Degree Of Market Power Research Articles

Bagging bundle benefits in broadband and media mergers: Lessons from Sky/Vodafone for antitrust analysis

The historic precedents in telecommunications antitrust findings have tended towards finding harm to competition when network operators integrate downstream and bundle the provision of applications and services. The reason for this is that market power in network provision is thought to be extended into the applications market(s). More recently however, proposed mergers have been between telecommunications and media distribution firms, both of whom have some degree of market power, already sell their own services in bundles, and who may or may not have been offering combined bundles already via contractual agreements. Examples include Sky/Vodafone in New Zealand, and Time Warner/AT&T in the United States as well as Vodafone/Unitymedia in Germany and Media Capital/Altice in Portugal. These complex proposed arrangements pose challenges to competition authorities, whose legal and procedural rules and precedents, especially those defining the relevant markets affected by the merger or vertical integration activity, have been developed from the analysis of simpler cases. These precedents may not be sufficient to analyse current cases, characterized by multiple products catering to heterogeneous consumer preferences, and consumers are not constrained to buying only one variant of the products in each of the upstream and downstream markets.We illustrate the challenges by way of a case study of the proposed merger between Sky and Vodafone, declined by the New Zealand Commerce Commission in February 2017. Limitations in existing market definition processes and the evaluation of market power where bundling already occurs risk overlooking complex demand-side interactions that influence the profitability and efficiency of various structural and contractual strategic choices. We propose that classic merger and antitrust analysis based on econometric cost-benefit analysis can be augmented by using simulation and numerical analysis of a range of bundle offers expected to be relevant in decision-making. We develop a simple model and use it to illustrate how it may be used to inform broadband and content mergers, and other complex antitrust cases, such the assessment of the effects of two-sided markets and firm pricing decisions.

MARKET POWER AND THE AGGREGATE SAVING RATE

Can increasing market power cause a decrease in the aggregate savings? We answer this question by using a heterogeneous agents model that features both idiosyncratic labor and capital income risk. Under complete markets, the saving rate does not depend on the degree of market power, but when markets are incomplete, higher markups substantially reduce the aggregate saving rate. This is due to endogenous changes in the distribution of income and wealth. A calibration of the model using the observed changes in market power in the United States since the 1970s closely matches the decline in the US saving rate. Furthermore, when market power increases, the model generates distributional changes that are consistent with the data.

A stochastic frontier estimator of the aggregate degree of market power exerted by the US meat packing industry

The objective of this study is to measure the aggregate degree of market power exercised by the US meat packing industry with the employment of the recently developed stochastic frontier estimator (SFA) of market power. Furthermore, the present work shows that the SFA estimation technique can be used in order to measure the sum of oligopsonistic and oligopolistic power along a food supply chain. Annual time series data for the period 1970–2011 were employed. The empirical results reveal that, in the US meat packing industry, the farm-to-wholesale price spread is 3.74% above the marginal processing cost. These findings indicate that rather a small percentage of the farm-to-wholesale price spread can be attributed to market power in the US meat packing sector.

The effects of market power on stability: do diversification and earnings strategy matter?

This paper examines whether the effect of the level of market power on bank soundness depends on the banks' decision to diversify and adopt a particular earnings strategy. We conduct the empirical approach in two stages. First, we estimate the Boone indicator, which is the measure for bank market power. We then regress this measure and other explanatory variables on the bank risk focusing on the role of earnings and diversification strategies. The results show that competition increases earnings management as the level of market power increases when banks diversify into non-interest income generating activities. The results also suggest that the relatively low insolvency risk among banks in Africa is attributed to the high degree of market power and the diversification strategy employed over the period.

Competition, efficiency, and innovation in Taiwan’s banking industry — An application of copula methods

Abstract This paper proposes a simultaneous stochastic frontier model that consists of a cost frontier and an output price frontier that relates a firm’s output price (P) to its marginal cost (MC). The gap between P and MC reflects a firm’s degree of market power, and the Lerner index (LI) is equal to the ratio of the gap to P. The salient feature of our model permits LI to be internally determined by the simultaneous equations model, which avoids obtaining negative estimates of the index. The joint probability density function of the composed errors can be derived in the context of copula methods. Our model is applied to study the competitive conditions of Taiwan’s banking industry. Findings show that: (1) the quiet life hypothesis is rejected; (2) the relationship between financial innovation, measured by the technology gap ratio of Huang et al. (2014), and our LI is U-shaped, which is robust over different specifications; and (3) the nexus between innovation and competition is inverted-U shape and consistent with Aghion et al. (2005) and Bos et al. (2013).

Factors determining the success or failure of a tourism tax: a theoretical model

PurposeThis theoretical paper aims to illustrate that tourism economies differ substantially with respect to market conditions, such as demand elasticity and industrial structure, which have a clear effect on the distribution of the tax burden.Design/methodology/approachThis paper has used partial and general equilibrium frameworks to study the effects of a production tax on the overall welfare of a tourism economy. The two frameworks are linked via the relative price of tourism based on the assumption that it is influenced by a typical tourism economy that is able to enjoy a certain degree of market power in its tourism exports.FindingsWe have discovered that the division of the tax burden is significantly affected by local market conditions, such as demand elasticity and industrial structure. Generally, tourism economies differ with respect to those characteristics, which can be crucial in determining the success of a tourism tax. This line of research has enabled us to determine why different tourism tax rates have been adopted in various markets and to provide a justification for government selection of a particular tax in a given market. The rational criterion for tax choices is to maximize the likelihood of enhancing welfare or to minimize the risk of reducing efficiency.Originality/valueThis paper argues that those conditions are crucial to determining the success or failure of a tourism tax and may thus be able to explain why each tourism economy has adopted a different tax.

Welfare implications of capacity payments in a price-capped electricity sector: A case study of the Texas market (ERCOT)

The aim of this paper is to analyze the welfare consequences of introducing capacity compensation payments in restructured and liberalized electricity markets. For that purpose, we set up a two-stage framework in which two kinds of electricity generators, peak load and base load generators, choose their capacity investment levels first and then compete on the basis of bids in a centralized market to sell electricity to consumers. We use data from the Texas ERCOT to evaluate consumers' welfare. We find that the introduction of capacity payments has two countervailing effects. On the one hand, it increases the wholesale electricity price. On the other hand, it reduces price volatility and increases the reliability of the system. We find that capacity payments are more beneficial for consumers in a perfectly competitive market than in the presence of certain degree of market power.

An Investigation of the Degree of Market Power in the Greek Manufacturing and Service Industries

This paper investigates the degree of market power in the Greek manufacturing and service industries over the period 1970–2007. The markup model developed by Hall (1988) and Roeger (1995) is taken into consideration where market power is expressed as the difference between the selling price and the marginal cost of production. The analysis will be conducted in three steps; the first step estimates the price-cost margin of the manufacturing and services industries over 1970–2007; the second step applies the cross section specification under which the markup ratio is obtained for the 23 manufacturing and 26 service 2-digit ISIC sectors of the panel sample; and the third step estimates the price-cost margin of the manufacturing and services industries for each year over 1973–2007 by employing the Hall-Roeger time series specification. The empirical findings suggest that both industries exert a positive markup ratio; however, the service industry appears to be less competitive than the manufacturing industry.

Buyer and/or seller power? An application to the Brazilian milk market

ABSTRACTDespite its importance, the co-existence of buyer and seller power has been largely neglected in the empirical literature. In this article, we develop a stochastic frontier model to measure channel market power as deviations from a perfectly competitive frontier and decompose it into buyer and seller power. We provide an empirical illustration using milk data from five Brazilian states and find that channel market power ranges between 4% and 12% of the wholesale price, but that 75% of the market power is accounted for by retail buyer power. The methodology proposed can provide a rapid assessment of the degree of market power in other markets and a method for separating out buyer and seller power in the market channel.

Pricing strategy of emerging market exporters in alternate currency regimes: The role of comparative advantage

The exchange rate pass-through (ERPT) literature has not considered product-level comparative advantage (CA) as a source of heterogeneous firm productivity, whilst the heterogeneous-firm trade literature suggests that a firm's production choice may determine its productivity level and also its pricing decision as both the degree of market power and the fixed costs of exporting vary across products. This paper combines these two strands of literature and empirically analyses the export pricing behaviour of Chinese and Indian exporters in 1994–2007 whilst considering 6-digit product-level CA at the intercept and at the slope. Previous ERPT estimates that did not take product-level CA into account are biased as CA is significant in both cases. ERPT is more incomplete in high CA products but export prices increase with export specialization because a stronger presence in export markets allows higher market power. If China were to let its currency float, Chinese exporters' pricing strategy would become a classic case of incomplete ERPT. On the contrary, Indian exporters' pricing strategy remains robust regardless of the exchange rate regime. This result supports recent calls for the adoption of a flexible exchange rate regime, particularly in the case of China.

Market Power of Domestic Marketers and its Influence on the Consequences of the Korea–US and Korea–Australia FTAs on the Beef Market

Domestic, US and Australian beef, which are differentiated by country of origin, are sold in Korea. In this differentiated product market, tariff reductions through Free Trade Agreements (FTAs) are expected to strengthen the competitiveness of imported beef and, therefore, to mitigate the effects arising from the market power of domestic marketers. The present study develops a simulation model that evaluates this mitigating effect by explicitly reflecting the market structure that domestic beef marketers constitute. The simulation results indicate that the farm-retail marketing margin would decrease by 10.59% or 6.79% due to the Korea–US and Korea–Australia FTAs, respectively, if domestic beef marketers formed a cartel or an oligopoly market (i.e. the degree of market power is 0.5), while the marketing margin under a competitive market scenario is simulated to have no change. The value of beef production would decrease by 1009 million dollars if the marketers form a cartel and hence exercise monopoly power. The FTAs are simulated to reduce the value of beef production by 564 million dollars under the competitive market scenario.

Firms and Labor Market Inequality: Evidence and Some Theory

review the literature on firm-level drivers of labor market inequality. There is strong evidence from a variety of fields that standard measures of productivity - like output per worker or total factor productivity - vary substantially across firms, even within narrowly-defined industries. Several recent studies note that rising trends in the dispersion of productivity across firms mirror the trends in the wage inequality across workers. Two distinct literatures have searched for a more direct link between these two phenomena. The first examines how wages are affected by differences in employer productivity. Studies that focus on firm-specific productivity shocks and control for the non-random sorting of workers to more and less productive firms typically find that a 10% increase in value-added per worker leads to somewhere between a 0.5% and 1.5% increase in wages. A second literature focuses on firm-specific wage premiums, using the wage outcomes of job changers. This literature also concludes that firm pay setting is important for wage inequality, with many studies finding that firm wage effects contribute approximately 20% of the overall variance of wages. To interpret these findings, we develop a model where workplace environments are viewed as imperfect substitutes by workers, and firms set wages with some degree of market power. We show that simple versions of this model can readily match the stylized empirical findings in the literature regarding rent-sharing elasticities and the structure of firm-specific pay premiums. (Author's abstract, IAB-Doku) ((en))

Evaluating the state of competition and the welfare losses in the Greek manufacturing sector: an extended Hall–Roeger approach

This paper extends the Hall–Roeger methodology in order to investigate the market structure and to measure the degree of market power in the Greek manufacturing sector over the period 1984–2007 as a whole and by subsector at the two-digit SIC level. The present paper also estimates the net and the total welfare losses in these market power scenarios. The bootstrap method is applied to assign measures of accuracy to the statistical estimates. The empirical results indicate some degree of market power and thus associated welfare losses for each subsector in the Greek manufacturing sector over the period 1984–2007.

The impact of market power at bank level in risk-taking: The Brazilian case

This paper seeks to examine the competitive behavior of the Brazilian banking industry by conducting an analysis at the level of individual banks to gain an understanding of how the risk-taking behaviors of banks are affected by their degree of market power. Our results suggest that the Brazilian banking industry is characterized by monopolistic competition. Our foremost finding is that the market power of Brazilian banks is negatively related to their risk-taking behavior, regardless of changes in banks' capital levels. Banks that experience a decline in market power, while simultaneously increasing their capital levels, tend to assume higher risk levels. After the Global Financial Crisis period, we find that Private and Foreign banks became risk averse. We also verify that State-Owned banks engaged in riskier activities to increase their market share after the crisis. These results have important implications for the design of appropriate financial regulations.

Transmission of real exchange rate changes to the manufacturing sector: The role of financial access

We explore the impact of real exchange rate changes on the performance of Indian manufacturing firms over the period 2000–2012. Our empirical analysis shows that real exchange rate movements have a significant impact on Indian firms’ performance but the impact varies across different firm and industry characteristics. In particular, the impact depends upon the degree of market power, trade orientation, foreign ownership, access to domestic finance and industry concentration. Furthermore, appreciation and depreciation affect firms’ performance differently. Results from Panel-VAR confirm these findings. Overall, our results point toward the need for taking into account firm and industry level heterogeneity in designing policies aimed at managing exchange rate shocks and also the role of greater financial development in currency risk management.

Transmission of Real Exchange Rate to the Manufacturing Sector: Role of Financial Access

We explore the impact of Real Exchange Rate changes on the performance of Indian manufacturing firms over the period 2000-2012. Our empirical analysis shows that real exchange rate movements have a significant impact on Indian firms’ performance but the impact varies across different firm and industry characteristics. In particular the impact depends upon the degree of market power, trade orientation, foreign ownership, access to domestic finance and industry concentration. Further, appreciation and depreciation affect firms’ performance differently. Results from Panel-VAR confirm these findings. Overall, our results point towards the need for taking in to account firm and industry level heterogeneity in designing policies aimed at managing exchange rate shocks and also the role of greater financial development in currency risk management.

Measuring Market Power in the Integrated Malaysian Poultry Industry: New Empirical Industrial Organization Approach

ABSTRACTThis article examines the level of competition that prevails in the Malaysian poultry markets by using the new empirical industrial organization methodology. We follow the Bresnahan (1982) and Lau (1982) oligopoly model, which allows the identification of market power using aggregated time-series data. The methodology involves the estimation of demand and supply equations for the identification of the parameters measuring the degree of market power. This study uses annual data from 1980–2010 to estimate the demand and supply equations of the poultry market in Malaysia. The estimation results show that the demand for chicken meat is inelastic (−0.124), indicating that consumers are not sensitive to price change. On the other hand, income is elastic at 3.636, implying that poultry meat is a luxury. The cross-price elasticity with respect to beef is −2.405, rejecting beef as a substitute to chicken meat in Malaysia. The coefficient of conduct parameters for the three subperiods of 1980–1990, 1991–2004, and 2005–2010 measuring market power are 0.6740, 0.5540, and 0.5790, respectively. The results indicate imperfect competitive market in the poultry industry as more farmers opt to join poultry integrators.

Corporation Nation by Robert E. Wright

Reviewed by: Corporation Nation by Robert E. Wright William H. Becker Robert E. Wright, Corporation Nation. Philadelphia: University of Pennsylvania Press, 2014. 328 pp. ISBN: 978-0-8122-4564-6, $69.95 (cloth). One outcome of the Great Recession has been a torrent of books on the origins and consequences of the financial collapse of 2008, as well as previous debacles in what might be called the era of Enron. Academics, journalists, and some defectors from the well-paid world of Wall Street have produced books that heighten our understanding of what has happened to the American corporate economy since the beginning of the twenty-first century. Perhaps, surprisingly, a book on the antebellum growth of incorporation should be added to the list of important works that contribute to our appreciation of the latest crisis. Robert E. Wright’s Corporation Nation provides a careful account of the legal structuring and governance of the first corporations. Knowledge of the safeguards embedded in the legal framework of the country’s initial corporate entities has been all but lost from the post-Civil War era through the twentieth century. Wright’s argument stems from a deep concern about the dangers inherent in the “agency principal problem” intrinsic to the corporate form. He maintains that the initially tightly governed antebellum corporations have evolved into very loosely governed corporations, which have contributed to the recent financial crises. If the stark weakening of corporate governance is not attended to, Wright fears an “existential” crisis as Americans broadly lose faith in stocks. [End Page 726] Incorporation in the antebellum economy created a tight governance system based, for the most part, on stockholders operating the enterprises in which they invested. State legislatures granted charters that spelled out the benefits that privileged the initial stockholders, such as “the ability to sue and be sued in their own name, perpetual succession, use of a corporate seal, limited liability, [and] share transferability”. In return, “early corporations were only supposed to engage in activities explicitly laid out in their charters, a concept tied to the legal doctrine called ‘ultra vires’” (p. 4). Wright’s analysis rests on a wide-ranging reading of economic and legal history and an impressive grasp of the writings about corporations by antebellum jurists, legislators, journalists, entrepreneurs, investors, merchants, and bankers. His work also illustrates the surprisingly broad scope of specially chartered businesses in the antebellum period. Wright and Richard Sylla found 22,419 such entities chartered between 1790 and 1860, based on data they assembled in a project sponsored by the National Science Foundation (NSF) (pp. 58–59). Wright’s findings challenge the work of a previous generation of historians who have for decades shaped our views of the corporation in the antebellum period. These scholars believed—and their views continue to appear in recent writings—that antebellum incorporations were confined to the infrastructure and banking sectors. Instead, Wright argues that a broad sweep of incorporated business entities stimulated economic growth by promoting local employment and economic activity, as the capital assembled through chartering helped corporations to realize scale economies, vertical integration, and a degree of market power. Tight governance in the antebellum period was not foolproof, of course. Managerial incompetence and fraud prompted ongoing debates about the role of state legislatures—and, later, Congress—in preventing corporate failure and abuse. The principal–agent problem increased concern because of “the intrinsic difficulty of managing large, complex organizations in a competitive environment” (p. 158). How best to limit fraud and ineptitude led to new state rules. To limit embezzlement, for example, large company checks had to be countersigned. More generally, banks and insurance companies were required to standardize accounting and actuarial rules. Fraud and mishandling of corporate affairs invited state legislative investigative committees to examine company affairs ever more closely. According to many corporate charters, such efforts should have been the responsibility of stockholders, not legislators. Banks were the most likely targets of legislative scrutiny, especially after the recession of 1819 and subsequent recessions. Some state legislatures rewrote charters to limit failures. They demanded increased capital reserves and [End Page 727] limited leverage to two or three times paid-in capital, exposing stockholders to greater liability and removal...

The Incidence of a Soda Tax, in Pennies and Pounds

Controversy over public health policies targeting carbonated soft drinks has catalyzed cross-disciplinary debate. Though beverage demand is characterized by purchases from multiple categories per trip, existing research using soda data predominantly employs discrete choice models, which restrict consumers to single unit choices. This paper instead combines a multiple-choice utility function with a hierarchical Bayesian model to estimate household-level preferences across beverages. I find that households in less healthy counties (as measured by mean body mass index) consume more regular soda per capita, have stronger preferences, and are less price sensitive than households in more healthy counties, suggesting that soda tax proposals should be county-specific. Because market players possess varying degrees of market power, I also study soda tax incidence. Simulations of equilibrium prices in various tax scenarios demonstrate that the assumption of 100% pass-through to prices, ubiquitous in soda tax research, underestimates the true change in prices, further underscoring the need for a county-level approach. Calculations then reveal that most of a counterfactual tax-induced shift in consumption is due to an income effect and low cross-price elasticities, so that while city governments are unlikely to raise enough revenue to cover the healthcare costs related to soda consumption, the downstream health benefits induced by a soda tax compensate most households for the reduction in utility.

Regulation of road accident externalities when insurance companies have market power

Accident externalities that individual drivers impose on one another via their presence on the road are among the most important external costs of road transport. We study the regulation of these externalities when insurance companies have market power. Some of the results we derive have close resemblance to the earlier literature on externality regulation with market power in aviation and private roads, but there are important differences, too. Using analytical models, we compare the first-best public welfare-maximizing outcome with a private profit-maximizing monopoly, and oligopoly. We find that insurance companies will internalize some of the externalities, depending on their degree of market power. We derive optimal insurance premiums, and regular parametric taxes as well as “manipulable” ones that make the companies set socially optimal premiums. The latter take into account that the firm tries to exploit knowledge of the tax rule applied by the government. Finally, we also study the taxation of road users rather than that of firms.