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on Industrial Competition |
| By: | Zhe Yuan; Panle Jia Barwick |
| Abstract: | The Hub-and-Spoke network is a defining feature of the airline industry. This paper is among the first in the literature to introduce an empirical framework for analyzing network competition among airlines. Airlines make market entry decisions and choose flight frequencies in the first stage, followed by price competition to attract passengers in the second stage. A key feature of this model is the linkage between direct and indirect flights, which is described by a technological relationship (and estimated using data) that proxies the Hub-and-Spoke network. The paper estimates the marginal costs of serving passengers and operating flights using first-order conditions, bounds the entry costs using inequalities derived from the reveal-preference argument, and employs a state-of-the-art econometric method to conduct inference for entry cost parameters. Ignoring network externality underestimates the benefits of operating an additional flight by 13.2%, and airlines would schedule 21.53% fewer one-stop flights had they made flight operation decisions independently for each market. To evaluate the impact of a hypothetical merger, the paper proposes a novel equilibrium concept that makes it feasible to compute the industry equilibria. Counterfactual analyses indicate that a hypothetical merger between Alaska and Virgin America would increase consumer surplus as the merged airline would offer direct flights in 10% more markets while the overall post-merger price effect would likely be muted. |
| JEL: | C51 L13 L14 L93 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32893 |
| By: | José Ignacio Cuesta; Carlos E. Noton; Benjamin Vatter |
| Abstract: | We measure the impacts of vertical integration between insurers and hospitals. In the Chilean market, where half of private hospital capacity is vertically integrated, integration increases inpatient care spending by 6 percent and decreases consumer surplus and total welfare. Integrated insurers offer generous coverage at integrated hospitals, limited access to rival hospitals, and lower premiums. Competition for enrollees forces non-integrated insurers to provide additional coverage to high-quality non-integrated hospitals, resulting in plan networks that limit hospital competition. Whereas vertical integration reduces double marginalization, skewed cost-sharing structures—and their effect on hospital competition—more than compensate, leading to an overall negative welfare impact. |
| JEL: | I11 L13 L40 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32833 |
| By: | Masuyama, Ryo |
| Abstract: | Targeted pricing is an aggressive strategy that steals demand from rivals. Previous studies have shown that a firm prefers targeted pricing to uniform pricing when another supply chain is vertically integrated and thus its downstream firm purchases an input at a constant price. This study relaxes the assumption that supply chains are vertically integrated. When supply chains are vertically separated, downstream firms face increasing input-supply function. Then, targeted pricing reduces the rival's demand and hence its input price, which intensifies competition. This negative effect is so severe in our Hotelling model that a firm prefers uniform pricing to targeted pricing when another supply chain is vertically separated. |
| Keywords: | targeted pricing, uniform pricing, vertical structure, supply chain management, Hotelling model. |
| JEL: | D43 L10 L13 |
| Date: | 2024–08–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121680 |
| By: | Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru |
| Abstract: | Motivated by the recent National Association of Realtors (NAR) settlement, this note examines the effects of reduced real estate agent commissions on home prices, housing turnover, and consumer welfare. Using a calibrated dynamic structural search model of the housing market, we explore how lowering agent commissions might influence market equilibrium. Our analysis highlights the importance of accounting for the dynamic nature of the housing market, consumer heterogeneity, and general equilibrium effects when assessing these outcomes. Contrary to the claims of some media commentators and consumer advocates, our findings suggest that reducing agent fees generally leads to higher house prices. This occurs because lower future transaction costs increase the value of housing as a durable asset. While reduced agent fees typically enhance consumer welfare by lowering the cost of homeownership, we find that most of these benefits are likely to accrue to current homeowners rather than prospective buyers. Furthermore, financially constrained households may see diminished benefits due to the expected rise in home prices. Our analysis also offers insights into the redistributive effects of technological innovations in the housing market aimed at reducing transaction costs. |
| JEL: | G0 G2 G50 L0 R20 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32855 |
| By: | Fliers, Philip T. |
| Abstract: | This study explores how market power and financial flexibility shape corporate investment policies among U.S. large and mature corporations, by estimating firm-specific, time-varying investment-to-added-value sensitivities. We find that firms with market power exhibit lower investment sensitivities, and this effect is more pronounced for the most financially flexible firms. We show that the firm's debt capacity is an important moderator in the relationship between market power and investment sensitivities. Our findings support theoretical predictions that market power and financial flexibility jointly influence investment decisions. The implication is that a lack of competition impedes corporate investments. For investors, these findings highlight the need to monitor both the competitive landscape and financial flexibility of firms in their portfolios. |
| Keywords: | Investments, market power, financial flexibility, added-value, debt capacity |
| JEL: | D40 G31 G32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:qmsrps:202407 |
| By: | Nicolas Schutz |
| Abstract: | I study a model in which two upstream firms compete to supply a homogeneous input to two downstream firms selling differentiated products. Upstream firms offer exclusive, discriminatory, public, two-part tariff contracts to the downstream firms. I show that, under very general conditions, this game does not have a pure-strategy subgame-perfect equilibrium. The intuition is that variable parts in such an equilibrium would have to be pairwise-stable; however, with pairwise-stable variable parts, downstream competitive externalities are not internalized, implying that upstream firms can profitably deviate. I contrast this non-existence result with earlier papers that found equilibria in related models. |
| Keywords: | vertical relations, exclusive dealing, two-part tariffs, slotting fees. |
| JEL: | L13 L14 L42 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_591 |
| By: | Mouré, Christopher |
| Abstract: | Much of the economic analysis of banking crises focuses on the interplay between concentration and stability. A common theory is that concentration is associated with greater stability, whereas competition is associated with instability. In this view, there is a trade-off between, on the one hand, the higher prices and higher profits associated with a banking cartel, and on the other, frequent banking crises and lower prices caused by a fragmented sector. However, this theory is not entirely convincing. Principally, it tends to treat competition and concentration as independent variables, whereas in reality, causality works both ways: banks actively work to transform the structure of the system and transcend apparent constraints – whether through coordinating interest rates, influencing policy, or by transforming the business landscape through corporate amalgamation. In addition, the last two major banking crises in the US occurred in dramatically different conditions of concentration from one other, complicating any obvious empirical connection between concentration and stability. In this paper, I try to move beyond this hypothesis by investigating the relationship between corporate concentration and banking stability through the lens of organized power. Using a combination of quantitative and qualitative analyses, I make two claims. First, since the 1980s, the differential profitability of large banks has been driven by corporate amalgamation. Second, crises tend to be followed by an increase in the pace of amalgamation. As a result, since the 1980s, banking crises have preceded a dramatic redistribution of resources and control to a handful of large banks. While it is not clear that concentration makes a banking crisis less likely, the evidence suggests that crisis makes concentration more likely. Though the research presented here is only tentative and exploratory, it indicates that since the 1980s, large banks have remade the business and regulatory landscape in ways that defy the logic of a simple binary relationship between concentration and stability, and that this needs to be taken into account when analysing the dynamics of banking crises. |
| Keywords: | banks, capital as power, concentration, crisis, mergers & acquisitions, United States |
| JEL: | G G2 G3 G01 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:capwps:301397 |
| By: | Guido Menzio |
| Abstract: | I derive a formula for the equilibrium distribution of markups in the search- theoretic model of imperfect competition of Butters (1977), Varian (1980), and Burdett and Judd (1983). The level of markups and the sign of the relationship between a seller’s markup and its size depends on the extent of search frictions, as well as on other deep parameters. Markups are efficient. Markups are positive even though the varieties produced by sellers are perfect substitutes. Markups are heterogeneous even when all sellers operate the same production technology. Markups depend on size, even though the substitutability between a variety and the others does not depend on how much of that variety is consumed. Interpreting these markups through the lens of the monopolistic competition model of Dixit and Stiglitz (1977) would lead one to recover incorrect and unstable buyers’ preferences. Interpreting these markups through the lens of the Dixit-Stiglitz model would also leads to incorrect policy recommendations. These results are a cautionary note on recent work in macroeconomics. |
| JEL: | D43 D83 L16 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32888 |
| By: | Leonard Treuren |
| Abstract: | A rapidly growing literature suggests that monopsony power is common in US labor markets. I examine whether this result generalizes to Europe, where collective bargain ing agreements characterize labor markets. I use Dutch firm-level manufacturing data from 2007 to 2018, together with an efficient bargaining model and revenue function estimation. Wages are typically above the marginal revenue contribution of employees. This is not in line with monopsonistic labor markets but precisely what is expected when employees have bargaining power and can extract rents from their employers. In addition, I provide evidence of buyer power in intermediate input markets and show that firms that underpay their input suppliers on the margin set higher wage markups. This suggests that firms share rents generated in intermediate input markets with their employees. Firm-time-specific rent sharing elasticities indicate that firms increase wages on average by 0.22 percent following a 1 percent increase in quasi-rents per employee. |
| Date: | 2022–11 |
| URL: | https://d.repec.org/n?u=RePEc:ete:msiper:746837 |
| By: | Liu, Jianan (Renmin University of China); Cai, Hongbo (Beijing Normal University); Lin, Carl (Bucknell University) |
| Abstract: | Competition in the labor market theoretically leads to higher wages, yet empirical evidence to substantiate it, particularly in developing countries, has been sparse. Our study delves into the impact of increased competition in the labor market on workers' wages using a panel dataset from Chinese industrial firms spanning 1998 to 2013. Employing OLS and IV regressions, we demonstrate that a decrease in employer concentration is significantly linked to higher wages. The elasticities of employer concentration on wages fall within the range of -0.034 and -0.107. Additionally, our findings suggest that state-owned enterprises gained the most from this upswing in competition, primarily due to restructuring. Furthermore, we demonstrate that total factor productivity serves as an important channel linking employer concentration to wages. |
| Keywords: | competition, monopsony, labor market concentration, wages, China |
| JEL: | J42 J3 O53 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17226 |
| By: | Mamatzakis, Emmanuel C. |
| Abstract: | This study examines the factors underlying the notably high Greek bank net interest margins compared to the euro-area average, with a particular focus on the interplay between bank competition and recapitalisations. Employing dynamic panel analysis from the early 2000s to 2021, we address potential endogeneity concerns and heterogeneity considerations. Additionally, we utilise local projections impulse response functions to account for structural shifts within the Greek banking landscape. Our findings reveal that diminished bank competition has played a significant role in driving up net interest margins in Greece. Intriguingly, the impact of Greek recapitalisations, in parallel with market conditions characterised by a low level of bank competition, has further contributed to high net interest margins. Supported by evidence from local projections impulse response functions, our study emphasises the necessity of accelerating the banking union and implementing a common regulatory framework across the euro-area. Setting caps on bank interest margins and fees could be a sensible practical recommendation. Such measures are crucial for fostering a more competitive banking environment and mitigating the persistently high net interest margins observed in the Greek banking industry. |
| Keywords: | bank competition; recapitalisations; net interest rate margin; dynamic panel analysis; local projections |
| JEL: | G21 E43 E52 D40 L10 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:124476 |
| By: | Brown, David P. (University of Alberta, Department of Economics); Cajueiro, Daniel O. (University of Brasilia); Eckert, Andrew (University of Alberta, Department of Economics); Silveira, Douglas (University of Alberta, Department of Economics) |
| Abstract: | Real-time information has the potential to improve market outcomes in wholesale electricity markets. However, transparency can also facilitate coordination between firms, raising questions over the appropriate extent of information disclosure. Despite this ongoing debate, there is a lack of understanding of the information employed by firms when bidding in wholesale electricity markets. We use data from Alberta’s wholesale market and leverage machine learning techniques to evaluate the real-time information firms use when forming their bidding decisions. We find that aggregate market-level variables emerge as important predictors, while detailed firm-specific information does not lead to a material improvement in predicting firms’ bidding decisions. These results suggest that firm-specific information, which has raised concerns because of its potential use in facilitating coordinated behavior, may not be required to promote efficient market outcomes. |
| Keywords: | Machine Learning; Electricity; Price Forecasting; Competition Policy |
| JEL: | D43 L13 L50 L94 Q40 |
| Date: | 2024–08–18 |
| URL: | https://d.repec.org/n?u=RePEc:ris:albaec:2024_002 |
| By: | Hoang, Trang (Oregon State University); Mitra, Devashish (Syracuse University); Pham, Hoang (Oregon State University) |
| Abstract: | This paper examines the impact of an export market expansion created by the US-Vietnam Bilateral Trade Agreement (BTA) on competition among manufacturing firms in Vietnam's local labor markets. Using a nonparametric production function approach, we measure distortionary wedges between equilibrium marginal revenue products of labor (MRPL) and wages. We find that the median manufacturing firm pays workers 59% of their MRPL. Following the BTA, which significantly reduced US import tariffs for Vietnamese products, firms in industries exposed more to the tariff reductions saw faster employment growth and faster declines in their MRPL-wage wedge. We find that the BTA permanently decreases labor market distortion in manufacturing by 3.4%, and the effect concentrates on domestic private firms with a magnitude of 4.9%. We exploit information on the gender composition to estimate the MRPL-wage wedges separately for men and women. We find that the median distortion is 26% higher for women relative to men, and the decline in distortion for women, amounting to more than 12%, is the driver of the overall reduction in labor market distortion attributable to the BTA. Our theory and empirics suggest that the entry of FDI firms combined with differential aggregate labor supply elasticities explains these results. |
| Keywords: | international trade, export market access, labor market distortion, misallocation, income distribution, labor share, gender inequality, monopsony, oligopsony |
| JEL: | F16 F63 O15 O24 J42 J16 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17196 |
| By: | Yokoyama, Kazuki |
| Abstract: | Without a sufficiently informative dataset, it would be difficult to explore strategic interdependencies among firms, such as demand estimation. This paper investigates strategic interdependence through a unique historical case of duopoly in the Japanese maritime industry during the 1880s. Yubin Kisen Mitsubishi, led by Iwasaki Yataro, was a monopoly. A new entrant, Kyodo Un'yu, led by Shibusawa Eiichi, offered superior services and implemented a strategy of one-sided fare reductions. Yubin Kisen Mitsubishi delayed in taking countermeasures. This paper regards this delay as a quasi-experiment, and reveals the process by which Kyodo Un'yu gained market share. A simple elasticity calculation shows that a 1% price cut by Kyodo Un'yu resulted in a 10.065% increase in cargo transport demand. |
| Keywords: | Strategic Interdependence, Duopoly, Price Reduction, Elasticity, Maritime Industry, Shibusawa Eiichi, Iwasaki Yataro |
| JEL: | D43 N75 N85 R41 |
| Date: | 2024–08–15 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121730 |
| By: | Kate Ho; Robin S. Lee |
| Abstract: | We investigate how formularies used by pharmacy benefit managers (PBMs) can affect manufacturer rebates for branded drugs. We first present a theoretical model of multidimensional contracting in which a PBM negotiates with drug manufacturers over menus of formulary-contingent rebate payments and then selects a formulary. We then estimate how formulary placement affects drug demand for statins using data from Princeton University, a large employer that contracts with a single PBM to offer prescription drug coverage to its employees. Using our theoretical model and demand estimates, we predict how rebates are affected by the use of a preferred tier in the formulary or the ability to exclude a drug from coverage. Our predictions align with aggregate rebate data, and we find that allowing a PBM to place branded drugs on preferred and non-preferred tiers can substantially increase negotiated rebate payments. |
| JEL: | I11 L14 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32790 |
| By: | Wassim Daher (Gulf University for Science and Technology, Kuwait); Jihad Elnaboulsi (Université de Franche-Comté, CRESE, UR3190, F-25000 Besançon, France); Mahelet G. Fikru (Missouri University of Science and Technology, USA); Luis Gautier (Universidad de Málaga, Spain) |
| Abstract: | We study the incentives to merge for energy producers in the presence of distributed renewable energy producers. Utilizing a Cournot model, we explore how uncertainty surrounding the cost of grid integration influences the profitability of mergers, where uncertainty comes in the form of an industry-wide shock (or common) and firm-specific errors (private shock). We find that the effect of these uncertainties on merger profitability depends on average energy grid integration costs, the size of the merger, and quality of private information. Overall, results suggest that mergers are more likely to be profitable when firms can effectively absorb private shocks due to the scale of the merger, unless average grid integration costs become too high. The incentives to merge are less clear-cut in the presence of an industry-wide shock, unless the quality of private information is high enough. |
| Keywords: | - |
| JEL: | Q4 G34 Q2 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:crb:wpaper:2024-14 |
| By: | Werden, Gregory (Mercury Publication) |
| Abstract: | Abstract not available. |
| Date: | 2023–05–10 |
| URL: | https://d.repec.org/n?u=RePEc:ajw:wpaper:12390 |
| By: | Erik Brynjolfsson; Avinash Collis; Asad Liaqat; Daley Kutzman; Haritz Garro; Daniel Deisenroth; Nils Wernerfelt |
| Abstract: | Research on the causal effects of online advertising on consumer welfare is limited due to challenges in running large-scale field experiments and tracking effects over extended periods. We analyze a long-running field experiment of online advertising in which a random 0.5% subset of all users are assigned to a group that does not ever see ever ads. We recruit a representative sample of Facebook users in the ads and no-ads groups and estimate their welfare gains from using Facebook using a series of incentive-compatible choice experiments. We find no significant differences in welfare gains from Facebook. Our estimates are relatively precisely estimated reflecting our large sample size (53, 166 participants). Specifically, the minimum detectable difference in median valuations at standard thresholds is $3.18/month compared to a baseline valuation of $31.95/month for giving up access to Facebook. That is, we can reject the hypothesis that the median disutility from advertising exceeds 10% of the median baseline valuation. Our findings suggest that either the disutility of ads for consumers is relatively small, or that there are offsetting benefits, such as helping consumers find products and services of interest. |
| JEL: | D12 D6 K24 M15 M37 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32846 |