Sunk costs,contestability and airline monopoly power

This paper examines the effects of sunk costs and potential competition on pricing behavior in monopoly airline markets. We find little evidence to support the proposition from contestable markets theory that the level of sunk costs influences pricing by monopolists. Rather, the results support the view, consistent with numerous game theoretic oligopoly models, that the costs and the price-cutting reputation of potential entrants influence incumbent behavior. These results suggest that contestability theory may not be robust. Even in the markets characterized by increasing returns to scale, the perfectly contestable market may not be a useful welfare standard.I am grateful to Richard Levin, Merton J. Peck, Sharon Oster, Paul MacAvoy, Dan Kaplan, Michael Levine, David Sappington, Andrea Shepard, and Diana Strassman for their advice. Participants at numerous workshops also made useful comments. Steven Davis, Tadas Osmolshis, and Maeve O'Higgins provided help with the data and technical assistance. I acknowledge financial support from Yale University and the Eno Foundation for Transportation. The usual disclaimer, of course, applies.     

What types of switching costs to create under behavior-based price discrimination?

We study firms' incentives to create switching costs using a four-period model consisting of two consecutive price-competing stages intervened by options to create switching costs early (before price competition) and late (during price competition). Acknowledging that many real/social switching costs need to be created early while many contractual/pecuniary switching costs are set up late during the competition, we show that firms are better off minimizing real/social switching costs while maximizing contractual/pecuniary switching costs. The results highlight the importance of timing of creation that is embedded in different types of switching costs. We also show that switching costs can actually benefit consumers when firms practice behavior-based price discrimination because consumers can enjoy benefits of deep price discounts without the hassle of actually switching. Therefore, an observed lack of consumer switching should not be immediately interpreted as lack of competition in markets where both switching costs and behavior-based pricing exist.     

Efficiency in nuclear power pricing

This study investigates whether the rate structure for electric utilities with nuclear and fossil fuel generation is efficient and perhaps equitable. Data were collected on fossil and nuclear steam generation and transmission to estimate costs. Tests were performed to determine if efficient pricing practices were being followed. The results indicate that the marginal cost of nuclear generated power is less than that of power generated from fossil fuel sources. Also, the rate structure for the nuclear utilities is inefficient, with industrial rates significantly higher than first-best or second-best pricing criteria would indicate.     

Localized Competition,Heterogeneous Firms and Vertical Relations

This paper investigates the link between firms' geographic configuration and market power in imperfect markets. We consider two related setups. The first illustrates the relevant characteristics of the pricing equilibrium. A main implication is that the equilibrium price vector changes in accordance with the firms' spatial configuration. The second, where firms operate as downstream retailers affiliated to rival upstream wholesalers, shows that upstream market power is strongly affected by an index of geographic concentration which reflects the spatial configuration of retailers. Finally, our analysis provides several insights for market delineation as well as merger evaluation and remedies.     

Municipal electric utilities’ role in telecommunications services

Municipal electric utilities (MEUs) are increasingly expanding into telecommunications services. Such entry is interesting in several respects. First, MEUs marry two potential pathways for the growth of telecommunications access infrastructure and services: public ownership of last-mile facilities and electric power company expansion into telecommunications. Second, municipalities are key early adopters of next generation access technology in the form of both fiber-to-the-home (FTTH) and broadband wireless (e.g., WiMax) systems. Third, MEUs are at the nexus of the debate over the proper role for local government in promoting broadband Internet access. Most homes in the United States are served by investor-owned local telephone and cable television providers, using company-owned wireline infrastructure. These providers have generally opposed municipal entry, arguing that it will crowd out private investment and represents an unfair and less efficient form of competition. A number of states have acted to limit—or in some cases—to promote such entry. Before engaging in this debate, it is necessary to have a clearer picture of the current state of municipal entry and the local demographic, cost, industry, and policy factors that influence its evolution. To address this need, this paper reports the results of an empirical analysis of MEUs that provide communications services to the public. This analysis shows that MEUs are more likely to offer such services if they also provide internal communication services to support their electric utility operations (scope economies); are relatively close to metropolitan areas (lower backhaul costs); are in markets with fewer competitive alternatives (cable modem and DSL service availability limited); and which are less encumbered by regulatory barriers to entry (in communities in states which do not restrict municipal entry into telecommunication services). Of these results, the competitive impacts are the least straight-forward to interpret, suggesting richer dynamics and avenues for further research.     

FOB or Uniform Delivered Prices: Strategic Choice and Welfare Effects

In spatial markets firms typically use either FOB (mill) or uniform delivered (UD) pricing. What competitive factors motivate this choice and what are the welfare implications of the choice? We study these questions in a duopsony market, where farmers with unit elastic supply curves sell to processing firms. In results that differ considerably from prior work, we show that the equilibrium price policy depends upon the extent of competition in the market, with FOB pricing emerging under very competitive structures and UD pricing emerging under less competition. Mixed FOB‐UD pricing may also emerge in equilibrium. In most cases welfare is higher under UD than FOB pricing.     

The landlocked island: Information access and communications policy in Nepal

This paper examines information access in Nepal, its current limitations, and opportunities for expansion, particularly in rural areas. It argues that government policies and the regulatory environment have failed to create the competition necessary for rapid expansion of information access through information and communication technologies (ICTs), particularly in rural areas. Furthermore, restrictive approaches to licensing and exorbitant fees have hindered the ability of civil society organizations, non-governmental organizations (NGOs), and small and medium enterprises (SMEs) to provide information access at the local level. This has resulted in very limited access to information outside a few urban centers and created some of the world's highest access costs in one of its poorest countries. To successfully address this situation, the newly installed republican government will need to create an environment that promotes competition in less lucrative rural markets while negotiating the demands of existing license holders.     

K?nnen sich erneuerbare Energien langfristig auf wettbewerblich organisierten Stromm?rkten finanzieren?

In this paper we address the issue of whether renewable energy sources can be integrated into power markets if the use of renewable energies is extended at the desired speed. Market integration means that renewable energy sources have to cover their full costs from revenues on competitive markets. In the first part of this paper, we evaluate the long-term revenues of intermittent renewable energy sources using a high resolution power market model. Considering the renewable targets of the German lead study of 2010, we show that due to the merit order effect, intermittent renewable energy sources, such as wind power and photovoltaic, cannot be financed through power markets alone, even if their full costs fall below those of conventional power plants. This is also true for scenarios with high CO₂-prices and increasing spot market prices. In the second part of this paper, we discuss whether in the long run additional instruments such as green certificates or capacity markets would allow for a more competitive financing of renewable energy sources. Center stage in the discussion is the question under which circumstances these instruments increase competitive pricing and decentralised market decisions.     

Changes in the Effects of Mandatory Rate Regulation On Growth in Hospital Operating Costs, 1980–1996

We conduct a panel data fixed effects analysis of hospital costs from 1980 through 1996. Consistent with the findings of similar studies, hospitals residing in all-payer rate regulated states in 1984 and 1991 had operating costs approximately 3 to 4 percentage points lower than their less regulated counterparts. However, by 1996, the effect of rate regulation on hospital costs was reduced to approximately -0.4 percent, a result that narrowly achieves statistical significance (p = 0.09). Hospitals residing in relatively concentrated markets, measured by the Herfindahl-Hirschman Index, were more likely to have higher operating costs, an effect that increased in magnitude over time. The results support the conclusion that hospitals in markets with comparatively less rate regulation or more competition have lower operating costs than their regulated or less competitive counterparts.     

Price Dispersion in Mortgage Markets

Using transaction‐level data on Canadian mortgage contracts, we document an increase in the average discount negotiated off the posted price and in rate dispersion. Our aim is to identify the beneficiaries of discounting and to test whether dispersion is caused by price discrimination. The standard explanation for dispersion in credit markets is risk‐based pricing. Our contracts are guaranteed by government‐backed insurance, so risk cannot be the main factor. We find that lenders set prices that reflect consumer bargaining leverage, not just costs. The presence of dispersion implies a lack of competition, but our results show this to be consumer specific.     

MERCHANT TRANSMISSION INVESTMENT*

We examine the performance attributes of a merchant transmission investment framework that relies on ‘market driven’ investment to increase transmission network capacity needed to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model has a remarkable set of attributes that appears to solve the natural monopoly problem and the associated need for regulating electric transmission companies. We expand the merchant model to incorporate several attributes of wholesale power markets and transmission networks that the merchant model ignores. These include market power in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, strategic behavior by potential merchant transmission investors and issues related to the coordination of transmission system operators and merchant transmission owners. Incorporating these more realistic attributes of transmission networks and the behavior of transmission owners and system operators leads to the conclusion that several potentially significant inefficiencies may result from reliance on the merchant transmission investment framework. Accordingly, it is inappropriate for policymakers to assume that they can avoid dealing with the many challenges associated with stimulating efficient levels of investment in electric transmission networks by adopting the merchant model.     

The Role of Competition in Natural Monopoly: Costs, Public Ownership, and Regulation

Conventional policy for industries with very high economies of scale is to permit monopoly but to subject it to regulation or public ownership. Since the latter may not result in cost minimization, however, it is possible that competition, by forcing firms to operate at the cost frontier, may be less costly despite sacrificing some scale economies. The paper sets out the relevant analytical considerations, estimates a cost function for electric distribution utilities in the U.S., and tests for the relative costs of monopoly and duopoly utilities. Among other notable findings, it concludes that competition does indeed lower net costs.     

Oligopoly intermediation,relative rivalry and market conduct

We consider two firms that compete against each other jointly in upstream and downstream markets under two pricing games: Purchasing to stock (PTS), in which firms select input prices prior to setting consumer prices; and purchasing to order (PTO), in which firms sell forward contracts to consumers prior to selecting input prices. The antitrust implications of the model depend on the relative degree of oligopoly rivalry in the upstream and downstream markets. Firms strategically precommit to setting prices in the less rivalrous market, which serves to soften competition in the more rivalrous market, resulting in anticompetitive effects. Bertrand prices emerge in equilibrium when the markets are equally rivalrous, while Cournot outcomes arise with upstream monopsony or downstream monopoly markets. The slope of firm reaction functions depends on relative rivalry, a feature we use to derive testable hypotheses for antitrust analysis of a wide variety of industry practices.     

中国与世界主要国家电价比较分析

通过对世界部分国家电价进行对比,剖析了我国在上网电价、输配电价、终端销售电价以及电力与其他能源产品比价方面存在的问题,认为我国电价总体水平偏低,需要适时调整电价水平和电价结构,尽快形成独立的输配电价。     

Transaction costs and competition policy

This paper evaluates current antitrust policy in light of our current understanding of how transaction costs influence the ability of firms and consumers to deal with market power. The paper shows how the failure to consider transaction costs can lead to erroneous policy decisions. Many models employed today make simplifying assumptions about transaction costs that can lead to biased results in analyzing vertical and horizontal issues. The increased ability to monitor the effect of promotional behavior should cause us to reexamine whether free riding justifications, previously accepted as justifications for various vertical restrictions, still hold. Nash bargaining and Nash-in-Nash models raise concerns about the simplified assumptions assumed in which supposedly high transaction costs restrict the choice and form of the assumed competitive alternatives. The increasing importance of two-sided markets together with an understanding of transaction costs is needed to understand antitrust conduct in those markets. The recent Amex case is likely to lead to confused litigation in these types of markets. Finally, the establishment of property rights for a consumer to his or her data could fail to remedy antitrust concerns that certain dominant firms are immune to competition because consumers do not own their data unless that property right is limited so that consumers cannot exclusively sell their data to one firm.     

企业内部市场定价:基于行为的理论模型

本文从行为的视角探讨内部市场定价问题。根据内部市场主体之间的合作、竞争行为提出并界定了内部市场结构的概念，将内部市场划分为简单型、合作主导型、竞争主导型、复合型四种结构类型；通过分析企业战略、内部定价对内部市场主体之间合作、竞争行为的影响，得出了企业战略决定内部市场结构应然、内部定价调节内部市场结构实然的结论：以内部市场结构的实然与应然相一致为原则．构建了企业内部市场定价的理论模型，阐述了在各种内部市场结构应然要求下的内部定价方法、决策权安排、绩效考核标准和激励机制等。     

Telecommunication in the US: From Regulation to Competition (Almost)

Alfred E. Kahn was an observer and practitioner of telecommunications regulation as technology changed the industry from a natural monopoly to a platform-based oligopoly among telephone, cable, satellite, and wireless carriers. Regulation and legislation were slow to recognize these changes, and large welfare losses occurred, some of which could have been avoided if regulators, legislators and economists had followed Fred’s economic advice: Prices must be informed by costs; the relevant costs are actual incremental costs; costs and prices are an outcome of a Schumpeterian competitive process, not the starting point; excluding firms from markets is fundamentally anticompetitive; a reliance on imperfect markets subject to antitrust law is preferable to necessarily imperfect regulation; and a regulatory transition to deregulation entails propensities to micromanage the process to generate preferred outcomes, visible competitors, and expedient price reductions.     

Platform Pricing at Sports Card Conventions

We study a new data set of U.S. sports card conventions from the perspective of the pricing theory of two‐sided markets. Conventions are two‐sided because organizers must set fees to attract both consumers and dealers. We present several findings: first, consumer pricing decreases with competition, but pricing to dealers is insensitive to competition and in longer distances even increases with competition. Second, when consumer price is zero (and thus constrained), dealer price decreases more strongly with competition. These results are compatible with existing models of two‐sided markets, but are difficult to explain without such models.     

国际输配电价形成机制综述及对我国的启示

从最优输电定价原则出发,通过对一些主要西方国家和地区的输电电价结构和定价机制的介绍比较,提出对我国输配电定价机制和电价结构的设想。     

Local Energy Markets*

In current power markets, the bulk of electricity is sold wholesale and transported to consumers via long-distance transmission lines. Recently, decentralized local energy markets have evolved, often as isolated networks based on solar generation. We analyze strategic pricing, investment, and welfare in local energy markets. We show that local energy markets yield competitive equilibrium prices and provide efficient investment incentives. Yet, we find that strategic behavior leads to allocative inefficiency. We propose a clearing mechanism that induces truth-telling behavior and restores first-best welfare.