Consumer Self-Generation and Monopoly Limit-Pricing under Timing Uncertainty of Deregulation in the Electricity Market

Due to uncertainty in the timing of deregulation for electric power generation, large and potentially self-generating consumers should consider a lost option value as part of the cost of any investment they consider. This paper uses a simple two-period model to analyze the role played by the timing anticipation of deregulation in the decision making of potential self-generators (PSGs) and for limit-contract pricing of local utilities. We develop an effective limit-pricing rule and conclude that a higher-probability of early deregulation will lead utilities to retain more consumers and to set higher limit prices before deregulation. A possible early deregulation might not harm utilities; it could even benefit utilities in finite lifetime periods. Finally, a simulation is provided which supports our main results and shows that the effects on utilities' expected profits of uncertainty about the coming deregulation will depend on the distribution of consumer types.     

ECONOMIC EFFICIENCY AND "PRUDENCE" ANALYSIS OF POWER PLANT INVESTMENT

The various deregulation proposals for the electric utility sector rely on market forces to provide incentives. Even within the traditional regulatory framework, using market behavior instead of regulators' views as a criterion for regulatory decisions is part of the spectrum of deregulation proposals. This paper proposes such an implicit deregulation of rate base decisions. It presents an efficiency standard with which public utility commissions (PUCs) should conduct their "prudence" analyses of power plant construction costs. Prudence reviews, as typically conducted by PUCs, are likely to change the risk structure in regulated sectors so as to make both ratepayers and shareholders worse off. Moreover, the correct perspective for such analyses is ex ante rather than ex post. This means that the expected costs and benefits of alternative actions are the correct parameters for evaluating prudence, and that the interests of ratepayers are consistent only with this economic efficiency approach to prudence analysis. Average industry behavior is the correct standard for implementing the efficient prudence criterion. This paper describes an alternative procedure that PUCs can use to conduct prudence reviews correctly.     

Consumer well-being in a future of accelerating novelty

Novel goods and ideas are introduced to today’s consumers with increasing frequency. This phenomenon is perhaps most notable in the apparel industry, which in recent decades has seen the rise of “fast fashion” and an accelerating rate of novel style introductions from semi-annual to semi-weekly. In this paper I study the potential for this type of accelerating novelty to have a negative impact on consumer well-being. I analyze a simple theoretical model of consumer behavior in which consumers with a preference for novelty decide how fast to replace their fashion goods before and after an innovation which accelerates the rate at which new goods become available. In the basic model, where consumers update their goods based on their intrinsic preference for novelty, the novelty-accelerating innovation is not welfare-decreasing. However, when the model is extended in realistic ways, I find that there are at least three conditions under which the innovation may decrease welfare by increasing the extent of sub-optimal replacement: if there are external costs of updating to a newer good; if the consumers are boundedly rational and exhibit present bias; or if consumers’ replacement decisions reflect an arms race for social status. My results in these model extensions provide an economic foundation for rising popular concern about undesirable social effects of “fast fashion.” I also discuss the implications of these results for future patterns of consumption, which are likely to reflect still more accelerated novelty and possibly the expansion of fashion behavior to a broader range of consumption settings.     

Nonlinear pricing with self-control preferences

A basic assumption of economics is that consumers choose what they want. However, many consumers find it difficult to stop overeating, overspending, smoking, procrastinating, etc, even though they want to. In reality, consumers have temptation and it is psychologically costly to exercise self-control. To clarify the implications of the existence of temptation and self-control costs, this paper studies a firm's optimal selling strategy exploiting the behavioral features of consumers. We characterize optimal nonlinear pricing schemes for a monopoly when self-control is costly for consumers. Since consumers have a preference for commitment, the firm faces a trade-off between offering a small menu that makes the consumers’ self-control easier and offering a large menu that achieves better price discrimination. We show that the optimal menu resembles the one in the standard nonlinear pricing problem with a price ceiling, where the upper bound on prices is determined endogenously by a participation constraint. The ceiling motivates the firm to offer a relatively flat and compact price schedule, serving more consumers with low demand. The characterization also shows that the firm may earn less if consumers have temptation.     

The Basic Needs Strategy,the Congressional Mandate,and U.S. Foreign Aid Policy

In line with Veblen's contributions on the "dark side" of commercial and political relationships, we show how promises can be used to manipulate the "common man." By imposing excessive access costs on potential promisees (e.g., citizens or consumers), a promiser (e.g., a politician or a firm) can benefit from making a promise without having to wholly fulfill it. These strategically manipulated access costs can be legitimized by the need to prevent abuse and fraud that exempts the promiser from being accused of cheating. Here, two case studies on promises offered to eligible households - the Food Stamp/Supplemental Nutrition Assistance Program and rebates - are developed. Some policy implications are drawn and extensions are suggested.     

基于农产品质量安全的技术扩散博弈分析

在有限理性的假设下,本文采用演化博弈论方法,分析了生产者之间、生产者和消费者之间以及生产者和政府监管部门之间相互作用时的策略选择行为,揭示出经济利益是影响质量安全技术扩散的主要内在因素。因此,若要遏制不安全技术行为的发生,一是要减少生产者的违规收益,严厉处罚并提高其生产成本;二是引导消费者增加对安全农产品的需求;三是加强对监管者的再规制,提高其监测能力、监管频率等。     

On Intertemporal Subsidy-Free Prices and Economic Depreciation: Constrained Market Pricing Revisited

The constrained market pricing approach to regulating monopolies maintains that prices should be subsidy-free, lying between the often expansive bounds of stand alone and incremental costs. For a simple two-good/two-period model of a monopolist subject to a zero profit constraint, it is shown that subsidy-free prices are those which rise to the amortized opportunity cost of the currently optimal asset configuration required to meet both current and future demand, providing—in some circumstances—justification for accelerated depreciation. Such intertemporal subsidy-free prices recognize that the stand alone cost of existing assets to current consumers depends on the value of those assets to future consumers. Hence, if a feasible resale price for the fixed costs of capacity exists within or between periods, then intertemporal stand alone costs and intertemporal incremental costs are driven to equality.     

Technological Change Bias In The U.S. Investor-Owned Electric Utility Industry Following Potential Deregulation

This paper estimates regulated and poientially deregulated costs of production for a multiproduct electric utility industry. The empirical evidence suggests technological regression with respect to costs in both regulated and deregulated environments. Analysis of factor cost shares indicates that technological change in a deregulated environment is expected to be less apital saving than technological change in the regulated environment. In addition, this study finds that overall diseconomies of scale may be nduced over time and to a greater extentunder deregulation than under regulation. Also, cost complementarities may be enhancedover time, but to a lesser extent under deregulation. Hence. tendencies toward natural monop oly may be increased or decreased by deregulation, and advancing deregulation may or may not be an appropriate policy.     

Costs under Regulation and Deregulation: The Case of US Passenger Airlines*

Privatization, the removal of regulatory control and similar changes in property rights within firms can be expected to shift cost functions downward and permit increased output, lower final service prices and more efficient resource allocation The US Airline Deregulation Act of 1978 was clearly expected to have these effects. This paper investigates whether the widely anticipated reduction in costs following the Airline Deregulation Act of 1978 actually occurred. We utilize an empirical procedure that explicitly takes the multi-product characteristics into account and identifies the various sources of changes in costs. The change in airline's costs are decomposed into components and separately measured to identify the effects attributable to deregulation A number of other countries are now considering important changes in the public ownership and control of their airline industries and a quantitative assessment of the actual effect of US deregulation on costs may be thought of as providing lower bound estimates of what might be expected in other countries.     

Markups,quality, and transport costs

This paper provides new evidence on trade prices based on firm-level data from France. It shows that firms charge higher free-on-board (net of transportation costs, hereafter noted as fob) unit values on exports to more distant countries. This finding holds within firms and products, and across destinations. The price premium paid by distant consumers is due to firms charging higher fob prices, and to higher transportation costs. A simple decomposition of the elasticity of import prices to distance shows that, after a fall in transport costs, almost 80% of the decline in import prices enjoyed by consumers is due to firms charging lower fob prices. This suggests a new channel through which changes in transport costs may affect welfare.     

Private consumption behaviour, liquidity constraints and financial deregulation in France: a nonlinear analysis

This paper examines the effect of financial deregulation on consumption expenditure in France during the period 1970–1993. A nonlinear model for consumption which allows for liquidity constraints through a time-varying parameter dependent on a proxy for financial deregulation is estimated using nonlinear instrumental variables. It is concluded that in France financial deregulation has significantly reduced liquidity constraints faced by consumers, allowing a higher percentage of the population to smooth consumption over time. Evidence is also provided that the intertemporal elasticity of substitution is not significantly different from zero at conventional nominal levels of significance. First version received: January 1997/final version received: May 1999     

Electoral and welfare consequences of political manipulation of the economy

This paper examines the long-term electoral and welfare consequences of repeated strategies whereby a political office-holder induces cycles in economic variables to maximize his chances of re-election. Unlike other studies of political business cycles, we focus on questions of the desirability of these cyclical patterns and on the long-run properties of these political economic models. Noting that the welfare costs of vote maximizing in a single term extend beyond that term, we examine in detail the properties of the ‘long-run equilibrium path’ to which such cycles converge. If the economy starts above this path, vote maximizing can lead to increased social welfare and vote margins. However, if the economy starts below this path, vote-maximizing in the present can cause reduced votes and electocal defeat in subsequent terms. This possibility should lead a far-sighted, enlightened politician or political party to eschew vote-maximizing tactics and the political business cycles which accompany them and thus canhelp explain why empirical studies have not found convincing evidence of the existence of such cycles. This paper also quantifies the dependence of this long-run equilibrium path on the important political and economic parameters of the model.     

Process and Product Innovation: Complementarity in a Vertically Differentiated Monopoly with Discrete Consumer Types

This paper examines the complementarity between process and product innovation where process innovation reduces the marginal cost of quality. In the context of a vertically differentiated monopolistic market with discrete consumer types, we investigate how the nature of (fixed versus variable) innovation costs and the distribution of consumers over different types affect the complementarity between process and product innovation. We show that under variable innovation costs a process innovation is more likely to occur alone than both innovations together when taste diversity (or consumer heterogeneity) is not significant and/or when there are more low-type than high-type consumers.     

Evaluating mobile number portability policy in the Thai mobile telecommunications market

Mobile number portability (MNP), which allows consumers to retain their mobile numbers when switching service providers, is expected to promote competition by lowering switching costs. This paper estimates switching costs and switching costs reduction from the MNP policy in Thailand using the mixed logit model with preference heterogeneity on a nationwide survey of mobile telecommunications service usages. The estimation result shows that the MNP policy reduces switching costs by 37% on average and that this benefit is heterogeneous across consumers. The considerable and persistent switching costs call for additional measures to facilitate switching.     

转移成本、价格歧视与银行竞争——基于霍特林模型的实证分析

在银行业竞争中,转移成本能够锁定消费者,使银行能够对锁定的消费者定一个较高的价格,但是,转移成本也使银行对没有被锁定的消费者的竞争更加激烈。研究发现,转移成本的存在增加了银行的利润,并且转移成本越高,银行从信贷中获得的利润越高。但是,当存在存款市场和贷款市场竞争时,由于价格歧视的存在,银行的利润随着转移成本的增加而降低,转移成本没有给银行带来优势。     

Preferences for risk in dynamic models with adjustment costs

This paper characterizes the solution to a consumption/savings decision problem in which one of the consumption goods involves transaction costs. It then analyzes how such adjustment costs affect consumersʼ risk attitudes. Previous studies have suggested that transaction costs, by resulting in infrequent but lumpy adjustments, magnify consumersʼ risk aversion with respect to moderate-stake risk and, simultaneously, stimulate the demand for large-stake wealth lotteries. This paper argues that such predictions, while naturally arising in static models, may disappear or even reverse in a dynamic setting, in which consumers can choose when to make an adjustment. Namely, it shows that such an option can eliminate the demand for large-stake lotteries, and that the consumers choosing to delay the adjustment may be more tolerant to moderate-stake risks than in the absence of adjustment costs. The paper also illustrates that both predictions crucially depend on the relationship between the time discount rate in the utility function and the interest rate.     

Private Provisions of a Discrete Public Good with Voluntary Participation

This paper studies the mechanism that a profit-making principal should adopt to provide a discrete public good when the values of the consumers are their private information and their participation is voluntary. The free-riding issue is resolved through threatened nonprovision of the good by the provider. Every bidder is asked to announce his or her virtual value as defined in Myerson (1981) . The public good is provided if and only if the sum of the bidders' announced virtual values exceeds the provision cost. When a provision decision results, each bidder pays an amount that is determined by the announcement of other consumers. No one pays when a nonprovision decision results. We find that this mechanism is implementable through an all-pay auction. A restricted profit-maximizing mechanism that implements efficient allocation is also characterized. As in Gradstein (1994) , when provision is always efficient, that is, the sum of consumers' values always exceeds the provision cost, efficient allocation is achievable through a profit-maximizer. However, this is not the case when provision is not efficient.     

Market frictions: A unified model of search costs and switching costs

It is well known that search costs and switching costs can create market power by constraining the ability of consumers to change suppliers. While previous research has examined each cost in isolation, this paper demonstrates the benefits of examining the two types of friction in unison. The paper shows how subtle distinctions between the two costs can provide important differences in their effects upon consumer behaviour, competition and welfare. In addition, the paper also illustrates a simple empirical methodology for estimating separate measures of both costs, while demonstrating a potential bias that can arise if only one cost is considered.     

Deregulation, competition and consumer welfare in a banking market: evidence from Hong Kong

This paper examines competition among commercial banks following deregulation in a small open economy. I jointly estimate a system of differentiated product demand and pricing equations, and use conduct parameters to identify market structure. Overall, I find positive outcomes for the banking deregulation, which suggest that the benefits of deregulation understood in large industrialized economies indeed apply to a small open economy. Encouragingly, the industry becomes more competitive and the consumers are better-off after the deregulation. Empirical results also indicate that the banking sector is characterized by non-cooperative competitive behavior. Bank size is an important determinant of consumer’s bank choice.