nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒02‒07
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Cars in Europe: Supply Chains and Spillovers during COVID-19 Times By Petia Topalova; Ara Stepanyan; Raju Huidrom; Ezgi O. Ozturk; Vizhdan Boranova; Shihangyin (Frank) Zhang
  2. Robust Algorithmic Collusion By Nicolas Eschenbaum; Filip Melgren; Philipp Zahn
  3. Markups and Financial Shocks By Ana Cristina Soares; Philipp Meinen
  4. A General Method for Selecting Subgame Perfect Nash Equilibria in Two-Player Stackelberg Games By Francesco Caruso; Maria Carmela Ceparano; Jacqueline Morgan
  5. Contracts as a Barrier to Entry: Impact of Buyer's Asymmetric Information and Bargaining Power By David Martimort; Jérôme Pouyet; Thomas Trégouët
  6. Prescription Drugs: Spending, Use, and Prices By Congressional Budget Office
  7. Impact of Mergers and Acquisitions on Innovation: Evidence from a Panel of Indian Pharmaceutical Firms By Basant, Rakesh; Jaiswal, Neha

  1. By: Petia Topalova; Ara Stepanyan; Raju Huidrom; Ezgi O. Ozturk; Vizhdan Boranova; Shihangyin (Frank) Zhang
    Abstract: The auto sector is macro-critical in many European countries and constitutes one of the main supply chains in the region. Using a multi-sector and multi-country general equilibrium model, this paper presents a quantitative assessment of the impact of global pandemic-induced labor supply shocks—both directly and via supply chains—during the initial phase of the COVID-19 pandemic on the auto sector and aggregate activity in Europe. Our results suggest that these labor supply shocks would have a significant adverse impact on the major auto producers in Europe, with one-third of the decline in the value added of the car sector attributable to spillovers via supply chains within and across borders. Within borders, the pandemic-induced labor supply shocks in the services sector have a bigger adverse impact, reflecting their larger size and associated demand effects. Across borders, spillovers from the pandemic-induced labor supply shocks that originate in other European countries are larger than those that originate outside the region, though the latter are still sizable.
    Keywords: Auto sector, supply chains, spillovers, Europe
    Date: 2022–01–14
  2. By: Nicolas Eschenbaum; Filip Melgren; Philipp Zahn
    Abstract: This paper develops a formal framework to assess policies of learning algorithms in economic games. We investigate whether reinforcement-learning agents with collusive pricing policies can successfully extrapolate collusive behavior from training to the market. We find that in testing environments collusion consistently breaks down. Instead, we observe static Nash play. We then show that restricting algorithms' strategy space can make algorithmic collusion robust, because it limits overfitting to rival strategies. Our findings suggest that policy-makers should focus on firm behavior aimed at coordinating algorithm design in order to make collusive policies robust.
    Date: 2022–01
  3. By: Ana Cristina Soares; Philipp Meinen
    Abstract: This paper analyses the impact of financial frictions on markup adjustments at the firm level. We use a rich panel data set that matches information on banking relationships with firm-level data. By relying on insights from recent contributions in the literature, we obtain exogenous credit supply shifters and markups that are both firm specific and time varying. We uncover new findings at this level. In particular, firms more exposed to liquidity risks tend to raise markups in response to negative bank-loan supply shocks, while less exposed firms generally reduce them. Further empirical analyses suggest that our findings are mostly consistent with models featuring a sticky customer base, where financially constrained firms have an incentive to raise markups in order to sustain liquidity. Our results have important economic implications regarding the cyclicality of the aggregate markup.
    JEL: D22 G01 G10 L11 L22
    Date: 2021
  4. By: Francesco Caruso (Università di Napoli Federico II); Maria Carmela Ceparano (Università di Napoli Federico II); Jacqueline Morgan (Università di Napoli Federico II and CSEF)
    Abstract: Two-player Stackelberg games may have multiple Subgame Perfect Nash Equilibria (henceforth SPNEs), especially when the best reply correspondence of the follower is not a single-valued map. Aim of the paper is to investigate the issue of selection of SPNEs in two-player Stackelberg games by exploiting perturbations of the payoff functions of the game. To achieve such a goal, since the limit of “perturbed" SPNEs is not necessarily an SPNE of the initial game even for classic perturbations, first we show how to produce an SPNE starting from a sequence of SPNEs of perturbed games. This result allows to define a general selection method for SPNEs that can accommodate various behaviors of the players. More precisely, under mild assumptions on the data of the game we prove that perturbations relying on a Tikhonov regularization, on an adverse-to-move behaviour and on an altruistic behaviour fit the general method and we present the specific selection results associated to such perturbations. On the one hand, as regards to the Tikhonov regularization and the adverse-to-move behaviour, we extend or recover the results showed by Morgan and Patrone [Advances in Dynamic Games, (2006), pp. 209-221] and by Caruso, Ceparano and Morgan [Dyn. Games Appl., 9 (2019), pp. 416-432]. On the other hand, concerning the altruistic behaviour, we present a new specific selection method for SPNEs based on the slightly altruistic approach introduced by De Marco and Morgan [J. Optim. Theory Appl., 137 (2008), pp. 347-362] for simultaneous-move games. Finally, we illustrate by examples that the general method carried out under the three different “behaviours" just mentioned can select different SPNEs.
    Keywords: Subgame perfect Nash equilibrium; selection; two-player Stackelberg game; Tikhonov regularization; adverse-to-move behaviour; slightly altruistic behaviour.
    Date: 2022–01–24
  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: excessive entry,foreclosure,exclusionary behavior,incomplete information
    Date: 2021–12
  6. By: Congressional Budget Office
    Abstract: Prescription drugs have become an increasingly important part of U.S. health care, as evidenced by the growth in nationwide spending on those drugs from 1980 to 2018. Over that period, such spending increased more than tenfold in real terms (that is, with the effects of economywide inflation excluded). This report by CBO discusses trends in nationwide spending on prescription drugs in the retail market from 1980 to 2018. It also presents a detailed analysis of trends in spending, use, and prices in the Medicare Part D and Medicaid programs over the 2009–2018 period.
    JEL: I11 I13 I18 L65
    Date: 2022–01–19
  7. By: Basant, Rakesh; Jaiswal, Neha
    Abstract: Based on the literature, the paper identifies processes that get initiated post an M&A event and affect the acquiring firm’s innovation efforts. We apply panel fixed effects estimation techniques to analyze the individual impact of mergers and acquisitions on R&D intensity of acquiring firms using data for 217 publically listed Indian pharmaceutical firms (both acquirers and non-acquirers) during 1999-2018. The study finds that acquisitions rather than mergers provide impetus to R&D in the acquiring firms. This suggests that these two combinations – mergers and acquisitions - do not unleash the same type of innovation activity related processes in the acquiring firm. Results also show that when mergers or acquisitions are combined with purchase of assets, they have a positive impact on R&D intensity. Purchase of assets when combined with M&A seem to provide access to relevant complementary assets that makes R&D activity profitable for the acquirer post the merger or acquisition event. Possibly, firms view purchase of assets as a strategy that is complementary to M&A strategies for enhancing innovation. The paper shows that impact of M&A on R&D takes time and it is useful to analyze the impact of mergers and acquisitions separately, rather than combining the two together.
    Date: 2022–01–25

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