nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒02‒08
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Quality and Price Setting of High-Tech Goods By Gorodnichenko, Yuriy; Talavera, Oleksandr; Vu, Nam
  2. Mixed ownership and R&D under discriminatory output subsidies By Chen, Jiaqi; Lee, Sang-Ho; Muminov, Timur
  3. How to Measure Product Differentiation By Franz Hackl; Michael Hölzl-Leitner; Dieter Pennerstorfer
  4. Digital platforms and antitrust By Geoffrey Parker; Georgios Petropoulos; Marshall Van Alstyne
  5. Market Definition in the Platform Economy By Jens-Uwe Franck; Martin Peitz
  6. Competition in the digital economy: An analysis of gatekeepers and regulations By Büchel, Jan; Rusche, Christian
  7. Platform competition in the tablet PC market: The effect of application quality By Thanh Doan; Fabio Maria Manenti; Franco Mariuzzo
  8. The Inefficient Combination: Competitive Markets, Free Entry, and Democracy By Halvor Mehlum; Gisle Natvik; Ragnar Torvik
  9. Market competition and strategic choices of electric power sources under fluctuating demand By Hiroaki Ino; Norimichi Matsueda; Toshihiro Matsumura
  10. The Market for Fake Reviews By He, Sherry; Hollenbeck, Brett; Proserpio, Davide
  11. Market Concentration in Europe: Evidence from Antitrust Markets By Pauline Affeldt; Tomaso Duso; Klaus Gugler; Joanna Piechucka
  12. Internet Access and U.S. - China Innovation Competition By Gerard Hoberg; Yuan Li; Gordon M. Phillips
  13. Market power in California's water market By Françeska Tomori; Erik Ansink; Harold Houba; Nick Hagerty; Charles Bos

  1. By: Gorodnichenko, Yuriy (University of California, Berkeley); Talavera, Oleksandr (University of Birmingham); Vu, Nam (University of Birmingham)
    Abstract: This paper investigates the link between product quality and price setting for central processing units (CPUs). Using thousands of price quotes from a popular price-comparison website, we find that market fundamentals, such as the number of sellers, median price, share of convenient prices and level of seller stability, are important factors for explaining price stickiness and price dispersion. We demonstrate that calculations of price inflation require conditioning not only on CPU quality, but also on market fundamentals to ensure that CPU attributes are priced correctly. Failing to do so can result in an understatement of CPU price deflation in the sample period.
    Keywords: price setting, e-commerce, product quality, hedonic pricing, inflation
    JEL: E31 L11 L81 L86
    Date: 2021–01
  2. By: Chen, Jiaqi; Lee, Sang-Ho; Muminov, Timur
    Abstract: This study considers a (partially privatized) semi-public firm in a mixed duopoly and examines the welfare effects of discriminatory output subsidies under R&D competition. We find that the government grants higher subsidies to the private firm than to the semi-public firm, which induces the private firm to invest more in R&D and to produce a higher output than the semi-public firm. We also show that optimal subsidy rates are higher (lower) than uniform subsidy rates for a sufficiently high (low) degree of privatization, which could decrease (increase) social welfare. This finding sharply contrasts to the case that the committed discriminatory output subsidy always yields the highest welfare compared to non-committed cases.
    Keywords: mixed ownership; time-consistency; discriminatory output subsidies; R&D competition
    JEL: D4 L1 L3
    Date: 2020–12
  3. By: Franz Hackl; Michael Hölzl-Leitner; Dieter Pennerstorfer
    Abstract: In this article, we provide a novel measure of product differentiation by observing consumer search behavior directly. We track individual consumers in a price search engine and generate a measure of distance in product space, based on goods surveyed conjointly within individual search episodes. This metric performs well in an application to digital cameras as an example of complex products. Regression results show that differences in product characteristics are correlated with our measure of distance to a surprisingly high degree, and that prices are significantly lower if products have to compete with a larger number of close substitutes.
    Keywords: product differentiation, characteristic space, consumer search, price search engine, clickstream.
    JEL: D83 D43 L13 L63
    Date: 2021–01
  4. By: Geoffrey Parker; Georgios Petropoulos; Marshall Van Alstyne
    Abstract: Digital platforms are at the heart of online economic activity, connecting multi-sided markets of producers and consumers of various goods and services. Their market power and their privileged ecosystem positions raise concerns that they may engage in anti-competitive practices that reduce innovation and consumer welfare. This paper deals with the role of market competition and regulation in addressing these concerns. Traditional (ex-post) antitrust intervention will be less effective in markets...
    Date: 2020–11
  5. By: Jens-Uwe Franck; Martin Peitz
    Abstract: The article addresses the role market definition can play for EU competition practice in the platform economy. The focus is on intermediaries that bring together two (or more) groups of users whose decisions are interdependent and which therefore are commonly referred to as “two-sided platforms”. We address challenges to market definition that accompany these cross-group network effects, assess current practice in a number of cases with the European Commission and Member States’ competition authorities, and provide guidance on how practice is to be adapted to properly account for the economic forces shaping markets with two-sided platforms. Owing to the complementarities of services provided to the user groups the platforms cater to, the question arises whether and when a single market can be defined that encompasses both sides. We advocate a multi-markets approach that takes account of cross-market linkages, acknowledges the existence of zero-price markets, and properly accounts for the homing behaviour of market participants.
    Keywords: antitrust law, EU competition practice, market definition, market power, Market Definition Notice, two-sided platforms, digital markets, network effects, matching platforms, zero-price markets, homing decisions, SSNIP test
    JEL: K21
    Date: 2021–01
  6. By: Büchel, Jan; Rusche, Christian
    Abstract: The Digital Age saw the rise of several rapidly growing digital platforms with substantial market shares. Europe is a large target market for these globally operating platforms, although the majority of the most successful platforms come from the USA or Asia. In general, platform ecosystems differ from regular market environments: platforms extend to several markets and user groups at the same time and there is an increased degree of dynamics in the allocation of market shares in platform ecosystems, which leads to a pressure to constantly innovate. Platform ecosystems vary among themselves, not least due to the different types of platform business models or their varying impact on the whole sector. Recent developments have included the emergence of particularly overwhelming platforms, known as "gatekeepers", that control entire platform ecosystems. A gatekeeper obtains durable and stable significant market power in the market for intermediation services, it has a large impact on the underlying market(s) and it is vital for users from all sides of the platform. In contrast to conventional platforms, for gatekeepers the ability to contest any of the markets is significantly reduced from the perspective of competing platforms, not least due to significant lock-in effects for consumers. But too tight regulation and pre-emptive intervention without any occasion is not preferable. Rash and untailored action negatively affects the development and growth opportunities for online platforms that do not intend to breach existing competition rules. Indirectly, that harms consumers, by restricting innovation and the availability of products and services. Tailored procedures for individual large online platforms with gatekeeper power on a case-by-case basis are more expedient. Thereby the current regulatory framework is capable of acting and builds on established legal pillars. However, tailored modernisation and adaption, for example in merger control, is helpful for ensuring fair competition. Merger control can be empowered by including data and other synergies between involved enterprises into assessments in order to prevent the formation of gatekeepers.
    JEL: G34 K21 L12
    Date: 2020
  7. By: Thanh Doan (Centre for Competition Policy and School of Economics, University of East Anglia); Fabio Maria Manenti (Department of Economics and Management, University of Padua); Franco Mariuzzo (Centre for Competition Policy and School of Economics, University of East Anglia)
    Abstract: Apple iOS is a closed platform; Google Android is open. In this paper, we combine data on iOS and Android tablet sales with dat a on the top 1000 mobile applications from both platforms for five European countries and estimate a structural demand model. We find that the quality of applications affects tablet demand. We then run two counterfactuals. In line with our theory, the exclusion of low-quality applications is beneficial to tablet producers in both platforms but is more pronounced for Apple. Tablet producers in the plat form with lower quality applications gain most from cross-platform app interoperability.
    Keywords: Android, indirect quality effect, iOS, mobile application, tablet demand
    JEL: L13 L15 L51 L63
    Date: 2020–12–01
  8. By: Halvor Mehlum; Gisle Natvik; Ragnar Torvik
    Abstract: We show that under fairly general conditions, the combination of (i) competitive markets, (ii) free entry, and (iii) democracy is inconsistent with allocative efficiency. This fundamental impossibility result, which has not been derived before, holds whenever not only prices, but also policy, responds to factor allocations. We develop a theory where agents enter an occupation (more generally, enter an economic activity) and thereafter make a policy decision. Thus, each voter's self interest becomes endogenous to the entry decision. In our baseline model, the policy instrument that citizens decide upon is simply taxation. Workers in occupations whose services are in high demand by the government have an incentive to vote for high taxes. Voters in occupations whose services are in low demand by the government have an incentive to vote for low taxes. We show that the socially efficient size of the public sector cannot be sustained in equilibrium, despite free entry into occupations. We generalize our theory, and show how our impossibility result extends well beyond the baseline model. We also discuss how departing from competitive markets may affect equilibrium outcomes. Our analysis implies that when assessing causes and consequences of factor allocations, it is key to acknowledge how allocations affect not only prices, but also policies.
    Keywords: Political Economy, Efficiency and Democracy, Endogenous Political Interests, The Size of Government, Labor Market Institutions, Dutch Disease
    Date: 2021–01
  9. By: Hiroaki Ino (Kwansei Gakuin University); Norimichi Matsueda (Kwansei Gakuin University); Toshihiro Matsumura (The University of Tokyo)
    Abstract: This study investigates how the introduction of a competitor affects the behavior of an incumbent electricity producer who is a former local monopolist. We especially focus on its implications for the incumbent's capacity choice between two different electric power sources: one technology with a relatively high production cost (peak-load technology), which is represented by gas-fired power generation, and the other with a relatively high capacity-building cost (base-load technology), which is represented by nuclear power generation. We assume that the entrant does not have access to the latter technology and also that demand fluctuates over time, as is typically the case with an electricity market. Surprisingly, the introduction of a competitor increases the capacity of nuclear power generation if and only if the nuclear technology is sufficiently inefficient. This result also implies that the introduction of a competitor competition tends to decrease the nuclear capacity when the level of carbon tax, which tends to raise the relative production cost of gas-fired power generation, is sufficiently high.
    Keywords: ;technology choice, carbon-free energy, carbon tax, deregulation, demand uncertainty, capacity commitment, imperfect competition
    JEL: Q41 Q42 L13 L43
    Date: 2021–01
  10. By: He, Sherry; Hollenbeck, Brett; Proserpio, Davide
    Abstract: We study the market for fake product reviews on These reviews are purchased in large private internet groups on Facebook and other sites. We hand-collect data on these markets to characterize the types of products that buy fake reviews and then collect large amounts of data on the ratings and reviews posted on Amazon for these products, as well as their sales rank, advertising, and pricing behavior. We use this data to assess the costs and benefits of fake reviews to sellers and evaluate the degree to which they harm consumers. The theoretical literature on review fraud shows that there exist conditions when they harm consumers and other conditions where they function as simply another type of advertising. Using detailed data on product outcomes before and after they buy fake reviews we can directly determine if these are low-quality products using fake reviews to deceive and harm consumers or if they are possibly high-quality products who solicit reviews to establish reputations. We find that a wide array of products purchase fake reviews including products with many reviews and high average ratings. Soliciting fake reviews on Facebook leads to a significant increase in average rating and sales rank, but the effect disappears after roughly one month. After firms stop buying fake reviews their average ratings fall significantly and the share of one-star reviews increases significantly, indicating fake reviews are mostly used by low quality products and are deceiving and harming consumers. We also observe that Amazon deletes large numbers of reviews and we document their deletion policy.
    Keywords: Online platforms, consumer protection, e-commerce, word-of-mouth
    JEL: K42 L15 L51 L81 M21 M31
    Date: 2021–01–21
  11. By: Pauline Affeldt; Tomaso Duso; Klaus Gugler; Joanna Piechucka
    Abstract: An increasing body of empirical evidence is documenting trends toward rising concentration, profits, and markups in many industries around the world since the 1980s. Two major criticisms of these studies is that concentration and market shares are poorly measured at the national industry level while firm level revenues are a poor indicator of product sales. We use a novel database that identifies over 20,000 product/geographic antitrust markets affected by over 2,000 mergers scrutinized by the European Commission between 1995 and 2014. We show that concentration, as measured by the market-specific post-merger HHI, is larger than reported in the extant literature (at least) by a factor of ten. We also show that concentration has increased over time on average. Yet, there is a great deal of heterogeneity across geographic markets and within broader industries. In a regression analysis that exploits this within-industry variation, we show that barriers to entry are unambiguously positively related to concentration irrespective of time periods, sectors of activity, and geographical market dimension analyzed. Strict past merger enforcement negatively correlates with concentration. Yet, this effect is stronger in the earlier decade (1995-2004) than subsequently. Intangibility of investments consistently displays positive correlation with concentration only for EU wide and worldwide services markets. In contrast, the correlation is negative in national markets. This underscores the importance of the large heterogeneity present in concentration developments across markets.
    Keywords: concentration, HHI, market definition, entry barriers, mergers, merger control, intangibles
    JEL: L24 L44 K21 O32
    Date: 2021
  12. By: Gerard Hoberg; Yuan Li; Gordon M. Phillips
    Abstract: Using new measures of expanded Internet access in China and internet-based search, we examine how competitive shocks from China impact U.S. innovation through the markets for innovation and existing products. We identify shocks to innovation competition using the geography of Chinese internet penetration and Chinese import data. Increases in the ability of Chinese industry peers to gather knowledge through the internet are followed by reductions in U.S. R&D investment and subsequent patents, and increased patenting by Chinese firms. The new Chinese patents also cite the U.S. firms patents at a high rate, consistent with increased intellectual property competition.
    JEL: D43 F13 L21 L26 O31 O34
    Date: 2020–12
  13. By: Françeska Tomori (Universitat Rovira i Virgili); Erik Ansink (Vrije Universiteit Amsterdam); Harold Houba (Vrije Universiteit Amsterdam); Nick Hagerty (Montana State University); Charles Bos (Vrije Universiteit Amsterdam)
    Abstract: We estimate market power in California's thin water market. Market frictions may distort the potential welfare gains from water marketing. We use a Nash-Cournot model and derive a closed-form solution for the extent of market power in a typical water market setting. We then use this solution to estimate market power in a newly assembled dataset on California's water economy. We show that, under the assumptions of the Cournot model, market power in this thin market is limited.
    Keywords: Water markets, Market power, California, Cournot-Nash
    JEL: C72 D43 Q25
    Date: 2021–01–24

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