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on Industrial Organization |
| By: | Masuyama, Ryo |
| Abstract: | Targeted pricing is an aggressive strategy that steals demand from rivals. Previous studies have shown that a firm prefers targeted pricing to uniform pricing when another supply chain is vertically integrated and thus its downstream firm purchases an input at a constant price. This study relaxes the assumption that supply chains are vertically integrated. When supply chains are vertically separated, downstream firms face increasing input-supply function. Then, targeted pricing reduces the rival's demand and hence its input price, which intensifies competition. This negative effect is so severe in our Hotelling model that a firm prefers uniform pricing to targeted pricing when another supply chain is vertically separated. |
| Keywords: | targeted pricing, uniform pricing, vertical structure, supply chain management, Hotelling model. |
| JEL: | D43 L10 L13 |
| Date: | 2024–08–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121680 |
| By: | Nicolas Schutz |
| Abstract: | I study a model in which two upstream firms compete to supply a homogeneous input to two downstream firms selling differentiated products. Upstream firms offer exclusive, discriminatory, public, two-part tariff contracts to the downstream firms. I show that, under very general conditions, this game does not have a pure-strategy subgame-perfect equilibrium. The intuition is that variable parts in such an equilibrium would have to be pairwise-stable; however, with pairwise-stable variable parts, downstream competitive externalities are not internalized, implying that upstream firms can profitably deviate. I contrast this non-existence result with earlier papers that found equilibria in related models. |
| Keywords: | vertical relations, exclusive dealing, two-part tariffs, slotting fees. |
| JEL: | L13 L14 L42 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_591 |
| By: | José Ignacio Cuesta; Carlos E. Noton; Benjamin Vatter |
| Abstract: | We measure the impacts of vertical integration between insurers and hospitals. In the Chilean market, where half of private hospital capacity is vertically integrated, integration increases inpatient care spending by 6 percent and decreases consumer surplus and total welfare. Integrated insurers offer generous coverage at integrated hospitals, limited access to rival hospitals, and lower premiums. Competition for enrollees forces non-integrated insurers to provide additional coverage to high-quality non-integrated hospitals, resulting in plan networks that limit hospital competition. Whereas vertical integration reduces double marginalization, skewed cost-sharing structures—and their effect on hospital competition—more than compensate, leading to an overall negative welfare impact. |
| JEL: | I11 L13 L40 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32833 |
| By: | Wassim Daher (Gulf University for Science and Technology, Kuwait); Jihad Elnaboulsi (Université de Franche-Comté, CRESE, UR3190, F-25000 Besançon, France); Mahelet G. Fikru (Missouri University of Science and Technology, USA); Luis Gautier (Universidad de Málaga, Spain) |
| Abstract: | We study the incentives to merge for energy producers in the presence of distributed renewable energy producers. Utilizing a Cournot model, we explore how uncertainty surrounding the cost of grid integration influences the profitability of mergers, where uncertainty comes in the form of an industry-wide shock (or common) and firm-specific errors (private shock). We find that the effect of these uncertainties on merger profitability depends on average energy grid integration costs, the size of the merger, and quality of private information. Overall, results suggest that mergers are more likely to be profitable when firms can effectively absorb private shocks due to the scale of the merger, unless average grid integration costs become too high. The incentives to merge are less clear-cut in the presence of an industry-wide shock, unless the quality of private information is high enough. |
| Keywords: | - |
| JEL: | Q4 G34 Q2 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:crb:wpaper:2024-14 |
| By: | Zhe Yuan; Panle Jia Barwick |
| Abstract: | The Hub-and-Spoke network is a defining feature of the airline industry. This paper is among the first in the literature to introduce an empirical framework for analyzing network competition among airlines. Airlines make market entry decisions and choose flight frequencies in the first stage, followed by price competition to attract passengers in the second stage. A key feature of this model is the linkage between direct and indirect flights, which is described by a technological relationship (and estimated using data) that proxies the Hub-and-Spoke network. The paper estimates the marginal costs of serving passengers and operating flights using first-order conditions, bounds the entry costs using inequalities derived from the reveal-preference argument, and employs a state-of-the-art econometric method to conduct inference for entry cost parameters. Ignoring network externality underestimates the benefits of operating an additional flight by 13.2%, and airlines would schedule 21.53% fewer one-stop flights had they made flight operation decisions independently for each market. To evaluate the impact of a hypothetical merger, the paper proposes a novel equilibrium concept that makes it feasible to compute the industry equilibria. Counterfactual analyses indicate that a hypothetical merger between Alaska and Virgin America would increase consumer surplus as the merged airline would offer direct flights in 10% more markets while the overall post-merger price effect would likely be muted. |
| JEL: | C51 L13 L14 L93 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32893 |
| By: | Guido Menzio |
| Abstract: | I derive a formula for the equilibrium distribution of markups in the search- theoretic model of imperfect competition of Butters (1977), Varian (1980), and Burdett and Judd (1983). The level of markups and the sign of the relationship between a seller’s markup and its size depends on the extent of search frictions, as well as on other deep parameters. Markups are efficient. Markups are positive even though the varieties produced by sellers are perfect substitutes. Markups are heterogeneous even when all sellers operate the same production technology. Markups depend on size, even though the substitutability between a variety and the others does not depend on how much of that variety is consumed. Interpreting these markups through the lens of the monopolistic competition model of Dixit and Stiglitz (1977) would lead one to recover incorrect and unstable buyers’ preferences. Interpreting these markups through the lens of the Dixit-Stiglitz model would also leads to incorrect policy recommendations. These results are a cautionary note on recent work in macroeconomics. |
| JEL: | D43 D83 L16 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32888 |
| By: | Brown, David P. (University of Alberta, Department of Economics); Cajueiro, Daniel O. (University of Brasilia); Eckert, Andrew (University of Alberta, Department of Economics); Silveira, Douglas (University of Alberta, Department of Economics) |
| Abstract: | Real-time information has the potential to improve market outcomes in wholesale electricity markets. However, transparency can also facilitate coordination between firms, raising questions over the appropriate extent of information disclosure. Despite this ongoing debate, there is a lack of understanding of the information employed by firms when bidding in wholesale electricity markets. We use data from Alberta’s wholesale market and leverage machine learning techniques to evaluate the real-time information firms use when forming their bidding decisions. We find that aggregate market-level variables emerge as important predictors, while detailed firm-specific information does not lead to a material improvement in predicting firms’ bidding decisions. These results suggest that firm-specific information, which has raised concerns because of its potential use in facilitating coordinated behavior, may not be required to promote efficient market outcomes. |
| Keywords: | Machine Learning; Electricity; Price Forecasting; Competition Policy |
| JEL: | D43 L13 L50 L94 Q40 |
| Date: | 2024–08–18 |
| URL: | https://d.repec.org/n?u=RePEc:ris:albaec:2024_002 |
| By: | Fliers, Philip T. |
| Abstract: | This study explores how market power and financial flexibility shape corporate investment policies among U.S. large and mature corporations, by estimating firm-specific, time-varying investment-to-added-value sensitivities. We find that firms with market power exhibit lower investment sensitivities, and this effect is more pronounced for the most financially flexible firms. We show that the firm's debt capacity is an important moderator in the relationship between market power and investment sensitivities. Our findings support theoretical predictions that market power and financial flexibility jointly influence investment decisions. The implication is that a lack of competition impedes corporate investments. For investors, these findings highlight the need to monitor both the competitive landscape and financial flexibility of firms in their portfolios. |
| Keywords: | Investments, market power, financial flexibility, added-value, debt capacity |
| JEL: | D40 G31 G32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:qmsrps:202407 |
| By: | Kate Ho; Robin S. Lee |
| Abstract: | We investigate how formularies used by pharmacy benefit managers (PBMs) can affect manufacturer rebates for branded drugs. We first present a theoretical model of multidimensional contracting in which a PBM negotiates with drug manufacturers over menus of formulary-contingent rebate payments and then selects a formulary. We then estimate how formulary placement affects drug demand for statins using data from Princeton University, a large employer that contracts with a single PBM to offer prescription drug coverage to its employees. Using our theoretical model and demand estimates, we predict how rebates are affected by the use of a preferred tier in the formulary or the ability to exclude a drug from coverage. Our predictions align with aggregate rebate data, and we find that allowing a PBM to place branded drugs on preferred and non-preferred tiers can substantially increase negotiated rebate payments. |
| JEL: | I11 L14 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32790 |
| By: | Ruiting Wang; Xue Wang; Gang Xu; Tao Zha |
| Abstract: | We estimate the effects of privatization on zombie versus healthy state-owned enterprises (SOEs) in China, extending our analysis beyond TFP to a broad array of financial and economic indicators. Privatizing zombie SOEs enhances labor productivity and TFP, reduces bank and government subsidies, alleviates leverage and administrative expenses, improves liquidity, boosts profits, and accelerates sales growth. These benefits are more pronounced than for healthy SOEs and are robust across regions and industries. Our findings offer policy implications for emerging markets, suggesting that prioritizing the privatization of underperforming, zombie-like entities can lead to substantial economic improvements and greater efficiency. |
| JEL: | D22 L21 L33 P31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32795 |