Price Discrimination, Regulation and Entry in the UK Residential Electricity Market

The residential electricity market in Great Britain has recently been opened to competition and is served by 14 regional incumbents, and up to 15 entrants in each area. This study finds that the incumbents' regulated prices are discriminatory between consumers using different payment methods, and that firms are practising third‐degree price discrimination between areas. The authors discuss the implications for regulatory policy both in the UK and in other countries where electricity markets are being deregulated.     

Multidivisional firms, internal competition, and the merger paradox

Abstract.  Traditional modelling of mergers has the merged firms (insiders) cooperate and maximize joint profits. This approach has several unappealing results in quantity‐setting games, for example, mergers typically are not profitable for insiders, but are profitable for non‐merging firms (outsiders). We take a different approach and allow for a parent company that can play each insider off one another. In quantity‐setting games, with our approach mergers are profitable for insiders, unprofitable for outsiders, socially beneficial, and involve (in a non‐monopolizing merger) a small number of firms. Finally, we find that the optimal strategy depends on whether firms compete in quantity or prices. JEL classification: L000     

Trade flows in a spatial oligopoly: gravity fits well,but what does it explain?

Abstract .  Large distance and border effects on trade flows in some industries may result from the collusive division of geographic markets. In the Brazilian cement industry, traditional gravity equations fit the data well, yet limited regional flows are due to firms' strategic behaviour. Thanks to a unique institutional setting and an unusually rich data set, I directly control for trade costs, which – despite their importance – cannot account for the observed segmentation of local markets at current prices. The paper highlights how collusive behaviour can magnify the effects of distance, as firms use geography to coordinate on higher prices and less cross-hauling.     

The closed‐loop effect and the profitability of horizontal mergers

Abstract.  We study the profitability of horizontal mergers in a dynamic competition context with sticky prices. It is shown that, when firms use open‐loop strategies, a merger is profitable only if the share of the market that merges is significant enough. In the case where firms use closed‐loop strategies we provide a method to conduct analytically the study of the profitability of horizontal mergers. We first prove the existence of an equilibrium of the game when a subset of firms merges. When firms use feedback strategies, mergers are profitable even when the share of the market that merges is arbitrarily small. JEL Classification:D4, L13     

GRADUAL NETWORK EXPANSION AND UNIVERSAL SERVICE OBLIGATIONS

ABSTRACT 1 : Universal service obligations are usually not competitively neutral as they modify the way firms compete in the market. In this paper, we consider a continuum of local markets in a dynamic setting with a stochastically growing demand. The incumbent must serve all markets (ubiquity) possibly at a uniform price and an entrant decides on its market coverage before firms compete in prices. Connecting a market involves a sunk cost. We show that the imposition of a uniform price constraint modifies the timing of entry: for low connection cost markets, entry occurs earlier while for high connection cost markets, entry occurs later.     

Counterintuitive number effects in experimental oligopolies

Recent theoretical research on oligopolistic competition suggests that under certain conditions prices increase with the number of competing firms. However, this counterintuitive result is based on comparative-static analyses which neglect the importance of dynamic strategies in naturally-occurring markets. When firms compete repeatedly, supra-competitive prices can become sustainable but this is arguably more difficult when more firms operate in the market. This paper reports the results of laboratory experiments investigating pricing behavior in a setting in which (static) theory predicts the counterintuitive number effect. Under a random matching protocol, which retains much of the one-shot nature of the model, the data corroborates the game-theoretic prediction. Under fixed matching duopolists post substantially higher prices, whereas prices in quadropolies remain very similar. As a result, the predicted effect is no longer observed, and towards the end the reverse effect is observed.

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Electronic Supplementary Material  The online version of this article () contains supplementary material, which is available to authorized users.      

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.     

Competition and Diversification Trends in Telecommunications: Regulatory, Technological and Market Pressures

In this paper, I examine: (i) regulatory, technological and economic trends driving telecommunications diversification and competition; and (ii) substantial investments and marketing efforts of telecommunications firms to diversity and enter each others' markets via vertical integration, joint ventures, and mergers. The Telecommunications Act of 1996 and ongoing regulatory, market and technological trends have addressed concerns that local exchange company (LEC) ownership of essential facilities may hinder diversification into local markets and stimulated substantial competition across historically distinct markets. (For example, long distance companies have entered local markets.) The entry of one LEC into the Connecticut long-distance market demonstrates that the benefits of competition—lower rates and service innovation—will be realized when Bell operating companies are allowed to enter long distance markets.     

Regulation and state ownership: conflicts and complementarities in eu telecommunications

Abstract ** :  In many countries infrastructure liberalization proceeded faster than the privatization of former state monopolies. Regulatory agencies, established to oversee the transition and safeguard the preconditions for competition, therefore monitor state‐owned firms in addition to privately owned firms. The research on public‐private firms has generated heterogeneous findings, with some pointing to the advantages and other to the disadvantages of this arrangement. Government regulation of mixed public‐private firms raises additional complicated issues, of which the paper studies two using the example of European telecommunications between 2000 and 2004. It examines, first, whether the dual role of the state as owner and regulator could be abused to disadvantage private competitors. Second, it probes whether, conversely, the combination of government ownership and regulation might help overcome some of the shortcomings of the regulation of private firms. We find weak evidence that public and mixed regulated firms were subject to more favourable regulation of interconnection prices. However, this effect weakened as more independent regulation was established. In the area of universal service provision, there is no clear evidence that public and mixed telecommunication service providers were more likely than private ones to be utilized in pursuit of social output goals without explicit compensation. Overall, it seems that the presence of independent regulation, appeals processes, and competition review is a safeguard against capture of the regulator, by public and mixed firms .     

Incentive Regulation and Efficient Pricing

Abstract ** :  One objective of introducing incentive regulation to the newly privatized UK utilities over the past 20 years was to encourage efficient pricing structures. Caps have been imposed on average price levels, giving firms freedom to rebalance amongst prices within the basket. We test how firms have responded to the incentives within such discretion through an extensive review of the relative prices charged within UK price capped industries. We find surprisingly little response to these incentives, suggesting that strategic behaviour dominates short‐term profit incentives even after the introduction or threat of competition .     

Pricing and price competition in consumer markets

This paper offers a simple model of the price mechanism in markets where buyers take prices as given and prices are set by sellers, as in most consumer markets. It explains price competition by arguing that a market price goes down if—and only if—a price cut appears profitable to a firm even if its competitors follow suit. It also explains why markets do not always clear, that is, why production can be restricted by sales and not capacity at prices set by firms.     

On intrabrand and interbrand competition: The strategic role of fees and royalties

We examine oligopolistic markets with both intrabrand and interbrand competition. We characterize equilibrium contracts involving a royalty (or wholesale price) and a fee when each upstream firm contracts with multiple downstream firms. Royalties control competition between own downstream firms at the expense of making them passive against rivals. When the number of downstream firms is endogenous, each upstream firm chooses to have only one downstream firm. This result is in sharp contrast to previous literature where competitors benefit by having a larger number of independent downstream firms under only fixed fee payments. We discuss why allowing upstream firms to charge per-unit payments in addition to fixed fees dramatically alters their strategic incentives.     

Multimarket contact of US newspaper chains: circulation competition and market coordination

Post-war ownership consolidation and acquisition in the US newspaper industry has given rise to extensive market contact amid the remaining chains. This paper studies the impact of this industrial structure on local daily newspaper competition. It seeks to examine whether multimarket contact (MMC) between two newspaper chains can facilitate coordinating exclusive circulation areas for their respective newspapers in proximate circulation markets. Econometric results indicate a strong linkage between the MMC variable and reduced circulation competition for 218 papers in the midwest US. Advertising prices are found to be significantly higher with MMC newspapers.     

Bargaining power and firm profits in asymmetric duopoly: an inverted-U relationship

This paper investigates the effects of bargaining power on downstream firms’ profits. Consider a vertically related industry consisting of one upstream and two downstream firms, the latter having different marginal costs. Each pair bargains over a linear wholesale price, and then the downstream firms engage in Cournot competition. We show that the inefficient downstream firm may benefit from an increase in the bargaining power of the upstream firm. Furthermore, we obtain similar results when each downstream firm trades with its exclusive upstream agent, under non-linear demand function, or when downstream firms compete in price.     

BERTRAND Vs. COURNOT COMPETITION WITH UPSTREAM FIRM INVESTMENT

This paper compares Bertrand and Cournot competition in a vertical structure in which the upstream firm sets the input price and makes R&D investments. We show that from the downstream firms’ point of view, Cournot competition has the advantage of a more monopolistic effect, leading to the setting of a higher price, but has the disadvantage of inducing a lower incentive for the upstream firm to invest. On the other hand, Bertrand competition has the advantage of providing a greater incentive for the upstream firm to invest but has the disadvantage of a more competitive effect, leading to the setting of a lower price. Our main findings are as follows. First, R&D investment level is greater under Bertrand competition than under Cournot competition. Second, from the standpoint of the upstream firm and industry, Bertrand competition is more efficient than Cournot competition. Third, from the standpoint of the downstream firms, Bertrand competition is more efficient than Cournot when investment is sufficiently efficient and products are sufficiently differentiated.     

Product differentiation in successive vertical oligopolies

Abstract.  This is a successive oligopoly model with two varieties of a final product. Downstream firms choose one variety to sell on a final market. Upstream firms specialize in the production of one input specifically designed for one variety, but they also produce the input for the other variety at an extra cost. We show that as more downstream firms choose one particular variety, more upstream firms specialize in the input specific to that variety, and vice‐versa. Multiple equilibria may result, and the softening effect of product differentiation on competition might not be strong enough to induce maximal differentiation. JEL Classification: L11, L13, L23     

Canadian and U.S. financial markets: testing the international integration hypothesis under time‐varying conditional volatility

Abstract.  This paper evaluates the international integration hypothesis, that is, that risk‐adjusted anticipated returns are identical, even when financial instruments are traded in different countries. Under time‐varying conditional volatility, this hypothesis is tested by verifying the equality between domestic and foreign risk prices associated with a multi‐factor analytic specification. The maximum‐likelihood and Kalman‐filter estimates are used to assess the national risk prices and interpret the factors. Empirically, the integration of Canadian and U.S. financial markets depends on the risk prices of two factors, which are related to certain non‐monetary events and to the conduct of monetary policies. JEL classification: G15, C32     

Effects of vertical integration on price and volume: An empirical inquiry

A simple model with two stages of production is used for deriving some empirically testable hypotheses. Firms (two upstream and two downstream) in the industry are either vertically integrated or not, hence the industry has three alternative patterns: Complete unintegrated, partially integrated, or fully integrated.Final good prices, outputs and profits of firms are different in each integration pattern but what is optimal can not be stated (i.e., pay-offs are much too complicated in order to solve the sub-game equilibrium).The essential feature of the model is that there are external markets for the intermediate inputs. Hence input trade between the four firms/divisions need not balance since excess supply or demand is traded at the external market. With this feature purely downstream exogenous shocks have no effect on upstream pricing nor production decisions if all four firms are unintegrated. Such exogenous shocks have non-zero effects if at least one firm is vertically integrated. There are also other dissimilarities in comparative statics of each industry integration pattern.An indirect method to test the effects of vertical integration on price and volume is presented and empirically tested. Depending on the vertical integration pattern of an industry exogenous shocks have dissimilar effects on prices and outputs of the final and intermediate good. A four equations system is estimated by using Finnish forest industry firm data. Final good demand rise has a reducing effect on both paper and pulp prices. Stumpage prices (upstream marginal costs) have a negative impact on paper and pulp production and a positive impact on prices. These effects from upstream (downstream) stage into downstream (upstream) market should not occur when all firms are unintegrated.This is a revised version of a paper which was presented at seminars at Brussels, Turku, Vienna, and Stuttgart. I would like to thank seminar participants (specially Frank Schmid) and anonymous referees for helpful comments. Financial support from the Marcus Wallenberg Foundation is gratefully acknowledged.     

Industry equilibrium with outside financing and moral hazard: Implications for market integration

In this paper, we study industry equilibrium under the assumptions that (1) firms need outside financing and (2) they have a moral hazard problem in taking potentially excessive risks. We characterize an industry equilibrium with credit rationing, where firms choose not to take risks, and compare this to the industry equilibrium in the absence of credit rationing. In both cases, we show that competition increases and prices decline as markets integrate. However, in markets with credit rationing there is typically more exit, a smaller decline in prices and, most strikingly, the market value of the industry increases rather than decreases.     

Product differentiation, cost‐reducing mergers, and consumer welfare

Abstract.  Cost synergies are an explicitly recognized justification for a two‐firm merger, and empirical techniques are now widely used to assess the impact of cost‐reducing mergers on prices and welfare in the post‐merger market. We show that if the merger occurs in a vertically product differentiated market, then the merger will lead to a reduction in product offerings that limits the usefulness of pre‐merger empirical estimates. Indeed, we further show that in such markets, two‐firm mergers will typically lead to higher prices regardless of the merger's cost savings. JEL classification: L10, L41