nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒01‒10
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Single monopoly profits, vertical mergers, and downstream entry deterrence By Hunold, Matthias; Schad, Jannika
  2. Optimal Price Targeting By Adam N. Smith; Stephan Seiler; Ishant Aggarwal
  3. Learning by litigating: An application to antitrust commitments By Andreea Cosnita-Langlais; Jean-Philippe Tropeano
  4. Collusive compensation schemes aided by algorithms By Martin, Simon; Schmal, W. Benedikt
  5. Hybrid Marketplaces with Free Entry of Sellers By Federico Etro
  6. Platform Competition with Free Entry of Sellers By Federico Etro
  7. Evaluating the US pharmaceutical patent policy By Izhak, Olena; Saxell, Tanja; Takalo, Tuomas
  8. Multi-plant Coordination in the US Beef Packing Industry By Christopher C. Pudenz; Lee L. Schulz

  1. By: Hunold, Matthias; Schad, Jannika
    Abstract: We review the Chicago school's single monopoly profit theory whereby an upstream monopolist cannot increase its profits through vertical integration as it has sufficient market power anyways. In our model the dominant supplier has full bargaining power and uses observable two-part tariffs. We show that, by vertically integrating with a downstream incumbent, the supplier can profitably commit to pricing more aggressively if a downstream entrant refuses its supply contract. This can deter welfare-enhancing entry. The anti-competitive effects arise from the seemingly pro-competitive elimination of double marginalization. We relate our model to hybrid platforms and, in particular, Apple's App store.
    Keywords: double marginalization,entry deterrence,exclusive dealing,foreclosure,verticalmerger
    JEL: L22 L40 L42
    Date: 2021
  2. By: Adam N. Smith; Stephan Seiler; Ishant Aggarwal
    Abstract: We examine the profitability of personalized pricing policies that are derived using different specifications of demand in a typical retail setting with consumer-level panel data. We generate pricing policies from a variety of models, including Bayesian hierarchical choice models, regularized regressions, and classification trees using different sets of data inputs. To compare pricing policies, we employ an inverse probability weighted estimator of profits that explicitly takes into account non-random price variation and the panel nature of the data. We find that the performance of machine learning models is highly varied, ranging from a 21% loss to a 17% gain relative to a blanket couponing strategy, and a standard Bayesian hierarchical logit model achieves a 17.5% gain. Across all models purchase histories lead to large improvements in profits, but demographic information only has a small impact. We show that out-of-sample hit probabilities, a standard measure of model performance, are uncorrelated with our profit estimator and provide poor guidance towards model selection.
    Keywords: targeting, personalization, heterogeneity, choice models, machine learning
    JEL: C11 C33 C45 C52 D12 L11 L81
    Date: 2021
  3. By: Andreea Cosnita-Langlais; Jean-Philippe Tropeano
    Abstract: This paper examines the impact of commitment decisions on the efficiency of antitrust enforcement. We discuss the optimal use of commitments considering past rulings as a source of knowledge to better assess future similar antitrust cases. Our framework combines two key effects: the deterrence of the anticompetitive behavior by the different enforcement regimes, and the dynamic perspective through litigation as a source of learning. We show that if the level of penalty is high enough, the antitrust authorities undervalue the dynamic informational benefit of litigation and tend to over-use commitments.
    Keywords: antitrust, commitments, deterrence, legal learning
    JEL: L41 K21 D82
    Date: 2021
  4. By: Martin, Simon; Schmal, W. Benedikt
    Abstract: Sophisticated collusive compensation schemes such as assigning future market shares or direct transfers are frequently observed in detected cartels. We show formally why these schemes are useful for dampening deviation incentives when colluding firms are temporary asymmetric. The relative attractiveness of each of these schemes is shaped by firms' ability to predict future market conditions, possibly aided by algorithms. Prices and profits are inverse u-shaped in prediction ability. Assigning future market shares is optimal when prediction ability is intermediate, and otherwise direct transfers are optimal. Competition authority's limited resources should be utilized to respond to these changing market conditions.
    Keywords: algorithmic collusion,market forecasting,prediction ability,firm asymmetry,compensation schemes
    JEL: D21 L41 L51
    Date: 2021
  5. By: Federico Etro
    Abstract: We study a hybrid marketplace such as Amazon selling its own products and setting commissions on sellers engaged in monopolistic competition with free entry. For a large class of microfoundations based on a representative agent, the introduction of products by the marketplace is neutral on consumer welfare for a given commission, but exerts an ambiguous impact through its changes: a "demand substitution mechanism" pushes for a higher commission, but an "extensive margin mechanism" pushes for a lower commission aimed at attracting new sellers and more purchases on the marketplace. With constant demand elasticities, a hybrid marketplace sets a lower (higher) commission rate and increases (decreases) consumer welfare compared to a pure marketplace if its products face a less (more) elastic demand. We extend the analysis to alternative timing, Bertrand competition between sellers, endogenous product selection by the marketplace, specific commissions and ads for product discovery.
    Keywords: Hybrid marketplaces, 3P Sellers, Commissions, Entry, Monopolistic Competition.
    JEL: L1 L4
    Date: 2021
  6. By: Federico Etro
    Abstract: We study platforms setting access prices and commissions on revenues of sellers engaged in monopolistic competition with free entry, as the app providers on the app stores of Apple and Android devices. Competition to attract buyers and sellers induces the platforms to redistribute all the revenues through lower access prices and set the optimal commission rates from the point of view of consumers, taking into account the pass-through on the prices of sellers, the elasticities of demand and surplus for their services and the elasticity of entry with respect to profitability. We discuss the role of heterogeneous sellers, substitutability between sellers's products and the introduction of platforms's products, as well as some limitations of the basic alignment of interest of platforms and consumers due to direct channels for sellers and consumer myopia.
    Keywords: Digital platforms, Third-party Sellers, Commissions, Entry.
    JEL: L1 L4
    Date: 2021
  7. By: Izhak, Olena; Saxell, Tanja; Takalo, Tuomas
    Abstract: The debate on whether COVID-19 vaccine patents are slowing down the pace of vaccination and the recovery from the crisis has brought the optimal design of pharmaceutical patent policy to the fore. In this paper we evaluate patent policy in the US pharmaceutical industry. We estimate the effect of patent length and scope on generic entry prior to the expiration of new drug patents using two quasi-experimental approaches: one based on changes in patent laws and another on the allocation of patent applications to examiners. We find that extending effective patent length increases generic entry whereas broadening protection reduces it. To assess the welfare effects of patent policy, we match these empirical results with a model of new drug development, generic entry, and patent length and scope. Optimal policy calls for shorter but broader pharmaceutical patents.
    JEL: I18 K20 L13 O34 O31
    Date: 2021–12–29
  8. By: Christopher C. Pudenz; Lee L. Schulz (Center for Agricultural and Rural Development (CARD) at Iowa State University)
    Abstract: U.S. beef packers openly began employing multi-plant coordination during the last decade. This paper adapts the Salop Circular City framework to demonstrate that beef packers effectively implementing multi-plant coordination can eliminate intra-firm forces causing correlation between downstream beef prices and upstream fed cattle prices. Taken together with market concentration, geography and transportation cost effects, alternative marketing arrangements, and cattle cycles and related beef packer capacity utilization, multi-plant coordination helps explain farm-to-wholesale beef price spreads that remain wide absent any obvious market shocks. Such beef price spread behavior has been observed in 2021, during which beef prices have been seemingly unhinged from fed cattle prices. We further demonstrate that adding a single strategically-located packing plant, owned by a different firm, can restore the correlation between beef prices and fed cattle prices. Overall, our results have implications for current policy and industry deliberations and also suggest avenues for future research.
    Date: 2021–12

This nep-ind issue is ©2022 by Kwang Soo Cheong. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.