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on Industrial Competition |
| By: | Jose Azar (IESE Business School); Ioana Marinescu (University of Pennsylvania) |
| Abstract: | Labor economics often assumes that wages w are equal to the marginal revenue product of labor MRPL. However, recent literature has shown that firms’ market power allows them to pay wages substantially below marginal productivity. The markdown (MRPL − w)/w is our preferred measure of firms’ monopsony power, and captures the percent wage increase that would occur if monopsony power were eliminated. We derive the markdown across three classes of models, each embodying a distinct source of monopsony power. First, in oligopsony models, monopsony power arises from strategic interactions between large firms, and is related to labor market concentration. Second, in job differentiation models, monopsony power arises from workers’ heterogeneous preferences over jobs that differ in wages and amenities. Finally, in search and matching models, it arises from frictions that prevent workers from accessing all existing job vacancies. To identify the markdown, empirical studies often rely on estimating the firm-level labor supply elasticity and taking its inverse as a measure of the markdown. A few studies directly estimate MRPL using a production function approach. Across studies, the markdown typically ranges between 15% and 50% implying that wages would increase by 15 to 50% if firms’ monopsony power were eliminated. Finally, we analyze the policy implications of monopsony power in three areas, drawing on both theory and empirical analysis: merger control in antitrust policy, the regulation of non-competition agreements, and minimum wages. Monopsony power helps explain how mergers and noncompetition agreements can lower wages, and how minimum wages can increase employment. Overall, the literature shows that monopsony power is significant, and should be considered when analyzing policy and the sources of wage variation. |
| Keywords: | monopsony, oligopsony, markdown, wages, labor market concentration, labor supply elasticity, antitrust, mergers, imperfect competition, minimum wage |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:crm:wpaper:2431 |
| By: | Yanlin Chen; Xianwen Shi; Jun Zhang |
| Abstract: | We study the welfare effects of price discrimination in a duopoly market with both captive and contested consumers. Using a unified information design approach, we characterize the best and worst market segmentations for producer surplus, consumer surplus, and social surplus. The firm-optimal segmentation, which divides the market into two nested segments, consistently harms consumers compared to uniform pricing. The consumer-optimal segmentation, which divides the market into a symmetric segment and a nested segment, sometimes leads to a Pareto improvement. Social surplus, if monotone in firm profit, is often maximized either by the firm-optimal or consumer-optimal segmentation. |
| Keywords: | Information Design, Market Segmentation, Firm-optimal Segmentation, Consumer-optimal Segmentation |
| JEL: | D43 D82 |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-790 |
| By: | Edward Kong; Timothy Layton; Mark Shepard |
| Abstract: | Adverse selection is a classic market failure known to limit or “unravel”' trade in high-quality insurance and many other economic settings. While the standard theory emphasizes quality distortions, we argue that selection has another big-picture implication: it unravels competition among differentiated firms, leading to fewer surviving competitors—and in the extreme, what we call “un-natural” monopoly. Adverse selection pushes firms toward aggressive price cutting to attract price-sensitive, low-risk consumers. This creates a wedge between average and marginal costs that (like fixed costs in standard models) limits how may firms can profitably survive. We demonstrate this insight in a simple model of insurer entry and price competition, estimated using administrative data from Massachusetts' health insurance exchange. We find a large “selection wedge” of 20-30% of average costs, which (without corrective policies) unravels the market to monopoly. Our analysis suggests a surprising policy implication: interventions that limit price-cutting can improve welfare by supporting more entry, and ultimately lower prices. |
| JEL: | D4 I11 I13 L1 L40 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33187 |
| By: | Jonathan Elliott (JHU - Johns Hopkins University); Georges Vivien Houngbonon (World Bank Group); Marc Ivaldi (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Paul T. Scott (NYU - New York University [New York] - NYU - NYU System) |
| Abstract: | We develop a model of competition in prices and infrastructure among mobile network operators. Although consolidation increases market power, it can lead to more efficient data transmission due to economies of scale, which we derive from physical principles. After estimating our model with French consumer and infrastructure data, equilibrium simulations reveal that while prices decrease with the number of firms, so do download speeds. Our framework also allows us to quantify the impact of spectrum allocation. The marginal social value of spectrum exceeds firms' willingness to pay in our model as well as observed prices in spectrum auctions. |
| Keywords: | Market structure, Scale efficiency, Antitrust policy, Infrastructure, Endogenous, Quality, Queuing, Mobile telecommunications |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04831225 |
| By: | Kenneth S. Rogoff; Zhiheng He; Yang You |
| Abstract: | Digitalization led to a rapid expansion of loyalty tokens typically bundled as part of product price. An open question is whether issuers are incentivized to make loyalty tokens tradable, raising regulation issues for monetary and banking authorities. This paper argues that an issuer earns more revenue by making tokens non-tradable even though consumers would pay a higher price for tradable tokens. We further show that an issuer with stronger market power makes its revenue more token-dependent. We test the model’s predictions with data on airline mileage and hotel reward programs and document consistent empirical results that align with our theory. |
| JEL: | G12 G32 G51 M20 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33201 |
| By: | Stefano Colombo; Paolo G. Garella; Noriaki Matsushima |
| Abstract: | We analyze behavior-based price discrimination (BBPD) where consumers choose between being identified (e.g., by opting in) or remaining anonymous, as opposed to mandatory opt-in. Opting in provides consumers with benefits but also enables firms to apply history-dependent pricing. Under voluntary opt-in, market segmentation becomes more fragmented compared to standard BBPD. Consumer surplus and social welfare are higher with voluntary opt-in, while firm profits increase under mandatory opt-in. However, if consumers heavily discount the future and firms are forward-looking, these results may reverse entirely. Our result implies that policymakers can ensure that consumers retain control over their data along with encouraging them to adopt a more forward-looking perspective. |
| Date: | 2023–11 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1219r |
| By: | Marc Ivaldi (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Connie Lee (TSE-R - TSE-R Toulouse School of Economics – Recherche - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement) |
| Abstract: | Is it the Advent of Fairness ? |
| Keywords: | European Union, United States of America, China, General antitrust, Competition policy, Consumer welfare, Consumer protection, All business sectors |
| Date: | 2024–11–13 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04823071 |
| By: | Matthias Mertens; Benjamin Schoefer |
| Abstract: | We document and dissect a new stylized fact about firm growth: the shift from labor to intermediate inputs. This shift occurs in input quantities, cost and output shares, and output elasticities. We establish this fact using German firm-level data and replicate it in administrative firm data from 11 additional countries. We also document these patterns in micro-aggregated industry data for 20 European countries (and, with respect to industry cost shares, for the US). We rationalize this novel regularity within a parsimonious model featuring (i) an elasticity of substitution between intermediates and labor that exceeds unity, and (ii) an increasing shadow price of labor relative to intermediates, due to monopsony power over labor or labor adjustment costs. The shift from labor to intermediates accounts for one half to one third of the decline in the labor share in growing firms (the remainder is due to wage markdowns and markups) and rationalizes most of the labor share decline in growing industries. |
| JEL: | E0 J0 L0 M0 O0 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33172 |
| By: | Jeroen Hinloopen (Netherlands Bureau for Economic Policy Analysis and Tinbergen Institute); Stephen Martin (Purdue University); Sander Onderstal (University of Amsterdam and Tinbergen Institute); Leonard Treuren (KU Leuven) |
| Abstract: | Antitrust laws prohibit private firms to coordinate their market behavior, yet many types of interfirm cooperation are legal. Using laboratory experiments, we study spillovers from legal cooperation in one market to non-competitive prices in a different market. Our theoretical framework predicts that such cooperation spillovers are most likely to occur for intermediate levels of competition. Our experimental findings support this theoretical prediction. In addition, our experimental results show that repeated interaction and communication about prices in a market are not necessary to achieve non-competitive prices in that market, as long as subjects can form binding agreements in a different market. Results from additional treatments suggest that commitment and multimarket contact are necessary for cooperation spillovers to emerge. |
| Keywords: | Cartel; Communication; Cooperation spillovers; Antitrust; Experiment |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:tin:wpaper:20240078 |
| By: | Alexei Parakhonyak; Andrew Rhodes |
| Abstract: | We consider a model in which consumers wish to buy a product repeatedly over time, but need to engage in costly search to learn prices and find a product that matches them well. The optimal search rule has two reservation values, one for newly-searched products, and another for products that were searched in the past. Depending on the search cost, firms either keep price steady over time, or gradually raise price to take advantage of a growing pool of high-valuation repeat customers. The model generates rich search and purchase dynamics, as consumers may optimally “stagger” search over time, initially trying different products, settling on one and buying it for a while, before choosing to search again for something better. We also show that consumers may be better off when firms can offer personalized prices based on their search history. |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:oxf:wpaper:1066 |
| By: | Jonathan Benchimol (BoI - Bank of Israel); Caroline Bozou (UP1 - Université Paris 1 Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique) |
| Keywords: | Banking concentration, Imperfect competition, Financial stability, Welfare analysis, DSGE model |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cesptp:emse-04624985 |
| By: | Bo Cowgill; Andrea Prat; Tommaso Valletti |
| Abstract: | Brandeis (1914) hypothesized that firms with market power will also attempt to gain political power. To explore this hypothesis empirically, we combine data on mergers with data on lobbying expenditures and campaign contributions in the US from 1999 to 2017. We pursue two distinct empirical approaches: a panel event study and a differential exposure design. Both approaches indicate that mergers are followed by large and persistent increases in lobbying activity, both by individual firms and by industry trade associations. There is also weaker evidence for an association of mergers with campaign contributions (PACs). We also find that mergers impact the extensive margin of political activity, for example, by impacting companies’ choice to establish their first in-house lobbying teams and/or first corporate PAC. We interpret these results within an oligopoly model augmented with endogenous regulation and lobbying. |
| JEL: | L19 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33255 |
| By: | Anderlik, Jasmin (Ministry of Labor and the Economy, Vienna); Jumaniyozova, Malika (Johannes Kepler University, Linz); Schmidpeter, Bernhard (IZA, Institute for the Study of Labor, Bonn, RWI - Leibnitz Institute for Economic Research, Essen and Vienna University of Business and Economics, Vienna.); Winter-Ebmer, Rudolf (Johannes Kepler University, Linz, Institute for the Study of Labor, Bonn, Institute for Advanced Studies, Vienna and CEPR, Centre for Economic Policy Research, London) |
| Abstract: | Using linked vacancy-employer-employee data from Austria, we investigate how monopsony power affects firms’ posting behavior and wage negotiations. Consistent with theoretical predictions, we find that firms with greater monopsony power post lower wages and offer fewer non-wage amenities, suggesting that wages and non-wage benefits are complementary. However, we find no evidence that monopsonistic firms demand higher levels of skill or education. Instead, our results indicate that they require more basic skills, particularly those related to routine tasks. On the workers’ side, we find that employees hired in monopsonistic labor markets face significantly lower wages, both initially and in the long run. These lower wages are driven by both lower posted wages and reduced bargaining power, as well as reduced opportunities to climb the wage ladder later. |
| Keywords: | Monopsony, wage bargaining, job amenities, wages |
| JEL: | J42 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:ihs:ihswps:number58 |
| By: | Kim, Min Jung |
| Abstract: | Self-preferencing by online platforms encompasses a spectrum of conduct types, all with implications for both anti-competitive and pro-competitive effects. Therefore, it is desirable to maintain the current ex-post regulatory framework, which applies the rule of reason and intervenes only when such practices are deemed to be unjust or harmful to fair competition, rather than imposing a blanket ban. However, the timeliness and efficiency of enforcement mechanisms should be improved in light of the distinct characteristics of the online environments and self-preferencing conducts. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:kdifoc:308156 |
| By: | Aslihan Asil; Paulo Ramos; Amanda Starc; Thomas G. Wollmann |
| Abstract: | A rollup is a series of acquisitions through which a financial sponsor consolidates ownership. Increasingly, this strategy is shaping economically important markets, but historically, it has escaped antitrust enforcement. We study this phenomenon in the anesthesia industry, site of the first rollup-based antitrust case in US history. First, we identify 18 other rollups that are observationally similar to the litigated ones. Next, we show that rollups consolidate ownership and that prices rise sharply as competing practices are acquired. Last, we estimate a structural bargaining model and simulate counterfactual equilibria under remedies that courts are likely to consider. |
| JEL: | I11 L1 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33217 |
| By: | Ms. Yevgeniya Korniyenko; Ahmed K Tohamy; Weining Xin |
| Abstract: | The Middle East (ME) is often perceived as region with rentier economies and uncompetitive markets. Evidence of market power in the region however is scant. In this paper, we ask the following three questions: Is the ME uniquely uncompetitive? Has the evolution of market power in the region traced the global rise in market power? What government policies and actions influenced the market power in the region and can taxes be a way to even the playing field? To answer these questions, we utilize comprehensive firm-level data from Compustat between 2004 and 2022 and employ two methods for estimating markups (production function and cost-share approach). We document that market power among listed firms in the ME is higher than in the US, but on a downward trend. We find that the value-added tax (VAT) reforms introduced by some Gulf states from 2018 to 2022 resulted in a reduction of market power, an additional benefit beyond increasing fiscal space. While policymakers should continue to use available regulatory levers to achieve economic efficiency and a level playing field, VAT could be considered as an alternative instrument. |
| Keywords: | Middle East; Market Power; Markup; Firm Behavior |
| Date: | 2025–01–10 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/001 |
| By: | Marleen Willekens; Simon Dekeyser; Lars Van Cutsem; Victor S Zuiddam |
| Abstract: | This study examines whether audit firm differentiation signaled through the strength of its intellectual property (IP) portfolio softens price competition. Following the patent and trademark literature, we focus on the stock of these intellectual property rights as an indicator of audit firm differentiation capturing an audit firm’s brand strength and technological capabilities. We hypothesize that the audit fee charged by an audit firm is increasing in its IP portfolio strength, ceteris paribus. Employing data on intellectual property (IP) of U.S. audit firms, in terms of branding and technological capabilities, we identify all active trademarks and patents for the 50 largest U.S. audit firms between 2004 and 2022. Our results suggest that the strength of an audit firm’s portfolio of trademarks and patents is significantly positively associated with audit fees, suggesting that branding and technological capabilities are means for audit firms to soften price competition through IP differentiation. |
| Keywords: | G074819N#54967485 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ete:afiper:742971 |
| By: | David P. Myatt (London Business School); David Ronayne (ESMT Berlin) |
| Abstract: | We study the pricing of homogeneous products sold to customers who consider different sets of suppliers. We seek prices that are stable in the sense that no firm wishes to undercut any rival or to raise its price when rivals have a subsequent opportunity to undercut it. We identify stable and dispersed prices that emerge from both collective choice and non-cooperative pricing games, and derive predictions for prices across several price-consideration specifications. We show how the implications for firms and customers compare to those generated by conventional approaches. |
| Date: | 2025–01–21 |
| URL: | https://d.repec.org/n?u=RePEc:rco:dpaper:523 |
| By: | Yingni Guo; Hao Li; Xianwen Shi |
| Abstract: | A seller of an indivisible good designs a selling mechanism for a buyer whose private information (his type) is the distribution of his value for the good. A selling mechanism includes both a menu of sequential pricing, and a menu of information disclosure about the realized value that the buyer is allowed to learn privately. In a model of two types with an increasing likelihood ratio, we show that under some regularity conditions the disclosure policy in an optimal mechanism has a nested interval structure: the high type is allowed to learn whether his value is greater than the seller's cost, while the low type is allowed to learn whether his value is in an interval above the cost. The interval of the low type may exclude values at the top of the distribution to reduce the information rent of the high type. Information discrimination is in general necessary in an optimal mechanism. |
| Keywords: | Sequential Screening, Dynamic Mechanism Design, Disclosure, Information Design |
| JEL: | D83 D82 |
| Date: | 2025–01–16 |
| URL: | https://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-792 |
| By: | Tobias Berg; Valentin Burg; Jan Keil; Manju Puri |
| Abstract: | “Buy Now, Pay Later” (BNPL) is a key innovation in consumer payments. It bundles the sale of a product with a subsidized loan, effectively offering lower prices to low-creditworthiness customers. BNPL thereby allows merchants to price-discriminate among customers with different willingness-to-pay. Consistent with a price-discrimination mechanism, we show that BNPL increases sales by 20%, driven by low-creditworthiness customers and products where market power is larger. We find that the benefits of offering BNPL significantly outweigh the costs for the merchant. Our findings help to explain the surge in popularity of BNPL in e-commerce around the world. |
| JEL: | D12 G40 G59 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33152 |
| By: | Kirill Safonov |
| Abstract: | This paper contributes to the literature on parametric demand estimation by using deep learning to model consumer preferences. Traditional econometric methods often struggle with limited within-product price variation, a challenge addressed by the proposed neural network approach. The proposed method estimates the functional form of the demand and demonstrates higher performance in both simulations and empirical applications. Notably, under low price variation, the machine learning model outperforms econometric approaches, reducing the mean squared error of initial price parameter estimates by nearly threefold. In empirical setting, the ML model consistently predicts a negative relationship between demand and price in 100% of cases, whereas the econometric approach fails to do so in 20% of cases. The suggested model incorporates a wide range of product characteristics, as well as prices of other products and competitors. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.00920 |
| By: | Marta F. Arroyabe (University of Sussex); Christoph Grimpe (Copenhagen Business School); Katrin Hussinger (DEM, Université du Luxembourg) |
| Abstract: | We investigate whether strengthened legal protection of trade secrets increases the likelihood of a firm being acquired. Stronger protection can make a firm more attractive for acquisition due to better safeguarding of trade secrets, but it may also increase information asymmetries that discourage potential acquirers. Using the staggered implementation of the Uniform Trade Secrets Act (UTSA) in the U.S., we show that stronger trade secret protection increases the likelihood of being acquired, but also changes firms’ acquisition strategies more broadly depending on the distance between acquirer and target. Compared to domestic acquirers, foreign acquirers are only half as likely to make an acquisition, and they prefer to acquire minority rather than majority stakes. Both domestic and foreign acquirers are more likely to pursue stepwise acquisitions of a target as protection increases, consistent with a real options rationale. Further investigation suggests that, while increased trade secret protection increases information asymmetries for all acquirers, foreign acquirers as well as domestic acquirers located further away from a target are disproportionately affected. |
| Keywords: | trade secret protection, firm acquisitions, ownership stakes, distance, Uniform Trade Secrets Act (UTSA). |
| JEL: | G34 O34 L20 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:luc:wpaper:25-05 |
| By: | Diaz, Adriano |
| Abstract: | This article examines the phenomenon of "Bad Law" ("Mal Derecho") within Argentina's legal tradition, where laws are crafted based on idealistic conceptions of what the legal framework ought to be but lack the practical mechanisms necessary for effective enforcement. This disconnect between a law's design and its implementation fosters a dysfunctional legal system and widespread non-compliance. Rather than addressing the structural flaws within these laws, legal scholars often invoke the “Protective Hypothesis of Bad Law, ” attributing non-compliance to a moral failure of the populace instead of recognizing the inherent deficiencies in the legal framework. This issue is starkly illustrated by Law 27, 442 on Antitrust. Although ostensibly designed to promote competition and prevent market distortions, the law suffers from critical design flaws that render enforcement—both public and private—ineffective. Public enforcement is undermined by a lack of political incentives to establish the necessary enforcement authority, a shortcoming embedded within the law itself. Meanwhile, private enforcement remains largely theoretical, as potential plaintiffs are discouraged by the prohibitive complexity and costs of litigation. As a result, Argentina's competition law fails to achieve its intended objectives, leaving the country’s antitrust system largely ineffective and illusory. |
| Date: | 2025–01–04 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:t8j6g |
| By: | Cuong Le; Tien Mai; Ngan Ha Duong; Minh Hoang Ha |
| Abstract: | We study a competitive facility location problem, where customer behavior is modeled and predicted using a discrete choice random utility model. The goal is to strategically place new facilities to maximize the overall captured customer demand in a competitive marketplace. In this work, we introduce two novel considerations. First, the total customer demand in the market is not fixed but is modeled as an increasing function of the customers' total utilities. Second, we incorporate a new term into the objective function, aiming to balance the firm's benefits and customer satisfaction. Our new formulation exhibits a highly nonlinear structure and is not directly solved by existing approaches. To address this, we first demonstrate that, under a concave market expansion function, the objective function is concave and submodular, allowing for a $(1-1/e)$ approximation solution by a simple polynomial-time greedy algorithm. We then develop a new method, called Inner-approximation, which enables us to approximate the mixed-integer nonlinear problem (MINLP), with arbitrary precision, by an MILP without introducing additional integer variables. We further demonstrate that our inner-approximation method consistently yields lower approximations than the outer-approximation methods typically used in the literature. Moreover, we extend our settings by considering a\textit{ general (non-concave)} market-expansion function and show that the Inner-approximation mechanism enables us to approximate the resulting MINLP, with arbitrary precision, by an MILP. To further enhance this MILP, we show how to significantly reduce the number of additional binary variables by leveraging concave areas of the objective function. Extensive experiments demonstrate the efficiency of our approaches. |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2412.17021 |