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on Industrial Organization |
| By: | Hamid Firooz; Sylvain Leduc; Zheng Liu |
| Abstract: | We study how AI affects market competition based on a general equilibrium framework with heterogeneous firms facing idiosyncratic productivity and variable markups. Firms choose the AI technology subject to fixed costs, where AI production requires data and energy inputs. Our model predicts a non-monotonic relation of AI diffusion with industry concentration. As AI usage rises from an initially low level, large incumbent users gain market share. When AI usage is sufficiently diffused, entry of new and smaller adopters erodes the market share of incumbents, reducing industry concentration. The non-monotonic relations are robust when firms can complement AI with their own data. Our calibrated model predicts that industry concentration is likely to fall if AI adoption increases relative to the current level. In comparison, the relation of AI with the average markup depends on whether increased AI usage is driven by demand or supply factors. Our model also predicts that a modest subsidy of about 3 percent for AI adopter revenues maximizes social welfare, reflecting a tradeoff between aggregate productivity and the average markup associated with AI usage. |
| Keywords: | artificial intelligence; data; heterogeneous firms; industry concentration; markup; productivity; welfare |
| JEL: | E24 L11 O33 |
| Date: | 2026–08–10 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:103630 |
| By: | Qing Hu (Kansai University); Ryo Masuyama (Kushiro Public University of Economics and Kobe University); Tomomichi Mizuno (Kobe University) |
| Abstract: | This paper examines how bundling affects the welfare comparison between input price discrimination (IPD) and uniform input pricing (UIP) in a vertical market structure with Cournot competition. A multi-product firm bundles its products across a competitive market and a monopoly market, while an upstream supplier provides inputs only to the competitive market. When the inefficient firm is the bundling firm, IPD can increase total surplus relative to UIP if the monopoly market is sufficiently small. When the efficient firm is the bundling firm, however, IPD always reduces both consumer and total surpluses. |
| Keywords: | input price discriminationï¼› uniform input priceï¼› bundlingï¼› vertical relationship |
| JEL: | D43 L10 L13 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2610 |
| By: | Qing Hu (Kansai University); Tomomichi Mizuno (Kobe University) |
| Abstract: | While cross-holdings are widely observed, their degree varies across industries. We show that upstream R&D is one possible reason. In a vertically related market with two downstream firms and an upstream firm engaging in cost-reducing R&D, the cross-holding rate is determined through Nash bargaining. The equilibrium rate maximizes downstream joint profit and is always below the merger level. An interior optimum exists only when upstream R&D is sufficiently inefficient, and the rate decreases with R&D efficiency and market size. In the linear-quadratic case, any degree of cross-holdings can arise. Since total surplus falls with cross-holdings, the private optimum is socially excessive, justifying antitrust intervention. |
| Keywords: | Cross-holdingsï¼› vertical structureï¼› R&Dï¼› optimal choice |
| JEL: | L13 D43 O32 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2611 |
| By: | Huffman, David (University of Pittsburgh); Pierce, Lamar (Washington University in St. Louis); Rees-Jones, Alex (University of Pennsylvania, Wharton School and NBER); Reyes, Germán (Middlebury College) |
| Abstract: | We examine a choice between bonus contracts offered to dealers of a U.S. auto manufacturer. In our data, dealers select the non-profit-maximizing option in 20 percent of observations, costing the mistaken dealers $18, 453 per year on average. We examine how the propensity to make this mistake varies with competition, identified both cross-sectionally and within dealers over time. Both analyses show that greater competition substantially lowers the rate of mistakes. However, even in the most competitive markets, consequential mistakes persist. Our results suggest that competition disciplines mainly through within-dealer changes in behavior rather than entry and exit. |
| Keywords: | behavioral economics, market competition, anomalies, non-profit-maximizing behavior, behavioral firms, incentive contracts, automobile dealers |
| JEL: | D22 D91 L13 M52 L62 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp18766 |
| By: | Ryuichi Hashimoto (Kobe University); Tomomichi Mizuno (Kobe University) |
| Abstract: | This study analyzes the conditions under which failing firm acquisitions arise endogenously and examines their welfare effects. We consider a vertical market structure in which an upstream firm supplies a common input to multiple independent downstream markets. We show that acquiring a failing downstream firm preserves input demand in the market, and when the demand in that market is relatively elastic, it results in a lower input price. This input price effect gives rival firms an incentive to acquire a failing firm even in the absence of efficiency gains or direct synergies. We further demonstrate that failing firm acquisitions can increase both consumer surplus and total surplus by maintaining the supply of final goods and reducing input prices. These findings remain robust when the upstream market is oligopolistic and suggest that competition authorities should account for upstream market effects when evaluating the failing firm defense. |
| Keywords: | horizontal mergerï¼› failing firm defenseï¼› vertical relationshipï¼› input prices upstream market power |
| JEL: | D43 L10 L13 |
| Date: | 2026–07 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2612 |
| By: | Qing Hu (Kansai University); Ryo Masuyama (Kushiro Public University of Economics and Kobe University); Tomomichi Mizuno (Kobe University) |
| Abstract: | This study evaluates the desirability of downstream free entry within vertical relationships. We consider a vertical market consisting of an upstream firm with corporate social responsibility (CSR) and downstream firms with free entry. We find that the desirability of entry depends on the degree of upstream CSR. Specifically, when the degree of upstream CSR is sufficiently high, the downstream market faces excess entry, whereas when the degree is low, it faces insufficient entry. When the upstream firm commits to CSR, it lowers the input price, thereby encouraging downstream entry. This study identifies a new factor that justifies the entry regulation policies. |
| Keywords: | free entry; corporate social responsibility; vertical relationship |
| JEL: | D43 L10 L13 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:koe:wpaper:2613 |
| By: | Chatterjee, Angana; Khanal, Ajit; McWilliams, William; Gupta, Anubhab |
| Abstract: | This paper studies how intermediary’s market power changes the welfare effects of tariffs in agricultural markets. We extend the Flexible Oligopoly–Oligopsony Model (FOOM) to an open economy where processors buy from domestic and foreign farmers, combine inputs through an Armington CES aggregator, and exercise market power in both input and output markets. We calibrating the model to the U.S. beef supply chain and find three major results. Market power dominates the welfare picture, costing roughly an order of magnitude more than any plausible tariff. The textbook welfare-improving tariff disappears at empirically estimated meatpacker market power; the optimal tariff falls to zero and becomes a welfare loss beyond it. Tariff incidence shifts from foreign farmers under competition to domestic consumers under concentration. These results indicate that antitrust enforcement and trade policy are not separable interventions in concentrated agricultural markets. |
| Keywords: | Industrial Organization |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ags:aaea26:404624 |