Toll-free numbers: Demand,property rights,and public policy

The demand for Toll Free Numbers (TFNs) languished from 2000 to 2008; however recent growth in demand caused the FCC to open a new toll-free code (855) with the possibility of new code openings in the next three years. The analysis here indicates the demand for TFNs is highly inelastic (the coefficient for own price elasticity for TFNs is approximately −0.04). This has implications for concerns regarding future exhaust of toll-free codes and the price structure for recovery of SMS/800's costs. This article considers the effects of the limited property rights for TFN, and welfare implications of gray markets for vanity TFNs. The FCC's allocation mechanism for new 855 codes is considered and whether other allocation mechanisms, such as auctions, could be welfare superior.     

Competition in Turkish mobile telecommunications markets: Price elasticities and network substitution

This paper estimates demand elasticities for Turkish mobile telecommunications markets. In contrast to most other studies, firm-level data is used to estimate dynamic panel data models including instrumental variable techniques. Both short- and long-run elasticities are calculated, yielding a long-run price elasticity of −0.72 for the post-paid market and of −0.33 for the pre-paid market. The short-run price elasticity is estimated to be −0.36 for the post-paid market and −0.20 for the pre-paid market. In addition, there is evidence of fixed-to-mobile traffic substitution for consumers who use pre-paid cards.     

Microsoft's Pricing of Windows and the Economics of Derived Demand Monopoly

The economic experts in the Microsoft case debated whether Microsoft's pricing of Windows was consistent with Microsoft having a monopoly over personal computer (PC) operating systems. In this debate, PCs were treated as a single homogeneous commodity. This paper demonstrates that PC heterogeneity is likely to reduce substantially the monopoly price of Windows. The reason is that low-end PCs, which surely have the more elastic demand, are of disproportionate importance in determining the elasticity of derived demand for Windows.     

Residual demand estimation for market delineation: Complications and limitations

To shed some light on market delineation in an antitrust context, many economists are turning to estimates of residual demand elasticities. Recent papers have drawn attention to the importance of demand curve in market delineation and explained how they can be estimated. This paper shows that there are many complications and limitations of the approach. The relationship between the residual demand elasticity and the scope of the relevant market is complicated and depends on behavioral assumptions. The residual demand elasticity that can be estimated is not the one on which market delineation turns. The estimation of residual demand elasticities can be very difficult because of the complex dynamics of consumer behavior. Finally, residual demand estimators are likely to have a high variance because of instrument problems and this is likely to lead to widely varying estimates depending on specification choices.     

Measuring the Efficiency Cost of Rent Control

This paper estimates the burden of lost producer surplus imposed on landlords by rent control. The approach employed measures the reduction in Marshallian quasi-rent from the side of the derived demand for factors rather than the short-run supply of housing.
A constant elasticity of substitution production function is employed to derive the input demand equation. The equation is estimated using post-war rent control data from five major New York State cities. It turns out that rent control reduced quasi-rent about 15%. The deadweight loss is estimated at 1.5% of gross rental payments or about 5% of net income before debt charges.     

The consumer loss of the minimum duration for mobile telephone calls

This article estimates price elasticities of demand for the duration of mobile telephone calls for Portugal, as well as the monetary loss per consumer of the existence of a minimum duration of calls. The demand for the duration of calls is estimated using a Tobit model for panel data with individual random effects. The elasticity of demand is found to be small and to vary across firms. At current prices, the average duration of calls ranges between 101 and 109 s, while the estimated average length of calls without minimum duration ranges between 63 and 66 s. Hence, the existence of a minimum duration for calls results in a monetary loss of 35–40% of the average invoice.     

Merger Simulation in the Presence of Large Choice Sets and Consumer Stockpiling: The Case of the Bottled Juice Industry

We simulate the price effects of several hypothetical mergers in the shelf-stable bottled juice industry. In doing so, we highlight the effects of consumer stockpiling on demand elasticity estimates and subsequent merger simulations. This task is complicated by a large number of choice alternatives within the bottled juice category. To address this challenge we employ a demand model based on the Distance Metric (DM) approach of Pinkse et al. (Econometrica 70:1111–1153, 2002). We find that merger simulations that do not account for consumer stockpiling behavior underestimate the permanent price changes that are likely to occur due to a merger.      

Product Innovation,Process Innovation,and Size

We test the hypothesis that large firms devote a higher proportion of their research and development (R & D) expenditure on process innovation thansmaller firms. According to the estimates, process- and product R & D expenditure rise less than in proportion to size. The size effect is somewhat stronger for process R & D but the difference to product R & D is in no way dramatic. This difference with regard to size elasticity of process- and product R & D is somewhat more pronounced when accounting for possible interrelationships between expenditure on process- and product R & D but remains statistically non-significant.     

Elasticity of demand and behaviour-based price discrimination

Behaviour-based price discrimination (BBPD) is typically analysed in a framework characterised by perfectly inelastic demand. This paper provides a first assessment of the role of demand elasticity on the profit, consumer and welfare effects of BBPD. We show that the demand expansion effect, that is obviously overlooked by the standard framework with unit demand, plays a relevant role. In comparison to uniform pricing, we show that firms are worse off under BBPD, however, as demand elasticity increases the negative impact of BBPD on profits gets smaller. Despite a possible slight increase in the average prices charged over the two periods in comparison to uniform pricing, we show that BBPD boosts consumer surplus and that this benefit is independent of elasticity. In contrast to the welfare results derived under the unit demand assumption, where BBPD is always bad for welfare, the paper shows that BBPD can be welfare enhancing if demand elasticity is sufficiently high.     

The welfare effects of cooperative R&D in oligopoly with spillovers

This paper provides a more complete characterization of the welfare effects of cooperative cost-reducing R&D investments in Cournot oligopoly with spillovers. I show that R&D cooperation reduces both R&D spending and social surplus when the spillover rate in R&D is neither sufficiently high nor sufficiently low. As the elasticity of the slope of the inverse demand function increases, however, the set of spillover rates over which cooperative R&D reduces social welfare shrinks, and in the limit, cooperative R&D is socially beneficial for all spillover rates.     

The economics of food aid under subsistence farming with an application to Malawi

We investigate how food-aid affects price and production of staple food, with a partial equilibrium model with non-separable production and consumption. The model captures the key characteristics of sub-Saharan Africa subsistence economies. Simulations generate negative but also positive food-aid elasticities of production. Conditions are identified which mitigate the negative impact and support a positive impact. The share of domestic food production in total staple food demand (+) and the share of income from staple food production in total household income (−) are key determinants. Price and production equations, estimated with a panel of district data of the Malawi maize market for the period 1999–2010, show a small positive impact of food-aid. Large negative impacts of food-aid are not likely given production and income shares and behavioural responses.     

The reverse Cellophane fallacy in market delineation

In the landmark Cellophane case, the Supreme Court erroneously concluded that du Pont did not have significant market power because the Court evaluated the elasticity of demand for Cellophane at the monopoly equilibrium, at which the elasticity was far higher than at the competitive equilibrium. The Court's error is commonly referred to as the Cellophane fallacy. This paper contends that there also is a reverse Cellophane fallacy. Markets delineated on the basis of prevailing demand elasticities are likely to be too small and the potential for the exercise of market power is likely to be overstated.     

Measuring Market Power in the U.S. Aluminum Industry: A Residual Demand Approach

This paper applies a refined market power test to examine market power in the U.S. aluminum industry. The study conducts a two-step analysis in which the inverse residual demand facing the industry is first estimated to generate the associate elasticity to infer market power, and then the inverse partial residual demand facing the industry is estimated to produce the elasticity to measure the potential effect of inter-industry coordination. The results suggest that only the primary industry attains market power, and the market power can exert even without collusion between the primary and secondary industries.     

Estimating the demand for ADSL and ISDN services in Greece

The aim of this paper is to investigate the demand for broadband services in Greece and to estimate the price elasticity of the demand for ADSL and ISDN services as well as the cross-price elasticity between the two services. The empirical analysis uses the 384 kbps connections since for the period examined, over 85% of the total ADSL customers in Greece are connected at this bandwidth. The empirical analysis is based on an ad-hoc specification of the demand equation, with no reference to the utility maximization problem of the representative consumer. The results of the analysis show that both demands are inelastic. In addition, cross-price elasticity for ADSL is negative, indicating that ISDN is a complement to ADSL, whereas the demand for ISDN is almost neutral to ADSL.     

Input market definition under department of Justice Merger Guidelines

This paper applies the Justice Department's Merger Guidelines to define a relevant antitrust market for an input. An expression for the elasticity of the residual demand facing a monopoly supplier of a factor of production is derived. It is shown that proper input market definition depends on the elasticity of residual demand confronting the downstream input users, on the supply elasticity in the downstream market (which, in turn, depends on the rate of capital depreciation there), on the cost of the input as a percentage of downstream sales, and on the extent to which the monopolist is integrated downstream.     

A new look at residential electricity demand using household expenditure data

Many electricity demand estimates have been obtained based on the assumption that consumers optimize with respect to known marginal prices, but increasing empirical evidence suggests that consumers are more likely to respond to average prices. Under this assumption, this paper develops a new strategy based on Generalized Method of Moments to estimate household electricity demand. Our demand estimation approach uses publicly available expenditure data and utility-level consumption data from several major U.S. cities, complementing studies that use individual billing data which are richer yet often proprietary. We estimate the price elasticity near − 0.50, which is at the upper end (in magnitude) among the estimates from previous studies. This could have important implications for policy analysis such as those on climate policies that may affect electricity prices.     

A note on the excess entry theorem in spatial models with elastic demand

This paper revisits the excess entry theorem in spatial models according to Vickrey [Vickrey, W.S., 1964. Microstatics. Harcourt, Brace and World, New York] and Salop [Salop, S., 1979. Monopolistic competition with outside goods. Bell Journal of Economics 10, 141–156] while relaxing the assumption of inelastic demand. Using a demand function with a constant demand elasticity, we show that the number of firms that enter a market decreases with the degree of demand elasticity. We find that the excess entry theorem does only hold when the demand elasticity is sufficiently small. Otherwise, there is insufficient entry. In the limiting case of unit elastic demand, the market is monopolized. We broaden our results with a more general transportation cost function.     

Market share,advertising, R&D,and profitability: An empirical analysis of leading industrial firms in Japan

This paper develops a dynamic model of a leader firm which chooses the time paths of R&D and advertising inputs so as to maximize the present value of expected profits. From this theoretical model simultaneous-equations system for market share, advertising, R&D, and profitability is derived and estimated using the data on the leading industrial firms in Japan. Our results show that, as far as top firms are concerned, market share and demand growth have significant positive effects on profitability, and an increase in the stock of goodwill increases market share as well as profitability.This study was financially supported by the Ministry of Education in Japan. Helpful comments were provided by H. Odagiri. Also I am indebted to an anonymous referee for advice and criticism on various points.     

OPERATING SYSTEM PRICES IN THE HOME PC MARKET*

Because the demand for OS is a derived demand revealed through the demand for PCs and because its elasticity is relatively small, the profit‐maximizing price of DOS/WIN that would result from a static equilibrium is much higher than the observed price. We investigate this assertion empirically by fitting a differentiated‐products model of the home PC market to panel data of all PC brands sold in the G7 countries over the period 1995–1999. The results confirm that the low value of the aggregate elasticity of demand for PCs is the result of differentiation and substitution among PCs.     

Demand for telecommunication services in developing countries

Living standards and economic growth in developing countries are invariably linked to the availability and use of telecom services. Effective policy decisions require the best estimates of the drivers of these services. In this paper, telecommunications demand is estimated in models for residential mainline and mobile telephone service for developing countries for the period 1996–2003. The paper tests for cross-price effects between mainline and mobile service and its findings have important policy implications. It finds residential monthly price elasticity to be insignificant for developing countries, but the connection elasticity is larger than generally found in the literature. Mobile monthly price elasticities are very large. A new and important empirical finding is that although wireline phones are substitutes in the mobile market, the contrary is not true—mobile phones are not substitutes in the wireline market, and in fact may be considered complements. This lack of symmetry has important implications for properly defining telecom markets. Universal service subsidies and competitive market initiatives should be reevaluated in light of the paper's elasticity estimates. Increased competition, income growth and enhanced education may be the ultimate universal service promoters.