Cable Service and Its Implicit Marginal Valuation

The objective is to estimate the implicit marginal value of channel offerings by cable systems in the USA. Hedonic analysis is a convenient framework in which to explore the relationship between the price of cable service and the channels offered by a cable system. Two separate hedonic equations are estimated-- one for the price of analog cable service and one for the price of digital cable service. With regard to the price of analog cable service, the implicit marginal valuation is statistically significant and positive for just 15 of 106 channel offerings and negative for seven channels. For the price of digital cable service, the implicit marginal valuation is statistically significant and positive for just eleven of 105 channel offerings and negative for five channels. The results suggest that a subscriber's utility would be enhanced by a pricing structure different from the typical approach used by cable systems today of offering a bundled package consisting of several channels. One alternative is to allow consumers to subscribe to just those programming services for which they have a positive implicit marginal value (i.e. an a la carte pricing structure).     

Nonlinear Pricing, Redistribution, and Optimal Tax Policy

This paper examines the role of nonlinear pricing by public (or regulated) utilities as a redistributive mechanism in presence of an optimal nonlinear income tax. It models an economy with many types of persons who differ in two unobservable characteristics (earning abilities and tastes). We show that nonlinear pricing does have a redistributive role; it is not a substitute for an ill-designed tax policy. We prove, assuming separable preferences, that a person whose valuation of the public sector output is smaller than the average valuation of the population (all measured at the same consumption bundle) must face a marginal price for the good above its marginal cost. Further assuming that tastes and earning abilities are perfectly correlated, we prove that everyone must face a marginal price for the public sector's output which strictly exceeds its marginal cost if correlation is positive. These properties provide an economic rationale for the provision of "support for low-income consumers" as mandated by the universal service and similar regulatory policies. Finally, we show that with correlated characteristics, implementation can be achieved through two separate functions: a pricing function that depends only on the public sector output and a tax function that depends only on income.     

Currency internationalization and valuation effects: based on the threshold model

ABSTRACT

Based on the three functions of currency internationalization, including exchange medium, pricing currency and foreign reserve, this paper explores how the degree of currency internationalization affects the impact of the exchange rate and the asset price on valuation effects. Using samples of 161 countries or regions from 2001 to 2016 and the threshold regression method, we find that, firstly, there is a threshold effect of the exchange rate on valuation effects due to currency internationalization. The higher the comprehensive level of currency internationalization is, the greater the positive impact of the exchange rate on valuation effects will be. Secondly, the threshold effect of the asset price on valuation effects due to currency internationalization is not significant because of the high stickiness of asset price. Besides, compared with developed countries, currency internationalization is more important to increase valuation effects through exchange rate channel and asset price channel in developing countries or regions. Finally, there are some differences in the three types of currency internationalization functions. The promotion of exchange medium function will lead to a greater positive impact of the exchange rate on valuation effects, as well as pricing currency function. However, the foreign reserve function has no such effect.     

On investment and exchange-rate movements

We investigate the ways in which permanent exchange-rate changes may affect investment by influencing domestic and foreign revenue, the cost of imported variable inputs and the investment price of imported capital goods. We find that the revenue and investment-price channels have a quantitatively greater effect on investment than the cost channel. The negative effect of the revenue channel, which affects the marginal profitability of capital, outweighs the positive effect of the investment-price channel, which affects the marginal cost of capital, implying that exchange-rate appreciation has a net negative influence on investment. The estimation results are robust to different approaches to extracting the permanent components of exchange rates.     

Bitcoin price and its marginal cost of production: support for a fundamental value

This study back-tests a marginal cost of production model proposed to value the digital currency Bitcoin. Results from both conventional regression and vector autoregression (VAR) models show that the marginal cost of production plays an important role in explaining Bitcoin prices, challenging recent allegations that Bitcoins are essentially worthless. Even with markets pricing Bitcoin in the thousands of dollars each, the valuation model seems robust. The data show that a price bubble that began in the Fall of 2017 resolved itself in early 2018, converging with the marginal cost model. This suggests that while bubbles may appear in the Bitcoin market, prices will tend to this bound and not collapse to zero.     

On the Second-best Policy of Household's Waste Recycling

This study analyzes the second-best household's waste recycling policy. If we assume the first-best economy with no illegal disposal or transaction costs, then unit pricing, an advance disposal fee and a recycling subsidy are required in order to achieve the social optimum such that both the sum of unit pricing and an advance disposal fee and the sum of unit pricing and a recycling subsidy are equal to the marginal disposal cost. Furthermore, the first-best outcome can also be obtained by a producer take-back requirement system.In the real economy, however, various factors prevent the first-best optimal outcome. In this study we consider two factors, one being the transaction cost associated with a recycling subsidy (or refund) and the other being illegal disposal by the consumer. If a recycling subsidy (or a deposit-refund system) is adopted, a transaction cost associated with it will be generated. Alternatively, if unit pricing is adopted, some of the consumed goods may be disposed of illegally. We show the complete trade-off between unit pricing and a recycling subsidy. In other words, we can not adopt unit pricing and a recycling subsidy simultaneously. As a result, there are three candidates for the second-best policy: unit pricing with an advance disposal fee, a deposit-refund system, and a producer take-back requirement system.Which of these three policies is the second-best policy will depend on the relative magnitude of the price of a recycled good and the marginal transaction cost associated with a recycling subsidy (or the refund in a deposit-refund system). Generally, if the price of a recycled good is positive and the marginal transaction cost is relatively high, unit pricing with an advance disposal fee is the second-best policy. However, where the price of a recycled good is negative and the marginal transaction cost is relatively high, a producer take-back requirement system is the second-best policy. Further, where the marginal transaction cost is relatively low, a deposit-refund system is the second-best policy, regardless of whether the price of a recycled good is positive or negative.     

Social welfare loss due to second-best pricing: an application to the Portuguese telecommunications

The telecommunications industry is usually characterized by low marginal costs and significant fixed costs which are the conditions for the inefficiency of marginal cost pricing. In such cases theory postulates that optimal pricing is obtained by maximizing welfare subject to a restriction of viability of the firm: the second-best pricing scheme. The possible welfare losses due to second-best pricing varies according to the values of marginal costs, prices and demand elasticities. This paper analyses to what extent the second-best pricing has been achieved in the Portuguese telecommunications firm CTT, over the period 1950#150;1984 as well as the magnitude of the price-cost margins and welfare losses created. We obtained empirical evidence of the presence of economies of scale, a welfare loss estimate of 1% of the telecommunications receipts and a result that price was 40% greater than marginal cost. We concluded that price regulation and public ownership of the firm did not seriously affect social welfare over the sample period (it should be noted that it is the non-digital and fixedwire infrastructure period). Therefore, it is important to study the impact of new digital and non-wire technologies and new services provided in the old regulatory scenery.     

Price,Programming and Potential Competition in US Cable Television Markets

Potential competition in the US cable television industry is empirically examined for 385 markets. Predicted entry probabilities are included in a supply-demand model to permit empirical investigation of the effect of potential competition on incumbent cable operators price and channel programming decisions. Estimation results show incumbents offer more channels to consumers in markets facing greater potential competition from broadband service provider (BSP) wireline overbuilders and/or incumbent local exchange carriers. In particular, when the probability of entry rises to about 42 the average cable system provides six more channels, and price per channel declines from US$ 0.77 to US$ 0.66.JEL Classification: L8, L9, L11We thank Ben Compaine, Shane Greenstein, Anne Hoag, Donald Waldman, Bradley Wimmer, the editor of this journal, an anonymous referee, and participants at the 30th Research Conference on Communication, Information and Internet Policy (TPRC 2002), September 28–30, 2002, Hilton Hotel, Alexandria, Virginia, for comments. Armando Galarraga and Nana Puangpathumanond provided research assistance, and Jane Frenette and Jonathan Levy provided excellent help with FCC cable entry and competition data. The usual disclaimer applies.     

A discrete choice contingent valuation estimate of the value of Kenai King salmon

A new method for estimating the demand curve for publicly supplied goods when quantities are restricted to a few discrete levels is introduced. The method involves fitting a conditional logit model to choices from a set of survey options in which price and quantity are both varied and consumer attitudes are explicitly controlled. The estimated parameters of the valuation function serve to trace the marginal value of the good at each level of hypothetical consumption in survey data. We apply the method to the valuation of salmon on Alaska's Kenai River. We find that there is a distinct kink in the marginal valuation function and that sport fishermen may place a negative marginal value on fish permits exceeding their desired catch levels.     

Flooding risk and housing values: An economic assessment of environmental hazard

Climate change, the ‘boom and bust’ cycles of rivers, and altered water resource management practice have caused significant changes in the spatial distribution of the risk of flooding. Hedonic pricing studies, predominantly for the US, have assessed the spatial incidence of risk and the associated implicit price of flood risk. Using these implicit price estimates and their associated standard errors, we perform a meta-analysis and find that an increase in the probability of flood risk of 0.01 in a year is associated to a difference in transaction price of an otherwise similar house of - 0.6%. The actual occurrence of a flooding event or increased stringency in disclosure rules causes ex-ante prices to differ from ex-post prices, but these effects are small. The marginal willingness to pay for reduced risk exposure has increased over time, and it is slightly lower for areas with a higher per capita income. We show that obfuscating amenity effects and risk exposure associated with proximity to water causes systematic bias in the implicit price of flood risk.     

Price discrimination via information provision

We study price discrimination where different prices are offered as a bundle with different levels of information about a product. The seller’s price discrimination induces high valuation buyers to purchase a good without information and low valuation buyers to purchase with information. Our analysis highlights several interesting results about price discrimination: (i) the seller’s choice of information provision is the combination of full information and no information, (ii) products can be cheaper without information provision than with information provision, (iii) as a result of price discrimination, prices can be more dispersed as buyers’ valuations become largely similar, and (iv) the high valuation buyers purchase a damaged good and may earn negative surplus. Furthermore, we investigate under which circumstances price discrimination is more profitable than uniform pricing. We show that a decline in transportation costs which facilitate price discrimination can be welfare reducing.     

Privatization,Underpricing, and Welfare in the Presence of Foreign Competition

We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit‐maximizing firms. In particular, we examine pricing below marginal cost by the public firm, the optimal degree of privatization, and the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and earns positive profits.     

All equilibria of the multi-unit Vickrey auction

This paper completely characterizes the set of equilibria of the Vickrey auction for multiple identical units when buyers have non-increasing marginal valuations and there are at least three potential buyers. There are two types of equilibria: In the first class of equilibria there are positive bids below the maximum valuation. In this class, above a threshold value all bidders bid truthfully on all units. One of the bidders bids at the threshold for any unit for which his valuation is below the threshold; the other bidders bid zero in this range. In the second class of equilibria there are as many bids at or above the maximum valuation as there are units. The allocation of these bids is arbitrary across bidders. All the remaining bids equal zero. With any positive reserve price equilibrium becomes unique: Bidders bid truthfully on all units for which their valuation exceeds the reserve price.     

Bundling, product choice, and efficiency: Should cable television networks be offered à la carte?

We conduct a numerical analysis of bundling’s impact on a monopolist’s pricing and product choices and assess the implications for consumer welfare in cable television markets. Existing theory is ambiguous: for a given set of products, bundling likely transfers surplus from consumers to firms but also encourages products to be offered that might not be under à la carte pricing. Simulation of “Full À La Carte” for an economic environment calibrated to an average cable television system suggests that consumers would likely benefit from à la carte sales. If all networks continued to be offered, the average household’s surplus is predicted to increase by $6.80 (65.6%) under à la carte sales (despite a total bundle price that almost doubles) and reduced network profits would have to be such that 41 of 50 offered cable networks have to exit the market to make her indifferent. Simulation of a “Theme Tier” scenario provides intermediate benefits. The incremental marginal costs to cable systems of à la carte sales and its impact in the advertising market and on competition are important factors in determining consumer benefits.     

Which business model for e-book pricing?

We characterize and compare equilibrium pricing strategies in a marketing channel in two scenarios. In the first scenario, the manufacturer chooses the wholesale prices of the two versions of a product, i.e., tangible and digital. and the retailer their prices to consumer. In the second scenario, the players use a revenue-sharing contract for only the digital version, while the competing version is managed by a wholesale price contract. The problem is inspired from a pricing controversy in the e-book industry.     

Pricing Access to a Monopoly Input

What price should downstream entrants pay a vertically integrated incumbent monopoly for use of its assets? Courts, legislators, and regulators have at times mandated that incumbent monopolies lease assets required for the production of a retail service to entrants in efforts to increase the competitiveness of retail markets. This paper compares two rules for pricing such monopoly inputs: marginal cost pricing (MCP) and generalized efficient component pricing rule (GECPR). The GECPR is not a fixed price, but is a rule that determines the input price to be paid by the entrant from the entrant's retail price. Comparing the retail market equilibrium under MCP and GECPR, the GECPR leads to lower equilibrium retail prices. If the incumbent is less efficient than the entrant, the GECPR also leads to lower production costs than does the MCP rule. If the incumbent is more efficient than the entrant, however, conditions may exist in which MCP leads to lower production costs than does the GECPR. The analysis is carried out assuming either Bertrand competition, quantity competition, or monopolistic competition between the incumbent and entrant in the downstream market.     

Asset price bubbles in Arrow-Debreu and sequential equilibrium

Summary. Price bubbles in an Arrow-Debreu equilibrium in an infinite-time economy are a manifestation of lack of countable additivity of valuation of assets. In contrast, the known examples of price bubbles in a sequential equilibrium in infinite time cannot be attributed to the lack of countable additivity of valuation. In this paper we develop a theory of valuation of assets in sequential markets (with no uncertainty) and study the nature of price bubbles in light of this theory. We define a payoff pricing operator that maps a sequence of payoffs to the minimum cost of an asset holding strategy that generates it. We show that the payoff pricing functional is linear and countably additive on the set of positive payoffs if and only if there is no Ponzi scheme, provided that there is no restriction on long positions in the assets. In the known examples of equilibrium price bubbles in sequential markets valuation is linear and countably additive. The presence of a price bubble means that the dividends of an asset can be purchased in sequential markets at a cost lower than the asset's price. We present further examples of equilibrium price bubbles in which valuation is nonlinear, or linear but not countably additive.     

Advance-purchase discounts as a price discrimination device

In an intertemporal setting in which individual uncertainty is resolved over time, advance-purchase discounts can serve to price discriminate between consumers with different expected valuations for the product. Consumers with a high expected valuation purchase the product before learning their actual valuation at the offered advance-purchase discount; consumers with a low expected valuation will wait and purchase the good at the regular price only in the event where their realized valuation is high. We characterize the profit-maximizing pricing strategy of the monopolist. Furthermore, adopting a mechanism design perspective, we provide a necessary and sufficient condition under which advance-purchase discounts implement the monopolist's optimal mechanism.     

Utility Regulation and Risk Allocation: The Roles of Marginal Cost Pricing and Futures Markets

The effects on consumer welfare of requiring a utility facing cost or demand risk to use either a fixed retail price or marginal cost pricing are assessed. With marginal cost pricing and cost volatility an efficient futures market allows consumer welfare to be at least as high in every state as with the fixed price. With demand risk marginal cost pricing can benefit the consumer in every state without harming the firm if the profit difference is transferred to the consumer. A futures market can act as a partial replacement for the transfer.     

When does tiered wholesale pricing create an incentive to reduce retail prices?

Wholesale ‘ladder pricing’ involves setting the wholesale price retailers face as a nonlinear (generally increasing) function of price chosen by retailers. This form of wholesale pricing occurred recently in UK Telecoms, and the issue became extensively debated in the law courts. A major concern in deciding the merits of the case lay with the question of whether or not the introduction of tiered wholesale pricing created incentives for retailers to actually reduce their prices. This paper examines the incentive for the case where the wholesale tariff is a non-linear continuous differentiable function. It is shown that so long as the tariff is strictly increasing, convex, and positive only for retail prices greater than the maximum retailer marginal cost, then there is indeed an incentive to reduce price, whatever the actual gradient of the tariff schedule.