Raising rivals' costs: The entry of an upstream monopolist into downstream markets

A regulated upstream monopolist provides an input to firms in a downstream market. If the monopolist enters the downstream market, a natural concern is that it will act so as to raise its downstream rivals' costs. An offsetting incentive is that a higher downstream price will reduce demand for the input, which reduces the monopolist's profit. Conditions under which one incentive dominates the other are derived. The monopolist may desire to lower its downstream rivals' costs rather than raise them. These findings suggest that regulatory policy towards such downstream entry should not focus exclusively on the ability to discriminate.     

Using Market Structure to Regulate a Vertically Integrated Monopolist

A natural monopolist whose cost is private information produces a good which is combined with another good that can be produced by the monopolist or by other firms. The agency that regulates the monopolist can impose any of several different market structures in the industry: integrated monopoly, vertical separation with free entry downstream, or liberalization downstream (both integrated and independent production). When several firms produce downstream, a Cournot quantity-setting game with free entry determines the market price. We derive the optimal contracts to offer the monopolist under all three market structures and examine the influence of downstream cost differences on access prices.We then study the optimal regulatory policy where the regulator can condition the downstream market structure on the monopolist's cost report to the regulator. The optimal regulatory policy awards a monopoly to a low-cost upstream firm, but requires free entry downstream if the monopolist reports high upstream costs. Thus, the choice of market structure is an additional tool to limit rent extraction by the monopolist. Simulation analysis reveals the possibility of significant welfare gains from this additional regulatory tool.     

Imperfect legal unbundling of monopolistic bottlenecks

We study an industry with a monopolistic bottleneck supplying an essential input to several downstream firms. Under legal unbundling the bottleneck must be operated by a legally independent upstream firm, which may be partly or fully owned by an incumbent active in downstream markets. Access prices are regulated but the upstream firm can perform non-tariff discrimination. Under perfect legal unbundling the upstream firm maximizes only own profits; with imperfections it is biased and to some extent accounts also for the incumbent’s downstream profits. We show that increasing the incumbent’s ownership share increases total output if the upstream firm’s bias is sufficiently small, while otherwise effects are ambiguous. Stronger regulation that reduces the bias without changing ownership shares generally increases total output. We also endogenize the bias and show that it can depend non-monotonically on the ownership share.     

Taxation and market power when products are durable

Empirical studies suggest that industries hardest hit by government regulations, such as pollution regulations, are both highly concentrated and manufacture durable products. We analyze a two-period durable goods monopoly model where the firm faces government restrictions in the form of pollution or excise taxes. In contrast to non-durable monopolistic industries, we show that taxes on pollution or an excise tax on output may increase a durable goods monopolist's commitment ability and market power. Indeed, any policy which restricts future output may have the perverse effect of increasing a monopolist's bargaining power with buyers and enhance their profits.The authors would like to thank several anonymous referees and the editor for helpful comments and suggestions on earlier drafts of the paper. Of course, any remaining errors are the sole responsibility of the authors.     

双重古诺竞争下的FDI关联溢出效应

扩展了以往理论研究的基本假设,在古诺竞争框架下分析FDI进入东道国上下游双边市场时的关联溢出效应。结果显示:当FDI仅进入东道国的下游市场时,FDI产生的竞争效应会增加下游市场的总产出,从而增大对上游市场中东道国本土供应商的后向关联程度,且其增大程度与技术差距正相关;在FDI同时进入东道国上下游双边市场的情况下,上游市场的FDI会对东道国本土供应商产生挤出效应,且两者的技术差距越大,挤出效应越明显,同时会对下游市场中的东道国本土生产者产生明显的前向关联,上游市场总产出的增加使得中间产品的均衡价格下降,直接减少了下游本土生产者的边际生产成本,从而增加了其产出和利润,部分抵消了下游市场的FDI的挤出效应。     

A dynamic duopoly model with bounded rationality based on constant conjectural variation

In this paper, we construct dynamic models on the basis of constant conjectural variation. Duopolists with dynamic adjustment behavior of bounded rationality have been considered. Numerical simulation is used to illustrate the complexion of models. The existence of equilibrium points and their stability in this nonlinear system are discussed. We study two special cases of symmetry model and Bertrand model with conjectural variation. When the speed of output adjustment changes, a series of complex phenomena including bifurcation, chaos and strange attractors can be observed in our models. We also analyzed the importance of the initial conditions to the system that a tiny variation of the initial value will cause dramatic fluctuations in output.     

Bottleneck co-ownership as a regulatory alternative

This paper proposes a regulatory mechanism for vertically related industries in which the upstream “bottleneck” segment faces significant returns to scale while other (downstream) segments may be more competitive. In the proposed mechanism, the ownership of the upstream firm is allocated to downstream firms in proportion to their shares of input purchases. This mechanism, while preserving downstream competition, partially internalizes the benefits of exploiting economies of scale resulting from an increase in downstream output. We show that this mechanism is more efficient than a disintegrated market structure in which the upstream natural monopoly bottleneck sets a price equal to average cost.     

Partial vertical ownership

A backward ownership interest held by a downstream firm yields a partial rebate of the upstream margin. Input demand increases with backward ownership, and the upstream firm optimally responds by raising price. With symmetric costs, every downstream firm's equilibrium input/output choice is invariant across a class of ownership profiles, including uniform ownership. Moreover, equity trading results in uniform holdings, so partial vertical ownership may have no real effects. With asymmetric costs ex ante, equity trading amplifies the asymmetries and shifts output toward lower-cost firms. With homogeneous goods, this improves producer and total surplus. With differentiated goods, it may harm consumers.     

DOWNSTREAM R&D RIVALRY WITH SPILLOVERS AND DISCRIMINATORY INPUT PRICING

This paper examines how discriminatory input pricing by the upstream monopolist affects the R&D choices of downstream duopolists in the presence of R&D spillovers. We show that the monopoly supplier can benefit from a precommitment to uniform pricing because under uniform pricing the downstream firms invest more in R&D, leading to larger output and thus benefiting the supplier. When R&D spillovers are sufficiently large, the downstream firms are also better off under uniform pricing. Moreover, social welfare is always higher under uniform pricing.     

International Pricing with Costly Consumer Arbitrage

Consumer arbitrage affects international pricing in several ways. If all consumers face the same arbitrage costs, a monopolist's profit increases with arbitrage costs, and world welfare declines with them (if output does not rise). If arbitrage costs differ across consumers, a monopolist may sell in a second country even if there is no local demand—it can use the second country to discriminate across consumers in the first country. Again, world welfare typically falls with arbitrage costs. When there is also local demand in the second country, world welfare may be increasing in arbitrage costs, even if output falls.     

Technology Diffusion with Market Power in the Upstream Industry

This paper compares taxes and tradable permits when used to regulate a competitive and polluting downstream industry that can purchase an abatement technology from a monopolistic upstream industry. Second-best policies are derived for the full range of the abatement technology’s emission intensities and marginal abatement costs. The second-best permit quantity can be both above or below the socially optimal emission level. Explicit consideration of the output market provides further insights on how market power distorts the allocation in the downstream industry. The ranking between permits and taxes is ambiguous in general, but taxes weakly dominate permits if full diffusion is socially optimal. In addition, it is analysed how a cap on the permit price affects the diffusion of an abatement technology.     

Upstream mergers,downstream mergers,and secret vertical contracts

In an industry characterized by secret vertical contracts, we consider a benchmark case where two vertical chains exist, with two upstream manufacturers selling to two downstream retailers, and show that the equilibrium prices are independent of whether upstream or downstream firms have all the bargaining power. We then analyse two alternative mergers, and show that a downstream merger (which gives the downstream monopolist all the bargaining power) is more welfare detrimental than an upstream merger (which gives the bargaining power to the upstream monopolist). We also show that downstream and upstream mergers have the same effects when contracts are observable.     

Controls of the complex dynamics of a multi-market Cournot model

In this paper, a multi-market Cournot game is proposed based on a specific inverse demand function. The game is studied statically and dynamically. Puu's incomplete information approach, as a realistic method, is used to contract the corresponding dynamical model under this function. Therefore, some stability analysis is carried out on the model to detect the stability and instability conditions of the system's Nash equilibrium. Based on that analysis some dynamic phenomena such as bifurcation and chaos are found. Under certain assumption, chaos control is performed in order to control the monopolistic model. Furthermore, a dynamic multi-market Cournot model is introduced.     

Licensing a quality-enhancing innovation to an upstream firm

This paper examines the case where a patent holder who is not a producer licenses its quality-enhancing innovation to an upstream firm, which sells its product through a downstream monopoly. It is found that the patent holder prefers a two-part tariff contract, which includes both a fixed-fee and per-unit output royalty. However, the royalty included in the licensing contract makes each firm price at a markup over marginal cost and therefore makes both consumers and the society worse off, if the innovation is small and the supplier is weak. From a welfare perspective, licensing by means of an ad valorem tax is more efficient, as it allows the upstream firm to be less aggressive when trading with the downstream firm.     

Imported inputs and privatization in downstream mixed oligopoly with foreign ownership

This paper examines welfare implications of privatization in a mixed oligopoly with vertically related markets, where an upstream foreign monopolist sells an essential input to public and private firms located downstream in the domestic country. The impact on domestic welfare of privatizing the downstream public firm is shown to contain three effects. The first is an output distortion effect, which negatively affects welfare since privatization decreases the production of final good for consumption. The second is an input price lowering effect resulting from a decrease in derived demand for the input. When the level of privatization increases, a decrease in final good production lowers input demand, causing input price to decline and domestic welfare to increase. The third is a rent‐leaking effect associated with foreign ownership in the downstream private firm. The rival domestic firm strategically increases its final good production, causing profits accrued to foreign investors to increase and domestic welfare to decline. Without foreign ownership in the downstream private firm, the optimal policy toward the public firm is complete privatization as the output distortion effect is dominated by the input price lowering effect. With foreign ownership, however, complete privatization can never be socially optimal due to the additional negative impact on domestic welfare of the rent‐leaking effect. We further discuss implications for domestic welfare under different privatization schemes (e.g., selling the privatization shares to the upstream foreign monopolist or to the rival domestic firm).     

Downstream mode of competition with upstream market power

In a two-tier oligopoly, where the downstream firms are locked in pair-wise exclusive relationships with their upstream input suppliers, the equilibrium mode of competition in the downstream market is endogenously determined as a renegotiation-proof contract signed between each downstream firm and its exclusive upstream input supplier. We find that the upstream–downstream exclusive relationships credibly sustain the Cournot (Bertrand) mode of competition in the downstream market, when the goods are substitutes (complements). In contrast to previous studies, this result holds irrespectively of the degree of product differentiation and the distribution of bargaining power between the upstream and the downstream firm, over the pair-specific input price.     

Monopolization through endogenous vertical mergers

While endogenous merger analysis has been applied to horizontal mergers, the thrust of vertical merger analysis has been based on exogenous mergers. The goal of this paper is to analyze endogenous vertical mergers. I consider a market structure with a downstream monopolist and an oligopolistic upstream industry. The downstream monopolist chooses to buy a certain number of the upstream firms. Mergers are endogenous, in the sense that the bids made by the downstream firm must be accepted by each of the integrated upstream firms, and must not exceed the increase in the profits of the downstream firm. It is shown that the unique equilibrium is complete monopolization: the buyer buys all the firms in the upstream industry. This result is consistent with the result that vertical mergers are profitable. However, it is in contrast with horizontal endogenous mergers, where complete monopolization is generally not an equilibrium.     

Exhaustible Resources, Monopolistic Competition, and Endogenous Growth

One of the central analytical findings of the growth literature is that continuous growth is possible even in an economy with exhaustible resources. Based on this result, this paper addresses the question of whether different equilibrium trajectories which lead to a balanced growth path are possible within an endogenous growth model with incomplete competition. Although the Solow-Stiglitz condition is violated due to a monopolistic sector, we nevertheless demonstrate that steady growth in per capita consumption is possible under the condition that the rate of entry of new monopolists exceeds that of the average monopolist's decline in output. As a necessary but not sufficient condition for indeterminacies in a growing economy, this paper demonstrates that the partial production elasticity of capital must be smaller than that of the exhaustible resource.     

Taxing a monopolist

We consider a simple, self-financing and informationally undemanding scheme to reduce the deadweight loss due to a monopolist's market power. Essentially, we propose taxing the monopolist and applying the tax revenue to generate a public demand for his output. It turns out that a favorable scenario for such a reform to generate an ‘efficiency increase’ (i.e. to increase total output) is an elasticity of market demand with an absolute value of less than 3 (a seemingly ‘realistic’ condition). We also consider the case for the implementation of the first best, and compare specific and ad-valorem taxes as a way to finance the public demand.     

Modelling upstream and downstream market power in bilateral oligopoly

This article develops a general model that estimates market power exertion in a bilateral market relationship for processors and retailers where each may also have market power in their primary input market and output markets, respectively. Monte Carlo experiments are used to generate industry data for market structures such as perfect competition, monopoly, monopsony, bilateral imperfect competition with an integrated processor/retailer, bilateral imperfect competition with separate processor and retailer, and bilateral imperfect competition with four adjacent upstream and downstream markets. Then, new empirical industrial organization models are estimated using the data with models that match the market structure under which the data were generated (true) and with models that reflect alternative market structures (alternative). The general model is derived using the production function approach without imposing the fixed proportion assumption. Monte Carlo simulation results indicate that the general model is preferred to alternative models that presume competitive behaviour by processors in primary input procurement and by retailers in the output market. Results indicate that less flexible models lead to biased market power estimates in the presence of market power in the corresponding input and output markets.