The effects of rent asymmetries in posted offer markets

We report the results of six posted-offer market experiments designed to analyze the effects of asymmetric supply and demand configurations on the price convergence path to competitive equilibrium. The posted-offer experiments are compared with twelve double-auction experiments reported by Smith and Williams (1982). Results differ markedly across trading institutions. Unlike trading under double-auction rules, we cannot reject the proposition that contract price convergence paths are unaffected by the distribution of consumer and producer surplus. Posted-offer contract prices tend to converge to the competitive equilibrium from above regardless of the distribution of the exchange surplus.     

ENDOGENOUS TIMING IN A MIXED DUOPOLY: WEIGHTED WELFARE AND PRICE COMPETITION*

In this paper we analyse the endogenous order of moves in a mixed duopoly for differentiated goods. Firms choose whether to set prices sequentially or simultaneously. The private firm maximises profits while the public firm maximises the weighted sum of the consumer and producer surpluses (weighted welfare). It is shown that the result obtained in equilibrium depends crucially on the weight given to the consumer surplus in weighted welfare and on the degree to which goods are substitutes or complements. We also analyse whether the equilibria obtained maximise the sum of the consumer and producer surpluses or not. Finally we study whether the nationality of the private firm influences the results.     

Price and Quantity Competition in a Differentiated Duopoly With Network Compatibility Effects

We consider the efficiency of price and quantity competition in a network products market, where we observe product compatibility with network externalities (hereafter, network compatibility effects). In particular, if network compatibility effects between firms are sufficiently asymmetric, the Cournot equilibrium is more efficient than the Bertrand equilibrium in terms of larger consumer, producer and total surpluses. Then, we consider an endogenous choice of the strategic variables, price and quantity. If the degree of network compatibility effects of the rival firm is larger (smaller) than the degree of product substitutability, then choosing prices (quantities) is a dominant strategy for the firm. Thus, if the network compatibility effects of both firms are larger (smaller), the Bertrand (Cournot) equilibrium arises. Furthermore, if the network compatibility effects between the firms are sufficiently asymmetric, the firm with a larger (smaller) network compatibility effect than a certain level of product substitutability chooses quantities (prices). In this case, the Cournot–Bertrand equilibrium arises, which is less (more) efficient than the Cournot equilibrium in terms of consumer (producer) surplus.     

Partial-Equilibrium Welfare Analysis

The use of partial equilibrium models is common, and, typically, efficiency is characterized by maximizing consumer plus producer surplus (or, sometimes, gross consumer surplus). The analysis appeals—implicitly or explicitly—to the concept of efficiency derived from general equilibrium models. Using the tax-reform methodology, it is shown in a simple general equilibrium model that, if the second-best outcome is not the first-best one, the sum of consumer plus producer surplus cannot lead an economy to its true second-best optimum.     

The Informational Role of Prices*

We consider a dominant firm with a competitive fringe in order to investigate the informational role of prices. The fringe is necessary for the existence of a unique, fully revealing equilibrium, in which the price reveals the quality of the good to uninformed buyers. A higher price triggers more sales on the part of the competitive fringe, reducing both residual demand and profits. We find that a larger share of uninformed buyers increases the price and reduces the quantity sold by the dominant firm, but increases the quantity sold by the competitive fringe. This, in turn, reduces consumer surplus and welfare.     

Union wage setting and unemployment in the Netherlands (1965–1987)

This paper presents an empirical model of union wage setting and employment. The (Stackelberg) equilibrium unemployment rate is shown to be a function of taxes, the replacement ratio, the gap between consumer and producer prices, productivity effects, and the rate of long-term unemployment. The model is estimated with aggregate data from the private sector in the Netherlands (1965–1987). The results suggest that the equilibrium unemployment rate is pushed upwards by taxes, the replacement ratio and by the gap between consumer and producer prices, and is reduced by productivity effects. Insider-outsider effects appear insignificant.     

Bidding in an Electricity Pay-as-Bid Auction

One of the main elements of the recent reform of electricity trading in the United Kingdom is the change from a uniform price auction in the wholesale market to discriminatory pricing. We analyze this change under two polar market structures (perfectly competitive and monopolistic supply), with demand uncertainty. We find that under perfect competition there is a trade-off between efficiency and consumer surplus between the two auction rules. We also establish that a move from uniform to discriminatory pricing under monopoly conditions has a negative impact on profits and output (weakly), a positive impact on consumer surplus, and ambiguous implications for welfare and average prices.     

Market power in distribution and pass‐through for consumers and producers

We examine the differential pass‐through of import prices into consumer and producer prices. We develop a framework with distribution costs and distribution market power. We then examine pass‐through from import prices to consumer and producer prices in the euro area using the U.S. import price as instrument. We find that pass‐through rates to producer prices are more sensitive to changes in distribution margins than pass‐through to consumer prices. Furthermore, only a portion of import price changes translate into domestic price changes limiting potential consumer benefits from tariff liberalization, with market power in distribution services being one important factor reducing pass‐through.     

Efficiency and surplus bounds in Cournot competition

We derive bounds on the ratios of deadweight loss and consumer surplus to producer surplus under Cournot competition. To do so, we introduce a parameterization of the degree of curvature of market demand using the parallel concepts of ρ-concavity and ρ-convexity. The “more concave” is demand, the larger the share of producer surplus in overall surplus, the smaller is consumer surplus relative to producer surplus, and the lower the ratio of deadweight loss to producer surplus. Deadweight loss over total potential surplus is at first increasing with demand concavity, then eventually decreasing.     

Private labels, price rivalry, and public policy

The article examines (i) why low-quality private labels are introduced in some product categories and not in others, (ii) how the existence of a low-quality private label affects the pricing of a competing national brand, and (iii) how consumers’ surplus and welfare are affected by private labels. We find that the potential for private label introduction may—in return for national brand exclusivity in that particular retail store (exclusive dealing)—lead to price concessions from the producer of the national brand. If the national brand producer decides not to offer an exclusivity contract, a private label is introduced. In this case, private label introduction may lead to higher retail prices on national brands, which can be detrimental to consumer welfare as well as total welfare. We argue that our results have important implications for the interpretation of empirical results and the public policy towards national brands     

DECENTRALIZED TRADE MITIGATES THE LEMONS PROBLEM*

In markets with adverse selection, only low‐quality units trade in the competitive equilibrium when the average quality of the good held by sellers is low. We show that under decentralized trade, however, both high‐ and low‐quality units trade, although with delay. Moreover, when frictions are small, the surplus realized is greater than the (static) competitive surplus. Thus, decentralized trade mitigates the lemons problem. Remarkably, payoffs are competitive as frictions vanish, even though both high‐ and low‐quality units continue to trade, and there is trade at several prices.     

An experimental comparison of two search models

Summary. We report an experiment designed to investigate markets with consumer search costs. In markets where buyers are matched with one seller at a time, sellers are predicted to sell at prices equal to buyers' valuations. However, we find sellers post prices that offer a more equal division of the surplus, and these prices tend to be accepted, while prices closer to the equilibrium prediction are rejected. At the other extreme, sellers are predicted to sell at a price equal to marginal cost when buyers are matched with two sellers at a time. Here, we find prices are closer to, but still significantly different from, the equilibrium prediction. Thus, our results support theoretical comparative static, but not point, predictions.     

An econometric assessment of telecommunications prices and consumer surplus in Mexico using panel data

We analyze telecommunications prices in Mexico by using a panel data of countries similar to Mexico to estimate demand models for mobile and fixed-line telecommunications. We find that Mexico’s actual mobile and fixed-line prices are below the predicted prices based on similar countries’ prices. Mexican consumers are paying lower prices than what one would expect based on comparisons of comparable countries. We calculate that in 2011 Mexican consumers received at least $4–$5 billion (USD) in consumer surplus from these lower mobile prices and in 2010 they received over $1 billion (USD) in consumer surplus from these lower fixed-line prices. These findings are in contrast to the general perception that concentrated telecommunications markets in Mexico are resulting in high prices and harming consumers.     

The Stability of Price Dispersion under Seller and Consumer Learning*

In many markets, it is possible to find rival sellers charging different prices for the same good. Earlier research has attempted to explain this phenomenon by demonstrating the existence of dispersed price equilibria when consumers must make use of costly search to discover prices. We ask whether such equilibria can be learned when sellers adjust prices adaptively in response to current market conditions. With consumer behavior fixed, convergence to a dispersed price equilibrium is possible in some cases. However, once consumer learning is introduced, the monopoly outcome first found by Diamond (Journal of Economic Theory3 (1971), 156–68) is the only stable equilibrium.     

Ad valorem tariff and spatial equilibrium models

The objectives of this article are to illustrate theoretically and empirically how to incorporate an ad valorem tariff in spatial equilibrium models and show the equivalence of three approaches (primal, dual and MCP) of spatial equilibrium trade modelling. The article lays out in detail the theory, empirical applications and the results for all three approaches so that trade modellers can easily follow and apply them in their work. The primal approach is commonly used by spatial equilibrium modellers, though the dual approach corresponds to the textbook depiction of consumer surplus, producer surplus and gains from trade. The Mixed Complementarity Problem (MCP) is not commonly used by spatial equilibrium modellers, though it is relatively simpler if the modeller knows the equilibrium conditions. This article also presents advantages and disadvantages of each approach.     

License prices for financially constrained firms

It is often alleged that high auction prices inhibit service deployment. We investigate this claim under the extreme case of financially constrained bidders. If demand is just slightly elastic, auctions maximize consumer surplus if consumer surplus is a convex function of quantity (a common assumption), or if consumer surplus is concave and the proportion of expenditure spent on deployment is greater than one over the elasticity of demand. The latter condition appears to be true for most of the large telecom auctions in the US and Europe. Thus, even if high auction prices inhibit service deployment, auctions appear to be optimal from the consumers’ point of view.      

Effect of credible quality investment with Bertrand and Cournot competition

We show how credible revelation and ability to commit to quality choice effect equilibrium qualities and welfare when product market is either Bertrand or Cournot competition. We show that results depend on the type of competition but not generally on the cost of quality function. We show that with Bertrand competition, the equilibrium qualities are lower with credible commitment. Competition is moderated and producer surplus is higher and consumer surplus lower. With Cournot competition, higher quality will be better but lower quality will be worse with credible commitment. Consumer surplus is always greater with credible commitment and if cost does not increase too quickly with quality, producer surplus will also increase. Thus credible commitment is a collusive device with Bertrand competition but it can improve social welfare with Cournot competition. Received: February 8, 2000; revised version: February 14, 2002 RID="*" ID="*" The idea of this paper originated in the weekly workshops of Mordecai Kurz at Stanford. I am forever in debted to Mordecai and fellow students – Luis Cabral, Peter DeMarzo, John Hillas, Michihiro Kandori, Steve Langois, Patrick McAllister, Steve Sharpe, Peter Streufert, Steve Turnbull and Gyu-Ho Wang – for their criticism and encouragement. I also benefited from comments from Yi-Heng Chen, Jin-Li Hu, Kala Krishna, Jinji Naoto, Thomas J. Prusa, and Shyh-Fang Ueng at various later stages of this work. Last but not least, I am grateful for the detailed comments of the referee.     

Vertical price transmission in the Turkish poultry market: the avian influenza crisis

This article assesses the impact of the Avian Influenza (AI) outbreak in the Turkish poultry market by focusing on price transmission at producer and retail levels. The relationship and patterns of transmission between producer and retail prices are analysed by estimating a Regime-Switching Vector Error Correction Model with three regimes. An AI information index variable is developed and used to determine regime-switching. Results suggest that consumer prices adjust to disequilibrium caused by the AI crisis, while producer prices are sticky and slowly responsive.     

Devaluation and pass-through in indebted and risky economies

This paper develops a structural general equilibrium model to analyse the pass-through from devaluation to producer and consumer prices in Emerging Market Economies (EMEs). Simulation analysis shows that balance-sheet effects created by capital market imperfections and the home bias shrink the impact of devaluation on both types of internal prices. This finding helps explain why pass-through to internal prices is low in EMEs. It also shows that, for benchmark values of the parameters, devaluation remains a good device to modify the real exchange rate and to mitigate the negative impact of external shocks in EMEs.     

Price-Matching Policies and Entry

A price-matching policy is a commonly observed pricing practice in retailing markets. When firms use this policy they are publicly committing themselves to match the prices of their competitors. The aim of this analysis is to show that, in a spatial free-entry model, the effects of a price-matching policy are an increase in the number of sellers, an increase in prices and a decrease in consumer surplus and social welfare. Moreover, there is the striking result that in a price-matching equilibrium an increase in the number of firms entering the market raises prices.