nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒02‒20
thirteen papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Do larger firms have higher markups? By Mertens, Matthias; Mottironi, Bernardo
  2. Search, Data, and Market Power By Carl-Christian Groh
  3. The Cost of Curbing Externalities with Market Power: Alcohol Regulations and Tax Alternatives By Christopher Conlon; Nirupama L. Rao
  4. Managing Seller Conduct in Online Marketplaces and Platform Most-Favored Nation Clauses By Schlütter, Frank
  5. Self-Preferencing at Amazon: Evidence from Search Rankings By Chiara Farronato; Andrey Fradkin; Alexander MacKay
  6. Superstar Exclusivity in Two-Sided Markets By Elias Carroni
  7. Merger control in retail markets with national pricing By Tommy Staahl Gabrielsen; Bjørn Olav Johansen; Odd Rune Straume
  8. Hospital competition when patients learn through experience By Luís Sá; Odd Rune Straume
  9. Patents with simultaneous innovations: The non-obviousness requirement and the direction of innovation By Fabio M. Manenti; Luca Sandrini
  10. Mergers, foreign competition, and jobs: Evidence from the U.S. appliance industry By Montag, Felix
  11. The Effects of Competition on Physician Prescribing By Janet Currie; Anran Li; Molly Schnell
  12. Optimizing Multiple Airport Charges with Endogenous Airline Quality Considering the Marginal Cost of Public Funds By Doi, Naoshi; Kono, Tatsuhito; Suzaki, Izumo
  13. Common Subcontracting, Multimarket Contact, and Airline Prices By Gaurab Aryal; Dennis J. Campbell; Federico Ciliberto; Ekaterina A. Khmelnitskaya

  1. By: Mertens, Matthias; Mottironi, Bernardo
    Abstract: Several models posit a positive cross-sectional correlation between markups and firm size, which, among others, characterizes misallocation, factor shares, and gains from trade. Yet, taking labor market power into account in markup estimation, we show that larger firms have lower markups. This correlation turns positive only after conditioning on wage markdowns, suggesting interactions between product and labor market power. Our findings are robust to common criticism (e.g., price bias) and hold across 19 European countries. We discuss the resulting implications and highlight studying input and output market power within an integrated framework as an important next step for future research.
    Keywords: firm size, markdowns, market power, markups
    JEL: J42 L11 L13 L25
    Date: 2023
  2. By: Carl-Christian Groh
    Keywords: search, information exchange, antitrust, price discrimination approach, German Competition Act, 19a designations, competition law I study the relationship between data and market power in a duopoly model of price discrimination with search frictions. One firm receives a signal about the valuation of any arriving consumer while its rival receives no information. A share of consumers, referred to as searchers, have equal valuation for the good of either firm and optimally choose which firms to visit. The remaining consumers are captive. In equilibrium, a large majority of searchers will only visit the firm with data. The market share of the firm with data converges to one as the share of searchers in the market goes to one, regardless of the signal structure. Reductions of search frictions induce higher market concentration. The establishment of a right to data portability can address the competitive imbalances caused by data advantages.
    JEL: D18 D83 L13 L86
    Date: 2022–11
  3. By: Christopher Conlon; Nirupama L. Rao
    Abstract: Products with negative externalities are often subject to regulations that limit competition. The single-product case may suggest that it is irrelevant for aggregate welfare whether output is restricted via corrective taxes or limiting competition. However, when products are differentiated curbing consumption through market power can be costly. Firms with market power may not only reduce total quantity, but distort the purchase decisions of inframarginal consumers. We examine a common regulation known as post-and-hold (PH) used by a dozen states for the sale of alcoholic beverages. Theoretically, PH eliminates competitive incentives among wholesalers selling identical products. We assemble unique data on distilled spirits from Connecticut, including matched manufacturer and wholesaler prices, to evaluate the welfare consequences of PH. For similar levels of ethanol consumption, PH leads to substantially lower consumer welfare (and government revenue) compared to excise, sales or Ramsey taxes by distorting consumption choices away from high-quality/premium brands and towards low-quality brands. Replacing PH with volumetric or ethanol-based taxes could reduce consumption by over 9% without reducing consumer surplus, and increase tax revenues by over 300%.
    JEL: D6 H21 H23 L13 L5 L66
    Date: 2023–01
  4. By: Schlütter, Frank (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: This article investigates the incentive and ability of a platform to limit the extent of competition between the sellers it hosts. Absent contractual restrictions, a platform has an incentive to ensure competition between the sellers. This incentive can change with the introduction of so-called platform most-favored nation clauses (PMFN) that require the online sellers not to offer better conditions on other distribution channels. Such clauses can align the interests between sellers and platforms to restrict competition. I illustrate that a platform can stabilize seller collusion to its own benefit. These results offer a novel rationale to treat PMFNs with scrutiny.
    Keywords: Platform MFN ; digital economics ; collusion in vertically-related markets ; agency model
    JEL: L13 L40 L50
    Date: 2022–11–29
  5. By: Chiara Farronato; Andrey Fradkin; Alexander MacKay
    Abstract: We study whether Amazon engages in self-preferencing on its marketplace by favoring its own brands (e.g., Amazon Basics) in search. To address this question, we collect new micro-level consumer search data using a custom browser extension installed by a panel of study participants. Using this methodology, we observe search positions, search behavior, and product characteristics. We find that Amazon branded products are indeed ranked higher than observably similar products in consumer search results. The prominence given to Amazon brands is 30% to 60% of the prominence granted to sponsored products.
    JEL: D12 D83 L13 L15 L81
    Date: 2023–01
  6. By: Elias Carroni (University of Bologna Author-Name: Leonardo Madio; University of Padova Author-Name: Shiva Shekhar; Tilburg University)
    Abstract: In most platform environments, the exclusive provision of premium content from leading creators (Superstars) is employed as a strategy to boost user participation and secure a competitive edge vis-Ã -vis rivals. In this article, we study the impact of Superstar exclusive content provi- sion on platform competition and complementors’ homing decisions. Two competing platforms facilitate interactions between consumers and suppliers, of which the latter are identified by the Superstar and a fringe of complementors (e.g., independent developers, amateurs). When platform competition is intense, more consumers become affiliated with the platform favored by Superstar exclusivity. This mechanism is self-reinforcing as it generates an entry cascade of complementors and some complementors singlehome on the favored platform. We find that cross-group externalities are key in shaping market outcomes. First, exclusivity benefits complementors and might make consumers better off when cross-group externalities are large enough. Second, contrary to con- ventional wisdom, vertical integration (platform-Superstar) may make exclusivity less likely than vertical separation under reasonable conditions. Finally, we discuss implications for the strategies of platform owners, managers of Superstars and complementors, and antitrust enforcers.
    Keywords: exclusivity, platforms, two-sided markets, vertical integration, network externalities.
    Date: 2023–01
  7. By: Tommy Staahl Gabrielsen (Department of Economics, University of Bergen); Bjørn Olav Johansen (Department of Economics, University of Bergen); Odd Rune Straume (NIPE/Center for Research in Economics and Management, University of Minho, Portugal; and Department of Economics, University of Bergen, Norway)
    Abstract: We analyze theoretically the efficiency of structural remedies in merger control in retail markets and show that this crucially depends on the retail chains´pricing policy. Whereas a retail merger can be perfectly remedied by divestiture of stores under local pricing, such remedies are not only less effective, but might even be counterproductive, if the chains set national prices. Paradoxically, such remedies might be even more counterproductive if the chains also compete locally along non-price dimensions such as quality. Our analysis suggests that antitrust authorities should be very cautious when reviewing structural remedies in retail markets with national pricing.
    Keywords: Retail mergers; structural remedies; national pricing.
    JEL: L11 L22 L41
    Date: 2022
  8. By: Luís Sá (NIPE/Center for Research in Economics and Management, University of Minho, Portugal); Odd Rune Straume (NIPE/Center for Research in Economics and Management, University of Minho, Portugal; and Department of Economics, University of Bergen, Norway)
    Abstract: We study competing hospitals' incentives for quality provision in a dynamic setting where healthcare is an experience good. In our model, the utility a patient derives from choosing a particular provider depends on a subjective component specifi c to the match between the patient and the provider, which can only be learned through experience. We find that the experience-good nature of healthcare can either reinforce or dampen the demand responsiveness to quality and the hospitals' incentives for quality provision, depending on two key factors: (i) the shape of the distribution of match-specific utilities, and (ii) the cost relationship between quality provision and treatment volume. Our analysis helps identify and understand the conditions required for the market-based provision of healthcare to deliver improved quality.
    Keywords: Hospital competition; experience goods; forward-looking consumers; expectations; quality.
    JEL: I11 I18 L13 L51
    Date: 2022
  9. By: Fabio M. Manenti (Department of Economics and Management M. Fanno, University of Padova); Luca Sandrini (Research Centre of Quantitative Social and Management Sciences, Budapest University of Technology and Economics)
    Abstract: We model a three-stage duopolistic game where firms first simultaneously choose the technological direction of their innovation, then invest in the chosen direction, and finally, compete. Investments can be in competing or non-competing innovations and their outcome is uncertain. If successful, a firm can be imitated by the rival. Patent protection prevents imitation and is granted to non-obvious innovations. We show that compared to a regime where negligible innovations are patentable, strengthening the non-obviousness requirement for patentability can increase market efficiency. Importantly, we also show that the level of the requirement may affect the direction of firms' R&D trajectories. While in a mild patent regime firms tend to invest in competing technologies, a stricter non-obviousness requirement may induce firms to operate in different technological areas, and this increases social welfare and consumer surplus. We illustrate our general theory through a stylised model of Cournot competition with process innovations.
    Keywords: patents, R&D, non-obviousness, direction of innovation
    JEL: L13 O31 O34
    Date: 2023–02
  10. By: Montag, Felix
    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
  11. By: Janet Currie; Anran Li; Molly Schnell
    Abstract: We ask how competition influences the prescribing practices of physicians. Law changes granting nurse practitioners (NPs) the ability to prescribe controlled substances without physician collaboration or oversight generate exogenous variation in competition. In response, we find that general practice physicians (GPs) significantly increase their prescribing of controlled substances such as opioids and controlled anti-anxiety medications. GPs also increase their co-prescribing of opioids and benzodiazepines, a practice that goes against prescribing guidelines. These effects are more pronounced in areas with more NPs per GP at baseline and are concentrated in physician specialties that compete most directly with NPs. Our findings are consistent with a simple model of physician behavior in which competition for patients leads physicians to move toward the preferences of marginal patients. These results demonstrate that more competition will not always lead to improvements in patient care and can instead lead to excessive service provision.
    JEL: I11 J44 L10
    Date: 2023–01
  12. By: Doi, Naoshi; Kono, Tatsuhito; Suzaki, Izumo
    Abstract: Airport operation costs are financed by charge revenues from airport users and funds transferred from general government funds. This study quantitatively optimizes the rates of three types of airport-related charges: per-passenger charges (e.g., passenger service facility charges), per-flight charges (e.g., landing fees), and aviation fuel tax, explicitly considering the marginal cost of public funds of the general funds. This study uses a route-level empirical structural model in which airlines with market power set both airfares and service quality (i.e., flight frequency). Our results show that it is optimal to increase the transfer from the general funds from the current amount and that the optimization increases social welfare by 19 percent. Even if the amount of the transfer is fixed at the current level, the social welfare can be increased by 10 percent only by adjusting the current rates of the airport-related charges. In particular, we show that charges should be adjusted so as to increase flight frequency on routes where small aircraft are used.
    Keywords: Optimal taxation, Airport-related charge, Marginal cost of public funds, Discrete choice model, Endogenous quality
    JEL: H21 H41 L13 R48
    Date: 2023–01
  13. By: Gaurab Aryal; Dennis J. Campbell; Federico Ciliberto; Ekaterina A. Khmelnitskaya
    Abstract: In the US airline industry, independent regional carriers fly passengers on behalf of different national airlines, giving rise to $\textit{common subcontracting}$. On the one hand, we find that subcontracting is associated with lower prices, confirming the accepted notion that regional airlines can fly passengers at lower costs. On the other hand, we find that $\textit{common}$ subcontracting is associated with higher prices. These two countervailing effects suggest that the growth of regional carriers can have anticompetitive implications for the airline industry. In line with the literature, we continue to find that multimarket contact among national airlines is associated with higher prices.
    Date: 2023–01

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