nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒01‒23
twelve papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Oligopoly Pricing: The Role of Firm Size and Number By Bos, Iwan; Marini, Marco A.
  2. Gains from Product Variety: Evidence from a Large Digital Platform By Erik Brynjolfsson; Long Chen; Xijie Gao
  3. Theory for Extending Single-Product Production Function Estimation to Multi-Product Settings By Emmanuel Dhyne; Amil Petrin; Valerie Smeets; Frederic Warzynski
  4. Common Ownership, Competition, and Top Management Incentives By Miguel Anton; Florian Ederer; Mireia Gine; Martin C. Schmalz
  5. Influence of rationality levels on dynamics of heterogeneous Cournot duopolists with quadratic costs By Xiaoliang Li; Yihuo Jiang
  6. Competition in Search Markets with Naive Consumers By Gamp, Tobias; Krähmer, Daniel
  7. A Stackelberg reinsurance-investment game under $\alpha$-maxmin mean-variance criterion and stochastic volatility By Guohui Guan; Zongxia Liang; Yilun Song
  8. Aggregate Information and Organizational Structures By Celik, Gorkem; Shin, Dongsoo; Strausz, Roland
  9. Self-Efficacy and Entrepreneurial Performance of Start-Ups By Marco Caliendo; Alexander Kritikos; Daniel Rodriguez; Claudia Stier
  10. Effects of the use-it-or-lose-it rule on airline strategy and climate By Till Kösters; Marlena Meier; Gernot Sieg
  11. Valuing Pharmaceutical Drug Innovations: An Event Study Approach By Gaurab Aryal; Federico Ciliberto; Leland E. Farmer; Ekaterina Khmelnitskaya
  12. Ex-post Evaluation of the American Airlines–US Airways Merger: a structural approach By Christian Bontemps; Kevin Remmy; Johnny Wei

  1. By: Bos, Iwan; Marini, Marco A.
    Abstract: This paper examines a homogeneous-good Bertrand-Edgeworth oligopoly model to explore the role of firm size and number in pricing. We consider the price impact of merger, breakup, investment, divestment, entry, and exit. A merger leads to higher prices only when it increases the size of the largest seller and industry capacity is neither too big nor too small post-merger. Similarly, breaking-up a firm only leads to lower prices when it concerns the biggest producer and aggregate capacity is within an intermediate range. Investment and entry (weakly) reduce prices, whereas divestment and exit yield (weakly) higher prices. Taken together, these findings suggest that size matters more than number in the determination of oligopoly prices.
    Keywords: Bertrand-Edgeworth Competition; Edgeworth Price Cycle; Firm Size Distribution; Oligopoly Pricing; Price Dispersion
    JEL: D43 L1 L12 L13
    Date: 2022–12–15
  2. By: Erik Brynjolfsson; Long Chen; Xijie Gao
    Abstract: E-commerce sales have grown rapidly worldwide, massively increasing the availability of new products. We examine data from the largest digital platform in China and find that the number of book titles almost doubled, prices fell somewhat, and most new books are sold to consumers with unusual tastes. Demand for these niche products was significantly more inelastic than that of mass products. Embedding the estimates of demand elasticity into a two-segment CES framework, we find the welfare gain from increased variety was about 40 times the gain from lower prices and that rural consumers enjoyed the largest gains.
    JEL: O0
    Date: 2022–12
  3. By: Emmanuel Dhyne; Amil Petrin; Valerie Smeets; Frederic Warzynski
    Abstract: We introduce a new methodology for estimating multi-product production functions. It embeds the seminal contributions of Diewert (1973) and Lau (1976) in our extended version of the semi-parametric econometric framework of Olley and Pakes (1996), where we address the simultaneity of inputs and outputs by allowing for the possibility of a possible vector of unobserved ”productivities, ” all of which may be freely correlated with inputs and outputs. We show how to use the multi-product production function to recover estimates of firm-product marginal costs using the input and output elasticities by extending Hall’s (1988) single-product result to our multi-product setting using McFadden (1978). We focus on six 6-digit Belgian ”industries” that produce two products, finding all but five of the forty-eight input coefficients are positive and thirty eight are strongly significant. We find outputs are substitutes as the coefficients on ”other good output” is always negative and highly significant. 100% of marginal cost estimates are positive and close to 80% of markups are estimated to be greater than 1. We find very similar results when we move to 4-digit industries, when we use similar multi-product data from France, and when we use the trans-log approximation.
    JEL: L0
    Date: 2022–12
  4. By: Miguel Anton; Florian Ederer; Mireia Gine; Martin C. Schmalz
    Abstract: We present a mechanism based on managerial incentives through which common ownership affects product market outcomes. Firm-level variation in common ownership causes variation in managerial incentives and productivity across firms, which leads to intra-industry and intra-firm cross-market variation in prices, output, markups, and market shares that is consistent with empirical evidence. The organizational structure of multiproduct firms and the passivity of common owners determine whether higher prices under common ownership result from higher costs or from higher markups. Using panel regressions and a difference-in-differences design we document that managerial incentives are less performance-sensitive in firms with more common ownership.
    JEL: D21 G32 J33 L13 L21 M12
    Date: 2022–12
  5. By: Xiaoliang Li; Yihuo Jiang
    Abstract: This paper is intended to investigate the dynamics of heterogeneous Cournot duopoly games, where the first players adopt identical gradient adjustment mechanisms but the second players are endowed with distinct rationality levels. Based on tools of symbolic computations, we introduce a new approach and use it to establish rigorous conditions of the local stability for these models. We analytically investigate the bifurcations and prove that the period-doubling bifurcation is the only possible bifurcation that may occur for all the considered models. The most important finding of our study is regarding the influence of players' rational levels on the stability of heterogeneous duopolistic competition. It is derived that the stability region of the model where the second firm is rational is the smallest, while that of the one where the second firm is boundedly rational is the largest. This fact is counterintuitive and contrasts with relative conclusions in the existing literature. Furthermore, we also provide numerical simulations to demonstrate the emergence of complex dynamics such as periodic solutions with different orders and strange attractors.
    Date: 2022–12
  6. By: Gamp, Tobias (HU Berlin); Krähmer, Daniel (University of Bonn)
    Abstract: We study the interplay between quality provision and consumer search in a search market where firms may design products of inferior quality to promote them to naive consumers who fail to fully understand product characteristics. We derive an equilibrium in which both superior and inferior quality is offered and show that as search frictions vanish, the share of firms offering superior goods in the market goes to zero. The presence of inferior products harms sophisticated consumers, as it forces them to search longer to find a superior product. We argue that policy interventions that reduce search frictions such as the standardization of price and package formats may harm welfare. In contrast, reducing the number of naive consumers through transparency policies and education campaigns as well as a minimum quality standard can improve welfare.
    Keywords: inferior products; competition; naivete; consumer search;
    JEL: D18 D21 D43 D83
    Date: 2022–12–30
  7. By: Guohui Guan; Zongxia Liang; Yilun Song
    Abstract: This paper investigates a Stackelberg game between an insurer and a reinsurer under the $\alpha$-maxmin mean-variance criterion. The insurer can purchase per-loss reinsurance from the reinsurer. With the insurer's feedback reinsurance strategy, the reinsurer optimizes the reinsurance premium in the Stackelberg game. The financial market consists of cash and stock with Heston's stochastic volatility. Both the insurer and reinsurer maximize their respective $\alpha$-maxmin mean-variance preferences in the market. The criterion is time-inconsistent and we derive the equilibrium strategies by the extended Hamilton-Jacobi-Bellman equations. Similar to the non-robust case in Li and Young (2022), excess-of-loss reinsurance is the optimal form of reinsurance strategy for the insurer. The equilibrium investment strategy is determined by a system of Riccati differential equations. Besides, the equations determining the equilibrium reinsurance strategy and reinsurance premium rate are given semi-explicitly, which is simplified to an algebraic equation in a specific example. Numerical examples illustrate that the game between the insurer and reinsurer makes the insurance more radical when the agents become more ambiguity aversion or risk aversion. Furthermore, the level of ambiguity, ambiguity attitude, and risk attitude of the insurer (reinsurer) have similar effects on the equilibrium reinsurance strategy, reinsurance premium, and investment strategy.
    Date: 2022–12
  8. By: Celik, Gorkem (ESSEC Business School and THEMA Research Center); Shin, Dongsoo (Santa Clara University); Strausz, Roland (HU Berlin)
    Abstract: We study information flows in an organization with a top management (principal) and multiple subunits (agents) with private information that determines the organization's aggregate efficiency. Under centralization, eliciting the agents' private information may induce the principal to manipulate aggregate information, which obstructs an effective use of information for the organization. Under delegation, the principal concedes more information rent, but is able to use the agents' information more effectively. The trade-off between the organizational structures depends on the likelihood that the agents are efficient. Centralizing information flows is optimal when such likelihood is low. Delegation, by contrast, is optimal when it is high.
    Keywords: agency; aggregate information; organization design;
    JEL: D86 L23 L25
    Date: 2022–12–27
  9. By: Marco Caliendo (University of Potsdam, IZA, DIW, IAB); Alexander Kritikos (DIW Berlin, University of Potsdam, IZA, IAB); Daniel Rodriguez (University of Potsdam); Claudia Stier (University of Potsdam)
    Abstract: Self-efficacy reflects the self-belief that one can persistently perform difficult and novel tasks while coping with adversity. As such beliefs reflect how individuals behave, think, and act, they are key for successful entrepreneurial activities. While existing literature mainly analyzes the influence of the task-related construct of entrepreneurial self-efficacy, we take a different perspective and investigate, based on a representative sample of 1, 405 German business founders, how the personality characteristic of generalized self-efficacy influences start-up performance as measured by a broad set of business outcomes up to 19 months after business creation. Outcomes include start-up survival and entrepreneurial income, as well as growth-oriented outcomes such as job creation and innovation. We find statistically significant and economically important positive effects of high scores of self-efficacy on start-up survival and entrepreneurial income, which become even stronger when focusing on the growth-oriented outcome of innovation. Furthermore, we observe that generalized self-efficacy is similarly distributed between female and male business founders, with effects being partly stronger for female entrepreneurs. Our findings are important for policy instruments that are meant to support firm growth by facilitating the design of more target-oriented offers for training, coaching, and entrepreneurial incubators.
    Keywords: entrepreneurship, firm performance, general self-efficacy, survival, job creation, innovation
    JEL: L26 M13 D91
    Date: 2023–01
  10. By: Till Kösters (Institute of Transport Economics, Muenster); Marlena Meier (Institute of Transport Economics, Muenster); Gernot Sieg (Institute of Transport Economics, Muenster)
    Abstract: Grandfather rights require airlines to operate at least 80% of their slots, if they are to keep them in the next scheduling period. To prevent losing slots, the airlines may operate slot-rescue flights, an airline strategy called slot hoarding. We model strategies of a monopolistic airline which chooses between long-haul and short-haul flights at a slot-coordinated airport. In cases of a binding use-it-or-lose-it rule, we observe a bias in the airline route network in favor of slot-rescue flights on short-haul distances. Slot-rescue flights reduce airline profits, but raise consumer surplus and airport profits. The overall effect of slot-rescue flights on welfare, however, remains ambiguous. Recently, slot hoarding and its climate impact have received considerable attention during the COVID-19 pandemic. We show that the environmental effects of slot-rescue flights are asymmetric. The climate damage of slot hoarding in the EU is reduced by the EU ETS, whereas CORSIA is rather ineffective.
    Keywords: Use-it-or-lose-it rule, Slot hoarding, Climate damage, EU ETS, CORSIA, COVID-19
    JEL: L93 R48 Q51
    Date: 2023–01
  11. By: Gaurab Aryal; Federico Ciliberto; Leland E. Farmer; Ekaterina Khmelnitskaya
    Abstract: We measure the $\textit{value of pharmaceutical drug innovations}$ by estimating the market values of drugs and their development costs. We rely on market responses to firms' drug development announcements to identify the values and costs. Using announcements by public U.S. pharmaceutical firms and their daily stock returns, we estimate the average market value of a successful drug at \$1.62 billion. At the discovery stage, drugs are valued at \$64.3 million, whereas their expected development cost is \$58.5 million, on average. Furthermore, we estimate the costs of the three phases of clinical trials at \$0.6, \$30, and \$41 million, respectively.
    Date: 2022–12
  12. By: Christian Bontemps (ENAC - Ecole Nationale de l'Aviation Civile, TSE-R - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Kevin Remmy (université de Mannheim); Johnny Wei
    Abstract: In this paper, we estimate a structural model of the domestic US airline market to analyze the eect of the recent merger between American Airlines and US Airways. Our results show that, between 2011 and 2016, a substantial fuel price drop in conjunction with changes in consumer preferences toward direct ights completely rationalizes the observed decrease in prices. However, we estimate that, during the same period, more than half of the consumer welfare increase is due, on top of these environmental changes, to the ex-post optimization of the networks of the newly merged airline and of its competitors. Acknowledgments: We would like to thank the Guest Editors and two anonymous referees for helpful comments. Special thanks to Sara Crompton Meade and Mariane Bontemps for proofreading. Funding from the French National Research Agency (ANR) under the Investments for the Future program (Investissements d'Avenir, grant ANR-17-EURE-0010) is gratefully acknowledged.
    Keywords: merger, airlines, network, structural model, nested logit, airfare, demand, supply
    Date: 2022

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