nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒04‒04
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Personalized Pricing, Competition and Welfare By Harold Houba; Evgenia Motchenkova; Hui Wang
  2. Monopoly, Product Quality, and Flexible Learning By Jeffrey Mensch; Doron Ravid
  3. Monopolies amplify demand shocks By Flavio M. Menezes; John Quiggin
  4. Cournot duopoly games with isoelastic demands and diseconomies of scale By Xiaoliang Li
  5. Unilateral Practices, Antitrust Enforcement and Commitments By Rey, Patrick; Polo, Michele
  6. Collusion by algorithm: The role of unobserved actions By Martin, Simon; Rasch, Alexander
  7. Gender and collusion By Haucap, Justus; Heldman, Christina; Rau, Holger A.
  8. Decomposing the Rise in Markups By van Vlokhoven, Has
  9. The Evolution of U.S. Retail Concentration By Dominic A. Smith; Sergio Ocampo
  10. Competition under incomplete contracts and the design of procurement policies By Rodrigo Carril; Andres Gonzalez-Lira; Michael S. Walker
  11. Alcohol prohibition and pricing at the pump By Fischer, Kai
  12. Pricing for Medicine Innovation: A Regulatory Approach to Support Drug Development and Patient Access By Rosie Collington; William Lazonick

  1. By: Harold Houba (Vrije Universiteit Amsterdam); Evgenia Motchenkova (Vrije Universiteit Amsterdam); Hui Wang (Beijing Zhengjiang Science and Technology Co.)
    Abstract: Data-driven AI pricing algorithms in on-line markets collect consumer information and use it in their pricing technologies. In the simplest symmetric Hotelling's model such technologies reduce prices and profits. We extend Hotelling's model with vertically differentiated products, cost asymmetries and arbitrary adjustment costs. We provide a characterization of competition in personalized pricing: Sellers compete in offering consumer surplus, personalized prices are constrained monopoly prices and social welfare is maximal. For linear adjustment costs, adopting personalized pricing technology is a dominant strategy for both sellers. We derive conditions under which the most efficient seller increases her profit through personalized pricing. While aggregate consumer surplus increases, consumers with high switching costs may be hurt. Finally, we discuss several extensions of our approach such as oligopoly.
    JEL: L1 D43 L13
    Date: 2022–02–24
  2. By: Jeffrey Mensch; Doron Ravid
    Abstract: A seller offers a buyer a schedule of transfers and associated product qualities, as in Mussa and Rosen (1978). After observing this schedule, the buyer chooses a flexible costly signal about his type. We show it is without loss to focus on a class of mechanisms that compensate the buyer for his learning costs. Using these mechanisms, we prove the quality always lies strictly below the efficient level. This strict downward distortion holds even if the buyer acquires no information or when the buyer's posterior type is the highest possible given his signal, reversing the ``no distortion at the top'' feature that holds when information is exogenous.
    Date: 2022–02
  3. By: Flavio M. Menezes (School of Economics, University of Queensland, Brisbane, Australia); John Quiggin (School of Economics, University of Queensland, Brisbane, Australia)
    Abstract: The central point of this note is that the relationship between market power and inflation depends crucially on the source of inflationary shocks. To the extent that inflation is driven by demand shocks, firms with market power are likely to respond by increasing margins, and thereby amplifying the inflationary impact of higher demand. By contrast, imperfectly competitive markets typically display only partial cost pass-through. This analysis is relevant to debates about the role of monopoly power in recent US inflation.
    Date: 2022–02
  4. By: Xiaoliang Li
    Abstract: In this discussion draft, we investigate five different models of duopoly games, where the market is assumed to have an isoelastic demand function. Moreover, quadratic cost functions reflecting decreasing returns to scale are considered. The games in this draft are formulated with systems of two nonlinear difference equations. Existing equilibria and their local stability are analyzed by symbolic computations. In the model where a gradiently adjusting player and a rational (or a boundedly rational) player compete with each other, diseconomies of scale are proved to have an effect of stability enhancement, which is consistent with the similar results found by Fisher for homogeneous oligopolies with linear demand functions.
    Date: 2022–03
  5. By: Rey, Patrick; Polo, Michele
    Abstract: This paper analyses the impact of commitments on antitrust enforcement. These tools, introduced in Europe by the Modernization reform of 2003, are now used intensively by the European Commission and by National Competition Agencies. We consider a setting where a firm can adopt a practice that is either pro- or anti-competitive; the firm knows the nature of the practice whereas the enforcer has only prior beliefs about it. If the firm adopts the practice, the enforcer then decides whether to open a case. When commitments are available, the firm can offer a commitment whenever a case is opened; the enforcer then decides whether to accept it or run a costly investigation that may or may not bring supporting evidence. We show that introducing commitments weakens enforcement when the practice is likely to be anti-competitive. The impact of commitments is however more nuanced when the practice is less likely to be anti-competitive.
    Keywords: Antitrust enforcement ; Commitment ; Remedies ; Deterrence
    JEL: L40 K21 K42
    Date: 2022–03–14
  6. By: Martin, Simon; Rasch, Alexander
    Abstract: We analyze the effects of better algorithmic demand forecasting on collusive profits. We show that the comparative statics crucially depend on the whether actions are observable. Thus, the optimal antitrust policy needs to take into account the institutional settings of the industry in question. Moreover, our analysis reveals a dual role of improving forecasting ability when actions are not observable. Deviations become more tempting, reducing profits, but also uncertainty concerning deviations is increasingly eliminated. This results in a u-shaped relationship between profits and prediction ability. When prediction ability is perfect, the "observable actions" case emerges.
    Keywords: Algorithm,Collusion,Demand forecasting,Unobservable actions,Secretprice cutting
    JEL: L41 L13 D43
    Date: 2022
  7. By: Haucap, Justus; Heldman, Christina; Rau, Holger A.
    Abstract: Many cartels are formed by individual managers of different firms, but not by firms as collectives. However, most of the literature in industrial economics neglects individuals' incentives to form cartels. Although oligopoly experiments reveal important insights on individuals acting as firms, they largely ignore individual heterogeneity, such as gender differences. We experimentally analyze gender differences in prisoner's dilemmas, where collusive behavior harms a passive third party. In a control treatment, no externality exists. To study the influence of social distance, we compare subjects' collusive behavior in a within-subjects setting. In the first game, subjects have no information on other players, whereas they are informed about personal characteristics in the second game. Results show that guilt-averse women are significantly less inclined to collude than men when collusion harms a third party. No gender difference can be found in the absence of a negative externality. Interestingly, we find that women are not sensitive to the decision context, i.e., even when social distance is small they hardly behave collusively when collusion harms a third party.
    Keywords: Collusion,Cartels,Competition Policy,Antitrust,Gender Differences
    JEL: C92 D01 D43 J16 K21 L13 L41
    Date: 2022
  8. By: van Vlokhoven, Has (Tilburg University, Center For Economic Research)
    Keywords: markups; market power; Decomposition; reallocation
    Date: 2022
  9. By: Dominic A. Smith; Sergio Ocampo
    Abstract: Increases in national concentration have been a salient feature of industry dynamics in the U.S. and have contributed to concerns about increasing market power. Yet, local trends may be more informative about market power, particularly in the retail sector where consumers have traditionally shopped at nearby stores. We find that local concentration has increased almost in parallel with national concentration using novel Census data on product-level revenue for all U.S. retail stores. The increases in concentration are broad based, affecting most markets, products, and retail industries. We implement a new decomposition of the national Herfindahl Hirschman Index and show that despite similar trends, national and local concentration reflect different changes in the retail sector. The increase in national concentration comes from consumers in different markets increasingly buying from the same firms and does not reflect changes in local market power. We estimate a model of retail competition which links local concentration to markups. The model implies that the increase in local concentration explains one-third of the observed increase in markups.
    Keywords: Retail, Local Markets, Concentration, Herfindahl-Hirschman Index
    JEL: L8
    Date: 2022–03
  10. By: Rodrigo Carril; Andres Gonzalez-Lira; Michael S. Walker
    Abstract: We study the effects of intensifying competition for contracts in the context of U.S. Defense procurement. Conceptually, opening contracts up to bids by more participants leads to lower awarding prices, but may hinder buyers' control over non-contractible characteristics of prospective contractors. Leveraging a regulation that mandates agencies to publicize certain contract opportunities, we document that expanding the set of bidders reduces award prices, but deteriorates post-award performance, resulting in more cost overruns and delays. To further study the scope of this tension, we develop and estimate a model in which the buyer endogenously chooses the intensity of competition, invited sellers decide on auction participation and bidding, and the winner executes the contract ex-post. Model estimates indicate substantial heterogeneity in ex-post performance across contractors, and show that simple adjustments to the current regulation that account for adverse selection could provide 2 percent of savings in procurement spending, or $104 million annually
    Keywords: Procurement, competition, auctions, incomplete contracts
    JEL: D22 D44 D73 H57 L13 L14
    Date: 2022–03
  11. By: Fischer, Kai
    Abstract: Firms often sell a transparent base product and a valuable add-on product. If only some consumers are aware of the latter, the add-on's effect on the base product's price will be ambiguous. Cross-subsidization between products to bait uninformed consumers might lower, intrinsic utility from the add-on for informed consumers might raise the price. We study this trade-off in the gasoline market by exploiting an alcohol sales prohibition at stations as an exogenous shifter of add-on availability. Gasoline margins drop by 5% during the prohibition. The effect is mediated by shop variety and local competition. Implications for gasoline market definition arise.
    Keywords: Off-Premise Alcohol Prohibition,Gasoline Market,Multi-Product Firms
    JEL: L11 L91 R41
    Date: 2022
  12. By: Rosie Collington (University College London Institute for Innovation and Public Purpose); William Lazonick (The Academic-Industry Research Network)
    Abstract: The United States represents the world's largest market for pharmaceutical drugs. It is also the only advanced economy in the world that does not regulate drug prices. There is no upper threshold for the prices of medicines in the United States. List prices are instead set by manufacturers in negotiation with supply-chain intermediaries, though some federal programs have degrees of discretion in price determinations. In practice, this deregulated system means that drug prices in the United States are generally far higher than in other advanced economies, adversely affecting patient accessibility and system affordability. In this paper, we draw on the "theory of innovative enterprise" to develop a framework that provides both a critique of the existing pricing system in the United States and a foundation for developing a new model of pricing regulation to support safety and effectiveness through drug development as well as accessibility and affordability in the distribution of approved medicines to patients. We introduce a regulatory approach we term "Pricing for Medicine Innovation" (PMI), which departs dramatically from the market-equilibrium assumptions of conventional (neoclassical) economics. The PMI approach recognizes the centrality of collective investments by government agencies and business firms in the productive capabilities that underpin the drug development process. PMI specifies the conditions under which, at the firm level, drug pricing can support both sustained investment in these capabilities and improved patient access. PMI can advance both of these objectives simultaneously by regulating not just the level of corporate profit but also its allocation to reinvestment in the drug development process. PMI suggests that although price caps are likely to improve drug affordability, there remain two potential issues with this pricing approach. Firstly, in an innovation system where a company's sales revenue is the source of its finance for further drug development, price caps may deprive a firm of the means to invest in innovation. Secondly, even with adequate profits available for investment in innovation, a firm that is run to maximize shareholder value will tend to use those profits to fund distributions to shareholders rather than for investment in drug innovation. We argue that, if implemented properly, PMI could both improve the affordability of medicines and enhance the innovative performance of pharmaceutical companies.
    Keywords: Pharmaceuticals, pricing, innovation, strategy, organization, finance, resource allocation, learning, scale, investment, regulation.
    JEL: D2 D4 D8 G3 H3 I11 L2 O3
    Date: 2022–01–28

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