nep-ind New Economics Papers
on Industrial Organization
Issue of 2018‒01‒22
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Power and the Laffer Curve By Miravete, Eugenio J; Seim, Katja; Thurk, Jeff
  2. Platform Competition: Who Benefits from Multihoming? By Paul Belleflamme; Martin Peitz
  3. Effects of globalizing a consumer-friendly firm into an asymmetric mixed duopoly By Leal, Mariel; Garcia, Arturo; Lee, Sang-Ho
  4. One Markup to Rule Them All: Taxation by Liquor Pricing Regulation By Eugenio J. Miravete; Katja Seim; Jeff Thurk

  1. By: Miravete, Eugenio J; Seim, Katja; Thurk, Jeff
    Abstract: We characterize the trade-off between consumption tax rates and tax revenue -- the Laffer curve -- while allowing for re-optimization by both consumers and firms with market power. Using detailed data from Pennsylvania, a state that monopolizes retail sales of alcoholic beverages, we estimate a discrete choice demand model allowing for flexible substitution patterns between products and across demographic groups while not imposing conduct among upstream distillers. We find that current policy overprices spirits and that firms respond to reductions in the state's ad valorem tax rate by increasing wholesale prices. The upstream response thus limits the state's revenue gain from lower tax rates to only 14% of the incremental tax revenue predicted under the common assumption of perfect competition. The burden of such naive policy falls disproportionately on older, poorer, uneducated, and minority consumers. Upstream collusion exacerbates these effects.
    Keywords: Laffer Curve; market power; Public Monopoly Pricing; Tax Incidence
    JEL: L12 L21 L32
    Date: 2017–12
  2. By: Paul Belleflamme; Martin Peitz
    Abstract: Competition between two-sided platforms is shaped by the possibility of multihoming. If initially both sides of platform singlehome, each platform provides users on one side exclusive access to its users on the other side. If then one side multihomes, platforms compete on the singlehoming side and exert monopoly power on the multihoming side. This paper explores the allocative effects of such a change from single- to multihoming. Our results challenge the conventional wisdom, according to which the possibility of multihoming hurts the side that can multihome, while benefiting the other side. This in not always true, as the opposite may happen or both sides may benefit.
    Keywords: Network effects, two-sided markets, platform competition, competitive bottleneck, multihoming
    JEL: D43 L13 L86
    Date: 2018–01
  3. By: Leal, Mariel; Garcia, Arturo; Lee, Sang-Ho
    Abstract: We study the effects of uniting two separated markets, each monopolized by a producer, into a single globalized duopoly market. When one of the firms is consumer-friendly before and after globalization, we examine certain conditions under which globalization turns out to be beneficial. Consumers in the local market which the consumer-friendly firm is from may have their surplus reduced under certain conditions. We also find conditions under which welfare of one market or the other can be reduced, even that of both simultaneously. If these conditions were met, it would be better, in a globalizing context, that the firm is friendly only with the consumers of its original market and not with those of the global market.
    Keywords: globalization, consumer-friendly firm, technical advantage, asymmetric mixed duopoly
    JEL: L12 L31
    Date: 2017–12–28
  4. By: Eugenio J. Miravete; Katja Seim; Jeff Thurk
    Abstract: Government often chooses simple rules to regulate industry even when firms and consumers are heterogeneous. We evaluate the implications of this practice in the context of alcohol pricing where the regulator uses a single markup rule that does not vary across products. We estimate an equilibrium model of wholesale pricing and retail demand for horizontally differentiated spirits that allows for heterogeneity in consumer preferences based on observable demographics. We show that the single markup increases market power among upstream firms, particularly small firms whose portfolios are better positioned to take advantage of the policy. For consumers, the single markup acts as a progressive tax by overpricing products favored by the rich. It also decreases aggregate consumer welfare though 16.7% of consumers are better off under the policy. These consumers tend to be older, less wealthy or educated, and minorities. Simple policies therefore generate significant cross-subsidies and may be an effective tool for government to garner favor of key constituencies.
    JEL: D42 D63 H23 L43 L66
    Date: 2017–12

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