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on Industrial Organization |
| By: | Sergei Kichko; Alina Ozhegova; Alexander Tarasov |
| Abstract: | In this paper, we explore how heterogeneous firms decide on vertical and horizontal qualities of their products. We show that if increasing the product qualities appears to be relatively costly, more productive firms choose higher vertical quality but lower horizontal quality. We also document distortions that arise in our framework. Specifically, we find that in the market equilibrium, firms tend to underinvest in horizontal quality but overinvest in vertical quality compared to the first best allocation. Using data from pizzerias in Oslo, Norway, we provide a calibration exercise to estimate welfare losses due to the quality distortions. |
| Keywords: | monopolistic competition, vertical quality, horizontal quality, welfare |
| JEL: | D43 L13 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11472 |
| By: | Domenico Delli Gatti; Roberta Terranova; Enrico Maria Turco |
| Abstract: | Can standard measures of industrial policy such as R&D subsidies or financial support for machine replacement be effective tools to reverse the current pattern of increasing market power and declining business dynamism? To answer this question we explore the effects of various industrial policy instruments in a macroeconomic agent-based model calibrated to reproduce the decline in US business dynamism over the last half-century. Our results indicate that R&D subsidies alone are insufficient to address the underlying causes of declining dynamism. They become effective, however, when combined in a policy mix with knowledge diffusion policies, particularly those favoring advanced technology adoption by small firms. In this case, industrial policy fosters growth by closing the productivity gap between leaders and laggards, and thereby curbing market power. These findings suggests a two-pronged approach to the design of industrial policy, integrating firm-level subsidies with knowledge diffusion measures and therefore ensuring that innovation and competition policies advance together. |
| Keywords: | macroeconomic dynamics, innovation, knowledge diffusion, market power, industrial policy, agent-based model |
| JEL: | C63 E32 L10 L52 O31 O33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11544 |
| By: | Marc Bourreau; Axel Gautier |
| Abstract: | In this paper, we consider two platforms that compete for the development of a new product to integrate into their ecosystems. The new product can be developed either inhouse by the platforms or by an independent startup active only in the technology market. The presence of the startup affects the platforms’ R&D efforts through an insurance effect, which reduces the cost of failure in innovation, and a competition effect, which diminishes the returns to innovation. The magnitude of these effects depends on the attitude of the competition authorities towards the acquisition of the startup by one of the platforms. We show that allowing acquisitions stimulates platform innovation, but at the cost of a more concentrated market structure. We also compare the funding of the startup by independent venture capitalists or by the platforms themselves, and investigate how the merger regime influences the direction of the startup’s innovation. |
| Keywords: | innovation, startup acquisitions, mergers, digital, big tech, competition policy |
| JEL: | D43 G34 K21 L40 L86 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11569 |
| By: | Federico M. Accursi; Raúl Bajo-Buenestado; Raul Bajo-Buenestado |
| Abstract: | Cooperatives, formally established to enhance social welfare and local economic development, often face pressures that divert them from these foundational goals and lead to their transformation into profit-driven entities that exploit market power. Leveraging an unexpected tax change following a vote of no confidence, we examine the pass-through to retail prices as a test for market power, using data from over 250 cooperatives operating in the Spanish fuel market. Our findings reveal a complete pass-through of the tax increase to retail prices. Additionally, descriptive evidence suggests that cooperatives consistently offer lower prices than their for-profit counterparts. These results are indicative of the absence of markup adjustments and market power exertion among cooperatives and are consistent with their prioritization of consumer welfare over profit maximization, thereby justifying the regulatory advantages they enjoy. |
| Keywords: | cooperatives, pass-through to prices, market power, firm conduct, retail fuel market |
| JEL: | D22 H22 H32 L21 L29 P13 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11473 |
| By: | Esteban Jaimovich; Boryana Madzharova; Vincenzo Merella |
| Abstract: | This paper examines firms’ market entry strategies for quality-differentiated goods, focusing on both initial and subsequent product-level entry decisions. Using a theoretical framework incorporating nonhomothetic preferences, we show that premium products are more likely to enter wealthier markets earlier, where producers can capture higher mark-ups. Furthermore, the determinants of follow-up market selection differ by product quality: for premium products, income plays a dominant role in shaping expansion paths, whereas geographic proximity remains the primary driver for low-quality products. Empirically, we test these predictions using micro-level data from the refrigeration industry. Our results confirm a strong positive relationship between market order of entry and income, with this effect being particularly pronounced for high-quality products. Additionally, we observe that, as product quality increases, follow-up markets tend to be geographically more dispersed relative to earlier markets. |
| Keywords: | market entry, gravity, nonhomothetic preferences, quality-differentiated products |
| JEL: | F10 F14 F23 L68 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11529 |
| By: | Conteduca, Francesco Paolo; Panon, Ludovic |
| Abstract: | Industries are not fully geographically concentrated, so that natural disasters can affect the degree of competition in the industry, forcing firms to adapt, and have aggregate consequences. Using administrative data, we show that natural disasters in Italy lead to a persistent decline in markups of affected manufacturing firms, particularly large ones. We implement an oligopolistic competition model with idiosyncratic shocks directly on the firm-level data and quantify how markup adjustments shape aggregate productivity and welfare. Our findings suggest that markup adjustments may have mitigated the impact of the 2012 Italian earthquake on aggregate productivity by approximately 30%. |
| Keywords: | Natural Disasters; Markups; Oligopolistic Competition; Aggregate Productivity; Misallocation; Firm Heterogeneity |
| JEL: | D22 D43 O47 Q54 |
| Date: | 2024–12–17 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123008 |
| By: | Guido Menzio |
| Abstract: | I study the equilibrium and the welfare effects of international trade when product markets are imperfectly competitive due of search frictions—as in Burdett and Judd (1983)—rather than product differentiation—as in Dixit and Stiglitz (1977). Markups are positive, even though there are multiple firms producing identical goods. Markups depend negatively on the number of firms producing identical goods, which, in turn, determines the extent of competition in the market. Markups may be increasing, constant, decreasing or non-monotonic in firm's size, depending on the extent of competition and on the distribution of marginal costs. The entry of firms and the quantity of output produced by each firm are efficient, even though the market is imperfectly competitive. International trade increases the measure of firms in the market, intensifies competition, lowers markups, and unambiguously increases welfare. These "natural" effects of trade emerge generically in the Burdett-Judd model of imperfect competition. In the Dixit-Stiglitz model of imperfect competition, these effects are an artifact of particular specifications of preferences. |
| JEL: | D43 D83 F12 L16 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33253 |
| By: | Anastasia Antsygina; Ekaterina Kazakova; Alexander Tarasov |
| Abstract: | We develop a model of spatial competition with two heterogeneous in their market access chains, choosing between third-degree price discrimination in their local markets (flexible pricing) and a unified chain-level price (uniform pricing). The markets are interconnected with each other via consumers who commute between them and can make purchases in locations where they do not reside. Our model supports an asymmetric equilibrium, in which the two pricing strategies co-exist: the larger chain uses uniform pricing, while the smaller chain employs flexible pricing. We also find that the chains never choose the pricing strategies that maximize the total consumer surplus. |
| Keywords: | spatial competition, price discrimination, uniform pricing, commuters |
| JEL: | D21 L11 L20 R32 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11576 |
| By: | Brekke, Kurt R. (Dept. of Economics, Norwegian School of Economics and Business Administration); Dalen, Dag Morten (Dept. of Economics, BI Norwegian Business School); Straume, Odd Rune (Dept. of Economics, University of Bergen) |
| Abstract: | Pharmaceutical expenditures are rising rapidly, driven in part by the innovation of highly effective but very expensive drug therapies that treat multiple diseases. While these drugs offer substantial health benefits, payers face a critical trade-off between cost containment and access to new medicines. A key policy question is whether producers should be restricted to uniform pricing or allowed to use indication-based pricing, where prices vary across patient groups. We analyse how this choice affects drug producers' incentives to invest in new indications, their pricing strategies, and the resulting surplus for health plans. In a monopoly setting, indication-based pricing yields higher profits and thus strengthens incentives to invest in new indications, while the payer prefers uniform pricing unless the fixed investment costs cannot be recouped. The novelty of our study lies in showing that monopoly-based insights may not hold under competition. Specifically, we identify a softening-of-competition effect, where a uniform pricing restriction serves as a credible commitment to raise prices in the competitive market. In this case, the health plan generally favours indication-based pricing to reduce costs. However, an exception arises, where both parties prefer uniform pricing, if the uniform price generates significant health gains through demand expansion in the original monopoly market. Our findings suggest that neither pricing scheme is universally optimal, underscoring the need for case-by-case assessments across drug classes. |
| Keywords: | Pharmaceuticals; Innovation incentives; Payer pricing schemes |
| JEL: | I18 L13 L65 O31 |
| Date: | 2025–01–08 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhheco:2025_001 |
| By: | Gabrielli Florencia; Culós Verónica; Herrera Gómez Marcos; Willington Manuel |
| Abstract: | This paper studies the demand for liquid fuels at the wholesale level, using the discrete choice approach. Demand is conditioned by the presence of wholesale competitors, the existence of a reward card, and the percentage of flagged outlets kept by each firm. Using a novel dataset from Argentina, we provide new empirical evidence that quantifies market power across firms and regions. We find differences among markups estimated at regional levels, based both on different presence of the firms within each region and on price elasticity of demand of each region itself. Even though leading firms tend to have higher markups on the whole, there are specific niche markets where small firms reach higher markups than those they could have obtained in more crowded markets, exceeding markups obtained by larger competitors. Price elasticity of demand is different among regions, partly because it reflects the variability that coexists in the productive structure of each economy and because of different income levels and consumption patterns in these geographic areas. |
| JEL: | C52 L13 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:aep:anales:4732 |
| By: | Alexander Guschanski; Özlem Onaran |
| Abstract: | We analyse UK markups and profit margins for the pandemic period and its aftermath using unconsolidated balance sheets of non-financial corporations for both listed and unlisted firms. The markup increases by 14.7% between 2014 and 2022, exceeding any previously documented growth rate for UK markups, despite major economic, ecological and geo-political crises. The rise in markups is driven by both increasing markups within UK companies and a reallocation of output towards high-markup firms. However, the within effect has dominated since 2020, driven by large firms. In this regard, the UK is different from the US, where the reallocation effect has been more prominent. Since 2014, the markup distribution of firms has become more polarised. Increasingly more firms are at risk of financial difficulties due to low profit margins while at the same time some firms are charging historically extraordinarily high markups and reap high profits. This contributes to bankruptcy risk and economic instability while exacerbating pricing power for some companies. Preventing markup increases during macroeconomic shocks should be a priority for policymakers seeking to reduce inflationary pressure and adverse effects on income inequality. |
| Keywords: | markup, profit margin, market power |
| JEL: | D40 J30 L10 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2501 |
| By: | Nguyen, Tan Phat; Huynh, Cong Minh |
| Abstract: | In the rapidly expanding global e-commerce landscape, ensuring customer satisfaction in home delivery services has become a critical priority, particularly in emerging economies like Vietnam. High-quality delivery services, enhanced perceived value, and strengthened customer trust are key drivers shaping satisfaction levels. This study investigates the relationships between service quality, perceived value, and customer satisfaction, with trust playing a mediating role. Using data from an online survey of 385 respondents in Binh Duong province - one of Vietnam's prominent industrial and economic hubs, the study employs Partial Least Squares Structural Equation Modeling (PLS-SEM) via SmartPLS 4 for analysis. The findings reveal that service quality, perceived value, and trust significantly and positively influence customer satisfaction, with trust acting as a powerful mediator. By extending the SERVQUAL model to include perceived value and grounding the analysis in Expectation Disconfirmation Theory (EDT), this study offers meaningful insights for home delivery service providers. The results highlight actionable strategies to optimize service performance, build trust, and elevate customer experiences in the competitive e-commerce market. |
| Keywords: | Service quality, Customer satisfaction, E-commerce, and Delivery services |
| JEL: | D12 L81 L87 M31 |
| Date: | 2025–01–05 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123201 |