Spatial Cournot competition and economic welfare: a note

We investigated welfare implications in location-quantity models in a symmetric linear city. We found that when firms are not agglomerated in equilibrium, increasing the distance between firms raises (reduces) producer surplus and social welfare (consumer surplus). Moreover, central agglomeration is always optimal for consumers among symmetric locations, but not necessarily for producers. Central agglomeration can be inefficient even if it is the unique equilibrium outcome. In short, the firms are more likely to agglomerate or locate closer than what welfare maximizers would dictate, whereas they locate farther apart than what consumer surplus maximizers would recommend.     

Spatial competition with free entry, Chamberlinian tangencies, and social efficiency

Free entry in Löschian spatial competition leads to a tangency between each firm's negatively sloped average revenue and the downsloping portion of average costs—as in Chamberlin's monopolistic competition. It is generally concluded that this equilibrium involves too many inefficiently small firms. However, this conclusion is incorrect. The difference between price and firm marginal production costs in spatial equilibrium is just sufficient to cover the additional marginal cost of output resulting from availability of multiple locations. This Chamberlinian tangency does not imply inefficiency, because it does not include all the social costs and benefits resulting from spatial competition.     

Spatial competition between shopping centers

We study competition between two shopping centers that sell the same set of goods and are located at the extremes of a linear city, without restricting consumers to make all their purchases at a single place. In the case of competition between a shopping mall (set of independent single-product shops) and a department store (single multiproduct shop), we find that: if the number of goods is low, all consumers shop at a single place; if it is moderately high, some consumers travel to both shopping centers to buy each good where it is cheaper (a single good is cheaper at the shopping mall). The shops at the mall, taken together, obtain a lower profit than the department store. Nevertheless, two shopping malls should be expected to appear endogenously.     

Bank competition,concentration and financial stability in the Turkish banking industry

This paper analyzes the impact of competition and concentration on bank stability in the Turkish banking industry over the period 2002–2012. The Boone indicator and the efficiency-adjusted Lerner index are used as proxies for competition, while the non-performing loans (NPL) ratio and Z-scores are used as proxies for bank stability. The main results indicate that competition is negatively related to the NPL ratio but positively related to the Z-score. The results further indicate that greater concentration has a positive impact on the NPL and a negative impact on the Z-score. We also use a quadratic term of the competition measures to capture a possible non-linear relationship between competition and stability. The results show that the coefficient of the quadratic term is negative for the NPL model and positive for the Z-score model. Overall, our findings provide support for the competition-fragility view.     

Spatial competition under uniform delivered pricing

A Hotelling-type model of spatial competition is considered, in which two firms compete in uniform delivered prices. First, it is shown that there exists no uniform delivered price–location equilibrium when the product sold by the firms is perfectly homogeneous andwhen consumers buy from the firm quoting the lower delivered price. Second, when the product is heterogeneous and when preferences are identically, independently Weibull-distributed with standard deviation μ, we prove that there exists a single uniform delivered price–location equilibrium iff μ≧1/8 times the transportation rate times the size of the market. In equilibrium, firms are located at the center of the market and charge the same uniform delivered price, which equals their average transportation cost, plus a mark-up of 2μ. Finally, we discuss how our result extends to the case of n firms and proceed to a comparison of equilibria under uniform mill and delivered pricing.     

Spatial concentration and plant-level productivity in France

This paper analyzes empirically the effect of spatial agglomeration of activities on plant-level productivity, using French firm and plant-level data from 1996 to 2004. We exploit short-run variations of variables by making use of GMM estimation. This allows us to control for endogeneity biases that the estimation of agglomeration economies typically encounters. This means that our paper focuses on a subset of agglomeration economies, the short-run ones. Our results show that French plants benefit from localization economies, but we find very little - if any - evidence of urbanization economies. We also show that those localization benefits are relatively well internalized by firms in their location choice: we find very little difference between the geography that would maximize productivity gains in the short-run and the geography actually observed.     

Volatility, growth, and welfare

This paper constructs an endogenous growth model driven by self-fulfilling expectation shocks to explain the stylized fact that the average growth rate of GDP is related negatively to volatility and positively to capacity utilization. The implied welfare gain from further stabilizing the U.S. economy is about a quarter of annual consumption, which is consistent in order of magnitude with estimates based on the empirical studies of Ramey and Ramey (1995) and Alvarez and Jermann (2004). Hence, policies designed to reduce fluctuations can generate large welfare gains because smaller fluctuations are associated with permanently higher rates of growth.     

Offshoring,globalization, and welfare

We investigate the issue of offshoring in a general-equilibrium model of two countries and one sector of increasing returns to scale. Our model uncovers that offshoring occurs and endogenously evolves in a bell-shaped pattern when trade costs decline, explaining some stylized facts in developed countries. Furthermore, this simple framework can be applied to examine the welfare issue. We find that a fall in offshoring costs benefits the high-wage country but hurts the low-wage country. On the other hand, the low-wage country benefits with trade liberalization. The impact of falling trade costs on the welfare of the high-wage country depends on the values of offshoring freeness.     

Integration, agglomeration and welfare

This paper studies the social desirability of agglomeration, and the efficiency arguments for policy intervention in a simple, analytically tractable new economic geography model. The location pattern emerging as market equilibrium is ‘bubble-shaped’, i.e. it features dispersion both at high and low trade costs and stable equilibria with partial and full agglomeration for intermediate levels of trade costs. We show that the market equilibrium is characterized by over-agglomeration for high trade costs and under-agglomeration for low trade costs, and we work out analytically that a net pecuniary externality is the underlying cause of this market failure. One particularly noteworthy result is that the net pecuniary externality is positive at high levels of trade freeness. However, there is no market under-agglomeration unless this positive net pecuniary externality interacts with an additional congestion force originating in the (per se efficient) competitive housing market.     

Spatial competition with demand uncertainty: A laboratory experiment

Motivated by recent research on product differentiation, we conduct laboratory experiments to study how demand uncertainty influences firms' incentives to differentiate. We ground our experiment on a discrete version of the standard location-then-price game introduced by Hotelling (1929), and we consider different levels of demand uncertainty. We first derive the game equilibrium assuming risk-neutral firms, and obtain the standard prediction that a high level of demand uncertainty generates more differentiation. Second, we extend the analysis to consider non-risk neutral firms and markets with asymmetric risk profiles. We show that the game equilibrium can differ substantially according to the attitude to risk. Third, we compare our predictions with the experimental data and find that demand uncertainty acts as a differentiation force in the context of both symmetric markets composed of risk-neutral or risk-lover subjects and asymmetric markets. We find support also for the agglomeration effect arising from demand uncertainty for sufficiently risk-averse subjects. Overall, these results might explain the opposite product differentiation strategies frequently observed in markets with fast-evolving tastes (i.e., minimum or maximum differentiation). Finally, the data confirm that subjects differentiate to relax price competition and provide evidence of a strong positive relationship between differentiation and prices.     

Price uncertainty, saving, and welfare

We analyze how commodity price uncertainty affects saving behavior and welfare in a dynamic model with multiple commodities, portfolio hedging, and a preference structure that disentangles ordinal preferences, attitudes towards risk, and attitudes towards intertemporal substitution. We show that the effect of price uncertainty on savings boils down to knowing (1) hf degree of resistance to intertemporal substitution and (2) the effect that uncertainty has on the certainty-equivalent real interest rate. We also show that, if the certainty-equivalent real interest rate is lower with uncertainty, consumers' welfare is also lower.     

Workfare,welfare, agency,and well-being

Workfare programs are state-instituted programs that require able-bodied persons with children of school age who wish to claim welfare payments to participate in job training programs, and, eventually, to enter the work force. The philosophy of workfare is based on the value of work and the goal of self-determination. However, as a mandatory program for welfare recipients, workfare requires of those recipients certain duties which, according to those who challenge workfare, interfere with the freedom to choose what one will do with one's life. Whether some form of workfare will be adopted as part of our national welfare system remains to be seen. What the debate about such a program suggests is that welfare, in itself, by ignoring the necessity of security and education for full human agency, neither satisfies basic needs nor prepares its recipients for any life other than that of dependency. With all its difficulties workfare nevertheless presents an alternative to welfare that, at least in theory, more closely identifies its purpose with the values of our society.     

Social welfare,corruption and credibility

Abstract

Economic development requires that investments by entrepreneurs are not subject to expropriation by government. Unfortunately, public agencies often serve as the instruments by which political elites engage in corruption and extracting rents from the economy. The question is how to design institutions that credibly commit to a stable system of guarantees of property rights and contract enforcement.

Principal agent theory and the new public management favor greater accountability of public managers to elected officials or eliminating public agencies through privatization. We argue for institutional designs that provide a degree of public agency autonomy. We show that public agency autonomy is a by-product of the competition between elites in democracies with multiple veto players. We show that transparency, professionalism, and legality help ensure that public managers do not engage in rent-extraction. The institutional design problem is how to induce public managers to serve the public interest without being fully responsive to elected political officials.     

Monopoly,product diversity and welfare

The more homogeneous its customers the easier it is for a monopolist to extract consumer surplus. Offering a range of product varieties (or spatial locations) sorts consumers into groups with similar preferences. The profit opportunities this yields may result in a monopoly providing more product choice than is socially optimal. Nevertheless, monopoly may be socially preferable to a free entry imperfectly competitive equilibrium.     

Land conservation,growth and welfare

This paper identifies the factors, such as leaving land fallow and conservation inputs, for conserving and enhancing soil fertility of land. The growth and welfare effects of these land policies are then examined. Leaving land fallow and conservation inputs raise the equilibrium soil fertility. In the short run, the polices can render unfavorable impacts to the economy, such as decreases in the land supply by the fallow plan, or reductions in public services and falls in private capital formation. Nonetheless, both policies have ambiguous impacts on growth and welfare of the economy in the long run. Furthermore, due to the favorable impact on initial consumption, the welfare-maximizing tax rate or transfer ratio is larger than the one for growth maximization. However, for the land fallow ratio, both rates are the same.     

Spatial price competition in the Manhattan hotel market: The role of location,quality, and online reputation

We investigate whether and to what extent price competition among hotels in Manhattan is driven by geographic location, quality, and online reputation. We investigate (a) which of the three product differentiation dimensions matters most for hotels' pricing decisions and (b) whether and to what extent competition is localized. Results show that hotel quality and geographic location matter the most for price competition. Whereas hotels of similar reputation also react to each other's prices, the effect is less important. Also, results indicate that hotels' prices react most aggressively to prices set by the four nearest hotels in the area.     

Common ownership,institutional investors,and welfare

This study evaluates the effects of institutional investors' common ownership of firms competing in the same market. Overall, common ownership has two opposing effects: (a) it serves as a device for weakening market competition, and (b) it induces diversification, thereby reducing portfolio risk. We conduct a detailed welfare analysis within which the competition‐softening effects of an increased degree of common ownership is weighted against the associated diversification benefits.     

Endogenous search,price dispersion,and welfare

This paper studies the welfare cost of inflation in a frictional monetary economy with endogenous consumer search. Equilibrium entails price dispersion, where sellers compete for buyers by posting prices. We identify three channels through which inflation affects welfare. The real balance channel is the source of welfare loss. Its interaction with the price posting channel generates a welfare cost larger than Lucas (2000). The search channel reduces the welfare cost by more than one half through general equilibrium effect. The aggregate effect of these three channels on welfare is non-monotonic. Additionally, the welfare cost of inflation fluctuations is negligible.     

Firm entry,product repositioning and welfare

We show that the entry of a second firm in a horizontally differentiated market (ala Hotelling) may harm consumers as prices increase and consumer’s surplus possibly decrease. We first derive the price and the consumer’s surplus of a monopoly which is located at the center of the market. When a second firm enters the market the first firm repositions and the two firms locate at their equilibrium points. Although competition adds to variety and increases consumer’s surplus, the post entry increase in price may outweight the gains from extra variety and make consumers worse off.