nep-ind New Economics Papers
on Industrial Organization
Issue of 2021‒11‒01
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Chamberlin without differentiation: Soft-capacity constrained price competition with free entry By Marie-Laure Cabon-Dhersin; Nicolas Drouhin
  2. Predicting Status of Pre and Post M&A Deals Using Machine Learning and Deep Learning Techniques By Tugce Karatas; Ali Hirsa
  3. The Determinants of Competitive Advantage: Capability vs. Industry Structure By Harada, Tsutomu; Hiramine, Yoshiki
  4. Market Segmentation and Competition in Health Insurance By Michael J. Dickstein; Kate Ho; Nathaniel D. Mark
  5. Market Design By Nikhil Agarwal; Eric Budish
  6. Private Labels in Marketplaces By Radostina Shopova
  7. Preemptive Entry and Technology Diffusion: The Market for Drive-in Theaters By Ricard Gil; Jean-François Houde; Shilong Sun; Yuya Takahashi

  1. By: Marie-Laure Cabon-Dhersin (CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - IRIHS - Institut de Recherche Interdisciplinaire Homme et Société - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université); Nicolas Drouhin (CREM - Centre de recherche en économie et management - CNRS - Centre National de la Recherche Scientifique - UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes - UNICAEN - Université de Caen Normandie - NU - Normandie Université, UNICAEN UFR SEGGAT - Université de Caen Normandie - UFR de Sciences Économiques, Gestion, Géographie et Aménagement des Territoires - UNICAEN - Université de Caen Normandie - NU - Normandie Université)
    Abstract: We show that the long-term properties of price and cost in Chamberlin's (1933) monopolistic competition model can be reproduced with a soft-capacity constrained price competition oligopoly model for a homogeneous good with free entry.
    Keywords: price competition,soft-capacity constraint,free entry,U-shaped cost function,monopolistic competition,Chamberlin
    Date: 2021–10–14
  2. By: Tugce Karatas; Ali Hirsa
    Abstract: Risk arbitrage or merger arbitrage is a well-known investment strategy that speculates on the success of M&A deals. Prediction of the deal status in advance is of great importance for risk arbitrageurs. If a deal is mistakenly classified as a completed deal, then enormous cost can be incurred as a result of investing in target company shares. On the contrary, risk arbitrageurs may lose the opportunity of making profit. In this paper, we present an ML and DL based methodology for takeover success prediction problem. We initially apply various ML techniques for data preprocessing such as kNN for data imputation, PCA for lower dimensional representation of numerical variables, MCA for categorical variables, and LSTM autoencoder for sentiment scores. We experiment with different cost functions, different evaluation metrics, and oversampling techniques to address class imbalance in our dataset. We then implement feedforward neural networks to predict the success of the deal status. Our preliminary results indicate that our methodology outperforms the benchmark models such as logit and weighted logit models. We also integrate sentiment scores into our methodology using different model architectures, but our preliminary results show that the performance is not changing much compared to the simple FFNN framework. We will explore different architectures and employ a thorough hyperparameter tuning for sentiment scores as a future work.
    Date: 2021–08
  3. By: Harada, Tsutomu; Hiramine, Yoshiki
    Abstract: The purpose of this study is to investigate the effects of capability and industry structure on competitive advantage in the Japanese economy. We used one of the most comprehensive data sets for Japanese firms compiled by Teikoku Databank. While related literature primarily examined the effects of industry on competitive advantage using industry dummies, this study incorporated more sophisticated measures for industry structure. The results revealed that both capability and industry structure accounted for competitive advantage. Moreover, the opposite effects of industry structure on competitive advantage between competitive and uncompetitive firms were identified. Thus, the results indicate that capability plays a more important role in accounting for competitive advantage than industry structure.
    Keywords: competitive advantage, capability, industry structure
    Date: 2021–10
  4. By: Michael J. Dickstein; Kate Ho; Nathaniel D. Mark
    Abstract: In the United States, households obtain health insurance through distinct market segments. We explore the economics of this segmentation by comparing coverage provided through small employers versus the individual marketplace. Using data from Oregon, we find households with group coverage spend 26% less on covered health care than households with individual coverage yet face higher markups. We develop a model of plan choice and health spending to estimate preferences in both markets and evaluate integration policies. In our setting, pooling can both mitigate adverse selection in the individual market and benefit small group households without raising taxpayer costs.
    JEL: I11 I13 I18 L0
    Date: 2021–10
  5. By: Nikhil Agarwal; Eric Budish
    Abstract: This Handbook chapter seeks to introduce students and researchers of industrial organization (IO) to the field of market design. We emphasize two important points of connection between the IO and market design fields: a focus on market failures—both understanding sources of market failure and analyzing how to fix them—and an appreciation of institutional detail. Section II reviews theory, focusing on introducing the theory of matching and assignment mechanisms to a broad audience. It introduces a novel “taxonomy” of market design problems, covers the key mechanisms and their properties, and emphasizes several points of connection to traditional economic theory involving prices and competitive equilibrium. Section III reviews structural empirical methods that build on this theory. We describe how to estimate a workhorse random utility model under various data environments, ranging from data on reported preference data such as rank-order lists to data only on observed matches. These methods enable a quantification of trade-offs in designing markets and the effects of new market designs. Section IV discusses a wide variety of applications. We organize this discussion into three broad aims of market design research: (i) diagnosing market failures; (ii) evaluating and comparing various market designs; (iii) proposing new, improved designs. A point of emphasis is that theoretical and empirical analysis have been highly complementary in this research.
    JEL: C78 D47 L00
    Date: 2021–10
  6. By: Radostina Shopova
    Abstract: This paper investigates the implications of vertical integration with private labels in the marketplace model opposed to the classic wholesale model. Differently from classic retailers, on a marketplace firms set end-consumer prices and the intermediary collects fees. When introducing a lower-quality version of a product, a marketplace owner does not have an incentive to increase the cost of the outside seller and foreclose him. In order to protect revenues from the seller channel, a marketplace owner overprices his product, compared to a retailer or stand-alone monopolist, and decreases the fee. I demonstrate that offering a lower quality is indeed optimal for both marketplace owner and classic retailer, with the former differentiating more from the seller's offering. This harms the seller less, but improves the consumer surplus less compared to a retailer.
    JEL: D21 D40 L12 L22 L42 L81
    Date: 2021–10
  7. By: Ricard Gil; Jean-François Houde; Shilong Sun; Yuya Takahashi
    Abstract: This paper studies the role and incidence of entry preemption strategic motives on the dynamics of new industries, while providing an empirical test for entry preemption, and quantifying its impact on market structure. The empirical context is the evolution of the U.S. drive-in theater market between 1945 and 1957. We exploit a robust prediction of dynamic entry games to test for preemption incentives: the deterrence effect of entering early is only relevant for firms in markets of intermediate size. Potential entrants in small and large markets face little uncertainty about the actual number of firms that will eventually enter. This leads to a non-monotonic relationship between market size and the probability of observing an early entrant. We find robust empirical support for this prediction using a large cross-section of markets. We then estimate the parameters of a dynamic entry game that matches the reduced-form prediction and quantify the strength of the preemption incentive. Our counterfactual analysis shows that strategic motives can increase the number of early entrants by as much as 50 percent in mid-size markets without affecting the number of firms in the long run. By causing firms to enter the market too early, we show that strategic entry preemption leads on average to a 5% increase in entry costs and a 1% decrease in firms' expected value (relative to an environment without strategic investments).
    JEL: L1 L12 L82
    Date: 2021–10

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