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on Industrial Competition |
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Issue of 2025–03–10
twenty-one papers chosen by Russell Pittman, United States Department of Justice |
| By: | Baum, Leonard; Bryson, Joanna J. (Hertie School) |
| Abstract: | Growing global concern about the problems associated with concentrated market power in the digital economy is leading to a renewed interest in competition policy. Since the late 2010s, China’s government has squarely confronted the problems of its own ‘Big Tech’ with a new competition regime for digital markets. Outcomes represent a unique learning opportunity for Western academics, competition authorities and lawmakers alike, which has so far been underutilized. However, given unreliable official figures, a new methodology is needed to assess competition in China’s digital economy. This article introduces a market capitalization approach that builds on the informativeness of China’s financial markets. We use Bloomberg financial data of 1142 publicly listed firms for the period 2019 to 2022 to quantitatively examine the impact of China’s new digital competition regime. We find a causal link between the new governance approach and a reduction of market concentration and aggregate growth in the primary markets of China’s three most dominant digital platforms – Baidu, Alibaba and Tencent (BATs). Further, our results show a robust correlation between the new competition regime and reduced market concentration and market capitalization growth rates across China’s digital markets. Other empirical findings include a negative correlation between market concentration and the openness of digital markets, a non-relationship between market concentration and profits, and the inability of profit and revenue-based metrics to capture market power effectively in China’s digital economy. Finally, we discuss the relevance of these insights for Western regulatory strategies, particularly as the EU and China emerge as global frontrunners in the field of digital competition regulation. |
| Date: | 2024–01–14 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:zyc6s_v2 |
| By: | Genakos, Christos; Lyu, Blair Yuan; Pagliero, Mario |
| Abstract: | We study the retail price pass-through of four major tax changes in petroleum products using daily pricing data from gas stations on small Greek islands. We find that (i) the pass-through of the tax hikes is five times higher than for the tax decrease, (ii) the pass-through of the tax hikes increases with competition, while that of the tax decrease does not, (iii) there is significant asymmetry in the speed of price adjustments, and, (iv) the asymmetric price adjustment cannot be explained by tacit collusion, instead the evidence suggests that search is the most plausible explanation. |
| Keywords: | pass-through; rockets and feathers; tax incidence; gasoline market; market structure; competition |
| JEL: | H22 L1 |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126788 |
| By: | Altomonte, Carlo; El-Mallakh, Nevine; Sonno, Tommaso |
| Abstract: | We build a novel worldwide database merging information on patent-citations of firms paired with information on firms' affiliation to Business Groups (BGs). We exploit these data to document how BGs appropriate knowledge through standalone firm acquisition. First, we confirm that innovative standalone firms have a higher probability of becoming part of a BG. Second, we document how BGs tend to acquire firms that are on an upward trend in patents and citations. We also show that innovating activity significantly deteriorates post-acquisition, particularly for firms with high-quality, cited patents. Third, we show that such a deterioration in innovation activity is driven by acquired firms patenting within the same technological classes of the acquiring BG, while the latter does not hold for acquired firms patenting in different technologies than the BG's. We also find that acquisitions occurring in environments characterized by higher market concentration and more mature leading firms are associated with a relatively more pronounced reduction in innovation. These results generalize the defensive acquisition narrative, suggesting that BGs leverage these transactions as a strategic manoeuvre to solidify their market position in the face of potential competition. |
| Keywords: | business groups; innovation |
| JEL: | O30 |
| Date: | 2024–04–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126757 |
| By: | Casacuberta, Carlos; Gandelman, Néstor |
| Abstract: | This paper examines the relationship between wages and market power at the firm level. We derive firm-specific measures of labor market power and present a natural decomposition of wage changes into shifts in labor market power and labor productivity. Our findings indicate that 50-60 percent of the variation in nominal wages is attributable to price changes, while the remaining portion, reflecting changes in real wages, is explained mainly by changes in market power and, to a lesser extent, by changes in labor productivity. Moreover, we show that firms with greater market power tend to pay higher wages, suggesting rent-sharing between employers and employees, at the cost of higher prices for consumers. |
| Keywords: | Price Markups;Labor market power |
| JEL: | L10 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13987 |
| By: | Pablo Casas; Asis Martinez-Jerez; Helena Perrone |
| Abstract: | We show evidence of retailers using stockouts to steer demand towards products with higher retailer margins. We consider a unique setting where regulation limits the use of vertical agreements that could weaken steering incentives, prices are set by manufacturers, and product assortment is fixed in the short run. Using data on cigarette vending machines, we find empirical evidence consistent with retailers making strategic product re-stocking decisions. They exert less re-stocking effort for low-margin products, prompting consumers to shift purchases toward high-margin products. In a setting where prices vary infrequently, we exploit variation in product availability as a source of identification to recover preference parameters. Estimated diversion ratios are high across products within the same vending machine and low towards outside retailers. We also recover manufacturers' marginal costs. Counterfactual exercises based on our model parameter estimates measure the welfare effects of demand steering for consumers and manufacturers. On average, welfare losses are economically relevant; however, some manufacturers are better off under strategic stockouts. |
| Keywords: | stockouts, demand steering, demand estimation, vending machine |
| JEL: | L1 L4 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_641 |
| By: | Calligaris, Sara; Chaves, Miguel; Criscuolo, Chiara; De Lyon, Joshua; Greppi, Andrea; Pallanch, Oliviero |
| Abstract: | Concentration - the share of an industry's output accounted for by its largest firms and a frequently used proxy of competition - has increased in European countries. This paper provides evidence about this development by introducing several methodological refinements in the cross-country measurement of concentration: it defines industries at a disaggregated level, mostly 3-digit; it takes into account the geographic level at which competition takes place - domestic, European or global; and it accounts for linkages between firms within the same domestic and multinational business group in the relevant geographic region of competition. It then applies these improvements to representative data for fifteen European countries, showing that average concentration increased by about 5 percentage points over the period 2000-2019, from 26% to more than 31%. Third, the paper investigates how each of the methodological improvements affects the levels and trends of concentration. |
| Keywords: | concentration; competition; market power |
| JEL: | L11 L22 F14 |
| Date: | 2024–12–13 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126768 |
| By: | Guadalupe, Maria; Rappoport, Veronica; Salanie, Bernard; Thomas, Catherine |
| Abstract: | We interpret M&A deals in Western Europe during the 2010s as the equilibrium of a matching model. Merger surplus arises from complementarities between multiple firm pre-merger characteristics. Large, productive firms prefer to merge with similarly productive but smaller partners, suggesting positive complementarity in productivities and negative cross complementarity between productivity and scale. We use post-merger data to show that estimated complementarities are strong predictors of merged firm performance. Our results inform the empirical relevance of different theories of mergers. |
| JEL: | G34 |
| Date: | 2024–12–04 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126749 |
| By: | Lluberas, Rodrigo |
| Abstract: | The functioning of the banking sector is key for economic growth. In this paper, we first gather banks' balance sheet monthly regulatory information in a consistent manner for seven Latin American countries. Second, we estimate lending markups and deposits markdowns in each country over time. Third, with the estimated markups and markdowns in the different countries we study how they relate with banks' profitability, the cost of credit, credit risk and credit supply. Finally, we explore whether there are differences in markups on lending rates and markdowns on deposit rates between international and domestic banks. |
| Keywords: | Banking;Markups;markdowns;Market concentration |
| JEL: | E44 L11 L16 G21 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13988 |
| By: | Dirk Bergemann (Yale University); Rahul Deb (Boston College) |
| Abstract: | We study the robust sequential screening problem of a monopolist seller of multiple cloud computing services facing a buyer who has private information about his demand distribution for these services. At the time of contracting, the buyer knows the distribution of his demand of various services and the seller simply knows the mean of the buyerÕs total demand. We show that a simple Òcommitted spend mechanismÓ is robustly optimal: it provides the seller with the highest profit guarantee against all demand distributions that have the known total mean demand. This mechanism requires the buyer to commit to a minimum total usage and a corresponding base payment; the buyer can choose the individual quantities of each service and is free to consume additional units (over the committed total usage) at a fixed marginal price. This result provides theoretical support for prevalent cloud computing pricing practices while highlighting the robustness of simple pricing schemes in environments with complex uncertainty. |
| Date: | 2025–02–10 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2423 |
| By: | Andrew Rhodes (Toulouse School of Economics); Jidong Zhou (Yale University); Junjie Zhou (Tsinghua University) |
| Abstract: | This paper provides a framework in which a multiproduct ecosystem competes with many single-product firms in both price and innovation. The ecosystem is able to use data collected on one product to improve the quality of its other products. We study the impact of data regulation which either restricts the ecosystem's cross-product data usage, or which requires it to share data with small firms. Each policy induces small firms to innovate more and set higher prices; it also dampens data spillovers within the ecosystem, reduces the ecosystem's incentive to collect data and innovate, and potentially increases its prices. As a result, data regulation has an ambiguous impact on consumers, and is more likely to benefit consumers when small firms are relatively more efficient in innovation. A data cooperative among small firms, which helps them to share data with each other, does not necessarily benefit small firms and can even harm consumers. |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2426 |
| By: | Dirk Bergemann (Yale University); Michael C. Wang (Yale University) |
| Abstract: | We consider a seller who offers services to a buyer with multi unit demand. Prior to the realization of demand, the buyer receives a noisy signal of their future demand, and the seller can design contracts based on the reported value of this signal. Thus, the buyer can contract with the service provider for an unknown level of future consumption, such as in the market for cloud computing resources or software services. We characterize the optimal dynamic contract, extending the classic sequential screening framework to a nonlinear and multi-unit setting. The optimal mechanism gives discounts to buyers who report higher signals, but in exchange they must provide larger fixed payments. We then describe how the optimal mechanism can be implemented by two common forms of contracts observed in practice, the two-part tariff and the committed spend contract. Finally, we use extensions of our base model to shed light on policy-focused questions, such as analyzing how the optimal contract changes when the buyer faces commitment costs, or when there are liquid spot markets. |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2424 |
| By: | Lluis Bru (Universitat de les Illes Balears); Daniel Cardona (Universitat de les Illes Balears); Jozsef Sakovics (Universitat de les Illes Balears and School of Economics, University of Edinburgh) |
| Abstract: | We analyze how to divide the requirements of a (public) firm into lots, when potential suppliers suffer from heterogeneous diseconomies of scale. The optimal design leads to all firms, included the disadvantaged competitors, the fringe, being active, despite the concomitant cost of increasing supplier profit. Setting large lots that only large firms can produce competitively is necessary; but also setting small lots that the fringe firms can competitively bid for, reduces procurement cost. If, in addition, some medium-sized lots are set aside for the fringe -- as allowed by the US regulations, but not by the EU ones -- procurement cost is further reduced. |
| Keywords: | Procurement, sequential auctions, block sourcing, regulation, affirmative action |
| JEL: | L13 L51 D47 K23 |
| Date: | 2023–07 |
| URL: | https://d.repec.org/n?u=RePEc:edn:esedps:310 |
| By: | Dirk Bergemann (Yale University); Alessandro Bonatti (Massachusetts Institute of Technology); Alex Smolin (Toulouse School of Economics) |
| Abstract: | We develop an economic framework to analyze the optimal pricing and product design of Large Language Models (LLM). Our framework captures several key features of LLMs: variable operational costs of processing input and output tokens; the ability to customize models through fine-tuning; and high-dimensional user heterogeneity in terms of task requirements and error sensitivity. In our model, a monopolistic seller offers multiple versions of LLMs through a menu of products. The optimal pricing structure depends on whether token allocation across tasks is contractible and whether users face scale constraints. Users with similar aggregate value-scale characteristics choose similar levels of fine-tuning and token consumption. The optimal mechanism can be implemented through menus of two-part tariffs, with higher markups for more intensive users. Our results rationalize observed industry practices such as tiered pricing based on model customization and usage levels. |
| Date: | 2025–02–11 |
| URL: | https://d.repec.org/n?u=RePEc:cwl:cwldpp:2425 |
| By: | Yonggyun Kim; Francisco Poggi |
| Abstract: | We introduce a dynamic innovation game where participants race to develop a product using alternative technologies. Race participants dynamically allocate resources across (i) developing the product with the currently available technology and (ii) obtaining a faster technology for posterior development. When firm’s available technologies are publicly observable, there is a unique MPE in which firms react to a rivals’ technological discovery by increasing the share of resources allocated to development. However, without frictions, the firms file patents and license technologies to their rivals. When firm’s available technologies are private information, firms conceal their discoveries by forgoing patenting, even when patent holders retain all bargaining power in licensing negotiations. |
| Keywords: | Direction of Innovation, Patent, License, Trade Secret |
| JEL: | C73 D21 O30 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2025_648 |
| By: | Dasol Kim; Luke M. Olson; Toan Phan |
| Abstract: | In a recent OFR working paper, the authors study how banks adjust their lending behavior when a new risk emerges, such as climate change. |
| Date: | 2024–06–21 |
| URL: | https://d.repec.org/n?u=RePEc:ofr:ofrblg:24-06 |
| By: | Vesa Pursiainen (University of St. Gallen; Swiss Finance Institute); Hanwen Sun (University of Bath, School of Management); Yue Xiang (Durham University) |
| Abstract: | Higher exposure to competition – measured by product fluidity – is associated with higher carbon emission intensity. This result is robust to using instrumental variables to obtain exogenous variation in fluidity. The positive relationship between competition and carbon emissions is stronger for firms in areas less concerned about climate change. It is also stronger in areas with weaker social norms. Our results suggest that shorttermism is not the primary driver, as the emissions-competition link is at least as strong for firms with longer-term-oriented shareholders. Our findings suggest that policies promoting competition may be at odds with climate change abatement. |
| Keywords: | carbon emissions, carbon intensity, competition |
| JEL: | D40 G30 M14 Q50 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:chf:rpseri:rp2516 |
| By: | Tito Boeri; Tommaso Crescioli; Andrea Garnero; Lorenzo G. Luisetto |
| Abstract: | Can collective bargaining mitigate monopsony power? This paper addresses this question by examining how the regulation of noncompete agreements for employees by collective agreements affects firm-level markdowns in the French manufacturing sector. Using a staggered difference-in-differences approach, we find that the regulation of noncompetes set by collective agreements leads to a 1.3%-2.2% reduction in markdowns on average. The effect grows over time and is more pronounced for smaller, less productive firms that pay lower wages. Studying a landmark decision of the French Supreme Court that introduced the obligation to have a compensation to consider a noncompete enforceable, we find a significant complementarity between the regulation of noncompetes at the national level (e.g., via case law) and sectoral collective bargaining. By enhancing compliance or imposing further restrictions, collective bargaining can therefore serve as an effective tool to regulate the use of noncompete agreements. |
| Keywords: | monopsony, unions, noncompetes |
| Date: | 2025–02–25 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2079 |
| By: | Zinn, Jesse Aaron (Clayton State University) |
| Abstract: | This work presents a formal proof that producer surplus may be calculated as the area of the rectangle below price and above the value of average variable cost at quantity supplied, between zero and that quantity supplied. It also shows how consumer and total surplus may be calculated as the areas of rectangles using an average benefit curve. |
| Date: | 2025–02–21 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:vsm48_v1 |
| By: | Grover, Arti Goswami; Maloney, William F.; O'Connell, Stephen A. |
| Abstract: | This paper uses the construction of India's Golden Quadrilateral (GQ) highway to explore the impact of an exogenous increase in market access and competition across the firm life cycle and generates four findings. First, while exit rates fall for all plants, aggregate gains are driven by expansion of young plants. Older plants stagnate or contract, consistent with the challenges of increased competition for incumbents. Second, the benefits of connectivity to young plants depend on access to complementary factors, such as finance, and business conditions, although older plants respond better in more distorted districts, perhaps reflecting access to inputs while protecting output markets as in de Loecker et al. (2016). Third, expanding young plants correspond to capital intensive value chain embedded activities that do not require close coordination with final producers. Fourth, plant-level panel data confirms plant capabilities as central to both the magnitude of the response, and to the composition of plants driving it. Aggregate expansion among young plants is driven by high skill plants while contraction of old plants is driven by low skill plants, consistent with frontier firms being able to escape competition (Aghion et al. 2014). |
| Date: | 2024–02–27 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10710 |
| By: | Norris Keiller, Agnes; Obermeier, Tim; Teichgraeber, Andreas; Van Reenen, John |
| Abstract: | When firms sell in multiple markets, estimates of markups from the demand-side will generally diverge from estimates based on the supply-side (e.g. via production functions). The empirical examination of the importance of this fact has been hampered by the absence of market-specific cost data. To overcome this, we show production markups can be expressed as the revenue-weighted average of demand-based markups across markets (and products). This highlights that a divergence in demand-based and production-based markups is due to the revenue shares and markups across foreign and domestic markets, factors that can be assessed with readily available trade data. Using data from auto firms producing in the UK, we show production-based markups increased between 1998 and 2018 whereas demand-based markups decreased. These trends can be reconciled by an increase in the markup that UK-based producers gained on their exports, which we corroborate using administrative trade data. We find that increases in production-based markups have been driven by exports, particularly to China where foreign brands command high markups. |
| Keywords: | markup divergence; auto markets; supply and demand |
| JEL: | F10 L10 |
| Date: | 2024–07–26 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126747 |
| By: | Dauda, Seidu; Pop, Georgiana; Iootty De Paiva Dias, Mariana |
| Abstract: | This paper assesses the performance of Romanian state-owned enterprises with various degrees of ownership (minority owned with 10 to 24.9 percent stakes, minority owned with 25 to 49.9 percent stakes, and majority owned with at least 50 percent ownership stakes) and control levels (central versus local state-owned enterprises and directly versus indirectly owned state-owned enterprises) relative to privately owned enterprises. The paper uses the Romanian firm-level data from the Ministry of Finance covering enterprises of all sizes from 2011 to 2020, combined with the new World Bank Businesses of the State dataset, which tracks ownership of state business entities with at least 10 percent stake in Romania. The paper analyzes whether various degrees of state ownership and levels of control matter for state-owned enterprises’ performance. The paper also assesses whether Romanian state-owned enterprises were able to act as stabilizers during the early period of the COVID-19 pandemic, and how the presence of state-owned enterprises in markets correlates with market outcomes. The findings show that relative to private firms, Romanian state-owned enterprises, particularly those that are majority owned, directly owned, and local ones, employ more people, pay higher wages, but are less productive. In addition, Romanian state-owned enterprises cushioned the job and wage losses associated with the COVID-19 pandemic better than private firms, especially in competitive sectors. Finally, there is evidence that the presence of state-owned enterprises may limit private firm entry and allocative efficiency. |
| Date: | 2023–12–18 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10649 |