Entry Barriers, Limit Pricing, and Incomplete Information

The aim of this work is to describe some of the major contributions to the theory of oligopoly with free entry, tracing the evolutionary phases and clarifying the interconnections between different models. In particular we will first analyze the starting contributions of the 1950’s which gave rise to the so-called limit pricing theory; then we will introduce the role of capacity in deterring entry; finally we will analyze a model with incomplete information in which both established and potential firms are not fully informed about others’ cost functions

Entry Barriers, Limit Pricing, and Incomplete Information

The aim of this work is to describe some of the major contributions to the theory of oligopoly with free entry, tracing the evolutionary phases and clarifying the interconnections between different models. In particular we will first analyze the starting contributions of the 1950’s which gave rise to the so-called limit pricing theory; then we will introduce the role of capacity in deterring entry; finally we will analyze a model with incomplete information in which both established and potential firms are not fully informed about others’ cost functions

Price Concentration Studies

Market or industry concentration are among the most widely used indicators of competition, which in turn affects market outcomes, and notably prices: based on this premise, chapter 2 aims at assessing the role of concentration in explaining observed differences in prices across Member States in specific sectors of economic activity. We note, indeed, that, after more than 50 years of governmental efforts to create a single European market, a surprisingly large number of products exhibit a relevant degree of price heterogeneity across countries in the EU. Such price differences are not an indication that the single market policy has not worked, but rather they suggest that many factors that affect prices vary across Member States. These factors include differences in costs, taxes, regulation and – most importantly for the present study – the degree of competition (which in this chapter is proxied by various indicators of market concentration). The influence of market concentration on prices is generally confirmed by the theoretical and empirical literature: several studies suggest that an increase in concentration is associated with higher prices, other things being equal. The literature, however, also warns that simple correlations between price and concentration are not sufficient to establish a compelling causal relationship between the two, and that more sophisticated empirical analyses would be warranted for this purpose. To explore the role of various sources of outcome variation (whether price or quality) across Member States – and, notably, to investigate the role that concentration plays in determining them – we select six sectors of economic activity for further examination: mobile telecom, airlines, beer, mortgages, modern consumer retail and cement. These sectors, which include both business-to-consumer and business-to-business activities, were selected due to their relevance to the economy and because they are characterized by relevant price differences across Member States. For mobile telecoms and airlines, we perform original empirical analyses that allow to infer a causal effect of market concentration on prices and other outcomes. For the remaining sectors, we carry out a qualitative comparison of prices and their main determinants across Member States. In general, we find that concentration seems to have an important role in explaining price differences, even considering the other potential sources of heterogeneity in outcomes. We investigate the impact of concentration on both price and investment in the mobile telecom services sector. Our results point to a strong, positive relationship between prices and market concentration. Prices in the US are considerably higher to those prevailing in the EU, where the number of Mobile Network Operators (MNOs) – suppliers that own their network – is much higher relative to market size. More generally, markets with more MNOs tend to exhibit lower prices, after adjusting for other differences; in particular, we find that an increase in HHI by 1,000 causes an increase in prices by 11-18%. The role of operators without their own physical networks – so-called Mobile Virtual Network Operators (MVNOs) – seems to be negligible for explaining price differences, even though these operators do tend to offer lower prices than their rival MNOs: the reason may be that MVNOs do not compete with MNOs for the same customers. When looking at the relationship between investment and concentration, we do not find that higher concentration leads to higher levels of investment; further, differently than for prices, MVNOs seem to play a meaningful role in fostering investment in mobile telecommunications. For airlines, the analyses performed suggest that, in line with the literature, market structure has a strong impact on prices, which we find to be substantially higher in markets that are more concentrated. This finding is confirmed both by a panel regression analysis on a comprehensive dataset of European as well as US routes, and by an event study that exploits the exit of the market of a prominent European airline, Air Berlin, to identify the causal impact of market concentration on prices. In the latter analysis we find that the increase in concentration in many routes caused by Air Berlin’s exit was accompanied by an immediate jump in price levels of about 19.4%, that was only mitigated over the years as new competitors began to serve the relevant routes. For beer, mortgages, modern consumer retail and cement, we identify a subset of EU countries and analyse price differences across them, as well as differences in the relevant price determinants, including concentration. We find that differences between the lowest and highest prices, among those observed in our samples, are around 66% for beer, 37% for mortgages, 38% for modern consumer retail and 80% for cement. Overall, we find that cost differences do not seem to fully justify the observed price differences between countries; that regulation may be a contributing factor; and that concentration may determine part of the observed differences. Specifically for each sector, we find that: ▪ for beer, prices observed in Germany are 66% lower compared to other countries in our sample, and the German beer market exhibits a much lower degree of concentration; ▪ for mortgages, more concentrated markets tend to have higher mortgage rates, with rates differing by as much as 0.71 percentage points, though different risk levels across countries may also account for some of these differences; ▪ for modern consumer retail (essentially, supermarkets) there is a tendency to find higher prices in countries with more concentration, although the extent to which our analyses are able to capture all the relevant sources of price differences is limited by the complexities of these markets; ▪ for cement, higher prices seem to be associated with higher regional concentration levels and, possibly, national regulatory standards. Despite our efforts to select samples of countries that guarantee a good coverage in terms of geographical and size distribution, we acknowledge that the results of the four studies described above may still be sensitive to country selection. More generally, we emphasize that, due to the lack of causal analysis (for beer, mortgages, modern consumer retail and cement), much care is needed to avoid over-interpreting the associated results. On balance, however, economic theory, prior empirical work and our own analyses support the idea that, all other things being equal, higher market concentration is associated with higher prices. To the extent that our findings are generalisable across other industries, they confirm that the trends of rising concentration described in chapter 1 of this study should be a reason for concern

Online privacy and market structure: Theory and evidence

This paper investigates how privacy regulation affects the structure of online markets. We provide a simple theoretical model capturing the basic trade-off between the degree of privacy intrusion and the informativeness of advertising. We derive empirically testable hypotheses regarding a possibly asymmetric effect of privacy regulation on large and small firms using a diff-diff-diff model with heterogeneous treatment timing. Our theoretical model predicts that privacy regulation may affect predominantly large firms, even if - as our data confirms - these large firms tend to offer more privacy. Our empirical results show that, if any, only large firms were negatively affected, suggesting that privacy regulation might boost competition by leveling out the playing field for small firms

Privacy regulation and online concentration during demand peaks: evidence from the E-commerce sector

In this paper, we study how the introduction of the GDPR affected online traffic and concentration. We rely on a unique dataset collecting information on websites' visits in the E-commerce sector, and we implement a difference-in-differences model that exploits the geographical origin of website traffic. We classify websites according to their pre-GDPR amount of visits to capture potential heterogeneous effects based on websites' size. We exploit the advent of the 2018 Black Friday to assess how online consumption and concentration react in a period of demand peak when constrained by privacy regulation. Our findings show that (1) online traffic decreases after GDPR, (2) the impact is higher for small websites which however gain traffic during demand peaks, and (3) online concentration decreases in Germany but increases in Italy

Digital highways and firm turnover

We study the impact of ultra‐broadband (UBB) internet connections on firmentry and exit dynamics. These connections are based on optical fiber cablesthat link telecommunication operators to final users, allowing a significantlyhigher performance compared with traditional copper‐line networks. Weleverage on a unique comprehensive dataset collecting municipality‐levelinformation on broadband diffusion and firm turnover in Italy for the periodof 2012–2019. Our empirical strategy exploits the staggered roll‐out of UBB,starting from 2015. Our identification strategy is based on an instrumentalvariable approach that exploits plausibly exogenous variation in the physicaland geographical peculiarities of the telecommunication infrastructure.Results suggest that UBB increases firm exit, particularly for small firms. Onthe contrary, firm entry rises only in digital intensive sectors and in the mostdeveloped geographical areas. Our findings have important implications forthe ongoing debate around the massive investments in high‐speed digitalinfrastructures, as they argue against the conventional idea that businessactivities equally benefit from last‐generation broadband technologies

Privacy regulations and online safety: evidence from adult-only websites

We study the effects of the introduction of a more stringent privacy legislation on the consumption of websites that increase consumers' exposure to privacy risk. We exploit panel data on online traffic on top 1000 domains in US and EU, before and after the introduction of the GDPR. We find that the traffic on Adult-only websites increased by 11% after the enactment of the GDPR, whereas it decreased by 7% in other websites. We show through a theoretical model that, because of their high privacy risk, the demand of Adult-only websites is analogous to that of a Giffen good

The Faster the Better? The Effect of Ultra-Fast Broadband on Students' Performance

In this paper, we study the impact of ultra-fast broadband (UBB) access on student performance. These networks are based on optical fiber, allowing significantly higher speed compared to traditional copper-line connections. Our empirical analysis leverages on a unique dataset that combines information on broadband diffusion with data on student performance in 2nd, 5th, and 8th grade for the period 2012-2017. We exploit the staggered roll-out of UBB, starting from 2015. Through an event study approach, we find evidence of endogeneity between student performance and broadband diffusion. We deal with this issue through an instrumental variable approach that exploits plausibly exogenous variation in the diffusion of the essential UBB input. Our results suggest that ultra-fast connections significantly decrease students' performance in Mathematics and Italian language in 8th grade. Instead, we do not find any significant effect in 2nd and 5th grade. Male students from low-educated parental backgrounds are those more adversely affected, especially if they attend schools with a low IT usage