nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒09‒23
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Optimal dynamic volume-based price regulation By Michele Bisceglia; Roberto Cellini; Luigi Siciliani; Odd Rune Straume
  2. Mergers, Mavericks, and Tacit Collusion By Darai, D.; Roux, C.; Schneider, F.
  3. Does Increasing Block Pricing Decrease Energy Use? Evidence from the Residential Electricity Market By Becka Brolinson
  4. Are U.S. Industries Becoming More Concentrated? By Gustavo Grullon; Yelena Larkin; Roni Michaely
  5. Returns to Scale in U.S. Production, Redux By Mumtaz Ahmad; John Fernald; Hashmat Khan
  6. Emerging the U.S. Firm Size Distribution Using 4.2 Billion Individual Tax Records By Joseph A.E. Shaheen
  7. Mergers and market power: Evidence from rivals' responses in European markets By Stiebale, Joel; Szücs, Florian
  8. Collusion Along the Learning Curve: Theory and Evidence from the Semiconductor Industry By Danial Asmat
  9. Oligopolistic Price Leadership and Mergers: An Empirical Model of the U.S. Beer Industry By Matthew Weinberg; Gloria Sheu; Nathan Miller

  1. By: Michele Bisceglia (Department of Economics, Management and Quantitative Methods, University of Bergamo;); Roberto Cellini (Department of Economics and Business, University of Catania); Luigi Siciliani (Department of Economics and Related Studies, University of York); Odd Rune Straume (Department of Economics/NIPE, University of Minho,)
    Abstract: We consider a model of optimal price regulation in markets where demand is sluggish and asymmetric providers compete on quality. Using a spatial model, which is suitable to investigate the health care and education sector, we investigate within a dynamic set-up the scope for price premiums or penalties on volume. We show that the socially optimal time path of quality provision o¤ the steady state can be replicated by a simple dynamic pricing rule where the dynamic part of the rule is ex-ante non-discriminatory in the sense that the price premium or penalty on volume is common across providers, despite their differing production costs. Whether the price schedule involves a penalty or a premium on volume relates to two concerns regarding production costs and consumer bene ts, which go in opposite directions. Price adjustments over time occur only through the price penalty or premium, not time directly, which highlights the simplicity and thus applicability of this regulation scheme.
    Keywords: Price regulation; Quality; Di¤erential games
    JEL: C73 I11 I14 L13
    Date: 2019
  2. By: Darai, D.; Roux, C.; Schneider, F.
    Abstract: We study whether firms’ collusive ability influences their incentives to merge: when tacit collusion is unsuccessful, firms may merge to reduce competitive pressure. We run a series of Bertrand oligopoly experiments where the participants decide whether, when, and to whom they send merger bids. Our experimental design allows us to observe (i) when and to whom mergers are proposed, (ii) when and by whom merger offers are accepted, and (iii) the effect on prices when mergers occur in this way. Our findings suggest that firms send more merger offers when prices are closer to marginal costs. Maverick firms that cut prices and thereby fuel competition are the predominant (but reluctant) receivers of these offers.
    Keywords: Tacit collusion, Mavericks, Bertrand oligopoly, Experiments
    JEL: C91 D43 K21 L13 L41
    Date: 2019–09–17
  3. By: Becka Brolinson (Department of Economics, Georgetown University)
    Abstract: Many electric utilities in the United States have replaced flat pricing schedules with increasing block prices (IBPs) in an effort to decrease aggregate energy use without imposing costs on low-income households. IBPs are step functions where the price per kilowatt-hour increases as a household uses more electricity. It is not clear, however, in theory or in practice, whether IBPs decrease aggregate energy use and protect low-income households relative to a revenue-neutral flat rate. I use detailed monthly billing records combined with demographic data for 11,745 California households and price differences over time across utility climate zones to estimate price elasticities of energy demand by income. The resulting estimates find that wealthier households are more price elastic than low-income households. I use these elasticities to show that IBPs increase total electricity use relative to a revenue-neutral flat price, therefore failing to achieve their goal of conservation. Finally, this paper finds that IBPs decrease electricity bills for low-income households while pushing costs to high-income households.
    Keywords: Consumer Economics: Empirical Analysis; Production, Pricing, and Market Structure; Electric Utilities; Government Policy; Energy Demand
    JEL: D12 L11 L94 L98 Q41
    Date: 2019–09–16
  4. By: Gustavo Grullon (Rice University - Jesse H. Jones Graduate School of Business); Yelena Larkin (York University - Schulich School of Business); Roni Michaely (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute)
    Abstract: In the last two decades, over 75% of U.S. industries have experienced an increase in concentration levels. We find that firms in industries with the largest increases in product market concentration have enjoyed higher profit margins and more profitable M&A deals. At the same time, we do not find evidence of a significant increase in operational efficiency, which suggests that market power is becoming an important source of value. These findings are robust to the inclusion of private firms, factors that account for foreign competition, as well as to the use of alternative measures of concentration. We also show that the higher profit margins associated with an increase in concentration are reflected in higher returns to shareholders. Overall, our results suggest that the nature of U.S. product markets has undergone a shift that has potentially weakened competition across the majority of industries.
    Keywords: industry concentration; HHI; product markets; profit margins; publicly-traded firms; M&A; antitrust
    JEL: G18 G30 G34 L40 L10
    Date: 2019–08
  5. By: Mumtaz Ahmad (Department of Economics, Carleton University); John Fernald (Department of Economics and Political Science Area, INSEAD); Hashmat Khan (Department of Economics, Carleton University)
    Abstract: We estimate constant returns or slightly decreasing returns at the industry level in the private U.S. economy over the past 30 years, using two separate industry datasets. An intuitive identity linking returns to scale, the markup, and the profit rate, gives an implied markup of approximately 12 percent, smaller than the estimates in the recent literature ranging from 15–40 percent. Put differently, given our estimated profit rate, large markups imply strongly increasing returns, which are not evident in the aggregate data.These findings suggest that approximately constant returns to scale in the U.S. economy are consistent with a relatively small aggregate markup in the post-1990 period.
    Keywords: Returns to scale, profit rates, markups
    JEL: E22 E32
    Date: 2019–09–09
  6. By: Joseph A.E. Shaheen (George Mason University, Fairfax, VA, USA)
    Abstract: The firm size distribution describes important economic and labor properties of any economy. Government entities must expend enormous resources in data collection, cleaning, and analysis in order to construct this and other important distributions describing the aggregate properties large economies. In the U.S., this process can be cumbersome and relies on querying multiple databases and utilizing significant computational resources. I show that construction of the U.S. firm size distribution is plausible using only individual income tax records (W2s) drawn directly from Internal Revenue Service tax records (micro data) and that the emergent distribution is statistically identical to what is reported by the United States Census Bureau. The methodology represents an incremental advance for population-scale studies in economic analysis—specifically firm and labor analysis. Finally, this paper acts as a re-validation of earlier work in fitting the firm size distribution.
    Keywords: firm size, labor, taxation, data policy, economic analysis, data science
    Date: 2019–04
  7. By: Stiebale, Joel; Szücs, Florian
    Abstract: This paper analyzes the effects of mergers and acquisitions on the markups of non-merging rival firms across a broad set of industries. We exploit expert market definitions from the European Commission's merger decisions to identify relevant competitors in narrowly defined product markets. Applying recent methodological advances in the estimation of production functions, we estimate markups as a measure of market power. Our results indicate that rivals significantly increase their markups after mergers relative to a matched control group. Consistent with increases in market power, the effects are particularly pronounced in markets with few players, high initial markups and concentration. We also provide evidence that merger rivals reduce their employment, sales and investment, while their profits increase around the time of a merger.
    Keywords: Merger,Markups,Productivity,Market Power,Innovation,Investment
    JEL: D22 L40 L13 O31
    Date: 2019
  8. By: Danial Asmat (Antitrust Division, U.S. Department of Justice)
    Abstract: This paper formulates a theory of collusion with learning-by-doing and multiproduct competition and tests it with data from an explicit cartel. The model shows that collusion is harder to sustain on a new product generation, where learning is high, than an old generation, where learning is low. Collusion on the old generation shifts demand toward the new generation, raising its output. Empirical analysis exploits variation between cartelization and competition in the DRAM market to identify counterfactual quantities and prices. Consistent with the model, cartel firms cut output of older generations by up to 50% and increased output of newer generations manifold.
    Date: 2019–07
  9. By: Matthew Weinberg (The Ohio State University, Department of); Gloria Sheu (US Department of Justice, Antitrust Division); Nathan Miller (Georgetown University)
    Abstract: We examine an infinitely-repeated game of oligopoly price leadership in which each period one firm, the market leader, proposes a supermarkup over Nash-Bertrand prices. The supermarkup is chosen to maximize the leader's profit subject to all firms' incentive compatibility constraints (ICCs). We provide conditions under which the equilibrium supermarkup can be recovered from aggregate data on price and quantities. We apply the model to the U.S. beer industry over 2005-2011 and estimate that ABI and MillerCoors implemented supermarkups of $\$0.60$ in the wake of the 2008 Miller/Coors merger. Counterfactual simulations demonstrate an ICC binds, as profit is greater with even higher supermarkups. We use the implied equality constraint to jointly identify a discount factor and the antitrust risk, the remaining structural parameters. We then explore the coordinated effects of ABI's acquisition of Grupo Modelo. Without divestitures, the merger would have relaxed ICCs, resulting in substantially higher prices. Finally, we return to the Miller/Coors merger. For many parameter values, no supermarkup satisfies ICCs without the merger. Thus, the merger may have be pivotal in generating the observed price leadership behavior.
    Date: 2019

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