nep-ind New Economics Papers
on Industrial Organization
Issue of 2023‒09‒25
eleven papers chosen by
Kwang Soo Cheong, Johns Hopkins University

  1. Monopolistic Duopoly By Emanuele Bacchiega; Elias Carroni; Alessandro Fedele
  2. Market Concentration in Fintech By Dean Corbae; Pablo D'Erasmo; Kuan Liu
  3. Efficiency vs. equity concerns in regulatory sandboxes By Crampes, Claude; Estache, Antonio
  4. Identification and Estimation of Demand Models with Endogenous Product Entry and Exit By Victor Aguirregabiria; Alessandro Iaria; Senay Sokullu
  5. Cost-Price Relationships in a Concentrated Economy By Falk Bräuning; José Fillat; Gustavo Joaquim
  6. Oligopolistic Competition, Price Rigidity, and Monetary Policy By Kozo Ueda; Kota Watanabe
  7. "Guinea Pig Trials" Utilizing GPT: A Novel Smart Agent-Based Modeling Approach for Studying Firm Competition and Collusion By Xu Han; Zengqing Wu; Chuan Xiao
  8. Not as good as it used to be: Do streaming platforms penalize quality? By Gambato, Jacopo; Sandrini, Luca
  9. Third-Degree Price Discrimination in Two-Sided Markets By de Cornière, Alexandre; Mantovani, Andrea; Shekhar, Shiva
  10. Comments on the 2023 Draft Merger Guidelines: A Labor Market Perspective By Berger, David; Hasenzagl, Thomas; Herkenhoff, Kyle; Mongey, Simon; Posner, Eric A.
  11. Electric Vehicle Subsidies: Cost-Effectiveness and Emission Reductions By Fournel, Jean-François

  1. By: Emanuele Bacchiega (Department of Computer Science and Engineering, University of Bologna, Italy); Elias Carroni (Department of Economics, University of Bologna, Italy); Alessandro Fedele (Faculty of Economics and Management, Free University of Bozen-Bolzano, Italy)
    Abstract: We delve into the Hotelling price competition game without assuming full market coverage, and derive three equilibrium configurations. Two of them are well-known: Hotelling duopoly, where firms set the prices with the aim of stealing customers from the rival, and the market is fully covered; Local Monopolies, where firms avoid strategic interaction and business stealing, and the market is partially covered. In the third, firms interact strategically to keep the market covered, while at the same time avoiding business stealing; we define it as Monopolistic Duopoly (MD) because it combines the features of the other two scenarios. Despite the existence of few contributions on MD, this equilibrium configuration has been substantially ignored. By spelling out the economics of MD and emphasizing its intriguing properties, we establish that MD has, instead, relevant implications for the Hotelling literature.
    Keywords: Hotelling Price Competition Game; Market Coverage; Monopolistic Duopoly.
    JEL: L13 C72 D21
    Date: 2023–09
  2. By: Dean Corbae; Pablo D'Erasmo; Kuan Liu
    Abstract: This paper discusses concentration in consumer credit markets with a focus on fintech lenders and residential mortgages. We present evidence that shows that concentration among fintech lenders is significantly higher than that for bank lenders and other nonbank lenders. The data also show that the overall concentration in mortgage lending has declined between 2011 and 2019, driven mostly by a reduction in concentration among bank lenders. We present a simple model to show that changes in lender financial technology (interpreted as improvements in quality of loan services) explain more than 50 percent of the increase in fintech market shares and 43 percent of the increase in fintech concentration. This change in concentration in the fintech industry may have important implications for regulatory policy and financial stability.
    Keywords: fintech; concentration; mortgage lending
    JEL: G2 L1 L5
    Date: 2023–06–08
  3. By: Crampes, Claude; Estache, Antonio
    Abstract: The paper makes the case for a more systematic ex-ante assessment of the distribution of gains and losses from efficiency enhancing innovations that regulatory sandboxes are expected to test. It shows how a prior formal modelling of tests can inform the regulators on the possible need to control better upfront in the design of the sandbox for some otherwise underestimated but predictable distributional effects. Failing to do so is likely to lead to underestimate efficiency-equity trade-offs and other distributional issues, across stakeholders or within groups of stakeholders. Simple Industrial Organization models will often suffice to identify the potential issues at an early stage and allow better sandboxes designs and hence more reliable policy relevant results.
    Keywords: Regulatory sandboxes; innovation; governance; anti-trust; regulation; efficiency; equity; quality standards
    JEL: K20 K21 K23 L12 L13 L15 L51 O31 O33
    Date: 2023–09–07
  4. By: Victor Aguirregabiria; Alessandro Iaria; Senay Sokullu
    Abstract: This paper deals with the endogeneity of firms' entry and exit decisions in demand estimation. Product entry decisions lack a single crossing property in terms of demand unobservables, which causes the inconsistency of conventional methods dealing with selection. We present a novel and straightforward two-step approach to estimate demand while addressing endogenous product entry. In the first step, our method estimates a finite mixture model of product entry accommodating latent market types. In the second step, it estimates demand controlling for the propensity scores of all latent market types. We apply this approach to data from the airline industry.
    Keywords: Demand for differentiated product; Endogenous product availability; Selection bias; Market entry and exit; Multiple equilibria; Identification; Estimation; Demand for airlines
    JEL: C14 C34 C35 C57 D22 L13 L93
    Date: 2023–08–27
  5. By: Falk Bräuning; José Fillat; Gustavo Joaquim
    Abstract: We use local projections with granular instrumental variables to estimate the aggregate pass-through of costs into prices and how it is affected by industry concentration. On average, we find, prices increase above trend growth for three quarters after an exogenous cost shock, and the price increase is accompanied by a decline in output. The estimated pass-through of the shock into prices one quarter ahead is 0.7. The price response to shocks becomes about 27 percent larger when there is an increase in concentration similar to the one observed over the last 20 years. This differential effect depending on concentration is primarily driven by a larger pass-through of positive shocks that increase costs. Consistent with a market power channel, margins decrease less in more concentrated industries after cost increases. Within industries, margins of industry leaders are not squeezed in response to positive cost shocks, unlike those of followers, while negative shocks increase margins for all firms. Our findings shed light on the post-COVID inflationary pressures and the linkages between inflation dynamics and rising market concentration.
    Keywords: cost-price pass-through; industry concentration; inflation; supply shock identification
    JEL: E30 E31 L11 L16
    Date: 2023–04–01
  6. By: Kozo Ueda (Waseda University); Kota Watanabe (Canon Institute for Global Studies and University of Tokyo)
    Abstract: This study investigates how strategic and heterogeneous price setting influences the real effect of monetary policy. Japanese data show that firms with larger market shares exhibit more frequent and larger price changes than those with smaller market shares. We then construct an oligopolistic competition model with sticky prices and asymmetry in terms of competitiveness and price stickiness, which shows that a positive cross superelasticity of demand generates dynamic strategic complementarity, resulting in decreased price adjustments and an amplified real effect of monetary policy. Whether a highly competitive firm sets its price more sluggishly and strategically than a less competitive firm depends on the shape of the demand system, and the empirical results derived from the Japanese data support Hotelling’s model rather than the constant elasticity of substitution preferences model. Dynamic strategic complementarity and asymmetry in price stickiness can substantially enhance the real effect of monetary policy.
    Keywords: strategic complementarity; price stickiness; real rigidity; competition
    JEL: D43 E31 E52 L11
    Date: 2023–07
  7. By: Xu Han; Zengqing Wu; Chuan Xiao
    Abstract: Firm competition and collusion involve complex dynamics, particularly when considering communication among firms. Such issues can be modeled as problems of complex systems, traditionally approached through experiments involving human subjects or agent-based modeling methods. We propose an innovative framework called Smart Agent-Based Modeling (SABM), wherein smart agents, supported by GPT-4 technologies, represent firms, and interact with one another. We conducted a controlled experiment to study firm price competition and collusion behaviors under various conditions. SABM is more cost-effective and flexible compared to conducting experiments with human subjects. Smart agents possess an extensive knowledge base for decision-making and exhibit human-like strategic abilities, surpassing traditional ABM agents. Furthermore, smart agents can simulate human conversation and be personalized, making them ideal for studying complex situations involving communication. Our results demonstrate that, in the absence of communication, smart agents consistently reach tacit collusion, leading to prices converging at levels higher than the Bertrand equilibrium price but lower than monopoly or cartel prices. When communication is allowed, smart agents achieve a higher-level collusion with prices close to cartel prices. Collusion forms more quickly with communication, while price convergence is smoother without it. These results indicate that communication enhances trust between firms, encouraging frequent small price deviations to explore opportunities for a higher-level win-win situation and reducing the likelihood of triggering a price war. We also assigned different personas to firms to analyze behavioral differences and tested variant models under diverse market structures. The findings showcase the effectiveness and robustness of SABM and provide intriguing insights into competition and collusion.
    Date: 2023–08
  8. By: Gambato, Jacopo; Sandrini, Luca
    Abstract: We study the incentives of a streaming platform to bias consumption when products are vertically differentiated. The platform offers mixed bundles of content to monetize consumers' interest in variety and pays royalties to sellers based on the effective consumption of the content they produce. When products are not vertically differentiated, the platform has no incentive to bias consumption in equilibrium: the platform being active represents a Pareto-improvement compared to the case in which she is not. With vertical differentiation, royalties can differ; the platform always biases recommendations in favor of the cheapest content, which hurts consumers and the high-quality seller. Biased recommendation always diminishes the incentives of a seller to increase the quality of her content for a given demand. If a significant share of the users is ex-ante unaware of the existence of the sellers the platform can bias recommendations more freely, but joining the platform encourages investment in quality. The bias, however, can lead to inefficient allocation of R&D efforts. From a policy perspective, we propose this as a novel rationale for regulating algorithmic recommendations in streaming platforms.
    Keywords: platform economics, media economics, recommendation bias, innovation
    JEL: D4 L1 L5
    Date: 2023
  9. By: de Cornière, Alexandre; Mantovani, Andrea; Shekhar, Shiva
    Abstract: We investigate the welfare effects of third-degree price discrimination by a two-sided platform that enables interaction between buyers and sellers. Sellers are heterogenous with respect to their per-interaction benefit, and, under price discrimination, the platform can condition its fee on sellers’ type. In a model with linear demand on each side, we show that price discrimination: (i) increases participation on both sides; (ii) enhances total welfare; (iii) may result in a strict Pareto improvement, with both seller types being better-off than under uniform pricing. These results, which are in stark contrast to the traditional analysis of price discrimination, are driven by the existence of cross-group network effects. By improving the firm’s ability to monetize seller participation, price discrimination induces the platform to attract more buyers, which then increases seller participation. The Pareto improvement result means that even those sellers who pay a higher price under discrimination can be better-off, due to the increased buyer participation.
    JEL: D42 D62 L11 L12
    Date: 2023–08
  10. By: Berger, David (Duke University); Hasenzagl, Thomas (University of Minnesota); Herkenhoff, Kyle (University of Minnesota); Mongey, Simon (Federal Reserve Bank of Minneapolis); Posner, Eric A. (University of Chicago)
    Abstract: The DOJ and FTC clarify the role of labor market power ("monopsony") in the 2023 draft merger guidelines. The draft states in Guideline 11 that the structural presumption threshold applies to labor market concentration, while also suggesting that a stricter threshold may be warranted in labor markets. The post-merger Herfindahl-Hirschman Index (HHI) that defines a highly concentrated market is 1800, which is lower, and so stricter, than the 2010 guidelines. We provide five comments on the draft guidelines based on our recent work Berger, Hasenzagl, Herkenhoff, Mongey, and Posner (2023). (1) Explicitly addressing monopsony in the draft guidelines is grounded in economic theory and empirical research. (2) Workers benefit from the lower threshold for highly concentrated markets. (3) The narrow nature of labor markets and high degree of monopsony power in the U.S. may warrant an even lower threshold. For example, merger simulations indicate that workers would benefit if the agencies lowered the HHI threshold further—to 1500 or 1000. (4) Worker welfare is central to the 2023 draft guidelines but the language is not always clear about this. The guidelines should make clear that degradations of "worker welfare" or "total compensation" indicate anticompetitive effects. (5) Dominant firms that can slow wage growth – but not freeze or cut wages – are subject to Guideline 7.
    Keywords: mergers, monopsony, labor market power, concentration
    JEL: J42 G34 K21 L4
    Date: 2023–08
  11. By: Fournel, Jean-François
    Abstract: This paper studies the environmental performance of electric vehicle subsidy programs in Canada. I leverage changes in the provincial-level subsidies to study their short-run impact on sales and charging station deployment using a natural experiment setting. My findings suggest that subsidies are very effective at increasing electric vehicle adoption, but failed to induce additional charging station installations in the short-run. I rely on a structural estimation of the demand for cars and the supply of charging stations to evaluate the environmental impact of subsidies. My results suggests that Canadian rebate programs led to an increase in adoption of 93%, and an increase in the size of the charging station network of 19%. I take these results as additional evidence of weak network effects. I propose a unified framework to conduct a cost-benefit analysis. I estimate the marginal cost of abating carbon emissions to be between $311 and $423 per ton, well above conventional estimates of the social cost of carbon. Part of the reason behind these high estimated costs is that half of the subsidies went to infra-marginal consumers who would have purchased an electric vehicle whether or not rebates are available. Finally, I evaluate the performance of two alternative policies: an income threshold on eligibility and a cash for clunker program. I find that the additional emission reductions tied to the removal of clunkers are crucial for improving the environmental performance of rebate programs.
    JEL: L91 L98 Q5 Q58
    Date: 2023–09–04

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