Friday, July 3, 2020
|By:||Bernard, Andrew; Dhyne, Emmanuel; Manova, Kalina; Magerman, Glenn; Moxnes, Andreas|
|Abstract:||This paper quantifies the origins of firm size heterogeneity when firms are interconnected in a production network. Using the universe of buyer-supplier relationships in Belgium, the paper develops a set of stylized facts that motivate a model in which firms buy inputs from upstream suppliers and sell to downstream buyers and final demand. Larger firm size can come from high production capability, more or better buyers and suppliers, and/or better matches between buyers and suppliers. Downstream factors explain the vast majority of firm size heterogeneity. Firms with higher production capability have greater market shares among their customers, but also higher input costs and fewer customers. As a result, high production capability firms have lower sales unconditionally and higher sales conditional on their input prices. Counterfactual analysis suggests that the production network accounts for more than half of firm size dispersion. Taken together, our results suggest that multiple firm attributes underpin their success or failure, and that models with only one source of firm heterogeneity fail to capture the majority of firm size dispersion.|
By: Yonatan Gur; Gregory Macnamara; Daniela Saban Abstract: We consider a platform facilitating trade between sellers and buyers with the objective of maximizing consumer surplus. In many such platforms prices are set by revenue-maximizing sellers, but the platform may influence prices through its promotion policy (e.g., increasing demand to a certain product by assigning to it a prominent position on the webpage), and the information it reveals about the additional demand associated with being promoted. Identifying effective joint information design and promotion policies for the platform is a challenging dynamic problem as sellers can sequentially learn the promotion "value" from sales observations and update prices accordingly. We introduce the notion of confounding promotion polices, which are designed to prevent a Bayesian seller from learning the promotion value (at the cost of diverting consumers away from the best product offering). Leveraging this notion, we characterize the maximum long-run average consumer surplus that is achievable by the platform when the seller is myopic. We then establish that long-run average optimality can be maintained by optimizing over a class of joint information design and promotion policies under which the platform provides the seller with a (random) information signal at the beginning of the horizon, and then uses the best confounding promotion policy, which prevents the seller from further learning. Additionally, we show that myopic pricing is a best response to such a platform strategy, thereby establishing an approximate Bayesian Nash equilibrium between the platform and the seller. Our analysis allows one to identify practical long-run average optimal platform policies in a broad range of demand models and evaluate the impact of the search environment and the design of promotions on consumer surplus. URL: http://d.repec.org/n?u=RePEc:arx:papers:1911.09256&r=com
Thursday, July 2, 2020
Vertically Differentiated Cournot Oligopoly : Effects of Market Expansion and Trade Liberalization on Relative Markup and Product Quality
|By:||Long, Ngo Van; Miao, Zhuang|
|Abstract:||We model an oligopoly where firms are allowed to freely enter and exit the market and choose the quality level of their products by incurring different set-up costs. Using this framework, we study the mix of firms in the long-run Cournot-Nash equilibrium under different cost structures and the effects of market size on market outcomes. Specifically, we consider two alternative specifications of cost structure. In the first specification, quality upgrading requires a large increment in the set-up cost or R&D investment. Under this cost structure, we show that in the Nash equilibrium, each firm specializes in a single quality level, and an increase in the market size leads to (i) an increase in the fraction of firms that specialize in the high quality product, (ii) an increase in the market share of the high quality product, and (iii) a reduction in firms'markups and in markup dispersion. Under the second type of cost structure where quality upgrading only requires higher marginal cost, we find that all firms will produce both types of product, and the value share of the high-quality product increases as the market expands, but in quantity terms, the market share of the high quality product does not change. Finally, we find that trade liberalization has broadly similar effects to that of a market expansion, but the supply of the high-quality product from the smaller economy may decrease.|
|Keywords:||Multiproduct firms, Cournot competition, Vertical product differentiation, Cost structure, Market size, Trade liberalization|
|JEL:||L1 L2 F15|
|By:||Lin, Ping; Zhang, Tianle|
|Abstract:||We study the effect of product liability on the incentives of product and safety innovation. We first develop a monopoly model in which a firm chooses both product novelty and safety in an innovation stage followed by a production stage. A greater product liability directly increases the marginal benefit of producing a safer product and thus increases product safety. However, as product liability increases, product novelty may increase or decrease, depending on the relative strengths of demand-shifting and cross-R&D effects identified in the model. Consequently, a greater product liability may decrease consumer welfare and thus total welfare. We extend the results to an oligopoly model with differentiated products and study the effects of competition measured by the number of firms and the degree of product substitutability. We find that equilibrium product novelty and safety decrease with the number of firms but exhibit non-monotonic relationships with the degree of product substitutability.|
|Keywords:||Product Liability, Safety, Novelty, Innovation Incentive|
|JEL:||D4 K13 L13|
|By:||Mark Armstrong; Jidong Zhou|
|Abstract:||This paper studies competition between firms when consumers observe a pri-vate signal of their preferences over products. Within the class of signal structures which allow pure-strategy pricing equilibria, we derive signal structures which are optimal for firms and those which are optimal for consumers. The firm-optimal signal structure amplifies the underlying product differentiation, thereby relaxÂ¬ing competition, while ensuring that consumers purchase their preferred product, thereby maximizing total welfare. The consumer-optimal structure dampens difÂ¬ferentiation, which intensifies competition, but induces some consumers with weak preferences between products to buy their less-preferred product. The analysis sheds light on the limits to competition when the information possessed by conÂ¬sumers can be designed flexibly.|
|Keywords:||Information design, Bertrand competition, product differentiation, online platforms|
|JEL:||D43 D47 D83 L13 L15|
Wednesday, July 1, 2020
Maarten Pieter Schinkel, University of Amsterdam - Department of Economics; Tinbergen Institute and Abel d'Ailly, University of Amsterdam address Corona Crisis Cartels: Sense and Sensibility.
Western competition authorities responded quickly and unanimously to the COVID-19 pandemic with a generous exemption from cartel law for any companies that aim to solve pressing scarcities through collaborations that restrict competition. However there is little reason to expect more supply, fair distribution, or wider use of personal protective equipment faster or at all from anticompetitive horizontal agreements. Traditional crisis cartels are about reducing excess supply, not excess demand. Embracing the policy may well have been about public image, rather than high expectations of collaboration amongst rivals contributing to solving the needs associated with COVID-19. This remarkable field experiment is not without side effects. By relaxing the first article of antitrust, the agencies undermined their own authority, just when we need them to effectively control the many markets that are rapidly consolidating as a result of the lockdowns and asymmetric state aids. The agencies should have stood by competition instead. On the other hand, this case could become a rich source of learning about the effectiveness of public interest cartels.
Thomas Cheng (HKU) has written Competition Law in Developing Countries.
BOOK ABSTRACT: This book brings together perspectives of development economics and law to tackle the relationship between competition law enforcement and economic development. It addresses the question of whether, and how, competition law enforcement helps to promote economic growth and development. This question is highly pertinent for developing countries largely because many developing countries have only adopted competition law in recent years: about thirty jurisdictions had in place a competition law in the early 1980s, and there are now more than 130 competition law regimes across the world, of which many are developing countries.
The book proposes a customized approach to competition law enforcement for developing countries, set against the background of the academic and policy debate concerning convergence of competition law. The implicit premise of convergence is that there may exist one, or a few, correct approaches to competition law enforcement, which in most cases emanate from developed jurisdictions, that are applicable to all. This book rejects this assumption and argues that developing countries ought to tailor competition law enforcement to their own economic and political circumstances. In particular, it suggests how competition law enforcement can better incorporate development concerns without causing undue dilution of its traditional focus on protecting consumer welfare. It proposes ways in which approaches to competition law enforcement need to be adjusted to reflect the special economic characteristics of developing country economies and the more limited enforcement capacity of developing country competition authorities. Finally, it also addresses the long-running debate concerning the desirability and viability of industrial policy for developing countries.
Inventing the Endless Frontier: The Effects of the World War II Research Effort on Post-War Innovation
Daniel P. Gross Harvard Business School; National Bureau of Economic Research and Bhaven N. Sampat, Columbia University - Mailman School of Public Health study Inventing the Endless Frontier: The Effects of the World War II Research Effort on Post-War Innovation. Highly recommended!
ABSTRACT: During World War II, the U.S. government launched an unprecedented effort to mobilize science for war: the newly-established Office of Scientific Research and Development (OSRD) entered thousands of R&D contracts with industrial and academic contractors, spending one to two orders of magnitude more than what the government was previously investing in science. In this paper, we study the long-run effects of the OSRD-supported research effort on U.S. invention. Using data on all OSRD contracts, we show that these investments had large effects on the direction and location of U.S. invention and high-tech industrial employment, setting in motion agglomeration forces which shaped the technology clusters of the postwar era. Our results demonstrate the effects of a large, mission-driven government R&D program on the growth of domestic technolo,gy clusters and long-run technological progress.
Giovanna Massarotto, UCL Centre for Blockchain Technologies (UCL CBT); University of Iowa - Henry B. Tippie College of Business asks CAN ANTITRUST TRUST BLOCKCHAIN?
ABSTRACT: Governments must anticipate today’s fast moving technologies to be effective. Blockchain potentially is the ideal tool to assist antitrust in enforcing regulation and fully exploiting its core principles—competition and consumer welfare. Blockchain offers antitrust an enormous opportunity and as any powerful tool it also has the capacity to harm as well as benefit if abused and left totally uncontrolled. Blockchain is not immune from the economic principle of trust. This chapter explores the delicate balance between regulation of and for blockchain.
Tuesday, June 30, 2020
ABSTRACT: Economists regularly appear as expert witnesses in antitrust litigations. This paper analyzes how their models and methodologies have performed vis-à-vis the standards of relevance and reliability affirmed by the US Supreme Court in Daubert and its progeny. Some explanations for the economists’ troubles when facing a Daubert challenge in antitrust cases are provided.
The Department of Justice and Federal Trade Commission issued today new Vertical Merger Guidelines that outline how the federal antitrust agencies evaluate the likely competitive impact of mergers and whether those mergers comply with U.S. antitrust law. These new Vertical Merger Guidelines mark the first time the Department and the FTC have issued joint guidelines on vertical mergers, and represent the first major revision to guidance on vertical mergers since the Department’s 1984 Non-Horizontal Merger Guidelines, which the Department withdrew in January of this year.
Elyse Dorsey, Government of the United States of America - Department of Justice, Geoffrey A. Manne, International Center for Law & Economics (ICLE), Jan Rybnicek, Freshfields Bruckhaus Deringer LLP, Kristian Stout, International Center for Law & Economics (ICLE), and Joshua D. Wright, George Mason University - Antonin Scalia Law School, Faculty have written Consumer Welfare & the Rule of Law: The Case Against the New Populist Antitrust Movement.
ABSTRACT: Populist antitrust notions suddenly are fashionable again. At their core is the view that antitrust law is responsible for a myriad of purported socio-political problems plaguing society today, including but not limited to rising income inequality, declining wages, and increasing economic and political concentration. Seizing on Americans’ fears about changes to the modern US economy, proponents of populist antitrust policies assert the need to fundamentally reshape how we apply our nation’s competition laws in order to implement a variety of prescriptions necessary to remedy these perceived social ills. The proposals are varied and expansive but have the unifying theme of returning antitrust to the “big-is-bad” enforcement era prevalent in the first half of the twentieth century.
But the criticisms populist antitrust proponents raise are generally unsupported and often dramatized, and the resulting policy proposals are, accordingly, fatally flawed. There is sparse evidence today suggesting that the underlying trends these critics purportedly identify are real or in any way linked to lax antitrust enforcement. Ironically, populist antitrust proponents ignore that antitrust law debated over 50 years ago the same proposals that they are raising anew today. At that time, leading jurists, economists, enforcers, and practitioners from across the political spectrum rejected the use of liability standards that seek to evaluate a variety of vague and often contradictory socio-political goals or that condemn conduct based simply on the size of a company. They recognized that these tests led to incoherent and paradoxical results that often did more to hinder than to promote competition by undermining the rule of law and fostering corporate welfare. Instead, antitrust evolved the elegant “consumer welfare standard” that simplified the core issue of what constitutes harm to competition into a straightforward question: does the conduct at issue harm consumers?
Today, the consumer welfare standard offers a rigorous, objective, and evidence-based framework for antitrust analysis. It leverages developments in modern economics more reliably to predict when conduct is likely to harm consumers as a result of harm to competition. It offers a tractable test that is broad enough to contemplate a variety of evidence related to consumer welfare but also sufficiently objective and clear to cabin discretion and honor the principle of the rule of law. Perhaps most significantly, it is inherently an economic approach to antitrust that benefits from new economic learning and is capable of evaluating an evolving set of commercial practices and business models. These virtues are precisely the target of the new populist antitrust movement, which seeks to reject economics in favor of mere supposition.
This Article makes the case in support of the current consumer welfare standard and against a sweeping set of unsupported populist antitrust reforms. There is significant room for debate within the consumer welfare model for what types of conduct should face antitrust scrutiny, what evidence is relevant, and where liability standards should be drawn. Such debate is healthy and to the benefit of antitrust enforcement. But it does not require abandoning decades of experience and economic learning that would turn back the hands of time and return us to an era where antitrust enforcement was incoherent and deleterious.
Glory Days: Do the Anticompetitive Risks of Standards-Essential Patent Pools Outweigh Their Procompetitive Benefits?
John ("Jay") Jurata, Jr., Orrick Herrington & Sutcliffe LLP and Emily Luken, Orrick, Herrington & Sutcliffe, LLP ask Glory Days: Do the Anticompetitive Risks of Standards-Essential Patent Pools Outweigh Their Procompetitive Benefits?
ABSTRACT: Patent pools—licensing arrangements in which multiple patent owners agree to license their intellectual property to each other and/or third parties—have existed in some form for nearly two centuries. During that time, courts and competition agencies have noted both the benefits and risks associated with pools. On the one hand, patent pools can reduce transaction costs, clear blocking positions, and enable parties to avoid costly infringement litigation. On the other hand, patent pools can serve as a vehicle for collusion, charge for unnecessary patents, and include exclusionary licensing terms. Nonetheless, the consensus for more than twenty years has been that the procompetitive benefits of patent pools outweigh their anticompetitive effects.
But the current assessment of patent pools may be influenced by the nostalgia of events long past. Developments over the past two decades warrant revisiting some of the assumptions regarding the procompetitive nature of patent pools. Creativity and increasingly aggressive licensing behavior also are amplifying the anticompetitive effects of certain pools. As a result, the promise of using certain types of patent pools to resolve licensing issues for standards-essential patents (“SEPs”) may be as yet another unrealized dream from glory days gone by.
This article proceeds as follows. First, it provides an overview of necessary background principles to understand the interaction between patent pools, commitments to license SEPS on terms that are fair, reasonable and non-discriminatory (“FRAND”), and competition law. Second, it explores how competition law principles traditionally have been applied to SEP patent pools. Third, it critically examines how some of the assumptions underlying the procompetitive nature of patent pools no longer are true in today’s SEP assertion environment. Fourth, it assesses how the anticompetitive risks of certain SEP pools likely eclipse their alleged procompetitive justifications. Finally, this article concludes by providing specific recommendations to restore SEP patent pools to a position where an appropriate balance is struck between competition risks and benefits.
|By:||Jung, Jinho; Sasmero, Juan; Siebert, Ralph|
|Abstract:||We estimate the degree of spatial differentiation among downstream firms that buy corn from upstream farmers and examine whether such differentiation confers market power upon buyers, defined as the ability to pay a price for corn that is below its marginal value product. We estimate a structural model of spatial competition using corn procurement data from the U.S. State of Indiana over 2004-2014. We adopt a strategy that allows us to estimate firmlevel structural parameters while using aggregate data. Our results return a transportation cost of 0.12 cents per bushel per mile (5% of the corn price under average distance traveled), which provides evidence of spatial differentiation among buyers. The estimated average markdown is $0.80 per bushel (16% of average corn price in the sample), of which $0.35 is explained by spatial differentiation and the rest by the fact that firms operated under binding capacity constraints. We also find that corn prices paid to farmers at the mill gate are independent of distance between the plant and the farm, indicating that firms do not engage spatial price discrimination. Finally, we evaluate the effect of a hypothetical merger on input markets and farm surplus. A merger between nearby ethanol producers eases competition and increases markdowns by $0.14 or 20% and triggers a sizable reduction in farm surplus. In contrast, a merger between distant procurers has little effect on competition and markdowns.|
Monday, June 29, 2020
|Abstract:||This paper studies the determinants of a firm’s organizational form in the context of an imperfectly competitive industry. There are two kinds of organizational forms: the multi-divisional form (M-form) and the unitary form (U-form). An M-form firm suffers from ignorance of demand externalities among different products and double marginalization is eliminated. In contrast, in a U-form firm, demand externalities are taken into consideration and double marginalization exists. A firm’s optimal choice of organizational form depends on the market structure.|
|Abstract:||In Electronic Payment Networks (EPNs), the No-Surcharge Rule (NSR) requires that merchants charge at most the same amount for a payment card transaction as for cash. In this paper, I use a three-party model (consumers, local monopolistic merchants, and a proprietary EPN) with endogenous transaction volumes, heterogeneous card use benefits for merchants and network externalities of card-accepting merchants on cardholders to assess the efficiency and welfare effects of the NSR. I show that the NSR: (i) promotes retail price efficiency for cardholders, and (ii) inefficiently reduces card acceptance among merchants. The NSR can enhance social welfare and improve payment efficiency by shifting output from cash payers to cardholders. However, if network externalities are sufficiently strong, the reduction of card payment acceptance affects cardholders negatively and, with the exception of the EPN, all agents will be worse off under the NSR. This paper also suggests that the NSR may be an instrument to decrease cash usage, but the social optimal policy on the NSR may depend on the competitive conditions in each market.|
By: Arthur Bauer (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique); Jocelyn Boussard (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, Directorate General for Economic and Financial Affairs (DG ECFIN) - European Commission) Abstract: This paper leverages a novel and comprehensive database on French firms from 1966 to 2016 to document important facts about secular trends in market power and labor shares, especially the role of market power in explaining variations of the aggregate labor share, as opposed to other technological factors. To do so, we follow the literature and rely on measures of industry concentration and firm level markups as proxies of market power. We find first that concentration has increased since the beginning of the 1980s in France, that the distribution of labor shares shifted upwards and that those two facts are correlated at the industry level. Second, aggregate markups increased slightly, but firm level markups decreased markedly. We find that the rise of concentration is correlated with a downward shift of the markup distribution, suggesting that the two measures might imperfectly capture different dimensions of market power. Third, larger firms have higher markups and lower labor shares. To sum up, larger firms with lower labor shares and higher markups gained market shares, even more so in industries where firm level labor shares increased and markups decreased most. From a macro point of view, the relative stability of the aggregate labor share in France can be decomposed into a small negative contribution of the aggregate markup, and a small positive contribution of aggregate technology, but from a micro point of view, reallocation contributed negatively, firm level markups contributed positively, and the contribution of technology was negligible. URL: http://d.repec.org/n?u=RePEc:hal:wpaper:hal-02353137&r=com
By: Katsafados, Apostolos G.; Androutsopoulos, Ion; Chalkidis, Ilias; Fergadiotis, Emmanouel; Leledakis, George N.; Pyrgiotakis, Emmanouil G. Abstract: In this paper, we use the sentiment of annual reports to gauge the likelihood of a bank to participate in a merger transaction. We conduct our analysis on a sample of annual reports of listed U.S. banks over the period 1997 to 2015, using the Loughran and McDonald’s lists of positive and negative words for our textual analysis. We find that a higher frequency of positive (negative) words in a bank’s annual report relates to a higher probability of becoming a bidder (target). Our results remain robust to the inclusion of bank-specific control variables in our logistic regressions. URL: http://d.repec.org/n?u=RePEc:pra:mprapa:96893&r=com
Friday, June 26, 2020
|By:||Takanori Adachi; Michal Fabinger|
|Abstract:||Using estimable concepts, this paper provides sufficient conditions for third-degree price discrimination to raise or lower aggregate output, social welfare, and consumer surplus under differentiated oligopoly when all discriminatory markets are open even without price discrimination. Specifically, we permit general demand functions and cost differences across separate markets, and show that our sufficient conditions entail a cross-market comparison of multiplications of two or three of the following key endogenous variables with economic interpretation:pass-through value,market power index, and markup value. Notably, our results based on these "sufficient statistics" can readily be extended to allow heterogeneous firms, suggesting that they would be used as a building block for empirical study of third-degree price discrimination and welfare.|