nep-ind New Economics Papers
on Industrial Organization
Issue of 2018‒11‒26
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Pricing algorithms in oligopoly: theory and antitrust implications By Jacques THEPOT
  2. Diverging Trends in National and Local Concentration By Rossi-Hansberg, Esteban; Sarte, Pierre-Daniel; Trachter, Nicholas
  3. Verifying High Quality: Entry for Sale By Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger
  4. Transfer Pricing and the Arm's Length Principle under Imperfect Competition By Jay Pil Choi; Taiji Furusawa; Jota Ishikawa
  5. Market Liberalization: Price Dispersion, Price Discrimination and Consumer Search in the German Electricity Markets By Gugler, Klaus; Heim, Sven; Janssen, Maarten; Liebensteiner, Mario
  6. Can we measure banking sector competition robustly? By Andrei Dubovik; Natasha Kalara

  1. By: Jacques THEPOT (LaRGE Research Center, Université de Strasbourg)
    Abstract: Pricing algorithms are computerized procedures that a seller may use to adapt instantaneously its price to market conditions, including to prices quoted by its rivals. These algorithms are related to the extensive use of web-collectors which contribute in many industries to identifying the best price. In such settings, price competition operates between algorithms, no longer between executives of brick and mortar companies. In this context, the question is to know whether economic efficiency is achieved as implicit forms of collusion may arise between the sellers. This paper is aimed at discussing this conceptual issue in a price-setting homogeneous product oligopoly with decreasing returns to scale where algorithms implement downward and upward matching policies. Using fixed point argument akin to general equilibrium theory, we find a multiplicity of equilibria with prices located between collusion and Cournot, if matching is allowed upward and downward. When matching operates only for price undercutting, this multiplicity is extended up to a bottom value of the market price, close to the competitive price. This bypasses the Bertrand-Edgeworth paradox. As a result, pricing algorithms may contribute to the stability of the market and also to welfare improvement.
    Keywords: oligopoly, antitrust law, cost structure.
    JEL: K21 L13 L41
    Date: 2018
  2. By: Rossi-Hansberg, Esteban; Sarte, Pierre-Daniel; Trachter, Nicholas
    Abstract: Using U.S. NETS data, we present evidence that the positive trend observed in national product-market concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment.
    JEL: E23 L11 R12
    Date: 2018–09
  3. By: Norbäck, Pehr-Johan; Persson, Lars; Svensson, Roger
    Abstract: When and how do entrepreneurs sell their inventions? To address this issue, we develop an endogenous entry-sale asymmetric information oligopoly model. We show that low quality inventions are sold directly or used for own entry. Inventors who sell post-entry use entry to credibly reveal information on quality. Incumbents are then willing to pay high prices for high-quality inventions to preempt rivals from obtaining them. Using Swedish data on patents granted to small firms and individuals, we find evidence that high-quality inventions are sold under preemptive bidding competition, post entry.
    Keywords: Acquisitions; Innovation; ownership; patents; Quality; start-ups; Verification
    JEL: G24 L1 L2 M13 O3
    Date: 2018–09
  4. By: Jay Pil Choi; Taiji Furusawa; Jota Ishikawa
    Abstract: This paper analyzes incentives of a multinational enterprise to manipulate an internal transfer price to take advantage of corporate-tax differences across countries under both monopoly and oligopoly. We examine “cost plus” and “comparable uncontrollable price” as two alternative implementations of the so-called arm’s length principle (ALP) to mitigate this problem. Tax-induced foreign direct investment (FDI) may entail inefficient internal production. We show how the mechanisms behind such inefficient FDI differ between alternative implementation schemes of the ALP and explore implications of the ALP for welfare and dual sourcing incentives. We also develop a novel theory of vertical foreclosure as an equilibrium outcome of strategic transfer pricing.
    Keywords: foreign direct investment, multinational enterprise, corporate tax, transfer pricing, arm’s length principle, vertical foreclosure
    JEL: F12 F23 H26 L12 L13 L51 L52
    Date: 2018
  5. By: Gugler, Klaus; Heim, Sven; Janssen, Maarten; Liebensteiner, Mario
    Abstract: We study how consumer search affects pricing in markets with incumbents and entrants using panel data on German electricity retail markets. Consumers observe the baseline price of the incumbent and decide whether or not to search. Incumbent providers can price discriminate between searching and loyal consumers. Empirically we show that local incumbents increase their baseline rate while entrants decrease their tariffs if consumer search increases. Moreover, the incumbent price discriminates more strongly in markets with more consumer search. Using a theoretical model, we show that these pricing patterns are consistent with the strategic interaction of profit-maximizing firms.
    Keywords: electricity; price discrimination; price dispersion; search
    JEL: D43 D83 L11 L13 Q40
    Date: 2018–09
  6. By: Andrei Dubovik (CPB Netherlands Bureau for Economic Policy Analysis); Natasha Kalara (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: We discuss existing measures of banking competition along with their advantages and disadvantages. For the Panzar and Rosse H-statistic,we further investigate the robustness of its estimates. Specifically, we consider how the estimates vary with respect to modelling and data choices along the following dimensions: bank types consolidation codes time periods outliers econometric models We construct a robust H-statistic estimate following a modified DerSimonian and Laird procedure. We find that no robust conclusions can be drawn regarding the relative competitiveness of the banking industries in European countries, nor regarding the development of the aggregate level of competition in Europe over the past twenty years. This finding illustrates why there is little consensus about the H-statistic estimates despite numerous publications on the topic. Additionally, we check which dimensions are most important in driving the differences between the estimates and find that the choice of model speci cation plays the largest role.
    JEL: G21 L13 L80
    Date: 2018–11

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