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on Industrial Organization |
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Issue of 2020‒06‒22
eight papers chosen by |
| By: | Kamepalli, Sai Krishna; Rajan, Raghuram G; Zingales, Luigi |
| Abstract: | We study why high-priced acquisitions of entrants by an incumbent do not necessarily stimulate more innovation and entry in an industry (like that of digital platforms) where customers face switching costs and enjoy network externalities. The prospect of an acquisition by the incumbent platform undermines early adoption by customers, reducing prospective payoffs to new entrants. This creates a "kill zone" in the space of startups, as described by venture capitalists, where new ventures are not worth funding. Evidence from changes in investment in startups by venture capitalists after major acquisitions by Facebook and Google suggests this is more than a mere theoretical possibility. |
| Keywords: | Acquisitions; Digital Platforms; Kill Zone |
| JEL: | G31 G34 L41 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14709&r=all |
| By: | Bergemann, Dirk (?); Castro, Francisco (?); Weintraub, Gabriel (Stanford U) |
| Abstract: | We compare the revenue of the optimal third-degree price discrimination policy against a uniform pricing policy. A uniform pricing policy offers the same price to all segments of the market. Our main result establishes that for a broad class of third-degree price discrimination problems with concave revenue functions and common support, a uniform price is guaranteed to achieve one-half of the optimal monopoly proï¬ ts. This revenue bound holds for any arbitrary number of segments and prices that the seller would use in case he would engage in third-degree price discrimination. We further establish that these conditions are tight and that a weakening of common support or concavity leads to arbitrarily poor revenue comparisons. |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:3860&r=all |
| By: | Jason Allen; Shaoteng Li |
| Abstract: | This paper develops a framework for investigating dynamic competition in markets where price is negotiated between an individual customer and multiple firms repeatedly. Using contract-level data for the Canadian mortgage market, we provide evidence of an “invest-then-harvest” pricing pattern: lenders offer relatively low interest rates to attract new borrowers and poach rivals' existing customers, and then at renewal charge interest rates which can be higher than what may be available through other lenders in the marketplace. We build a dynamic model of price negotiation with search and switching frictions to capture key market features. We estimate the model and use it to investigate (i) the effects of dynamic competition on borrowers' and banks' payoffs, (ii) the implications of dynamic versus static settings for merger-studies, and (iii) the impacts from recent Canadian macroprudential policies. |
| Keywords: | Financial institutions; Financial services; Market structure and pricing |
| JEL: | L2 D4 G21 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:20-22&r=all |
| By: | Hollenbeck, Brett; Giroldo, Renato |
| Abstract: | In this paper we study a novel setting where firms were randomly allocated differently sized retail chains in a new and rapidly growing industry. Beginning in 2014, Washington State used a lottery to allocate licenses to firms in the newly legalized retail cannabis industry. This lottery generates random variation in firm size and in the level of market concentration. We also observe detailed data on all subsequent industry transactions, including prices, wholesale costs, markups, and product assortments. We find that firms that are randomly allocated more retail store licenses in the lottery ultimately earn much higher per store profits than single-store firms. Retailers in multi-store chains charge lower margins, offer larger product assortments, and pay lower wholesale prices. They also face higher but more elastic consumer demand. Similarly at the market level, more concentrated markets have lower average prices and markups. We conclude that higher retail scale and a more concentrated retail sector can benefit consumers and firms alike. |
| Keywords: | Economies of scale, retail pricing, markups, entrepreneurship |
| JEL: | L11 L22 L81 |
| Date: | 2020–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:100766&r=all |
| By: | Lina Cortés; Juan M. Lozada; Javier Perote |
| JEL: | C14 L11 L25 |
| Date: | 2020–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:col:000122:018185&r=all |
| By: | Arlan Brucal (Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science); Nori Tarui (Department of Economics, University of Hawaii at Manoa and the University of Hawaii Economic Research Organization (UHERO)) |
| Abstract: | Revenue decoupling (RD) is a regulatory mechanism that allows adjustments of retail electricity rates so that the regulated utility recovers its required revenue despite fluctuations in its sales volume. The U.S. utility data in 2000-2012 reveals that RD is associated with more than 10% higher electricity prices in two years after RD is implemented relative to similar non-decoupled utilities---an impact significantly higher than previously thought. Theoretically, unexpected sales declines would lead to higher electricity prices while unexpected sales increases would lead to lower prices. RD adjustments have yielded both refunds and surcharges, but the data indicates that electricity prices demonstrate downward rigidity and statistically significant upward adjustments for the utilities subject to RD. Together with the likely negative impacts of RD on low-income(as opposed to high-income) households, this analysis indicates the limitations of decoupling, and fixed-cost recovery practice in general, which involves adjustments in volumetric electricity rates. |
| Keywords: | utility regulation; revenue decoupling; electricity sector |
| JEL: | L94 Q41 Q48 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:202011&r=all |
| By: | Ennis, Sean; Ivaldi, Marc; Lagos, Vicente |
| Abstract: | This paper examines the impact of most favored nation (MFN) clauses on retail prices, taking advantage of two natural experiments that changed vertical contracting between hotels and major digital platforms. The broad E.U. intervention narrowed the breadth of "price parity" obligations between hotels and major Online Travel Agencies (OTAs). Direct sales by hotels to customers subsequently became relatively cheaper. Comparisons with hotel pricing outside the E.U. confirm the reduction in prices for mid-level and luxury hotels. France and Germany went further and eliminated all price-parity agreements. This stronger intervention was associated solely with a significant additional price-reducing effect for mid-level hotels in Germany. Overall, wide MFNs are associated with higher retail prices. Regulating MFNs reduced prices with primary effects coming either from the narrow price-parity intervention or, perhaps, from direct sales becoming cheaper than OTAs in both E.U. and non-E.U. countries, and, interestingly, not from complete elimination of MFNs. |
| Keywords: | Digital Platforms; Hotel Industry; Impact Evaluation; Most favored customer; Most favored nation; Online Travel Agency; Price Parity Clause |
| JEL: | K21 L14 L42 L81 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:14771&r=all |
| By: | James A. Schmitz |
| Abstract: | Today, monopolies inflict great harm on low- and middle-income Americans. One particularly pernicious way they harm them is by sabotaging low-cost products that are substitutes for the monopoly products. I'll argue that the U.S. housing crisis, legal crisis, and oral health crisis facing the low- and middle-income Americans are, in large part, the result of monopolies destroying low-cost alternatives in these industries that the poor would purchase. These results would not surprise those studying monopolies in the first half of the 20th century. During this period extensive evidence was developed showing monopolies engaging in these same activities and many others that harmed the poor. Models of monopoly were constructed by giants in economics and law, such as Henry Simons and Thurman Arnold, to explain these impacts of monopoly. These models are of sabotaging monopolies. Unfortunately, in the 1950s, the economics profession turned its back on this evidence, these models and these giants. It embraced the Cournot model of monopoly, that found in textbooks today. In this model the monopolist chooses its price, nothing more. Gone are the decisions on whether to sabotage substitutes or to employ any of the other weapons at the disposal of sabotaging monopolies. I'll call this Cournot monopoly the toothless monopoly. Using this model, the economics profession has concluded that the costs of monopoly are small. But the toothless monopoly model is ill-equipped to study the "costs of monopoly." By relying on it, the economics profession has made major errors in its study of monopoly. |
| Keywords: | Inequality; Monopoly; Cournot; Competition; Harberger; Sabotage |
| JEL: | K0 D22 L12 K21 D42 L0 |
| Date: | 2020–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:87988&r=all |