nep-ind New Economics Papers
on Industrial Organization
Issue of 2015‒12‒01
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Do better entrepreneurs avoid more taxes? By Laurent Bach
  2. Dynamic Competition in Deceptive Markets By Johannes Johnen
  3. Cross-Licensing and Competition By Jeon, Doh-Shin; Lefouili, Yassine
  4. Effective European Antitrust: Does EC Merger Policy Generate Deterrence By Joseph Clougherty; Tomaso Duso; Miyu Lee; Jo Seldeslachts
  5. Tax incentives and R&D: an evaluation of the 2002 UK reform using micro data By Irem Guceri
  6. Cartels Destroy Productivity: Evidence from the New Deal Sugar Manufacturing Cartel, 1934-74 By Bridgman, Benjamin; Qi, Shi; Schmitz, James A.

  1. By: Laurent Bach (Stockholm School of Economics and Swedish House of Finance)
    Abstract: In this paper, we estimate why some firms strongly react to avoidance incentives given by nonlinear taxes and regulations while others don¡¯t. We measure avoidance using a kinkpoint in the French corporate income tax schedule and a notch in exposure to French labor regulation. We find that firm profitability is a strong predictor of avoidance: income tax elasticities are 30% bigger among firms in the top quintile of ROA than among firms in the bottom quintile; employment declines induced by the regulation notch are more than twice as big among the former group of firms as among the latter. Going further, we find that tax elasticities reflect in great part the speed of tax code learning by firms and that more profitable firms learn faster. We also find that firms¡¯ avoidance strategies are much more developed when management is more sophisticated and ownership structures are more concentrated. Overall, we conclude that a large part of firm heterogeneity in the strength of reaction to taxes and regulations reflects differences in the quality of governance rather than differences in firm technologies.
    Date: 2015
  2. By: Johannes Johnen (European School of Management and Technology)
    Abstract: This paper studies the impact of private customer data about consumer naiveté in markets for deceptive products in which firms use these data to distinguish their existing customers’ level of sophistication. To do so, I introduce a dynamic model in which competing firms can shroud hidden fees from naive customers, but not from sophisticated ones. Data on past usage is highly valuable to firms in competitive settings only if it identifies naive customers. Firms exploit private information on their existing customers’ types to make type-specific offers. Since naives believe to be sophisticated, consumers do not self-select when given type-specific offers, making it impossible for rivals to compete effectively. Privately informed firms make offers to induce sophisticated customers to switch already at higher prices. Thus, competitors cannot attract profitable naives without attracting unprofitable sophisticates as well. This adverse-attraction effect enables firms to keep positive margins on existing naives, while breaking even on sophisticates. Since this implies that margins of naive consumers decrease in the share of sophisticated ones, firms prefer a balanced customer base. Achieving positive continuation profits from exploiting naive consumers requires each firm to have a substantial customer base. Thus, even when firms compete before learning about customers’ types, firms have an incentive to coordinate on prices and competition is mitigated even more. I analyze the effects of a policy that discloses customer information to all firms and thereby increases consumer surplus, and illustrate the robustness of the results through several extensions.
    Keywords: Deceptive Products; Shrouded Attributes; History-based Price Discrimination; Industry Dynamics; Big Data
    JEL: D14 D18 D21 D99 D89
    Date: 2015–07–25
  3. By: Jeon, Doh-Shin; Lefouili, Yassine
    Abstract: We study bilateral cross-licensing agreements among N (>2) competing firms. We find that the industry-profit-maximizing royalty can be sustained as the outcome of bilaterally efficient agreements. This holds regardless of whether agreements are public or private and whether firms compete in quantities or prices. We extend this monopolization result to a general class of two-stage games in which firms bilaterally agree in the first stage to make each other payments that depend on their second-stage non-cooperative actions. Policy implications regarding the antitrust treatment of cross-licensing agreements are derived.
    Keywords: antitrust and intellectual property; collusion; cross-licensing; royalties
    JEL: D14 F13 L24 L41 O34
    Date: 2015–11
  4. By: Joseph Clougherty; Tomaso Duso; Miyu Lee; Jo Seldeslachts
    Abstract: We estimate the deterrence effects of European Commission (EC) merger policy instruments over the 1990-2009 period. Our empirical results suggest that phase-1 remedies uniquely generate robust deterrence as – unlike phase-1 withdrawals, phase-2 remedies, and preventions – phase-1 remedies lead to fewer merger notifications in subsequent years. Furthermore, the deterrence effects of phase-1 remedies work best in high-concentration industries; i.e., industries where the HHI is above the 0.2 cut-off level employed by the EC. Additionally, we find that phase-1 remedies do not deter clearly pro-competitive mergers, but do deter potentially anti-competitive mergers in high-concentration industries.
    Keywords: Merger, deterrence, European Commission, merger policy, competition policy, antitrust
    JEL: K21 K40 L40
    Date: 2015
  5. By: Irem Guceri (Oxford University Centre for Business Taxation)
    Abstract: The United Kingdom introduced an R&D tax incentive scheme rst for SMEs in 2000 and then for large rms in 2002, gradually increasing the generosity of both schemes after 2008. This study exploits the differences between companies with similar characteristics that were just above the size threshold for eligibility to the SME scheme and those that were just below, before and after the 2002 reform. This allows for a difference-in-differences approach to measure the (additional) impact of the tax incentives on firms around this size threshold. Treatment group firms are found to have increased their R&D spending by around 18 percent on average in response to the large company tax incentive, implying a user cost elasticity of -1.35. We do not find significant differences in this effect between sectors.
    Keywords: R&D, tax credits, difference-in-differences
    JEL: H25 O31
    Date: 2015
  6. By: Bridgman, Benjamin (Bureau of Economic Analysis); Qi, Shi (Florida State University); Schmitz, James A. (Federal Reserve Bank of Minneapolis)
    Abstract: The idea that cartels might reduce industry productivity by misallocating production from high to low productivity producers is as old as Adam. However, the study of the economic consequences of cartels has almost exclusively focused on the losses from higher prices (i.e., Harberger triangles). Yet, as the old idea suggests, we show that the rules for quotas and side payments in the New Deal sugar cartel led to significant misallocation of production. The resulting productivity declines essentially destroyed the entire cartel profit. The magnitude of the deadweight losses (relative to value added) was large: we estimate a lower bound for the losses equal to 25 percent and 42 percent in the beet and cane industries, respecttively.
    Keywords: Cartels; Quota; Monopoly
    JEL: L00 L43 L6
    Date: 2015–10–31

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