nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒02‒27
eleven papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Globalization and Firm Performance By Catão, Luis A. V.; de Faria, Pedro; Martins, António; Portela, Miguel
  2. Equilibria and their stability in an asymmetric duopoly model of Kopel By Xiaoliang Li; Kongyan Chen
  3. A Capability Approach to Merger Review By Boa, I.; Elliott, M.; Foster, D.
  4. The Optimality of Constant Mark-Up Pricing By Dirk Bergemann; Tibor Heumann; Stephen Morris
  5. Competition in supply functions and conjectural variations: a unified solution By Flavio M. Menezes; John Quiggin
  6. Circular Business Models: Product Design and Consumer Participation By Stefan Buehler; Rachel Chen; Daniel Halbheer
  7. Industry Linkages from Joint Production By Xiang Ding
  8. Anticompetitive bundling when buyers compete By Taylor, Greg
  9. Welfare Cost of Mobile Spectrum (Mis)allocation By Aimene, Louise; Guiffard, Jean-Baptiste; Ivaldi, Marc; Liang, Julienne
  10. Data and Competition: A Simple Framework By de Cornière, Alexandre; Taylor, Greg
  11. Monopsony Makes Firms not only Small but also Unproductive: Why East Germany has not Converged By Rüdiger Bachmann; Christian Bayer; Heiko Stüber; Felix Wellschmied

  1. By: Catão, Luis A. V. (Inter-American Development Bank); de Faria, Pedro (University of Groningen); Martins, António (ISEG); Portela, Miguel (University of Minho)
    Abstract: Using a new panel dataset of about 140 thousand Portuguese firms during 2006-2019, we measure the effects of globalization on firm-level performance along four dimensions: ownership of capital, employment of foreign-seasoned managers, and participation in export and import markets. Once at least one of these channels is active, firms are larger, less leveraged, employ better qualified workers, and pay higher hourly wages. We also uncover a pecking order of effects, with export-market participation having generally larger positive effects on productivity and negative effects on unit labor costs. All four channels interact, sometimes complementing, sometimes substituting one another. For instance, foreign ownership boosts exports at the extensive margin while being an importer and/or having a foreign-experienced manager help at the intensive margin; conversely, the marginal productivity gains of foreign-ownership are greatly reduced when the firm is already an exporter. Breaking down the effects of each channel by firm size, we show that smaller firms stand the most to gain from export market participation and foreign-ownership.
    Keywords: foreign direct investment, entrepreneurship, trade, productivity, wages, labor costs, leverage, firm size distribution
    JEL: D22 D24 F23 G34 J3 L20 M10
    Date: 2023–01
  2. By: Xiaoliang Li; Kongyan Chen
    Abstract: In this paper, we investigate the equilibria and their stability in an asymmetric duopoly model of Kopel by using several tools based on symbolic computations. We explore the possible positions of the equilibria in Kopel's model. We discuss the possibility of the existence of multiple positive equilibria and establish a necessary and sufficient condition for a given number of equilibria to exist. Furthermore, if the two duopolists adopt the best response reactions or homogeneous adaptive expectations, we establish rigorous conditions for the existence of distinct numbers of positive equilibria for the first time.
    Date: 2023–01
  3. By: Boa, I.; Elliott, M.; Foster, D.
    Abstract: Merger analysis typically focuses on possible strategic price effects in markets where there is existing competition between the merging firms. We refer to this as the product based approach. This paper proposes a complementary approach based on an assessment of the merging firms’ capabilities that can provide insights on potential merger effects, including in circumstances where the product based approach offers little practical guidance to antitrust authorities. Our approach is rooted in the resource-based view of business strategy that starts from the premise that it is a firm’s capabilities (sometimes called core competencies), which drive its competitive advantage across markets. We argue that mergers in which firms’ capabilities are less overlapping are more pro-competitive on several dimensions: immediate competition in overlapping markets, immediate competition in other markets, long-run competition and innovation.
    Date: 2023–02–03
  4. By: Dirk Bergemann (Yale University); Tibor Heumann (Yale University); Stephen Morris (Cowles Foundation, Yale University)
    Abstract: We consider a nonlinear pricing environment with private information. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible distributions of willingness to pay of the buyers. With a constant elasticity cost function, constant markup pricing provides the optimal revenue guarantee across all possible distributions of willingness to pay and the lower bound is attained under a Pareto distribution. We characterize how profits and consumer surplus vary with the distribution of values and show that Pareto distributions are extremal. We also provide a revenue guarantee for general cost functions. We establish equivalent results for optimal procurement policies that support maximal surplus guarantees for the buyer given all possible cost distributions of the sellers.
    Date: 2023–01
  5. By: Flavio M. Menezes (Australian Institute for Business and Economics, University of Queensland, Brisbane, Australia); John Quiggin (School of Economics, University of Queensland, Brisbane, Australia)
    Abstract: This paper reconciles the concepts of ex ante and ex post supply function equilibria of, respectively, Klemperer and Meyer (1989) and Menezes and Quiggin (2020) with the conjectural variations equilibrium of Bowley (1924) and Bresnahan (1981). We show that under appropriate conditions, the ex ante and ex post equilibrium supply curves coincide with each other and with the consistent conjectural equilibrium solution. Further, this is a dominant strategy equilibrium for both ex ante and ex post games, and represents the case in which players are indifferent regarding move order. We explore the implications of our results for empirical work.
    Keywords: Imperfect competition, games in supply functions, conjectural variations
    JEL: D43 L13
    Date: 2023–02–04
  6. By: Stefan Buehler (HSG - University of St.Gallen); Rachel Chen (UC - University of California); Daniel Halbheer (HEC Paris - Ecole des Hautes Etudes Commerciales)
    Abstract: This paper develops an analytical framework to study how firms should design a product by choosing its recyclability and price in a market where consumers adopt a life-cycle approach and decide whether to recycle an end-of-life product. We show that the firm offers a non-recyclable product in the absence of a reverse supply chain even if consumers care about recyclability – the linear take-make-dispose model. By operating a reverse supply chain, the firm generates revenue from both sales and recycling, and determines recyclability by balancing the marginal changes in the consumers' expected end-of-life utility and the unit production cost net of the expected value of the recovered resources. We identify conditions under which the firm offers a fully recyclable product and all consumers return the product for recycling – the fully circular model. In addition, we show that stronger concerns about recyclability and a higher market value of the recovered resources increase recyclability, but have an ambiguous impact on price, demand, profit, and the overall waste footprint of the firm. Further, we characterize the conditions under which transitioning from a linear to a circular business model is profitable and socially desirable. Finally, we show when a deposit-refund system, product buyback, and retaining product ownership are effective tools to boost circularity.
    Keywords: Circular business model, waste footprint, resource footprint, recycling, reverse supply chain, pricing
    Date: 2022–12–30
  7. By: Xiang Ding
    Abstract: I develop a theory of joint production to quantify aggregate economies of scope. In US manufacturing data, increased export demand in one industry raises a firm’s sales in its other industries that share knowledge inputs like R&D and software. I estimate that knowledge inputs contribute to economies of scope through their scalability and partial non-rivalry within the firm. On average a 10 percent increase in output in one industry lowers prices in other industries by 0.4 percent. Such economies of scope manifest disproportionately among knowledge proximate industries and imply large spillover impacts of recent US-China trade policy on producer prices.
    Date: 2023–01
  8. By: Taylor, Greg
    Abstract: We study the profitability of bundling by an upstream firm who licenses com-plementary technologies to downstream competitors, and who faces a superior competitor for one of its technologies. In an otherwise standard “Chicago-style” model, we show that the existence of downstream competition can make inefficient bundling profitable. Forcing downstream firms to use a less efficient technology can soften competition, thus allowing the upstream firm to extract more profit through the licensing of its monopolized technology. Bundling is more likely to be profitable if downstream competition is intense and if technologies are strongly complementary. The mechanism requires a public commitment to bundling (e.g. technical bundling) and the unobservability of the contracts offered to downstream firms. A similar logic can make it profitable for the upstream firm to degrade the interoperability between its technologies and those of its rivals, even without foreclosing competition.
    Date: 2023–01–31
  9. By: Aimene, Louise; Guiffard, Jean-Baptiste; Ivaldi, Marc; Liang, Julienne
    Abstract: Conditions under which spectrum is allocated are significant in determining the market structure in the telecom sector which in turn affects the prices and the quality of mobile services. In a more concentrated market, the quantity of spectrum is less diluted, and operators can offer higher quality to their customers; In a more competitive market, consumers can benefit from a lower price but at the expense of less quality for each operator. To address this trade-off, we first fit a demand model of mobile telecommunications services on a unique panel database of 23 European MNOs; we then conduct counterfactual simulations to measure the effect on consumer surplus of different schemes of spectrum allocation in Germany. Reallocating additional spectrum to three instead of four operators is consumer welfare improving as increasing prices is compensated by larger improvement in quality.
    Keywords: spectrum allocation; network investment; market structure; investment and; competition
    JEL: L40 L96 L11
    Date: 2023–02
  10. By: de Cornière, Alexandre; Taylor, Greg
    Abstract: Does enhanced access to data foster or hinder competition among firms? Using a competition-in-utility framework that encompasses many situations where firms use data, we model data as a revenue-shifter and identify two opposite effects: a mark-up effect according to which data induces firms to compete harder, and a surplus-extraction effect. We provide conditions for data to be pro- or anti-competitive, requiring neither knowledge of demand nor computation of equilibrium. We apply our results to situations where data is used to recommend products, monitor insuree behavior, price-discriminate, or target advertising. We also revisit the issue of data and market structure.
    JEL: L1 L4 L5
    Date: 2023–01–31
  11. By: Rüdiger Bachmann; Christian Bayer; Heiko Stüber; Felix Wellschmied
    Abstract: When employers face a trade-o between being large and paying low wages|and in this sense have monopsony power|some productive employers decide to acquire few customers, forgo sales, and remain small. These decisions have adverse consequences for aggregate labor productivity. Using high-quality administrative data from Germany, we document that East German plants (compared to West German ones) face steeper size-wage curves, invest less into marketing, remain smaller, and are less productive. A model with labor market monopsony, product market power, and customer acquisition matching these features of the data predicts ten percent lower aggregate labor productivity in East Germany.
    Keywords: aggregate productivity, plant heterogeneity, unions, monopsony power, size-wage curve, customer capital, size distortions
    JEL: E20 E23 E24 J20 J42 J50
    Date: 2023–02

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