nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒09‒20
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Dynamic Games in Empirical Industrial Organization By Victor Aguirregabiria; Allan Collard-Wexler; Stephen P. Ryan
  2. Strategic Inventories in a Supply Chain with Downstream Cournot Duopoly By Xiaowei Hu; Jaejin Jang; Nabeel Hamoud; Amirsaman Bajgiran
  3. Global Value Chains and Unequal Exchange- Market Power and Monopoly Power By Deepankar Basu; Ramaa Vasudevan
  4. Competition and Mergers with Strategic Data Intermediaries By David Bounie; Antoine Dubus; Patrick Waelbroeck
  5. Contracts as a Barrier to Entry: Impact of Buyer's Asymmetric Information and Bargaining Power By David Martimort; Jérôme Pouyet; Thomas Trégouët
  6. Collusion among autonomous pricing algorithms utilizing function approximation methods By Jeschonneck, Malte
  7. Asymmetric Information and Differentiated Durable Goods Monopoly: Intra-period versus intertemporal price discrimination By Didier Laussel; Ngo Van Long; Joana Resende
  8. On the pro-competitive effects of passive partial backward ownership By Alipranti, Maria; Petrakis, Emmanuel; Skartados, Panagiotis
  9. Churning and profitability in the U.S. Corporate Sector By Leila Davis; Joao de Souza
  10. The Competitive Effects of Vertical Integration in Platform Markets By Jérôme Pouyet; Thomas Trégouët

  1. By: Victor Aguirregabiria; Allan Collard-Wexler; Stephen P. Ryan
    Abstract: This survey is organized around three main topics: models, econometrics, and empirical applications. Section 2 presents the theoretical framework, introduces the concept of Markov Perfect Nash Equilibrium, discusses existence and multiplicity, and describes the representation of this equilibrium in terms of conditional choice probabilities. We also discuss extensions of the basic framework, including models in continuous time, the concepts of oblivious equilibrium and experience-based equilibrium, and dynamic games where firms have non-equilibrium beliefs. In section 3, we first provide an overview of the types of data used in this literature, before turning to a discussion of identification issues and results, and estimation methods. We review different methods to deal with multiple equilibria and large state spaces. We also describe recent developments for estimating games in continuous time and incorporating serially correlated unobservables, and discuss the use of machine learning methods to solving and estimating dynamic games. Section 4 discusses empirical applications of dynamic games in IO. We start describing the first empirical applications in this literature during the early 2000s. Then, we review recent applications dealing with innovation, antitrust and mergers, dynamic pricing, regulation, product repositioning, advertising, uncertainty and investment, airline network competition, dynamic matching, and natural resources. We conclude with our view of the progress made in this literature and the remaining challenges.
    Keywords: Dynamic games; Industrial organization; Market competition; Structural models; Estimation; Identification; Counterfactuals
    JEL: C57 C63 C73 L11 L13
    Date: 2021–09–03
  2. By: Xiaowei Hu; Jaejin Jang; Nabeel Hamoud; Amirsaman Bajgiran
    Abstract: The inventories carried in a supply chain as a strategic tool to influence the competing firms are considered to be strategic inventories (SI). We present a two-period game-theoretic supply chain model, in which a singular manufacturer supplies products to a pair of identical Cournot duopolistic retailers. We show that the SI carried by the retailers under dynamic contract is Pareto-dominating for the manufacturer, retailers, consumers, the channel, and the society as well. We also find that retailer's SI, however, can be eliminated when the manufacturer commits wholesale contract or inventory holding cost is too high. In comparing the cases with and without downstream competition, we also show that the downstream Cournot duopoly undermines the profits for the retailers, but benefits all others.
    Date: 2021–09
  3. By: Deepankar Basu (Department of Economics, University of Massachusetts Amherst); Ramaa Vasudevan (Department of Economics, Colorado State University.)
    Abstract: We revisit the hypotheses of unequal exchange and deteriorating terms of trade in the specific context of import-intensive, export- led strategies of developing countries which rely on integration into GVCs for access to markets in developed countries using a stylized two-country two-commodity Classical- Marxian trade model. Two sources of asymmetry can be distinguished: market power arising from the competition between suppliers that depresses the prices at which the final good is supplied; and monopoly power arising from the lead firms control and ownership of intangible assets including brand and design. The model explores some implications of these two sources of asymmetry.
    Keywords: Unequal Exchange, Global Value Chains, Classical Trade Model
    JEL: F02 F23 O19
    Date: 2021
  4. By: David Bounie (IP Paris - Institut Polytechnique de Paris); Antoine Dubus (ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]); Patrick Waelbroeck (Télécom Paris)
    Abstract: We analyze competition between data intermediaries collecting information on consumers, which they sell to firms for price discrimination purposes. We show that competition between data intermediaries benefits consumers by increasing competition between firms, and by reducing the amount of consumer data collected. We argue that merger policy guidelines should investigate the effect of the data strategies of large intermediaries on competition and consumer surplus in related markets.
    Date: 2021–09–07
  5. By: David Martimort (PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, EHESS - École des hautes études en sciences sociales); Jérôme Pouyet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, ESSEC Business School - Essec Business School); Thomas Trégouët (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: An incumbent seller contracts with a buyer and faces the threat of entry. The contract stipulates a price and a penalty for breach if the buyer later switches to the entrant. Sellers are heterogenous in terms of the gross surplus they provide to the buyer. The buyer is privately informed on her valuation for the incumbent's service. Asymmetric information makes the incumbent favor entry as it helps screening buyers. When the entrant has some bargaining power vis-à-vis the buyer and keeps a share of the gains from entry, the incumbent instead wants to reduce entry. The compounding effect of these two forces may lead to either excessive entry or foreclosure, and possibly to a fixed rebate for exclusivity given to all buyers.
    Keywords: foreclosure,excessive entry,exclusionary behavior,incomplete information
    Date: 2021–08–30
  6. By: Jeschonneck, Malte
    Abstract: The increased prevalence of pricing algorithms incited an ongoing debate about new forms of collusion. The concern is that intelligent algorithms may be able to forge collusive schemes without being explicitly instructed to do so. I attempt to examine the ability of reinforcement learning algorithms to maintain collusive prices in a simulated oligopoly of price competition. To my knowledge, this study is the first to use a reinforcement learning system with linear function approximation and eligibility traces in an economic environment. I show that the deployed agents sustain supra-competitive prices, but tend to be exploitable by deviating agents in the short-term. The price level upon convergence crucially hinges on the utilized method to estimate the qualities of actions. These findings are robust to variations of parameters that control the learning process and the environment.
    Date: 2021
  7. By: Didier Laussel; Ngo Van Long; Joana Resende
    Abstract: A durable good monopolist faces a continuum of heterogeneous customers who make purchase decisions by comparing present and expected price-quality offers. The monopolist designs a sequence of price-quality menus to segment the market. We consider the Markov Perfect Equilibrium (MPE) of a game where the monopolist is unable to commit to future price-quality menus. We obtain the novel results that (a) under certain conditions, the monopolist covers the whole market in the first period (even when a static Mussa-Rosen monopolist would not cover the whole market), because this is a strategic means to convince customers that lower prices would not be offered in future periods, and that (b) this can happen only under the stage-wise Stackelberg leadership assumption (whereby consumers base their expectations on the value of the state variable at the end of the period). Conditions under which MPE necessarily involve sequentially trading are also derived. Un monopoleur de biens durables fait face à un continuum de clients hétérogènes qui prennent des décisions d'achat en comparant les offres qualité-prix actuelles et attendues. Le monopole conçoit une séquence de menus qualité-prix pour segmenter le marché. Nous considérons l'équilibre parfait de Markov (MPE) d'un jeu où le monopoleur est incapable de s'engager sur les futurs menus de qualité-prix. Nous prouvons que (a) dans certaines conditions, le monopoleur couvre l'ensemble du marché dans la première période (même lorsqu'un monopoleur statique de Mussa-Rosen ne couvrirait pas l'ensemble du marché), car c'est un moyen stratégique de convaincre les clients que des prix plus bas ne seraient pas proposés dans les périodes futures, et que (b) cela ne peut se produire que sous l'hypothèse de leadership par étapes de Stackelberg (dans laquelle les consommateurs fondent leurs attentes sur la valeur de la variable d'état à la fin de la période). Les conditions dans lesquelles le MPE implique nécessairement des échanges séquentiels sont également dérivées.
    Keywords: Intertemporal price discrimination,Durable goods monopoly,Product quality,Markov perfect equilibrium, Discrimination tarifaire intertemporelle,Monopoleur des biens durables,La qualité des produits,équilibre parfait de Markov
    JEL: C73 D42 L12 L15
    Date: 2021–09–07
  8. By: Alipranti, Maria; Petrakis, Emmanuel; Skartados, Panagiotis
    Abstract: We consider a vertically related market in which an upstream monopolist supplier trades, via interim observable two-part tariff contracts, with two differentiated goods' downstream Cournot competitors. We show that passive partial backward ownership (PPBO) may be pro-competitive and welfare enhancing. PPBO exacerbates the upstream's commitment problem and yields lower wholesale prices, and higher industry output, consumers surplus, and welfare than in the absence of PPBO.
    Keywords: Passive Partial Backward Ownership; Vertical Relations; Two-Part Tariffs; Interim Observable Contracts
    JEL: D43 L13 L14
    Date: 2021–09–14
  9. By: Leila Davis (Department of Economics, University of Massachusetts Boston); Joao de Souza (Department of Economics, University of Massachusetts Boston)
    Abstract: This paper establishes that entry and exit regulate the top half of the profitability distribution in the post-1970 U.S. economy. We, first, document stability in the distribution of total profits earned on tangible, intangible, and financial capital. Whereas a narrower measure of returns on tangible capital, instead, suggests rising dispersion, it fails to capture post-1970 growth in intangible and financial assets. Second, we use quantile decompositions to show that churning – specifically, exit for cause – regulates median and top-end profitability. Thus, the process by which competition drives out unprofitable firms acts to stabilize profit rates in the U.S. economy.
    Keywords: Profit rates, competition, entry and exit dynamics
    JEL: B5 L1
    Date: 2021
  10. By: Jérôme Pouyet (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université, ESSEC Business School - Essec Business School); Thomas Trégouët (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)
    Abstract: We analyze vertical integration between platforms providing operating systems to manufacturers of devices in presence of indirect network effects between buyers of devices and developers of applications. Vertical integration creates market power over non-integrated manufacturers and application developers. That market power provides the merged entity with the ability to coordinate pricing decisions across both sides of the market, which allows to better internalize network effects. Vertical integration does not systematically lead to foreclosure and can benefit all parties, even in the absence of efficiency gains. Its competitive impact depends on the strength and the structure of indirect network effects.
    Keywords: vertical integration,platform markets,network effects,foreclosure
    Date: 2021–08–30

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