nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒02‒13
fourteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Firms and Inequality By De Loecker, Jan; Obermeier, Tim; Van Reenen, John
  2. Global Evidence on Profit Shifting Within Firms and Across Time By Fotis Delis; Manthos D. Delis; Luc Laeven; Steven Ongena
  3. Endogenous choice of price or quantity contract with upstream advertising By Qing Hu; Dan Li; Tomomichi Mizuno
  4. Mergers, Foreign Competition, and Jobs: Evidence from the U.S. Appliance Industry By Felix Montag
  5. Long-run Effect of a Horizontal Merger and Its Remedial Standards By FUKASAWA Takeshi; OHASHI Hiroshi
  6. Price vs Market Share with Royalty Licensing: Incomplete Adoption of a Superior Technology with Heterogeneous Firms By Luca Sandrini
  7. Price Authority and Information Sharing with Competing Principals By Enrique Andreu; Damien Neven; Salvatore Piccolo
  8. National Concentration of High-tech Products: The Second Great Divergence? By JU, Jiandong; LU, Bing; YU, Xinding
  9. Feedback and Contagion through Distressed Competition By Hui Chen; Winston Wei Dou; Hongye Guo; Yan Ji
  10. International mixed triopoly, privatization and subsidization By Ohnishi, Kazuhiro
  11. Investment and Patent Licensing in the Value Chain By Gerard Llobet; Damien Neven
  12. Energy Tax Exemptions and Industrial Production By Andreas Gerster; Stefan Lamp
  13. Continuing patent applications at the USPTO By Cesare Righi; Davide Cannito; Theodor Vladasel
  14. Evaluating the Impact of Divestitures on Competition: Evidence from Alberta's Wholesale Electricity Market By Brown, David P.; Eckert, Andrew; Shaffer, Blake

  1. By: De Loecker, Jan; Obermeier, Tim; Van Reenen, John
    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
    JEL: R14 J01 J1 N0
    Date: 2022–03–09
  2. By: Fotis Delis (European Commission, Joint Research Centre); Manthos D. Delis (Audencia Business School); Luc Laeven (European Central Bank (ECB); Centre for Economic Policy Research (CEPR)); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))
    Abstract: We provide the first global estimates of profit shifting at the subsidiary-year level. Employing nonparametric estimation techniques within a mainstay model of profit shifting, we examine the subsidiary-year responses of earnings to the composite tax indicator faced by all subsidiaries of a multinational firm. Our panel includes 26, 593 subsidiaries across 95 countries for the period 2009 2017. We extensively validate our results against aggregate estimates of previous studies and evidence from specific cases. We find that profit shifting decreased over this period in advanced economies but increased in other parts of the world where taxation policies are less stringent on average, consistent with tax arbitrage strategies. We also examine correlates of profit shifting, identifying that a key determinant is the subsidiaries’ ratio of intangible assets, and this channel is stronger in countries with weaker institutions. Both our new database and correlates open important avenues to analyze the sources and effects of profit shifting.
    Keywords: Profit shifting, multinational enterprises, nonparametric estimation, intangible assets, institutional quality, global sample
    JEL: F23 H25 H26 H32 M41
    Date: 2022–12
  3. By: Qing Hu (Kushiro Public University of Economics); Dan Li (School of Management, Xi’an Polytechnic University); Tomomichi Mizuno (Graduate School of Economics, Kobe University)
    Abstract: We investigate a supply chain comprising a manufacturer engaged in advertising and two retailers who compete with differentiated products. We examine the endogenous choice between competing on quantity or price for the retailers. Our analysis reveals that, depending on the level of product substitutability, the range of possible outcomes is varied and includes Cournot, Bertrand, and Cournot-Bertrand under informative advertising. This result contradicts the established understanding that firms tend to engage in Cournot competition as their dominant strategy. Furthermore, we find that under persuasive advertising, Cournot or Bertrand outcomes may be optimal, but Cournot-Bertrand never arises as an equilibrium.
    Keywords: Exporting; endogenous competition mode, advertising, vertical relationship
    JEL: D43 L13 M21
    Date: 2023–01
  4. By: Felix Montag (Tuck School at Dartmouth)
    Abstract: Policy choices often entail trade-offs between workers and consumers. I assess how foreign competition changes the consumer welfare and domestic employment effects of a merger. I construct a model accounting for demand responses, endogenous product portfolios, and employment. I apply this model to the acquisition of Maytag by Whirlpool in the household appliance industry. I compare the observed acquisition to one with a foreign buyer. While a Whirlpool acquisition decreased consumer welfare by $250 million, it led to 1, 300 fewer domestic jobs lost. Jobs need to be worth above $220, 000 annually for domestic employment effects to offset consumer harm.
    JEL: F61 L13 L40
    Date: 2023–01–27
  5. By: FUKASAWA Takeshi; OHASHI Hiroshi
    Abstract: This paper estimates a dynamic oligopoly model with firms’ continuous investment decisions to assess long-run consequences of a horizontal steel merger. It employs a novel simulation method to show that the merger improved social welfare. While the merger discouraged the merged firm from investing in capacity, it encouraged investment within non-merged firms, absent the efficiency gains of the merger. The paper also evaluates the remedial measure targeting asset divestiture that was endorsed by the competition authority. The paper finds that the effects of the merger remedy persisted for the 20 years after its implementation covered by this study, and the prescribed remedy differed considerably on the standpoint of either consumer or social welfare standards.
    Date: 2023–01
  6. By: Luca Sandrini (Research Centre of Quantitative Social and Management Sciences, Budapest University of Technology and Economics)
    Abstract: This article shows that the usual result of full adoption of a superior technology induced by pure royalty licensing may not hold when firms have different production technologies. By modeling a licensing game with an external innovator offering per-unit royalty contracts to downstream firms, this article shows that full adoption of the innovation occurs only if i) the new technology is sufficiently more efficient than the best one available in the market or ii) if the firms have similar efficiency levels. Moreover, I disentangle two distinct forces that influence the innovator's choice: a price effect (PE) and a market share effect (MSE). The former highlight the asymmetry in willingness to pay for the new technology. The inefficient firms, which benefit the most from the cost-reducing innovation, are willing to pay a higher price than their efficient rivals to become licensees. The latter illustrates the innovator's aim to maximize the volume of royalties collected by licensing to many firms. When PE dominates MSE, the patent holder sets a higher royalty rate and attracts fewer, less efficient firms. Otherwise, if MSE dominates, the patent holder lowers the royalty rate and attracts more firms to reach as many consumers as possible. From a policy perspective, I show that royalty licensing improves consumer surplus and that the positive effect increases with the number of licensees.
    Keywords: Innovation; Licensing; Royalties; Price Effect; Market Share Effect
    JEL: L13 L24 O31
    Date: 2023–01
  7. By: Enrique Andreu (Compass Lexecon); Damien Neven (IHEID, Graduate Institute of International and Development Studies, Geneva); Salvatore Piccolo (Bergamo University)
    Abstract: We characterize the degree of price discretion that competing principals award their agents in a framework where agents are informed about demand and seek to pass on their unveriÂ…able distribution costs to consumers at the principalsÂ’ expense. Principals learn demand probabilistically and may exchange this information on a reciprocal basis. While equilibria with full price delegation never exist, partial delegation equilibria exist with and without information sharing and feature binding price caps (list prices) that prevent agents from passing on their distribution costs to consumers. Yet, these equilibria are more likely to occur with than without information sharing. Moreover, while principals exchange information when products are sufficiently differentiated and downstream distribution costs are not too low, expected prices are unambiguously lower with than without information sharing. These results have potential implications for recent and ongoing antitrust investigations and damage claims in prominent sectors both in the US and the EU.
    Keywords: Competing Principals; Delegates Sales; Discretion; Information Sharing; List Prices
    JEL: L42 L50 L81
    Date: 2022–12–18
  8. By: JU, Jiandong; LU, Bing; YU, Xinding
    Abstract: Based on the product-country level trade data from 2004 to 2017, as well as the High-Tech Products Catalog from the US Census Bureau, this paper examines empirically the current phenomenon of “national concentration” in high-tech exports. The results show that the phenomenon of “national concentration” not only exists but also tends to be self-reinforcing. Compared with other products, the exports of high-tech products tend to be concentrated in certain countries, and this concentration trends were further strengthened after the global financial crisis of 2008–2009. The national concentration of R&D activities may be one of the important causes of the national concentration of high-tech products. This pattern remains robust when we further use the value-added export data and different definitions of high-tech products. We argue that the phenomenon of “national concentration” of high-tech exports may herald the arrival of the “Second Great Divergence” – the divergence between innovative and manufacturing activities – in the global economy.
    Keywords: high-tech products, national concentration, R&D, second great divergence
    JEL: F14
    Date: 2023–01–01
  9. By: Hui Chen; Winston Wei Dou; Hongye Guo; Yan Ji
    Abstract: Firms tend to compete more aggressively in financial distress; the intensified competition in turn reduces profit margins, pushing themselves further into distress and adversely affecting other firms. To study such feedback and contagion effects, we incorporate strategic competition into a dynamic model with long-term defaultable debt, which generates various peer interactions like predation and self-defense. The feedback effect imposes an additional source of financial distress costs incurred for raising leverage, which helps explain the negative profitability-leverage relation across industries. Owing to the contagion effect, in a decentralized equilibrium, leverage is excessively high from an industry perspective, compromising industry's financial stability.
    JEL: C73 D43 G12 L13 O33
    Date: 2023–01
  10. By: Ohnishi, Kazuhiro
    Abstract: This paper examines privatization in an international mixed triopoly model with a state-owned firm, a domestic firm and a foreign private firm to reassess the welfare effect of production subsidies. The main result of the paper is that if optimal domestic subsidies are used before and after privatization, then privatization improves domestic social welfare. The paper finds that this result is quite different from that of the existing domestic mixed oligopoly model.
    Keywords: International mixed triopoly; Privatization; Subsidy
    JEL: C72 D21 F23 L32
    Date: 2023–01–22
  11. By: Gerard Llobet (CEPR); Damien Neven (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: At which stage in the production chain should patent licensing takes place? In this paper we show that under realistic circumstances a patent holder would be better off by licensing downstream. This occurs when the licensing revenue can depend on the downstream value of the product either directly or through the use of ad-valorem royalties. We show that the results are similar when, instead, we assume that the downstream licensee is less informed about the validity of the patent. In most cases, downstream licensing increases allocative efficiency. However, it might reduce the incentives to invest by the manufacturers and thereby reduce welfare. We characterize the circumstances under which a conflict arises between the stage at which patent holders prefer to license their technology and the stage at which it is optimal from a social standpoint that licensing takes place.
    Keywords: Royalty Neutrality; Standard Setting Organizations; Patent Licensing; R&D Investment.
    JEL: L15 L24 O31 O24
    Date: 2022–12–22
  12. By: Andreas Gerster; Stefan Lamp
    Abstract: Environmental policies are often accompanied by exemptions for energy-intensive and trade-exposed industrial firms to avoid leakage from regulated to unregulated jurisdictions. This paper investigates the impact of a large electricity tax exemption on production levels, employment, and input choices in the German manufacturing industry. For two different policy designs, we show that exempted plants significantly increase their electricity use. This effect is considerably larger under a notched exemption policy, where passing an eligibility threshold yields infra-marginal benefits, compared to a revised policy where these benefits have been largely removed. We detect no significant impact of the exemptions on production levels, export shares, and employment. Using counterfactual simulations, we document substantial distortive effects of notched exemption policies when financial stakes are high and compliance cost for firms are low.
    Keywords: Environmental Policy, Leakage, Energy Taxes, Manufacturing Industry
    JEL: D22 H23 L60 Q41
    Date: 2023–01
  13. By: Cesare Righi; Davide Cannito; Theodor Vladasel
    Abstract: Despite their growing importance for rm innovation strategy and frequent appearance in U.S. patent policy debates, how continuing patent applications are used remains unclear. Turn-of-the-century reforms strongly limited opportunities to extend patent term and surprise competitors, but continuing applications have steadily risen since. We argue that they retain a subtle use, as applicants can file continuations to keep prosecution open and change patent scope after locking in gains with the initial patent. We document a sharp drop in parent abandonment and rise in continuations per original patent after the reforms. Continuing applications are more privately valuable than original patents, are led in more uncertain contexts, for higher value technologies, by more strategic applicants, and react strongly to the notice of allowance. The evidence supports a current strategic use of continuing applications to craft claims over time.
    Keywords: Intellectual property, patent scope, continuation, divisional, innovation.
    JEL: O31 O34 O38
    Date: 2023–01
  14. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics); Shaffer, Blake (University of Calgary)
    Abstract: Asset divestitures play a central role in antitrust and competition policy. Despite their importance, empirical evidence on their impacts on market competition is limited. We analyze market power in Alberta's wholesale electricity market, where transitional arrangements that virtually divested generation assets from large incumbents were put in place during market restructuring in the early 2000's and expired at the end of 2020. Subsequently, average peak hour prices rose by 120% the year after their expiry. We demonstrate that nearly two-thirds of this increase can be explained by elevated market power from the large suppliers. Further, exploiting variation in the allocation of the divested assets across heterogeneous firms, we demonstrate that market power execution is elevated when the divested assets are controlled by large strategic firms. Our findings highlight the important role that asset divestitures and their allocations can have on market competition. Our analysis also raises concerns over the ability of restructured electricity markets to facilitate sufficient competition through entry and the potential need for regulatory intervention.
    Keywords: Electricity; Market Power; Competition Policy; Divestitures
    JEL: D43 L13 L50 L94 Q40
    Date: 2023–01–29

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