nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒03‒22
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Definition in the Platform Economy By Jens-Uwe Franck; Martin Peitz
  2. Random Encounters and Information Diffusion about Product Quality By Jean J. Gabszewicz; Marco A. Marini; Skerdilajda Zanaj
  3. Impact of Vertical Integration By H. Luke, Erin
  4. Vertical Mergers with Input Substitution: Double Marginalization, Foreclosure and Welfare By Marius Schwartz; Serge Moresi
  5. Asset Bubbles and Product Market Competition By Francisco Queirós
  6. The effects of personal information on competition: Consumer privacy and partial price discrimination By Clavorà Braulin, Francesco
  7. Oligopoly model with interdependent preferences: existence and uniqueness of Nash equilibrium By Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
  8. A Welfare Analysis of Competitive Insurance Markets with Vertical Differentiation and Adverse Selection By W. Bentley MacLeod

  1. 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: 2021–03
  2. By: Jean J. Gabszewicz (CORE, Université Catholique de Louvain); Marco A. Marini (University of Rome La Sapienza and CREI); 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 proÂ…t-maximizing fiÂ…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 Diffusion, Country Size, Product Quality
    JEL: D42 D43 D83 F15 L13
    Date: 2021–03
  3. By: H. Luke, Erin
    Abstract: Vertical integration is a powerful, and complex business strategy that when used under the right conditions can positively impact an organization. A company’s strategists need to understand what dimensions of integration to use, and the best time to use it. De Beers is a company with a controversial history of being an anti-competitive monopoly. By strategizing into a vertical integrated company De beers has added value to its company by not only targeting the retail, and industrial market, but also the I.T. industry. Forward and backward integration has helped organizations like De Beers maintain control over its inputs and outputs. Rather than just buying all diamond mines, and stock piling the material in order to control the prices, De Beers has embraced change by focusing on new emerging industries. Through vertical strategy and new ownership De Beers is turning its company around in a very competitive luxury industry. Organizations should be aware of the costs of vertical integration when exploring its potential. Bureaucratic costs, and companies becoming too large and inflexible under certain environments can become a problem. Vertical integration is a powerful strategy, but it must always be under scrutiny, and redesigned when the external and internal environment deems change necessary.
    Keywords: Bureaucratic costs; Competitive Advantage; De Beers; Vertical integration; Ownership
    JEL: A10 A19 L00
    Date: 2021–03–07
  4. By: Marius Schwartz (Department of Economics, Georgetown University); Serge Moresi (Charles River Associates, Inc.)
    Abstract: We consider differentiated duopolists that face symmetric linear demands and produce using identical or different Cobb-Douglas technologies with a monopolized input and a competitively supplied input. A merger between the input monopolist and either firm eliminates double marginalization but—unlike with fixed-proportions technologies in the same setting—can lead to foreclosure and reduce consumer welfare and total welfare. The same can occur under a CES technology with greater input substitutability than Cobb-Douglas. When firms use identical Cobb-Douglas technologies, the merged firm raises the rival’s cost by more, and the welfare effects are worse, when the input it controls constitutes a low rather than high share of downstream input costs. If that share is sufficiently low then consumer welfare and total welfare decline, while rising elsewhere despite foreclosure. With different Cobb-Douglas technologies, the input monopolist may foreclose completely either firm pre-merger. A merger’s welfare effects then can be non-monotonic in the monopoly input’s share of costs. Classification-L4, L41, L42
    Keywords: Vertical Mergers, Foreclosure, Input Substitution, Antitrust
    Date: 2021–03–14
  5. By: Francisco Queirós (Università di Napoli Federico II and CSEF)
    Abstract: This paper studies the interactions between asset bubbles and competition. I first document a negative industrylevel relationship between measures of stock market overvaluation and indicators of market power: larger overvaluation is associated with an increase in the number of firms, lower markups and a higher probability of negative earnings. I then construct multi-industry growth model featuring imperfect competition and rational bubbles that sheds light on these findings. By providing an entry or production subsidy, bubbles stimulate competition and reduce monopoly rents. When they are sufficiently large they can, however, lead to excessive entry and competition. I also show that imperfect competition depresses the interest rate, thereby relaxing the conditions for the emergence of rational bubbles.
    Keywords: Rational Bubbles, Competition, Market Power, British Railway Mania, Dotcom Bubble
    JEL: E44 L13 L16
    Date: 2021–03–17
  6. By: Clavorà Braulin, Francesco
    Abstract: This article studies the effects of consumer information on the intensity of competition. In a two dimensional duopoly model of horizontal product differentiation, firms use consumer information to price discriminate. I contrast a full privacy and a no privacy benchmark with intermediate regimes in which the firms target consumers only partially. No privacy is traditionally detrimental to industry profits. Instead, I show that with partial privacy firms are always better-off with price discrimination: the relationship between information and profits is hump-shaped. Consumers prefer either no or full privacy in aggregate. However, even though this implies that privacy protection in digital markets should be either very hard or very easy, the effects of information on individual surplus are ambiguous: there are always winners and losers. When an upstream data seller holds partially informative data, an exclusive allocation arises. Instead, when data is fully informative, each competitor acquires consumer data but on a different dimension.
    Keywords: price discrimination,data broker,consumer information,privacy
    JEL: D43 L11 L13
    Date: 2021
  7. By: Marco F. Boretto; Fausto Cavalli; Ahmad Naimzada
    Abstract: We propose a model to describe and study the effect of social interdependent preferences in a Cournot oligopoly based on a game in which the utility functions of firms depend on a combination of weighted profits of their competitors. If social interaction is neglected, the model reduces to the classic Cournot game, diverting from it as the role of social interaction becomes more and more relevant. Several synthetic measures are proposed to summarize the overall behavior of the agents and some configurations characterized by particular interactional structures are presented. Finally, the study of the well-posedness of the proposed framework is investigated, in terms of the existence and uniqueness of Nash equilibria. To this end, we generalize the conditions under which the existence and/or uniqueness of Nash equilibrium in classic game is guaranteed for particular Cournotian oligopoly models without interdependent preferences. In particular, we focus on two families of oligopolies, respectively consisting of "concave" oligopolies and oligopolies with isoelastic demand function.
    Keywords: Cournot Game, Preference interdependence, Network, Nash Equilibrium, existence and uniqueness
    JEL: D43 C62 C70
    Date: 2021–03
  8. By: W. Bentley MacLeod
    Abstract: A feature of many insurance markets is that they combine vertical differentiation (all consumers prefer high to low-coverage policies) and adverse selection (high cost customers prefer high-coverage plans). Building on Novshek and Sonnenschein (1978) and Azevedo and Gottlieb (2017), this paper characterizes the competitive equilibria in a vertically differentiated market characterized by adverse selection. This provides a simple, dynamic model of the market, along with their welfare consequences over time in response to policy changes. The model makes predictions consistent with recent evidence on the ACA exchange in the US (Frean et al. (2017)). Moreover, it provides a complete characterization of the health insurance “death spiral”. The death spiral leads to an inefficient outcome, but does not lead to a complete breakdown of the market. Rather, it predicts a large number of plans, with coverage that falls with an individual’s willingness to pay. It is shown that introducing a minimum coverage standard combined with an insurance mandate cannot restore efficiency. The optimal system depends on both the valuation of public funds and the social value of insurance. Depending on these parameters, a number of different types of systems may be optimal, including a single payer system with mandatory participation for all, such as the Canadian system, a mixed private-public system, as one sees in many countries, or a pure, free market system.
    JEL: D01 D21 D41 I11 I13 L15
    Date: 2021–03

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