nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒07‒19
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Determinants of competitive intensity: substitutability and pricing policy By Cocioc, Paul
  2. Entry and Exit of Informal Firms and Development By Brian McCaig; Nina Pavcnik
  3. Paying off the Competition: Market Power and Innovation Incentives By Xuelin Li; Andrew W. Lo; Richard T. Thakor
  4. Shapes as Product Differentiation: Neural Network Embedding in the Analysis of Markets for Fonts By Sukjin Han; Eric H. Schulman; Kristen Grauman; Santhosh Ramakrishnan
  5. E-commerce, parcel delivery and environmental policy By Cremer, Helmuth; Borsenberger, Claire; Joram, Denis; Lozachmeur, Jean-Marie; Malavolti, Estelle
  6. Broadband speed and firm entry in digitally intensive sectors: The case of Croatia By Drilo, Boris; Stojcic, Nebojsa; Vizek, Maruska

  1. By: Cocioc, Paul
    Abstract: The article offer a critical perspective of several elements and some associated indicators used in characterizing and estimating the intensity of competition (i.e., the extent to which the mutual pressure of rivals is exerted on the market). We focus on the pricing policies of the firms and its impact and expected responses from competitors. Influences of substitutes and overall production capacity surplus are also analyzed.
    Keywords: competition; competitive intensity; imperfect competition; price signals;
    JEL: D40 D43 L11 L13 L41
    Date: 2021–01–27
  2. By: Brian McCaig; Nina Pavcnik
    Abstract: Non-farm informal businesses comprise the majority of the firm distribution in developing countries. We document novel stylized facts about entry and exit of informal, non-farm firms using nationally representative panel data over 15 years and across regions with varying levels of local economic development in Vietnam. First, we find that informal businesses exhibit rates of entry and exit around 14-18% annually. Entry and exit rates are similar and highly correlated at a point in time, within industries, and within regions. They both decline over time and across space with economic development. Second, although market selection influences which firms survive, entry and exit has little net effect on aggregate (revenue) productivity or hiring of workers outside the household. This owes to overlapping labor productivity of entering and exiting firms and low subsequent productivity growth and hiring among the surviving entrants. Nonetheless, entry and exit are associated with large changes in individual income. Third, the large overlap in revenue of entering and exiting informal businesses and the high correlation between entry and exit rates are related to the education of owners and their economic activities before and after operating an informal business. Informal business owners are less educated on average than wage workers in the formal sector, but more educated than agricultural workers. The transitions in and out of operating an informal business reflect the underlying structure of economic activities of the working age population, with education gaps also playing a role. The most common transition into non-farm businesses is to and from self-employment in agriculture. The likelihood of this transition declines with economic development, highlighting the role of net entry from agriculture into informal non-farm businesses in structural change.
    JEL: J46 L2 O17 O53
    Date: 2021–07
  3. By: Xuelin Li; Andrew W. Lo; Richard T. Thakor
    Abstract: How does a firm’s market power in existing products affect its incentives to innovate? We explore this fundamental question using granular project-level and firm-level data from the pharmaceutical industry, focusing on a particular mechanism through which incumbent firms maintain their market power: “reverse payment” or “pay-for-delay” agreements to delay the market entry of competitors. We first show that when firms are unfettered in their use of “pay-for-delay” agreements, they reduce their innovation activities in response to the potential entry of direct competitors. We then examine a legal ruling that subjected these agreements to antitrust litigation, thereby reducing the incentive to enter them. After the ruling, incumbent firms increased their net innovation activities in response to competitive entry. These effects center on firms with products that are more directly affected by competition. However, at the product therapeutic area level, we find a reduction in innovation by new entrants after the ruling in response to increased competition. Overall, these results are consistent with firms having reduced incentives to innovate when they are able to maintain their market power, highlighting a specific channel through which this occurs.
    JEL: D42 D43 G31 K21 L41 L43 L65 O31 O32
    Date: 2021–06
  4. By: Sukjin Han; Eric H. Schulman; Kristen Grauman; Santhosh Ramakrishnan
    Abstract: Many differentiated products have key attributes that are unstructured and thus high-dimensional (e.g., design, text). Instead of treating unstructured attributes as unobservables in economic models, quantifying them can be important to answer interesting economic questions. To propose an analytical framework for this type of products, this paper considers one of the simplest design products -- fonts -- and investigates merger and product differentiation using an original dataset from the world's largest online marketplace for fonts. We quantify font shapes by constructing embeddings from a deep convolutional neural network. Each embedding maps a font's shape onto a low-dimensional vector. In the resulting product space, designers are assumed to engage in Hotelling-type spatial competition. From the image embeddings, we construct two alternative measures that capture the degree of design differentiation. We then study the causal effects of a merger on the merging firm's creative decisions using the constructed measures in a synthetic control method. We find that the merger causes the merging firm to increase the visual variety of font design. Notably, such effects are not captured when using traditional measures for product offerings (e.g., specifications and the number of products) constructed from structured data.
    Date: 2021–07
  5. By: Cremer, Helmuth; Borsenberger, Claire; Joram, Denis; Lozachmeur, Jean-Marie; Malavolti, Estelle
    Abstract: We study the design of environmental policy in the e-commerce sector and examine two main questions. First, what is the appropriate level of intervention along the value chain. Second, which instruments should be used at a specic level in the vertical chain? We consider a model with two retailers/producers who sell a di¤erentiated product and two parcel delivery operators. The production, retailing and delivery of these goods generates CO2 emissions. We assume that it is more expensive for the retailers and the delivery operators to use greentechnologies. We consider di¤erent scenarios reecting the type of competition and the vertical structure of the industry. In all cases the equilibria are ine¢ cient for two reasons. First, at both level of the value chain (at the production/retailing stage and the delivery stage), the levels of emissions are too large (given the output levels - the number of items produced and delivered). Second the levels of outputs are not e¢ cient because the cost of emissions is not reected by the consumer prices. We show that in the perfect competition scenario a uniform Pigouvian tax on emission, reecting the marginal social damage, is su¢ cient to correct both types of ine¢ ciencies. Under imperfect competition a Pigouvian emissions tax is also necessary, but it has to be supplemented by positive or negative taxes on the quantity of good produced and delivered. The specic design of these instruments is a¤ected by vertical integration between a retailer and a delivery operator.
    Keywords: Pigouvian rule; emission taxes; output taxes; E-commerce, delivery operators; vertical integration
    JEL: H21 L42 L87
    Date: 2021–07–03
  6. By: Drilo, Boris; Stojcic, Nebojsa; Vizek, Maruska
    Abstract: We explore how improvements in digital infrastructure contribute to digital transformation of the Croatian economy. More specifically, we investigate under what conditions improvements in broadband speed are conductive for firm entry in digitally intensive sectors at the local level (cities and municipalities; LGUs) during the period 2014–2017. The results of the benchmark random effects panel data model suggest a 10 percent increase in broadband speed increases the number of new digitally intensive firms by 0.68. Two-way interactions between explanatory variables suggest improvements in broadband infrastructure yield the greatest number of new firm entries in densely populated LGUs, and in LGUs with a higher quality of human capital and greater public investment in physical infrastructure. Using the spatial Durbin panel method, we find improvements in broadband infrastructure exhibit positive firm entry effects both within and between cities and municipalities.
    Keywords: firm entry; digitally intensive sectors; broadband speed; digital transformation; Croatia; spatial spillovers
    JEL: D22 L26 M13 O33
    Date: 2021–07

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