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on Industrial Competition |
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Issue of 2025–01–20
twenty-two papers chosen by Russell Pittman, United States Department of Justice |
| By: | Marc Bourreau; Axel Gautier |
| Abstract: | In this paper, we consider two platforms that compete for the development of a new product to integrate into their ecosystems. The new product can be developed either inhouse by the platforms or by an independent startup active only in the technology market. The presence of the startup affects the platforms’ R&D efforts through an insurance effect, which reduces the cost of failure in innovation, and a competition effect, which diminishes the returns to innovation. The magnitude of these effects depends on the attitude of the competition authorities towards the acquisition of the startup by one of the platforms. We show that allowing acquisitions stimulates platform innovation, but at the cost of a more concentrated market structure. We also compare the funding of the startup by independent venture capitalists or by the platforms themselves, and investigate how the merger regime influences the direction of the startup’s innovation. |
| Keywords: | innovation, startup acquisitions, mergers, digital, big tech, competition policy |
| JEL: | D43 G34 K21 L40 L86 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11569 |
| By: | Guido Menzio |
| Abstract: | I study the equilibrium and the welfare effects of international trade when product markets are imperfectly competitive due of search frictions—as in Burdett and Judd (1983)—rather than product differentiation—as in Dixit and Stiglitz (1977). Markups are positive, even though there are multiple firms producing identical goods. Markups depend negatively on the number of firms producing identical goods, which, in turn, determines the extent of competition in the market. Markups may be increasing, constant, decreasing or non-monotonic in firm's size, depending on the extent of competition and on the distribution of marginal costs. The entry of firms and the quantity of output produced by each firm are efficient, even though the market is imperfectly competitive. International trade increases the measure of firms in the market, intensifies competition, lowers markups, and unambiguously increases welfare. These "natural" effects of trade emerge generically in the Burdett-Judd model of imperfect competition. In the Dixit-Stiglitz model of imperfect competition, these effects are an artifact of particular specifications of preferences. |
| JEL: | D43 D83 F12 L16 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33253 |
| By: | Anastasia Antsygina; Ekaterina Kazakova; Alexander Tarasov |
| Abstract: | We develop a model of spatial competition with two heterogeneous in their market access chains, choosing between third-degree price discrimination in their local markets (flexible pricing) and a unified chain-level price (uniform pricing). The markets are interconnected with each other via consumers who commute between them and can make purchases in locations where they do not reside. Our model supports an asymmetric equilibrium, in which the two pricing strategies co-exist: the larger chain uses uniform pricing, while the smaller chain employs flexible pricing. We also find that the chains never choose the pricing strategies that maximize the total consumer surplus. |
| Keywords: | spatial competition, price discrimination, uniform pricing, commuters |
| JEL: | D21 L11 L20 R32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11576 |
| By: | Brekke, Kurt R. (Dept. of Economics, Norwegian School of Economics and Business Administration); Dalen, Dag Morten (Dept. of Economics, BI Norwegian Business School); Straume, Odd Rune (Dept. of Economics, University of Bergen) |
| Abstract: | Pharmaceutical expenditures are rising rapidly, driven in part by the innovation of highly effective but very expensive drug therapies that treat multiple diseases. While these drugs offer substantial health benefits, payers face a critical trade-off between cost containment and access to new medicines. A key policy question is whether producers should be restricted to uniform pricing or allowed to use indication-based pricing, where prices vary across patient groups. We analyse how this choice affects drug producers' incentives to invest in new indications, their pricing strategies, and the resulting surplus for health plans. In a monopoly setting, indication-based pricing yields higher profits and thus strengthens incentives to invest in new indications, while the payer prefers uniform pricing unless the fixed investment costs cannot be recouped. The novelty of our study lies in showing that monopoly-based insights may not hold under competition. Specifically, we identify a softening-of-competition effect, where a uniform pricing restriction serves as a credible commitment to raise prices in the competitive market. In this case, the health plan generally favours indication-based pricing to reduce costs. However, an exception arises, where both parties prefer uniform pricing, if the uniform price generates significant health gains through demand expansion in the original monopoly market. Our findings suggest that neither pricing scheme is universally optimal, underscoring the need for case-by-case assessments across drug classes. |
| Keywords: | Pharmaceuticals; Innovation incentives; Payer pricing schemes |
| JEL: | I18 L13 L65 O31 |
| Date: | 2025–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhheco:2025_001 |
| By: | Sergei Kichko; Alina Ozhegova; Alexander Tarasov |
| Abstract: | In this paper, we explore how heterogeneous firms decide on vertical and horizontal qualities of their products. We show that if increasing the product qualities appears to be relatively costly, more productive firms choose higher vertical quality but lower horizontal quality. We also document distortions that arise in our framework. Specifically, we find that in the market equilibrium, firms tend to underinvest in horizontal quality but overinvest in vertical quality compared to the first best allocation. Using data from pizzerias in Oslo, Norway, we provide a calibration exercise to estimate welfare losses due to the quality distortions. |
| Keywords: | monopolistic competition, vertical quality, horizontal quality, welfare |
| JEL: | D43 L13 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11472 |
| By: | Cândida Ferreira |
| Abstract: | This paper empirically tests the two competing hypotheses regarding the relationship between competition and stability: the competition-fragility hypothesis and the competition-stability hypothesis. The banking sector stability is first proxied by the estimated Z-score that provides a measure of overall bank stability. Further, the paper separately considers some specific constituent components of the Z-score measure to analyse different aspects of the bank stability: bank profitability and bank capitalisation. Two different measures are used to represent bank competition: the Herfindahl-Hirschman Index (a specific measure of market concentration), and the Boone indicator (which measures competition from an efficiency perspective). Using data sourced from the Moody’s Analytics BankFocus database, the paper applies panel estimations to a relatively large panel including 784 relevant banks of all the 27 European Union countries, between 2006 and 2021. The main findings overall confirm the validity of the competitionfragility hypothesis. Moreover, the results obtained for two specific EU countries: Germany and France, highlight some specific differences in particular regarding the effects of bank market concentration, and the responses to the crises that affected the EU banking institutions over the considered period. The findings of this paper reinforce the relevance of the policy makers’ role and give room to some recommendations. |
| Keywords: | Bank stability: bank competition; Z-score; Herfindahl-Hirschman Index; Boone indicator; EU banking sector. |
| JEL: | C33 D53 F36 G21 |
| Date: | 2023–02 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp02612023 |
| By: | Conteduca, Francesco Paolo; Panon, Ludovic |
| Abstract: | Industries are not fully geographically concentrated, so that natural disasters can affect the degree of competition in the industry, forcing firms to adapt, and have aggregate consequences. Using administrative data, we show that natural disasters in Italy lead to a persistent decline in markups of affected manufacturing firms, particularly large ones. We implement an oligopolistic competition model with idiosyncratic shocks directly on the firm-level data and quantify how markup adjustments shape aggregate productivity and welfare. Our findings suggest that markup adjustments may have mitigated the impact of the 2012 Italian earthquake on aggregate productivity by approximately 30%. |
| Keywords: | Natural Disasters; Markups; Oligopolistic Competition; Aggregate Productivity; Misallocation; Firm Heterogeneity |
| JEL: | D22 D43 O47 Q54 |
| Date: | 2024–12–17 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123008 |
| By: | Federico M. Accursi; Raúl Bajo-Buenestado; Raul Bajo-Buenestado |
| Abstract: | Cooperatives, formally established to enhance social welfare and local economic development, often face pressures that divert them from these foundational goals and lead to their transformation into profit-driven entities that exploit market power. Leveraging an unexpected tax change following a vote of no confidence, we examine the pass-through to retail prices as a test for market power, using data from over 250 cooperatives operating in the Spanish fuel market. Our findings reveal a complete pass-through of the tax increase to retail prices. Additionally, descriptive evidence suggests that cooperatives consistently offer lower prices than their for-profit counterparts. These results are indicative of the absence of markup adjustments and market power exertion among cooperatives and are consistent with their prioritization of consumer welfare over profit maximization, thereby justifying the regulatory advantages they enjoy. |
| Keywords: | cooperatives, pass-through to prices, market power, firm conduct, retail fuel market |
| JEL: | D22 H22 H32 L21 L29 P13 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11473 |
| By: | Brüll, Eduard (ZEW); Rostam-Afschar, Davud (University of Mannheim); Schlenker, Oliver (University of Konstanz) |
| 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: | threat of entry, healthcare provision, general practitioners, entry regulation, regression discontinuity design |
| JEL: | I11 I18 J44 J22 L10 L22 R23 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17504 |
| By: | Marleen R. Marra; Nathan H. Miller; Gretchen Sileo |
| Abstract: | Incarcerated individuals in the U.S. purchase goods and services from monopoly vendors selected by their correctional authority. We study telecommunications, which have come under bipartisan scrutiny due to the high prices inmates pay for phone calls. Prospective providers are evaluated on their technical capabilities, the prices they would charge, and the “commission” they would pay the correctional authority. Using data from public records requests, we estimate a first-score auction model with evaluation uncertainty and multi-dimensional bidder heterogeneity. The model indicates that reducing the role of commissions in procurement lowers prices, whereas increasing competition among providers mainly raises commissions. Moreover, recent federal regulations that ban commissions and cap prices likely preserve providers' profitability. |
| JEL: | D43 D44 H57 L13 L51 L96 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33292 |
| By: | Gabrielli Florencia; Culós Verónica; Herrera Gómez Marcos; Willington Manuel |
| Abstract: | This paper studies the demand for liquid fuels at the wholesale level, using the discrete choice approach. Demand is conditioned by the presence of wholesale competitors, the existence of a reward card, and the percentage of flagged outlets kept by each firm. Using a novel dataset from Argentina, we provide new empirical evidence that quantifies market power across firms and regions. We find differences among markups estimated at regional levels, based both on different presence of the firms within each region and on price elasticity of demand of each region itself. Even though leading firms tend to have higher markups on the whole, there are specific niche markets where small firms reach higher markups than those they could have obtained in more crowded markets, exceeding markups obtained by larger competitors. Price elasticity of demand is different among regions, partly because it reflects the variability that coexists in the productive structure of each economy and because of different income levels and consumption patterns in these geographic areas. |
| JEL: | C52 L13 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4732 |
| By: | Ohnishi, Kazuhiro |
| Abstract: | Over the past approximately 30 years, many researchers have examined oligopoly models where firms endogenously select the timing of their action decisions. Therefore, this paper studies a mixed triopoly model featuring competition between a labour-managed firm, a capitalist firm and a state-owned firm. The sequence of events is as follows. In stage 0, each firm independently and simultaneously selects either ‘stage 1’ or ‘stage 2’. In this context, stage 1 denotes that a firm produces in stage 1, whereas stage 2 signifies that it produces in stage 2. In stage 1, if a firm opts for stage 1, it determines its output for this stage. In stage 2, if a firm chooses stage 2, it decides on its output for this stage. Upon the conclusion of the game, the market opens, and all firms sell their outputs. The purpose of this paper is to present the equilibrium outcome of triopoly competition where a state-owned firm, a labour-managed firm and a capitalist firm compete in quantities. As a result of the analysis, this paper reveals that there exists an equilibrium wherein both the labour-managed firm and the capitalist firm assume leadership roles. The paper finds that the state-owned firm is precluded from functioning as the Stackelberg leader. |
| Keywords: | Capitalist firm; Cournot game; Endogenous timing; Labour-managed firm; State-owned firm |
| JEL: | C72 D21 L30 |
| Date: | 2024–12–17 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123007 |
| By: | Esteban Jaimovich; Boryana Madzharova; Vincenzo Merella |
| Abstract: | This paper examines firms’ market entry strategies for quality-differentiated goods, focusing on both initial and subsequent product-level entry decisions. Using a theoretical framework incorporating nonhomothetic preferences, we show that premium products are more likely to enter wealthier markets earlier, where producers can capture higher mark-ups. Furthermore, the determinants of follow-up market selection differ by product quality: for premium products, income plays a dominant role in shaping expansion paths, whereas geographic proximity remains the primary driver for low-quality products. Empirically, we test these predictions using micro-level data from the refrigeration industry. Our results confirm a strong positive relationship between market order of entry and income, with this effect being particularly pronounced for high-quality products. Additionally, we observe that, as product quality increases, follow-up markets tend to be geographically more dispersed relative to earlier markets. |
| Keywords: | market entry, gravity, nonhomothetic preferences, quality-differentiated products |
| JEL: | F10 F14 F23 L68 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11529 |
| By: | Youngjin Hong; In Kyung Kim; Kyoo il Kim |
| Abstract: | Understanding firm conduct is crucial for industrial organization and antitrust policy. In this article, we develop a testing procedure based on the Rivers and Vuong non-nested model selection framework. Unlike existing methods that require estimating the demand and supply system, our approach compares the model fit of two first-stage price regressions. Through an extensive Monte Carlo study, we demonstrate that our test performs comparably to, or outperforms, existing methods in detecting collusion across various collusive scenarios. The results are robust to model misspecification, alternative functional forms for instruments, and data limitations. By simplifying the diagnosis of firm behavior, our method provides an efficient tool for researchers and regulators to assess industry conduct. Additionally, our approach offers a practical guideline for enhancing the strength of BLP-style instruments in demand estimation: once collusion is detected, researchers are advised to incorporate the product characteristics of colluding partners into own-firm instruments while excluding them from other-firm instruments. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.05022 |
| By: | Domenico Delli Gatti; Roberta Terranova; Enrico Maria Turco |
| Abstract: | Can standard measures of industrial policy such as R&D subsidies or financial support for machine replacement be effective tools to reverse the current pattern of increasing market power and declining business dynamism? To answer this question we explore the effects of various industrial policy instruments in a macroeconomic agent-based model calibrated to reproduce the decline in US business dynamism over the last half-century. Our results indicate that R&D subsidies alone are insufficient to address the underlying causes of declining dynamism. They become effective, however, when combined in a policy mix with knowledge diffusion policies, particularly those favoring advanced technology adoption by small firms. In this case, industrial policy fosters growth by closing the productivity gap between leaders and laggards, and thereby curbing market power. These findings suggests a two-pronged approach to the design of industrial policy, integrating firm-level subsidies with knowledge diffusion measures and therefore ensuring that innovation and competition policies advance together. |
| Keywords: | macroeconomic dynamics, innovation, knowledge diffusion, market power, industrial policy, agent-based model |
| JEL: | C63 E32 L10 L52 O31 O33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11544 |
| By: | Tengjiao Chen; Daniel H. Karney |
| Abstract: | This study constructs a novel analytical general equilibrium model to compare environmental policies in a setting where oligopolistic energy firms engage in third-degree price discrimination across residential consumers and industrial firms. Closed-form solutions demonstrate the impact on prices and quantities. The resulting welfare change is decomposed across three distortions: output, price discrimination, and externality. This study finds that the output distortion and price discrimination welfare effects generally move in opposite directions under policies such as an emission tax or a two-part instrument. Numerical analysis compares policies and finds scenarios where the output distortion and price discrimination welfare changes fully offset and thus leaves the net welfare gain of the externality correction. In this way, environmental policy can be designed to mitigate output distortion welfare concerns when firms have market power. |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2501.03114 |
| By: | Jyotsana Kala; Lucie Lebeau; Lu Wang |
| Abstract: | We study the dynamic interplay between monetary policy and market power in a decentralized monetary economy. Building on Choi and Rocheteau (2024), our key innovation is to model rent seeking as a process that takes time, allowing market power to evolve gradually. Our model predicts that a gradual reduction in the nominal interest rate causes a simultaneous increase in rent-seeking effort and producers’ market power, consistent with the stylized correlation observed in the U.S. over the last few decades. Producer entry can however reverse this relation in the short run, and neutralize it in the long run. Indeterminacy and hysteresis emerge when consumers benefit from valuable outside options, with short-run monetary policy shocks potentially locking the economy into high- or low-market-power equilibria in the long run. |
| Keywords: | search; money; market power; monetary policy |
| JEL: | D82 D83 E40 E50 |
| Date: | 2025–01–07 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99409 |
| By: | Beck, Dominik |
| Abstract: | I construct a continuous-time market entry game to experimentally investigate whether continuous-time interaction increases the incumbent’s reputation compared to discrete-time interaction. In the model, entrants can build capacity up to a certain threshold in order to enter the market, while the incumbent can deter entry to influence the entrant’s decision. In continuous time, players can adjust their actions at any moment, whereas in discrete time, actions are limited to a few simultaneous moves. In the experiment, both games are repeated five times in a row with a fixed incumbent and changing entrants. Through the transmission of distinct information among subsequent entrants, the incumbent is able to build reputation throughout the game. In continuous time, the incumbent achieves a significantly higher reputation. Moreover, when considering reputation in a round-based view, it becomes evident that reputation reaches a high level already in the first round, whereas in discrete time, it takes about three rounds to develop. These insights can be attributed to enhanced information transfer in continuous time. Through frequent and endogenous action changes, the incumbent is able to send more and clearer entry-deterring signals. |
| Keywords: | continuous-time game, reputation building, market entry, Chain Store Game, entry deterrence, laboratory experiment |
| JEL: | C72 C92 L10 |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122772 |
| By: | Pittman, Russell |
| Abstract: | In its 2023 decision approving the acquisition of the Kansas City Southern Railway by the Canadian Pacific, the U.S. Surface Transportation Board conditioned its approval on the merged railway’s commitment “to keep gateways open on commercially reasonable terms” – that is, to allow shippers and non-merging railroads to continue to enjoy the option of using joint-line service, despite the merger’s creation of the alternative of single-line service on the merged railroad. A century has passed since the Board’s predecessor agency, the Interstate Commerce Commission, first imposed a condition of the maintenance of open gateways as a condition for approving a rail merger. This paper asks three questions. First, exactly what, in practice, are open gateways? Second, how have the two regulatory agencies dealt with the inherent tension between maintaining open gateways and achieving merger efficiencies? Third, what is the current state of play? |
| Keywords: | freight railways, regulation, vertical mergers, nondiscrimination conditions |
| JEL: | K23 L51 L92 R48 |
| Date: | 2024–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123063 |
| By: | Tine De Bock; annelies Costers; Simon Hazée |
| Abstract: | E-commerce is flourishing globally, with more and more organizations developing e-commerce applications and opting for pay-what-you-want (PWYW) as an innovative pricing strategy. Although customers behave differently online (compared to offline) and commonly buy tangible products in this context, prior research on PWYW mainly focused either on offline settings or on the distribution of digital music content (i.e., an intangible product). Therefore, the purpose of this paper is to examine, drawing on signaling theory, the effects of three signaling cues on customer PWYW online payments for tangible products and the mediating effect of trust and risk perceptions. Two-hundred fifty-five adult consumers participated in a 2 (virtual product experience versus no virtual product experience) × 2 (warranty versus no warranty) × 2 (product review versus no product review) between-subjects experiment. The results indicate that offering a product warranty, an online user review, and—to a greater extent—a virtual product experience positively influence customer PWYW online payments for a tangible product. Furthermore, all three signals influence the price that customers want to pay because of enhanced trust regarding the e-vendor rather than reduced risks. The findings provide e-commerce managers with relevant insights to refine their digital strategy, influence customer online trust, and ultimately benefit from PWYW. This research contributes to the literature with an extension of current PWYW research by examining the antecedents of customer PWYW payments for tangible products in an online setting. |
| Keywords: | e-commerce, innovative pricing, participative pricing, Pay-what-you-want, risk, signaling theory, trust |
| Date: | 2023–09–25 |
| URL: | https://d.repec.org/n?u=RePEc:ete:marwps:725819 |
| By: | Alexander Guschanski; Özlem Onaran |
| Abstract: | We analyse UK markups and profit margins for the pandemic period and its aftermath using unconsolidated balance sheets of non-financial corporations for both listed and unlisted firms. The markup increases by 14.7% between 2014 and 2022, exceeding any previously documented growth rate for UK markups, despite major economic, ecological and geo-political crises. The rise in markups is driven by both increasing markups within UK companies and a reallocation of output towards high-markup firms. However, the within effect has dominated since 2020, driven by large firms. In this regard, the UK is different from the US, where the reallocation effect has been more prominent. Since 2014, the markup distribution of firms has become more polarised. Increasingly more firms are at risk of financial difficulties due to low profit margins while at the same time some firms are charging historically extraordinarily high markups and reap high profits. This contributes to bankruptcy risk and economic instability while exacerbating pricing power for some companies. Preventing markup increases during macroeconomic shocks should be a priority for policymakers seeking to reduce inflationary pressure and adverse effects on income inequality. |
| Keywords: | markup, profit margin, market power |
| JEL: | D40 J30 L10 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2501 |
| By: | Marianna Endresz (Magyar Nemzeti Bank (Central Bank of Hungary)); Peter Gabriel (Magyar Nemzeti Bank (Central Bank of Hungary)) |
| Abstract: | This paper estimates the impact of acquisitions on various firm-level performance measures of Hungarian firms. Using difference-in-differences estimation with matching, we show that the performance of the acquirer improves significantly following an acquisition. By controlling for the – typically weaker – efficiency of the target, we also estimate the overall efficiency gain. Our results indicate that acquisitions are powerful tools to improve efficiency in the Hungarian economy. The estimated impacts are heterogeneous. Efficiency gains are higher if the acquirer is smaller and less efficient prior to the acquisition, highlighting that improving scale efficiency is an important motive for acquisitions. Furthermore, if the acquirer and target companies had business links beforehand, the productivity gain is twice as large. Acquisitions made during recessions are also different in some ways. Firms make fewer acquisitions, although the number of potential target companies increases. Because acquirers become more selective, the efficiency gains remain sizeable even in the unfavourable business environment. |
| Keywords: | mergers, acquisitions, efficiency, productivity, matching |
| JEL: | C22 D22 D24 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:mnb:wpaper:2024/3 |