Wednesday, August 9, 2017
Robert Kulick studies Ready-to-Mix: Horizontal Mergers, Prices, and Productivity.
ABSTRACT: I estimate the price and productivity effects of horizontal mergers in the ready-mix concrete industry using plant and firm-level data from the US Census Bureau. Horizontal mergers involving plants in close proximity are associated with price increases and decreases in output, but also raise productivity at acquired plants. While there is a significant negative relationship between productivity and prices, the rate at which productivity reduces price is modest and the effects of increased market power are not offset. I then present several additional new results of policy interest. For example, mergers are only observed leading to price increases after the relaxation of antitrust standards in the mid-1980s; price increases following mergers are persistent but tend to become smaller over time; and, there is evidence That firms target plants charging below average prices for acquisition. Finally, I use a simple multinomial logit demand model to assess the effects of merger activity on total welfare. At acquired plants, the consumer and producer surplus effects approximately cancel out, but effects at acquiring plants and non-merging plants, where prices also rise, cause a substantial decrease in consumer surplus.
Victor Aguirregabiria and Margaret Slade examine Empirical Models of Firms and Industries.
ABSTRACT: We review important developments in Empirical Industrial Organization (IO) over the last three decades. The paper is organized around six topics: collusion, demand, productivity, industry dynamics, interfirm contracts, and auctions. We present models that are workhorses in empirical IO, and describe applications. For each topic, we discuss at least one empirical application using Canadian data.
Tuesday, August 8, 2017
Brian Adams (Bureau of Labor Statistics) and Kevin R. Williams (Cowles Foundation, Yale University) have a paper on Zone Pricing in Retail Oligopoly.
ABSTRACT: We quantify the welfare effects of zone pricing, or setting common prices across distinct markets, in retail oligopoly. Although monopolists can only increase profits by price discriminating, this need not be true when firms face competition. With novel data covering the retail home improvement industry, we find that Home Depot would benefit from finer pricing but that Lowe’s would prefer coarser pricing. Zone pricing softens competition in markets where firms compete, but it shields consumers from higher prices in markets where firms might otherwise exercise market power. Overall, zone pricing produces higher consumer surplus than finer pricing discrimination does.
Paul Belleflamme (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille) ; Wing Man Wynne Lam (University of Liège) ; Wouter Vergote (CEREC, University Saint-Louis) discuss Price Discrimination and Dispersion under Asymmetric Profiling of Consumers.
ABSTRACT: Two duopolists compete in price on the market for a homogeneous product. They can use a 'profiling technology' that allows them to identify the willingness-to-pay of their consumers with some probability. If both firms have profiling technologies of the exact same precision, or if one firm cannot use any profiling technology, then the Bertrand paradox continues to prevail. Yet, if firms have technologies of different precisions, then the price equilibrium exhibits both price discrimination and price dispersion, with positive expected profits. Increasing the precision of both firms’ technologies does not necessarily harm consumers.
Gilad Sorek studies Market Power and Growth through Vertical and Horizontal Competition.
ABSTRACT: I study the implications of innovators' market power to growth and welfare in a two-R&D-sector economy. In this framework either vertical or horizontal competition is binding in the price setting stage, depending on the model parameters and the implemented market-power policy. I consider two alternative policies that are commonly, yet separately, used in the literature to constraint innovators' market power: patent lagging-breadth protection and direct price controls. I show that (a) the alternative policies may have non-monotonic and contradicting effects on growth (b) unconstrained market power may yields either excessive or insufficient growth compared with social optimum and (c) the social optimum can be achieved by reducing innovators market power with the proper policy instrument, along with a corresponding flat rate R&D-subsidy.
Alexander Karaivanov, Simon Fraser University (SFU) - Department of Economics and Fernando M. Martin, Federal Reserve Banks - Federal Reserve Bank of St. Louis discuss Market Power and Asset Contractibility in Dynamic Insurance Contracts.
ABSTRACT: The authors study the roles of asset contractibility, market power, and rate of return differentials in dynamic insurance when the contracting parties have limited commitment. They define, characterize, and compute Markov-perfect risk-sharing contracts with bargaining. These contracts significantly improve consumption smoothing and welfare relative to self-insurance through savings. Incorporating savings decisions into the contract (asset contractibility) implies sizable gains for both the insurers and the insured. The size and distribution of these gains depend critically on the insurers’ market power. Finally, a rate of return advantage for insurers destroys surplus and is thus harmful to both contracting parties.
Monday, August 7, 2017
W. Blake Marsh, Federal Reserve Bank of Kansas City and Rajdeep Sengupta, Federal Reserve Bank of Kansas City examine Competition and Bank Fragility.
ABSTRACT:We present empirical evidence documenting how increased competition can affect the fragility of banks using U.S. banking data from 1990 to 2005. In particular, we find that local banks belonging to community (CBOs) and regional banking organizations (RBOs) increased their share of CRE loans as competition from large banking organizations (LBOs) increased. The paper traces the build-up in CRE concentrations in such local banks before the financial crisis to the expansions of LBO activity into local banking markets. After instrumenting for LBO entry into new markets, we find a steady and continuous increase in CRE loan shares at local banks. CRE concentrations were a principal cause of post-crisis bank failures, and this paper presents evidence showing how competition increases not just individual bank fragility, but the stability of the banking sector as a whole.
ABSTRACT: This paper studies how competitive prices are affected by price-matching guarantees allowing for markups on the lowest competing price. This new type of low-price guarantee was recently introduced in the German retail gasoline market. Using a sequential Hotelling model, we show that such guarantees, similar to perfect price-matching guarantees, can induce collusive prices. In particular, this occurs if the first mover provides a price guarantee with a markup which is below a threshold value. In these cases, prices are on average set at the monopoly level. A laboratory experiment supports the theoretical predictions.
Charles J. Thomas (Economic Science Institute & Argyros School of Business and Economics Chapman University) examines Profitable Horizontal Mergers Without Efficiencies Can Increase Consumer Surplus.
ABSTRACT: In a simple model I show consumer surplus can increase after competing sellers consummate a profitable merger that generates no cost savings. This finding contrasts sharply with the conventional wisdom that horizontal mergers without efficiencies must enhance sellers’ market power to be profitable, thereby harming buyers. The model fits industries in which individual buyers conduct distinct procurement contests for which sellers incur costs to participate, say to assess their product’s fit with the buyer’s preferences. Mergers benefit buyers by inducing stronger contest-level entry, echoing common claims from merging parties that their merger is beneficial because it creates a stronger competitor.
Llorente-Saguer, Aniol and Zultan, Ro'i theorize about Collusion and Information Revelation in Auctions.
ABSTRACT: The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. However, such analyses neglect to consider the effects of failed collusion attempts, wherein information revealed in the negotiation process may affect bidding behavior. We experimentally test a setup in which theory predicts no collusion and no information revelation in first-price auctions. The results reveal a hitherto overlooked failing of the first-price mechanism: failed collusion attempts distort bidding behavior, resulting in a loss of seller revenue and efficiency. Moreover, the first-price mechanism does not result in less collusion than the second-price mechanism. We conclude that, while the features of the first-price mechanism may have the potential to deter bidder collusion, the role of beliefs in guiding bidding behavior make it highly susceptible to distortions arising from the informational properties of collusive negotiation. Auction designers should take this phenomenon into account when choosing the auction mechanism.
Friday, August 4, 2017
First a Top Gun sequel is announced. What could be better? How about news that The Karate Kid Is Making a TV Comeback with Ralph Macchio and William Zabka.
What could be next? I would love to see a Breakfast Club comeback movie.
Senator Hatch discussed antitrust and high tech on the Senate Floor. See his remarks here.
In conclusion, Mr. President, for all the intellectual pretension, for all the claims that a new age requires a new doctrine, the ideas behind the progressive standard are not new; they’re terribly old. They may be adorned with original terminology, or aimed at novel markets, but it’s the same old collectivist impulse that we’ve seen time and again. And in that sense, these ideas are not unique to American leftwing political thought. Every day we receive concerning reports from around the world that foreign governments are increasingly turning to antitrust for industrial policy.
Whether domestically, or abroad, the stakes are simply too high, the consequences too grievous, for the consumer welfare standard to be swept away in an instant merely because a new breed of central planners—falsely conceiving themselves different from their predecessors—imagine they know best. In America, we’ve always opted for the invisible hand of the free market over the heavy hand of government intervention. Let’s keep it that way. I yield the floor.
Sylvain Chassang (New York University) and Juan Ortner (Boston University) study Collusion in Auctions with Constrained Bids: Theory and Evidence from Public Procurement.
ABSTRACT: We study the mechanics of cartel enforcement and its interaction with bidding constraints in the context of repeated procurement auctions. Under collusion, bidding constraints weaken cartels by limiting the scope for punishment. This yields a test of repeated collusive behavior exploiting the counter-intuitive prediction that introducing minimum prices can lower the distribution of winning bids. The model's predictions are borne out in procurement data from Japan, where we find evidence that collusion is weakened by the introduction of minimum prices. A robust design insight is that setting a minimum price at the bottom of the observed distribution of winning bids necessarily improves over a minimum price of zero.
Alexandrov, Alexei ; Pittman, Russell ; Ukhaneva, Olga explore Royalty stacking in the U.S. freight railroads: Cournot vs. Coase.
ABSTRACT: Monopolists selling complementary products charge a higher price in a static equilibrium than a single multiproduct monopolist would, reducing both the industry profits and consumer surplus. However, firms could instead reach a Pareto improvement by lowering prices to the single monopolist level. We analyze administrative nationally-representative pricing data of railroad coal shipping in the U.S. We compare a coal producer that needs to ship from A to C,with the route passing through B, in two cases: (1) the same railroad owning AB and BC and (2) different railroads owning AB and BC. We find no price difference between the two cases, suggesting that the complementary monopolist pricing inefficiency is absent in this market. For our main analysis, we use a specification used by previous literature; however, we confirm our findings using propensity score blocking and machine learning algorithms. Finally, we confirm the results by using a difference-in-differences analysis to gauge the impact of a merger that made two routes wholly-owned (switched from case 2 to case 1). Our results have implications for royalty stacking and patent thickets, vertical mergers, tragedy of anti-commons, and mergers of firms selling complements.
Mauro Caselli (University of Trento) ; Stefano Schiavo (Department of Economic Geography) and Lionel Nesta (Observatoire français des conjonctures économiques) examine Markups and markdowns.
ABSTRACT: This paper studies the high yet undocumented incidence of firms displaying markups lower than unity, i.e., prices lower than marginal costs, for protracted periods of time. Using a large sample of French manufacturing firms for the period 1990-2007, the paper estimates markups at the firm level and documents the extent to which firms exhibit negative price cost margins. The paper is able to provide an explanation for this phenomenon using the option value approach to investment decisions. The results suggest that firms facing higher investment irreversibility tend to continue operating even when prices fall below marginal costs as they wait for market conditions to improve. This effect is magnified in the presence of uncertainty.
Thursday, August 3, 2017
Helfrich, Magdalena and Herweg, Fabian explain Salience in Retailing: Vertical Restraints on Internet Sales.
ABSTRACT: We provide an explanation for a frequently observed vertical restraint in e-commerce, namely that brand manufacturers partially or completely prohibit that retailers distribute their high-quality products over the internet. Our analysis is based on the assumption that a consumer's purchasing decision is distorted by salient thinking, i.e. by the fact that he overvalues a product attribute -- quality or price -- that stands out in a particular choice situation. In a highly competitive low-price environment like on an online platform, consumers focus more on price rather than quality. Especially if the market power of local (physical) retailers is low, price tends to be salient also in the local store, which is unfavorable for the high-quality product and limits the wholesale price a brand manufacturer can charge. If, however, the branded product is not available online, a retailer can charge a significant markup on the high-quality good. As the markup is higher if quality rather than price is salient in the store, this aligns the retailer's incentives with the brand manufacturer's interest to make quality the salient attribute and allows the manufacturer to charge a higher wholesale price. We also show that, the weaker are consumers' preferences for purchasing in the physical store and the stronger their salience bias, the more likely it is that a brand manufacturer wants to restrict online sales. Moreover, we find that a ban on distribution systems that prohibit internet sales increases consumer welfare and total welfare, because it leads to lower prices for final consumers and prevents inefficient online sales.
Claire Chambolle (UR 1303 Alimentation et Sciences Sociales - INRA - Institut National de la Recherche Agronomique - ALISS - Alimentation et Sciences Sociales, Departement d'Economie de l'Ecole Polytechnique - Ecole Polytechnique - X) and Clémence Christin (CREM - Centre de Recherche en Economie et Management - UNICAEN - Université Caen Normandie - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique) analyze New Product Introduction and Slotting Fees.
ABSTRACT: The availability of a new product in a store creates, through word-of-mouth ad- vertising, an informative spillover that may go beyond the store itself. We show that, because of this spillover, each retailer is able to extract a slotting fee from the manu- facturer at product introduction. Slotting fees may discourage innovation and in turn harm consumer surplus and welfare. We further show that the spillover may facilitate the use of pay-to-stay fees by an incumbent to deter entry. Finally, a manufacturer is likely to pay lower slotting fees when it can heavily advertize or when it faces larger buyers.
Abbring, Jaap (Tilburg University, Center For Economic Research) and Campbell, J.R. ; Tilly, J. ; Yang, N. (Tilburg University, Center For Economic Research) offer Very Simple Markov-Perfect Industry Dynamics : Theory.
ABSTRACT: This paper develops a simple model of firm entry, competition, and exit in oligopolistic markets. It features toughness of competition, sunk entry costs, and market-level demand and cost shocks, but assumes that firms' expected payoffs are identical when entry and survival decisions are made. We prove that this model has an essentially unique symmetric Markov-perfect equilibrium, and we provide an algorithm for its computation. Because this algorithm only requires finding the fixed points of a finite sequence of contraction mappings, it is guaranteed to converge quickly.
Hirose, Kosuke and Matsumura, Toshihiro are Comparing Welfare and Profit in Quantity and Price Competition within Stackelberg Mixed Duopolies.
ABSTRACT: We compare welfare and profits under price and quantity competition in mixed duopolies, wherein a state-owned public firm competes against a private firm. It has been shown that price competition yields larger profit for the private firm and greater welfare if the two firms move simultaneously, regardless of whether the private firm is domestic or foreign. We investigate welfare and profit rankings under Stackelberg competition. Under public leadership, the profit and welfare rankings have common features with the simultaneous-move game, regardless of the nationality of private firms. By contrast, under private leadership, the result depends on the nationality of the private firm. When the private firm is domestic, welfare is greater under quantity competition, while the result is reversed when the private firm is foreign. However, regardless of nationality, private firms earn more under price competition. Introducing the nonnegative profit constraint in the public firm improves welfare and increases the private firm's profit, and price competition yields a higher profit for private firms regardless of nationality and which firm is the leader. However, this constraint affects the welfare ranking. Under private leadership, quantity competition yields greater welfare regardless of the nationality of the private firm. These results indicate that profit ranking is fairly robust to the time structure in mixed Stackelberg duopolies, but welfare ranking is not.
Wednesday, August 2, 2017
Aymeric Lardon (Université Côte d'Azur, France) provides thoughts On the Coalitional Stability of Monopoly Power in Differentiated Bertrand and Cournot Oligopolies.
ABSTRACT: In this article we revisit the classic comparison between Bertrand and Cournot competition in the presence of a cartel of firms that faces outsiders acting individually. This competition setting enables to deal with both non-cooperative and cooperative oligopoly games. We concentrate on industries consisting of symmetrically differentiated products where firms operate at a constant and identical marginal cost. First, while the standard Bertrand-Cournot rankings still hold for Nash equilibrium prices, we show that the results may be altered for Nash equilibrium quantities and profits.Second, we define cooperative Bertrand and Cournot oligopoly games with transferable utility on the basis of their non-cooperative foundation. We establish that the core of a cooperative Cournot oligopoly game is strictly included in the core of a cooperative Bertrand oligopoly game when the number of firms is lower or equal to 25. Otherwise the cores cannot be compared. Moreover, we focus on the aggregate-monotonic core, a subset of the core, that has the advantage to select point solutions satisfying both core selection and aggregate monotonicity properties. We succeed in comparing the aggregate-monotonic cores between Bertrand and Cournot competition regardless of the number of firms.