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on Industrial Organization |
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Issue of 2024‒07‒22
thirteen papers chosen by |
| By: | Moshe Babaioff; Linda Cai; Brendan Lucier |
| Abstract: | We consider a principal seller with $m$ heterogeneous products to sell to an additive buyer over independent items. The principal can offer an arbitrary menu of product bundles, but faces competition from smaller and more agile single-item sellers. The single-item sellers choose their prices after the principal commits to a menu, potentially under-cutting the principal's offerings. We explore to what extent the principal can leverage the ability to bundle product together to extract revenue. Any choice of menu by the principal induces an oligopoly pricing game between the single-item sellers, which may have multiple equilibria. When there is only a single item this model reduces to Bertrand competition, for which the principal's revenue is $0$ at any equilibrium, so we assume that no single item's value is too dominant. We establish an upper bound on the principal's optimal revenue at every equilibrium: the expected welfare after truncating each item's value to its revenue-maximizing price. Under a technical condition on the value distributions -- that the monopolist's revenue is sufficiently sensitive to price -- we show that the principal seller can simply price the grand-bundle and ensure (in any equilibrium) a constant approximation to this bound (and hence to the optimal revenue). We also show that for some value distributions violating our conditions, grand-bundle pricing does not yield a constant approximation to the optimal revenue in any equilibrium. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.13835 |
| By: | Max Riegel |
| Abstract: | I study pricing and product design choices of multiproduct firms in a model of directed search. Product design introduces vertical differentiation à la Gabszewicz and Thisse (1979) as well as Shaked and Sutton (1982). While all consumers have a preference for a more niche product design, consumers with lower search costs benefit relatively more. Firms gain from dispersion in tastes through product design and choose maximum differentiation in equilibrium. The firm with the broader product design sets a lower price and attracts consumers with high search costs. |
| Keywords: | product design, vertical differentiation, consumer search, directed search, search cost heterogeneity |
| JEL: | D43 D83 L15 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_556 |
| By: | Irfan Tekdir |
| Abstract: | This paper investigates third-degree price discrimination under endogenous market segmentation. Segmenting a market requires access to information about consumers, and this information comes with a cost. I explore the trade-offs between the benefits of segmentation and the costs of information acquisition, revealing a non-monotonic relationship between consumer surplus and the cost of information acquisition for monopolist. I show that in some markets, allowing the monopolist easier access to customer data can also benefit customers. I also analyzed how social welfare reacts to changes in the cost level of information acquisition and showed that the non-monotonicity result is also valid in social welfare analysis. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.06026 |
| By: | Ruslan Shavshin (National Research University Higher School of Economics); Marina Sandomirskaia (National Research University Higher School of Economics) |
| Abstract: | This paper proposes a model of a finite two-sided market with a limited arbitrary number of products per seller, where buyers are involved in a directed search for the appropriate purchase. The effect of friction, discovered for the models with a single product per seller, remains, though the competition intensifies. We derive an analytical formula for the case of an equal number of products for every seller and deduce that the equilibrium price decreases with the growth of availability and drops to marginal costs when two sellers are able to serve the whole set of buyers. However, the seller’s utility is a bell-shaped function of the number of products. This produces the controversial impact of market concentration on the various equilibrium characteristics. For the general model with different capacities across sellers, we formulate equilibrium conditions on prices, and clarify how the market power of a particular seller depends on its capacity. Numerical analysis is also applied to the related problem of endogenous capacities |
| Keywords: | finite market, directed search, market inefficiency, market concentration, friction, quantity competition. |
| JEL: | D43 L13 D82 D83 C72 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:hig:wpaper:267/ec/2024 |
| By: | Jose M. Betancourt (Yale University); Ali Horta su (University of Chicago); Aniko …ry (Carnegie Mellon University); Kevin R. Williams (Yale University) |
| Abstract: | We study dynamic price competition between sellers offering differentiated products with limited capacity and a common sales deadline. In every period, firms simultaneously set prices, and a randomly arriving buyer decides whether to purchase a product or leave the market. Given remaining capacities, firms trade off selling today against shifting demand to competitors to obtain future market power. We provide conditions for the existence and uniqueness of pure-strategy Markov perfect equilibria. In the continuous-time limit, prices solve a system of ordinary differential equations. We derive properties of equilibrium dynamics and show that prices increase the most when the product with the lowest remaining capacity sells. Because firms do not fully internalize the social option value of future sales, equilibrium prices can be inefficiently low such that both firms and consumers would benefit if firms could commit to higher prices. We term this new welfare effect the Bertrand scarcity trap. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2394 |
| By: | Eric AVENEL (Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes France) |
| Abstract: | With the development of e-commerce, upstream firms have the possibility to sell their products on BtoC markets. I explore the consequences of this observation on the analysis of vertical integration and more specifically vertical foreclosure. I consider the same industry structure as in OSS (1990), but I allow the integrated firm to sell the intermediate good either on a BtoB market (as assumed by OSS) and/or on a BtoC market (in which case it is in fact no longer an intermediate good). I also consider the possibility that the competing producer of the intermediate good sells it on a BtoC market. In this enriched strategic framework, the firm has to decide on how to combine vertical foreclosure and tying, which sheds new light on the relation between these two possibly anticompetitive practices. |
| Keywords: | Vertical foreclosure, tying, BtoB, BtoC. |
| JEL: | L41 L42 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:tut:cremwp:2024-03 |
| By: | Sangmin Aum; Yongseok Shin |
| Abstract: | When explaining the declining labor income share in advanced economies, the macro literature finds that the elasticity of substitution between capital and labor is greater than one. However, the vast majority of micro-level estimates shows that capital and labor are complements (elasticity less than one). Using firm- and establishment-level data from Korea, we divide capital into equipment and software, as they may interact with labor in different ways. Our estimation shows that equipment and labor are complements (elasticity 0.6), consistent with other micro-level estimates, but software and labor are substitutes (1.6), a novel finding that helps reconcile the macro vs. micro-literature elasticity discord. As the quality of software improves, labor shares fall within firms because of factor substitution and endogenously rising markups. In addition, production reallocates toward firms that use software more intensively, as they become effectively more productive. Because in the data these firms have higher markups and lower labor shares, the reallocation further raises the aggregate markup and reduces the aggregate labor share. The rise of software accounts for two-thirds of the labor share decline in Korea between 1990 and 2018. The factor substitution and the markup channels are equally important. On the other hand, the falling equipment price plays a minor role, because the factor substitution and the markup channels offset each other. |
| JEL: | D22 D24 D33 E22 E25 L11 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32591 |
| By: | Eric AVENEL (Univ Rennes, CNRS, CREM – UMR6211, F-35000 Rennes France) |
| Abstract: | The successive Cournot oligopoly model presented in Salinger (1988) is very popular in the literature on vertical relations. There is however a problem in this model, since the assumption of elastic supply on the intermediate market is inconsistent with the assumption that upstream firms choose their output before downstream firms place their orders. I show that dropping the assumption of elastic supply on the intermediate market and complementing the model with a well chosen allocation rule - the competitive rule of Cho and Tang (2014) - restores the validity of the results in Salinger (1988) and the subsequent contributions using the same model. |
| Keywords: | Cournot competition, successive oligopoly, allocation rule. |
| JEL: | L13 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:tut:cremwp:2024-02 |
| By: | Zarek Brot-Goldberg; Zack Cooper; Stuart V. Craig; Lev R. Klarnet; Ithai Lurie; Corbin L. Miller |
| Abstract: | We analyze the economic consequences of rising health care prices in the US. Using exposure to price increases caused by horizontal hospital mergers as an instrument, we show that rising prices raise the cost of labor by increasing employer-sponsored health insurance premiums. A 1% increase in health care prices lowers both payroll and employment at firms outside the health sector by approximately 0.4%. At the county level, a 1% increase in health care prices reduces per capita labor income by 0.27%, increases flows into unemployment by approximately 0.1 percentage points (1%), lowers federal income tax receipts by 0.4%, and increases unemployment insurance payments by 2.5%. The increases in unemployment we observe are concentrated among workers earning between $20, 000 and $100, 000 annually. Finally, we estimate that a 1% increase in health care prices leads to a 1 per 100, 000 population (2.7%) increase in deaths from suicides and overdoses. This implies that approximately 1 in 140 of the individuals who become fully separated from the labor market after health care prices increase die from a suicide or drug overdose. |
| JEL: | I11 J30 L4 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32613 |
| By: | Haruo Kakehi (Graduate School of Economics, Keio University); Ryo Nakajima (Faculty of Economics, Keio University) |
| Abstract: | This study investigates how pharmacists dispense generic drugs by considering patients' brand preferences. While the literature shows that pharmacists, as experts, underestimate brand premiums, our data show that they frequently dispense brandidentical generics, known as authorized generics. We model patients' generic drug choices and pharmacies' dispensing decisions to explain how patients' brand preferences vary across pharmacies and to determine for-profit pharmacists' heterogeneous dispensing behavior. Using Japanese pharmacists' dispensing data, our empirical results show significant variations in patients' brand preferences and perceived differences in the quality of antibiotics. Furthermore, our findings show that one of the factors behind these differences is the provision of information by pharmacists. |
| Keywords: | generic pharmaceuticals, authorized generic, brand premiums, pharmacist behavior, information provision |
| JEL: | D12 I11 I18 L65 |
| Date: | 2024–06–17 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:2024-015 |
| By: | Lee, Neil; Ni, Metta; Boey, Augustin |
| Abstract: | The Singaporean state has played a crucial role in the country’s economic development. This led to concerns that a state-steered economy would be unable to develop fast-changing, disruptive sectors that are reliant on individual entrepreneurship, such as digital technology. Yet Singapore has become a world leader in the scaling of digital technology firms. In this paper, we consider how this happened. We show that advances in ICT opened a window of locational opportunity in digital tech, which was spotted by Singaporean policymakers open to experimentation. A distinctive ‘Singapore model’ developed to take advantage of this opportunity, exploiting Singapore’s geographical position, open economy, and business environment but combining this with active state intervention. To address coordination problems in the creation of an entrepreneurial ecosystem, Singaporean policymakers worked through a process we term ‘network coordination’ across the whole of government. While overall rates of entrepreneurship remain low, the country has been successful at scaling firms in the digital technology sector. These primarily focused on consumer applications and non-Singaporean markets, but there has been little development in frontier ‘deep tech’. |
| Keywords: | digital technology; Singapore; developmental states; industrial policy; entrepreneurial ecosystems |
| JEL: | R14 J01 L81 |
| Date: | 2024–06–14 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123885 |
| By: | Ouyang, Hanzhen; Shi, Shuo |
| Abstract: | In 2023, Mexico exceeded China and became the largest trade partner of the US. Will Mexico further replace China and rise to a strategically vital supplier for US supply chains? This working paper shows that although US supply chain sources are shifting from China to Mexico, China remains the primary value-added source of Mexican exports to the US market. Moreover, Mexican exports to the US rely on low-skill sectors, whereas more Chinese exports are high-skill goods. The current US trade shift is likely caused by China’s FDI inflows to Mexico’s traditionally competitive export sector. However, Mexico lacks edge-cutting manufacturing firms to substitute China in US supply chains. Therefore, the US strategy of “trade diversion” cannot support Mexico’s role in reducing the US supply chain dependence on China. The US should rethink a sustainable trade framework that promotes stable cooperation with China. |
| Keywords: | supply chains; Mexico-China competition; USMCA; trade diversion |
| JEL: | L81 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:123941 |
| By: | Keiko Ito (Graduate School of Social Sciences, Chiba University); Masahiro Endoh (Faculty of Business and Commerce, Keio University); Naoto Jinji (Graduate School of Economics, Kyoto University); Toshiyuki Matsuura (Keio Economic Observatory, Keio University); Toshihiro Okubo (Faculty of Economics, Keio University); Akira Sasahara (Faculty of Economics, Keio University) |
| Abstract: | This study is the first to comprehensively investigate international trade at the firm-level using Japan fs customs data for the 2014-2020 period. We first decompose international trade into the intensive and extensive margin and show that the intensive margin accounts for around 30% and 40% of the variation in partner country-specific exports and imports, respectively. We next find a substantial concentration of trading firms: in 2017, the top 10% of exporters accounted for 96.6% of all exports, while the top 10% of importers were responsible for 94.6% of all imports. Finally, we match the customs data with other firm-level datasets and estimate the performance premia of exporting firms. Our findings indicate that exporting firms outperform non-exporting firms in all aspects we consider: sales, value added, the number of employees, the capital-labor ratio, productivity, and wages. Interestingly, the exporter premia for value added, labor productivity, and total factor productivity decreased between 2014 and 2016 and then increased until 2019, whereas the exporter premium for the average wage steadily increased. |
| Keywords: | Japan fs international trade, customs data, intensive and extensive margin of trade, exporter premia |
| JEL: | F10 F14 L25 |
| Date: | 2024–06–18 |
| URL: | https://d.repec.org/n?u=RePEc:keo:dpaper:2024-017 |