nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒09‒21
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. On the Profitability of Cross-Ownership in Cournot Oligopolies: Stock Sizes Matter By Hassan Benchekroun; Miao Dai; Ngo Van Long
  2. Is Real-time Pricing Smart for Consumers? By Boom, Anette; Schwenen, Sebastian
  3. The Economics of Platforms: A Theory Guide for Competition Policy By Bruno Jullien; Wilfried Sand-Zantman
  4. Antitrust policies and profitability in non-tradable sectors By Besley, Timothy; Fontana, Nicola; Limodio, Nicola
  5. Corporate Tax Avoidance and Industry Concentration By Julien Martin; Mathieu Parenti; Farid Toubal
  6. The Patent Buyout Price for Human Papilloma Virus (HPV) Vaccine and the Ratio of R&D Costs to the Patent Value By Mario Songane; Volker Grossmann
  7. Algorithmic Pricing and Competition: Empirical Evidence from the German Retail Gasoline Market By Stephanie Assad; Robert Clark; Daniel Ershov; Lei Xu
  8. Concentration and Competition in Serbian Banking Sector in the Period 2016–2018 By Bukvić, Rajko

  1. By: Hassan Benchekroun; Miao Dai; Ngo Van Long
    Abstract: We examine the profitability of cross-ownership in an oligopolistic industry where firms compete as Cournot rivals. We consider a symmetric cross-ownership structure in which a subset of k firms engage in cross-shareholding and each firm has an equal silent financial interest in the other firms, while the remaining (n – k) firms stay independent. We show that a symmetric cross-ownership is never profitable for any levels of non-controlling minority shareholdings if the participation ratio (k/n) is less than or equal to (n+1)/(2n), while there exists a large range of cross-ownership for which it can be profitable beyond that participation ratio. This result may be called a cross-ownership paradox, analogous to the merger paradox. With the presence of stock constraints, however, we find some of the results from the cross-ownership paradox do not carry over to the case of non-renewable resource industries. The profitability of a symmetric cross-ownership can be positive even when the participation ratio (k/n) is less than or equal to (n+1)/(2n) and is always positive when the participation ratio (k/n) is greater than (n+1)/(2n), provided that the initial resource stock owned by each firm is small enough. We also highlight that cross-ownership can be preferable to a horizontal merger under Cournot competition. Not only is it more profitable to do so, more importantly, it constitutes a shrewd strategy to avoid possible legal challenges.
    Keywords: cross-ownership, profitability, oligopoly, shareholding, non-renewable resources, resource stock, horizontal merger, competition policy, antitrust
    JEL: L13 L41 Q30
    Date: 2020
  2. By: Boom, Anette (Department of Economics, Copenhagen Business School); Schwenen, Sebastian (Technical University of Munich, School of Management, and DIW Berlin (Germany))
    Abstract: We examine the effects of real-time pricing on welfare and consumer surplus in electricity markets. We model consumers on real-time pricing who purchase electricity on the wholesale market. A second group of consumers contracts with retailers and pays time-invariant retail prices. Electricity generating firms compete in supply functions. Increasing the number of consumers on real-time pricing increases welfare and consumer surplus of both types of consumers. Yet, risk averse consumers on traditional time-invariant retail prices are always better off. Collectively, our results point to a public good nature of demand response in power markets when consumers are risk-averse.
    Keywords: Electricity; Real-time pricing; Market power; Efficiency
    JEL: D42 D43 D44 L11 L12 L13
    Date: 2020–07–01
  3. By: Bruno Jullien; Wilfried Sand-Zantman
    Abstract: We propose an analysis of platform competition based on the academic literature with a view towards competition policy. First, we discuss to which extent competition can emerge in digital markets and show which forms it can take. In particular, we underline the role of dynamics, but also of platform differentiation, consumers multi-homing and beliefs to allow competition in platform markets. Second, we analyse competition policy issues and discuss how rules designed for standard markets can perform in two-sided markets. We show that multi-sided externalities create new opportunities for anti-competitive conducts, often related to pricing and contractual imperfections.
    Keywords: networks, platforms, markets, competition policy
    JEL: L13 L41 L86 D82
    Date: 2020
  4. By: Besley, Timothy; Fontana, Nicola; Limodio, Nicola
    Abstract: Firms in tradable sectors are more likely to be subject to external competition to limit market power while non-tradable firms are more dependent on domestic policies and institutions. This paper combines an antitrust index available for multiple countries with firm-level data from Orbis covering more than 10 million firms from 90 countries, covering 20 sectors over 10 years and finds that profit margins of firms operating in non-tradable sectors are significantly lower in countries with stronger antitrust policies compared to firms operating in tradable sectors. The results are robust to a wide variety of empirical specifications.
    Keywords: competition; antitrust; institutions; forthcoming
    JEL: F3 G3 J1
    Date: 2020–09–04
  5. 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
  6. By: Mario Songane; Volker Grossmann
    Abstract: Human papillomavirus (HPV) is responsible for almost all of the 570,000 new cases of cervical cancer and approximately 311,000 deaths per year. HPV vaccination is an integral component of the World Health Organization’s (WHO) global strategy to fight the disease. However, high vaccine prices enforced through patent protection are limiting vaccine expansion, particularly in low- and middle-income countries. By limiting market power, patent buyouts could reduce vaccine prices and raise HPV vaccination rates while keeping innovation incentives. We estimate the global patent buyout price as the present discounted value (PDV) of the future profit stream over the remaining patent length for Merck’s HPV vaccines (Gardasil-4 and 9), which hold 87% of the global HPV vaccine market, in the range of US$ 15.6–27.7 billion (in 2018 US$). The estimated PDV of the profit stream since market introduction amounts to US$ 17.8–42.8 billion and the estimated R&D cost to US$ 1.05–1.21 billion. Thus, we arrive at a ratio of R&D costs to the patent value of the order of 2.5–6.8%. We relate this figure to typical estimates of the probability of success (POS) for clinical trials of vaccines to discuss if patent protection provides Merck with extraordinarily strong price setting power.
    Keywords: Human Papilloma Virus (HPV) vaccine, market power, patent buyout price, patent value, R&D costs
    JEL: I18 L12 L65
    Date: 2020
  7. By: Stephanie Assad; Robert Clark; 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 algo-rithmic pricing. We find 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 in-creases 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
  8. By: Bukvić, Rajko
    Abstract: The paper deals with the analysis of the degree of concentration and competition in Serbian banking sector in the period 2016–2018. The analyses are based on the data of bank financial statements for relevant years, as well the results of other researchers and reports of the National Bank of Serbia. It was used the traditional concentration indicators (CRn and HH indices), as well as the Gini coefficients and not only in Serbia the relatively rarely used Linda indices. The concentration degree in all cases is calculated based on five variables: total assets, deposits, capital, bank operating income and loans. Although these variables are highly correlated, the results show relative important differences. In the case of such variable as capital, the Linda indices suggested the existence of the oligopoly structure. As conclusion, it was demonstrated that in the case of the relatively large number of banks in Serbia, the existing concentration degree is generally moderate low, which provides suitable conditions for the development of healthy competition among them.
    Keywords: concentration, competition, banking sector, SCP paradigm, Serbia, indices Linda, Gini coefficient, Herfindahl-Hirschman index, Lorenz curve, concentration ratio, oligopoly
    JEL: C38 G21 L0
    Date: 2020

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