Non-price Dimensions Research Articles

Assessing the Common Ownership Hypothesis in the US Banking Industry

The U.S. banking industry is well suited to assess the common ownership hypothesis (COH), because thousands of private banks without common ownership (CO) compete with hundreds of public banks with high and increasing levels of CO. This paper assesses the COH in the banking industry using more comprehensive ownership data than previous studies. In simple comparisons of raw deposit rate averages we document that (i) private banks do offer substantially more attractive deposit rates than public banks, but (ii) the deposit rates of public banks are similar in markets without CO where a single public bank competes only with private rivals, and in markets with CO where multiple public banks compete with each other. Panel regressions of deposit rates on the profit weights implied by the COH are generally consistent with the COH if only quarter FEs (without other controls) are included but not if bank-quarter FEs are included. Estimates with bank-quarter FEs are “precise zeros” with 95% CIs suggesting that the threefold rise in CO among public banks between 2005 and 2022 moved their deposit rates by less than a quarter of a basis point in either direction. To assess the COH along non-price dimensions we also estimate the effect of CO on deposit quantities, and find that the estimates are also not consistent with the COH.

The effect of competition on pricing and product positioning: Evidence from wholesale club entry

This paper empirically examines incumbents’ reactions to market entry along price and non-price dimensions in the example of wholesale warehouse entry into grocery retail markets. Leveraging a detailed retail panel spanning 2001–2011 and a novel dataset documenting opening and closing dates and locations of all Costco warehouse clubs, we classify incumbent retailers’ strategic responses (e.g., pricing, assortment) by the storability of product categories, controlling for persistent systematic differences across retailer–product combinations. We find that retailers are substantially affected by increased competition from wholesale club warehouse openings and in response increase the variability of their prices, consistent with adoption of the Hi–Lo pricing strategy. In addition, incumbent retailers’ strategic responses differ significantly across storability levels: They are more likely to increase prices and reduce assortments for highly storable products and decrease prices and increase assortments for less storable products. We extend our analysis by exploiting the spatial variations in our data and analyzing divergent market effects across geographical areas. We find significant geospatial differences in these strategic responses.

The Record of Weak U.S. Merger Enforcement in Big Tech

The term “Big Tech” is often used to describe the five largest multinational online service or computer hardware and software companies: Amazon, Apple, Facebook, Google, and Microsoft. These companies hold five of the top six slots, by market value, for publicly traded firms. The growth of Big Tech over the past three decades is a function of numerous forces. These range from economic phenomena such as network effects and winner-take-all markets, organic growth resulting from innovative business models and technologies, to expansion through a series of acquisitions of smaller, potential, or nascent rivals. While Big Tech has undoubtedly produced benefits, significant concerns have coalesced around it. The growth of Big Tech has created controversy over the companies’ role in our society and raised a suite of competition issues that are attracting attention from Congress and enforcers. These include effects on innovation and market entry; incentives to compete on price and non-price dimensions of competition such as privacy; and the potential for artificial intelligence-driven algorithmic pricing to facilitate coordinated conduct. The debate over the size and alleged dominance of Big Tech companies has promoted wideranging proposals to use the antitrust laws to break them up. But few of these proposals are driven by a methodological, fact-based analysis. Such analysis would explore the strategic competitive abilities and incentives that are specific to different Big Tech business models, how the companies compete in a variety of individual markets and clusters of related markets, and how alleged conduct potentially runs afoul of the U.S. antitrust laws. Breakup proposals therefore “put the cart before the horse” and fail to provide needed support for more vigorous antitrust enforcement and beneficial reform proposals. This American Antitrust Institute (AAI) White Paper offers a fact-based analysis of one important component of a broader assessment of the competitive issues surrounding Big Tech. It focuses on Big Tech’s acquisition of over 720 smaller, potential, and nascent rivals over almost the last three decades. As is typical of M&A activity, only a portion of these transactions were reportable to the U.S. antitrust agencies under the Hart Scott Rodino Act (HSR) federal premerger reporting requirements.8 A closer look at enforcement data for one major Big Tech industry category reveals that while the U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) appear to have subjected a higher than average number of transactions to more extensive agency investigation, only one deal has been challenged in federal court. It does not come as a surprise therefore that the record of U.S. merger enforcement in an important Big Tech industry category is far lower than the record across all sectors, as defined by the rate of merger challenges in federal court. This statistic warrants further inquiry. This White Paper does not investigate whether serial acquisitions by Big Tech companies have created dominance in certain markets, or if they engage in conduct that violates the antitrust laws. Those questions should be the subject of appropriately framed merger retrospectives and antitrust agency inquiries, including the DOJ’s reported investigation into Google. Rather, the analysis herein explores the various reasons why enforcement might be weaker in Big Tech and the policy implications raised by those explanations. The AAI has provided independent, in-depth legal, economic, and policy analysis of antitrust and competition issues for over 20 years. The organization has been outspoken on the issue of competition in the tech sector through its research, education, and advocacy agenda and initiatives. This White Paper begins with an empirical review of the acquisition history of Big Tech and the U.S. antitrust agencies’ limited record of merger enforcement in a major industry area in which many Big Tech firms operate. It then unpacks the limited merger enforcement record and examines why it can and should be invigorated.

The Information View of Financial Crises

Short-term debt that can serve as a medium of exchange is designed to be information insensitive. No one should be tempted to acquire private information to gain an informational advantage in trading that could destabilize the value of the debt. Short-term debt minimizes the incentive to acquire information among all securities of equal value backed by the same underlying asset. Moreover, backing short-term debt with debt (i.e. using debt as collateral) minimizes information sensitivity across all types of collateral with equal value. These features align with observed practice in money markets (markets for short-term debt). They are also consistent with financial crises occurring periodically. In the information view adopted here, financial crisis can occur when the collateral backing the short-term debt is thought to have lost enough value to raise doubts among the traders that some may acquire private information. In a crisis, there is a shift from information insensitive to information sensitive debt. The purpose of this paper is to review some of the burgeoning empirical literature that bears on the information view sketched above. We focus on evidence related to three key implications of information insensitive debt: (i) adjustments to external shocks will occur along non-price dimensions (less debt issued, higher haircuts, added collateral, etc); (ii) in a crisis some of the short-term debt turns information sensitive; (iii) money markets feature low transparency as well as purposeful opacity.

Economics at the FTC: Non-price Merger Effects and Deceptive Automobile Ads

Economists at the Federal Trade Commission analyze a wide range of activities, practices, and policies in support of the agency’s consumer protection and competition missions as demonstrated by the two economic analyses discussed in this article. The first section of this article describes the economic analysis of a proposed merger’s impact on non-price dimensions of competition in the daily fantasy sports market. The second section builds an economic model to quantify the harm to consumers from deceptive advertising in automobile markets.

Non-Price Effects of Mergers

Mergers may impact price as well as non-price forms of competition in the form of product quality, variety, service, and innovation. This special issue of the Antitrust Bulletin examines the increasing importance of non-price dimensions of competition in merger analysis, the challenges that non-price effects pose for antitrust merger enforcement, and approaches for enhancing the analysis and role of non-price competition in merger enforcement decisions and competition policy responses. This is a critical discussion that informs the debate over the importance and adequacy of the consumer welfare standard, which is the prevailing standard for evaluating the competitive effects of mergers and nonmerger conduct.

Considering Non-Price Effects in Merger Control: OECD Background Note

In a competitive market, firms and consumers make decisions based on several aspects of the product involved. While price is a fundamental aspect, it is not the only one: in many markets, innovation, quality, variety or even privacy may play at least some role in the competition between firms. This paper will introduce these characteristics, and the merger theories of harm associated with them. It will also describe some of the practical challenges involved in considering non-price dimensions of competition, namely identifying when they are important, and considering price and non-price effects together. Although the theoretical basis for the non-price effects of mergers is mixed, the consideration of these effects will be unavoidable in at least some cases. Competition authorities will therefore need to conduct a case-by-case, evidence intensive analysis when considering merger effects for markets with competition on non-price dimensions. Risks of introducing subjectivity to the process can be minimized with a focus on concrete evidence and an assessment of the probabilities of impact.

The Impact of Mergers on Quality Provision: Evidence from the Airline Industry

We examine how mergers affect quality provision by analyzing five U.S. airline mergers, focusing on on-time performance (OTP). We find that airline mergers have minimal negative impacts on OTP, and likely result in long-run improvements due to efficiencies. Importantly, we show that this finding is not driven by post-merger changes in price that could affect on-time performance. Consequently, policymakers should not, as a rule, fear the negative quality effects of mergers, and may want to consider potential positive impacts on non-price dimensions, in addition to impacts on price, when assessing a proposed merger.

Dynamic Platform Design

Abstract I model dynamic product design along price and non-price dimensions by a firm in a market with positive network externalities between consumers. In the case of a usage fee, I provide conditions under which the steady state (SS) is unique and show that the introductory price is negative and therefore below the positive SS price. Moreover, SS price increases with the size of demand frictions and is therefore higher than in a static model. A welfare maximizer's SS price is lower than a profit-maximizer's, and it is negative if demand frictions are low enough. If a platform chooses product scope (in the sense of Johnson and Myatt (2006)), it is optimal to begin as a niche platform and to broaden scope as market share increases. When the platform can target different groups of consumers with different prices, it caters to those consumers whose price-elasticity of demand is large relative to their valuation for network externalities. Finally, we show how the model can be extended to the case where consumers have multidimensional types and make heterogeneous contributions to the network's value.

A Pressure-Release Model of Competitive Reactions: Evidence from Online Price Comparisons

The increased transparency of online markets enables highly detailed insights into competitive processes between firms that were previously hard to observe. One of the most fundamental issues in such competitive processes is the reaction of a firm to an action of its competitor(s). In this paper we develop a model outlining the conditions for competitive reactions, using detailed data from a price-comparison in the online market for laptops. The analysis reveals that the probability for a reaction rises by a firm’s distance to its preferred position (rank and placement), by a lower price rank as well as if the firm reacted to the same sellers in the past, although the precise timing of the reaction is much more difficult to determine. Furthermore, when companies react, they react stronger if they are further away from their preferred position (rank and placement) and if they face a disadvantage on non-price dimensions.

Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices

Prior research shows that grocery stores reduce prices to compete with Walmart Supercenters. This study finds evidence that the competitive effects of two other big‐box retailers—Costco and Walmart‐owned Sam's Club—are quite different. Using city‐level panel grocery price data matched with a unique data set on Walmart and warehouse club locations, we find that Costco entry is associated with higher grocery prices at incumbent retailers and that the effect is strongest in cities with small populations and high grocery store densities. This is consistent with incumbents competing with Costco along nonprice dimensions, such as product quality or quality of the shopping experience. We find no evidence that Sam's Club entry affects grocery stores' prices, consistent with Sam's Club's focus on small businesses instead of consumers.

How Can Internet Comparison Sites Work Optimally for Consumers?

In today's information society, there is such a large amount of available information about any given good or service that consumers are unable to make an informed choice. Internet comparison sites (ICSs) could provide a solution to this problem by comparing markets for consumers and making a comprehensive recommendation. However, currently, they are not fully effective for consumers. Consumers do not trust ICSs because of concerns about commission biases and lack of full market coverage. To be fully effective, ICSs also ought to cover non-price dimensions such as product quality and after-sales service. Changing the economic model from the current two-sided platform to a one-sided platform could solve these problems. In order for this to occur, changes or clarifications to existing EU consumer laws might need to be made.

What Drives Market Share in the Mutual Fund Industry?*

This article examines competition and investor behavior in the mutual fund industry for the universe of US mutual funds during 1976-2009. Over this period, industry assets increased by a factor of 200, the number of active fund families quadrupled, and the average market share of a fam- ily declined by four-fifths. We find that price competition and product differentiation are both effec- tive strategies in obtaining market share. Families that pass along economies of scale to investors and those that charge lower fees than the competition gain market share, but only if these fees are above average to begin with. Loads and 12b-1 fees, however, have a positive effect on market share, con- sistent with the use of these types of fees for marketing and distribution. Families that perform better, offer a wider range of products, and start more funds relative to the competition (a measure of in- novation) also have a higher market share. Innovation is rewarded more if the new fund is more differentiated from existing offerings. Overall, our evidence suggests that mutual fund families com- pete effectively along both price and non-price dimensions.

Local underwriter oligopolies and IPO underpricing

We develop a theory of initial public offering (IPO) underpricing based on differentiated underwriting services and localized competition. Even though a large number of investment banks compete for IPOs, if issuers care about non-price dimensions of underwriting, then the industry structure is best characterized as a series of local oligopolies. We test our model implications on all-star analyst coverage, industry expertise, and other non-price dimensions. Furthermore, we posit that venture capitalists (VCs) are especially focused on all-star analyst coverage, and develop the analyst lust theory of the underpricing of VC-backed IPOs. Consistent with this theory, we find that VC-backed IPOs are much more underpriced when they have coverage from an all-star analyst.

Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices

Research shows that grocery stores reduce prices to compete with Walmart Supercenters. This study finds evidence that the competitive effects of two other big box retailers – Costco and Walmart-owned Sam's Club – are quite different. Using city-level panel grocery price data matched with a unique data set on Walmart and warehouse club locations, we find that Costco entry is associated with higher grocery prices at incumbent retailers, and that the effect is strongest in cities with small populations and high grocery store densities. This is consistent with incumbents competing with Costco along non-price dimensions such as product quality or quality of the shopping experience. We find no evidence that Sam’s Club entry affects grocery stores’ prices, consistent with Sam’s Club’s focus on small businesses instead of consumers.

Online pricing dynamics in Internet retailing: The case of the DVD market

The explosive growth of Internet retailing offers an excellent opportunity to collect online prices at a disaggregate (e.g., individual store and/or individual product) level over time and to investigate the evolution of Internet markets. In this paper, we generalize the results obtained in existing static analyses and develop two random coefficient regression models to capture the dynamics of prices in the US online DVD market. On the basis of the models, we test hypotheses to compare the rates of change in price levels and in price dispersion at both pure dotcoms and online branches of multichannel retailers in the DVD market. The results, based on the analysis of 6759 price quotes over a 12-month period, suggest that multichannel retailers effectively differentiated themselves from pure dotcoms on nonprice dimensions so that they charged higher prices and maintained the difference in price levels throughout the time period of the study. Head-to-head price competition within pure dotcoms tended to be more severe. Our results also suggest that there is a sign of maturity in the current US online DVD market.

Local Underwriter Oligopolies and IPO Underpricing

We develop a theory of initial public offering (IPO) underpricing based on differentiated underwriting services and localized competition. Even though a large number of investment banks compete for IPOs, if issuers care about non-price dimensions of underwriting, then the industry structure is best characterized as a series of local oligopolies. We test our model implications on all-star analyst coverage, industry expertise, and other non-price dimensions. Furthermore, we posit that venture capitalists (VCs) are especially focused on all-star analyst coverage, and develop the analyst lust theory of the underpricing of VC-backed IPOs. Consistent with this theory, we find that VC-backed IPOs are much more underpriced when they have coverage from an all-star analyst.

Auctioning Incentive Contracts: An Experimental Study

In this note, we experimentally examine the relative performance of price-only auctions and multi-attribute auctions. We do so in procurement settings where the buyer can give the winning bidder incentives to exert effort on non-price dimensions after the auction. Both auctions theoretically implement the surplus maximizing mechanism. Our experiment confirms this result. Moreover, we observe that the pie is shared the same in both auctions between buyer and suppliers both in theory and in the lab (after accounting for learning effects). Key words: Procurement; Price-only auctions; Multi-attribute auctions; Incentive Contracts; Laboratory Experiment

PARALLEL IMPORTATION AND SERVICE QUALITY: AN EMPIRICAL INVESTIGATION OF COMPETITION BETWEEN DVDS AND CINEMAS IN NEW ZEALAND

Investigations into the causes and effects of parallel importing have concentrated on price discrimination but arbitrage can also occur on non-price dimensions. Using a natural experiment in the New Zealand film distribution industry between May 1998 and November 2001 we examine the effect of parallel importing on quality as it relates to the timing of the availability of film media. We demonstrate that a) cinema revenues were undermined as consumers substituted viewing films on parallel imported DVDs for thecinema format and b) that studios responded to the threat of parallel imported DVDs by bringing forward the release of films into New Zealand cinemas. The reduced delay between US and New Zealand cinematic release dates is shown to be consistent with the introduction of competition when timing is a dimension of quality and choice. We conclude that parallel importation of DVDs almost certainly resulted in a net increase in welfare in New Zealand.

Parallel Importation and Service Quality: An Empirical Investigation

Investigations into the causes and effects of parallel importing have concentrated on price discrimination, but arbitrage can also occur on non-price dimensions. Using a natural experiment in the New Zealand film distribution industry between May 1998 and November 2001, we examine the effect of parallel importing on quality as it relates to the timing of the availability of film media. We demonstrate that a) cinema revenues were undermined as consumers substituted viewing films on parallel imported DVDs for the cinema format and b) that studios responded to the threat of parallel imported DVDs by bringing forward the release of films into New Zealand cinemas. The reduced delay between US and New Zealand cinematic release dates is shown to be consistent with the introduction of competition when timing is a dimension of quality and choice. We conclude that parallel importation of DVDs almost certainly resulted in a net increase in welfare in New Zealand.