Showing papers in "Industrial Organization in 2003"

Speculative Trading and Market Performance: The Effect of Arbitrageurs on Efficiency and Market Power in the New York Electricity Market

Abstract: While the effect speculators have on forward premiums (the difference between forward and expected spot prices) has been widely studied, there has been very little focus on the effect speculators have on competition in the product market. I study the effect speculators have had on production decisions and price levels in New York's deregulated electricity market. For the past two years of its operation, the market, which opened in November 1999, restricted trade to producers and retailers of electricity. During this period, the forward price of electricity in western New York was significantly higher than the expected spot price. I show that, after the market opened to purely speculative traders the forward premium significantly decreased. In addition, the forward price of transmission (the price difference between two geographically distinct points) ceased to differ significantly from the expected spot price of transmission. I present a theoretical model to help understand these price relationships and other possible effects of speculators on market prices and firms' production decisions. Absent speculators, the model predicts that firms with market power will price discriminate between the forward and spot markets for electricity, resulting in the forward price being higher than the expected spot price. This discrimination in the market for electricity will result in the forward price of transmission under-predicting the spot price of transmission. When speculators that prevent firms from price discriminating are added to the model forward price-cost margins decrease. Using detailed data on the marginal costs of generation units in New York, I test these predictions of the model, and find that, after controlling for other market changes, the forward price-cost margins of firms in western New York did, in fact, significantly decrease after speculators were allowed to enter the market.

Negotiation and Merger Remedies: Some Problems

Abstract: Working Paper No. CPC03-41 Negotiation and Merger Remedies: Some Problems Joseph Farrell Department of Economics, University of California, Berkeley August 21, 2003 Forthcoming in H. Shelanski and F. Leveque (eds.), Merger Remedies in Competition Policy, 2003. The Merger Remedies Conference, Paris, January 2002, prompted me to write this exploration. Richard Gilbert, Michael Katz, William Kovacic, Steven Salop, Carl Shapiro, and Howard Shelanski gave helpful comments; Berkeley undergraduate student Tracy Chou volunteered research assistance. SIEPR provided research support through a Cain Fellowship. I thank them all; errors and opinions are mine. CPC Working Papers are produced by IBER, UC Berkeley. This paper is available on-line at http://repositories.cdlib.org/iber/cpc/ Or from the CPC website: http://iber.berkeley.edu/cpc/pubs/Publications.html

The Fall in British Electricity Prices: Market Rules, Market Structure, or Both? ⁄

Abstract: In this paper we investigate the factors contributing to the fall in the Lerner Index (price-cost margin) in the British electricity market during the 90s. A flrst stage of our analysis models the number of breaks in the Lerner Index and their dating as unknowns. Our results suggest the existence of one structural break in the time series of the Lerner Index. The break point interval includes the go-live of the New Electricity Trading Arrangements (NETA), but also several other (but not all) regulatory interventions. In a second stage of our analysis, we construct a general regression model for the Lerner index as a function of the regulatory interventions within the estimated break point interval, the Herflndahl-Hirschman Index (HHI), and the demand-capacity ratio. The results show that both the HHI and the demand-capacity ratio are strongly signiflcant for explaining the fall in the Lerner Index. NETA is also signiflcant, even when the Lerner Index is corrected for the in∞uence of the HHI and the demand-capacity ratio.

Open Source vs Closed Source Software: Public Policies in the Software Market

Abstract: This paper analyses the impact of public policies supporting open source software (OSS). Users can be divided between those who know about the existence of OSS, the "informed" adopters, and the "uninformed" ones; the presence of uniformed users yields to market failures that justify government intervention. We study three policies: i) mandatory adoption, when government forces public agencies, schools and universities to adopt OSS, ii) information campaign, when the government informs the uninformed users about the existence and the characteristics of OSS and, iii) subsidisation, when consumers are payed a subsidy when adopting OSS. We show that the second policy enhances welfare, the third is always welfare decreasing while mandatory adoption can be either good or bad for society depending on the number of informed and uninformed adopters. We extend the model to the presence of network effects and we show that strong externalities require "drastic" policies.

Open Source Software and the Economics of Organization

Abstract: Open source software development has organizational characteristics that are out of the ordinary (eg, flatter hierarchy, self-organization, self-regulation, and no ownership structure) The study suggests that this organization of work can be explained by combining the recently developed organizational theory of professions with the classic one of clubs Still, the explanans falls within the broad rubric of the knowledge approach The claim is in fact that this organization is at least as good as a firm in sharing rich types of information in real time because (a) constituents have symmetry of absorptive capacity, and (b) software itself is a capital structure embodying knowledge Indeed, in this regard the study goes so far as to suggest that the distinction between input (knowledge) and output (software) is somewhat amorphous because knowledge and software are not only the common (spontaneous) standards, but also the nonrivalrous network products being shared

The Value of a Reputation System

Abstract: This paper explores the trade-off between the short-term benefits of false quality advertisements against the longer term costs of reputation damage. A directed search model is constructed in which submarkets are created by the advertisements and reputations of sellers. A reputation system links misleading advertisements in the present period to a lower reputation in the next period. We show that a reputation system always increases the prices of high quality products and directs search more accurately towards the sellers with such products. We also show that buyers are hurt by a reputation system if the market is thin -- has few sellers -- because the equilibrium increase in prices is greater than the equilibrium increase in the quality of trade. Finally, we show that a reputation system which screens for honesty increases social welfare by making sellers more truthful. However, we also show that a reputation for honesty is not always highly valued and that an alternative reputation system which screens for type can be more effective.

Wage and Productivity Differentials in Private and Public

Abstract: A model is used to study the impact of ownership on productivity and wages. Data on private and public manufacturing in Turkey during the 1950-1998 period indicate that productivity is higher in the private sector.There is a close relationship between wages and productivity in the private sector; no such relationship exists in the public sector.

Port Reorganisation And The Worlds Of Production Theory

Abstract: Taking into consideration the new dimensions of port production that have become evident during the resent past, this paper tackles the issue of port reorganisation. In the light of the changes in the world economy and the new competitive environment, the paper focuses on the new structures of the port industry and the characteristics of the contemporary port product within a more general analytical framework of ‘Worlds of Production’. This conceptualisation suggests that neither the industrial model of mass production, nor any other model alone, can determine a single effective pattern of organisation of port production. Within the new reality, modern ports must provide a greater variety of services to port users than in the past. The diversity and complexity of the contemporary port product demand the application of multiple organisational transformations incorporating elements from different possible action frameworks. In this vein, the introduction of intra-port competition, the development of strategic or regional networks, and the reconsideration of the role of port authority turn to critical parameters of the necessary restructuring.

Another Perspective on Planned obsolescence: is there really too much Innovation?

Abstract: Models of durable goods with network externalities that set instantaneously have emphasized that a monopolist selling those goods has too high an incentive to introduce new vintages of the durable good, to make previous vintages (already bought by consumers) obsolete. This is referred to as planned obsolescence. We examine the robustness of planned obsolescence to the inclusion of network externalities that set in with a lag. If externalities set in with a lag (however small), consumers have an incentive to wait for other consumers to adopt the new vintage first, and in the absence of any change in prices, that leads to inefficient delay in adoption. Combining the two types of incentives we show that the monopolist is able to overcome consumer's inertia and still generate planned obsolescence through both intratemporal and intertemporal price discrimination. However, if monopoly power is "short lived" (for example due to copying), we show that, depending on the parameters of the model, we could have both types of inefficiencies: planned obsolescence or delay. Delay is brought about because copying limits the ability of the monopolist to increase prices in the future and therefore gives consumers an incentive to wait for both the onset of the (lagged) externality effect and the reduction in price caused by copiers. Delay appears mainly when the externality effect is strong and the new vintage is a significant improvement over the existing durable good.

Affirmative Action in Hierarchies

Abstract: UNIVERSITY OF CALIFORNIA A T B E R K E L E Y Department of Economics Berkeley, California 94720-3880 Working Paper No. E03-327 Affirmative Action in Hierarchies Suzanne Scotchmer Department of Economics and Graduate School of Public Policy University of California, Berkeley and N B E R January 2003 Keywords: labor markets, affirmative action, hierarchy, risk-taking JEL Classification: J7 Abstract There is considerable evidence that males are more prone to take risks than females. This difference has implications for rates of promotion in hierarchies where promotion is based on random signals of ability. I explore the promotion consequences of three types of performance standards: gender-blind standards, standards designed to promote agents of equal ability on average, and standards designed to promote equal numbers of both genders. These three objectives lead to different promotion standards, which highlights among other things that the goal of affirmative action is not well defined. Lower promotion standards for females can be necessary to ensure either equal abilities or equal numbers in the promoted populations. I thank Eddie Dekel, Dino Falaschetti, Anthony Marino (at the 2001 Econometric Society meetings), David Neumark and Stephen Maurer for discussion. This paper is available on-line at the new California Digital Library/ eScholarship site: http ://repos.itori es.cdl i.b..org/ib£r/ecflnZ and at the original Economics Dept Publication site: http-//iber.herk-e1ey.eHn/wps/ennnwp.hmi3

Portfolio Effects and Merger Control: Full-line Forcing as an Entry Deterrence Strategy

Abstract: The ''portfolio effect theory'' developed by the European Commission in merger control is at the center of a fierce international row with the US authorities who believe that this theory has no economic foundations. This paper aims to provide a counter-argument and shows that full-line forcing may be used by the holder a comprehensive range of products as an entry deterrence device to maintain its monopoly power. However, due to buyer power on the retail market, this will happen only if entry is not profitable for the industry as a whole. The effects on consumer welfare are ambiguous. Full-line forcing will reduce prices in the first period, but as it helps maintaining monopoly power, is harmful in the long-term.

Cournot Competition Yields Spatial Avoiding Competition in Groups

Abstract: This paper characterizes the properties of equilibrium location patterns in an Anderson-Neven-Pal model and uses these characteristics to comprehensively find the subgame perfect Nash equilibria, most of which are not yet found in the literature Since the external competition effect may be exactly canceled out, or internal competition strictly dominates external competition, or the internal competition effect is consistent with the external competition effect, therefore without any externality and prior collusion, a competitive group structure may form endogenously in equilibrium and firms tend to avoid competition inside each group The analyses of an Anderson-Neven-Pal model are instructive in studying the conditions for a capacity to implement a ``Nash combination"

B2C eCommerce Strategy and Market Structure: The Survey Based Approach

Abstract: This paper follows two objectives: (i) It demonstrates the merits of the survey based approach to B2C eCommerce characteristics and company strategy, and (ii) it presents empirical evidence of the crucial importance of size and marketing investment in B2C eCommerce markets. It presents econometric estimates of the effects of company characteristics and company strategies on the performance of Viennese B2C eCommerce companies in 2001. We provide econometric analysis of three dependent variables in turn: (i) number of B2C eCommerce customers in 2000, (ii) number of B2C eCommerce employees in January 2001 and (iii) revenue growth rate in 2001. The models do explain the data quite well: Size as well as endogenous sunk costs emerge as the main success factors. Furthermore, the results of nonparametric tests are presented. They mostly confirm the econometric evidence. We also show that the quantitative results are consistent with the qualitative results of the surveys. Finally, we argue that the survey based approach to B2C eCommerce is a method that provides reliable and consistent data, and that it complements the approach based on prices and consumer behavior commonly applied.

Pricing Structures in the Deregulated UK Electricity Market

Abstract: As residential energy markets open to competition, consumers can choose from a range of tariffs offered by different suppliers. We examine the relationship between the fixed charge levied on each consumer, and the variable charge per unit of energy used across all these tariffs. Data are the tariffs offered in April 2002 in the 14 electricity regions of Great Britain by seventeen suppliers, seven of whom operate nationally. Our analysis focuses on the revenue trade-off for the company. We identify the effect of payment method on the relationship between fixed and variable charge. We find significant effects of the distribution and transmission charges which the suppliers pay in each area, as well as the size of the market both by number of customers and area; and confirm that incumbents charge significantly more that entrants. We also find significant differences between the prepayment and credit tariffs.