nep-reg New Economics Papers
on Regulation
Issue of 2022‒02‒14
twenty papers chosen by
Christopher Decker
Oxford University

  1. Protecting sticky consumers in essential markets By Walter Beckert; Paolo Siciliani
  2. Product market competition, creative destruction and innovation By Rachel Griffith; John Van Reenen
  3. Assessing EU Merger Control through Compensating Efficiencies By Pauline Affeldt; Tomaso Duso; Klaus Gugler; Joanna Piechucka
  4. Voice assistants as gatekeepers for consumption? How information intermediaries shape competition By Noskova, Victoriia
  5. Firm Competition and Cooperation with Norm-Based Preferences for Sustainability By Roman Inderst; Eftichios S. Sartzetakis; Anastasios Xepapadeas
  6. Profit Margins in U.S. Domestic Airline Routes By Hakan Yilmazkuday
  7. Competitors’ Reactions to Big Tech Acquisitions: Evidence from Mobile Apps By Pauline Affeldt; Reinhold Kesler
  8. Endogenous multihoming and network effects: Playstation, Xbox, or both? By Foros, Øystein; Kind, Hans Jarle; Stähler, Frank
  9. Prosumer Empowerment Through Community Power Purchase Agreements:A Market Design for Swarm Grids By Dumitrescu, Raluca; Lüth, Alexandra; Weibezahn, Jens; Groh, Sebastian
  10. Strategic Storage Investment in Electricity Markets By Dongwei Zhao; Mehdi Jafari; Audun Botterud; Apurba Sakti
  11. From the First World War to the National Recovery Administration (1917-1935) - The Case for Regulated Competition in the United States during the Interwar Period By Thierry Kirat; Frédéric Marty
  12. Decentralized Infrastructure Development in the Philippines: Constraints, Governance, and Regulation in Water By Dante B. Canlas; Margarita Debuque-Gonzales
  13. Optimal sin taxation and market power By Martin O'Connell; Kate Smith
  14. Price floors and externality correction By Rachel Griffith; Martin O'Connell; Kate Smith
  15. Measuring the online platform economy in Germany By Hildenbrand, Hannah-Maria; von Rueden, Christina; Viete, Steffen
  16. Market forces in healthcare insurance: The impact of healthcare reform on regulated competition revisited By J.A.|info:eu-repo/dai/nl/06912261X Bikker; J.G.J. Bekooij
  17. Cournot, Bertrand or Chamberlin: Market Structures and the Home Market Effect By Kenji Fujiwara
  18. The repo market under Basel III By Gerba, Eddie; Katsoulis, Petros
  19. Marktprämie beschert Betreibern erneuerbarer Energien Zusatzgewinne – Differenzverträge würden VerbraucherInnen entlasten By Jörn C. Richstein; Frederik Lettow; Karsten Neuhoff
  20. Money, Credit and Imperfect Competition Among Banks By Allen Head; Timothy Kam; Sam Ng; Isaac Pan

  1. By: Walter Beckert (Institute for Fiscal Studies and Birkbeck, University of London); Paolo Siciliani (Institute for Fiscal Studies)
    Abstract: This paper studies regulatory policy interventions aimed at protecting sticky consumers who are exposed to exploitation. We model heterogeneous consumer switching costs alongside asymmetric market shares. This setting encompasses many markets in which established ?rms are challenged by new entrants. We identify circumstances under which such interventions can be counterproductive, both with regard to the stated consumer protection objective and the complementary aim to promote competition.
    Date: 2021–04–27
  2. By: Rachel Griffith (Institute for Fiscal Studies and University of Manchester); John Van Reenen (Institute for Fiscal Studies)
    Abstract: We examine the economic analysis of the relationship between innovation and product market competition. First, we give a brief tour of the intellectual history of the area. Second, we examine how the Aghion-Howitt framework has influenced the development of the literature theoretically and (especially) empirically, with an emphasis on the “inverted U”: the idea that innovation rises and then eventually falls as the intensity of competition increases. Thirdly, we look at recent applications and development of the framework in the areas of competition policy, international trade and structural Industrial Organization.
    Date: 2021–12–03
  3. By: Pauline Affeldt; Tomaso Duso; Klaus Gugler; Joanna Piechucka
    Abstract: Worldwide, the overwhelming majority of large horizontal mergers are cleared by antitrust authorities unconditionally. The presumption seems to be that efficiencies from these mergers are sizeable. We calculate the compensating efficiencies that would prevent a merger from harming consumers for 1,014 mergers affecting 12,325 antitrust markets scrutinized by the European Commission between 1990 and 2018. Compensating efficiencies seem too large to be achievable for many mergers. Barriers to entry and the number of firms active in the market are the most important factors determining their size. We highlight concerns about the Commission’s merger enforcement being too lax.
    Keywords: Compensating efficiencies, Efficiency gains, Merger control, Concentration, Screens, HHI, Mergers, Unilateral Effects, Market Definition, Entry barriers
    JEL: L19 L24 L40 K21
    Date: 2021
  4. By: Noskova, Victoriia
    Abstract: In December 2020, new regulation of digital markets was proposed by European Commission. It specifically addresses main concerns raised by business behavior of operators of core services in their gatekeeping positions. However, voice assistants (or digital personal assistants, DPAs, e.g. Apple's Siri, Amazon's Alexa, Google Assistant) are not included into this regulation. In contrast, the Internal Market and Consumer Protection Committee of European Parliament suggested to include them. This paper argues that (i) voice assistants as gatekeepers for consumption should be listed among core services, (ii) some Digital Market Act's obligations need to be adopted to fit specifics of voice assistants, (iii) two relevant dimensions of power should be included into rebuttable presumptions used for competition policy and regulation: market power on voice assistants' market and ecosystem of related markets (cross-market integration criterion), (iv) growth of new gatekeepers should be prevented, among other means by stricter merger control.
    Keywords: Voice Assistants,Gatekeepers,Digital Market Act,Digital Personal Assistants,Virtual Assistants,Competition in Digital Markets,Competitive Bottleneck,Information Intermediaries,Platform Competition,Smart Speakers,Siri,Alexa,Google Assistant
    JEL: K21 L1 L4 L86 O33 D4
    Date: 2021
  5. By: Roman Inderst (Faculty of Economics and Business Administration, Goethe University Frankfurt); Eftichios S. Sartzetakis (Department of Economics, University of Macedonia); Anastasios Xepapadeas (Department of International and European Economic Studies, Athens University of Economics and Busines)
    Abstract: We posit that consumers?preferences for more sustainable products depend on the perceived social norm, which in turn is shaped by average consumption behavior. We explore the implications of such preferences for ?rms?incentives to introduce more sustainable products and to co-operate in order to either foster or forestall their introduction. Our main motivation lies in the increasing pressure put on antitrust authorities to exert more leniency towards horizontal agreements that are motivated by sustainability considerations.
    Keywords: Sustainability; Antitrust; Firm Cooperation.
    Date: 2022–02
  6. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper estimates profit margins in the U.S. airline industry at the domestic route level. The dynamic estimation methodology used not only is robust to any simultaneity/endogeneity bias by construction but also results in profit margin estimates that are highly consistent with actual profit data from the U.S. airline industry. Estimated annual profit margins have an average of about 13.3%, with a range between 2.7% and 42.9% across routes. A cross-route analysis further suggests that annual profit margins increase with the market share of the largest airline serving the route, whereas they decrease with airfare. Important policy suggestions follow.
    Keywords: Profit Margin, Price Elasticity, U.S. Domestic Routes
    JEL: C32 L93
    Date: 2021–11
  7. By: Pauline Affeldt; Reinhold Kesler
    Abstract: Since 2010, Google, Apple, Facebook, Amazon, and Microsoft (GAFAM) have acquired more than 400 companies. Competition authorities did not scrutinize most of these transactions and blocked none. This raised concerns that GAFAM acquisitions target potential competitors yet fly under the radar of current merger control due to the features of the digital economy. We empirically study the competitive effects of big tech acquisitions on competitors in a relevant online market. We identify acquisitions by GAFAM involving apps from 2015 to 2019, matching these to a comprehensive database covering apps available in the Google Play Store. We find that competing apps tend to innovate less following an acquisition by GAFAM, while there seems to be no impact on prices and privacy-sensitive permissions of competing apps. Additionally, we find evidence that affected developers reallocate innovation efforts to unaffected apps and that affected markets experience less entry post-acquisition.
    Keywords: Mergers and acquisitions, digital markets, GAFAM, apps, innovation, privacy, event study
    JEL: K21 L41 L86 G34
    Date: 2021
  8. By: Foros, Øystein (Dept. of Economics, Norwegian School of Economics and Business Administration); Kind, Hans Jarle (Dept. of Economics, Norwegian School of Economics and Business Administration); Stähler, Frank (University of Tübingen)
    Abstract: Competition between firms that sell incompatible varieties of network products might be fierce, because it is important for each of them to attract a large number of users. The literature therefore predicts that stronger network effects decrease prices and profits. We show that this prediction hinges critically on an implicit or explicit assumption that each consumer buys only one of the varieties offered in the market (singlehoming consumers). We show that multihoming (some consumers buy more than one variety) may arise endogenously if the number of exclusive features that each variety offers is sufficiently high. In sharp contrast to the conventional prediction under consumer singlehoming, we further show that both prices and profits could increase in the strength of the network effects if (some) consumers multihome. However, this does not necessarily imply that profits are higher under multihoming than under singlehoming. On the contrary, multihoming might constitute a prisoner s dilemma for the firms, in the sense that they could make higher profits if each consumer bought only one of the varieties.
    Keywords: multihoming; incremental pricing; network effects.
    JEL: L13 L14 L82
    Date: 2022–02–06
  9. By: Dumitrescu, Raluca (MicroEnergy Systems Research Group, Technische Universität Berlin); Lüth, Alexandra (Department of Economics, Copenhagen Business School); Weibezahn, Jens (Department of Economics, Copenhagen Business School); Groh, Sebastian (BRAC Business School (BBS), BRAC University)
    Abstract: In this paper, we are proposing a policy innovation for both a more sustainable and a more inclusive electrification strategy, particularly for improved energy access in the Global South: combining the extension of national grids whilst taking advantage of existing decentralized renewable energy infrastructure allowing their collective feed-in to the national grid. We are introducing community power purchase agreements as a regulatory instrument for compensating and incentivizing the actors active at the intersection of the two infrastructures (prosumer, grid operator, state utility).We use both a mixed complementarity and a linear model for analyzing the concept in a case study of Pirgacha village, Bangladesh, in which a cluster of solar home system prosumers are interconnected into a renewable energy swarm grid. We determine the energy infrastructure cost components and their split among the actors. The results demonstrate a series of co-benefits: (a) the prosumer is monetarily rewarded for the utilization of her assets and for electricity trading with no additional infrastructure investment; (b) if the state utility takes over the investment costs with the interconnection infrastructure and outsources the integrated grid operations and maintenance to the private sector, the otherwise high grid expansion costs can be saved and repurposed in other infrastructure investments; (c) the operations of the decentralized renewable energy company are no longer threatened by the grid expansion and it can become an Integrated Grid Operator.
    Keywords: Decentralized renewable energy; Swarm grids; Grid integration; Power purchase agreements; Integrated grid operator
    JEL: C61 C63 D47 L94 Q41 Q42 Q48
    Date: 2022–02–03
  10. By: Dongwei Zhao; Mehdi Jafari; Audun Botterud; Apurba Sakti
    Abstract: Arbitrage is one important revenue source for energy storage in electricity markets. However, a large amount of storage in the market will impact the energy price and reduce potential revenues. This can lead to strategic behaviors of profit-seeking storage investors. To study the investors' strategic storage investments, we formulate a non-cooperative game between competing investors. Each investor decides the storage investment over a long investment horizon, and operates the storage for arbitrage revenues in the daily electricity market. Different investors can deploy storage with different characteristics. Their decisions are coupled due to the market price that is determined by all the investors' decisions. We use market data from California ISO to characterize the storage impact on the market price, based on which we establish a centralized optimization problem to compute the market equilibrium. We show that an increasing number of investors will increase the market competition, which reduces investors' profits but increases the total invested storage capacity. Furthermore, we find that a slight increase in the storage efficiency (e.g., increased charge and discharge efficiency) can significantly improve an investor's profit share in the market.
    Date: 2022–01
  11. By: Thierry Kirat (IRISSO - Institut de Recherche Interdisciplinaire en Sciences Sociales - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Frédéric Marty (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (... - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur, CIRANO - Centre interuniversitaire de recherche en analyse des organisations - UQAM - Université du Québec à Montréal = University of Québec in Montréal)
    Abstract: The experience of the war economy during the First World War in the United States reinforced the influence of arguments in favour of managed competition. By extending the principles of scientific management to the economy as a whole, this approach aimed to coordinate firms through the exchange of information, which was seen as a necessity both in terms of economic efficiency and response to cyclical fluctuations. Such a stance greatly reduced the application of competition rules. Nevertheless, the proposals that emerged during the 1929 crisis – leading to the reproduction of the war-economy experience in peacetime at the risk of steering the US economy towards the formation of cartels under the supervision of the federal government – were rejected by President Herbert Hoover, despite his defence of a model for regulated competition in the 1920s. The paradox was President Franklin D. Roosevelt's resumption of these projects within the framework of the First New Deal. This paper deals with the arguments that were put forward to evade competition rules and explains why the Democratic administration ultimately decided to return to a resolute enforcement of the Sherman Act.
    Keywords: Information Exchange,Scientific Management,Competition Rules,Cartelization,War Economy
    Date: 2020–12–10
  12. By: Dante B. Canlas (School of Economics, University of the Philippines Diliman); Margarita Debuque-Gonzales (School of Economics, University of the Philippines Diliman)
    Abstract: This chapter discusses infrastructure development in the Philippines under decentralization using illustrations mainly in the water sector. It opens up a study of the constraints and challenges in governance and regulation that local government units (LGUs) face in narrowing down the infrastructure gaps in their various jurisdictions. To enable LGUs’ project proposals to get into the priority public investment program of the national government, the former must have skilled human resources capable of conducting the technical, legal, and financial analysis required. In governance, they must be able to navigate the complexities of water-pricing regulation. At the start, LGUs will need a good deal of technical, legal, and financial assistance from the national government in raising their capacity to overcome the challenges. However, through learning-by doing and as LGUs are able to mobilize additional resources using their power to impose tax and non-tax measures, decentralized infrastructure development can take off, guided by an effective division of labor between the national government and LGUs.
    Keywords: decentralization; infrastructure development; governance and regulation; Philippines
    JEL: H7 O5
    Date: 2020–06
  13. By: Martin O'Connell (Institute for Fiscal Studies and University of Wisconsin); Kate Smith (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: This paper studies the design of sin taxes when ?rms exercise market power. We outline an optimal tax framework that highlights how market power impacts the e?ciency and redistributive properties of sin taxation, and quantify these e?ects in an application to sugar-sweetened beverage taxation. We estimate a detailed model of demand and supply for the UK drinks market, which we embed in our tax design framework to solve for optimal sugar-sweetened beverage tax policy. Positive price-cost margins on drinks create allocative distortions, which act to lower the optimal rate compared with a perfectly competitive setting. However, since pro?ts accrue to the rich, this is partially mitigated under social preferences for equity. Overall, ignoring market power when setting the optimal sugar-sweetened beverage tax rate leads to welfare gains that are 40% below those at the optimum. We show that moving from a single tax rate on sugar-sweetened beverages to a multi-rate system can result in further substantial welfare gains, with much of these gains realized by instead taxing sugar content directly.
    Date: 2021–09–21
  14. By: Rachel Griffith (Institute for Fiscal Studies and University of Manchester); Martin O'Connell (Institute for Fiscal Studies and University of Wisconsin); Kate Smith (Institute for Fiscal Studies and Institute for Fiscal Studies)
    Abstract: We evaluate the impact of a price floor for alcohol introduced in Scotland in 2018, using a difference-in-differences strategy with England as a control group. We show that the policy led to the largest reductions in alcohol units purchased among the heaviest drinkers – the group who, at the margin, are likely to create the largest externalities from drinking. The price floor is well targeted at heavy drinkers because they buy a much greater fraction of their units from cheap products and switched away from these products strongly, with only limited substitution towards more expensive products. We show that if the marginal external cost of drinking is at least moderately higher for heavy than lighter drinkers, then a price floor outperforms an ethanol tax. However, more flexible tax systems can achieve similar reductions in externalities to the price floor, but avoid the large transfers from public funds to the alcohol industry that arise under the floor.
    Date: 2021–11–15
  15. By: Hildenbrand, Hannah-Maria; von Rueden, Christina; Viete, Steffen
    Abstract: Online platforms have become one of the most important business models of the digital economy and likely counteracted some of the drop in economic activity during the COVID-19 pandemic. At the same time, platform markets are subject to controversial debates about market power and the need for pro-competitive policy reforms. Despite their rising importance in modern economies, however, a lack of data on platforms' activity complicates the evaluation of their impact on economies and societies. In this paper we aim to improve the understanding of patterns of platform diffusion and market dynamics among online platforms in Germany using proprietary data on website traffic between 2018 and 2021. Our analysis suggests that German platform markets experienced considerable growthover the past years, and especially since the onset of the COVID-19 pandemic. Results also show that the pandemic led to diverging growth patterns between sectors of the German platform economy, reflecting the sectoral heterogeneity of the COVID-19 shock. Finally, while German platforms are numerous, they often fail to reach a critical size to challenge the mostly foreign dominant platforms. We associate this finding with the observation that dominance in platform market typically persists over time, possibly reflecting a lack of market contestability.
    Date: 2021
  16. By: J.A.|info:eu-repo/dai/nl/06912261X Bikker; J.G.J. Bekooij
    Abstract: This paper investigates the impact of market forces on competitive behaviour and efficiency in healthcare by investigating the Dutch healthcare insurance reform in 2006. This reform replaced the dual system of public and private insurance with a single compulsory health insurance scheme, in which insurance providers compete for customers in a free market. We measure competition directly from either shifts in market shares, or developments in profits. Using formal tests we find that in each approach a structural break occurs after the reform: competition is significantly higher after 2006 than before. Several robustness tests confirm this outcome. Nevertheless, we find that the health insurance sector is still less competitive than the banking, manufacturing and service industries, and even less competitive than life insurance.
    Keywords: (regulated) competition, concentration, healthcare insurance, performance-conduct-structure model, boone-indicator, scale economies
    Date: 2021–01
  17. By: Kenji Fujiwara (School of Economics, Kwansei Gakuin University)
    Abstract: Comparison among Cournot, Bertrand and (Chamberlin) monopolistic competition receives recent attention in industrial organization, but not in New Economic Geography (NEG). To fulfill this gap, we examine how the difference in market structures affects industry location in a footloose capital (FC) model of NEG. We find that the home market effect is strongest in Cournot competition, second strongest in Bertrand competition, and weakest in monopolistic competition.
    Keywords: Cournot competition, Bertrand competition, monopolistic competition, Home market effect
    JEL: D43 F12 F21 L13
    Date: 2022–01
  18. By: Gerba, Eddie (Bank of England); Katsoulis, Petros (Bank of England)
    Abstract: This paper assesses the impact of banking regulation (Basel III) on financial market dynamics using the repo market as an important case study. To this end, we use unique proprietary data sets from the Bank of England to examine the individual and joint impact of leverage, capital and liquidity coverage ratios on participants’ trading in all collateral segments of the UK repo market. We find non-uniform effects across ratios and participants and non-linear effects across time. For instance, we find that the leverage ratio induces participants to charge lower (higher) interest margins on repo (reverse repo) trades that are non-nettable compared to the nettable ones. Second,we document a change in market microstructure under the new regulatory regime. Specifically, we evidence a substitution effect of banks’ long-term repo borrowing backed by gilts from dealers to investment funds which can be fragile during times of stress. Likewise, we find an increasing prominence of central counterparties. Third, we find evidence that participants who are jointly constrained by multiple ratios and closer to the regulatory thresholds during times of stress reduce their activity to a greater extent than those that are constrained by a single ratio or not constrained, with implications for market liquidity.
    Keywords: Banking regulation; repo market; market microstructure; liquidity; monetary policy transmission
    JEL: E44 E52 G11 G21 G28
    Date: 2021–12–17
  19. By: Jörn C. Richstein; Frederik Lettow; Karsten Neuhoff
    Abstract: Die steile Entwicklung der Gaspreise hat die Strompreise im vergangenen Jahr in bislang ungeahnte Höhen klettern lassen. Satte Zusatzgewinne gemacht haben die Betreiber von Anlagen für erneuerbare Energien – und zwar indirekt auf Kosten der VerbraucherInnen, die kräftig draufzahlen mussten. Grund dafür ist die geltende Politik der gleitenden Marktprämie, mit der den Betreibern fast aller geförderter Windanlagen und von rund einem Drittel der Solaranlagen eine Mindestvergütung für den verkauften Strom zusteht. In Zeiten von niedrigen Strompreisen werden die Erneuerbare-Energien-Anlagen zusätzlich gefördert: Im Falle von hohen Strompreisen wie jetzt winken zugleich unverhoffte Gewinne, die die Betreiber einstreichen dürfen. Die KonsumentInnen haben das Nachsehen: Obwohl sie bei niedrigen Strompreisen regenerative Energien über die EEG-Umlage über Jahre hinweg gefördert haben, sind sie im Gegenzug nicht gegen hohe Strompreise abgesichert. Hätte die Bundesregierung in der Vergangenheit bereits auf Differenzverträge (Contracts-for-Difference, CfDs) statt auf die gleitende Marktprämie für Wind an Land und Photovoltaik gesetzt, hätten auch die StromkundInnen davon profitiert: Berechnungen des Deutschen Instituts für Wirtschaftsforschung (DIW Berlin) zeigen, dass die Stromkosten im vergangenen Jahr knapp 1,7 Milliarden Euro geringer gewesen wären. Allein im Dezember hätte die Ersparnis bei etwa 750 Millionen Euro gelegen.
    Date: 2022
  20. By: Allen Head (Queen's University); Timothy Kam (Australian National University); Sam Ng (Australian National University); Isaac Pan (University of Sydney)
    Abstract: Using micro-level data for the U.S., we provide new evidence—at national and state levels—of a positive (negative) relationship between the standard deviation (coefficient of variation)and the average in bank lending-rate markups. In a quantitative theory consistent with theseempirical observations, banks’ lending market power is determined in equilibrium and is a novelchannel of monetary policy. At low inflation, banks tend to extract higher markups from existingloan customers rather than competing for additional loans. As a result, banking activity neednot be welfare-improving if inflation is sufficiently low. This result speaks to concerns regardingmarket power in the banking sectors of low-inflation countries. Normatively, under a giveninflation target, welfare gains arise if a central bank can use additional liquidity-provision (ortax-and-transfer) instruments to offset banks’ market-power incentives
    Keywords: Banking; Credit; Markup Dispersion; Market Power; Stabilization Policy; Liquidity
    JEL: E41 E44 E51 E63 G21
    Date: 2022–02

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