Downstream Market Research Articles

Upstream regulation in mature network industry: evidence from Nordic mobile telecommunications markets

ABSTRACTThis article investigates the effects of upstream regulation that aims to create niches and attract new type of entrants on the competitive environment of downstream markets. Using unique cross-country data of Nordic mobile telecommunications markets, we show that upstream regulation leads to (i) increases in both number and aggregate market share of service-based providers in the downstream market, (ii) an increase in the number of service-based providers, thus increasing their aggregate market share, but no opposite direction of results and (iii) a lower retail price level, proxied by average revenue per user. Our findings imply that upstream regulation may be able to achieve better outcomes when the policy objectives are to revitalize mature network industries and to enhance consumer welfare.

Information disclosure in auctions with downstream competition

When bidders’ valuations are derived from a downstream market in which they may compete, the allocation to the firms with the lowest costs can differ from the allocation that maximizes the ex post valuations of the bidders. I consider the problem of auctioning two goods to bidders whose valuations for a good flexibly depend on their and their rival’s costs as well as the identity of the rival. I show that revealing the identities of winners through a sequential auction procedure leads to allocations in which bidders tend to have higher ex post valuations but also higher costs when compared to a simultaneous auction.

Cheap Trade Credit and Competition in Downstream Markets

Using a unique dataset with information on 20 million inter-firm transactions, we provide evidence that suppliers offer trade credit to high-bargaining-power customers to ease competition in downstream markets in which they have a large number of other clients. Differently from price discounts, trade credit targets infra-marginal units and does not lower the marginal cost of high-bargaining-power customers. As a consequence, the latter do not gain market share and the supplier can preserve profitable sales to low-bargaining-power customers. We show that empirically trade credit is not monotonically increasing in past purchases, as is consistent with our conjecture that it targets infra-marginal units. In addition, the supplier grants trade credit to high-bargaining-power-customers only when it fears the cannibalization of sales to other low-bargaining-power clients. Our results are not driven by differences in suppliers' ability to provide trade credit, customer-specific shocks, or endogenous location decisions.

Pervasive technologies and industrial linkages: Modeling acquired purposes

What makes an industry a dominant filiére and a particular technology a so-called general purpose technology (GPT)? The paper contributes to a microeconomics of vertically related and networked industries by framing GPTs as a peculiar case of technological connectivity between sectors and provides a simple model that accounts for the endogenous success (failure) of GPT-based industries in a competing technologies setting. In a nutshell, we explore the process potentially leading to technological pervasiveness and dissect it in its structural elements. The model takes into consideration several conditions under which an upstream technology increases its pervasiveness in the economy or remains constrained as a component used by a small subset of downstream applications only. Hence, the model shows how ‘purposes’ are acquired by a technology struggling to dominate the downstream market. Policy implications of the analysis are highlighted, and dynamic implications of the model are discussed. Two main features of the study are that (i) we go beyond the a priori assumption that a pervasive GPT-like technology already exists in the economy and (ii) we bring GPT theorizing under the umbrella of studies of structural change through the dynamics of industries’ linkages.

Vertical Contract and Competition Intensity in Hotelling’s Model

AbstractThis paper explores the impact of intensity of rivalry in downstream market on the equilibrium locations of the downstream firms under a vertical market structure á la Hotelling. We find that: (i) the presence of upstream firms softens the spatial competition in downstream market; (ii) minimum differentiation cannot be achieved as the equilibrium outcome and the equilibrium product differentiation is insufficient relative to socially optimum; (iii) social welfare is higher with a higher weight attached to intensity of rivalry, which is different from the non-monotonic relationship under the horizontal market case; (iv) the equilibrium product differentiation is independent of bargaining power under the two-part tariff contracts, which is different from Brekke and Straume (2004) under linear pricing.

Sourcing strategies under agglomeration economies, capacity risks and retail competition

We study two sourcing scenarios where in the first scenario, two symmetric buyers procure capacity from a common cluster of suppliers (or agglomerate) and in the second scenario the symmetric buyers procure capacity from different geographies. The buyers sell differentiated products and compete in the final downstream market. Further, there are disruption risks associated with suppliers and the common cluster. In this research, we determine how factors in the downstream market competition and upstream agglomeration scale economies affect the buyers' sourcing strategy in both the scenarios. We find some interesting insights on the buyers' sourcing strategy due to downstream market parameters like demand substitution and price sensitivity. Our analysis also reveals that the optimal capacity to be procured by the buyer in both the scenarios follows a threshold policy on the downstream demand substitution factor.

Auctioning the Digital Dividend: A model for spectrum auctions

We model a spectrum auction where firms purchase units to participate in a constrained, multi-product, downstream market. We use dynamic programming techniques to numerically solve for the optimal bidding strategy in a clock auction. Firms value constraining competitor market power, so incumbents often bid aggressively to shut out entrants. We find that high cost firms may hold up the market, so the auction may be inefficient and generate zero revenue. An auction may be optimal for a regulator maximising total surplus. A regulator maximising auction revenue sets reserve prices high enough to restrict spectra sold, effectively behaving as a monopolist.

Manufacturer collusion: Strategic implications of the channel structure

AbstractWe investigate how the structure of the distribution channel affects tacit collusion between manufacturers. When selling through a common retailer, we find—in contrast to the conventional understanding of tacit collusion that firms act to maximize industry profits—that colluding manufacturers strategically induce double marginalization so that retail prices are above the monopoly level. This lowers industry profits but increases the profit share that manufacturers appropriate from the retailer. Comparing common distribution with independent (exclusive) distribution, we show that the latter facilitates collusion. Despite this result, common retailing leads to lower welfare because a common retailer monopolizes the downstream market. For the case of independent retailing, we also demonstrate that contract offers that are observable to the rival retailer are not necessarily beneficial for collusive purposes.

Auctions for Essential Inputs

We study the design of auctions for the allocation of essential inputs, such as spectrum rights, transmission capacity or airport landing slots, to firms using these inputs to compete in a downstream market. When welfare matters in addition to auction revenues, there is a tradeoff: provisions aimed at fostering post-auction competition in the downstream market typically results in lower prices for consumers, but also in lower auction proceeds. We first characterize the optimal auction design from the standpoints of consumer and total welfare. We then examine how various regulatory instruments can be used to implement the desired allocation.

TO REGULATE OR TO DEREGULATE? THE ROLE OF DOWNSTREAM COMPETITION IN UPSTREAM MONOPOLY VERTICALLY LINKED MARKETS

ABSTRACTThis paper attempts to cast light to the effect of monopoly regulation in Cournot markets compared to its effect in Bertrand markets. To this purpose, we use a simple model of a vertically linked market, where an upstream regulated natural monopoly is trading via two‐part tariff contracts with a downstream duopoly. Combining our results to those of the existing literature on deregulated markets, we argue that when the downstream competition is in prices, efficiency dictates regulating the monopoly with a marginal cost based pricing scheme. However, this type of regulation leads to significant welfare loss, when the downstream market is characterized by Cournot competition.

Input price discrimination, technology licensing and social welfare

This paper examines the welfare effect of third-degree input price discrimination in the presence of technology licensing by an outside innovator. It is found that discriminatory pricing induces the innovator to issue more licenses to downstream firms which improves the overall production efficiency of the downstream market and makes discriminatory pricing more socially desirable than uniform pricing. However, if the level of innovation is endogenously determined by the outside innovator, price discrimination suppresses his R&D incentive, which reduces the social welfare and makes the welfare effect of price discrimination ambiguous.

Pricing and market conduct in a vertical relationship

We consider a vertical relationship where an upstream monopolist supplies input to downstream duopolistic firms. Under the assumption that downstream firms produce under a soft capacity restriction, we show that the balance between price and quantity in downstream firms’ strategy is endogenous. In this way, the monopolist’s charge for input co-determines downstream market conduct. We spell out some consequences of this, for example, that an increase of downstream capacity costs can result in increased output. We discuss other implications in relation to pass-through and incidence of cost changes.

Complementary Monopolies and Bargaining

AbstractHow should complementarities affect antitrust merger policy? I introduce a two-stage strategic model in which complementary-input monopolists offer supply schedules to producers and then engage in bilateral bargaining with producers. The main result is that there is a unique weakly dominant strategy equilibrium, the equilibrium attains the joint-profit-maximizing outcome, and output equals that of a bundling monopoly. The result holds with perfect competition in the downstream market with both unit capacity and multiunit capacity. The result also holds with oligopoly competition in the downstream market. The result contrasts with the Cournot effect, which states that complementary-input monopolists choose total prices that are greater than the bundled-monopoly level. The analysis shows that consumers’ surplus and total producers’ surplus are greater with supply schedules and bargaining than with posted-price competition. The analysis has implications for antitrust policy toward vertical and conglo...

Inclusion and economic empowerment of rural-tribal women in lac value chain and market: a case study of Udyogini

The tribal communities in central India are excluded in many ways from accessing and benefiting from the fruits of mainstream development. Within tribal groups, women are more marginalized and sidelined than men despite their multiple roles in the household. Women’s exclusion from the mainstream knowledge systems, market sphere and their limited access and control over the resources affects the overall development of tribal communities. Key for economic growth of tribal communities is the equal participation and promotion of women’s physical and economic rights. This necessitates for a purposive design of activities and institutional mechanisms for both socially inclusive economic empowerment and environmentally sustainable growth by building their knowledge and skills to restore NTFP-based value chains for sustainable livelihoods. The present paper is an attempt to analyse and document the findings of an inclusive Lac livelihood model executed by Udyogini, a national-level NGO established by World bank in 1992, with support of PACS to address the geographical, social, technological and economic inclusion of tribal women in the Lac supply chain and downstream market integration to improve their incomes in Gumla district of Jharkhand state. It is found that by employing inclusive strategies, scientific technologies and participative approaches, the socially excluded women could be organized, engaged and integrated successfully by leveraging proven Lac-based livelihood model in the value chains and markets for increasing their incomes. The women demonstrated entrepreneurial abilities to handle markets and acquired economic empowerment over the incomes generated for family needs, mostly for education and health, while in some cases for assets building. The case study provided ample evidence that disadvantaged women could be receptive, Cooperative and capable of acquiring new skills and leadership responsibilities for value chain refinement, micro-enterprise development and management through appropriate training and skill building. Udyogini in partnership with PACS has revived the neglected and insignificant Lac-based livelihoods for social and economic inclusion of tribal women through inclusive approach in the trouble torn Gumla district in Jharkhand.

Upstream Partnerships among Competitors When Size Matters

In several industries downstream competitors form upstream partnerships. An important rationale is that higher aggregate upstream volume might generate efficiencies that reduce both fixed and marginal costs. Our focus is on the latter. We show that if upstream marginal costs are decreasing in sales volume, then a partnership between downstream rivals will make them less aggressive. However, a partnership might nonetheless induce both partners and non-partners to charge lower prices. We also show that it might be better for two firms to form a partnership and compete downstream than to merge. Somewhat paradoxically, this is true if they compete fiercely in the downstream market with a third firm. The reason is that a merger is de facto a commitment to set higher prices. Under aggressive competition from the third firm, the members will not want to make such a commitment when upstream marginal costs are decreasing in output.

Myanmar's Attractiveness for Investment in the Energy Sector: A Comparative International Perspective

Myanmar’s needs: Myanmar is severely affected by energy poverty, and needs to invest a greater share of GDP in the energy sector than any other country in Asia. It is estimated to require a total of USD 650 billion by 2030 to satisfy its growing demand for energy – USD 170 billion from foreign investors and the remainder from domestic sources. Investment is needed in both the petroleum and renewable energy sectors. Due to lack of capital, technology and know how in Myanmar, much of the necessary investment will have to come from abroad. However, the World Bank ranks Myanmar’s general investment climate as only 167th out of 189 countries. This report examines the strengths and weaknesses of Myanmar’s business climate in the petroleum and renewable energy sectors: how it compares with other countries, especially in ASEAN; what matters to foreign investors; and how this situation can be improved. Not resting on one’s (new) laurels: The recent international interest in Myanmar may prove counterproductive for the country’s investment climate, if this upsurge in interest induces the government to slow down in its reform efforts. When the novelty of Myanmar wears off, that may become a problem. Indeed, possible signs of such a slowdown can be observed already. According to official data, FDI in Myanmar decreased significantly in the first four months of 2016 compared to the same period in 2015. Investors were increasingly cautious and worried about the slow pace of reform, delays in establishing a panel to approve new investment projects and the lack of clarity on the country’s new economic development strategy (DVB, 2016). This highlights the importance of working constantly to improve the investment climate and staying in close contact with investors, keeping them informed about developments. Challenges common to the petroleum and renewables sectors: Lack of data and information for market entry; fragmented institutional and regulatory framework; low levels of electricity access and digitalization; low international oil prices. Challenges in the petroleum sector: Limited supply-industry infrastructure and lack of local engineers; MOGE petroleum sector monopolization and conflicts of interest; limited geological data; complicated taxation; weak government–business communication; challenges in finding local partners; time-consuming licensing procedures; paper-based communication and lack of e-government; production-sharing agreements biased towards participation of large oil companies, excluding smaller ones; frequent changes in legislation; closed downstream market. Challenges in the renewable energy sector: No national target or legislation on renewable energy; no dedicated public agency regulating the sector; lack of business associations; subsidies for grid electricity generated from fossil fuels disadvantage off-grid renewables; access to suitable land; complex mountainous terrain and protected areas as well as political instability in these areas; underdeveloped grid system for large-scale production; lack of data on the renewable-energy resource potential; limited infrastructure for technical support and maintenance; high cost of installing solar panels and wind turbines; disintegrated biofuel production and supply markets; lack of local specialists; no taxation system for renewables; security risks in conflict-prone Kachin, Rakhine and Shan states. Opportunities in the petroleum and renewable energy sectors: Government commitment to reform; advantageous location as part of the Greater Mekong Subregion and ASEAN, close to the Chinese and Indian markets; significant resource base, especially natural gas, hydropower and bioenergy; rapidly rising energy demand in Myanmar and neighbouring countries; high demand for investment in refineries, oil terminals, oil barges and petrol stations; opportunities in retail business; new petroleum and renewable energy laws are underway; abundant semi-skilled labour, and low cost of unskilled labour; low levels of corruption and criminality. Initially, companies may perceive the business climate as unpredictable, but, having entered the market, and having learned and adapted to local conditions, companies experience greater predictability. Opportunities in the petroleum sector: Relatively transparent tender system; equal treatment of investors; government experience and capacity; market maturity. Myanmar’s strategic location, with rapidly rising energy demand among hundreds of millions of people in the neighbouring countries and low transportation costs (especially for gas delivery to China, India and Thailand), represents an opportunity to foreign investors. Opportunities in the renewable energy sector: Latecomer advantage; low level of electrification increases cost advantage of off-grid electrification; support from international donors; strong civil society actors are promoting renewable energy development.

Environmental Protection for Sale: Strategic Green Industrial Policy and Climate Finance

Industrial policy has long been criticized as subject to protectionist interests; accordingly, subsidies to domestic producers face disciplines under World Trade Organization agreements, without exceptions for environmental purposes. Now green industrial policy is gaining popularity as governments search for low-carbon solutions that also provide jobs at home. The strategic trade literature has largely ignored the issue of market failures related to green goods. I consider the market for a new environmental good (like low-carbon technology) whose downstream consumption provides external benefits (like reduced emissions). Governments may have some preference for supporting domestic production, such as by interest-group lobbying, introducing a political distortion in their objective function. I examine the national incentives and global rationales for offering production (upstream) and deployment (downstream) subsidies in producer countries, allowing that some of the downstream market may lie in nonregulating third-party countries. Restraints on upstream subsidies erode global welfare when environmental externalities are large enough relative to political distortions. Climate finance is an effective alternative if political distortions are large and governments do not undervalue carbon costs. Numerical simulations of the case of renewable energy indicate that a modest social cost of carbon can imply benefits from allowing upstream subsidies.

Contract Contingency in Vertically Related Markets

We study the optimal contract choice of an upstream monopolist producing an essential input that may sell to two vertically differentiated downstream firms. The upstream supplier can offer an exclusive contract to one of the firms or non-exclusive contracts to both firms. Each of the latter can be made contingent or not on the breakdown of the negotiations between the upstream supplier and the rival downstream firm. The distribution of bargaining power during the contract terms negotiations is the main driving force of the monopolist's choices. A powerful supplier always opts for an exclusive contract. By contrast, a weaker supplier offers non-exclusive contracts and makes each of them contingent or non-contingent such as to guarantee the most favorable outside option in its negotiations. Our main results hold under an horizontally differentiated downstream market too.

Competitive Package Size Decisions

In the consumer packaged goods (CPGs) industry, consumers base their purchase decisions in part on package size because different package sizes offer different levels of convenience. The heterogeneous preference for package size allows manufacturers to use package size as a competitive tool in order to raise margins in the face of higher production costs. By competing in package sizes, manufacturers may be able to soften the degree of price competition in the downstream market, and raise margins accordingly. In order to test this hypothesis, we develop a structural model of consumer demand, and manufacturers’ joint decisions regarding package size and price applied to supermarket chain-level scanner data for the ready-to-eat breakfast cereal category. While others have argued that manufacturers reduce package sizes as a means of raising unit prices in a hidden way, we show that package size and price are strategic complements – downsizing intensifies price competition, which does not allow manufacturers to raise unit prices through package downsizing. Therefore, package downsizing does not yield a desirable outcome for manufactures. On the other hand, retailers benefit from package downsizing, as it leads to lower wholesale prices, and higher category profits.

Price Discrimination in Input Markets and Quality Differentiation

This paper examines the welfare implications of input price discrimination in a vertically-related market, which is composed of a monopolistic upstream market and a duopolistic downstream market. The downstream duopolists produce quality-differentiated products at different marginal costs. We show that the equilibrium input prices are closely related to the downstream quality gap and cost difference. When the monopolist simply charges a unit wholesale price for its input product, discriminatory pricing could be socially desirable even though the aggregate output remains unchanged. Nevertheless, if a two-part tariff is feasible, then banning price discrimination could increase the aggregate output and social welfare.