nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒05‒08
ten papers chosen by

  1. Data, Competition, and Digital Platforms By Dirk Bergemann; Alessandro Bonatti
  2. Heterogeneity in the Pass-Through from Oil to Gasoline Prices: A New Instrument for Estimating the Price Elasticity of Gasoline Demand By Lutz Kilian; Xiaoqing Zhou
  3. Managed Campaigns and Data-Augmented Auctions for Digital Advertising By Dirk Bergemann; Alessandro Bonatti; Nicholas Wu
  4. Entry Decision, the Option to Delay Entry, and Business Cycles By Ia Vardishvili
  5. Interoperability between Ad-Financed Platforms with Endogenous Multi-Homing By Marc Bourreau; Adrien Raizonville; Guillaume Thébaudin
  6. An Anatomy of Monopsony: Search Frictions, Amenities and Bargaining in Concentrated Markets By David W. Berger; Kyle F. Herkenhoff; Andreas R. Kostøl; Simon Mongey
  7. Supply Chain Risk: Changes in Supplier Composition and Vertical Integration By Nuri Ersahin; Mariassunta Giannetti; Ruidi Huang
  8. Renewal of Companies Through Product Switching By Kuosmanen, Natalia; Valmari, Nelli
  9. Local and National Concentration Trends in Jobs and Sales: The Role of Structural Transformation By David Autor; Christina Patterson; John Van Reenen
  10. Merger Guidelines for the Labor Market By David W. Berger; Thomas Hasenzagl; Kyle F. Herkenhoff; Simon Mongey; Eric A. Posner

  1. By: Dirk Bergemann (Cowles Foundation, Yale University); Alessandro Bonatti
    Abstract: We analyze digital markets where a monopolist platform uses data to match multiproduct sellers with heterogeneous consumers who can purchase both on and off the platform. The platform sells targeted ads to sellers that recommend their products to consumers and reveals information to consumers about their values. The revenueoptimal mechanism is a managed advertising campaign that matches products and preferences efficiently. In equilibrium, sellers offer higher qualities at lower unit prices on than off the platform. Privacy-respecting data-governance rules such as organic search results or federated learning can lead to welfare gains for consumers.
    Keywords: Data, Data, Privacy, Data Governance, Digital Advertising, Competition, Digital Platforms, Digital Intermediaries, Personal Data, Matching, Price Discrimination, Automated Bidding, Algorithmic Bidding, Managed Advertising Campaigns, Showrooming
    JEL: D18 D44 D82 D83
    Date: 2023–04
  2. By: Lutz Kilian; Xiaoqing Zhou
    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. We show that these differences are primarily driven by the cost of producing and distributing gasoline, which varies with states’ access to oil and gasoline transportation infrastructure, refinery technology, and environmental regulations, creating cross-sectional gasoline price shocks in response to an aggregate oil price shock. Time-varying estimates do not support the view that the gasoline demand elasticity has declined in absolute value to near zero since the 1980s. The elasticity was stable near -0.3 until the end of 2014. It rose to about -0.2 in 2015-16, but has remained stable since 2016. Gasoline demand is more responsive in states with lower personal income, higher unemployment rates and lower urban population shares. There is no evidence for an asymmetry in the elasticity with respect to positive and negative gasoline price shocks. We illustrate how these elasticity estimates inform the recent policy debate about the impact of gasoline tax holidays on consumers’ discretionary income, about the demand destruction from the spike in gasoline prices after the invasion of Ukraine, and about the impact of rising gasoline prices on carbon emissions.
    Keywords: price elasticity of gasoline demand, pass-through, gasoline tax, gasoline supply, identification, IV, cross-section
    JEL: D12 Q41
    Date: 2023
  3. By: Dirk Bergemann (Cowles Foundation, Yale University); Alessandro Bonatti (MIT Sloan School of Management); Nicholas Wu (Cowles Foundation, Yale University)
    Abstract: We develop an auction model for digital advertising. A monopoly platform has access to data on the value of the match between advertisers and consumers. The platform support bidding with additional information and increase the feasible surplus for on-platform matches. Advertisers jointly determine their pricing strategy both on and off the platform, as well as their bidding for digital advertising on the platform. We compare a data-augmented second-price auction and a managed campaign mechanism. In the data-augmented auction, the bids by the advertisers are informed by the data of the platform regarding the value of the match. This results in a socially efficient allocation on the platform, but the advertisers increase their product prices off the platform to be more competitive on the platform. In consequence, the allocation off the platform is inefficient due to excessively high product prices. The managed campaign mechanism allows advertisers to submit budgets that are then transformed into matches and prices through an autobidding algorithm. Compared to the data-augmented second-price auction, the optimal managed campaign mechanism increases the revenue of the digital platform. The product prices off the platform increase and the consumer surplus decreases.
    Date: 2023–04
  4. By: Ia Vardishvili
    Abstract: I show that firms' ability to postpone entry has important implications for our understanding of the observed business cycle behavior of start-ups. I use a model that closely replicates the main features of the US firm dynamics to explore and quantify the mechanism. I find that the option to wait endogenously generates a countercyclical opportunity cost of entry: during recessions, a higher risk of failure increases the value of waiting, hence the cost of entry. The mechanism increases the elasticity of entrants to aggregate shocks five times. It is responsible for three-fourths of the observed persistent differences in the recessionary and expansionary cohorts' productivity, survival, and employment. Without the channel, existing models require either large shocks that generate excessive aggregate fluctuations or exogenous mechanisms to reconcile the observed dynamics of entrants. Overlooking this channel may also result in misleading predictions about entrants' responses to different shocks or policies.
    Keywords: Entry Decision; Delay; Option Value; Firm Dynamics; Business Cycles
    JEL: D25 E22 E23 E32 E37 L25
    Date: 2023–04
  5. By: Marc Bourreau; Adrien Raizonville; Guillaume Thébaudin
    Abstract: Platform interoperability is considered a powerful tool to promote competition in digital markets when network effects are at play. We study the effect of interoperability on competition between two ad-financed platforms, allowing for endogenous multi-homing of consumers. When the platforms are symmetric and decide non-cooperatively on their level of interoperability, interoperability emerges in equilibrium if the value of multi-homers relative to single-homers is sufficiently low for advertisers. From a welfare perspective, the equilibrium level of interoperability can be either too low or too high. When one (“large”) platform has an installed base of customers, its incentive to make its services interoperable is lower than for the other, smaller platform. However, mandating interoperability between the asymmetric platforms is not always socially optimal.
    Keywords: interoperability, platform competition, multi-homing, advertising
    JEL: L13 L86 L15
    Date: 2023
  6. By: David W. Berger; Kyle F. Herkenhoff; Andreas R. Kostøl; Simon Mongey
    Abstract: We contribute a theory in which three channels interact to determine the degree of monopsony power and therefore the wedge between a worker’s spot wage and her marginal product (henceforth, the wage markdown): (1) heterogeneity in worker-firm-specific preferences (nonwage amenities), (2) firm granularity, and (3) off- and on-the-job search frictions. We use Norwegian data to discipline each channel and then reproduce novel reduced-form empirical relationships between market concentration, job flows, wages and wage inequality. Our main exercise quantifies the contribution of each channel to income inequality and wage markdowns. The markdowns are 21 percent in our baseline estimation. Removing nonwage amenity dispersion narrows them by a third. Giving the next-lowest-ranked competitor a seat at the bargaining table narrows them by half. Removing search frictions narrows them by two-thirds. Each counterfactual shows decreased wage inequality and increased welfare.
    JEL: E02 J01 J42
    Date: 2023–04
  7. By: Nuri Ersahin; Mariassunta Giannetti; Ruidi Huang
    Abstract: Using textual analysis of earnings conference calls, we quantify firms’ supply chain risk and its sources. Our proxy for supply chain risk exhibits large cross-sectional and time-series variation that aligns with reasonable priors and is unprecedently high during the Covid-19 pandemic. In addition, a firm exhibits high supply chain risk when its suppliers also do so. We find that firms that experience an increase in supply chain risk establish relationships with closer and domestic suppliers and with suppliers that are industry leaders, but also continue to work with suppliers in other continents. In addition, firms that do not face financial constraints become more likely to engage in vertical mergers and acquisitions.
    JEL: F15 G31 G34
    Date: 2023–04
  8. By: Kuosmanen, Natalia; Valmari, Nelli
    Abstract: Abstract The past few decades have witnessed a slowdown in productivity growth in many advanced economies, including Finland. Against this backdrop, this study investigates product switching in Finnish manufacturing firms during the period of 2009–2019. The findings indicate a growing trend towards specialization, with more firms focusing on a single product. In general, product diversity has decreased over time. Multi-product firms and those with diverse output tend to be larger in terms of value added, sales, and employment. Additionally, these firms are also more likely to export their products compared to single-product firms. While single-product firms outperform multi-product firms in productivity, the study shows that product diversity is positively related to productivity. Furthermore, the study demonstrates that there is a positive relationship between product scope expansion and contraction and an increase in firm size, as compared to firms where product scopes remain unchanged. These findings suggest that product switching is closely related to the economic outcomes of Finnish manufacturing firms.
    Keywords: Manufacturing firms, Multi-product firms, Product switching
    JEL: D22 D24 L11 L25 O14
    Date: 2023–04–21
  9. By: David Autor; Christina Patterson; John Van Reenen
    Abstract: National industrial concentration in the U.S. has risen sharply since the early 1980s, but there remains dispute over whether local geographic concentration has followed a similar trend. Using near population data from the Economic Censuses, we confirm and extend existing evidence on national U.S. industrial concentration while providing novel evidence on local concentration. We document that the Herfindhahl index of local employment concentration, measured at the county-by-NAICS six-digit-industry cell level, fell between 1992 and 2017 even as local sales concentration rose. The divergence between national and local employment concentration trends is attributable to the structural transformation of U.S. economic activity: both sales and employment concentration rose within industry-by-county cells; but reallocation of sales and employment from relatively concentrated Manufacturing industries (e.g., steel mills) towards relatively un-concentrated Service industries (e.g. hair salons) reduced local concentration. A stronger between-sector shift in employment relative to sales drove the net fall in local employment concentration. Holding industry employment shares at their 1992 level, average local employment concentration would have risen by about 9% by 2017. Instead, it fell by 5%. Falling local employment concentration may intensify competition for recent market entrants. Simultaneously, rising within industry-by-geography concentration may weaken competition for incumbent workers who have limited sectoral mobility. To facilitate analysis, we have made data on these trends available for download.
    JEL: E23 J42 L10 L11 L22 R11 R12
    Date: 2023–04
  10. By: David W. Berger; Thomas Hasenzagl; Kyle F. Herkenhoff; Simon Mongey; Eric A. Posner
    Abstract: While the labor market implications of mergers have been historically ignored as “out of market” effects, recent actions by the Department of Justice (DOJ) place buyer market power (i.e., monopsony) at the forefront of antitrust policy. We develop a theory of multi-plant ownership and monopsony to help guide this new policy focus. We estimate the model using U.S. Census data and demonstrate the model’s ability to replicate empirically documented paths of employment and wages following mergers. We then simulate a representative set of U.S. mergers in order to evaluate merger review thresholds. Our main exercise applies the DOJ and FTC’s product market concentration thresholds to local labor markets. Assuming mergers generate efficiency gains of 5 percent, our simulations suggest that workers are harmed, on average, under the enforcement of the more lenient 2010 merger guidelines and unharmed, on average, under enforcement of the more stringent 1982 merger guidelines. We also provide a framework for further research evaluating alternative concentration thresholds based on assumptions about the efficiency effects of mergers and the resource constraints of regulators. Finally, we provide guidance for using the Gross Downward Wage Pressure method for evaluating the impact of mergers on labor markets.
    JEL: D40 E20 H0 J0 K0 L0
    Date: 2023–04

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