Current Projects and Working Papers
When Switching Costs benefit Consumers. Evidence from a Market with Lock-in Effects [Job market paper: Latest Version]
Abstract: We analyze a long-standing controversial economic questions: Can we foster competition by stimulating consumer response in markets with switching costs? Our analysis actually shows the opposite effect, that is, markets are more competitive with switching costs than without. This counterintuititve result comes from a novel dynamic structural demand and supply model, where the main innovative ingredient is the pricing dynamics: firms compete for non-captive consumers by lowering their prices based on expected switching costs and then set profit-maximizing prices for captive consumers. We analyze a market with psychological switching costs (diapers) featuring no-name products, which have no, or lower, switching costs. Then, firms compete too fiercely for consumers, who, consequently, benefit from lower prices. Our results imply that many markets do not require policy interventions, which are often difficult or even impossible to design.
Prices and Product Variety in Models of Vertical Relationships. Empirical Evidence from the Biscuit Market, with Celine Bonnet & Zohra Bouamra-Mechemache
This empirical study aims at shedding light on how the variety decisions of retailers affect the pro.t sharing in their bilateral relationships with manufacturers. To this extent, we study the biscuit market, where variety is an important determinant of consumer welfare and develop a supply model on the vertical relationship between retailers and manufacturers that explicitly considers strategic retail decisions on store variety. The number of products offered by the retail stores affects consumer choices, which establishes a link between consumer preferences for variety and the product line length. Bargaining on wholesale prices and retail price decisions happen subsequent to the retail variety choice, which allows to analyze the effect of variety on retail- and wholesale prices. We find that due to variety retailers get a larger slice from a larger pie---meaning that both the total industry profits and the retail profit share positively correlate to larger variety. In a next step, we quantify the effect of how retail and wholesale prices change with retail variety. Finally, we implement several counterfactuals to investigate how retailer buyer power---due to (i) retail mergers, (ii) increase in private label shares, and (iii) dynamic bargaining tactics---affects the retailers' choice of product variety in their stores.
When Retail Mergers benefit Producers, Processors, and Consumers: Empirical Evidence from German Retailing [slides]
Increasing concentration (e.g., through merger activity) is one of the major policy concerns of our times. Retail mergers are different than other mergers because larger retailers can (i) distribute the share of costs over more units (fixed cost degression) and (ii) demand lower input prices when buying more items (buyer power). Our paper analyzes the effects of a merger between a German supermarket chain and a soft discounter on retail prices, retail costs, and buyer power. Using data from two complementary grocery retailing categories, we disentangle three post-merger effects: market power, efficiency gains in distribution, and buyer power increase vis-a-vis the suppliers (i.e., the ability to negotiate lower input prices). We find that retailers decrease prices while being able to increase markups, which is caused by cost savings from fixed cost degression and increased buyer power. Although suppliers get lower prices, they benefit nonetheless by selling more units at a lower price, which we explain with reduced double-markup inefficiencies.
Preliminary Work in Progress
State Aid, Productivity, and Competition, joint with Sven Heim & Joel Stiebale
Upstream Collusion and Product Variety, joint with Hugo Molina
The Effectiveness of Environmental Public Policies in Multi-Level Food Supply Chains, joint with Celine Bonnet & Zohra Bouamra-Mechemache
Bargaining in Manufacturer-Retailer Relationship, joint with Justus Haucap, Ulrich Heimeshoff, Gordon J. Klein & Christian Wey, DICE Discussion Paper No 107, University of Düsseldorf