nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒08‒24
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Age Distribution of Business Firms By Flavio Calvino; Daniele Giachini; Mattia Guerini
  2. Fine Cartels By David K Levine
  3. The Market for "Harmful Component-Free" Products under Pressure from the NGOs By Dorothée Brécard; Mireille Chiroleu-Assouline
  4. Competing Bandits: The Perils of Exploration Under Competition By Guy Aridor; Yishay Mansour; Aleksandrs Slivkins; Zhiwei Steven Wu

  1. By: Flavio Calvino (OECD Directorate for Science, Technology and Innovation); Daniele Giachini (Sant’Anna School of Advanced Studies); Mattia Guerini (Université Côte d'Azur, CNRS, GREDEG, France; Sant’Anna School of Advanced Studies; Sciences Po., OFCE)
    Abstract: We investigate upon the shape and the determinants of the age distribution of business firms. By employing a novel dataset covering the population of French businesses, we highlight that a geometric law provides a reasonable approximation for the age distribution. However, relevant systematic deviations and sectoral heterogeneity appear. We develop a stochastic model of firm dynamics to explain the mechanisms behind this evidence and relate them to business dynamism. Results reveal a long-term decline in entry rates and lower survival probabilities of young firms. Our findings bear important implications for aggregate outcomes, notably employment growth.
    Keywords: Firm demographics, age distribution, business dynamism
    JEL: L11 L22 M13 M21
    Date: 2020–08
  2. By: David K Levine
    Date: 2020–08–04
  3. By: Dorothée Brécard; Mireille Chiroleu-Assouline
    Abstract: Non-governmental organizations (NGOs) are exerting growing pressure on firms to eliminate product components (such as palm oil) that are harmful to the environment (such as rainforests) or replace such components with NGO-certified sustainable components. Under which conditions does NGO pressure lead firms to eliminate basic components from their products or, alternatively, substitute damaging components with certified sustainable components? What are the ensuing effects on market structure, environmental quality, and social welfare? The paper addresses these issues using a model of two-dimensional vertical product differentiation. It shows that, for an NGO that collects certification fees to accrue its budget and finance its awareness campaign, it may — paradoxically — be optimal to reduce the certified product’s market share and eventually evict it.
    Keywords: NGO, eco-label, environmental quality, product differentiation, palm oil, biofuels
    JEL: D11 D62 D83 L15 Q58
    Date: 2020
  4. By: Guy Aridor; Yishay Mansour; Aleksandrs Slivkins; Zhiwei Steven Wu
    Abstract: Most online platforms strive to learn from interactions with consumers, and many engage in exploration: making potentially suboptimal choices for the sake of acquiring new information. We initiate a study of the interplay between exploration and competition: how such platforms balance the exploration for learning and the competition for consumers. Here consumers play three distinct roles: they are customers that generate revenue, they are sources of data for learning, and they are self-interested agents which choose among the competing platforms. We consider a stylized duopoly model in which two firms face the same multi-armed bandit instance. Users arrive one by one and choose between the two firms, so that each firm makes progress on its bandit instance only if it is chosen. We study whether and to what extent competition incentivizes the adoption of better bandit algorithms, and whether it leads to welfare increases for consumers. We find that stark competition induces firms to commit to a "greedy" bandit algorithm that leads to low consumer welfare. However, we find that weakening competition by providing firms with some "free" consumers incentivizes better exploration strategies and increases consumer welfare. We investigate two channels for weakening the competition: relaxing the rationality of consumers and giving one firm a first-mover advantage. We provide a mix of theoretical results and numerical simulations. Our findings are closely related to the "competition vs. innovation" relationship, a well-studied theme in economics. They also elucidate the first-mover advantage in the digital economy by exploring the role that data can play as a barrier to entry in online markets.
    Date: 2020–07

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