Commitment to Competition: An Assessment of Antitrust Agency Budgets since 1970

In these remarks to the Industrial Organization Society, I discuss the adequacy of antitrust enforcement resources in the U.S. Relevant resources are measured by the competition budgets of the Justice Department and the Federal Trade Commission. Since 1970 these have been influenced by the overall economy, its changing structure, and politics, but they have not kept up with the pace of mergers or other measures of the need for antitrust. Thus at present, the resources devoted to antitrust fall well short of what is required for continued vigilance over our growing and changing economy.     

The effects of divestiture,privatization, and competition on productivity in U.S. and U.K. telecommunications

The telecommunications industries in the United States and the United Kingdom have undergone massive changes during the 1980s. This paper decomposes the total factor productivity growth of AT&T and British Telecom into their various components. It finds that while a great deal of the productivity increases apparently resulted from continuing scale economies, competition for AT&T and privatization of BT have been responsible for 17 percent and 25 percent of their respective gains in recent years. Among other variables, divestiture appears to have initially depressed AT&T's productivity growth, and competition for BT is too insignificant to yet have an impact.     

Herfindahl Concentration with an Import Fringe and with Supply Constraints

The widely used Herfindahl index of concentration measures market power incorrectly in cases where a core of sellers faces a competitive fringe or where some subset of sellers is supply-constrained. These cases arise, for example, where domestic sellers face a small fringe of imports, or where import supply of any magnitude is limited by natural or artificial constraints. Returning to the theoretical roots of the Herindahl, this paper demonstrates how the index should be modified to deal with such circumstances.     

The comparative advantage of public ownership: evidence from U.S. electric utilities

Abstract.  Studies of the performance effects of public vs private ownership have found mixed evidence. This paper draws on theory suggesting that public enterprise may have an advantage in producing goods and services whose quality attributes are difficult to specify a priori. Using a comprehensive data set of U.S. electric utilities to estimate cost functions, we find that while privately owned systems achieve lower costs in generation, public systems generally have an advantage in the end‐user‐oriented distribution function with its more non‐contractible quality attributes. Other evidence on quality differences by ownership type and by enterprise size supports this distinction. JEL classification: L33, L94     

Automobiles: The Old Economy Collides with the New

The U.S. automobile industry is beginning to confront the next major technology – the internet. Business-to-business manufacturing systems and supply exchanges, together with business-to-consumer ordering and purchase systems, all have the potential to bring great efficiencies to this traditional industry. But each of these innovations raises new competitive issues. Internet ordering will greatly diminish the role of conventional dealers, who have thus far blunted its impact. B2B exchanges raise concerns about buyer power and other competitive effects. This paper outlines and analyzes these internet-drivenchanges and their competitive implications for the industry, its dealers, suppliers, and customers.     

Incentive regulation,service quality,and standards in U.S. electricity distribution

The widespread use of incentive regulation in telecom, electricity, and other industries in the U.S. and elsewhere has raised questions about its possible adverse effect on the quality of service. This paper examines U.S. electricity distribution utilities in the years 1993–1999, several of which were subject to incentive regulation. Controlling for other possible influences, including possible endogeneity of the regulatory regime, the data and model indicate that incentive regulation is indeed associated with significantly longer duration of service outages, although not necessarily more frequent outages. Importantly, this quality reduction is offset in cases where regulation incorporates service quality standards. We also examine the causal chain connecting incentive regulation, cost expenditures, and service quality. We conclude that careful design of quality standards can allow incentive regulation to achieve cost savings without quality degradation.     

Divestiture policy and operating efficiency in U.S. electric power distribution

Divestiture of generation assets by vertically integrated electric utilities has been a key element of restructuring in the U.S. The resulting generation sector has received much attention, but the standalone distribution sector that has been simultaneously created has received very little. This paper addresses the effects of divestiture policy on the operating efficiency of the resulting distribution utilities. Using data envelopment analysis to measure operating efficiency, we examine 73 utilities in the period 1994–2003 and find that the major divestitures that were required by state regulators had large adverse effects on efficiency, whereas utilities that divested at their own initiative had at worst neutral efficiency outcomes. These results raise serious questions about one of the centerpieces of electricity restructuring.     

Price Spikes in Energy Markets: “Business by Usual Methods” or Strategic Withholding?

There is considerable controversy whether price spikes in energy markets represent demand shifts in the presence of inelastic supply or strategic withholding by suppliers. This paper sets out a new method for distinguishing the two possible explanations, namely, determining whether supply shifts to the left during periods of high demand. Such behavior would be inconsistent with ordinary profit-maximization, that is, “business by usual methods.” This approach is applied to a period of unusually high prices in the New York wholesale electricity market in 2001. There is evidence of strategic withholding for one brief period.     

Do mergers improve efficiency? Evidence from restructuring the US electric power sector

This paper analyses the performance impact of the merger wave which took place in the US electricity industry during the period 1994–2003. It does so by analyzing the impact on operating and total cost in electricity distribution. While there are past studies of efficiency and productivity effects, as well as of prices, profits, and other outcomes, this study differs in several ways. First, the database consists of many merging and non-merging firms, rather than only a few on which to base inferences. Second, all of these mergers arise in a single industry, greatly facilitating controlled comparison. Third, we have data on the several years of pre-merger and post-merger efficiency of the specific merging units, unlike virtually all past studies. Finally, we employ a powerful nonparametric technique—data envelopment analysis—to measure the efficiency of each operating unit. The results indicate that electricity mergers are not consistent with improved cost performance.