Market Power in Emission Permit Markets: Theory and Evidence from the EU ETS

A well-known result about market power in emission permit markets is that efficiency can be achieved by full free allocation to the dominant firm. I show that this result breaks down when taking the interaction between input and output markets into account, even if the dominant firm perceives market power in the permit market alone. I then examine the empirical evidence for price manipulation by the ten largest electricity firms during phase I of the EU ETS. I find that some firms’ excess allowance holdings are consistent with strategic price manipulation, and that they cannot be explained by price speculation or by precautionary purchases to insure against uncertain future emissions. My results suggest that market power is likely to be an empirically relevant concern during the early years of emission permit markets.     

海外市场需求与跨国垂直并购——基于低端下游企业的视角

本文构建了一个产品从低端到高端分布的Hotelling模型,以探讨我国低端下游企业进行跨国垂直并购的时机选择和决定因素。研究表明,垂直并购国外高端上游企业能实现扩大市场份额、提升产品定位的双重效能。海外市场需求环境对低端下游企业拓展战略起关键性作用。在正常需求条件下,与直接出口及先并购国内上游企业再出口两种模式相比,跨国垂直并购并非最优选择。在遭受负向需求冲击时,国外上游企业生产成本的大幅上升以及国外下游竞争对手品牌价值的下降给跨国垂直并购带来了契机,此时在技术密集度较高的上游产业进行跨国垂直并购成为国内低端下游企业的最优选择。如果并购能实现足够大的品牌价值效应,还会改善被并购企业所在国的社会福利水平。     

Optimal Pricing and Entry Rules When a Regulated Dominant Firm Faces a Competitive Fringe

In this paper, we study optimal regulation of a dominant firm facing an unregulated competitive fringe. First, assuming the size of the fringe is fixed, we demonstrate that the usual Ramsey Rule for second-best efficient pricing remains applicable in this context. We also examine the suitability of the Laspeyres price cap and show that it retains its desirable properties. This implies that regulators should continue to apply Laspeyres price cap regulation to the dominant firm after competition has materialized. Then, assuming that price and entry control are regulatory instruments, we characterize the efficient pricing and entry rules. We demonstrate that the free entry equilibrium number of firms will be excessive relative to the efficient number of firms, thereby providing a new Excess Entry Theorem. Finally, we suggest a modification of the Laspeyres price cap that can incentivize the regulated dominant firm to support efficient entry into the fringe.     

Price and Quantity Competition in a Differentiated Duopoly With Network Compatibility Effects

We consider the efficiency of price and quantity competition in a network products market, where we observe product compatibility with network externalities (hereafter, network compatibility effects). In particular, if network compatibility effects between firms are sufficiently asymmetric, the Cournot equilibrium is more efficient than the Bertrand equilibrium in terms of larger consumer, producer and total surpluses. Then, we consider an endogenous choice of the strategic variables, price and quantity. If the degree of network compatibility effects of the rival firm is larger (smaller) than the degree of product substitutability, then choosing prices (quantities) is a dominant strategy for the firm. Thus, if the network compatibility effects of both firms are larger (smaller), the Bertrand (Cournot) equilibrium arises. Furthermore, if the network compatibility effects between the firms are sufficiently asymmetric, the firm with a larger (smaller) network compatibility effect than a certain level of product substitutability chooses quantities (prices). In this case, the Cournot–Bertrand equilibrium arises, which is less (more) efficient than the Cournot equilibrium in terms of consumer (producer) surplus.     

Permit markets, market power, and the trade-off between efficiency and revenue raising

This paper focuses on an emissions permit market dominated by one firm and with a government concerned about social efficiency and permits revenue. In this setting, it is shown that the dominant firm's market power reduces the opportunities for the government to raise non-distortionary revenue from permits without loss of consumer surplus. Since the government's objectives are thus hampered in auctioning permits, the dominant firm should be excluded from the auction. Specifically, the regulator should sell permits directly, through bilateral negotiation, to the dominant firm, and auction off the remaining permits to the fringe firms.     

Horizontal mergers and product quality

We study the effects of a horizontal merger when firms compete on price and quality. In a Salop framework with three symmetric firms, several striking results appear. First, the merging firms reduce quality but possibly also price, whereas the outside firm increases both price and quality. As a result, the average price in the market increases, but also the average quality. Second, the outside firm benefits more than the merging firms from the merger, and the merger can be unprofitable for the merger partners, i.e., the “merger paradox” may appear. Third, the merger always reduces total consumer utility (though some consumers may benefit), but total welfare can increase due to endogenous quality cost savings. In a generalized framework with n firms, we identify two key factors for the merger effects: (i) the magnitude of marginal variable quality costs, which determines the nature of strategic interaction and (ii) the cross‐quality and cross‐price demand effects, which determines the intensity of price relative to quality competition. These findings have implications for antitrust policy in industries where quality is a key strategic variable for the firms.     

Horizontal Mergers Under Asymmetric Information About Synergies

This paper analyses a situation in which there are three quantity‐setting firms, two of which are considering whether or not to merge. When these two firms have private information about the potential cost‐saving synergies of the merger, they may have an incentive to overstate them. This is because if they succeed in making the non‐merging rival firm believe that the synergies are high, the rival firm reduces output and the merger becomes more profitable. Under some conditions, anticipating that the rival will form such a belief, low‐synergy firms that would never merge under complete information will mimic high‐synergy firms by merging. Such pooling behaviour by the merging firms can have a negative impact on social welfare.     

Price distributions and competition

This paper utilizes an equilibrium search model to investigate market structure and price dispersion. In a market with one large firm and a competitive fringe, the large firm offers the highest price. Fringe firms offer a distribution of lower prices.     

Forward contracts and competition

This paper examines the strategic use of forward contracts in an industry where downstream firms must buy an essential input from imperfectly competitive upstream suppliers. When a single large firm and a fringe of firms exist downstream, the large firm buys forward contracts from the fringe, i.e. there is horizontal subcontracting from the large firm to the firms on the fringe, in order to make the spot market less competitive. Hence our paper argues that horizontal subcontracting becomes an anti-competitive device. We also compare the strategies of buying forward contracts and purchasing productive capacity and we find that both are equivalent tools. When the downstream industry has instead several large firms, they have a “horizontal” incentive to sell forward contracts in order to gain market share, but the former “vertical” incentive to buy them persists. In this case, forward contracting may then lead to less competition in the spot market. We are indebted to Ramon Faulí-Oller, José Manuel Ordó?ez and Juan Carlos Reboredo for their helpful comments and suggestions on an earlier draft. We also gratefully acknowledge the valuable observations made by two anonymous referees and a Co-Editor that led to substantial improvements. Of course, the usual disclaimer applies. Antelo acknowledges financial support from the Xunta de Galicia (Grant PGIDIT02PXIA20101PR) and Bru that from the Spanish Ministerio de Ciencia y Tecnología (Grant PB98-1402).     

Strategic Trade Policy and Vertical Structure

We introduce intermediaries into the Brander-Spencer model of strategic trade policy. A key finding is that in regimes involving independent retailers, output competition and linear pricing (and two-part tariffs under certain restrictions), the optimal policy involves an export tax instead of a subsidy. If firms commit to vertical structure before governments commit to policy then under output competition firms choose integration, whereas if policy precedes structure then at least one firm chooses separation. Under price competition separation is a dominant strategy regardless of whether the structure decision is made before or after the policy decision.     

A DYNAMIC ENTRY AND PRICE GAME WITH CAPACITY INDIVISIBILITY

Strategic market interaction is here modelled as a two‐stage game in which potential entrants choose capacities and next active firms compete in prices. Due to capital indivisibility, the capacity choice is made from a finite grid and there are economies of scale. In the simplest version of the model with a single production technique, the equilibrium turns out to depend on the ratio between the level of total output at the long‐run competitive equilibrium and the firm's minimum efficient scale: if that ratio is sufficiently large (the market is sufficiently ‘large’), then the competitive price emerges at a subgame‐perfect equilibrium of the capacity and price game; if not, then the firms randomize in prices on the equilibrium path. The role of the market size for the competitive outcome is shown to be even more important if there are several available production techniques.     

How Applicable is the Dominant Firm Model of Price Leadership?

In this paper, we examine the usefulness of the dominant firm model of price leadership to serve as a benchmark for organizing behavior in laboratory markets. This well established model, whose origins can be traced back over a hundred years, has been recently applied to such landmark antitrust cases as Standard Oil and Alcoa and more recently to the analysis of deregulated markets for electric power. Our results indicate that in posted offer markets the dominant firm quite often produces more than the model's benchmark and sometimes at much greater prices. With sealed offer auction rules and a low elasticity of fringe supply, the dominant firm produces the theoretical output at a price greater than the prediction. However, with a high elasticity of fringe supply, the dominant firm produces more output over a wide range of prices that includes the predicted price.     

Bilateral Agreements in a MultiFirm Industry: Technology Transfer and Horizontal Merger

The paper studies the profitability of technology transfer and horizontal merger between two asymmetric firms in a multifirm Cournot oligopoly. If there is only one technologically advanced firm and one or many technologically backward firm(s), a profitable technology deal between two asymmetric firms exists if and only if the collaborating firms are "close" in terms of their initial technology levels. With more than one advanced firm such a technology deal is "always" profitable. Contrary to that, a profitable bilateral horizontal merger occurs if and only if the gap of technologies between the two partners is larger than a critical level. The paper also studies the relative profitability of these two bilateral arrangements.     

Complementing Cournot’s analysis of complements: unidirectional complementarity and mergers

We study the price and welfare effects of a merger of firms producing unidirectional complements: a firm is producing a product (called an optional good) that is valuable only if it is consumed with the other product (called a base good) produced by another firm. Under the assumption that there are two types of consumers: (i) those who consume one unit of the base good only or nothing (having zero valuation of the optional good), and (ii) those who consume one unit of the composite good or nothing, we show that a merger of the two firms raises the price of the base good, resulting in lower consumer surplus for the former consumer group, if and only if the average willingness to pay in the latter consumer group is sufficiently low. This result is in sharp contrast to Cournot’s (Researches into the mathematical principles of the theory of wealth, 1838) classical implication that a merger of firms producing strict complements makes all consumers strictly better off.     

THE EFFICIENCY OF THE STATE‐OWNED FIRM AND SOCIAL WELFARE: A NOTE

We consider a mixed market where a state‐owned firm competes with private firms. If the number of firms is exogenous, then a deterioration of the efficiency of the state‐owned firm might improve social welfare. This situation occurs when the state‐owned firm is inefficient and private firms are efficient. However, if the number of firms is endogenous, then a deterioration of the efficiency of the state‐owned firm must reduce social welfare.     

Bertrand–Edgeworth Duopoly with Buyouts or First Refusal Contracts

In this game the players are firms involved in a Bertrand–Edgeworth duopoly market. Payoffs to the low priced firm depend only on the own price, whereas the payoff to the high priced firm depends on both its own price and the price of the opponent. The price of the opponent enters the payoff function of the high priced firm through buyout or a first refusal contract. Only when the total capacity in the market is less than the output in a monopoly situation, there is an equilibrium in pure strategies.Journal of Economic LiteratureClassification Numbers: C72, D43, L12.     

Firm Scale and the Endogenous Timing of Entry: a Choice between Commitment and Flexibility

This paper presents a model of stochastic oligopoly with demand uncertainty where firms endogenously choose entry timing. We examine two extreme types of market structure and show that the equilibrium correspondence that connects them is continous. With two identically sized firms, there are symmetric, Cournot type equilibria where the probability of early entry declines with greater uncertainty, and for low uncertainty two asymmetric equilibria. With one large firm with a continuum of nonatomic firms, there is a unique Stackelberg equilibrium. We conclude that the behavior of a dominant firm with a finite fringe can be approximated by Stackelberg equilibrium.Journal of Economic LiteratureClassification Numbers?: D21, L11.     

Stable market structures from merger activities in mixed oligopoly with asymmetric costs

This paper examines endogenous merger formations in a mixed oligopoly. Applying the core as a solution concept, we analyze which market structure(s) remain(s) stable when three firms—two symmetric private firms and one inefficient public firm—are allowed to merge with each other in a mixed Cournot industry. We show that according to the value of the marginal cost of the public firm, there always exists a pair of share ratios of the owners of both the (pre-merged) public firm and the (pre-merged) private firm such that the market structure with the merger between the public firm and one private firm belongs to the core. When the initial market structure is a mixed triopoly, it can only be blocked when one public firm and one private firm merge. Furthermore, we conduct a similar analysis in a general mixed oligopoly with one public firm and n private firms.      

Oligopolistic Competition and New Technology Adoption under Uncertainty

The paper examines the adoption of a new technology in oligopoly, where there is ex ante uncertainty about variable costs of the new technology. Each firm can either adopt the new process by bearing some up-front investment or may continue to use the old one, after which firms play a Cournot market game. If in equilibrium both technologies are employed, more uncertainty about the new technology increases (decreases) the number of innovating firms and decreases (increases) the product price if the up-front investment is large (small). Our model applies readily to vertical integration if integrated firms neither buy nor sell the intermediate good on the market. However, if buying and selling is allowed, the number of integrated firms is independent of input price uncertainty.     

Analysis of price competition and strategic implications for heterogeneous market structure

This paper examines strategic competition behavior in heterogeneous market structure where both conventional offline and online firms coexist in equilibrium and draws strategic implications with some remarks on welfare. Research on the price competition between conventional offline and online firms has been done through empirical approaches; however, the results are conflicting. This paper reconciles the existing conflicting empirical findings on price levels between conventional offline and online firms through a theoretical approach. We find that as the online market matures, prices in both conventional and online firms drop, and the price in the online firm can be higher than that in a conventional offline firm. Furthermore, if convenience associated with the online increases, the online price tends to exceed the conventional offline price.