Wholly-owned vs. collaborative ventures for diversifying financial services

Recent empirical work has supported the Penrose-Teece view that firms diversify to exploit fully specific assets or capabilities. Where transactions costs permit, these economies of scope may be realized via input supply contracts among producers. However, asset specificities frequently create transactions costs which discourage market contracting and leave firms with a choice between collaborative ventures and wholly-owned new entry. This research uses the natural experiment of financial services deregulation to explore the collaborative-own entry choice for 292 new entries in 13 financial product markets. The results generally support our maintained hypotheses that specificity encourages full ownership while collaboration is used to ease a resource constraint.     

Input Price Discrimination and Allocation Efficiency

This research examines the effects of input price discrimination on allocation efficiency and social welfare. Instead of assuming constant marginal costs, we allow downstream firms to produce under increasing marginal costs. When downstream firms operate in separate markets, even though total output remains unchanged, consumer surplus and social welfare could be greater under discriminatory pricing than under uniform pricing. Moreover, the social desirability of input price discrimination can still hold true when downstream firms compete either in Cournot or Bertrand fashion.

     

Economic analysis of the introduction of the MVNO system and its major implications for optimal policy decisions in Korea

This study analyzes the anticipated economic effects arising from the introduction of the mobile virtual network operator (MVNO) system in the mobile communications service market. For the analysis, actual data (or estimated data)—such as price elasticity, the number of subscribers, traffic volume, rate, and access charge—were combined with an assumption about a competition scenario in the future market. Based on this analysis, consumer surplus, and change in the service provider's profits were estimated according to the type of policy that may be adopted for the MVNO system by the regulator. The results of the analysis indicate that consumer surplus appears to increase largely because of the reduction of the mobile service rate by the promotion of “service-based competition,” which occurs upon adoption of an MVNO policy in the mobile communication service market. Moreover, the introduction of an MVNO system into the mobile communication market seems to be socially beneficial regardless of policy type if access charges are set reasonably by a cost-plus or retail-minus method. In particular, in order to make sense of the introduction of a special MVNO, whether by the cost-plus method or the retail-minus method, the correct discount rate must be used in setting an access charge between the special MVNO and the significant market power (SMP) mobile network operator (MNO).     

Third-degree price discrimination in oligopoly with endogenous input costs

This paper examines the output effect of third-degree price discrimination in symmetrically differentiated oligopoly. We find that when the sellers’ input costs are chosen endogenously by an upstream supplier with market power, as opposed to being fixed exogenously, long-standing qualitative conclusions about the effect of price discrimination on aggregate output can be reversed. In contrast to previous findings (e.g., by Holmes, 1989), more intense competition in the strong market than in the weak market can make it less likely that price discrimination raises aggregate output. For linear demand functions, we establish necessary and sufficient conditions under which the output effect changes sign when input costs are endogenized.     

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.     

Vertical Contracts and Downstream Entry*

We study the implications of different contractual forms in a market with an incumbent upstream monopolist and free downstream entry. We show that traditional conclusions regarding the desirability of linear contracts radically change when entry in the downstream market is endogenous rather than exogenous. By triggering more entry than two-part tariffs, wholesale price contracts can generate higher aggregate output, consumer surplus, and welfare. In light of this, the upstream monopolist may prefer to trade with wholesale price contracts as well as to give up part of its bargaining power when it is high.     

Group identity in markets

We present a laboratory experiment that measures the effects of group identity—one's perceived membership in social groups—on market transactions in an oligopoly market with a few sellers and buyers. We artificially induce group identity using art preferences and college majors in different treatments, respectively. Subjects are randomly assigned into the roles of buyers and sellers and interact repeatedly. We find that the presence of groups influences both the selection of trading partners and the determination of prices. All else equal, sellers are more likely to make offers to ingroup buyers, and the buyers are more likely to accept offers from ingroup sellers. There are considerable intergroup price differentials with the outgroup sellers charging a lower price than the ingroup sellers.     

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.     

Regulation, Vertical Integration and Sabotage

We consider the incentive of a dominant firm that supplies a necessary input to a Bertrand-competitive differentiated products downstream industry to: (1) vertically integrate forward, and (2) raise its downstream rivals' costs through non-price activities which we characterize generally as 'sabotage'. We examine these incentives both in the absence and presence of a regulatory constraint on the upstream price. We find that, while an incentive for vertical integration is present regardless of the existence of the regulatory constraint, the incentive for sabotage emerges only in the presence of binding input price regulation. Welfare effects are also explored.     

The Welfare Effects of Non-Price Competition Among Real Estate Brokers

This paper examines the role of brokers in economizing on transaction costs in the housing market. By lowering the cost of transactions, brokers create welfare gains compared to a market in which buyers and sellers transact on their own. However, if brokers engage in unproductive, non-price competition to acquire a larger share of available listings, then some of the welfare gains are dissipated. Using a partial equilibrium model, this paper shows how an excessive commission rate can lead to this result.     

Food policy research for improving the reform of agricultural input and output markets in Central Asia

Agriculture is a significant component of the Central Asian economies. Since independence, the republics have implemented agricultural reforms in varying measure, yet production has fallen sharply across the region. The more ambitious agricultural reform programs have included measures aimed at liberalizing agricultural marketing, trade and prices. However, so far the expected supply response has yet to emerge. The objective of this paper is to highlight key policy and research issues surrounding reform of agricultural markets. It summarizes the main features of agricultural performance since the reforms, highlighting trends in grain and cotton, livestock, input use, and trade and analyzes key constraints to improvement of the sector, emphasizing price policy, sequencing problems, and institutional weakness. It presents a research agenda by identifying the main research needs for better agricultural policy design. It calls for more research on input and output market efficiency, private sector development, the effects of reform on farmers, sequencing issues, comparative advantage, water management, land tenure and farm size.     

Entry,imperfect competition,and futures market for the input

We analyze firms' entry, production and hedging decisions under imperfect competition. We consider an oligopoly industry producing a homogeneous output in which risk-averse firms face an entry cost upon entering the industry, and then compete in Cournot with one another. Each firm faces uncertainty in the input cost when making production decision, and has access to the futures market to hedge the random cost. We provide two sets of results. First, under general assumptions about risk preferences, demand, and uncertainty, we characterize the unique equilibrium. In contrast to previous results in the literature (without entry), both production and output price depend on uncertainty and risk aversion. Specifically, when entry is endogenized and the futures price is not actuarially fair, access to the futures market does not lead to separation. Second, to study the effect of access to the futures market on entry and production, we restrict attention to constant absolute risk aversion (CARA) preferences, a linear demand, and a normal distribution for the spot price. In general, the effect of access to the futures market on the number of firms and production is ambiguous.     

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.     

An antitrust analysis of bundled loyalty discounts

Consider a monopolist in one market that faces competition in a second market. Bundled loyalty discounts, in which customers receive a price break on the monopoly good in exchange for making all purchases from the monopolist, have ambiguous welfare effects. Such discounts should not always be treated as a form of predatory pricing. In some settings, they act as tie-in sales. Existing tests for whether such discounts violate competition laws do not track changes in consumer surplus or total surplus. We apply a new test to an illustrative example based on SmithKline that assumes the “tied” market has homogeneous goods. If the tied market is characterized by Hotelling competition, bundling by the monopolist causes the rival firm to reduce its price. In numerical examples, we find that this can deter entry or induce exit.     

Nonsequential search equilibrium with search cost heterogeneity

We generalize the model of Burdett and Judd (1983) to the case where an arbitrary finite number of firms sells a homogeneous good to buyers who have heterogeneous search costs. We show that a price dispersed symmetric Nash equilibrium always exists. Numerical results show that the behavior of prices and consumer surplus with respect to the number of firms hinges upon the nature of search cost dispersion: when search costs are relatively concentrated, entry of firms leads to lower average prices and greater consumer surplus; however, for relatively dispersed search costs, the mean price goes up and consumer surplus may decrease with the number of firms.     

Stabilizing food markets in eastern and southern Africa

A major challenge for agricultural policy in Africa is how to address the market instability-related causes of low farm productivity and food insecurity. This paper highlights structural changes affecting the behavior of food markets in eastern and southern Africa and discusses their implications for the design of strategies to stabilize food prices. These changes include (1) an increasing trend in maize prices toward import parity levels, reflecting an emerging structural maize deficit in much of the region; (2) increasingly diversified food consumption patterns in both rural and urban areas; (3) highly concentrated marketed maize surplus, which have largely unrecognized implications for the magnitude of price risk faced by most farm households; and (4) the strategic interactions between private and public marketing actors leading in some cases to heightened market instability and food crises. In the prevailing dual market environment now characterizing most of the region, greater coordination, transparency, and consultation between private and public market actors is needed to achieve reasonable levels of food price stability and predictability.     

How pastoralists perceive and respond to market opportunities: The case of the Horn of Africa

This article examines how pastoralists of the Horn of Africa negotiate the need for herd mobility (production) under conditions of variable rainfall and grazing conditions, with the necessity to market animals at fixed market locations. It addresses a set of related questions: (1) are herder mobility and other production decisions being altered by improved market opportunities; (2) what roles do markets play in pastoralist drought and drought recovery strategies; (3) which groups of producers are taking advantage of and/or benefiting from which market chains; and (4) what factors other than price help to explain why and when pastoralists sell livestock? The article concludes that macro-economic forecasts about supply response in the region may be overly optimistic and off target, because they fail to appreciate the non-price factors that influence pastoralist households’ decisions to sell livestock.     

Entry in Local Telecommunication Markets

In this paper, we explore the determinants of recent entry into local exchange service, and the role that regulatory policies have had in aiding this policy objective. Our results suggest that the 1996 Telecommunications Act did lead to some entry, but that strategic non-price behavior by incumbents may have offset this impact to some extent. We also find that regulatory policies and market fundamentals play an important role in determining entry. Clearly, market size (measured in various ways) is an important determinant of entry, while there is empirical support for the role of more flexible regulatory mechanisms in promoting new entry.     

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.