nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒09‒30
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Limit pricing, climate policies, and imperfect substitution By Gerard van der Meijden; Cees Withagen
  2. Patent-Based News Shocks By Cascaldi-Garcia, Danilo; Vukotic, Marija
  3. Prices and Promotions in U.S. Retail Markets: Evidence from Big Data By Günter J. Hitsch; Ali Hortaçsu; Xiliang Lin
  4. Who Bears the Welfare Costs of Monopoly? The Case of the Credit Card Industry By Gajendran Raveendranathan; Kyle Herkenhoff
  5. Competition and price stickiness: Evidence from the French retail gasoline market By Sylvain Benoit; Yannick Lucotte; Sébastien Ringuedé
  6. Quality Regulation and Competition: Evidence from Pharmaceutical Markets By Jesus Juan Pablo Atal; Jose´ Ignacio Cuesta; Morten Sæthre
  7. Collective Reputation in Trade: Evidence from the Chinese Dairy Industry By Jie Bai; Ludovica Gazze; Yukun Wang

  1. By: Gerard van der Meijden (Vrije Universiteit Amsterdam); Cees Withagen (IPAG Business School)
    Abstract: The effects of climate policies are often studied under perfect competition and constant marginal extraction costs. In this paper, we allow for monopolistic fossil fuel supply and more general cost functions, which, in the presence of perfectly substitutable renewables, gives rise to limit-pricing behavior. Four phases of supply may exist in equilibrium: sole supply of fossil fuels below the limit price, sole supply of fossil fuels at the limit price, simultaneous supply of fossil fuels and renewables at the limit price, and sole supply of renewables at the limit price. The consequences of climate policies for initial extraction depend on the initial phase: in case of sole supply of fossil fuels at the limit price, a renewables subsidy increases initial extraction, whereas a carbon tax leaves initial extraction unaffected. With simultaneous supply at the limit price or with sole supply of fossil fuels below the limit price, a renewables subsidy and a carbon tax lower initial extraction. Both policy instruments decrease cumulative extraction. If fossil fuels and renewables are imperfect but good substitutes, the monopolist will exhibit ‘limit-pricing resembling’ behavior, by keeping the effective price of fossil close to that of renewables for considerable time.
    Keywords: limit pricing, non-renewable resource, monopoly, climate policies
    JEL: Q31 Q42 Q54 Q58
    Date: 2019–09
  2. By: Cascaldi-Garcia, Danilo (Federal Reserve Board); Vukotic, Marija (University of Warwick)
    Abstract: In this paper we exploit firm-level data on patent grants and subsequent reactions of their stocks to identify technological news shocks. Changes in stock market valuations due to announcements of individual patent grants represent expected future increases in the technology level, which we refer to as patent-based news shocks. Our patent-based news shocks resemble diffusion news in that they do not affect total factor productivity in the short-run but account for about 20 percent of its variations after five years. These shocks induce positive comovement between consumption, output, investment and hours. Unlike the existing empirical evidence, patent-based news shocks generate a positive response in inflation and the federal funds rate, in line with a standard New Keynesian model. Patenting activity in electronic and electrical equipment industries within the manufacturing sector and computer programming and data processing services within the services sector play a crucial role in driving our results.
    Keywords: News Shocks ; Patents ; Patent-based news shocks
    JEL: E3 E32 L60
    Date: 2019
  3. By: Günter J. Hitsch; Ali Hortaçsu; Xiliang Lin
    Abstract: We document the degree of price dispersion and the similarities as well as differences in pricing and promotion strategies across stores in the U.S. retail (grocery) industry. Our analysis is based on “big data” that allow us to draw general conclusions based on the prices for close to 50,000 products (UPC’s) in 17,184 stores that belong to 81 different retail chains. Both at the national and local market level we find a substantial degree of price dispersion for UPC’s and brands at a given moment in time. We document that both persistent base price differences across stores and price promotions contribute to the overall price variance, and we provide a decomposition of the price variance into base price and promotion components. There is substantial heterogeneity in the degree of price dispersion across products. Some of this heterogeneity can be explained by the degree of product penetration (adoption by households) and the number of retail chains that carry a product at the market level. Prices and promotions are more homogenous at the retail chain than at the market level. In particular, within local markets, prices and promotions are substantially more similar within stores that belong to the same chain than across stores that belong to different chains. Furthermore, the incidence of price promotions is strongly coordinated within retail chains, both at the local market level and nationally. We present evidence, based on store-level demand estimates for 2,000 brands, that price elasticities and promotion effects at the local market level are substantially more similar within stores that belong to the same chain than across stores belonging to different retailers. Moreover, we find that retailers can not easily distinguish, in a statistical sense, among the price elasticities and promotion effects across stores using retailer-level data. Hence, the limited level of price discrimination across stores by retail chains likely reflects demand similarity and the inability to distinguish demand across the stores in a local market.
    JEL: L11
    Date: 2019–09
  4. By: Gajendran Raveendranathan (McMaster University); Kyle Herkenhoff (University of Minnesota)
    Abstract: How are the welfare costs from monopoly borne? We answer this question in the context of the U.S. credit card industry, which is highly concentrated, charges interest rates that are 3.4 to 8.8 percentage points above competitive pricing, generates excess profits, and has repeatedly lost antitrust lawsuits. We depart from existing consumer credit models that assume perfect competition (e.g. Livshits, MacGee, and Tertilt (2007,2010) and Chatterjee, Corbae, Nakajima, and Rios-Rull, 2007), by integrating oligopolistic lenders into a Bewley-Huggett-Aiyagariframework. Our model accounts for roughly half of the spreads and excess profits observed in the data. The welfare gains to the current population from competitive reforms in the credit card industry are equivalent to a onetime transfer to households worth 3.4 percent of GDP. Along the transition path, all cohorts realize welfare gains from competitive reforms. Asset poor households benefit the most from increased consumption smoothing. Asset rich households also benefit from higher general equilibrium saving interest rates.
    Date: 2019
  5. By: Sylvain Benoit (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine); Yannick Lucotte (LEO - Laboratoire d'Économie d'Orleans - CNRS - Centre National de la Recherche Scientifique - Université de Tours - UO - Université d'Orléans); Sébastien Ringuedé (LEO - Laboratoire d'Economie d'Orléans - Université - CNRS - Centre National de la Recherche Scientifique)
    Abstract: Using daily price quotes from about 8,000 French gas stations, this paper empirically analyses whether the level of competition determines the degree of price stickiness on the retail gasoline market. The degree of price rigidity is measured by the frequency of price changes, while the distance to the nearest station and the number of gas stations within a given radius are considered as proxies for local competition. The results confirm that local competition is an important determinant of the price-setting behavior of gas stations. Indeed, considering Ordinary Least Squares (OLS) and spatial regression models, we find that the degree of price rigidity is positively related to the distance to the nearest station, and negatively related to the concentration of firms in a given geographical area. This result can be notably explained by the fact that gas stations facing a high competitive pressure are more likely to adjust their prices more quickly and more frequently in response to crude oil price decreases than stations enjoying market power.
    Keywords: Retail gasoline pricing,Price-setting behavior,Price stickiness,Localcompetition
    Date: 2019–09–19
  6. By: Jesus Juan Pablo Atal (University of Pennsylvania); Jose´ Ignacio Cuesta (University of Chicago); Morten Sæthre (Norwegian School of Economics)
    Abstract: Quality regulation attempts to ensure quality and to foster price competition by reducing vertical di?erentiation, but may also have unintended consequences through its e?ects on market structure. We study these e?ects in the context of pharmaceutical bioequivalence, which is the primary quality standard for generic drugs. Exploiting the staggered phase-in of bioequivalence requirements in Chile, we show that stronger quality regulation decreased the number of drugs in the market by 25%, increased average paid prices by 10%, decreased total sales by 20%, and did not have a significant e?ect on observed outcomes related to drug quality. These adverse e?ects were concentrated among small markets. Our results suggest that the intended e?ects of quality regulation on price competition through increased (perceived) quality of generics were overturned by adverse competitive e?ects arising from the costs of complying with the regulation.
    Keywords: Aggregate quality regulation, competition, bioequivalence, generic pharmaceuticals
    JEL: I11 L11 L15
    Date: 2019–07–15
  7. By: Jie Bai; Ludovica Gazze; Yukun Wang
    Abstract: Collective reputation implies an important externality. Among firms trading internationally, quality shocks about one firm’s products could affect the demand of other firms from the same origin country. We study this issue in the context of a large-scale scandal that affected the Chinese dairy industry in 2008. Leveraging rich firm-product level administrative data and official quality inspection reports, we find that the export revenue of contaminated firms dropped by 84% after the scandal, relative to the national industrial trend, and the spillover effect on non-contaminated firms is measured at 64% of the direct effect. Notably, firms deemed innocent by government inspections did not fare any better than noninspected firms. These findings highlight the importance of collective reputation in international trade and the challenges governments might face in signaling quality and restoring trust. Finally, we investigate potential mechanisms that could mediate the strength of the reputation spillover. We find that the spillover effects are smaller in destinations where people have better information about parties involved in the scandal. New firms are more vulnerable to the collective reputation damage than established firms. Supply chain structure matters especially in settings where firms are less vertically integrated and exhibit fragmented upstream-downstream relationships.
    JEL: F10 F14 L15 L66 O10 O19
    Date: 2019–09

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