nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒09‒07
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Power and the Incentive to Innovate: A Return to Schumpeter and Arrow By Todorova, Tamara
  2. Developing international perspectives on digital competition policy By Sean F. Ennis; Amelia Fletcher
  3. Generalized linear competition: From pass-through to policy By Genakos, C.; Grey, F.; Ritz, R.
  4. Collusion in Two-Sided Markets By Yassine Lefouili; Joana Pinho
  5. Digitalization in Two-Sided Platform By Filomena Garcia; Muxin Li
  6. Data and the regulation of e-commerce: data sharing vs. dismantling By Claire Borsenberger; Helmuth Cremer; Denis Joram; Jean-Marie Lozachmeur; Estelle Malavolti
  7. Generalizable and Robust TV Advertising Effects By Bradley Shapiro; Günter J. Hitsch; Anna Tuchman
  8. Algorithmic Pricing and Competition: Empirical Evidence from the German Retail Gasoline Market By Stephanie Assad; Robert Clark; Daniel Ershov; Lei Xu
  9. Enhancing business dynamism and consumer welfare in Costa Rica with regulatory reform By Alberto González Pandiella

  1. By: Todorova, Tamara
    Abstract: Using a simple linear demand and marginal cost function, we demonstrate that both competition and monopoly have incentives to innovate since this increases their profit levels. However, our results show that perfect competition is more motivated to innovate since the increase in the profit is greater with the same cost reduction and the same innovation. We also conclude that a more drastic innovation brings greater rent to the monopolist and reduces the advantages of perfect competition over monopoly. It could be presumed that monopoly firms would be attracted to more substantive inventions rather than non-drastic innovations.
    Keywords: competition,monopoly,innovation,profit
    JEL: D23 D24 D41 D42 L12 O31 O32
    Date: 2020
  2. By: Sean F. Ennis (Centre for Competition Policy and Norwich Business School, University of East Anglia); Amelia Fletcher (Centre for Competition Policy and Norwich Business School, University of East Anglia)
    Abstract: The year 2019 was a turning point in the debate around how to address competition issues in digital platform markets. At the start of the year, the focus was on reform of competition law. By July, there had been calls – on both sides of the Atlantic – for pro-competitive ex ante regulation. This paper considers these developments through the lens of three influential expert reports, from the EC, UK and US. While the reports offer similar diagnoses of the underlying economic drivers of competition concerns in digital platform markets, they reach somewhat different policy conclusions. The EC report, which was commissioned first, highlights recommendations for antitrust. While it recognises that a regulatory regime may be needed in the longer run, this option is not considered in any detail. By contrast, the UK and US expert reports argue strongly for ex ante regulation. There are other differences too. While the US and EC experts were inclined to relax or reverse burdens of proof for both mergers and abuse of dominance, albeit in specified circumstances only, the UK experts did not recommend this. This paper compares these reports under the categories of mergers, dominance, data, regulation, and international.
    Keywords: Antitrust, Competition Policy, Digital Markets, Platforms, Merger Policy, Regulation, Big Data
    JEL: K21 L13 L40 L50 L86
    Date: 2020–08–24
  3. By: Genakos, C.; Grey, F.; Ritz, R.
    Abstract: Economic policy and shifts in input market prices often have significant effects on the marginal costs of firms and can prompt strategic responses that make their impact hard to predict. We introduce “generalized linear competition” (GLC), a new model that nests many existing theories of imperfect competition. We show how firm-level cost pass-through is a sufficient statistic to calculate the impact of a cost shift on an individual firm’s profits. GLC sidesteps estimation of a demand system and requires no assumptions about the mode of competition, rivals’ technologies and strategies, or “equilibrium”. In an empirical application to the US airline market, we demonstrate GLC’s usefulness for ex ante policy evaluation and identify the winners and losers of climate-change policy. We also show how GLC’s structure, under additional assumptions, can be used for welfare analysis and to endogenize the extent of regulation.
    Keywords: Pass-through, imperfect competition, regulation, carbon pricing, airlines, political economy
    JEL: D43 H23 L51 L93
    Date: 2020–08–18
  4. By: Yassine Lefouili; Joana Pinho
    Abstract: This paper explores the incentives for, and the effects of, collusion in prices between two-sided platforms. We characterize the most profitable sustainable agreement when platforms collude on both sides of the market and when they collude on a single side of the market. Under two-sided collusion, prices on both sides are higher than the competitive prices, implying that agents on both sides become worse off as compared to the competitive outcome. An increase in cross-group externalities makes two-sided collusion harder to sustain, and reduces the harm from collusion suffered by the agents on a given side as long as the collusive price on that side is lower than the monopoly price. When platforms collude on a single side of the market, the price on the collusive side is lower (higher) than the competitive price if the magnitude of the cross-group externalities exerted on that side is sufficiently large (small). As a result, one-sided collusion may benefit the agents on the collusive side and harm the agents on the competitive side.
    Keywords: Collusion; Two-sided markets; Cross-group externalities
    JEL: L41 D43
    Date: 2020–04
  5. By: Filomena Garcia; Muxin Li
    Abstract: In this paper we study the effects of the introduction of a new two sided platform endowed with artificial intelligence in a market where a firm provides a brick and mortar platform to buyers and sellers. In our theoretical model we show that the decision of whether to introduce the new platform depends on the reduction of the search cost for the consumers. We also show that the introduction of the platform enlarges the market with more consumers using both platforms. Finally we study the welfare effect of the introduction of the platform opening the discussion on whether certain artificial intelligence devices for shopping should be regulated.
    Keywords: e-Commerce; Intermediary; Two-sided markets
    JEL: L1 L2 L8
    Date: 2020–04
  6. By: Claire Borsenberger; Helmuth Cremer (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Denis Joram; Jean-Marie Lozachmeur (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Estelle Malavolti (ENAC - Ecole Nationale de l'Aviation Civile, TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: This paper considers an e-commerce market wherein a vertically integrated marketplace competes downstream with a single retailer and upstream with an independent parcel delivery operator. Because of the information collected by the marketplace on customersíhabits and preferences, the integrated parcel delivery operator has lower delivery costs than its competitor. Products are di§erentiated according to the retailer and the parcel operator who delivers them. The representation of product di§erentiation is inspired by the Anderson, De Palma and Thisse (2002) discrete choice model. We study several scenarios each representing a speciÖc policy implemented to regulate the marketplace. The Örst one is a data sharing policy. The integrated marketplace has to share its information with the other delivery operator which in turn will lower this operatorís cost of delivering the marketplaceís product. The second one is vertical separation under which the parcel delivery operator previously owned and managed by the marketplace becomes independent. Finally we consider a full dismantlement scenario under which there is both vertical and horizontal separation. We show that the optimal policy is either complete dismantlement or data sharing. The relative impacts on consumer surplus and total welfare of these two options involve a tradeo§ between the increased competition implied by complete dismantling and the data related delivery cost advantage achieved under data sharing. When this cost advantage is small, completely dismantling dominates, while data sharing is the best policy when the cost advantage is large.
    Keywords: E-commerce,delivery operators,vertical integration,platform regulation,data sharing,dismantling
    Date: 2020–07–03
  7. By: Bradley Shapiro; Günter J. Hitsch; Anna Tuchman
    Abstract: We provide generalizable and robust results on the causal sales effect of TV advertising for a large number of products in many categories. Such generalizable results provide a prior distribution that can improve the advertising decisions made by firms and the analysis and recommendations of policy makers. To provide generalizable results, we base our analysis on a large number of products and clearly lay out the research protocol used to select the products. We characterize the distribution of all estimates, irrespective of sign, size, or statistical significance. To ensure generalizability, we document the robustness of the estimates. First, we examine the sensitivity of the results to the assumptions made when constructing the data used in estimation. Second, we document whether the estimated effects are sensitive to the identification strategies that we use to claim causality based on observational data. Our results reveal substantially smaller advertising elasticities compared to the results documented in the extant literature, as well as a sizable percentage of statistically insignificant or negative estimates. Finally, we conduct an analysis of return on investment (ROI). While our results show that many brands perform better with their observed advertising than they would without advertising, we document considerable over-investment in advertising at the margin.
    JEL: B41 C18 C52 C55 C81 L00 L15 L81 M31 M37
    Date: 2020–08
  8. By: Stephanie Assad; Robert Clark (Queen's University); Daniel Ershov; Lei Xu
    Abstract: Economic theory provides ambiguous and conflicting predictions about the association between algorithmic pricing and competition. In this paper we provide the first empirical analysis of this relationship. We study Germany's retail gasoline market where algorithmic-pricing software became widely available by mid-2017, and for which we have access to comprehensive, high-frequency price data. Because adoption dates are unknown, we identify gas stations that adopt algorithmic-pricing software by testing for structural breaks in markers associated with algorithmic pricing. We nd a large number of station-level structural breaks around the suspected time of large-scale adoption. Using this information we investigate the impact of adoption on outcomes linked to competition. Because station-level adoption is endogenous, we use brand headquarter-level adoption decisions as instruments. Our IV results show that adoption increases margins by 9%, but only in non-monopoly markets. Restricting attention to duopoly markets, we find that market-level margins do not change when only one of the two stations adopts, but increase by 28% in markets where both do. These results suggest that AI adoption has a significant effect on competition.
    Keywords: Artificial Intelligence, Pricing-Algorithms, Collusion, Retail Gasoline
    JEL: L41 L13 D43 D83 L71
    Date: 2020–08
  9. By: Alberto González Pandiella
    Abstract: Regulations of product markets serve legitimate objectives but, when ill-designed, can impose unnecessary restrictions on competition, and therefore on business dynamism, productivity and ultimately well-being. A recent update of the OECD’s Product Market Regulation indicator for Costa Rica shows that there is ample room to improve regulations. Costa Rica’s economic development is hindered by heavy state involvement and high barriers to entry, compared to both OECD countries and regional peers. This paper discusses options to improve product market regulations, based on international best practices. Regulatory reform can improve consumer welfare by boosting competition and thus lowering prices of key goods and services, which in turn increases the purchasing power of low-income households and reduces poverty. By raising productivity, stronger competition will also allow higher wages. Reducing barriers to entry can facilitate firm creation, boosting investment and jobs.
    Keywords: competition, inclusiveness, product market regulations, productivity
    JEL: D4 L1 L2 L3 L8 L9 L5 O54 K23
    Date: 2020–09–04

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