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on Industrial Organization |
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Issue of 2023‒06‒19
eleven papers chosen by |
| By: | Siddhartha Banerjee; Kamesh Munagala; Yiheng Shen; Kangning Wang |
| Abstract: | A seller is pricing identical copies of a good to a stream of unit-demand buyers. Each buyer has a value on the good as his private information. The seller only knows the empirical value distribution of the buyer population and chooses the revenue-optimal price. We consider a widely studied third-degree price discrimination model where an information intermediary with perfect knowledge of the arriving buyer's value sends a signal to the seller, hence changing the seller's posterior and inducing the seller to set a personalized posted price. Prior work of Bergemann, Brooks, and Morris (American Economic Review, 2015) has shown the existence of a signaling scheme that preserves seller revenue, while always selling the item, hence maximizing consumer surplus. In a departure from prior work, we ask whether the consumer surplus generated is fairly distributed among buyers with different values. To this end, we aim to maximize welfare functions that reward more balanced surplus allocations. Our main result is the surprising existence of a novel signaling scheme that simultaneously $8$-approximates all welfare functions that are non-negative, monotonically increasing, symmetric, and concave, compared with any other signaling scheme. Classical examples of such welfare functions include the utilitarian social welfare, the Nash welfare, and the max-min welfare. Such a guarantee cannot be given by any consumer-surplus-maximizing scheme -- which are the ones typically studied in the literature. In addition, our scheme is socially efficient, and has the fairness property that buyers with higher values enjoy higher expected surplus, which is not always the case for existing schemes. |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2305.07006&r=ind |
| By: | Lin William Cong; Siguang Li |
| Abstract: | With the rise of social media and streaming platforms, firms and brand-owners increasingly depend on influencers to attract consumers, who care about both common product quality and consumer-influencer interaction. Sellers thus compete in both influencer and product markets. As outreach and distribution technologies improve, influencer payoffs and income inequality change non-monotonically. More powerful influencers sell better-quality products, but pluralism in style mitigates market concentration by effectively differentiating consumer experience. Influencer style dispersion substitutes horizontal product differentiation but serves as either complement (small dispersion) or substitute (large dispersion) to vertical product differentiation. The assortative matching between sellers and influencers remains under endogenous influence-building, with the maximal differentiation principle recovered in the limit of costless style acquisition. Meanwhile, influencers may under-invest in consumer outreach to avoid exacerbating price competition. Finally, while requiring balanced seller-influencer matching can encourage seller competition, uni-directional exclusivity can improve welfare for sufficiently differentiated products and uncrowded influencer markets. |
| JEL: | L11 L20 L51 M31 M37 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31243&r=ind |
| By: | Rhodes, Andrew |
| Abstract: | Drip pricing arises when a firm initially advertises a low price, then reveals additional fees as the consumer advances through the purchase process. We give examples of firms that have been pursued for engaging in drip pricing. We summarize theoretical papers on the topic, emphasizing the importance of whether drip prices are optional or mandatory, as well as the degree of consumer sophistication. We also discuss empirical papers which examine how consumers respond to drip pricing, and which examine how the ability to do drip pricing affects firm profitability. False advertising arises when firms make false claims about the “quality” of their product, which in turn cause consumers to pay more than they otherwise might. We give examples of firms that have been pursued for making such false claims. We summarize theoretical papers on the topic, emphasizing that it may not be optimal for consumers or society to impose very large fines for false advertising. For example, we argue this can be true when consumers are sophisticated and the market is relatively healthy. We also discuss empirical evidence which shows that false advertising can affect consumers’ purchase behavior, and that firms are more likely to use it when the returns are higher. |
| Keywords: | Drip pricing, Add-ons; Obfuscation, Deception; False Advertising, Regulation |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:128073&r=ind |
| By: | Enghin Atalay; Erika Frost; Alan T. Sorensen; Christopher J. Sullivan; Wanjia Zhu |
| Abstract: | We study changes in markups across 72 product markets from 2006 to 2018. A growing literature has documented a rise in markups over time using a production function approach; we instead employ the standard microeconomic method, which is to estimate demand and then invert firms’ first-order pricing conditions to infer their markups. To make the method scalable, we propose estimating nested logit demand models, using household panel data to automate the assignment of products to nests. Our results indicate an overall upward trend in markups between 2006 and 2018, with considerable heterogeneity across and within product markets. We find that changes in firms’ marginal costs and households’ price sensitivity are the primary drivers of markup increases, with changes in firm ownership playing a much smaller role. |
| JEL: | L0 L1 L10 L11 L13 L16 L2 L20 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31230&r=ind |
| By: | Nicolas Bonneton |
| Abstract: | This paper examines the unintended consequences of the rapid growth of markets for ethically labeled goods such as \organic" or \child-labor-free", using a model of voluntary labeling. On the supply and demand side, agents act based on their intrinsic motivation and monetary payo . After a positive demand shock, the expected social and environmental attributes of both labeled and unlabeled goods deteriorate. As such, even if producing ethically labeled goods help mitigates externalities, it can be optimal for policymakers not to intervene and sometimes to tax these goods. Sorting in this market is non-trivial: under plausible conditions, only the most and least intrinsically motivated agents strategically position themselves in the ethical segment of the market. |
| JEL: | L31 L15 D91 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_426&r=ind |
| By: | Enghin Atalay; Alan T. Sorensen; Christopher J. Sullivan; Wanjia Zhu |
| Abstract: | We examine merging firms' additions and removals of products for a sample of 66 mergers across a wide variety of consumer packaged goods markets. We find that mergers lead to a net reduction in the number of products offered by merging firms. Merging firms tend to both drop and add products at the periphery of their joint product portfolios, with the net effect of increasing within-firm product similarity. These results are consistent with theories of the firm that emphasize cost synergies among similar types of products or managerial core competencies linked to particular segments of the product market. |
| JEL: | L0 L1 L10 L13 L21 L22 L23 L25 L4 L40 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31229&r=ind |
| By: | Granlund, David (Department of Economics, Umeå University); Rudholm, Niklas (Handelns Forskningsinstitut) |
| Abstract: | We present a new method for estimating the probability of collusion using observed price patterns. Having these probabilities, we can estimate the impact of the number of firms and other relevant variables on collusion as well as estimate how collusion affects prices in the market. We find that the most common form of collusion in our dataset is bid-rotation (i.e., firms taking turns in offering the lowest price in the market). Depending on specification, we find that moving from competition to collusion increases average prices by 30–65%, resulting in overcharges of between 375 and 694 million SEK (33 to 61 million USD). For two reasons, the total overcharge would be severely underestimated if we grouped observations with a likelihood of collusion below 90% and treated them as competitive, as is done in many previous studies. First, approximately half of the sales predicted to be affected by collusion are in markets with a probability of collusion below 90%. Second, the price effect of collusion is underestimated when the comparison group also contains collusive markets. Finally, our results demonstrate that multimarket contact significantly increases the risk of collusion and that increasing the number of firms from two to four reduces the risk of collusion by approximately one half. |
| Keywords: | bid rigging; price coordination; cartels; collusion screening; competition |
| JEL: | C57 D22 D44 I11 L41 |
| Date: | 2023–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:1014&r=ind |
| By: | Wändi Bruine de Bruin; Keshav Dogra; Sebastian Heise; Edward S. Knotek; Brent Meyer; Robert W. Rich; Raphael Schoenle; Giorgio Topa; Wilbert Van der Klaauw |
| Abstract: | We examine businesses' price-setting practices via open-ended interviews and in a quantitative survey module with business contacts from the Federal Reserve Banks of Atlanta, Cleveland, and New York in December 2022 and January 2023. Businesses indicated that their prices were strongly influenced by demand, a desire to maintain steady profit margins, and wages and labor costs. Survey respondents expected reduced growth in costs and prices of about 5 percent on average over the next year. Backward-looking, forward-looking, and hypothetical scenarios reveal average cost-price passthrough of around 60 percent, with meaningful heterogeneity across firms. |
| Keywords: | Prices; Business Survey; Hypothetical Questions |
| JEL: | D4 E3 L2 |
| Date: | 2023–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:96283&r=ind |
| By: | Vanessa I. Alviarez; Michele Fioretti; Ken Kikkawa; Monica Morlacco |
| Abstract: | We develop a quantitative theory of prices in firm-to-firm trade with bilateral negotiations and two-sided market power. Markups reflect oligopoly and oligopsony forces, with relative bargaining power as weight. Cost pass-through elasticities into import prices can be incomplete or complete, depending on the exporter's and importer's bargaining power and market shares. In U.S. import data, we find that U.S. importers have substantial market power and disproportionate leverage in price negotiations. The estimated model produces accurate predictions of the impact of Trump tariffs on pair-level prices. At the aggregate level, ignoring two-sided market power could exaggerate tariff pass-through by about 60%. |
| JEL: | F12 L14 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31253&r=ind |
| By: | Micael Castanheira De Moura; Georges Siotis; Carmine Ornaghi |
| Abstract: | Competition investigations start with market definition, which establishes the perimeter of the competitive analysis. In this paper, we focus on the definition of economic markets in the pharmaceutical industry, where the entry of generics in different therapeutic areas provides a sequence of quasi-natural experiments involving a significant competitive shock for the originator producer. We show how generic entry modifies price and non-price competitive constraints over time, generating market-wide effects. Paradoxically, generic entry may soften the competitive pressure for brands other than the originator. We obtain these results by econometrically estimating time-varying price elasticities. We then apply the logic of the Hypothetical Monopolist Test to gauge the strength of competitive constraints under different market structures. Our results provide strong empirical support for an approach that defines relevant markets contingent on the theory of harm. We discuss the relevance of these findings in the context of ongoing cases. |
| Keywords: | market definition; competition policy; antitrust; pharmaceutical industry |
| JEL: | D22 I11 L13 |
| Date: | 2023–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:ulb:ulbeco:2013/353440&r=ind |
| By: | Mario Bernasconi; Miguel Espinosa; Rocco Macchiavello; Carlos Suarez |
| Abstract: | Under collusion, firms deviate from current profit maximization in anticipation of future rewards. As current profit maximization places little restrictions on firms’ pricing behaviour, collusive conduct is hard to infer. We show that bids from certain firms in the Colombian wholesale electricity market collapsed immediately after the announcement, and before the implementation, of a reform that potentially made collusion harder to sustain. After ruling out confounders, we uncover how the cartel functioned and how firms may have communicated. Calibrating the dynamic enforcement constraint confirms that collusion was sustainable before, but not after, the reform. The conclusions discuss policy implications. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10384&r=ind |