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on Industrial Organization |
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Issue of 2024‒03‒18
eight papers chosen by |
| By: | Salant, Stephen (Resources for the Future) |
| Abstract: | When a firm sells the same good in two markets at different prices but virtually no one in the high-price market purchases in the low-price market, the absence of arbitrage is typically attributed to exogenous “blockades, ” never to deliberate “arbitrage deterrence.” Such deterrence may involve not only limit-pricing but also spending to raise the consumers’ cost of arbitrage. I present examples of arbitrage deterrence from three industries: pharmaceuticals, chemicals, and automobiles. Motivated by these three examples, I generalize the standard model of third-degree price discrimination to encompass both blockaded and deterred arbitrage. I also develop a model where the lower of the two prices is negotiated as is done by foreign governments in the case of prescription drugs. In both models, if the government raises the firm’s marginal cost of deterring arbitrage, the higher price will fall and the lower one will rise but the firm will continue to deter arbitrage. In the bargaining model, if the absence of arbitrage is mistakenly attributed to exogenous factors when in fact it is the result of deliberate deterrence, econometric estimates of the firm’s bargaining power will be biased upwards. |
| Date: | 2024–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:rff:dpaper:dp-24-03&r=ind |
| By: | Alireza Fallah; Michael I. Jordan; Ali Makhdoumi; Azarakhsh Malekian |
| Abstract: | We consider a producer's problem of selling a product to a continuum of privacy-conscious consumers, where the producer can implement third-degree price discrimination, offering different prices to different market segments. In the absence of privacy constraints, Bergemann, Brooks, and Morris [2015] characterize the set of all possible consumer-producer utilities, showing that it is a triangle. We consider a privacy mechanism that provides a degree of protection by probabilistically masking each market segment, and we establish that the resultant set of all consumer-producer utilities forms a convex polygon, characterized explicitly as a linear mapping of a certain high-dimensional convex polytope into $\mathbb{R}^2$. This characterization enables us to investigate the impact of the privacy mechanism on both producer and consumer utilities. In particular, we establish that the privacy constraint always hurts the producer by reducing both the maximum and minimum utility achievable. From the consumer's perspective, although the privacy mechanism ensures an increase in the minimum utility compared to the non-private scenario, interestingly, it may reduce the maximum utility. Finally, we demonstrate that increasing the privacy level does not necessarily intensify these effects. For instance, the maximum utility for the producer or the minimum utility for the consumer may exhibit nonmonotonic behavior in response to an increase of the privacy level. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.08223&r=ind |
| By: | Dirk Bergemann (Yale University); Tibor Heumann (Pontificia Universidad Catolica de Chile); Michael C. Wang (Yale University) |
| Abstract: | We analyze the welfare impact of a monopolist able to segment a multiproduct market and offer differentiated price menus within each segment. We characterize a family of extremal distributions such that all achievable welfare outcomes can be reached by selecting segments from within these distributions. This family of distributions arises as the solution to the consumer maximizing distribution of values for multigood markets. With these results, we analyze the effect of segmentation on consumer surplus and prices in both interior and extremal markets, including conditions under which there exists a segmentation benefiting all consumers. Finally, we present an efficient algorithm for computing segmentations. |
| Date: | 2024–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2376&r=ind |
| By: | Burani, Nadia; Mantovani, Andrea |
| Abstract: | We consider a duopolistic market in which a green firm competes with a brown rival, and both firms offer vertically differentiated products. Consumers are heterogeneous in both their willingness to pay for intrinsic quality and environmental concern. The latter is positively related to the green firm's market share, giving rise to a green network e¤ect. We characterize how price and quality schedules are set and how consumers sort between the two firms at the market equilibrium. When considering pollution both from consumption and production, we compute total welfare and evaluate the impact of an emission tax and a subsidy for the consumption of the green good. Our analysis demonstrates that efficiency can be achieved through an emission tax, which restores the optimal differential between firms' intrinsic qualities, combined with a discriminatory subsidy, which restores the optimal sorting of consumers. |
| Keywords: | bidimensional product differentiation; environmental concern; green network effect; pollution emissions; price discrimination; subsidy |
| JEL: | D21 L13 H21 Q58 Q51 |
| Date: | 2024–02–26 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129135&r=ind |
| By: | Rafael Rocha Oliveira; Claudio Lucinda |
| Abstract: | Little attention has been given in the literature to the effects of the exit of a potential competitor. The extant papers usually analyze the incumbent response only in markets directly affected. They do not explore the effects of reduced competition in markets threatened by entry. Aiming to fill this gap this work evaluates the extent of a threat potential competitors are in terms of price and quantity supplied. We used the bankruptcy of Avianca, the fourth-largest airline in the Brazilian airline sector as a case study. We find evidence the main incumbents respond with a price increase. When analyzing the quantity supplied, we find no evidence of an incumbent response regarding the number of flights or the number of seats. |
| Keywords: | Threat; Potential competition; Exit; Bankruptcy; Airline companies; Tariffs airlines |
| JEL: | L13 L93 L43 |
| Date: | 2024–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:spa:wpaper:2024wpecon4&r=ind |
| By: | Mert Demirer; Diego J. Jiménez Hernández; Dean Li; Sida Peng |
| Abstract: | By regulating how firms collect, store, and use data, privacy laws may change the role of data in production and alter firm demand for information technology inputs. We study how firms respond to privacy laws in the context of the EU’s General Data Protection Regulation (GDPR) by using seven years of data from a large global cloud-computing provider. Our difference-in-difference estimates indicate that, in response to the GDPR, EU firms decreased data storage by 26% and data processing by 15% relative to comparable US firms, becoming less “data-intensive.” To estimate the costs of the GDPR for firms, we propose and estimate a production function where data and computation serve as inputs to the production of “information." We find that data and computation are strong complements in production and that firm responses are consistent with the GDPR, representing a 20% increase in the cost of data on average. Variation in the firm-level effects of the GDPR and industry-level exposure to data, however, drives significant heterogeneity in our estimates of the impact of the GDPR on production costs. |
| JEL: | D22 L11 L51 L86 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32146&r=ind |
| By: | Bena, Jan (U of British Columbia); Erel, Isil (Ohio State U and ECGI); Wang, Daisy (Ohio State U); Weisbach, Michael S. (Ohio State U and ECGI) |
| Abstract: | The hold-up problem can impair firms' abilities to make relationship-specific investments through contracts. Ownership changes can mitigate this problem. To evaluate changes in the specificity of human capital investments, we perform textual analyses of patents filed by lead inventors from both acquirer and target firms before and after acquisitions. Inventors whose human capital is highly complementary with the patent portfolios of their acquisition partners are more likely to stay with the combined firm post-deal and subsequently make their investments more specific to the partner's assets. As ownership of another firm results in increasingly specific investments to that firm's assets, contracting issues related to relationship-specific investments is likely a motive for acquisitions. |
| JEL: | G34 L14 L22 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2023-27&r=ind |
| By: | Lachlan Hotchin; Andrew Leigh |
| Abstract: | Are excessively concentrated markets inequitable as well as inefficient? We explore this issue by analyzing the degree of market concentration in the industries where Australia’s wealthiest made their fortunes. Compared with the economy at large, we find that top wealth holders have tended to make their fortunes in industries with a higher-than-average degree of market concentration. Top wealth shares have grown substantially, and from 1990 to 2020, there appears to have been an increase in the propensity of top wealth holders to make their fortunes in highly concentrated industries. |
| Keywords: | income distribution, competition, market power |
| JEL: | D31 L12 L41 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-12&r=ind |