The effects of resale price maintenance laws on petrol prices and station attrition: empirical evidence from Wisconsin

The state of Wisconsin's Unfair Sales Act prevents the sale of any item below cost in order to attract business, and specifically requires petrol (gasoline) stations to mark up their prices by at least 6% over the wholesale price. While the ostensible reason for this law is to protect small, independent retailers and thus enhance competition, the evidence suggests that the primary result of this law has been to inflate the price of petrol for Wisconsin consumers and facilitate tacit collusion in retail petrol markets. Petrol prices in two major markets in the state are examined, as well as in one market outside of the state where no minimum markup is required. The data show that when the penalties for violating the Unfair Sales Act were strengthened, the average markup of retail petrol over the wholesale price increased significantly in Wisconsin without a commensurate change in the average markup in the market outside of Wisconsin. It is also found that price dispersion is significantly lower over a two-year period in the protected Wisconsin market than in the unprotected markets.     

X-Factor updating and total factor productivity growth: the case of peruvian telecommunications, 1996–2003

This paper measures TFP growth of Telefonica del Peru, and based on this growth rate computes a telecommunications X-factor or offset. More broadly the paper analyses the problem of updating an X-factor under existing price cap regulation. A revised offset must account for the possible restructuring of service offerings resulting from improved efficiencies in response to price cap incentives. Our updating framework focuses on efficiency criteria, and based on economic principles emphasizes the continuity between prior and continuing standards. In the case of Peru, based on annual average TFP growth of 1.66%, the X-factor is computed to be 4.06% per year. An erratum to this article can be found at     

Price Caps,Rate of Return Constraints and Universal Service Obligations

This paper evaluates the effects of modifying price cap regulation when firms are allowed to use non-linear tariffs. We consider a stylized network industry and analyze price cap regulation combined with rate of return regulation and with a universal service obligation. While both modifications can increase aggregate welfare by reducing the pricing distortions under price cap regulation, a universal service obligation is welfare superior if the firms profits and the size of its network are held constant.     

Social Preferences and Price Cap Regulation

This paper analyzes the allocative properties of price cap regulation under very general hypotheses on the nature of society's preferences. We propose a generalized price cap that ensures the convergence to optimal (second best) prices in the long-run equilibrium for virtually any form of the welfare function. Hence, the result of the convergence to Ramsey prices of Laspeyres-type price cap regulation is a particular instance of our more general result. We also provide an explicit and relatively easy to calculate and implement generalized price cap formula for distributionally weighted utilitarian welfare functions, as suggested by Feldstein (1972a).     

Asymmetric access price regulation in telecommunications markets

In liberalized telecommunications markets, the incumbent typically enjoys several advantages over any entrant. Regulation in such asymmetric markets stimulates competition in the short and the long term if retail prices are low and the entrant's profits are high so that entry is encouraged. I show that asymmetric access price regulation with a cost-based access price for the incumbent and an access markup for the entrant is more successful than cost-based access price regulation applied to incumbent and entrant. This is a robust prediction with respect to the pricing strategies considered. Such asymmetric access price regulation is in accordance with European legislation.     

Estimating entrants' productivity when prices are unobserved

Entrant firms are constrained to set lower price–cost markups than incumbents due to idiosyncratic demand shocks faced in the startup phase. Productivity indices suffer from micro-level markup variation and underestimate entrants' productivity, when productivity is measured by nominal sales and expenditures but not quantities. This study makes the first attempt to estimate entrants' productivity by controlling for their markup difference, when prices or quantities are unobserved at the firm-level. The econometric methodology introduces demand side into a structural model of production to account for the price variation. The estimation routine deals with the endogeneity due to unobserved productivity using a control function approach, and retrieves average markups for entrants and incumbents together with a markup-adjusted productivity index. My findings show that entrants set on average lower markups than incumbents in Japanese manufacturing. When productivity is adjusted to markups, entrants are as productive as incumbents, while the standard measures of labor and total factor productivity indicate low productivity for entrant firms.     

Optimal Pricing and Entry Rules When a Regulated Dominant Firm Faces a Competitive Fringe

In this paper, we study optimal regulation of a dominant firm facing an unregulated competitive fringe. First, assuming the size of the fringe is fixed, we demonstrate that the usual Ramsey Rule for second-best efficient pricing remains applicable in this context. We also examine the suitability of the Laspeyres price cap and show that it retains its desirable properties. This implies that regulators should continue to apply Laspeyres price cap regulation to the dominant firm after competition has materialized. Then, assuming that price and entry control are regulatory instruments, we characterize the efficient pricing and entry rules. We demonstrate that the free entry equilibrium number of firms will be excessive relative to the efficient number of firms, thereby providing a new Excess Entry Theorem. Finally, we suggest a modification of the Laspeyres price cap that can incentivize the regulated dominant firm to support efficient entry into the fringe.     

Price Caps and Output Floors: A Comparison of Simple Regulatory Rules

We study in this paper a simple alternative to price cap regulation. The mechanism, which we label 'output floor' regulation, requires the regulated firm to supply a given level of output. This rule is as simple as price cap regulation, and performs identically when the regulated firm is a natural monopoly; however, we show that, in the presence of a competitive fringe, output floor regulation yields lower prices and stronger incentives for cost reduction. Its introduction, however, is likely to be resisted by the industry, since it lowers managerial utility and shareholders' profits.     

环境规制如何影响了制造企业的成本加成率

本文以“十一五”以来环境规制政策的实质性推进为“准自然实验”，基于2000—2011年《工业企业污染排放数据库》和《中国工业企业数据库》合并得到的微观面板数据，运用双重差分倾向得分匹配方法(PSM-DID)，考察环境规制政策实施对制造企业成本加成率的影响效果及其微观作用机制。研究发现，环境规制政策显著提升了制造企业的成本加成率；环境规制对成本加成率的促进作用主要通过创新补偿机制实现，市场结构变动机制对成本加成率的影响不明显，遵循成本机制对成本加成率的影响为负；环境规制政策对高污染行业和中部地区制造企业成本加成率的促进效果更强。     

Regulation of network infrastructure investments: an experimental evaluation

This paper reports the results of an experiment evaluating three regulatory schemes for network infrastructure, in terms of their ability to generate efficient levels of capacity investment. We compare the performance of (1) price cap regulation, (2) a regulatory holiday for new capacity, and (3) price cap regulation with long term contracts combined with a secondary market. The setting is one in which network users can benefit from acting strategically, and are better informed than the network operator about demand growth. We find that the regulatory holiday creates an incentive to underinvest relative to optimal levels. Long term contracts also fail to improve on single price-cap regulation, and may reduce investment by providing noisier signals about future demand.     

Intertemporal price cap regulation under uncertainty

This paper examines the intertemporal price cap regulation of a firm that has market power. Under uncertainty, the unconstrained firm 'waits longer' before investing or adding to capacity and as a corollary, enjoys higher prices over time than would be observed in an equivalent competitive industry. In the certainty case, the imposition of an inter-temporal price cap can be used to realise the competitive market solution; by contrast, under uncertainty, it cannot. Even if the price cap is optimally chosen, under uncertainty, the monopoly firm will generally (a) under-invest and (b) impose quantity rationing on its customers.     

价格上限规制在药品定价领域的应用

本文从价格上限规制的产生原因、基本理论和规制效果出发,详细介绍了这一价格规制形式的要点。随后,研究了其在药品价格领域的应用,例如价格上限规制和国际价格比较以及参考定价等制度的结合与对比。最后,以我国药品价格管理的现实问题为基础,重点讨论了价格上限规制在我国的应用前景和实施方法。     

A hedonic price analysis of hearing aid technology

In this article, we study how technological components affect the price of hearing aids. The main goals are to determine which functional and technological features have the greatest influence on manufacturer-based prices in the hearing aid industry, and to analyse the price-cost margins at the dispenser level using a unique data set that is compiled from a hearing clinic in West Texas. The result shows that style and signal processing scheme are the two most important determinants of hearing aid price. Other characteristics such as directional microphone, noise cancellation, and a certain shell type are also positively related to price. Further, on average, this particular local dispenser has a markup of about 35% per hearing instrument.     

Partial Regulation in Vertically Differentiated Industries

We provide theoretical foundations for quality‐adjusted price‐cap regulation in industries where a regulated incumbent and an unregulated entrant offer vertically differentiated products competing in price and quality. We show that, whether or not the incumbent anticipates the reaction of the entrant, the optimal weights in the cap depend upon the market served by the entrant, despite the latter not being directly concerned by regulation. We further show that the cap is robust to small errors in the weights. Our findings point to the conclusion that, in partially regulated industries, regulators should use information about the whole sectors rather than on the sole regulated incumbents.     

Price cap regulation: A case study of some pitfalls of implementation

There has been considerable discussion of price-cap regulation as an alternative to traditional rate-of-return regulation. This paper examines some of the practical pitfalls of price-cap regulation. First, a model of a terminating price cap is developed. Next, this model is used to propose some problems of implementation. These problems are evaluated in the context of a case study of the Tucson Electric Power Company, which faced a type of price cap for several years in the 1980s. Extensions of the specific case to more general lessons about price-cap regulation are considered.     

A 'pricing-to-market' model with unobserved variables: explaining New Zealand's import prices

A model of ‘pricing-to-market’ (PTM) behaviour in import prices is developed for a small open economy to allow for two measurement problems: (i) that neither the marginal production cost of imported goods nor their corresponding (foreign-currency) export price are observable by the econometrician; (ii) that PTM behaviour, if it exists, alters the relationship between foreign countries' export price indices for total exports and the true, unobservable price index. The analysis shows that variations in the measured markup on import prices depends on the degree to which domestic demand is synchronized with world demand, whether bilateral exchange rate movements are due to domestic or foreign factors, and on the degree to which PTM behaviour differs from such behaviour in other countries. Equations estimated for the price of New Zealand (NZ) imports from the US strongly supports the model, and finds that the degree of PTM by US exporters in response to price and exchange rate movements is substantially greater in NZ than the average for other countries. However, the degree of PTM in NZ in response to excess demand is similar to that of other countries.     

Market structure and market performance in E-commerce

We analyze the interaction between market structure and market performance and how it varies over the product cycle. To account for the potential endogeneity in this relation, we use an instrumental variable approach. We combine data from the largest Austrian online market for price comparisons with retail data on wholesale prices provided by a major hardware producer for consumer electronics. Our results show that instrumenting is important for estimating the empirical effect of competition on the markup of the price leader. One more firm in the market is associated with a reduction of the price leader׳s markup which is equivalent to competition between existing firms for an additional 3 weeks in the product life cycle. Our results support search theoretic models and contradict models of monopolistic competition. Moreover our results support the existence of price dynamics over the product cycle. They also highlight the substitutability between newly innovated and old expiring technologies and how it varies with respect to competitors׳ and own brand innovations.     

Pharmaceutical regulation under market integration through parallel trade

In this paper, I study the effect of parallel trade (cross-border resale of goods without the authorization of the manufacturer) on pharmaceutical regulation. Governments may restrict prices directly (price caps) or limit third-party payer reimbursement for the drug (reimbursement limits). I find that parallel trade may relax regulation in the source country of parallel imports under both instruments and intensify regulation in the destination country under a reimbursement limit. I also find that parallel trade may change regulatory preferences: under no parallel trade, both the source and destination country set price caps, and under parallel trade, the source country sets a price cap but the destination country sets a reimbursement limit, thereby enforcing a higher price cap in the South. This implies that drug prices are higher under parallel trade in both source and destination countries.     

Comparing new Keynesian models in the Euro area: a Bayesian approach

This paper estimates and compares four versions of the sticky price New Keynesian model for the Euro area using a Bayesian approach. We find that the average duration of price contracts is between two and four quarters, while the average duration of wage contracts is estimated to be below two quarters. Both mechanisms of price and wage indexation are not important when autocorrelated price markup shocks are introduced in the model. These results are in stark contrast to Smets and Wouters (2003): when we use their priors, our estimated posterior distributions are similar to theirs, but the models’ fit to the data is worse. We are thankful to the Econometric Modelling Unit at the European Central Bank for providing us with the Euro area data. We also thank two anonymous referees for helpful suggestions. The views expressed in this paper are those of the authors and do not necessarily reflect the views of Caixa d’Estalvis i Pensions de Barcelona (“la Caixa”).     

Regulation and pricing of pharmaceuticals: Reference pricing or price cap regulation?

We study the relationship between regulatory regimes and pharmaceutical firms’ pricing strategies using a unique policy experiment in Norway, which in 2003 introduced a reference price (RP) system called “index pricing” for a sub-sample of off-patent pharmaceuticals, replacing the existing price cap (PC) regulation. We estimate the effect of the reform using a product level panel dataset, covering the drugs exposed to RP and a large number of drugs still under PC regulation in the time before and after the policy change. Our results show that RP significantly reduces both brand-name and generic prices within the reference group, with the effect being stronger for brand-names. We also identify a negative cross-price effect on therapeutic substitutes not included in the RP system. In terms of policy implications, the results suggest that RP is more effective than PC regulation in lowering drug prices, while the cross-price effect raises a concern about patent protection.