps the AI supply chain by profiling 25 leading companies, examining their 300 pairwise relationships, and noting approximately 80 significant mergers and acquisitions, and 40 relevant antitrust litigation. Second, it offers a conceptual discussion on market definitions and integration drivers, investigating major players like AI labs and chip designers, horizontal integration levels, and vertical relationships among industry leaders. To further understand the strategic partnerships in the industry, we provide three brief case studies, featuring companies such as OpenAI and Nvidia. We conclude by posing open research questions regarding market dynamics and potential governance interventions, such as licensing and safety audits. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.01722&r= |
| By: | Shivam Somani |
| Abstract: | The console gaming industry, a dominant force in the global entertainment sector, has witnessed a wave of consolidation in recent years, epitomized by Microsoft's high-profile acquisitions of Activision Blizzard and Zenimax. This study investigates the repercussions of such mergers on consumer welfare and innovation within the gaming landscape, focusing on product quality as a key metric. Through a comprehensive analysis employing a difference-in-difference model, the research evaluates the effects of acquisition on game review ratings, drawing from a dataset comprising over 16, 000 console games released between 2000 and 2023. The research addresses key assumptions underlying the difference-in-difference methodology, including parallel trends and spillover effects, to ensure the robustness of the findings. The DID results suggest a positive and statistically significant impact of acquisition on game review ratings, when controlling for genre and release year. The study contributes to the literature by offering empirical evidence on the direct consequences of industry consolidation on consumer welfare and competition dynamics within the gaming sector. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.02525&r= |
| By: | Foerster, Manuel; Hellmann, Tim; Vega-Redondo, Fernando |
| Abstract: | We set out a model of social media influencer marketing in which a firmmay hire influencers to inform consumers about an innovation. Influencersgenerate sales through purchases of their followers and followers' social networks and set prices for their endorsements. In turn, the firm decides whichinfluencers to hire, which story to convey via the influencers, and sets the retail price of the innovation. In equilibrium, influencers price according totheir marginal contribution to industry profits and increase consumers' willingnessto pay with their stories. In particular, under a weak condition itis the influencers with the most reactive followers who are hired and obtainpositive profits in equilibrium. Finally, we show that the firm may be betteroff if it could commit to hire fewer influencers. |
| Keywords: | Strategic Product Marketing; Social Media Influencer; Innovation; Social Networks; Bertrand Competition. |
| Date: | 2024–06–17 |
| URL: | https://d.repec.org/n?u=RePEc:cte:werepe:43985&r= |
| By: | Gao, Longfei; Tang, Yao |
| Abstract: | In a multi-product Melitz model, we demonstrate that after a drop in domestic trade costs, the cost savings on the shipping of domestic intermediate inputs dominate the pressure from increased competition, thus aiding surviving domestic firms in increasing the number of export varieties. The response of export revenue at the product level is heterogeneous; revenue from a firm’s low-markup varieties will increase, while that from high-markup varieties will decrease. Total export revenue of a firm increases if its export varieties or its exports of low-markup products expand significantly. Using 2SLS regressions, we test this theory with data on Chinese manufacturing firms from 2000 to 2007 and find supportive evidence. As access to domestic intermediate inputs improves with the expansion of the railway network, the number of export varieties of domestic firms increases. Meanwhile, revenue per product drops. Because the positive effect on varieties dominates the negative effect on revenue per product, the total export revenue of firms increases on average. Furthermore, the entry of new firms also increases, lending additional support to our theoretical model. |
| Keywords: | export performance, domestic transportation infrastructure, access to intermediate inputs, railway network, Chinese manufacturing firms |
| JEL: | F10 F15 R40 |
| Date: | 2024–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121155&r= |
| By: | Niklas Klarnskou; Philippos Louis; Wouter Passtoors |
| Abstract: | We use a lab experiment to examine the effect of feedback on bidder behavior in procurement e-auctions. We compare ‘Rank-only’ to ‘show lead bid’ feedback, two regimes applied frequently by procurement professionals. A choice among the two is often based on rules-of-thumb that rely on initial ‘bid compression’, i.e. the spread of the bids submitted pre-auction. The use of such criteria finds no support in existing economic theory. A common assumption in theoretical auction models is that bidders face no opportunity cost from participating in a dynamic auction. This may not hold in situations where the expected value of a contract does not justify a long-time commitment to the bidding process on the part of bidders. In our experiment participants face the choice of remaining active in an auction vs. exiting and being rewarded with a diminishing outside option. Showing the lead bid accelerated bidders’ learning. In the presence of opportunity costs, this can lead to substantially different outcomes conditional on the initial bid compression. With low bid compression, the bidder with the lowest cost wins more frequently, enhancing efficiency, but faces reduced competition by the others, which hurts the buyer’s potential outcome. The opposite is true when bid compression is high. Rank only feedback achieved similar overall levels of efficiency, with higher benefits for the buyer. Crucially, these outcomes are not as sensitive to initial bid compression as in the case of ‘show lead bid’ feedback. A discouragement effect emerging in the ‘Show-lead-bid’, but not in the ‘Rank-only’ regime can explain these results. |
| Keywords: | Procurement auctions, feedback, opportunity cost, competition, bid compression, discouragement effect, lab experiment |
| JEL: | C92 D44 D83 |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:ucy:cypeua:04-2024&r= |
| By: | Fabienne Loetscher, Christian P.R. Schmid, Michael Gerfin |
| Abstract: | Health care markets often lack a market force because the presence of health insurance undermines price signals. Patients have little incentive to shop for low-priced alternatives because they do not bear the full cost of their health care consumption. In turn, producers lack incentives to compete on prices. To improve efficiency in the pharmaceutical market, Switzerland introduced out-of-pocket price differentiation. As of July 1st 2011, substitutable pharmaceuticals with prices above a predefined threshold were subject to 20% coinsurance instead of the regular 10% coinsurance rate. Using comprehensive price data from public sources and patient drug use data from two Swiss health insurers, we analyze the price and demand response of this policy. Our analysis reveals an average pharmaceutical firm price reduction of 11%, with a more pronounced response from generic producers than from firms producing brand-name drugs. Regarding demand, we exploit a natural experiment in which one health insurer failed to timely implement the 20% coinsurance policy, resulting in quasi-random exposure to higher coinsurance. For patients affected by the policy, we find that the likelihood of purchasing a 20% coinsurance drug decreases by 4.3 and 1.3 percentage points for generic and brand-name drugs, respectively. These demand response estimates constitute lower bounds, as without the anticipatory behavior of producers, the demand response would likely have been more pronounced. Hence, our results indicate that the policy’s effectiveness is based on the interaction between price-sensitive demand and profit-maximizing firms. Overall, our findings suggest that the (re)introduction of market-like mechanisms, such as price signals, can be effective in improving health care market efficiency.Creation-Date: 2024-05 |
| Keywords: | Patient cost sharing; pharmaceutical pricing; patient demand; price signals; regulated competition; natural experiment |
| JEL: | I11 I18 D12 D22 |
| URL: | https://d.repec.org/n?u=RePEc:ube:dpvwib:dp2405&r= |
| By: | Mayaki, Alfred Anate |
| Abstract: | In this paper, the Nash equilibrium reversion is used as an optimal tool for clearing dynamic prices and wages. The balanced growth path of the efficiency wage and the outcome of repeated household/firm wage bargaining decisions are determined by various exogenous competitive rigidities. A location model is pursued to explore the extent to which a downstream spatial co-operation agreement might affect the price equilibrium. There is also an endogenous hiring function and a knowledge base which is increasing in output, as is the real wage. As the article demonstrates, after accounting for real rigidities in the baseline model, the effect of wage growth on household utility through staggered bargaining can be best catered for by adopting a policy of point scoring on the mobility of skilled labour against the model’s key rigidities. Finally, labour mobility is explored. Mobility point scores, which serve to encourage mobility from skilled labour within the model, not only increase the knowledge base but also place upward pressure on nominal wage growth. |
| Keywords: | labour, wages, mobility, signalling, game theory, competition |
| JEL: | D19 D21 D31 D61 L16 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:298827&r= |
| By: | Waterson, Michael (University of Warwick); Wojciechowska , Olga |
| Abstract: | We examine bidders’ behaviour in auction sales of the iPhone4 on eBay in the context of a significant shortage of the product at listed price, leading to achieved prices significantly above the posted price, on average. We examine the behaviour of sellers then test the direct prediction of the successive auctions model that bidders increase their bids over successive auctions and are influenced by the effects of information gained from previous auctions, finding that bidders indeed react both to their direct experience and to experience gained from studying previous auctions. In addition, the results are suggestive of bidders being reluctant to reveal their true valuation of the product initially but that they do so only over time. Our results are novel in being able to track individual bidders’ behaviour rather than simply auction outcomes. |
| Keywords: | Repeated auctions ; eBay ; consumer valuations JEL Codes: L63 ; L81 ; D12 ; D44 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1498&r= |