nep-ind New Economics Papers
on Industrial Organization
Issue of 2020‒12‒21
three papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Subsidy policies and vertical integration in times of crisis: Can two virtues produce an evil? By Giuranno, Michele G.; Scrimitore, Marcella; Stamatopoulos, Giorgos
  2. Asymmetric Information and Delegated Selling By Maarten Janssen; Santanu Roy
  3. Corporate Social Responsibility and Profit Shifting By Iftekhar Hasan; Panagiotis Karavitis; Pantelis Kazakis; Woon Sau Leung

  1. By: Giuranno, Michele G.; Scrimitore, Marcella; Stamatopoulos, Giorgos
    Abstract: Vertical integration in an environment without foreclosure, or more generally without any mechanisms that restrict competition among firms, and subsidization of firms' production are two separate mechanisms that raise consumer welfare, and both have been proposed as antidotes to certain aspects of the current economic crisis caused by COVID-19. In this paper we show that the interplay of the two can, surprisingly, be harmful for consumers. We consider a two-layer imperfectly competitive industry where each downstream firm purchases an input from its exclusive upstream supplier, in the presence of a welfare-maximizing government. We allow one (or more than one) of the downstream firms to integrate with its upstream counterpart and we identify two opposite resulting effects: on the one hand, integration alleviates the double marginalization problem and raises industry output and on the other, it alters the government's optimal subsidy policy in a way that reduces output. It turns out that the latter effect dominates the former and thus integration leads to lower market output and consumer surplus. This holds irrespective of the mode of downstream market competition (quantities or prices) or the nature of commodities (homogeneous or differentiated). It also holds when the fiscal policy of the government is subject to social costs. Our conclusions are in particular relevant to the current pandemic period which spurs heavy subsidization of firms and reformulation of firms' vertical relations.
    Keywords: vertical industry; integration; subsidy policy; consumer surplus
    JEL: H21 L13 L42
    Date: 2020–11–28
  2. By: Maarten Janssen (University of Vienna); Santanu Roy (Southern Methodist University)
    Abstract: Asymmetric information about product quality can create incentives for a privately informed manufacturer to sell to uninformed consumers through a retailer and to maintain secrecy of upstream pricing. Delegating retail price setting to an intermediary generates pooling equilibria that avoid signaling distortions associated with direct selling even under reasonable restrictions on beliefs; these beliefs can also prevent double marginalization by the retailer. Expected profit, consumer surplus and social welfare can all be higher with intermediated selling. However, if secrecy of upstream pricing cannot be maintained, selling through a retailer can only lower the expected profit of the manufacturer.
    Keywords: Asymmetric Information; Product Quality; Delegation, Intermediary, Signaling.
    JEL: L13 L15 D82 D43
    Date: 2020–12
  3. By: Iftekhar Hasan; Panagiotis Karavitis; Pantelis Kazakis; Woon Sau Leung
    Abstract: This paper studies the relationship between corporate social responsibility (CSR) and profit shifting. Using a profit-shifting measure derived from worldwide data for parent firms and their foreign subsidiaries, we find that corporate social responsibility is positively and significantly associated with profit shifting, consistent with the legitimacy theory and a risk-management strategy. Our findings are robust to a battery of sensitivity and endogeneity tests. Overall, our evidence suggests that multinational firms with higher CSR scores shift larger amounts of profits to their low-tax foreign subsidiaries, potentially indicating strategic planning in the choice of CSR investments by multinational enterprises.
    Keywords: Corporate social responsibility, Legitimacy theory, Risk management, Profit shifting, Corporate tax systems, Agency problems
    JEL: F23 G30 G32 H25 H26 L10 L21 M14
    Date: 2020–10

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