Imported inputs and privatization in downstream mixed oligopoly with foreign ownership

This paper examines welfare implications of privatization in a mixed oligopoly with vertically related markets, where an upstream foreign monopolist sells an essential input to public and private firms located downstream in the domestic country. The impact on domestic welfare of privatizing the downstream public firm is shown to contain three effects. The first is an output distortion effect, which negatively affects welfare since privatization decreases the production of final good for consumption. The second is an input price lowering effect resulting from a decrease in derived demand for the input. When the level of privatization increases, a decrease in final good production lowers input demand, causing input price to decline and domestic welfare to increase. The third is a rent‐leaking effect associated with foreign ownership in the downstream private firm. The rival domestic firm strategically increases its final good production, causing profits accrued to foreign investors to increase and domestic welfare to decline. Without foreign ownership in the downstream private firm, the optimal policy toward the public firm is complete privatization as the output distortion effect is dominated by the input price lowering effect. With foreign ownership, however, complete privatization can never be socially optimal due to the additional negative impact on domestic welfare of the rent‐leaking effect. We further discuss implications for domestic welfare under different privatization schemes (e.g., selling the privatization shares to the upstream foreign monopolist or to the rival domestic firm).     

Piracy and limited liability

This paper analyzes the effects of end-user piracy on a monopolized software industry with network effects in which consumers have heterogeneous income and limited liability. Limited liability produces a piracy cost which increases with income. The monopolist thus may be able to exploit the network effect brought about by the piracy of low-income consumers to charge a higher price to high-income consumers thereby earn a higher profit, especially when the monopolist can prevent the network effect from spilling over to the high-income consumers. If intellectual property rights policies are severe enough, then the monopolist can avoid the spillover. Otherwise it may become a case where each high-income buyer benefits from the piracy but the monopolist is hurt. However, a severe policy may bring about a high piracy rate since it invites the monopolist to raise the price.      

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 DETERMINANTS OF THE QUANTITY‐QUALITY BALANCE IN MONOPOLY*

This paper describes how a monopolist manipulates the balance of quantity and quality in order to increase revenue when its customers treat quantity and quality as substitutes. This ‘skewing’ of quality depends on the characteristics of customer's demand for quality. Customers differ in demand for quality, because they differ in either (i) their preferences and/or (ii) their time cost per unit. The monopolist is constrained to supply the same quality of good to all customers. The price and quality per unit are described under the assumption the monopolist (i) profit maximises; (ii) maximises social welfare subject to a profit constraint. The determinants of the skewing of quantity and quality are found under third‐degree price discrimination and uniform pricing.     

A note on welfare-improving ignorance about quality

Consider a monopolist that is selling a high quality product when the quality is unknown to a fraction of the consumers. If the quality cannot be signaled and the fraction is sufficiently large, then the monopolist will offer a low price to induce uninformed consumers to buy. If the fraction is sufficiently small, then uninformed consumers are irrelevant to its optimal price. If the uninformed consumers are priced out of the market as a result, then welfare can decrease. I am very grateful for the comments of two anonymous referees that have significantly improved this paper.     

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.     

High Price Strategy and Quality Signalling

I investigate a high price strategy by a durable‐goods producer for signalling the high quality of goods. It is assumed that two types of monopolists exist: high‐quality and low‐quality. The monopolist's type is assumed to be unknown to consumers in the first period. Before the beginning of the second period, a product reputation established in the past period enables consumers to recognize the real type of the monopolist. I show that there occurs a signalling equilibrium where the high‐quality type monopolist uses a high price strategy. An interaction between the new and old products peculiar to the durable‐goods markets plays an important role in the pricing strategy.     

Quality uncertainty and time inconsistency in a durable good market

In a durable good monopoly where consumers cannot observe quality prior to purchase and product improvement occurs exogenously over time, I show that uncertainty in quality may resolve the time inconsistency problem (even for low levels of product improvement). Higher dispersion in quality creates greater demand for future product by increasing the incentive of buyers with inferior quality realizations to repeat purchase and this, in turn, reduces the incentive of the seller to cut future price. For various levels of product improvement, I characterize the range of quality uncertainty for which the market equilibrium is identical to one where the monopolist can credibly precommit to future prices. I also show that the presence of quality uncertainty can lead to no trading in the primary good market. Further, in contrast to the literature on the Coase conjecture, inability to precommit to future prices can reduce social welfare as a result of the market closure.     

Intertemporal self-selection with multiple buyers

Summary We consider a monopolist selling durable goods to consumers with unit demands but different preferences for quality. The seller can offer items of different quality at the same time to induce buyers to self-select, as in Mussa-Rosen (1978), but is not artificially constrained to offer only one such menu. Instead the seller can offer without precommitment asequence of menus over time. In the two-buyer case where the seller has complete information about each buyer's marginal valuation for quality, the seller's profits exceed what can be obtained from a single menu and sometimes approximate the profits of a perfectly discriminating monopolist. In companion papers (Bagnoli et al., 1990, 1992), we show that these conclusions continue to hold (1) in the infinite-horizon case with any finite number of buyers and (2) in two-period examples where the seller has incomplete information about buyer preferences.     

Front-running dynamics

We integrate a monopolist dual trader into a dynamic model of speculation. In static settings, [J.-C. Rochet, J.-L. Vila, Insider trading without normality, Rev. Econ. Stud. 61 (1994), 131-152] establish an irrelevance result—expected equilibrium outcomes are the same whether the monopolist speculator sees liquidity trade or not; and Roell [Dual-capacity trading and market quality, J. Finan. Intermediation (1990), 105-124] shows that with multiple speculators, dual trading benefits liquidity traders. In dynamic settings, these results are reversed: a front-running speculator exploits knowledge of future liquidity trade, extracting greater profits by smoothing profit extraction intertemporally. Front running introduces positive serial correlation to order flow. Accordingly, market makers discount past order flow in prices, but prices retain the martingale property.     

The monopolist is not the best environmentalist’s best friend: An example

This letter addresses the second-degree price discrimination issue when a monopolized product is tied with environmental quality. The monopolist may degrade environmental quality too much when marginal valuations of environmental quality and the good itself are positively related across consumers.     

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.     

Natural monopoly and differential pricing

Under uniform pricing a monopolist cannot make a positive profit in equilibrium. I analyze how differential pricing can be exploited by a natural monopolist to deter entry when entry is costless. In a two-stage game with price competition before quantity competition I show that the incumbent firm can deter entry and make a positive profit in equilibrium. The incumbent sets two different prices, the low price to deter entry and the high price to generate profit. Entry is not possible because of scale effects. If dumping is allowed for all firms no positive profits are realizable, but welfare is reduced. I show that for some parameter values the incumbent is forced to engage in a stunt (i.e., set a negative low price) to keep entrants out.     

WELFARE EFFECTS OF STRATEGIC PRICE SETTING IN ANTICIPATION OF PRICE REGULATION

A single product monopolist with constant unit costs, in a simple two-period model, is aware that price regulation will be imposed in the second period. The form of the regulation is such that price in period 2 may not exceed 100 ; per cent of price in period 1, where 0 < < 1. The period 1 price will be set higher than it would be in the absence of anticipated regulation. However, it is not always the case that pre-regulation price will be raised as falls. The welfare effects are crucially dependent on the form of the demand function. Under constant elasticity of demand a reduction in will reduce both consumers' and the producer's welfare. Under linear demand, consumers benefit and the producer loses as is reduced and the resultant effect on aggregate welfare is ambiguous.     

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.     

Competition and confidentiality: Signaling quality in a duopoly when there is universal private information

We model non-cooperative signaling by two firms that compete over a continuum of consumers, assuming each consumer has private information about the intensity of her preferences for the firms' respective products and each firm has private information about its own product's quality. We characterize a symmetric separating equilibrium in which each firm's price reveals its respective product quality. We show that the equilibrium prices, the difference between those prices, the associated outputs, and profits are all increasing functions of the ex ante probability of high safety. If horizontal product differentiation is sufficiently great then equilibrium prices and profits are higher under incomplete information about quality than if quality were commonly known. Thus, while signaling imposes a distortionary loss on a monopolist using price to signal quality, duopolists may benefit from the distortion as it can reduce competition. Finally, average quality is lower since signaling quality redistributes demand towards low-quality firms.     

Dynamic Monopoly with Nondurable Goods

A nondurable good monopolist who posts a single price will generally achieve an inefficient outcome. But is it possible that the monopolist would achieve efficiency by repeatedly posting prices before delivery? If buyers recognize the effect of current purchases on future prices, then, under complementary ideal conditions, the answer is yes. On the other hand, traditional concerns about monopoly are viable if the seller bears a small cost per buyer of market reopening.Journal of Economic LiteratureClassification Numbers: D42, L12.     

A note on monopolistic quantity rationing

It is shown that under incomplete information it may be optimal for a monopolist to ration a single price taker in addition to setting prices, which is in contrast to the case of complete information. As a byproduct it is shown that the star-shaped hull of the offer curve of a price taker exactly consists of the points that can be supported as Drèze-optima.     

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.     

Deregulation,competition, and the network size in the market for telecommunication services

This paper analyzes the networking aspect in telecommunication services and the recent divestiture and increased competitiveness of the industry. The product considered is the right to access the network. The utility of a consumer from having access to a network depends on the network's quality, defined by the number of other local and long-distance consumers which can be reached. Network services are provided in two layers; On the lower layer consumers within a local access and transport area (LATA) are connected to a central office which provides the basic switching facility for local telecommunication. On the upper layer, LATAs are connected together by an interLATA carrier, to enable long distance communication from different localities.It is shown that relative to the choices of an unconstrained monopolist, larger networks at both layers may be obtained by imposing quality controls, while price controls may have the opposite effect. A divestiture policy in which all local carriers are connected to a single long distance carrier is likely to reduce the quality of services at both layers. Introducing competition among long-distance carriers further reduces the quality of long distances services but may improve the local service.