nep-ind New Economics Papers
on Industrial Organization
Issue of 2022‒12‒05
seven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Content Licensing with Endogenous Homing By Lu, Qiuyu
  2. Discreet Personalized Pricing By Benjamin R. Shiller
  3. Strategic Interaction Between Wholesale and Ancillary Service Markets By Brown, David P.; Eckert, Andrew; Silveira, Douglas
  4. Mergers and Advertising in the Pharmaceutical Industry By Dubois, Pierre; Majewska, Gosia
  5. An Empirical Model of Mobile App Competition By Kawaguchi, Kohei; Kuroda, Toshifumi; Sato, Susumu
  6. Self-Preferencing, Quality Provision, and Welfare in Mobile Application Markets By Xuan Teng
  7. Meta-Analysis of E-Cigarette Price Elasticity By Selya, Arielle; Foxon, Floe; Chandra, Siddharth; Nealer, Erin

  1. By: Lu, Qiuyu
    Abstract: This paper examines the licensing strategy of a monopoly content provider that supplies horizontally differentiated content through downstream distributors to consumers who can potentially purchase from both distributors. When consumers' additional gain from the second purchase is high, the mismatch cost is low, and the quality of the extra content is high, some consumers purchase from both firms, which is called multi-homing. Apart from that, all consumers purchase from either distributor. When some consumers multi-home, the content provider always licenses to only one distributor. When all consumers single-home, the content provider either licenses to one distributor or shares the licensing.
    Keywords: Multi-homing, Licensing, Exclusive Dealing, Digital Content, Online Platform
    JEL: D43 L13 L42
    Date: 2022–11–09
  2. By: Benjamin R. Shiller
    Abstract: Emerging tracking data allow precise predictions of individuals’ reservation values. However, firms are reluctant to conspicuously implement personalized pricing because of concerns about consumer and regulatory reprisals. This paper proposes and applies a method which disguises personalized pricing as dynamic pricing. Specifically, a firm can sometimes tailor the “posted” price for the arriving consumer but privately commits to change price infrequently. Note such pricing may unintentionally arise through algorithmic pricing. I examine outcomes in four contexts: one empirical and three hypothetical distributions of consumer valuations. I find that this strategy is most intense and raises profits most for medium popularity products. Furthermore, improvements in the precision of individual-level demand estimates raise the range of popularities this strategy can be profitably applied to. I conclude that this is an auspicious strategy for online platforms, if not already secretly in use.
    Keywords: personalized pricing, algorithmic pricing, price discrimination, targeted pricing, behavioural pricing, dynamic pricing, sticky pricing
    JEL: L81 D40 L10
    Date: 2022
  3. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics); Silveira, Douglas (University of Alberta, Department of Economics)
    Abstract: In electricity markets, system reliability requires the instantaneous balancing of supply and demand. In addition to the wholesale electricity market, the procurement of various ancillary services is vital in achieving this objective. An important design feature is whether ancillary service markets clear simultaneously or sequential with wholesale markets. We propose a model to study the strategic implications of simultaneous versus sequential timing when firms compete in the ancillary services and wholesale electricity markets. Considering the case where ancillary services markets clear before wholesale markets, we demonstrate that when firms face increasing marginal cost curves, a strategic incentive to reduce ancillary services output and, consequently, lower their marginal costs in the wholesale market arises. We employ data from Alberta’s electricity markets to demonstrate the quantitative implications of our findings. Our numerical results show that the strategic commitment effect has a small impact on wholesale market outcomes but a large impact on the equilibrium in the ancillary services market, elevating the market-clearing price.
    Keywords: ancillary services; electricity; market power; strategic commitment
    JEL: L13 L50 L94 Q40
    Date: 2022–10–19
  4. By: Dubois, Pierre; Majewska, Gosia
    Abstract: In many industries, market structure determines how firms not only compete in terms of prices but also utilize promotional activities. We study how price and advertising strategies change when firms merge in pharmaceutical markets in the US. We show that across all drug markets, although mergers indeed increase prices, advertising spending also decreases. Merger simulations not accounting for advertising reductions may thus obtain biased price eects. Considering the merger effects of two large pharmaceutical companies on an antimicrobial drug market, we estimate a structural model of supply and demand and simulate the merger effect. We find that the merger effect on prices is smaller given the reduction in the amount of advertising. We also provide a simple method through which to evaluate long-term welfare effects using some known value of the sensitivity of innovation to profits.
    Keywords: Merger; Advertising; Drugs; Welfare; Innovation;
    JEL: I10 L22 L41
    Date: 2022–11–07
  5. By: Kawaguchi, Kohei; Kuroda, Toshifumi; Sato, Susumu
    Abstract: This paper proposes an empirical model of mobile app competition, in which consumers decide downloads and usage time, and apps compete in price and advertising intensity. We estimate the model using data from Google Play in Japan from 2015 to 2017. We demonstrate merger simulation and the analysis of the vertical relation with Google Play. We find that a reduction of the fee imposed by Google Play can increase the price for game apps by inducing the shift of revenue source from advertising to downloads, highlighting the importance of considering two-sidedness and mixed business models.
    Date: 2022–09–28
  6. By: Xuan Teng
    Abstract: Platforms may give preferential treatment to their own products in search results. Whether and how to regulate this self-preferencing behavior is an intensely debated antitrust issue. This paper identifies self-preferencing and quantifies its equilibrium welfare effects in Apple App Store. I start by examining the effect of a change in the platform’s search algorithm that dropped several Apple’s apps from top positions. I find that the search algorithm change leads to significantly higher installations and update frequencies of independent apps that compete with Apple’s apps in the same categories. Then I develop an empirical model of consumer search and update competition allowing for potential self-preferencing. The model is estimated with aggregate data on consumer search and purchase, search ranking, and app characteristics. Estimation results point to self-preferencing: Apple’s apps are more likely to be ranked higher than independent apps conditional on app quality, price, ratings, and title match with search terms. Based on counterfactual simulations, I find that eliminating the identified self-preferencing modestly increases the quality of independent apps on average. Furthermore, the elimination improves consumer surplus by $2.2 million and profits of independent developers by $1.6 million per month.
    Keywords: search algorithm, consumer search, endogenous product characteristics, mobile application
    JEL: D12 D43 D83 L13 L41 L86
    Date: 2022
  7. By: Selya, Arielle; Foxon, Floe; Chandra, Siddharth; Nealer, Erin
    Abstract: Background: Adoption of electronic nicotine delivery systems (ENDS) has the potential to impact the prevalence of combusted cigarette use. Understanding whether and how much ENDS act as economic substitutes for cigarettes helps inform tobacco policy to minimize harm. Objectives: The goals of this study are to review the own-price elasticity of ENDS, the cross-price elasticity of ENDS with respect to cigarette price (including taxes), and the cross-price elasticity of cigarettes with respect to ENDS price. Methods: Pre-registered systematic review and meta-analysis following Cochrane review guidelines where applicable. Articles were sourced from PubMed and Google Scholar. Where appropriate, effects were combined in random-effects models with a two-step estimator. Other articles were reviewed narratively. Results: A 10% increase in ENDS price is associated with a 10.7% (7.7%–13.6%) decrease in ENDS sales/purchases, and also decreased ENDS use prevalence. A 10% increase in cigarette price is associated with an 18.3% (9.3%–27.4%) increase in ENDS sales/purchases, and also increased ENDS use prevalence. No evidence for increased cigarette sales/purchases after increased ENDS price was found, but increased ENDS price was associated with increased smoking prevalence, propensity, and number of cigarettes smoked. Discussion: These data suggest ENDS are substitutes for cigarettes. Taxing cigarettes encourages switching away from the more harmful product. More research is needed to clarify the association between ENDS price and cigarette demand. Conclusions: Policymakers should consider using taxation to influence behavior and tax tobacco products in proportion to their harm.
    Date: 2022–10–07

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