nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒04‒24
five papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Effects of the Pandemic on Market Power and Profitability By Juan Andres Espinosa-Torres; Jaime Ramirez-Cuellar
  2. Pretend-But-Perform Regulation of a Duopoly under Three Competition Modes By Saglam, Ismail
  3. The Economics of Royalty Rates in Plant Breeding By Adrien Hervouet; Stéphane Lemarié
  4. When Is Product Personalization Profit-Enhancing? A Behavior-Based Discrimination Model By Didier Laussel; Joana Resende
  5. Why Do Platforms Charge Proportional Fees? Commitment and Seller Participation By Johannes Muthers; Sebastian Wismer

  1. By: Juan Andres Espinosa-Torres; Jaime Ramirez-Cuellar
    Abstract: We explore firm-level markup and profit rates during the COVID-19 pandemic for a panel of 3, 611 publicly traded firms in Compustat and find increases for the average firm. We offer conditions to give markups and profit rate forecasts a causal interpretation of what would have happened had the pandemic not happened. Our estimations suggest that had the pandemic not happened, markups would have been 4% and 7% higher than observed in 2020 and 2021, respectively, and profit rates would have been 2.1 and 6.4 percentage points lower. We perform a battery of tests to assess the robustness of our approach. We further show significant heterogeneity in the impact of the pandemic on firms by key firm characteristics and industry. We find that firms with lower than forecasted markups tend to have lower stock-exchange tenure and fewer employees.
    Date: 2023–03
  2. By: Saglam, Ismail
    Abstract: This paper considers a duopoly with asymmetric costs and demand uncertainty to study the welfare effects of pretend-but-perform regulation (PPR) of Koray and Sertel (1988) under three modes of competition, involving the Cournot, conjectural variations, and supply function competitions. PPR induces a two-stage game where each firm declares in the first stage a cost report and produces in the second stage accordingly. Theoretically characterizing and numerically computing the equilibrium of this game, we show that the consumer surplus increases if PPR is applied under the Cournot competition and it decreases if PPR is applied under the other modes of competition.
    Keywords: Duopoly; regulation, Cournot, conjectural variations, supply function equilibrium.
    JEL: D43 L13 L51
    Date: 2022–12
  3. By: Adrien Hervouet; Stéphane Lemarié
    Abstract: In the seed sector, for some self-pollinated varieties such as wheat, innovative breeders compete directly with self-producing farmers for commercializing their new seed varieties. The use of farm-saved seed (FSS) can reduce breeders’ incentive to innovate. Several countries have established different royalty systems for both certified seed and FSS to reduce such inefficiencies. In this article, we develop a theoretical model to compare these different systems. More precisely, we compare six different systems by analyzing their impact on the incentive to innovate, as well as production efficiencies at both the seed and agricultural production levels. We show that royalty systems leading to a certain proportion of FSS are welfare improving. The systems leading the highest total welfare levels are those in which the royalty level on FSS is regulated, i.e., either defined directly by the regulator (French or UK systems) or imposed at the same level of certified seed (Australian system). When all economic effects are taken into account, the Australian system performs better with high research costs. Conversely, with low research costs, the best system is either the French or the UK system, depending on the relative cost of producing FSS vs. certified seed.
    Keywords: Farm-Saved Seeds, Intellectual Property Rights, Plant Breeders' Rights, Royalty Rates
    JEL: L13 O34 O38 Q16
    Date: 2023–04
  4. By: Didier Laussel (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Joana Resende (Cef.up, Economics Department, University of Porto)
    Abstract: This paper investigates duopoly competition when horizontally differentiated firms are able to make personalized product-price offers to returning customers, within a behavior-based discrimination model. In the second period, firms can profile old customers according to their preferences, selling them targeted products at personalized prices. Product-price personalization (PP) allows firms to retain all old customers, eliminating second-period customer poaching. The overall profit effects of PP are shown to be ambiguous. In the second period, PP improves the matching between customers' preferences and firms' offers, but firms do not make any revenues in the rival's turf. In the Bertrand outcome, second-period profits only increase for both firms if the size of their old turfs are not too different or initial products are not too differentiated. However, the additional second-period profits may be offset by lower first-period profits. PP is likely to increase firms' overall discounted profits when consumers' (firms') discount factor is low (high) and firms' initial products are exogenous and sufficiently different. When the location of initial products is endogenous, profits are hurt because of an additional location (strategic) effect aggravating head-to-head competition in the first period. Likewise, when a fraction of active consumers conceals their identity, PP increases second-period profits at the cost of aggressive first-period price competition. Finally, we show that the room for profitable PP enlarges considerably if firms rely on PP as an effective device to sustain tacit collusive outcomes, with firms credibly threatening to respond to first-period price deviations with second-period aggressive relocations of their standard products. This paper was accepted by Matthew Shum, marketing.
    Keywords: behavior-based discrimination, price and product targeting, consumer poaching, consumer retention, segmentation, tacit collusion
    Date: 2022–12
  5. By: Johannes Muthers; Sebastian Wismer
    Abstract: This paper deals with trade platforms whose operators not only allow third party sellers to offer their products to consumers, but also offer products themselves. In this context, the platform operator faces a hold-up problem if he uses classical twopart tariffs only as potential competition between the platform operator and sellers reduces platform attractiveness. Since some sellers refuse to join the platform, some products that are not known to the platform operator will not be offered at all. We find that revenue-based fees lower the platform operator’s incentives to compete with sellers, increasing platform attractiveness. Therefore, charging such proportional fees can be profitable, which may explain why several trade platforms indeed charge proportional fees.
    Keywords: Intermediation, Platform Tariff, Hold-Up Problem
    JEL: D40 L14 L81
    Date: 2023–03

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