nep-reg New Economics Papers
on Regulation
Issue of 2022‒08‒29
seventeen papers chosen by
Christopher Decker
Oxford University

  1. Improved Information in Search Markets By Jidong Zhou
  2. Optimal Tariffs on a Monopoly Platform in Two-sided Markets By KAO Kuo-Feng; MUKUNOKI Hiroshi
  3. The Economics of Platform Liability By Yassine Lefouili; Leonardo Madio
  4. Changing times - Incentive regulation, corporate reorganisations, and productivity in Great Britain’s gas networks By Victor Ajayi; Michael Pollitt
  5. Case studies on agile regulatory governance to harness innovation: Civilian drones and bio-solutions By Guillermo Hernández; Miguel Amaral
  6. Flexibility and risk transfer in electricity markets By Crampes, Claude; Renault, Jérôme
  7. Decarbonizing the Industry Sector and its Effect on Electricity Transmission Grid Operation - Implications from a Model Based Analysis for Germany By Lieberwirth, Martin; Hobbie, Hannes
  8. Price cap versus tariffs: The case of the EU-Russia gas market By Ehrhart, Karl-Martin; Schlecht, Ingmar; Wang, Runxi
  9. Carbon Pricing, Clean Electricity Standards, and Clean Electricity Subsidies on the Path to Zero Emissions By Severin Borenstein; Ryan Kellogg
  10. On Market Clearing of Day Ahead Auctions for European Power Markets: Cost Minimisation versus Social Welfare Maximisation By Ioan Alexandru Puiu; Raphael Andreas Hauser
  11. TARGET2 analytical tools for regulatory compliance By Glowka, Marc; Müller, Alexander; Polo Friz, Livia; Testi, Sara; Valentini, Massimo; Vespucci, Stefano
  12. Pricing of new pharmaceuticals and price regulation in India By Vasudha Wattal
  13. Adverse Selection as a Policy Instrument: Unraveling Climate Change By Steve Cicala; David Hémous; Morten G. Olsen
  14. Pricing Power in Advertising Markets: Theory and Evidence By Matthew Gentzkow; Jesse M. Shapiro; Frank Yang; Ali Yurukoglu
  15. Impact of Municipal Mergers on Pollution Control: Evidence from Water Quality Change in Japan By Motohashi, Kazuki; Toya, Michiyoshi
  16. Pass-through of water pollution regulation: Evidence from sewer utility bills and Wisconsin's phosphorus rule By Meyer, Andrew G.; Raff, Zach
  17. Limited-tenure concessions for collective goods By Nicolas Quérou; Agnes Tomini; Christopher Costello

  1. By: Jidong Zhou (Cowles Foundation, Yale University)
    Abstract: How will an improved information environment affects competition and market performance when consumers face search frictions? This paper provides a unified way to model information improvement that makes the search pool more ``selective" (e.g., due to personalized recommendations), or more ``informative" (e.g., due to the availability of more detailed product information). Information improvement tends to induce consumers to search less, intensify price competition and benefit consumers, if the search friction is small, or if information improvement truncates the match utility distribution from below. More generally, however, it is also possible for information improvement to raise the market price and harm consumers.
    Keywords: consumer search, personalized recommendations, information improvement, price competition
    JEL: D43 D83 L13
    Date: 2020–11
  2. By: KAO Kuo-Feng; MUKUNOKI Hiroshi
    Abstract: This study investigates how countries set import tariffs on a monopoly platform’s product in a two-sided market. Consumers and service providers interact through the platform’s product, wherein service providers’ entries spur product demand and larger demand invokes more entries. Optimal import policies for importing countries are subsidies when network externalities and the number of importing countries are large, while they are tariffs when they are small. There is a case where optimal non-cooperative policies are import tariffs, but optimal cooperative policies are import subsidies. These results suggest that promoting digital trade and cooperative actions in tariff settings is important to advance trade liberalization for the platform’s products.
    Date: 2022–07
  3. By: Yassine Lefouili (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Leonardo Madio (Universita degli Studi di Padova)
    Abstract: Public authorities in many jurisdictions are concerned about the proliferation of illegal content and products on online platforms. One often discussed solution is to make the platform liable for third parties' misconduct. In this paper, we first identify platform incentives to stop online misconduct in the absence of liability. Then, we provide an economic appraisal of platform liability that highlights the intended and unintended effects of a more stringent liability rule on several key variables such as prices, terms and conditions, business models, and investments. Specifically, we discuss the impact of the liability regime applying to online platforms on competition between them and the incentives of third parties relying on them. Finally, we analyze the potential costs and benefits of measures that have received much attention in recent policy discussions.
    Keywords: Liability rules,Online platform,Illegal content and products,Intellectual property
    Date: 2022–06
  4. By: Victor Ajayi (Energy Policy Research Group, Judge Business School, University of Cambridge); Michael Pollitt (Energy Policy Research Group, Judge Business School, University of Cambridge)
    Keywords: Total factor productivity, incentive regulation, corporate reorganisations, gas networks, data envelopment analysis
    JEL: D24 H23 L43 L94
    Date: 2022–07
  5. By: Guillermo Hernández (OECD); Miguel Amaral (OECD)
    Abstract: This working paper presents two case studies of agile regulatory governance focusing, respectively, on civilian drones and bio-solutions (i.e. the use of renewable bio-resources for industrial scale production, for example with a view to creating alternatives to petro-based and chemical products). Each of the case studies looks at the main transformative impacts of the innovations at hand as well as the associated regulatory challenges and responses. They complement a compilation of Case Studies on the Regulatory Challenges Raised by Innovation and the Regulatory Responses developed jointly between the OECD and the Korean Development Institute (2021) and provide further evidence to support the implementation of the OECD Recommendation for Agile Regulatory Governance to Harness Innovation.
    Keywords: Agile regulation, Better Regulation, innovation, Regulatory governance, Regulatory policy
    JEL: D7 K00 K2 L5 L51 L98 O1 O33 O38 L65
    Date: 2022–08–05
  6. By: Crampes, Claude; Renault, Jérôme
    Abstract: The producers of electricity using dispatchable plants rely on partially flexible technologies to match the variability of both demand and production from renewables. We analyse upward and downward flexibility in a two-stage decision process where firms compete in quantities produced ex ante at low cost and ex post at high cost to supply a random residual demand. We first compute the first best and competitive outcomes, then we determine the subgame perfect equilibria corresponding to two market designs: one where all trade occurs in a spot market with known demand, the other where a day-ahead market with random demand is added to the ex-post market, first in a general setting, then using a quadratic specification. We show that being inflexible can be more profitable than being flexible. We also show that adding a day-ahead market to the spot market increases welfare but transfers risks from firms to consumers.
    Keywords: flexibility; electricity; market design; risk transfer
    JEL: C72 D24 D47 L23 L94
    Date: 2022–07–28
  7. By: Lieberwirth, Martin; Hobbie, Hannes
    Abstract: Integrating large amounts of electrolyzer capacities poses particular challenges for grid operators along the entire hydrogen value chain. This research examines how hydrogen production capacities that support the decarbonization of German industrial sectors impact the electricity transmission grid. The operation of electrolyzer capacities and the production of green hydrogen result in increased electricity demand that stresses the power grids beyond conventional electricity load levels. The question arises to what extent electrolyzer capacities cause additional grid congestion and how flexible operation of electrolyzers can contribute to efficient management of future power grids. A scenario framework is created, differing in the decarbonizing strategy of industry sectors, operation mode of electrolyzers, and penetration levels of electrolyzer installations for a market projection of the future European electricity system. Model-based research is performed by applying a fundamental electricity market and congestion management optimization model of the European electricity systems for the set of scenarios. Results of the model-based investigation highlight the importance of integrating electrolyzer capacities into congestion management practices, primarily if corresponding decarbonized industries feature a more distributed allocation throughout Germany, such as the chemical, paper and printing industries. The findings of this work provide policymakers, system operators, and regulators with meaningful insights for designing future congestion management frameworks.
    Keywords: Electricity,Green hydrogen,Congestion management,Grid modelling,Germany
    JEL: C61 Q41 Q48
    Date: 2022
  8. By: Ehrhart, Karl-Martin; Schlecht, Ingmar; Wang, Runxi
    Abstract: To counter rising gas prices and corresponding Russian profits, many scholars point to import tariffs on Russian gas as a preferred policy instrument. While this makes sense in the case of oil, for the case of gas we observe the opposite. This is due to the structure of the EU-Russia gas market, where Russia holds a monopoly over the EU’s residual gas demand and the EU, if it would engage in joint procurement, has market power itself potentially acting as monopsony. However, it has not yet chosen to exercise its market power. Under these conditions, an external price cap for Russian gas can be considered to be the more appropriate policy instrument, because a price cap tends to take away economic incentives for Russia to use its market power, increasing gas prices through decreasing supply. Under such circumstances, we show that an external price cap is superior to a tariff in the sense that for any tariff there exists a price cap that makes both the EU and Russia better off. Consequently, the EU can always design a price cap that gives Russia the same welfare (so it is equally likely to accept), but makes the EU better off compared to imposing a tariff.
    Keywords: price cap,Russia,gas market,tariff,sanctions
    Date: 2022
  9. By: Severin Borenstein; Ryan Kellogg
    Abstract: We categorize the primary incentive-based mechanisms under consideration for addressing greenhouse gas emissions from electricity generation—pricing carbon, setting intensity standards, and subsidizing clean energy—and compare their market outcomes under similar expansions of clean electricity generation. While pricing emissions gives strong incentives to first eliminate generation with the highest social cost, a clean energy standard incentivizes earliest phaseout of the generation with the highest private cost. We show that the importance of this distinction depends on the correlation between private costs and emissions rates. We then estimate this correlation for US electricity generation and fuel prices as of 2019. The results indicate that the emissions difference between a carbon tax and clean energy standard that phase out fossil fuel generation over the same timeframe may actually be quite small, though it depends on fossil fuel prices during the phaseout. We also discuss how each of these policy options is likely to impact electricity prices, quantity demanded, government revenue, and economic efficiency. Large pre-existing markups of retail electricity prices over marginal costs are likely to considerably weaken or even reverse the usual assumed efficiency advantage of carbon pricing policies over alternatives, including direct subsidization of clean electricity generation.
    JEL: L94 Q52 Q54 Q58
    Date: 2022–07
  10. By: Ioan Alexandru Puiu; Raphael Andreas Hauser
    Abstract: For the case of inflexible demand and considering network constraints, we introduce a Cost Minimisation (CM) based market clearing mechanism, and a model representing the standard Social Welfare Maximisation mechanism used in European Day Ahead Electricity Markets. Since the CM model corresponds to a more challenging optimisation problem, we propose four numerical algorithms that leverage the problem structure, each with different trade-offs between computational cost and convergence guarantees. These algorithms are evaluated on synthetic data to provide some intuition of their performance. We also provide strong (but partial) analytical results to facilitate efficient solution of the CM problem, which call for the introduction of a new concept: optimal zonal stack curves, and these results are used to devise one of the four solution algorithms. An evaluation of the CM and SWM models and their comparison is performed, under the assumption of truthful bidding, on the real world data of Central Western European Day Ahead Power Market during the period of 2019-2020. We show that the SWM model we introduce gives a good representation of the historical time series of the real prices. Further, the CM reduces the market power of producers, as generally this results in decreased zonal prices and always decreases the total cost of electricity procurement when compared to the currently employed SWM.
    Date: 2022–07
  11. By: Glowka, Marc; Müller, Alexander; Polo Friz, Livia; Testi, Sara; Valentini, Massimo; Vespucci, Stefano
    Abstract: As the operator of a systemically important payment system (SIPS), the Eurosystem has the responsibility of regularly assessing the resilience of the Trans-European Automated Real-time Gross Settlement Express Transfer System (TARGET2) to various types of risks, as set out in the Principles for Financial Market Infrastructures (PFMIs) drawn up by the Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO). To identify, measure, monitor and mitigate these risks over time, the TARGET2 operator has developed specific approaches that include both qualitative and quantitative elements. JEL Classification: G20, E42, E58, C10, C63
    Keywords: FMIs, payment systems, PFMIs, TARGET2
    Date: 2022–08
  12. By: Vasudha Wattal (Centre for Competition Policy and School of Economics, University of East Anglia)
    Abstract: How does restricting a firm’s ability to raise prices in the future affect the introductory price of new products? This paper considers this question for new molecules launched in the Indian pharmaceutical market. The empirical results from the Indian market show higher launch prices for originators of chronic drugs that were introduced after the regulatory announcement. However, there appears no significant effect on competitor prices. I show that these findings align with a theoretical framework where originators of repeat purchase products increase introductory prices. While the originator secures a higher second period price, the competitor offers significant price cuts to capture new consumers. Overall, these results suggest that regulation delays welfare gains from new drugs, as initially more consumers are left out. The significance of this finding depends on the importance of these new introductions.
    Keywords: regulation, oligopoly, price setting, pharmaceuticals
    Date: 2022–07–08
  13. By: Steve Cicala; David Hémous; Morten G. Olsen
    Abstract: This paper applies principles of adverse selection to overcome obstacles that prevent the implementation of Pigouvian policies to internalize externalities. Focusing on negative externalities from production (such as pollution), we consider settings in which aggregate emissions are known, but individual contributions are unobserved by the government. We evaluate a policy that gives firms the option to pay a tax on their voluntarily and verifiably disclosed emissions, or pay an output tax based on the average rate of emissions among the undisclosed firms. The certification of relatively clean firms raises the output-based tax, setting off a process of unraveling in favor of disclosure. We derive sufficient statistics formulas to calculate the welfare of such a program relative to mandatory output or emissions taxes. We find that the voluntary certification mechanism would deliver significant gains over output-based taxation in two empirical applications: methane emissions from oil and gas fields, and carbon emissions from imported steel.
    JEL: D82 H2 H87 K32 L51 Q54
    Date: 2022–07
  14. By: Matthew Gentzkow; Jesse M. Shapiro; Frank Yang; Ali Yurukoglu
    Abstract: Existing theories of media competition imply that advertisers will pay a lower price in equilibrium to reach consumers who multi-home across competing outlets. We generalize and extend this theoretical result and test it using data from television and social media advertising. We find that television outlets whose viewers watch more television charge a lower price per impression to advertisers. This finding helps rationalize well-known stylized facts such as a premium for younger and more male audiences on television. Also consistent with the theory, we show that social media advertising markets feature a premium for older audiences. A quantitative version of our model whose only free parameter is a scale normalization can explain 35 percent of the variation in price per impression across owners of television networks, and aligns with recent trends in television advertising revenue. We use the model to quantify the impact of mergers, the effect of competition on incentives to produce content, and the effect of Netflix ad carriage on prices for linear television advertising.
    JEL: L10 L82 M37
    Date: 2022–07
  15. By: Motohashi, Kazuki; Toya, Michiyoshi
    Keywords: Environmental Economics and Policy, Resource/Energy Economics and Policy, Community/Rural/Urban Development
    Date: 2022–08
  16. By: Meyer, Andrew G.; Raff, Zach
    Keywords: Environmental Economics and Policy, Resource/Energy Economics and Policy, Agricultural and Food Policy
    Date: 2022–08
  17. By: Nicolas Quérou (CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier); Agnes Tomini (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Christopher Costello (UCSB - University of California [Santa Barbara] - University of California)
    Abstract: We analyze theoretically an institution called a "limited-tenure concession" for its ability to induce efficient public goods contribution and common-pool resource extraction. The basic idea is that by limiting the tenure over which an agent can enjoy the public good, but offering the possibility of renewal contingent on ample private provision of that good, efficient provision may be induced. We first show in a simple repeated game setting that limited-tenure concessions can incentivize socially-efficient provision of public goods. We then analyze the ability of this instrument to incentivize the first best provision for common-pool natural resources such as fish and water, thus accounting for spatial connectivity and growth dynamics of the resource. The duration of tenure and the dispersal of the resource play pivotal roles in whether this limitedtenure concession induces the socially optimal private provision. Finally, in a setting with costly monitoring, we discuss the features of a concession contract that ensure first-best behavior, but at least cost to the implementing agency.
    Keywords: Concessions,public goods,cooperation,natural resources,spatial externalities,dynamic games
    Date: 2022

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