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on Industrial Competition |
| By: | Helena Perrone |
| Abstract: | This paper analyzes the Nvidia-Arm vertical merger through the lens of the recent literature in Industrial Organization. It explores potential competitive concerns surrounding market foreclosure, technological access, and exclusionary behavior, considering the dynamic semiconductor industry’s intricacies. Although limited public information is available due to the parties halting the merger during phase two, I propose four theories of competitive effects addressing issues such as vertical foreclosure in dynamic markets, stifling of innovation due to hold-up concerns, and the ecosystem effects of the merger. This discussion sheds light on the potential impact of this merger in the semiconductor industry on competition in innovative high tech markets such as CPUs, datacenters, gaming consoles, and assisted driving. |
| Keywords: | vertical merger, foreclosure, holdup, ecosystems, semiconductor industry |
| JEL: | L4 K2 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_647 |
| By: | Axel Gottfries; Gregor Jarosch |
| Abstract: | We model and analyze employer cartels that fix wages by committing to a wage ceiling. The setting is a frictional labor market with large employers that compete for workers via posted wages. Wage fixing reduces competition both inside and outside the cartel, leading to market-wide wage depression. Competition from outside employers disciplines the cartel and hence governs its wage impact and profitability. Consequently, wage-fixing schemes are more likely to emerge and remain stable when the labor market has slack, concentration is high, the span of control is small, product demand is elastic, and firms also collude in the product market. We describe a simple sufficient statistic to gauge the harm caused by a wage-fixing cartel. |
| JEL: | E0 J0 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33501 |
| By: | Zhe Zhang; Young Kwark; Srinivasan Raghunathan |
| Abstract: | The use of sponsored product listings in prominent positions of consumer search results has made e-commerce platforms, which traditionally serve as marketplaces for third-party sellers to reach consumers, a major medium for those sellers to advertise their products. On the other hand, regulators have expressed anti-trust concerns about an e-commerce platform's integration of marketplace and advertising functions; they argue that such integration benefits the platform and sellers at the expense of consumers and society and have proposed separating the advertising function from those platforms. We show, contrary to regulators' concerns, that separating the advertising function from the e-commerce platform benefits the sellers, hurts the consumers, and does not necessarily benefit the social welfare. A key driver of our findings is that an independent advertising firm, which relies solely on advertising revenue, has same or lesser economic incentive to improve targeting precision than an e-commerce platform that also serves as the advertising medium, even if both have the same ability to target consumers. This is because an improvement in targeting precision enhances the marketplace commission by softening the price competition between sellers, but hurts the advertising revenue by softening the competition for prominent ad positions. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.08548 |
| By: | Cali, Massimiliano; Presidente, Giorgio |
| Abstract: | This paper unveils a novel externality of product market regulation in the labor market. It shows theoretically and empirically that higher barriers to entry in product markets translate into higher employers’ labor market power, measured by the wage markdown—the ratio between the marginal product of labor and the wage. The literature suggests that this wedge can distort factor allocation, resulting in lower aggregate output and employment, but also in higher inequality through a reduction in the labor share of national output. Using variation in investment restrictions across 346 manufacturing product markets in Indonesia, the analysis finds that wage markdowns increase by 25 percent in product markets that become subject to investment restrictions. The result is rationalized using a simple oligopsony model in which higher entry costs reduce the equilibrium number of firms, thereby limiting employment options for workers and, hence, their labor market power. Instrumental variable estimates support the model’s prediction that lower entry is the main driver of the positive relationship between investment restrictions and wage markdowns. |
| Date: | 2023–03–29 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10388 |
| By: | Macedoni, Luca; Morrow, John; Tyazhelnikov, Vladimir |
| Abstract: | Which products are potentially produced together? When demand for a product increases, which firms will supply it? Using multi-product production patterns within and across firms, we recover a continuous cost based distance between firms and unproduced products. Higher product distance implies decreasing adoption frequency. When export demand induces domestic product adoption, closer firms provide this supply. Potential costs imply measures of Revenue and Competition Potential. These predict firm sales growth, scope growth and core focus. If all firms produced all products linked by co-production, consumer welfare would increase by 10-30%. |
| Keywords: | multi-product firms; firm capabilities; product classification; product space; growth paths |
| JEL: | F1 D2 L1 L23 L25 |
| Date: | 2024–02–02 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126833 |
| By: | Alves, Julian; Serra Lorenzo, Bruno; Greenberg, Jason; Guo, Yaxin; Harjai, Ravija; Van Reenen, John |
| Abstract: | Monopsony power is an important feature of modern labour markets. We examine its impact on workers. We report the first representative survey of Non-Compete-Agreements (NCA) in the UK and find that about 26% of workers appear to be covered, a higher fraction than in comparable surveys in the US (18%) and Italy (16%). Although NCAs are more prevalent for skilled workers, a large number of low skilled workers are also subject to NCAs (e.g. over a fifth of plant operators). Moreover, although NCAs are associated with higher training (conditional on other measures of skills), we argue that such benefits are unlikely to justify their high prevalence. Finally, we examine the impact of over 2, 000 M& UK panel data between 1997 and 2022 (over 900, 000 observations). The data suggests that M&A tends to reduce employment growth in the merged entity (from 3% a year prior to the merger to about zero in the subsequent five years), particularly in target firms. However, there is no evidence of any falls in average wage growth (in acquirer or target) as monopsony would predict - if anything, average wages are higher. Nor does profitability or productivity change post-merger. |
| Keywords: | management practices; productivity; competition |
| JEL: | L2 M2 O32 O33 |
| Date: | 2024–01–29 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126835 |
| By: | Brüll, Eduard; Rostam-Afschar, Davud; Schlenker, Oliver |
| Abstract: | We study how the threat of entry affects service quantity and quality of general prac- titioners (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 com- petitors 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 J22 L10 L22 R23 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:312185 |
| By: | Dirk Bergemann; Rahul Deb |
| Abstract: | We study the robust sequential screening problem of a monopolist seller of multiple cloud computing services facing a buyer who has private information about his demand distribution for these services. At the time of contracting, the buyer knows the distribution of his demand of various services and the seller simply knows the mean of the buyer's total demand. We show that a simple "committed spend mechanism" is robustly optimal: it provides the seller with the highest profit guarantee against all demand distributions that have the known total mean demand. This mechanism requires the buyer to commit to a minimum total usage and a corresponding base payment; the buyer can choose the individual quantities of each service and is free to consume additional units (over the committed total usage) at a fixed marginal price. This result provides theoretical support for prevalent cloud computing pricing practices while highlighting the robustness of simple pricing schemes in environments with complex uncertainty. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.07168 |
| By: | Dirk Bergemann; Michael C. Wang |
| Abstract: | We consider a seller who offers services to a buyer with multi-unit demand. Prior to the realization of demand, the buyer receives a noisy signal of their future demand, and the seller can design contracts based on the reported value of this signal. Thus, the buyer can contract with the service provider for an unknown level of future consumption, such as in the market for cloud computing resources or software services. We characterize the optimal dynamic contract, extending the classic sequential screening framework to a nonlinear and multi-unit setting. The optimal mechanism gives discounts to buyers who report higher signals, but in exchange they must provide larger fixed payments. We then describe how the optimal mechanism can be implemented by two common forms of contracts observed in practice, the two-part tariff and the committed spend contract. Finally, we use extensions of our base model to shed light on policy-focused questions, such as analyzing how the optimal contract changes when the buyer faces commitment costs, or when there are liquid spot markets. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.08022 |
| By: | Joel Kariel; Anthony Savagar |
| Abstract: | We present empirical evidence on the relationship between demand shocks and price changes, conditional on returns to scale. We find that in industries with decreasing returns to scale, demand increases (which raise costs) correspond to price increases. Whereas, in industries with increasing returns to scale, demand increases (which lower costs) correspond to stable prices. We interpret the results with a theory of imperfect competition and returns to scale. For prices to remain stable following a cost decrease, markups necessarily rise. For prices to increase as cost increases, it is not necessary for markups to change but does not preclude their role. From a macroeconomic perspective, our results imply that inflation dynamics and the effectiveness of monetary policy depend on market structures. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.05898 |
| By: | Patrick M. Kline |
| Abstract: | This chapter reviews the theory of monopsonistic wage setting, its empirical implications, and some puzzles the framework has struggled to explain. We begin by examining the fundamentals of monopsonistic wage determination. The core of the theory is a mapping from the distribution of worker outside options to wages. We study non-parametric shape restrictions that ensure this mapping is unique. Building on these results, we introduce a menu of tractable parametrizations of labor supply to the firm, some of which are shown to emerge naturally from equilibrium search models. Next, we review why wage markdowns do not necessarily signal inefficiency and discuss some criteria for assessing misallocation in a monopsony model with search frictions. Turning to the model’s empirical implications, we examine how the magnitude of productivity-wage passthrough depends on the super-elasticity of labor supply to the firm and establish that compensating differentials for firm amenities depend on the curvature of the outside option distribution. We show that firm-specific shifts in either productivity or amenities can be used as instruments to identify labor supply elasticities and review strategies for estimating non-constant elasticities. We then consider extensions of the basic model involving third-degree wage discrimination and examine their ability to rationalize patterns of worker-firm sorting. Monopsony models traditionally assume that firms commit to posted wages. Relaxing this assumption, we develop a connection between the first-order conditions of the monopsony model and models of bargaining with incomplete information. These models explain why bilateral inefficiencies may persist in the presence of negotiation, yield predictions about the response of within-firm wage dispersion to productivity shocks, and suggest reasons why some productivity shifters may not constitute excludable instruments. Next, we endogenize productivity by allowing for efficiency wages, non-constant returns to scale, and price-cost markups. Empirical monopsony estimates often suggest that firms enjoy implausibly large profit margins. We argue that allowing for non-constant labor supply elasticities and firm adjustment costs can potentially resolve this difficulty. Finally, we review why the strong passthrough of minimum wages to product prices presents a challenging puzzle for standard monopsony models and discuss potential reconciliations to this puzzle involving firm heterogeneity, quality changes, and lumpy price adjustment. |
| JEL: | J30 J42 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33467 |
| By: | Dirk Bergemann; Alessandro Bonatti; Alex Smolin |
| Abstract: | We develop an economic framework to analyze the optimal pricing and product design of Large Language Models (LLM). Our framework captures several key features of LLMs: variable operational costs of processing input and output tokens; the ability to customize models through fine-tuning; and high-dimensional user heterogeneity in terms of task requirements and error sensitivity. In our model, a monopolistic seller offers multiple versions of LLMs through a menu of products. The optimal pricing structure depends on whether token allocation across tasks is contractible and whether users face scale constraints. Users with similar aggregate value-scale characteristics choose similar levels of fine-tuning and token consumption. The optimal mechanism can be implemented through menus of two-part tariffs, with higher markups for more intensive users. Our results rationalize observed industry practices such as tiered pricing based on model customization and usage levels. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.07736 |
| By: | Steve Lawford |
| Abstract: | I investigate how incumbents in the U.S. airline industry respond to threatened and actual route entry by Southwest Airlines. I use a two-way fixed effects and event study approach, and the latest available data from 1999-2022, to identify a firm's price and quantity response. I find evidence that incumbents cut fares preemptively (post-entry) by 6-8% (16-18%) although the significance, pattern, and timing of the preemptive cuts are quite different to Goolsbee and Syverson's (2008) earlier results. Incumbents increase capacity preemptively by 10-40%, up to six quarters before the entry threat is established, and by 27-46% post-entry. My results suggest a clear shift in firms' strategic response from price to quantity. I also investigate the impact of an incumbent's network structure on its preemptive and post-entry behaviour. While the results on price are unclear, a firm's post-entry capacity reaction depends strongly on its global network structure as well as the local importance (centrality) of the route. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.20418 |
| By: | Raj Pabari; Udaya Ghai; Dominique Perrault-Joncas; Kari Torkkola; Orit Ronen; Dhruv Madeka; Dean Foster; Omer Gottesman |
| Abstract: | We introduce and analyze a variation of the Bertrand game in which the revenue is shared between two players. This game models situations in which one economic agent can provide goods/services to consumers either directly or through an independent seller/contractor in return for a share of the revenue. We analyze the equilibria of this game, and show how they can predict different business outcomes as a function of the players' costs and the transferred revenue shares. Importantly, we identify game parameters for which independent sellers can simultaneously increase the original player's payoff while increasing consumer surplus. We then extend the shared-revenue Bertrand game by considering the shared revenue proportion as an action and giving the independent seller an outside option to sell elsewhere. This work constitutes a first step towards a general theory for how partnership and sharing of resources between economic agents can lead to more efficient markets and improve the outcomes of both agents as well as consumers. |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2502.07952 |
| By: | Jeronimo Carballo; Richard K. Mansfield |
| Abstract: | This paper examines how the composition of firm exposure and competition among imperfectly substitutable workers mediate the earnings, welfare, and unemployment incidence of changes in the international trade environment. We merge LEHD job match records with firm-level import and export records from the LFTTD and use them to estimate a large-scale assignment model of the entire U.S. labor market. The model flexibly accommodates frictions from switching regions, industries, trade engagement status, and even particular employers. We construct firm-level estimates of the employment impact of China's WTO entry using exogenous tariff gap variation via four different channels, import and export competition and import and export access, and combine them with the model to evaluate the shock's worker-level incidence. Our results show that the firm composition of shock exposure does matter for medium-run worker-level earnings incidence, with workers at the highly exposed multinational manufacturing firms experiencing the largest shock-induced earnings losses. However, labor market competition causes the shock's impact to spread to seemingly unaffected sectors and trickle down the skill ladder, so that entry-level non-traded service workers and initially unemployed job-seekers account for a large share of earnings losses and particularly unemployment increases. |
| JEL: | F15 F16 F6 J23 J6 J62 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33481 |
| By: | Andrea Di Giovan Paolo; Jose Higueras |
| Abstract: | This paper examines the equilibrium effects of insurance contracts on healthcare markets using a mechanism design framework. A population of risk-averse agents with preferences as in Yaari (1987) face the risk of developing an illness of unknown severity, which can be treated in a competitive hospital services market at the prevailing market price. After privately observing their health risk, but before learning their sickness level, agents have the option to purchase insurance from a monopolistic provider. Insurance contracts specify premiums, out-of-pocket costs (OPCs), and hospital service coverage, thus determining demand and price in the downstream hospital market through a market-clearing condition. Our first main result shows that optimal insurance contracts take a simple form: agents can choose between full hospital coverage with a high OPC or restricted coverage with a low OPC. This highlights a novel form of under-insurance (rationing or restricted access to healthcare services) emerging purely due to the insurer's attempt to control his price impact. Our second key result illustrates the nuanced effect of price impact on the amount of insurance provided. Higher healthcare prices increase insurer payouts but also worsen agents' outside options, making them more willing to pay for insurance ex ante. The net effect of these forces determines whether insurance provision exceeds or falls short of a price-taking benchmark. |
| Date: | 2025–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2503.01780 |