Competition and regulation with product differentiation

We consider a market for differentiated products, where one good is supplied by a regulated monopolist and competitive firms operate in an unregulated segment. In this setting we investigate the issue of whether to allow the monopolist to diversify into the unregulated segment by owning a competitive firm. Under asymmetric cost information, if goods are substitutes a diversified monopolist, which exaggerates its costs in the regulated segment to charge a higher regulated price, stimulates the demand for the competitive affiliate. This strengthens the firm??s incentive to inflate costs, since doing so generates a positive informational spillover to its profits in the competitive segment. Consequently, a regime of separation, which prevents the firm from operating in the competitive segment, is welfare-enhancing. Conversely, with complements, cost exaggeration in the regulated monopoly reduces the demand and harms profits in the competitive segment, and allowing the monopolist to diversify into the competitive segment therefore generates countervailing incentives, which weaken the firm??s interest in cost manipulation and improve social welfare.     

Consumer surplus and the reform of network industries: a primer

Starting from an industry where production is provided by a public monopolist, we observe the effects of a sequence of reforms within the network industry on consumer surplus. Using a simple comparative statics framework, we find the indifference conditions for the consumer surplus under the following regimes: a public monopoly, an unregulated private monopoly, a regulated private monopoly, a vertically disintegrated monopoly, a duopoly and a liberalized market. The results are determined by the relative size of the x-inefficiencies of the public monopolist, allocative inefficiencies of the private monopoly, the cost of unbundling and the costs related to establishing a competitive market.     

Oligopoly with a large number of competitors: asymmetric limit result

We address how profitable innovation is in a competitive market by investigating the asymmetric oligopoly model in which 1 firm (innovator) has a cost advantage that is not drastic enough for her to become a monopolist, and by inducing asymmetric limit outcomes when the number of the other firms (laggard firms) goes to infinity. If the innovator is the Stackelberg leader, two cases can arise: (i) the innovator behaves as in the competitive market or (ii) she occupies the entire market but cannot make the price. If we consider Cournot competition, the innovator becomes the partial monopolist. An erratum to this article can be found at     

A theoretical analysis of resale price maintenance

Resale Price Maintenance has been defended as a tool to prevent free riding among retailers and condemned as a tool to protect price fixing schemes. This paper presents an economic model in which customers search for products from among those provided by manufacturers and competitive dealers who provide, at a cost, information useful in the customers' search. It is shown that competitive manufacturers will not maintain the resale price above the competitive dealer equilibrium but that the monopolist manufacturer will under certain elasticity conditions. Thus resale price maintenance is a sufficient but not necessary condition of monopoly.     

Market Power and Buffer Stocks

The first-order conditions for a monopolist inventory holder are found under more general conditions than previously. It is found that monopolist storers facing inelastic demand will carry over more stock than they would with competition unless the elasticity of demand b increasing as price decreases or is constant. The competitive stocks equilibrium is identified and found to be Pareto optimal and hence Sams' result that there will be no losers from a rent-maximizing buffer stock policy is shown to be wrong.     

Unionized labor market and licensing by a monopolist

We show that a monopolistic final goods producer may find it profitable to create competition by licensing its technology if the input market is imperfectly competitive. With a centralized union, we show that licensing by a monopolist is profitable under both uniform and discriminatory wage settings by the union. However, the incentive for licensing is higher under the former situation. We also show that licensing by the monopolist is profitable under both quantity and price competition, and the incentive for licensing is higher under price competition than under quantity competition. Our qualitative results hold even with decentralized unions.      

CAPACITY EXPANSION IN MARKETS WITH INTER‐TEMPORAL CONSUMPTION EXTERNALITIES

This paper analyses market capacity expansion in the presence of inter‐temporal consumption externalities such as consumer learning, networks and bandwagon effects. An externality leads to an endogenous shift of market demand that responds to past market capacity. Whereas market capacity grows in waves, its magnitude depends on the degree of market concentration. The competitive environment contributes to S‐shaped time patterns of market capacity expansion. On the other hand, using a low introductory price, a monopolist plans an initially larger amount of market cultivation than a competitive market capacity expansion.     

Repair Market Structure, Product Durability, and Monopoly

This paper shows that a durable goods monopolist makes consumers choose a level of repairs which is below the socially optimal level if it monopolises the repair market as well. This distortion occurs due to the possibility of substituting new and used goods and a time inconsistency problem concerning repair decisions. However, if the monopolist is unable to commit the repair price, it may prefer to invite competitors into the repair market. If the repair market is competitive, even when the product market is monopolistic, the socially optimal level of repairs, and thus also the socially optimal durability level is chosen.     

International trade in genetically modified products

This paper investigates competition between two markets that sell close substitutes: a traditional product and a genetically modified (GM) product. Tightening an import quota on the GM product raises the prices of both goods and hurts consumers. Two scenarios are considered under free trade: Cournot–Nash equilibrium and Stackelberg equilibrium. A Stackelberg type monopolist produces more, and the competitive traditional firms produce less, than in Cournot–Nash equilibrium. In the long run, an import ban on the GM product does not help competitive producers of the genetically modified organism (GMO)-free products but benefits only the landowners in Europe.     

Monopoly and the choice of product characteristics

Monopoly firms producing large, indivisible goods may be able to effect perfect price discrimination by charging an all-or-none implicit price for each product characteristic. In that case, a monopolist will provide the same vector of product characteristics (i.e., the same product ‘quality’) as will a competitive industry; and, perhaps more surprisingly, produce the same quantity of the good. With all-or-none pricing, monopoly power leads to a higher product price, but no change in product quality or output.     

The Coase conjecture need not hold for durable good monopolies with depreciation

We consider the optimal sales policy for a monopoly seller of a durable good in a non-stationary rational expectations equilibruim with replacement sales. We show that Coase's conjecture that the monopolist will sell the competitive stock as period length approaches zero may not hold under these assumptions.     

Advantageous monopolies

It is proved that in economies with one atom and one type of small traders, for each core allocation x there is a competitive allocation y whose utility to the monopolist is not greater than that of x, whenever either x is an equal treatment core allocation, or all small traders have the same homogeneous preferences. An example shows that these two requirements are, in general, indispensable for the result to hold.     

OPEC and the monopoly price of world oil

The paper presents a dynamic model of the behavior of OPEC viewed as a monopolist sharing the oil market with a competitive sector. The main conclusion is that the recent increase in the price of oil was a once and for all phenomenon due to the formation of the cartel and that prices should remain approximately constant during the next twenty years.     

The Promise and Pitfalls of Restructuring Network Industries

Abstract. This paper examines the competitive effects of reorganizing a network industry's vertical structure. In this industry, an upstream monopolist operates a network used as an input to produce horizontally differentiated final products that are imperfect substitutes. Three potential pitfalls of restructuring integrated network industries are analyzed: (i) double marginalization, (ii) underinvestment and (iii) vertical foreclosure. The paper studies the net effect of restructuring on retail prices and cost‐reducing investment and discusses policy implications.     

Using Market Structure to Regulate a Vertically Integrated Monopolist

A natural monopolist whose cost is private information produces a good which is combined with another good that can be produced by the monopolist or by other firms. The agency that regulates the monopolist can impose any of several different market structures in the industry: integrated monopoly, vertical separation with free entry downstream, or liberalization downstream (both integrated and independent production). When several firms produce downstream, a Cournot quantity-setting game with free entry determines the market price. We derive the optimal contracts to offer the monopolist under all three market structures and examine the influence of downstream cost differences on access prices.We then study the optimal regulatory policy where the regulator can condition the downstream market structure on the monopolist's cost report to the regulator. The optimal regulatory policy awards a monopoly to a low-cost upstream firm, but requires free entry downstream if the monopolist reports high upstream costs. Thus, the choice of market structure is an additional tool to limit rent extraction by the monopolist. Simulation analysis reveals the possibility of significant welfare gains from this additional regulatory tool.     

Optimal Delegation

We analyse the design of decision rules by a principal who faces an informed but biased agent and who is unable to commit to contingent transfers. The contracting problem reduces to a delegation problem in which the principal commits to a set of decisions from which the agent chooses his preferred one. We characterize the optimal delegation set and perform comparative statics on the principal's willingness to delegate and the agent's discretion. We also provide conditions for interval delegation to be optimal and show that they are satisfied when the agent's preferences are sufficiently aligned. Finally, we apply our results to the regulation of a privately informed monopolist and to the design of legislatives rules.     

UPSTREAM MARKET FORECLOSURE

This paper investigates how an incumbent monopolist can weaken potential rivals or deter entry in the output market by manipulating the access of these rivals in the input market. We analyse two polar cases. In the first one, the input market is assumed to be competitive with the input being supplied inelastically. We show that this situation opens the door to entry deterrence. Then, we assume that the input is supplied by a single seller who chooses the input price. In this case, we show that entry deterrence can be reached only through merger with the seller of the input.     

International Income Transfer under Imperfect Competition

This paper examines the effects of an international income transfer under international monopoly. One of the markets in the donor country is monopolized and there exist two distinct types of agent: monopolist and factor owners. The transfer is provided by the agents with different lump sum tax (burden‐share) rates. The burden‐share rate plays a key role concerning the welfare effects of a transfer. We show that the government of the donor country can raise both its social welfare and the wellbeing of the recipient country by providing a further transfer and by simultaneously adjusting the burden‐share rates.     

Dynamic control of a monopolist’s product and process innovation with reference quality

ABSTRACT

Our main purpose is to investigate the dynamic control problem of a monopolist’s product and process innovation under reference quality. The main features of this article are: (i) a monopolist dealing with customer behaviour in the spirit of the principle of behaviour economics determines the product price, and carries out the activities of product and process innovation; (ii) the consumers’ demand depends on price, product quality and reference quality, and adopts an additive separable demand function form. Our main results show that under the cases of the monopolist optimum and the social planner optimum, (i) there exists an unique stable, which is a saddle-point steady-state equilibrium; (ii) the change rates of the monopolist’s investments in product and process innovation are increasing with the reference quality, while the monopolist’s steady-state investments in product and process innovation are decreasing with the reference quality; (iii) as the memory parameter increases with other parameters kept constant, it is very likely that the monopolist’s investment in process innovation be greater than the investment in product innovation; and (iv) the social incentive towards both investments in product and process innovation is always larger than the private incentive characterizing the profit-seeking monopolist.     

Optimal Experimentation in a Changing Environment

This paper studies optimal experimentation by a monopolist who faces an unknown demand curve subject to random changes, and who maximizes profits over an infinite horizon in continuous time. We show that there are two qualitatively very different regimes, determined by the discount rate and the intensities of demand curve switching, and the dependence of the optimal policy on these parameters is discontinuous. One regime is characterized by extreme experimentation and good tracking of the prevailing demand curve, the other by moderate experimentation and poor tracking. Moreover, in the latter regime the agent eventually becomes "trapped" into taking actions in a strict subset of the feasible set.