nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒08‒10
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Surplus Bounds in Cournot Monopoly and Competition By Condorelli, Daniele; Szentes, Balazs
  2. Competitive Strategies when Consumers are Relative Thinkers: Implications for Pricing, Promotions, and Product Choice By Roman Inderst; Martin Obradovits
  3. Price-Directed Search and Collusion By Martin Obradovits; Philipp Plaickner
  4. Corporate Tax Avoidance and Industry Concentration By Julien Martin; Mathieu Parenti; Farid Toubal

  1. By: Condorelli, Daniele (University of Warwick); Szentes, Balazs (London School of Economics)
    Abstract: We characterize equilibria of oligopolistic markets where identical firms with constant marginal cost compete a’ la Cournot. For given maximal willingness to pay and maximal total demand, we first identify all combinations of equilibrium consumer and producer surplus that can arise from arbitrary demand functions. Then, as a further restriction, we fix the average willingness to pay above marginal cost (i.e., first best surplus) and identify all possible triples of consumer surplus, producer surplus and deadweight loss.
    Date: 2020
  2. By: Roman Inderst; Martin Obradovits
    Abstract: How should firms optimally choose prices and promotional strategies and how should they position their products when consumers are "relative thinkers"? We provide answers in a model that extends the seminal contributions of Varian (1980) and Narasimhan (1988) and derive both managerial implications and implications for empirical researchers with regards to promotional frequency and depth as well as observed product heterogeneity in the market.
    Keywords: Relative Thinking, Price Competition, Promotions, Product Choice, Product Heterogeneity, Managerial Implications
    JEL: D21 D43 D91 L11 L13
    Date: 2020
  3. By: Martin Obradovits; Philipp Plaickner
    Abstract: In many (online) markets, consumers can readily observe prices, but need to examine individual products at positive cost in order to assess how well they match their needs. We propose a tractable model of price-directed sequential search in a market where firms compete in prices. Each product meets consumers' basic needs, however they are only fully satisfied with a certain probability. In our setup, four types of pricing equilibria emerge, some of which entail inefficiencies as not all consumers are (always) served. We then lend our model to analyze collusion. We find that for any number of firms, there exists a parameter region in which the payoff-dominant symmetric collusive equilibrium gives rise to a higher expected total social welfare than the repeated one-shot Nash equilibrium. In other regions, welfare is identical under collusion and merely consumer rents are transferred, or both welfare and consumer rents are reduced. An all-inclusive cartel maximizing industry profit increases welfare for an even larger set of parameters, but may also be detrimental to it.
    Keywords: Consumer Search, Directed Search, Price Competition, Mixed-Strategy Pricing, Collusion, Cartels
    JEL: D43 D83 L13
    Date: 2020
  4. By: Julien Martin; Mathieu Parenti; Farid Toubal
    Abstract: This paper argues that tax avoidance by large corporations has contributed to the 25% increase in concentration among U.S. firms since the mid-1990s. Corporate tax avoidance gives large firms a competitive edge, which translates into larger market shares and an increase in the granularity of the economy. We develop IV and difference-in-differences strategies that show the causal impact of tax avoidance on firm-level sales. Had firms not resorted to tax avoidance in 2017, our results imply that the average industry concentration would have been 8.3% lower, which is around its early 2000 level.
    Keywords: Tax Avoidance; Industry Concentration; IRS Audit Probability
    JEL: D22 H26 L11 D40 F23
    Date: 2020–07

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