nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒09‒11
five papers chosen by
Kwang Soo Cheong, Johns Hopkins University

  1. Flagship Entry in Online Marketplaces By Ginger Zhe Jin; Zhentong Lu; Xiaolu Zhou; Lu Fang
  2. Digitalization: Productivity By Jeffrey Mollins; Temel Taskin
  3. Research and/or Development? Financial Frictions and Innovation Investment By Filippo Mezzanotti; Timothy Simcoe
  4. Cursed Consumers and the Effectiveness of Consumer Protection Policies By Alessandro Ispano; Peter Schwardmann
  5. Competition for Exclusivity and Customer Lock-in: Evidence from Copyright Enforcement in China By Youming Liu

  1. By: Ginger Zhe Jin; Zhentong Lu; Xiaolu Zhou; Lu Fang
    Abstract: In this paper, we empirically study how flagship entry in an online marketplace affects consumers, the platform, and various sellers on the platform. We find flagship entry may benefit consumers by expanding the choice set, by intensifying price competition within the entry brand, and by improving consumer perception for parts of the platform. In the meantime, flagship entry cannibalizes the sales of same-brand sellers, while other brands may gain as the buyer base expands on the platform. Counterfactual simulation suggests that flagship entry improves the gross merchandise value of the platform and overall consumer welfare in most cases.
    Keywords: Market structure and pricing; Economic models
    JEL: D4 L1 L8
    Date: 2023–08
  2. By: Jeffrey Mollins; Temel Taskin
    Abstract: We examine the relationship between digitalization and productivity, the factors that influence this relationship, and how digitalization’s effect on productivity could change firm behaviour.
    Keywords: Digitalization; Productivity
    JEL: E2 L11 O47 O51
    Date: 2023–08
  3. By: Filippo Mezzanotti; Timothy Simcoe
    Abstract: Abstract U.S. firms have reduced their investment in scientific research (“R”) compared to product development (“D”), raising questions about the returns to each type of investment, and about the reasons for this shift. We use Census data that disaggregates “R” from “D” to study how US firms adjust their innovation investments in response to an external increase in funding cost. Companies with greater demand for refinancing during the 2008 financial crisis made larger cuts to R&D investment. This reduction in R&D is achieved almost entirely by reducing investments in basic and applied research. Development remains essentially unchanged. Although patenting is more strongly correlated with development than research investments, the impact of the crisis appears in citation-weighted patent output after 3 to 5 years. Finally, we show that if other firms patenting similar technologies are exposed to the crisis, then a focal firm's Development investment declines. We consider several mechanisms that could explain these results, and without ruling out every alternative, conclude that the overall pattern is consistent with an important role for technological competition in R&D financing decisions.
    JEL: G30 L20 O31 O32
    Date: 2023–08
  4. By: Alessandro Ispano (THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université); Peter Schwardmann (LMU - Ludwig-Maximilians-Universität München)
    Abstract: We model firms' quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that cursed consumers are exploited in duopoly if firms are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common consumer protection policies that work under monopoly, that is, mandatory disclosure, third party disclosure and consumer education, may all increase exploitation and decrease welfare. Even where these policies improve welfare, they often lead to a reduction in consumer surplus. Our conclusions hold in extensions with endogenous quality and horizontal differentiation.
    Keywords: naive, cursed, disclosure, consumer protection, labeling
    Date: 2023
  5. By: Youming Liu
    Abstract: Copyright law grants copyright owners exclusive rights so that they have adequate financial incentives to create and innovate. However, when firms are copyright owners, they can leverage their right to sell or distribute products exclusively and thus obtain excessive financial gains. This paper studies the music streaming industry, where streaming services compete for exclusive licenses from music labels. Service providers use unique content to attract users, tailoring their services to individual preferences to create switching costs that lead to user lock-in. Using theoretical analysis and descriptive empirics, I show that exclusivity confers advantages in competition for a service that can generate larger lock-in effects. I then construct a dynamic structural model in which consumers face switching costs when making subscription decisions. I estimate the model using monthly data from China’s music streaming market over 2014–17. Finally, I simulate market outcomes under two alternative policies: a compulsory licensing provision and a mandatory data portability policy. The policy simulation shows that compulsory licensing that enforces non-exclusive distribution would not improve market competition by “leveling the field” between dominant and small services as intended. On the contrary, this policy increases market concentration, enlarging the gap in market share between dominant and small services. In contrast, mandatory data portability that reduces switching costs would decrease market concentration, bringing more users to smaller services.
    Keywords: Econometric and statistical methods; Firm dynamics; Market structure and pricing
    JEL: L13 L42 L51
    Date: 2023–08

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