The trade reducing effects of market power in international shipping

Developing countries pay substantially higher transportation costs than developed nations, which leads to less trade and perhaps lower incomes. This paper investigates price discrimination in the shipping industry and the role it plays in determining transportation costs. In the presence of market power, shipping prices depend on the demand characteristics of goods being traded. We show theoretically and estimate empirically that ocean cargo carriers charge higher prices when transporting goods with higher product prices, lower import demand elasticities, and higher tariffs, and when facing fewer competitors on a trade route. These characteristics explain more variation in shipping prices than do conventional proxies such as distance, and significantly contribute to the higher shipping prices facing the developing world. A simple back of the envelope calculation suggests that eliminating market power in shipping would boost trade volumes by 5.9% (for the US) to 15.2% (for Latin America). Our findings are also important for evaluating the impact of tariff liberalization. Cargo carriers decrease shipping prices by 1–2% for every 1% reduction in tariffs.     

Competition Tests with a Non-Structural Model: the Panzar–Rosse Method Applied to Germany's Savings Banks

Abstract. In this paper we adopt the Panzar–Rosse approach to assess the competitive conditions in the German banking market for the period from 1993 to 2002. We suggest several improvements to the empirical application of the approach and show that frequently used empirical models that apply price rather than revenue functions lead to biased results. Using disaggregated annual data from more than 400 savings banks (Sparkassen) the empirical findings indicate monopolistic competition, the cases of monopoly and perfect competition are strongly rejected. Furthermore, small banks seem to enjoy even more market power than larger institutions.     

Franchise fee, competition and economic growth

This paper introduces the different kinds of franchise contract bargaining into a macroeconomic model and accordingly researches the relationship between competition and economic growth. In Nash bargaining model/vertical integration we find an inverted-U shaped or a monotonically increasing relationship between the competitive degree of the intermediate goods market and economic growth. In bargaining of the right to manage model/vertical non-integration our result shows an inverted-U shaped or a monotonically decreasing relationship between the competitive degree of the intermediate goods market and economic growth. In addition, there is an overall negative relationship between the competitive degree of the final goods market and economic growth. Especially, our interesting findings that the pricing rule for intermediate goods firm depends not only on market power but also bargaining power are more general. Therefore, we can further explain the firms' vertical control strategy.     

A model of relative national price levels under pricing to market

This paper proposes an alternative to the Balassa-Samuelson theory of how relative price levels between countries are determined. The theory is a general equilibrium formulation of a model where pricing to market arises endogenously from firm decisions. It differs from Balassa-Samuelson in that it centers on the distinction between segmented national goods markets rather than the distinction between traded and nontraded goods. The paper also explores how Balassa-Samuelson might be updated by combining it together with pricing to market elements. Applied to the case of a monetary union, the theory offers an alternative explanation for the inflation differentials observed in EMU. It implies that such differentials may be a natural and enduring feature of a monetary union in which markets for goods and labor are less than fully integrated.     

Unemployment and product market competition in a Cournot model with efficiency wages

This paper analyzes the impact of product market competition on unemployment, wage and welfare in a model where unemployment is caused by the efficiency wage consideration and oligopolistic firms compete in quantity. It is shown that while more intense competition in the product market increases output and reduces price, it does not necessarily lead to a lower unemployment rate or a higher wage for workers. Depending on the technologies, the relationship between the intensity of competition and the level of employment (respectively, wage, welfare) is not always monotonic, and, in some instances, has an inverted U‐shape.     

Viscous demand

In many markets, demand adjusts slowly to changes in prices, i.e., demand is “viscous”. This viscosity gives each firm some monopoly power, since it can raise its price above that of its competitors without immediately losing all of its customers. The resulting equilibrium pricing behavior and market outcomes can differ significantly from what one would predict in the absence of demand viscosity. In particular, the model explains the importance of market share as an investment, as well as “kinked demand curves”. It also explains how apparently “competitive” pricing behavior can lead to outcomes that mimic those of collusion.     

Can a decline in search cost increase prices?

This paper provides a new explanation of why a decline in consumers’ price search cost may not lead to lower prices. In a duopoly with price competition, I show that when some consumers are captive to one firm, there may be a non‐monotonic relationship between search cost and market power; firms may charge high prices with higher probability and the average price charged may be higher when consumers’ price search cost falls below a critical level. Furthermore, when firms have asymmetric captive segments, expected prices charged by each firm may move in opposite directions as search cost declines.     

Temporary Bottlenecks,Hydropower and Acquisitions*

We apply a model with four markets, two regions and two time periods, to study the effects of an acquisition in a hydropower system with temporary bottlenecks. The effect on welfare is found to be ambiguous. In some instances an acquisition leads to larger differences in prices between markets, which gives rise to an increase in deadweight loss. In other instances it leads to a reduction in price differences between markets, particularly if the dominant firm acquires a firm which was active in the market where the dominant firm used to dump its production before the acquisition.     

The impacts of investor sentiment and price uncertainty on the effects of open-market share repurchase announcements

This study probes into relationship between investor sentiment and cumulative abnormal returns (CAR) of share repurchase announcements, and it treats market return as threshold variable. By threshold regression model, it tries to find the effect of market situations on relation between investor sentiment and CAR. According to empirical result, in share market of Taiwan, investor sentiment can explain CAR. When share market is extremely pessimistic (market return lower than ?16.0053%), relation between investor sentiment and CAR will change to some degree. In addition, relation between price risk of announcement company and CAR will disappear with the extremely pessimistic situation of market.     

COOPERATIVE MANAGERIAL DELEGATION,R&D AND COLLUSION

Existing literature on managerial delegation indicates that collusive outcomes can be obtained in an oligopoly game through cooperative managerial delegation. In contrast, this paper shows that, if managers are delegated to choose R&D, in addition to choosing production levels, full‐collusive outcomes cannot be achieved through cooperative delegation. Moreover, (i) under cooperative delegation, semi‐collusion always yields lower profit, higher R&D, higher price and lower social welfare than that in the case of competition and (ii) cooperative delegation leads to a higher profit lower R&D, higher price and lower social welfare than the no delegation case, irrespective of product market conduct.     

Golden cages for showy birds: Optimal switching costs in labor contracts

Under what circumstances do workers sign contracts with high quitting penalties? Our answer points to market transparency. When the worker's performance is privately observed by the incumbent firm, alternative employers face an adverse selection problem. As a result, efficient separations can only take place through involuntary layoffs and there is no role for quitting fees. In contrast, when performance is public, quitting fees are useful devices to appropriate the surplus from workers’ reallocation. Separations are amicable and take the form of quitting after downwardly renegotiating the fees. Qualitative features of contracts are independent of the distribution of ex-post bargaining power. The impact of switching costs on total welfare and its distribution depends on the degree of market transparency and the ex-ante distribution of market power.     

Buyer power and supplier incentives

This paper analyzes the origins and welfare consequences of buyer power. We show that if suppliers are capacity constrained or have strictly convex costs, there are two different channels through which large buyers can obtain more favorable terms from their suppliers. In particular, we show how the presence of large buyers can then erode the value of suppliers’ outside option. Somewhat surprisingly, we show how this can induce suppliers to undertake strategies that lead to higher output and potentially higher welfare.     

Auctions with private uncertainty and resale opportunities

When an auction is followed by an opportunity for resale, bidder valuations are endogenously determined, reflecting anticipated profit from buying/selling in the resale market. These valuations vary with the resale market structure, can differ across auction types, and may be lower or higher than if resale were impossible. Although resale introduces a common value element to the model, revenue equivalence can hold; when it fails, this is due not to affiliation but to differences in information conveyed to the secondary market. Information linkages between markets can also lead to signaling and, in some cases, preclude separation in the auction.     

Downstream merger with upstream market power

We examine how a downstream merger affects input prices and, in turn, the profitability of a such a merger under Cournot competition with differentiated products. Input suppliers can be interpreted as ordinary upstream firms, or trade unions organising workers. If the input suppliers are plant-specific, we find that a merger is more profitable than in a corresponding model with exogenous input prices. In contrast to the received literature, we find that it can be more profitable to take part in a merger than being an outsider. For firm-specific input suppliers, on the other hand, results are reversed. We apply our model to endogenous merger formation in an international oligopoly, and show that the equilibrium market structure is likely to be characterised by cross-border merger.     

Choosing price or quantity? The role of delegation and network externalities

We consider a differentiated duopoly and endogenise the firm choice of the strategy variable (price or quantity) to play on the product market in the presence of network externalities. We model this choice by assuming both competition between entrepreneurial (owner-managed) firms and competition between managerial firms in which market decisions are delegated from owners to revenue-concerned managers. While network externalities are shown not to alter the symmetric equilibrium quantity choice arising in the no-delegation case, sufficiently strong network effects allow us to eliminate the multiplicity of equilibria under delegation and lead to a unique equilibrium in which both firms choose price.     

Dynamic management of water transfer between two interconnected river basins

This paper analyzes the dynamic interaction between two regions with interconnected river basins. Precipitation is higher in one river-basin while water productivity is higher in the other. Water transfer increases productivity in the recipient basin, but may cause environmental damage in the donor basin. The recipient faces a trade-off between paying the price of the water transfer, or investing in alternative water supplies to achieve a higher usable water capacity. We analyze the design of this transfer using a dynamic modeling approach, which relies on non-cooperative game theory, and compare solutions with different information structures (Nash open-loop, Nash feedback, and Stackelberg) with the social optimum. We first assume that the equilibrium between supply and demand determines the optimal transfer price and amount. We show that, contrary to the static case, in a realistic dynamic setting in which the recipient uses a feedback information structure the social optimum will not emerge as the equilibrium solution. We then study different leadership situations in the water market and observe that the transfer amount decreases toward a long-run value lower than the transfer under perfect competition, which in turn lays below the social optimum. In consequence, the water in the donor's river-basin river converges to a better quality in the presence of market power. Finally, we numerically compare our results to the Tagus-Segura water transfer described in Ballestero (2004). Welfare gains are compared for the different scenarios. We show that in all dynamic settings, the long-run transfer amount is lower than in Ballestero's static model. Further, we show that the long-run price settles at a lower level than in Ballestero's model, but is still higher than the average cost-based price determined by the Spanish government.     

Product line pricing in a vertically differentiated oligopoly

Abstract This paper examines the joint pricing decision of products in a firm’s product line. When products are distinguished by a vertical characteristic, those with higher values of that characteristic will command higher prices. We investigate whether, holding the value of the characteristic constant, there is an additional price premium for products on the industry and/or the firm frontier, that is, for the products with the highest value of the characteristic in the market or in a firm’s product line. We also investigate the existence of price premia for lower‐ranked products and other product line pricing questions. Using personal computer price data, we show that prices decline with the distance from the industry and firm frontiers, even after holding absolute quality constant. We find evidence that consumer tastes for brands is stronger for the consumers of frontier products (and thus competition between firms weaker in the top end of the market). There is also evidence that a product’s price is higher if a firm offers products with the immediately faster and immediately slower computer chip (holding the total number of a firm’s offerings constant), possibly as an attempt to reduce cannibalization. Finally, a product’s price declines with the time it is offered by a firm, suggesting intertemporal price discrimination.     

Invention under uncertainty and the threat of ex post entry

This article proposes a theoretical framework for studying the invention of new products when demand is uncertain. In this framework, under general conditions, the threat of ex post entry by a competitor can deter invention ex ante. Asymmetric market power in the ex post market exacerbates the problem. The implications of these general results are examined in a series of examples that represent important markets in the computer industry. The first is a model that shows how an operating system monopolist, by its mere presence, can deter the invention of complements, to its own detriment as well as that of society. The implications of policies such as patent protection, price regulation, and mandatory divestiture are considered. Three additional examples consider the ability of a monopolist in one market to commit to bundling an unrelated product, a pair of horizontally differentiated firms that can add a new feature to their products, and a platform leader that can be challenged in its base market by the supplier of a complementary product.     

Forecasting technological substitution: The logistic model of energy systems revisited

A simple logistic model of market substitution has been applied to situations where price and cost parameters vary in time. In such cases the market share does not necessarily evolve as a monotonous function of time. Although this particular feature of the model has not been validated against data from past experience, it can be applied heuristically to studying future trends in market penetration. As an example, possible competition patterns of coal and nuclear power as primary fuels for electricity production have been examined under various combinations of economical parameters. The illustrative results involve both cases where the nuclear contribution would be phased out as well as those where nuclear power could still maintain a strong position a few more decades to come.     

Resource Rights and Markets in a General Equilibrium Model of Production

Rights to a free resource lead to distributional deadweight losses in partial equilibrium. The present paper examines related distortions in a general equilibrium model of production with output prices constant for the small open economy. The free resource can result in lower output than a market with weak substitution in the other sector. The free resource also leads to a convex production frontier implying a price increase lowers output in the sector. Regarding policy, an import tariff, export subsidy, or price support would lower sector output. These general equilibrium distortions increase the incentives to favor resource markets over rights.