nep-reg New Economics Papers
on Regulation
Issue of 2023‒01‒02
twenty papers chosen by
Christopher Decker
Oxford University

  1. When can lotteries improve public procurement processes? By Antonio Estache; Renaud Foucart; Tomas Serebrisky
  2. Self-preferencing and foreclosure in digital markets: Theories of harm for abuse cases By Massimo Motta
  3. Redesigning Automated Market Power Mitigation in Electricity Markets By Jacqueline Adelowo; Moritz Bohland
  4. Gas Price Caps and Electricity Production Effects in the Context of the Russo-Ukrainian War: Modeling and New Policy Reforms By Werner Roeger; Paul J. J. Welfens
  5. Gaspreisdeckel, Strommarkt und Makroeffekte in Deutschland und der EU By Werner Roeger; Paul J. J. Welfens
  6. Organizational Structure and Pricing: Evidence from a Large U.S. Airline By Ali Hortacsu; Olivia R. Natan; Hayden Parsley; Timothy Schwieg; Kevin R. Williams
  7. Product Market Regulation in Brazil By Cristiana Vitale; Alexis Durand; Pedro Caro de Sousa; Paul Yu
  8. Improving the regulatory framework in the natural gas sector in Brazil By Cristiana Vitale; Alexis Durand; Gloriana Madrigal; Manuel Gerardo Flores Romero; Pedro Caro de Sousa; Paul Yu
  9. Cap-and-Innovate: Evidence of regulation-induced innovation in California By Vanessa da Cruz
  10. Uneven regulation and economic reallocation: Evidence from transparency regulation By Breuer, Matthias; Breuer, Patricia
  11. Productivity drivers of infrastructure companies: network industries to maximize economies of scale in the digital era By Nakatani, Ryota
  12. Environmental Economics, Regulation, and Innovation By Mads Greaker; David Popp
  13. Economics of Grid-Supported Electric Power Markets: A Fundamental Reconsideration By Tesfatsion, Leigh
  14. Deployment of high-speed broadband in rural areas in the EU: Evolution of the investment gap and alternatives to reduce it By Ferrandis, Jesús; Ramos, Sergio; Feijóo, Claudio
  15. Effects of Conferring Business Resource on Rivals By Ajit, Tejaswi Channagiri; Jamison, Mark A.
  16. The Regulation of Medical AI: Policy Approaches, Data, and Innovation Incentives By Ariel Dora Stern
  17. Competitive Effects of Resale Price Maintenance Through Inventory: Evidence from Publishing Industry By Kawaguchi, Kohei; Qiu, Jeff; Zhang, Yi
  18. The Cost of Regulatory Compliance in the United States By Francesco Trebbi; Miao Ben Zhang
  19. Competition Law Enforcement in Post-Socialist EU Member States: The Legacy of Authoritarian Legal Culture, Semantic Dissonance and Skewed Agencification By Jasminka Pecotić Kaufman
  20. Regulation of residential tenancies and impacts on investment By Martin, Chris; Hulse, Kath; Ghasri, Milad; Ralston, Liss; Crommelin, Laura; Goodall, Zoë; Parkinson, Sharon; Webb, Eileen O’Brien

  1. By: Antonio Estache; Renaud Foucart; Tomas Serebrisky
    Abstract: We study the feasibility, challenges, and potential benefits of adding a lottery component to standard negotiated and rule-based procurement procedures. For negotiated procedures, we introduce a “discrete lottery†in which local bureaucrats negotiate with a small number of selected bidders and a lottery decides who is awarded the contract. We show that the discrete lottery performs better than a standard negotiated procedure when the pool of firms to choose from is large and corruption is high. For rule-based auction procedures, we introduce a “third-price lottery†in which the two highest bidders are selected with equal probability and the project is contracted at a price corresponding to the third highest bid. We show that the third-price lottery reduces the risks from limited liability and renegotiation. It performs better than a standard second-price or ascending auction when the suppliers’ pool size, the risk of cost overrun, delays and non-delivery of the project are high. The choice between a second-price auction, a third price lottery and a lottery amongst all bidders also depends on the weight placed on producer surplus, including for instance the desire to increase the participation of local SMEs in public sector services markets.
    Keywords: rules, discretion, procurement, lotteries, corruption, auctions
    JEL: D44 D73 H57
    Date: 2022
  2. By: Massimo Motta
    Abstract: Antitrust agencies all over the world have been investigating large digital platforms for practices which may constitute an abuse of dominance. Here I discuss practices (including "selfpreferencing" and denial or degradation of interoperability) which can be interpreted as foreclosure in vertically-related or complementary markets. I discuss in particular a few high-profile cases involving Amazon, Apple, Facebook and Google. I focus on possible theories of harm for such cases and show that both original simple models and well-established economic theories (adapted or interpreted) provide a rationale for anti-competitive foreclosure.
    Keywords: self-preferencing, abuse of dominance, monopolization, exclusionary practices, digital platforms, two-sided markets, vertical foreclosure
    JEL: D40 K21 L10 L40
    Date: 2022–12
  3. By: Jacqueline Adelowo; Moritz Bohland
    Abstract: Electricity markets are prone to the abuse of market power. Several US markets employ algorithms to monitor and mitigate market power abuse in real time. The performance of automated mitigation procedures is contingent on precise estimates of firms’ marginal production costs. Currently, marginal cost are inferred from the past offers of a plant. We present new estimation approaches and compare them to the currently applied benchmark method. We test the performance of all the approaches on auction data from the Iberian power market. The results show that our novel approaches outperform the benchmark approach significantly, reducing the mean absolute estimation error from 11.53 €/MWh to 2.77 €/MWh for our most precise alternative approach. Applying this result to a market mitigation simulation we find sizeable overall welfare gains and welfare transfers from supplier to buyer surplus. Our research contributes to accurate monitoring of market power and improved automated mitigation. Although we focus on power markets, our findings are applicable to monitoring of renewable energy tenders or market power surveillance in rail and air traffic.
    Keywords: Regulation, automated mitigation procedure, best-response pricing, market power, Electricity, mark-up
    JEL: D22 D43 D44 D47 L13 L94
    Date: 2022
  4. By: Werner Roeger (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Paul J. J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: The merit-order approach in the electricity market, which is in widespread use across the EU27 and the UK, has proven to be somewhat economically problematic in the context of the Russo- Ukrainian war. The massively increased gas prices since summer 2022 – in the context of Russian supply cuts to the EU – has led to an abnormally high electricity price: Using the merit order approach, the price of electricity increases enormously if, as is often the case, gas is the last type of energy still realized in power generation; this leads to artificial increases in returns for all other types of energy providers whose output is used in power generation. Gas price increases by Russia or Russian supply cuts to the EU can increase the price of electricity and also the rate of inflation, as well as depress real income. The electricity price shock can be countered by switching – temporarily – to a modified regulation of the electricity market for a few years with a gas price subsidy in the electricity market. In a macroeconomic analysis, we identify both the output losses and adverse distributional effects of a gas price hike and find that a gas price subsidy is superior in stabilizing output and employment compared to a transfer; it also at least partially addresses certain distributional issues by reducing windfall profits in the electricity market. The study advocates a combination of gas price subsidies only in the electricity market and targeted transfers to households to meet both efficiency and distributional targets. The macro-analysis findings presented herein should be considered carefully, as they could minimize the welfare losses in the EU and the UK. As regards the expansion of renewable energy-based electricity, it is shown herein that the cost-differential between gas-fired power stations and renewable electricity is critical – large cost differentials imply barriers for an expansion of electricity generation from renewables unless there is a price regulation of electricity. There is the potential of an inefficient adjustment path due to nonlinearities. With a proposed narrow gas price cap for the electricity market only, the associated initial deficit related to necessary subsidies is, of course, much smaller than in the case of a general gas price cap.
    Keywords: Power sector, Russo-Ukrainian war, gas prices, macro modeling, subsidy policy, transfers, DSGE model
    JEL: D58 L51 L52 Q41 E64 Q48
    Date: 2022–09
  5. By: Werner Roeger (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW)); Paul J. J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: Since late summer 2022, policymakers in Germany and many other European Union (EU) countries have increasingly discussed the option of imposing a gas price cap and introducing transfer payments to private households to help consumers in terms of gas, heat and electricity purchases. How a gas price cap should be designed - for all gas customers in the household and industrial sectors or targeted towards certain gas-consuming sectors - is not clear for the time being; in Germany, a special commission is to deliver proposals on this in October. Following a new EIIW analysis by Roeger and Welfens, it is shown below that a gas price cap only makes economic sense for the electricity market and the overall economy - supplemented by certain transfer measures. The DSGE model simulation results for Germany (or also the EU) are clear: Compared to a situation without government intervention or a pure transfer approach, real income and employment develop more favorably, while both inflation and the government deficit are lower in the medium term. It is also recommended that policy approaches be coordinated within the EU to avoid distortions in the EU’s internal market and, finally, that demand and peak load management be stepped up in national electricity markets. This is because with reduced peak loads over the course of the day, there will be less need to rely on the flexible but price-driving gas-fired power generation than has been the case to date or which can be expected in the context of a falling gas price in the electricity market. If the share of gas in electricity generation decreases, this may contribute to a medium-term decline in the price of gas in Europe.
    Keywords: Power sector, Russo-Ukrainian war, gas prices, macro modeling, subsidy policy, transfers, DSGE model
    JEL: D58 L51 L52 Q41 E64 Q48
    Date: 2022–10
  6. By: Ali Hortacsu (University of Chicago and NBER); Olivia R. Natan (University of California, Berkeley); Hayden Parsley (University of Texas, Austin); Timothy Schwieg (University of Chicago, Booth); Kevin R. Williams (Cowles Foundation, Yale University)
    Abstract: Firms often involve multiple departments for critical decisions that may result in coordination failures. Using data from a large U.S. airline, we document the presence of important pricing biases that differ significantly from dynamically optimal profit maximization. However, these biases can be rationalized as a Òsecond-bestÓ after accounting for department decision rights. We show that assuming prices are generated through profit maximization biases demand estimates and that second-best prices can persist, even under improvements to pricing algorithm inputs. Our results suggest caution in abstracting from organizational structure and drawing inferences from firmsÕ pricing decisions alone.
    Keywords: Pricing, Organizational Structure, Revenue Management, Pricing Frictions, Behavioral IO
    JEL: C11 C53 D22 D42 L10 L93
    Date: 2021–11
  7. By: Cristiana Vitale; Alexis Durand; Pedro Caro de Sousa; Paul Yu
    Abstract: Appropriately designed and implemented regulations are powerful tools for enhancing economic performance. A strong and sound regulatory framework can mitigate threats to health, safety, and the environment and address market imperfections. However, regulation can also create barriers to the entry and expansion of firms, which may limit and distort competition. Some of these barriers are necessary, but others may go beyond what is needed to address the policy objectives and the market failure(s) regulation is intended to remedy. The OECD developed in the late 1990s a set of Product Market Regulation (PMR) Indicators to assess how competition-friendly the regulatory framework of a country is across a range of sectors and regulatory areas. A regulatory framework that facilitates competition, for example, can stimulate productivity by encouraging the efficient allocation of resources and promoting innovation and growth. This paper examines a range of product markets, services, and network industries in Brazil, relying on the results of the PMR indicators, and identifies areas where country’s regulations could be brought more in line with international best practices. These include the governance of state-owned enterprises, interaction between policy makers and interest groups, network sectors, and professional services.
    Keywords: Brazil, Competition, Governance of State-Owned Enterprises, Network Sectors, Product Market Regulation, Productivity, Professional Services, Public Procurement, Regulation
    JEL: D4 K23 L1 L2 L3 L5 L8 L9
    Date: 2022–12–08
  8. By: Cristiana Vitale; Alexis Durand; Gloriana Madrigal; Manuel Gerardo Flores Romero; Pedro Caro de Sousa; Paul Yu
    Abstract: This paper describes and analyses recent reforms in the natural gas market in Brazil aimed at fostering a more open, competitive, efficient, and flexible gas sector. This paper reviews the changes in the regulatory framework using two lenses: the reform process seen through a regulatory policy lens and the resulting regulatory framework using the OECD Product Market Regulation (PMR) indicator. The paper includes policies options to further improve the regulatory framework in the sector and reap the full range of benefits of the reforms.
    Keywords: Brazil, Competition, Network Sectors, Product Market Regulation, Regulation
    JEL: L51 L95 N76
    Date: 2022–12–08
  9. By: Vanessa da Cruz (CER-ETH Centre of Economic Research at ETH Zurich, Switzerland)
    Abstract: The paper applies the synthetic control method to examine the effects of California’s Cap-and-Trade Program on environmental innovation. The analysis exploits the International Patent Classification system to identify patents relating to environmentally sound technologies. This enables the study to focus on the effects of the policy intervention on green patent filings. A counterfactual is constructed by the combination of other states in the US which allows the comparison of patent applications in California to the estimated counterfactual situation in the absence of a Cap-and-Trade program. The study finds that the number of patents related to green technologies increased by approximately 22.5% after the passing of the Cap-and-Trade regulation. This result is robust to alternative specifications of the synthetic control method.
    Keywords: Induced Innovation, Environmental Policy, Climate Change, California Cap-and-Trade Program
    JEL: Q55 Q58 O31 O38
    Date: 2022–12
  10. By: Breuer, Matthias; Breuer, Patricia
    Abstract: We investigate the impact of uneven transparency regulation across countries and industries on the location of economic activity. Using two distinct sources of regulatory variation-the varying extent of financial-reporting requirements and the staggered introduction of electronic business registers in Europe-, we consistently document that direct exposure to transparency regulation is negatively associated with the focal industry's economic activity in terms of inputs (e.g., employment) and outputs (e.g., production). By contrast, we find that indirect exposure to supplier and customer industries' transparency regulation is positively associated with the focal industry's economic activity. Our evidence suggests uneven transparency regulation can reallocate economic activity from regulated toward unregulated countries and industries, distorting the location of economic activity.
    Keywords: Regulation,Reallocation,Transparency,Disclosure,Supply Chain
    JEL: K22 L51 M21 M41 M48
    Date: 2022
  11. By: Nakatani, Ryota
    Abstract: What drives the productivity dynamics of infrastructure companies? Using a panel of firms in fourteen countries, we study total factor productivity (TFP) enhancers of utility and network services companies. We find that the catching up of TFP with the technological frontier drives productivity growth at higher speeds in Asian countries than in European countries. We also find that financial leverage exerts a positive effect on TFP growth for larger infrastructure firms, and more financially developed countries utilize economies of scale through better use of financial resources. Large utility and transportation companies display a higher rate of TFP growth, indicating that a competition policy to encourage M&As would be prudent for the utility/transportation sectors to maximize economies of scale. In contrast, we find diseconomies of scale for energy companies in some countries. Moreover, young network firms improve TFP growth faster than their peers in countries with fewer product market regulations. Therefore, the policies should remove entry barriers while facilitating the exit of old and low-productivity firms from the network markets. Finally, policymakers should offer well-targeted fiscal incentives for intangible investments to boost TFP because the accumulation of intangible assets such as digital technology promotes more scale economies through network effects.
    Keywords: total factor productivity; utility and network services; infrastructure companies; energy industry; transportation industry; (dis)economies of scale; financial leverage; intangible assets
    JEL: D24 E22 G38 L25 L87 L9 O34
    Date: 2022–12–03
  12. By: Mads Greaker (Oslo Business School, Oslo Metropolitan University); David Popp (Syracuse University)
    Abstract: This paper provides a primer on the economics of environmental innovation. Our intention is not to write a pure review paper, but to also provide an up-to-date textbook treatment on the issue. Thus, we start by defining the marginal costs of both emissions and of emissions abatement. We then analyze theoretically how innovation may affect marginal abatement costs. We also cover the different modelling choices with respect to how the innovation process is represented mathematically and how different environmental policy measures could affect environmental innovation. Our theoretical propositions are all illustrated with examples from the empirical literature. A special emphasis is placed on the recent literature on directed technical change and the potential impact of government intervention in the research and development choices of private firms.
    Date: 2022–09
  13. By: Tesfatsion, Leigh
    Abstract: U.S. centrally-managed wholesale power markets operating over high-voltage AC transmission grids are currently transitioning from heavy reliance on fossil-fuel based power to greater reliance on renewable power. This study highlights four conceptually-problematic economic presumptions reflected in the legacy core design of these markets that are hindering this transition. The key presumption is the static conceptualization of the basic transacted product as energy amounts competitively determined for delivery at designated grid locations during successive operating periods, supported by ancillary services. The study then discusses an alternative "linked swing-contract market design" that appears better-suited for the support of increasingly decarbonized grid operations. This design entails a fundamental switch to a dynamic insurance focus on advance reserve procurement permitting continual balancing of real-time net load. Reserve consists of available collections of diverse centrally-dispatchable power flows with swing (flexibility) in their attributes, offered into linked centrally-managed forward reserve markets by two-part pricing swing contracts in firm or option form.
    Date: 2022–09–14
  14. By: Ferrandis, Jesús; Ramos, Sergio; Feijóo, Claudio
    Abstract: This paper uses an estimation model to calculate the investment gap that needs to be covered to meet the objectives set by the European Commission in the context of the European Gigabit Society (EGS) regarding gigabit networks availability. It analyses the evolution of this gap between mid-2017 and mid-2019 and concludes that it will not be closed in the expected timeframe at the current pace of deployment, especially in rural areas, that are affected by higher costs to deploy. The paper also introduces a high-level assessment of different alternatives that have been proposed to ease the deployment of network and foresees alternative operating models as the most likely option to help reduce the gap in these rural areas.
    Date: 2022
  15. By: Ajit, Tejaswi Channagiri; Jamison, Mark A.
    Abstract: We examine how requiring platforms to give rivals resources, such as data, affects innovation. Using simulations in which an initial firm obtains a head start on rivals and uses that head start to build a valuable resource that subsequently gives it a competitive advantage over rivals when competing in the initial technology, we contrast scenarios in which the initial firm is or is not required by a government regulator to provide this resource to rivals. We develop pricing provisions that incentivize the initial firm to voluntarily provide the resource to rivals. We then contrast incentives to create substitutes for the initial technology.
    Keywords: platforms,innovation,competition
    JEL: L13 L15 L51
    Date: 2022
  16. By: Ariel Dora Stern
    Abstract: For those who follow health and technology news, it is difficult to go more than a few days without reading about a compelling new application of Artificial Intelligence (AI) to health care. AI has myriad applications in medicine and its adjacent industries, with AI-driven tools already in use in basic science, translational medicine, and numerous corners of health care delivery, including administrative work, diagnosis, and treatment. In diagnosis and treatment, a large and growing number of AI tools meet the statutory definition of a medical device or that of an in-vitro diagnostic. Those that do are subject to regulation by local authorities, resulting in both practical and strategic implications for manufacturers, along with a more complex set of innovation incentives. This chapter presents background on medical device regulation—especially as it relates to software products—and quantitatively describes the emergence of AI among FDA-regulated products. The empirical section of this chapter explores characteristics of AI-supported/driven medical devices (“AI devices”) in the United States. It presents data on their origins (by firm type and country), their safety profiles (as measured by associated adverse events and recalls), and concludes with a discussion of the implications of regulation for innovation incentives in medical AI.
    JEL: I11 I18 K2 K32 O31 O32 O33
    Date: 2022–12
  17. By: Kawaguchi, Kohei; Qiu, Jeff; Zhang, Yi
    Abstract: This paper examines the competitive effects of resale price maintenance (RPM) through inventory decisions under demand uncertainty. We focus on the Japanese publishing industry where RPM is allowed. We develop and estimate a model of RPM in which price and inventory are determined before demand is realized. Counterfactual simulations show that the RPM model would yield a higher consumer surplus than a wholesale model due to a sufficient inventory and a lower price of new titles. Moreover, we show that the price ceiling due to RPM plays a welfare-enhancing role, whereas the price floor is irrelevant in the industry.
    Date: 2022–11–29
  18. By: Francesco Trebbi; Miao Ben Zhang
    Abstract: We quantify firms’ compliance costs of regulation from 2002 to 2014 in terms of their labor input expenditure to comply with government rules, a primary component of regulatory compliance spending for large portions of the U.S. economy. Detailed establishment-level occupation data, in combination with occupation-specific task information, allow us to recover the share of an establishment’s wage bill owing to employees engaged in regulatory compliance. Regulatory costs account on average for 1.34 percent of the total wage bill of a firm, but vary substantially across and within industries, and have increased over time. We investigate the returns to scale in regulatory compliance and find an inverted-U shape, with the percentage regulatory spending peaking for an establishment size of around 500 employees. Finally, we develop an instrumental variable methodology for decoupling the role of regulatory requirements from that of enforcement in driving firms’ compliance costs.
    JEL: P0 P48
    Date: 2022–11
  19. By: Jasminka Pecotić Kaufman (Faculty of Economics and Business, University of Zagreb)
    Abstract: This paper argues that more than thirty years after democratic and economic transition, the legacy of authoritarian legal culture in post-socialist EU Member States limits the effectiveness of competition law enforcement. Concentrating on Croatia but mindful of the experience of other Central and East European countries that acceded to the EU in 2004 and 2007, we show examples of post-accession case law illustrative of excessive judicial formalism and disassociation between the legal norm and its socio-economic context in judicial interpretation. Also, we explain how the excessively stringent legal standard of proof for cartel agreements, established by Croatian courts post-accession, indicates an incomplete semantic alignment with EU competition rules. Furthermore, we discuss the difference in legal cultures between the judiciary and the competition authority by using the notion of “skewed agencification” and show how slow reception of EU competition law standards by the judiciary adversely impacts the enforcement of competition rules.
    Keywords: competition law, legal culture, judiciary, post-socialist countries, Central and Eastern Europe, Croatia
    JEL: K21 K40 K42 L4
    Date: 2022–12–12
  20. By: Martin, Chris; Hulse, Kath; Ghasri, Milad; Ralston, Liss; Crommelin, Laura; Goodall, Zoë; Parkinson, Sharon; Webb, Eileen O’Brien
    Abstract: This research reviews the evidence-base about factors impacting and shaping rental investment; reviews the state of residential tenancies laws across Australia; and presents options for a renewed reform agenda. The regulation of the Australian private rental sector (PRS) directly affects about 40 per cent of Australian households: the 26 per cent who live in private rental housing as tenants, and the 14 per cent who own it as landlords. Reform of regulation of residential tenancies processes are underway or have recently concluded in different jurisdictions. These processes, however, have mostly been uncoordinated at a national level and significant divergences and gaps have opened up in the laws. The research finds little evidence that Australian residential tenancies law has impacted investment in private rental housing. On the contrary, Australian residential tenancies law has accommodated, even facilitated, the long-term growth of the PRS and of its particular structure and dynamic character. However, the small-holding, frequently-transferring character of the PRS presents basic problems for tenants trying to make homes in it. The research also presents a number of issues that could be considered as part of a national agenda for residential tenancy law reform.
    Date: 2022–11–27

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