nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒11‒09
seven papers chosen by

  1. Multi-product firms and product quality expansion By Van Pham; Alan Woodland
  2. Selling Consumer Data for Profit: Optimal Market-Segmentation Design and its Consequences By Kai Hao Yang
  3. Growing by the Masses - Revisiting the Link between Firm Size and Market Power By Hassan Afrouzi; Andres Drenik; Ryan Kim
  4. Using Information to Amplify Competition By Wenhao Li
  5. Incentivized Mergers and Cost Effciency: Evidence from the Electricity Distribution Industry By Robert Clark; Mario Samano
  6. The Duopoly Analysis of Graphics Card Market By Nan Miles Xi
  7. Entry Barriers and Anti-Competitive Behaviour in a Deregulated Canadian Airline Market By Gillen, David W.; Oum, Tae H.; Tretheway, Michael W.

  1. By: Van Pham; Alan Woodland
    Abstract: This paper develops and analyzes a model of international trade comprising multiproduct firms that can produce a range of product varieties distinguished by quality. First, it analyses the within-firm distribution of product quality and argues that firms export decisions are sensitive to their sizes and their product quality level. Specifically, a firm successfully exports both its high-end products and low-end products. Also, the sales of its top-end products relative to sales of its lower-end products is sensitive to the extent to which effective labour costs rise with quality. Second, the paper explores the heterogeneous effects of trade liberalization on multi-product firm behaviour and quality range choices. Under trade liberalization, small domestic firms experience a shrinkage of their product quality range, while even the new small-sized exporters narrow their product quality range to focus on an export variety. In contrast, existing exporters (large firms) can compete on both price and quality under trade liberalization by expanding their export product range toward both the low-end and high-end varieties. There is a greater expansion toward the lower-end varieties relative to the higher-end varieties under trade liberalization, this relative expansion decreasing as the variable trade cost decreases.
    Keywords: Firm heterogeneity, Multiproduct firms, Quality range of varieties, Exports, Productivity
    JEL: F12 F13 L11 L23 L25
    Date: 2020–10
  2. By: Kai Hao Yang (Cowles Foundation, Yale University)
    Abstract: A data broker sells market segmentations created by consumer data to a producer with private production cost who sells a product to a unit mass of consumers with heterogeneous values. In this setting, I completely characterize the revenue-maximizing mechanisms for the data broker. In particular, every optimal mechanism induces quasi-perfect price discrimination. That is, the data broker sells the producer a market segmentation described by a cost-dependent cutoff, such that all the consumers with values above the cutoff end up buying and paying their values while the rest of consumers do not buy. The characterization of optimal mechanisms leads to additional economically relevant implications. I show that the induced market outcomes remain unchanged even if the data broker becomes more active in the product market by gaining the ability to contract on prices; or by becoming an exclusive retailer, who purchases both the product and the exclusive right to sell the product from the producer, and then sells to the consumers directly. Moreover, vertical integration between the data broker and the producer increases total surplus while leaving the consumer surplus unchanged, since consumer surplus is zero under any optimal mechanism for the data broker.
    Keywords: Price discrimination, Market segmentation, Mechanism design, Virtual cost
    JEL: D42 D82 D61 D83 L12
    Date: 2020–10
  3. By: Hassan Afrouzi; Andres Drenik; Ryan Kim
    Abstract: How are a firm’s size and market power related to one another? Combining micro-data about producers and consumers, we document that while firms mainly grow by selling to more customers, their markups are only associated with their average sales per customer. To study the macroeconomic implications of these facts, we develop a model of firm dynamics with endogenous customer acquisition and variable markups. Relative to a model without customer acquisition, our model generates higher concentration at the top, but a lower aggregate markup. Our quantitative analysis reveals large welfare and efficiency losses due to (mis)allocation of customers across firms. By increasing market concentration among the most productive firms, the efficient allocation achieves 11% higher aggregate productivity and 15% higher output.
    Keywords: customer acquisition, misallocation, concentration, markups
    JEL: D24 D42 D61 E22
    Date: 2020
  4. By: Wenhao Li (Department of Economics, The Pennsylvania State University)
    Abstract: I characterize the consumer-optimal market segmentation in competitive markets with differentiated products. I show that this segmentation is public---in that each firm observes the same market segments---and takes a simple form: in each market segment, there is a dominant firm favored by all consumers in that segment. By segmenting the market, all but the dominant firm maximally compete to poach the consumer's business, setting price to equal marginal cost. Information, thus, is being used to amplify competition. This segmentation simultaneously generates an efficient allocation and delivers to each firm its minimax profit.
    Date: 2020–10
  5. By: Robert Clark (Queen's University); Mario Samano (HEC Montreal)
    Abstract: In an effort to lower costs of provision, authorities have encouraged the consolidation of providers for a number of services such as electricity distributors, school boards, hospitals, and municipalities. In this paper we propose an endogenous merger process to evaluate the impact of government-provided incentives on consolidation patterns,and to evaluate the resulting outcomes. The process takes as input estimates from a stochastic frontier cost model, which yields an average cost curve for the industry. Policy parameters are used to simulate final configurations using offers that are the output of a Nash Bargaining problem. The efficiency of candidate merged entities is determined by a relative-influence function that measures the degree to which the combination of the involved firms' levels of efficiency results in cost-increasing amalgamations, and an interconnection cost that measures the impact of the size of the conglomerate that is formed. We calibrate parameters by applying the merger process to replicate the observed industry reconfiguration and then use these parameters to simulate the consolidation patterns that would have resulted from different policy incentives. We apply the method to the case of Ontario, where past mergers of local electricity distribution companies were incentivized by transfer tax reductions and a further round of mergers was recently proposed. Our findings suggest that the proposed tax incentive would have no impact on efficiency levels and consolidation patterns, and that even a substantial subsidy would still leave about five times as many LDCs as desired by policy makers.
    Date: 2020–07
  6. By: Nan Miles Xi
    Abstract: By analyzing the duopoly market of computer graphics cards, we categorized the effects of enterprise's technological progress into two types, namely, cost reduction and product diversification. Our model proved that technological progress is the most effective means for enterprises in this industry to increase profits. Due to the technology-intensive nature of this industry, monopolistic enterprises face more intense competition compared with traditional manufacturing. Therefore, they have more motivation for technological innovation. Enterprises aiming at maximizing profits have incentives to reduce costs and achieve a higher degree of product differentiation through technological innovation.
    Date: 2020–10
  7. By: Gillen, David W.; Oum, Tae H.; Tretheway, Michael W.
    Keywords: Public Economics
    Date: 2020–10–22

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