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on Industrial Competition |
| By: | Armin Schmutzler |
| Abstract: | This paper provides a simple unified discrete-choice framework for analyzing differentiated duopolies. This framework nests models of horizontal and vertical differentiation, including standard textbook models (Hotelling and Shaked-Sutton). Contrary to these models, it also applies to economic environments where horizontal differentiation coincides with positive correlation of product valuations across consumers, and environments where vertical differentiation coincides with negative correlation. The paper provides an equilibrium characterization that is applicable independently of the type of differentiation and the sign of the valuation correlation. |
| Keywords: | Duopoly, differentiated products, price competition |
| JEL: | D43 L13 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:zur:econwp:461 |
| By: | Petrakis, Emmanuel; Moreno, Diego |
| Abstract: | We consider a market economy in which consumption goods are produced using high- and low-skilled labor. When rms have market power, the economy's surplus, aggregate income, employment, wages, and labor share are smaller than those under perfect competition. A low binding minimum wage alleviates the ineficiency and distributional bias caused by market power, without creating unemployment. Revenues from non-distortionary corporate taxes may be used to fund distributional policies (e.g., unemployment subsidies) and/or public spending enhancing production possibilities (e.g., education/innovation programs).Free entry leads to eficient entry under perfect competition but may lead to either excessive or insuficient entry when rms have market power. |
| Keywords: | General Equilibrium; Market Power; Oligopoly; Monopoly; Wage Markdowns; Labor Share; Income Distribution; Minimum Wages; Unemployment |
| JEL: | D4 D5 D6 L1 L4 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:cte:werepe:45283 |
| By: | Chiara Bellucci; Armando Rungi |
| Abstract: | Rising market power threatens competition and decreases consumers' welfare. To date, a few works have shown how global firm-level markups increase, but there is scant evidence about the channels of such a change. This study investigates the causal impact of takeovers on markups and related firm-level outcomes on European manufacturing in 2007- 2021. Interestingly, findings suggest that takeovers aimed at vertical integration strategies are procompetitive because they result in lower markups (0.7%) and more sales (2.9%). The effects are higher as time passes from the takeover event, and they increase with the parents' number of already integrated subsidiaries. Notably, we do not find a significant impact on markups in horizontal integration strategies after we control for cherry-picking by acquirers. Eventually, we emphasize that our results on vertical takeovers point to strategies aimed at eliminating double profit margins on the input markets; thus, lower markups increase sales, spreading fixed costs and benefiting from economies of scale. Several checks on methods and sample composition effects confirm our central tenets. Finally, we reconnect with the debate initiated by the U.S. Vertical Merger Guidelines (2020; 2023), where the presumption of harm after vertical deals has been softened, thus considering procompetitive effects, but the discussion of potential foreclosure risks has been expanded. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.12412 |
| By: | Steven Callander (Stanford University, Stanford Graduate School of Business); Hongyi Li (University of New South Wales, School of Economics) |
| Abstract: | Innovations bring many benefits to society, but they can also bring harm. We study the problem of a regulator deciding whether to approve an innovation where information about the impact of the innovation is held within the firms that are developing it. We show that competition for the innovation undermines the regulator’s ability to extract the information she needs to make good policy. As the number of firms increases and the expected benefit of the innovation grows, the probability that the regulator is persuaded to approve an innovation decreases. This tension between competition and communication reverses Arrow’s famous “replacement effect.” Thus, in regulated markets, more competition can lead to fewer innovations making it to market. We explore how this tension can be mitigated, but not eliminated, by political and market design. |
| Keywords: | Innovation, regulation, competition |
| JEL: | L51 O31 D82 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:swe:wpaper:2024-07 |
| By: | Mertens, Matthias; Schoefer, Benjamin |
| Abstract: | We document and dissect a new stylized fact about firm growth: the shift from labor to intermediate inputs. This shift occurs in input quantities, cost and output shares, and output elasticities. We establish this fact using German firm-level data and replicate it in administrative firm data from 11 additional countries. We also document these patterns in micro-aggregated industry data for 20 European countries (and, with respect to industry cost shares, for the US). We rationalize this novel regularity within a parsimonious model featuring (i) an elasticity of substitution between intermediates and labor that exceeds unity, and (ii) an increasing shadow price of labor relative to intermediates, due to monopsony power over labor or labor adjustment costs. The shift from labor to intermediates accounts for one half to one third of the decline in the labor share in growing firms (the remainder is due to wage markdowns and markups) and rationalizes most of the labor share decline in growing industries. |
| Keywords: | firm growth, labor-intermediate substitution, labor share, monopsony |
| JEL: | D24 E23 J23 J42 L60 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:307130 |
| By: | Rudolf Winter-Ebmer; Jasmin Anderlik; Malika Jumaniyozova; Bernhard Schmidpeter |
| Abstract: | Using linked vacancy-employer-employee data from Austria, we investigate how monopsony power affects firms’ posting behavior and wage negotiations. Consistent with theoretical predictions, we find that firms with greater monopsony power post lower wages and offer fewer non-wage amenities, suggesting that wages and non-wage benefits are complementary. However, we find no evidence that monopsonistic firms demand higher levels of skill or education. Instead, our results indicate that they require more basic skills, particularly those related to routine tasks. On the workers’ side, we find that employees hired in monopsonistic labor markets face significantly lower wages, both initially and in the long-run. These lower wages are driven by both lower posted wages and reduced bargaining power, as well as reduced opportunities to climb the wage ladder later. |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:jku:econwp:2024-15 |
| By: | Kind, Hans Jarle (Dept. of Business and Management Science, Norwegian School of Economics); Schjelderup, Guttorm (Dept. of Business and Management Science, Norwegian School of Economics) |
| Abstract: | Many of the largest and most influential industries in the global economy operate digitally as multi-sided platforms, catering to different groups who are connected through intergroup network effects. This paper provides a survey of the theoretical literature on the effects of taxing these firms via indirect and corporate taxes. It seeks to establish an understanding of why traditional insights from taxation in one-sided markets may not apply to firms in multi-sided markets. Indeed, governments risk implementing counterproductive tax policies in multi-sided markets if they base their strategies on what constitutes efficient taxation in traditional markets. |
| Keywords: | Multisided platforms; taxation; imperfect competition |
| JEL: | D40 D43 H21 H22 L13 |
| Date: | 2024–12–20 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:nhhfms:2024_012 |
| By: | Ali-Yrkkö, Jyrki; Kauhanen, Antti |
| Abstract: | Abstract This study examines the impact of foreign acquisitions on innovation activities in Finnish target firms using comprehensive linked employer-employee data from 2010–2021. Unlike previous research that found negative effects on R&D expenditures and patenting, we measure innovation through the share of R&D personnel in total employment. Our main finding is that foreign acquisitions have a statistically insignificant and economically small impact on the share of R&D employees in target firms. Three years post-acquisition, the point estimate shows a 0.9 percentage point increase in R&D employee share, and we can rule out increases over 2 percentage points and decreases below 0.09 percentage points. This null effect persists across different firm sizes and industries. Our results suggest that con-cerns about foreign acquisitions substantially reducing domestic R&D activity may be overstated, at least when measured by R&D employment. |
| Keywords: | Acquisition, M&A, Research, Development, R&D, Innovation, Impact |
| JEL: | O3 L6 L64 |
| Date: | 2024–11–27 |
| URL: | https://d.repec.org/n?u=RePEc:rif:wpaper:122 |
| By: | Teddy Mekonnen; Bobak Pakzad-Hurson |
| Abstract: | An agent engages in sequential search. He does not directly observe the quality of the goods he samples, but he can purchase signals designed by profit maximizing principal(s). We formulate the principal-agent relationship as a repeated contracting problem within a stopping game and characterize the set of equilibrium payoffs. We show that when the agent's search cost falls below a given threshold, competition does not impact how much surplus is generated in equilibrium nor how the surplus is divided. In contrast, competition benefits the agent at the expense of total surplus when the search cost exceeds that threshold. Our results challenge the view that monopoly decreases market efficiency, and moreover, suggest that it generates the highest value of information for the agent. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.11183 |
| By: | Armin Schmutzler |
| Abstract: | By affecting prices and thereby market shares of green and brown firms, product innovations and process innovations influence industry emissions even when they do not directly affect the emission intensity of the innovating firm. Using a differentiated two-stage duopoly, this paper therefore analyzes the effects of environmental policy on such innovations, and it asks how these effects differ from each other and from those of environmental innovations that directly reduce the emission intensity. The paper investigates the determinants of R&D investments, showing in particular that incentives for certain types of potentially beneficial innovations may be negative. Moreover, it analyzes how suitable policies can foster green innovation. |
| Keywords: | Innovation, environmental policy, imperfect competition |
| JEL: | Q55 L13 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:zur:econwp:462 |
| By: | Doron Sayag; Avichai Snir; Daniel Levy |
| Abstract: | We study the price rounding regulation in Israel, which outlawed non-0-ending prices, forcing retailers to round 9 ending prices, which in many stores, comprised more than 60 percent of all prices. The goal of the regulation was to eliminate the rounding tax, the extra amount consumers paid because of price rounding, which was necessitated by the abolition of low denomination coins, and the inattention tax, the extra amount consumers paid the retailers because of their inattention to the prices rightmost digits. Using 4 different datasets, we assess the success of the government in achieving these goals, focusing on fast moving consumer goods, a category of products strongly affected by the price rounding regulation. We focus on the response of the retailers to the price rounding regulation and find that although the government succeeded in eliminating the rounding tax, the bottom line is that shoppers end up paying more, not less, because of the regulation, underscoring, once again, the warning of Milton Friedman that policies should be judged by their results, not by their intentions. |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2411.13427 |
| By: | Abdel Mokhtari (emlyon business school, 144 avenue Jean Jaurès, 69007, Lyon, France); Richard Ruble (emlyon business school, CNRS, Université Lumière Lyon 2, Université Jean Monnet Saint-Etienne, GATE, 69007, Lyon, France) |
| Abstract: | We study incentives to invest in electricity generation capacity if an incumbent using nuclear power competes with an endogenous number of entrants using intermittent renewable energy sources. The intermittence of renewables makes the incumbent less aggressive, and the incumbent accommodates if the efficiency difference between technologies is not too large. We analyze France’s long-running subsidy scheme, the ARENH, through the prism of our model. This policy achieves its aim of making product market outcomes more competitive through an endogenous entry channel, but if investments in nuclear power are restarted then pursuing such a scheme would run the risk of facilitating deterrence. |
| Keywords: | Free entry, Intermittence, Renewable energy, Stackelberg leadership |
| JEL: | D24 D61 L13 Q41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:gat:wpaper:2422 |
| By: | Nicholas Li (Department of Economics, Toronto Metropolitan University, Toronto, Canada); Angela Daley (Department of Economics, University of Maine, Orono, Maine, USA); Barry Watson (Department of Economics, Acadia University, Wolfville, Nova Scotia, Canada) |
| Abstract: | Cost of living is comparatively high in Northern Canada, which is a remote and sparsely populated region served by retail oligopolies (about 34 percent of communities feature a monopoly, while the rest feature a duopoly). Government transfers constitute a large share of household income in Northern communities, and child benefits are particularly important, with these programs having expanded in recent years (Universal Child Care Benefit in 2015 and Canada Child Benefit in 2016). We assess the extent to which increased child benefits are “captured†by higher prices. Using the Longitudinal Administrative Database and community-level data on prices and food shipments from Nutrition North Canada (2012-2019), we find that expanded child benefits are associated with higher prices (with an elasticity of 0.02), which for a family of four, offset about 24 percent of the increased purchasing power resulting from the expansion. Our results suggest that expanded child benefits increase food demand and that the main transmission mechanism leading to higher prices is markups, as our price effects hold conditional on the quantity of food shipped and are mostly driven by monopoly communities where about 61 percent of increased purchasing power is offset by higher food prices. Thus, Northern communities are not pure “pricetakers†and policies that increase cash assistance should consider the implications for local prices. |
| Keywords: | Northern Canada; Subsidies; Prices; Competition; Monopoly |
| JEL: | I18 J15 D42 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:rye:wpaper:wp093 |
| By: | Richard N. Langlois (University of Connecticut) |
| Abstract: | Edith Penrose was far from underappreciated in management theory, where she was considered the inspiration for more than one research program. But she was virtually unknown in economics, the discipline in which she was trained and in which she considered herself to be working. This essay chronicles the life and work of Edith Penrose. It examines the streams of thought she influenced – and didn’t influence. As a special bonus, the essay also considers another underappreciated economist, George Richardson, who built on Penrose’s work and overcame some of its limitations. Following Brian Loasby, the essay ultimately argues for understanding Penrose and Richardson as industrial organization economists in the tradition of Adam Smith and Alfred Marshall. |
| JEL: | B25 B31 B52 B53 L2 L65 O32 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:uct:uconnp:2024-05 |
| By: | Bolotova, Yuliya V. |
| Abstract: | This research analyzes the U.S. fluid milk industry dynamics in light of a herd retirement (HR) program implemented by the Cooperatives Working Together (CWT) in the period of 2003 to 2010, which led to an antitrust lawsuit filed by buyers of fluid milk and other fresh milk products at the retail level against CWT dairy cooperatives and a large settlement. Presuming that they had a Capper-Volstead Act immunity, CWT cooperatives acted in a cartel-like manner to decrease milk supply to increase and stabilize milk prices received by dairy farmers. The HR program may have modestly increased seller market power of dairy farmers reflected in the increased farm sector shares in the retail fluid whole milk prices in the majority of the analyzed cities in the HR period. In contrast, seller market power of fluid milk retailers decreased in these cities, as reflected in the increased cost pass-throughs, decreased fixed absolute markups, and decreased farm-to-retail margins. The cost of milk used in fluid milk manufacturing increased at a higher rate than retail fluid whole milk prices in these cities and fluid milk retailers were able to pass only a portion of the farm milk price increase on their buyers. Nevertheless, in the HR period, buyers of fluid whole milk at the retail level paid higher prices in all analyzed cities, except for Cincinnati and Seattle. |
| Date: | 2024–12–18 |
| URL: | https://d.repec.org/n?u=RePEc:isu:genstf:202412181834180000 |
| By: | Till Fladung; Anna Saile |
| Abstract: | During the energy crisis in 2022, electricity prices in Germany soared to unprecedented levels. To explore the drivers of the high electricity prices, we develop an electricity dispatch model that simulates hourly equilibrium prices under the assumption of perfect competition. We then extend this model to account for firms exercising market power. By comparing the outcomes of the perfect competition and Cournot competition models with actual market data, we demonstrate that market power may contributed to higher prices during the crisis, elevating them beyond what rising input costs alone would justify. |
| Keywords: | Energy Economics, Market Power, Energy Crisis, Electricity Prices, Cournot Competition |
| JEL: | Q41 Q43 L13 D43 L94 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ifowps:_414 |
| By: | Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University) |
| Abstract: | Introducing network externalities into a Hotelling linear market model, we consider the profit ranking of Bertrand and Cournot equilibria, the problem of endogenous choice of strategic variables, and welfare efficiency. In particular, focusing on network connectivity (horizontal interoperability) between network products, we demonstrate the following results: (i) firms earn higher (lower) profits under Bertrand competition rather than under Cournot competition if network connectivity is sufficiently large (small); (ii) firms choose price (quantity) contracts if network connectivity is sufficiently large (small); (iii) social efficiency is achieved under Bertrand competition if network connectivity is sufficiently large. |
| Keywords: | Hotelling linear market model, Bertrand competition, Cournot competition, network connectivity, fulfilled expectations, rational expectations |
| JEL: | D43 L13 L15 L22 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:kgu:wpaper:283 |