nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒01‒13
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. How to Draw the Line: A Note on Local Market Definition By Dieter Pennerstorfer; Biliana Yontcheva
  2. The unintended consequences of increasing returns to scale in geographical economics By Steven Bond-Smith
  3. Platform competition and incumbency advantage under heterogeneous switching cost — exploring the impact of data portability By Siciliani, Paolo; Giovannetti, Emanuele
  4. The Unexpected Consequences of Generic Entry By Micael Castanheira De Moura; Georges Siotis; Carmine Ornaghi
  5. How Does Competition Affect Reputation Concerns? Theory and Evidence from Airbnb By Michelangelo Rossi
  6. Robots & the Rise of European Superstar Firms By Jens Suedekum; Nicole Woessner
  7. The Sky in Blues: On the Recent Development of Indonesian Airlines Industry By Chaikal Nuryakin; Regi Kusumaatmadja; Natanael Waraney Gerald Massie; Alvin Ulido Lumbanraja; Sean Hambali; Devina Anindita

  1. By: Dieter Pennerstorfer; Biliana Yontcheva (WU Wien)
    Abstract: This article presents a novel method of market delineation, which generates virtually isolated residential clusters using data on the spatial distribution of population. The performance of this approach is evaluated by contrasting it with traditional delineation techniques based on municipal boundaries. The estimation of simple entry models for five industries shows that markets defined using micro-level residence information perform better in terms of reducing cross-border spatial spillovers and predicting the equilibrium number of firms on the market more accurately. Additionally, the estimated entry threshold ratios using this method successfully reflect our expectations based on ex-ante knowledge about the investigated industries.
    Keywords: market definition, entry models, spatial competition
    JEL: L13 L11 R32
    Date: 2019–10
  2. By: Steven Bond-Smith (Bankwest Curtin Economic Centre, Curtin University)
    Abstract: Increasing returns to scale is now fundamental to both economics and economic geography. But first generation theories of endogenous growth imply an empirically-refuted scale effect. This scale effect and assumptions to negate the scale effect both imply unintentional spatial consequences. A review of the broad economic geography literature reveals the widespread use and misuse of first generation and semi-endogenous growth techniques despite these distortions. Techniques are suggested for avoiding these unintended spatial consequences. Crucially, the scale-neutral Schumpeterian branch of endogenous growth theory enables research in economic geography to focus on the distinctly spatial mechanisms that define the spatial economy.
    Keywords: endogenous growth, scale effects, increasing returns, innovation, economic geography
    JEL: E10 L16 O41
    Date: 2019–11
  3. By: Siciliani, Paolo (Bank of England and UCL Laws); Giovannetti, Emanuele (Anglia Ruskin University & Hughes Hall, University of Cambridge)
    Abstract: The paper develops a static model to explore how, under platform competition, heterogeneous levels of switching costs can give rise to an incumbency advantage. The key condition required for the coexistence of both platforms on the market, to have effective competition, relies on the relative strength of switching costs over the network effects. Only when switching costs are stronger than cross-group network benefits is market tipping avoided. The same condition also underpins the presence of a material incumbency advantage vis-à-vis the entrant platform. Therefore, regulatory intervention aimed at facilitating switching, for example by imposing data portability, might worsen entry condition as the incumbent platform is less accommodative. Besides the standard configuration with exogenous singlehoming, we also fully characterise the model with endogenous multihoming on both sides. Partial multihoming occurs only on one side, the one with comparatively lower switching costs. However, in contrast to the seminal ‘competition bottleneck’ model, on the opposite side, where singlehoming arises endogenously, agents face higher prices than under exogenous singlehoming. Therefore, the incumbent platform would normally opt for this regime, whereas we show that the entrant is basically indifferent between the two.
    Keywords: two-sided markets; platform competition; switching costs; multihoming
    JEL: L11 L13
    Date: 2019–12–20
  4. By: Micael Castanheira De Moura; Georges Siotis; Carmine Ornaghi
    Abstract: Generic drugs are sold at a fraction of the original brand price. Yet, generic entry typically produces a drop in the quantity market share of the molecule losing exclusivity. This effect is economically and statistically significant for a large dataset covering hundreds of prescription drugs sold in the US during the period 1994Q1–2003Q4. This paper proposes the first systematic analysis of what appears to be a market anomaly.We propose a model to characterize the market equilibrium before and after generic entry. We identify precise conditions under which entry reduces the quantity market share of the molecule. Intriguingly, this is more likely to occur when the remaining patent-protected molecules feature low horizontal differentiation. We test this and other theoretical predictions of the model and find they are validated empirically.
    Keywords: Non-price competition; Pharmaceutical industry; Consumer choice; Generic entry
    JEL: D22 I11 L13
    Date: 2019–12–01
  5. By: Michelangelo Rossi
    Abstract: I show how changes in competition affect the power of reputation to induce sellers to exert effort. The impact of competition on sellers’ incentives is theoretically ambiguous. More com-petition disciplines sellers, but, at the same time, it erodes reputational premia. This paper identifies empirically whether one effect dominates the other using data from Airbnb. To guide the empirical analysis, I develop a model of reputation where the relative number of hosts and guests affects the value of building a reputation through effort. In this framework, more competition depresses hosts’ profits and leads hosts to reduce effort. I test the model’s predic-tion exploiting a change in regulation for Airbnb listings effective in San Francisco in 2017. I identify a negative causal effect of competition on effort. As the number of competitors sur-rounding each listing increases by 10 percent, ratings about hosts’ effort decrease by more than one standard deviation. These findings suggest that more competition may erode incentives for high-quality services in markets where sellers’ performances depend on reputation.
    Keywords: reputation, competition, digitization
    JEL: D82 D83 L50 L81
    Date: 2019
  6. By: Jens Suedekum; Nicole Woessner
    Abstract: We estimate the impact of a recent digital automation technology - industrial robotics - on the distribution of productivity and markups within industries. Our empirical analysis combines data on the industry-level stock of industrial robots with firms' balance sheet data for six European countries from 2004 to 2013. We find that robots dis-proportionally raise productivity in those firms that are already most productive to begin with. Those firms are able to increase their markups, while markups tend to decline for less profitable firms within the same industry, country and year. We also show that industrial robots contribute to the falling aggregate labour income share through a rising concentration of industry sales. In short, our paper suggests that robots boost the emergence of superstar firms within European manufacturing, and thereby shifts the functional income distribution away from wages and towards profits.
    JEL: D4 L11 O33
    Date: 2019–10
  7. By: Chaikal Nuryakin (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI)); Regi Kusumaatmadja (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI)); Natanael Waraney Gerald Massie (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI)); Alvin Ulido Lumbanraja (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI)); Sean Hambali (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI)); Devina Anindita (Institute for Economic and Social Research, Faculty of Economics and Business, Universitas Indonesia (LPEM FEB UI))
    Abstract: As the ASEAN put forward aviation industry liberalization measures in 2010, the Indonesian aviation industry has been moving towards the other side of spectrum of late. Two market ventures driving the change was in late 2018, where one of the leading airlines group, Garuda Group, through Citilink agreed to form cooperation with Sriwijaya Air. Second, January 2019 further marked the period in which Lion Air started charging ‘baggage fees’ and Garuda Indonesia stopped offering sub class ticket. Amid the presence of such changes in the industry, this study aims to discuss the current state, challenges, and potential of the Indonesian aviation market; comprehensively discuss the economic implications of such state of the industry; as well as how the government may act to help address the possible market failures. The study utilizes multiple data sources, i.e., data from CAPA, INFARE, as well as official governmental transportation database. We first describe the potential of airlines industry in Indonesia. We identify the periodical breaks in the industry’s growth; that is, during which periods significant changes are happening. What follows is a complete breakdown of the market concentration and landscape. We proceed to show the impacts of the generalized price hike. Our findings suggest that loss of passengers is immense. Further, we find an intriguingly similar capacity drop in the period following the Citilink – Sriwijaya deal conducted by virtually all the members of Garuda Group and Lion Air Group – all against the year-on-year trend. We specifically decompose the changes that follow the late 2018 trend. Further implications are discussed. We conclude the study with relevant policy recommendations.
    Keywords: airlines industry — imperfect competition — Indonesia — liberalization — consumer welfare
    JEL: L93 L98 D43
    Date: 2019

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