Structural estimation of price adjustment costs in the European car market

This paper characterizes the price adjustment costs that are consistent with observed price dynamics in the European car market. We estimate a dynamic model of international multiproduct firms that set prices in different currencies while facing price adjustment costs. We find that large price adjustment costs are not needed to rationalize the substantial degree of price inertia we observe in the data. Intuitively, since GDP, wages and exchange rates exhibit such a large degree of autocorrelation, small adjustment costs can explain very persistent prices. Also, accounting for country-specific price sensitivity, wages, GDP and exchange rates, the price adjustment costs should differ substantially across producers and markets to match the data.     

The bakers of Washington cartel: Twenty-five years later

Craig M. Newmark challenges the findings of a 1965 Federal Trade Commission decision and Economic Report that a price fixing cartel increased bread prices in the state of Washington from the mid-1950s to 1964. Newmark believes prices were higher during the cartel's existence because retailers in the west had higher margins and that bakers in the west had higher wages and higher normal profits than elsewhere in the country. Newmark ignores evidence that the cartel had set the higher retailer margins in Washington and that the labor costs and profits of Washington bakers were not higher than elsewhere. The Washington bakers had inflated distribution costs and excess capacity prior to the cartel's breakup. This result is commonplace when a cartel stimulates costly nonprice competition, so that the higher prices of the cartel members end up primarily in higher unit cost. Finally, Newmark claims that the reason prices fell in 1965 was the entry of a significant size price cutter, not the demise of the cartel. What Newmark characterized as a principal entrant was actually a tiny, two-man operation, with less than a 1.0 percent market share. The record shows that this entrant did not trigger the precipitous price decline occuring when the cartel was destroyed.     

Successive Oligopolies with Differentiated Firms and Endogeneous Entry

We develop a model of successive oligopolies with endogenous entry, allowing for varying degrees of product differentiation and entry costs in both markets. We show that downstream conditions dominate the overall profitability of the two‐tier structure while upstream conditions mainly affect the distribution of profits. We analyze how two‐part tariffs and resale price maintenance shape the endogenous market structure and study their welfare effects. In contrast to previous literature, we find that welfare under linear prices can be larger than under twopart tariffs although the latter avoids double marginalization. This is because linear prices induce more downstream market entry.     

Prices and Departures in European Domestic Aviation Markets

Using data on 172 domestic city-pair markets in eight European countries, weinvestigate the effect of the market structure on airlines choices of departuresand prices. We find that flag carriers have a higher number of departures thanother airlines and that it is more likely that flag carriers are monopolists. At thesame time flag carriers do not have a higher ticket price than other airlines. Theinfluence of market power, measured with the Herfindahl index, does not havea significant effect on ticket prices, but a significant effect on the number ofdepartures: decreased market concentration and an increased number of airlinesresults in increased aggregate frequencies. Comparing the predicted ticket prices,at sample mean, between monopoly and non-monopoly routes we can reject thehypothesis of differences in equilibrium price. However, the predicted aggregatenumber of departures, calculated at sample mean, is significantly higher at non-monopoly routes compared with monopoly routes.     

The Effects of the Interstate Commerce Act on Transport Costs: Evidence from Wheat Prices

There is significant debate over the effect of the Interstate Commerce Act (ICA) on the cost of rail transport to shippers. Taking price differences across locations as proxy for transport costs, we use data on wheat prices before and after the implementation of the ICA to see if the Act led to smaller differences in wheat prices across American cities relative to a control group of European cities. We find that the ICA had no effect on US transport costs; however, it reduced their volatility substantially. This evidence supports the view that the ICA helped stabilize cartel prices after a period of significant price wars.     

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.     

The Welfare Losses From Price-Matching PolicIes

Several recent papers argue that price-matching policies raise equilibrium prices. We add to this literature by considering potential welfare losses, which have two sources: Harberger triangles from high prices and Posner rectangles from over-entry. We compare price-matching markets with entry to monopoly and price-matching markets without entry, and find that price matching with entry creates greater welfare losses than monopoly in markets with a low ratio of fixed to marginal cost. We illustrate this result using parameters from the US wholesale gasoline and air travel markets, and relate our model to price matching among NASDAQ market makers.     

Price Controls and Market Structure: Evidence from Gasoline Retail Markets

In this paper we study the effect of price floor regulations on the organization and performance of markets. The standard interpretation of the effects of these policies is concerned with short‐run market distortions associated with excess supply. Since price controls prevent markets from clearing, they lead to higher prices. While this analysis may be correct in the short‐run, it does not consider the dynamic equilibrium consequences of price controls. We demonstrate that price floor regulations can have important long‐run effects on the the structure of markets by crowding them and creating endogenous barriers to entry for low‐cost retailers. Moreover, we show that these factors can indirectly lower productivity and possibly even prices. We test this in the context of an actual regulation imposed in the retail gasoline market in the Canadian province of Québec and show that the policy led to more competition between smaller/less efficient stations. This resulted in lowered sales, and, despite the reduction in efficiency, did not increase prices.     

Efficiencyv. collusion: Evidence cast in cement

Through the 1970s and 1980s, the U.S. portland cement industry experienced a significant increase in average plant size and market concentration. A simultaneous equation model is developed to examine the effects of plant size and concentration on costs, prices and margins in that industry. The results indicate the presence of significant scale economies, but also show that prices and margins are increasing in concentration. Further analysis shows that almost one third of the cost savings associated with larger plants are passed on to producers through higher margins resulting from concomitant increases in concentration, rather than to consumers as lower prices.     

Prices,Profits, and Preference Dependence

We develop a new approach to discrete choice demand for differentiated products, using copulas to separate the marginal distribution of consumer values for product varieties from their dependence relationship, and apply it to the issue of how preference dependence affects market outcomes in symmetric multiproduct industries. We show that greater dependence lowers prices and profits under certain conditions, suggesting that preference dependence is a distinct indicator of product differentiation. We also find new sufficient conditions for the symmetric multiproduct monopoly and the symmetric single‐product oligopoly prices to be above or below the single‐product monopoly price.     

Opportunity Cost Pass‐Through from Fossil Fuel Market Prices to Procurement Costs of the U.S. Power Producers

This paper investigates the transmission of fossil fuel commodity spot market price changes to procurement costs of U.S. power producers. We measure and compare the speed and magnitude with which spot prices predict procurement costs using restricted access fuel price data. Natural gas spot prices are quickly reflected in procurement costs. Coal spot prices offer very little predictive power to coal procurement costs. Although not causal, the empirical results also show differences across regulatory status. These findings may have implications for the electricity market deregulation literature that creates marginal cost curves as a competitive benchmark.     

Collusion in a price-quantity oligopoly

In the context of an infinitely repeated oligopoly game, we study collusion among firms that simultaneously choose prices and quantities. We compare a price cartel with a price-quota cartel and analyze when and why firms prefer the latter to the former. Output quota may be required to solve coordination and incentive problems when market demand is sufficiently elastic. If market demand is sufficiently inelastic, then the cartel faces a trade-off between increasing prices and the amount of costly overproduction. We find that a price cartel prices consistently below the monopoly price to mitigate excessive production. In this case, a quota arrangement allows firms to avoid overproduction and to sustain the monopoly price. From a policy perspective, our findings suggest that an overall price increase in conjunction with more stable prices and market shares is indicative of collusion in industries where production precedes sales and outputs are imperfectly observable.     

Auctioneers sometimes prefer entry fees to extra bidders

We investigate a market thickness–market power tradeoff in an auction setting with endogenous entry. We find that charging admission fees can sometimes dominate the benefit of recruiting additional bidders, even though the fees themselves implicitly reduce competition at the auction stage. We also highlight that admission fees and reserve prices are different instruments in a setting with uncertainty over entry costs, and that optimal mechanisms in such settings may be more complex than simply setting a reserve price. Our results provide a counterpoint to the broad intuition of Bulow and Klemperer (1996) that market thickness often takes precedence over market power in auction design.     

CUT‐THROAT FRINGE COMPETITION IN AN EMERGING COUNTRY MARKET: TAX EVASION OR THE ABSENCE OF MARKET POWER?*

Brazil's established soft‐drink firms recently lost ground to multiple low‐price entrants, with small‐scale operations and minimal advertising. While incumbents attributed such undercutting to entrants' lower costs from non‐compliance with the law, ‘generics’ counterargued that incumbents' high prices stemmed from unilateral market power rather than cost heterogeneity. By estimating a structural model, I can single‐handedly explain established brands' high prices through low equilibrium price elasticities of demand. Tax evasion in the fringe, while plausible, appears to be offset by higher procurement costs or less efficient scale. More generally, a competitive informal sector can alleviate the allocative distortions in certain concentrated industries.     

Cartel pricing dynamics with cost variability and endogenous buyer detection

This paper characterizes collusive pricing patterns when buyers may detect the presence of a cartel. Buyers are assumed to become suspicious when observed prices are anomalous. We find that the cartel price path is comprised of two phases. During the transitional phase, price is generally rising and relatively unresponsive to cost shocks. During the stationary phase, price responds to cost but is much less sensitive than under non-collusion or simple monopoly; a low price variance may then be a collusive marker. Compared to when firms do not collude, cost shocks take a longer time to pass-through to price.     

RETAIL GASOLINE PRICE DYNAMICS AND LOCAL MARKET POWER*

Using monthly data from the 48 contiguous states (except Nevada) for the 1988–2002 period, it is shown that retail gasoline prices respond faster to wholesale price increases than to equivalent wholesale price decreases. Moreover, markets with high average retail‐wholesale margins experience a slower adjustment and a more asymmetric response. Since gasoline is the only variable input, average margins in a state likely reflect the degree of retail market power. This suggests that sticky prices and response asymmetries in the gasoline market are, at least partially, a consequence of retail market power.     

POSTING MULTIPLE PRICES TO REDUCE THE EFFECTIVENESS OF CONSUMER PRICE SEARCH*

In a model of competition with imperfect consumer price information and incomplete price search, some consumers may end up comparing prices originating from the same supplier: either because one firm sets multiple prices or because a group of firms colludes. This leads to added monopoly power for these firms, and average prices in the mixed strategy equilibrium become higher. There is a shift in welfare from consumers to producers, both with exogenous and endogenous consumer search behaviour. However consumers might search more or less with multiple prices. The implications for the price‐setting equilibrium, competition policy and recent judgements are considered.     

DOES COPYRIGHT ENFORCEMENT ENCOURAGE PIRACY?*

When copyright enforcement is targeted at high‐value buyers such as corporate and government users, the copyright holder charges super‐monopoly prices, thereby encouraging low‐value buyers to switch to inferior pirated copies. We show that enlarging the copyright holder's captive market through more extensive copyright enforcement reduces prices toward the monopoly level, increases sales of legitimate copies and can increase consumer surplus. Therefore, in contrast with the case of more intensive copyright enforcement, more extensive copyright enforcement over some range can increase the incentive to generate intellectual property while also reducing the loss to consumers from monopoly power.     

Optimal Pricing Strategy in the Case of Price Dispersion: New Evidence from the Tokyo Housing Market

We adopt a multistage search model, in which the home seller's reservation price is determined by her or his opportunity cost, search cost, discount rate and additional market parameters. The model indicates that a greater dispersion in offer prices leads to higher reservation and optimal asking prices. A unique dataset from the Tokyo condominium resale market enables us to test those modeled hypotheses. Empirical results indicate that a one percentage point increase in the standard deviation of submarket transaction prices results in a two‐tenths of a percent increase in the initial asking price and in the final transaction price. Increases in the dispersion of market prices enhance the probabilities of a successful transaction and/or an accelerated sale.     

Cost Recovery in Congested Electricity Networks

Large scale investments in European electricity networks are foreseen in the next decade. Pricing the network at marginal cost will not be sufficient to pay for those investments as the network is a natural monopoly. This paper derives numerically the socially optimal transmission prices for cost recovery, taking into account that electricity networks are often congested, while allowing for market power in generation. The model is illustrated with a Stackelberg game for the Belgian electricity market.