nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒06‒13
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Firms and Inequality By Jan De Loecker; Tim Obermeier; John Van Reenen
  2. Legal Design in Sustainable Antitrust By Inderst, Roman; Thomas, Stefan
  3. A Class of Behavioral Models for the Profit-Maximizing Firm By Philippe Choné; Laurent Linnemer
  4. Generalized Separability and Integrability: Consumer Demand with a Price Aggregator By Thibault Fally
  5. Collective Hold-Up By Matias Iaryczower; Santiago Oliveros
  6. AI Adoption in a Monopoly Market By Joshua S. Gans
  7. AI Adoption in a Competitive Market By Joshua S. Gans
  8. Machine Learning based Framework for Robust Price-Sensitivity Estimation with Application to Airline Pricing By Ravi Kumar; Shahin Boluki; Karl Isler; Jonas Rauch; Darius Walczak
  9. CK Telecoms and the New Frame of Reference for the Analysis of Unilateral Effects in EU Merger Control By Elias
  10. Dangerous Prescribing and Healthcare Fragmentation: Evidence from Opioids By Keith Marzilli Ericson; Adam Sacarny; R. Annetta Zhou
  11. Monopsony Makes Firms Not Only Small but Also Unproductive: Why East Germany Has Not Converged By Bachmann, Rüdiger; Bayer, Christian; Stüber, Heiko; Wellschmied, Felix
  12. Evaluating Horizontal Mergers in Swedish District Courts Using Plant Capacity Concepts: With a Focus on Nonconvexity By Kristiaan KERSTENS; Xiaoqing CHEN

  1. By: Jan De Loecker; Tim Obermeier; John Van Reenen
    Abstract: In the last few decades, dramatic changes have been documented in the US business landscape. These include rising productivity and pay dispersion between firms, higher aggregate markups (of price over variable costs), growing dominance of big companies ("superstar firms"), a fall in the labour share of GDP and a decline in business dynamism. We review the existing literature and present a new analysis using comprehensive firm level panel data, to show that qualitatively, these trends are also apparent in the UK. This similarity suggests that common trends in technology (or globalisation) have been the driving force behind these changes, rather than country-specific institutions (such as weaker US antitrust enforcement). Since (at least) the mid-1990s, there has been a large increase in UK firm-level inequality (especially in the upper tails) of productivity, wages, markups, and labour shares. Of course, inequality between firms is much less of a concern than inequality between people. However, it can signal economic problems, such as a slowdown in the diffusion of ideas between leading and laggard firms and can foster higher wage inequality. Indeed, there has been little aggregate UK productivity growth since the Global Financial Crisis, and this has been a serious drag on median and mean real wages. We suggest a simple theoretical framework for understanding some of these trends and quantitatively analyse why, despite increasing markups, the, the UK labour share has not fallen as sharply as that in the US. Finally, we suggest some policy options in response to these worrying trends, include modernising competition rules to deal with the growth of superstar firms and strengthening worker bargaining power.
    Keywords: firms inequality, financial crisis
    Date: 2022–12
  2. By: Inderst, Roman; Thomas, Stefan
    Abstract: We lay out a roadmap for how the legislator could create a framework of “sustainability corridors” that would allow to rely on the ancillary restraints doctrine to make antitrust law more accommodating of sustainability considerations. We show how this avoids the pitfalls of a multi-goals approach, under which it would be left to antitrust authorities and courts to reconcile sustainability and competition objectives, while out-of-market benefits (externalities), that would escape even a broad consumer welfare approach, can still be accounted for. Our proposal sets out specific requirements for such sustainability corridors that ensure that the ensuing antitrust assessment is governed by a strict and quantifiable indispensability test. Specifically, we discuss three such instances: specific sustainability obligations placed on individual firms, which may however require collective actions; specific mandates that are targeted at the respective industry rather than individual firms; and policy objectives that are not targeted at individual firms or industries but provide a metric for the measurement of sustainability benefits (e.g., by way of conducting an abatement cost analysis).
    Keywords: sustainability,ancillary restraints doctrine
    JEL: D4
    Date: 2022
  3. By: Philippe Choné; Laurent Linnemer
    Abstract: We study the behavior of a firm that consistently maximizes a misspecified profit function. We provide an equilibrium concept where the misspecification error remains undetected. We examine the uniqueness and stability of the equilibria. The model of the price-taking firm belongs to this class. In one of these models, the cost-taking firm, the equilibrium price increases with fixed costs. The behavioural price can be lower or higher than the rational price, meaning consumers can benefit from the lack of rationality. Finally in a long-run perspective where the cost is endogenous, we show that the behavioral and rational firms end with the same level of output.
    Keywords: behavioural model of a firm, misspecified profit function, fixed costs
    JEL: L12 L21 L23 L25 M41
    Date: 2022
  4. By: Thibault Fally
    Abstract: This paper examines demand systems where the demand for a good depends on other prices only through a common price aggregator (a scalar function of all prices). We refer to this property as ``generalized separability'' and provide the functional forms of demand that this property implies when demand is rational, i.e., derived from utility maximization. Generalized separability imposes restrictions on either income or price effects, and greater flexibility is obtained by adding indirect utility as an additional aggregator. We provide examples and applications which encompass a large variety of examples from the literature. In particular, generalized separability can be used in simple general-equilibrium models to obtain a more tractable framework and yet generate a wider range of effects of market size and productivity on firm size, entry, and prices.
    JEL: D11 D40 L13
    Date: 2022–04
  5. By: Matias Iaryczower; Santiago Oliveros
    Abstract: We consider dynamic processes of coalition formation in which a principal bargains sequentially with a group of agents. This problem is at the core of a variety of applications in economics and politics, including a lobbyist seeking to pass a bill, an entrepreneur setting up a start-up, or a firm seeking the approval of corrupt bureaucrats. We show that when the principal’s willingness to pay is high, strengthening the bargaining position of the agents generates delay and reduces agents’ welfare. This occurs in spite of the lack of informational asymmetries or discriminatory offers. When this collective action problem is severe enough, agents prefer to give up considerable bargaining power in favor of the principal.
    JEL: C78 D7 D71 D72
    Date: 2022–04
  6. By: Joshua S. Gans
    Abstract: The adoption of artificial intelligence (AI) prediction of demand by a monopolist firm is examined. It is shown that, in the absence of AI prediction, firms face complex trade-offs in setting price and quantity ahead of demand that impact on the returns of AI adoption. Different industrial environments with differing flexibility of prices and/or quantity ex post, also impact on AI returns as does the time horizon of AI prediction. While AI has positive benefits for firms in terms of profitability, its impact on average price and quantity, as well as consumer welfare, is more nuanced and critically dependent on environmental characteristics.
    JEL: D21 D81 O31
    Date: 2022–04
  7. By: Joshua S. Gans
    Abstract: Economists have often viewed the adoption of artificial intelligence (AI) as a standard process innovation where we expect that efficiency will drive adoption in competitive markets. This paper models AI based on recent advances in machine learning that allow firms to engage in better prediction. Using prediction of demand, it is demonstrated that AI adoption is a complement to variable inputs whose levels are directly altered by predictions and use is economised by them (that is, labour). It is shown that, in a competitive market, this increases the short-run elasticity of supply and may or may not increase average equilibrium prices. There are generically externalities in adoption with this reducing the profits of non-adoptees when variable inputs are important and increasing them otherwise. Thus, AI does not operate as a standard process innovation and its adoption may confer positive externalities on non-adopting firms. In the long-run, AI adoption is shown to generally lower prices and raise consumer surplus in competitive markets.
    JEL: D21 D41 D81 O31
    Date: 2022–04
  8. By: Ravi Kumar; Shahin Boluki; Karl Isler; Jonas Rauch; Darius Walczak
    Abstract: We consider the problem of dynamic pricing of a product in the presence of feature-dependent price sensitivity. Based on the Poisson semi-parametric approach, we construct a flexible yet interpretable demand model where the price related part is parametric while the remaining (nuisance) part of the model is non-parametric and can be modeled via sophisticated ML techniques. The estimation of price-sensitivity parameters of this model via direct one-stage regression techniques may lead to biased estimates. We propose a two-stage estimation methodology which makes the estimation of the price-sensitivity parameters robust to biases in the nuisance parameters of the model. In the first-stage we construct the estimators of observed purchases and price given the feature vector using sophisticated ML estimators like deep neural networks. Utilizing the estimators from the first-stage, in the second-stage we leverage a Bayesian dynamic generalized linear model to estimate the price-sensitivity parameters. We test the performance of the proposed estimation schemes on simulated and real sales transaction data from Airline industry. Our numerical studies demonstrate that the two-stage approach provides more accurate estimates of price-sensitivity parameters as compared to direct one-stage approach.
    Date: 2022–05
  9. By: Elias (Centre for Competition Policy and School of Law, University of East Anglia)
    Abstract: In the recent CK Telecoms (Case T-399/16) judgment, the General Court annulled the European Commission’s decision to block the 4-to-3 telecom merger Hutchison3G UK/Telefónica UK. This watershed case is set to curtail the Commission’s ability to challenge future mergers in concentrated markets and proposes a fundamental reshape of the analysis of unilateral effects in the absence of dominance. This article shows that CK Telecoms advances six propositions that form the foundations of a new frame of reference for the analysis of unilateral effects under the EU Merger Regulation. This new framework has been welcomed by commentators as a long-overdue recognition that ‘the law’ trumps the Commission’s administrative discretion and as a vindication of the ‘more economic approach’. Based on a thorough review of 15 years of merger enforcement in the mobile telecommunication sector, this article challenges this account by debunking both the ‘rule of law’ and the ‘more economic approach’ arguments in support of the new framework. It instead demonstrates that each of the six principles advanced by CK Telecoms neither constitutes a reaffirmation of the ‘law’, nor aligns EU merger enforcement with the economic analysis of unilateral effects. In critically reflecting on the new framework laid down in CK Telecoms, this article formulates a number of policy proposals as building blocks for an alternative frame of reference that would preserve the effectiveness of EU merger enforcement in unilateral effects cases while enhancing its legal certainty.
    Keywords: Competition Law, Antitrust, Compliance, Cartels.
    Date: 2022–06–06
  10. By: Keith Marzilli Ericson; Adam Sacarny; R. Annetta Zhou
    Abstract: Fragmented healthcare received from many different physicians results in higher costs and lower quality, but does it contribute to dangerous opioid prescribing? The effect is theoretically ambiguous because fragmentation can trigger costly coordination failures but also permits greater specialization. We examine dangerous opioid prescribing, defined as receiving high dosages, long prescription durations, or harmfully interacting medications. Cross-sectionally, regions with higher fragmentation have lower levels of dangerous opioid prescribing. This relationship is associational and may result from unobserved patient-level confounders. Identifying the impact of healthcare fragmentation by examining patients who move across regions, we find a relatively precise null effect of fragmentation on dangerous opioid prescribing. These results cast doubt on the role of fragmentation in this phenomenon and highlight the potential role of other forces in driving it.
    JEL: I11 I12 L14 L22
    Date: 2022–04
  11. By: Bachmann, Rüdiger (University of Notre Dame); Bayer, Christian (University of Bonn); Stüber, Heiko (University of Erlangen-Nuremberg); Wellschmied, Felix (Universidad Carlos III de Madrid)
    Abstract: When employers face a trade-off between growing large and paying low wages—that is, when they have monopsony power—some productive employers will decide to acquire fewer customers, forgo sales, and remain small. These decisions have adverse consequences for aggregate labor productivity. Using high-quality administrative data from Germany, we document that East German plants (compared to West German ones) face a steeper size-wage curve, invest less into marketing, and remain smaller. A model with labor market monopsony, product market power, and customer acquisition matching these features of the data predicts 10 percent lower aggregate labor productivity in East Germany.
    Keywords: aggregate productivity, plant heterogeneity, unions, monopsony power, size-wage curve, monopolistic competition, customer capital, size distortions
    JEL: E20 E23 E24 J20 J42 J50
    Date: 2022–05
  12. By: Kristiaan KERSTENS (Univ. Lille, CNRS, IESEG School of Management, UMR 9221 - LEM - Lille Économie Management, F-59000 Lille, France); Xiaoqing CHEN (School of Economics and Management, Southeast University, Nanjing, Jiangsu, China, and IESEG School of Management, 3 rue de la Digue, F-59000 Lille, France)
    Abstract: This contribution investigates the effects of horizontal mergers and acquisitions on the plant capacity utilisation of the Swedish district courts over the periods 2000-2017. More specifically, we empirically demonstrate the decomposition of input-oriented and output-oriented technical efficiency by incorporating several concepts of plant capacity utilisation. Moreover, we also explore the impact of convexity on input-oriented and output-oriented measures of plant capacity in the short-run scenario in an attempt to discover the potential rationale behind the merger wave. To the best of our knowledge, we are the first to assess horizontal mergers by employing plant capacity utilisation concepts. The results indicate that the horizontal mergers improve capacity utilisation. Furthermore, the nonconvex frontier method provides a more conservative estimate of plant capacity changes of this merger wave.
    Keywords: : Data Envelopment Analysis, Free Disposal Hull, Plant capacity utilisation, Horizontal mergers and acquisitions
    JEL: O13 O47 P28
    Date: 2022–05

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