nep-reg New Economics Papers
on Regulation
Issue of 2023‒01‒09
twenty papers chosen by
Christopher Decker
Oxford University

  1. THE EUROPEAN WHOLESALE ELECTRICITY MARKET: FROM CRISIS TO NET ZERO By Willems, Bert; Pollitt, Michael; von der Fehr, Nils-Henrik; Banet, Catherine
  2. Retail Energy Markets Under Stress : LESSONS LEARNT FOR THE FUTURE OF MARKET DESIGN By Willems, Bert; von der Fehr, Nils-Henrik; Banet, Catherine; Pollitt, Michael; Le Coq, Chloé
  3. Congestion management games in electricity markets By Ehrhart, Karl-Martin; Eicke, Anselm; Hirth, Lion; Ocker, Fabian; Ott, Marion; Schlecht, Ingmar; Wang, Runxi
  4. How large is the energy savings potential in the UK? By Fetzer, Thiemo; Gazze, Ludovica; Bishop, Menna
  5. Renewable energy communities, digitalization and information By Bergemann, Dirk; Bertolini, Marina; Castellini, Marta; Moretto, Michele; Vergalli, Sergio
  6. Economic Research on Privacy Regulation: Lessons from the GDPR and Beyond By Garrett Johnson
  7. Network Effects: Betwixt and Between By Mohammed Mardan; Mark J. Tremblay
  8. Ownership illusions: When ownership really matters for economic analysis By Murray, Cameron; Helm, Tim
  9. Man vs. Machine : Technological Promise and Political Limits of Automated Regulation Enforcement By Browne, Oliver R.; Gazze, Ludovica; Greenstone, Michael; Rostapshova, Olga
  10. Product market regulation in Indonesia: An international comparison By Christine Lewis; Cristiana Vitale; Rosamaria Bitetti; Auxentius Andry Yudhianto; Javier Terrero-Davila
  11. Adverse Selection and Network Design Under Regulated Plan Prices: Evidence from Medicaid By Amanda R. Kreider; Timothy J. Layton; Mark Shepard; Jacob Wallace
  12. Plane to see? Empirical Analysis of the 1999-2006 Air Cargo Cartel By Nolan, James; Laulederkind, Zoe
  13. All Clear for Takeoff: Evidence from Airports on the Effects of Infrastructure Privatization By Howell, Sabrina T.; Jang, Yeejin; Kim, Hyeik; Weisbach, Michael S.
  14. Turn Off the Faucet: Solving Excess Water Consumption with Individual Meters By Contreras, Ivette; Carrillo, Paul E.; Scartascini, Carlos
  15. By Object or by Effect? The Collusive Potential of First Refusal Contracts By Patrick Van Cayseele; Andreas Bovin
  16. Bundling with Resale By Drew Vollmer
  17. Regulatory Incentives for Innovation: The FDA's Breakthrough Therapy Designation By Amitabh Chandra; Jennifer Kao; Kathleen L. Miller; Ariel D. Stern
  18. When do "Nudges" Increase Welfare? By Hunt Allcott; Daniel Cohen; William Morrison; Dmitry Taubinsky
  19. Win/Loss Data, Consumer Switching Costs: Measuring Diversion Ratios and the Impact of Mergers By Jeff Qiu; Masayuki Sawada; Gloria Sheu
  20. Collusion and Predation Under Cournot Competition By Emilie Dargaud; Maxime Menuet; Petros G. Sekeris

  1. By: Willems, Bert (Tilburg University, School of Economics and Management); Pollitt, Michael; von der Fehr, Nils-Henrik; Banet, Catherine
    Date: 2022
  2. By: Willems, Bert (Tilburg University, School of Economics and Management); von der Fehr, Nils-Henrik; Banet, Catherine; Pollitt, Michael; Le Coq, Chloé
    Date: 2022
  3. By: Ehrhart, Karl-Martin; Eicke, Anselm; Hirth, Lion; Ocker, Fabian; Ott, Marion; Schlecht, Ingmar; Wang, Runxi
    Abstract: This paper proposes a game-theoretic model to analyze the strategic behavior of inc-dec gaming in market-based congestion management (redispatch). We extend existing models by considering incomplete information about competitors' costs and a finite set of providers. We find that these extensions do not dissolve inc-dec gaming, which already occurs in our setup of two regions. We also benchmark market-based redispatch against grid investment, cost-based redispatch, and the Vickrey-Clarke-Groves mechanism. The comparison highlights a significant inefficiency of market-based redispatch and inflated redispatch payments. Finally, we study seven variations of our basic model to assess whether different market fundamentals or market design changes mitigate inc-dec gaming. None of these variations eliminate inc-dec gaming entirely.
    Keywords: Energy market,Game theory,Auctions/bidding,Congestion management,Inc-dec gaming
    JEL: D43 D44 L13 Q41 Q48
    Date: 2022
  4. By: Fetzer, Thiemo (University of Warwick, Department of Economics & CAGE); Gazze, Ludovica (University of Warwick, Department of Economics & CAGE); Bishop, Menna (University of Warwick)
    Abstract: Which households will be most affected by the energy price shock? How large are the energy, financial, and environmental benefits of improved energy efficiency of the British residential building stock? How do policies or interventions in price setting in energy markets affect these incentives? We develop a measurement and ex-ante modelling approach using granular property-level micro data representing around 50% of the English and Welsh building stock. This allows us to quantify the likely impact of recent energy price shocks on energy bills and how these bills would look like if energy savings measures were implemented. We find, on average, that the energy price shock acts as a form of progressive taxation hitting better-off regions more than poorer ones, in absolute terms. We estimate that on aggregate, 30% of energy consumption could be saved if buildings were upgraded to their highest energy efficiency standard. At market prices, these savings range between GBP 10 to 20 billion pounds per year with the highest energy savings largely concentrated in the wealthiest parts of the UK. However, current policies weaken incentives for households to invest in energy efficiency upgrades. Current policies, such as the energy price cap, appears to be very regressive. Alternative, more targeted policies, are cheaper, easily implementable and could align incentives better.
    Keywords: Energy Crisis ; Economic Hardship ; Populism JEL Codes:
    Date: 2022
  5. By: Bergemann, Dirk; Bertolini, Marina; Castellini, Marta; Moretto, Michele; Vergalli, Sergio
    Abstract: In this work we study the case of agents willing to engage in a Renewable Energy Community (REC). The municipality – being the promoter of the REC – burdens all the investment costs (RE plants, storage, local grid interventions) and entrusts an aggregator of its operation paying a fixed tariff. The latter, acting as a monopolist, is also the sole supplier of energy for the REC’s members. The management of the REC requires the collection of energy data from the members to assure its efficient operation on the side of the self-consumption and exchange of energy within it. Such data allow also the identification of the agents’ preferences across energy devices and are an additional source of revenues for the aggregator thanks to their sell to third parts. This behaviour translates into a dis-utility the agents, which we call privacy cost. In such a framework, we consider also uncertainty on the side of the investment cost. On the basis of the outcomes of our model, we are able to study the effect of data collection policy performed by the aggregator on the size of the REC, while also accounting for agents’ valuation and the role of uncertainty on the investment cost side.
    Keywords: Demand and Price Analysis, Research and Development/Tech Change/Emerging Technologies, Resource /Energy Economics and Policy
    Date: 2022–12–02
  6. By: Garrett Johnson
    Abstract: This paper reviews the economic literature on the European Union's General Data Protection Regulation (GDPR). I highlight key challenges for studying the regulation including the difficulty of finding a suitable control group, variable firm compliance and regulatory enforcement, as well as the regulation's impact on data observability. The economic literature on the GDPR to date has largely—though not universally—documented harms to firms. These harms include firm performance, innovation, competition, the web, and marketing. On the elusive consumer welfare side, the literature documents some objective privacy improvements as well as helpful survey evidence. The literature also examines the consequences of the GDPR's design decisions and illuminates how the GDPR works in practice. Finally, I suggest opportunities for future research on the GDPR as well as privacy regulation and privacy-related innovation more broadly.
    JEL: K2 L51
    Date: 2022–12
  7. By: Mohammed Mardan; Mark J. Tremblay
    Abstract: We challenge the dichotomy of network effects and highlight that they are not an exogenous characteristic of networks, but endogenous to the decisions of network users. When users choose which activities to perform in a network, multi-activity users transform indirect into direct network effects and a network effectively becomes one-sided if merely multi-activity users frequent it. Our work contributes to theory by determining the underlying micro-foundations that produce what the literature calls a two-sided market and by highlighting how the standard two-sided pricing results arises only under very specific conditions. We also contribute to estimation by illustrating how the presence of multi-active users can challenge identification in network industries.
    Keywords: platforms, one-sided markets, two-sided markets, multi-siding users
    JEL: L10 L20 D21 D42
    Date: 2022
  8. By: Murray, Cameron (The University of Sydney); Helm, Tim (Independent economic consultant)
    Abstract: A common unit of economic analysis is the firm. Firms are assumed to maximise profits, subject to the well-recognised caveat that incentives of owners and managers can differ. Less well recognised is how ownership structures themselves affect incentives, behaviour and economic outcomes. With the wrong assumptions about ownership and when it matters, economic analysis can misrepresent economic reality. Such situations we refer to as ownership illusions. We show how attention to ownership structures can change subsequent economic analysis through four examples of ownership illusions. In competition policy, the incentives of firms are blurred by cross-ownership, leading to questions around the validity of default models and exactly how the incentive-driven process of competition is to be understood. When assessing the economic performance of privately or government owned businesses, the capital value of ownership is often ignored when in public ownership but is a primary metric of success when in private ownership. Retirement income systems reliant on individual ownership of financial assets are often inaccurately described as “pre-funded”, by way of contrast with pay-as-you-go or “unfunded” public pensions, regardless of differences in underlying capacity to support cashflows but simply because there exist no priced ownership rights for future pensions. In housing policy, the idea that competition between landowners can push down land prices reflects incentives from product market models where ownership dispersion matters, not those from the “location franchise” model of monopoly that land involves in reality. Identifying this class of problems in economic reasoning can help refine our economic understanding and foster more consistency in future analysis.
    Date: 2022–11–20
  9. By: Browne, Oliver R. (University of California, Berkeley); Gazze, Ludovica (University of Warwick, Department of Economics & CAGE); Greenstone, Michael (University of Chicago); Rostapshova, Olga (University of Chicago)
    Abstract: New technologies allow perfect detection of environmental violations at near-zero marginal cost, but take-up is low. We conducted a field experiment to evaluate enforcement of water conservation rules with smart meters in Fresno, CA. Households were randomly assigned combinations of enforcement method (automated or in-person inspections) and fines. Automated enforcement increased households’ punishment rates from 0.1 to 14%, decreased water use by 3%, and reduced violations by 17%, while higher fine levels had little effect. However, automated enforcement also increased customer complaints by 1,102%, ultimately causing its cancellation and highlighting that political considerations limit technological solutions to enforcement challenges.
    Keywords: Field Experiment ; Automated Enforcement ; Remote Sensing ; Water Conservation JEL Codes: Q25 ; K42
    Date: 2022
  10. By: Christine Lewis; Cristiana Vitale; Rosamaria Bitetti; Auxentius Andry Yudhianto; Javier Terrero-Davila
    Abstract: Appropriately designed Product Market Regulation (PMR) is essential to enhance productivity, boost economic growth and increase welfare. Regulation is needed to address market failures and guarantee the health and safety of consumers. However, by limiting the entry and expansion of firms, a too stringent regulatory environment can hinder an efficient allocation of resources both within and across industries. This paper provides a detailed review of PMR in Indonesia and analyses the country’s performance in this area relative to OECD countries, other G-20 members and regional peers. To do so, it relies on the OECD’s PMR Indicators, which have been recently compiled for Indonesia. These indicators assess the extent to which the regulatory framework of a country is competition-friendly across a range of sectors and regulatory areas. The analysis reveals that PMR in Indonesia is less conducive to competition than in most OECD countries. The scope for improvement is particularly great in areas such as barriers in network sectors, command-and-control regulation, public procurement, the governance of State-owned Enterprises (SOEs) and the extent to which the impact on competition is assessed when designing new regulation. The paper proposes concrete policy measures to align the regulatory environment of Indonesia with that of best performing countries.
    Keywords: Competition, Governance of State-Owned Enterprises, Indonesia, Product Market Regulation, Productivity, Professional Services, Public Procurement, Regulation
    JEL: D24 D4 H57 K23 K32 L1 L2 L3 L4 L5 L6 L7 L8 L9 O53
    Date: 2022–12–16
  11. By: Amanda R. Kreider; Timothy J. Layton; Mark Shepard; Jacob Wallace
    Abstract: Health plans for the poor increasingly limit access to specialty hospitals. We investigate the role of adverse selection in generating this equilibrium among private plans in Medicaid. Studying a network change, we find that covering a top cancer hospital causes severe adverse selection, increasing demand for a plan by 50% among enrollees with cancer versus no impact for others. Medicaid’s fixed insurer payments make offsetting this selection, and the contract distortions it induces, challenging, requiring either infeasibly high payment rates or near-perfect risk adjustment. By contrast, a small explicit bonus for covering the hospital is sufficient to make coverage profitable.
    JEL: H51 I11 I13
    Date: 2022–12
  12. By: Nolan, James; Laulederkind, Zoe
    Abstract: ”Cargo tariffs are agreed through the IATA machinery, and in theory approved by governments….the IATA Tarff Coordination Conferences still agree cargo tariffs on over 200,000 separate routes. But these tariffs bear little relevance to what is actually charged in the marketplace ” (Doganis, 2002). ”The stipulations ICAO standards contain never supersede the primacy of national regulatory requirements. It is always the local, national regulations which are enforced in, and by, sovereign states, and which must be legally adhered to by air operators making use of applicable airspace and airports. ICAO is therefore not an international aviation regulator, just as INTERPOL is not an international police force. We cannot arbitrarily...............condemn airlines for poor safety performance or customer service……. should a country transgress a given international standard adopted through our organization, ICAO’s function in such circumstances…….is to help countries conduct any discussions, condemnations, sanctions, etc., they may wish to pursue, consistent with the Chicago Convention and the Articles and Annexes it contains under international law.”(ICAO, 2021). In spite of being a growing liberalized global industry served by many firms, we know that much of the international air cargo sector operated as an admitted cartel from 1999 through 2006. Given its visibility and importance to world trade, how did this cartel go undetected for so long? It seems that partly due to the way the cartel was uncovered, almost no empirical analysis has been done about the case. To fill this gap, we use publicly available air carrier data and examine whether a diligent anti-trust authority could have identified cartel/collusive behavior in the air cargo industry using established empirical methods. Our stark findings point to a regulatory failure in an industry whose long-standing business practices through the era of airline liberalization effectively “slipped through the cracks”, leaving the many shippers of air cargo unprotected against collusive behavior.
    Keywords: Industrial Organization, Research Methods/ Statistical Methods
    Date: 2022–09–07
  13. By: Howell, Sabrina T. (New York University); Jang, Yeejin (UNSW Sydney); Kim, Hyeik (University of Alberta); Weisbach, Michael S. (Ohio State University and ECGI, Brussels)
    Abstract: Infrastructure assets have undergone substantial privatization in recent decades. How do different types of owners target and manage these assets? And does the contract form—control rights (concession) vs. outright ownership (sale)—matter? We explore these questions in the context of global airports, which like other infrastructure assets have been privatized by private firms and private equity (PE) funds. Our central finding is that PE acquisitions bring marked improvements in airport performance along a rich array of dimensions such as passengers per flight, total passengers, number of routes, number of airlines, cancellations, and awards. Net income increases after PE acquisitions, which does not reflect lower costs or layoffs. In contrast, in the few cases where non-PE acquisitions bring some improvement, it appears to reflect targeting rather than operational changes. Overall, we find little evidence that privatization alone increases airport performance; instead, infrastructure funds improve performance both in privatization and subsequent acquisitions from non-PE private firms. These effects are largest when there is a competing airport nearby. Finally, we show that outright ownership rather than control rights alone is associated with the most improvement after privatization.
    JEL: G32 G38 H54 L32 R42
    Date: 2022–10
  14. By: Contreras, Ivette; Carrillo, Paul E.; Scartascini, Carlos
    Abstract: When consumption of water and other utilities is measured collectively and payment for such services is equally shared among members of the group, individuals may use more than what is socially optimal. In this paper, we evaluate how installation of individual meters affects water consumption. Using rich administrative data from the public water utility company in Quito, Ecuador, it is estimated that water consumption decreases by about 8% as a result of the introduction of individual metering. The effect is large and economically significant: in order to obtain the same effect prices would have to double. Individual water metering could be a useful tool to curve down consumption in both developing and developed countries.
    Keywords: Water consumption;Commons problem;Individualmeters;Price elasticity;Difference-in-difference
    JEL: D12 D62 Q21 Q25 Q58
    Date: 2021–10
  15. By: Patrick Van Cayseele; Andreas Bovin
    Abstract: This article examines the collusive potential of first refusal contracts, which are contracts that grant one party, the buyer, a right of first refusal on the output of another party, the seller. When two parties enter into this type of contract, the seller is obligated to offer any output she wishes to sell to the buyer first. It is only after a 'first refusal' by the buyer that output can be offered to third parties. We compare the outcomes which arise under first refusal contracts with those resulting from explicit cooperation. Our findings suggest that these contracts can result in an identical distortion of competition, while remaining under the radar of antitrust authorities.
    Keywords: Right of first refusal, contract, theory of harm, abuse of bargaining power
    JEL: L4 L40 L41 L42
    Date: 2022
  16. By: Drew Vollmer (U.S. Department of Justice)
    Abstract: How does resale affect multiproduct bundling? I investigate using a model of monopoly bundling with costly resale. Consumers purchase in the primary market while anticipating resale, then participate in a resale market with market-clearing prices. Resale forces the monopolist to balance the additional profit from a discounted bundle against the opportunity for consumer arbitrage. In equilibrium, the monopolist may still other a discounted bundle, but resale reduces the returns to bundling and has an ambiguous effect on consumer and total welfare. When consumers have heterogeneous costs of resale, it is possible for consumers to resell in equilibrium.
    Date: 2022–12
  17. By: Amitabh Chandra; Jennifer Kao; Kathleen L. Miller; Ariel D. Stern
    Abstract: Regulators of new products confront a tradeoff between speeding a new product to market and collecting additional product quality information. The FDA’s Breakthrough Therapy Designation (BTD) provides an opportunity to understand if a regulator can use new policy to innovate around this tradeoff—i.e., whether it improved regulator productivity by allowing products to come to market more quickly without compromising quality. We find that the BTD program shortened clinical development times by 23 percent and did not impact the ex post safety profile of drugs with the designation. In exploring mechanisms, we find that the BTD program had the greatest impact on less experienced firms and was associated with reduced BTD clinical trial design complexity. The results suggest that targeted regulatory innovation can shorten R&D periods without compromising the quality of new products.
    JEL: I10 I18
    Date: 2022–12
  18. By: Hunt Allcott; Daniel Cohen; William Morrison; Dmitry Taubinsky
    Abstract: Policymakers are increasingly interested in non-standard policy instruments (NPIs), or “nudges,” such as simplified information disclosure and warning labels. We characterize the welfare effects of NPIs using public finance sufficient statistic approaches, allowing for endogenous prices, market power, and optimal or suboptimal taxes. While many empirical evaluations have focused on whether NPIs increase ostensibly beneficial behaviors on average, we show that this can be a poor guide to welfare. Welfare also depends on whether the NPI reduces the variance of distortions from heterogenous biases and externalities, and the average effect becomes irrelevant with zero pass-through or optimal taxes. We apply our framework to randomized experiments evaluating automotive fuel economy labels and sugary drink health labels. In both experiments, the labels increase ostensibly beneficial behaviors but also may decrease welfare in our model, because they increase the variance of distortions.
    JEL: D90 H0
    Date: 2022–12
  19. By: Jeff Qiu (U.S. Department of Justice); Masayuki Sawada (U.S. Department of Justice); Gloria Sheu (U.S. Department of Justice)
    Abstract: The diversion ratio is a key input to many indicators of merger harm. Measuring the diversion ratio, however, is challenging in the presence of state dependence driven by things like consumer switching costs. We propose an identification strategy for diversion based on win/loss data. First, we show that win/loss data from the merging firms and market shares for all firms in two periods are sufficient to identify the diversion ratios between the merging partners. Second, we show that win/loss data from the merging firms alone are sufficient for partial identification, and we construct a lower bound that provides a good approximation to the diversion ratio when switching costs are high. We demonstrate the performance of our method with numerical simulations and with an application to the Anthem/Cigna merger..
    Date: 2022–12
  20. By: Emilie Dargaud (Univ Lyon, Université Lumière Lyon 2, GATE, UMR 5824, F-69130 Ecully, France); Maxime Menuet (LEO, University of Orleans, Orleans, France. e-mail:; Petros G. Sekeris (Corresponding author: TBS Business School, 1 Place A. Jourdain, 31000 Toulouse, France)
    Abstract: This paper studies how predation strategies can affect the sustainability of collusion. We demonstrate that in the presence of few competitors collusion may be sustained at equilibrium for intermediate discount factors. In such instances predation implies that punishment strategies will yield low subgame perfect payoffs, thereby making collusion easier to sustain. For low discount factors collusion is not sustainable because of the high incentives to deviate to Cournot-Nash strategies. Moreover, for high discount factors it is always optimal to predate colluding firms, thus contrasting with much of the earlier literature showing that collusion is only achievable by sufficiently patient firms.
    Keywords: Collusion, Predation, Cournot competition
    JEL: D43 L13 L41
    Date: 2022

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