nep-ind New Economics Papers
on Industrial Organization
Issue of 2016‒04‒09
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Structure and Advance Selling By Marc Möller; Makoto Watanabe
  2. Competition, Innovation, and the Number of Firms By Pedro Bento
  3. Empirical Tools and Competition Analysis: Past Progress and Current Problems By Ariel Pakes
  4. Bertrand under Uncertainty: Private and Common Costs By Johan N. M. Lagerlöf
  5. Reconciling the Firm Size and Innovation Puzzle By Anne Marie Knott; Carl Vieregger
  6. Agglomeration and the product mix By Dalvai, Wilfried
  7. The State of American Entrepreneurship: New Estimates of the Quantity and Quality of Entrepreneurship for 15 US States, 1988-2014 By Jorge Guzman; Scott Stern

  1. By: Marc Möller (University of Bern, Switzerland); Makoto Watanabe (Faculty of Economics and Business Administration, VU University Amsterdam, the Netherlands)
    Abstract: When products are sold in advance, i.e. prior to consumption, consumers trade off an early, uninformed purchase at a low price against a late, informed purchase at a high price. This paper considers the effect of market structure on the prevalence of advance selling. We show that in an oligopolistic market with multi-product firms, advance selling (with its associated allocative inefficiency) is decreasing in market concentration when the consumers’ preference uncertainty is high but can be increasing when uncertainty is low.
    Keywords: Competition; Price Discrimination; Individual Demand Uncertainty; Advance Purchase Discounts
    JEL: D43 D80 L13
    Date: 2016–03–31
  2. By: Pedro Bento (Texas A&M University, Department of Economics)
    Abstract: I look at manufacturing firms across countries and over time, and find that barriers to competition actually increase the number of firms. This finding contradicts a central feature of all current models of endogenous markups and free entry, that higher barriers should reduce competition and firm entry, thereby increasing markups. To rationalize this finding, I extend a standard model in two ways. First, I allow for multi-product firms. Second, I model barriers as increasing the cost of entering a product market, rather than the cost of forming a firm. Higher barriers to competition reduce the number of products per firm and per market, but increase markups and the total number of firms. Calibrating the model to U.S. data, I estimate cross-country differences in consumption as large as 65 percent from observed differences in barriers to competition. In addition, increasing barriers generates either a negative or inverted-U relationship between firm-level innovation and markups. While higher markups encourage product-level innovation through the usual Schumpeterian mechanism, firm-level innovation (at least eventually) drops as firms reduce their number of products. I provide new evidence supporting these two novel implications of the model - that product-level innovation increases with barriers to competition, while the number of products per firm decreases.
    Keywords: product market regulation, entry costs, firm size, productivity, innovation, markups, competition, multi-product firms, innovation, inverted-U
    JEL: L1 L5 O1 O3 O4
    Date: 2016–03–23
  3. By: Ariel Pakes
    Abstract: I review a subset of the empirical tools available for competition analysis. The tools discussed are those needed for the empirical analysis of; demand, production efficiency, product repositioning, and the evolution of market structure. Where relevant I start with a brief review of tools developed in the 1990’s that have recently been incorporated into the analysis of actual policy. The focus is on providing an overview of new developments; both those that are easy to implement, and those that are not quite at that stage yet show promise.
    JEL: L1 L4
    Date: 2016–03
  4. By: Johan N. M. Lagerlöf (Department of Economics, University of Copenhagen)
    Abstract: This paper proposes an n-firm homogeneous-good Bertrand model with private information about costs. The model allows for any non-negative correlation between the cost draws and for any demand elasticity but still yields a closed-form solution. The solution is simple, in pure strategies, and involves price dispersion. For some parameter values, a weak version of the winner’s curse arises. This framework is used to study the question whether cost uncertainty softens competition. Earlier literature has shown that the answer (perhaps counter-intuitively) is “no,” while assuming (i) independent cost draws and (ii) no drastic innovations. The analysis here shows that relaxing (ii) but not (i) does not alter that result. However, when the cost draws are sufficiently highly correlated and the price elasticity of demand is sufficiently low, cost uncertainty indeed softens competition.
    Keywords: Bertrand competition, Hansen-Spulber model, private information, information sharing, common values, private values, winner’s curse
    JEL: D43 D44 L13
    Date: 2016–02–12
  5. By: Anne Marie Knott; Carl Vieregger
    Abstract: Since Schumpeter, there has been a long-standing debate regarding the optimal firm size for innovation. Empirical results have settled into a puzzle: R&D spending increasing with scale while R&D productivity decreases with scale. Thus large firms appear irrational. We propose the puzzle stems from the fact that product and patent counts undercount large firm innovation. To test that proposition we use recently available NSF BRDIS survey data of firms R&D practices as well as a broader measure of R&D productivity. Using the broader measure, we find that both R&D spending and R&D productivity increase with scale—thus resolving the puzzle. We further find that while large firms and small firms differ in the types of R&D they conduct, there is no type whose returns decrease in scale—there are merely types for which the small firm penalty is less severe.
    Date: 2016–03
  6. By: Dalvai, Wilfried
    Abstract: Worldwide trade flows are dominated by high-productivity firms, that have a large range of products. Since the product range of firms reflects partly trade flows, it is a source of economic differences in space. In this paper, I analyze the effects of the product mix of firms on agglomeration. I build a theoretical model of multiproduct firms à la Mayer, Melitz, and Ottaviano (2014, AER), expand it with skilled, mobile workers and a spatial equilibrium. I show that a larger product mix of firms in a region favours dispersion. The product mix influences the indirect utility through two channels, the wage and consumer surplus. A larger product mix decreases the wage differential between the two regions through a more competitive environment and thus strengthening the dispersion force. More competition means less profits and therefore a lower wage for skilled workers. On the other hand a more competitive environment means a higher consumer surplus which diminishes agglomeration forces.
    Keywords: Agglomeration,Heterogenous Firms,Product Mix,Migration
    JEL: L11 F12 R11 R12
    Date: 2016
  7. By: Jorge Guzman; Scott Stern
    Abstract: While official measures of business dynamism have seen a long-term decline, early-stage venture financing of new companies has reached levels not observed since the late 1990s, resulting in a sharp debate about the state of American entrepreneurship. Building on Guzman and Stern (2015a; 2015b), this paper offers new evidence to inform this debate by estimating measures of entrepreneurial quality based on predictive analytics and comprehensive business registries. Our estimates suggest that the probability of a significant growth outcome (either an IPO or high-value acquisition) is highly skewed and predicted by observables at or near the time of business registration: 69% of realized growth events are in the top 5% of our estimated growth distribution. This high level of skewness motivates the development of three new economic statistics that simultaneously account for both the quantity as well as the quality of entrepreneurship: the Entrepreneurial Quality Index (EQI, measuring the average quality level among a group of start-ups within a given cohort), the Regional Entrepreneurship Cohort Potential Index (RECPI, measuring the growth potential of firms founded within a given region and time period) and the Regional Entrepreneurship Acceleration Index (REAI, measuring the performance of a region over time in realizing the potential of firms founded there). We use these statistics to establish several new findings about the history and state of US entrepreneurship using data for 15 states (covering 51% of the overall US economy) from 1988 through 2014. First, in contrast the secular decline in the aggregate quantity of entrepreneurship observed in series such as the Business Dynamic Statistics (BDS), the growth potential of start-up companies (RECPI relative to GDP) has followed a cyclical pattern that seems sensitive to the capital market environment and overall economic conditions. Second, while the peak value of RECPI is recorded in 2000, the level during the first decade during this century was actually higher than the late 1980s and first half of the 1990s, and also has experienced a sharp upward swing beginning in 2010. Even after controlling for changes in the overall size of the economy, the second highest level of entrepreneurial growth potential is registered in 2014. Third, the likelihood of start-up firms for a given quality level to realize their potential (REAI) declined sharply in the late 1990s, and did not recover through 2008. These findings suggest that divergent assessments of the state of American entrepreneurship can potentially be reconciled by explicitly adopting a quantitative approach to the measurement of entrepreneurial quality.
    JEL: C53 L26 O51
    Date: 2016–03

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