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on Regulation |
| By: | Darryl Biggar |
| Abstract: | In regulatory proceedings, few issues are more hotly debated than the cost of capital. This article formalises the theoretical foundation of cost of capital estimation for regulatory purposes. Several common regulatory practices lack a solid foundation in the theory. For example, the common practice of estimating a single cost of capital for the regulated firm suffers from a circularity problem, especially in the context of a multi-year regulatory period. In addition, the relevant cost of debt cannot be estimated using the yield-to-maturity on a corporate bond. We suggest possible directions for reform of cost of capital practices in regulatory proceedings. |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2303.10818&r=reg |
| By: | Farrell, Niall; Meles, Tensay Hadush |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp744&r=reg |
| By: | Bontemps, Christian; Gualdani, Cristina; Remmy, Kevin |
| Abstract: | We develop a two-stage game in which competing airlines first choose the networks of markets to serve in the first stage before competing in price in the second stage. Spillovers in entry decisions across markets are allowed, which accrue on the demand, marginal cost, and fixed cost sides. We show that the second-stage parameters are point identified, and we design a tractable procedure to set identify the first-stage parameters and to conduct inference. Further, we estimate the model using data from the domestic US airline market and find significant spillovers in entry. In a counterfactual exercise, we evaluate the 2013 merger between American Airlines and US Airways. Our results highlight that spillovers in entry and post-merger network readjustments play an important role in shaping post-merger outcomes. |
| Keywords: | Endogenous market structure; Networks; Airlines; Oligopoly; Product repositioning; Mergers; Remedies |
| Date: | 2023–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:127943&r=reg |
| By: | Ivaldi, Marc; Petit, Nicolas; Unekbas, Selçukhan |
| Abstract: | Do established firms buy new businesses to take out future competition? Recent works in economics literature use “killer acquisitions” as a graphic concept to describe these transactions. How concerned should competition policy be? The answer to this question hinges on how much the “theory” of killer acquisitions explains. To gain insights on this, the paper studies a sample of past cases composed of all merger transactions reviewed by the European Commission (“EC”) in ICT industries. In line with the predictions of the theory, some of these cases might constitute “killer acquisitions”. Hence, the paper asks: did they lead to a reduction of competition? By focusing on perceptions of the competitors of the acquired entity as reported in financial disclosures, the paper shows that one could not observe a disappearance of the target’s products, a weakening of competing firms, and/or a post-merger lowering or absence of entry and innovation. In other words, the paper finds no factual evidence supporting the killer acquisition theory. Whilst based on small number of observations, the paper’s findings are strong. Indeed the paper’s methodology overcomes the inherent problem of lack of observing the post-merger activities of the target, and addresses the inference problem that stems from the fact that even if the target’s products are discontinued in the buyer’s firm, it is non sequitur to infer from this a post-merger weakening of competition. |
| Keywords: | Killer Acquisition; Dynamic Competition; Mergers and Acquisitions; Innovation |
| JEL: | G34 L41 L86 O31 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:127996&r=reg |
| By: | Guillaume Monchambert (LAET - Laboratoire Aménagement Économie Transports - UL2 - Université Lumière - Lyon 2 - ENTPE - École Nationale des Travaux Publics de l'État - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This paper investigates pricing decisions when a monopolistic multi-sided platform is myopic, that is unable to distinguish between two agents who participate on the same side of the platform but produce different externalities. We find that the structure of prices is the same for profit- and welfare-maximizing platforms. The unique price supplied to the two undistinguishable agents is a weighted average of the perfect information prices, where the weights depend on demand elasticities and externalities produced by the other undistinguishable agent. The prices supplied to the distinguishable agents are also affected by information asymmetry through an extra term than can be positive or negative. Introducing Hotelling competition does not affect results. We apply the model to a monopolistic short-distance carpooling platform with and without HOV lane, and show that the profit-maximizing platform does not subsidize efficiently the "good" side of the market, leading to very little traffic reduction. These results call for a discussion of the regulation of myopic platforms in general, and those of carpooling in particular. |
| Keywords: | Network effect, Information asymmetry, Externality, Working Papers du LAET |
| Date: | 2023–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03980205&r=reg |
| By: | Didier Laussel (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); Ngo van Long (Department of Economics [McGill University] - McGill University = Université McGill [Montréal, Canada], Hitotsubashi Institute for Advanced Study); Joana Resende (Cef.up, Economics Department, University of Porto) |
| Abstract: | A durable good monopolist faces a continuum of heterogeneous customers who make purchase decisions by comparing present and expected price-quality offers. The monopolist designs a sequence of price-quality menus to segment the market. We consider the Markov perfect equilibrium (MPE) of a game where the monopolist is unable to commit to future price-quality menus. We obtain the novel results that: (a) under certain conditions, the monopolist covers the whole market in the first period (even when a static Mussa–Rosen monopolist would not cover the whole market), because this is a strategic means to convince customers that lower prices would not be offered in future periods and that (b) this can happen only under the stage-wise Stackelberg leadership assumption (whereby consumers base their expectations on the value of the state variable at the end of the period). Conditions under which MPE necessarily involves sequentially trading are also derived. |
| Keywords: | Product quality, Durable good monopoly, Second-degree price discrimination, Coase conjecture |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-03434362&r=reg |
| By: | Gonzalo Ballestero (Department of Economics, Universidad de San Andres) |
| Abstract: | Firms increasingly delegate their strategic decisions to algorithms. A potential con- cern is that algorithms may undermine competition by leading to pricing outcomes that are collusive, even without having been designed to do so. This paper investigates whether Q-learning algorithms can learn to collude in a setting with sequential price competition and stochastic marginal costs adapted from Maskin and Tirole (1988). By extending a previous model developed in Klein (2021), I find that sequential Q-learning algorithms leads to supracompetitive profits despite they compete under uncertainty and this finding is robust to various extensions. The algorithms can coordinate on focal price equilibria or an Edgeworth cycle provided that uncertainty is not too large. However, as the market environment becomes more uncertain, price wars emerge as the only possible pricing pattern. Even though sequential Q-learning algorithms gain supracompetitive profits, uncertainty tends to make collusive outcomes more difficult to achieve. |
| Keywords: | Competition Policy |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:sad:ypaper:1&r=reg |
| By: | Doh-Shin Jeon (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse 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); Domenico Menicucci (UniFI - Università degli Studi di Firenze = University of Florence); Nikrooz Nasr (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse 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) |
| Abstract: | We study mix-and-match compatibility choices of firms selling complementary products in a dynamic setting. Contrary to what happens in a static setting where symmetric firms choose compatibility (Matutes and Régibeau, 1988), when switching costs are high and firms make price discrimination based on past purchases, symmetric firms choose incompatibility to soften future competition if the discount factor is large, which harms consumers. Interoperability increases consumer surplus at least for high switching costs. Data portability, by reducing switching costs, induces the firms to choose compatibility more often but, given a compatibility regime, benefits consumers only if a non-negative pricing constraint binds. |
| Keywords: | Compatibility, Switching Cost, Data Portability, Interoperability, Cloud computing |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04018457&r=reg |
| By: | Frédéric Cherbonnier (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse 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); Christian Gollier (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse 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) |
| Abstract: | When evaluating public and private investment projects, those that contribute more to the collective risk should be more penalized through an upward adjustment of their discount rate. This paper shows how to estimate the risk-adjusted discount rate for different projects, with applications to the electricity sector. Using the standard framework of consumer theory, we express any investment project's beta in terms of the easier-to-measure price and income elasticities of the goods generated by the project. When considering an investment in production capacity, the beta has a flat term structure, and is positive (negative) for normal (inferior) goods. When considering core infrastructures carrying goods or services, such as energy transmission and distribution assets, the beta has a decreasing term structure with very high values at short horizons for infrastructures facing capacity constraints. We provide a real-case example of a cross-border electricity connection with negative beta for the exporting country. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04012977&r=reg |
| By: | Erik Brynjolfsson; Wang Jin; Xiupeng Wang |
| Abstract: | Information flows, and thus information technology (IT) are central to the structure of firms and markets. Using data from the U.S. Census Bureau, we provide firm-level evidence that increases in IT intensity are associated with increases in firm size and concentration in both employment and sales. Results from instrumental variables and long-difference models suggest that the effect is likely causal. The effect of IT on size is more pronounced for sales than employment, which leads to a decline in the labor share, consistent with the “scale without mass” theory of digitization. Furthermore, we find that IT provides greater benefits to larger firms by increasing their capability to replicate their operations across establishments, markets, and industries. Our findings provide empirical evidence suggesting that the substantial rise in IT investment is one of the main driving forces for the increase in firm size, decline of labor share, the growth of superstar firms, and increased market concentration in recent years. |
| JEL: | L10 O3 O30 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31065&r=reg |
| By: | Dominique Barjot (CRM - Centre de Recherche Roland Mousnier Histoire et Civilisation - EPHE - École pratique des hautes études - PSL - Université Paris sciences et lettres - SU - Sorbonne Université - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | Over the long-term, public-private partnerships constituted a means of conciliating the social function of public services and public works, whilst limiting their costs for citizens. It was the case with the use of the concession system in the utilities, even after the massive waves of nationalizations in France in 1944-1946, then 1981-1982. Indeed, from the end of the 1980s, there was a return to the concession system, which was combined with Anglo-Saxon practices, including Build Operate Transfers (BOT) and Public-Private partnerships (PPP). The French model of concession contributed significantly towards the international development of the French Colonial Empire, it was an excellent instrument for French capitalism around the world (Compagnie du Canal de Suez). After World War Two, the concession remained a competitive system: indeed, France produced four important private groups (GDF-Suez, Veolia Environnement, Vinci and Bouygues). The world competitiveness of these French groups resulted of a long-term tradition of interest on the part of engineers in networks systems (École Nationale des Ponts et Chaussées, Ecole Centrale de Paris) and questions relating to energy (Écoles Nationales des Mines), but also due to the intervention of French banks as Suez or Paribas in major international ventures. Building Suez (today Engie) constituted a quasi-perfect example of the French experience: take-over of the Société Générale de Belgique (1988), merger Lyonnaise des Eaux-Dumez (1990), then Suez-Lyonnaise des Eaux (1997), finally merger GDF-Suez (2008). |
| Abstract: | Sur le long terme, les partenariats public-privé ont constitué un moyen de concilier la fonction sociale des services et travaux publics, tout en limitant leurs coûts pour les citoyens. Ce fut le cas avec l'utilisation du système de concession dans les services publics, même après les vagues massives de nationalisations en France en 1944-1946, puis en 1981-1982. En effet, à partir de la fin des années 1980, il y a eu un retour au système de concession, qui a été combiné avec des pratiques anglo-saxonnes, notamment le Build Operate Transfers (BOT) et les partenariats public-privé (PPP). Le modèle français de concession a contribué de manière significative au développement international de l'Empire colonial français, il a été un excellent instrument pour le capitalisme français dans le monde (Compagnie du Canal de Suez). Après la seconde guerre mondiale, la concession est restée un système compétitif : en effet, la France a produit quatre groupes privés importants (GDF-Suez, Veolia Environnement, Vinci et Bouygues). La compétitivité mondiale de ces groupes français résulte d'une longue tradition d'intérêt des ingénieurs pour les systèmes de réseaux (École Nationale des Ponts et Chaussées, École Centrale de Paris) et les questions relatives à l'énergie (Écoles Nationales des Mines), mais aussi de l'intervention de banques françaises comme Suez ou Paribas dans de grands projets internationaux. La construction de Suez (aujourd'hui Engie) a constitué un exemple quasi-parfait de l'expérience française : rachat de la Société Générale de Belgique (1988), fusion Lyonnaise des Eaux-Dumez (1990), puis Suez-Lyonnaise des Eaux (1997), enfin fusion GDF-Suez (2008). |
| Date: | 2023–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-04010657&r=reg |
| By: | Elise S. Brezis (Bar-Ilan University) |
| Keywords: | bureaucratic capital; compensation package; corruption; ethics; legal system; revolving door; social norms. |
| JEL: | H10 H70 O11 O43 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:biu:wpaper:2023-03&r=reg |