nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒05‒20
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Aggregation of Efficiency and Productivity: From Firm to Sector and Higher Levels By Valentin Zelenyuk
  2. R&D, innovation and productivity By Mohnen, Pierre
  3. Shipping the good apples under strategic competition By Creane, Anthony
  4. The hidden cost of real time electricity pricing By Ioana Bejan; Carsten Lynge Jensen; Laura M. Andersen; Lars Gårn Hansen
  5. Is there a loyalty-enhancing effect of retroactive price-reduction schemes? By Lisa Bruttel
  6. Multinationals, Offshoring and the Decline of U.S. Manufacturing By Christoph E. Boehm; Aaron Flaaen; Nitya Pandalai-Nayar
  7. Do LPG Prices React to the Entry of Natural Gas? Implications for Competition Policy By Aldo González; Vicente Lagos
  8. Price-cost margin and bargaining power in the European Union By Soares, Ana Cristina

  1. By: Valentin Zelenyuk (School of Economics and Centre for Efficiency and Productivity Analysis (CEPA) at The University of Queensland, Australia)
    Abstract: Here we consider various cases where researchers are interested in measuring aggregate efficiency or productivity levels or their changes for a group of decision making units. These could be entire industry composed of individual firms, banks, hospitals, or a region composed of sub-regions or countries, or particular sub-groups of these units within a group, e.g., sub-groups of public vs. private or regulated vs. non-regulated firms, banks or hospitals within the same industry, etc. Such analysis requires solutions to the aggregation problem some theoretically justified approaches that can connect individual measures to aggregate measures. Various solutions are offered in the literature and our goal is to try to coherently summarize at least some of them in this chapter. This material should be interesting not only for theorists but also (and perhaps more so) for applied researchers, as it provides exact formulas and intuitive explanations for various measures of group efficiency, group scale elasticity and group productivity indexes and refers to original papers for more details.
    Keywords: Efficiency, Productivity, Aggregation, Industry Efficiency, Duality.
    JEL: D24 C43 L25
    Date: 2019–05
  2. By: Mohnen, Pierre (UNU-MERIT, and SBE, Maastricht University)
    Abstract: This paper reviews various technological indicators from innovation inputs to innovation outputs, pointing out their strengths and weaknesses and the consequent caution that is in order when using these data for economic analysis. It briefly explains the theoretical link between innovation and productivity growth and then compares the estimated magnitudes of that relationship using the different innovation indicators.
    Keywords: innovation, productivity, indicators
    JEL: D24 O31 O33 O47
    Date: 2019–05–06
  3. By: Creane, Anthony
    Abstract: Production runs suffer from inadvertent quality variation. There are good apples; there are bad apples (also known as “seconds”). The Alchian-Allen theorem states that a common perunit charge on two goods differentiated only by quality, increases the relative export demand for the higher quality good leading to local consumers lamenting that they cannot find them locally. While usually stated for competitive markets, firms with market power also suffer from inadvertent seconds in their production. For example, brand-name retailers send their seconds to outlets, even though this undercuts the demand for their firsts. A model is presented of oligopolistic firms choosing production and what fraction of their first and seconds to export: a model of “shipping the good apples” with strategic competition. In this model an increase in the per-unit charge can increase the absolute fraction of high quality exported. Despite this, shipping the good apples may not hold, that is, an increase in the per-unit charge can decrease the quantity demanded of good apples relative to bad ones. Rather, shipping the good apples holds when the export market’s willingness-to-pay for high quality is greater (or greater value for “quality upgrading” (Johnson and Myatt, 2006)). Despite the consumers’ lament, domestic consumer welfare increases with exporting
    Keywords: Market power, Cournot, quality, trade
    JEL: D43 F12 L2
    Date: 2019–05
  4. By: Ioana Bejan (Department of Food and Resource Economics, University of Copenhagen); Carsten Lynge Jensen (Department of Food and Resource Economics, University of Copenhagen); Laura M. Andersen (Department of Food and Resource Economics, University of Copenhagen); Lars Gårn Hansen (Department of Food and Resource Economics, University of Copenhagen)
    Abstract: In theory real time pricing ensures more efficient electricity markets than time of use pricing. However, people are prone to habits and regularity, so real time pricing may impose a greater cost of reacting on consumers. In a randomized field experiment we compared the cost of reacting to incentives under these two pricing regimes. We utilized smart-metered hourly power consumption to unobtrusively measure treatment effects. We found that real time pricing reduces consumer surplus from reacting to incentives by half, compared to reacting under a corresponding time of use pricing regime. This suggests a substantial economic value to households of the regularity and predictability provided by time of use pricing.
    Keywords: real time electricity pricing, time of use electricity pricing, field experiment, household cost of reacting
    JEL: L51 L94 C93 Q41
    Date: 2019–05
  5. By: Lisa Bruttel (University of Potsdam)
    Abstract: This paper presents an experiment on the effect of retroactive price-reduction schemes on buyers’ repeated purchase decisions. Such schemes promise buyers a reduced price for all units that are bought in a certain time frame if the total quantity that is purchased passes a given threshold. This study finds a loyalty-enhancing effect of retroactive price-reduction schemes only if the buyers ex-ante expected that entering into the scheme would maximize their monetary gain, but later learn that they should leave the scheme. Furthermore, the effect crucially hinges on the framing of the price reduction.
    Keywords: rebate and discount, buyer behavior, risk aversion, loss aversion, regulation of dominant firms, experiment
    JEL: C91 D03 D81 L42
    Date: 2019–05
  6. By: Christoph E. Boehm; Aaron Flaaen; Nitya Pandalai-Nayar
    Abstract: We provide new facts about the role of multinationals in the decline in U.S. manufacturing employment between 1993-2011, using a novel microdata panel with firm-level ownership and trade information. Multinational-owned establishments displayed lower employment growth than a narrow control group and accounted for 41% of the aggregate manufacturing employment decline. Further, newly multinational establishments in the U.S. experienced job losses, while their parent firms increased input imports from abroad. We develop a model that rationalizes this behavior and bound a key elasticity with our microdata. The estimates imply that a reduction in the costs of foreign sourcing leads firms to increase imports of intermediates and to reduce U.S. manufacturing employment. Our findings suggest that offshoring by multinationals was a key driver of the observed decline in manufacturing employment.
    JEL: F14 F16 F23 F4
    Date: 2019–05
  7. By: Aldo González; Vicente Lagos
    Abstract: In developing countries, the penetration of Liquefied Petroleum Gas (LPG) is still high, and hence the entry of Natural Gas (NG) networks coexists with the use of LPG by an important fraction of households. Thus, a relevant policy question is whether the number and degree of horizontal integration among NG and LPG providers has an influence on the level of retail prices. Using selfreported LPG retail prices of the largest LPG provider in Chile for the period 2013-2014, we estimate that the presence of a competing NG network generates an average decrease of LPG retail prices within the range [-2,-4%] depending on the econometric specification. Thus, since the presence of an additional competing provider (i.e., an NG retailer) has an influence on the level of prices, LPG and NG may be indeed considered as imperfect substitutes. The main policy implication of this result is that the degree of horizontal integration between both types of providers should matter and there would be room for regulatory intervention aimed at proposing remedies in order to mitigate any potential anticompetitive effect.
    Date: 2019–05
  8. By: Soares, Ana Cristina
    Abstract: Using firm-level data between 2004 and 2012 for eleven countries of the European Union (EU), we document the size of product and labour market imperfections within narrowly defined sectors including services which are virtually undocumented. Our findings suggest that perfect competition in both product and labour markets is widely rejected. Levels of the price-cost margin and union bargaining power tend to be higher in some service sectors depicting however substantial heterogeneity. Dispersion within sector and across countries tends to be higher in some services sectors assuming a less tradable nature which suggests that the Single Market integration is partial particularly relaxing the assumption of perfect competition in the labour market. We report also figures for the aggregate economy and show that Eastern countries tend to depict lower product and labour market imperfections compared to other countries in the EU. Also, we provide evidence in favour of a very limited adjustment of both product and labour market imperfections following the international and financial crisis.
    Keywords: market imperfection,market structure,nash bargaining,European Union
    JEL: D40 J50 L10
    Date: 2019

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