nep-ind New Economics Papers
on Industrial Organization
Issue of 2018‒09‒03
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Global Market Power By Jan De Loecker; Jan Eeckhout
  2. Cartel Stability under Quality Differentiation By Bos, Iwan; Marini, Marco A.
  3. Preferred Pharmacy Networks and Drug Costs By Amanda Starc; Ashley Swanson
  4. Imperfect Competition in Electricity Markets with Renewable Generation: The Role of Renewable Compensation Policies By Brown, David P.; Eckert, Andrew
  5. Industry rates of return in Korea and alternative theories of competition: equalising convergence versus tendential equalisation By Trofimov, Ivan D.

  1. By: Jan De Loecker; Jan Eeckhout
    Abstract: To date, little is known about the evolution of market power for the economies around the world. We extract data from the financial statements of over 70,000 firms in 134 countries, and we analyze and document the evolution of markups over the last four decades. We show that the average global markup has gone up from close to 1.1 in 1980 to around 1.6 in 2016. Markups have risen most in North America and Europe, and least in emerging economies in Latin America and Asia. We discuss the distributional implications of the rise in global market power for the labor share and for the profit share.
    JEL: E0 K0 L0
    Date: 2018–06
  2. By: Bos, Iwan; Marini, Marco A.
    Abstract: This note considers cartel stability when the cartelized products are vertically differentiated. If market shares are maintained at pre-collusive levels, then the firm with the lowest competitive price-cost margin has the strongest incentive to deviate from the collusive agreement. The lowest-quality supplier has the tightest incentive constraint when the difference in unit production costs is sufficiently small.
    Keywords: Cartel Stability, Collusion, Vertical Differentiation, Price Collusion.
    JEL: D2 D4 D43 L1 L4
    Date: 2018–07–31
  3. By: Amanda Starc; Ashley Swanson
    Abstract: Selective contracting is an increasingly popular tool for reducing health care costs, but these savings must be weighed against consumer surplus losses from restricted access. In both public and private prescription drug insurance plans, issuers utilize preferred pharmacy networks to reduce drug prices. We show that, in the Medicare Part D program, drug plans with more restrictive preferred pharmacy networks, and plans with fewer enrollees who are insensitive to preferred pharmacy discounts on copays, pay lower retail drug prices. We then use estimates of plan and pharmacy demand to estimate the first-order costs and benefits of selective contracting in the presence of enrollees with heterogeneous sensitivity to preferred supplier incentives.
    JEL: I13 L1
    Date: 2018–07
  4. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics)
    Abstract: We analyze the effects of commonly employed renewable compensation policies on firm behavior in an imperfectly competitive market. We consider a model where firms compete for renewable capacity in a procurement auction prior to choosing their forward contract positions and competing in wholesale electricity markets. We focus on fixed and premium-priced feed-in tariff (FIT) compensation policies. We demonstrate that the renewable compensation policy impacts both the types of resources that win the renewable auction and subsequent market competition. While firms have stronger incentives to exercise market power in wholesale markets under a premium-priced FIT, they also have increased incentives to sign pro-competitive forward contracts. Despite these countervailing incentives, in net firms have stronger incentives to exercise market power under the premium-priced policy. We find conditions under which renewable resources that are more correlated with market demand are procured under a premium-priced design, while the opposite occurs under a fixed-priced policy. If the cost efficiencies associated with the "more valuable" renewable resources are sufficiently large, then welfare is larger under the premium-priced policy despite the stronger market power incentives in the wholesale market. Finally, we consider incumbent behavior in the renewable auction when competing against entrants with more valuable resources.
    Keywords: Electricity; Renewables; Market Power; Regulation; Procurement
    JEL: D43 L40 L51 L94 Q48
    Date: 2018–08–24
  5. By: Trofimov, Ivan D.
    Abstract: This paper considers convergence and equalisation in industry profit rates in the Republic of Korea in the period of 1970–2015, from the perspective of alternative paradigms of competition – classical and neoclassical. Two measures of profitability are estimated: average rate of profit based on the total capital stock in the economy, and incremental rate of profit (IROP) based on the concept of regulating capital. It is shown that little convergence in industry rates of profit occur when the former measure is used, while almost complete equalisation of IROP is achieved. The classical-type equalisation takes place in particular capital accumulation and competitive settings in Korea, characterised by the prominent role of diversified conglomerate firms, the capital flows within conglomerates, investment coordination by the state, and the fast pace of capital accumulation and renewal).
    Keywords: Convergence, gravitation, average profit rate, incremental profit rate, unit roots
    JEL: B5 C22 L0 L60 L70 L90
    Date: 2018–08–08

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