Sebastian VERGARA's PhD Thesis, July 11th, 2023

July 11, 2023 Research

Sebastian VERGARA will defend his thesis on Tuesday 11 July at 14:00 (online only)
Title: «Essays in Industrial Organization»
Supervisor: Professor Patrick REY

To attend the conference (zoom only), please contact the secretariat Christelle Fotso Tatchum

Memberships are:

  • Patrick Rey : Professor Université Toulouse Capitole, TSE and Supervisor
  • Bruno Jullien : TSE CNRS Senior Researcher, Examinateur
  • Markus Reisinger : Professor, Frankfurt School of Finance & Management, Rapporteur
  • Juan Pablo Montero : Professor, Pontificia Universidad Católica de Chile, Rapporteur

Abstract :

The present thesis consists of three independent chapters, in the field of Industrial Organization. The first two chapters are related to entry deterrence in different contexts, while the third chapter is concerned with data collection and market tipping in digital economies.

The first chapter develops a dynamic model for the use of all-units-discount (AUD) contracts—also referred to as loyalty rebates—by an incumbent supplier, to deter or delay the entry of a more efficient supplier in the upstream market. This extends the work of Ide, Montero and Figueroa (2016), in which they analyzed the use of such contracts in a static context of non-contestability, wherein the incumbent supplier enjoys a non-contestable share of the market, which cannot be served by the entrant. Their main contribution is to show that, contrary to exclusive dealing contracts, AUD contracts cannot foreclose a more efficient entrant in any of the post-Chicago models, and therefore their prevalence is due to reasons other than exclusion. However, the non-contestability constraint reflects the presence of brand loyalty, capacity constraints, or any other mechanism that initially prevents full-market competition, but can be eventually overcome in the future upon entry. Therefore, from a competition perspective, the analysis of the dynamic implications is necessary and relevant. It turns out that when downstream retailers are fierce competitors, AUD contracts can be a profitable tool for the incumbent to deter—or at least delay—entry. The key to this contrasting result is intense downstream competition, as it prevents retailers from capturing any profits, even upon entry, thus the incumbent does not need to compensate them for any forgone future profits, and can transfer its own future profits to oppose entry at the outset.

The second chapter looks into entry deterrence—in the form of a limit price- path—in the context of positive selection. Revisited by Tirole (2016), positive selection refers to the feature in non-durable goods markets where the most motivated customers—those with higher valuations for the good—remain in the market, while the least motivated leave, contrary to the Coasian dynamics of durable goods— negative selection. In such a context, an incumbent facing the threat of entry by a differentiated competitor can implement a sequence of increasing prices, possibly up to its monopoly level, to profitably deter entry. The increasing price-path is explained by the exit of customers least attracted to the incumbent—and most attracted to the entrant—whenever entry does not occur. This leads the way to skimming dynamics, by which the incumbent can modulate the entrant’s residual demand and therefore reduce its profits from entry. The increasing limit price-path characterized in this chapter has clear negative consequences for consumer welfare, as prices grow over time, possibly up to the monopoly price, and the lack of entry means less variety for consumers.

The third and last chapter sheds some light on the role of data collection in the competitive process of firms in a digital economy. In the wake of digitization, the role of data in competition has been a very relevant topic of discussion, both from scholars and practitioners. While not dismissing the multiple benefits that more and better data can bring to society, the fact that data can be regarded as a competitive advantage can be a matter of concern. The main interest of this analysis rests in the necessary conditions for market tipping in the long-run, when data allows firms to offer more value to consumers but any data advantage is only transient, as data can become obsolete. In this context, the main insight is that data on its own is not enough for markets to tip in the long-run, precisely because of its obsolescence. Market-tipping requires a firm to have a structural advantage, for example, in the form of more intrinsic value offered to consumers.