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on Industrial Competition |
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Issue of 2026–08–24
twenty-six papers chosen by Russell Pittman, United States Department of Justice |
| By: | Yuan, Zhe; Barwick, Panle |
| Abstract: | The Hub-and-Spoke network is a defining feature of the airline industry. This paper is among the first in the literature to introduce an empirical framework for analyzing network competition among airlines. Airlines make market entry decisions and choose flight frequencies in the first stage, followed by price competition to attract passengers in the second stage. A key feature of this model is the linkage between direct and indirect flights, which is described by a technological relationship (and estimated using data) that proxies the Hub-and-Spoke network. The paper estimates the marginal costs of serving passengers and operating flights using first-order conditions, bounds the entry costs using inequalities derived from the reveal-preference argument, and employs a state-of-the-art econometric method to conduct inference for entry cost parameters. Ignoring network externality underestimates the benefits of operating an additional flight by 13.2%, and airlines would schedule 21.53% fewer one-stop flights had they made flight operation decisions independently for each market. To evaluate the impact of a hypothetical merger, the paper proposes a novel equilibrium concept that makes it feasible to compute the industry equilibria. Counterfactual analyses indicate that a hypothetical merger between Alaska and Virgin America would increase consumer surplus as the merged airline would offer direct flights in 10% more markets while the overall post-merger price effect would likely be muted. |
| Keywords: | Network competition; Network externalities; Airline industry; Entry models; Moment inequalities |
| JEL: | C51 L13 L14 L93 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19423 |
| By: | Qing Hu (Kansai University); Ryo Masuyama (Kushiro Public University of Economics and Kobe University); Tomomichi Mizuno (Kobe University) |
| Abstract: | This paper examines how bundling affects the welfare comparison between input price discrimination (IPD) and uniform input pricing (UIP) in a vertical market structure with Cournot competition. A multi-product firm bundles its products across a competitive market and a monopoly market, while an upstream supplier provides inputs only to the competitive market. When the inefficient firm is the bundling firm, IPD can increase total surplus relative to UIP if the monopoly market is sufficiently small. When the efficient firm is the bundling firm, however, IPD always reduces both consumer and total surpluses. |
| Keywords: | input price discriminationï¼› uniform input priceï¼› bundlingï¼› vertical relationship |
| JEL: | D43 L10 L13 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2610 |
| By: | Ryuichi Hashimoto (Kobe University); Tomomichi Mizuno (Kobe University) |
| Abstract: | This study analyzes the conditions under which failing firm acquisitions arise endogenously and examines their welfare effects. We consider a vertical market structure in which an upstream firm supplies a common input to multiple independent downstream markets. We show that acquiring a failing downstream firm preserves input demand in the market, and when the demand in that market is relatively elastic, it results in a lower input price. This input price effect gives rival firms an incentive to acquire a failing firm even in the absence of efficiency gains or direct synergies. We further demonstrate that failing firm acquisitions can increase both consumer surplus and total surplus by maintaining the supply of final goods and reducing input prices. These findings remain robust when the upstream market is oligopolistic and suggest that competition authorities should account for upstream market effects when evaluating the failing firm defense. |
| Keywords: | horizontal mergerï¼› failing firm defenseï¼› vertical relationshipï¼› input prices upstream market power |
| JEL: | D43 L10 L13 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2612 |
| By: | Jeon, Doh-Shin; Rey, Patrick |
| Abstract: | We study the development of apps on competing platforms. We show that competition leads to commissions exceeding those maximizing consumer surplus (and, a fortiori, social welfare) whenever raising one commission reduces rivals' app bases. We relate this finding to economies of scope in app development and, to illustrate it, consider a setting in which some developers can port their apps at no cost: as their proportion increases, app development is progressively choked-off. Fostering platform competition or interoperability may therefore fail to produce the desired results. Within-platform app store competition, together with appropriate access conditions, may constitute a more promising avenue. |
| Keywords: | Platform competition |
| JEL: | D21 D43 L13 L22 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19456 |
| By: | Chatterjee, Angana; Khanal, Ajit; McWilliams, William; Gupta, Anubhab |
| Abstract: | This paper studies how intermediary’s market power changes the welfare effects of tariffs in agricultural markets. We extend the Flexible Oligopoly–Oligopsony Model (FOOM) to an open economy where processors buy from domestic and foreign farmers, combine inputs through an Armington CES aggregator, and exercise market power in both input and output markets. We calibrating the model to the U.S. beef supply chain and find three major results. Market power dominates the welfare picture, costing roughly an order of magnitude more than any plausible tariff. The textbook welfare-improving tariff disappears at empirically estimated meatpacker market power; the optimal tariff falls to zero and becomes a welfare loss beyond it. Tariff incidence shifts from foreign farmers under competition to domestic consumers under concentration. These results indicate that antitrust enforcement and trade policy are not separable interventions in concentrated agricultural markets. |
| Keywords: | Industrial Organization |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea26:404624 |
| By: | Diallo, Yaya; Djolaud, Guy Arnold |
| Keywords: | Labour market concentration, Monopsony power, Immigrant assimilation |
| JEL: | J42 J61 J15 J21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:clefwp:342474 |
| By: | Alexander, Patrick; Han, Lu; Kryvtsov, Oleksiy; Tomlin, Ben |
| Abstract: | How do market power and nominal price rigidity influence inflation dynamics? We formulate a tractable model of oligopolistic competition and sticky prices, and derive closed-form expressions for the pass-through of idiosyncratic and common cost shocks to firms' prices. Using unpublished micro data for Canadian wholesale firms, we estimate that idiosyncratic cost pass-through is incomplete and independent of the sector price stickiness, while common cost pass-through declines with price stickiness. The estimates imply a degree of strategic complementarity that lowers the slope of the New Keynesian Phillips curve by 30% in a one-sector model and by 64% in a multi-sector model. |
| Keywords: | Inflation; Oligopolistic competition; Markups; Strategic complementarities |
| JEL: | D43 E31 L13 L81 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19419 |
| By: | Huffman, David (University of Pittsburgh); Pierce, Lamar (Washington University in St. Louis); Rees-Jones, Alex (University of Pennsylvania, Wharton School and NBER); Reyes, Germán (Middlebury College) |
| Abstract: | We examine a choice between bonus contracts offered to dealers of a U.S. auto manufacturer. In our data, dealers select the non-profit-maximizing option in 20 percent of observations, costing the mistaken dealers $18, 453 per year on average. We examine how the propensity to make this mistake varies with competition, identified both cross-sectionally and within dealers over time. Both analyses show that greater competition substantially lowers the rate of mistakes. However, even in the most competitive markets, consequential mistakes persist. Our results suggest that competition disciplines mainly through within-dealer changes in behavior rather than entry and exit. |
| Keywords: | behavioral economics, market competition, anomalies, non-profit-maximizing behavior, behavioral firms, incentive contracts, automobile dealers |
| JEL: | D22 D91 L13 M52 L62 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18766 |
| By: | Qing Hu (Kansai University); Ryo Masuyama (Kushiro Public University of Economics and Kobe University); Tomomichi Mizuno (Kobe University) |
| Abstract: | This study evaluates the desirability of downstream free entry within vertical relationships. We consider a vertical market consisting of an upstream firm with corporate social responsibility (CSR) and downstream firms with free entry. We find that the desirability of entry depends on the degree of upstream CSR. Specifically, when the degree of upstream CSR is sufficiently high, the downstream market faces excess entry, whereas when the degree is low, it faces insufficient entry. When the upstream firm commits to CSR, it lowers the input price, thereby encouraging downstream entry. This study identifies a new factor that justifies the entry regulation policies. |
| Keywords: | free entry; corporate social responsibility; vertical relationship |
| JEL: | D43 L10 L13 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2613 |
| By: | Kim, Kyungmin; Kos, Nenad |
| Abstract: | The model considers a monopolist who optimally chooses the design and price of a product on the Hotelling line. We characterize the set of prices and consumer surplus that can arise in the model across all distributions of tastes. In a stark departure from the monopoly model without product design, the seller never offers a price below a certain threshold. Moreover, the maximal consumer surplus is strictly smaller than in the absence of product design. It is attained by a distribution that renders the seller indifferent over a set of design/price combinations. Notably, the distribution does not exhibit unit elasticity given any fixed design. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19630 |
| By: | Qing Hu (Kansai University); Tomomichi Mizuno (Kobe University) |
| Abstract: | While cross-holdings are widely observed, their degree varies across industries. We show that upstream R&D is one possible reason. In a vertically related market with two downstream firms and an upstream firm engaging in cost-reducing R&D, the cross-holding rate is determined through Nash bargaining. The equilibrium rate maximizes downstream joint profit and is always below the merger level. An interior optimum exists only when upstream R&D is sufficiently inefficient, and the rate decreases with R&D efficiency and market size. In the linear-quadratic case, any degree of cross-holdings can arise. Since total surplus falls with cross-holdings, the private optimum is socially excessive, justifying antitrust intervention. |
| Keywords: | Cross-holdingsï¼› vertical structureï¼› R&Dï¼› optimal choice |
| JEL: | L13 D43 O32 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2611 |
| By: | Toxvaerd, Flavio |
| Abstract: | In this paper, I revisit and synthesize the rich literature on price formation in bilateral monopoly. I show how traditional flat-rate price posting (e.g. price setting and price taking) is akin to Nash bargaining over wholesale price with subsequent `right-to-manage', while two-part tariffs are akin to bilaterally efficient Nash bargaining over both wholesale price and quantity. Outcomes under the former protocol nest price posting and the cases of pure monopoly and pure monopsony. Outcomes under the latter protocol nest all-or-nothing offers, the Walrasian outcome under two-sided price taking and trace out the contract curve. With lopsided bargaining power, outcomes under right-to-manage can lead to socially superior outcomes to those that are bilaterally efficient, but may also lead to socially inferior over production. Last, effects of bargaining power on markups, markdowns and cost pass-through are characterized. |
| Keywords: | Bilateral monopoly |
| JEL: | L13 L42 D42 C78 J42 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19338 |
| By: | Zhang, Yuan; Anderson, Andrew; McKenzie, Andrew; Park, Eunchun; Pates, Nicholas |
| Abstract: | ecent and pending rail mergers renew questions about the trade-off between operational efficiency and market power. We examined the 2023 Canadian Pacific (CP)–Kansas City Southern (KCS) merger and its effects on grain basis using elevator-level cash bids from 2016-2024, comparing CPKC elevators with other carriers in a difference-in-differences framework. Corn basis improved at elevators in grain surplus regions but declined at elevators in grain deficit regions. Soybean basis showed little persistent response. Wheat basis strengthened, with all sample elevators in production regions. Our results suggest this consolidation improved transportation efficiency with net welfare gains for grain producers and users. |
| Keywords: | Industrial Organization, Marketing |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:asea26:404833 |
| By: | Martimort, David; Pouyet, Jerome |
| Abstract: | A retailer may boost demand for a manufacturer's product through unobservable promotional efforts. Fixed fees cannot be used to freely allocate profit within the vertical structure. When manufacturers have market power, the equilibrium wholesale contract features a retail price below cost together with a rebate for incremental units bought by the retailer when effort has succeeded in boosting sales. Loss leading emerges as an incentive device in such an incomplete contracting scenario. A ban on below-cost pricing leads to a higher retail price and a lower promotional effort. |
| JEL: | L42 L81 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19474 |
| By: | Marra, Marleen |
| Abstract: | Globally, scarce airport capacity is rationed by awarding time-specific slots free of charge to airlines, incentivising retention regardless of efficiency. I quantify the efficiency losses and welfare effects of market-based reallocation, defining slot values as equilibrium profits from a structural flight-level model. Reallocating 6% of weekly slot pairs in two airports increases consumer surplus by at least 3.2% through substitution of under-utilised slots for long-haul flights at suitable hours; fare effects are negligible. Larger operations yield cost and demand advantages and reduce outside hubs as substitutes. This reinforces concentration, but unlike in standard markets, the resulting network convenience benefits consumers at the margin. |
| Keywords: | Airline industry; Structural estimation; Airports; Auctions; Demand estimation |
| JEL: | L13 L93 D44 C57 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19442 |
| By: | Luca Lorenzini |
| Abstract: | I develop a general-equilibrium oligopsony model in which firms differ in their demand for worker ability, generating worker-specific monopsony power. Taking the model to matched employer–employee data for Italy and Germany reveals ability segregation that localizes competition: firms compete most intensely with similar firms targeting the same ability segment. In the calibrated model, monopsony power and welfare losses are largest for low- and high- ability workers, who face fewer effective employers. Output losses are modest relative to standard quantitative benchmarks. Labor-market power amplifies wage inequality because wider between-market wage dispersion outweighs compressed assortative matching and top wages. |
| Keywords: | labor-market power, worker-firm sorting, misallocation |
| JEL: | J42 J31 D43 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12858 |
| By: | Hamid Firooz; Sylvain Leduc; Zheng Liu |
| Abstract: | We study how AI affects market competition based on a general equilibrium framework with heterogeneous firms facing idiosyncratic productivity and variable markups. Firms choose the AI technology subject to fixed costs, where AI production requires data and energy inputs. Our model predicts a non-monotonic relation of AI diffusion with industry concentration. As AI usage rises from an initially low level, large incumbent users gain market share. When AI usage is sufficiently diffused, entry of new and smaller adopters erodes the market share of incumbents, reducing industry concentration. The non-monotonic relations are robust when firms can complement AI with their own data. Our calibrated model predicts that industry concentration is likely to fall if AI adoption increases relative to the current level. In comparison, the relation of AI with the average markup depends on whether increased AI usage is driven by demand or supply factors. Our model also predicts that a modest subsidy of about 3 percent for AI adopter revenues maximizes social welfare, reflecting a tradeoff between aggregate productivity and the average markup associated with AI usage. |
| Keywords: | artificial intelligence; data; heterogeneous firms; industry concentration; markup; productivity; welfare |
| JEL: | E24 L11 O33 |
| Date: | 2026–08–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103630 |
| By: | Albrecht, James; Cai, Xiaoming; Gautier, Pieter; Vroman, Susan |
| Abstract: | This paper considers competitive search equilibrium in a market for a good whose quality differs across sellers. Each seller knows the quality of the good that he or she is offering for sale, but buyers cannot observe quality directly. We thus have a “market for lemons†with competitive search frictions. In contrast to Akerlof (1970), we prove the existence of a unique equilibrium, which is separating. Higher-quality sellers post higher prices, so price signals quality. The arrival rate of buyers is lower in submarkets with higher prices, but this is less costly for higher-quality sellers given their higher continuation values. For some parameter values, higher-quality sellers post the full-information price; for other values these sellers have to post a higher price to keep lower-quality sellers from mimicking them. In an extension, we show that if sellers compete with auctions, the reserve price can also act as a signal. |
| Keywords: | Competitive search; Signalling |
| JEL: | C78 D82 D83 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19467 |
| By: | Elliott, Matthew; Talamas, Eduard |
| Abstract: | Agents make non-contractible investments before bargaining over who matches with whom and their terms of trade. When an agent is a price taker—in the sense that her investments do not change her potential partners’ payoffs—she has incentives to make socially-optimal investments. Across a variety of non-cooperative bargaining models featuring dynamic entry, we show that everyone necessarily becomes a price taker as the discount factor goes to 1 if there is a minimal amount of competition always present in the market. If this condition is not satisfied, dynamic entry need not create enough competition to guarantee price taking even if agents are arbitrarily patient. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19568 |
| By: | Heidhues, Paul; Köster, Mats; Köszegi, Botond |
| Abstract: | We develop a theory of digital ecosystems built on the premise that a multi-market firm can steer users it has in one market toward its products in other markets. Due to this "cross-market leverage, " a leader in an "access-point'' market (where users begin their online journeys) derives a high value from offering services in connected markets (where users continue their journeys), and can thus make profitable takeovers. Indeed, because the firm has the outside option of acquiring, and steering users toward, its target's competitor, it can take over the target at a discount. In contrast, other firms have no or smaller incentives for takeovers, explaining why ecosystems grow out of market leaders at access points. Conversely, cross-market leverage also implies that once an ecosystem has grown, it has an increased value of controlling access points, so it may go to great lengths to dominate these markets. Our theory suggests that ecosystems have mixed implications for consumer welfare. Under plausible assumptions, a to-be ecosystem takes over market leaders, and this consolidation of good services across markets benefits consumers in the short run. But an ecosystem's takeovers and dominance of access points lower incentives for entry and innovation, and lower the efficiency of access-point markets with superior alternatives. Hence, the long-run welfare implications of ecosystems are often negative. |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19524 |
| By: | Huang, Hanwei; Manova, Kalina; Perelló, Oscar; Pisch, Frank |
| Abstract: | We study the role of firm heterogeneity and imperfect competition for global production networks and the gains from trade. We develop a quantifiable trade model with two-sided firm heterogeneity, matching frictions, and oligopolistic competition upstream. More productive buyers endogenously match with more suppliers, thereby inducing tougher competition among them to enjoy lower input costs and superior performance. Customs data confirms that downstream French and Chilean firms import higher values and quantities at lower prices as upstream Chinese markets become more competitive over time, with stronger responses by larger firms. Moreover, suppliers charge more diversified buyers lower markups. Counterfactual analysis indicates that entry upstream benefits high-productivity buyers, while trade liberalization and lower matching costs favor mid-productivity buyers. Welfare gains are sizable for each shock, greater under package reforms, and significantly reduced with fixed markups or networks. Global production networks thus mediate bigger effects and cross-border spillovers from industrial and trade policies. |
| Keywords: | Production networks; Global value chains; Matching frictions; Imperfect competition; Gains from trade |
| JEL: | D24 F10 F12 F14 L11 L22 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19408 |
| By: | Anh Nguyen; Teck Yong Tan |
| Abstract: | We study a monopolist facing a buyer whose valuation is determined by pre-trade investment. Before setting price, the seller observes a signal about the buyer's private investment cost (buyer profiling). Information that helps the seller extract surplus can also undermine the buyer's incentive to create it. We characterize the buyer-seller payoffs attainable across all possible profiling. On the Pareto frontier, if investment increases, hold-up risk always raises the payoff that the seller captures faster than the surplus that the investment creates. Protecting buyer welfare therefore requires discouraging investment, even though investment is socially efficient. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.19558 |
| By: | Bhaskar, Venkataraman; Roketskiy, Nikita |
| Abstract: | We study the steady state behavior of the market for a storable good where firms have monopoly power instantaneously, but compete against future sellers. Consumers have identical preferences, but differ in their willingness to pay due to differential inventory holdings. In a steady state, the optimal nonlinear tariffs chosen by the firms induce the constant distribution of private inventories. Identical consumers behave differently, shop infrequently and consume in a cyclical manner. The ability to store goods gives rise to inefficiency, but also allows consumers to retain some surplus. |
| Keywords: | storable good; dynamic nonlinear pricing |
| JEL: | D11 D21 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19480 |
| By: | Matthew T. Cole (Department of Economics, California Polytechnic State University); Michael P. McCullough (Agribusiness Department, California Polytechnic State University); Nathan H. Miller (Georgetown University and NBER) |
| Abstract: | We study business-to-business price adjustment around the 2025 U.S. aluminum tariffs, using California wholesale beer filings that date each price change. Posted prices rise commensurate with the increase in the cost of aluminum cans. Adjustment is delayed, selective, and bundled: new filings surge four months after implementation without raising prices, and the increases arrive at six and seven months, in filings that reset long-unrevised prices and span more of the product line. Surges recur in other years, at other dates, without the selection or bundling. Frictions that contribute to price rigidity between firms operate even around salient, dated cost events. |
| Keywords: | price adjustment, menu costs, wholesale markets, posted prices, tariffs, beer |
| JEL: | E31 F13 L11 L13 L66 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:cpl:wpaper:2602 |
| By: | Teck Yong Tan |
| Abstract: | A monopolist sells a product line whose variants are horizontally differentiated from the buyers' perspective but ordered by production cost. Buyers privately know their ideal product, and willingness to pay may be correlated with horizontal need. The seller screens buyers through product mismatch, and what she must screen determines whether mismatch creates or reduces information rent. When buyers differ only in horizontal need, mismatch creates rent: the seller induces less mismatch, assigning served buyers products closer to their ideals than under the first best. When willingness to pay is correlated with horizontal need, mismatch instead reduces rent: the seller induces more mismatch, sells the basic product to buyers whose efficient products are advanced variants while excluding buyers better matched to it, and stronger horizontal differentiation can expand coverage and raise profit. Because mismatch is type-specific, optimal allocations are determined by individual rationality rather than by incentive compatibility alone. |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2607.21765 |
| By: | Matsuyama, Kiminori |
| Abstract: | This article reviews homothetic non-CES demand systems and their implications when applied to monopolistic competition, to offer guidance to those looking for flexible and yet tractable ways of departing from CES. Under general homothetic symmetric non-CES, two measures, substitutability and love-for-variety, are introduced to identify the condition under which the equilibrium product variety is excessive or insufficient. Because homotheticity and symmetry alone impose little restriction to make further progress, we turn to the Homothetic Single Aggregator (H.S.A.) class. H.S.A. is more flexible than CES and translog, which are its special cases, and yet equally analytically tractable, because all cross-variety interactions are summarized by the single aggregator. Under H.S.A., substitutability is increasing in product variety iff Marshall’s 2nd law holds, which is a sufficient condition for love-for-variety to be diminishing in product variety and for the equilibrium product variety to be excessive. Monopolistic competition under H.S.A. remains tractable even under various forms of firm heterogeneity and in multi-market settings. |
| Keywords: | Substitutability vs love-for-variety; Equilibrium vs optimal; Homothetic single aggregator; 2nd and 3rd laws of demand; Firm heterogeneity |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cpr:ceprdp:19376 |