nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒07‒25
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Business creation during Covid-19 By Bahaj, Saleem; Piton, Sophie; Savagar, Anthony
  2. A bargaining perspective on vertical integration By Döpper, Hendrik; Sapi, Geza; Wey, Christian
  3. The Sale of Data: Learning Synergies Before M&As By Antoine Dubus; Patrick Legros
  4. Screening Adaptive Cartels By Juan Ortner; Sylvain Chassang; Kei Kawai; Jun Nakabayashi
  5. Do Firms Gain from Managerial Overconfidence? The Role of Severance Pay By Clara Graziano; Annalisa Luporini
  6. Microgiving with Digital Platforms By Xiheng Jiang; Jianwei Xing; Jintao Xu; Eric Zou
  7. Fighting Communism Supporting Collusion By Sebastian Galiani; Jose Manuel Paz y Miño; Gustavo Torrens
  8. How Firms Survive in European Emerging Markets: A Survey By Eduard Baumohl; Evzen Kocenda

  1. By: Bahaj, Saleem (Bank of England); Piton, Sophie (Bank of England); Savagar, Anthony (University of Kent and Centre for Macroeconomics)
    Abstract: We use data on business registrations in the UK to study the response of firm entry to the Covid-19 pandemic. We find that firm entry increased during the pandemic, unlike typical recessions where firm entry declines. The rise in firm creation is driven by individual entrepreneurs creating companies for the first time, and particularly creating companies in online retail. We link the rise in firm creation to declines in brick-and-mortar retail footfall via Google mobility data, and show that it takes 10 weeks for a firm to be registered after a shock to footfall. To study the impacts of the newly created firms, we merge entry data with online job postings from Indeed and show that the rise in firm creation drives increased vacancy postings. However, we also show there is a higher probability of pandemic startups dissolving relative to pre-pandemic cohorts. Therefore, we conclude that booming firm creation aided the rapid recovery of the UK economy in the short run, but the long-run implications are more uncertain.
    Keywords: Firm dynamics; Covid-19; business dynamism; firm entry.
    JEL: E32 L25 L26
    Date: 2022–05–20
  2. By: Döpper, Hendrik; Sapi, Geza; Wey, Christian
    Abstract: This paper analyzes vertical integration incentives in a bilaterally duopolistic industry where input market outcomes are determined by bargaining. Vertical integration incentives are a combination of horizontal integration incentives up- and downstream and depend on the strength of substitutability or complementarity and the shape of the unit cost function. In contrast to the widely prevailing view in competition policy, vertical integration can under particular circumstances convey more bargaining power to the merged entity than a horizontal merger to monopoly. In a bidding game for an exogenously determined target firm, a vertical merger can dominate a horizontal one, while pre-emption does not occur.
    Keywords: Bargaining,Vertical Mergers,Shapley Value
    JEL: L13 L22 L42
    Date: 2022
  3. By: Antoine Dubus (D-MTEC - Department of Management, Technology, and Economics [ETH Zürich] - ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]); Patrick Legros (ECARES - European Center for Advanced Research in Economics and Statistics - ULB - Université libre de Bruxelles)
    Abstract: Firms may share information to discover potential synergies between their data sets and algorithms, which eventually may lead to more efficient mergers and acquisitions (M&A) decisions. However, as pointed out by Arrow, information sharing also modifies the competitive balance when companies do not merge, and a firm may be reluctant to share information with potential rivals. Under general conditions, we show that firms benefit from (partially) sharing information. Because more sharing of information may increase industry expected profits both when there is head-to-head competition and when there is an M&A, the presence of a regulator who can prevent or allow the M&A can decrease or increase the level of information sharing, as well as consumer surplus, with respect to the no-regulator case. A regulator who can also control the level of information sharing will allow firms to share information.
    Date: 2022–06–17
  4. By: Juan Ortner (Boston University); Sylvain Chassang (Princeton University); Kei Kawai (University of California, Berkeley); Jun Nakabayashi (Kindai University)
    Abstract: We propose an equilibrium theory of data-driven antitrust oversight in which regulators launch investigations on the basis of suspicious bidding patterns and cartels can adapt to the statistical screens used by regulators. We emphasize the use of asymptotically safe tests, i.e. tests that are passed with probability approaching one by competitive firms, regardless of the underlying economic environment. Our main result establishes that screening for collusion with safe tests is a robust improvement over laissez-faire. Safe tests do not create new collusive equilibria, and do not hurt competitive industries. In addition, safe tests can have strict bite, including unraveling all collusive equilibria in some settings. We provide evidence that cartel adaptation to regulatory oversight is a real concern.
    Keywords: collusion, auctions, bidding rings, cartels, procurement, antitrust
    JEL: D44 L40
    Date: 2022–06
  5. By: Clara Graziano; Annalisa Luporini
    Abstract: We analyze the effects of optimism and overconfidence when the manager’s compensation package includes severance pay and the CEO has bargaining power. We find that optimism does not affect incentive pay but increases severance pay with a negative effect on profit. Overconfidence, on the contrary, reduces incentive pay as shown by the previous literature, while its effect on severance pay depends on the intensity of the bias. High values of overconfidence yield an inefficient level of investment which in turn increases severance pay with a negative impact on firm profit. Thus, the attempt to exploit managerial overconfidence to reduce incentive pay may if the manager is replaced and severance agreements come into effect. Our model explains the large severance payments documented by empirical literature by showing that discretionary pay in excess of contractual severance pay may represent a form of efficient contracting when the manager is overconfident and optimist.
    Keywords: overconfidence, optimism, managerial compensation, severance pay, entrenchment
    JEL: J33 D86 D90 L21
    Date: 2022
  6. By: Xiheng Jiang; Jianwei Xing; Jintao Xu; Eric Zou
    Abstract: Microgiving, a new form of digital fundraising, operates by soliciting minuscule, recurring donations from large numbers of potential donors. We evaluate a charity subscription program operated by Alibaba, China’s largest retail platform, which allows sellers to pledge a tiny portion of a product’s revenue (2 cents per order) to charity, with donations made automatically as transactions occur. We present three sets of descriptive findings. First, sellers tend to pick their best-selling products for charity subscription, and many did so right before sales promotion of the associated products. This suggests revenue-maximizing motives. Second, charity subscriptions are almost never canceled, despite limited evidence that they increase revenues; interview evidence suggests that sellers’ decision to keep donating is sustained by joys of giving that worth the tiny monetary sacrifices; we also observe sellers to purchase more charity-linked products themselves after they become charity subscribers. This suggests warm-glow utilities. Third, between 2018 and 2020, the program attracted more than 2 million Alibaba sellers and generated 1.2 billion yuan of charitable funds, representing one of China’s largest online fundraisers and accounts for 12% of the country’s overall online charitable sector. We conclude that digital platforms can create an incentive-compatible environment to scale up microgiving.
    JEL: D64 H41 L81 M14
    Date: 2022–06
  7. By: Sebastian Galiani; Jose Manuel Paz y Miño; Gustavo Torrens
    Abstract: We develop a simple model to explain why a powerful importer country like the United States may provide political support for international collusive agreements concerning certain commodities (e.g., coffee). This behavior raises questions due to the fact that an importer country should have strong economic incentives to avoid the cartelization of its suppliers. We show that an importer country sometimes helps producer countries organize and enforce collusion to advance important geopolitical goals, e.g., by reducing the chances that the producer countries will align with a rival global power (e.g., the Soviet Union). Moreover, using this practice, a powerful importer country can immediately share the cost of collusion with other importers (including allies). Thus, a powerful importer country may see collusion as a superior strategy to foreign aid (a priori a more direct and efficient instrument), which is riddled with free riding problems. The model sheds light on why the United States supported (or failed to support) international commodity agreements for coffee, sugar, and oil during and immediately after the Cold War period.
    JEL: F02 F1 F5 L4
    Date: 2022–06
  8. By: Eduard Baumohl (University of Economics in Bratislava & Faculty of Economics, Technical University of Kosice, Slovakia); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & CESifo, Munich; IOS, Regensburg)
    Abstract: We survey the empirical evidence on corporate survival and its determinants in European emerging markets. We demonstrate that (i) institutional quality is a significant preventive factor for firm survival in all sectors of the economy, which holds for small, medium and large firms alike. On the other hand, (ii) the impact of financial performance indicators is lower than one would expect. However, (iii) other firm-level variables play more important roles in firm survival, and the most important preventive factors are the legal form of a limited liability company, the number of large shareholders, and the presence of a foreign owner.
    Keywords: firm survival, institutions, financial development, European emerging markets, survival and exit determinants, hazards model
    JEL: D22 G01 G33 G34 P34
    Date: 2022–07

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