nep-ind New Economics Papers
on Industrial Organization
Issue of 2019‒12‒16
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Merger Policy in Digital Markets: An Ex-Post Assessment By Elena Argentesi; Paolo Buccirossi; Emilio Calvano; Tomaso Duso; Alessia Marrazzo; Salvatore Nava
  2. Mergers and Innovation Portfolios By José Luis Moraga-González; Evgenia Motchenkova; Saish Nevrekar
  3. The Surprising Hybrid Pedigree of Measures of Diversity and Economic Concentration By Paolo M. Adajar; Ernst R. Berndt; Rena M. Conti
  4. The Specialness of Zero By Joshua S. Gans
  5. Bundling, Belief Dispersion, and Mispricing in Financial Markets By Milo Bianchi; Philippe Jehiel
  6. The Effect of Horizontal Mergers on Efficiency and Market Power: An Application to the Argentine Hamburger Market By Germán Coloma

  1. By: Elena Argentesi; Paolo Buccirossi; Emilio Calvano; Tomaso Duso; Alessia Marrazzo; Salvatore Nava
    Abstract: This paper presents a broad retrospective evaluation of mergers and merger decisions in the digital sector. We first discuss the most crucial features of digital markets such as network effects, multi-sidedness, big data, and rapid innovation that create important challenges for competition policy. We show that these features have been key determinants of the theories of harm in major merger cases in the past few years. We then analyse the characteristics of almost 300 acquisitions carried out by three major digital companies –Amazon, Facebook, and Google – between 2008 and 2018. We cluster target companies on their area of economic activity and show that they span a wide range of economic sectors. In most cases, their products and services appear to be complementary to those supplied by the acquirers. Moreover, target companies seem to be particularly young, being four-years-old or younger in nearly 60% of cases at the time of the acquisition. Finally, we examine two important merger cases, Facebook/Instagram and Google/Waze, providing a systematic assessment of the theories of harm considered by the UK competition authorities as well as evidence on the evolution of the market after the transactions were approved. We discuss whether the CAs performed complete and careful analyses to foresee the competitive consequences of the investigated mergers and whether a more effective merger control regime can be achieved within the current legal framework.
    Keywords: Digital Markets, Mergers, Network Effects, Big Data, Platforms, Ex-post, Antitrust
    JEL: L4 K21
    Date: 2019
  2. By: José Luis Moraga-González (Vrije Universiteit Amsterdam); Evgenia Motchenkova (Vrije Universiteit Amsterdam); Saish Nevrekar (Universidad Carlos III de Madrid)
    Abstract: This paper studies mergers in markets where firms invest in a portfolio of research projects of different profitability and social value. The portfolio nature of the investment problem brings about novel insights on the external effects of firms’ investments. The investment of a firm in one project imposes a negative business-stealing externality on the rival firms because it lowers the probability they win the innovation contest for that project; however, the investment of a firm in one project also exerts a positive business-giving externality on the rival firms because it increases the likelihood they win the contest for the alternative project.
    Keywords: innovation portfolios, R&D contests, mergers
    JEL: O32 L13 L22 O31
    Date: 2019–12–08
  3. By: Paolo M. Adajar; Ernst R. Berndt; Rena M. Conti
    Abstract: Measures of economic concentration, such as the k-firm concentration index and the Hirschman-Herfindahl Index (HHI) are commonly used to ascertain the competitiveness of a product market. Within a Cournot model industry equilibrium, it is known a relationship exists between the HHI and the gap between industry price and marginal cost, but the economic theory foundations and intuition underlying the HHI formula are seemingly arbitrary. Here we document that there are indeed powerful and intuitive theoretical foundations to the HHI, but those foundations emanate from outside economics, namely, ecology, where the HHI is known as Simpson’s Diversity Index. We discuss the origins of the HHI and Simpson’s Diversity Index, summarize other measures of concentration, and link them to common measures of inequality. Based on a priori reasoning, we conclude there is little on which to base a choice between the HHI and non-HHI measures of market concentration. We empirically illustrate the implementation of the HHI and other concentration indexes as the statin drug LipitorTM lost patent protection and faced generic competition in 2012; we find very similar empirical trends and high correlations among them. Our research provides support for the continued use of HHI as a measure of concentration, provided one recognizes its link to market power is equivocal.
    JEL: B4 C43 D22 D4 I1 K21 L1 L4 L5
    Date: 2019–11
  4. By: Joshua S. Gans
    Abstract: A model is provided whereby a monopolist firm chooses to price its product at zero. This outcome is shown to be driven by the assumption of ‘free disposal’ alongside selection markets (where prices impact on a firm’s costs). Free disposal creates a mass point of consumers whose utility from the product is zero. When costs are negative, the paper shows that a zero price equilibrium can emerge. The paper shows that this outcome can be socially optimal and that, while a move from monopoly to competition can result in a negative price equilibrium, this can be welfare reducing. The conclusion is that zero can be a ‘special zone’ with respect to policy analysis such as in antitrust.
    JEL: L11 L41
    Date: 2019–11
  5. By: Milo Bianchi (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - CNRS - Centre National de la Recherche Scientifique - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales); Philippe Jehiel (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, UCL - University College of London [London])
    Abstract: Bundling assets of heterogeneous quality results in dispersed valuations when these are based on investor-specific samples from the pool. A monop olistic bank has the incentive to create heterogeneous bundles only when investors have enough money as in that case prices are driven by more opti- mistic valuations. When the number of banks is sufficiently large, oligopolistic banks choose extremely heterogeneous bundles even when investors have little money and even if this turns out to be collectively detrimental to the banks, which we refer to as a Bundler.s Dilemma.
    Keywords: complexnancial products,bounded rationality,disagreement,market efficiency
    Date: 2019–07
  6. By: Germán Coloma
    Abstract: This paper analyzes the behavior of the Argentine hamburger market during the period 2013-2018, to see if an important merger that occurred by the end of 2015 (the BRF/MRP merger) had any discernable market-power or efficiency effects. To do this, we run an econometric demand-and-supply model, and we find that there is an appreciable cost reduction that more than counterbalances the price increases induced by the merger. This implies that total consumers’ surplus may have grown as a consequence of the merger.
    Keywords: Merger, hamburger, Argentina, market power, efficiency
    JEL: C32 L13 L41 L66
    Date: 2019–12

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