nep-reg New Economics Papers
on Regulation
Issue of 2022‒01‒24
nineteen papers chosen by
Christopher Decker
Oxford University

  1. Estimating economic severity of Air Traffic Flow Management regulations By Luis Delgado; G\'erald Gurtner; Tatjana Boli\'c; Lorenzo Castelli
  2. Procurement Auctions for Regulated Retail Service Contracts in Restructured Electricity Markets By Brown, David P.; Eckert, Andrew; Olmstead, Derek E.H.
  3. Where next for the electricity distribution system operator? Evidence from a survey of European DSOs and National Regulatory Authorities By Anaya, K. L.; Giulietti, M.; Pollitt, M .G.
  4. Market Structure, Risk Preferences, and Forward Contracting Incentives By Brown, David P.; Sappington, David E.M.
  5. Potential utilization of Battery Energy Storage Systems (BESS) in the major European electricity markets By Yu Hu; Miguel Armada; Maria Jesus Sanchez
  6. Socioeconomic and Demographic Disparities in Residential Battery Storage Adoption: Evidence from California By Brown, David P.
  7. Nonzero-sum stochastic impulse games with an application in competitive retail energy markets By Ren\'e A\"id; Lamia Ben Ajmia; M'hamed Ga\"igi; Mohamed Mnif
  8. Peltzman Revisited: Quantifying 21st Century Opportunity Costs of FDA Regulation By Casey B. Mulligan
  9. Dynamic Monopoly Pricing With Multiple Varieties: Trading Up By Buehler, Stefan; Eschenbaum, Nicolas
  10. Oligopoly under incomplete information: On the welfare effects of price discrimination By Garrett, Daniel F.; Gomes, Renato; Maestri, Lucas
  11. Nonlinear prices, homogeneous goods, search By Atayev, Atabek
  12. The Dynamics of Power in Labor Markets: Monopolistic Unions versus Monopsonistic Employers By Samuel Dodini; Kjell Salvanes; Alexander L.P. Willén; Kjell G. Salvanes
  13. Collusion Between Non-differentiated Two-Sided Platforms By Martin Peitz; Lily Samkharadze
  14. Should I stay or should I go? Migrating away from an incumbent platform By Crémer, Jacques; Biglaiser, Gary; Veiga, André
  15. Will video kill the radio star? Digitalisation and the future of banking By Beck, Thorsten; Cecchetti, Stephen G.; Grothe, Magdalena; Kemp, Malcolm; Pelizzon, Loriana; Sánchez Serrano, Antonio
  16. Algorithmic Design: Fairness Versus Accuracy By Annie Liang; Jay Lu; Xiaosheng Mu
  17. Europäische Regulierung digitaler Dienste: Eine kritische Würdigung der Entwürfe DMA & DSA aus medienökonomischer Perspektive By Budzinski, Oliver
  18. Operational Resilience in Digital Payments: Experiences and Issues By Mr. Tanai Khiaonarong; Mr. Harry Leinonen; Ryan Rizaldy
  19. Bank Consolidation, Interest Rates, and Risk: A Post-Merger Analysis Based on Loan-Level Data from the Corporate Sector By Steffen Juranek; Øivind Anti Nilsen; Simen A. Ulsaker

  1. By: Luis Delgado; G\'erald Gurtner; Tatjana Boli\'c; Lorenzo Castelli
    Abstract: The development of trajectory-based operations and the rolling network operations plan in European air traffic management network implies a move towards more collaborative, strategic flight planning. This opens up the possibility for inclusion of additional information in the collaborative decision-making process. With that in mind, we define the indicator for the economic risk of network elements (e.g., sectors or airports) as the expected costs that the elements impose on airspace users due to Air Traffic Flow Management (ATFM) regulations. The definition of the indicator is based on the analysis of historical ATFM regulations data, that provides an indication of the risk of accruing delay. This risk of delay is translated into a monetary risk for the airspace users, creating the new metric of the economic risk of a given airspace element. We then use some machine learning techniques to find the parameters leading to this economic risk. The metric is accompanied by an indication of the accuracy of the delay cost prediction model. Lastly, the economic risk is transformed into a qualitative economic severity classification. The economic risks and consequently economic severity can be estimated for different temporal horizons and time periods providing an indicator which can be used by Air Navigation Service Providers to identify areas which might need the implementation of strategic measures (e.g., resectorisation or capacity provision change), and by Airspace Users to consider operation of routes which use specific airspace regions.
    Date: 2021–12
  2. By: Brown, David P. (University of Alberta, Department of Economics); Eckert, Andrew (University of Alberta, Department of Economics); Olmstead, Derek E.H. (University of Calgary)
    Abstract: A challenge in setting regulated rates for default retail electricity products is the presence of both price and quantity risk faced by retailers. To address this challenge, regulators have been increasingly employing competition via full-load (load following) auctions to value these risks. In a full-load auction, firms bid to supply a fixed percentage of the regulated utility's hourly demand at a fixed price. In this paper, we develop a model of break-even pricing of electricity forward products under risk aversion, based on a mean-variance utility function. We use this model to evaluate the performance of full-load auctions in Alberta, where the largest regulated retail provider adopted such auctions in December 2018. We find that winning full-load bids exceed break-even levels, even allowing for risk-aversion, but that the difference falls over time. This reduction coincides with an increase in the number of bidders active in the full-load auctions. Our paper highlights the importance of sufficient participation for the success of full-load auctions and the potential role for competitive markets in determining the value of risk faced by retailers.
    Keywords: Electricity; Forward Contracts; Regulation; Procurement Auctions
    JEL: L51 L94 Q48
    Date: 2021–12–31
  3. By: Anaya, K. L.; Giulietti, M.; Pollitt, M .G.
    Abstract: This paper seeks to shed light on the nature of optimal regulation of the electricity distribution system operator (DSO) over the period to 2025 and beyond, following the implementation of the EU Clean Energy Package and its constituent parts: Electricity Regulation (EU) 2019/943 and Electricity Directive (EU) 2019/944. We conducted two parallel surveys of DSOs and their national regulatory authorities (NRAs) across 39 European countries. This produced 39 responses from DSOs and 12 responses from NRAs covering, respectively, 40% and 78% of customers in those countries. We asked both DSOs and NRAs three sets of questions related to: (1) the definition and regulation of the future system operator function of the DSO; (2) lessons learned from transmission system operator (TSO) regulation that can be translated to the DSO; and (3) the way in which regulators support the capacity of the DSO to operate and coordinate the system. Our findings are consistent with the observation that the move towards a more active role for the DSO remains work in progress for both DSOs and their NRAs, given the fact that the Clean Energy Package has only passed into European Law relatively recently and some Member States are still implementing its provisions.
    Keywords: distribution system operator, DSO, Electricity Regulation
    JEL: L94 L21
    Date: 2022–01–04
  4. By: Brown, David P. (University of Alberta, Department of Economics); Sappington, David E.M. (University of Florida)
    Abstract: We examine the distinct impacts of forward contracting on generators and buyers of electricity. Increased forward contracting systematically reduces the variance of a generator's profit but can increase the variance of a buyer's profit. Consequently, increased risk aversion or market uncertainty can lead buyers, but not generators, to prefer reduced levels of forward contracting. We examine how the extent of equilibrium forward contracting varies with industry conditions, including the number of generators, the number of buyers, their aversion to profit variation, and the structure of retail electricity prices.
    Keywords: forward contracting; risk aversion; electricity sector
    JEL: L51 L94 Q28 Q40
    Date: 2021–12–31
  5. By: Yu Hu; Miguel Armada; Maria Jesus Sanchez
    Abstract: Given the declining cost of battery technology in the last decade, nowadays BESS becomes a more attractive solution in electrical power systems. The objective of this work is to analyze the potential utilization of BESS in the major European electricity markets. A general payoff model for BESS operation is proposed to correctly address the operational flexibility of battery systems. Utilization factors such as potentially profitable utilization time and rate are calculated for common applications including energy arbitrage and frequency support services using real market information. The result shows that under the current empirical estimation of the battery cost and lifetime, BESS is not feasible for energy arbitrage in most of the European electricity markets. However, BESS shows clearly and significantly higher potential in providing frequency support services. The result suggests that, when the frequency containment reserve is remunerable, the potentially profitable utilization of BESS has become already accretive in most of the European countries. For example from January to September 2021, the potentially profitable utilization rate has reached almost 100% for the FCR-N service in the Danish market. Comparing the regional electricity markets in Europe, BESS has shown significant potential in becoming a feasible solution in Central Western Europe and parts of Northern Europe by providing frequency regulation services. Meanwhile, in the British Isles and some other islanded local markets, a remarkable level of scarcity of flexibility has been revealed by the investigation, and the potential of BESS would also be considerably encouraging.
    Date: 2021–12
  6. By: Brown, David P. (University of Alberta, Department of Economics)
    Abstract: There is growing interest in the adoption of residential battery storage because of its ability to provide bill savings, capture excess solar energy, and provide resiliency value. The resiliency benefits have become increasingly salient in light of recent large-scale power outages. However, these benefits may not accrue to all communities. We explore the presence of disparities in residential battery adoption and the allocation of subsidies under California's Self-Generation Incentive Program (SGIP) by measures of income, race and ethnicity, and a vulnerability index that captures environmental justice (EJ) concerns. We present evidence that battery adoption and subsidy allocations are concentrated in communities that have higher household income and lower EJ concerns. Regression analyses demonstrate that there are disparities in battery adoption rates by household income and race/ethnicity demographic variables, after controlling for important time-varying and regional factors. These findings persist despite the fact that the SGIP has specific funds targeting lower income households and communities, as well as funding targeting wildfi re- and outage-vulnerable households. We demonstrate that these findings are partially, but not fully, driven by SGIP funding eligibility criteria that correlate with communities that have higher income, lower EJ concerns, and a lower percentage of residents of color.
    Keywords: Battery Storage; Resiliency; Distributed Energy Resources; Environmental and Energy Justice
    JEL: H23 I30 L94 Q40 Q54
    Date: 2021–12–31
  7. By: Ren\'e A\"id; Lamia Ben Ajmia; M'hamed Ga\"igi; Mohamed Mnif
    Abstract: We study a nonzero-sum stochastic differential game with both players adopting impulse controls, on a finite time horizon. The objective of each player is to maximize her total expected discounted profits. The resolution methodology relies on the connection between Nash equilibrium and the corresponding system of quasi-variational inequalities (QVIs in short). We prove, by means of the weak dynamic programming principle for the stochastic differential game, that the value function of each player is a constrained viscosity solution to the associated QVIs system in the class of linear growth functions. We also introduce a family of value functions converging to our value function of each player, and which is characterized as the unique constrained viscosity solutions of an approximation of our QVIs system. This convergence result is useful for numerical purpose. We apply a probabilistic numerical scheme which approximates the solution of the QVIs system to the case of the competition between two electricity retailers. We show how our model reproduces the qualitative behaviour of electricity retail competition.
    Date: 2021–12
  8. By: Casey B. Mulligan
    Abstract: This paper revisits Peltzman (1973) in light of two recent opportunities to quantitatively assess tradeoffs in drug regulation. First, reduced regulatory barriers to drug manufacturing associated with the 2017 reauthorization of Generic Drug User Fee Amendments were followed by significantly more entry and lower consumer prices for prescription drugs. Using a simple and versatile industry model and historical data on entry, I find that easing generic restrictions discourages innovation, but this welfare cost is more than offset by consumer benefits from enhanced competition, especially after 2016. Second, accelerated vaccine approval in 2020 had unprecedented net benefits as it not only improved health but substantially changed the trajectory of the wider economy. The evidence suggests that cost-benefit analysis of FDA regulation is incomplete without accounting for substitution toward potentially unsafe and ineffective treatments that are both outside FDA jurisdiction and heavily utilized prior to FDA approval. Moreover, the policy processes initiating these 21st century regulatory changes show a clear influence of Peltzman’s 1973 findings.
    JEL: I18 L51 L65 O31
    Date: 2021–12
  9. By: Buehler, Stefan; Eschenbaum, Nicolas
    Abstract: This paper studies dynamic monopoly pricing for a class of settings that includes multiple durable, multiple rental, or a mix of varieties. We show that the driving force behind pricing dynamics is the seller’s incentive to switch consumers—buyers and non-buyers—to higher-valued consumption options by lowering prices (“trading up”). If consumers cannot be traded up from the static optimal allocation, pricing dynamics do not emerge in equilibrium. If consumers can be traded up, pricing dynamics arise until all trading-up opportunities are exhausted. We study the conditions under which pricing dynamics end in finite time and characterize the final prices at which dynamics end.
    Keywords: price discrimination, inter-temporal pricing, Coasian dynamics
    JEL: D42 L12
    Date: 2021
  10. By: Garrett, Daniel F.; Gomes, Renato; Maestri, Lucas
    Abstract: We study competition by firms that simultaneously post (potentially nonlinear) tariffs to consumers who are privately informed about their tastes. Market power stems from informational frictions, in that consumers are heterogeneously informed about firms’ offers. In the absence of regulation, all firms offer quantity discounts. As a result, relative to Bertrand pricing, imperfect competition benefits disproportionately more consumers whose willingness to pay is high, rather than low. Regulation imposing linear pricing hurts the former but benefits the latter consumers. While consumer surplus increases, firms’ profits decrease, enough to drive down utilitarian welfare. By contrast, improvements in market transparency increase utilitarian welfare, and achieve similar gains on consumer surplus as imposing linear pricing, although with limited distributive impact. On normative grounds, our analysis suggests that banning price discrimination is warranted only if its distributive benefits have a weight on the societal objective.
    Keywords: oligopoly,; nonlinear pricing,; linear pricing; informational frictions; asymmetric information
    JEL: D82
    Date: 2022–01–10
  11. By: Atayev, Atabek
    Abstract: We analyze competition on nonlinear prices in homogeneous goods markets with consumer search. In equilibrium firms offer two-part tariffs consisting of a linear price and lump-sum fee. The equilibrium production is socially efficient as the linear price of equilibrium two-part tariffs equals to the production marginal cost. Firms thus compete in lump-sum fees, which are dispersed in equilibrium. We show that sellers enjoy higher profit, whereas consumers are worse-off with two-part tariffs than with linear prices. The competition softens because with two-part tariffs firms can make effective per-consumer demand less elastic than the actual demand.
    Keywords: Nonlinear prices,consumer search,homogeneous goods
    JEL: D11 D43 D83 L13
    Date: 2021
  12. By: Samuel Dodini; Kjell Salvanes; Alexander L.P. Willén; Kjell G. Salvanes
    Abstract: This paper brings together the modern literatures on monopsony power and labor unions by empirically examining the effects of unionization on the dynamics of worker earnings across differently concentrated markets. Exploiting tax reforms to union due deductions as exogenous shocks to unionization, we demonstrate that there is a steep unionization gradient over labor market concentration. We show that there is an equally steep gradient in the union wage premium over concentration and that the premium loads almost exclusively on highly concentrated markets. This result implies a potentially important role of unions as alleviating market failures induced by imperfect competition. To validate our findings and examine robustness to different types of shocks, we extend the analysis by exploiting the emergence of import competition from China as an exogenous shock to employer concentration. This analysis suggest that the negative earnings effect of labor market concentration is eliminated upon reaching a union density of approximately 63 percent at the firm.
    Keywords: monopsony, skills, unions, market power
    JEL: J23 J24 J42 J51 J52 J63
    Date: 2021
  13. By: Martin Peitz; Lily Samkharadze
    Abstract: Platform competition can be intense when offering non-differentiated services. However, competition is somewhat relaxed if platforms cannot set negative prices. If platforms collude they may be able to implement the outcome that maximizes industry profits. In an infinitely repeated game with perfect monitoring, this is feasible if the discount factor is sufficiently large. When this is not possible, under some condition, a collusive outcome with one-sided rent extraction along the equilibrium path can be sustained that leads to higher profits than the non-cooperative outcome.
    Keywords: Two-sided markets, tacit collusion, cartelization, price structure, platform competition
    JEL: L41 L13 D43
    Date: 2022–01
  14. By: Crémer, Jacques; Biglaiser, Gary; Veiga, André
    Abstract: We study incumbency advantage in markets with positive consumption externalities. Users of an incumbent platform receive sto- chastic opportunities to migrate to an entrant and can either accept them or wait for a future opportunity. In some circumstances, users have incentives to delay migration until others have migrated. If they all do so, no migration takes place, even when migration would have been Pareto-superior. We use our framework to identify environments where incumbency advantage is larger. A key result is that having more migration opportunities actually increases incumbency advantage.
    Keywords: Platform; Migration; Standardization and Compatibility; Industry Dynamics
    JEL: D85 L14 R23 L15 L16
    Date: 2022–01–10
  15. By: Beck, Thorsten; Cecchetti, Stephen G.; Grothe, Magdalena; Kemp, Malcolm; Pelizzon, Loriana; Sánchez Serrano, Antonio
    Abstract: This report discusses the impact of digitalization on the structure of the European banking system. The recent wave of financial innovation based on the opportunities digitalisation offers, however, has come mostly from outside the incumbent banking system in the form of new financial service providers, either in competition or cooperation with incumbent banks but with the potential for substantial disruption. After discussing how identified risks may evolve and the emergence of new sources of risks, the report introduces three different scenarios for the future European banking system: (i) incumbent banks continue their dominance; (ii) incumbent banks retrench; and (iii) central bank digital currencies (under certain specifications). It also derives macroprudential policy measures.
    Date: 2022–01
  16. By: Annie Liang; Jay Lu; Xiaosheng Mu
    Abstract: Algorithms are increasingly used to guide decisions in high-stakes contexts, such as who should receive bail, be approved for a loan, or be hired for a job. Motivated by a growing body of empirical evidence, regulators are concerned about the possibility that the error rates of these algorithms differ sharply across subgroups of the population. What are the tradeoffs between accuracy and fairness faced by algorithms, and how do they depend on the underlying statistical properties of the algorithm's inputs? To answer these questions, we propose a model in which a designer chooses an algorithm that maps observed inputs into decisions. We characterize the accuracy-fairness Pareto frontier (corresponding to different preferences for how to trade off accuracy and fairness), and identify simple statistical properties of the algorithm's inputs that determine the shape of this frontier. These general results allow us to derive characterizations in special cases where the inputs satisfy additional structure, for example when one of the inputs is the individual's group identity. We conclude by applying our results to address a recent policy question regarding whether and when to ban use of certain kinds of inputs by predictive algorithms.
    Date: 2021–12
  17. By: Budzinski, Oliver
    Abstract: Der Beitrag liefert eine kritische Würdigung der geplanten europäischen Regulierung digitaler Onlinedienste - Digital Markets Act (DMA) und Digital Services Act (DAS) - aus medienökonomischer Perspektive. Dabei werden Schwerpunkte auf Gatekeeper-Effekte und die Rolle von algorithmischen Such- und Empfehlungssystemen gelegt. Der Beitrag zieht ein kritisches Fazit und drückt Skepsis aus, ob die geplante Regulierung in der vorgeschlagenen Form der richtige Weg zur notwendigen Eindämmung der ökonomischen Macht großer Onlinedienste ist.
    Keywords: Digitalisierung,Medienökonomik,Online-Dienste,Plattformen,Digital MarketsAct,Digital Services Act,Streaming-Märkte,Regulierungsökonomik,GAFA,Gatekeeper,Empfehlungssysteme
    JEL: K21 K23 K24 L40 L50 L81 L82 L86 Z10
    Date: 2021
  18. By: Mr. Tanai Khiaonarong; Mr. Harry Leinonen; Ryan Rizaldy
    Abstract: Major operational incidents in payment systems suggest the need to improve their resiliency. Meanwhile, as payment infrastructures become more digitalized, integrated, and interdependent, they require an even higher degree of resilience. Moreover, risks that could trigger major disruptions have become more acute given the rise in power outages, cyber incidents, and natural disasters. International experiences suggest the need to strengthen reliability objectives, redundancies, assessment of critical service providers, endpoint security, and alternative arrangements
    Keywords: Operational resilience, payment systems, risks, disasters, business continuity
    Date: 2021–12–10
  19. By: Steffen Juranek; Øivind Anti Nilsen; Simen A. Ulsaker
    Abstract: In this paper we analyse the bank merger between DnB and Gjensidige Bank in 2003, ranked by market share as number one and number three in the Norwegian bank market. Focusing on loans to firms, our difference-in-differences analysis shows no increase of concentration of new loans. The concentration in affected markets (markets where both merging parties were present) developed similarly to unaffected markets. Moreover, the interest rate tended to be lower in the affected markets relative to unaffected markets, but this relationship is weak and not statistically significant. The merger also affected the riskiness of loans only marginally. These weak effects could be the result of efficiency gains in the form of lower costs being pass-through to customers, and the increased market power (and consequently higher interest rates) cancelled each other out. The remedial measures imposed by the Norwegian Competition Authority on the two merging parties are also likely to explain some of the modest effects of the merger. The weak effects are largely coincident with international literature showing the effects of mergers and acquisitions in the banking sector to be modest.
    Keywords: banking, local competition, risk taking, firm behaviour
    JEL: G21 L41 D53
    Date: 2021

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