nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒10‒11
nine papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Consumer Loss Aversion and Scale-Dependent Psychological Switching Costs By Heiko Karle; Heiner Schumacher; Rune Vølund
  2. Consumer naivete and competitive add-on pricing on platforms By Ghosh, Meenakshi
  3. Dynamics of Large Multinationals By Elhanan Helpman; Benjamin C. Niswonger
  4. Platform Competition and Interoperability: The Net Fee Model By Mehmet Ekmekci; Alexander White; Lingxuan Wu
  5. Efficient copyright filters for online hosting platforms By Alessandro De Chiara; Ester Manna; Antoni Rubí-Puig; Adrian Segura-Moreiras
  6. On the social welfare effects of runner-up mergers in concentrated markets By Jovanovic, Dragan; Wey, Christian; Zhang, Mengxi
  7. The ambiguous competitive effects of passive partial forward integration By Papadopoulos, Konstantinos G.; Petrakis, Emmanuel; Skartados, Panagiotis
  8. “For the public benefit”: who should control our data? By Sarit Markovich; Yaron Yehezkel
  9. The Canadian Pacific -- Kansas City Southern Railway Merger and the Optimal Railroad Network By Yanyou Chen

  1. By: Heiko Karle; Heiner Schumacher; Rune Vølund
    Abstract: We consider the Salop (1979) model of product differentiation and assume that consumers are uncertain about the qualities and prices of firms’ products. They can inspect all products at zero cost. A share of consumers is expectation-based loss averse. For these consumers, a purchase plan, which involves buying products of varying quality and price with positive probability, creates disutility from gain-loss sensations. Even at modest degrees of loss aversion they may refrain from inspecting all products and choose an individual default that is strictly dominated in terms of surplus. Firms’ strategic behavior exacerbates the scope for this effect. The model generates “scale-dependent psychological switching costs” that increase in the value of the transaction. We find empirical evidence for the predicted association between switching behavior and loss aversion in new survey data.
    Keywords: switching costs, competition, loss aversion
    JEL: D21 D83 L41
    Date: 2021
  2. By: Ghosh, Meenakshi
    Abstract: We model a situation where two sellers trade vertically and horizontally differentiated goods on a platform for which they are charged a commission fee. Sellers' costs are asymmetric due to differences in the fees charged by the platform and in their costs of production. Consumers purchase either a base good, or a bundle comprising of the base good and an add-on, from one of the sellers on the platform. Consumers differ in their brand preferences, valuations of quality and in their levels of sophistication. More specifically, we assume that there is a fraction of consumers who are naive, and do not observe or consider add-on prices - possibly because they do not foresee their demand for an add-on - until after they have committed to buying the base good from a seller. We examine how the interplay of these forces shapes consumer behavior, sellers' pricing strategies and cost pass-through, and platform fees and revenues.
    Keywords: add-on pricing, consumer naivete, cost asymmetry, horizontal differentiation, platform fees, cost pass-through
    JEL: D43 L11 L14 L15
    Date: 2021–10–01
  3. By: Elhanan Helpman; Benjamin C. Niswonger
    Abstract: We develop a model of large multinational enterprises, each one producing a continuum of products. These outsized firms compete as oligopolists in a domestic and foreign market, facing competitive pressure from single-product firms that engage in monopolistic competition. The multinational enterprises invest in R&D in order to expand the span of their products and in foreign direct investment (FDI) in order to expand the range of products manufactured by their foreign affiliates. We study the dynamic evolution of these markets and characterize transition dynamics and steady states. In addition to the evolution of product spans, we characterize the evolution of prices, markups, market shares, and exports relative to subsidiary sales. Furthermore, we study comparative dynamics that result from changes in trade costs, R&D costs, the cost of FDI and productivity changes of the multinational firms.
    JEL: D43 F12 F23 L11 L13 L25
    Date: 2021–10
  4. By: Mehmet Ekmekci (Department of Economics, Boston College); Alexander White (School of Economics and Management, Tsinghua University); Lingxuan Wu (Department of Economics, Harvard University)
    Abstract: We study the effects of competition and interoperabilty in platform markets. To do so, we adopt an approach of competition in net fees, which is well-suited to situations where users pay additional charges, after joining, for on-platform interactions. Compared to other approaches, net fees expand the tractable scope to allow platform asymmetry and variable total demand. Regarding competition, our findings raise concerns, including possible dominance-inducing entry, which symmetric models overlook. Our results are more optimistic towards the helpfulness of policies that promote interoperability among platforms, but they urge caution when total demand variability is a significant factor.
    Keywords: Platform Competition, Big Tech, Net Fees, Interoperability
    JEL: D21 D43 D85 L13
    Date: 2021–09
  5. By: Alessandro De Chiara (Department of Economics, Universitat de Barcelona and Barcelona Economic Analysis Team (BEAT), Avinguda Diagonal 696, 08034, Barcelona, Spain.); Ester Manna (Professora Lectora Serra Húnter, Department of Economics, Universitat de Barcelona and Barcelona Economic Analysis Team (BEAT), Avinguda Diagonal 696, 08034, Barcelona, Spain.); Antoni Rubí-Puig (Department of Law, Universitat Pompeu Fabra, Ramon Trias Fargas, 25-27, 08005 Barcelona, Spain.); Adrian Segura-Moreiras (Department of Law, Universitat Pompeu Fabra, Ramon Trias Fargas, 25-27, 08005 Barcelona, Spain.)
    Abstract: In this paper, we build a theoretical model in which an online hosting platform can develop a copyright filter to screen content that contributors wish to upload. The technology is imprecise, since non-infringing material may be incorrectly filtered out. Once the content is hosted on the platform, a right-holder may send a take-down notice if its own automated notice system, also imprecise, finds it to be copyright infringing. We investigate the efficient design of regulation and liability and we find that (i) the right-holder should be given incentives to evaluate fair use when submitting a notice and (ii) the platform should be fined if the take-down to notice ratio is above some predetermined threshold. Such dual system would achieve efficient copyright enforcement without excluding fair-use material.
    Keywords: Article 17; Copyright filters; Infringing material; Fair use; Liability rules; Online hosting platforms; Notice and take-down system.
    JEL: K2 L51
    Date: 2021–10
  6. By: Jovanovic, Dragan; Wey, Christian; Zhang, Mengxi
    Abstract: This paper argues that it cannot be taken for granted that any merger that raises consumer surplus also increases social welfare. We assume a Cournot model with homogeneous goods, linear demand, and constant marginal costs, to show that a merger can raise consumer surplus while harming social welfare. Within this framework, we show that such an outcome depends on two conditions: the merger is between small firms (i.e., relatively inefficient firms) and it reduces concentration; that is, a constellation which can be characterized as a "runner-up" merger.
    Keywords: Runner-up Mergers,Efficiencies,Oligopoly,welfare
    JEL: K21 L13 L41
    Date: 2021
  7. By: Papadopoulos, Konstantinos G.; Petrakis, Emmanuel; Skartados, Panagiotis
    Abstract: In a two-tier industry with an upstream monopolist supplier and downstream competition with differentiated goods, we show that passive partial forward integration (PPFI) has ambiguous effects on competition and welfare. When vertical trading is conducted via linear tariffs, PPFI is pro-competitive and welfare-increasing. While under two-part tariffs, it is anti-competitive and welfare-decreasing. These hold irrespectively of the degree of product differentiation, the observability or secrecy of contract terms, the mode of downstream competition, and the distribution of bargaining power between firms.
    Keywords: Partial Passive Forward Integration; Two-Part Tariffs; Linear Tariffs; Competition; Welfare
    JEL: D43 L13
    Date: 2021–10–01
  8. By: Sarit Markovich (Kellogg School of Management, Northwestern University, Evanston, IL, USA); Yaron Yehezkel (Coller School of Management, Tel-Aviv University, Ramat-Aviv, Israel)
    Abstract: We consider a platform that collects data from users. Data has commercial benefit to the platform, personal benefit to the user, and public benefit to other users. We ask whether the platform, or users, should have the right to decide which data the platform commercializes. We find that when users differ in their disutility from the commercialization of their data and the public benefit of data is high (low), it is welfare enhancing to let the platform (users) control the data. In contrast, when heterogeneity is in the disutility from the commercialization of different data items, it is welfare enhancing to let users (the platform) control the data when the public benefit of data is high (low). Furthermore, we find that allowing the platform to compensate users for their data is not always welfare enhancing and competition does not necessarily result in the efficient outcome.
    Keywords: data regulation, network externalities, platform competition
    JEL: L1
    Date: 2021–09
  9. By: Yanyou Chen (University of Toronto, Department of Economics, Max Gluskin House, 150 St. George Street, 310, Toronto, ON, Canada, M5S 2E9)
    Abstract: This project evaluates the optimal transport network in North America by first analyzing the proposed $25 billion merger between the Canadian Pacific Railway and the Kansas City Southern Railway. Then this project studies different sequences of mergers and find the optimal path of mergers to form the transport network in North America. Current simulation results suggest that average over all origin-destination markets, the proposed merger between Canadian Pacific Railway and the Kansas City Southern Railway will decrease the average shipment cost by 6.27%. Among different local markets, regions near or utilize the route from Des Moines, IA -- Kansas City, MO -- Joplin, MO will have the largest efficiency gain from the proposed merger.
    Keywords: Merger; Transport Network; Railroad
    JEL: L13 L43 L92
    Date: 2021–09

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