nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒07‒12
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Horizontal Mergers under Bertrand Competition By X. Henry Wang; Jingang Zhao
  2. The collusive efficacy of competition clauses in Bertrand Markets with capacity-constrained retailers By Trost, Michael
  3. Consumer Information and the Limits to Competition By Armstrong, Mark; Zhou, Jidong
  4. Price Competition Online: Branded Websites, Marketplace Selling and Price Competition By Oksana Loginova
  5. Political Power and Market Power By Bo Cowgill; Andrea Prat; Tommaso Valletti
  6. Product Differentiation and Equilibrium Price with Partial Product Search By Lin Liu; X. Henry Wang
  7. Advance Selling in the Wake of Entry By Nadia Ceschi; Marc Möller
  8. Patterns of Competitive Interaction By Armstrong, Mark; Vickers, John
  9. Price discrimination with inequity-averse consumers: A reinforcement learning approach By Buchali, Katrin
  10. Entry regulation and competition evidence from retail and labor markets of pharmacists By Rostam-Afschar, Davud; Unsorg, Maximiliane

  1. By: X. Henry Wang (Department of Economics, University of Missouri); Jingang Zhao (Economics Department, University of Saskatchewan)
    Abstract: This paper draws on recent results from the study of hybrid games and multi-product oligopolies to analyze horizontal mergers under Bertrand competition. We identify a set of linear Bertrand models in which a horizontal merger will reduce both the outsiders' profits and consumer surplus when the insiders' cost savings are sufficiently large. We also show that mergers in Bertrand models will normally increase the insiders' profits even without generating any cost-savings. Such results suggest that the increase in the insiders' profits may arise at the expense of rival firms and consumers, and thus raise new concerns about the anti-competitive effects of mergers under price competition.
    Keywords: Horizontal merger, Bertrand competition, consumer surplus
    JEL: D43 L13 L41
    Date: 2021
  2. By: Trost, Michael
    Abstract: We study the collusive efficacy of competition clauses (CC) such as the meeting competition clause (MCC) and the beating competition clauses (BCC) in a general framework. In contrast to previous theoretical studies, we allow for repeated interaction among the retailers and heterogeneity in their sales capacities. Besides that, the selection of the form of the CC is endogeneized. The retailers choose among a wide range of CC types - including the conventional ones such as the MCC and the BCCs with lump sum refunds. Several common statements about the collusive (in)efficacy of CCs cannot be upheld in our framework. We show that in the absence of hassle costs, MCCs might induce collusion in homogeneous markets even if they are adopted only by few retailers. If hassle and implementation costs are mild, collusion can be enforced by BCCs with lump sum refunds. Remarkably, these fundings hold for any reasonable rationing rule. However, a complete specification of all collusive CCs is in general impossible without any further reference to the underlying rationing rule.
    Keywords: Competition clauses,price-matching guarantee,price-beating guarantee,anti-competitivepractice,capacity-constrained oligopoly
    JEL: L11 L13 L41
    Date: 2021
  3. By: Armstrong, Mark; Zhou, Jidong
    Abstract: This paper studies competition between firms when consumers observe a private signal of their preferences over products. Within the class of signal structures which induce pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal policy amplifies underlying product differentiation, thereby relaxing competition, while ensuring consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal policy dampens differentiation, which intensifies competition, but induces some consumers to buy their less-preferred product. Our analysis sheds light on the limits to competition when the information possessed by consumers can be designed flexibly.
    Keywords: Information design, Bertrand competition, product differentiation, online platforms
    JEL: D43 D47 D8 L13 L15
    Date: 2021–06
  4. By: Oksana Loginova (Department of Economics, University of Missouri)
    Abstract: I consider a market for differentiated products with an online marketplace (the platform) and two types of firms. Marketplace firms sell through the platform. Branded firms sell to consumers directly and, if they choose so, through the platform. When a branded firm joins the platform, the firm expands its reach beyond its branded website/physical store(s) to consumers who visit the platform for all their purchases. The drawback is that the firm has to pay a referral fee for all sales on the platform, some of which are from its loyal consumers who would otherwise have purchased from the firm directly. I investigate the role of the firm composition in determining the equilibrium outcome. Interestingly, a higher fraction of branded firms translates into more firms on the platform and intense price competition. In the midst of the COVID-19 pandemic consumers who used to shop at physical stores turn to the platform. I show that if they do (do not) look into other products, more (fewer) branded firms will join the platform in equilibrium.
    Keywords: pricing, competition, online marketplace, platform, brands
    JEL: C72 D43 L11 L13 M31
    Date: 2021
  5. By: Bo Cowgill; Andrea Prat; Tommaso Valletti
    Abstract: We study the link between lobbying and industrial concentration. Using data for the past 20 years in the US, we show how lobbying increases when an industry becomes more concentrated, using mergers as shocks to concentration. This holds true both for expenditures on federal lobbying as well as expenditures on campaign contributions. Results are in line with the predictions of a model where lobbying is akin to a public good for incumbents, and thus typically underprovided, while a merger solves the coordination problem.
    Date: 2021–06
  6. By: Lin Liu (College of Business, University of Central Florida); X. Henry Wang (Department of Economics, University of Missouri)
    Abstract: According to earlier economics literature, an increase in product differentiation increases firms' prices. Anderson and Renault (1999), however, show that when search cost is needed to evaluate any product, a U-shaped relationship exists between firms' equilibrium prices and product differentiation. Such a relationship emerges because an increase in product differentiation brings in a positive direct effect on price through increasing market power and a negative indirect effect through encouraging search across firms. In this paper, we revisit this important issue with the recent development of partial-depth search, which allows consumers to evaluate a subset of product attributes. We use a simultaneous search model, and our results show that a U-shaped relationship still emerges in equilibrium when search depth is fixed and dictated by the search environment but vanishes when depth is chosen by consumers. Specifically, in the latter eventuality with endogenous depth, an increase in product differentiation creates a second indirect effect which is positive on price through a greater search depth: a higher differentiation increases the expected search benefit and thus induces consumers to search products at a greater depth, which allows them to better differentiate products and thus softens competition. This new positive indirect effect combined with the conventional positive direct effect leads firms' equilibrium prices to increase with product differentiation.
    Keywords: Search, Partial-search depth, Price, Product differentiation, Competition
    JEL: D43 D83 L13
    Date: 2021
  7. By: Nadia Ceschi; Marc Möller
    Abstract: This article provides a tractable model of inter-temporal price-discrimination by heterogeneous firms, imperative for our understanding of advance purchase markets in the wake of entry. The pricing schedule of a more efficient entrant is found to differ systematically from the pricing schedule of a more prominent incumbent. By diverting competition to a stage where consumers face uncertainty about their preferences, advance selling reduces prices while increasing the entrant’s market share and profitability relative to the incumbent. Policies that curtail the firms’ ability to sell in advance, although potentially beneficial for welfare, may have the adverse effects of consolidating an incumbent’s position and of reducing the consumers’ surplus.
    Keywords: Competition, Price Discrimination, Individual Demand Uncertainty, Advance Purchase Discounts.
    JEL: D43 D80 L13
    Date: 2021–06
  8. By: Armstrong, Mark; Vickers, John
    Abstract: We explore patterns of price competition in an oligopoly where consumers vary in the set of firms they consider for their purchase and buy from the lowest-priced firm they consider. We study a pattern of consideration, termed "symmetric interactions", that generalises models used in existing work (duopoly, symmetric firms, and firms with independent reach). Within this class, equilibrium profits are proportional to a firm's reach, firms with a larger reach set higher average prices, and a reduction in the number of firms (either by exit or by merger) harms consumers. However, increased competition (either by entry of by increased consumer awareness) does not always benefit consumers. We go on to study patterns of consideration with asymmetric interactions. In situations with disjoint reach and with nested reach we find equilibria in which price competition is "duopolistic": only two firms compete within each price range. We characterize the contrasting equilibrium patterns of price competition for all patterns of consideration in the three-firm case.
    Keywords: Price competition, consideration sets, price dispersion, entry and merger.
    JEL: C72 D43 D83 L13 L4
    Date: 2021–05
  9. By: Buchali, Katrin
    Abstract: With the advent of big data, unique opportunities arise for data collection and analysis and thus for personalized pricing. We simulate a self-learning algorithm setting personalized prices based on additional information about consumer sensitivities in order to analyze market outcomes for consumers who have a preference for fair, equitable outcomes. For this purpose, we compare a situation that does not consider fairness to a situation in which we allow for inequity-averse consumers. We show that the algorithm learns to charge different, revenue-maximizing prices and simultaneously increase fairness in terms of a more homogeneous distribution of prices.
    Keywords: pricing algorithm,reinforcement learning,Q-learning,price discrimi-nation,fairness,inequity
    JEL: D63 D91 L12
    Date: 2021
  10. By: Rostam-Afschar, Davud; Unsorg, Maximiliane
    Abstract: We examine a deregulation of German pharmacists to assess its effects on retail and labor markets. From 2004 onward, the reform allowed pharmacists to expand their single-store firms and to open or acquire up to three a liated stores. This partial deregulation of multi-store prohibition reduced the cost of firm expansion substantially and provides the basis for our analysis. We develop a theoretical model that suggests that the general limitation of the total store number per firm to four is excessively restrictive. Firms with hig€h managerial e ciency will open more stores per firm and have higher labor demand. Our empirical analysis uses very rich information from the administrative panel data on the universe of pharmacies from 2002 to 2009 and their a liated stores matched with survey data, which provide additional information on the characteristics of expanding firms before and after the reform. We find a sharp immediate increase in entry rates, which continues to be more than five-fold of its pre-reform level after five years for expanding firms. Expanding firms can double revenues but not profits after three years. We show that the increase of the number of employees by 50% after five years and the higher overall employment in the local markets, which increased by 40%, can be attributed to the deregulation.
    Keywords: regulation,acquisitions,entry,market concentration,wages,employment,pharmacists
    JEL: L4 L5 L2 J44 J23
    Date: 2021

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