Opportunity Cost Pass‐Through from Fossil Fuel Market Prices to Procurement Costs of the U.S. Power Producers

This paper investigates the transmission of fossil fuel commodity spot market price changes to procurement costs of U.S. power producers. We measure and compare the speed and magnitude with which spot prices predict procurement costs using restricted access fuel price data. Natural gas spot prices are quickly reflected in procurement costs. Coal spot prices offer very little predictive power to coal procurement costs. Although not causal, the empirical results also show differences across regulatory status. These findings may have implications for the electricity market deregulation literature that creates marginal cost curves as a competitive benchmark.     

Non-Exclusive Dealing with Retailer Differentiation and Market Penetration

Retailer differentiation exists in most industries and gives manufacturers an incentive to contract with different retailers to penetrate a market. This paper analyzes the impact of this penetration effect on vertical contract exclusivity in an oligopolistic model with differentiated retailers. In the model, manufacturers endogenously choose contract types and negotiate with retailers on wholesale prices. We show that, when the penetration effect is sufficiently strong, non-exclusive contracts lead to higher profits for the manufacturers and retailers. The model is applied to an example with logit demand, which shows that both manufacturers choosing the non-exclusive contracts is a dominant-strategy Nash equilibrium even though they may both be better off under exclusive contracts when the products have high quality or low costs.     

Auctioning Horizontally Differentiated Items

This paper analyzes competition between two sellers that offer horizontally differentiated items at competing auctions. Three possible outcomes can arise in equilibrium. For substantially differentiated items the monopoly reserve prices form an equilibrium, and the market is not entirely covered. When products become closer substitutes, a non-empty interval of types becomes valuable to both sellers. When transport costs are low, and virtual valuations are high, sellers compete for these bidders and set their reserve prices below the valuation of the marginal bidder. In equilibrium all types enjoy participation rents. For intermediate levels of transport costs it is not worth competing for runaway bidders. In this case, there is a continuum of equilibria. In each equilibrium sellers adjust their reserve prices so that the marginal bidder gets no rents.     

Capacity reservation under spot market price uncertainty

Capacity reservation contracts and spot markets are two alternative purchasing practices. We focus on the cost-effective management of the combined use of these two procurement sources. Due to the variability of the spot market prices and demand uncertainty, the flexibility of combined sourcing can be advantageous. Spot market purchasing is a benefit in case of low spot market prices or insufficient reserved capacity, and the capacity reservation contract is an operational risk hedging for high spot market price incidents. The structure of the optimal combined purchasing policy is complex. In this paper we consider a simple and easy-to-implement capacity reservation—base stock policy and compare it to single sourcing options. We examine the joint effect of demand and spot market price uncertainty. Our analysis shows that in the case of large spot market price variability the combined sourcing is superior over spot market sourcing even in the case of low average spot price. The combined sourcing is also superior over long-term sourcing even in the case of high average spot price if there is large spot market price variability. Analytical and simulation results are presented to show the effect of the different price, cost, and uncertainty parameters on the optimal capacity reservation—base stock policy and on the expected percentage gain over single sourcing.     

An experimental test of automatic mitigation of wholesale electricity prices

In several major deregulated electricity generation markets, the market operator uses an “automatic mitigation procedure” (AMP) to attempt to suppress the exercise of market power. A leading type of AMP compares the offer price from each generation unit with a recent historical average of accepted offer prices from that same unit during periods when there was no transmission-system congestion to impede competition. If one or more units' offer prices exceed the recent historical average by more than a specified margin, and if these offer prices raise the market-clearing price by more than a specified margin, the market operator replaces the offending offer prices with lower ones. In an experiment, we test an AMP of this type. We find that it keeps market prices close to marginal cost if generation owners have low market power in uncongested periods. However, with high market power in uncongested periods, a condition that may apply in many parts of the world, the generation owners are able to gradually raise the market price well above short-run marginal cost in spite of the AMP. We also test the effect of the AMP on the frequency with which high-variable-cost units are used, inefficiently, in place of low-variable-cost units.     

Training and Labour Market Flexibility: Is There a Trade-off?

This paper explores the nexus between work-related training and labour market 'flexibility' (which we proxy by contract type, part-time employment and lack of union coverage), using the first five waves of the British Household Panel Survey (BHPS) conducted over the period 1991–5. Our results show that workers on short-term employment contracts, who are working part-time or are not covered by a union collective agreement, are significantly less likely to be involved in any work-related training to improve or increase their skills. These findings suggest that there is a trade-off between expanding the more marginal forms of employment and expanding the proportion of the work-force getting work-related training.     

Robust exclusion and market division through loyalty discounts

We show that loyalty discounts create an externality among buyers because each buyer who signs a loyalty discount contract softens competition and raises prices for all buyers. This externality can enable an incumbent to use loyalty discounts to effectively divide the market with its rival and raise prices. If loyalty discounts also include a buyer commitment to buy from the incumbent, then loyalty discounts can also deter entry under conditions in which ordinary exclusive dealing cannot. With or without buyer commitment, loyalty discounts will increase profits while reducing consumer welfare and total welfare as long as enough buyers exist and the entrant does not have too large a cost advantage. These propositions are true even if the entrant is more efficient and the loyalty discounts are above cost and cover less than half the market. We also prove that these propositions hold without assuming economies of scale, downstream competition, buyer switching costs, financial constraints, limits on rival expandability, or any intra-product bundle of contestable and incontestable demand.     

Financial and operational instruments for commodity procurement in quantity competition

We analyze a commodity procurement problem under uncertain future procurement prices and product demands. An optimization model is presented that finds the best mix of advance procurement, spot market procurement, and financial options to satisfy demand in an asymmetric and duopolistic sales market. One firm can only procure just-in-time whereas the other can additionally procure in advance via inventories or option contracts. We show that even under arbitrage-free procurement prices, inventories and option contracts both provide an advantage in comparison to pure just-in-time procurement. However, inventories turn out to dominate option contracts due to a stronger capacity commitment.     

Pensions as Psychological Contracts: Implications for Work Outcomes

Drawing on psychological contract theory, we develop predictions regarding the moderating influence of the meaning employees assign to their marginal quit costs, as well as on the role of stayer perceptions and saver effects, on various work outcomes under a defined-benefit pension. Results show pension incentives can have favorable or unfavorable effects depending on whether employees perceive them as supportive relational contracts or as low-trust transactional contracts. Implications for research and policy are discussed.     

Asymmetric price adjustments: A supply side approach

Using a model of dynamic price competition, we provide an explanation from the supply side for the well-established observation that output prices react faster in response to input cost increases than to decreases. When costs decline, the opportunity of profitable storing in anticipation of higher future costs allows competitive firms to coordinate on prices above current marginal costs. The initial price response is only partial and profitable storing relaxes competition. Conversely, when costs rise, storing is not beneficial in anticipation of lower future costs and firms immediately adjust their prices to current marginal costs, which entails the standard Bertrand outcome. Our results shed new light on the empirical evidence about asymmetric pricing and can stimulate further empirical investigation on this puzzle.     

Language as a barrier to entry: Foreign competition in Georgian public procurement

Provision of government contract information in English reduces the barriers to participation by foreign suppliers. We measure this effect using data from the country of Georgia, where English translations of government tenders were provided above specified contract size thresholds, which varied over time and across contract types. The provision of English documentation more than doubles foreign company participation for low value contracts, and leads to smaller, though still substantial, increases for higher value contracts. Because foreign bidder participation in Georgia is relatively small, the resulting impact on prices is in the order of only one percent.     

QUANTIFYING MARKET POWER IN THE GERMAN WHOLESALE ELECTRICITY MARKET USING A DYNAMIC MULTI‐REGIONAL DISPATCH MODEL*

This paper quantifies the degree of market power in the German wholesale electricity market. A dispatch model simulates competitive marginal costs. In addition to common input factors like plant capacities, fuel prices and load structures, the model also incorporates international power exchange and dynamic effects like start‐up costs and hydro storage plant dispatch. The simulated prices are subsequently used as a benchmark for observed electricity prices. The analysis reveals significant market power in the German electricity market, mainly exhibited during peak periods. Producer surplus is also increased significantly due to strategic behavior.     

How Do Switching Costs Affect Market Concentration and Prices in Network Industries?

I investigate the effects of switching costs on the market outcome in network industries using a dynamic duopoly model of price competition in the presence of an outside option. I find that the role of switching costs depends on network effects and the outside option. Without a viable outside option, high switching costs can neutralize the tendency towards high market concentration associated with network effects, but with a viable outside option, switching costs increase market concentration. Furthermore, switching costs lower prices if network effects are modest and there exists a viable outside option, but generally raise prices otherwise.     

MARKET POWER,VERTICAL INTEGRATION AND THE WHOLESALE PRICE OF GASOLINE*

This paper examines empirically the relationship between vertical integration and wholesale gasoline prices. We use discrete and differential changes in the extent of vertical integration generated by mergers in West Coast gasoline refining and retailing markets to test for incentives to raise rivals' costs. The research design allows us to test for a relationship between vertical integration and wholesale prices, controlling for horizontal market structure, cost shocks and trends. We find evidence consistent with the strategic incentive to raise competitors' input costs. This suggests that vertical integration can have a significant impact on wholesale prices.     

Do International Roaming Alliances Harm Consumers?

This paper develops a model of international roaming in which mobile network operators (MNO's) compete both on the wholesale market to sell roaming services to foreign operators and on the retail market for subscribers. To allow their subscribers to place or receive calls abroad, they have to buy roaming services provided by foreign MNO's. In the absence of international alliances, competition between foreign operators would drive wholesale unit prices down to marginal costs. However, international alliances are endogenously formed since they serve as a commitment device to soften competition on the retail market, leading to excessively high roaming per‐call prices.     

Contract farming configuration: Smallholders’ preferences for contract design attributes

While Contract Farming (CF) can enhance smallholders’ income in developing countries, empirical research on the motivation of smallholders to participate in CF is scarce. This paper explores farmer preferences for particular contract design attributes. We combined analytical hierarchy process and discrete choice experiments to investigate the importance of contract design attributes. On the basis of data collected among potato farmers in Ethiopia, we found that input market uncertainty is more important than output market uncertainty in smallholders’ decision to participate. Farmers tend to minimize their risk by opting for the buyer firm above the state and NGOs as providers of seed, inputs, and technical assistance. The results imply that the success of a CF scheme depends on the willingness of the firm to incorporate the preferred contract design attributes. Institutional intervention in the input market could induce agribusiness firms to offer attractive contracts for smallholders.     

Analytical Screens for Electricity Mergers

Electricity mergers pose distinct challenges for competition policy. Electricity demand is highly inelastic in the short run, storage is limited, and transmission constraints limit the ability to substitute generation at other locations. As a result, a merger can affect prices in many different markets and even generators with small market shares may be able to exercise market power. The U.S. Federal Energy Regulatory Commission’s approach for screening horizontal mergers, based on the concentration thresholds in the Department of Justice/Federal Trade Commission Horizontal Merger Guidelines, can fail to identify mergers that lessen competition, and mergers that fail the FERC screen may have no significant anticompetitive effect. We propose competitive residual demand (CRD) analysis, which examines the supply curves of the markets affected by a merger and considers the ability and incentive of firms to raise prices before and after a proposed merger. CRD analysis is a relatively easy way to address the incentives for generators to exercise market power and relies on data that are often available. Vertical (convergent) mergers between electricity and gas raise additional concerns, and we propose a methodology to screen vertical mergers.     

Markets Linked by Rising Marginal Costs: Implications for Multimarket Contact,Recoupment, and Retaliatory Entry

This paper studies the effects on prices and welfare of multimarket contact when firms serve multiple markets from a single facility with rising marginal costs. Here a link is created between markets, even with independent demands: greater output in one market leads to a higher marginal cost and lower output in other markets; and multimarket contact can indeed lower welfare. Variations of the model can explain two other puzzling phenomena: “recoupment” – lower prices in one market “paid for” by higher prices in other markets; and “retaliatory entry” – the credible threat to enter a rival’s market if it enters yours.     

The Economics of Internal Labor Markets

Our essay focuses on the economics of long-term contractual relationships between a firm and its employees, referred to as the internal labor market. We review the economics literature on match-specific investments, risk aversion, asymmetric information, and transaction costs. We argue that an integrated treatment of all four factors is needed in order to apply implicit contract theoy to internal labor markets. Integrating the topics also highlights the tradeoffs created among these factors. Our discussion stresses contract enforcement mechanisms, including self-enforcing contracts and third-party enforcement.     

Third-Degree Price Discrimination in Oligopoly when Markets are Covered*

We analyze oligopolistic third-degree price discrimination relative to uniform pricing when markets are covered. Pricing equilibria are critically determined by supply-side features such as the number of firms and their marginal cost differences. It follows that each firm's Lerner index under uniform pricing is equal to the weighted harmonic mean of the firm's relative margins under discriminatory pricing. Uniform pricing then lowers average prices and raises consumer surplus. We can calculate the gain in consumer surplus and loss in firms' profits from uniform pricing based only on the market data of the discriminatory equilibrium (i.e., prices and quantities).