Competition

• Abstract
  This paper extends Boone (2008) by introducing a competition measure at the individual
  firm level rather than for an entire market segment.
• We apply this extended Boone indicator to individual bank-level competition
  in the loan market in the four largest euro area countries and Austria.
• Our new measure of firm-level competition enriches and complements
  other competition measures and provides a promising starting point for future market
  power analyses.
• The only measure among non-structural measures that is based on the
  concept of competition as a process of rivalry is the Boone (2008) indicator.
• We introduce
  a new performance measure of competition by extending the Boone indicator to the
  individual firm level.
• Introduction
  The ability to reliably measure competition is valuable to researchers, analysts, and
  policymakers, especially antitrust authorities, financial supervisors, and central banks.
• One broad
  category of indicators often used to measure competition are structural competition
  measures, such as static concentration measures, and dynamic measures, e.g., entry and
  exit rates.
• Out of these measures, the only measure based on the
  concept of competition as a process of rivalry is the Boone indicator.
• This study introduces a new performance measure of competition by extending the
  Boone indicator to the individual firm level.
• It thus measures the
  increase in profits in percent of one percentage point increase in efficiency, with marginal
  costs as measure of efficiency.
• We extend the theoretical
  underpinning of the measurement of competition for the entire market of Boone (2008) by
  a new measure of individual firm-level competition.
• A concern of the literature is the gap
  between the practical application and the theoretical framework of Boone (2008).
• We introduce within the same theoretical
  framework a new measure of competition on firm level, the MRP.
• Our new
  measure significantly augments the antitrust evaluative framework by shedding light on
  whether a merger results in a less competitive market.
• Our novel indicator focuses on
  firms? incentives to enhance their relative efficiency, as manifested in the elasticity
  between relative profits and efficiency.
• However, an inefficient firm that is foreclosed could be more
  competitive than the larger efficient firm that relies on its scale economies.
• Our new metric of competition unveils
  banks? ability to influence their profitability in the short term by cutting costs relative to
  their peers.
• The new MRP indicator provides the ability to assess the impact
  of individual banks? competitiveness on their interest rate-setting behaviour in loan
  markets.
• Incorporating this information promises a more refined understanding of the impact and
  timing of monetary policy rates changes on the real economy.
• Section 3 introduces within the Boone
  (2008) theoretical framework our new measure of individual firm-level competition,
  including the interpretation of the MRP.
• Section 4 provides an application of our new
  ECB Working Paper Series No 2925

  6

  individual firm-level competition measure to the loan market.

• The StructureConduct-Performance paradigm (SCP) provides a traditional framework in the field of
  industrial organization for analysing competition behaviour in markets.
• Concentrated
  markets ease the possibilities to collude implicitly or explicitly and therefore concentrated
  markets result in higher prices and profits.
• For example, a tougher competition
  setup may lead to a reallocation of market shares, potentially forcing some firms to exit
  the market.
• This approach gives firms? strategic behaviour
  central stage and focuses on the strategic interaction on prices and quantities, known as
  conjectural variation.
• Another measure from
  this strand of literature is the H-statistic developed by Panzar and Rosse (1987).
• The only competition measure from this performance literature where competition is the
  outcome from a process of rivalry is the Boone indicator.
• A continuous and monotonically increasing relationship exists between
  RPD and the level of competition if firms are ranked by decreasing efficiency.
• (2013) compare the Boone indicator with the price-cost margin
  and conclude that the profit elasticity is a more reliable measure of competition.
• The high
  elasticity of profits to efficiency unequivocally indicates that the high market shares and
  therefore high profits are due to high efficiency.
• A firm that quickly passes changes to the input prices is seen as a price
  taker with little market power.
• Indicators of competition tend to measure different phenomenon and may provide
  conflicting messages, as reported for European banking by Carbo et al.
• Application 2: Test the ?quiet life? and related market structure hypotheses using the
  MRP as competition or market structure measure.
• Data
  Our application to individual bank-level competition in the euro area loan market uses
  balance sheet and income statement data from the Moody?s Analytics BankFocus for the
  calendar years 2013-2020.
• As such, most publications
  on competition in the euro area includes the largest four member states.
• Due to these restrictions the database was reduced to an unbalanced panel of up to 1862
  banks (depending on the year) from five euro area countries.
• Application 1: Measure bank competition using MRP
  Looking at the distribution of the MRP for individual banks (Fig.
• A similar finding for the four largest euro area countries as a group is
  reported in Carbo et al.
• Application 2: Test of market structure hypotheses using MRP
  Our new measure of individual-bank competition can be used to test market structure
  theories.
• Euro area banks? market power,
  lending channel and stability: the effects of negative policy rates, European Central Bank
  Working Paper, 2790 (February).
• A
  new approach to measuring competition in the loan markets of the euro area, Applied
  Economics, 43 (23), 3155?3167.
• Impact of bank competition on the interest rate pass-through in the euro area, Applied
  Economics, 45 (11), 1359?1380.

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• Participating exhibitors will come from Hong Kong, Mainland China, Canada, France, India, Poland, Thailand, the United Kingdom and other locations.
• The Smart Hong Kong Pavilion, organised by the Office of the Government Chief Information Officer (OGCIO), drew crowds at the previous InnoEX and returns this year.

• ABC’s complaint asserts that President Joe Biden lacks the legal and constitutional authority to impose a new federal regulation injuring economy and efficiency in federal contracting and illegally steering construction contracts to certain unionized contractors, which employ roughly 10% of the U.S. construction workforce.
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Loyalty programs enable firms to offer significantly lower prices to some of their customers. You’d think this would encourage strong competition. But that isn’t always what actually happens. New research shows that paradoxically, by changing the way companies target customers, loyalty programs can sometimes reduce price competition. The research also points to solutions.

A win-win proposition?

• You – the customer – get to enjoy perks and discounts, while the company gains useful commercial insights and builds brand allegiance.
• The hotel chain, in turn, records and analyses how you spend money and encourages you to stay with them again.

• Loyalty schemes can have pro-competitive effects and intensify competition between rivals leading to competing loyalty discounts and lower prices for consumers.
• But on the other hand:
  Loyalty schemes can also reduce the flexibility of consumers’ buying patterns and responsiveness to competing offers, which may reduce competition.
• Loyalty schemes can also reduce the flexibility of consumers’ buying patterns and responsiveness to competing offers, which may reduce competition.

How a two-speed price system can hurt everyone

A new economic theory research working paper, coauthored by one of us (Kominers), suggests that on competitive grounds alone, loyalty programs can sometimes harm all consumers – both ordinary shoppers and the program’s own members.

• Since a firm’s loyalty program enables it to offer discounted prices to its members, the firm can raise the base prices it offers to everyone else.
• Those not participating in the program pay more than they otherwise would have, and the firm can respond by saying “join our program!” instead of having to lower its price.
• This, in turn, reduces overall price competition for loyal customers, so firms can raise prices for them, too.

What’s the solution?

• So, how do we preserve these benefits while enabling price competition?
• The research suggests an answer: making a customer’s loyalty status verifiable, transparent and portable across firms.
• To address this, in 2015, the Victorian government launched a program encouraging households to compare energy offers.

• These allow direct transfer of loyalty status, but currently rely on a lengthy, individual-level verification process.
• Both startups and established firms have experimented with building such systems.

What next?

New academic research helps us model and better understand when loyalty programs could be weakening supply side competition and undermining consumer welfare. A neat universal solution may prove elusive. But targeted government or industry interventions – centred on increasing the transparency of a customer’s loyalty status and letting them move it between firms – could help level the playing field between firms and consumers.

• Part of this work was conducted during the Simons Laufer Mathematical Sciences Institute Fall 2023 program on the Mathematics and Computer Science of Market and Mechanism Design, which was supported by the National Science Foundation under Grant No.
• DMS-1928930 and by the Alfred P. Sloan Foundation under grant G-2021-16778.
• He also holds digital assets, including both fungible and non-fungible tokens, and serves as an expert on marketplace design and Web3-related matters.
• DMS-1928930 and by the Alfred P. Sloan Foundation under grant G-2021-16778.