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on Industrial Competition |
| By: | Elia Sartori (CSEF) |
| Abstract: | We study the distribution of goods that are freely duplicated and damaged. The monopolist solves a screening problem that is not cost-separable and requires a concave-linear preference specification to generate nontrivial allocations, associated with two interdependent inefficiencies: underacquisition and damaging. In a game where firms acquire market power through an irreversible investment, both monopoly and active competition emerge as equilibria. Despite worsening underacquisition and inducing double-spending, competition may increase welfare because it mitigates the damaging inefficiency by distributing a version for free. We discuss an application to information markets, where experts produce a signal and sell Blackwell-garbled versions of it. |
| Date: | 2024–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:719&r= |
| By: | Crowley, Meredith A.; Han, Lu; Prayer, Thomas |
| Abstract: | How does trade policy affect competition? Using the universe of product exports by firms from eleven low and middle income countries, we document that tariff reductions under trade agreements have strong pro-competitive effects — they encourage entry and reduce the (tariff exclusive) price-cost markups of exporters. This finding, that markups fall with tariff cuts, contradicts a core prediction of standard oligopolistic competition models of trade. We extend a workhorse international pricing model of oligopolistic competition to include multiple countries and a rich preference structure. Our preference structure allows for fierce competition among firms from the same country and less intense competition among firms from different countries. We show a firm’s optimal markup after a tariff cut can rise or fall depending on the parameters of the preference structure and tariff-induced reallocation of market share among firms and across countries. |
| Keywords: | trade agreements; variable markups; markup elasticity; trade elasticity; competition policy; firm level data |
| JEL: | F13 F14 F15 |
| Date: | 2024–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123982&r= |
| By: | Michele Fioretti; Junnan He; Jorge Tamayo |
| Abstract: | We study firms' strategic interactions when each firm may own multiple production technologies, each with its own marginal cost and capacity. Increasing industry concentration by reallocating non-efficient capacity to the largest and most efficient firm can decrease market prices as it incentivizes the firm to outcompete its rivals. However, with large reallocations, the standard monotonic relationship between concentration and prices re-emerges as competition weakens due to the rival's lower capacity. Thus, we demonstrate a U-shaped relationship between market prices and industry concentration when firms are diversified. This result does not rely on economies of scale or scope. We find consistent evidence from the Colombian wholesale energy market, where strategic firms are diversified with fossil-fuel and renewable technologies, exploiting exogenous variation in renewable capacities. Our findings not only apply to the green transition but also to other industries and suggest new insights for antitrust policies. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.03504&r= |
| By: | Kate Ho; Ariel Pakes |
| Abstract: | Our calculations indicate that currently proposed U.S. policies to reduce pharmaceutical prices, though particularly beneficial for low-income and elderly populations, could dramatically reduce firms’ investment in highly welfare-improving R&D. The U.S. subsidizes the worldwide pharmaceutical market. One reason is U.S. prices are higher than elsewhere. If each drug had a single international price across the highest-income OECD countries, and total pharmaceutical firm profits were held fixed, then U.S. prices would fall by half and every other country’s prices would increase (by 28 to 300%). International prices would maintain firms’ R&D incentives and more equitably share the costs of pharmaceutical research. |
| JEL: | I18 L20 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32606&r= |
| By: | Nikhil Datta |
| Abstract: | This paper studies monopsony power in a low pay labour market and explores its determinants. I emphasise the role of the spatial distribution of activity and workers' distaste for commuting in generating imperfect substitutability between jobs, and heterogeneity in monopsony power. To formalise the role of commutes in generating monopsony power I develop a job search model where utility depends on wages, commutes and an idiosyncratic component. The model endogenously defines probabilistic spatial labour markets which are point specific and overlapping, and generates labour supply to the firm elasticities which vary across space. Distaste for commuting is shown to increase monopsony power, but does so heterogeneously, increasing monopsony power in rural areas more than in denser urban ones. Using detailed applicant data for a firm with hundreds of establishments across the UK, coupled with two sources of job-establishment level exogenous wage variation I estimate the model parameters and show that commutes generate considerable spatial heterogeneity in monopsony power and are responsible for approximately 1/3 of the total wage markdown. A decomposition exploiting the granularity of the model demonstrates that 40% of spatial variation in monopsony power is within Travel To Work Areas. Calculating employer concentration based on highly-granular 1km2 grids and probability of applying across grids based on pair-wise grid travel times shows how coarsely discretised labour markets such as Commuting Zones can cause sizeable mismeasurement in concentration measures. |
| Keywords: | monopsony |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2012&r= |
| By: | Luca Macedoni; Rui Zhang; Frederic Warzynski |
| Abstract: | We propose a new model of multi-product firms in international trade, where firms choose their product mix based on the products’ attractiveness and endogenous competition. The model is motivated by two novel stylized facts using Danish manufacturing data, which demonstrate the importance of product-specific characteristics in understanding firms’ product mix choices. The model predicts that as a larger number of firms want to supply products with high attractiveness, these products also feature the toughest competition. Depending on the strength of competition, two sorting patterns are possible: one in which only the most productive firms produce the most attractive products and another in which all firms produce the most attractive products. Our model can generate both sorting patterns depending on the value of a key preference parameter. By quantifying our model, we find that product-specific differences in attractiveness and competition explain a quarter of the variation in sales. Furthermore, we find that the most attractive products tend to be produced by all firms, while the least attractive products are made only by the most productive firms. |
| Keywords: | multi-product firms, competition, product attractiveness, sorting |
| JEL: | F12 F14 L11 L25 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11144&r= |
| By: | Pachali, Max (Tilburg University, School of Economics and Management); Kurz, Peter; Otter, Thomas |
| Date: | 2023 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiutis:3a3eeaa6-6e7f-4a63-b800-0cdeecf1cc4e&r= |
| By: | Li, Mengjie; Lopez, Rigoberto A.; Mohapatra, Debashrita; Steinbach, Sandro |
| Keywords: | Agribusiness, Agricultural And Food Policy, Industrial Organization |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea22:343666&r= |
| By: | Nahim Bin Zahur |
| Abstract: | The liquefied natural gas (LNG) industry is characterized by systematic inter-regional price differentials, raising the question of whether sellers price discriminate. This paper measures market power in the LNG spot market and studies how market power influences pricing, trade and welfare. I develop a novel method for inferring market conduct that utilizes information on sellers’ pricing and quantity decisions across multiple geographically segmented markets. My test for market conduct is based on the observation that sellers exercising market power engage in third-degree price discrimination, whereas sellers behaving competitively do not. Using data from 2006 to 2017 on spot market trade flows, spot prices, shipping costs and seller capacities, I estimate a structural model of LNG trade and pricing that incorporates spatial differentiation, capacity constraints and trade frictions and flexibly nests different models of seller market power. I find that seller decisions are consistent with a Cournot model and unlikely to be generated by a competitive model. The total deadweight loss from market power is estimated to be USD 12 billion, or about 4.5% of total revenue. I find that market power plays a key role in exacerbating inter-regional price differentials. |
| Keywords: | Market Power, Price Discrimination, Conduct Parameter, Contracts, Liquefied Natural Gas |
| JEL: | D23 L13 D43 Q41 |
| Date: | 2023–02 |
| URL: | https://d.repec.org/n?u=RePEc:qed:wpaper:1517&r= |
| By: | Victor Aguirregabiria; Robert Clark; Hui Wang |
| Abstract: | Geographic dispersion of depositors, borrowers, and banks may prevent funding from flowing to high loan demand areas, limiting credit access. Using bank-county-year level data, we provide evidence of the geographic imbalance of deposits and loans and develop a methodology for investigating the contribution to this imbalance of branch networks, market power, and scope economies. Results are based on a novel measure of imbalance and estimation of a structural model of bank competition that admits interconnections across locations and between deposit and loan markets. Counterfactual experiments show branch networks and competition contribute importantly to credit flow but benefit more affluent markets. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.03517&r= |
| By: | Liran Einav; Amy Finkelstein; Pietro Tebaldi |
| Abstract: | Health insurance is increasingly provided through managed competition, in which subsidies for consumers and risk adjustment for insurers are key market design instruments. We illustrate that subsidies offer two advantages over risk adjustment in markets with adverse selection. They provide greater flexibility in tailoring premiums to heterogeneous buyers, and they produce equilibria with lower markups and greater enrollment. We assess these effects using demand and cost estimates from the California Affordable Care Act marketplace. Holding government spending fixed, we estimate that subsidies can increase enrollment by 16 percentage points (76%) over risk adjustment, while all consumers are weakly better off. |
| JEL: | G22 G28 H51 I13 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32586&r= |
| By: | Victor Augias; Alexis Ghersengorin; Daniel M. A. Barreto |
| Abstract: | Consumer data can be used to sort consumers into different market segments, allowing a monopolist to charge different prices at each segment. We study consumer-optimal segmentations with redistributive concerns, i.e., that prioritize poorer consumers. Such segmentations are efficient but may grant additional profits to the monopolist, compared to consumer-optimal segmentations with no redistributive concerns. We characterize the markets for which this is the case and provide a procedure for constructing optimal segmentations given a strong redistributive motive. For the remaining markets, we show that the optimal segmentation is surprisingly simple: it generates one segment with a discount price and one segment with the same price that would be charged if there were no segmentation. We also show that a regulator willing to implement the redistributive-optimal segmentation does not need to observe precisely the composition and the frequency of each market segment, the aggregate distribution over prices suffices. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.14174&r= |
| By: | Cristian Chica; Yinglong Guo; Gilad Lerman |
| Abstract: | Algorithmic price collusion facilitated by artificial intelligence (AI) algorithms raises significant concerns. We examine how AI agents using Q-learning engage in tacit collusion in two-sided markets. Our experiments reveal that AI-driven platforms achieve higher collusion levels compared to Bertrand competition. Increased network externalities significantly enhance collusion, suggesting AI algorithms exploit them to maximize profits. Higher user heterogeneity or greater utility from outside options generally reduce collusion, while higher discount rates increase it. Tacit collusion remains feasible even at low discount rates. To mitigate collusive behavior and inform potential regulatory measures, we propose incorporating a penalty term in the Q-learning algorithm. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.04088&r= |
| By: | Igor Sadoune; Marcelin Joanis; Andrea Lodi |
| Abstract: | This paper introduces the Minimum Price Markov Game (MPMG), a dynamic variant of the Prisoner's Dilemma. The MPMG serves as a theoretical model and reasonable approximation of real-world first-price sealed-bid public auctions that follow the minimum price rule. The goal is to provide researchers and practitioners with a framework to study market fairness and regulation in both digitized and non-digitized public procurement processes, amidst growing concerns about algorithmic collusion in online markets. We demonstrate, using multi-agent reinforcement learning-driven artificial agents, that algorithmic tacit coordination is difficult to achieve in the MPMG when cooperation is not explicitly engineered. Paradoxically, our results highlight the robustness of the minimum price rule in an auction environment, but also show that it is not impervious to full-scale algorithmic collusion. These findings contribute to the ongoing debates about algorithmic pricing and its implications. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.03521&r= |
| By: | Johannes Johnen; Robin Ng |
| Abstract: | Evidence suggests lower prices lead to better ratings, but better ratings induce firms to charge higher prices in the future. We model that consumers are only willing to make the effort to rate a seller if this seller provides a sufficient value-for-money. Using this model, we explore how firms use prices to impact their own ratings. We show that firms harvest ratings: they offer lower prices in early periods to trigger consumers to leave a good rating in order to earn larger profits in the future. Because especially low-quality firms harvest ratings, harvesting makes ratings less-informative about quality. Based on this mechanism, (i) we argue that rating harvesting causes rating inflation; (ii) we show that a marketplace that facilitates ratings (e.g. through reminders, one-click ratings etc.) may get more ratings, but also less-informative ratings; (iii) a marketplace that screens the quality of sellers makes ratings less-informative if the screening is insufficient. Counter to the conventional wisdom that consumers benefit from ratings via the information they transmit, we show that consumers prefer somewhat, but never fully informative ratings. Nonetheless consumers prefer more-informative ratings than average sellers. We apply these results to characterise when a two-sided platform wants to facilitate ratings. Our results suggest that efforts of major platforms to facilitate ratings may have lead to less-informative ratings, and possibly also shifted surplus from consumers to sellers. |
| Keywords: | Rating and reviews, digital economy, reputation |
| JEL: | D21 D83 L10 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_509v2&r= |
| By: | Gazilas, Emmanouil Taxiarchis; Vozikis, Athanassios |
| Abstract: | This research investigates the dynamics of the Greek General Private Clinics Sector over the period 2012-2020, examining the interplay between market concentration, as measured by the Herfindahl-Hirschman Index (HHI), and key financial ratios. The study delves into Return on Equity (ROE), Gross Profit Margin, Operating Profitability, Net Profit Margin, Earnings After Tax Margin, and Return on Assets financial ratios. Commencing with a moderately concentrated market in 2012 (HHI=775.74), subsequent years witnessed the sector's adaptability to evolving market dynamics, reflected in fluctuations in both market concentration and financial ratios. The unexpected positive correlation observed in 2015, where a decrease in HHI (710.39) coincided with an increase in Net Sales and EBITDA, challenges conventional expectations. Throughout the analyzed period, the sector showcased resilience, demonstrated by its ability to navigate changes in market concentration while sustaining and expanding earnings. In 2019, Net Sales and EBITDA experienced an upturn, reaching 554.31 million euros and 104.11 million euros, respectively. However, the intriguing scenario in 2020, marked by a slight decrease in Net Sales (540.55 million euros) coupled with a significant surge in HHI (1097.52), underscores the intricate interplay between market structure and financial performance. The juxtaposition of key financial ratios with the HHI provides a holistic view of the sector's financial landscape, offering valuable insights for practitioners, policymakers, and researchers alike. |
| Keywords: | Greek Healthcare, Market Concentration, Financial Ratios, Herfindahl Hirschman Index (HHI), General Private Clinics, Financial Analysis |
| JEL: | I11 |
| Date: | 2023–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121234&r= |
| By: | Nahim Bin Zahur |
| Abstract: | In many capital-intensive markets, sellers sign long-term contracts with buyers before committing to sunk cost investments. Ex-ante contracts mitigate the risk of under-investment arising from ex-post bargaining. However, contractual rigidities reduce the ability of firms to respond flexibly to demand shocks. This paper provides an empirical analysis of this trade-off, focusing on the liquefied natural gas (LNG) industry, where long-term contracts account for over 70% of trade. I develop a model of contracting, investment and spot trade that incorporates bargaining frictions and contractual rigidities. I structurally estimate this model using a rich dataset of the LNG industry, employing a novel estimation strategy that utilizes the timing of contracting and investment decisions to infer bargaining power. I find that without long-term contracts, sellers would decrease investment by 27%, but allocative efficiency would significantly improve. Negative contracting externalities lead to inefficient over-use of long-term contracts in equilibrium. Policies aimed at eliminating contractual rigidities reduce investment by 16%, but raise welfare by 9%. |
| Keywords: | Long-term Contracts, Spot Markets, Under-investment, Nash Bargaining, Contracting Externalities, Market Power, Liquefied Natural Gas |
| JEL: | D22 D23 L14 L22 L42 Q41 |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:qed:wpaper:1518&r= |
| By: | Goerke, Laszlo; Neugart, Michael |
| Abstract: | Monopsony power by firms and social preferences by consumers are well established. We analyze how wages and employment change in a monopsony if workers compare their income with that of a reference group. We show that the undistorted, competitive outcome may no longer constitute the benchmark for welfare comparisons and derive a condition that guarantees that the monopsony distortion is exactly balanced by the impact of social comparisons. We also demonstrate how wage restrictions and subsidies or taxes can be used to ensure this condition, both for a welfarist and a paternalistic welfare objective. |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:dar:wpaper:146301&r= |