Differences In Marginal Costs Research Articles

Estimating the marginal costs of road wear

This study estimates the marginal cost of using road infrastructure. Based on a large data set with information on sections of the road network, including age, pavement type, and traffic, a more disaggregate analysis of pavement life than that in the literature is facilitated. The analytical strategy enables identification of major differences in marginal costs across the road network. This establishes that the deterioration of the road quality can be attributed not only to heavy vehicles but also light vehicles such as passenger cars, a possible reason being the widespread use of studded tires in a country with regular freeze-thaw cycles. Due to the limited width of time windows of the dataset observations, no evidence could be found to support the notion that road deterioration is significantly influenced by time alone.

Capacity sharing: The impacts of agreement and contracting timing

We investigate the timing of capacity sharing agreement and contracting between two firms. The firms have the choices of forming an alliance either before or after capacity investment, and signing a specific contract stipulating the price and quantity of capacity sharing either before or after demand observation. We analyze optimal strategies under four alternative cases on the timing of agreement and contracting. We show that, under an ex post agreement, the firms have different preferences for contracting timing, however, the incentives can be aligned when the variances of market intercepts are sufficiently large. Under an ex ante agreement, the firms’ preferences for contracting timing are aligned when the markets are either relatively stable or highly uncertain and the difference in marginal capacity cost is either relatively large or insignificant. Between the two timing of agreement, the ex ante agreement results in more profit gains for both firms. Between the two timing of contracting, we find that the firms do not necessarily benefit from an early contracting scheme. When the markets are highly uncertain or the cost difference between firms is insignificant, spot contracting outperforms forward contracting under both ex ante and ex post agreement.

Global economic and environmental outcomes of the Paris Agreement

Abstract In this paper, we use a ten-region model of the world economy to analyze the economic and environmental outcomes that are likely to result from the Paris Climate Agreement. To construct our modeling scenario, we first convert the Agreement's disparate Nationally Determined Contribution (NDC) pledges into equivalent reductions in CO2 emissions relative to a baseline scenario without the Agreement. We then model the Agreement by solving for a CO2 price path in each region that would gradually fulfill the region's NDC pledge by its target date. The resulting paths are quite different across regions, indicating significant differences in marginal abatement costs. We also find that if all regions achieve their NDCs, the Agreement significantly reduces CO2 emissions relative to baseline. However, global emissions would not decline in absolute terms relative to 2015 levels, let alone follow a path consistent with a 2 °C stabilization scenario. We then construct additional scenarios to explore how the outcomes of the Agreement would change if particular countries (the United States, China, and Australia) were to unilaterally withdraw from it without undertaking alternative climate policies. We find that leaving the Agreement raises GDP for the country that leaves, but it also sharply reduces the domestic co-benefits the country receives as a side effect of controlling CO2. For each country we consider, the net effect of withdrawing is negative: the loss of co-benefits exceeds the gain in GDP. That is, we show that when co-benefits are considered, it is in each country's self-interest to remain in the Agreement.

Assessment of a Compressed Air Energy Storage System using gas pipelines as storage devices in Chile

Some of the existing natural gas pipelines in Chile are underutilized; thus, these reservoirs could be utilized as Compressed Air Energy Storage (CAES) systems taking advantages of fluctuations in the price of electricity related to the entrance of renewable energy sources in the electrical market. A thermodynamic and economic-optimization of CAES system using existing gas pipelines under different operating conditions is performed. Substations located in the proximity to existing gas pipelines are assessed as possible CAES locations. Throughout the day, the CAES system compresses air, charges the pipeline by buying energy during low prices, and expands the air, discharging the pipeline by selling energy when prices are high. One of the Northern substations (Taltal) shows the best results where more of the photovoltaic power plant are located; consequently, CAES is more profitable when high difference in marginal cost is present along the day, which happens on grids with high renewable share. Therefore, the daily variations of marginal costs should be a key parameter decision to operate the CAES plant. With higher marginal costs fluctuations throughout the day, CAES systems should become more attractive economically.

Nonlinear dynamics of a quantum Cournot duopoly game with heterogeneous players

In this paper, a dynamic quantum Cournot duopoly game with heterogeneous players is proposed by applying the Li–Du–Massar scheme. We analyze the influence of the degree of quantum entanglement (DQE) on stability and dynamics behavior of the system. The result shows that: (i) The corresponding classical Cournot duopoly game is a special case of the dynamic quantum Cournot duopoly game. (ii) The stability region may increase or decrease as the DQE increases. It depends on the relative marginal cost difference. (iii) Numerical simulations show that the complicated dynamics behaviors of quantum Cournot game is different from that of corresponding classical model.

The risk markup of intermittent renewable supply in German electricity forward markets

Renewable energy sources such as wind or solar power currently make up a large share of the total German electricity supply as a result of the German energy transition. This paper presents an empirical analysis of how power shocks resulting from intermittent renewables affect the forecast error of the forward premium in German electricity markets. We extend the existing literature by investigating determinants of forward premiums, focusing on both wind and solar power. We find positive monthly wind shock effects on forecast errors, ie, a specific risk markup on forward prices. These findings underline the need to introduce wind power futures at the European Energy Exchange (EEX) in order to reduce the risk markup for participants in forward markets. No daily wind shock or solar shock effects are found. One explanation for this could be the almost perfect approximations of the expected spot price. This is in line with the EEX’s strategy, which does not create wind power futures for contracts with maturities of days. The wind shock effect on monthly peak-load premium is larger than that on base-load premiums. This is likely due to higher differences in marginal costs on the right-hand side of the merit order curve.

Trade-Promoting and Welfare-Enhancing Cartels?

I present a model of two quantity-setting firms, each producing two goods in a different country, but enjoying a competitive advantage in only one of them. An international cartel can either shut down trade and manufacture both goods domestically or foreclose the inefficient plant and import the high-cost good from the firm that has a competitive advantage in it. Despite the cartel's exploitation of its market power, it can improve national welfare by generating efficiency gains. There always exists a set of marginal cost differences and transportation costs such that collusion weakly welfare-dominates competition for any degree of product substitutability. Further, collusion can promote trade relative to competition when each firm completely specializes in the production of its low-cost product and exports it, as long as the goods are sufficiently unrelated. Using novel data on international cartels, I find that the effect of multi-product cartels on trade is positive, significant and statistically larger than the effect of single-product cartels on trade. This positive and significant effect becomes more pronounced, the more distant substitutes the goods are.

Evolutionary game analysis on the behavior strategies of power producers in renewable portfolio standard

Renewable portfolio standard (RPS) plays a significant role in developing renewable energy. This study developed an evolution game model of power producers to analyze the symbiotic evolution between RPS and the electric producers’ behavior strategies, and discuss the impacts of the key institutional parameters on the dynamic evolution process of electric producers. To verify the theoretical results, simulation experiments and sensitivity analysis were conducted with meaningful results: Trading Tradable Green certificates (TGC) could become the common belief of all power producers, with the scientific design of institutional parameters. An optimal quota, higher unit fine, lower transaction cost and marginal cost difference of green and thermal power contribute to improving the effectiveness of RPS. This study could provide some scientific recommendations for government to design and construct RPS.

A hybrid recourse policy for the vehicle routing problem with stochastic demands

In this paper, we propose a new recourse policy for the vehicle routing problem with stochastic demands (VRPSD). In this routing problem, customer demands are characterized by known probability distributions. The actual demand values are only revealed upon arriving at a customer location. The objective of the problem is to plan routes minimizing the travel cost and the expect recourse cost. The latter cost is a result of a predetermined recourse policy designed to handle route failures. Given the planned routes, such failures may occur in the event where a vehicle has insufficient capacity to serve the current customer or the next customer. In the relevant literature, there are three types of recourse policies: (i) classical, where failures at customers are handled by return trips to the depot, (ii) optimal restocking, where preventive restocking trips to the depot are performed based on optimized customer-specific thresholds, and failures are handled by return trips to the depot, and (iii) rule-based policies, where preventive restocking trips are performed based on thresholds established by preset rules, and failures are handled by performing return trips to the depot. While the first type is rather myopic, the last two types of recourse policies use simplistic comparisons of the vehicle’s residual capacity to trigger recourse actions. In this paper, we propose a more advanced rule-based recourse policy, which does not solely depend on the vehicle’s residual capacity. To do so, we first propose a taxonomy that groups rule-based policies into three classes, we then propose the first hybrid recourse policy, which simultaneously combines two of these classes, namely risk and distance. We develop an exact solution algorithm for the VRPSD with this hybrid recourse policy and conduct a broad range of computational experiments. The algorithm is able to solve instances with up to 60 customers, and for certain experimental configurations, the exact algorithm solves to optimality up to 79% of the instances. Finally, we show that when the optimal routes of the hybrid policy are operated under the optimal restocking policy they yield a marginal average cost difference.

Carbon offsets out of the woods? Acceptability of domestic vs. international reforestation programmes in the lab

Following the entry into force of the Paris Agreement in November 2016, governments around the world are now expected to turn their nationally determined contributions into concrete climate policies. Given the global public good nature of climate change mitigation and the important cross-country differences in marginal abatement costs, distributing mitigation efforts across countries could substantially lower the overall cost of implementing climate policy. However, abating emissions abroad instead of domestically may face important political and popular resistance. We ran a lab experiment with more than 300 participants and asked them to choose between a domestic and an international reforestation project. We tested the effect of three informational treatments on the allocation of participants’ endowment between the domestic and the international project. The treatments consisted in: (1) making more salient the cost-effectiveness gains associated with offsetting carbon abroad; (2) providing guarantees on the reliability of reforestation programmes; (3) stressing local ancillary benefits associated with domestic offset projects. We found that stressing the cost-effectiveness of the reforestation programme abroad did increase its support, the economic argument in favour of offsetting abroad being otherwise overlooked by participants. We relate this finding to the recent literature on the drivers of public support for climate policies, generally pointing to a gap between people's preferences and economists’ prescriptions.

Specific versus ad valorem taxes in the presence of cost and quality differences

We take into account the cost and product differences in an oligopolistic framework to examine the superiority of a specific tax versus an ad valorem tax. We obtain the following main results. First, given a fixed total output and assuming that both differences in quality levels and in marginal costs are arithmetic progressions, a specific tax can be superior to an ad valorem tax if the quality difference is larger than the marginal-cost difference. Second, provided that products differ in quality levels, in horizontal levels, and in terms of marginal costs, a rise in the difference in horizontal levels will enhance the superiority of a specific tax over an ad valorem tax. Third, the above two results remain valid, regardless of whether the mode of competition is Cournot or Bertrand. Finally, when the difference in quality levels is larger than the difference in marginal costs, not only is a specific tax welfare superior to an ad valorem tax, but the former also Pareto dominates the latter.

Employment Effects of On-the-Job Human Capital Acquisition

This paper quantifies the joint effect of on-the-job training and workers' on-the-job learning decisions on aggregate employment. We present an Index of On-the-job Human Capital Acquisition (OJHCA), based on data from the OECD Program for the International Assessment of Adult Competencies. The objective of the index is to capture both formal and informal learning in the workplace. We document a strong positive association between the two components of our index, i.e., on-the-job training and on-the-job learning. We also show that the index is positively correlated with employment across OECD economies. To explain these stylized facts, we build a search and matching model with on-the-job human capital acquisition that depends on both on-the-job training provided by firms and on the workers' level of on-the-job learning. We calibrate the model to the Canadian economy and adjust the learning and training marginal costs to match cross-country levels in the human capital index. We compare the model's predictions with the data and we conclude that differences in marginal costs are necessary to match the differences observed in employment rates across countries. We also extend the model including payroll taxes and education. The model is able to reproduce the observed differences in employment rates between countries with the highest and the lowest level of OJHCA.

The Role of Firm Factors in Demand, Cost, and Export Market Selection for Chinese Footwear Producers

In this article, we use micro data on both trade and production for a sample of large Chinese manufacturing firms in the footwear industry from 2002 to 2006 to estimate an empirical model of export demand, pricing, and market participation by destination market. We use the model to construct indexes of firm-level demand, marginal cost, and fixed cost. The empirical results indicate substantial firm heterogeneity in all three dimension with demand being the most dispersed. The firm-specific demand and marginal cost components account for over 30% of market share variation, 40% of sales variation, and over 50% of price variation among exporters. The fixed cost index is the primary factor explaining differences in the pattern of destination markets across firms. The estimates are used to analyse the supply reallocation following the removal of the quota on Chinese footwear exports to the EU. This led to a rapid restructuring of export supply sources on both the intensive and extensive margins in favour of firms with high demand and low fixed costs indexes, with marginal cost differences not being important.

The revealed cost competitiveness of changing trade patterns: A country-sector exercise

In new trade models with heterogenous firms, trade liberalization between high-cost and low-cost countries is expected, all the rest equal, to increase cost competitiveness (i.e., to decrease real marginal costs) relatively more in the former. We report evidence in favour of this prediction for a sample of countries, accounting for about 85% of world trade, from the 1980s to the 2000s. The estimation of the country-sector changes in cost competitiveness (relative to the UK) hinges on taking advantage of the observability of international trade patterns to reveal information on cross-country differences in marginal costs, hence ‘revealed’’ cost competitiveness.

Dual Coproduct Technologies: Implications for Process Development and Adoption

Many industries operate technologies in which multiple outputs (coproducts) are jointly produced. In some settings (“vertical”) the coproducts differ along a performance dimension and are substitutable. In other settings (“horizontal”) the coproducts differ in their applications and are not substitutable. In both cases, three important attributes of a coproduct technology are its processing cost, overall yield, and coproduct split, i.e., the proportion of each output produced. For both vertical and horizontal settings with deterministic market sizes, we characterize the optimal pricing and production decisions of a monopoly firm with two technologies. We establish the necessary and sufficient conditions for dual activation (i.e., using both technologies) to be optimal. Dual activation is driven by differences in marginal costs across the two technologies. There is an additional motive for dual activation in the horizontal setting: the desire to generate a product mix that better resembles the market mix. Building on the optimal production analysis, we characterize the optimal adoption-and-usage strategy of a firm with one incumbent technology considering a new technology. We establish the conditions for which a new technology will displace the incumbent or be used with the incumbent, and highlight some important adoption and usage differences between vertical and horizontal settings. Results are extended to the setting with uncertain market size(s). The online appendix is available at https://doi.org/10.1287/msom.2017.0637 .

The effect of high levels of solar generation on congestion in the European electricity transmission grid

The increasing levels of solar power affect the usage and development of electricity grids, both at local distribution level and with respect to potential congestion within the transmission grid. We use a cost-minimising investment model (ELIN) to determine the development of the European electricity generation system up to Year 2050, for two renewable-dominated scenarios: the Green Base scenario, with a Europe-wide, technology-neutral renewable certificate scheme; and the Net Metering scenario, with an additional net metering support scheme for solar power. The system compositions are extracted from the ELIN results for the years 2022 and 2032, and analysed in an hourly dispatch model (EPOD) to study the effects of solar power on marginal electricity costs and transmission congestion. From the results of the investment model, it is clear that the presence of a net metering subsidy scheme significantly affects both the pace at which solar power continues to expand and the geographical distribution of the new capacity. In the dispatch modelling, it can be seen that high penetration levels of solar power have a strong effect on the marginal costs of electricity, since production is concentrated around a few hours each day. At penetration levels of 20–30% of annual electricity demand, solar power production entails a predictable daily marginal cost difference between the solar peak and the evening price peak, which could make short-term storage competitive. Transmission congestion during summer is consistently higher in the systems from the Net Metering scenario than in those from the Green Base scenario, while the opposite is true during winter. Solar power production correlates strongly with congestion 6–9h after the solar peak, whereas wind power correlates with congestion with respect to more slowly evolving and longer-term variations.

The external costs of private versus public road transport in the Metropolitan Area of Santiago, Chile

We estimate marginal external costs per kilometer for car and bus in the Metropolitan Area of Santiago, Chile, in terms of congestion, road damage, accidents, air pollution and noise. Estimates are provided for both peak and off-peak periods. To carry out our analysis, we collected and integrated the output of several local studies. These estimates should contribute to a better debate on how to manage efficiently motor vehicles externalities by means of both (pigouvian) tax instruments, public transport subsidies and regulation. We also offer a comparison of our results with those reported in the literature.At peak times, marginal external costs per kilometer for petrol cars, diesel cars and buses are estimated at USD 0.51, USD 0.53 and USD 1.80 respectively. When these values are converted to passenger-kilometer, petrol cars, diesel cars and buses impose a marginal external cost of USD 0.41, USD 0.42 and USD 0.04 respectively. At off-peak times, all these values are reduced as congestion decreases significantly. The marginal external cost for petrol cars, diesel cars and buses are USD 0.15, USD 0.16 and USD 0.78 respectively. Differences in marginal external costs per passenger-kilometer between cars and buses shrink as these costs fall to USD 0.12, USD 0.13 and USD 0.05 for petrol car, diesel car and bus respectively.

Eurotunnel versus the Ferries

Considers the competitive strategy of the Channel Tunnel just prior to the time it opened for business in 1994. Focusing specifically on the tunnel's Le Shuttle service for freight and passenger traffic, gives students an opportunity to explore whether Le Shuttle should follow a premium pricing strategy relative to the cross-channel ferries, match the ferries' prices, or undercut the ferries' prices. Following a section on the history of the tunnel's construction, provides an in-depth discussion of the cross-channel ferry business and the Le Shuttle services. Concludes by posing the question: What pricing strategy should Le Shuttle follow?To illustrate the key drivers of price competition in a differentiated products industry: differences in marginal cost; vertical differentiation among competitors; the degree of horizontal differentiation in the market; and the sources and sustainability of competitive advantage.

Trade and FDI liberalization in a general oligopolistic equilibrium

Incorporating recent evidence that FDI firms are more efficient than exporters into a general oligopolistic equilibrium model, this paper examines the welfare effects of trade and FDI liberalization. We find that trade liberalization alone is beneficial if the difference in marginal cost between the exporting and FDI industries is small enough while FDI liberalization unambiguously improves welfare. Combining these results, we further show that simultaneous liberalization of trade and FDI necessarily turns out welfare-improving.

Combining price and quantity controls under partitioned environmental regulation

This paper analyzes hybrid emissions trading systems (ETSs)under partitioned environmental regulation when firms' abatement costs and future emissions are uncertain. We show that hybrid policies that introduce bounds on the price or the quantity of abatement provide a way to hedge against differences in marginal abatement costs across partitions. Price bounds are more efficient than abatement bounds as they also use information on firms' abatement technologies while abatement bounds can only address emission uncertainty. Using a numerical stochastic optimization model with equilibrium constraints for the European carbon market, we find that introducing hybrid policies in EU ETS reduces expected excess abatement costs of achieving targeted emission reductions under EU climate policy by up to 89%. We also find that under partitioned regulation there is a high likelihood for hybrid policies to yield sizeable ex-post cost reductions.