nep-reg New Economics Papers
on Regulation
Issue of 2024‒05‒13
sixteen papers chosen by
Christopher Decker, Oxford University

  1. Dynamic competition, exclusionary and exploitative abuses, and article 102 TFEU: Towards a concept of systemic market power? By Budzinski, Oliver; Stöhr, Annika
  2. Algorithmic Collusion by Large Language Models By Sara Fish; Yannai A. Gonczarowski; Ran I. Shorrer
  3. Price effects of horizontal mergers: A retrospective on retrospectives By Stöhr, Annika
  4. Finding Stable Price Zones in European Electricity Markets: Aiming to Square the Circle? By Teodora Dobos; Martin Bichler; Johannes Kn\"orr
  5. Renewable integration: the role of market conditions By Daniel Davi-Arderius; Tooraj Jamasb; Juan Rosellon
  6. Competition for Carbon Storage By Rolf Golombek; Michael Hoel; Snorre Kverndokk; Stefano Ninfole; Knut Einar Rosendahl; Michael Olaf Hoel
  7. Market Power, Liberalization, and Deregulation in the Spanish Banking Sector between 1971 and 2018. New Evidence By Josep Dols-Miro; Joaquim Cuevas; Juan Fernández de Guevara
  8. Personalization and Privacy Choice By Andrew Rhodes; Jidong Zhou
  9. Financial regulation in sport championships as an anticompetitive institution By Budzinski, Oliver
  10. Optimal Information Design of Online Marketplaces with Return Rights By Jonas von Wangenheim
  11. Robust Advertisement Pricing By Tan Gan; Hongcheng Li
  12. Consumer Behavior under Benevolent Price Discrimination By Alexander Erlei; Mattheus Brenig; Nils Engelbrecht
  13. Predicting Mergers and Acquisitions in Competitive Industries: A Model Based on Temporal Dynamics and Industry Networks By Dayu Yang
  14. Financial inclusion and banking sector competition in South Africa By Tendai Gwatidzo; Witness Simbanegavi
  15. The rationality of M&A targets in the choice of payment methods By Klitzka, Michael; He, Jianan; Schiereck, Dirk
  16. Guarding Expertise and Assets: Non-competition Agreements and Their Implications By Adam Feher

  1. By: Budzinski, Oliver; Stöhr, Annika
    Abstract: In this paper, we comment on the debate about guidelines for Art. 102 TFEU in the face of the challenges brought by digital ecosystems and abuse of dominance in related markets. We take the perspective of dynamic competition economics and derive four recommendations for the future enforcement of abuse control and related merger control: (i) we advocate to abandon the as-efficient-competitor standard embraced in the late 2000s, (ii) we emphasize the relevance on focusing on exploitative abuses as well as on exclusionary ones, (iii) we suggest to implement a concept of systemic market power as a guideline to enforcement, and (iv) we argue that the same enhanced market power standard should also be applied in the corresponding merger control. While going beyond pure guideline recommendations and focusing on a dynamic-economic view, we are convinced that these steps are necessary to move towards a more effective competition policy towards abuse of digital dominance.
    Keywords: abuse of market power, Art. 102 TFEU, digital ecosystems, antitrust, European competition policy, as-efficient-competitor standard, exclusionary abuse, exploitative abuse, dynamic competition, merger control
    JEL: K21 L41 L40 L12 L14 L81 L86
    Date: 2024
  2. By: Sara Fish; Yannai A. Gonczarowski; Ran I. Shorrer
    Abstract: The rise of algorithmic pricing raises concerns of algorithmic collusion. We conduct experiments with algorithmic pricing agents based on Large Language Models (LLMs), and specifically GPT-4. We find that (1) LLM-based agents are adept at pricing tasks, (2) LLM-based pricing agents autonomously collude in oligopoly settings to the detriment of consumers, and (3) variation in seemingly innocuous phrases in LLM instructions ("prompts") may increase collusion. These results extend to auction settings. Our findings underscore the need for antitrust regulation regarding algorithmic pricing, and uncover regulatory challenges unique to LLM-based pricing agents.
    Date: 2024–03
  3. By: Stöhr, Annika
    Abstract: This comprehensive review of ex-post merger studies assesses the price effects of horizontal transactions to determine whether there are common post-merger price effects, both overall and in specific markets. The aim is to derive implications for policy makers and competition authorities in terms of effective merger enforcement and competition policy. By combining and further analysing the results of 52 retrospective studies on 82 mergers or horizontal transactions, it can be shown that the sector in which the respective transaction takes place alone is not a strong indicator of the direction of price-related merger effects. In contrast, the "size" or "importance" of a transaction, as well as market concentration seem to be correlated with post-transaction price increases, especially in already highly concentrated markets. Overall, this meta-study shows the importance of ex-post case studies for improving ex-ante merger control: although generalisations can only be made with caution, the subsequent analysis of a case and its ex-post observable outcome can provide useful information for future merger enforcement in general, either in the same industry and/or with similar case characteristics, as well as for competition policy regulators.
    JEL: D49 K21 L13 L40
    Date: 2024
  4. By: Teodora Dobos; Martin Bichler; Johannes Kn\"orr
    Abstract: The European day-ahead electricity market is split into multiple bidding zones. Within these zones, a uniform energy price is computed for each hour. Large bidding zones have been under scrutiny. The fact that zonal clearing ignores the transmission capacities within zones and the increase in renewables lead to a growing number of interventions in the generation of energy sources and large redispatch costs. The European Union Agency for the Cooperation of Energy Regulators (ACER) proposed alternative bidding zone configurations that should be analyzed as part of the Bidding Zone Review. For Germany, four alternative configurations were suggested. Bidding zones shall be stable and based on long-term, structural congestion in the grid. We analyzed the proposed configurations considering different clustering algorithms and periods. We found that the configurations do not reduce the price standard deviations within zones considerably, while the average prices across zones are similar. Other configurations identified based on clustering prices lead to lower price standard deviations but are not geographically coherent. Importantly, different configurations emerge depending on clustering features, algorithm, and period considered. Given the substantial changes in energy supply and demand that can be expected in the future, defining stable configurations appears to be a moving target.
    Date: 2024–04
  5. By: Daniel Davi-Arderius; Tooraj Jamasb; Juan Rosellon
    Keywords: Renewables, decarbonisation, generation mix, redispatching, renewable curtailment, synchronous generators, day-ahead market, network constraints, gas crisis, system operator, smart grids, digitalisation
    JEL: L51 L94 Q41 Q42
    Date: 2024–05
  6. By: Rolf Golombek; Michael Hoel; Snorre Kverndokk; Stefano Ninfole; Knut Einar Rosendahl; Michael Olaf Hoel
    Abstract: It is widely recognized that a cost-efficient way to achieve the climate targets of the Paris agreement requires investment in carbon capture and storage (CCS). However, to trigger sizeable investment in CCS the carbon price must exceed the historic carbon prices. This paper examines whether a higher price of carbon enhances competition of storage services and thus leads to lower costs of CCS. Using a Hotellling model with two storage sites, each being located at each end of the Hotelling line, we show that there are three alternative competition regimes. The level of the carbon tax determines which regime materializes. For “low” carbon taxes, there is no competition between the two storage firms. For “high” carbon taxes, there is standard Bertrand competition between the two storage firms. Finally, for “intermediate” carbon taxes, there is so called partial competition with multiple equilibria. Contrary to the standard conclusion on competition, we find that when each storage site is imposed to charge the same price for all its clients, the price under monopoly is lower than under partial competition. We offer several extensions of the model as well as numerical illustrations. With our reference parameter values and a carbon tax sufficiently high to reach the Paris targets, we find that we may end in a partial competition regime.
    Keywords: Hotelling line, kinked demand curve, duopoly, multiple equilibria, emission tax, carbon capture and storage
    JEL: L13 Q35 Q38
    Date: 2024
  7. By: Josep Dols-Miro (Universitat de València, Valencia, Spain); Joaquim Cuevas (Universitat de València, Valencia, Spain); Juan Fernández de Guevara (Instituto Valenciano de Investigaciones Económicas (IVIE), Valencia, Spain)
    Abstract: This study links the evolution of market power in the Spanish banking sector since 1971 with changes in banking regulation between 1970 and 1990. The main contributions are: 1) An exhaustive chronology of liberalization and deregulation measures in the sector during those years is provided; and 2) Market power is empirically measured for over 40 years using the Lerner Index. A decrease in market power in the 70s was observed, coinciding with increased competition through the branch network, followed by an increase in the 80s, as the liberalization process was affected by the economic cycle. Since 1988, competition intensified with the consolidation of liberalization measures. The results allow for an additional hypothesis in the literature analyzing competition in the Spanish banking sector: There seems to be no evidence that the bulk of deregulation was the trigger per se for rivalry. Rather, it appears that entities anticipated, taking advantage of the imminent changes, and the increase in competition was early. Possibly, it was not the regulatory changes. The latent rivalry between entities took advantage of the opportunities offered by liberalization.
    Keywords: Spain, Banking History, Regulation, Lerner Index
    JEL: D40 G18 N20
    Date: 2024–04
  8. By: Andrew Rhodes (Toulouse School of Economics); Jidong Zhou (Yale University)
    Abstract: This paper studies consumers' privacy choices when firms can use their data to make personalized offers. We first introduce a general framework of personalization and privacy choice, and then apply it to personalized recommendations, personalized prices, and personalized product design. We argue that due to firms' reaction in the product market, consumers who share their data often impose a negative externality on other consumers. Due to this privacy-choice externality, too many consumers share their data relative to the consumer optimum; moreover, more competition, or improvements in data security, can lower consumer surplus by encouraging more data sharing.
    Date: 2024–04
  9. By: Budzinski, Oliver
    Abstract: Financial regulation in sports is usually discussed in the context of representing an instrument against 'financial doping'. Notwithstanding the merits of this discussion, this paper takes the opposite perspective and analyses how market-internal financial regulation itself may anticompetitively influence sporting results. Virtually every regulative financial intervention distorts sporting competition to some extent and creates beneficiaries and losers. Sometimes, the actual winners and losers of financial regulation stand in line with the (legitimate) goals of the regulation like limiting financial imbalances or preventing distortive midseason insolvencies of teams. However, financial regulation may also display unintended side-effects like protecting hitherto successful teams from new challengers, cementing the competitive order, creating foreclosure and entry barriers, or serving vested interests of powerful parties. All of these effects may also be hidden agendas by those who are implementing and enforcing market-internal financial regulation or influencing it. This paper analyses various types of budget caps (including salary caps) with respect to potentially anticompetitive effects. UEFA's so-called Financial Fair Play Regulations and Formula One's recent budget cap are highlighted as examples. Furthermore, the paper discusses allocation schemes of common revenues (like from the collective sale of broadcasting rights) as another area of financial regulation with potentially anticompetitive effects. Eventually, the effects of standards for accounting, financial management, and auditing are discussed.
    Keywords: sports economics, financial regulation, budget caps, salary caps, financial fair play, financial doping, collective sale of media rights, sports broadcasting rights, revenue sharing, formula one
    JEL: Z20 Z23 L40 L83 K21
    Date: 2024
  10. By: Jonas von Wangenheim
    Abstract: Consumer data increasingly enable online marketplaces to identify buyers’ preferences and provide individualized product information. Buyers, however, fully learn their product value only after contracting, when the product is delivered. I characterize the impact of such ex-ante information on buyer surplus and seller surplus, when the seller sets prices and refund conditions in response to the ex-ante information. I show that efficient trade and an arbitrary split of the surplus can be achieved. For the buyer- optimal signal low-valuation buyers remain partially uninformed. Such a signal induces the seller to sell at low prices without refund options.
    Keywords: information disclosure, sequential screening, information design, strategic learning, Bayesian persuasion, mechanism design, platform economics, consumer protection
    JEL: D82 D47 D18
    Date: 2022–05
  11. By: Tan Gan; Hongcheng Li
    Abstract: We consider the robust pricing problem of an advertising platform that charges a producer for disclosing hard evidence of product quality to a consumer before trading. Multiple equilibria arise since consumer beliefs and producer's contingent advertisement purchases are interdependent. To tackle strategic uncertainty, the platform offers each producer's quality type a menu of disclosure-probability-and-price plans to maximize its revenue guaranteed across all equilibria. The optimal menus offer a continuum of plans with strictly increasing marginal prices for higher disclosure probabilities. Full disclosure is implemented in the unique equilibrium. All partial-disclosure plans, though off-path, preclude bad equilibrium play. This solution admits a tractable price function that suggests volume-based pricing can outperform click-based pricing when strategic uncertainty is accounted for. Moreover, the platform prioritizes attracting higher types into service and offers them higher rents despite symmetric information between the platform and the producer.
    Date: 2024–04
  12. By: Alexander Erlei; Mattheus Brenig; Nils Engelbrecht
    Abstract: Extensive research shows that consumers are generally averse to price discrimination. However, instruments of differential pricing can benefit consumer surplus and alleviate inequity through targeted price discounts. This paper examines how these outcome considerations influence consumer reactions to price discrimination. Six studies with 3951 participants show that a large share of consumers is willing to costly switch away from a store that introduces a discount for low-income consumers. This happens irrespective of whether income differences are due to luck or merit. While the price-discriminating store does attract some new high-income consumers, it cannot compensate the loss of existing consumers. Allowing for altruistic preferences by simulating a market mechanism increases costly support for price discounts, but does not alleviate consumer aversions. Finally, we provide evidence that warm glow drives costly support for price discounts.
    Date: 2024–04
  13. By: Dayu Yang
    Abstract: M&A activities are pivotal for market consolidation, enabling firms to augment market power through strategic complementarities. Existing research often overlooks the peer effect, the mutual influence of M&A behaviors among firms, and fails to capture complex interdependencies within industry networks. Common approaches suffer from reliance on ad-hoc feature engineering, data truncation leading to significant information loss, reduced predictive accuracy, and challenges in real-world application. Additionally, the rarity of M&A events necessitates data rebalancing in conventional models, introducing bias and undermining prediction reliability. We propose an innovative M&A predictive model utilizing the Temporal Dynamic Industry Network (TDIN), leveraging temporal point processes and deep learning to adeptly capture industry-wide M&A dynamics. This model facilitates accurate, detailed deal-level predictions without arbitrary data manipulation or rebalancing, demonstrated through superior evaluation results from M&A cases between January 1997 and December 2020. Our approach marks a significant improvement over traditional models by providing detailed insights into M&A activities and strategic recommendations for specific firms.
    Date: 2024–04
  14. By: Tendai Gwatidzo; Witness Simbanegavi
    Abstract: Using survey data from the World Banks Global Findex Database and a pseudo panel we investigate two pertinent issues pertaining to financial inclusion in South Africa. First, we consider the factors driving the likelihood of accessing financial services in South Africa. Second, we investigate the impact of banking sector competition on financial inclusion in South Africa essentially testing the information and market power hypotheses. Household head characteristics such as age, education and income are found to positively influence the likelihood of being financially included. Considering the relationship between financial inclusion and banking sector competition, evidence supports the information hypothesis rather than the market power hypothesis. That is, lower bank competition facilitates the formation of longer-lasting relationships between banks and their clients, which incentivises banks to invest in information generation and monitoring in previously unserved markets, thereby expanding financial inclusion.
    Date: 2024–04–16
  15. By: Klitzka, Michael; He, Jianan; Schiereck, Dirk
    Abstract: This study analyzes mergers and acquisitions (M&A) payment methods in large transactions of public U.S. acquirers between 2009 and 2016. While we find consistent with previous evidence that asymmetric information between acquirers and targets significantly influences the choice of M&A payment methods, we show that contrary to prevailing findings in the literature, acquirers cannot exploit their overvaluation through stock-financed M&A at targets’ disadvantage. In addition, when facing larger uncertainty in the counterparty’s valuation, a higher ratio of cash is applied in M&A payment. Our results document that both acquirers and targets are rational in choosing M&A payment methods.
    Date: 2024–04–02
  16. By: Adam Feher (Institute for Labour Law and Industrial Relations in the European Union (IAAEU), Trier University)
    Abstract: The degree of access granted to employees to a firm’s critical asset is a pivotal organizational decision. This access can boost the employees’ productivity within the firm but also enables them to become competitors after leaving, leading to a holdup problem. Economic theory suggests that non-competition agreements (noncompetes) can mitigate this issue. This paper examines the optimal compensation package for an employee, considering access, wage, and noncompete agreements. I demonstrate that firms compensate lower ability agents primarily through access, coupled with the minimum wage and strictest noncompete agreements since access not only increases the employee’s utility but also the firm’s production. For higher ability agents, the maximum degree of access is provided, while the wage and stringency of the noncompete depends on the damage the employee causes with competing. For low damages, the firm offers a lax noncompete with lower wages. Conversely, high potential damage necessitates higher wages and a stricter noncompete. The study’s findings are consistent with observed patterns in CEO contracts.
    Keywords: Noncompete agreements, wage differential, Optimal contract
    JEL: J31 J33 J42
    Date: 2024–04

This nep-reg issue is ©2024 by Christopher Decker. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.