nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒03‒08
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Impact of Regulation on Innovation By Philippe Aghion; Antonin Bergeaud; John Van Reenen
  2. Economic distributions, primitive distributions, and demand recovery in Monopolistic Competition By André De Palma; Simon P. Anderson
  3. Competition Policy in a Simple General Equilibrium Model By Louis Kaplow
  4. Random Encounters and Information Diffusion about Product Quality By Jean Gabszewicz; Marco A. Marini; Skerdilajda Zanaj
  5. Vertical Integration and Production Inefficiency in the Presence of a Gross Receipts Tax By Benjamin Hansen; Keaton S. Miller; Caroline Weber
  6. Joint bidding and horizontal subcontracting By BOUCKAERT, Jan; VAN MOER, Geert
  7. When and Why Do Buyers Rate in Online Markets? By Xiang Hui; Tobias J. Klein; Konrad Stahl
  8. The Inverse Product Differentiation Logit Model By André De Palma; Mogens Fosgerau; Julien Monardo
  9. A Retrospective Study of State Aid Control in the German Broadband Market By Tomaso Duso; Mattia Nardotto; Jo Seldeslachts

  1. 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 labour 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 labour saving) breakthroughs.
    Keywords: Innovation, regulation, patents, firm size.
    JEL: O31 L11 L51 J8 L25
    Date: 2021
  2. By: André De Palma; Simon P. Anderson (Université de Cergy-Pontoise, THEMA)
    Abstract: We link fundamental technological and taste distributions to endogenous economic distributions of prices and firm size (output, profit) generated under monopolistic competition with heterogeneous productivities as per recent Trade and IO models. We new derive properties for monopoly pricing and equivalence properties on demand curvature, profit functions, and marginal revenue, which we use to ensure distributions of cost, price, output, and profit can be matched under monopolistic competition. Demand and one distribution determine the rest. We provide constructive proofs to recover demand and all distributions from just two (e.g., price and cost distributions uncover demand form), and derive consistency conditions that distribution pairs must satisfy. We then extend to include mark-up distributions.
    Keywords: Primitive and economic distributions, monopoly, monopolistic competition, pass-through and demand recovery, mark-up, price and profit dispersion
    JEL: L13 F12
    Date: 2021
  3. By: Louis Kaplow
    Abstract: The flow of resources across sectors to their best use, with concomitant entry and exit, is central to the functioning and welfare properties of a market economy. Nevertheless, most industrial organization research, including applications to competition policy, undertakes partial equilibrium analysis in a single sector, often with a fixed number of firms. This article examines competition policy in a simple, multi-sector, general equilibrium model with free entry and exit. Even partial equilibrium analysis yields some lessons, such as that accounting for free entry often makes strengthening competition policy more rather than less attractive. When admitting flows between sectors, familiar prescriptions readily reverse. But such results may be partially offset or overturned yet again when incorporating free entry and exit in nontargeted sectors. Finally, the analysis of efficiencies also changes qualitatively with free entry because even fixed costs are fully borne by consumers in equilibrium.
    JEL: D43 D51 D61 K21 L13 L40
    Date: 2021–02
  4. By: Jean Gabszewicz (CORE, Université Catholique de Louvain); Marco A. Marini (Department of Social Sciences and Economics, Sapienza University of Rome); Skerdilajda Zanaj (DEM, University of Luxembourg.)
    Abstract: This paper explores how social interactions among consumers shape markets. In a two-country model, consumers meet and exchange information about the quality of the goods. As information spreads, the demands evolve, affecting the prices and quantities manufactured by profi?t-maximizing ?rms. We show that market prices with informational frictions reach the duopoly price with full information, at the limit. However, this convergence can take two different paths depending on the size asymmetry between countries. In particular, when countries are of very different sizes, the single market does not immediately turn into a duopoly and monopoly prices may persist for several periods. Hence, the price-reducing trade effects may take longer to appear. In view of an intense globalization process, understanding how social meetings affect market outcomes is critical for understanding the performance of international economic integration.
    Keywords: Consumer Encounters, Information Di¤usion, Country Size, Product Quality.
    JEL: D42 D43 D83 F15 L13
    Date: 2021–02
  5. By: Benjamin Hansen; Keaton S. Miller; Caroline Weber
    Abstract: We quantify the effects of a gross receipts tax (GRT) on vertical integration for the first time. We use data from the Washington state recreational cannabis industry, which has numerous advantages including a clean natural experiment: a 25% GRT imposed on cannabis firms was subsequently replaced by an excise tax at retail. We find the short-run elasticity of vertical integration with respect to the intermediate good net- of-tax rate is -0.15 and the long-run elasticity is more than twice as large. We find these incentives lead to large output losses – production increases by 23 percent when the GRT is eliminated.
    JEL: H21 H25 H26 H30 H71 I28 L51 L6
    Date: 2021–02
  6. By: BOUCKAERT, Jan; VAN MOER, Geert
    Abstract: This paper investigates joint bidding when firms have incentives to sign subcontracts with each other after competing in the bidding stage. A bidding consortium affects the horizontal subcontracting market and, through backward induction, alters firms’ bids. Our findings challenge the current legal practice that consortia without efficiencies must pass the “no-solo-bidding test”, requiring that its members could not bid stand-alone. Our framework predicts that the formation of a temporary consortium, which has the feature that it dissolves after submitting a losing bid, benefits the procurer. The winning bid is more competitive with a temporary as compared to a structural consortium.
    Keywords: Joint bidding, Horizontal subcontracting, buyer power
    JEL: D43 L13 L14 L41
    Date: 2021–02
  7. By: Xiang Hui; Tobias J. Klein; Konrad Stahl
    Abstract: Anonymous markets would be very difficult to successfully operate without the possibility that buyers rate the seller. Yet many empirical results yield that ratings are non-random and concentrate on extreme experiences. We develop a model of rating decisions in which the buyer is willing to share publicly her opinion about a transaction, if its realized quality differs much from the quality expected by her, where expected quality is influenced by an aggregate of the seller’s past ratings. We demonstrate our results empirically using raw data from eBay. In spite of the non-randomness of responses, unweighted rating aggregates appear to rather well reflect reported buyer experience as long as expectations are not extreme.
    Keywords: Online Markets, Rating, Reputation
    JEL: D83 L12 L13 L81
    Date: 2021–03
  8. By: André De Palma; Mogens Fosgerau; Julien Monardo (Université de Cergy-Pontoise, THEMA)
    Abstract: We propose the Inverse Product Differentiation Logit (IPDL) model, a structural (inverse) demand model for differentiated products that captures market segmentation with segments that may overlap in any way. The IPDL model generalizes the nested logit model to allow richer substitution patterns, including complementarity in demand, and can be estimated by linear instrumental variable regression using aggregate data. We use the IPDL model to estimate the demand for cereals in Chicago. We then extend it to a general demand model that is consistent with a utility model of heterogeneous, utilitymaximizing consumers.
    JEL: C26 D11 D12 L
    Date: 2021
  9. By: Tomaso Duso; Mattia Nardotto; Jo Seldeslachts
    Abstract: We provide an evaluation of the impact of public subsidy schemes that aimed to support the development of basic broadband infrastructure in rural areas of Germany. Such subsidies are subject to state aid control by the European Commission (EC). While the EC increasingly recognises the role of economic analysis in controlling public aid to companies, there are to date no full retrospective studies performed on state aid control, especially assessing the so-called balancing test. In this study, we do not only analyse whether the aid was effective in solving a market failure – low broadband coverage in rural areas – but also study its impact on competitive outcomes, on both rival firms and consumers. We adopt a difference-in-differences framework after using a matching procedure to account for selection on observables. We find that the aid significantly increased broadband coverage. More importantly, we find that the number of internet providers has significantly increased in the municipalities receiving aid. This additional entry decreased average prices. Therefore, the subsidies complied with EU state aid rules, both in terms of effectiveness and competition.
    Keywords: state aid, ex-post evaluation, broadband, coverage, entry, competition, prices
    JEL: C23 D22 L10 L40 L64
    Date: 2021

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