Downstream price-cap regulation and upstream market power

Under “partial separation,” it is increasingly common for a utility’s upstream affiliate (e.g., an electric generation supplier) to be unregulated while its downstream affiliate (e.g., the distribution company offering retail service) is subject to regulation. When choosing the optimal form of downstream regulation, regulators may be confronted with the potential exercise of market power by the upstream affiliate. This paper finds that the imposition of a downstream price cap with an appropriate profit-sharing rate can eliminate the upstream affiliate’s exercise of market power. However, it is less desirable to fully mitigate affiliate market power when upstream rivals also behave strategically.      

Rolling Seas in Liner Shipping

This paper examines the current economic environment and recent legislative changesin the U.S. international liner shipping industry, which has operated under antitrustimmunity for cartel agreements since 1916. Specifically, we address the impact ofthe Ocean Shipping Reform Act (OSRA) of 1998, which increased cartel enforcementcosts by reducing the transparency of freight rates and mandating that cartel membershave independent contracting rights. Our analysis looks at industry trends andinvestigates whether OSRA has affected cartel membership, contracting practices,horizontal integration, and freight rates.     

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.     

Strategic Pricing when Electricity is Storable

In this paper, we develop a simplified oligopoly model where hydro generators engage in dynamic Bertrand competition. Each player uses a Markov strategy based on the state of water reservoirs at the beginning of each period. The replenishing of water reservoirs, which affects generators' productive capacity, is governed by a stochastic process. Also, a price cap, i.e. a maximum bid allowed, is imposed on the market. We develop valuable insights for regulatory policy in predominantly hydro based electricity markets, including the effects of price caps, the efficiency of dispatch under strategic behavior and the likelihood of collusion.     

In the Matter of Weyerhaeuser Company: The Use of a Hold-Separate Order in a Merger with Horizontal and Vertical Effects

This article examines Weyerhaeuser's acquisition of Menasha Corporation's west-coast corrugating medium and corrugated box operations. The Federal Trade Commission challenged the acquisition based on anticompetitive concerns arising from concentration in the corrugating medium market and ignored the potential for efficiencies in corrugated box production due to Weyerhaeuser's increased vertical integration. Our analysis also considers pricing behavior during the "hold-separate" period when the court attempted to maintain the acquired corrugating-medium mill as an "independent" entity. We find that the unfettered acquisition likely led to lower prices, and the hold-separate order may have created agency problems that permitted anticompetitive behavior and prevented efficiencies.     

The effectiveness of FERC’s transmission policy: is transmission used efficiently and when is it scarce?

We investigate the impact of FERC’s policy to create Independent System Operators (ISOs) that independently manage regional electricity transmission resources and institute regional electricity exchange markets. Our analysis examines how the formation of the PJM ISO affected inter-regional electricity trading costs during the period from March 1997 to June 2002. We also examine how ISO formation affected the likelihood of encountering “congestion” in trading electricity between PJM and adjoining regions (particularly the New York ISO and the more loosely organized East Central Area of Reliability (ECAR)). In addition, our analysis estimates the marginal economic value of increased inter-regional transfer capability.      

Entry Policy and Entry Subsidies

Optimal entry policy is considered in markets served by both domestic and foreign firms. Compared with the prior entry literature, introducing foreign producers as market participants reduces incentives for entry deterrence and enhances incentives for entry subsidization. Incentives are changed because entry produces "terms-of-trade" gains. The optimal entry subsidy is analyzed under complete and incomplete information regarding the entrant's costs. Incomplete cost information creates differences in the optimal subsidy for domestic and foreign entrants, with foreign entrants relatively less subsidized. Domestic entrants with low marginal costs are oversubsidized and those with high marginal costs are undersubsidized.     

Incentive Contracts for Infrastructure,Litigation and Weak Institutions

In this paper we revisit incentive contract design in a simple setting, after developing a model that captures the fact that in weak institutional settings the procurement of large scale public works through contracts with strong incentives for private firms, may result in excessive litigation over contract terms. This result is possible because we assume that parties in litigation can influence (by purchasing better or more legal services) the observable merits of their case. In weak institutional settings, governments have an inherent disadvantage in these litigation contests. We show that a commitment to a prespecified level of litigation effort by the government, together with weaker incentive contracts, is a more efficient procurement mechanism.Jel Classification: D8, H57, H54, K41, K23, L51