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  5. Contracting in Industrial Organization and Development Economics
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Contracting in Industrial Organization and Development Economics

Paper Session

Saturday, Jan. 6, 2024 8:00 AM - 10:00 AM (CST)

Grand Hyatt, Presidio C
Hosted By: Econometric Society
  • Chair: Vivek Bhattacharya, Northwestern University

Price-Cost Margins and Quality: Evidence from Colombian Coffee Exports

Nicolas De Roux
,
University of the Andes
Rocco Macchiavello
,
London School of Economics
Pepita Miquel-Florensa
,
Toulouse School of Economics
Eric Verhoogen
,
Columbia University

Abstract

Drawing on internal records from a Colombian coffee processer and exporter, we explore the relationship between price-cost margins and product quality. We find that higher-quality coffee is sold at a higher price-cost margin. We develop a model of intermediaries that exercise both output-market and input-market power and use it to estimate the relative contributions of markups and markdowns to the observed price-cost margins, for different quality categories.

Product Conflation and Marketplace Transparency

Ameet Morjaria
,
Northwestern University
Isaias N. Chaves
,
Northwestern University

Abstract

We study product conflation and information disclosure in a large centralized commodity marketplace. While exchanges solve the search and contracting friction, concurrently they give rise to challenges to commodities whose precise origin, quality, and supplier identity matter for buyers. The Ethiopian commodity exchange recently engaged in dramatic policy experimentation on the margin of product conflation. It went from bundling (``conflating'') a wide range of coffee qualities into a single anonymized limit order book by regional quality ``grades,'' to auctioning seller coffee lots one-by-one in ascending auctions, with given individual quality measurements and producer ID's (a ``deconflated'' regime).
We study the price responses to this market reform. Price is uncorrelated to true quality in the pre-reform period and strongly correlated in the post, i.e, the price curve rotates.
At the same time, average prices drop in the post reform period across virtually all quality levels, i.e., the price curve shifts downwards. Different product classes respond differently with deconflation, with most of the price responsiveness to information coming from the highest quality coffee.

Long-Term Relationships and the Spot Market: Evidence from U.S. Trucking

Adam Harris
,
Massachusetts Institute of Technology
Thi Mai Anh Nguyen
,
Massachusetts Institute of Technology

Abstract

Long-term informal relationships play an important role in the economy, capitalizing on match-specific efficiency gains and mitigating incentive problems. However, the prevalence of long-term relationships can also lead to thinner, less efficient spot markets. We develop an empirical framework to quantify the market-level tradeoff between long-term relationships and the spot market. We apply this framework to an economically important setting—the US truckload freight industry—exploiting detailed transaction-level data for estimation. At the relationship level, we find that long-term relationships have large intrinsic benefits over spot transactions. At the market level, we find a strong link between the thickness and the efficiency of the spot market. Overall, the current institution performs fairly well against our first-best benchmarks, achieving 44% of the relationship-level first-best surplus and even more of the market-level first-best surplus. The findings motivate two counterfactuals: (i) a centralized spot market for optimal spot market efficiency and (ii) index pricing for optimal gains from individual long-term relationships. The former results in substantial welfare loss, and the latter leads to welfare gains during periods of high demand.

Competitive Effects of Resale Price Maintenance Through Inventory: Evidence from Publishing Industry

Kohei Kawaguchi
,
Hong Kong University of Science and Technology
Yin Jia (Jeff) Qiu
,
Yale University
Yi Zhang
,
Hong Kong University of Science and Technology

Abstract

This paper examines the competitive effects of resale price maintenance (RPM) through
inventory decisions under demand uncertainty. We focus on the Japanese publishing
industry where RPM is allowed. We develop and estimate a model of RPM in which
price and inventory are determined before demand is realized. Counterfactual simulations show that the RPM model would yield a higher consumer surplus than a wholesale
model due to a sufficient inventory and a lower price of new titles. Moreover, we show
that the price ceiling due to RPM plays a welfare-enhancing role, whereas the price
floor is irrelevant in the industry

Take the Goods and Run: Contracting Frictions and Market Power in Supply Chains

Felipe Brugues
,
Mexico Autonomous Institute of Technology

Abstract

This paper studies the efficiency of self-enforced relational agreements, a common solution to contracting frictions, when sellers have market power and contracts cannot be externally enforced. To this end, I develop a dynamic contracting model with limited enforcement in which buyers can default on their trade-credit debt and estimate it using a novel dataset from the Ecuadorian manufacturing supply-chain. The key empirical finding is that bilateral trade is inefficiently low in early periods of the relationship, but converges toward efficiency over time, despite sellers' market power. Counterfactual simulations imply that both market power and enforcement contribute to inefficiencies in trade.
JEL Classifications
  • L1 - Market Structure, Firm Strategy, and Market Performance
  • O1 - Economic Development