nep-reg New Economics Papers
on Regulation
Issue of 2022‒10‒17
seventeen papers chosen by
Christopher Decker
Oxford University

  1. Navigating the crises in European energy: Price Inflation, Marginal Cost Pricing, and Principles for Electricity Market Redesign in an Era of Low-Carbon Transition By Michael Grubb
  2. Intermittency or Uncertainty? Impacts of Renewable Energy in Electricity Markets By Paige Weber; Matt Woerman
  3. Vertical Control Change and Platform Organization under Network Externalities By Jorge Padilla; Salvatore Piccolo; Shiva Shekhar
  4. Corrective regulation with imperfect instruments By Dávila, Eduardo; Walther, Ansgar
  5. Future-proof regulation against the test of time: the evolution of European telecommunications regulation By Ibáñez Colomo, Pablo
  6. Information vs Competition: How Platform Design Affects Profits and Surplus By Amedeo Piolatto; Florian Schuett
  7. Market Effects of Sponsored Search Auctions By Massimo Motta; Antonio Penta
  8. Participación de la capacidad fotovoltaica instalada en México: un análisis benchmarking By Juárez-Luna, David; Urdiales, Eduardo
  9. Changing times: Incentive regulation, corporate reorganisations, and productivity in the Great Britain’s gas networks. By Ajayi, V.; Pollitt, M.
  10. Regulatory policy 2.0: Viewpoints and beliefs about better regulation: A report from the “Q exercise” By Claudio M. Radaelli; Lorenzo Allio; Karl O’Connor; Richard Alcorn; Daniel Trnka
  11. Price-Directed Search, Product Differentiation and Competition By Martin Obradovits; Philipp Plaickner
  12. Cursed Consumers and the Effectiveness of Consumer Protection Policies By Ispano, Alessandro; Schwardmann, Peter
  13. Antitrust and Digital Platforms By World Bank
  14. The Costs of Natural Gas Dependency: Price Shocks, Inequality, and Public Policy By Mats Kröger; Maximilian Longmuir; Karsten Neuhoff; Franziska Schütze
  15. Platform Liability and Innovation By Doh-Shin Jeon; Yassine Lefouili; Leonardo Madio
  16. Optimal Non-Linear Pricing with Data-Sensitive Consumers By Krähmer, Daniel; Strausz, Roland
  17. Water Bill Perception in Brazil: Do Households Get It Right? By Pérez, María; Libra, Jesse; Machado, Kleber; Serebrisky, Tomás; Solís, Ben

  1. By: Michael Grubb (University College London)
    Abstract: The energy crisis engulfing Europe is a crisis of both gas and electricity markets, with huge cost impacts on consumers across all European countries. In Britain, half of typical household energy expenditure arises from electricity. This paper examines how the cost of gas-powered generation feeds through to electricity bills, on the principle of marginal cost pricing, setting the price for most of the time though it accounts for only about 40% of GB generation. Combined with the steep decline in wind and solar costs over the past decade, this has resulted in an unprecedented degree of 'cost inversion' in the electricity system. We offer estimates of the increase of revenues across the wholesale market, and outline five principles for reform for addressing the combined challenges of energy costs and accelerating low-carbon transition.
    Keywords: Electricity market design; energy crisis; marginal cost pricing; energy transition; energy poverty
    JEL: L16 L51 L94 L98 Q4 Q28 Q58
    Date: 2022–09–06
  2. By: Paige Weber; Matt Woerman
    Abstract: Renewable energy resources possess unique characteristics—intermittency and uncertainty— that pose challenges to electricity grid operations. We study these characteristics and find that uncertainty, represented by wind forecast error, has larger grid impacts than intermittency, or hourly generation changes. Uncertainty yields roughly double the price effects and roughly double the number of conventional generator start-ups, as compared to perfectly forecast wind. While this finding is important given the persistence of wind forecast error over the study period, reducing wind forecast error to the level of demand forecast error would lower costs by a modest half a million dollars per year.
    Keywords: renewable energy, electricity prices and price dispersion, electricity grid management
    JEL: Q40 Q42 Q47
    Date: 2022
  3. By: Jorge Padilla; Salvatore Piccolo; Shiva Shekhar
    Abstract: In this paper, we examine how the introduction of network externalities impact an open and vertically integrated platform’s post-merger contractual relationship with third-party sellers distributing through its marketplace. Regardless of whether the platform uses linear contracts or two-part tariffs, we find that, provided these contracts are public, the platform has no incentive to exclude its non-integrated rivals and that the latter’s market share rises as network effects gain importance. Vertical integration serves as a commitment device that open platforms can use to convince potential users (e.g., consumers and developers) that their ecosystem will be large and compelling. Interestingly, when the open platform competes with a closed rival, i.e., with a fully integrated ecosystem, it may find it profitable to subsidize independent third-party sellers to strategically steer demand away from the competing ecosystem. These results have novel managerial implications on the incentives of a platform to open up its ecosystem to third-party sellers, as well as for the regulation of vertical integration in the presence of network effect and when different platforms operate alternative business models.
    Keywords: open ecosystems, network externalities, platforms, vertical integration
    JEL: L22 L41 L51
    Date: 2022
  4. By: Dávila, Eduardo; Walther, Ansgar
    Abstract: This paper studies optimal second-best corrective regulation, when some agents/activities cannot be perfectly regulated. We show that policy elasticities and Pigouvian wedges are sufficient statistics to characterize the marginal welfare impact of regulatory policies in a large class of environments. We show that a subset of policy elasticities, leakage elasticities, determine optimal second-best policy, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities, uniform regulation across agents/activities, and costly regulation. We illustrate our results in applications to financial regulation with environmental externalities, shadow banking, behavioral distortions, asset substitution, and fire sales. JEL Classification: H23, Q58, G28, D62
    Keywords: corrective regulation, Pigouvian taxation, second-best policy
    Date: 2022–09
  5. By: Ibáñez Colomo, Pablo
    Abstract: Regulation is sometimes designed to be future-proof, so that it can adapt to changing economic and technological realities. The EU (and UK) Regulatory Framework for electronic communications was expressly crafted to be able to adjust to the evolution of the industry. This article considers how well the regime has stood the test of time and, based on this analysis, what lessons can be drawn for regulation more generally. It appears that, by and large, the Framework has effectively accompanied the transformation of telecommunications in Europe. On the other hand, the EU legislature’s commitment to future-proof intervention has waned over time. Every new review of the regime has represented a move away from the philosophy and mechanisms conceived to ensure that regulation would adapt seamlessly to industry shifts. This experience suggests that the failure or success of future-proof intervention primarily hinges on the intertemporal consistency of legislatures.
    Keywords: economic regulation; administrative law; public law; EU law; internet
    JEL: J1
    Date: 2022–09–16
  6. By: Amedeo Piolatto; Florian Schuett
    Abstract: We study the design of online platforms that aggregate information and facilitate transac tions. Two different designs can be observed in the market: revealing platforms that disclose the identity of transaction partners (e.g. Booking) and anonymous platforms that do not (e.g. Hotwire). To analyse the implications of this design choice for profits and surplus, we develop a model in which consumers differ in their location as well as their preferred product variety. Sellers offer their products for sale both directly (`offline') and indirectly via the platform (`online') but are unable to credibly disclose the product variety they offer when selling offline. The model gives rise to a novel trade-off associated with the anonymous platform design: offline, consumers observe location but not variety; online, they observe variety but not location. While the revealing design leads to more informed consumers and better matches, the anonymous design allows sellers to price discriminate and introduces competition between sellers whose markets would otherwise be segmented. We show that the comparison between the designs depends crucially on the relative importance of information about location vis-à-vis information about variety. For an intermediate range, the anonymous design outperforms the revealing design in terms of both profits and welfare.
    Keywords: anonymous information platforms, opaque products, horizontal competition, experience goods, mismatch costs
    JEL: D02 D21 D43 D61 D83 L11 L13 L15
    Date: 2022–03
  7. By: Massimo Motta; Antonio Penta
    Abstract: We investigate the market effects of brand search advertising, within a model where two firms simultaneously choose the price of their (differentiated) product and the bids for the advertising auction which is triggered by own and rival's brand keywords search; and where there exist sophisticated/attentive consumers (who look for any available information on their screen) and naive/inattentive consumers (who only look at the top link of their screen), both aware of either brand's characteristics and price. Relative to a benchmark where only organic search exists, in any symmetric equilibrium each firm wins its own brand auction, and advertising has detrimental effects on welfare: (i) the sponsored link crowds out the rival's organic link, thus reducing competition and choice, and leading to price increases; (ii) the payment of the rival's bid (may) raise marginal cost, also contributing to raise market prices. Under extreme asymmetry (there is an incumbent and an unknown new entrant), we do find that the market effect of brand bidding might be beneficial, if the search engine does not list the entrant's link in organic search, and the share of the sophisticated consumers in the economy is large enough for an equilibrium in which the entrant wins the advertising auction on the search for the incumbent's brand to exist.
    Keywords: digital advertising, auctions, oligopoly, search engines, brands, horizontal agreements
    JEL: D44 L13 L4
    Date: 2022–06
  8. By: Juárez-Luna, David; Urdiales, Eduardo
    Abstract: This paper aims to identify specific policies that promote the participation of installed PV capacity in Mexico's energy basket. We apply a benchmarking analysis, which provides a comparative perspective between Mexico and the countries with the highest installed PV capacity in the world. The analysis suggests that, in order to boost the participation of installed PV capacity, a long-term planning of the Mexican PV industry should be carried out, with Smart Electric Grids as the leading principle, focusing on PV electricity. In such plan, the starting point should consist of implementing four policies: a) capital subsidy, concession or rebate; b) tax credit for investment or production; c) public investment, and; d) the promotion of research and development of PV technology.
    Keywords: Photovoltaic electricity, Energy policies, Benchmarking, Energy planning, Smart electrical grids.
    JEL: Q40 Q42 Q48
    Date: 2021–10
  9. By: Ajayi, V.; Pollitt, M.
    Abstract: The gas industry in Great Britain has witnessed periodic regulatory reviews and large corporate changes over the last few decades. We undertake two separate analyses for the total factor productivity (TFP) of the gas networks using a non-parametric data envelopment analysis (DEA) approach to assess how these changes are impacting on productivity growth. First, we set out different models for the TFP analysis, each for gas transmission and distribution network, to examine how changes in incentive mechanism have influenced the measured TFP using quality of service and environmental targets. Quality standards from regulators warrant some adjustment to explore industry productivity growth. Second, we construct a combined single series for distribution and transmission using financial data to uncover how corporate reorganisations have impacted measured productivity to get a new perspective in the years before and after restructuring, when the industry went from being a single integrated transmission and distribution network to the disintegrated networks of today. We find a negative TFP growth of -1.6% p.a. for gas transmission over the sample period (2006/07-2018/19). Although, this is reversed to a positive growth once quality is included. For gas distribution, we actually find that productivity regress at -6.2% p.a. over the sample period (2006/07-2018/19), with the negative TFP trend observed across all the models, despite the inclusion of quality variables. However, we find a slightly higher TFP growth of 1% using corporate accounts over the 25 years from 1995/1996-2020/2021. The period before restructuring has a more positive productivity compared to the post-restructuring era with negative productivity growth.
    Keywords: Total factor productivity, incentive regulation, corporate reorganisations, gas networks, data envelopment analysis.
    JEL: C23 D24 L51 L94
    Date: 2022–10–03
  10. By: Claudio M. Radaelli (European University Institute); Lorenzo Allio (allio-rodrigo consulting); Karl O’Connor (Ulster University); Richard Alcorn (OECD); Daniel Trnka (OECD)
    Abstract: Regulatory policy today is still grounded in principles and tools designed a few decades ago, but the context has changed significantly. To determine whether the current framework can help countries meet the challenges of contemporary societies, the OECD launched the Regulatory Policy 2.0 project. This report sets out the results from the second phase of the project, which included an exercise to map beliefs around better regulation. The exercise, involving government officials and regulatory experts, has identified four internally coherent belief systems about what better regulation is today, which core aims it should have, and where it should go in the future. Based on this analysis, the report provides empirical evidence and implications for the future direction of regulatory policy.
    Keywords: Better Regulation, Regulatory Policy 2.0
    JEL: A1 D6 D7 H00 Z18
    Date: 2022–10–04
  11. By: Martin Obradovits; Philipp Plaickner
    Abstract: Especially in many online markets, consumers can readily observe prices, but may need to further inspect products to assess their suitability. We study the effects of product differentiation and search costs on competition and market outcomes in a tractable model of price-directed consumer search. We find that (i) firms' equilibrium pricing always induces efficient search behavior, (ii) for relatively large product differentiation, welfare distortions still occur because some consumers (may) forgo consumption, and (iii) lower search costs lead to stochastically higher prices, increasing firms' expected profits and decreasing their frequency of sales. Consumer surplus often falls when search costs decrease.
    Keywords: Consumer Search, Price-Directed Search, Product Differentiation, Price Competition, Mixed-Strategy Pricing, Search Costs
    JEL: D43 D83 L13
    Date: 2022
  12. By: Ispano, Alessandro (CY Cergy Paris Université, CNRS and THEMA); Schwardmann, Peter (LMU Munich)
    Abstract: We model firms’ quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that cursed consumers are exploited in duopoly markets if firms are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common consumer protection policies that work under monopoly, i.e. mandatory disclosure, third party disclosure and consumer education, may all increase exploitation and decrease welfare. Even where these policies improve overall welfare, they often lead to a reduction in consumer surplus. We show that our conclusions hold in extensions with endogenous quality choice and horizontal differentiation.
    Keywords: naive; cursed; disclosure; consumer protection; labeling; competition;
    JEL: C72 D03 D82 D83
    Date: 2021–12–01
  13. By: World Bank
    Keywords: Information and Communication Technologies - Digital Divide Law and Development - Private Sector Development Law Private Sector Development - Competitiveness and Competition Policy Private Sector Development - E-Business Private Sector Development - Legal Regulation and Business Environment
    Date: 2021–09
  14. By: Mats Kröger; Maximilian Longmuir; Karsten Neuhoff; Franziska Schütze
    Abstract: Natural gas prices in Germany saw a strong increase at the end of 2021, subsequently worsening with the start of the war in Ukraine in February 2022, raising concerns about the distributional consequences. Our study shows that low-income households are affected the most by the natural gas price increase. Low-income households pay at the median 11.70 percent of their equivalent income on gas bills, compared to 6.21 percent in 2020. Contrarily, high-income households pay at the median 2.41 percent, compared to 1.52 in 2020. Natural gas expenditures are higher for tenants in detached houses and in houses with no double glassing or thermal insulation. Our policy analysis builds on an exploration of new energy expenditure data in 2020 provided by the German Socio-Economic Panel, and shows that a well-targeted subsidy scheme can be more effective for reducing inequality and less costly than a subsidy for all households. Additionally, the introduction of a minimum energy-efficiency standard for buildings can help reduce inequality in the medium-term.
    Keywords: Natural gas prices, income distribution, energy efficiency, building retrofit
    JEL: D30 Q41 I38
    Date: 2022
  15. By: Doh-Shin Jeon (Toulouse School of Economics, University of Toulouse Capitole and CEPR); Yassine Lefouili (Toulouse School of Economics, University of Toulouse Capitole); Leonardo Madio (Department of economics and management †Marco Fanno†, University of Padova and CESifo)
    Abstract: We study a platformâs incentives to delist IP-infringing products and the effects of holding the platform liable for the presence of such products on innovation and consumer welfare. For a given number of buyers, platform liability increases innovation by reducing the competitive pressure faced by innovative products. However, there can be a misalignment of interests between innovators and buyers. Furthermore, platform liability can have unintended consequences, which overturn the intended effect on innovation. Platform liability tends to increase (decrease) innovation and consumer welfare when the elasticity of participation of innovators is high (low) and that of buyers is low (high).
    Keywords: platform, liability, intellectual property, innovation
    JEL: K40 K42 K13 L13 L22 L86
    Date: 2022–09
  16. By: Krähmer, Daniel (University of Bonn); Strausz, Roland (HU Berlin)
    Abstract: We introduce consumers with intrinsic privacy preferences into the monopolistic non-linear pricing model. Next to classical consumers, there is a share of data-sensitive consumers who incur a privacy cost if their purchase reveals information to the monopolist. The monopolist discriminates between privacy types using privacy mechanisms which consist of a direct mechanism and a privacy option, targeting, respectively, classical and data-sensitive consumers. We show that a privacy mechanism is optimal if privacy costs are large and that it yields classical consumers a higher utility than data-sensitive consumers with the same valuation. If, by contrast, privacy preferences are public information, data-sensitive consumers with a low valuation obtain a strictly higher utility than classical consumers. With public privacy preferences, data-sensitive consumers and the monopolist are better off, whereas classical consumers are worse off. Our results are relevant for policy measures that target the data-awareness of consumers, such as the European GDPR.
    Keywords: optimal non-linear pricing; privacy; monopolistic screening;
    Date: 2021–11–19
  17. By: Pérez, María; Libra, Jesse; Machado, Kleber; Serebrisky, Tomás; Solís, Ben
    Abstract: An issue that affects the effectiveness of water pricing policies is consumers misperception, which implies that households decide their water consumption based on poor/inaccurate information about the marginal price. We use household survey data on bill and quality perception in Brazil to analyze this problem and its drivers. Once we control for the selection bias caused by survey respondents voluntarily providing their bill, we find evidence of bill misperception. Apart from the informational and socioeconomic drivers usually considered in the literature, perceived water quality seems to be a relevant factor of the degree of misperception.
    Keywords: water pricing,water quality,price perceptions,economics of information
    JEL: Q21 Q25 Q54
    Date: 2022

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