nep-reg New Economics Papers
on Regulation
Issue of 2010‒08‒28
eight papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. Prices vs. Quantities with Fiscal Cushioning By Moritz Rohling; Markus Ohndorf
  2. The Creation of a Market for Retail Electricity Supply By Littlechild, S.
  3. Cross-border Merger, Vertical Structure, and Spatial Competition By Beladi, Hamid; Chakrabarti, Avik; Marjit, Sugata
  4. Analyzing Entry Strategies in the Canadian Wireless Industry: The Case of the Discount Market By Sandy Mokbel
  5. Estimation of Search Frictions in the British Electricity Market By Giulietti, Monica; Waterson, Michael; Wildenbeest, Matthijs R.
  6. Who Engages in Water Scarcity Conflicts? A Field Experiment with Irrigators in Semi-arid Africa By Els Lecoutere; Ben D’Exelle; Bjorn Van Campenhout
  7. Bugs in the proofs of revelation principle By Wu, Haoyang
  8. Uncertain Demand, Consumer Loss Aversion, and Flat-Rate Tariffs By Fabian Herweg

  1. By: Moritz Rohling (Chair of Economics, Institute for Environmental Decisions IED, ETH Zurich); Markus Ohndorf (Chair of Economics, Institute for Environmental Decisions IED, ETH Zurich)
    Abstract: Regulating international externalities, like climate change, raises various enforcement problems. It is often argued that international price-based regulations (e.g. emission taxes) are more difficult to enforce than quantity-based regulations (e.g. tradable pollution permits). In this paper, we analyze the relative performance of price-based and quantity-based instruments when costs and benefits are uncertain and enforcement of quantity regimes is stricter than that of price regimes. We show that under these conditions, instrument choice solely based on the relative slopes of the marginal curves can yield inefficient results. If policy enforcement differs, rational policy choice should also take into account the level of the marginal benefit curve, as well as institutional parameters. In contrast to earlier analyses on "Prices vs. Quantities", we find that the choice of instrument also depends on the variance of the marginal abatement costs. Numerical simulations of our stylized model suggest that, for climate policies, quantity-regulations might well be preferable to price-based approaches after all.
    Keywords: market-based instruments, incomplete enforcement, uncertainty, environmental regulation
    JEL: D8 L51 K42 Q58
    Date: 2010–07
  2. By: Littlechild, S.
    Abstract: In September 1989, as part of its privatization program, the Government laid down an eight year timetable for opening up to retail competition the entire electricity market of England and Wales, phased over the period 1990-1998. It might be assumed that the Government was in a position to specify all the arrangements, and that this was part of a considered policy to facilitate the introduction and implementation of competition. But previous accounts suggest that the outcome was part of a deal between generators and regional companies to limit competition (Henney 1994), or was intended to set targets to force companies, regulators and government to come up with practical solutions (Helm 2004). The Department of Energy’s internal History of Electricity Privatisation, only now available, shows that there is merit in these last two suggestions. However, it also documents the significantly evolving views within Government as the implications of retail competition became clearer, not least for electricity contracts and for privatization of the coal industry. Initially, retail competition was hardly worth mentioning, later it was a mild concern that could be met by a small tranche of spot-price contracts, by July 1989 the plan was to introduce full competition immediately with short-term instead of long-term contracts. But the industry resisted, and in September 1989 the Government accepted the industry proposal of a franchise monopoly to enable a mix of short, medium and long-term contracts, though it insisted that the franchise should have an eight year limit. The approach may not be a model for others, but it may not be atypical of how governments actually behave in balancing conflicting objectives and practical constraints, save perhaps for the distinctive commitment to competition exhibited by the leading actors here.
    Keywords: Retail competition, Electricity regulation
    JEL: L94
    Date: 2010–08–16
  3. By: Beladi, Hamid; Chakrabarti, Avik; Marjit, Sugata
    Abstract: This analysis is a natural follow up of continued efforts to assess the consequences of cross-border mergers in industries with a vertical structure. Absent free trade, in a vertically related industry, the downstream firms will not choose the social optimum under spatial price discrimination when none of the downstream firms produce all the varieties that consumers demand. We show that free trade will induce the downstream firms to gravitate toward the social optimum but an upstream merger across borders, under free trade, will pull the downstream firms away from the social optimum back to their autarkic positions.
    Keywords: Product-differentiation; Price-discrimination; Spatialcompetition; Firm-location; Cross-border Merger
    JEL: L13 F12 D43
    Date: 2010
  4. By: Sandy Mokbel
    Abstract: This study examines entry strategies in the Canadian wireless discount market. Analysis was mainly focused on the incumbents’ strategic choices when faced with the threat of sequential entry. The main model used is Fudenberg and Tirole’s taxonomy of business strategies that is studied in the context of multimarket contact and when entry deterrence might be considered as a public good. The core of the analysis is done with two interconnected two stage games. It is argued that Fido, Solo and Virgin adopted a Puppy Dog strategy to face Koodo’s entry, then might have aligned with their new competitor and switched to a Top Dog attitude when faced with the threat of a second round of market entries. <P>Cette étude examine les stratégies d’entrée sur le marché canadien des télécommunications sans-fil à escompte. L’analyse porte principalement sur les choix stratégiques des entreprises établies qui font face à des menaces d’entrée séquentielles sur le marché. Le modèle, essentiellement basé sur la taxonomie des stratégies de gestion de Fudenberg et Tirole, est étudié dans un contexte de firmes ayant des contacts sur plusieurs marchés et en supposant que la dissuasion à l’entrée pourrait avoir les mêmes caractéristiques qu’un bien public. L’analyse se base sur deux jeux à deux phases interconnectés. Ce modèle supposerait alors que Fido, Solo et Virgin auraient adopté la stratégie d’un Gentil Chiot en préparation à l’entrée de Koodo, et se seraient ensuite alignés avec leur nouveau concurrent en adoptant ce qui semblerait être une attitude de Chien Méchant lorsque soumis à des menaces d’une nouvelle vague d’entrées.
    Keywords: market strategy, game theory, telecommunications, industrial organization, stratégie de marché, théorie des jeux, télécommunications, organisation industrielle
    Date: 2010–08–01
  5. By: Giulietti, Monica (Nottingham University Business School); Waterson, Michael (Department of Economics, University of Warwick); Wildenbeest, Matthijs R. (Kelley School of Business, Indiana University)
    Abstract: This paper studies consumer search and pricing behaviour in the British domestic electricity market following its opening to competition in 1999. We develop a sequential search model in which an incumbent and an entrant group compete for consumers who nd it costly to obtain information on prices other than from their current supplier. We use a large data set on prices and input costs to structurally estimate the model. Our estimates indicate that consumer search costs must be relatively high in order to rationalize observed pricing patterns. We confront our stimates with observed switching behaviour and nd they match well. Keywords:
    Keywords: electricity ; consumer search ; price competition JEL Classification: C14 ; D83 ; L13
    Date: 2010
  6. By: Els Lecoutere (Ghent University); Ben D’Exelle (University of East Anglia); Bjorn Van Campenhout (University of Antwerp)
    Abstract: Does water scarcity induce conflict? And who would engage in a water scarcity conflict? In this paper we look for evidence of the relation between water scarcity and conflictive behavior. With a framed field experiment conducted with smallholder irrigators from semi-arid Tanzania that replicates appropriation from an occasionally scarce common water flow we assess what type of water users is more inclined to react in conflictive way to scarcity. On average, water scarcity induces selfish appropriation behavior in the experiment which is regarded conflictive in the Tanzanian irrigator communities where strong noncompetition norms regulate irrigation water distribution. But not all react to water scarcity in the same way. Poor, marginalized, dissocialized irrigators with low human capital and with higher stakes are most likely to react with conflictive appropriation behavior to water scarcity. Viewed a political ecology perspective we conclude that circumstances in Tanzania are conducive to resource scarcity conflicts. Water scarcity and water values are increasing. Water governance institutions entail exclusionary elements. Moreover, a higher likelihood to react in a conflictive way to water scarcity coincides with real economic and political inequalities which could form a basis for mobilization for more violent ways of competing for scarce resources.
    Date: 2010
  7. By: Wu, Haoyang
    Abstract: In the field of mechanism design, the revelation principle has been known for decades. Myerson, Mas-Colell, Whinston and Green gave formal proofs of the revelation principle. However, in this paper, we argue that there are serious bugs hidden in their proofs.
    Keywords: Revelation principle; Mechanism design; Implementation theory.
    JEL: D71 C72
    Date: 2010–08–19
  8. By: Fabian Herweg (University of Bonn)
    Abstract: The so called flat-rate bias is a well documented phenomenon caused by consumers' desire to be insured against fluctuations in their billing amounts. This paper shows that expectation-based loss aversion provides a formal explanation for this bias. We solve for the optimal two-part tariff when contracting with loss-averse consumers who are uncertain about their demand. The optimal tariff is a flat rate if marginal cost of production is low compared to a consumer's degree of loss aversion and if there is enough variation in the consumer's demand. Moreover, if consumers differ with respect to the degree of loss aversion, firms' optimal menu of tariffs typically comprises a flat-rate contract.
    Keywords: Consumer Loss Aversion; Flat-Rate Tariffs; Nonlinear Pricing; Uncertain Demand
    JEL: D11 D43 L11
    Date: 2010–07

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