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on Industrial Competition |
| By: | Mundt, Philipp; Oh, Ilfan |
| Abstract: | We propose a parsimonious statistical model of firm competition where structural differences in the strength of competitive pressure and the magnitude of return fluctuations above and below the system-wide benchmark translate into a skewed Subbotin or asymmetric exponential power (AEP) distribution of returns to capital. Empirical evidence from US data illustrates that the AEP distribution compares favorably to popular alternative models such as the symmetric or asymmetric Laplace density in terms of goodness of fit when entry and exit dynamics of markets are taken into account. |
| Keywords: | return on capital,maximum entropy,asymmetric Subbotin distribution |
| JEL: | C16 D21 L10 E10 C12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:145&r=all |
| By: | De Ridder, M. |
| Abstract: | Productivity growth has stagnated over the past decade. This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I hypothesize that intangibles create a shift from variable costs to endogenous fixed costs, and use a new measure to show that the share of fixed costs in total costs rises when firms increase ICT and software investments. I then develop a quantitative framework in which intangibles reduce marginal costs and endogenously raise fixed costs, which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. Paradoxically, the presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.6 percentage point decline in long-term productivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, though markups overstate the increase in firm profits. |
| Keywords: | Business Dynamism, Growth, Intangibles, Productivity, Market Power |
| Date: | 2019–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1931&r=all |
| By: | Adriana Breccia (Risk Control Limited, London) |
| Abstract: | Numerous studies have examined how market structure affects appropriability of R&D returns and, in turn, R&D investment and innovation speed. Less effort has been spent on the opposite relationship which is instead our focus. In a continuous time model, two firms compete in R&D, with the leading patent affecting the probability of success of a second patent (competing in the same product market); the size and the direction of this effect depends on the level of appropriability, which, unlike previous research, connects competition in R&D and competition in the product market. We find that low appropriability delays R&D investments and thus discovery, with the (future) benefit of a more competitive product market. Secondly, we show that the relation between concentration in R&D and concentration in product markets can be positive or negative depending on the probability of success of an innovation and its level of appropriability. Also, we find that an increase in the probability of success of innovation does not necessarily speed up investment in R&D. |
| Keywords: | real options, intellectual property, R&D, geometric Brownian motion, Stackelberg games |
| JEL: | C7 D8 O3 K4 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bbk:bbkefp:1902&r=all |
| By: | Sylvain Chassang (New York University); Kei Kawai (U.C. Berkeley); Jun Nakabayashi (Kindai University); Juan Ortner (Boston University) |
| Abstract: | We document a novel bidding pattern observed in procurement auctions from Japan: winning bids tend to be isolated. There is a missing mass of close losing bids. This pattern is suspicious in the following sense: it is inconsistent with compet- itive behavior under arbitrary information structures. Building on this observation, we develop a theory of data-driven regulation based on “safe tests,†i.e. tests that are passed with probability one by competitive bidders, but need not be passed by non-competitive ones. We provide a general class of safe tests exploiting weak equilib- rium conditions, and show that such tests reduce the set of equilibrium strategies that cartels can use to sustain collusion. We provide an empirical exploration of various safe tests in our data, as well as discuss collusive rationales for missing bids. Keywords: missing bids, collusion, regulation, procurement. |
| Keywords: | missing bids, collusion, regulation, procurement |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2019-004&r=all |
| By: | Massimo Motta; Martin Peitz |
| Abstract: | The proposal to relax EU merger control to allow for anti-competitive 􀇲European Champions􀇳 may lead policy makers to update current merger control. While we see little merit in this specific proposal, we recommend a revision that goes into a different direction and, in particular, addresses mergers of potential competitors and the burden of proof. Thus, our proposal aims at the EC addressing problems of under-enforcement and making better-informed decisions. However, we would find it sensible to introduce in the Merger Regulation a clause whereby in exceptional and well-defined cases a merger, which would otherwise pass muster on competition grounds, may be prohibited due to defence, strategic and security of supply considerations. |
| Keywords: | Merger policy, European Union, potential competitor, safe harbour, national champion |
| JEL: | K21 L41 L52 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2019_077&r=all |
| By: | Antonella Nocco; Gianmarco I. P. Ottaviano; Matteo Salto |
| Abstract: | How should multilateral trade policy be designed in a world in which countries differ in terms of market access and technology, and firms with market power differ in terms of productivity? We answer this question in a model of monopolistic competition in which variable markups increasing in firm size are a key source of misallocation across firms and countries. We use `disadvantaged' to refer to countries with smaller market size, worse state of technology (in terms of higher innovation and production costs), and worse geography (in terms of more remoteness from other countries). We show that, in a global welfare perspective, optimal multilateral trade policy should: promote the sales of low cost firms to all countries, but especially to disadvantaged ones; trim the sales of high cost firms to all countries, but especially to disadvantaged ones; reduce firm entry in all countries, but especially in disadvantaged ones. This would not only restore efficiency but also reduce welfare inequality between advantaged and disadvantaged countries if their differences in market size, state of technology and geography are large enough. |
| Keywords: | International trade policy, monopolistic competition, firm heterogeneity, pricing to market, multilateralism |
| JEL: | D4 D6 F1 L0 L1 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1610&r=all |
| By: | Alessandra Bonfiglioli (Queen Mary University of London and CEPR); Rosario Crinò (Università Cattolica del Sacro Cuore, Dept. of Economics and Finance, CEPR and CESifo); Gino Gancia (Queen Mary University of London, CREi and CEPR) |
| Abstract: | We use transaction-level data to study changes in the concentration of US imports. Concentration has fallen in the typical industry, while it is stable by industry and country of origin. The fall in concentration is driven by the extensive margin: the number of exporting firm has grown, and the number of exported products has fallen more for top firms. Instead, average revenue per product of top firms has increased. At the industry level, top firms are converging, but top firms within country are diverging. These facts suggest that intensified competition in international markets coexists with growing concentration among national producers. |
| Keywords: | Superstar Firms, Concentration, US Imports, Firm Heterogeneity, International Trade |
| JEL: | E23 F12 F14 L11 R12 |
| Date: | 2019–02–28 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:883&r=all |
| By: | McAdam, Peter; Petroulakis, Filippos; Vansteenkiste, Isabel; Cavalleri, Maria Chiara; Eliet, Alice; Soares, Ana |
| Abstract: | We examine the degree of market power in the big four countries of the euro area using macro and firm-micro data. We focus on three main indicators of market power in and across countries: namely, the concentration ratios, the markup and the degree of economic dynamism. For the macro database we use the sectoral data of KLEMs and for the micro data we use a combination of Orbis and iBACH (dating from 2006 onwards). We find that, in contrast to the situation in the US, market power metrics have been relatively stable over recent years and – in terms of the markup specifically – marginally trending down since the late 1990s, driven largely by Manufacturing. In terms of the debate as to the merits of market concentration, we find (relying on results for Manufacturing) that firms in sectors which exhibit high concentration, but are categorized as ‘high tech’ users, generally have higher TFP growth rates. By contrast, markups tend to display a bi-modal distribution when looked at through the lens of high concentration and high tech usage. These results would tend to confirm that the rise in market power documented for other economies is not obviously a euro area phenomenon and that welfare and policy analysis of market concentration is inevitably complex. JEL Classification: D2, D4, N1, O3 |
| Keywords: | euro area, market power, micro-macro data |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192253&r=all |
| By: | Jacopo Arpetti; Antonio Iovanella |
| Abstract: | Increased data gathering capacity, together with the spreading of data analytics techniques, has allowed an unprecedented concentration of information related to the individuals' preferences in the hands of a few gatekeepers. In such context, the traditional economic literature has been attempting to frame all the data-driven economy features. Such features, although being able to bring about a more efficient matching of people and relevant purchase opportunities, also result into distortions and disequilibria, up to market failures. Data-economy market disequilibria can be decrypted by leveraging on some of the known network properties, thus obtaining general results suitable for building a new theoretical framework for economic phenomena. Starting from the hypothesis that a digital company can always benefit from an underlying network of consumers or items related to its market, their representation can indeed provide significant competitive advantages, also enhancing the platforms' capacity to implement discriminatory practices by means of an increased ability to estimate individuals' preferences. In the present paper, we propose a measure called Information Patrimony, considering the amount of information available within the system and we look into how platforms may exploit data stemming from connected profiles within a network, with a view to obtaining competitive advantages. Such information flow may eventually allow to envisage the emergence of a new hybrid price discrimination pattern, through which platforms may influence and steer individuals' purchase choices, as well as to apply different prices to different customers. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1903.11469&r=all |
| By: | Giuseppe Moscelli (Economics of Social and Health Care Research Unit, Centre for Health Economics,University of York, UK and School of Economics, University of Surrey, Guildford, UK.); Hugh Gravelle (Economics of Social and Health Care Research Unit, Centre for Health Economics, University of York, UK); Luigi Siciliani (Economics of Social and Health Care Research Unit, Centre for Health Economics, University of York, UK and Department of Economics and Related Studies, University of York, York, UK) |
| Abstract: | We investigate the change in the effect of market structure on planned hospital quality for three high-volume treatments, using a quasi difference in differences approach based on the relaxation of patient constraints on hospital choice in England. We employ control functions to allow for timevarying endogeneity from unobserved patient characteristics. We find that the choice reforms reduced quality for hip and knee replacement but not for coronary bypass. This is likely due to hospitals making a larger loss on hip and knee replacements, since robustness checks rule out changes in length of stay, new competitors’ entry and hospital-level mortality as possible confounders. |
| Keywords: | competition, quality, hospital, choice, endogeneity, difference in difference, control function. |
| JEL: | H51 I11 I18 L32 L33 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:chy:respap:162cherp&r=all |
| By: | Macchiavello, Rocco; Morjaria, Ameet |
| Abstract: | How does competition affect market outcomes when formal contracts are not enforceable, and parties' resort to relational contracts? Difficulties with measuring relational contracts and dealing with the endogeneity of competition have frustrated attempts to answer this question. We make progress by studying relational contracts between upstream farmers and downstream mills in Rwanda's coffee industry. First, we identify salient dimensions of their relational contracts (unenforceable provision of services in both directions before, during and after harvest) and measure them through an original survey of mills and farmers. Second, we take advantage of an engineering model for the optimal placement of mills to construct an instrument that isolates geographically determined variation in competition. Conditional on the suitability for mills within the catchment area, we find that mills surrounded by more suitable areas: (i) face more competition from other mills; (ii) use fewer relational contracts with farmers; and (iii) exhibit worse performance. In contrast to conventional wisdom, an additional competing mill also (iv) makes farmers worse off; (v) reduces the aggregate quantity of coffee supplied to mills by farmers; and (vi) conditional on the farmer's distance from the mill, lowers relational contracts more for farmers close to the competing mill, suggesting that competition directly alters farmers temptation to renege on the relational contract. The finding that increased competition downstream leaves all producers -- including upstream producers -- no better-off suggests a potential role for policy in a second-best environment in which contracts are hard to enforce. |
| Keywords: | Agricultural markets; Competition; Management Practices; Market imperfections; Relational Contracts |
| JEL: | D43 D86 L14 O13 Q13 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13607&r=all |
| By: | JINJI Naoto; KAWAGOSHI Yoshitaka |
| Abstract: | In this study, we analyze the effects of state aid in the regional jet aircraft industry, taking the new entry of Mitsubishi Regional Jet (MRJ) by Mitsubishi Aircraft Corporation as an example. Using a simple model of imperfectly-competitive industry with a vertical relationship, we theoretically analyze the economic effects of research and development (R&D) subsidies for a new downstream entrant on an incumbent firm and domestic welfare. We show that the incumbent firm does not necessarily suffer from a loss in profits due to the new entry if it can benefit from spillovers from the new entrant through R&D in the upstream industry. Based on the theoretical results, we discuss policy implications. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rdpsjp:19013&r=all |
| By: | Yiwei Dou; Geng Li; Joshua Ronen |
| Abstract: | We study the unintended consequences of consumer financial regulations, focusing on the CARD Act, which restricts consumer credit card issuers’ ability to raise interest rates. We estimate the competitive responsiveness-the degree to which a credit card issuer changes offered interest rates in response to changes in interest rates offered by its competitors-as a measure of competition in the credit card market. Using small business card offers, which are not subject to the Act, as a control group, we find a significant decline in the competitive responsiveness after the Act. The decline in responsiveness is more pronounced for competitors’ reductions, as opposed to increases, in interest rates, and is more pronounced in areas with more subprime borrowers. The reduced competition underscores the potential unintended consequence of regulating the consumer credit market and contributes toward a more comprehensive and balanced evaluation of the costs and benefits of consumer financial regulations. |
| Keywords: | CARD Act ; Competitive responsiveness ; Credit card market ; Regulations |
| JEL: | L51 G21 E51 |
| Date: | 2019–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-18&r=all |
| By: | Sebastien Houde (ETH Zurich, Switzerland) |
| Abstract: | A coarse certification provides simple, but incomplete information about quality. Its main rationale is to help consumers trade off dimensions of quality that are complex and lack salience. In imperfectly competitive markets, it may induce excess bunching at the certification requirement, crowd out high quality, and facilitate price discrimination. Who will ultimately benefit from a coarse certification thus depends on the degree of market power firms can exercise as well as on consumers’ sophistication in responding to such information. This paper illustrates these insights using the ENERGY STAR certification program as a case study. I investigate the incidence of the program with a structural econometric model of the U.S. appliance market. I find that the certification can crowd out energy efficiency, make consumers worst off, and have small, but heterogenous impacts on firms’ profits. In this context, the certification tends to not be welfare-improving. This conclusion, however, crucially depends on the market environment and the design of the policy - in scenarios where energy prices are low, or the certification requirement is very stringent, the ES program can be welfare-improving. |
| Keywords: | Coarse certification, consumer attention, differentiated markets, structural estimation, energy efficiency |
| JEL: | D43 L13 L15 L68 Q48 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:18-290&r=all |
| By: | Sebastien Houde (ETH Zurich, Switzerland) |
| Abstract: | This paper shows that firms respond strategically to ENERGY STAR, a voluntary certification program for energy-efficient products. Firms offer products that bunch at the certification requirement, differentiate certified products in energy and non-energy dimensions, and charge a price premium on certified products. In the US refrigerator market, the magnitude of the price premium corresponds exactly to the average willingness to pay consumers have for certified products. This suggests that firms have the ability to extract most of the consumer surplus associated with certified products. If firms had to pay a fee to use the certification, a policy recently suggested, most of the cost should then be borne by consumers. I illustrate how such policy would impact the adoption of energy-efficient appliances. |
| Keywords: | environmental certification, firm behavior, energy efficiency, imperfect competition |
| JEL: | L13 L15 Q48 Q58 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:18-292&r=all |
| By: | Xiliang Lin; Harikesh S. Nair; Navdeep S. Sahni; Caio Waisman |
| Abstract: | When multiple firms are simultaneously running experiments on a platform, the treatment effects for one firm may depend on the experimentation policies of others. This paper presents a set of causal estimands that are relevant to such an environment. We also present an experimental design that is suitable for facilitating experimentation across multiple competitors in such an environment. Together, these can be used by a platform to run experiments "as a service," on behalf of its participating firms. We show that the causal estimands we develop are identified nonparametrically by the variation induced by the design, and present two scalable estimators that help measure them in typical high-dimensional situations. We implement the design on the advertising platform of JD.com, an eCommerce company, which is also a publisher of digital ads in China. We discuss how the design is engineered within the platform's auction-driven ad-allocation system, which is typical of modern, digital advertising marketplaces. Finally, we present results from a parallel experiment involving 16 advertisers and millions of JD.com users. These results showcase the importance of accommodating a role for interactions across experimenters and demonstrates the viability of the framework. |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1903.11198&r=all |
| By: | Hirth, Lion; Schlecht, Ingmar |
| Abstract: | In zonal electricity markets, such as Europe’s, system operators relieve congested power lines within bidding zones using out-of-market measures. One such measure is “redispatching” power plants, i.e. increasing the output of one power station while decreasing the output of another. Traditionally, generators have often been legally obliged to participate in redispatch and were subsequently compensated by the system operator for costs in-curred. In recent years, with increasing pressure on power grids, numerous proposals have been made, including one by the European Commission, to organize redispatch through voluntary markets. In this paper, we introduce a simple graphical model of a zonal spot market with a locational, voluntary redispatch market to show that such a market-based solution should not be used in this setting. We solve the model explicitly by determining optimal bidding strategies and Nash equilibrium prices. We show that market parties anticipate the redispatch market and bid strategically in the spot market – the so-called increase-decrease game. As a result, grid congestion is aggravat-ed, producers extract windfall profits, financial markets are distorted, and perverse investment incentives emerge. Despite claims to the contrary, we show that such gaming is possible absent market power, i.e. if all generators ultimately bid marginal cost. At the root of the problem is inconsistent power market design: combining a regional with a locational market yields undue arbitrage opportunities that rational firms exploit. We conclude that such inconsistent market design should be avoided. |
| Keywords: | Redispatch,Inc-Dec |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:194292&r=all |
| By: | Sergio Mayordomo (Banco de España); Omar Rachedi (Banco de España) |
| Abstract: | We study the effect of rising Chinese import competition in the early 2000s on banks’ credit supply policies. Using bank-firm-level data on the universe of Spanish corporate loans, we exploit heterogeneity across banks in the exposure of their loan portfolios towards firms competing with Chinese imports. Exposed banks rebalanced their loan portfolios by cutting the supply of credit to firms affected by Chinese competition, while raising their lending towards non-exposed sectors. This portfolio reallocation depressed further the economic activity of firms competing with Chinese imports |
| Keywords: | trade shock, credit register, banks’ portfolio reallocation, bank loans, real effects |
| JEL: | G21 G32 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1908&r=all |
| By: | Notheisen, Benedikt; Weinhardt, Christof |
| Abstract: | Despite a growing interest, researchers and practitioners still struggle to transfer the blockchain concept introduced by Bitcoin to market-oriented application scenarios. To shed light on the technology's usage in markets with asymmetric information, this study analyzes the effect of the blockchain's public transparency paradigm on behavioral patterns and market outcomes. In line with prior research, our findings indicate that the blockchain's shared record mitigates adverse selection effects and reduces moral hazard of good market participants (plums). In addition, we identify an incentive for bad market participants (lemons) to behave opportunistically in the presence of perfect quality information. More specifically, the disclosed information allows them to learn about quality differences between plums and lemons, deceive their counterparties, and move to a new equilibrium with increased utility. As a result, the market collapses despite a welfare gain and future generations are denied market access. In addition, plums and lemons are committed to inefficient equilibria following irrational behavior. In total, this study aims to provide initial guidance for blockchain adoption in the context of markets with information asymmetries and highlights risks that arise from competition, the exposure to irrational behavior, and the implementation of services on the infrastructure level. |
| Keywords: | Blockchain,Transparency,Market for Lemons,FinTech,Moral Hazard,Information Sharing,Credit Markets |
| JEL: | D53 D82 G21 L86 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kitwps:130&r=all |
| By: | Daniel Ferreira (London School of Economics, CEPR and ECGI); Jin Li (Hong Kong University, CEP); Radoslawa Nikolowa (Queen Mary University of London) |
| Abstract: | We develop a theory of blockchain governance. In our model, the proof-of-work system, which is the most common set of rules for validating transactions in blockchains, creates an industrial ecosystem with specialized suppliers of goods and services. We analyze the two-way interactions between blockchain governance and the market structure of the industries in the blockchain ecosystem. Our main result is that the proof-of-work system leads to a situation where the governance of the blockchain is captured by a large firm. |
| Keywords: | Governance, Blockchain, Proof-of-Work, Industrial Ecosystem |
| JEL: | G30 L13 M20 |
| Date: | 2019–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:880&r=all |