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on Industrial Organization |
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Issue of 2024‒07‒29
eight papers chosen by |
| By: | Cristian Chica; Yinglong Guo; Gilad Lerman |
| Abstract: | Algorithmic price collusion facilitated by artificial intelligence (AI) algorithms raises significant concerns. We examine how AI agents using Q-learning engage in tacit collusion in two-sided markets. Our experiments reveal that AI-driven platforms achieve higher collusion levels compared to Bertrand competition. Increased network externalities significantly enhance collusion, suggesting AI algorithms exploit them to maximize profits. Higher user heterogeneity or greater utility from outside options generally reduce collusion, while higher discount rates increase it. Tacit collusion remains feasible even at low discount rates. To mitigate collusive behavior and inform potential regulatory measures, we propose incorporating a penalty term in the Q-learning algorithm. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.04088 |
| By: | Victor Augias; Alexis Ghersengorin; Daniel M. A. Barreto |
| Abstract: | Consumer data can be used to sort consumers into different market segments, allowing a monopolist to charge different prices at each segment. We study consumer-optimal segmentations with redistributive concerns, i.e., that prioritize poorer consumers. Such segmentations are efficient but may grant additional profits to the monopolist, compared to consumer-optimal segmentations with no redistributive concerns. We characterize the markets for which this is the case and provide a procedure for constructing optimal segmentations given a strong redistributive motive. For the remaining markets, we show that the optimal segmentation is surprisingly simple: it generates one segment with a discount price and one segment with the same price that would be charged if there were no segmentation. We also show that a regulator willing to implement the redistributive-optimal segmentation does not need to observe precisely the composition and the frequency of each market segment, the aggregate distribution over prices suffices. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.14174 |
| By: | Luca Macedoni; Rui Zhang; Frederic Warzynski |
| Abstract: | We propose a new model of multi-product firms in international trade, where firms choose their product mix based on the products’ attractiveness and endogenous competition. The model is motivated by two novel stylized facts using Danish manufacturing data, which demonstrate the importance of product-specific characteristics in understanding firms’ product mix choices. The model predicts that as a larger number of firms want to supply products with high attractiveness, these products also feature the toughest competition. Depending on the strength of competition, two sorting patterns are possible: one in which only the most productive firms produce the most attractive products and another in which all firms produce the most attractive products. Our model can generate both sorting patterns depending on the value of a key preference parameter. By quantifying our model, we find that product-specific differences in attractiveness and competition explain a quarter of the variation in sales. Furthermore, we find that the most attractive products tend to be produced by all firms, while the least attractive products are made only by the most productive firms. |
| Keywords: | multi-product firms, competition, product attractiveness, sorting |
| JEL: | F12 F14 L11 L25 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11144 |
| By: | Nikhil Datta |
| Abstract: | This paper studies monopsony power in a low pay labour market and explores its determinants. I emphasise the role of the spatial distribution of activity and workers' distaste for commuting in generating imperfect substitutability between jobs, and heterogeneity in monopsony power. To formalise the role of commutes in generating monopsony power I develop a job search model where utility depends on wages, commutes and an idiosyncratic component. The model endogenously defines probabilistic spatial labour markets which are point specific and overlapping, and generates labour supply to the firm elasticities which vary across space. Distaste for commuting is shown to increase monopsony power, but does so heterogeneously, increasing monopsony power in rural areas more than in denser urban ones. Using detailed applicant data for a firm with hundreds of establishments across the UK, coupled with two sources of job-establishment level exogenous wage variation I estimate the model parameters and show that commutes generate considerable spatial heterogeneity in monopsony power and are responsible for approximately 1/3 of the total wage markdown. A decomposition exploiting the granularity of the model demonstrates that 40% of spatial variation in monopsony power is within Travel To Work Areas. Calculating employer concentration based on highly-granular 1km2 grids and probability of applying across grids based on pair-wise grid travel times shows how coarsely discretised labour markets such as Commuting Zones can cause sizeable mismeasurement in concentration measures. |
| Keywords: | monopsony |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2012 |
| By: | Elia Sartori (CSEF) |
| Abstract: | We study the distribution of goods that are freely duplicated and damaged. The monopolist solves a screening problem that is not cost-separable and requires a concave-linear preference specification to generate nontrivial allocations, associated with two interdependent inefficiencies: underacquisition and damaging. In a game where firms acquire market power through an irreversible investment, both monopoly and active competition emerge as equilibria. Despite worsening underacquisition and inducing double-spending, competition may increase welfare because it mitigates the damaging inefficiency by distributing a version for free. We discuss an application to information markets, where experts produce a signal and sell Blackwell-garbled versions of it. |
| Date: | 2024–06–20 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:719 |
| By: | Michele Fioretti; Junnan He; Jorge Tamayo |
| Abstract: | We study firms' strategic interactions when each firm may own multiple production technologies, each with its own marginal cost and capacity. Increasing industry concentration by reallocating non-efficient capacity to the largest and most efficient firm can decrease market prices as it incentivizes the firm to outcompete its rivals. However, with large reallocations, the standard monotonic relationship between concentration and prices re-emerges as competition weakens due to the rival's lower capacity. Thus, we demonstrate a U-shaped relationship between market prices and industry concentration when firms are diversified. This result does not rely on economies of scale or scope. We find consistent evidence from the Colombian wholesale energy market, where strategic firms are diversified with fossil-fuel and renewable technologies, exploiting exogenous variation in renewable capacities. Our findings not only apply to the green transition but also to other industries and suggest new insights for antitrust policies. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.03504 |
| By: | Atul Gupta; Ambar La Forgia; Adam Sacarny |
| Abstract: | Firms often exploit loopholes in government contracts to boost revenues. The welfare consequences of this behavior depend on how firms use the marginal windfall dollar, yet little evidence exists to guide policymakers. This paper studies how hospitals allocated over $3 billion obtained from gaming a Medicare payment loophole. The average gaming hospital increased both Medicare and total revenue by around 10%, implying large spillovers on other payers. Consistent with theories of organizational behavior, nonprofit hospitals deployed most of the windfall toward operating costs, while for-profits deducted the entire amount off their balance sheet, distributing a substantial portion to executives and shareholders. Accordingly, we detect modest reductions in mortality rates at nonprofits but no changes at for-profits. Our results imply that the consequences of such engineered windfalls vary substantially by hospital ownership. |
| JEL: | I13 I18 L33 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32564 |
| By: | Christina Gravert |
| Abstract: | This paper presents new evidence on the question: Why don’t consumers switch electricity contracts? By conducting a large-scale survey experiment with 3% of the Danish working-age population, I have gathered data on respondents’ factual knowledge of the retail electricity market, their beliefs, preferences, and intentions to switch providers. Crucially, I can link their intentions with actual switching behaviors using nationwide smart meter data. My findings reveal a enormous gap between switching intentions and actions. This gap is exacerbated by my experimental interventions which 1) provide information about savings and switching costs and 2) decrease switching costs by offering free access to a switching service. A majority of consumers leaves money on the table by not switching, despite their stated intentions to switch. The low switching rates of on average 1.2% per month cannot be explained by biased beliefs or high switching costs. Demographics do not explain switching behavior, but personality traits such as risk aversion, trust, and a tendency to avoid procrastination matter. These results raise the fundamental question: Why should consumers actively choose electricity contracts? Instead, policymakers should consider implementing smart defaults, for which I find strong support from consumers. |
| Keywords: | consumer inertia, electricity markets, switching, field experiment |
| JEL: | C83 D03 D12 D83 L13 L43 L94 L98 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11139 |