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on Industrial Organization |
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Issue of 2024‒04‒01
twelve papers chosen by |
| By: | Gilad Sorek |
| Abstract: | I study product-quality innovation under monopolistic competition with variable demand elasticity preferences and variable marginal cost. I characterize the free-entry equilibrium and the market size effect on product quality and markups. I then compare these results with the ones obtained in related studies of markets with process innovation and show that the market size effect on equilibrium markups depends on innovation type. Lastly, I show that the normative properties of the market equilibrium depend solely on the preferences characteristics, as in the canonical monopolistic competition framework with no innovation. |
| Keywords: | Quality Innovation; Variable Demand Elasticity; Monopolistic Competition |
| JEL: | L1 O30 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2024-05&r=ind |
| By: | Miguel Antón; Florian Ederer; Mireia Giné; Martin C. Schmalz |
| Abstract: | Firms have inefficiently low incentives to innovate when other firms benefit from their inventions and the innovating firm therefore does not capture the full surplus of its innovations. We show that common ownership of firms mitigates this impediment to corporate innovation. By contrast, without technological spillovers, innovation has the effect of stealing market share from rivals; in that case, more common ownership reduces innovation. Empirically, the association between common ownership and innovation inputs and outputs decreases with product market proximity and increases with technology proximity. The sign and magnitude of the overall relationship between common ownership and corporate innovation thus varies considerably across the universe of firms depending on their relative proximity in technology and product market space. These results persist if we use only variation from BlackRock's acquisition of BGI. Our results inform the debate about the welfare effects of increasing common ownership among U.S. corporations. |
| JEL: | G30 L20 L40 O31 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32192&r=ind |
| By: | Rupayan Pal (Indira Gandhi Institute of Development Research); Emmanuel Petrakis (Departamento de Econom¡a, Universidad Carlos III de Madrid) |
| Abstract: | This paper shows that in a duopoly a firm has no incentives to divest its passive shares in its rival when firms' strategies are strategic complements. This holds independently whether goods are substitutes or complements and whether firms engage in simultaneous or sequential move product market competition. However, if firms' strategies are strategic substitutes and are engaged in simultaneous move competition, it is optimal for both firms to fully divest their shares in their rivals under a private placement mechanism via independent intermediaries or under competitive bidding. Yet, in the sequential move game only the follower has such incentives. Notably, under a private placement mechanism via a common intermediary, there are circumstances under which there are partial or no firms' divestment incentives, highlighting that the divestment mechanism employed by firms may have a crucial role on their divestment incentives. |
| Keywords: | Cross-ownership, passive shares, strategic substitutes and complements, divestment incentives, market competition |
| JEL: | L13 L41 L2 D43 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2024-003&r=ind |
| By: | Enrique Ide |
| Abstract: | I examine the implications of cross-market mergers of suppliers to intermediaries that bundle products for consumers. These mergers are controversial. Some argue that suppliers' products will be substitutes for intermediaries, despite not being substitutes for consumers. Others contend that because bundling makes products complements for consumers, products must be complements for intermediaries. I contribute to this debate by showing that two products can be complements for consumers but substitutes for intermediaries when the products serve a similar role in attracting consumers to purchase the bundle. This result leads to new recommendations and helps explain why cross-market hospital mergers raise prices. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2402.12575&r=ind |
| By: | Rumen Kostadinov |
| Abstract: | I study a dynamic model of durable-good monopoly where the seller cannot commit to future prices and is uncertain about the buyer’s value. I adopt a prior-free approach where the seller minimises lifetime regret against the worstcase type of the buyer. In the unique equilibrium the seller’s worst-case regret against types who purchase at any given time equals the worst-case regret against types who purchase at any other time. The seller cannot profitably deviate even if he could commit to his deviation. Despite this, the equilibrium does not match the commitment outcome. This is because the seller’s objective is endogenously determined by his optimal counterfactual behaviour against each type, which is time-inconsistent. The Coase conjecture holds: in the frequent-offer limit the good is sold immediately at a price equal to the lowest value. |
| Keywords: | durable-good monopoly; Coase conjecture; regret |
| JEL: | C73 D81 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2024-02&r=ind |
| By: | Chiara Fumagalli; Massimo Motta |
| Abstract: | The European Commission (EC) has recently announced its intention to issue Guidelines on exclusionary abuses. In this paper, we explain how economics can and should be used to inform a sound and effects-based approach in the enforcement of Article 102 TFEU. In particular, the EC should be guided only by a consumer welfare standard; exclusive dealing and exclusivity rebates should be subject to a (rebuttable) presumption of harm; price-cost tests are meaningful only for predation and other practices which do not reference rivals; essentiality of the input should not be a requirement for vertical foreclosure cases of any type, but such cases should be limited only to dominant firms that satisfy certain criteria. |
| JEL: | K21 L12 L13 L41 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1431&r=ind |
| By: | Sayag, Doron; Snir, Avichai; Levy, Daniel |
| Abstract: | The finding of small price changes in many retail price datasets is often viewed as a puzzle. We show that a possible explanation for the presence of small price changes is related to sales volume, an observation that has been overlooked in the existing literature. Analyzing a large retail scanner price dataset that contains information on both prices and sales volume, we find that small price changes are more frequent when products’ sales volume is high. This finding holds across product categories, within product categories, and for individual products. It is also robust to various sensitivity analyses such as measurement errors, the definition of “small” price changes, the inclusion of measures of price synchronization, the size of producers, the time horizon used to compute the average sales volume, the revenues, the competition, shoppers’ characteristics, etc. |
| Keywords: | Menu Cost, (S, s) Band, Price Rigidity, Sticky Prices, Small Price Changes, Small Price Adjustments, Sales Volume |
| JEL: | E31 E32 L16 L81 M31 M1 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:285116&r=ind |
| By: | Rupayan Pal (Indira Gandhi Institute of Development Research); Sumit Shrivastav (Indian Institute of Science Education and Research Bhopal) |
| Abstract: | This article analyzes implications of privacy regulation on stability of tacit collusion. It shows that privacy regulation is likely to hurt consumers' economic benefits, through its competition dampening effect. A more effective broad scope privacy regulation makes collusion more likely to be stable, regardless of the level of consumers' cognitive ability. Whereas, if the scope of privacy regulation is narrow, (a) its effectiveness positively (does not) affect collusion stability under limited (unlimited) cognitive ability of consumers and (b) the likelihood of collusion stability is decreasing in the level of consumers' cognitive ability. Our insights are relevant for designing privacy regulation. |
| Keywords: | Privacy regulation, Limited cognitive ability, Behavior-based price discrimination, Stability of collusion, Level-k Thinkin |
| JEL: | D43 L13 L88 L86 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2024-004&r=ind |
| By: | Joon Suk Huh; Ellen Vitercik; Kirthevasan Kandasamy |
| Abstract: | We study a sequential profit-maximization problem, optimizing for both price and ancillary variables like marketing expenditures. Specifically, we aim to maximize profit over an arbitrary sequence of multiple demand curves, each dependent on a distinct ancillary variable, but sharing the same price. A prototypical example is targeted marketing, where a firm (seller) wishes to sell a product over multiple markets. The firm may invest different marketing expenditures for different markets to optimize customer acquisition, but must maintain the same price across all markets. Moreover, markets may have heterogeneous demand curves, each responding to prices and marketing expenditures differently. The firm's objective is to maximize its gross profit, the total revenue minus marketing costs. Our results are near-optimal algorithms for this class of problems in an adversarial bandit setting, where demand curves are arbitrary non-adaptive sequences, and the firm observes only noisy evaluations of chosen points on the demand curves. We prove a regret upper bound of $\widetilde{\mathcal{O}}\big(nT^{3/4}\big)$ and a lower bound of $\Omega\big((nT)^{3/4}\big)$ for monotonic demand curves, and a regret bound of $\widetilde{\Theta}\big(nT^{2/3}\big)$ for demands curves that are monotonic in price and concave in the ancillary variables. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.01361&r=ind |
| By: | Peter Gibbard; Kevin Remmy |
| Abstract: | We estimate a structural model of electricity retailer choices accommodating various sources of consumer inertia, including inattention, limited information, switching costs, and product differentiation. The model disentangles the relative importance of different frictions. We estimate our model using individual-level data of all retailer switches and queries on a price comparison website in New Zealand. We find that price comparison tools strongly impact market structure and consumer surplus. However, mandating all consumers search for alternatives has stronger effects on market structure and consumer surplus gains. Our results help policymakers design policies that improve consumer choices and effective competition in retail markets. |
| Keywords: | consumer inertia, consumer search, retail electricity markets, structural demand estimation |
| JEL: | D12 D83 L13 L94 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_516&r=ind |
| By: | Chung Yi See; Vasco Rato Santos; Lucas Woodley; Megan Yeo; Daniel Palmer; Shuheng Zhang; Ashley Nunes |
| Abstract: | Although electric vehicles are less polluting than gasoline powered vehicles, adoption is challenged by higher procurement prices. Existing discourse emphasizes EV battery costs as being principally responsible for this price differential and widespread adoption is routinely conditioned upon battery costs declining. We scrutinize such reasoning by sourcing data on EV attributes and market conditions between 2011 and 2023. Our findings are fourfold. First, EV prices are influenced principally by the number of amenities, additional features, and dealer-installed accessories sold as standard on an EV, and to a lesser extent, by EV horsepower. Second, EV range is negatively correlated with EV price implying that range anxiety concerns may be less consequential than existing discourse suggests. Third, battery capacity is positively correlated with EV price, due to more capacity being synonymous with the delivery of more horsepower. Collectively, this suggests that higher procurement prices for EVs reflects consumer preference for vehicles that are feature dense and more powerful. Fourth and finally, accommodating these preferences have produced vehicles with lower fuel economy, a shift that reduces envisioned lifecycle emissions benefits by at least 3.26 percent, subject to the battery pack chemistry leveraged and the carbon intensity of the electrical grid. These findings warrant attention as decarbonization efforts increasingly emphasize electrification as a pathway for complying with domestic and international climate agreements. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.00458&r=ind |
| By: | Elizabeth Steiner |
| Abstract: | This paper estimates the impact of exchange rate fluctuations on markups. Firm-level markups are estimated for a comprehensive panel of Swiss manufacturing firms for the period 2012-2017 using a production-function approach. The pass-through of the exchange rate is then estimated using an event-study design exploiting the large, sudden and persistent appreciation of the Swiss franc against the euro in January 2015. The results show that following an appreciation, Swiss manufacturing firms adjust their markup very heterogeneously. Large firms, especially those that invoice in foreign currency or are highly profitable, substantially decrease their markup. Owing to their sheer size, large firms shape the aggregate response. In contrast, the average firm does not respond significantly. This suggests that smaller firms, which are in the majority, are either unable or unwilling to absorb exchange rate movements by adjusting their markup. |
| Keywords: | Markup, Exchange rate, Pass-through, Firm-level data |
| JEL: | D22 D24 F12 F14 F41 F23 L11 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2024-02&r=ind |