GRADUAL NETWORK EXPANSION AND UNIVERSAL SERVICE OBLIGATIONS

ABSTRACT 1 : Universal service obligations are usually not competitively neutral as they modify the way firms compete in the market. In this paper, we consider a continuum of local markets in a dynamic setting with a stochastically growing demand. The incumbent must serve all markets (ubiquity) possibly at a uniform price and an entrant decides on its market coverage before firms compete in prices. Connecting a market involves a sunk cost. We show that the imposition of a uniform price constraint modifies the timing of entry: for low connection cost markets, entry occurs earlier while for high connection cost markets, entry occurs later.     

Why does China protect its labour‐intensive industries more?*

China's tariff structure favours labour‐intensive sectors, and this is at odds with traditional theory of comparative advantage. The paper argues that tariffs in China are a mechanism for protecting technology‐backward domestic – especially state‐owned enterprises (SOEs) from competition technology‐advanced foreign enterprises producing in China. With relatively integrated labour markets and cross‐firm technology differences, SOEs’ subsistence is supported by subsidized credit and limited access of foreign firms’ local production to tariff‐protected domestic markets. Labour market integration and capital subsidies increase the relative cost of labour in SOEs compared to their foreign competitors, hurting more domestic firms in industries that use labour more intensively. Restrictions to FIEs’ (foreign‐invested enterprises) access to tariff‐protected product markets, which protect more labour‐intensive industries, compensate for the greater cost disadvantage of SOEs in labour‐intensive sectors.     

China wage inequality: the role of trade and technology

This article empirically investigates the impact of international trade and technical change on skill premia for a panel of 28 manufacturing sectors in China over the period 2002–2011. The results find that the effect of changes of the share of SOEs is twofold. First, the contraction of SOEs promoted productivity growth, and the promoting effect was skill-biased, which tended to increase the skill premia in China. Second, the drop of product prices resulting from falling SOEs share was more magnificent in skill-intensive industries, which helped to mitigate wage inequality through product prices. The accounted-for portion of price changes by productivity growth was skill-biased, significantly raising skill premia through product prices. However, the portion of price changes accounted for by foreign price was unskill-biased, and world price competition diminished the growing income disparity in China.     

Land price diffusion across borders – the case of Germany

ABSTRACT

Land market regulations are often justified by the assumption that activities of foreign and non-agricultural investors drive up prices in domestic land markets. However, empirical knowledge about the dynamics of agricultural land prices across borders is sparse. Using the German reunification as a natural experiment, we study the effect of the former inner German border on the dynamics of agricultural land prices in East and West Germany. We apply a land price diffusion model with an error correction specification to analyse spatial agricultural land markets. A novel feature of our model is its ability to distinguish price diffusion within states and across state borders. We provide evidence for a persistent border effect given that the fraction of spatially integrated counties is larger within states than across the former border. Moreover, we observe non-significant error correction terms for many counties along the former border. From a policy perspective, it is striking to realize that even 25 years after German reunification, pronounced land price differences persist. It is quite likely that price diffusion through existing borders within the EU would take even more time given language barriers, different institutional frameworks, and information asymmetries between domestic and foreign market participants.     

Pricing Access to a Monopoly Input

What price should downstream entrants pay a vertically integrated incumbent monopoly for use of its assets? Courts, legislators, and regulators have at times mandated that incumbent monopolies lease assets required for the production of a retail service to entrants in efforts to increase the competitiveness of retail markets. This paper compares two rules for pricing such monopoly inputs: marginal cost pricing (MCP) and generalized efficient component pricing rule (GECPR). The GECPR is not a fixed price, but is a rule that determines the input price to be paid by the entrant from the entrant's retail price. Comparing the retail market equilibrium under MCP and GECPR, the GECPR leads to lower equilibrium retail prices. If the incumbent is less efficient than the entrant, the GECPR also leads to lower production costs than does the MCP rule. If the incumbent is more efficient than the entrant, however, conditions may exist in which MCP leads to lower production costs than does the GECPR. The analysis is carried out assuming either Bertrand competition, quantity competition, or monopolistic competition between the incumbent and entrant in the downstream market.     

Exchange-rate pass-through and market structure

We consider a situation in whichn firms located in market 1 andm firms located in market 2 each sell a commodity which is homogeneous within each market but may differ between markets. All firms sell on both markets. Each market has its own currency. The market demand functions differ. We give some basic results on the effects of exchange-rate changes and then show the following. When these markets are independent on the cost side (constant marginal costs) and demands are linear, a reduction in the number of firms (which might result from a merger) in market 1 increases the pass-through (of an appreciation of currency 2) in market 1 and decreases the pass-through in market 2. A similar occurrence in market 2 has the opposite effect. We give conditions under which, with identical economies of scope linking the markets, the sign of the price changes will be reversed when the number of foreign firms is small enough compared to the number of local firms. However, such sign reversals cannot occur in the two markets simultaneously.     

Upstream regulation in mature network industry: evidence from Nordic mobile telecommunications markets

This article investigates the effects of upstream regulation that aims to create niches and attract new type of entrants on the competitive environment of downstream markets. Using unique cross-country data of Nordic mobile telecommunications markets, we show that upstream regulation leads to (i) increases in both number and aggregate market share of service-based providers in the downstream market, (ii) an increase in the number of service-based providers, thus increasing their aggregate market share, but no opposite direction of results and (iii) a lower retail price level, proxied by average revenue per user. Our findings imply that upstream regulation may be able to achieve better outcomes when the policy objectives are to revitalize mature network industries and to enhance consumer welfare.     

The effect of entry restrictions on price: evidence from the retail gasoline market

I exploit a change in Spanish regulations to test the effect of the relaxation of entry restrictions on the equilibrium retail price of diesel. In February 2013, a Central Government reform permitted gasoline stations to operate in industrial and commercial areas. Over the following 2-year period, this deregulation led to a high number of new market entrants in these newly designated free entry areas. By isolating markets exposed to entry and markets unaffected by new entrants, and adopting a difference-in-difference approach, results show that gasoline stations exposed to a new market entrant within a one-mile radius lower their prices by an average 1.04%. This result is significant, representing almost one fifth of the average retail margin. Additionally, the results show that the reduction in the equilibrium price is caused by the first market entrant and that the effect decreases over time.     

Market Power,Permit Allocation and Efficiency in Emission Permit Markets

Market power in permit markets has been examined in some detail following the seminal work of Hahn (Q J Econ 99(4):753–765, 1984), but the effect of free allocation on price manipulation with market power in both product and permit market has not been fully addressed. I show that in this case, the threshold of free allocation above which a dominant firm will set the permit price above its marginal abatement costs is below its optimal emissions in a competitive market, and that overall efficiency cannot be achieved by means of permit allocation alone. In addition to being of general economic interest, this issue is relevant in the context of the EU ETS. I find that the largest German, UK and Nordpool power generators received free allowances in excess of the derived threshold. Conditional on having price-setting power in both the electricity and permit markets, these firms would have found it profitable to manipulate the permit price upwards despite being net permit buyers.     

Switching costs, consumer heterogeneity and price discrimination

In a duopoly with price discrimination and switching costs, we analyse the evolution of market structure, when an incumbent and a new entrant compete, and a new class of users with lower willingness to pay appears in the market. We find that the market share of the new entrant depends on the degree of heterogeneity and the level of switching costs. In particular, if the degree of heterogeneity is intermediate, the evolution of market structure is similar for high and null switching costs. Since consumer surplus and social welfare are unambiguously lower under high switching costs, this result points at the risk of inferring the degree of market competitiveness from the convergence in market shares.     

Level of access and infrastructure investment in network industries

In this paper, we study how the terms of access to an incumbent’s infrastructure (i.e., the level of access and price) affect an entrant’s incentives to build its own infrastructure. Setting a high level of access (e.g., a resale arrangement), which requires relatively small up-front investment for entry, accelerates market entry, but at the same time delays the deployment of the entrant’s infrastructure. This is also true for a lower access price. We show that the socially optimal access price can vary non-monotonically with the level of access. We also study the case where access is provided at two different levels, and show that access provision at multiple levels can delay infrastructure building. Finally, we modify our baseline model to allow for experience and/or market share acquisition via access-based entry, and show that high levels of access may accelerate facility-based entry.     

Emission Permit Trading Between Imperfectly Competitive Product Markets

The present paper analyzes the efficiency of emission permit trading between two imperfectly competitive product markets. Even if firms are price takers in permit markets, the integration of permit markets can decrease welfare because of imperfect competition in product markets. If there is asymmetric information between the regulator and firms, the integration of the permit markets could have a positive effect related to the flexibility of an integrated market; this flexibility can justify integrating the permit markets.     

Are Commodity Prices Driven by Fundamentals?

Physical scarcity is hardly sufficient to explain commodity price swings. However, despite of clues of commodity market inefficiency in the last decade, excess volatility in commodity markets emerges only under strong assumptions. When we allow for non‐stationarity in commodity prices and time variation in commodity‐specific risk premia, evidence of commodity market inefficiency becomes significantly weaker. Moreover, there is some evidence of commodity‐specific regime changes in commodity markets, with negligible or even positive correlation between efficiency and market liquidity.     

Capital flows to an emerging financial market in Turkey

Increased globalization in financial markets implies that the percentage of all shares under foreign ownership in domestic stock markets has been rising. Speculative attacks on the foreign exchange market in February 2001 led to deep economic crisis in Turkey. This article will explore various indicators of the financial crisis in Turkey based on a macro-model. The foreign share of the domestic economy is a key variable to establish the degree of vulnerability during a financial crisis. An empirical investigation shows that the percentage of shares owned by foreigners on the Istanbul Stock Exchange (ISE) has been increasing since 1995 and is currently about 50 percent of the total. Furthermore, the general index of stock market prices in 1999 was at its highest level since 1995. This would imply that the general price index of the stock market is another strong indicator of an impending financial crisis. An empirical investigation of Turkish data based on a theoretical model is presented in this paper. An unexpected capital outflow would certainly cause exchange rate fluctuations, balance of payments problems, and international debt crisis. Hot money inflows boost share prices and keep the real exchange rate high. However, short-term stay of capital implies a sudden capital outflow that creates financial crisis, which results in international debt crisis. This in turn leads to a further increase in loans from the International Monetary Fund (IMF). Relatively high stock market prices may suggest an impending financial crisis. Using Turkish stock market price data, an impending financial crisis can be statistically predicted.     

Import Protection, Export Promotion, and Product Positioning

The argument that import protection may lead to export promotion is examined from the marketing standpoint. The model shows that protection allows home firms to cover a larger portion of the domestic market than they otherwise would and to target market segments that are closer to the mainstream. At the same time, foreign competitors are forced to retreat to more idiosyncratic market segments of narrower appeal. Thus, protection gives home firms a product positioning advantage over their foreign rivals; this advantage translates into higher market share and profits—not only in the protected home market, but also in export markets.     

Local monopsony and free riders

In an industry with upstream economies of scale in the distribution of differentiated products to retailers which have monopoly power within separate local market areas, the retailers have an incentive to exert monopsony power due to the divergence between average and marginal costs in the distribution of those inputs. The retailers increase their ability to exert monopsony power by forming coalitions (that is, chains) across local markets. Sufficiently large retail chains may force input price below the seller's average cost, thus ‘free riding’ on the level of product variety supported by other retailers. Vertical integration, cartels, or other cooperative behavior, however, can be means to control the level of product variety, and may increase both industry profits and economic welfare. Policy applications to the cable television, motion picture, and pharmaceutical industries are discussed.     

Pricing inputs to induce efficient Make-or-Buy decisions

We investigate input pricing regimes that induce efficient Make-or-Buy decisions by entrants when there is constant returns in the production of the input(s) and simultaneous noncooperative price competition in downstream retail markets. Necessary and sufficient conditions for efficient Make-or-Buy decisions are derived. The necessary condition shows that input prices are relevant for Make-or-Buy decisions except under restrictive and often unverifiable assumptions on the demand structure, and that the least informationally-demanding way to ensure efficient Make-or-Buy decisions is to price inputs at marginal cost provided changes in the entrant’s cost have a “normal” effect on the entrant’s profit. The conditions also show that pricing the incumbent’s input at the entrant’s marginal cost always ensures efficient Make- or-Buy decisions. The extent to which input prices can depart from marginal cost while still inducing efficient Make-or-Buy decisions increases with the efficiency differential between the incumbent and entrant and with the demand displacement ratio.      

Asymmetric access price regulation in telecommunications markets

In liberalized telecommunications markets, the incumbent typically enjoys several advantages over any entrant. Regulation in such asymmetric markets stimulates competition in the short and the long term if retail prices are low and the entrant's profits are high so that entry is encouraged. I show that asymmetric access price regulation with a cost-based access price for the incumbent and an access markup for the entrant is more successful than cost-based access price regulation applied to incumbent and entrant. This is a robust prediction with respect to the pricing strategies considered. Such asymmetric access price regulation is in accordance with European legislation.     

Unbundling the local loop

We study competition for high bandwidth services in the telecommunications industry by introducing the possibility of unbundling the local loop, where leased lines permit the entrant to provide services without building up its own infrastructure. We use a dynamic model of technology adoption and study the incentives of the entrant to lease loops and compete “service-based”, and/or to build up a new and more efficient infrastructure and compete “facility-based”, given the rental price.We show that the incumbent sets too low a rental price for its loops; hence, the entrant adopts the new technology too late from a social welfare perspective. The distortion may appear not only on the timing of technology adoption but also on the type (quality) of the new technology to be adopted. We also show that while regulating the rental price may suffice to achieve socially desirable outcomes, a sunset clause does not improve social welfare.