nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒08‒16
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. A Model of Oligopoly By Hernán Vallejo
  2. A Characterization of the Herfindahl Hirschman Index and its use in the Horizontal Merger Guidelines By Hernán Vallejo
  3. Strategic inattention and divisionalization in duopoly By Promit Kanti Chaudhuri
  4. The Cultural Roots of Firm Entry, Exit, and Growth By Katharina Erhardt; Simon Haenni
  5. Strategic delegation in spatial price discrimination mixed duopoly; Nash is consistent at the presence of a public firm By Michelacakis, Nickolas
  6. Size Matters: Corruption Perceptions versus Corruption Experiences by Firms By Rajeev K. Goel; Ummad Mazhar; Rati Ram
  7. Profitability of behavior based price discrimination By Sumit Shrivastav
  8. Price discrimination with imperfect consumer recognition By Sumit Shrivastav
  9. Intermediaries in the Online Advertising Market By Anna D'Annunzio; Antonio Russo
  10. Concentration and Resilience in the U.S. Meat Supply Chains By Meilin Ma; Jayson L. Lusk
  11. Buying Data from Consumers: The Impact of Monitoring Programs in U.S. Auto Insurance By Yizhou Jin; Shoshana Vasserman

  1. By: Hernán Vallejo
    Abstract: This article builds a simple model of oligopoly and uses it to make a detailed characterization of the equilibrium prices; quantities; mark-ups; price elasticities of market demand; price elasticities of residual demand; and welfare, all in terms of the parameters of the model. This is done under five different conjectures -Collusion, Threat, Cournot, Stackelberg and Bertrand-. The results of the model are used do comparative statics.
    Keywords: Oligopoly, Collusion, Threat, Cournot, Stackelberg, Bertrand, mark-up
    JEL: C70 C71 D43 L13
    Date: 2021–07–27
  2. By: Hernán Vallejo
    Abstract: This article characterizes the Herfindahl Hirshman Index and its use by the Department of Justice and the Federal Trade Commission of the United States, in their Horizontal Merger Guidelines. The characterization maps ranges of the index with the level of market concentration and its changes due to horizontal mergers and acquisitions, in terms of the number of firms operating in the market and the market share of the largest active firm. The article aims to provide alternative and graphic approaches that may contribute to analyze horizontal mergers and acquisitions in an easier and expedited way, from a market concentration perspective and before there are any changes in strategic interactions or market equilibria.
    Keywords: Horizontal Merger Guidelines, Herfi ndahl Hirshman Index, Market Concentrationand Enhanced Market Power
    JEL: L11 L22
    Date: 2021–07–21
  3. By: Promit Kanti Chaudhuri (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, a differentiated product economy is modeled where firms strategically set up autonomous rival divisions and the divisions play the quantity competition game `a la Cournot or by means of monopolistic competition, where the divisions are unaware of the impact of their output either on the firm's total output or on the total industry output. This case of divisions being unaware of the impact of their outputs on the firm's aggregate output or on the industry total output is termed as `Strategic Inattention'. The incentive to divisionalize still remains within the firms even in the case of the `Strategic Inattention', but the incentive is lower than the case of normal Cournot competition. Next in a duopoly, the firms play a three stage game. In the first stage, the firms decide whether to let their divisions utilize or ignore the information on the impact of their individual output on the firm's total output or industry total output. In the second stage the firms strategically decide on the number of divisions and in the final stage the divisions compete against each other in terms of quantity. It is seen that one firm deciding to be inattentive to the information available and the other firm using that information, is the equilibrium outcome. Thus inattentive and attentive firms coexist in a Subgam Perfect Nash Equilibrium. This result is in sharp contrast to the findings of Cellini et al. (2020).
    Keywords: Divisionalization, information, Monopolistic competition, Oligopoly, Strategic interaction
    JEL: D43 L11 L13
    Date: 2021–07
  4. By: Katharina Erhardt; Simon Haenni
    Abstract: Can culture explain persistent differences in economic activity among individuals and across regions? A novel measure of cultural origin enables us to contrast the entrepreneurial activity of individuals located in the same municipality but whose ancestors lived just on opposite sides of the Swiss language border in the 18th century. Individuals with ancestry from the German-speaking side create 20% more firms than those with ancestry from the French-speaking side. These differences persist over generations and independent of the predominant culture at the current location. Yet, founders’ ancestry does not affect exit or growth of newly-founded firms. A model of entrepreneurial choice and complementary survey evidence suggest that the empirical patterns are mainly explained by differences in preferences, rather than skill. The results have sizable economic implications, accounting for 120,000 additional jobs over a period of 15 years.
    Keywords: culture, entrepreneurship, natural experiment, spatial RDD
    JEL: D22 L26 O12 Z10
    Date: 2021
  5. By: Michelacakis, Nickolas
    Abstract: We consider a mixed ownership duopoly delegation model with spatial price discrimination and constant, albeit different, marginal production costs. In contrast to what holds true for a private duopoly, the Nash equilibrium, absent delegation, for a mixed duopoly with discriminatory pricing according to location is both consistent and socially optimal. We find that under Nash conjectures, in most cases, firm owners have a strong incentive to delegate location decisions to managers. In such cases, firms locate closer to each other. The intensity of the competition leads to lower prices, lower profits, for both firms, and increased surplus for the consumer.
    Keywords: mixed duopoly; delegation; spatial competition; consistent conjectures; Nash equilibrium
    JEL: D43 L13 L21 L22 R32
    Date: 2021–08
  6. By: Rajeev K. Goel; Ummad Mazhar; Rati Ram
    Abstract: This study uses a large firm-level data set covering more than 80 countries to explore the effects of firm-size, city-size, and government-size on perceived and experienced corruption. Four points summarize our main findings, which seem instructive and new. First, there is a broad structural similarity in the major determinants of perceived and experienced corruption. Second, larger firms and larger government size lower corruption perceptions and experience. Third, larger cities raise corruption perceptions and experience. Fourth, when the sample is limited to large cities, the corruption-lowering effect of government size loses significance throughout, while firm size loses significance in experience regressions.
    Keywords: corruption perception, corruption experience, firm size, government size, city size, emerging economies
    JEL: K42 L25
    Date: 2021
  7. By: Sumit Shrivastav (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we analyze the profitability of price discrimination based on recognition of consumers' brand preferences, in a duopoly model with switching costs. We show that, in contrast to existing studies, price discrimination results into higher profits than uniform pricing if consumers are heterogeneous in terms of brand preferences and the extent of such heterogeneity is sufficiently high.
    Keywords: BBPD, Consumer recognition, Price discrimination
    JEL: D43 L13
    Date: 2021–07
  8. By: Sumit Shrivastav (Indira Gandhi Institute of Development Research)
    Abstract: In this paper, we analyze the competitive and welfare effects of imperfect consumer recognition, in a duopoly model with switching costs. We demonstrate that the impact of consumer recognition on firms' pricing strategies, industry profits, and welfare crucially depends on the accuracy of consumer recognition. When the extent of correct recognition is greater than that of incorrect recognition equilibrium profits decrease with correct recognition and increase with incorrect recognition Consumer surplus increases with correct recognition and falls with incorrect recognition. Welfare decreases with correct recognition, while impact of incorrect recognition on welfare is non-monotonic On the other hand, when the extent of correct recognition is less than that of incorrect recognition, the reverse happens with equilibrium profits. The effect of correct recognition on consumer surplus is ambiguous, and it increases with incorrect recognition. Welfare increases with correct recognition and may increase or decrease with incorrect recognition.
    Keywords: BBPD, Consumer recognition, Price discrimination, Imperfect information
    JEL: D43 D80 L13 L40
    Date: 2021–06
  9. By: Anna D'Annunzio; Antonio Russo
    Abstract: A large share of the ads displayed by digital publishers (e.g., newspapers and blogs) are sold via intermediaries (e.g., Google), that have large market power and reportedly allocate the ads in an opaque way. We study the incentives of an intermediary to disclose consumer information to advertisers when auctioning ad impressions. We show that disclosing information that enables advertisers to optimize the allocation of ads on multi-homing consumers is profitable to the intermediary only if advertising markets are sufficiently thick. In turn, we study how disclosure affects the incentives of publishers to outsource the sale of their ads to an intermediary, and relate these incentives to the extent of consumer multi-homing, the competitiveness of advertising markets and the ability of platforms to profile consumers. We show that, even when most consumers multi-home, the publishers may be worse off by outsourcing to the intermediary, in particular if they operate in thin advertising markets. Finally, we study how the intermediary responds to policies designed to enhance transparency or consumer privacy, and the implications of these policies for the online advertising market.
    Keywords: online advertising, intermediary, multi-homing, privacy, transparency
    JEL: D43 D62 L82 M37
    Date: 2021
  10. By: Meilin Ma; Jayson L. Lusk
    Abstract: Supply chains for many agricultural products have an hour-glass shape; in between a sizable number of farmers and consumers is a smaller number of processors. The concentrated nature of the meat processing sectors in the United States implies that disruption of the processing capacity of any one plant, from accident, weather, or as recently witnessed – worker illnesses from a pandemic – has the potential to lead to system-wide disruptions. We explore the extent to which a less concentrated meat processing sector would be less vulnerable to the risks of temporary plant shutdowns. We calibrate an economic model to match the actual horizontal structure of the U.S. beef packing sector and conduct counter-factual simulations. With Cournot competition among heterogeneous packing plants, the model determines how industry output and producer and consumer welfare vary with the odds of exogenous plant shutdowns under different horizontal structures. We find that increasing odds of shutdown results in a widening of the farm-to-retail price spread even as packer profits fall, regardless of the structure. Results indicate that the extent to which a more diffuse packing sector performs better in ensuring a given level of output, and thus food security, depends on the exogenous risk of shutdown and the level of output desired; no horizontal structure dominates. These results illustrate the consequences of policies and industry efforts aimed at increasing the resilience of the food supply chain and highlight that there are no easy solutions to improving the short-run resilience by changing the horizontal concentration of meat packing.
    JEL: L11 Q11 Q19
    Date: 2021–07
  11. By: Yizhou Jin; Shoshana Vasserman
    Abstract: New technologies have enabled firms to elicit granular behavioral data from consumers in exchange for lower prices and better experiences. This data can mitigate asymmetric information and moral hazard, but it may also increase firms’ market power if kept proprietary. We study a voluntary monitoring program by a major U.S. auto insurer, in which drivers accept short-term tracking in exchange for potential discounts on future premiums. Using a proprietary dataset matched with competitor price menus, we document that safer drivers self-select into monitoring, and those who opt in become yet 30% safer while monitored. Using an equilibrium model of consumer choice and firm pricing for insurance and monitoring, we find that the monitoring program generates large profit and welfare gains. However, large demand frictions hurt monitoring adoption, forcing the firm to offer large discounts to induce opt-in while preventing the unmonitored pool from unraveling given the competitive environment. A counterfactual policy requiring the firm to make monitoring data public would thus further reduce the firm’s incentive to elicit monitoring data, leading to less monitoring and lower consumer welfare in equilibrium.
    JEL: L0
    Date: 2021–07

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