nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒04‒22
fourteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Anticompetitive Vertical Merger Waves By Hombert, Johan; Pouyet, Jérôme; Schutz, Nicolas
  2. Market Concentration and the Productivity Slowdown By Olmstead-Rumsey, Jane
  3. The Comparative Advantage of Firms By Johannes Boehm; Swati Dhingra; John Morrow
  4. Why is Productivity Correlated with Competition? By Matthew Backus
  5. Why do firms incorporate and what difference does it make? By holmes, james
  6. Price Setting on a Network By Toomas Hinnosaar
  7. Dirty versus Clean Firms’ Relocation under International Trade and Imperfect Competition By Julie Ing; Jean-Philippe Nicolai
  8. Consumer Privacy and Serial Monopoly By V. Bhaskar; Nikita Roketskiy
  9. Foreign Competition and the Durability of US Firm Investments By Philippe Fromenteau; Jan Schymik; Jan Tscheke
  10. EU Merger Policy Predictability Using Random Forests By Pauline Affeldt
  11. Trust, Investment and Competition: Theory and Evidence from German Car Manufacturers By Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad O. Stahl
  12. State-aided Price Coordination in the Dutch Mortgage Market By Mark Dijkstra; Maarten Pieter Schinkel
  13. Spatial Drivers of Firm Entry in Iran By Iman Cheratian; Saleh Goltabar; Carla Daniela Calá
  14. A Decade of Competition Policy in Arab Countries: A De jure and De facto Assessment By Jala Youssef; Chahir Zaki

  1. By: Hombert, Johan; Pouyet, Jérôme; Schutz, Nicolas
    Abstract: We develop a model of vertical merger waves and use it to study the optimal merger policy. As a merger wave can result in partial foreclosure, it can be optimal to ban a vertical merger that eliminates the last unintegrated upstream firm. Such a merger is more likely to worsen market performance when the number of downstream firms is large relative to the number of upstream firms, and when upstream contracts are non-discriminatory, linear, and public. On the other hand, the optimal merger policy can be non-monotonic in the strength of synergies or in the degree of downstream product differentiation.
    Date: 2019–04
  2. By: Olmstead-Rumsey, Jane
    Abstract: Since around 2000, U.S. aggregate productivity growth has slowed and product market (sales) concentration has risen. At the same time, productivity differences among firms in the same sector appear to have risen dramatically. In this paper I propose a rich model of competition and innovation to explain the coincidence of these three observations. In the model a key parameter governing all three phenomena is the probability that innovating firms make radical innovations. Thus one explanation for rising concentration, slower productivity growth, and wider technology differences among firms is that the incidence of radical innovations has slowed relative to the 1990s, when the internet and other information technology radically transformed production and sales technology in many sectors.
    Keywords: Endogenous growth; market concentration; market power; productivity slowdown; superstar firms
    JEL: E23 L1 O3 O4
    Date: 2019–04–10
  3. By: Johannes Boehm; Swati Dhingra; John Morrow
    Abstract: Multiproduct firms dominate production, and their product turnover contributes substantially to aggregate growth. Theories propose that multiproduct firms grow by diversifying into products which need the same know-how or capabilities, but are less clear on what these capabilities are. Input-output tables show firms co-produce in industries that share intermediate inputs, suggesting input capabilities drive multiproduct production patterns. We provide evidence for this in Indian manufacturing: the similarity of a firm's input mix to an industry's input mix predicts entry into that industry. We identify the direction of causality from the removal of size-based entry barriers in input markets which made firms more likely to enter industries that were similar in input use to their initial input mix. We rationalize this finding with a model of industry choice and economies of scope to estimate the importance of input capabilities in determining comparative advantage. Complementarities driven by input capabilities make a firm on average 5% (and up to 15%) more likely to produce in an industry. Entry barriers in input markets constrained the comparative advantage of firms and were equivalent to a 10.5 percentage point tariff on inputs.
    Keywords: multiproduct firms, firm capabilities, vertical input linkages, comparative advantage, economies of scope, size-based policies
    JEL: F11 L25 M2 O3
    Date: 2019–04
  4. By: Matthew Backus
    Abstract: The correlation between productivity and competition is an oft–observed but ill–understood result. Some suggest that there is a treatment effect of competition on measured productivity, e.g. through a reduction of managerial slack. Others argue that greater competition makes unproductive establishments exit by reallocating demand to their productive rivals, raising observed average productivity via selection. I study the ready-mix concrete industry and offer three perspectives on this ambivalence. First, using a standard decomposition approach, I find no evidence of greater reallocation of demand to productive plants in more competitive markets. Second, I model the establishment exit decision and construct a semi-parametric selection correction to quantify the empirical significance of treatment and selection. Finally, I use a grouped IV quantile regression to test the distributional predictions of the selection hypothesis. I find no evidence for greater selection or reallocation in more competitive markets; instead, all three results suggest that measured productivity responds directly to competition. Potential channels include specialization and managerial inputs.
    JEL: L22 L23 L25 L61
    Date: 2019–04
  5. By: holmes, james
    Abstract: Economic history suggests that technological innovations with long productivity delays contributed to the emergence of corporations. We develop a theory, with supporting evidence, explaining why in a competitive economy proprietors chose to incorporate, because of the difference in the contracts each can make. Corporations, because their equity is transferable, are not restricted to pay factors their marginal product, and therefore can use advanced technologies with long lags more efficiently, and distribute the resulting output as income optimally. Hence, corporations cause economic growth, eliminate competitive market failures, reduce income inequality, and can be viewed as “social organizations” similar to non-coercive “mini-Governments”.
    Keywords: firm type, contracting, production delays
    JEL: D2 L2 O3 O4
    Date: 2019–04–13
  6. By: Toomas Hinnosaar
    Abstract: Most products are produced and sold by supply chain networks, where an interconnected network of producers and intermediaries set prices to maximize their profits. I show that there exists a unique equilibrium in a price-setting game on a network. The key distortion reducing both total profits and social welfare is multiple-marginalization, which is magnified by strategic interactions. Individual profits are proportional to influentiality, which is a new measure of network centrality defined by the equilibrium characterization. The results emphasize the importance of the network structure when considering policy questions such as mergers or trade tariffs.
    Date: 2019–04
  7. By: Julie Ing (University of Rennes, France); Jean-Philippe Nicolai (ETH Zurich, Switzerland)
    Abstract: This paper develops a simple partial equilibrium model with two countries (North and South) to fathom the effects of firms’ relocation in a context of international and imperfect competition. Two different production technologies are considered, a clean technology and a dirty one, and the effects of relocation according to the kind of technology used by the relocated firms are determined. Two heterogeneous firms in the North and only one dirty firm in the South are assumed and the four different possible scenarios are compared: neither firm relocates, the two northern firms relocate, the clean one relocates and the dirty one relocates. This paper demonstrates that the relocation of a dirty firm as compared to the relocation of a clean firm is worse for the environment, better for northern consumers, and better for the domestic profits. Moreover, the relocation of a dirty firm always increases global emissions, while the relocation of a clean firm may decrease global emissions.
    Keywords: Relocation, Emissions tax, Trade of polluting goods, Dirty and clean production technologies, Imperfect competition
    JEL: L13 Q53 Q58
    Date: 2019–04
  8. By: V. Bhaskar; Nikita Roketskiy
    Abstract: We examine the implications of consumer privacy when preferences today depend upon past consumption choices, and consumers shop from different sellers in each period. Although consumers are ex ante identical, their initial consumption choices cannot be deterministic. Thus ex post heterogeneity in preferences arises endogenously. Consumer privacy improves social welfare, consumer surplus and the profits of the second-period seller, while reducing the profits of the first period seller, relative to the situation where consumption choices are observed by the later seller.
    Date: 2019–04
  9. By: Philippe Fromenteau; Jan Schymik; Jan Tscheke
    Abstract: How does the exposure to product market competition affect the investment horizon of firms? We study if firms have an incentive to shift investments towards more short-term assets when exposed to tougher competition. Based on a stylized firm investment model, we derive a within-firm estimator using variation across investments with different durabilities. Exploiting the Chinese WTO accession, we estimate the effects of product market competition on the composition of US firm investments. Firms that experienced tougher competition shifted their expenditures towards investments with a shorter durability. This effect is larger for firms with lower total factor productivity.
    Keywords: import competition, firm investment behavior, investment life-span, short-termism
    JEL: F14 F36 G32 L20 D22
    Date: 2019–04
  10. By: Pauline Affeldt
    Abstract: I study the predictability of the EC’s merger decision procedure before and after the 2004 merger policy reform based on a dataset covering all affected markets of mergers with an official decision documented by DG Comp between 1990 and 2014. Using the highly flexible, non-parametric random forest algorithm to predict DG Comp’s assessment of competitive concerns in markets affected by a merger, I find that the predictive performance of the random forests is much better than the performance of simple linear models. In particular, the random forests do much better in predicting the rare event of competitive concerns. Secondly, postreform, DG Comp seems to base its assessment on a more complex interaction of merger and market characteristics than pre-reform. The highly flexible random forest algorithm is able to detect these potentially complex interactions and, therefore, still allows for high prediction precision.
    Keywords: Merger policy reform, DG Competition, Prediction, Random Forests
    JEL: K21 L40
    Date: 2019
  11. By: Giacomo Calzolari; Leonardo Felli; Johannes Koenen; Giancarlo Spagnolo; Konrad O. Stahl
    Abstract: Based on data from a comprehensive benchmarking study on buyer-supplier relationships in the German automotive industry, we show that more trust in a relationship is associated with higher idiosyncratic investment by suppliers and better part quality|but also with more competition among suppliers. Both associations hold only for parts involving comparatively unsophisticated technology, and evaporate for parts involving sophisticated technology. We rationalize all these observations by means of a relational contracting model of repeated procurement with non-contractible, buyer-specific investments. In relationships involving higher trust, buyers are able to induce higher investment and more intense competition among suppliers|but only when the buyer has the bargaining power. This ability disappears when the bargaining power resides with the supplier(s).
    Keywords: Relational Contracts, Hold-up, Buyer-Supplier Contracts
    JEL: D86 L14
    Date: 2019–04
  12. By: Mark Dijkstra (Utrecht University); Maarten Pieter Schinkel (University of Amsterdam)
    Abstract: This paper shows how price leadership bans imposed, as part of the European Commission’ s State aid control, on all main mortgage providers but the largest bank shifted the Dutch mortgage market from a competitive to a collusive price leadership equilibrium. In May 2009, mortgage rates in The Netherlands suddenly rose against the decreasing funding cost trend to almost a full percentage point above the Eurozone average. We derive equilibrium best-response functions, identify the price leader, and estimate response adjustments in cointegrating equations on a large data set of daily mortgage rates 2004-2012. Consistent with the full coordination equilibrium, we find structural decreases in the leader’s cost pass-through and H-statistic, suggesting monopoly power, as well as much closer following of the leader’s price and strongly reduced transmission of common cost changes in to price followers mortgage rates. All the structural breaks are around the Spring of 2009, when the price leadership bans were negotiated. Predicted over charges are 125 basis points or 26% on average.
    Keywords: banking, competition, price leadership, collusion, State aid
    JEL: L11 G21 L85
  13. By: Iman Cheratian (Tarbiat Modares University); Saleh Goltabar; Carla Daniela Calá
    Abstract: Given the importance of entry promotion to prompt economic growth and promote structural transformation, this paper investigates the regional determinants of firm entry in the 30 Iranian regions, considering four different sizes -micro, small, medium and large-over 2000-2015. Using a new and unique database, we estimate panel non-spatial and spatial lag and error dependence models. We find that regional factors explain firm entry, but the impact is not homogeneous across firms of different size. We also find that most types of firms are influenced by the negative effect of economic sanctions during the sample period.
    Date: 2019
  14. By: Jala Youssef (World Bank); Chahir Zaki
    Abstract: Despite its several benefits, competition policy seems to lack the attention it deserves in terms of public interest and in terms of research in Arab countries. In the 1990s, many of them started to adopt economic reform programs that were broadly market packages aiming at reducing the role of the state, whereas competition laws mostly appeared in the following wave of reforms in the 2000s. However, the adoption of law does not seem to be sufficient in its own and what really matters is its implementation and enforcement. To date, many Arab countries have at least ten years of experience in competition policy, which we believe is a sufficient and suitable experience for assessment. However, to our knowledge, there are no cross countries studies assessing the market outcomes of competition policy in this group of countries. Against this backdrop, the objective of this paper is twofold. First, the paper aims at assessing competition policy in Arab countries in terms of rules (de jure) and implementation (de facto). For both the rules and implementation, we construct indices assessing three categories: enforcement, advocacy and institutional effectiveness. Second, the paper analyses the association between competition policy rules (de jure) and implementation (de facto) and competition outcomes (factual-based and perception-based). This correlation exercise uses our own created indices and the World Bank Enterprise Surveys data (WBES). Our main findings show that, in general, the overall assessment of our group of Arab countries competition legislations seems to be broadly average. In particular, Egypt and Tunisia had better scores in their implementation index for 2012 compared to their corresponding rules index, while it is the inverse in the Jordanian and Moroccan cases. Moreover, the Djiboutian and the Yemeni legislations are the weakest among the group. As per factual based competition outcomes, our competition indices are in general negatively correlated with market power, pointing out the importance of the deterrence effect that competition policy can play in limiting market power. In addition, on the perception-based outcomes front, our indices are mostly positively associated with perceiving more competition.
    Date: 2019

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