nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒04‒03
ten papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Search and Competition Under Product Quality Uncertainty By Chen, Yongmin
  2. Product Innovation with Vertical Differentiation: Is a Monopolist's Incentive Weaker? By Serge Moresi; Marius Schwartz
  3. Rivals’ Exit and Vertical Merger Evaluation By Javier D. Donna; Pedro Pereira
  4. An Empirical Analysis of Optimal Nonlinear Pricing By Soheil Ghili; Russ Yoon
  5. Is List Pricing and Discounting Procompetitive? Tacit Collusion in a Bertrand-Edgeworth Duopoly. By Roman Fossati; Roberto Hernan González; Praveen Kujal
  6. Q-Learning algorithms in a Hotelling model By Lucila Porto
  7. The Expansion of Product Varieties in the New Age of Advertising By Salome Baslandze; Jeremy Greenwood; Ricardo Marto; Sara Moreira
  8. Competition, regulation and growth in a digitized world: Dealing with emerging competition issues in digital markets By Giuseppe Nicoletti; Cristiana Vitale; Carolina Abate
  9. Heterogeneity in the pass-through from oil to gasoline prices: A new instrument for estimating the price elasticity of gasoline demand By Kilian, Lutz; Zhou, Xiaoqing
  10. Market power in the Argentine liquid fuels wholesale chain. By María T. Verónica Culós; María Florencia Gabrielli; Marcos Herrera Gómez

  1. By: Chen, Yongmin
    Abstract: I review models of consumer search and competition when product quality is uncertain and differs across firms. Although firms are vertically---and possibly also horizontally---differentiated, an appropriate symmetric price equilibrium with optimal consumer search can be neatly characterized. I propose a "random-quality" framework that unifies these models and discuss their insights on the operation of consumer search markets, focusing on (i) online advertising and search through platforms, (ii) the welfare effects of entry in search markets, and (iii) the role of quality observability under search frictions. I suggest directions for further research on these and related topics.
    Keywords: consumer search, search cost, competition, product quality, firm quality, platform, entry, inspection goods, experience goods, quality observability.
    JEL: D8 L1
    Date: 2023–03–06
  2. By: Serge Moresi (Charles River Associates, Inc.); Marius Schwartz (Department of Economics, Georgetown University)
    Abstract: Extant literature shows that Arrow’s famous result—a secure monopolist gains less from a nondrastic process innovation than would a competitive firm—does not always extend to nondrastic product innovations. If the new product is horizontally differentiated, the monopolist can have a greater incentive to add the new product than a firm that would face competition from the old product; but the monopolist’s incentive to add the new product cannot be greater if the new product is vertically differentiated with higher quality than the old. This paper compares the incentives when the new product is vertically differentiated but of lower quality, a common case empirically. We show that, as with horizontal differentiation, the monopolist can have the greatest incentive to add the new product. However, in all the cases analyzed, consumer welfare (though not total welfare) is lower under monopoly, even when only the monopolist would add the new product. Our analysis also helps clarify why the ranking of incentives depends on the type of product differentiation and on whether the market is covered or not.
    Keywords: Product Innovation Incentives, Vertical Differentiation, Monopoly vs. Competition
    JEL: L1 L4
    Date: 2023–01–22
  3. By: Javier D. Donna (University of Florida); Pedro Pereira (Instituto Universitário de Lisboa)
    Abstract: We discuss a subset of vertical mergers, where the exercise of market power and the efficiencies enabled by a vertical merger reduce rivals’ profits, making rivals’ exit a potentially serious concern. Rivals’ exit can fundamentally alter the welfare analysis of vertical mergers due to the reduction in product variety to consumers and the reduction in the number of competitors that would otherwise exert downward pricing pressure. An exit-inducing vertical merger might reduce welfare even if it is a welfare-enhancing merger absent exit. We present a theoretical framework to analyze vertical mergers that focuses on the possibility and consequences of exit, discuss the antitrust implications for merger evaluation, and provide examples. We argue that the possibility of rivals’ exit should be an integral part of the analysis of vertical mergers.
    Keywords: Antitrust, Vertical Mergers, Rivals’ Exit, Double Marginalization, Merger Evaluation, Competition Policy.
    JEL: K21 K41 L42 L44 L52
    Date: 2023–03
  4. By: Soheil Ghili; Russ Yoon
    Abstract: In "continuous choice" settings, consumers decide not only on whether to purchase a product, but also on how much to purchase. As a result, firms should optimize a full price schedule rather than a single price point. This paper provides a methodology to empirically estimate the optimal schedule under multi-dimensional consumer heterogeneity. We apply our method to novel data from an educational-services firm that contains purchase-size information not only for deals that materialized, but also for potential deals that eventually failed. We show that the optimal second-degree price discrimination (i.e., optimal nonlinear tariff) improves the firm's profit upon linear pricing by about 7.9%. That said, this second-degree price discrimination scheme only recovers 7.4% of the gap between the profitability of linear pricing (i.e., no price discrimination) and that of infeasible first degree price discrimination. We also conduct several further counterfactual analyses (i) comparing the role of demand- v.s. cost-side factors in shaping the optimal price schedule, (ii) examining third-degree price discrimination, and (iii) empirically quantifying the magnitude by which incentive-compatibility constraints impact the optimal pricing and profits.
    Date: 2023–02
  5. By: Roman Fossati; Roberto Hernan González; Praveen Kujal
    Abstract: List-pricing and discounting is a common practice in retail and wholesale markets. Under this pricing mechanism, a posted list price is offered to sellers in a prior stage which can then de discounted at a later in a second stage. The practice of list pricing and discounting is viewed as collusive theoretically, however, its interpretation amongst competition authorities varies from being pro-competitive to being a collusion facilitating device. We experimentally test how list pricing and discounting impact prices in a capacity constrained Bertrand-Edgeworth duopoly with symmetric and asymmetric firms. We find evidence of collusion under list pricing and discounting with symmetric as well as with asymmetric firms relative to a baseline case without the discounting stage.
    JEL: C9 L0 L1 L4 L11 L13
    Date: 2022–11
  6. By: Lucila Porto
    Abstract: What if Q-Learning algorithms set not only prices but also the degree of differentiation between them? In this paper, I tackle this question by analyzing the competition between two Q-Learning algorithms in a Hotelling setting. I find that most of the simulations converge to a Nash Equilibrium where the algorithms are playing non-competitive strategies. In most simulations, they optimally learn not to differentiate each other and to set a collusive price. An underlying deviation and punishment scheme sustains this implicit agreement. The results are robust to the enlargement of the action space and the introduction of relocalization costs.
    JEL: L1 L4
    Date: 2022–11
  7. By: Salome Baslandze (Federal Reserve Bank of Atlanta); Jeremy Greenwood (University of Pennsylvania); Ricardo Marto (University of Pennsylvania); Sara Moreira (Northwestern University)
    Abstract: The last decades have seen large improvements in advertising technology that allowed firms to target better specific consumers. The relationship between advertising, the rise of product varieties, and economic welfare is studied here. A model of advertising and product varieties is developed, where firms choose the intensity of digital ads directed at specific consumers as well traditional ads that are undirected. The calibrated model shows that improvements in digital advertising have driven the rise in product varieties over time. Causal empirical evidence, using detailed micro data on firms’ products and advertising choices for the 1995-2015 period and exogenous variation in consumers’ differential access to the internet, supports the suggested theoretical mechanism.
    Keywords: causality, digital (directed) advertising, lightening strikes, micro-level data, product lines, regression analysis, specialization, targeting, traditional (undirected) advertising, varieties
    JEL: E13 L15 I31 M37 O14 O31
    Date: 2023–03
  8. By: Giuseppe Nicoletti; Cristiana Vitale; Carolina Abate
    Abstract: Digital markets have raised a number of new competition challenges. Ex-post competition policy appears not to be able to address them in their entirety and with the necessary speed. There is considerable consensus, among academics and policy-makers, that ex-ante regulatory policies are needed to avoid competition being stifled in these markets, with a negative impact on productivity and innovation. As a result, major OECD economies are discussing or have approved regulatory proposals with the aim to foster contestability and fair trade in digital markets.
    Keywords: Competition, Digital Economy, Digital Market Act, Digital Markets, Gatekeepers, Platforms, Product Market Regulation, Productivity, Regulation
    JEL: D4 K3 L1 L2 L4 L5
    Date: 2023–03–20
  9. By: Kilian, Lutz; Zhou, Xiaoqing
    Abstract: We propose a new instrument for estimating the price elasticity of gasoline demand that exploits systematic differences across U.S. states in the pass-through of oil price shocks to retail gasoline prices. These differences, which are primarily driven by variation in the cost of producing and distributing gasoline, create cross-sectional dispersion in gasoline price growth in response to an aggregate oil price shock. We find that the elasticity was stable near -0.3 until the end of 2014, but subsequently rose to about -0.2. Our estimates inform the recent debate about gasoline-tax holidays and policies to reduce carbon emissions.
    Keywords: Price elasticity of gasoline demand, pass-through, gasoline tax, gasoline supply, identification, IV, cross-section
    JEL: D12 L71 Q31 Q41 Q48 R48
    Date: 2023
  10. By: María T. Verónica Culós; María Florencia Gabrielli; Marcos Herrera Gómez
    Abstract: The liquid fuels market in Argentina is characterized by a high level of concentration, especially in local geographic areas. This paper studies the demand of the liquid fuels wholesale chain in Argentina, using the discrete choice approach, based on the premise that different firms offer differentiated goods, by virtue of the intrinsic characteristics of the good, and that such differentiation gives them the power to set prices above marginal production costs. The difference between prices and marginal costs determines the firms market power. Using a novel dataset, we provide new empirical evidence that quantifies market power across firms and regions.
    JEL: C52 L13
    Date: 2022–11

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