nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒10‒14
sixteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Size and Competition: A "Hump-Shaped" Result By Grant, Iris; Kesternich, Iris; Schumacher, Heiner; Van Biesebroeck, Johannes
  2. Oligopoly price discrimination, competitive pressure and total output By Aguirre, Iñaki
  3. Optimal Price of Entry into a Competition By Ginzburg, Boris
  4. Robust Monopoly Regulation By Yingni Guo; Eran Shmaya
  5. Externalities, entry bias and optimal subsidy policy in oligopoly By Rupayan Pal; Ruichao Song
  6. Tying in evolving industries, when future entry cannot be deterred By Fumagalli, Chiara; Motta, Massimo
  7. Matching with Externalities By Pycia, Marek; Yenmez, M. Bumin
  8. Deceptive Products on Platforms By Johannes Johnen; Robert Somogyi
  9. Group Hug: Platform Competition with User-groups By Sarit Markovich; Yaron Yehezkel
  10. Optimal Assortment on an Integrated Platform By Zachary Nolan
  11. Multimarket Contact and Platform Competition: Reassessing the Mutual Forbearance Hypothesis By Eric Darmon; Thomas Le Texier; Zhiwen Li; Thierry Pénard
  12. Entry decisions and asymmetric competition between non-profit and for-profit homes in the long-term care market By Grant, Iris; Kesternich, Iris; Van Biesebroeck, Johannes
  13. Dominance and the pre-emption of competition following the Servier and Paroxetine GSK judgments By Lipatov, Vilen; Neven, Damien J; Siotis, Georges
  14. Market definition in the pharmaceutical industry: a case of drugs hopping antitrust markets? By Castanheira, Micael; Ornaghi, Carmine; Siotis, Georges
  15. Markups and market structure in South Africa: What can be learnt from new administrative data? By Budlender Joshua
  16. Facts on Business Dynamism in Turkey By Akcigit, Ufuk; Akgunduz, Yusuf Emre; Cilasun, Seyit Mumin; Ozcan Tok, Elif; Yilmaz, Fatih

  1. By: Grant, Iris; Kesternich, Iris; Schumacher, Heiner; Van Biesebroeck, Johannes
    Abstract: An active empirical literature estimates entry threshold ratios, introduced by Bresnahan and Reiss (1991), to learn about the impact of firm entry on the strength of competition. These ratios measure the increase in minimum market size needed per firm to sustain one additional firm in the market. We show that there is no monotonic relationship between a change in the entry threshold ratio and a change in the strength of competition or in the price-cost margin. In the standard homogenous goods oligopoly model with linear or constant elasticity demand, the ratio is hump-shaped in the number of active firms, increasing at first and only when additional firms enter it gradually decreases and converges to one. Empirical applications should use caution and interpret changes in the entry threshold ratios as indicative of changes in competition only from the third entrant onwards.
    Keywords: Competition; Entry Threshold Ratio; Market entry; market size
    JEL: D43 L13
    Date: 2019–09
  2. By: Aguirre, Iñaki
    Abstract: This paper extends the traditional analysis of the output effect under monopoly (third-degree) price discrimination to a multimarket oligopoly. The author shows that under oligopoly price discrimination, differences in competitive pressure, measured by the number of firms, across markets are more important than the relative demand curvature when determining the effect on total output.
    Keywords: third-degree price discrimination,total output,oligopoly,welfare
    JEL: D42 L12 L13
    Date: 2019
  3. By: Ginzburg, Boris
    Abstract: A continuum of agents are choosing whether to enter a competition. Entry is controlled by a firm that charges a price for it. The mass of agents is uncertain. I analyse how the distribution of the mass of agents determines the equilibrium price and the intensity of entry. A shift of the distribution towards more mass initially induces a reduction of price, and later – a reduction in entry.
    Keywords: contests, entry, university admission tests
    JEL: C72 D82
    Date: 2019–10–05
  4. By: Yingni Guo; Eran Shmaya
    Abstract: We study the regulation of a monopolistic firm using a robust-design approach. We solve for the policy that minimizes the regulator's worst-case regret, where the regret is the difference between his complete-information payoff minus his realized payoff. When the regulator's payoff is consumers' surplus, it is optimal to impose a price cap. The optimal cap balances the benefit from more surplus for consumers and the loss from underproduction. When his payoff is consumers' surplus plus the firm's profit, he offers a piece-rate subsidy in order to mitigate underproduction, but caps the total subsidy so as not to incentivize severe overproduction.
    Date: 2019–10
  5. By: Rupayan Pal (Indira Gandhi Institute of Development Research); Ruichao Song (Southwestern University of Finance and Economics)
    Abstract: This article analyses alternative subsidy schemes and long-run entry bias in a new industry that creates positive environmental externalities. It demonstrates that per unit subsidy scheme, despite attracting fewer firms, results in higher industry output and economic surplus in the equilibrium compared to the expenditure equivalent lump-sum subsidy scheme. However, the later leads to higher total surplus, unless spill-over externalities is sufficiently small. Further, free entry equilibrium number of firms may be excessive or insufficient. The first best equilibrium outcome can be implemented through a unique combination of per unit subsidy and lump sum subsidy/tax, which involves positive government expenditure.
    Keywords: Positive externalities, Environmental benefit, Free entry, Cournot Oligopoly, Expenditure equivalent subsidy schemes, Social Optimum
    JEL: D43 L52 H23 Q48 Q58
    Date: 2019–08
  6. By: Fumagalli, Chiara; Motta, Massimo
    Abstract: We show that the incentive to engage in exclusionary tying (of two complementary products) may arise even when the incumbent's dominant position in the primary market cannot be protected. By engaging in tying, an incumbent firm sacrifices current profits but can exclude a more efficient rival from a complementary market by depriving it of the critical scale it needs to be successful. In turn, exclusion in the complementary market allows the incumbent to be in a favorable position when a more efficient rival will enter the primary market, and to appropriate some of the rival's efficiency rents. The paper also shows that tying is a more profitable exclusionary strategy than pure bundling, and that exclusion is the less likely the higher the proportion of consumers who multi-home.
    Keywords: Inefficient foreclosure; network externalities; Scale Economies; Tying
    JEL: K21 L41
    Date: 2019–09
  7. By: Pycia, Marek; Yenmez, M. Bumin
    Abstract: We incorporate externalities into the stable matching theory of two-sided markets. Extending the classical substitutes condition to allow for externalities, we establish that stable matchings exist when agent choices satisfy substitutability. Furthermore, we show that substitutability is a necessary condition for the existence of a stable matching in a maximal-domain sense and provide a characterization of substitutable choice functions. In addition, we establish novel comparative statics on externalities and show that the standard insights of matching theory, like the existence of side-optimal stable matchings and the deferred acceptance algorithm, remain valid despite the presence of externalities even though the standard fixed-point techniques do not apply.
    JEL: C78 D62
    Date: 2019–09
  8. By: Johannes Johnen (CORE and LIDAM, Universite catholique de Louvain, Voie du Roman Pays 34, 1348 Ottignies-Louvain-la-Neuve, Belgium); Robert Somogyi (Budapest University of Technology and Economics, Department of Finance and Centre for Economic and Regional Studies, Magyar tudosok korutja 2, 1117 Budapest, Hungary)
    Abstract: On many online platforms, sellers offer products with additional fees and features. Platforms often deliberately shroud these fees from consumers. Examples are shipping fees, luggage fees on flight-aggregator websites, or resort fees and upgrades on hotel booking platforms. We explore the incentives of two-sided platforms to disclose additional fees and design a transparent marketplace when consumers might naively ignore shrouded additional fees. First, we find that platforms have stronger incentives to shroud additional fees than sellers in the absence of platforms. This result holds for monopoly platforms and in some competitive settings. Second, competition might induce platforms to regulate additional fees, which benefits consumers. We discuss connections to frequent practices like drip pricing, and platforms like Amazon or eBay regulating shipping fees.
    Keywords: Two-sided markets; Deceptive products; Platform competition; Consumer mistakes; Shrouded attributes
    JEL: D18 D42 D90 L13 L86
    Date: 2019–09
  9. By: Sarit Markovich (Kellogg School of Management, Northwestern University, Evanston, IL, USA); Yaron Yehezkel (Coller School of Management, Tel Aviv University, Ramat Aviv, Israel)
    Abstract: We consider platform competition in the presence of small users and a user-group. One platform enjoys a quality advantage and the other benefits from favorable beliefs. We study whether the group mitigates the users' coordination problem –i.e., joining a low-quality platform because they believe that other users would do the same. We find that when the group is sufficiently large to facilitate coordination on the high-quality platform, the group may choose to join the low-quality one. When the group joins the more efficient platform it does not necessarily increase consumer surplus. Specifically, a non-group user benefits from a group with an intermediate size, and prefers a small group over a large group. The utility of a group user is also non-monotonic in the size of the group.
    Keywords: network externalities; coordination
    JEL: L1
    Date: 2019–09
  10. By: Zachary Nolan (Duke University, Department of Economics)
    Abstract: Consumers rely on platforms to access goods and services in many industries. Platform firms are often integrated, including their own goods in the menu of products offered to consumers. With the ability to impact both pricing and product assortment, these integrated firms face a trade-off between foreclosing third-party competitors to promote their integrated products and maintaining the value of the platform as a whole. This paper studies the pricing and assortment decisions of internet service providers (ISPs), which sell broadband internet access and TV packages. The ISP’s network connects consumers to third-party online video, which increases the value of internet access, but also competes with the ISP’s TV packages. I develop a model of consumer choice over ISP and third-party subscriptions and estimate the model using a novel household-level dataset of ISP subscriptions and usage. Next, I use a model of bundle pricing to study alternative pricing strategies in which internet prices vary with access to online video. I find that a strategy of blocking access to online video is not profitable due to the imbalance in the profit margins of TV and internet access. For low-margin TV firms, restricting online video usage leads to increased TV market share, but is offset by lower willingness-to-pay for internet access. When the ISP sets an additional access charge for online video, profits rise, and a decrease in the price charged for non-streaming internet access leads to previously unserved consumers gaining access to the internet.
    Keywords: Bundling, Platforms, Broadband, Internet, Online Video, Telecommunications Industry, Cord-cutting
    JEL: L11 L13 L96
    Date: 2019–09
  11. By: Eric Darmon (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France); Thomas Le Texier (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France); Zhiwen Li (School of Management, Jiangsu University, China); Thierry Pénard (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France)
    Abstract: Antitrust authorities are particularly concerned with the dominant market position of tech giants such as Google, Facebook, and Amazon. These digital conglomerates are characterized by platform-based business models. However, despite their dominance, they are competing with each other to attract the same groups of users (developers, advertisers, end users, third party sellers, etc). They therefore have not only overlapping users (or sides) but also multimarket contact (MMC). In traditional one-sided markets, theory and empirical evidence show that MMC tends to relax competition. However, it is unclear whether this result holds under platform competition. This paper examines how MMC a ects pricing behaviour and pro ts of two-sided platforms. We develop a model of platform competition with two distinct markets. We assume that platforms only charge one group of users and provide free access to the other group. We argue that multimarket platforms also generate cross-market externalities that favour their users, in addition to well-known cross-group externalities. We nd that when cross-market externalities bene t the side that has free access, price competition is ercer and total welfare increases under MMC. However, when they bene t the side that pays to access the platform, the same result only holds if the cross-group externality and/or cross-market externality are suciently high. Finally, we show that a single-market platform competing with a multimarket platform may be deterred from entering the second market if cross-market or cross-group externalities are high. Our ndings contrast with the mutual forbearance hypothesis which claims that MMC relaxes competition in traditional (one-sided) industries. From a competition policy perspective, our paper provides an insight into how antitrust authorities should review conglomerate mergers and assess the e ects of diversi cation strategies of digital platforms.
    Keywords: two-sided markets, platform competition, multimarket contact, conglomerate, digital markets
    JEL: L13 L49 L86
    Date: 2019–09
  12. By: Grant, Iris; Kesternich, Iris; Van Biesebroeck, Johannes
    Abstract: The demand for long-term care (LTC) services is growing strongly, mostly due to population aging. Historically, the German LTC market was dominated by non-profit nursing homes, but the recent entry wave was tilted towards for-profit competitors. Using a rich administrative dataset on all LTC facilities in Germany, we examine strategic interaction between these two ownership types in a static entry model. The estimates of competitive effects imply that non-profit and for-profit homes are substitutes, but competition is much stronger within-type, suggesting that they provide differentiated products. For-profit homes in particular act as if they operate in a different market segment, but over time their entry behavior has converged to that of the more established non-profits. Counterfactual simulations of proposed changes in government policy suggest that even small changes favoring either type could have a large impact on the fraction of markets that remain unserved or only served by a single type.
    Keywords: Competition; For-profit; Long-term care; non-profit
    JEL: I11 L13 L22 L33
    Date: 2019–09
  13. By: Lipatov, Vilen; Neven, Damien J; Siotis, Georges
    Abstract: This paper discusses, from economic and enforcement perspectives, unilateral conduct aimed at foreclosing the entry of generics. We assume, in line with empirical evidence, that before the entry of generics, competition takes place among originators mostly through non price instruments and in particular, promotion. The entry of generics for one molecule introduces head to head price competition for that molecule and changes competitive interactions among the originators that remain patent protected. First, we develop a model in which competition takes place through price and promotion and analyse the consequence of unilateral conduct preventing the entry of generics, thus prolonging the status quo. We find that that the extent to which this conduct reduces consumer welfare (if at all) depends on whether promotion enhances the utility of users and whether promotion also involves business stealing. In order to provide some guidance for enforcement, we characterise the competitive outcome that prevails before entry in terms of consumer welfare. We find that unlike what happens with price competition, common indicators of performance such as the number of firms, the level of concentration (for a given number of firms) and the intensity of rivalry might be negatively associated with consumer welfare. As a consequence, the foreclosure of entrants might lead to welfare losses even when the status quo involves intense non-price competition and low concentration. Finally, we consider how unilateral conduct towards generic entry can be dealt with in the current enforcement framework. In the Servier and Paroxetine cases, the foreclosure of generics has been framed as an abuse of a dominant position held by the originator before entry, in spite of evidence of non-price competition. We show that it would be preferable to frame the conduct as an abuse of the dominant position that the originator holds in the molecule market as a consequence of its patent. In such a framework, the dominant position is instrumental in making exclusion feasible.
    Keywords: Abuse of dominance; foreclosure; Non-price competition; Pharmaceutical industry
    JEL: I11 K21 L13
    Date: 2019–09
  14. By: Castanheira, Micael; Ornaghi, Carmine; Siotis, Georges
    Abstract: Delineating the boundaries of the relevant market plays a central role in the conduct of competition policy. In this paper, we focus on market definition in the pharmaceutical industry, where the introduction of generics represents a significant competitive shock for the molecule experiencing Loss of Exclusivity. We show that generic entry generates market-wide effects that shift the boundaries of the relevant antitrust market, but in unexpected ways. In a market where non-price competition is prevalent, entry may lead to a split of the (initial) relevant market. Hence, and paradoxically, entry may soften competitive constraints. We also highlight the importance of properly accounting for non-price instruments: ignoring them can easily lead to a flawed definition of the relevant antitrust market. We obtain these results by econometrically estimating time-varying substitution patterns in the pharmaceutical industry.
    Keywords: Antitrust; competition policy; Market Definition; Pharmaceutical industry
    JEL: D22 I11 L22
    Date: 2019–10
  15. By: Budlender Joshua
    Abstract: The South African economy is generally understood to be characterised by high levels‚ of product market concentration and high firm markups. This paper reviews the existing literature‚ and discusses what can be learnt from new administrative firm-level panel data. I present new‚ evidence on South African markups, industrial concentration, and the firm-size distribution, for‚ sectors across the South African economy.I find that conclusions on whether markups are ¢â‚¬Ëœhigh¢â‚¬â„¢‚ or ¢â‚¬Ëœlow¢â‚¬â„¢ are heavily dependent on the method used, and I show that this is consistent with the‚ prior literature. There is however preliminary evidence that markups have generally declined over‚ the 2010¢â‚¬â€œ14 period. I argue that it is difficult to make strong conclusions about industrial‚ concentration using cross-industry study, and that high and growing concentration across the‚ South African economy is yet to be conclusively shown. I also investigate how firm-level markups‚ are related to industry-level concentration and firm-level market share. While some patterns‚ emerge, I argue that their economic meaning is unclear.
    Keywords: firm-size distribution,Market design,markups,Panel data analysis
    Date: 2019
  16. By: Akcigit, Ufuk; Akgunduz, Yusuf Emre; Cilasun, Seyit Mumin; Ozcan Tok, Elif; Yilmaz, Fatih
    Abstract: In this paper, we investigate various trends on competition and business dynamism in the Turkish manufacturing sector. More specifically, using micro level administrative data sets of firm balance sheets, credit registry and social security records, we focus on moments such as firm entry, exit, profitability, worker reallocation, labor share, labor productivity and credit distributions, among several others. Our results indicate that business dynamism in the Turkish manufacturing sector was relatively stable and even improving until 2012 but has been declining since then. We find that market concentration and exit rates have started to rise, yet new business creation, labor share of output and economic activities of young firms have declined. Using a model with endogenous market competition, we show that a adverse shock to cost of R&D investment can explain these empirical trends. We identify increases in financing costs after 2012 of followers as a potential mechanism for our findings in Turkey. We next perform a policy analysis with our model which suggests that providing support (e.g., R&D subsidy) to immediate followers can undo the adverse effects of the negative shock to financing costs and therefore foster competition and faster growth.
    Keywords: business dynamism; Competition; Market concentration; Turkish economy
    JEL: E22 E25 L12 O31 O33 O34
    Date: 2019–09

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