nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒09‒13
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Airbnb and hotels during COVID-19: different strategies to survive By Gyódi, Kristóf
  2. COVID-19, Beef Price Spreads, and Market Power By Dhoubhadel, Sunil P.; Azzam, Azzeddine M.
  3. Cournot-Bertrand equilibria under two-part tariff contract By Basak, Debasmita
  4. The Missing Middle in Product Price Distribution By Chang, Pao-Li; Yi, Xin; Yoon, Haeyeon
  5. Assessing the Market Power of Digital Platforms By Prado, Tiago S.
  6. Quality Differentiation and Optimal Pricing Strategy in Multi-Sided Markets By Soo Jin Kim; Pallavi Pal
  7. Bork's Hoax: Antitrust and the Internet Market By Alleman, James
  8. Kill Zones? Effects of Big Tech Start-up Acquisitions on Innovation By Prado, Tiago S.
  9. Free entry under an output-cap constraint By Hiroaki Ino; Toshihiro Matsumura
  10. Comparative analysis of existing multi-sided digital platform initiatives By Verfaillie, Bryan; Van der Wee, Marlies; Verbrugge, Sofie
  11. Markups and Fixed Costs in Generic and Off-Patent Pharmaceutical Markets By Sharat Ganapati; Rebecca McKibbin

  1. By: Gyódi, Kristóf
    Abstract: Purpose: The purpose of this paper is to examine the impact of the COVID-19 pandemic on the traditional hotel industry and Airbnb in nine major European cities. The author examines differences between the two business models and analyses various strategies of Airbnb hosts to cope with the crisis. Design/methodology/approach: A detailed empirical analysis is presented based on data from STR and Inside Airbnb for the period January 2018–September 2020. To assess the impact of the pandemic on the hotel industry, year-to-year changes in various performance metrics are presented. The author also investigates the impact of the pandemic on Airbnb prices with panel data regression analysis. Using text-mining methods, signs for new use-cases are explored, including renting flats for home-office or quarantine. Findings: The results support that Airbnb supply is more flexible. While hotel supply quickly returned to a level close to 2019, the average number of Airbnb listings was lower by more than 15%. Furthermore, the price analysis showed that Airbnb rates decreased more moderately than hotel prices. These findings suggest that a significant share of hosts pivoted from short-term accommodation provision and used their property differently, e.g. rented on a long-term basis. The analysis of listing characteristics revealed that the role of longer stays increased; however, the results do not support a shift towards advertising listings for home-office or quarantine purposes. Originality/value: This paper presents the impact of the pandemic on the hospitality sector in a wide sample of European cities, explores the adjustment of hotels and Airbnb and provides new evidence on the differences between the business models.
    Keywords: Tourism, Airbnb, Text-mining, COVID
    JEL: L8
    Date: 2021–08–12
  2. By: Dhoubhadel, Sunil P.; Azzam, Azzeddine M.
    Keywords: Agribusiness, Marketing, Agricultural and Food Policy
    Date: 2021–08
  3. By: Basak, Debasmita
    Abstract: We consider a vertically related market where one quantity setting and another price setting downstream firm negotiate the terms of a two-part tariff contract with an upstream input supplier. In contrast to the traditional belief, we show that when bargaining is decentralised, the price setting firm produces a higher output and earns a higher profit than the quantity setting firm. And, when bargaining is centralised, both firms produce the same output whereas the profit is higher under the price setting firm than the quantity setting firm.
    Keywords: Bargaining; Bertrand; Cournot; Two-part tariffs; Vertical pricing; Welfare
    JEL: L13 L2 L22
    Date: 2021–09–04
  4. By: Chang, Pao-Li (School of Economics, Singapore Management University); Yi, Xin (School of Economics, Singapore Management University); Yoon, Haeyeon (School of Economics, University of Bristol)
    Abstract: The IO literature has typically studied the supply-side factors that determine the price structure of products/services competing in a market. This paper pro-poses that the demand-side demographics could play an important role in shaping the product price structure. In particular, we document a “missing middle” phe-nomenon in both the income and the product price distributions in the U.S., based on the IPUMS ACS dataset (2005–2017) and the Nielsen Retail Scanner Data (2006–2017), for a large set of goods sold in the U.S. at the national, state, or commuting-zone level. We show that the lagged population share of the middle-income class has a positive impact on the market share (in quantity) of middle-priced varieties (and respectively so for the low/high income and price group), after controlling for product category and state (or commuting zone) fixed effects. The impacts are further stronger in commuting zones of higher population density. We then evaluate the cost-of-living implications of the observed missing-middle phe-nomenon, taking into account product entry, exit, and pro-competitive price effects of continuing products, in a framework that allows for non-homothetic preferences across income groups with respective to the price groups. We find that ignoring the non-homothetic demand structure and the missing-middle phenomenon under-states the rise in the cost of living for the period 2006–2017. The downward bias is sizable (as large as 2 percentage points out of 11–13% increase in the cost of living for the period), and particularly noticeable for the middle-income households.
    Keywords: missing middle; price and income distribution; demand demographics; cost of living; entry/exit
    JEL: D12 D31 D61 J11 L11
    Date: 2021–06–07
  5. By: Prado, Tiago S.
    Abstract: In this conceptual paper, I propose a framework for measuring the market power of digital platforms. The rise of big technology companies that act both as intermediary platforms and providers of services and goods in several markets has heightened concerns about potential economic harms brought by the concentrated structure of the digital economy. However, the operationalization of market power in the platform economy and the procedures to define which digital platforms and markets should be targeted by pro-competitive remedies, either under a competition policy framework or under a regulatory regime, remain highly contested. I demonstrate that large technology platforms can leverage their market power across markets in the digital economy to make their end users unlikely to switch to smaller competitors, even when they offer better services. Based on this analysis, I argue that market-specific approaches, such as the commonly used Significant Market Power (SMP) framework, would have limited impact in promoting competition in digital markets. I then propose a new set of tools aimed to identify the market power of digital platforms in two-sided markets and suggest some policy alternatives to harness the potential of pro-competitive remedies in the digital economy.
    Keywords: digital platform,digital economy,market power,competition policy,regulation
    JEL: L12 L13 L41 L44 L51
    Date: 2021
  6. By: Soo Jin Kim; Pallavi Pal
    Abstract: This paper analyzes the generalized quality differentiation model in multi-sided markets with positive externalities, which leads to new insights into the optimal pricing structure of the firm. We find that quality differentiation for users on one side affects not only the side involving differentiation but also the other side due to cross-side network externalities, thereby affecting the pricing structure of multi-sided firms. In addition, quality differentiation affects the strategic relationships among all the choice variables for the platform, enabling the platform to strategically use quality differentiation to raise its profits.
    Keywords: multi-sided market, quality differentiation, platform business strategies
    JEL: D43 L11 L42
    Date: 2021
  7. By: Alleman, James
    Abstract: Robert Bork's Antitrust Paradox (1978) has been justification for lack of antitrust behavior for over four decades. His test essentially asks if consumers are harmed by the pricing practices of the firm in the market in which they purchase the good or service. Even if these firms are monopoly or oligopolies in their fields with huge economic rents, if they pass this test, no action is taken against them. "Bigness is not bad." This narrow view, inter alia, ignores two- and multisided markets (MSM) where the appearance of "no harm" is addressed to only one side of the market. The correct view is to examine all the markets impacting potential harm to consumers. It illustrates the harm which is "free" to the users, but advertisers pay dearly for the ability to micro-focus on potential consumers of their products. Facebook and Google are used as examples. This advertising cost is added into the sales price of the product, resulting in consumers being harmed by the embedded advertising costs in the products or services purchased. We argue here, using Bork's own criterion - except to expand it to the other side of the market and eliminating producer's surplus - that much needed antitrust action has been ignored by this narrow criterion. This analysis indicates that antitrust action is long overdue after considering two-sided markets. In addition, we argue that his "consumer welfare" criterion is misleading and liable to deceive, thus the hoax. The Bork critique is a hoax in two ways: Bork's analysis does not include the other side of the market. The cost of advertising has to be included in the price of the products being sold in order for the firm to remain in business. So, clearly, the price of goods and services is increased by the cost of advertising, thus reducing consumers' surplus. The second flaw is Bork's definition of "consumer welfare" - it includes the economic rents of the firm - all at a cost to consumers. Enhancing the wealth (profits) of corporations in the name of efficiency was not the purpose of the antitrust laws. We address the Bork Paradox on its own terms by examining the second side of the market which harms consumers indirectly by increasing the price of the products and services they purchase. Using the corrected Bork metric - both sides of the market and no producer's surplus - the estimated loss of consumers' welfare in $60.4 and $43.7 billion respectively from Google and Facebook, respectively.
    Keywords: Advertising,Antitrust,Bork,competition,consumers' surplus,digital markets,Information and Communications Technology (ICT),internet,platform economics,monopoly,regulation,two-sided/multisided markets
    JEL: D42 D43 K21 L12 L13 L22 L51 L96
    Date: 2021
  8. By: Prado, Tiago S.
    Abstract: This paper investigates short-term effects of big tech start-up acquisitions on innovation empirically. Innovation research has found a strong positive, causal relationship between VC investment and innovation. Using this insight, we can explore the repercussions of big tech start-up acquisitions on innovation by examining their effects on venture capital (VC) activity. We analyze a very large set of observations of more than 32,000 venture capital deals in more than 170 different segments of the tech industry and almost 400 tech start-up acquisitions made worldwide between 2010 and 2020 by Google, Facebook, Amazon, Apple, and Microsoft. Our results suggest a positive, causal impact of big tech start-up acquisitions on venture capital activity, challenging claims about the creation of "kill zones" for start-ups after acquisitions are made by the big techs. For example, after controlling for other factors that may impact VC activity, like initial public offerings (IPOs) and other mergers and acquisitions (M&As), we found an average increase of 30.7% in the total amount of VC funding towards U.S. based start-ups of the same industry segment in the four quarters following a big tech start-up acquisition. For deals targeting European start-ups, we found an increase of 32.1% in the VC funding in in the first quarter after a big tech start-up acquisition. Finally, our findings show that such positive effects, when existent, persist for a few months only, and so do not seem to have lasting impacts on the innovation incentives in the the start-up ecossystem. Our empirical findings should inform current competition policy discussions on imposing restrictions to acquistions of start-ups by the big techs.
    Keywords: kill zone,platform,big tech,venture capital,innovation
    JEL: G11 G24 G32 G34 L41 L44
    Date: 2021
  9. By: Hiroaki Ino (School of Economics, Kwansei Gakuin University); Toshihiro Matsumura (Institute of Social Science, The University of Tokyo)
    Abstract: This study considers a peer-to-peer market with capacity-constrained suppliers. We examine a free-entry market of individual suppliers and discuss the welfare consequences of free entry. We show that the number of entries is socially optimal.
    Keywords: sharing economy, Cournot competition, excess entry theorem, private lodging businesses, capacity constraint
    JEL: D43 L13 K25
    Date: 2021–09
  10. By: Verfaillie, Bryan; Van der Wee, Marlies; Verbrugge, Sofie
    Abstract: Digital platforms are omnipresent in our society. For example, streaming movies via Netflix, interacting with friends through social media, or using Deliveroo to order your meal. Digital platforms and digital marketplaces caused a big impact on the value creation process within different application domains. Actual digital ecosystems have appeared and the value propositions of traditional players within different domains got challenged by new and more integrated offers. Within this setting, also smaller-scale initiatives try to find their position. Local initiatives such as energy management platforms to link residents with (renewable) energy suppliers, or community platforms to link neighbours and city or village initiatives, especially in "online-only" times are appearing fast. Although the number of both successful and failed cases is constantly growing, systematic understanding of the reasons behind this, is still lacking. This paper wants to add to this understanding by analysing digital platform initiatives from different points of view. The overall research question tackled in this paper is to determine critical characteristics that can impact the success of the digital, multi-sided platform business model. To achieve this, a conceptual framework that allows to analyse and compare platforms is presented. The framework is then applied on different existing platform solutions, in a broad range of application domains, to identify specific design choices and compare the different platforms. Overall, more general insights in the role of network effects, pricing strategy, and other key features that impact the risk of failure, are obtained. The analyses indicate that positive network effects are predominantly present which is important for the growth of the user base. Pricing schemes indicate that general customers do not want to spend a lot of money to use a platform. Therefore, they usually can use it for free. Advertisers play a crucial role in the revenue stream for a platform but too much ads can irritate the end user. Platforms also tend to use third parties for services which reduces the time to market and lowers the investment risk. Platforms immediately benefit from other technological advantages like scalability. Due to the low homing-costs for users, there is room for competition in each domain but of course platforms try to differentiate their offer from their competitors.
    Keywords: Digital Platforms,Multi-Sided Platforms,Network Effects,Pricing,Multi-Homing Cost
    Date: 2021
  11. By: Sharat Ganapati; Rebecca McKibbin
    Abstract: There is wide dispersion in pharmaceutical prices across countries with comparable quality standards. Under monopoly, off-patent and generic drug prices are at least four times higher in the United States than in comparable English-speaking high income countries. With five or more competitors, off-patent drug prices are similar or lower. Our analysis shows that differential US markups are largely driven by the market power of drug suppliers and not due to wholesale intermediaries or pharmacies. Furthermore, we show that the traditional mechanism of reducing market power – free entry – is limited because implied entry costs are substantially higher in the US.
    JEL: F14 I11 L44 L65
    Date: 2021–09

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