nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒06‒17
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Natural Monopoly in Transport By André de Palma; Julien Monardo
  2. Private Labels and Product Quality under Asymmetric Information By Zhiqi Chen; Heng Xu
  3. Merger Waves: Are Buyers Following the Herd or Responding to Structural Queues? By Ralph Sonenshine
  4. If You Think 9-Ending Prices Are Low, Think Again By Avichai Snir; Daniel Levy
  5. A network approach to cartel detection in public auction markets By Johannes Wachs; J\'anos Kert\'esz
  6. Platform Competition With Cash-back Rebates Under No Surcharge Rules By Marius Schwartz; Daniel R. Vincent
  7. Price Disclosure by Two-sided Platforms By Paul Belleflamme; Martin Peitz
  8. On the Competitive Effects of Screening in Procurement By Seres, G.; Pigon, Adam
  9. Injunctions against false advertising By Baumann, Florian; Rasch, Alexander
  10. Industry heterogeneity and exchange rate pass-through By Camila Casas

  1. By: André de Palma; Julien Monardo (ENS Cachan - École normale supérieure - Cachan)
    Keywords: Natural Monopoly,Regulation,Subadditivity of Costs,Economies of Scale,Average Cost,Ramsey-Boiteux,Incentive,Multiproduct Firm
    Date: 2019–05–06
  2. By: Zhiqi Chen (Department of Economics, Carleton University); Heng Xu (Business School, China University of Political Science and Law)
    Abstract: Contrary to the existing theories of private label products, we demonstrate that the introduction of a private label product by a retailer may improve the profits of the supplier of a competing national brand product. Our theory is built on two main elements. First, the introduction of a private label product may expand the total demand for the products carried by the retailer and thus enlarge the joint profit to be split between the retailer and the supplier of the national brand product. Second, in an environment where consumers do not know the quality of the private label product, the national brand serves as a bond to assure consumers that the retailer sells high-quality products only. This quality assurance enhances the joint profit generated by the introduction of the private label product, which, in conjunction with the weakening of the retailer’s bargaining position caused by asymmetric information, may enable the national brand supplier to earn a larger profit than in the absence of the private label product.
    JEL: L20 L15
    Date: 2019–06–03
  3. By: Ralph Sonenshine
    Abstract: While there has been a significant amount of research covering the causes of merger waves, few papers have rank ordered merger waves based on the causes nor sought to determine which rationale leads to higher bidder payouts. This paper seeks to fill this gap by examining a cross section of large, global mergers across most industries occurring over a 17 year period. I find that merger waves over this period are caused foremost by changing economic and regulatory conditions. It is the behavioral rationale of mispricing, however, that more often leads to higher bidder payouts or merger premiums among acquirers in merger waves.
    Keywords: mergers and acquisitions, merger premium, behavioral, merger wave
    JEL: G02 G12 G34
    Date: 2019
  4. By: Avichai Snir (Department of Banking and Finance, Netanya Academic College, Israel); Daniel Levy (Department of Economics, Bar-Ilan University, Israel; Department of Economics, Emory University, USA; Rimini Centre for Economic Analysis)
    Abstract: 9-ending prices are a dominant feature of many retail settings, which according to the existing literature, is because consumers perceive them as being relatively low. Are 9-ending prices really lower than comparable non 9-ending prices? Surprisingly, the empirical evidence on this question is scarce. We use 8 years of weekly scanner price data with over 98 million price observations to document four findings. First, at the category level, 9-ending prices are usually higher, on average, than non 9-ending prices. Second, at the product level, in most cases, 9-ending prices are, on average, higher than prices with other endings. Third, sale prices are more likely to be non-9 ending than the corresponding regular prices. Fourth, among sale prices, 9-ending prices are often lower, on average, than comparable non 9-ending prices. The first three findings imply that although consumers may associate 9-ending prices with low prices, the data indicates otherwise. The fourth finding offers a possible explanation for this misperception. Retailers may be using 9-ending prices to draw consumers' attention to particularly large price cuts during sales, which perhaps conditions the shoppers to associate 9-ending prices with low prices.
    Keywords: Behavioral Pricing, Psychological Prices, Price Perception, Image Effect, 9-Ending Prices, Price Points, Regular Prices, Sale Prices
    JEL: M30 M31 L11 L16 L81 D12 D22 D40 D90 D91 E31
    Date: 2019–06
  5. By: Johannes Wachs; J\'anos Kert\'esz
    Abstract: Competing firms can increase profits by setting prices collectively, imposing significant costs on consumers. Such groups of firms are known as cartels and because this behavior is illegal, their operations are secretive and difficult to detect. Cartels feel a significant internal obstacle: members feel short-run incentives to cheat. Here we present a network-based framework to detect potential cartels in bidding markets based on the idea that the chance a group of firms can overcome this obstacle and sustain cooperation depends on the patterns of its interactions. We create a network of firms based on their co-bidding behavior, detect interacting groups, and measure their cohesion and exclusivity, two group-level features of their collective behavior. Applied to a market for school milk, our method detects a known cartel and calculates that it has high cohesion and exclusivity. In a comprehensive set of nearly 150,000 public contracts awarded by the Republic of Georgia from 2011 to 2016, detected groups with high cohesion and exclusivity are significantly more likely to display traditional markers of cartel behavior. We replicate this relationship between group topology and the emergence of cooperation in a simulation model. Our method presents a scalable, unsupervised method to find groups of firms in bidding markets ideally positioned to form lasting cartels.
    Date: 2019–06
  6. By: Marius Schwartz (Department of Economics, Georgetown University); Daniel R. Vincent (Department of Economics, University of Maryland)
    Abstract: We analyze competing strategic platforms setting fees to a local monopolist merchant and cash-back rebates to end users, when the merchant may not surcharge platforms’ customers, a rule imposed by some credit card networks. Each platform has an incentive to gain transactions by increasing the spread between its merchant fee and user rebate above its rival’s spread. This incentive yields non-existence of pure strategy equilibrium in many natural environments. In some circumstances, there is a mixed strategy equilibrium where platforms choose fee structures that induce the merchant to accept only one platform with equal probability, a form of monopolistic market allocation.
    Keywords: Platform price competition; rebates; no surcharge; payment networks; credit cards.
    JEL: L13 L41 L42 D43
    Date: 2019–06–11
  7. By: Paul Belleflamme; Martin Peitz
    Abstract: We consider two-sided platforms with the feature that some users on one or both sides of the market lack information about the price charged to participants on the other side of the market. With positive cross-group external effects, such lack of price information makes demand less elastic. A monopoly platform does not benefit from opaqueness and optimally reveals price information. contrast, in a two-sided singlehoming duopoly, platforms benefit from opaqueness and, thus, do not have an incentive to disclose price information. In competitive bottleneck markets, results are more nuanced: if one side is fully informed (for exogenous reasons), platforms may decide to inform users on the other side either fully, partially or not at all, depending on the strength of cross-group external effects and the degree of horizontal differentiation.
    Keywords: price transparency; two-sided markets; competitive bottleneck; platform competition; price information; strategic disclosure
    JEL: D43 L12 L13
    Date: 2019–06
  8. By: Seres, G. (Tilburg University, TILEC); Pigon, Adam
    Abstract: Procuring authorities frequently use screening in order to mitigate risky bids. This study estimates the effect of bid screening and litigation on entry and bidding using a unique data set on highway construction procurement auctions in Poland. The market exhibits a screening method that ex post selects eligible offers. We demonstrate with an empirical model that this method disproportionately affects small firms and creates a barrier to entry. Our results suggest that screening increases bids by two channels. First, it directly inflates bids as well as decreasing entry. Second, in a competitive market, lower entry also inflates bids and prices.
    Keywords: procurement; auctions; market design; litigation
    JEL: H57 D44 L5
    Date: 2019
  9. By: Baumann, Florian; Rasch, Alexander
    Abstract: Rules of consumer protection or fair competition can be publicly or privately enforced. We consider the possibility of false advertising by a firm in duopolistic competition where consumers can be distinguished according to whether or not they form rational beliefs about the trustworthiness of advertising claims. We compare private and public law enforcement in the form of the demand for injunctions against false advertising. From a welfare perspective, we show that it can be optimal either to have the private entity (the competitor/a consumer protection agency) or the government agency as plaintiff, where the optimal regime depends on the share of naive consumers and the level of trial costs in a non-trivial way.
    Keywords: injunction suits,false advertising,law enforcement,naive consumers,product differentiation
    JEL: K41 K42 L13 L15
    Date: 2019
  10. By: Camila Casas
    Abstract: In the presence of price rigidities, nominal exchange rate fluctuations can have real effects on the economy. External shocks may have differentiated effects across economic sectors depending on firms' marginal cost structure and features of the demand they face, such as strategic complementarities. I analyse the relationship between the exchange rate pass-through to export and import prices and volumes and the use of imported inputs in production, an important determinant of marginal cost. Using microdata from Colombia, I show that manufacturing industries differ significantly in their use of imported inputs and in the estimated exchange rate pass-through. I find a clear correlation between the use of imported inputs and the response of prices to changes in exchange rates. That is, the exchange rate pass-through to prices tends to be larger for industries in which firms use a larger share of imported inputs. The link is stronger in the case of exports, but the effect on the pass-through to import prices is also positive. In contrast, I do not find a clear correlation between the use of imported inputs and the response of traded quantities to changes in exchange rates.
    Keywords: exchange rate pass-through, export and import prices, export and import volumes, intermediate inputs
    JEL: F1 F2 L2 L6
    Date: 2019–05

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