nep-ind New Economics Papers
on Industrial Organization
Issue of 2018‒12‒17
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Is data the new oil? Diminishing returns to scale By Arnold, René; Marcus, J. Scott; Petropoulos, Georgios; Schneider, Anna
  2. Spatial Competition with Capacity Constraints and Subcontracting By Matthias Hunold; Johannes Muthers
  3. Mixed duopolies with advance production By Balogh, Tamás László; Tasnádi, Attila
  4. Growing Oligopolies, Prices, Output, and Productivity By Sharat Ganapati
  5. Costly Information Intermediation as a Natural Monopoly By Monte, Daniel; Pinheiro, Roberto
  6. Licensing with Free Entry By Johannes Muthers; Toker Doganoglu; Firat Inceoglu
  7. Success of firm strategies in e-commerce By Franz Hackl; Michael Hölzl-Leitner; Rudolf Winter-Ebmer; Christine Zulehner
  8. Patterns of Competition with Captive Customers By Armstrong, Mark; Vickers, John
  9. Niche vs. central firms: Technology choice and cost-price dynamics in a differentiated oligopoly By E. Bacchiega; P. G. Garella
  10. Organizing Global Supply Chains: Input Cost Shares and Vertical Integration By Berlingieri, Giuseppe; Pisch, Frank; Steinwender, Claudia
  11. Intermediaries and Product Quality in Used Car Markets By Gary Biglaiser; Fei Li; Charles Murry; Yiyi Zhou
  12. Price Discrimination in International Airline Markets By Gaurab Aryal; Charles Murry; Jonathan W. Williams
  13. Market Structure and Competition in Airline Markets By Ciliberto, Federico; Murry, Charles; Tamer, Elie

  1. By: Arnold, René; Marcus, J. Scott; Petropoulos, Georgios; Schneider, Anna
    Abstract: A key advantage of online advertising over offline is that online advertising can, with sufficient data, be far more accurately targeted than traditional advertising. But how much data is enough? The empirical literature tends to suggest that there are indeed economies of scale in using data for market targeting, but that these benefits are subject to diminishing returns in a static perspective. Is there a plateau, and is it perhaps very large? It is clear that a certain amount of data is necessary to identify meaningful consumer segments and to offer targeted advertising space as part of an advertising campaign; however, a simple correlation between the volume of data gathered by an advertiser and the return on investment of an advertising campaign neglects the complexity of advertising effectiveness. We provide a general assessment of key elements of the literature on economies of scale in the use of data for online advertising, and then seek to link these to the general literature on market targeting in order to provide insights as to the factors that limit effectiveness in using big data for market targeting.
    Date: 2018
  2. By: Matthias Hunold; Johannes Muthers
    Abstract: We characterize mixed-strategy equilibria when capacity constrained suppliers can charge location-based prices to different customers. We establish an equilibrium with prices that weakly increase in the costs to supply a customer. Despite prices above costs and excess capacities, each supplier exclusively serves its home market in equilibrium. Competition yields volatile market shares and an inefficient allocation of customers to firms. Even ex-post cross-supplies may restore efficiency only partly. We use our findings to discuss recent competition policy cases and provide hints for a more refined coordinated-effects analysis.
    Keywords: Bertrand-Edgeworth, capacity constraints, inefficient competition, spatial price discrimination, subcontracting, transport costs.
    JEL: L11 L41 L61
    Date: 2018–10
  3. By: Balogh, Tamás László; Tasnádi, Attila
    Abstract: Production to order and production in advance have been compared in many frameworks. In this paper we investigate a production in advance version of the capacityconstrained Bertrand-Edgeworth mixed duopoly game and determine the solution of the respective timing game. We show that a pure-strategy (subgame-perfect) Nashequilibrium exists for all possible orderings of moves. It is pointed out that unlike the production-to-order case, the equilibrium of the timing game lies at simultaneous moves. An analysis of the public firm's impact on social surplus is also carried out. All the results are compared with those of the production-to order version of the respective game and with those of the mixed duopoly timing games.
    Keywords: Bertrand-Edgeworth, mixed duopoly, timing games
    JEL: D43 L13
    Date: 2018–11–30
  4. By: Sharat Ganapati
    Abstract: American industries have grown more concentrated over the last forty years. In the absence of productivity innovation, this should lead to price hikes and output reductions, decreasing consumer welfare. Using public data from 1972-2012, I use price data to disentangle revenue from output. Difference-in-difference estimates show that industry concentration increases are positively correlated to productivity and real output growth, uncorrelated with price changes and overall payroll, and negatively correlated with labor’s revenue share. I rationalize these results in a simple model of competition. Productive industries (with growing oligopolists) expand real output and hold down prices, raising consumer welfare, while maintaining or reducing their workforces, lowering labor’s share of output.
    Date: 2018–11
  5. By: Monte, Daniel (São Paulo School of Economics, FGV); Pinheiro, Roberto (Federal Reserve Bank of Cleveland)
    Abstract: Many markets rely on information intermediation to sustain cooperation between large communities.We identify a key trade-off in costly information intermediation: intermediaries can create trust by incentivizing information exchange, but with too much information acquisition, intermediation becomes expensive, with a resulting high equilibrium default rate and a low fraction of agents buying this information. The particular pricing scheme and the competitive environment affect the direct and indirect costs of information transmission, represented by fees paid by consumers and the expected loss due to imperfect information, respectively. Moreover, we show that information trade has characteristics similar to a natural monopoly, where competition may be detrimental to efficiency either because of the duplication of direct costs or the slowing down of information spillovers. Finally, a social-welfare-maximizing policymaker optimally chooses a low information sampling frequency in order to maximize the number of partially informed agents. In other words, maximizing information spillovers, even at the cost of slow information accumulation, enhances welfare.
    Keywords: Costly Information trade; Market Structure; Natural Monopoly;
    JEL: D83 D85
    Date: 2018–12–07
  6. By: Johannes Muthers; Toker Doganoglu (University Würzburg); Firat Inceoglu (University Würzburg)
    Abstract: We introduce a fairly general licensing model with an endogenous industry structure – in terms of number of active firms – and general licensing contracts. We show that when the patentee can employ contracts that can condition on market entry or price, it can implement an outcome that yields monopoly profits by awarding the license to a single firm. Furthermore, when the patentee can only use contracts based on the quantities of the licensees, it still captures the entire market via a single licensee, albeit not at the monopoly price. Commonly assumed two-part tariff contracts cannot duplicate this last outcome and yield lower profits. We discuss the welfare implications of various contractual schemes.
    Keywords: Patent licensing, free entry, quantity competition.
    JEL: D45 K11 L11 L13 L21 L41
    Date: 2018–09
  7. By: Franz Hackl; Michael Hölzl-Leitner (Johannes Kepler University Linz); Rudolf Winter-Ebmer; Christine Zulehner
    Abstract: The choice of an appropriate e-commerce strategy is crucial for the survival of online stores in B2C e-commerce business. We use a comprehensive data set from the Austrian price search engine to identify successful e-commerce strategies. An e-commerce strategy is a set of choices including the listing decision, availability decision, and decisions on price and shipping cost. We apply cluster analysis to identify the different strategies that have been used by online retailers. Using various success measures such as revenue, clicks, market share, and the survival of firms, as dependent variables in our regression analyses, we present empirical evidence on the effectiveness of different e-commerce strategies.
    Keywords: e-commerce, online trade, business strategies, retailing
    JEL: L81 L10
    Date: 2018–08
  8. By: Armstrong, Mark; Vickers, John
    Abstract: We study mixed-strategy equilibrium pricing in oligopoly settings where consumers vary in the set of suppliers they consider for their purchase---some being captive to a particular firm, some consider two particular firms, and so on. In the case of "nested reach" we find equilibria, unlike those in more standard models, in which firms are ranked in terms of the prices they might charge. We characterize equilibria in the three-firm case, and contrast them with equilibria in the parallel model with capacity constraints. A theme of the analysis is how patterns of consumer interaction with firms matter for competitive outcomes.
    Keywords: Oligopoly, Bertrand competition, Bertrand-Edgeworth competition, Consideration sets, Mixed strategies
    JEL: C72 D43 D83 L1 L15
    Date: 2018–12–03
  9. By: E. Bacchiega; P. G. Garella
    Abstract: This paper is about technology choices in a differentiated oligopoly. The main questions are: whether the position in the product space affects the choice of technology, how changes in fixed costs affect price outcomes, the strategic responses to policy interventions. The industry is an oligopoly where a central firm is competing with two peripheral (or marginal) ones. The former is shown to be more ready than the latter to adopt a technology with low marginal costs and high fixed costs (Increasing Returns to Scale) rather than one with the opposite pattern (Constant Returns to Scale). The fixed cost in the IRS affects the technology configuration and hence output prices. For instance, a lower fixed cost may trigger lower prices and it is neutral only for given technologies. A price-cap may forestall a change in technologies; nondiscriminatory ad-valorem tax and taxes on variable input, or discriminatory unit taxes can also affect the technology pattern and deliver important effects on prices.
    JEL: D43 L11 L13
    Date: 2018–12
  10. By: Berlingieri, Giuseppe; Pisch, Frank; Steinwender, Claudia
    Abstract: We study whether and how the technological importance of an input - measured by its cost share - is related to the decision of whether to "make" or "buy" that input. Using detailed French international trade data and an instrumental variable approach based on self-constructed IO tables, we show that French multinationals vertically integrate those inputs that have high cost shares. A stylized incomplete contracting model with both ex ante and ex post inefficiencies explains why: technologically more important inputs are "made" when transaction cost economics type forces (TCE; favoring integration) overpower property rights type forces (PRT; favoring outsourcing). Additional results related to the contracting environment and headquarters intensity consistent with our theoretical framework show that both TCE and PRT type forces are needed to fully explain the empirical patterns in the data.
    Keywords: direct requirements; input output relationship; intrafirm trade; Supply Chains; vertical integration
    JEL: F10 F14 L16 L23 O14
    Date: 2018–11
  11. By: Gary Biglaiser (University of North Carolina at Chapel Hill); Fei Li (University of North Carolina at Chapel Hill); Charles Murry (Department of Economics, Boston College); Yiyi Zhou (Stony Brook University)
    Abstract: We examine used car dealers’ roles as intermediaries. We present empirical evidence supporting that cars sold by dealers have higher quality: (1) dealer transaction prices are higher than private market prices and this dealer premium increases in the age of the car as a ratio and is hump-shaped in dollar value, and (2) used cars purchased from dealers are less likely to be resold immediately. We formalize a model to show that these empirical facts can be rationalized either when dealers serve to alleviate information asymmetry between sellers and buyers or when dealers facilitate assortative matching between heterogenous-quality cars and heterogeneous consumers. Lastly, based on predictions of the model, we use the data to distinguish these two theories and find evidence for both, but the preponderance of the evidence supports the asymmetric information theory.
    Keywords: Adverse Selection, Sorting, Search Frictions, Car Dealer, Used Car, Intermediary, Middlemen
    JEL: D82 D83 L15 L62
    Date: 2018–12–07
  12. By: Gaurab Aryal (Department of Economics, University of Virginia); Charles Murry (Department of Economics, Boston College); Jonathan W. Williams (Department of Economics, University of North Carolina - Chapel Hill)
    Abstract: We develop a model of inter-temporal and intra-temporal price discrimination by airlines to study the ability of different discriminatory mechanisms to remove sources of inefficiency and the associated distributional implications. To estimate the model’s multi-dimensional distribution of preference heterogeneity, we use unique data from international airline markets with flight-level variation in prices across time and cabins, and information on passengers’ reason for travel. We find that current pricing practices grant late-arriving business passengers substantial informational rents and yield 81% of first-best welfare, with stochastic demand and asymmetric information accounting for 65% and 35% of the gap, respectively.
    Keywords: dynamic pricing, screening, perishable goods
    JEL: L00 D42 L93
    Date: 2018–11–26
  13. By: Ciliberto, Federico; Murry, Charles; Tamer, Elie
    Abstract: We provide an econometric framework for estimating a game of simultaneous entry and pricing decisions in oligopolistic markets while allowing for correlations between unobserved fixed costs, marginal costs, and demand shocks. Firms' decisions to enter a market are based on whether they will realize positive profits from entry. We use our framework to quantitatively account for this selection problem in the pricing stage. We estimate this model using cross-sectional data from the US airline industry. We find that not accounting for endogenous entry leads to overestimation of demand elasticities. This, in turn, leads to biased markups, which has implications for the policy evaluation of market power. Our methodology allows us to study how firms optimally decide entry/exit decision in response to a change in policy. We simulate a merger between American and US Airways and we find that the post-merger market structure and prices depend crucially on how we model the characteristics of the post-merger firm as a function of the pre-merger firms' characteristics. Overall, the merged firm has a strong incentive to enter new markets; the merged firm faces a stronger threat of entry from rival legacy carriers, as opposed to low cost carriers; and, post-merger entry mitigates the adverse effects of increased concentration.
    Keywords: Entry; market power; market structure; merger; multiple equilibria; oligopoly; Self-selection
    JEL: C35 C51 D43 L13 L41 L44
    Date: 2018–11

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