Competition for exclusive customers: comparing equilibrium and welfare under one-part and two-part pricing

Abstract.  This paper compares one-part and two-part pricing in a discrete-continuous choice model, providing more extensive welfare results than prior literature. Under two-part pricing, firms may set fixed fees with or without 'unit-price commitment,' where the lack of unit-price commitment is consistent with 'after-market monopolization.' We find that two-part pricing with unit-price commitment is firms' dominant unilateral and joint pricing policy. Two-part pricing without unit-price commitment is the least desirable policy from a welfare standpoint. Under appropriate conditions, one-part pricing produces the highest consumer and social welfare, but the lowest profits.     

Measuring welfare losses from interruption and pricing as responses to water shortages: an application to the case of Seville

Supply cuts and pricing policies can be used to ration water. The appropriateness of a given policy depends on the losses in social welfare which it generates. We find some drawbacks with the only method in the previous literature which deals with the issue of measuring welfare losses under supply cuts. We propose an alternative method. We compare the welfare losses under supply cuts and a pricing policy during the drought period of 1992–1996 in Seville, Spain, using both methods, and find that the results vary widely from one method to the other.      

Why some product innovations are licensed and others are not?

We study in a Stackelberg industry the licensing of a product that embodies an innovation (quality-improving product) whose owner may be the firm that plays as a leader or a follower in setting output in the the product market. We find that the innovation is transferred (and social welfare is reduced) if its owner is the market-leader firm. However, if the innovation is in the hands of the market-follower firm, it is not licensed, even though licensing would be welfare enhancing. Thus, subsidizing R&D with the mandatory licensing of the resulting innovation may be a socially desirable policy.     

The Welfare Impact of Self-supplied Water Pricing in Canada: A Computable General Equilibrium Assessment

This paper uses a computable general equilibrium model to assess the welfare cost of changing the method of water allocation in Canada towards one that uses prices to ration demand. We model the introduction of a price on both water that is abstracted as well as water that is consumed (that is abstracted, and not returned to the source). We estimate that reducing water consumption by 25 % would require imposition of a price on water consumption of around $$\$0.21/\text{ m }^{3}$$ . Similarly, introduction of a water abstraction charge of about $$\$0.013/\text{ m }^{3}$$ would be sufficient to reduce water abstraction by 25 %. We find that if revenues from water pricing are returned in lump sum to households, the introduction of water pricing would result in a modest welfare loss. When revenues from water pricing are used to offset existing taxes, we find a gain in welfare corresponding to a ‘strong double dividend.’     

Intermediaries,transport costs and interlinked transactions

Farmers in developing countries often encounter difficulties selling their products on local markets. Inadequate transport infrastructure in rural areas and large distances between areas of production and consumption mean that farmers find it costly to bring their produce to the market and this very often results in small net margins and poverty among farmers who are geographically isolated. Agriculture in developing countries is characterized by the presence of intermediaries that have a cost advantage over farmers. Because of their market power, these intermediaries are able to impose interlinked contracts and are free to choose the spatial pricing policy they use. In this paper, we develop a model of input–output interlinked contracts between an intermediary and geographically dispersed farmers. We establish when the intermediary uses either uniform or mill pricing policies, as opposed to spatial discriminatory pricing. For each pricing policy, we analyze what the welfare implications are in terms of an increase in farmers' income and a reduction in poverty in rural areas. We also establish how the choice of a spatial pricing policy impacts geographically isolated farmers and how it influences the participation by farmers.     

Should central bankers discount the future? A note

Optimal monetary policy under discretion is analysed in a New Keynesian model with rule of thumb pricing. The paper finds that social welfare increases if the policy maker does not discount the future. The welfare improvement rises with the extent of intrinsic inflation persistence.     

A proposal for social pricing of water supply in Côte d'Ivoire

We consider the design of a nonlinear social tariff for residential water in Côte d'Ivoire, which is a case of a monopolistic private operator supplying a population of heterogeneous consumers. The proposed optimal tariff includes an initial “social” block with a low unit price, and higher consumption blocks with a monopoly pricing rule. This optimal nonlinear tariff is calibrated using econometric estimates of a panel-data residential water demand equation. Welfare changes associated with moving from the actual tariff to approximations of the optimal pricing system are computed under different tariff scenarios. We find that gains in consumer welfare would outweigh losses in producer surplus in a majority of Ivorian local communities.     

Tariffs and privatization policy in a bilateral trade with corporate social responsibility

Corporate social responsibility (CSR) has become a global business strategy and thus it provides significant welfare implications for designing optimal policies. This paper investigates the impact of CSR on policy interaction between tariffs and privatization in an international bilateral trade model. We find that CSR is closely related to the government's policy decisions on tariffs. In particular, we find that the strategic tariff for increasing domestic welfare is always higher (lower) than the efficient tariff for improving global welfare when the degree of CSR is low (high). We also show that a privatization policy raises tariff and worsens (improves) domestic welfare when the degree of CSR is low (high). Finally, we demonstrate that both countries choose a nationalization policy even though the privatization policy is globally optimal when the degree of CSR is high.     

Price-Matching Policies and Entry

A price-matching policy is a commonly observed pricing practice in retailing markets. When firms use this policy they are publicly committing themselves to match the prices of their competitors. The aim of this analysis is to show that, in a spatial free-entry model, the effects of a price-matching policy are an increase in the number of sellers, an increase in prices and a decrease in consumer surplus and social welfare. Moreover, there is the striking result that in a price-matching equilibrium an increase in the number of firms entering the market raises prices.     

Certification and minimum quality standards when some consumers are uninformed

We compare certification to a minimum quality standard (MQS) policy in a duopolistic industry where firms incur quality-dependent fixed costs and only a fraction of consumers observe the quality of the offered goods. Compared to the unregulated outcome, both profits and social welfare would increase if firms could commit to producing a higher quality. An MQS restricts the firms׳ quality choice and leads to less differentiated goods. This fuels competition and may therefore deter entry. A certification policy, which awards firms with a certificate if the quality of their products exceeds some threshold, does not restrict the firms׳ quality choice. In contrast to an MQS, certification may lead to more differentiated goods and higher profits. We find that firms are willing to comply with an ambitious certification standard if the share of informed consumers is small. In that case, certification is more effective from a welfare perspective than a minimum quality standard because it is less detrimental to entry.     

国有股权重、政策性负担与绩效——国有银行战略引资方案探析

We present a mixed oligopoly model for private banks and a public bank with mixed ownership and policy burden to research the program of strategic investor importing for state-owned banks. We find that close relationships exist among the equilibrium equity structure following strategic investor importing, the policy burden of state-owned banks and the number of private banks; that the policy burden of state-owned banks has positive relationships with the performance of private banks, with overall negative effect on social welfare; that the policy burden would not affect the maximum market capacity number of private banks but would affect the equity structure of state-owned banks with such a number.     

国有股权重、政策性负担与绩效——国有银行战略引资方案探析

本文结合当前国有银行战略引资的改革背景,构建银行业混合寡占、国有银行混合持股的古诺竞争均衡模型,研究认为战略引资后的均衡股权结构与国有银行所承担的政策性负担及私有银行数量密切相关;国有银行政策性负担与私有银行的经营绩效正相关,但从整体来看则损害了社会总福利.另外,政策性负担不影响市场可容纳的最大银行数量,但会影响达到这一数量时国有银行的股权结构.     

Immigration and remittances in a two-country model of growth with labor market frictions

We present a North-South model with labor market frictions and labor migration to study the dynamic implications of workers mobility on employment, capital accumulation and welfare. In the baseline model, the Northern country is able to control immigration flows by setting a cap on the number of foreign workers. We find that, despite an increase in migration displaces native employment in the short-run, a permanent raise of the migration cap stimulates capital accumulation, improves labor market conditions and increases social welfare in the long run. In an extension of the model, we also test the long-run effects of a pro-employment protectionist policy consisting in imposing a distortionary tax on immigrant employment. We find that the protectionist policy in North, while increasing national welfare, damages the macroeconomic performance of the domestic economy and is not effective in improving native employment.     

Social welfare loss due to second-best pricing: an application to the Portuguese telecommunications

The telecommunications industry is usually characterized by low marginal costs and significant fixed costs which are the conditions for the inefficiency of marginal cost pricing. In such cases theory postulates that optimal pricing is obtained by maximizing welfare subject to a restriction of viability of the firm: the second-best pricing scheme. The possible welfare losses due to second-best pricing varies according to the values of marginal costs, prices and demand elasticities. This paper analyses to what extent the second-best pricing has been achieved in the Portuguese telecommunications firm CTT, over the period 1950#150;1984 as well as the magnitude of the price-cost margins and welfare losses created. We obtained empirical evidence of the presence of economies of scale, a welfare loss estimate of 1% of the telecommunications receipts and a result that price was 40% greater than marginal cost. We concluded that price regulation and public ownership of the firm did not seriously affect social welfare over the sample period (it should be noted that it is the non-digital and fixedwire infrastructure period). Therefore, it is important to study the impact of new digital and non-wire technologies and new services provided in the old regulatory scenery.     

考虑港口收费管制的进出口贸易竞争研究

考虑港口的收费管制因素,建立了进出口贸易竞争模型。该模型由一个出口国和两个进口国组成,且各国都拥有一个港口,位于出口国的两家公司均向两个进口国销售商品,并在各个进口国展开市场竞争（古诺竞争或伯川德竞争）,各贸易国的港口根据其是否存在价格管制确定港口收费。针对进出口公司的每种竞争模式,得到了不同的港口收费管制组合下各贸易国的港口收费、港口利润和社会福利,并将竞争均衡结果进行了比较。研究发现： （1）在进出口公司古诺竞争模式下,若三个贸易国的港口都无收费管制（有收费管制）且进出口产品的差异较大 （小）时,各贸易国的社会福利和港口利润均更高; （2）在进出口公司伯川德竞争模式下,若进出口产品的差异较大 （小）,则出口国的港口利润主要取决于港口收费 （贸易量）,而进口国恰好相反; （3）当进出口产品的差异较大 （小）时,进出口公司在古诺 （伯川德）竞争模式下各贸易国的社会福利、港口利润以及港口使用费都更高。     

Should the Social Security Trust Fund Hold Equities? An Intergenerational Welfare Analysis

In a stochastic economy with overlapping generations, fiscal policy affects the allocation of aggregate risks. The paper shows how to compute the welfare effects of marginal policy changes that shift risk across cohorts, in general and for an application to social security equity investments. I estimate the relevant correlations between macroeconomic shocks and equity returns from 1874–1996 U.S. data, calibrate the model, and find positive welfare effects for equity investments. Since stock returns are positively correlated with social security's wage-indexed benefit obligations, equity investments would also help to stabilize the payroll tax rate. Journal of Economic Literature Classification Numbers: E62, H55.     

The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability

We study how constrained fiscal policy can affect macroeconomic stability and welfare in a two-region model of a monetary union with sticky prices and distortionary taxation. Both government spending and taxes can be used to stabilize regional variables; however, the best welfare outcome is obtained under some tax variability and constant regional inflations. We use a variety of rules to characterize constrained fiscal policy and find that strict fiscal rules coupled with a monetary policy that targets union-wide inflation result in regional inflation stability and the welfare costs of such rules are not as unbearable as one would expect. Fiscal authorities can enhance welfare by targeting the regional output gap, while targeting regional inflation is less successful since inflation stability is guaranteed by the central bank.     

Licensing to a durable-good duopoly in patent litigation

Incorporating patent litigation into a durable-good duopoly model, we revisit the optimal licensing contract on a cost-reducing innovation. We find that both the optimal licensing contract and the innovator's licensing revenue are closely related to the patent's strength, i.e., the probability it would be found valid if tested in court. It is shown that, for a relatively weak patent (patent's strength is low), it's optimal for the innovator to charge the royalty rate as high as possible coupled with a negative fixed fee. But for a relatively strong patent (patent's strength is high), contract involving the combination of a medium level royalty rate and a positive fixed fee is optimal. We also discuss how the patent's strength affects the social welfare of a patent. Finally we present two policy suggestions that may alleviate the social welfare loss raised by the licensing of weak patents.     

Advance disposal fee vs. disposal fee: A monopolistic producer’s durability choice model

This study examines how the timing of waste disposal fee collection affects the producer’s choice of built-in product durability and social welfare in a durable-goods monopoly model. We categorize the waste disposal fee policies into two: advance disposal fee (ADF) policy and disposal fee (DF) policy. We show that a DF policy has two opposing effects on durability. Firstly, a DF policy gives the producer an incentive to increase durability in order to delay the households’ waste disposal and to discount future payments of the disposal fee (the payment-discounting effect). Secondly, a DF policy creates an incentive for consumers to dump waste illegally in order to mitigate the payment of the disposal fee, and gives the producer an incentive to reduce durability in order to avoid market saturation and the associated future price cuts (the illegal-dumping effect). When the disposal fee is low, the payment-discounting effect dominates the illegal-dumping effect under a DF policy, leading to the enhancement of durability. In this case, from a social welfare viewpoint, a DF policy may be more desirable than an ADF policy if the environmental damage associated with illegal dumping is not serious. However, when the disposal fee is high, a DF policy induces more illegal dumping, reduces durability, and inflicts more environmental damage. Therefore, an ADF policy is more socially desirable than a DF policy when the disposal fee is high. Moreover, we consider an oligopoly case and find that an ADF policy is more socially desirable in an industry with smaller market power.     

THE RISK PREMIUM FOR EQUITY: IMPLICATIONS FOR RESOURCE ALLOCATION,WELFARE AND POLICY*

Analysis of the equity premium puzzle has focused on private sector capital markets. The object of this paper is to consider the welfare and policy implications of each of the broad classes of explanations of the equity premium puzzle. As would be expected, the greater the deviation from the first‐best outcome implied by a given explanation of the equity premium puzzle, the more interventionist are the implied policy conclusions. Nevertheless, even explanations of the equity premium puzzle consistent with a general consumption‐based asset pricing model have important welfare and policy implications.