nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒01‒25
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Multi-market Oligopoly of Equal Capacity By Ruda Zhang; Roger Ghanem
  2. Markups for consumers By Ganglmair, Bernhard; Kann, Alexander; Tsanko, Ilona
  3. A theory of entry dissuasion By Domenico Buccella; Luciano Fanti
  4. National pricing with local quality competition By Gabrielsen, Tommy Staahl; Johansen, Bjørn Olav; Straume, Odd Rune
  5. The impact of regulation on innovation By Philippe Aghion; Antonin Bergeaud; John Van Reenen
  6. Do slotting allowances reduce product variety? By Lømo, Teis Lunde; Meland, Frode; Sandvik, Håvard Mork
  7. Dynamic pricing under nested logit demand By David M\"uller; Yurii Nesterov; Vladimir Shikhman
  8. The Leniency Rule Revisited: Experiments on Cartel Formation with Open Communication By Maximilian Andres; Lisa Bruttel; Jana Friedrichsen
  9. Macroeconomic effects of EU Competition Policy By Merino Troncoso, Carlos
  10. Entry Threat, Entry Delay, and Internet Speed: The Timing of the U.S. Broadband Rollout By Wilson, Kyle; Xiao, Mo; Orazem, Peter F.
  11. Purchase discounts and travel premiums during holiday periods: Evidence from the airline industry By Luttmann, Alexander; Gaggero, Alberto A
  12. The Market Trajectory of a Radically New Product: E-Cigarettes By Kislev, Mickey M.; Kislev, Shira

  1. By: Ruda Zhang; Roger Ghanem
    Abstract: We consider a variant of Cournot competition, where multiple firms allocate the same amount of resource across multiple markets. We prove that the game has a unique pure-strategy Nash equilibrium (NE), which is symmetric and is characterized by the maximal point of a "potential function". The NE is globally asymptotically stable under the gradient adjustment process, and is not socially optimal in general. An application is in transportation, where drivers allocate time over a street network.
    Date: 2020–12
  2. By: Ganglmair, Bernhard; Kann, Alexander; Tsanko, Ilona
    Abstract: A central motivating factor for studying price markups is their effect on consumer welfare. Reported estimates of (firm-level) price markups in the literature, however, are often focused on industry or cross-country comparisons. These treat different industries equally rather than based on how relevant they are for consumers. We propose markup measures in which firm-level price markups are weighted according to consumption expenditures in the respective industries. Using a concordance table between consumption categories (otherwise used for the calculation of consumer price indices) and a firm's industry classification, we report results for Germany for the years 2002 through 2016. We find that consumption-weighted price markups are higher than the conventionally reported revenue-weighted markups. We further show that consumption-weighted markups have increased faster, in particular for medium-income households, which highlights a potential role of price markup as a contributing factor to changes of inequality in society.
    Keywords: COICOP,consumption weights,Germany,inequality,price markups
    JEL: D63 E31 K21 L11 L40
    Date: 2020
  3. By: Domenico Buccella; Luciano Fanti
    Abstract: In an industry with homogeneous goods, this note compares the standard incumbent's strategic capacity choice vs the incumbent's pre-emptive payment (profit) transfer (PPT) strategy (i.e., preentry acquisition). It is shown that, via the transfer option, the incumbent holds its monopoly position "dissuading" the potential competitor entry for a range of fixed costs larger than under strategic capacity. Moreover, in that range, the monopolist via transfer ensures higher payoffs both for itself and the potential competitor. That is, in contestable markets, the incumbent can keep its dominant position in an easier way than standard models predict.
    Keywords: Entry deterrence, Monopoly, Duopoly
    JEL: L13 L21
    Date: 2020–12–01
  4. By: Gabrielsen, Tommy Staahl (University of Bergen, Department of Economics); Johansen, Bjørn Olav (University of Bergen, Department of Economics); Straume, Odd Rune (Department of Economics, University of Minho)
    Abstract: We study the incentives of national retail chains to adopt national (uniform) prices across local markets that differ in size and competition intensity. In addition to price, the chains may also compete along a quality dimension, and quality is always set locally. We show that absent quality competition, the chains will never use national pricing. However, if quality competition is sufficiently strong there exist equilibria where at least one of the chains adopts national pricing. We also identify cases in which national pricing benefits (harms) all consumers, even in markets where such a pricing strategy leads to higher (lower) prices.
    Keywords: National pricing; local pricing; retail chains; price and quality competition
    JEL: L11 L13 L21
    Date: 2020–11–11
  5. By: Philippe Aghion; Antonin Bergeaud; John Van Reenen
    Abstract: Does regulation affect the pace and nature of innovation and if so, by how much? We build a tractable and quantifiable endogenous growth model with size-contingent regulations. We apply this to population administrative firm panel data from France, where many labor regulations apply to firms with 50 or more employees. Nonparametrically, we find that there is a sharp fall in the fraction of innovating firms just to the left of the regulatory threshold. Further, a dynamic analysis shows a sharp reduction in the firm's innovation response to exogenous demand shocks for firms just below the regulatory threshold. We then quantitatively fit the parameters of the model to the data, finding that innovation at the macro level is about 5.4% lower due to the regulation, a 2.2% consumption equivalent welfare loss. Four-fifths of this loss is due to lower innovation intensity per firm rather than just a misallocation towards smaller firms and lower entry. We generalize the theory to allow for changes in the direction of R&D, and find that regulation's negative effects only matter for incremental innovation (as measured by citations and text-based measures of novelty). A more regulated economy may have less innovation, but when firms do innovate they tend to "swing for the fence" with more radical (and labor saving) breakthroughs.
    Keywords: innovation, regulation, patents, firm size
    JEL: O31 L11 L51 J8 L25 O31 L11 L51 J8 L25 O31 L11 L51 J8 L25
    Date: 2021–01
  6. By: Lømo, Teis Lunde (University of Bergen, Department of Economics); Meland, Frode (University of Bergen, Department of Economics); Sandvik, Håvard Mork (Norwegian Competition Authority)
    Abstract: Slotting allowances are lump-sum fees paid by manufacturers in return for retail shelf space. We present a novel mechanism by which such upfront payments facilitate vertical foreclosure and thereby reduce product variety. When bidding for the patronage of two retailers, one manufacturer may foreclose a symmetric rival by offering slotting allowances paired with per-unit input prices that offset downstream competition ex post. Contrary to the conventional wisdom, slotting allowances can exclude first-rate brands of powerful manufacturers. Our results are in line with recent empirical evidence on slotting allowances but cast doubt on the current policy approach to these payments.
    Keywords: vertically related markets; slotting allowances; product variety; vertical foreclosure; exclusion; antitrust policy
    JEL: L13 L14 L42
    Date: 2020–10–30
  7. By: David M\"uller; Yurii Nesterov; Vladimir Shikhman
    Abstract: Recently, there is growing interest and need for dynamic pricing algorithms, especially, in the field of online marketplaces by offering smart pricing options for big online stores. We present an approach to adjust prices based on the observed online market data. The key idea is to characterize optimal prices as minimizers of a total expected revenue function, which turns out to be convex. We assume that consumers face information processing costs, hence, follow a discrete choice demand model, and suppliers are equipped with quantity adjustment costs. We prove the strong smoothness of the total expected revenue function by deriving the strong convexity modulus of its dual. Our gradient-based pricing schemes outbalance supply and demand at the convergence rates of $\mathcal{O}(\frac{1}{t})$ and $\mathcal{O}(\frac{1}{t^2})$, respectively. This suggests that the imperfect behavior of consumers and suppliers helps to stabilize the market.
    Date: 2021–01
  8. By: Maximilian Andres; Lisa Bruttel; Jana Friedrichsen
    Abstract: The experimental literature on antitrust enforcement provides robust evidence that communication plays an important role for the formation and stability of cartels. We extend these studies through a design that distinguishes between innocuous communication and communication about a cartel, sanctioning only the latter. To this aim, we introduce a participant in the role of the competition authority, who is properly incentivized to judge communication content and price setting behavior of the firms. Using this novel design, we revisit the question whether a leniency rule successfully destabilizes cartels. In contrast to existing experimental studies, we find that a leniency rule does not affect cartelization. We discuss potential explanations for this contrasting result.
    Keywords: cartel, judgment of communication, corporate leniency program, price competition, experiment
    JEL: C92 D43 L41
    Date: 2021
  9. By: Merino Troncoso, Carlos
    Abstract: I estimate the macroeconomic impact of competition policy to deter collusion and merger control in the EU using a dynamic macroeconomic model . The impact was estimated using a traditional Dynamic Stochastic General Equilibrium Model and an upgraded version that includes Central Bank quantitative easing policies. When these are included in the model the macroeconomic effects are higher than previously estimated.
    Keywords: competition policy, macroeconomic impact, DSGE
    JEL: L40 L44
    Date: 2021–01–07
  10. By: Wilson, Kyle; Xiao, Mo; Orazem, Peter F.
    Abstract: In a rapidly growing industry, potential entrants strategically choose which local markets to enter. Facing the threat of additional entrants, a potential entrant may lower its expectation of future profits and delay entry into a local market, or it may accelerate entry due to preemptive motives. Using the evolution of local market structures of broadband Internet service providers from 1999 to 2007, we find that the former effect dominates the latter after allowing for spatial correlation across markets and accounting for endogenous market structure. On average, it takes 2 years longer for threatened markets to receive their first broadband entrant. Moreover, this entry delay has long†run negative implications for the divergence of the U.S. broadband infrastructure: 1 year of entry delay translates into an 11% decrease on average present†day download speeds.
    Date: 2020–11–29
  11. By: Luttmann, Alexander; Gaggero, Alberto A
    Abstract: Discounts during Thanksgiving and Christmas are common in a variety of retail markets. Although classical economic theory predicts that prices should increase when aggregate demand is high, one possibility is that consumers are more price elastic during seasonal demand peaks. In this article, we examine holiday pricing in the airline industry. Exploiting a unique panel of almost 22 million fares, we find that fares purchased on a holiday are 1.8% cheaper, supporting the conjecture that airlines price discriminate when the mix of purchasing passengers makes demand more elastic. These holiday booking discounts are also found to be larger in competitive markets, with the largest discounts reserved for flights within one-week of departure. In contrast to flights purchased on a holiday, we find that traveling on a holiday is more expensive. Consistent with peak-load pricing, we estimate travel premiums ranging from 41.6% to 82.0% on national holidays and from 4.6% to 35.0% on federal holidays.
    Keywords: advance-purchase discounts, airline pricing, peak-load pricing, price discrimination, sales
    JEL: D40 L11 L13 L93
    Date: 2020–12–21
  12. By: Kislev, Mickey M.; Kislev, Shira
    Abstract: The study analyzes the diffusion of electronic cigarettes as an innovation, as well as how industry, society, and the individual affect its market dynamics. The study is based on five surveys conducted during the years 2017−2019, and including participants of all ages (age 12 to 80 and beyond). The article describes indicators for evaluating the sustainability of a really-new product like electronic cigarettes, following the market trajectory of this product as it sets its dominant design and shapes the use-system for the product type from now onward. This process has two phases: trial and adoption. The probability of each nicotine product type’s adoption is different, depending on the prevalence of trials of that product among the population. The results of e-cigarette trials and additional indicators reveal the point (critical mass-point) where social influence outweighs rational evaluation by the individual regarding nicotine products. By using triers’ prevalence as the indicator for measuring an entry of really-new product into the market, the authors could identify the sustainability of that really-new product at a much early phase. Therefore, the prevalence of triers can be used as a predictor for the diffusion rate of an innovative product in a certain population and should be measured. The authors also propose a regression model that estimates the prevalence of triers based on the extent of users in the population.
    Keywords: demerit good, electronic cigarette, innovation, diffusion, nicotine
    JEL: L66 M31 O33 Z13
    Date: 2020–10–25

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