PRICES,SPATIAL COMPETITION AND HETEROGENEOUS PRODUCERS: AN EMPIRICAL TEST*

Homogeneous‐producer models attribute lower prices in denser markets solely to lower optimal markups. I argue here that when producers have different production costs, competition‐driven selection on costs also reduces prices. This selection mechanism can be distinguished from the homogenous‐producer case because it implies that higher density leads not only to lower average prices, but to declines in upper‐bound prices and price dispersion as well. I find empirical support for this mechanism in the prices of ready‐mixed concrete plants. I also show these findings do not simply reflect lower factor prices in dense markets, but result instead because dense‐market producers are more efficient.     

The Welfare Losses From Price-Matching PolicIes

Several recent papers argue that price-matching policies raise equilibrium prices. We add to this literature by considering potential welfare losses, which have two sources: Harberger triangles from high prices and Posner rectangles from over-entry. We compare price-matching markets with entry to monopoly and price-matching markets without entry, and find that price matching with entry creates greater welfare losses than monopoly in markets with a low ratio of fixed to marginal cost. We illustrate this result using parameters from the US wholesale gasoline and air travel markets, and relate our model to price matching among NASDAQ market makers.     

Price Controls and Market Structure: Evidence from Gasoline Retail Markets

In this paper we study the effect of price floor regulations on the organization and performance of markets. The standard interpretation of the effects of these policies is concerned with short‐run market distortions associated with excess supply. Since price controls prevent markets from clearing, they lead to higher prices. While this analysis may be correct in the short‐run, it does not consider the dynamic equilibrium consequences of price controls. We demonstrate that price floor regulations can have important long‐run effects on the the structure of markets by crowding them and creating endogenous barriers to entry for low‐cost retailers. Moreover, we show that these factors can indirectly lower productivity and possibly even prices. We test this in the context of an actual regulation imposed in the retail gasoline market in the Canadian province of Québec and show that the policy led to more competition between smaller/less efficient stations. This resulted in lowered sales, and, despite the reduction in efficiency, did not increase prices.     

Exclusionary pricing in two-sided markets

This paper studies the incentives to engage in exclusionary pricing in the context of two-sided markets. Platforms are horizontally differentiated, and seek to attract users of two groups who single-home and enjoy indirect network externalities from the size of the opposite user group active on the same platform. The entrant incurs a fixed cost of entry, and the incumbent can commit to its prices before the entry decision is taken. The incumbent has thus the option to either accommodate entry, or to exclude entry and enjoy monopolistic profits, albeit under the constraint that its price must be low enough to not leave any room for an entrant to cover its fixed cost of entry. We find that, in the spirit of the literature on limit pricing, under certain circumstances even platforms find it profitable to exclude entrants if the fixed entry cost lies above a certain threshold. By studying the properties of the threshold, we show that the stronger the network externality, the lower the thresholds for which incumbent platforms find it profitable to exclude. We also find that entry deterrence is more likely to harm consumers the weaker are network externalities, and the more differentiated are the two platforms.     

Increasing product variety and rising prices

Rising average prices have been observed following establishment of new varieties of ready-to-eat cereals, and with entry in the physicians' services market. Most explanations require monopoly or collusion, and/or consumer ignorance. Prices can rise in a non-cooperative market setting with full consumer knowledge, however, given preferences for different varieties. Demand for a particular variety becomes less elastic with entry if a seller loses the most elastic individual demands for that variety to the new substitute while retaining the least elastic consumer demands. Thus, price rises. Total purchases of all varieties also increase.     

How does income inequality affect market outcomes in vertically differentiated markets?

The distribution of consumer incomes is a key factor in determining the structure of a vertically differentiated industry when consumer's willingness to pay depends on her income. This paper computes the Shaked and Sutton (1982) model for a lognormal distribution of consumer incomes to investigate the effect of inequality on firms' entry, product quality, and pricing decisions. The main findings are that greater inequality in consumer incomes leads to the entry of more firms and results in more intense quality competition among the entrants. More intense quality competition raises the average quality of products in the market as firms compete for the shrinking share of higher-income consumers. With zero costs of quality improvements and an upper bound on the top quality or when costs of quality are fixed and rise sufficiently fast, greater heterogeneity of consumer incomes also reduces firms' incentives to differentiate their products. Competition between more similar products tends to reduce their prices. However, when income inequality is very high, the top quality producer chooses to serve only the rich segment of the market and charges a higher price. The conclusion is that income inequality has important implications for the degree of product differentiation, price level, industry concentration, and consumer welfare.     

Successive Oligopolies with Differentiated Firms and Endogeneous Entry

We develop a model of successive oligopolies with endogenous entry, allowing for varying degrees of product differentiation and entry costs in both markets. We show that downstream conditions dominate the overall profitability of the two‐tier structure while upstream conditions mainly affect the distribution of profits. We analyze how two‐part tariffs and resale price maintenance shape the endogenous market structure and study their welfare effects. In contrast to previous literature, we find that welfare under linear prices can be larger than under twopart tariffs although the latter avoids double marginalization. This is because linear prices induce more downstream market entry.     

An improved maize marketing system for African countries: the case of Zimbabwe

This article proposes a system for Zimbabwe which retains government control of national stocks and enables the parastatal marketing system to stabilize prices, at the same time ensuring a more rational delivery system in rural areas with prices reflecting storage and transport costs. The local population is encouraged to fulfill local needs, thus avoiding the expense of directing all marketing and processing through the urban areas. A more localized system will also have greater multiplier effects. Zimbabwe's maize marketing system is used to show how this system could be modified with benefits to rural consumers, producers and government. Data suggest there is little market exploitation: price differentials between markts reflect transport costs, returns on storage are reasonable, and voluntary procurement operations are usually able to stabilize prices. Zoning, movement restrictions and compulsory procurement have been shown to destabilize food markets; prices between markets are higher in periods of strict control than when marketing is relatively free. Controlled marketing answers a real political and economic need in Zimbabwe. Existing public food marketing agencies are not inherently inefficient. While stabilizing maize supply, there are important advantages in announcing preplanting prices, but any trade in maize only takes place after price setting. It is unlikely that there would be both imports and exports in any 1 year, except when previous contracts are being fulfilled. 2 policy options are available to cover anticipated periods of insufficient national maize production: the maintenance of a strategic reserve; and importation of maize to cover supply shortfalls. Single-channel marketing should be replaced by an internal free market operating between floor and ceiling prices by supply manipulation to prevent excessive producer and consumer welfare fluctuations. This system would be more efficient and have beneficial effects on development. It is more equitable for the rural poor, and result in greater stability of producer incomes, more reliable food supplies, higher producer prices and the release of public funds.     

CUT‐THROAT FRINGE COMPETITION IN AN EMERGING COUNTRY MARKET: TAX EVASION OR THE ABSENCE OF MARKET POWER?*

Brazil's established soft‐drink firms recently lost ground to multiple low‐price entrants, with small‐scale operations and minimal advertising. While incumbents attributed such undercutting to entrants' lower costs from non‐compliance with the law, ‘generics’ counterargued that incumbents' high prices stemmed from unilateral market power rather than cost heterogeneity. By estimating a structural model, I can single‐handedly explain established brands' high prices through low equilibrium price elasticities of demand. Tax evasion in the fringe, while plausible, appears to be offset by higher procurement costs or less efficient scale. More generally, a competitive informal sector can alleviate the allocative distortions in certain concentrated industries.     

OPEN VERSUS CLOSED FIRMS AND THE DYNAMICS OF INDUSTRY EVOLUTION*

We develop a model of industry evolution in which firms choose proprietary standards (closed firm) or adopt a common standard (open firm). A closed entrant can capture multiple profits whereas an open entrant faces lower entry barriers: The odds of closed entry (relative to open entry) decrease with price and eventually open entry becomes more likely. While initially closed firms have better survival because they can offset losses in one component with profits from another, the situation is reversed when prices fall below a threshold. These entry and exit dynamics can lead the industry away from its long run equilibrium.     

Entry and Prices: Evidence from the Supermarket Sector

The purpose of this paper is to investigate the effect on prices of the entry of a large supermarket into a given location. We use a panel with data from fifteen cities in Chile for the period 1998:I–2004:IV. We correct for the potential simultaneity problem derived from the fact that entry can be a response to price differentials. We find that the entry of a hypermarket to a given city reduces relative prices in that local market by 7–11%. Most interestingly, we also find that part of this effect takes place the year before the supermarket actually opens for business.      

Entry deterrence and dynamic competition : The role of capacity reconsidered

We study a model with sequential capacity choice and entry by firms into an industry. Post-entry competition is long term and firms compete by choosing prices. The complex role played by the capacity choice of the first mover is highlighted. In contrast to the conclusions derived from static or reduced form specifications, entry may be deterred only by choosing a low capacity level and charging a very high price. The arguments are used to provide an explanation of events in the U.S. phosphorus industry.     

Creating Growth in New Markets: A Simultaneous Model of Firm Entry and Price*

Sales in a new market generally follow a hockey‐stick pattern: After commercialization, sales are very low for some time before there is a dramatic takeoff in growth. Reported sales takeoffs across products vary widely from a few years to several decades. Prior research identifies new firm entry or price declines as key factors that relate to the timing of a sales takeoff in new markets. However, this literature considers these variables to be exogenous and only finds unilateral effects. In the present article, new firm entry and price declines are modeled as being endogenous. Thus, the simultaneous relationship between price declines and firm entry in the introductory period of new markets when industry sales are negligible is studied. Using a sample of new markets formed in the United States during the last 135 years, strong support for a simultaneous model of price and firm entry is found: Price decreases relate to the competitive pressures associated with firm entry, and, in turn, firm entry is lower in new markets with rapidly falling prices. Furthermore, a key driver of firm entry during the early years of a new market involves the level of patent activity, and a key driver of price decreases is the presence of large firms. In contrast to the recommendations from other research, these results indicate that rapid price declines may further delay sales takeoff in industries by dampening new firm entry. Instead, rapid sales takeoffs in new markets come from encouraging greater innovative activity and the entry of large firms.     

Forgoing invention to deter entry

A monopoly facing potential entry may not want to develop an efficient technology even at zero R&D costs. Such a phenomenon occurs if a new technology is distinct from the existing one so production uncertainty becomes technology-specific. Then the monopoly can reduce the entrant's post-entry profit to the point of deterrence by using the existing technology with which the entrant would enter. We show that the monopoly develops a new technology when the entrant faces a sufficiently high or low entry cost but forgoes invention when the entry cost is intermediate. These results hold both in quantity and price competition.     

Estimating the Causal Effect of Entry on Generic Drug Prices Using Hatch–Waxman Exclusivity

Competition among generics helps keep drug prices low and control medical costs. Good estimates of the effect on price of the entry of another generic competitor would inform competition policy and test oligopoly theories. However, identifying the causal effect of entry is difficult since the number of firms that compete in a market is endogenously determined. We exploit provisions of the 1984 Hatch–Waxman Act to identify a causal effect. We find that ignoring endogenous selection into generic drug markets imparts a significant downward bias to the estimates of the effects of two and three competitors on generic drug prices.     

Asymmetry of information and contestability theory

In this paper, contestability theory is examined under conditions of asymmetric information. Signals of economic profitability to potential entrants are the incumbent's list price and accounting rate of return. A disequilibrium analysis indicates that, while potential entry imposes a price discipline, incumbents can earn profits, although not indefinitely under stable conditions. Also, there may be wasteful entry even into industries where prices approximate the optimum.     

How useful is the PSE in determining agricultural support?

The support of the agricultural sector in developed countries plays a major role in the international policy agenda. The producer support estimate (PSE) is one of the best known measures which has been developed by OECD and is used all over the globe. In the PSE all types of support are aggregated and one of the main components (70% at OECD level) is the market price support (MPS). Here we show by means of characteristic examples that the MPS has no clear relation to basic economic measures determining support for producers as a consequence of policy intervention. The MPS overestimates the consequences of tariffs and export subsidies and underestimates the consequences of quota systems in determining producer support. Misperception of the size and directions of support may affect policy decision-making wrongly. The paper indicates that weighted average producer prices, corrected for quantity restrictions, may be more useful than the reference prices and quantities used by OECD.     

Oil Prices and Urban Housing Demand

We develop a model of a monocentric, oil‐exporting city. The model predicts a “twist” (rotation combined with a level shift) of the house price gradient with an oil price change due to the combined producer price and transportation cost effects. Empirical findings support the predictions, with house price changes positively linked to the price of oil in cities specialized in oil and gas‐related industries, and negatively linked in suburban areas of all cities. These results quantify the large and differential risks to house prices associated with oil price changes both within and across cities. Overall, estimates suggest a 50% change in the price of oil results in a city‐wide house price change of 15% over five years in a city specialized in the production of oil (export employment share of 50%), whereas house prices for units greater than 15 miles from the city‐center change in relative terms by ?1.5% over the same period.     

The advantage of being first and competition between firms

It is frequently suggested that the first brand in a product market enjoys a price advantage over its imitators due to imperfect information about product quality. This article considers the effect of this advantage on prices and market shares in a dominant firm price leadership model. An established firm with a price advantage faces free entry by firms producing unbranded products (generics). In equilibrium, the first brand enjoys a market share advantage over entrants in entry and post entry periods. If the initial price disadvantage is large, entry will not occur.     

Local impacts of a global crisis: Food price transmission,consumer welfare and poverty in Ghana

This paper takes a local perspective on global food price shocks by analyzing food price transmission between regional markets in Ghana. It also assesses the impacts of food price increases on various household groups. Taking the 2007–2008 global food crisis as an example, we show that prices for domestic grain products are highly correlated with world market prices. This is true both for products for which Ghana is highly import-dependent (e.g., rice) and the products for which Ghana is self-sufficient (e.g., maize). The econometric results also show that price transmission is high between regional producer markets and markets located in the country’s largest cities, and the distance between producer and consumer markets and the size of consumer markets matter in explaining the price transmission. The welfare analysis for households as consumers shows that the effect of world food prices appears relatively modest for the country as a whole due to relatively diverse consumption patterns within country. However, the national average hides important regional differences, both between regions and within different income groups. We find that the poorest of the poor—particularly those living in the urban areas—are hardest hit by high food prices. The negative effect of the food crisis is particularly strong in northern Ghana. The main explanations for this regional variation in the price effect is the different consumption patterns and much lower per capita income levels in the North of Ghana compared to other regions in the country.