Showing papers on "Market power published in 2004"

Factors Explaining the Interest Margin in the Banking Sectors of the European Union

Abstract: This study analyses the interest margin in the principal European banking sectors (Germany, France, the United Kingdom, Italy and Spain) in the period 1993–2000 using a panel of 15,888 observations, identifying the fundamental elements affecting this margin. Our starting point is the methodology developed in the original study by Ho and Saunders [Journal of Financial and Quantitative Analysis XVI (1981) 581–600] and later extensions, but widened to take banks' operating costs explicitly into account. Also, unlike the usual practice in the literature, a direct measure of the degree of competition (Lerner index) in the different markets is used. The results show that the fall of margins in the European banking system is compatible with a relaxation of the competitive conditions (increase in market power and concentration), as this effect has been counteracted by a reduction of interest rate risk, credit risk, and operating costs.

What you sell is what you lend? Explaining trade credit contracts

Abstract: We use a broad range of contractual information to assess the empirical relevance of different financial theories of trade credit. The common feature of all financial theories is that suppliers have an advantage over other lenders in financing credit-constrained firms. While the reasons for the financing advantage differ across theories, they are usually related either to product characteristics or to market structure. We propose a novel identifying strategy that exploits this insight to analyse the trade credit volume and the contract terms. Our analysis suggests that the most important product characteristic for explaining trade credit volume and contract terms is the ease with which the seller’s product can be diverted. Market power in input and output markets also contributes to explain trade credit patterns.

Bundling as an Entry Barrier

Abstract: In this paper we look at the case for bundling in an oligopolistic environment. We show that bundling is a particularly effective entry-deterrent strategy. A company that has market power in two goods, A and B, can, by bundling them together, make it harder for a rival with only one of these goods to enter the market. Bundling allows an incumbent to credibly defend both products without having to price low in each. The traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist. Although price discrimination provides a reason to bundle, the gains are small compared with the gains from the entry-deterrent effect. I. INTRODUCTION In this paper we look at the case for bundling in an oligopolistic environment. We show that bundling is a particularly effective entry-deterrent strategy. A company that has market power in two goods, A and B, can, by bundling them together, make it harder for a rival with only one of these goods to enter the market. Bundling allows an incumbent to defend both products without having to price low in each. While it is still possible to compete by offering a rival bundle, a monopolist can significantly lower the potential profits of a one-product entrant without having to engage in limit pricing prior to entry. We also show that bundling continues to be an effective pricing tool even if entry deterrence fails (or if there is already an existing one-product rival). A company with a monopoly in product A and a duopoly in product B makes higher profits by selling an A‐B bundle than by selling A and B independently. Leveraging market power from A into B and accepting some one-product competition against the bundle is better than using the monopoly power in good A all by itself. Since bundling mitigates the impact of competition on the incumbent, an entrant can expect the bundling strategy to persist, even without any commitment. The traditional explanation for bundling that economists have given is that it serves as an effective tool of price discrimination by a monopolist (see Stigler [1968], Adams and Yellen

Competition Between Networks: A Study of the Market for Yellow Pages

Abstract: This paper estimates the importance of network effects in the market for Yellow Pages. I estimate three simultaneous equations: consumer demand for usage of a directory, advertiser demand for advertising and a publisher's first-order condition (derived from profit-maximizing behaviour). Estimation shows that advertisers value consumer usage and that consumers value advertising, implying a network effect. I find that internalizing network effects would significantly increase surplus. As an application, I consider whether the market benefits from monopoly (which takes advantage of network effects) or oligopoly (which reduces market power). I find that a more competitive market is preferable. Copyright 2004, Wiley-Blackwell.

Idiosyncratic Volatility and Product Market Competition

Abstract: This Paper investigates the link between a firm's competitive environment and the idiosyncratic volatility of its stock returns. We find that firms enjoying high market power, or established in concentrated industries, have lower idiosyncratic volatility. We posit that competition affects volatility in two distinct and inter-related ways. Market power works as a hedging instrument that smoothes out idiosyncratic fluctuations. At the same time, a high degree of market power implies lower information uncertainty for investors and, therefore, lower return volatility. We find strong support for both effects. Our results contribute to the understanding of recent trends of idiosyncratic volatility, and confirm the important link between stock market performance and the competitive environment of firms.

A slightly differently formatted version with the same text appeared in Review of Industrial Organization 24: 105-127, 2004. Published here with the Review's permission. The Nature and Benefits of National Brand/Private Label Competition

Abstract: The article highlights the history of national brand/private label competition. It argues that the private labels of large retail chains possess unique competitive weapons to constrain the market power of powerful national brands that are not available to rival manufacturers' brands. Consumer welfare is maximized when private labels and national brands compete vigorously rather than when either one is too dominant. There is some ominous recent evidence that the vigor of national brand/private label competition is sometimes being diminished by collusion between the two kinds of brands.

The Nature and Benefits of National Brand/Private Label Competition

Abstract: The article highlights the history of national brand/private label competition. Itargues that the private labels of large retail chains possess unique competitiveweapons to constrain the market power of powerful national brands that are notavailable to rival manufacturers' brands. Consumer welfare is maximized whenprivate labels and national brands compete vigorously rather than when eitherone is too dominant. There is some ominous recent evidence that the vigor ofnational brand/private label competition is sometimes being diminished bycollusion between the two kinds of brands.

Supermarket choice and supermarket competition in market equilibrium

Abstract: Multi-store firms are common in the retailing industry. Theory suggests that cross-elasticities between stores of the same firm enhance market power. To evaluate the importance of this effect in the U.K. supermarket industry, we estimate a model of consumer choice and expenditure using three data sources: profit margins for each chain, a survey of consumer choices and a data-set of store characteristics. To permit plausible substitution patterns, the utility model interacts consumer and store characteristics. We measure market power by calculating the effect of merger and demerger on Nash equilibrium prices. Demerger reduces the prices of the largest firms by between 2 and 3.8% depending on local concentration; mergers between the largest firms lead to price increases up to 7.4%.

Inserting GM Products into the Food Chain: The Market and Welfare Effects of Different Labeling and Regulatory Regimes

Abstract: The purpose of this article is to examine the system-wide effects of the introduction of genetically modified (GM) products with and without labeling and to compare these two regimes to a third regime where GM products are not present either because they have not yet been developed or because they have been banned. For each regime, the decisions and welfare of consumers, producers, and life science companies are examined. The article explicitly incorporates the consumer response to the introduction of GM technology and considers different market structures of the life science sector.

Real Effects of Bank Competition

Abstract: Does banking market power contribute to the formation of nonfinancial industries populated by few, large firms, or does it instead enhance industry entry? Theoretical arguments could be made to support either side. The banking industry of European Union (EU) countries has been significantly deregulated in the early 1990s. Under the old regime, cross-border expansions were heavily constrained, while after deregulation, banks from EU countries have instead been allowed to branch freely into other EU countries. Concurrently to the process of deregulation, European banking industries have also experienced a significant process of consolidation. Exploiting such significant innovations affecting the banking industries of EU countries, this paper explores whether changes in bank competition have in fact played a role on the market structure of nonfinancial industries. Empirical evidence is derived from a panel of manufacturing industries in 29 OECD countries, both EU and non-EU members, adopting a methodology that allows controlling for other determinants of industry market structure common across industries, across countries or related to time passing. The evidence suggests that the overall process of enhanced competition in EU banking markets has led to markets in nonfinancial sectors characterized by lower average firm size.

Food Industrialisation and Food Power: Implications for Food Governance

Abstract: Food supply chains of developed countries industrialised in the second half of the twentieth century, with significant implications for developing countries over policy priorities, the ensuing external costs and the accompanying concentration of market power. Very powerful corporations dominate many sectors. Primary producers are locked into tight specifications and contracts. Consumers may benefit from cheaper food but there are quality implications and health externalities. As consumer confidence has been shaken, new quality agencies have been created. Tensions have emerged about the state's role as facilitator of industrial efficiencies. Food policy is thus torn between the pursuit of productivity and reduced prices and the demand for higher quality, with implications for both producers and consumers in the developing world.

Trading in the Downstream European Gas Market: A Successive Oligopoly Approach

Abstract: A model of successive oligopoly is applied to the European natural gas market. The model has a two-level structure, in which Cournot producers are also Stackelberg leaders with respect to traders, who may be Cournot oligopolists or price takers. Several conclusions emerge. First, successive oligopoly (double marginalization) yields higher prices and lower consumer welfare than if oligopoly exists only on one level. Second, due to the high concentration of traders, prices are distorted more by market power in trading than in production. Third, trader profits depend on whether producers can price discriminate among consuming sectors; if so, producers collect a greater share of the profits. Finally, when traders increase in number; prices approach competitive levels. Thus, it is important to prevent concentration in the downstream gas market. If oligopolistic trading cannot be prevented, vertical integration should not be discouraged, especially if it would increase the number of traders.

Edgeworth Price Cycles: Evidence from the Toronto Retail Gasoline Market - eScholarship

Abstract: In this article, I exploit a new station-level, twelve-hourly price dataset to examine the strong retail price cycles in the Toronto gasoline market. The cycles are visually similar to the theoretical Edgeworth Cycles of Maskin & Tirole [1988]: strongly asymmetric, tall, rapid, and highly synchronous across stations. I test a series of predictions made by the theory about how firm behaviors would differentially evolve over the path of a cycle. The evidence is consistent with the existence of Edgeworth Cycles and inconsistent with competing hypotheses. One finding is that smaller firms are more likely than larger firms to initiate rounds of price undercutting but the reverse is true for rounds of price increases. While the cycles are an interesting phenomenon for study in their own right, the evidence has important implications for understanding market power in both cycling and non-cycling gasoline markets.

Allocating Transmission to Mitigate Market Power in Electricity Markets

Abstract: We ask under what conditions transmission contracts increase or mitigate market power. We show that the allocation process of transmission rights is crucial. In an efficiently arbitraged uniform price auction generators will only obtain contracts that mitigate their market power. However, if generators inherit transmission contracts or buy them in a 'pay-as-bid' auction, then these contracts can enhance market power. In the two-node network case banning generators from holding transmission contracts that do not correspond to delivery of their own energy mitigates market power. Meshed networks differ in important ways as constrained links no longer isolate prices in competitive markets from market manipulation. The paper suggests ways of minimising market power considerations when designing transmission contracts.

A Minimum of Rivalry: Evidence from Transition Economies on the Importance of Competition for Innovation and Growth

Abstract: This paper examines the importance of competition in the growth and development of firms. We make use of the large-scale natural experiment of the shift from an economic system without competition to a market economy to shed light on the factors that influence innovation by firms and their subsequent growth. Using a dataset from a survey of nearly 4,000 firms in 24 transition countries, we find evidence of the importance of a minimum of rivalry in both innovation and growth: the presence of at least a few competitors is effective both directly and through improving the efficiency with which the rents from market power in product markets are utilised to undertake innovation.

Underpricing and market power in uniform price auctions

Abstract: In uniform auctions, buyers chosse demand schedules as strategies and the same "market clearing" price for units awarded. Despite the widespread use of these auctions, the extant theory shows that they are susceptible to arbitrarily large underpricing. We make a realistic modification to the theory by letting prices, quantities, and bids be discrete. We show that underpricing can be made arbitrarily small by choosing a sufficiently small price tick size and a sufficiently large quantitity multiple. We also show how one might improve revenues by modifying the allocation rule. A trivial change in the design can have a dramatic impact on prices. Our conclusions are robust to bidders being capacity constrained. Finally, we examine supply uncertainty robust equilibria.

Oligopolistic equilibrium analysis for electricity markets: a nonlinear complementarity approach

Abstract: Oligopolistic equilibrium models are widely used in electricity market analysis, among which the supply function equilibrium model has been chosen as the basis of many power market models. A nonlinear complementarity approach has been proposed in this paper to calculate the Nash supply function equilibrium for a bid-based-pool generation market with a dc transmission model. A mixed nonlinear complementarity problem (NCP) is presented by combining the Karush-Kuhn-Tucker conditions of all strategic generating firms. Using a special nonlinear complementarity function, the mixed NCP is reformulated as a set of nonlinear algebraic equations and thus can be solved by an inexact Levenberg-Marquardt algorithm. Numerical examples are presented to verify the effectiveness of the proposed method. The results show that the generating firms could exercise their market power by over-production under congestion, or by capacity withholding in case of power shortage. The approach developed in this paper provides an efficient way to the solution of large-scale, complicated equilibrium models for electricity markets.

Finding multiperiod Nash equilibria in pool-based electricity markets

Abstract: Pool-based electricity markets can be simulated with various degrees of accuracy. When compared to actual markets, most of the simulators produce outcomes than cannot be extrapolated beyond the specific scenario analyzed. This is most critical for regulators and market participants which need tools to analyze market power and bidding strategies, respectively, for a broad range of scenarios. Both objectives can be tackled if the possible equilibria of a pool-based multiperiod market are determined. This paper presents a three-step methodology to find these equilibria. First, a detailed model of an electricity market is presented, considering multiperiod bidding, price elasticity, and network modeling. Second, an iterative simulation process is run to detect participants' bidding strategies implicit in the optimized production resulting from the simulation. Finally, output data from the simulator are analyzed to obtain Nash equilibria. Iterated deletion is used in the last step to remove strategies that are dominated by others that generate higher profits. A realistic case study illustrates the proposed technique.

Intertemporal Price Cap Regulation Under Uncertainty

Abstract: This paper examines the intertemporal price cap regulation of a firm that has market power. Under uncertainty, the unconstrained firm 'waits longer' before investing or adding to capacity and, as a corollary, enjoys higher prices over time than would be observed in an equivalent competitive industry. In the certainty case, the imposition of an inter-temporal price cap can be used to realize the competitive market solution; by contrast, under uncertainty, it cannot. Even if the price cap is optimally chosen, under uncertainty, the monopoly firm will generally (a) under-invest and (b) impose quantity rationing on its customers.

Labeling Policies in Food Markets: Private Incentives, Public Intervention, and Welfare Effects

Abstract: This study considers the welfare impact of labeling policies of agricultural commodities with speci6c characteristics. Using a model of vertical differentiation, the effects on equilibrium and welfare levels are calculated. The introduction of the regulation and the emergence of two differentiated competitive markets leaves consumers and high-quality producers better off, while low-quality producers are worse off. With high costs and low quality differences, the total welfare impact of the regulation can be negative. Findings show that when high-quality producers can exercise market power, the regulation could be more easily accepted by producers, but it would have a negative effect on consumers.

Does Firm Size Matter Anymore? The New Economy and Firm Size Wage Effects

Abstract: Researchers have long known that large firms pay higher wages than small firms for workers with similar measured characteristics; however, an agreed-upon explanation for this firm size wage effect (FSWE) has not been reached. Recent changes in the economy provide new leverage for testing competing theories for the effect, while questions about the existence and nature of the “New Economy” provide new motivation for exploring this topic. This study uses the 1988-2003 Current Population Survey and finds that the FSWE has declined by about one third over the study period. Examining the competing explanations for the FSWE, this study finds that while the sorting of workers by traits, unions, and industry factors all contribute to some portion of the effect in cross-section, they fail to explain why it has declined over time. Market power explanations also fail to find support. Shifts in organizational structures, particularly a decline of internal labor markets, appear to best fit the results. These findings ...

Market Concentration and Product Variety under Spatial Competition: Evidence from Retail Gasoline

Abstract: We show that for a spatially differentiated economy reduced product variety is the likely outcome of mergers except in cases where exit costs in relation to (outlet-specific) fixed costs are high. Our empirical analysis of the Austrian retail gasoline market confirms that increases in concentration reduce product variety. Ignoring this product variety effect is likely to lead to an underestimate of market power in structural merger analysis.

Nodal market power assessment in electricity markets

Abstract: Market power assessment is an important aspect of electric market analysis and operation. Market power problems are more complicated in an electric market than those in other markets due to the specific properties of electricity. This paper investigates market power problems and the related solution techniques in an electric power market. The impact of load variation, the size of a power supplier and random failures on market power has been investigated. The geographic difference of market power caused by network constraints has been considered. Must run share (MRS) and nodal must-run share (NMRS) have been proposed to represent system and local market powers respectively. An optimization technique and the topological analysis of power flow have been used to determine the MRS and NMRS. Expected nodal must-run share (ENMRS) has been proposed to represent the impact of random failures on market power and the associated risk of customers paying a high price due to the exercise of market power. The contingency enumeration and probabilistic technique have been used to determine the ENMRS. The IEEE Reliability Test System is analyzed to illustrate the proposed indices and techniques.

Intertemporal price cap regulation under uncertainty

Abstract: This paper examines the intertemporal price cap regulation of a firm that has market power. Under uncertainty, the unconstrained firm ‘waits longer’ before investing or adding to capacity and as a corollary, enjoys higher prices over time than would be observed in an equivalent competitive industry. In the certainty case, the imposition of an inter-temporal price cap can be used to realise the competitive market solution; by contrast, under uncertainty, it cannot. Even if the price cap is optimally chosen, under uncertainty, the monopoly firm will generally (a) under-invest and (b) impose quantity rationing on its customers.

Market Power and Joint Dominance in U.K. Brewing

Abstract: Market power and joint dominance are examined in U.K. brewing. I assess unilateral and coordinated effects, where the latter is equated with joint dominance, and show how one can distinguish between the two econometrically. The application makes use of two demand equations: the nested logit of McFadden [1978a] and the distance-metric of Pinkse, Slade, and Brett [2002]. The two equations yield very different predictions concerning elasticities and markups. Nevertheless, although there is evidence of market power using either demand model, that power is due entirely to unilateral effects. In other words, neither model uncovers evidence of coordinated effects (tacit collusion).

Market Power and Joint Dominance in U.K. Brewing

Abstract: Market power and joint dominance are examined in U.K. brewing. I assess unilateral and coordinated effects, where the latter is equated with joint dominance, and show how one can distinguish between the two econometrically. The application makes use of two demand equations: the nested logit of McFadden [1978a] and the distance-metric of Pinske, Slade, and Brett [2002]. The two equations yield very different predictions concerning elasticities and markups. Nevertheless, although there is evidence of market power using either demand model, that power is due entirely to unilateral effects. In other words, neither model uncovers evidence of coordinated effects (tacit collusion).