Price asymmetries and the path dependence of market power: Evidence from the U.S. airline industry

This paper uncovers price asymmetries across oligopolistic and monopolistic markets that are seemingly identical in structure but different in competitive history. This is done by identifying “quiet life” markets that have not (yet) experienced a change in structure, and “non-quiet life” markets that have been disrupted by firm entry and/or exit. Using a long panel dataset from the U.S. airline industry, we find that quiet life duopolies price significantly higher than duopolies that come about by entry in monopoly, and that quiet life monopolies price significantly lower than monopolies that come about by exit in duopoly. We show that the path towards a particular market structure matters for the determination of prices and explore several mechanisms that likely explain the price asymmetries, including engagement in anticompetitive behaviour, adjustment behaviour to market structure changes, and the cost heterogeneity of competing firms.     

Estimating Market Power in the US Copper Industry

Before 1978, most of the domestic copper production in the US and an important share of imports were traded at a price set by the major US producers. At the same time, the rest of the world was trading copper at prices determined in auction markets. This two-price system ended in 1978, when the largest US producers began using the Comex price of refined copper as a benchmark for setting their prices. Using this regime shift, I empirically test the competitive behavior of the US copper industry before 1978. The results show that copper prices were close to the levels predicted by a competitive model of the industry.     

Collusion Under Imperfect Monitoring with Asymmetric Firms

We explore the effects of asymmetries in capacity constraints on collusion where market demand is uncertain and where firms’ sales and prices are private information. We show that all firms can infer when at least one firm's sales are below some firm‐specific ‘trigger level.’ When firms use this public information to monitor the collusive agreement, price wars may occur on the equilibrium path. Symmetry facilitates collusion but, if price wars are sufficiently long, then the optimal collusive prices of symmetric capacity distributions are lower on average than the competitive prices of asymmetric capacity distributions. We draw conclusions for merger policy.     

Market Power in International Commodity Trade: The Case of Coffee

This paper studies the impact of market power on international commodity prices. I use a standard oligopoly model and exploit historical variations in the structure of the international coffee bean market to assess the impact of a cartel treaty on coffee prices and its global welfare consequences. The results suggest that the International Coffee Agreement (ICA, 1965–89) raised its price by 75% above the Cournot‐competitive level, annually transferring approximately $12 billion from consumers to exporting countries, and its lapse in 1989 explains four‐fifths of the subsequent price decline, that is, the ‘coffee crisis.’     

The Competitive Effects of a New Product Introduction: A Case Study

This paper analyzes the competitive effect of a new product introduction. We break the overall competitive effect into two parts: the effect on the prices of existing products due to increased competition, and the effect of having additional product variety. Using data from both before and after the introduction, we directly estimate the price effects and the additional variety effect. Then, using only the estimated post–introduction demand structure, along with an assumed model of competition, we estimate the price effects indirectly. By comparing the 'indirect' and 'direct' estimates, we assess the validity of alternative models of competition for the industry.     

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.     

Crop prices and the individual decision to migrate

This paper investigates the effect of commodity prices, in particular rice and coffee, on the decision of migrating at the individual level. As most coffee production is sold by households for exports, we would expect that coffee price shocks would have a direct effect on the probability to migrate. On the other hand, we would anticipate that fluctuations in rice prices have little or no effect on migration decisions, given that rice is mainly produced for household consumption. We test these hypotheses drawing evidence from migration in Viet Nam. We show that the lower the price of coffee, the higher the likelihood of migrating. This evidence seems to suggest that migration acts as a shock-coping strategy. We find that rice prices have no effect on the probability of migrating. We further explore the extent of migrants’ self-selection and show that lower coffee prices increase the migration probability of individuals with lower education.     

Reprint of: Crop prices and the individual decision to migrate

This paper investigates the effect of commodity prices, in particular rice and coffee, on the decision of migrating at the individual level. As most coffee production is sold by households for exports, we would expect that coffee price shocks would have a direct effect on the probability to migrate. On the other hand, we would anticipate that fluctuations in rice prices have little or no effect on migration decisions, given that rice is mainly produced for household consumption. We test these hypotheses drawing evidence from migration in Viet Nam. We show that the lower the price of coffee, the higher the likelihood of migrating. This evidence seems to suggest that migration acts as a shock-coping strategy. We find that rice prices have no effect on the probability of migrating. We further explore the extent of migrants’ self-selection and show that lower coffee prices increase the migration probability of individuals with lower education.     

Cournot and Bertrand equilibria compared: substitutability,complementarity and concavity

This paper assesses the view that Bertrand equilibrium is intrinsically more competitive than Cournot equilibrium. We consider an oligopoly model with linear demand, and a mixture of substitute and complementary products. Our results provide support for the conventional wisdom, and also indicate its limitations. We provide counter-examples showing that no clear-cut comparison of prices and quantities is possible without strategic complementarity in either of the two games. However, price competition is indeed more competitive according to the following criteria: lower mark-up/output ratios, larger average output, and lower average price.     

Do Edgeworth price cycles lead to higher or lower prices?

A recent literature seeks to understand the causes of the high-frequency, asymmetric retail price cycles observed in many retail gasoline markets. However, much less attention has been given to the effects of the cycles, in particular, whether the cycles lead to higher or lower prices and margins. The leading theory for the underlying cause of the price cycles, Edgeworth price cycles, is silent on the issue. The challenge in addressing this most important question has been the difficulty in isolating cycle effects from other confounding factors, especially market structure. In this article, I exploit a unique natural experiment to isolate the effect of cycles — a refinery fire that, in a matter of days, halted cycles that had previously persisted for decades. I find that Edgeworth price cycles lead to lower prices and lower margins. I conclude with implications for competition policy.     

MARKET POWER AND PRICE MOVEMENTS OVER THE BUSINESS CYCLE*

This paper develops and tests implications of an oligopoly‐pricing model. The model predicts that during a demand expansion, the short run competitive price is a pure strategy Nash equilibrium but in a recession, firms set prices above the competitive price. Thus, price markups over the competitive price are countercyclical. Prices set during a recession are more variable than prices set in expansions because firms employ mixed strategy pricing in recessions. The empirical analysis utilizes Hamilton's time series switching regime filter to test the predictions of the model. Fourteen out of fifteen industries have fluctuations consistent with this oligopoly‐pricing model.     

Demand for coffee in Sweden: The role of prices, preferences and market power

There is a widespread belief that consumer coffee prices are high relative to bean prices and that lower consumer prices would lead to substantial increases in bean exports from Third-World countries. This issue is evaluated by analysing how retail prices, preferences and market power influence coffee demand in Sweden. A demand function is estimated for the period 1968–2002 and used, together with information on import prices of coffee beans, to simulate an oligopoly model. This approach gives estimates of the maximum average degree of market power and shows how coffee demand would react to reductions in marginal cost to its minimum level. The maximum level of market power is found to be low, but it generates large spreads between consumer and bean prices because the price elasticity has low absolute values. Moreover, the impact of a price decrease would be small because long-run coffee demand is dominated by changes in the population structure in combination with different preferences across age groups. Hence, a change to perfect competition would only have a negligible effect on bean imports.     

A protectionist foodgrain price policy : The case of rice in Panama

Panama has pursued a protectionist price policy for rice, with domestic prices well above the world market level. The government marketing authority purchases sufficient rice to support the established price level and stores or exports the surplus. Although producers benefit, this policy imposes significant costs on consumers, government expenditures and economic efficiency. One policy recommendation is to bring domestic prices in line with the international level. Although free trade is one possibility, a market stabilization programme could be retained. At a minimum Panama's rice price should reflect domestic demand and not production costs. The unfavourable rice-fertilizer price ratio also deserves attention.     

HOW DOES THE INTERNET INFLUENCE PRICE DISPERSION? EVIDENCE FROM THE AIRLINE INDUSTRY*

I estimate the Internet's effect on the level and dispersion of airline fares on a given route within and across firms. The results suggest that increases in Internet penetration reduce average price and lead to higher intrafirm price dispersion, while increases in Internet penetration do not affect interfirm price dispersion on a given route. Internet penetration affects average fares most in competitive markets. These results suggest that the Internet has significantly but subtlely influenced domestic airline competition. The effect of the Internet on prices and price dispersion is larger on direct flights.     

Price Controls and Market Structure: Evidence from Gasoline Retail Markets

In this paper we study the effect of price floor regulations on the organization and performance of markets. The standard interpretation of the effects of these policies is concerned with short‐run market distortions associated with excess supply. Since price controls prevent markets from clearing, they lead to higher prices. While this analysis may be correct in the short‐run, it does not consider the dynamic equilibrium consequences of price controls. We demonstrate that price floor regulations can have important long‐run effects on the the structure of markets by crowding them and creating endogenous barriers to entry for low‐cost retailers. Moreover, we show that these factors can indirectly lower productivity and possibly even prices. We test this in the context of an actual regulation imposed in the retail gasoline market in the Canadian province of Québec and show that the policy led to more competition between smaller/less efficient stations. This resulted in lowered sales, and, despite the reduction in efficiency, did not increase prices.     

Regulation of international roaming in the European Union—Lessons learned

This paper analyzes the evolution of prices and competition in intra-EU international roaming markets. It addresses three main research questions: (i) to what extent have market forces by themselves brought competition to retail roaming markets? (ii) Has the evolution of market dynamics in wholesale roaming improved competition? (iii) Is wholesale regulation sufficient to lead to a reduction in retail roaming prices? Data show that there has been little price-based competition both at wholesale and retail levels, despite prices being well above costs and the significant margins allowed by regulation. Available data from the period preceding the entry into force of the first EU roaming regulation also point to the same conclusion. Lack of competitive pressure in retail roaming markets and inelastic demand give little incentives for retail roaming service providers to lower prices. Wholesale international roaming markets have complex competition dynamics. They are characterized by the reciprocity of wholesale roaming agreements and traffic internalization inside transnational groups. These circumstances limit price competition at the wholesale level. The traditional regulatory approach applied to electronic communication markets has been primarily focused on wholesale regulation. However, empirical evidence shows that even if wholesale charges are reduced, retail roaming markets continue to operate at very high retail margins (for example, more than 200% retail mark-up over wholesale charges for data roaming services and incoming calls). This proves that in international roaming markets wholesale charge reductions are not necessarily passed on to retail prices. It can thus be inferred that wholesale price regulation alone is in most cases not sufficient to ensure that benefits are passed through to end users.     

考虑结构突变的大宗商品价格波动对中国经济的影响分析

本文从结构突变的视角,考察国际大宗商品价格波动对中国经济的影响规律。首先,运用内生多重结构突变的Bai-Perron检验,发现从1990～2015年的国际原油价格指数、工业投入品（包括金属和农产品）价格指数、中国工业增加值增长速度、消费物价指数等4个指标均存在结构突变现象。然后,利用退势处理方法去除这4个指标的结构突变影响,并运用结构向量自回归（SVAR）模型,建立了这4个指标之间的动态关系系统。脉冲响应分析表明,国际原油价格上升,短期内会减缓我国经济增长速度,但中期内反而会对经济有小幅刺激作用,同时会逐渐拉升我国物价水平;工业投入品价格上升也会减缓我国经济增长速度,但会先拉升后降低物价水平。本文通过考虑结构突变这一重要因素,能更精确地揭示国际大宗商品价格波动对中国经济的影响情况。     

CUT‐THROAT FRINGE COMPETITION IN AN EMERGING COUNTRY MARKET: TAX EVASION OR THE ABSENCE OF MARKET POWER?*

Brazil's established soft‐drink firms recently lost ground to multiple low‐price entrants, with small‐scale operations and minimal advertising. While incumbents attributed such undercutting to entrants' lower costs from non‐compliance with the law, ‘generics’ counterargued that incumbents' high prices stemmed from unilateral market power rather than cost heterogeneity. By estimating a structural model, I can single‐handedly explain established brands' high prices through low equilibrium price elasticities of demand. Tax evasion in the fringe, while plausible, appears to be offset by higher procurement costs or less efficient scale. More generally, a competitive informal sector can alleviate the allocative distortions in certain concentrated industries.     

Pricing behavior in United States manufacturing industries: A statistical study using disaggregated data

We investigate the relationship between industrial market structure and price flexibility (the administered-pricing hypothesis) across United States manufacturing industries by embedding market-structure variables in a model relating relative price variability (dispersion) and inflation. While we find support for a positive relationship between variability and inflation, we do not find that high seller concentration lessens the impact of inflation on price variability. We do find that the larger the efficient-sized plant, the lower the impact of inflation on variability. We also find strong effects of input prices and degree of product durability on relative price variability.