nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒06‒29
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Competition Laws and Corporate Innovation By Ross Levine; Chen Lin; Lai Wei; Wensi Xie
  2. Rising markups, common ownership, and technological capacities By Gibbon, Alexandra J.; Schain, Jan Philip
  3. Product Quality and Consumer Search By Moraga-González, José-Luis; Sun, Yajie
  4. Multi-product exporters : Costs, prices and markups on foreign vs domestic markets By Catherine Fuss
  5. Tacit Collusion with Consumer Preference Costs By Roig, G.
  6. Coopetition Against an Amazon By Ronen Gradwohl; Moshe Tennenholtz
  7. Global giants and local stars: How changes in brand ownership affect competition By Alviarez, Vanessa; Head, Keith; Mayer, Thierry
  8. Platform Mergers: Lessons from a Case in the Digital TV Market By Ivaldi, Marc; Zhang, Jiekai
  9. How to Get Away with Merger: Stealth Consolidation and Its Real Effects on US Healthcare By Thomas G. Wollmann
  10. Dynamic Mergers Effects on R&D Investments and Drug Development across Research Phases in the Pharmaceutical Industry By Ralph Siebert; Zhili Tian

  1. By: Ross Levine; Chen Lin; Lai Wei; Wensi Xie
    Abstract: A central debate in economics concerns the relationship between competition and innovation, with some stressing that competition discourages innovation by reducing post-innovation rents and others emphasizing that more contestable markets spur currently dominant and other firms to invest more in innovation. We examine the impact of competition laws on innovation. We create a unique firm-level dataset on patenting activities that includes over 1.4 million firm-year observations, across 68 countries, from 1991 through 2015. Using a new, comprehensive dataset on competition laws, we find that more stringent competition laws are associated with increases in firms’ number of self-generated patents and the citation-impact and explorative nature of those patents. We also conduct the first examination of the relationship between competition laws and firms’ acquisition of patents from other firms. We find that competition increases patent acquisitions but lowers the ratio of acquired to self-generated patents. The results hold when using country-industry data on 186 countries over the 1888-2015 period.
    JEL: K21 L4 O3
    Date: 2020–05
  2. By: Gibbon, Alexandra J.; Schain, Jan Philip
    Abstract: This paper analyses the impact of common ownership on markups and innovation and adds to the discussion of the recently observed patterns of a long term rise in market power. We shed light on the inconclusiveness of results regarding the effects of common ownership on markups in the existing literature by exploiting industry technology classifications by the European Commission. Using a rich panel of European manufacturing firms from 2005 to 2016, we structurally infer markups and construct a measure of common ownership. Combining propensity score matching with a difference-in-differences estimator, we find an increase of firm markups by 3.1% after the first exposure tocommon ownership. While this effect is strongly pronounced in low-tech industries, we find no effect on markups in high-tech industries. In contrast, we measure a positive effect of common ownership on innovation activity in high-tech industries and no effectin low-tech industries. Both findings are consistent with recent theoretical findings in Lopéz and Vives (2019).
    Keywords: Competition,Common Ownership,Market Power,Industry Structure,Antitrust,Innovation
    JEL: L10 L41 L60 G23 G32 O34
    Date: 2020
  3. By: Moraga-González, José-Luis; Sun, Yajie
    Abstract: This paper carries out a positive and normative analysis of the provision of quality in a consumer search market for differentiated products. An increase in quality shifts up the distribution of match utilities offered by firms and makes consumers pickier. The typical number of products consumers inspect before settling, however, does not necessarily increase in quality. Higher search costs may lead to less investment in quality and, correspondingly, the equilibrium price may decrease in search costs. If the equilibrium is socially inefficient, it is only because of the inadequacy of quality investment. There is a one-to-one relationship between the intensity of search and the inefficiency of the market equilibrium. The market level of quality investment is excessive (insufficient) and consumers are too (little) picky from the point of view of welfare maximization if and only if a raise in quality results in that consumers inspect a higher (lower) number of products.
    Keywords: efficiency; quality investment; sequential search; super- and sub-modular match value distributions
    JEL: D43 D83 L13
    Date: 2020–04
  4. By: Catherine Fuss (Economics and Research Department, National Bank of Belgium)
    Abstract: After establishing that exporters obtain higher margins than non-exporters, the paper takes a new look at export premia by comparing multi-product exporters’ costs, prices and markups on the domestic and foreign markets. This firm-product-market analysis is made possible thanks to a unique dataset for Belgian manufacturing firms over 1996-2016. Firm-product estimates of marginal costs are obtained following De Loecker et al. (2016) methodology, based on firm-product production data. Combined with firm-product international transaction data, firm-product unit values can be computed separately for the domestic market and foreign markets. Markups can then be recovered at the firm- product-market level from observed unit values and estimated marginal costs. The empirical results suggest that firms select their best products, the ones with lower marginal cost, for foreign markets. They partly translate this cost advantage into lower prices, but essentially extract higher margins from these.
    Keywords: markups, multi-product firms, pricing decisions, international trade
    JEL: D22 D24 F14
    Date: 2020–06
  5. By: Roig, G.
    Abstract: When consumers have preference costs, two opposing effects need to be assessed to analyze firms' incentives to set collusive prices. On the one hand, preference costs make a deviation from collusion less attractive, as the deviating firm must offer a steeper discount to cover these preference costs. On the other hand, preference costs lock in consumers and make punishment from rivals less effective. When preference costs are low, the second effect dominates and collusion is harder to sustain than in a situation with no preference costs. The contrary happens with high enough preference costs.
    Keywords: Tacit Collusion; Consumer Preference Costs
    JEL: D43 L13 L12
    Date: 2020–06–05
  6. By: Ronen Gradwohl; Moshe Tennenholtz
    Abstract: This paper studies cooperative data-sharing between competitors vying to predict a consumer's tastes. We design optimal data-sharing schemes both for when they compete only with each other, and for when they additionally compete with an Amazon---a company with more, better data. In both cases we show that participants benefit from such coopetition. We then apply the insights from our optimal schemes to more general settings.
    Date: 2020–05
  7. By: Alviarez, Vanessa; Head, Keith; Mayer, Thierry
    Abstract: Multinational acquisitions, unlike greenfield investments, can subtract from the number of active competitors. The outcomes for consumers depend on the change in markups and whether new owners implement significant quality or productivity improvements. We assess the consequences of multinational acquisitions in beer and spirits. Rather than confining the study to an individual country, we apply recent methods with minimal data requirements to conduct a worldwide evaluation. After correcting for severe limited mobility bias, owner fixed effects contribute very little to the performance of brands. On average, foreign ownership tends to raise costs and lower appeal. Using the estimated model, we simulate the consequences of counterfactual national merger regulation. The US beer price index would be 4--7\% higher had competition authorities not forced divestitures. On the other hand, up to 30\% savings could have been obtained in Latin America by emulating the pro-competition policies of the US and EU.
    Keywords: brands; competition policy; Concentration; firm effects; frictions; Markups; mergers and acquisitions; multinationals; oligopoly
    JEL: F12 F23 F61 L13
    Date: 2020–04
  8. By: Ivaldi, Marc; Zhang, Jiekai
    Abstract: This paper contributes to the analysis of mergers in two-sided markets, notably those in which a platform provides its service for free on one side but obtains all its revenues from the other, as in the digital TV industry. Specifically, we assess a decision of the French competition authority which approved the merger of the broadcasting services of the TV channels involved but imposed a behavioral remedy prohibiting the merger of their respective advertising sales services. To do so, we build a structural model allowing for multi-homing of advertisers and, using a comprehensive dataset, we estimate the demand of viewers and advertisers. Our evaluation provides evidence that the remedy has been ineffective at limiting the increase in prices and amounts of advertising, due to the cross-side externalities between viewers and advertisers. Without resulting in significant positive effects on the viewers' surplus, the remedy has also drastically increased the advertisers' total cost. Nevertheless, the remedy has benefited the competitors of the merging channels. The main lesson of our analysis is that, in the process of designing competition or regulatory policy for two-sided markets, ignoring the interaction between the two sides of platforms can result in unexpected outcomes.
    Keywords: Two-sided market; platform merger; advertising; TV market; competition policy
    JEL: K21 L10 L40 L82 M37
    Date: 2020–06
  9. By: Thomas G. Wollmann
    Abstract: Most US mergers are not reported to the government on the basis of their size, which can effectively exempt them from antitrust scrutiny, thereby leading to anticompetitive behavior. This paper studies premerger notification exemptions in the US dialysis industry. Over two decades, dialysis providers attempted over 4,000 facility acquisitions, half of which were not reported to the nation’s competition authorities. I estimate the effect of premerger notification exemptions on antitrust enforcement rates, and then I estimate the impact of the resulting market structure changes on patient health outcomes. First, I find that exemptions severely limit enforcement. Most striking, proposed facility acquisitions that would result in monopoly are blocked more than 80% of the time when apart of reportable mergers but less than 2% of the time when apart of exempt ones. Second, I find that the resulting market structure changes reduce the quality of care, evidenced by higher hospitalization rates and lower survival rates.
    JEL: D4 D43 I11 K21 L0 L1 L11 L13 L4 L40
    Date: 2020–05
  10. By: Ralph Siebert; Zhili Tian
    Abstract: Pharmaceutical firms spend increasing amounts in mergers and acquisitions (M&As), which raises the question of whether sufficient investment is left after mergers to further develop firms’ internal drug development capability. We evaluate the effects of M&As on firms’ post-merger R&D investments and drug development capabilities across drug development phases. This study builds on a novel database that enables us to evaluate the post-merger effect at the research project level and across development phases. A further novel feature of the study is allowing measurement errors to enter firms’ R&D investments. Our study adopts a structural equation modeling approach, which is appropriate for evaluating a system of equations through which we examine the direct and indirect merger effects on R&D capabilities across development phases. We find that M&As have a strong effect on firms’ drug development at the late development phases through economies of scope. At the early development phases, M&As serve to replenish firms’ drug pipelines. The study shows that M&As have a direct and negative effect on firms’ R&D investments. However, the overall effect on R&D investments accounting for enhanced post-merger R&D capabilities and product approvals turns out to be positive. M&As can be an effective instrument for firms to acquire drug development knowledge and technology in late stages of the development process (Phases 3 clinical testing and regulatory filing). Our study provide empirical evidence that investments in M&As in late stage of drug development help firms’ growth and increase firms revenue.
    Keywords: drug development phases, dynamics, innovation management, merger and acquisition, pharmaceutical drug development, R&D capabilities
    JEL: L11 L13 L52 O31 O32 O38
    Date: 2020

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