nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒10‒24
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Market Size and Number of Firms with New Technology By Sugata Marjit; Krishnendu Ghosh Dastidar; Gouranga Gopal Das
  2. Rising Markups or Changing Technology? By Lucia S. Foster; John C. Haltiwanger; Cody Tuttle
  3. Cournot–Bertrand comparison under common ownership in a mixed oligopoly By Xu, Lili; Zhang, Yidan; Matsumura, Toshihiro
  4. The Sociology of Cartels By Justus Haucap; Christina Heldman
  5. Dynamics of First-Time Patenting Firms By Øivind Anti Nilsen; Arvid Raknerud
  6. Competition for Loyal Customers By Alexander Usvitskiy; Dmitry Ryvkin
  7. Market Power And Wage Inequality By Shubhdeep Deb; Jan Eeckhout; Aseem Patel; Lawrence Warren
  8. Foreclosure and tunneling with partial vertical ownership By Hunold, Matthias; Petrishcheva, Vasilisa
  9. Auditing the Prescription Drug Consumer Price Index in a Changing Marketplace By Richard G. Frank; Andrew L. Hicks; Ernst R. Berndt
  10. Trade-ins and Transaction Costs in the Market for Used Business Jets By Charles Hodgson

  1. By: Sugata Marjit; Krishnendu Ghosh Dastidar; Gouranga Gopal Das
    Abstract: In this paper, unlike the conventional wisdom, we demonstrate that the relationship between the size of the market and number of firms would be non-monotonic. While moderate rise in the size would force the local firms to exit and only the foreign firm rules, substantial rise in the size would accommodate all firms. Also, the possibility of survival increases if the local firms could differentiate their product more and then we drift towards the conventional result.
    Keywords: product differentiation, free entry, Cournot, output, market size, technology, FDI
    JEL: L13 D40 F10
    Date: 2022
  2. By: Lucia S. Foster; John C. Haltiwanger; Cody Tuttle
    Abstract: Recent evidence suggests the U.S. business environment is changing, with rising market concentration and markups. The most prominent and extensive evidence backs out firm-level markups from the first-order conditions for variable factors. The markup is identified as the ratio of the variable factor’s output elasticity to its cost share of revenue. Our analysis starts from this indirect approach, but we exploit a long panel of manufacturing establishments to permit output elasticities to vary to a much greater extent - relative to the existing literature - across establishments within the same industry over time. With our more detailed estimates of output elasticities, the measured increase in markups is substantially dampened, if not eliminated, for U.S. manufacturing. As supporting evidence, we relate differences in the markups’ patterns to observable changes in technology (e.g., computer investment per worker, capital intensity, diversification to non-manufacturing), and we find patterns in support of changing technology as the driver of those differences.
    JEL: L11 O14
    Date: 2022–09
  3. By: Xu, Lili; Zhang, Yidan; Matsumura, Toshihiro
    Abstract: Price competition is more intense than quantity competition in private oligopolies, wherein all firms are profit maximizers. However, in mixed oligopolies where one state-owned public firm competes with profit-maximizing private firms, price competition may not provide tougher competition than quantity competition. In this study, we introduce common ownership, a distinct feature of recent financial markets, into a mixed oligopoly model and investigate how common ownership affects this ranking. We find that under common ownership, quantity competition is likely to be tougher than price competition. Moreover, we find that common ownership harms welfare regardless of competition mode. Common ownership enhances private firms’ profits under Bertrand competition while these may decline under Cournot competition.
    Keywords: Cournot model; Bertrand model; common ownership; mixed oligopoly
    JEL: D4 D43 H42 L13
    Date: 2022–09–20
  4. By: Justus Haucap; Christina Heldman
    Abstract: Traditional economic theory of collusion assumed that cartels are inherently unstable, and yet some manage to operate for years or even decades. While the literature has presented several determinants of cartel stability, the vast majority focuses on firms as entities, even though cartels are typically formed between individuals who need to develop structures that allow them to establish trust and ensure cooperation. We analyze 15 German cartels, focusing on the individual participants, the communication and internal structures within the cartels as well as their breakup. Our results indicate that cartel members are highly homogeneous and often rely on existing networks within the industry. Most impressively, only two of the 156 individuals involved in these 15 cartels were female, suggesting that gender also plays a role for cartel formation. We further identify various forms of communication and divisions of responsibilities and show that leniency programs are a powerful tool in breaking up cartels. Based on these results we discuss implications for competition policy and further research.
    Keywords: cartels, collusion, social networks, trust, antitrust
    JEL: L41 K21 Z13
    Date: 2022
  5. By: Øivind Anti Nilsen; Arvid Raknerud
    Abstract: This paper investigates firm dynamics in the period before, during, and after an event consisting of a first published patent application. The analysis is based on patent data from the Norwegian Industrial Property Office merged with data from several business registers covering a period of almost 20 years. We apply an event study design and use matching to control for confounding factors. The first patent application by a young firm is associated with significant growth in employment, output, assets and public research funding. Moreover, our results indicate that economic activity starts to increase at least three years ahead of the first patent application. However, we find no evidence of additional firm growth after patent approval for successful applicants. Our findings indicate that the existence of a properly functioning patenting system supports innovation activities, especially early in the life cycle of firms.
    Keywords: patenting, firm performance, panel data, event study design
    JEL: C33 D22 O34
    Date: 2022
  6. By: Alexander Usvitskiy (School of Advanced Studies); Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: We consider competition for market shares between two firms that make costly investments to attract and retain customers. The value customers bring to the firms in the next period is higher if these customers are loyal, i.e., they remained with the firm. Based on the retention value and on the prior allocation of market shares, the firms' equilibrium investments either preserve the status quo or redistribute customers so that one of the firms gains and the other firm loses its market share. We conduct a laboratory experiment to test the theory and investigate the effects of the relative retention value and the initial state of the market on competition. The initial state of the market is either randomly assigned or endogenously generated through a preliminary contest between the firms. We find that competitors invest more as the customer retention value rises, but only when it is sufficiently high. Investment also rises with initial market share when it is low, but not when it is high. Somewhat surprisingly, we find that, for a given initial market share, investment is lower when this market share is endogenously won than when it is randomly assigned, which we attribute to within-match learning about the competitor's type.
    Keywords: Competition, Loyalty, Market shares, Dynamic game, Laboratory experiment
    JEL: C72 C92 D21 L21
    Date: 2022–10
  7. By: Shubhdeep Deb; Jan Eeckhout; Aseem Patel; Lawrence Warren
    Abstract: We propose a theory of how market power affects wage inequality. We ask how goods and labor market power jointly affect the level of wages, the Skill Premium, and wage inequality. We then use detailed microdata from the US Census between 1997 and 2016 to estimate the parameters of labor supply, technology and the market structure. We find that a less competitive market structure lowers the wage level, contributes 7% to the rise in the Skill Premium and accounts for half of the increase in between-establishment wage variance.
    Keywords: Market Power. Wage Inequality. Skill Premium. Technological Change. Market Structure. Endogenous Markups. Endogenous Markdowns.
    JEL: L1 C6 D3 D4 D5
    Date: 2022–09
  8. By: Hunold, Matthias; Petrishcheva, Vasilisa
    Abstract: We study the incentives of firms that hold partial vertical ownership to foreclose rivals. Compared to a full vertical merger, with partial ownership, a firm may obtain only part of the target's profit but may nevertheless be able to influence the target's strategy significantly. The target may be either a supplier or a customer, which opens the scope for either input foreclosure or customer foreclosure. We show that the incentives to foreclose can be higher, equal, or even lower with partial ownership than with a vertical merger, depending on how the protection of minority shareholders and transfer price regulations are specified.
    Keywords: Backward ownership,Entry deterrence,Foreclosure,Minority shareholdings,Partial ownership,Uniform pricing,Vertical integration
    JEL: G34 L22 L40
    Date: 2022
  9. By: Richard G. Frank; Andrew L. Hicks; Ernst R. Berndt
    Abstract: The Bureau of Labor Statistics' Prescription Drug Consumer Price Index (CPI-Rx) has been the focus of considerable controversy in recent years. The CPI-Rx limits its sampling frame to transactions in retail outpatient outlets, and excludes prescription pharmaceuticals dispensed in hospitals, physician/clinic outpatient facilities, and nursing homes. Thus the CPI-Rx overlooks the increasingly important specialty pharmaceuticals dispensed in hospitals, outpatient clinics, and physician offices, whose transactions are instead captured in the overall hospital or professional services component of the medical CPI. Specialty drugs now account for 55% of all U.S. drug spending, double the amount of a decade earlier. To the extent specialty drug growth differs from that of traditional pharmaceuticals, the CPI-Rx could provide an inaccurate measure of overall drug price inflation. Using data from the IBM MarketScan database for the years 2010-2019 and IQVIA-designated specialty drugs, we estimate that by not sampling specialty drugs in non-retail settings, the CPI-Rx has understated overall U.S. prescription drug price inflation by just under 75 basis points annually. We discuss implications for health care policy, and suggest the BLS examine the feasibility of publishing an overall pharmaceutical price index incorporating both traditional and specialty pharmaceuticals dispensed in retail and non-retail settings.
    JEL: C43 D43 I11 I18 L11 L53 L65
    Date: 2022–09
  10. By: Charles Hodgson
    Abstract: Manufacturers of durable goods can encourage consumers facing transaction costs to upgrade by accepting used units as trade-ins. These “buyback schemes” increase demand for new units, but increase the supply of used units if trade-ins are resold. In this paper, I investigate the equilibrium effects of buyback schemes in the market for business jets. I find that buyback increases demand for new units by 37% at fixed prices. However, in equilibrium this increase in sales is diminished by 38% due to substitution away from new jets among first time buyers. Because of this cannibalization, offering buyback is a dominant strategy for only 3 of the 6 major firms, with 3 firms offering buyback as a best response to other firms' policies. I show that equilibrium buyback policies can change under counterfactual market structures: a simulated merger leads to a reduction in consumer welfare, 70% of which is due to a change in buyback policy.
    JEL: L13 L14 L20 L93
    Date: 2022–09

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