Survey evidence on the rationality of expectations

Data on expectations collected by business surveys offer the opportunity to test the rational expectation hypothesis. Tests directly based on qualitative data are not powerful because of the nature of the data. An alternative method is proposed in this paper. We apply the usual orthogonality conditions of rationality to the unobservable variables which are assumed to trigger the categorical responses of surveys when they cross certain thresholds. To implement the test, an original estimation method for latent variable models using indicators is required. The results show that the Hypothesis is not always rejected for the expectations of changes in demand drawn from surveys of French manufacturing industry.     

Density and Integration Effects on Class I U.S. Freight Railroads

We investigate some technological aspects of railroading relevant to the debate on open access by estimating a multiproduct cost function with both operational outputs and infrastructure maintenance outputs. We find strong cost complementarities among operational outputs, but not between operations and infrastructure. The latter result implies that at the levels of output that characterize freight rail operations in the U.S. there may be no inherent technological advantages from vertical integration. The former suggests though (for reasons that we develop below) that competitive access alone will not necessarily lead to competitive outcomes in rail freight markets.     

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.     

Branching and competition in the European banking industry

In this study branching costs and competitiveness of European banks are measured by fitting a monopolistic competition model to a representative sample drawn from nine EEC banking industries in the period from 1990 to 1996. In the theoretical model, banks decide strategically the size of their branching network anticipating the degree of competition faced on interest rates. From the structural equations of the model an econometric test is derived in order to measure branching costs and degree of competition in banking services. The empirical analysis captures their changing over time together with the impact of various European directives aiming at deregulating the banking industry. Furthermore the study shows persistence of segmentation acoss EEC banking industries.     

Rent extraction and incentives for efficiency in recent regulatory proposals

Building on a simple model proposed by Schmalensee (1989), this paper uses simulation techniques to analyze and compare various regulatory schemes including Schmalensee's family of (linear) good regulatory regimes, a price-cap regime allowing for downward price flexibility, and a regime that combines price-cap and profit sharing. The quantitative analysis pays particular attention to measuring the trade-off between rent extraction and incentives for efficiency. The main findings of this study can be summarized as follows. First, it appears that pure price-cap regulation leaves substantial rent to the firm relative to the other regimes. Second, introducing room for downward price flexibility improves efficiency of price-cap over Schmalensee's linear regulatory regimes. Finally, by correcting in part for the distributional distortion of price-cap, the profit-sharing mechanism often yields levels of welfare comparable to optimal regulation levels.     

Stochastic Frontiers and Asymmetric Information Models

This article is an attempt to shed light on the specification and identification of inefficiency in stochastic frontiers. We consider the case of a regulated firm or industry. Applying a simple principal-agent framework that accounts for informational asymmetries to this context, we derive the associated production and cost frontiers. Noticeably this approach yields a decomposition of inefficiency into two components: The first component is a pure random term while the second component depends on the unobservable actions taken by the agent (the firm). This result provides a theoretical foundation to the usual specification applied in the literature on stochastic frontiers. An application to a panel data set of French urban transport networks serves as an illustration.     

The differentiated effect of advertising on readership: evidence from a two-sided market approach

In this paper, we empirically analyze the French print media market by modeling the existence of a reciprocal effect between the size of the readership and the amount of advertising. For this two-sided platform, we measure the cross-effects of advertising on the readership and periodical popularity on advertising. By estimating a structural model of simultaneous demand equations, we quantify some crucial elements in designing pricing and product-differentiating strategies. We measure the impact of advertising on reader demand and find in the data that it has opposite effects depending on whether the publication presents informational or entertaining content. By taking into account the market interactions, we compute price and advertising elasticities. Our results show that advertisers targeting a specific category of the audience would choose its corresponding periodicals and would trade off the size of the readership for these periodicals and the advertising insert price changes. Also, advertising campaigns aimed at reaching a broader spectrum of the population should focus on popular titles and on titles for which demand is inelastic to ensure a more consistent impact of the campaign. Finally, for magazines with low price demand elasticity on the readers’ side, editors’ revenues could be improved by increasing prices. These combined effects should allow a publisher to generate positive margins from both sides of the market, for certain content categories.     

A test of the impact of mergers on bank competition

We propose a new test to evaluate the impact of horizontal mergers on competition in the banking industry. The test is designed to be applied ex ante to potential mergers while being parsimonious in terms of data, as it only uses information on branches in local markets. The test is a counterfactual exercise based on a two‐stage model where banks compete in branching and interest rates and requires comparing the estimated degree of competition in the status quo, where branching networks by banks are those actually observed, with a counterfactual scenario, where the branching network of the new entity is the sum of the branches of the banks involved in the horizontal merger. The statistical difference between the two estimated measures of competition quantifies the impact of the merger. We apply our test to French and Italian mergers.     

Economic Efficiency and Political Capture in Public Service Contracts

We consider contracts for public transport services between a public authority and a transport operator. We build a structural endogenous switching model where the contract choice results from the combined effects of the incentivization scheme aimed at monitoring the operator's efficiency and the political agenda followed by the regulator to account for the voice of private interests. Our results support theoretical predictions as they suggest that cost‐plus contracts entail a higher cost for society than fixed‐price contracts but allow the public authority to leave a rent to a subset of individuals. Accounting for transfers to interest groups in welfare computations reduces the welfare gap between cost‐plus and fixed‐price regimes.