nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒03‒27
eight papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Competitive Model Selection in Algorithmic Targeting By Ganesh Iyer; T. Tony Ke
  2. The Effect of R&D on Quality, Productivity, and Welfare By Mons Chan; Amil Petrin; Frederic Warzynski
  3. Estimating Consumer Surplus Resulting from Lower Cross-Border E-Commerce Prices By Kim, Sukkyung
  4. Curation Strategy of Platforms in the Sharing Economy: A Simple Micro Economic Approach By Noriyuki Doi
  5. Financing Innovation with Innovation By Zhiyuan Chen; Minjie Deng; Min Fang
  6. The Economics of Digital Privacy By Avi Goldfarb; Verina F. Que
  7. Dynamic Pricing Regulation and Welfare in Insurance Markets By Naoki Aizawa; Ami Ko
  8. How the Internet Changed the Market for Print Media By Manudeep Bhuller; Tarjei Havnes; Jeremy McCauley; Magne Mogstad

  1. By: Ganesh Iyer; T. Tony Ke
    Abstract: This paper studies how market competition influences the algorithmic design choices of firms in the context of targeting. Firms face the general trade-off between bias and variance when choosing the design of a supervised learning algorithm in terms of model complexity or the number of predictors to accommodate. Each firm then appoints a data analyst that uses the chosen algorithm to estimate demand for multiple consumer segments, based on which, it devises a targeting policy to maximize estimated profit. We show that competition may induce firms to strategically choose simpler algorithms which involve more bias. This implies that more complex/flexible algorithms tend to have higher value for firms with greater monopoly power.
    JEL: D43 L13 M37
    Date: 2023–03
  2. By: Mons Chan; Amil Petrin; Frederic Warzynski
    Abstract: In this paper we provide a methodology that jointly studies production and demand for multi-product firms using detailed firm-product level data from Denmark. We estimate marginal cost by combining production function estimation with a cost function that allows for quasi-fixed inputs. We use a discrete choice demand model that extends insights from Berry, Levinsohn and Pakes (1995) to obtain a measure of the demand shock (quality). We estimate the relationship between product (process) R&D and quality (efficiency), and find strong evidence that process innovation is related to higher efficiency, while product innovation is associated with higher product quality. We discuss the welfare implications of these two distinct innovation activities.
    JEL: L1
    Date: 2023–02
  3. By: Kim, Sukkyung (Korea Institute for Industrial Economics and Trade)
    Abstract: Cross-border B2C e-commerce is growing rapidly in Korea. According to data released by Statistics Korea, Korea’s total retail import value from the cross-border e-commerce trade in 2017 stood at about KRW 2.2 trillion, while in 2021 it reached KRW 5.1 trillion.2 The total retail value of consumer goods in 2017 and in 2021 was KRW 440.3 trillion and KRW 518.5 trillion, respectively.3 Thus the share of the total retail value of consumer goods accounted for by cross-border e-commerce retail imports rose from 0.5 percent in 2017 to one percent in 2021. In the literature on cross-border e-commerce in Korea, studies have found that cross-border e-commerce increases consumer welfare. But no research has determined quantitatively how the degree to which this occurs. Therefore, this study aims to estimate the level of consumer welfare that domestic consumers can obtain from cross-border e-commerce. Increases in consumer welfare due to cross-border e-commerce can be divided into increases due to lower prices and increases due to wider product variety. This study aims to identify the increases in consumer welfare due to lower prices by estimating consumer surplus.
    Keywords: cross-border e-commerce; BDC e-commerce; consumer surplus; consumer welfare; consumer economics; exports; e-commerce exports; consumer choice; consumer decision-making; retails sales; retail distribution; innovation; competition policy
    JEL: F10 F12 F14 F16 F23 F31 I30 L81 O31 O38
    Date: 2023–02–28
  4. By: Noriyuki Doi (Emeritus Professor and Visiting Researcher at Innovation System Research Center, Kwansei Gakuin University)
    Abstract: Platform curation plays a key role in the sharing economy, and suggests challenging perspectives and opportunities in policy-making. This paper focuses on the curation by sharing platforms, and explains its incentives and social welfare effects, using a simple micro-economic theory, and taking into consideration some features observed in the sharing economy. And future policy and research agenda are summarized.
    Keywords: sharing economy, platform, curation, social welfare regulation
    JEL: L41 L42 L43
    Date: 2023–03
  5. By: Zhiyuan Chen; Minjie Deng; Min Fang
    Abstract: This paper documents that firms are increasingly financing innovation using their stock of innovation, measured as patents. We refer to this behavior as financing innovation with innovation. Drawing on patent collateral data from both the US and China, we first show that (1) in both countries, the total number and share of patents pledged as collateral have been rising steadily, (2) Chinese firms employ patents as collateral on a smaller scale and with a lower intensity than US firms, (3) firms increase their borrowing and innovation after they start to use patent collateral. We then construct a heterogeneous firm general equilibrium model featuring idiosyncratic productivity risk, innovation capital investment, and borrow- ing constrained by patent collateral. The model emphasizes two barriers that hinder the use of patent collateral: high inspection costs and low liquidation values of patent assets. We parameterize the model to firm-level panel data in the US and China and find that both barriers are significantly more severe in China than in the US. Finally, counterfactual analyses show that the gains in innovation, output, and welfare from reducing the inspection costs in China to the US level are substantial, moreso than enhancing the liquidation value of patent assets.
    Keywords: Patent collateral; innovation investment; financial frictions; firm dynamics;
    JEL: E22 G32 O31 O33
    Date: 2023–03–02
  6. By: Avi Goldfarb; Verina F. Que
    Abstract: There has been increasing attention to privacy in the media and in regulatory discussions. This is a consequence of the increased usefulness of digital data. The literature has emphasized the benefits and costs of digital data flows to consumers and firms. The benefits arise in the form of data-driven innovation, higher quality products and services that match consumer needs, and increased profits. The costs relate to intrinsic and instrumental values of privacy. Under standard economic assumptions, this framing of a cost-benefit tradeoff might suggest little role for regulation beyond ensuring consumers are appropriately informed in a robust competitive environment. The empirical literature thus far has focused on this direct cost-benefit assessment, examining how privacy regulations have affected various market outcomes. However, an increasing body of theory work emphasizes externalities related to data flows. These externalities, both positive and negative, suggest benefits to the targeted regulation of digital privacy.
    JEL: L51 L86
    Date: 2023–02
  7. By: Naoki Aizawa; Ami Ko
    Abstract: While the traditional role of insurers is to provide protection against idiosyncratic risks of individuals, insurers themselves face substantial uncertainties due to aggregate shocks. To prevent insurers from passing through aggregate risks to consumers, governments have increasingly adopted dynamic pricing regulations that limit insurers' ability to change premiums over time. This paper develops and estimates an equilibrium model with dynamic pricing and firm entry and uses it to evaluate the design of dynamic pricing regulations in the U.S. long-term care insurance (LTCI) market. We find that stricter dynamic pricing regulation lowers social welfare as the benefit from improved premium stability is outweighed by the cost of reduced insurer participation. The welfare loss from stricter dynamic pricing regulation could be mitigated if the government also expands public LTCI through Medicaid.
    JEL: D14 G22 I13 L11 L51
    Date: 2023–02
  8. By: Manudeep Bhuller; Tarjei Havnes; Jeremy McCauley; Magne Mogstad
    Abstract: Combining comprehensive data from the Norwegian media market on newspaper circulation, readership, revenues, factor inputs, and product characteristics with plausibly exogenous variation in the availability and adoption of broadband internet, this paper provides causal evidence on how the internet affected the traditional print media market. Household adoption of broadband internet triggered large reductions in print readership and circulation and equally large increases in online news readership. Despite strong substitution from print to online news consumption, newspaper firms’ revenues fell by almost 30%. Newspaper firms responded by dramatically cutting costs, either by shedding labor inputs or by reducing the physical size of newspaper sheets, and in doing so avoided meaningful losses in profits. The printed newspaper product available to customers also changed, as newspapers shifted content away from tabloid to more serious news. This paper offers a case study on how an adverse technology shock transmits through firms with multiple margins of adjustment, and provides an explanation for the economic resilience of newspapers.
    JEL: L11 L82 L86 O33 R22
    Date: 2023–02

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