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on Industrial Competition |
| By: | G. Spano |
| Abstract: | This paper examines the interplay between market power and financial frictions, highlighting the bidirectional relationship between firms' access to finance and competitive dynamics. We develop a theoretical model where firms invest in technology to enhance product quality, which increases their market power. In our model, firms with greater market power can invest more, thereby reinforcing and accumulating additional market power in subsequent periods. However, the general equilibrium effects of reducing financial frictions is not clear. Specifically, when financial frictions are relaxed, firms can invest more, enabling them to produce at higher margins. This results in an increase in aggregate average market power. On the other hand, a reduction in financial frictions could also facilitate the entry of new firms into the market, thereby increasing competitive pressure. Our results indicate that an increase in investment, driven by reduced financial frictions, does not necessarily enhance competition unless the entry of new firms accompanies it. Through empirical analysis, using data from publicly listed U.S. firms, we test that firms with more market power are subjected to less financial frictions pressures in the subsequential periods. Empirical evidence also suggests higher levels of market power in the earlier period are correlated with less financial constraints in later periods. |
| Keywords: | technology ladder;investment;financial frictions;Market power |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202422 |
| By: | Jeon, Doh-Shin; Ichihashi, Shota; Kim, Byung-Cheol |
| Abstract: | We study a mechanism design problem of a monopoly platform that matches content of varying quality, ads with dierent ad revenues, and consumers with heterogeneous tastes for content quality. The optimal mechanism balances revenue from advertising and revenue from selling access to content: Increasing advertising revenue requires serving content to more consumers, which may reduce access revenue. Contrary to the standard monopolistic screening, the platform may serve content to consumers with negative virtual values while, to reduce information rents, limiting their access to higher-quality content. Then, an increase in ad protability reduces its incentive to invest in content quality. |
| JEL: | D42 D82 L15 O31 |
| Date: | 2024–11–13 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129923 |
| By: | OECD |
| Abstract: | Structural presumptions in antitrust law refer to the concept that certain market structures, including high market shares and concentration, may presumptively harm competition and consumers. Once established by competition authorities or courts, the burden of proof typically shifts to the firms which need to rebut these presumptions. The use of structural presumption in antitrust enforcement continues to animate debates among competition authorities, academics and practitioners, reflecting different views on their relevance, application and accuracy when assessing potential anticompetitive practices. This paper explores how the use of structural presumptions may enable competition authorities to simplify complex issues related to market analysis and accelerate the competitive process, while maintaining the required degree of legal certainty to achieve the desired outcome. These mechanisms can ultimately make competition enforcement more predictable, transparent and efficient. Yet their use may also increase potential error costs, requiring competition authorities to consider trade-offs between different enforcement strategies (e.g. certainty, administrability and efficiency in decision-making versus accuracy). This paper also analyses the balancing of structural presumptions against detailed economic analysis which can be crucial to ensure fair and effective antitrust enforcement. |
| Date: | 2024–11–09 |
| URL: | https://d.repec.org/n?u=RePEc:oec:dafaac:317-en |
| By: | Ataman, Berk (Koç University); Pauwels, Koen (Northeastern University); Srinivasan, Shuba (Boston University); Vanhuele, Marc (HEC Paris) |
| Abstract: | Managers often count on advertising to create and reinforce brand differentiation, which should, in theory at least, translate into lower price sensitivity for their brands. But to what extent does it do so, what is the route through which this effect of advertising materializes, and what are the boundary conditions? The authors develop a Dynamic Linear Model that links advertising to brand price elasticity directly and indirectly through consideration and main brand preference mindset metrics. Model estimation on six and a half years of data, on average, for 350 brands in 39 categories of fast-moving consumer goods shows that advertising indeed decreases the magnitude of price elasticity. The effect is mainly direct (97.5%) and partly indirect (2.5%), through brand preference. The direct effect shows that advertising predominantly decreases price sensitivity among the consumers who already consider the brand and among the consumers who already prefer it. When converted into incremental revenue impact, monetary gains from this increased pricing power are especially pronounced for expensive brands in complex and frequently purchased categories. The findings thus help managers demonstrate the benefits of advertising in sustaining brand performance. |
| Keywords: | Advertising; price elasticity; mindset metrics; long-term effects; dynamic linear models; and empirical generalization. |
| JEL: | M30 M31 M37 |
| Date: | 2024–01–24 |
| URL: | https://d.repec.org/n?u=RePEc:ebg:heccah:1500 |
| By: | J. M. L. Chan; H. Qi (Audencia Business School) |
| Abstract: | We study the firm dynamics associated with mergers and acquisitions (M&A) and their implications at the micro and macro levels. Our paper presents three main findings: (i) mergers generate a more fat-tailed firm-size distribution, thereby amplifying granular fluctuations and increasing aggregate volatility; (ii) the impact of mergers depends on strategic market power and endogenous markups; and (iii) under endogenous markups, we provide a novel characterization of the firm size-volatility relationship in which volatility declines disproportionately with size. We build a quantitative model of domestic horizontal mergers and find a sizeable impact of mergers on aggregate volatility using counterfactual analysis. |
| Keywords: | firm-size distribution, mergers and acquisitions, granularity, size-volatility relationship, variable markups |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04719146 |
| By: | OECD |
| Abstract: | Competition authorities rarely consider democracy in their day-to-day functioning, yet the notion that competition is important for the maintenance of a healthy democracy was a core part of the motivation for introducing antitrust laws in some jurisdictions. This paper explores the link between competition and democracy and the potential for reduced competition to allow firms to acquire economic power. When economic power grows large, firms may be able, through mechanisms such as lobbying or political donations, to convert it into political power, allowing them to influence and affect political outcomes independent of democratic will. However, the link between competition and economic power is complex and further research is warranted. Furthermore, the paper identifies several approaches to the role of democracy within competition law, arguing irrespective of any changes in policy, increased competition benefits democracy and provides another reason for robust and resourced competition policy to champion and preserve competition. |
| Date: | 2024–11–07 |
| URL: | https://d.repec.org/n?u=RePEc:oec:dafaac:316-en |
| By: | Commander, Simon (IE Business School, Altura Partners); Estrin, Saul (London School of Economics); Thomas, Naveen (O.P. Jindal Global University); Lingineni, Varun (London School of Economics) |
| Abstract: | We analyse changes in market structure in India between 2000 and 2020 using a rich dataset at high levels of disaggregation. We examine the extent to which business groups – notably family-owned groups – have maintained dominant market positions in the Indian economy. We focus on two key dimensions. The first is the extent of concentration in markets and market shares by industry. The second concerns the dynamics and the extent to which business groups have focussed on consolidating their position in specific, narrow sectors or, rather, entered new sectors and diversified. We find that while market concentration has been falling, a bloc of high concentration sectors remains. Further, diversification has been actively pursued across sectors by most business groups. While this points to greater competition among business groups, the ratio of revenues to variable costs – a measure of the markup – has shifted upwards, particularly after 2013. The weight and persistence of these large business groups in the economy, as measured by the ratio of their revenues to GDP, has also increased. Finally, we discuss possible policy options. |
| Keywords: | market concentration, India, business groups, Hirschman Herfindahl Indices, diversification |
| JEL: | D22 L1 L11 O14 O25 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17428 |
| By: | Hashimzade, Nigar; Hatsor, Limor; Jelnov, Artyom |
| Abstract: | Recent antitrust regulations in several countries have granted exemptions for col- lusion aimed at achieving environmental goals. Firms can apply for exemptions if collusion helps to develop or to implement costly clean technology, particularly in sec- tors like renewable energy, where capital costs are high and economies of scale are significant. However, if the cost of the green transition is unknown to the competition regulator, firms might exploit the exemption by fixing prices higher than necessary. The regulator faces the decision of whether to permit collusion and whether to commission an investigation of potential price fixing, which incurs costs. We fully characterise the equilibria in this scenario that depend on the regulator’s belief about the high cost of green transition. If the belief is high enough, collusion will be allowed. We also identify conditions under which a regulator’s commitment to always investigate price fixing is preferable to making discretionary decisions. |
| Keywords: | policy, antitrust, collusion, environment |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:esprep:305321 |
| By: | John Asker; Allan Collard-Wexler; Charlotte De Canniere; Jan De Loecker; Christopher R. Knittel |
| Abstract: | Market power reduces equilibrium quantities and distorts production, typically causing welfare losses. However, as Buchanan (1969) noted, market power may mitigate overproduction from negative externalities. This paper examines this in the global oil market, where OPEC’s market power affects oil production and carbon intensity. We estimate that from 1970 to 2021, OPEC’s market power reduced emissions by over 67 GtCO2, equating to $4, 073 billion in climate damages and 17.8% of the carbon budget needed for the 1.5◦ C Paris Agreement target. This environmental benefit outweighs the welfare loss from distorted production allocation. |
| JEL: | L12 Q41 Q54 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33115 |
| By: | Emmens, Joseph; Hutschenreiter, Dennis; Manfredonia, Stefano; Noth, Felix; Santini, Tommaso |
| Abstract: | Does increasing common ownership influence firms' automation strategies? We develop and empirically test a theory indicating that institutional investors' common ownership drives firms that employ workers in the same local labor markets to boost automation-related innovation. First, we present a model integrating task-based production and common ownership, demonstrating that greater ownership overlap drives firms to internalize the impact of their automation decisions on the wage bills of local labor market competitors, leading to more automation and reduced employment. Second, we empirically validate the model's predictions. Based on patent texts, the geographic distribution of firms' labor forces at the establishment level, and exogenous increases in common ownership due to institutional investor mergers, we analyze the effects of rising common ownership on automation innovation within and across labor markets. Our findings reveal that firms experiencing a positive shock to common ownership with labor market rivals exhibit increased automation and decreased employment growth. Conversely, similar ownership shocks do not affect automation innovation if firms do not share local labor markets. |
| Keywords: | automation, common ownership, local labor markets, market power |
| JEL: | G23 J23 L22 O32 O33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:304457 |
| By: | Mustapha Nyenye Issah |
| Abstract: | We explore how dynamic entry deterrence operates through feedback strategies in markets experiencing stochastic demand fluctuations. The incumbent firm, aware of its own cost structure, can deter a potential competitor by strategically adjusting prices. The potential entrant faces a one-time, irreversible decision to enter the market, incurring a fixed cost, with profits determined by market conditions and the incumbent's hidden type. Market demand follows a Chan-Karolyi-Longstaff-Sanders Brownian motion. If the demand is low, the threat of entry diminishes, making deterrence less advantageous. In equilibrium, a weak incumbent may be incentivized to reveal its type by raising prices. We derive an optimal equilibrium using path integral control, where the entrant enters once demand reaches a high enough level, and the weak incumbent mixes strategies between revealing itself when demand is sufficiently low. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.16203 |
| By: | Brüll, Eduard; Rostam-Afschar, Davud; Schlenker, Oliver |
| Abstract: | We study how the threat of entry affects service quantity and quality of general practitioners (GPs). We leverage Germany's needs-based primary care planning system, in which the likelihood of new GPs reduces by 20 percentage points when primary care coverage exceeds a cut-off. We compile novel data covering all German primary care regions and up to 30, 000 GP-level observations from 2014 to 2019. Reduced threat of entry lowers patient satisfaction for incumbent GPs without nearby competitors but not in areas with competitors. We find no effects on working hours or quality measures at the regional level including hospitalizations and mortality. |
| Keywords: | Entry regulation, general practitioners, healthcare provision, threat of entry, regression discontinuity design |
| JEL: | I11 I18 J44 J22 L10 L22 R23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cexwps:305253 |
| By: | Haefner, Samuel; Haeusle, Niklas; Koeniger, Winfried; Braun, Alexander |
| Abstract: | We develop a model in which large risk-neutral firms and individual risk-averse consumers compete to employ heterogeneous workers by posting compensation menus. Production takes time, and we analyze how screening motives interact with the desire to smooth consumption. There is a unique symmetric separating equilibrium that is also efficient. In equilibrium, the extent to which the compensation scheme delays payment until the production quality becomes known depends on whether, and to which extent, the consumers are financially constrained. We discuss how our model relates to the design of compensation schemes in current online peer-to-peer markets. |
| Keywords: | Adverse selection, Self selection, Peer-to-peer markets, Labor markets, Capital market imperfections |
| JEL: | D15 D82 D86 E24 J33 M52 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:usg:econwp:2024:05 |