nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒04‒18
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Shirking and Capital Accumulation under Oligopolistic Competition By Zhou, Haiwen; Zhou, Ruhai
  2. Collusion and Artificial Intelligence: A Computational Experiment with Sequential Pricing Algorithms under Stochastic Costs By Gonzalo Ballestero
  3. A Review of Platform Business Models By Markéta MlÄ úchová
  4. Of Shrimp and Men By Amanda De Pirro; Renaud Foucart
  5. A note on the equilibrium of a monopoly providing a pure network good and the stand-alone effect: A reconsideration of the coordination problem By Tsuyoshi Toshimitsu
  6. Price discrimination under nonuniform calling circles and call externalities By Clavijo, R
  7. How to Reach the Land of Cockaigne? Edgeworth Cycle Theory and Why a Gasoline Station is the First to Raise Its Price By Mats Petter Kahl; Thomas Wein
  8. How do retailers compete on price promotions? Evidence from a temporary promotion ban in Belgium By Hindriks, Jean; Madio, Leonardo; Serse, Valerio

  1. By: Zhou, Haiwen; Zhou, Ruhai
    Abstract: In this infinite horizon model, unemployment results from the existence of efficiency wages. Consumers choose saving optimally and there is capital accumulation. Firms producing intermediate goods engage in oligopolistic competition and choose technologies to maximize profits. A more advanced technology has a higher fixed cost but a lower marginal cost of production. In the steady state, it is shown that an increase in population size or a decrease in the discount rate leads intermediate good producers to choose more advanced technologies and the wage rate increases. Interestingly, the equilibrium unemployment rate decreases with the size of the population.
    Keywords: : Unemployment, increasing returns to scale, capital accumulation, choice of technology, oligopolistic competition
    JEL: E24 J64 L13 O14
    Date: 2022–03–17
  2. By: Gonzalo Ballestero (Universidad de San Andrés)
    Abstract: Firms increasingly delegate their strategic decisions to algorithms. A potential concern is that algorithms may undermine competition by leading to pricing outcomes that are collusive, even without having been designed to do so. This paper investigates whether Q-learning algorithms can learn to collude in a setting with sequential price competition and stochastic marginal costs adapted from Maskin and Tirole (1988). By extending a previous model developed in Klein (2021), I find that sequential Q-learning algorithms leads to supracompetitive profits despite they compete under uncertainty and this finding is robust to various extensions. The algorithms can coordinate on focal price equilibria or an Edgeworth cycle provided that uncertainty is not too large. However, as the market environment becomes more uncertain, price wars emerge as the only possible pricing pattern. Even though sequential Q-learning algorithms gain supracompetitive profits, uncertainty tends to make collusive outcomes more dicult to achieve.
    Keywords: Competition Policy, Artificial Intelligence, Algorithmic Collusion
    JEL: D43 K21 L13
    Date: 2022–02
  3. By: Markéta MlÄ úchová (Department of Finance, Faculty of Business and Economics, Mendel University in Brno, ZemÄ›dÄ›lská 1, 613 00 Brno, Czech Republic)
    Abstract: The paper focuses on platform business models as ubiquitous features of the digital economy whose economic importance is continuously increasing. Considering their varying definitions and diverse typology, this review of platform business models aims to discuss and evaluate the current heterogeneous literature. In line with fulfilling the aim of the paper, the following research question is addressed: ‘What are the main attributes of platform business models?’ Based on a vast literature review, the paper coins a unified definition and devises a novel typology, distinguishing four main types of platform business models: transaction, innovation, integrated and investment. Furthermore, the importance of both digital data and network effects as the main identified attributes is highlighted. Additionally, the paper devises a novel typology of network effects, amplifying users’ value-creating activities and interconnected relationships. The novel typology of network effects is distinguishing direct, indirect (cross-sided, cross-network or two-sided), data, positive and negative network effects.
    Keywords: Digital economy, business model, platform business model, digital data, network effects
    JEL: F23 L86
    Date: 2022–04
  4. By: Amanda De Pirro; Renaud Foucart
    Abstract: Building on a model of competition with endogenous product differentiation and using data from the shrimp aquaculture industry, we show how a cost-reducing innovation can hurt the profit of the innovator by decreasing product diversity and strengthening competition. In the late 1990s, a US governmental program designed a new pathogen-free breed reducing the production cost of white legs shrimp. This innovation gave a temporary boost to the profit of American producers, largely specialized in that variety. However, over time other countries abandoned their native production to adopt the new breed. In this phase of technological catch-up US producers thus not only lost their cost advantage, but also the market power derived from the pre-innovation product differentiation.
    Keywords: innovation, cost paradox, product differentiation, shrimp
    JEL: D43 F61 L1 L81 O3 Q22
    Date: 2022
  5. By: Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University)
    Abstract: In this note, we reconsider the coordination problem in the case of a monopoly providing a pure network good, such as telecommunications: a problem previously examined by Rohlfs (1974). As in Lambertini and Orsini (2004), we find that the coordination problem relating to critical mass is not associated with the presence of network effects but is more the property of consumer expectations. Assuming a pure network good and passive expectations, we demonstrate this from the perspective of Rohlfs (1974; 2001), i.e., the coordination problem is associated with critical mass and the role of a stand-alone effect.
    Keywords: pure network good, network effect, stand-alone value, critical mass, coordination problem, start-up problem, passive expectations, monopoly.
    JEL: D42 D62 L12
    Date: 2022–04
  6. By: Clavijo, R
    Abstract: This work develops a competition model between two asymmetrical networks with calling circles, allowing subscribers to derive utility by receiving calls. Unlike the traditional literature predictions, in equilibrium firms have strategies to set off-net price below on-net price. In markets where consumers display strongly concentrated calling patterns, firms can only extract limited surplus from off-net calls. This is reinforced if consumers display weak call externalities, languishing the price strategies to discourage off-net calls. Furthermore, regulating price differential of the large firm can lead consumers to face higher fees compared to discriminatory setting. Therefore, regulators should broaden efforts to measure call externalities and calling circles strength before making decisions on retail tariff regulation.
    Keywords: Calling circles; Call externalities; Network competition; Price differentials.
    JEL: D43 D62 L14
    Date: 2022–04–08
  7. By: Mats Petter Kahl (Leuphana Universität Lüneburg, Institut für Volkswirtschaftslehre); Thomas Wein (Leuphana Universität Lüneburg, Institut für Volkswirtschaftslehre)
    Abstract: Competition in the German gasoline retail market is characterized by strong intraday price cycles. The cycles are described in the literature as corresponding to the well-known Edgeworth cycles. Cyclical pricing patterns are observable all over Germany and throughout the world. So far, research has focused on analyzing price patterns using average prices. We are the first to study the initiation of new price cycles by looking at the exact timing of competition in the daily cycle. We modified the data to be able to analyze local competition on a second-by-second level. What determines that a certain gasoline station increases its price to initiate a new price cycle? We are the first to empirically analyze whether the theoretically and economically significant price differences of the Edgeworth cycles explain the cyclical patterns throughout a day, or whether brand affiliation, local characteristics, or services offered predict the behavior of price increases. To provide first evidence and to do justice to the complexity of analyzing second-by-second intraday price cycles, we limit ourselves to one local market in Germany. We find that price considerations, as well as services offered, play a minor role in explaining why a gasoline station is the first to increase its price. Brand affiliation, as well as location parameters, are much more important in a gasoline stations’ decision on whether they will be the first to increase prices. Furthermore, we show that the dominant suppliers Aral and Shell, who jointly account for more than 80 percent of price increases in the market, are the major drivers of the size of the price cycles. Together, the strong results for oligopoly players Aral and Shell suggest that market power is the major driver of the cyclical pricing pattern in the gasoline market.
    Keywords: Edgeworth cycles, gasoline prices, dynamic pricing, gasoline market
    JEL: L13 L41 K21
    Date: 2022–04
  8. By: Hindriks, Jean (Université catholique de Louvain, LIDAM/CORE, Belgium); Madio, Leonardo (Université catholique de Louvain, LIDAM/CORE, Belgium); Serse, Valerio (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: In March 2020, the Belgian government imposed a two-week promotion ban to contain panic buying at the beginning of the Covid-19 Pandemic. Using a unique daily dataset tracking list prices and promotions in different retail chains at the store level, we investigate how retailers set price promotions once the ban was lifted. We find that both frequency and size of promotions reverted to the pre-ban but only several months after the ban was lifted. This effect presents large heterogeneity across retailers: one chain acted as a promotion leader, reintroducing promotions quicker than others. Another large chain acted as a promotion follower, reintroducing promotions more gradually but eventually setting more frequent and larger price promotions than in the pre-ban period. Overall, the promotion ban was a major factor driving up sale prices in Belgian stores.
    Keywords: Price promotions ; promotion ban ; retailers ; competition
    JEL: D22 E30 E31 L11
    Date: 2022–02–01

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