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on Industrial Competition |
| By: | Jose M. Betancourt (Yale University); Ali Horta su (University of Chicago); Aniko …ry (Carnegie Mellon University); Kevin R. Williams (Yale University) |
| Abstract: | We study dynamic price competition between sellers offering differentiated products with limited capacity and a common sales deadline. In every period, firms simultaneously set prices, and a randomly arriving buyer decides whether to purchase a product or leave the market. Given remaining capacities, firms trade off selling today against shifting demand to competitors to obtain future market power. We provide conditions for the existence and uniqueness of pure-strategy Markov perfect equilibria. In the continuous-time limit, prices solve a system of ordinary differential equations. We derive properties of equilibrium dynamics and show that prices increase the most when the product with the lowest remaining capacity sells. Because firms do not fully internalize the social option value of future sales, equilibrium prices can be inefficiently low such that both firms and consumers would benefit if firms could commit to higher prices. We term this new welfare effect the Bertrand scarcity trap. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2394&r= |
| By: | Max Riegel |
| Abstract: | I study pricing and product design choices of multiproduct firms in a model of directed search. Product design introduces vertical differentiation à la Gabszewicz and Thisse (1979) as well as Shaked and Sutton (1982). While all consumers have a preference for a more niche product design, consumers with lower search costs benefit relatively more. Firms gain from dispersion in tastes through product design and choose maximum differentiation in equilibrium. The firm with the broader product design sets a lower price and attracts consumers with high search costs. |
| Keywords: | product design, vertical differentiation, consumer search, directed search, search cost heterogeneity |
| JEL: | D43 D83 L15 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_556&r= |
| By: | Ruslan Shavshin (National Research University Higher School of Economics); Marina Sandomirskaia (National Research University Higher School of Economics) |
| Abstract: | This paper proposes a model of a finite two-sided market with a limited arbitrary number of products per seller, where buyers are involved in a directed search for the appropriate purchase. The effect of friction, discovered for the models with a single product per seller, remains, though the competition intensifies. We derive an analytical formula for the case of an equal number of products for every seller and deduce that the equilibrium price decreases with the growth of availability and drops to marginal costs when two sellers are able to serve the whole set of buyers. However, the seller’s utility is a bell-shaped function of the number of products. This produces the controversial impact of market concentration on the various equilibrium characteristics. For the general model with different capacities across sellers, we formulate equilibrium conditions on prices, and clarify how the market power of a particular seller depends on its capacity. Numerical analysis is also applied to the related problem of endogenous capacities |
| Keywords: | finite market, directed search, market inefficiency, market concentration, friction, quantity competition. |
| JEL: | D43 L13 D82 D83 C72 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:hig:wpaper:267/ec/2024&r= |
| By: | Paul Heidhues (Heinrich Heine University Düsseldorf & DICE); Takeshi Murooka (Osaka University); Botond Kőszegi (University of Bonn) |
| Abstract: | We develop models of markets with procrastinating consumers where competition operates — or is supposed to operate — both through the initial selection of providers and through the possibility of switching providers. As in other work, consumers fail to switch to better options after signing up with a firm, so at that stage they exert little downward pressure on the prices they pay. Unlike in other work, however, consumers are not keen on starting with the best available offer, so price competition fails at this stage as well. In fact, a competition paradox results: an increase in the number of firms or the intensity of marketing increases the frequency with which a consumer receives switching offers, so it facilitates procrastination and thereby potentially raises prices. By implication, continuous changes in marketing costs can, through a self-reinforcing process, lead to discontinuous changes in market outcomes. Sign-up deals do not serve their classically hypothesized role of returning ex-post profits to consumers, and in some cases even exacerbate the failure of price competition. Consumer procrastination thus emerges as a novel source of competition failure that applies in situations where other theories of competition failure do not. |
| Keywords: | Present bias, procrastination, price competition, competition failure, switching, subscription markets |
| JEL: | L11 L13 D11 D41 D43 D91 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:318&r= |
| By: | Kamesh Munagala; Yiheng Shen; Renzhe Xu |
| Abstract: | In this paper, we study third-degree price discrimination in a model first presented in Bergemann, Brooks, and Morris [2015]. Since such price discrimination might create market segments with vastly different posted prices, we consider regulating these prices, specifically, via restricting them to lie within an interval. Given a price interval, we consider segmentations of the market where a seller, who is oblivious to the existence of such regulation, still posts prices within the price interval. We show the following surprising result: For any market and price interval where such segmentation is feasible, there is always a different segmentation that optimally transfers all excess surplus to the consumers. In addition, we characterize the entire space of buyer and seller surplus that are achievable by such segmentation, including maximizing seller surplus, and simultaneously minimizing buyer and seller surplus. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.06023&r= |
| By: | G. Spano |
| Abstract: | We analyze the real effects of market power induced by ownership concentration in the presence of bankruptcy costs due to costly state verification. We find that, for an economy where the probability of bankruptcy and associated costs are sufficiently low, greater concentration of common ownership, which increases market power, reduces the cost of business credit, thereby positively affecting output. However, this positive effect is more than offset by the reduction in output and consumer surplus typically induced by market power. Conversely, in an economy where the probability of bankruptcy and associated costs are high, greater market power associated with increased ownership concentration can be beneficial in terms of welfare. This is because reducing the cost of credit also reduces aggregate bankruptcy costs, leading to a positive effect. Under these circumstances, there is an optimal level of common ownership that maximizes aggregate welfare. Comparing this with the U.S. economy, we find that this optimal level exists, but the actual level documented in the literature is higher, resulting in the observed negative effects. |
| Keywords: | Market power;financial friction;general equilibrium |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:cns:cnscwp:202410&r= |
| By: | Gambato, Jacopo |
| Abstract: | I analyze a model of directed search in which a consumer inspects a finite number of products sharing attributes with each others. The consumer discovers her valuation for the attributes of the inspected products and adapts her search strategy based on what she has learned. The consumer anticipates the optimal paths that arise after different realizations; this generates a search rule that accounts for learning systematically. In this search environment, a multiproduct seller commits to a menu of horizontally differentiated products. The seller can exploit the fact that the emerging search paths reveal the consumer's preferences: by setting different prices for ex ante identical products, the seller can encourage specific paths to arise and exploit the information that the consumer learned through search. In some cases, the seller optimally limits the set of available products. |
| Keywords: | consumer search, directed search, learning, multiproduct monopoly, pricing, product portfolio |
| JEL: | D42 D83 L12 L15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:300012&r= |
| By: | Irfan Tekdir |
| Abstract: | This paper investigates third-degree price discrimination under endogenous market segmentation. Segmenting a market requires access to information about consumers, and this information comes with a cost. I explore the trade-offs between the benefits of segmentation and the costs of information acquisition, revealing a non-monotonic relationship between consumer surplus and the cost of information acquisition for monopolist. I show that in some markets, allowing the monopolist easier access to customer data can also benefit customers. I also analyzed how social welfare reacts to changes in the cost level of information acquisition and showed that the non-monotonicity result is also valid in social welfare analysis. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.06026&r= |
| By: | Agostino Capponi; Chuan Du; Joseph E. Stiglitz |
| Abstract: | We show that supply networks are inefficiently, and insufficiently, resilient. Upstream firms can expand their production capacity to hedge againstsupply and demand shocks. But the social benefits of such investments arenot internalized due to market power and market incompleteness. Upstreamfirms under-invest in capacity and resilience, passing-on the costs to downstreamfirms, and drive trade excessively towards the spot markets. There isa wedge between the market solution and a constrained optimal benchmark, which persists even without rare and large shocks. Policies designed to incentivize capacity investment, reduce reliance on spot markets, and enhancecompetition ameliorate the externality. |
| Keywords: | Resilience; Capacity; Monopolistic competition; Supply network; Production |
| JEL: | D21 D24 D25 D43 D85 E23 L13 |
| Date: | 2024–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfe:2024-31&r= |
| By: | Eric AVENEL (Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes France) |
| Abstract: | With the development of e-commerce, upstream firms have the possibility to sell their products on BtoC markets. I explore the consequences of this observation on the analysis of vertical integration and more specifically vertical foreclosure. I consider the same industry structure as in OSS (1990), but I allow the integrated firm to sell the intermediate good either on a BtoB market (as assumed by OSS) and/or on a BtoC market (in which case it is in fact no longer an intermediate good). I also consider the possibility that the competing producer of the intermediate good sells it on a BtoC market. In this enriched strategic framework, the firm has to decide on how to combine vertical foreclosure and tying, which sheds new light on the relation between these two possibly anticompetitive practices. |
| Keywords: | Vertical foreclosure, tying, BtoB, BtoC. |
| JEL: | L41 L42 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:tut:cremwp:2024-03&r= |
| By: | Fotis, Panagiotis; Polemis, Michael |
| Abstract: | Explicit collusion, or cartel behavior, involves coordinated efforts among firms within a market to restrict competition for their mutual benefit. Recidivism in this context occurs when cartel members, previously fined for such activities, establish a new cartel in the future. This paper examines 111 cartel cases from various markets and periods in the US to assess the impact of recidivism on productivity growth. We define a recidivist as a repeat offender with at least two fines. Investigating the causality between cartel recidivism and total factor productivity (TFP) growth is crucial for several reasons. First, understanding this relationship helps policymakers and regulators design more effective anti-cartel enforcement strategies. Second, examining the causality between cartel recidivism and TFP growth provides insights into the broader economic impacts of anti-competitive practices. Ultimately, such investigations help in creating a more efficient and equitable economy, where market forces drive productivity improvements and sustainable economic growth. Our econometric findings drawn from OLS and quantile regression analysis indicate a negative relationship between recidivism and productivity growth. The rationale is that recidivism undermines the effectiveness of anti-cartel enforcement, which consequently hampers productivity growth in the affected markets. |
| Keywords: | Cartels; Recidivism; Competition Policy; Anti-Cartel Enforcement; TFP |
| JEL: | D24 K21 L41 |
| Date: | 2024–07–04 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121386&r= |
| By: | Moshe Babaioff; Linda Cai; Brendan Lucier |
| Abstract: | We consider a principal seller with $m$ heterogeneous products to sell to an additive buyer over independent items. The principal can offer an arbitrary menu of product bundles, but faces competition from smaller and more agile single-item sellers. The single-item sellers choose their prices after the principal commits to a menu, potentially under-cutting the principal's offerings. We explore to what extent the principal can leverage the ability to bundle product together to extract revenue. Any choice of menu by the principal induces an oligopoly pricing game between the single-item sellers, which may have multiple equilibria. When there is only a single item this model reduces to Bertrand competition, for which the principal's revenue is $0$ at any equilibrium, so we assume that no single item's value is too dominant. We establish an upper bound on the principal's optimal revenue at every equilibrium: the expected welfare after truncating each item's value to its revenue-maximizing price. Under a technical condition on the value distributions -- that the monopolist's revenue is sufficiently sensitive to price -- we show that the principal seller can simply price the grand-bundle and ensure (in any equilibrium) a constant approximation to this bound (and hence to the optimal revenue). We also show that for some value distributions violating our conditions, grand-bundle pricing does not yield a constant approximation to the optimal revenue in any equilibrium. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.13835&r= |
| By: | Amodio, Francesco; Brancati, Emanuele; De Roux, Nicolas; Di Maio, Michele |
| Abstract: | Using establishment-level data from the World Bank Enterprise Survey, we assess the market power of exporting firms across 16 countries in Latin America. Leveraging information on export destinations, as well as exchange rate and price data, we construct exchange rate-driven shocks to the marginal revenue product of individual firms. By examining firms' employment and wage responses, we estimate the inverse elasticity of the labor supply they face a direct indicator of labor market power. In our preferred specification, we estimate that workers employed in exporting firms produce on the margin 83% more than what they earn as wage. We investigate the correlations between labor market power and firm characteristics, country attributes, and labor market institutions and regulations. We find that labor market power is higher for firms in countries where unions, collective bargaining, and unemployment protection are less prevalent. |
| Keywords: | Firms;exports;Labor market power;Labor market institutions;Latin America |
| JEL: | F10 F14 F16 J42 L10 O54 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13451&r= |