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on Industrial Organization |
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Issue of 2024‒06‒24
twelve papers chosen by |
| By: | Budzinski, Oliver; Stöhr, Annika |
| Abstract: | The model of perfect competition is one of the most famous, most important, and most misunderstood concepts in economics. Rather than aiming to be a full-blown model of real-world competitive markets, the perfect competition model isolates the decentralized coordination mechanism inherent in all competitive markets. Coordinating supply and demand is not the only feature of market competition, but it plays a central role regarding to its virtues, and understanding the working mechanism of this coordination is valuable for economic thinking and economic theory. However, the implications of the perfect competition model for competition law and policy are limited. Market power is a multifaceted phenomenon that consists of several distinguishable types. This contribution explains absolute market power (single-firm monopoly and dominance), collective market power, relative market power, and systemic market power. Due to the possibility of merit-driven paths to market power positions (especially disruptive innovations), market power is difficult to prohibit - despite its welfare-reducing effects within the affected markets (anticompetitive effects) and in other parts of the economy and society (rent-seeking, lobbying, distributional issues). Therefore, competition policy usually focuses on preventing non-merit paths to market power (merger control) and on combating the (anticompetitive) abuse of market power. Contestability refers to the openness of markets. More specifically, it is the ability of companies to overcome barriers to entry and exit as well as to expansion on markets. While the original economic theory of contestability defines very strict conditions for perfectly contestable markets, antitrust has employed the term contestability in broader and in varying ways, emphasizing the role of potential competition and potential market entries to discipline the behavior of powerful incumbents on monopoly or dominance markets. Recently, contestability is rising to new prominence as a major goal of the European regulation of digital ecosystems. |
| Keywords: | perfect competition, atomistic competition, coordination of supply and demand, market power, monopoly, market concentration, dominance, digital ecosystems, price setting, economic power, contestability, entry barriers, exit barriers, potential competition, open markets, Digital Markets Act (EU) |
| JEL: | A10 A20 B10 B20 D00 K21 L12 L13 L40 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:tuiedp:296473&r= |
| By: | Rubing Li; Arun Sundararajan |
| Abstract: | The emergence of the branded recommerce channel - digitally enabled and branded marketplaces that facilitate purchasing pre-owned items directly from a manufacturer's e-commerce site - leads to new variants of classic IS and economic questions relating to secondary markets. Such branded recommerce is increasingly platform-enabled, creating opportunities for greater sustainability and stronger brand experience control but posing a greater risk of cannibalization of the sales of new items. We model the effects that the sales of pre-owned items have on market segmentation and product durability choices for a monopolist facing heterogeneous customers, contrasting outcomes when the trade of pre-owned goods takes place through a third-party marketplace with outcomes under branded recommerce. We show that the direct revenue benefits of branded recommerce are not their primary source of value to the monopolist, and rather, there are three indirect effects that alter profits and sustainability. Product durability increases, a seller finds it optimal to forgo marketplace fees altogether, and there are greater seller incentives to lower the quality uncertainty associated with pre-owned items. We establish these results for a simple two-period model as well as developing a new infinite horizon model with overlapping generations. Our paper sheds new insight into this emerging digital channel phenomenon, underscoring the importance of recommerce platforms in aligning seller profits with sustainability goals. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.09023&r= |
| By: | Klajdi Hoxha |
| Abstract: | How do consultants price expertise? This paper studies a problem of selling information products (expertise) to a buyer (client) who faces decision-making problem under uncertainty. The client is privately informed about the type of expertise she needs and her willingness to pay (WTP) for additional information. A monopolist seller (consultant) designs and sells information products as Blackwell experiments over the underlying states associated with each client-specific desired expertise. Because there is correlation across states, a client with high WTP may find it profitable to purchase information about a low type's state, whenever correlation is sufficiently high. I find that the consultant can extract full (socially efficient) surplus whenever such (marginal) gains do not exceed the (marginal) costs of buying cheaper, but noisier information. Otherwise, unlike typical results in mechanism design, I find that buyers with low and sufficiently high value for information get no information rents, and only the "middle" types enjoy positive surplus. Common pricing structures observed in practice, like flat/hourly rates or value-based fees, are obtained as optimal contracts if correlation across states is sufficiently high or low, respectively. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.11142&r= |
| By: | Sara Calligaris; Chiara Criscuolo; Luca Marcolin |
| Abstract: | Relying on a novel dataset which combines balance sheet data on firms, patents, and industry-level proxies of technology for 25 countries in the period 2001-2014, we document an increase in mark-ups over time, mainly driven by firms in the top half of the mark-up distribution, and a significant and increasing "mark-up gap" between firms in digital intensive and less digital intensive industries. Second, we show that the intangible components of the digital transformation, matter above all others for firm mark-up, and that this is not explained by the industry's fixed-cost structure, concentration, openness to trade and product market regulation. |
| Keywords: | mark-ups, market power, digitalisation, intangible assets |
| Date: | 2024–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1994&r= |
| By: | Sánchez, Mariola; Nerja, Adrian |
| Abstract: | In this paper, we compare the scenarios of exclusive licenses and cross-licenses under the existence of partial vertical integration. To do this, a successive duopoly model is proposed, with two owners and two firms competing in a differentiated product market. Each technology owner has a share in one of the competing firms, so that competition is also extended to the upstream R&D sector. We propose a novel analysis where differences in the size of their innovation process are allowed, extending the results in Sánchez et al. (2021). We find that the cross-licensing scenario is preferred when the size of the innovation is small; this occurs regardless of the participation in the competing companies and how many innovate. If the innovation is very large, the owners may be better off with exclusive licenses. |
| Keywords: | Patent Licensing; Exclusive licenses; Market for technology; Asymmetric innovation |
| JEL: | L13 L24 O33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120829&r= |
| By: | Okuyama, Suzuka |
| Abstract: | Existing studies on Behaviour-based price discrimination (BBPD) typically show that firms offer discounts to encourage consumers located middle of the line segment to switch in a duopoly model. However, in practice, some firms offer both this discount and a discount to encourage consumers with lower preferences for the product itself to buy at the same time. I introduce heterogeneity of consumer willingness to pay and relax the assumption that the market is fully covered. Then, there are three purchase histories: bought from a firm, bought from another firm, and bought nothing. I assume that the two firms offer three different prices according to the purchase histories under BBPD. In the second period, firms offer discounts not only for rival customers but also for customers who bought nothing. On the other hand, firms offer higher prices for consumers who purchase the same goods over two periods in the second period than in the first period. This paper shows that BBPD does not lower all prices in the second period and does not increase consumer surplus. |
| Keywords: | Behavior-based price discrimination, Hotelling model. |
| JEL: | D43 L13 |
| Date: | 2024–03–16 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:120949&r= |
| By: | Lisa Bruttel (University of Potsdam, Berlin School of Economics, CEPA); Maximilian Andres (University of Potsdam, Berlin School of Economics, CEPA) |
| Abstract: | While the economic harm of cartels is caused by their price-increasing effect, sanctioning by courts rather targets at the underlying process of firms reaching a price-fixing agreement. This paper provides experimental evidence on the question whether such sanctioning meets the economic target, i.e., whether evidence of a collusive meeting of the firms and of the content of their communication reliably predicts subsequent prices. We find that already the mere mutual agreement to meet predicts a strong increase in prices. Conversely, express distancing from communication completely nullifies its otherwise price-increasing effect. Using machine learning, we show that communication only increases prices if it is very explicit about how the cartel plans to behave. |
| Keywords: | cartel, collusion, communication, machine learning, experiment |
| JEL: | C92 D43 L44 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:pot:cepadp:77&r= |
| By: | Pham, Hien |
| Abstract: | A monopolistic seller jointly designs allocation rules and (new) information about a pay-off relevant state to a buyer with private types. When the new information flips the ranking of willingness to pay across types, a screening menu of prices and threshold disclosures is optimal. Conversely, when its impact is marginal, bunching via a single posted price and threshold disclosure is (approximately) optimal. While information design expands the scope for random mechanisms to outperform their deterministic counterparts, its presence leads to an equivalence result regarding sequential versus. static screening. |
| Keywords: | mechanism design, information design, sequential screening, random mechanisms, bunching. |
| JEL: | D42 D82 D86 L15 |
| Date: | 2023–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120989&r= |
| By: | Mohamed Coulibaly; Yu-Chin Hsu; Ismael Mourifié; Yuanyuan Wan |
| Abstract: | We propose a new specification test to assess the validity of the judge leniency design. We characterize a set of sharp testable implications, which exploit all the relevant information in the observed data distribution to detect violations of the judge leniency design assumptions. The proposed sharp test is asymptotically valid and consistent and will not make discordant recommendations. When the judge’s leniency design assumptions are rejected, we propose a way to salvage the model using partial monotonicity and exclusion assumptions, under which a variant of the Local Instrumental Variable (LIV) estimand can recover the Marginal Treatment Effect. Simulation studies show our test outperforms existing non-sharp tests by significant margins. We apply our test to assess the validity of the judge leniency design using data from Stevenson (2018), and it rejects the validity for three crime categories: robbery, drug selling, and drug possession. |
| JEL: | C1 C12 C18 C26 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32456&r= |
| By: | Giulia Brancaccio; Myrto Kalouptsidi; Theodore Papageorgiou |
| Abstract: | Transportation infrastructure is vital for the smooth functioning of international trade. Ports are a crucial gateway to this system: with more than 80% of trade carried by ships, they shape trade costs, and it is critical that they operate efficiently. Yet ports are susceptible to disruptions, causing costly delays. With enormous budgets spent on infrastructure to alleviate these costs, a key policy question emerges: in a world with high volatility, what are the returns to investing in infrastructure? To address this question, we introduce an empirical framework that combines insights from queueing theory to capture port technology, with tools from demand estimation. We use our framework, together with a collection of novel datasets, to quantify the costs of disruptions and evaluate transportation infrastructure investment. Our analysis unveils three policy-relevant messages: (i) investing in port infrastructure can lead to substantial trade and welfare gains, but only if targeted properly– in fact, net of costs, investment has positive returns at a minority of US ports; (ii) there are sizable spillovers across ports, as investing in one port can decongest a wider set of ports, suggesting that coordinated decision-making may result in more efficient investment decisions; (iii) macroeconomic volatility can drastically change returns to investment and their geography. |
| JEL: | E39 F1 F14 L0 L90 L91 R4 R41 R42 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32503&r= |
| By: | Rrukaj, Ritvana (School of Economics and Business, Norwegian University of Life Sciences); Steen, Frode (Dept. of Economics, Norwegian School of Economics and Business Administration) |
| Abstract: | Estimating non-linear autoregressive distributed lag models, we establish shortrun cost pass-through in the Swedish retail gasoline market. Our findings reveal a slower correction of disequilibrium error in volume-adjusted prices compared to average pump prices, suggesting that oil companies are more focused on pricing on days and at stations with larger sales. Our results also suggest that earlier studies of pass-through using average prices underestimates the price asymmetry. Exploring heterogeneity in price responses we find that gasoline stations less exposed to local competition impose larger and more prolonged asymmetry on retail gasoline prices. Full-service stations have a higher and more prolonged asymmetry in pricing than automated self-service stations. Despite indicating only roughly three percent rise in consumer prices, this asymmetry accounts for nearly 40% of firms’ gross margins, carrying significant implications for market regulation and business strategies. |
| Keywords: | Gasoline markets; asymmetric short- and long-run cost pass-through; market power; volume-adjusted prices; station heterogeneity; local competition |
| JEL: | C12 C13 F14 L11 L71 |
| Date: | 2024–05–30 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhheco:2024_008&r= |
| By: | Kim, Kye Hwan (Korea Institute for Industrial Economics and Trade); Yang, Jooyoung (Korea Institute for Industrial Economics and Trade); Cho, Eun Kyo (Korea Institute for Industrial Economics and Trade) |
| Abstract: | China and the United States are both pursuing strategic de-risking to navigate the murky waters of their relationship, fraught with conflict but bound by trade. De-risking is essentially a kind of industrial policy that focuses on dominating advanced technologies and industries, protecting technologies and markets, and courting the support of like-minded nations. Washington’s de-risking strategy for the semiconductor and battery sectors focuses on bolstering the competitiveness of American industries via internalization, supply chain diversification, and deeper partnerships with allies and friendly nations. China meanwhile is working to navigate the US sanctions regime on technologies and supply chains by establishing China-centered industrial ecosystems and weaponizing key battery inputs, such as rare earths and other important minerals. In the chip sector, the reconfiguration of supply chains would simultaneously feature an accelerated decoupling in cutting-edge nodes and the creation of alternative supply chains in Southeast Asia and India that support mature nodes. Battery supply chains are likely to be reshaped by the rise of major regional blocs or markets (encompassing China, South Korea, and Japan) and concentration of technologies and manufacturing capacity in a few multinational corporations. Korea should pursue a five-pronged industrial policy to respond to these developments. First, it needs to invest in the establishment of vertically integrated industrial clusters. Doing so could transform the country into a trusted hub and middleman. Second, the Korean government should adopt an industrial policy that fosters these clusters. Third, Korea should strive to become a major production hub capable of meeting the high standards necessitated by new protectionist policies. Fourth, Korean firms should establish overseas bases of these integrated clusters as well. Finally, Korea should work to promote green technology partnerships as a viable alternative to the current international trade order. Only with a multifaceted and systematic de-risking policy can Korea hope to overcome the challenges posed by the fragmentation wreaking havoc in contemporary supply chains. |
| Keywords: | semiconductors; chips; batteries; EVs; China; US; Korea; US-China conflict; de-risking; supply chains; supply chain risk; supply chain diversification; industrial policy; supply chain weaponization; Korea; KIET |
| JEL: | F51 F52 L52 L62 L63 L65 L72 |
| Date: | 2024–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kietrp:2024_002&r= |