nep-reg New Economics Papers
on Regulation
Issue of 2023‒09‒04
eighteen papers chosen by
Christopher Decker, Oxford University

  1. Denial of Interoperability and Future First-Party Entry By Massimo Motta; Martin Peitz
  2. Cost Based Nonlinear Pricing By Dirk Bergemann; Tibor Heumann; Stephen Morris
  3. The Cost of Regulatory Compliance in the United States By Francesco Trebbi; Miao Ben Zhang; Michael Simkovic
  4. The New Economics of Industrial Policy By Juhász, Réka; Lane, Nathaniel; Rodrik, Dani
  5. Merger control in Ireland after the Uniphar/NaviCorp transaction: state of play meetings and market testing remedies By Gorecki, Paul
  6. Anticipatory Effects of Regulation in Open Access By Bruno, Ellen Marie; Hagerty, Nick
  7. Can data openness unlock competition when an incumbent has exclusive data access for personalized pricing? By Rosa-Branca Esteves; Francisco Carballo-Cruz
  8. Ad Blocking, Whitelisting, and Advertiser Competition By Martin Peitz; Anton Sobolev; Paul Wegener
  9. An investigation of auctions in the Regional Greenhouse Gas Initiative By Khezr, Peyman; Pourkhanali, Armin
  10. Behavior-based price discrimination with a general demand By Rosa-Branca Esteves; Jie Shuai
  11. Whom to Inform about Prices? Evidence from the German Fuel Market By Felix Montag; Alina Sagimuldina; Christoph Winter
  12. Some Commonly-Held but Shaky Assumptions about Data, Privacy and Power By Veale, Michael
  13. Price equilibrium with selling constraints By Makoto WATANABE; José L. Moraga-González
  14. Information-Forcing Effects of Non-Disclosure Rules By Giuseppe Dari-Mattiacci Author-Workplace-Name :University of Amsterdam; Sander Onderstal Author-Workplace-Name :University of Amsterdam; Francesco Parisi Author-Workplace-Name :University of Minnesota; Ram Singh
  15. Bertrand-Edgeworth game under oligopoly. General results and comparisons with duopoly By De Francesco, Massimo A.; Salvadori, Neri
  16. Mergers, Foreign Competition, and Jobs: Evidence from the U.S. Appliance Industry By Felix Montag
  17. Local banking markets and barriers to entrepreneurship in minority and other areas: Does broadband availability help? By Prieger, James
  18. Generative Artificial Intelligence (GAI): Foundations, use cases and economic potential By Brühl, Volker

  1. By: Massimo Motta; Martin Peitz
    Abstract: Motivated by a recent antitrust case involving Google, we develop a rationale for foreclosure when the owner of an essential input is not yet integrated downstream. Our theory rests on data-enabled network effects across periods. If a platform considers offering a first-party app in the future, by not allowing a third-party app to be hosted on its platform, it ensures that the third-party app would be a weaker competitor to its own app in the future. This makes denial of access attractive as a full or partial foreclosure strategy, which is costly in the short term but may be beneficial in the long term. We also study the effects of policies such as compulsory access or data-sharing, showing under which conditions they might be beneficial to consumers or backfire.
    Keywords: Exclusionary practices, vertical interoperability, refusal to deal, digital platforms, vertical foreclosure, data-enabled networks effects, compulsory access, data-sharing policies
    JEL: L10 L40 K21
    Date: 2023–08
  2. By: Dirk Bergemann (Yale University); Tibor Heumann (Pontificia Universidad Catolica de Chile); Stephen Morris (Massachusetts Institute of Technology)
    Abstract: How should a seller offer quantity or quality differentiated products if they have no information about the distribution of demand? We consider a seller who cares about the "profit guarantee" of a pricing rule, that is, the minimum ratio of expected profits to expected social surplus for any distribution of demand. We show that the profit guarantee is maximized by setting the price markup over cost equal to the elasticity of the cost function. We provide profit guarantees (and associated mechanisms) that the seller can achieve across all possible demand distributions. With a constant elasticity cost function, constant markup pricing provides the optimal revenue guarantee across all possible demand distributions and the lower bound is attained under a Pareto distribution. We characterize how profits and consumer surplus vary with the distribution of values and show that Pareto distributions are extremal. We also provide a revenue guarantee for general cost functions. We establish equivalent results for optimal procurement policies that support maximal surplus guarantees for the buyer given all possible cost distributions of the sellers.
    Date: 2023–08
  3. By: Francesco Trebbi; Miao Ben Zhang; Michael Simkovic
    Abstract: One of the key questions in the study of regulation is whether the costs of regulatory compliance fall homogeneously on all businesses or whether certain firms, for instance small ones, are especially penalized. We quantify firms’ compliance costs in terms of their labor spending to adhere to government rules. Using comprehensive establishment-level occupational microdata and occupation-specific task information, we recover the proportion of a firm’s wage bill attributable to employees engaged in regulatory compliance. On average for 2002-14, regulatory costs account for 1.34% to 3.33% of a firm’s wage bill, totaling up in 2014 to $239 billion, and to $289 billion when adding capital equipment costs. Our findings reveal an inverted-U relation between firms’ regulatory compliance costs and their scale of employment, indicating that firms with approximately 500 employees face compliance costs that are about 40 percent higher as a share of total wages compared to small or large firms. Finally, we develop an instrumental variable methodology to disentangle the influence of regulatory requirements and enforcement in driving firms’ compliance costs.
    Keywords: regulation, compliance costs, labor task, occupation, firm growth, economies of scale, regulatory requirement, enforcement
    JEL: P00
    Date: 2023
  4. By: Juhász, Réka; Lane, Nathaniel (University of Oxford); Rodrik, Dani
    Abstract: We discuss the considerable literature that has developed in recent years providing rigorous evidence on how industrial policies work. This literature is a significant improvement over the earlier generation of empirical work, which was largely correlational and marred by interpretational problems. On the whole, the recent crop of papers offers a more positive take on industrial policy. We review the standard rationales and critiques of industrial policy and provide a broad overview of new empirical approaches to measurement. We discuss how the recent literature, paying close attention to measurement, causal inference, and economic structure, is offering a nuanced and contextual understanding of the effects of industrial policy. We re-evaluate the East Asian experience with industrial policy in light of recent results. Finally, we conclude by reviewing how industrial policy is being reshaped by a new understanding of governance, a richer set of policy instruments beyond subsidies, and the reality of de-industrialization.
    Date: 2023–07–30
  5. By: Gorecki, Paul
    Abstract: On 15 December 2022 the Competition and Consumer Protection Commission (CCPC), Ireland’s national competition authority, prohibited the acquisition by Uniphar plc of NaviCorp Limited. In the two decades in which the CCPC has been responsible for merger control this was the first instance in which the agency had prohibited a notifiable transaction in which there had been remedy proposals. The paper argues that the CCPC did not follow international best practice with respect to state of play meetings with the parties and the market testing of remedies. Timelines were compressed. Options – withdrawing the merger notification and offering remedy proposals – were narrowed, biasing the outcome of the CCPC’s merger investigation towards prohibition. The CCPC should reform its state of play/market testing procedures such that they are consistent with the timely and transparent processes employed in international best practice.
    Keywords: Merger control; state of play meetings; remedies; Competition & Consumer Protection Commission; administrative procedures; market testing remedies; and Competition Act 2002.
    JEL: G34 K21
    Date: 2023–08–04
  6. By: Bruno, Ellen Marie; Hagerty, Nick
    Abstract: We study the regulation of open-access resources under long implementation horizons. Our theoretical model clarifies when and how future regulation creates either an anticipatory decline or perverse incentives to accelerate extraction (a "Green Paradox'"). Then, we evaluate the early effects of a major groundwater regulation in California that does not yet bind. We assemble new data and compare within pairs of neighboring agencies that face varying restrictions on extraction. Differences in future regulation do not affect measures of water-intensive investments or groundwater extraction today. The absence of anticipatory response in either direction can be explained by high private discount rates.
    Keywords: Social and Behavioral Sciences
    Date: 2023–08–18
  7. By: Rosa-Branca Esteves (NIPE/Center for Research in Economics and Management, University of Minho, Portugal); Francisco Carballo-Cruz (NIPE/Center for Research in Economics and Management, University of Minho, Portugal)
    Abstract: This paper examines how an incumbent firm´s data investment decisions can impact market structure and competition. In markets with sufficiently low entry costs, using exclusive data for personalized pricing (PP) does not raise any barrier to entry. However, in markets with intermediate entry costs, the risk of competition and harm to consumers is signifi cant. Policy intervention is needed to foster competition. The effectiveness of an information-sharing policy depends on whether the incumbent anticipates it. Mandatory information sharing can only promote entry in markets with intermediate to high entry costs if the incumbent does not foresee its imposition. If the incumbent foresees this policy, it will strategically reduce its data acquisition to deter entry, by serving fewer consumers in the early period. This will cause signi ficant harm to consumers and overall welfare. Only in markets with low enough intermediate entry costs, information-sharing obligations can foster competition and bene fit consumers, regardless of the incumbent´s anticipation. A ban on price personalization practices could be a better policy option to promote competition, especially in markets with high entry costs or where mandatory information sharing is not effective due to the incumbent strategic behavior.
    Date: 2023
  8. By: Martin Peitz; Anton Sobolev; Paul Wegener
    Abstract: Advertisers post ads on publishers’ websites to attract the attention of consumers (who visit both available publishers). Since advertisers are competing in the product market, an advertiser may have an incentive to foreclose its competitor through excessive advertising. An ad blocker may be present and charge publishers for whitelisting. We fully characterize the equilibrium in which ad blocker, publishers, and advertisers make strategic pricing decisions. Under some conditions, the ad blocker sells whitelisting to one publisher and both publishers are strictly better off than without the ad blocker. Under other conditions, not only publishers but also advertisers or consumers are worse off.
    Keywords: advertising, advertiser competition, ad blocker, whitelisting, imperfect competition
    JEL: L12 L13 L15 M37
    Date: 2023–08
  9. By: Khezr, Peyman; Pourkhanali, Armin
    Abstract: The Regional Greenhouse Gas Initiative (RGGI), as the largest cap-and-trade system in the United States, employs quarterly auctions to distribute emissions permits to firms. This study examines firm behavior and auction performance from both theoretical and empirical perspectives. We utilize auction theory to offer theoretical insights regarding the optimal bidding behavior of firms participating in these auctions. Subsequently, we analyze data from the past 58 RGGI auctions to assess the relevant parameters, employing panel random effects and machine learning models. Our findings indicate that most significant policy changes within RGGI, such as the Cost Containment Reserve, positively impacted the auction clearing price. Furthermore, we identify critical parameters, including the number of bidders and the extent of their demand in the auction, demonstrating their influence on the auction clearing price. This paper presents valuable policy insights for all cap-and-trade systems that allocate permits through auctions, as we employ data from an established market to substantiate the efficacy of policies and the importance of specific parameters.
    Keywords: Emissions permit, auctions, uniform-price, RGGI
    JEL: C5 D21 Q5
    Date: 2023–04–24
  10. By: Rosa-Branca Esteves (NIPE/Center for Research in Economics and Management, University of Minho, Portugal); Jie Shuai (Wenlan School of Business, Zhongnan University of Economics and Law)
    Abstract: This paper offers a complete picture of the impact of behavior-based price discrimination on profits, consumer surplus, and welfare in markets with a general demand function, where consumers and firms can discount the future at different discount factors. Regardless of the demand function considered, in comparison to uniform pricing, BBPD reduces firms´ second-period prices and profits. In contrast, we show that new results arise regarding the impact of BBPD on first-period prices. Under perfectly inelastic and CES demand, the firm-side effect is null and the consumer-side e¤ect fully explains the increase in first-period prices. This is no longer the case when the price elasticity of demand varies with price level. Specifically, we show that the firm-side effect can lead firms to raise first-period prices, even when consumers are myopic. We also show that, depending on the demand function considered, the consumer side effect can act to reduce or increase first-period prices. The overall impact of BBPD on first-period prices depends on the interplay between these two effects. Our analysis reveals that the output effect and consumer switching plays an important role in explaining the impact of BBPD on welfare. When discount factors are equal, BBPD may have a positive or negative impact on consumer surplus and social welfare, which contrasts with the result that BBPD is beneficial for consumers under a unit and CES demand. For a linear demand function, we identify the regions for firms and consumers discount factors where BBPD can simultaneously enhance or reduce total discounted profits, consumer surplus, and social welfare.
    Date: 2023
  11. By: Felix Montag (Tuck School at Dartmouth College); Alina Sagimuldina (LMU Munich); Christoph Winter (EY-Parthenon)
    Abstract: Combining a theoretical model of imperfect information with empirical evidence, we show how the effect of providing price information to consumers depends on how well informed they are beforehand. Theoretically, an increase in consumer information decreases prices more, the fewer ex ante informed consumers there are. Empirically, we study mandatory price disclosure in the German fuel market for two fuel types that differ in ex ante consumer information. The decline in prices is stronger when there are fewer ex ante informed consumers. The magnitude of the treatment effect declines over time but is intensified by local follow-on information campaigns.
    Keywords: mandatory price disclosure; consumer information; retail fuel market;
    JEL: D83 L41
    Date: 2023–08–09
  12. By: Veale, Michael (University College London)
    Abstract: August 2023 pre-print. To appear in: Maria Ioannidou, and Despoina Mantzari (eds.) Research Handbook on Competition Law and Data Privacy (Edward Elgar, forthcoming). Data has been seen as central to understanding privacy, informational power, and increasingly, digital-era competition law. Data is not unimportant, but it is misunderstood. I highlight several assumptions in need of challenge. Firstly, that data protection is distinct from privacy, and has a broader role correcting digitally-exacerbated power asymmetries. Secondly, contrary to economic received wisdom, data is not fully non-rivalrous due to the infrastructural implications of its integration. Thirdly, data can be less important than capacity for experimentation and intervention, which is not simple to ‘open up’. Lastly, data is increasingly unimportant due to large firms’ investments in confidential computing technologies, facilitating distributed analysis, learning, and even microtargeting. In the right conditions, data can be economically substituted for the ability to orchestrate a protocol — an infrastructural capacity unrecognised sufficiently in competition or other fields. This substitutability also requires the ability to force users to adhere to a protocol, bringing further privacy concerns. In sum, privacy, data protection and power need to be considered more closely entwined than at present, and all fields need to consider the infrastructural dimensions of large platforms, more than focussing on the data they accumulate.
    Date: 2023–08–07
  13. By: Makoto WATANABE; José L. Moraga-González
    Abstract: This paper studies how selling constraints, which refer to the inability of firms to attend to all the buyers who want to inspect their products, affect the equilibrium price and social welfare. We show that the price that maximizes social welfare is greater than the marginal cost. This is because with selling constraints, a higher price, despite reducing the probability of trade (fewer buyers are willing to pay a higher price) increases the value of trade (only trades generating positive surplus are consummated). We show that the equilibrium price is inefficiently high except in the limit when firms selling constraints vanish and consumers observe prices before they visit firms. Thus, selling constraints constitute a source of market power.
    Date: 2023–08
  14. By: Giuseppe Dari-Mattiacci Author-Workplace-Name :University of Amsterdam; Sander Onderstal Author-Workplace-Name :University of Amsterdam; Francesco Parisi Author-Workplace-Name :University of Minnesota; Ram Singh (Department of Economics, Delhi School of Economicss, University of Delhi)
    Abstract: Contract law traditionally applies different disclosure duties on buyers and sellers. Sellers are generally required to disclose “negative” information about hidden defects of the products they sell. Failure to disclose can make the contract voidable and can give rise to liability. By contrast, buyers are generally under no comparable duties to disclose “positive” information about hidden qualities of the products they buy. The leading explanation for the law’s disparate treatment of buyers and sellers in these two asymmetric information problems is that imposing disclosure duties on buyers would undermine their incentives to acquire costly (but socially useful) information prior to forming a contract (Kronman, 1978). This explanation lacks a key step—the failure to correct asymmetric information problems would cause the inverse adverse selection problem (identified by Burckart and Lee (2016) and Dari-Mattiacci et al. (2021)) to arise. Uninformed sellers would withdraw from the market and resources would not move to higher-valuing users. In this paper, we develop a model to study the incentives created by disclosure and non-disclosure rules. We show that when parties can contract around defaults, the choice of alternative disclosure rules (duty to disclose vs. no duty to disclose) makes a difference. Unlike disclosure rules, non-disclosure default rules yield partially separating equilibria that preserve the buyers’ incentives to acquire information. They also foster trade opportunities between expert buyers and uninformed sellers. Our results add to the existing literature by providing an additional rationale for the different treatment of buyers and sellers in asymmetric information problems. JEL Codes : D44, D82, D86, K12.
    Keywords: asymmetric information, penalty default rules, inverse adverse selection
    Date: 2023–08
  15. By: De Francesco, Massimo A.; Salvadori, Neri
    Abstract: This paper studies price competition among a given number of capacity-constrained producers of a homogeneous commodity under the efficient rationing rule and constant (and identical) marginal cost until full capacity, when demand is a continuous, non-increasing, and non-negative function defined on the set of non-negative prices and is positive, strictly decreasing, twice differentiable and (weakly) concave when positive. The focus is on general properties of equilibria in the region of the capacity space in which no pure strategy equilibria exist. We study how the properties that are known to hold for the duopoly are generalized to the oligopoly and, on the contrary, what properties do not need to hold in oligopoly. Our inquiry reveals, among other properties, the possibility of an atom in the support of a firm smaller than the largest one and the properties that such an atom entails. Although the characterization of equilibria is far from being complete, this paper provides substantial elements in this direction.
    Keywords: Bertrand-Edgeworth; Price game; Oligopoly; Duopoly; Mixed strategy equilibrium.
    JEL: C72 D43 L13
    Date: 2023–08–08
  16. By: Felix Montag (Tuck School at Dartmouth)
    Abstract: Policy choices often entail trade-offs between workers and consumers. I assess how foreign competition changes the consumer welfare and domestic employment effects of a merger. I construct a model accounting for demand responses, endogenous product portfolios, and employment. I apply this model to the acquisition of Maytag by Whirlpool in the household appliance industry. I compare the observed acquisition to one with a foreign buyer. While a Whirlpool acquisition decreased consumer welfare by $250 million, it led to 1, 300 fewer domestic jobs lost. Jobs need to be worth above $220, 000 annually for domestic employment effects to offset consumer harm.
    JEL: F61 L13 L40
    Date: 2023–08–09
  17. By: Prieger, James
    Abstract: This empirical study investigates the linkages among entrepreneurship in the form of establishment entry, local banking markets, and broadband availability, focusing on minority areas in the US. Lack of access to banks and lack of competition in the market for small business loans can make it more difficult for an entrepreneur to overcome the liquidity constraint to starting a new business. Broadband internet access can facilitate startups directly by enhancing firm profitability and indirectly by stimulating competition in the loan market, lowering the cost of access to finance, and enabling access to financial capital from fintech lenders. The barriers to new business creation erected by local banking markets are hypothesized to be even higher in minority areas, given the greater difficulty minority entrepreneurs face in raising financial capital. The empirical results show that broadband availability, local bank density, and competition in small business loans all facilitate startups. Broadband lowers barriers for entrepreneurs as hypothesized through both the direct and indirect channels. Broadband availability attenuates the barriers from insufficient access to local banks and lack of competition in small business loans from banks. For some industries, higher bank density and greater loan competition facilitate startups more in minority areas than in mostly white areas. Given that minority areas have many fewer banks per capita and much less loan competition than mostly white counties, the results imply that minority areas face even higher barriers to entrepreneurship from insufficient local formal financial resources. The moderating effect of broadband on local financial constraints applies even more so to Black communities; thus while the barriers for Black entrepreneurs may be higher, access to broadband has a greater alleviating effect on those barriers. Business creation in Hispanic areas also faces obstacles from the local banking environment, but broadband does not appear to help reduce them, although it still has a positive direct effect on entry. Additional evidence shows that broadband helped small businesses in minority areas procure more bank loans. Broadband access can thus help entrepreneurs in general, Blacks in particular, and to a lesser extent Hispanics surmount the liquidity constraint to starting a business. The implications of the results are discussed with reference to current and proposed policy to promote broadband availability, usage, and digital equity.
    Keywords: entrepreneurship; startups; minority entrepreneurship; broadband internet access; fintech; FCC Form 477 data; entrepreneurs
    JEL: D22 L26 R11
    Date: 2023–01–02
  18. By: Brühl, Volker
    Abstract: A key technology driving the digital transformation of the economy is artificial intelligence (AI). It has gained a high degree of public attention with the initial release of the chatbot ChatGPT, which demonstrates the potential of generative AI (GAI) as a relatively new segment within AI. It is widely expected that GAI will shape the future of many industries and society in the coming years. This article provides a brief overview of the foundations of generative AI ("GAI") including machine learning and what distinguishes it from other fields of AI. Furthermore, we look at important players in this emerging market, possible use cases and the expected economic potential as of today. It is apparent that, once again, a few US-based Big Tech firms are about to dominate this emerging technology and that the European tech sector is falling further behind. Finally, we conclude that the recently adopted Digital Markets Act (DMA) and the Digital Service Act (DSA) as well as the upcoming AI Act should be reviewed to ensure that the regulatory framework of European digital markets keeps up with the accelerated development of AI.
    JEL: O30 O40
    Date: 2023

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