Commodity price inflation, retail pass-through and market power

When commodity prices rise, wholesalers and retailers of products derived from basic commodities respond by passing along at least a portion of the price increase to consumers. In this paper we examine whether firms respond differently to positive commodity price shocks than to negative commodity price shocks; that is, whether commodity price volatility alters market power. We exploit recent volatility in food commodity prices over the period 2007-2010 to investigate how commodity price shocks translate into market power in two different vertically-structured food product industries: potatoes and fluid milk. For potatoes, we find both wholesale and retail market power decreases (increases) during periods of rising (falling) commodity prices. Moreover, price-cost margins widen a substantially greater degree in response to negative shocks than margins narrow in response to positive shocks, indicating that commodity price volatility increases market power. For fluid milk, we find that market power likewise declines during periods of rising commodity prices; however, market power does not significantly change during periods of falling commodity prices, suggesting that commodity price volatility decreases market power.     

Anti‐Competitive Interconnection: the effects of the elasticity of consumers' expectations and the shape of the network effects function

I find that interconnection might cause the market to be less competitive, and might lead to an increase in the price firms charge for their product. Absent interconnection, firms compete for a consumer for two reasons. The first reason is to obtain revenue from selling the product to a consumer (as in the case without network effects). The second reason is that by expanding the network by one more consumer, the product becomes more attractive to all other consumers. Interconnection eliminates the second reason—when firms interconnect, they are no longer concerned with consumers' following the crowd. I show that consumers and society might be worse off from interconnection. I focus on two factors that make the (post‐interconnection) price increase larger: consumer expectations that are highly sensitive to prices and consumers putting a high value on small increases in network size at the equilibrium market shares. Both of these factors make firms highly competitive, but only if the firms' products' networks are not interconnected.     

Resale price maintenance and restrictions on dominant firm and industry-wide adoption

We consider a model in which firms use resale price maintenance (RPM) to dampen competition. We find that even though the motive for using RPM is thus anti-competitive, market forces may limit the overall adverse impact on consumers. Indeed, we find that when there are a large number of firms in the market, consumer welfare under a laissez-faire policy might be as high or almost as high as it would be under an alternative policy in which RPM is banned. Government interventions that put an upper limit on the extent of industry-wide adoption of RPM can have adverse welfare effects in the model. We further show that proposed guidelines in the United States and Europe may come close to minimizing welfare.     

Personalized pricing and advertising: Who are the winners?

This paper investigates who wins and who loses when firms depart from a mass advertising/uniform pricing strategy (benchmark model) to a targeted advertising/price discrimination one. Considering a duopoly market in which firms simultaneously compete in prices and advertising decisions, we examine the competitive and welfare effects of personalized pricing with targeted advertising by comparing equilibrium outcomes under customized advertising/ pricing decisions to the results arising under mass advertising and uniform pricing. We show that, when both firms compete in both market segments, all segment consumers are expected to pay higher average prices under the personalized advertising/pricing strategy. We also show that, in the context of our simultaneous game, targeted advertising with price discrimination might boost firms’ profits in comparison to the case of mass advertising and uniform prices. The overall welfare effects of the personalized strategy are ambiguous. However, even when the personalized strategy boosts overall welfare, consumers might all be worse-off. Thus the paper gives support to concerns that have been raised regarding the firms’ ability to adopt personalized strategies to boost profits at the expense of consumers.     

Bidding asymmetries in multi-unit auctions: Implications of bid function equilibria in the British spot market for electricity

This paper introduces and tests Bid Function Equilibria (BFE) in the British spot market for electricity. BFE extend von der Fehr and Harbord's (1993) multi-unit auction model of wholesale electricity markets by allowing firms to have heterogeneous costs for different generating units. Pure-strategy equilibria in BFE predict asymmetric bidding by producers: a single firm (the “price-setter") bids strategically while other firms (“non-price-setters") bid their costs. We test for asymmetries in firms' bid functions in the British spot market between 1993 and 1995 and find strong empirical support for the theory. We conclude that BFE have important implications for the design and governance of electricity markets.     

Will the Market Get it Right? The Placing of New Power Plants in Germany

This paper applies ELMOD, an economic-engineering model of the European electricity market to the issue of optimal investment placing of generation capacity in Germany under different market integration scenarios. The model is formulated as cost minimization approach. We conduct a scenario analysis comparing different rules for power plant placing in a national, a market-coupling and an integrated EU market approach. We find that there are great benefits for consumers and producers if taking into account network conditions and cross border congestion in generation location planning. Moreover a change from national planning to an integrated market planner perspective shows even more improvements in prices and network utilization.     

Endogenous Mergers of Complements with Mixed Bundling

This paper studies endogenous mergers of complements with mixed bundling, by allowing both for joint and separate consumption. After merger, partner firms decrease the price of the bundled system. In addition, when markets for individual components are sufficiently important, partner firms find it strategically advantageous to raise the prices of stand-alone products, thus making substitute ‘mix-and-match’ composite products less attractive to consumers. Even though these effects favor the profitability of mergers, merging is not always an equilibrium outcome. The reason is that outsiders respond by cutting their prices to retain their market share, and mergers can be unprofitable when competition is intense. From a welfare analysis, we observe that the number of mergers that are observed in equilibrium may be either excessive (when markets for individual components are important) or suboptimal (when markets for individual components are less important).     

Evaluating the impact of divestitures on competition: Evidence from Alberta’s wholesale electricity market

Asset divestitures play a central role in antitrust and competition policy. Despite their importance, empirical evidence on their impacts on market competition is limited. We analyze market power in Alberta’s wholesale electricity market, where transitional arrangements that virtually divested generation assets from large incumbents were put in place during market restructuring in the early 2000’s and expired at the end of 2020. Subsequently, average peak hour prices rose by 120% the year after their expiry. We demonstrate that nearly two-thirds of this increase can be explained by elevated market power from the large suppliers. Further, exploiting variation in the allocation of the divested assets across heterogeneous firms, we demonstrate that market power execution is elevated when the divested assets are controlled by large strategic firms. Our findings highlight the important role that asset divestitures and their allocations can have on market competition. Our analysis also raises concerns over the ability of restructured electricity markets to facilitate sufficient competition through entry and the potential need for regulatory intervention.     

Under the Cover of Antidumping: Does Administered Protection Facilitate Domestic Collusion?

Anecdotal evidence suggests that domestic firms can use the antidumping petition process to engage in collusion and increase domestic prices. In this paper, I test whether the antidumping petition process itself can help domestic firms raise prices. I propose a method to identify whether firms in the industry experience a structural break in the level of market power possessed by the firms at the time that they file their antidumping petition. I use this methodology to analyze the impact of antidumping petitions on competition levels in two industries. I find little evidence that either of these industries increased their market power following the filing of petitions for trade relief, nor even from the protection that resulted from these petitions. These findings suggest that the widespread belief that antidumping leads to more market power may not always hold.     

Austrian-style gasoline price regulation: How it may backfire

In January 2011, a price regulation was established in the Austrian gasoline market which prohibits firms from raising their prices more than once per day. Similar restrictions have been discussed in New York State and Germany. Despite their intuitive appeal, this article argues that Austrian-type policies may actually harm consumers. In a two-period duopoly model with consumer search, I show that under the regulation, firms will distort their prices intertemporally in such a way that their aggregate expected profit remains unchanged. This implies that, as some consumers find it optimal to delay their purchase due to expected price savings, but find it inconvenient to do so, a friction is introduced that decreases net consumer surplus in the market.     

An experimental test of automatic mitigation of wholesale electricity prices

In several major deregulated electricity generation markets, the market operator uses an “automatic mitigation procedure” (AMP) to attempt to suppress the exercise of market power. A leading type of AMP compares the offer price from each generation unit with a recent historical average of accepted offer prices from that same unit during periods when there was no transmission-system congestion to impede competition. If one or more units' offer prices exceed the recent historical average by more than a specified margin, and if these offer prices raise the market-clearing price by more than a specified margin, the market operator replaces the offending offer prices with lower ones. In an experiment, we test an AMP of this type. We find that it keeps market prices close to marginal cost if generation owners have low market power in uncongested periods. However, with high market power in uncongested periods, a condition that may apply in many parts of the world, the generation owners are able to gradually raise the market price well above short-run marginal cost in spite of the AMP. We also test the effect of the AMP on the frequency with which high-variable-cost units are used, inefficiently, in place of low-variable-cost units.     

Non-linear pricing and conscious consumption

We consider a duopolistic market in which a green firm competes with a brown rival and each firm sells two quality-differentiated products. We study optimal non-linear contracts offered by the two firms when consumers: (i) Are privately informed about their willingness to pay for quality, and (ii) differ in their environmental consciousness. We characterize how consumers with different valuations for quality self-select into firms and show that the ranking of qualities, relative prices and profits all depend on the interplay between consumers’ valuations and firms’ cost heterogeneity. Interestingly, when consumers’ valuations for quality are relatively low, the brown firm does not offer a low-quality variety. This contrasts with the situation of full information, in which both firms commercialize a high- and a low-quality variety. Hence, the lack of information about consumers’ valuations may not only favor the green firm in terms of higher prices and profits, but also reduce the product range offered by the brown rival.     

Die Kosten des Klimaschutzes am Beispiel der Strompreise für private Haushalte

Power prices in Germany have been surging since the outset of the new millennium. Among the major reasons for this tendency are newly raised taxes and levies on electricity prices, whose introduction is primarily motivated by climate concerns. Without these taxes and levies, net electricity prices would have remained constant for private households. This article discusses these taxes and levies that have been responsible for the cost increases in private households’ electricity consumption. Most influential have been the feed-in tariffs for renewable energies, above all photovoltaics. According to our calculations, the levy for renewables will further increase in the up-coming years, thereby pushing consumers’ electricity cost once again. Our calculations also show that within the next couple of years, there will be a fierce competition among renewable energy technologies, most notably between photovoltaics and wind power. Politics would be well-advised, therefore, to limit the annual capacity of newly installed solar modules in order to avoid both the explosion of consumers’ electricity bills and strong competition among renewables.     

On the diffusion of electronic commerce

This paper analyzes retailers' adoption of e-commerce in a technology adoption race framework. An internet-based firm with no traditional market presence competes with an established traditional firm to adopt the e-commerce technology and sell to a growing number of consumers with on-line shopping capability. The focus of the analysis is on identifying how consumer loyalty, differences in firms' technology and consumers' preferences for the traditional versus the virtual market, and the expansion in market size made possible by the internet can affect the timing and sequence of adoption by firms, as well as the post-adoption evolution of prices. The model's implications are used to discuss empirical evidence on adoption patterns for different product categories and firm types.     

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.     

Estimation of Search Frictions in the British Electricity Market

This paper studies consumer search and pricing behavior in the British domestic electricity market following its opening to competition in 1999. We develop a sequential search model in which an incumbent and an entrant group compete for consumers who find it costly to obtain information on prices other than from their current supplier. We use a large data set on prices and input costs to structurally estimate the model. Our estimates indicate that consumer search costs must be relatively high in order to rationalize observed pricing patterns. We confront our estimates with observed switching behavior and find they match well.     

Switching costs in the US seed industry: Technology adoption and welfare impacts

We evaluate the role of brand and technology switching costs in the US soybean seed industry using a unique dataset of actual seed purchases by about 28,000 farmers from 1996 to 2016. Using a random coefficients logit model of demand, we estimate brand and technology switching costs, characterize the distributions of buyers’ willingness to pay for seed brands and the glyphosate tolerance (GT) trait, and assess the implications of brand and technology switching costs for farmers’ welfare, technology adoption, firm profits, and firm market shares. We find that farmers are willing to pay large premiums for brand labels, and even larger premiums for the GT trait, although there is considerable heterogeneity in these values. Switching costs play an important role in the soybean seed industry. Eliminating these costs would significantly increase buyers’ welfare, reduce seed prices and firm profits, decrease adoption of the GT trait, and impact industry consolidation by expanding smaller firms’ market shares.     

Upstream merger in a successive oligopoly: Who pays the price?

This study applies a successive oligopoly model, with an unobservable non-linear tariff between upstream and downstream firms, to analyze the possible anti-competitive effects of an upstream merger in the Norwegian food sector (specifically, the market for eggs). The theoretical predictions are that an upstream merger may lead to higher average prices paid by downstream firms and at the same time no changes in the prices paid by consumers. Consistent with the theoretical predictions it is found that the merger had no effect on consumer prices, but led to higher average prices paid by the downstream firms to the merged firm.     

Wage councils,product markups and wage markdowns: Evidence from Uruguay

In 2005, after a leftist coalition won the national election for the first time, Uruguay returned to sector-level wage bargaining councils with active government participation. We estimate product markups and wage markdowns using firm-level data for the period 2002–2016, and report decreasing wage markdowns and increasing -to a lesser extent- firm-level product markups. We find statistically significant impacts of minimum mandated wages on product markups and wage markdowns, and additional effects of unions on wage markdowns. The evidence suggests that firms operate in monopsonistic labor markets. Though their bargaining power in the labor market was reduced over time as a result of wage councils, firms were able to pass a sizable part of the increases in labor costs to consumers.     

Retail Mergers and Food Prices: Evidence from France

This paper analyzes the impact of a merger in the French supermarket industry on food prices. Using consumer panel data, we compare the changes in prices for merging and rival firms in affected and comparison markets. We use a novel definition of affected markets when some firms have a local pricing strategy and others a more centralized pricing strategy. We find that prices increase significantly following the merger, and that the merging firms lose market shares. For the rivals, the price increases are larger in local markets, in which concentration increased and differentiation changed after the merger.