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Understanding competition and market power

Queen’s economics professor Robert Clark receives Bank of Canada fellowship to study competition in a variety of markets.

Robert Clark
Robert Clark's research topics include the impact of Artificial-Intelligence in pricing, the stability of the US banking system, and the alleged bread cartel in the Canadian grocery sector.

Market power is the ability of a firm to set a product’s price higher than it cost to produce it. Over the last forty years, research shows market power has been increasing and competition, decreasing. Understanding and shedding light on the sources and consequences of market power is the goal of economics professor Robert Clark, who has received a fellowship with the Bank of Canada to advance this research. The fellowship includes a grant worth approximately $500,000 spanning five years.

In this interview, Dr. Clark, who is also the Smith Chair in economic policy and a faculty advisor for the John Deutsch Institute (JDI), a research institute for economic policy at Queen’s, details the projects that aided him in receiving the fellowship.

What is currently the focus of your research?

Most recently I have been studying the impact of Artificial-Intelligence driven algorithmic pricing and its impact on competition. AI is becoming more relevant in our daily lives, evidenced through its use in areas like medicine, security, and more. I investigate how these advances may impact the functioning of firms and markets around the world, particularly in relation to collusion.

Why did you decide to look at AI driven pricing?

With technological advancements, pricing that was historically done mechanically is shifting towards AI-powered algorithms for its capabilities in handling large quantities of data efficiently.

There has been a lot of work done from a theoretical perspective to try to understand the extent to which algorithmic pricing can increase market power by facilitating collusion, and the results are ambiguous. My project is the first empirical work on the subject, examining the German retail gasoline market. It’s a great case study because of its incredibly detailed and high frequency data, combined with the fact that AI pricing software was allegedly introduced in the market sometime in 2017. We use a data-driven approach to identify stations that we believe adopted algorithmic pricing, and then study the impact of adoption on margins. Our findings suggest that adoption increased margins, but only in competitive markets, suggesting that adoption facilitated coordination among stations.

Does your research also focus on other aspects of crisis and collusion in the economy?

I am working on a project that examines the stability of the US banking system. In recent periods of crisis, many US banks have failed. This is problematic for the financial industry, and the consequences of a bank’s failure spill over into the rest of the system. The Federal Deposit Insurance Corporation (FDIC) is responsible for resolving failed banks, and does so by auctioning off failed banks to healthy institutions by using a least-cost scoring rule to evaluate bids along multiple dimensions. However, the way the FDIC evaluates bids is unknown to banks, and some are observed to submit multiple bids (simultaneously) in a given auction. My research establishes that this approach is costly for the FDIC and we develop a method for illustrating the significant savings that could be achieved if the method for auctioning off the failed banks were improved.

Another project examines the alleged bread cartel that was recently uncovered in the Canadian grocery sector. Typically, cartels are just amongst retailers or just amongst manufacturers, but this links firms at both ends of the supply chain. I attempt to provide evidence for collusion occurring by examining court documents and pricing data, and provide a case for how and why inflation occurred as a result.

Could you speak to some key mechanisms that might be impacting the current position of the Canadian economy, particularly in relation to inflation?

Historically low interest rates have led to significant debt accumulation, particularly throughout the pandemic. We are now faced with an important rise in inflation resulting from supply chain issues, the war in Ukraine, and Covid relief provided by the government. The main tool the government has at its disposal to combat inflation is interest rates, and it may need to ratchet these up even further in the coming months. Given the high debt levels, this will put considerable strain on our economy.

While you research Canadian economy, you are also investigating economics in Europe. How does working with international researchers impact your work?

Economics is definitely a very international field. Even within the department at Queen’s, there is a diverse group with different backgrounds. I have worked with researchers from Italy, Germany and elsewhere, and sometimes there is a link between the market I’m studying and the person I’m working with, but it is not always the case. It’s always interesting to get a new perspective.

View Dr. Clark’s faculty page to see his selected publications and working papers.