Market Performance Implications of the Transfer Price Rule

The “transfer price rule” (TPR) defines a vertical price squeeze as an input price, output price combination set by a vertically‐integrated firm monopoly producer of an essential input that would not allow the firm's downstream unit to earn at least a normal rate of return on investment in the “as‐if” case that it had to purchase the input at the price charged independent firms. In its 2009 linkLine decision, the U.S. Supreme Court rejected the TPR for the purpose of enforcing the anti‐monopolization prohibition of Section 2 of the Sherman Act. In contrast, a vertical price squeeze, defined by a TPR‐like standard, is an abuse of a dominant position under Article 102 of the Treaty on the Functioning of the European Union. In this article, we model the impact of the TPR on market performance. We find that the TPR increases consumer surplus and net social welfare if all firms remain active in the downstream market. It sometimes induces the upstream firm to refuse to supply the downstream firm, and in such cases, consumer surplus and net social welfare are reduced. The impact of the TPR on market performance thus depends on whether or not an upstream firm can refuse to supply downstream firms on terms that would offer it at least a normal rate of return on investment.     

The Impact of R&D Cooperations and Mergers in Pharmaceuticals on Research Activities and Drugs Offered on the Market

In the last 10 years, the pharmaceutical industry has experienced steep, unprecedented price increases which are frequently attributed to increasing drug development costs. To cope with rocketing development costs, companies engage in Research and Development (R&D) cooperations. We study the impact of R&D cooperations on firms' research activities and drugs offered on the market. Using a comprehensive dataset, we find that R&D cooperations formed at the early stage of the drug development process increase the number of R&D projects and the number of drugs offered on the market. Late stage R&D cooperations, formed among larger firms in technology and product markets, increase firms' research activities, but reduce the number of drugs launched on the product market. Results suggest that large firms cooperating in the late research stage re‐optimize their R&D pipelines and eliminate similarly aligned research projects.     

中国股票市场流动性价值研究——双重上市A、B股经验证据

本文首先利用流动性综合测度指标,将证券交易数量、证券流动性水平及证券市场流动性水平引入到证券价格函数中,构建了证券价格差异的流动性模型,从流动性角度探讨证券价格溢价问题,在理论上证明了证券流动性价值的存在性。随后,本文利用A、B股股票实证分析证券流动性价值,实证结果表明,股票流动性水平与股票市场流动性水平可以解释A、B股价格差异,中国股票市场存在流动性价值,流动性价值受股票流动性水平、股票市场流动性水平以及股票交易数量影响。     

The Short‐Term Economic Impact of Levying E‐Tolls on Industries

TERM is used to analyse the short‐term regional economic impact of an increase in industries' transport costs when paying E‐Tolls. Market‐clearing and accounting equations allow regional economies to be represented as an integrated framework, labour adjusts to accommodate increasing transportation costs, and investments change to accommodate capital that is fixed. 1 1 TERM is a bottom‐up CGE model designed for highly disaggregated regional data. The Enormous Regional Model's originate from Horridge et al. ( 2005 ) and are better explained in Horridge ( 2011 ).
We concluded that costs from levying E‐Tolls on industries are small in comparison to total transport costs, and the impact on economic aggregates and most industries are marginal: investments (?0.404%), gross domestic product (GDP) (?0.01) and consumer price inflation (?0.10%). This is true even when considering costs and benefits on industries as well as consumers. Industries that experienced the greatest decline in output were transport, construction and gold. Provinces that are closer to Gauteng and have a greater share of severely impacted industries experienced larger GDP and real income reductions. Mpumalanga's decrease in GDP was 17% greater than Gauteng's.     

Multi‐Market Competition,R&D,and Welfare in Oligopoly

We investigate a multi‐market Cournot model with strategic process research and development (R&D) investments wherein a multi‐market firm meets new competitors that enter one of the markets. We show that entry can enhance the total R&D expenditures of the multi‐market firm. Moreover, the incumbent's profit nonmonotonically changes as the number of entrants increases. Depending on the fixed entry costs and R&D technologies, both insufficient and excess entry can appear. Our results imply that diversification of their products can be a useful strategy for firms.     

Parental Education and Children's School and Work Status in Urban Ethiopia: A Note on Gender Bias

This paper examines gender bias in the parental education–child status link using data from urban Ethiopia. Gender bias is defined here, specifically, as the differential impact of a parent's education on a child's status depending on the gender of the parent vis‐à‐vis the child. Children's status is measured by school enrolment and participation in market work. Results from a basic model point to same‐gender bias – father–son, mother–daughter in school enrolment and father–son in market work. In an extended model, results show that father–son bias in market work may be particularly pertinent for middle‐ to later‐born children. Policy interventions should be mindful of such differential effects, particularly if the aim is to address persistent gender disparities in children's status.     

Institutional Investors' Trading in Speculation: Evidence from China

The trading behaviour of institutional investors has attracted much attention. However, many issues related to their trading behaviour cannot be addressed without high‐frequency changes in institutional ownership. Based on a measure of the trading behaviour of institutional investors by using an institutional account dataset from China, we find that (i) active institutions trade speculatively by taking advantage of individual investors; (ii) individuals buying high and selling low offer liquidity only on average; (iii) foreign investors do not show significant patterns in speculation; and (iv) trading of active institutions significantly affects price. This study casts doubt on the conventional wisdom that institutional or sophisticated investors improve market efficiency by correcting mispricing, and provides direct evidence for institutional investors' speculation behaviour and their destabilising effect on the stock market. Results suggest that regulators in emerging markets should monitor institutions' speculation to bring fairness and justice to the stock market.     

An experimental investigation of bilateral oligopoly in emissions trading markets

Market power in emissions trading has been extensively investigated because emerging markets for tradable emissions permits, such as the European Union's Emissions Trading Scheme (ETS), can be dominated by relatively few large sellers or buyers. Previous studies on market power in emissions trading have assumed the existence of a subset of competitive players. However, a key feature of emissions trading markets is that emissions permits are often traded by a small number of large sellers and buyers. Using a laboratory experiment, our objective in this paper is to test the performance of an emissions trading market utilizing a double auction in a bilateral oligopoly. Our results suggest that the theoretical bilateral oligopoly models can better describe market outcomes of emissions trading. The effects of the slope of the marginal abatement cost function on market power in laboratory experiments are found to be consistent with those predicted by the theoretical bilateral oligopoly model. How market power is exercised depends on the curvature of the abatement cost function. If the marginal abatement cost function of buyers (sellers) is less steep than that of sellers (buyers), the price of permits is lower (higher) than that under perfect competition. This is because the market power of buyers (sellers) exceeds that of sellers (buyers). The price of permits is close to the perfect competitive price when all traders have the sameslope of the marginal abatement cost function.     

The reaction of Canadian securities to revisions of earnings forecasts*

Abstract. This first study of Canadian securities' earnings forecasts published by Institutional Brokers Estimate System (IBES) focuses on changes in the mean earnings per share forecasts of 159 to 188 companies from 1985 to 1987. Cumulative average residuals are used to detect the announcement effects of large earnings forecast revisions. The main results of this study are the following. First, an investor with access to changes of earnings per share forecasts at the beginning of the month of publication could realize abnormal excess returns. Second, trading strategies based on earnings forecasts revisions can also yield abnormal returns, but the magnitude of the revision, the sector of the company, and the month in which the revision is realized must be considered. Third, when financial analysts' forecasts are published, the informational content of large revisions in forecasts has already been discounted by the market. This result is similar to findings of U.S.– and U.K.–based studies. Finally, large forecasts revisions coincide with a period of abnormal returns. However, the information content of the announcement of forecasts changes cannot be established. The gains are larger if the trade is undertaken before the diffusion of the forecast revision to the IBES subscribers. These results do not vary with the model chosen to predict company returns. This does not necessarily indicate the existence of a market inefficiency because information acquisition and analysis costs, as well as transaction costs, may diminish considerably these abnormal trading gains.     

How Do Retailers Price Beer During Periods of Peak Demand? Evidence from Game Weeks of the German Bundesliga

This article considers retail beer pricing during game weeks of the German Bundesliga. German consumers exhibit a high degree of brand‐loyalty in their preference for regionally crafted beers, and we exploit the regional brand‐loyalty of German beer consumers to identify brand‐level demand shocks for beers preferred by the home team's fans and visiting team's fans during Bundesliga game weeks. We find retailer price adjustments at the category level mask a considerably more nuanced pricing behavior at the brand level. Retailers in regions hosting Bundesliga games significantly increase beer prices at the category level during game weeks; however, at the brand level, we find retailers selectively discount prices on the home team's sponsored beers and systematically raise prices on the visiting team's sponsored beers. Our findings are consistent with a “tourist–natives” model of retail pricing during periods of increased demand in the German beer market.     

Sentimental Preferences and the Organizational Regime of Betting Markets

We analyze the price impact of sentimental bettor preferences within a bookmaker betting market. A theoretical model demonstrates that, under reasonable assumptions about the nature of demand in a market with strong competition, the bookmaker will offer lower prices for bets with comparatively stronger demand. Using a sample of more than 16,000 English soccer matches we find evidence that more favorable odds are extended to bets on more popular clubs and that this effect is amplified on weekends when sentimental bettors face lower opportunity costs to wager. Our findings help to explain why the market for sports gambling operates as a hybrid structure with bookmakers able to attract a considerable share of the betting volume, although identical contracts are traded on exchange markets at lower costs: the organizational design of a quote‐driven market enables the dealer to take advantage of sentimental bettor preferences.     

Price‐Match Announcements in a Consumer Search Duopoly

Using a model of sequential search, we show that announcements to price‐match raise prices by altering consumer search behavior. First, price‐matching diminishes firms’ incentives to lower prices to attract consumers who have no search costs. Second, for consumers with positive search costs, price‐matching lowers the marginal benefit of search, inducing them to accept higher prices. Finally, price‐matching can lead to asymmetric equilibria where one firm runs fewer sales and both firms tend to offer smaller discounts than in a symmetric equilibrium. Price increases grow in the proportion of consumers who invoke price‐matching guarantees and in the level of equilibrium asymmetry.     

An Empirical Analysis of the Effects of Online Trading on Stock Price and Trading Volume Reactions to Earnings Announcements*

This study provides evidence regarding the effects of online trading on stock price and trading volume reactions to quarterly earnings announcements. We test for differences in stock price and volume reactions to quarterly earnings announcements between a period with a significant amount of online trading (1996‐99) and a period without online trading (1992‐95). We conjecture that online trading has increased the proportion of naive investors in the market. We predict that this will result in (1) a decrease in the average precision of investor information prior to earnings announcements leading to higher earnings response coefficients (ERCs), (2) an increase in differential interpretation of earnings leading to higher trading volume reactions that are unrelated to price change, and (3) a decrease in differential prior precision leading to a decrease in the association between trading volume and absolute price change. We find evidence consistent with all three predictions. Our findings are relevant for assessing the validity of concerns about online trading expressed by regulators and the validity of theoretical models of trade with asymmetrically informed investors.     

Fragmentation and Market Quality: The Case of European Markets

This paper questions whether the proliferation of alternative trading venues in Western Europe after MiFID implementation in 2007 affected market quality. By means of a difference-in-differences analysis, we evaluate changes in market quality of stocks that initiated trading in Multilateral Trading Facilities (MTF) in relation to matched samples. Our analysis provides evidence that the overall liquidity (measured by transaction costs and price impact) and trading activity increased in the short term with trade initiation in MTF. Notably, we show that fragmentation did not cause lower price precision or informativeness, but some tests suggest that fragmentation correlates positively with volatility. The results of this study are stronger for stocks with greater propensity for MTF trade initiation, i.e. stocks with greater size and liquidity prior to that event. Interestingly, the impact on liquidity and trading activity varied across stock exchanges and timing of MTF trade initiation. As for long run effects, our results suggest an improvement of overall liquidity and a neutral effect on the trading activity of traditional exchanges.     

Gray marketing and unfair competition

With the European Court of Justice's (ECJ) relaxation of the definitions of cartels, price controls, and market manipulation in July 1998, the Court effectively banned the import of gray goods into the EU. This judgment, restricting parallel importation, raises arguments amongst trademark owners, gray marketers, and consumers. First of all, has the ECJ's judgment connived a situation of unfair competition? Secondly, can the import of gray market goods with genuine trademarks be considered a trademark infringement? Thirdly, is a gray marketer a free rider? To provide the answers to these questions, there is need to investigate the relationships of parallel importation, trademarks and market competition. In this study, the author uses a price dominant model to determine the positions of the trademark owner and the gray marketer. This study finds that parallel importation does not contravene trademark law. In the spirit of free competition, gray marketing activities can develop a situation of fair competition in which social welfare increases. Given the existence of heterogeneous preference of consumers, authorized distributors should offer better levels of service to gain market share. Therefore, the author strongly supports a parallel importation policy.     

Endogenous Price Leadership and the Strategic Acquisition of Information

We model a differentiated Bertrand duopoly in which a firm's earlier knowledge of market demand than its competitor results in endogenous price leadership with the information advantaged firm leading. In such a setting with second‐mover advantage, we then study the firms’ incentives to acquire information and analyze an information acquisition game. Both (i) neither firm acquiring information and (ii) one firm acquiring information can arise as subgame perfect equilibrium, but both firms acquiring information is never an equilibrium outcome, even if information is free. Information may have a negative value if it causes a change in the timing of price competition.     

Bubbles and experience: An experiment with a steady inflow of new traders

We revisit the effect of traders' experience on price bubbles by introducing either one‐third or two‐thirds steady inflow of new traders in each of four consecutive experimental asset markets. We find that bubbles are still reduced in the treatments with a steady inflow of new traders, but at a slower pace compared to the baseline treatment in which new traders are only introduced in the last market. Our analysis of individual trading behavior shows that the slower abatement of bubbles in the inflow treatments can be attributed mainly to the inexperienced traders who make more mistakes than experienced traders.     

Price Discrimination in the Subscription Market for Economics Journals

We examine what factors affect the degree of price discrimination for an academic journal by analyzing data on 190 of the 208 economics journals indexed in the 2008 edition of Journal Citation Reports. We find that (i) the library‐to‐individual price ratio of a for‐profit journal is 37% higher than that of a comparable nonprofit journal because the price premium of a for‐profit journal in the library market is disproportionately larger than that in the individual market, (ii) journals with higher citations per page or impact factor are more price discriminatory, and (iii) Elsevier and Wiley‐Blackwell practice the highest degree of price discrimination of all publishers.     

Asymmetric Mispricing and Regime‐dependent Dynamics in Futures and Options Markets

We examine regime‐dependent price dynamics and mispricing adjustments within the KOSPI200 spot, futures and options markets through an analysis of data from January 2000 to December 2014. Investors exploit mispricing between derivatives and spot markets only if mispricing is sufficiently large. The futures traders take long, rather than short, positions to adjust for mispricing. Mispricing between spot and options markets is adjusted by trading options and not by trading spots. We find the bidirectional information flows between spot and futures markets when the futures‐implied index is sufficiently larger than the spot index. In contrast, no significant lead–lag relationship between spot and options markets exists. Significant asymmetric transaction costs exist in the spot market and this asymmetry has decreased over time.     

Disclosure Policy and Market Liquidity: Impact of Depth Quotes and Order Sizes*

This paper investigates the relation between disclosure policy and market liquidity. Our tests examine two key aspects of market liquidity, the effective bid‐ask spread and quoted depth, and how they relate to financial analysts' ratings of firms' disclosure policies. We introduce a method of combining order sizes and depth quotes to yield more precise estimates of effective spreads on trades likely constrained by quoted depth. We find that while firms with higher rated disclosures are charged lower effective spreads, they are also quoted lower depth, consistent with the notion that better disclosures reduce information asymmetry but also cause some liquidity suppliers to exit the market. Therefore, a simple examination of spreads and depths yields ambiguous inferences on the relation between disclosure policy and market liquidity. We resolve this ambiguity by estimating depth‐adjusted effective spreads, and find that firms with higher rated disclosures have lower depth‐adjusted effective spreads across all trade sizes. Consequently, our results reveal a robust inverse relation between disclosure ratings and effective trading costs. This implies that a policy of enhanced financial disclosure is related to improved market liquidity.