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on Industrial Organization |
| By: | Carl Shapiro; Ali Yurukoglu |
| Abstract: | Has the United States economy become less competitive in recent decades? One might think so based on a body of research that has rapidly become influential for antitrust policy. We explain that the empirical evidence relating to concentration trends, markup trends, and the effects of mergers does not actually show a widespread decline in competition. Nor does it provide a basis for dramatic changes in antitrust policy. To the contrary, in many respects the evidence indicates that the observed changes in many industries are likely to reflect competition in action. We highlight research that points to targeted interventions that can enable antitrust enforcement policy to better promote and protect competition. Throughout the paper, we identify open questions and opportunities for future research in the cross-industry evidence-at-scale paradigm, the industry-specific study paradigm, and their intersection. |
| JEL: | L13 L40 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32762 |
| By: | Robert J. Barro |
| Abstract: | The Hotelling locational model and its adaptations to a circular city provide a core framework for research in industrial organization. The present paper expands the explanatory power of this model by incorporating a continuum of consumers with constant-elasticity demand functions along with stores that have constant marginal costs of production. The stores are evenly spaced in equilibrium. The model generates a simple formula in which the markup of price over marginal cost depends on the spacing between stores and a transportation-cost parameter but is independent of the elasticity of demand. This result reflects pricing decisions by stores that factor in the threat of losing business entirely at the borders with neighboring stores. The free-entry solutions for the number of stores and their spacing approximate socially optimal values but quantities of goods consumed are inefficiently low. |
| JEL: | L1 L12 L13 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32660 |
| By: | Hendrik Döpper; Alexander MacKay; Nathan H. Miller; Joel Stiebale |
| Abstract: | We characterize the evolution of markups for consumer products in the United States from 2006 to 2019. Using detailed data on prices and quantities for products in more than 100 distinct product categories, we estimate flexible demand systems and recover markups under an assumption that firms set prices to maximize profit. Our empirical strategy obtains a panel of consumer preferences and marginal costs based on the estimation of separate random coefficient models by category and year. We find that markups increased by about 30 percent on average over the sample period. The change is primarily attributable to decreases in marginal costs, as real prices only increased slightly from 2006 to 2019. Our estimates indicate that consumers have become less price sensitive over time. |
| JEL: | D20 D40 L10 L2 L81 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32739 |
| By: | Daniel Deisenroth; Utsav Manjeer; Zarak Sohail; Steven Tadelis; Nils Wernerfelt |
| Abstract: | Digital advertising, which uses consumer data to target ads to users, now accounts for most of global ad expenditures. Privacy concerns have prompted regulations that restrict the use of personal data. To inform these policy debates, we develop an equilibrium model of advertising and market structure to analyze the impact of privacy regulation on market outcomes. We test the model’s predictions using the launch of Apple’s App Tracking Transparency feature, which created a natural experiment that limited the use of consumer data. Leveraging data from all U.S. advertisers on Meta combined with offline administrative data, we find that reductions in digital ad effectiveness led to decreases in investments in advertising, increases in market concentration, and increases in product prices. These effects are economically meaningful in magnitude and suggest potential harms to both firms and consumers from privacy regulation. |
| JEL: | D22 D40 L10 L59 M38 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32726 |
| By: | Martin Peitz |
| Abstract: | In this chapter, I review the economic theory of two-sided platforms. First, I elaborate on the prevailing price structure in monopoly and oligopoly and explore the prevailing market structure. Second, I consider the choice of non-price strategies that affect users on the platform and address the horizontal and vertical scope of platforms. |
| Keywords: | Two-sided platform, price theory, digital markets, network effects, platform design |
| JEL: | L12 L13 L41 L42 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_584 |
| By: | Rosina Rodríguez Olivera |
| Abstract: | I study the incentives of an informed firm to share its private information with its competitor and the incentives of a regulator to constrain or enforce disclosure in order to benefit consumers. Firms offer differentiated goods, compete a là Bertrand and one firm has an information advantage about demand over its competitor. I show that full disclosure of information is optimal for the informed firm, because it increases price correlation and surplus extraction from consumers. A regulator can increase expected consumer surplus and welfare by restricting disclosure, but consumers can benefit from the regulator privately disclosing some information to the competitor. Disclosure increases the ability of firms to extract surplus from consumers, but private disclosure creates a coordination failure in firm pricing. The optimal disclosure policy is chosen to induce goods to be closer substitutes and intensify the competition across firms. |
| Keywords: | Competition, Information |
| JEL: | D18 D43 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_578 |
| By: | Mert Demirer; Ömer Karaduman |
| Abstract: | Using rich data on hourly physical productivity and thousands of ownership changes from US power plants, we study the effects of acquisitions on efficiency and underlying mechanisms. We find a 2% average increase in efficiency for acquired plants, beginning five months after acquisitions. Efficiency gains rise to 5% under direct ownership changes, with no significant change when only parent ownership changes. Investigating the mechanisms, three-quarters of the efficiency gain is attributed to increased productive efficiency, while the rest comes from dynamic efficiency through changes in production allocation. Our evidence suggests that high-productivity firms buy underperforming assets from low-productivity firms and make them as productive as their existing assets through operational improvements. Finally, acquired plants improve their performance beyond efficiency by increasing output and reducing outages. |
| JEL: | L22 L25 L40 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32727 |
| By: | Siying Ding; Ahmad Lashkaripour; Volodymyr Lugovskyy |
| Abstract: | We develop a method to measure the incidence of monopolistic markup distortions in the global economy. Using semi-parametric formulas, we measure how trade modifies the deadweight loss of markups through two channels: (1) trade-induced change in markup dispersion, and (2) international rent-shifting. The latter, which has received less attention in the literature, constitutes zero-sum welfare effects similar to implicit tariffs that tilt the terms of trade in favor of countries exporting high-markup goods. To measure these effects, we estimate firm-level markups globally using demand-based and cost-based methods and compile new data on global profit ownership. Our findings reveal that trade has greatly reshaped the global incidence of monopoly distortions, reducing the deadweight loss of markups for high-income countries by 15% while increasing it by 44% among low-income nations. These asymmetric effects are primarily due to international rent-shifting and represent an 8% implicit tariff imposed by high-income countries on low-income partners. These findings are robust to accounting for global input-output linkages and fixed investment costs. Our results challenge the prevailing view that high-income countries have made disproportionately greater concessions under existing trade agreements. We show that rent-shifting externalities can be effectively mitigated through additional preferential tariff concessions under the WTO or a globally coordinated destination tax on profits. |
| Keywords: | markup, incidence, distortion, market power, trade, profits, rents, welfare, unequal, tariff, policy |
| JEL: | F12 F13 F14 O24 O25 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11211 |
| By: | Jose M. Betancourt; Ali Hortaçsu; Aniko Öry; Kevin R. Williams |
| Abstract: | We study dynamic price competition between sellers offering differentiated products with limited capacity and a common sales deadline. In every period, firms simultaneously set prices, and a randomly arriving buyer decides whether to purchase a product or leave the market. Given remaining capacities, firms trade off selling today against shifting demand to competitors to obtain future market power. We provide conditions for the existence and uniqueness of pure-strategy Markov perfect equilibria. In the continuous-time limit, prices solve a system of ordinary differential equations. We derive properties of equilibrium dynamics and show that prices increase the most when the product with the lowest remaining capacity sells. Because firms do not fully internalize the social option value of future sales, equilibrium prices can be inefficiently low such that both firms and consumers would benefit if firms could commit to higher prices. We term this new welfare effect the Bertrand scarcity trap. |
| JEL: | C7 D04 D6 L0 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32673 |
| By: | Tomaso Duso; Lea Bernhardt; Joanna Piechucka |
| Abstract: | We discuss the main Theories of Harm in EU merger control and their evolution since the 1990s. We present stylised facts and trends using data extracted from EU merger decisions by natural language processing tools. EU merger policy has adapted over time, both in terms of legislation and theories of harm, as well as in terms of the investigative tools and evidence used. The introduction of the new Merger Regulation in 2004, which led to a change in the substantive test, also brought about significant changes in the use of Theories of Harm. Unilateral theories are now used more frequently and have developed further, in particular in relation to the assessment of closeness of competition. Non-horizontal conglomerate and vertical Theories of Harm focusing on foreclosure issues are now much more common and are a standard tool in most in-depth investigations. More novel Theories of Harm related to innovation and digital markets have been developed and implemented since the 2010’s. While market shares remain a central tool for merger assessment, the use of internal documents has increased, accompanied by the use of quantitative tools. With respect to Commission interventions, structural remedies are used more frequently, although behavioural remedies are also increasingly deployed, especially in Phase II. |
| Keywords: | merger control, theories of harm, unilateral effects, coordinated effects, non-horizontal effects, foreclosure, innovation, ecosystem, digital market shares, internal documents, structural remedies, behavioural remedies |
| JEL: | K21 L40 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11218 |
| By: | Jens-Uwe Franck |
| Abstract: | The EU has set itself an ambitious agenda to tackle climate change. Competition policy, including merger review, is called upon to play its part. Based on an analysis of the Commission’s practice, this paper identifies the key framework issues for the consideration of climate change concerns in merger control and the parameters for addressing them under the EU Merger Regulation and in the light of the European Treaties. One focus is on the implications of the differentiated allocation of regulatory powers. It is argued that a distinction must be made between scenarios in which the climate change argument is used to justify stricter or conceptually extended merger control and those in which it is argued that merger control should need to be relaxed for climate change reasons. With regard to the first scenario, shifts of a normative nature can be observed and are indeed called for, but these take place within the consumer welfare paradigm and it remains the case that the protection of competition is the sole overriding principle of the EU Merger Regulation. In contrast, in the second scenario, merger-specific positive effects on climate concerns need to be considered even if they are not captured by the consumer welfare paradigm. |
| Keywords: | antitrust law, merger control, climate change, environmental sustainability |
| JEL: | K21 K32 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_576 |
| By: | Ohnishi, Kazuhiro |
| Abstract: | This paper explores a price-setting oligopoly game where labor-managed firms have the option to provide lifetime employment as a strategic commitment. The game unfolds in two stages. In the first stage, each firm independently and simultaneously decides whether to provide lifetime employment as a strategic commitment. If a firm provides lifetime employment, then it chooses an output level and establishes a lifetime employment agreement with the required number of employees to reach the output level. In the second stage, each firm independently and simultaneously selects a price level to maximize its objective function value. At the conclusion of the second stage, the market opens, and each firm sells at its own price. The paper delves into the equilibrium of the labor-managed Bertrand oligopoly game. The analysis reveals that the equilibrium aligns with the Bertrand solution when no lifetime employment is offered. Consequently, the paper concludes that using lifetime employment as a strategic commitment device is not advantageous for labor-managed firms in the price-setting competition. |
| Keywords: | Labor-managed firm; Lifetime employment; Price-setting model; Substitute goods |
| JEL: | C72 D21 L13 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121486 |
| By: | Phares Akari; Chirantan Chatterjee; Matthew J. Higgins |
| Abstract: | We explore how firms respond to downstream product shocks. We find that affected firms increase R&D and make additional safety-related investments in their existing assets-in-place. These investments vary with firm capabilities and across shock severity. Competitors appear to vicariously learn and also engage in similar upstream investments. We present evidence that these upstream investments have important performance implications. First, these investments are positively related to transition probabilities and approval rates for products that received them. Second, these investments are related to a decrease in the intensity and rate of future downstream product shocks. Surprisingly, however, these investments appear to have limited impact on mitigating the negative demand response caused by these shocks. |
| JEL: | L10 L51 L65 M21 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32703 |
| By: | Robin Ng |
| Abstract: | Free and Open-Source Software (FOSS) are developed by a community of developers led by a coordinator. Coordinators balance the following trade-off: (i) more developers improve FOSS quality—a positive vertical differentiation effect; (ii) more developers lead to more diverse views, driving FOSS characteristics away from the preferences of existing developers—a negative horizontal differentiation effect. FOSS are able to attract more developers when coordinators improve their level of coordination, increasing the marginal vertical network effect, or by having a more permissive Open-Source license, increasing the marginal horizontal network effect. More permissive Open-Source licenses can intensify competition between FOSS and proprietary software, resulting in lower prices. However permissive licenses may reduce the incentives to coordinate FOSS, leading to lower quality FOSS that only serve niche markets. I explore coordinators who may have different motivations—self-interested Founders, volunteering Altruists, and profit-driven Managers—discussing when and how they choose to coordinate FOSS. |
| Keywords: | Open-Source Software, Network effects, Software Licensing |
| JEL: | D21 D26 L14 L17 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_585 |