Consumers Worse Off Research Articles

When ownership and copyright are separated: Economics of non-fungible token marketplaces with secondary markets

Creators have long strived to secure royalties for their works but with little success. In the digital realm, monetization presents an even greater challenge, as traditional digital assets frequently suffer from piracy issues, primarily due to the lack of verifiable ownership. Recently, non-fungible token (NFT), a blockchain-enabled tradable digital asset, has aroused great public attention for its potential to address this long-standing issue. Specifically, NFTs empower creators by enabling them to earn resale royalties from post-primary-sale transactions and by providing verifiable ownership that facilitates consumer trading in a secondary market. In this paper, we employ a two-stage game-theoretic model to examine this innovative business model. Here, an NFT creator makes optimal pricing and royalty rate decisions, while consumers make their purchase and resale decisions accordingly. Our study reveals that the creator inevitably reduces the selling price when a secondary market is introduced, even without imposing royalties. Moreover, contrary to conventional wisdom that NFT-enabled royalties always benefit creators, our research uncovers that the introduction of a secondary market leads to unintended revenue loss for the creator, particularly when most consumers only engage in secondary transactions. Furthermore, we find that the platform's profitability diminishes with the introduction of a secondary market, especially when most consumers are uninformed and the platform relies primarily on the primary market for commission collection. Finally, we find that the introduction of a secondary market may leave consumers worse off, despite the resale opportunities it offers. Our findings carry crucial managerial implications for platforms, creators, consumers, and policymakers.

The Impacts of Removing Fossil Fuel Subsidies and Increasing Carbon Taxation in Ireland

Though the magnitude of fossil fuel subsidies eclipses carbon pricing revenues, policies and economic literature focus on carbon taxation. This paper aims to show that removing fossil fuel subsidies can reduce emissions as much as carbon taxation without making producers and consumers worse off. Using a dynamic intertemporal CGE model of Ireland, we compare removing eight Irish fossil fuel subsidies and increasing the carbon tax to €100 per tonne by 2030. We find that both policies result in similar emission reductions. Carbon taxation results in lower negative GDP and investment impacts, whereas subsidy removal results in lower negative employment impacts, higher revenues, an improved trade balance and lower debt. The impacts across sectors and households are distributed more evenly under a carbon tax, where subsidy removal results in extreme impacts for specific sectors and households. Excluding households’ subsidies from removal can alleviate these household distributional impacts at no cost to emission reduction. With revenue recycling reducing tax rates, a double-dividend is found at the expense of worsened income distribution. The economic benefit of revenue recycling is greater when removing subsidies than with carbon taxation and results confirm the importance of fossil fuel subsidies in climate policy.

Dynamic Competition in Digital Markets: A Critical Analysis of the House Judiciary Committee's Antitrust Report

Amazon, Apple, Facebook, and Google, often referred to as the “big four” tech companies, are four of the five most valuable US companies traded on the public market and together control over $5 trillion in market capitalization, almost one-fifth of the S&P 500. As these companies have grown in size and power, so has public scrutiny of them, including calls for them to be broken up. The latest example is the recent antitrust report from the Subcommittee on Antitrust, Commercial, and Administrative Law of the House Committee on the Judiciary. The report focuses specifically on competition in digital markets. The report is the result of a lengthy investigation conducted by the subcommittee. It attempts to assess the state of competition in digital markets and the effects of competition within these markets. It focuses primarily on the power and conduct of the big four tech companies and provides a detailed analysis of its findings with regard to each of these companies. It also proposes several reforms that seek to strengthen antitrust law and enforcement in light of the problems affecting these growing markets. This policy brief provides a critical analysis of the report and its recommendations based on the consumer welfare standard, which has governed antitrust policy since the late 1970s. It also proposes a theoretical framework for refutation of the report’s allegations about anticompetitive conduct of the big four tech companies that we hope will be useful for future empirical work. Using this framework, we find that the report likely overstates the market power held by these tech companies and the extent to which their conduct is actually harmful to consumers. In addition, our framework leads us to hypothesize that the reforms advocated in the report may actually make consumers worse off by interfering with market dynamism and slowing innovation.

Salient Peers and Consumption: Evidence from the Warranty Claims of Neighbors

We provide novel evidence that peer induced saliency bias acts as a mechanism to explain consumption peer effects. This bias occurs when consumers overweight the influence of a single, salient peer when assessing brand quality, and underweight more objective, aggregate quality data. We exploit data on durable good warranty claims, as an indicator of poor brand quality. We find that a warranty claim from a single neighbor, causes other neighbors to reduce their subsequent purchases of that brand. These peer induced biases are more likely to generate brand switching away from objectively higher quality brands, thus making consumers worse off.

Consumer surplus-enhancing cooperation in a natural resource oligopoly

In this study, we use a differential game to illustrate that cooperation among oligopolists selling a common-pool renewable resource may lead not only to higher industrial output, consumer surplus, and resource stock in the stationary equilibrium, but also a greater discounted sum of consumer surplus. A priori, this finding is not straightforward; an increase in the coefficient of cooperation causes industry output to first decrease and then increase over time, thus making consumers worse off in the short run and better off in the long run. This study establishes the conditions under which the long-run effects outweigh the short-run effects of cooperation, leading to an increase in the discounted sum of consumer surplus. Our analysis suggests that, in some cases, “conservation cartels” should be promoted on the basis of not only resource conservation but also efficiency.

Standing on the Shoulders of Web Giants: The Economic Effects of Personal Data Brokers

In several jurisdictions, like the European Union and California, consumers now have a legal right to port the data that a company has collected about them to another service. This has spurred the emergence of personal data brokers (PDBs), which offer consumers financial rewards for access to their personal data collected by large online content and service providers (CSPs). Using a game-theoretic model, we investigate how PDBs affect market outcomes in the data economy and under which conditions users will indeed benefit from them. Across several model variants, we find that in markets with a PDB two main equilibrium outcomes exist. First, a minimum income equilibrium can arise, where the PDB only pays a minimal reward, and the CSP lowers its service quality in the long run, leaving consumers worse off than without a PDB. Second, a positive income equilibrium can arise, where the PDB pays significant rewards to consumers, and the CSP’s quality may be higher or lower depending on the PDB's efficiency on the data market. Whether consumers are better off in this equilibrium depends on the relative strengths of three effects that we characterize formally and denote as competition effect, displacement effect, and appropriation effect. Consumers will only benefit from a PDB if it can sell their data efficiently; but in this case, the CSP will also demand a higher (non-zero) price for using its service. Thus, our results bear important managerial and policy implications for data-driven business models and the regulation of data access and portability.

DOES THE EUROPEAN DAMAGES DIRECTIVE MAKE CONSUMERS BETTER OFF?

In the enforcement of European competition law, both public and private actors play a role. Public enforcement dominates. Leniency programs give cartelists incentives to reveal the cartel and disclose relevant information to the competition authority. The incentives originate from a reduction in sanctions. Directive 2014/104/EU aims at removing practical obstacles to compensation for victims of infringements of EU competition law. The literature suggests that facilitating private damages actions tends to limit the effectiveness of leniency programs. If victims are able to claim compensation, the incentive to apply for leniency may vanish. In addition to the literature, this paper not only considers the effect of private damages on incentives to apply for leniency, but also explores the consequence for deterrence and consumer welfare. Specifically, this paper investigates the implications of an improvement in the claim position of victims for (1) decisions to start or continue a cartel, (2) decisions to apply for leniency, and (3) consumer welfare. Cartelists’ behavior is analyzed in a dynamic setting. The paper finds that a marginal improvement in the position of victims in most cases leads to an increase in consumer welfare but not in deterrence. In some cases, it also leads to an increase in deterrence, and, in exceptional cases, makes consumers worse off because cartelists refrain from applying for leniency.

Health insurance, market power, and social welfare

AbstractThis paper considers the welfare effects of health insurance. With a rather general model, we show that the presence of traditional health insurance makes consumers worse off when the marginal cost of health care is low enough, while always making the health care provider better off. The presence of traditional health insurance increases social welfare, but cannot achieve the socially optimal outcome. Furthermore, we consider a market structure called “integrated health insurance” and show that in a health care market where a firm provides not only health care but also health insurance, the socially optimal outcome can be achieved.

A Portion of Profits to Charity: Corporate Social Responsibility and Firm Profitability

I develop a model in which a firm can choose to donate a portion of its profits to the provision of a public good. Consumers value this public good and are willing to pay a price premium to a firm which makes such a donation. When this price premium is sufficiently large, the firm can raise its net profits by pledging a portion of those profits to provision of the public good. This is more likely when the consumer's marginal valuation of contributions to the public good is high and when the firm (in the absence of donations) has a high ratio of fixed costs to operating profits. I also identify circumstances under which corporate social responsibility makes consumers worse off.

How the Internet, the Sharing Economy, and Reputational Feedback Mechanisms Solve the 'Lemons Problem'

This paper argues that the sharing economy — through the use of the Internet and real time reputational feedback mechanisms — is providing a solution to the “lemons problem” that many regulations, and regulators, have spent decades attempting to overcome. Section I provides an overview of the sharing economy and traces its rapid growth. Section II revisits “lemons problem” theory as well as the various regulatory solutions proposed to deal with the problem of asymmetric information, and provides some responses. Section III discusses the relationship between reputation and trust and analyzes how reputational incentives have been used historically in commercial interactions. Section IV discusses how information asymmetries were addressed in the pre-Internet era. Section V surveys how the evolution of the Internet and information systems (especially sharing economy reputational feedback mechanisms) addresses the “lemons problem” concern. Section VI explains how these new realities affect public policy and concludes that asymmetric information is not a legitimate rationale for policy intervention in light of technological changes. We also argue continued use of this rationale to regulate in the name of consumer protection might, in fact, make consumers worse off. This has ramifications for the current debate over regulation of the sharing economy.

PLEASE DON'T REGULATE MY INTERNALITIES.

PLEASE DON'T REGULATE MY INTERNALITIES.

Protecting Consumers Through Patent Protection: The Implications of Merger

We challenge the common wisdom that patent protection (compared to no or weak patent protection) makes the consumers worse off by reducing product-market competition unless it increases innovation significantly. We show that the absence of patent protection may encourage horizontal merger and affect the consumers adversely by increasing product-market concentration compared to the situation with patent protection. Hence, even if we ignore the innovation inducing role of patent protection, the positive impact of patent protection on the consumers through its effect on the product-market competition provides a new rationale for patent protection, which has been overlooked in the literature.

Retailers as agents and the limits of parallel trade

The volume of retail-level parallel trade is surprisingly small despite persistent international price differences. We offer an agency-based explanation by considering competition between an original home manufacturer and a foreign retailer. The model endogenizes the role of the retailer as an agent with private information on the perceived quality of the good in its own market. The manufacturer cannot control the retailer once the latter has ordered its sales quantity but it can limit the initial offer. If parallel trade is permitted, this offer will fall if there is incomplete information, resulting in a small, or zero, volume of parallel trade. This outcome makes both the original producer and foreign consumers worse off, while offering little benefit to home consumers, compared to the case where such trade is banned.

External Shocks and High Volatility in Consumption in Low‐Income Countries

According to the well‐known concept of consumption smoothing, the volatility of consumption is low even when income is volatile; this is confirmed by data from G7 countries. Surprisingly, however, consumption volatility in many low‐income countries is nontrivially higher than income volatility. Here I examine what causes high consumption volatility in low‐income countries. In general, volatile consumption makes consumers worse off. Therefore, understanding the causes of high consumption volatility can contribute to improving welfare in low‐income countries by suggesting measures to assist in the stabilization of consumption. Unlike much previous research, I focus on international factors when explaining high consumption volatility. The results suggest that external shocks, which are far more volatile in low‐income countries than in industrialized countries, strongly swing consumption. By capturing these mechanisms, the model I use successfully accounts for consumption volatility's differences between the sample low‐income country and sample industrialized country.

Labour union, entry and consumer welfare

It is usually believed that the presence of a labour union makes firms as well as consumers worse off by increasing wages compared to the situation with no labour union. We show that the presence of a labour union may increase the incentive for entry and may also make consumers better off compared to the situation with no labour union if the labour productivity of the entrant is sufficiently higher to that of the incumbent.

A Note on the Adverse Effect of Competition on Consumers

AbstractIt is usually believed that higher competition, implying more active firms, benefits consumers. We show that this may not be the case in an industry with asymmetric cost firms. A rise in the number of more cost‐inefficient firms makes the consumers worse off in the presence of a welfare‐maximizing tax/subsidy policy. A rise in the number of more cost‐inefficient firms also reduces social welfare.

Competition in the US Meatpacking Industry

This article reviews and evaluates the recent literature on competition in the US meatpacking industry. Studies on market power in meatpacking indicate that concentration in procurement of livestock (cattle or hogs) has not adversely affected prices received by producers or prices paid by consumers. Indeed, there is evidence that producers may be better off because of lower processing costs due to the concentration and introduction of new technical innovations. Policies to restrict alternative marketing arrangements such as those proposed by GIPSA would make producers and consumers worse off. The beef and pork industries are quite complex and contain both spatial and temporal dimensions that can affect the level of competition. Fringe producers because of locational shift of industry and thin markets may be worse off. Establishment of niche enterprises may benefit these producers. In the future, incentives are to maintain steady long-run supplies of livestock to fully operate slaughtering and processing facilities.

A Portion of Profits to Charity: Corporate Social Responsibility and Firm Profitability

I develop a model in which a firm can choose to donate a portion of its profits to the provision of a public good. Consumers value this public good and are willing to pay a price premium to a firm which makes such a donation. When this price premium is sufficiently large, the firm can raise its net profits by pledging a portion of those profits to provision of the public good. This is more likely when the consumer’s marginal valuation of contributions to the public good is high and when the firm (in the absence of donations) has a high ratio of fixed costs to operating profits. I identify some circumstances under which corporate social responsibility makes consumers worse off. I also analyze firm behavior when giving takes the form of a fixed dollar amount per unit sold. When giving takes this form, firms find it profitable to make a donation to the public good in a smaller range of circumstances compared to when giving is a fixed percentage of profits.

PRICE FLOORS AND QUALITY CHOICE

This paper studies effects of price floors in a simple model of vertical product differentiation. We find that even non-binding price floor (i.e., minimum price set below the lowest Nash equilibrium price in the baseline model) can increase quality on the market, if the cost of quality is sufficiently low. Where a binding price floor does not increase the equilibrium quality, it makes consumers worse off. There is also a possibility of over-investment into quality as a result of the binding minimum price.

Step Tolling with Price Sensitive Demand: Why More Steps in the Toll Makes the Consumer Better Off

Most dynamic models of congestion pricing use fully time-variant tolls. However, in practice, tolls are uniform over the day or at most have a few steps. Such uniform and step tolls have received surprisingly little attention from the literature. Moreover, most models that do study them assume that demand is insensitive to price. This seems an empirically questionable assumption that, as this paper finds, strongly affects the implications of step tolling for the consumer. First-best tolling has no effect on the generalized price, and thus leaves the consumer equally well off as without tolling. Conversely, under price-sensitive demand, step tolling increases the price and lowers the number of users, making consumers worse off. The more steps the step toll has, the closer it approximates the first-best toll, thereby increasing the welfare gain and making consumers better off. This makes it important for real-world tolls to have as many steps as possible: this not only raises welfare, but also increases the political acceptability of the scheme by making consumers better off.