nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒06‒28
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Intrapersonal price discrimination in a dominant firm model By Antelo, Manel; Bru, Lluís
  2. Equivalence between fixed fee and ad valorem profit royalty By Colombo, Stefano; Ma, Siyu; Sen, Debapriya; Tauman, Yair
  3. Competition Laws, Governance, and Firm Value By Ross Levine; Chen Lin; Wensi Xie
  4. Competition in Pricing Algorithms By Zach Y. Brown; Alexander MacKay
  5. Platform mergers and antitrust By Geoffrey Parker; Georgios Petropoulos; Marshall Van Alstyne
  6. Digital Addiction By Hunt Allcott; Matthew Gentzkow; Lena Song
  7. Has Market Power of U.S. Firms Increased? By Mary Amiti; Sebastian Heise
  8. When Social Assistance Meets Market Power: A Mixed Duopoly View of Health Insurance in the United States By Ranasinghe, Ashantha; Su, Xuejuan
  9. Price Discrimination and Public Policy in the U.S. College Market By Ian Fillmore
  10. Market Size and Research: Evidence from the Pharmaceutical Industry By Dennis Byrski; Fabian Gaessler; Matthew J. Higgins
  11. The Effect of Mergers on Variety in Grocery Retailing By Elena Argentesi; Paolo Buccirossi; Roberto Cervone; Tomaso Duso; Alessia Marrazzo
  12. Market Power and the Volatility of Markups in the Food Value Chain: The Role of Italian Cooperatives By Hyejin Lee; Johan Swinnen; Patrick Van Cayseele

  1. By: Antelo, Manel; Bru, Lluís
    Abstract: The standard dominant firm (DF)-competitive fringe model, in which all firms sell the good through linear pricing, is extended to the use of nonlinear contracts in the form of two-part tariffs (2PT). We show that under general conditions, the DF practices intrapersonal price discrimination, and supplies to fewer consumers than under linear pricing. As a consequence, nonlinear pricing leads to an inefficient result and consumers are worse off than when the DF uses linear prices; on the contrary, fringe firms are better off as they end up charging a higher price for the good.
    Keywords: Dominant firm, fringe firms, linear and nonlinear contracts, intrapersonal price discrimination
    JEL: L13
    Date: 2021–06
  2. By: Colombo, Stefano; Ma, Siyu; Sen, Debapriya; Tauman, Yair
    Abstract: For an outside innovator with a finite number of buyers of the innovation, this paper compares two licensing schemes: (i) fixed fee, in which a licensee pays a fee to the innovator and (ii) ad valorem profit royalty, in which a licensee leaves a fraction of its profit with the innovator. We show these two schemes are equivalent in that for any number of licenses the innovator puts for sale, these two schemes give the same licensing revenue. We obtain this equivalence result in a general model with minimal structure. It is then applied in a Cournot oligopoly for an outside innovator. Finally, in a Cournot duopoly it is shown that when the innovator is one of the incumbent firms rather than an outsider, the equivalence result does not hold.
    Keywords: fixed fee. advlorem profit royalty, licensing schemes, auction, posted price, outside innovator
    JEL: D43 D44 D45 L13 L24
    Date: 2021–06–03
  3. By: Ross Levine; Chen Lin; Wensi Xie
    Abstract: Do antitrust laws influence corporate valuations? We evaluate the relationship between firm value and laws limiting firms from engaging in anticompetitive agreements, abusing dominant positions, and conducting M&As that restrict competition. Using firm-level data from 99 countries over the 1990-2010 period, we discover that valuations rise after countries strengthen competition laws. The effects are larger among firms with more severe pre-existing agency problems: firms in countries with weaker investor protection laws, with weaker firm-specific governance provisions, and with greater opacity. The results suggest that antitrust laws that intensify competition exert a positive influence on valuations by reducing agency problems.
    JEL: G3 K21 K22 L4
    Date: 2021–06
  4. By: Zach Y. Brown; Alexander MacKay
    Abstract: Increasingly, retailers have access to better pricing technology, especially in online markets. Using hourly data from five major online retailers, we show that retailers set prices at regular intervals that differ across firms. In addition, faster firms appear to use automated pricing rules that are functions of rivals' prices. These features are inconsistent with the standard assumptions about pricing technology used in the empirical literature. Motivated by these facts, we consider a model of competition in which firms can differ in pricing frequency and choose pricing algorithms rather than prices. We demonstrate that, relative to the standard simultaneous price-setting model, pricing technology with these features can increase prices in Markov perfect equilibrium. A simple counterfactual simulation implies that pricing algorithms lead to meaningful increases in markups in our empirical setting, especially for firms with the fastest pricing technology.
    JEL: D43 L13 L81 L86
    Date: 2021–05
  5. By: Geoffrey Parker; Georgios Petropoulos; Marshall Van Alstyne
    Abstract: This is an updated version of the Working Paper- Platform mergers and antitrust published by Bruegel in January 2021. Platform ecosystems rely on economies of scale, data-driven economies of scope, high quality algorithmic systems, and strong network effects that frequently promote winner-takes-most markets. Some platform firms have grown rapidly and their merger and acquisition strategies have been very important factors in their growth. Big platforms’ market dominance has generated competition concerns...
    Date: 2021–06
  6. By: Hunt Allcott; Matthew Gentzkow; Lena Song
    Abstract: Many have argued that digital technologies such as smartphones and social media are addictive. We develop an economic model of digital addiction and estimate it using a randomized experiment. Temporary incentives to reduce social media use have persistent effects, suggesting social media are habit forming. Allowing people to set limits on their future screen time substantially reduces use, suggesting self-control problems. Additional evidence suggests people are inattentive to habit formation and partially unaware of self-control problems. Looking at these facts through the lens of our model suggests that self-control problems cause 31 percent of social media use.
    JEL: D12 D61 D90 D91 I31 L86 O33
    Date: 2021–06
  7. By: Mary Amiti; Sebastian Heise
    Abstract: A number of studies have documented that market concentration among U.S. firms has increased over the last decades, as large firms have grown more dominant. In a new study, we examine whether this rising domestic concentration means that large U.S. firms have more market power in the manufacturing sector. Our research argues that increasing foreign competition over the last few decades has in fact reduced U.S. firms’ market power in manufacturing.
    Keywords: market concentration; markups; import competition
    JEL: E2
    Date: 2021–06–21
  8. By: Ranasinghe, Ashantha (University of Alberta, Department of Economics); Su, Xuejuan (University of Alberta, Department of Economics)
    Abstract: We develop a mixed duopoly model with quality-differentiated products. The public firm chooses its product quality and offers it for free to eligible individuals as a form of social assistance to maximize consumer welfare, while the private firm chooses both the product quality and price to maximize profit. We first characterize the pattern of market segmentation for given product offerings, highlighting the non-monotonic relationship between market participation and individual income. We then calibrate the model to health insurance for the U.S. working-age population, with Medicaid acting as the public firm. We examine the distributional implications of policy changes, both actual and hypothetical, that lead to various degrees of public program expansion. Despite potentially significant inefficiency of the public firm, the overall effect of its expansion is welfare improving. Central to these findings is the significant market power enjoyed by the private firm that results in high profit margins if left unchecked. As more individuals become eligible for the public program, the resulting increase in competitive pressure disciplines the private firm’s ability to exercise market power.
    Keywords: mixed duopoly; quality differentiation; public provision of private goods; funding of public services; distribution
    JEL: D21 D43 H11 H42 H44 I00 L38
    Date: 2021–06–23
  9. By: Ian Fillmore (Washington University in St. Louis)
    Abstract: In the United States, the federal government grants colleges access to a student's Free Application for Federal Student Aid (FAFSA) which facilitates substantial price discrimination. This paper is the first to estimate the consequences of allowing colleges to use the FAFSA in their pricing decisions. I build and estimate a structural model of college pricing and simulate counterfactuals wherein some or all of the FAFSA information is restricted. I find that if FAFSA information were restricted, 13 percent of students attending elite colleges would be inefficiently priced out of the elite market. Nevertheless, student welfare would rise as colleges charged the majority of students lower prices. Colleges do use the FAFSA to transfer resources from high- to low-income students on average, but this redistribution is highly imprecise: allowing colleges to use the FAFSA harms one-third of low-income students while one in seven high-income students actually benefit.
    Keywords: price discrimination, higher education, first-price auction, Bayes-Nash equilibrium, financial aid, Free Application for Federal Student Aid, FAFSA
    JEL: I20 L11
    Date: 2021–06
  10. By: Dennis Byrski; Fabian Gaessler; Matthew J. Higgins
    Abstract: Prior literature has established a link between changes in market size and pharmaceutical innovation; whether a link exists with scientific research remains an open question. If upstream research is not responsive to these changes, the kinds of scientific discoveries that flow into future drug development could be disconnected from downstream demand. We explore this question by exploiting the effects of quasi-experimental variation in market size introduced by Medicare Part D. We find no causal relationship between market size and biomedical research in the decade following the implementation of Medicare Part D. While many factors have been shown to motivate scientists to conduct research, this result suggests that changes in market size provide no such incentive. We do find, however, limited support for a response by corporate scientists conducting applied research. Implications for pharmaceutical innovation policy are discussed.
    JEL: I13 I18 L65 O31 O32
    Date: 2021–05
  11. By: Elena Argentesi; Paolo Buccirossi; Roberto Cervone; Tomaso Duso; Alessia Marrazzo
    Abstract: We study the effect of a merger between two Dutch supermarket chains to assess its effect on the depth as well as composition of assortment. We adopt a difference-in-differences strategy that exploits local variation in the merger’s effects, controlling for selection on observables through a matching procedure when defining our control group. We show that the merger led the merging parties to reposition their assortment to avoid cannibalization in the areas where they directly competed before the merger. While the low-variety target’s stores reduced the depth of their assortment when in direct competition with the acquirer, the latter increased their assortment. This suggests that variety is a strategic variable in retail chains’ response to changes in local competition.
    Keywords: variety, assortment, mergers, ex-post evaluation, retail sector, supermarkets, grocery
    JEL: L10 L41 L66 L81 D22 K21 C23
    Date: 2021
  12. By: Hyejin Lee; Johan Swinnen; Patrick Van Cayseele
    Abstract: Agricultural cooperatives have often been promoted as a way to increase their market power and to obtain stability of profit against uncertainty. This paper estimates the firm-level markups and markup volatility to identify the countervailing market power of cooperatives in the Italian fruits and vegetable sector and the dairy sector. We use the firm-level data of Italian firms for the period 2007-2014. We find that, overall, there is a tradeoff in cooperatives’ role between obtaining market power and stability. Farmer cooperatives in both sectors gain stability in their markups but their markups are lower, on average, than those for non-cooperatives. For processor cooperatives, the fruits and vegetable sector obtains more market power. This appears to arise from the product differentiation strategy of the processors cooperative.
    Keywords: Cooperatives, market power, firm-level markups, volatility
    JEL: L44 Q13 D23
    Date: 2021

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