Downstream Prices Research Articles

Determination of Biodiesel Prices in Thailand

Biodiesel is a diesel equivalent fuel produced from biological feed stocks, acting as a substitute for petroleum or fossil diesel. Biodiesel production in Thailand began in 2005, with prices stabilizing after 2008. Biodiesel, along with other biofuels, plays a role in Thailand’s Alternative Energy Development Plan (AEDP). The purpose of this study is to examine factors in the Thai biodiesel prices (2009-2014). The study assessed factors in downstream biodiesel prices at consumer locations like gas stations. The price factors assessed in the study included ex-refinery prices, excise taxes, municipal taxes, oil fund contributions, energy conservation fund conributions, marketing margin and exchange rate (USD). Regression results showed that all of these factors were significant (r2 = 0.867). The implication of the study is that while most of the retail price of biodiesel in Thailand is attributable to cost factors, there is some unexplained variance in price. This offers an opportunity for future research.

The existence of buyer power in the Italian fresh milk supply chain

Purpose – Buyer power can be defined as the ability to obtain trade terms more favourable than a supplier’s normal trade terms. The purpose of this paper is to estimate existence of buyer power in the Italian market of fresh milk. The sector is characterised by high industrial and retail firms concentration and a significant gap between the downstream and upstream prices exists. Design/methodology/approach – The authors applied the “first-pass” test proposed by Lloyd et al. (2009) on a set of monthly price indexes series from 2000 to 2013 in order to estimate if a buyer power exists in this sector. This in order to verify how prices are transmitted along the supply chain and to determine if buyer power contributes in conditioning the retail-producer price spread. Findings – Estimated results suggest that buyer power exists in the Italian fresh milk supply chain and oligopsonistic behaviour affects the spread between downstream and upstream prices. Originality/value – The paper gives a contribute on estimation of buyer power in the agro-food supply chains. However, more research needs to be carried out in order to precisely evaluate the nature and the causes of presence of buyer power.

Using Forward Contracts to Reduce Regulatory Capture

A fully unbundled, regulated network firm of unknown efficiency level can untertake unobservable effort to increase the likelihood of low downstream prices, e.g. by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can force the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but recieves the expected value of the contracts when selling them to a competivitve financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic propability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.

Enforcing Margin Squeeze Ex Post Across Converging Telecommunications Markets

A margin squeeze is an exclusionary abuse which occurs when a vertically integrated telecoms operator creates a disparity between upstream and downstream prices with the intention of squeezing an access competitor’s profits. The purpose of such pricing is either to increase the latter’s entry costs, delay profitability or limit their ability to remain or expand on markets. However, traditional market definitions are being challenged by (1) the technological convergence of services and (2) innovative product offerings taking advantage of this convergence. Consumers now routinely purchase a bundle of telecoms services with a single payment (known as quad play), including fixed and mobile voice calls, broadband connectivity, and premium broadcasting content. How should such unilateral conduct be assessed ex post by a competition authority under Article 102 TFEU? We suggest that convergence and innovation present both theoretical and practical difficulties for assessing muddled margins on telecoms markets. New and different enforcement approaches to exclusion will have to be formulated within the Article 102 framework and tested in the Courts. This may even require abstaining from applying Article 102 TFEU during material periods of convergence, and confining ex post enforcement activity to sector regulation, even when this is inferior for safeguarding effective competition.

Nonexclusionary input prices under quantity competition: vertical integration, foreclosure and sabotage

A vertically integrated provider is a monopoly supplier of an input essential for its rival to produce downstream output. Market exclusion in the form of inefficient foreclosure or sabotage can arise when input prices are, respectively, ‘too high’ or ‘too low’ relative to the downstream price. The range of nonexclusionary input prices within which neither form of market exclusion arises is determined by displacement ratios. The safe harbour range of downstream-to-upstream ‘price-cost’ margin ratios is decreasing in the degree of product homogeneity and approaches a single ratio in the limit as the products become perfectly homogeneous. The bounds of nonexclusionary input prices are markedly wider under Bertrand–Nash competition than they are under Stackelberg competition.

Regulation and State Intervention in Non-Renewable Natural Resources: The Cases of the Oil and Gas Sectors in Argentina .

This paper develops a theoretical model based on stylized facts regarding regulation and performance of the oil and gas sectors in Argentina after the fall of Convertibility. Regarding performance, facts include an important drop in domestic production and investment, as well as a reversal in the energy trade balance (from surplus to de…cit). Regulations include a direct government intervention in upstream and downstream prices (below international ones), together with strong restrictions to export. The model uses a self-enforcing equilibrium concept derived from Yared (2010) to endogeneize such policy variables such as upstream domestic prices and downstream energy prices. The model can explain some of the regulation policies observed in the facts, including very low energy prices and strictly positive subsidies.

Forecasting the oil–gasoline price relationship: Do asymmetries help?

According to the Rockets and Feathers Hypothesis (RFH), the transmission mechanism of positive and negative changes in the price of crude oil to the price of gasoline is asymmetric. Although there have been many contributions documenting that downstream prices are more reactive to increases than to decreases in upstream prices, little is known about the forecasting performance of econometric models incorporating asymmetric price transmission from crude oil to gasoline. In this paper we fill this gap by comparing point, sign and probability forecasts from a variety of Asymmetric-ECM (A-ECM) and Threshold Autoregressive ECM (TAR-ECM) specifications against a standard ECM. Forecasts from A-ECM and TAR-ECM subsume the RFH, while the ECM implies symmetric price transmission from crude oil to gasoline. We quantify the forecast accuracy gains due to incorporating the RFH in predictive models for the prices of gasoline and diesel. We show that, as far as point forecasts are involved, the RFH does not lead to significant improvements, while it can be exploited to produce more accurate sign and probability forecasts. Finally, we highlight that the forecasting performance of the estimated models is time-varying.

Safe harbor input prices and market exclusion

An essential input price that is “too high” relative to the downstream price leads to inefficient foreclosure and one that is “too low” induces the vertically-integrated firm to engage in non-price discrimination. Displacement ratios are used to derive the range of safe harbor (downstream/upstream) margin ratios within which no market exclusion arises in equilibrium. The range of admissible margin ratios is increasing in the degree of product differentiation and reduces to a single ratio in the limit as the products become homogeneous. A key policy finding is that complementary price-ceiling and price-floor constraints can prevent both forms of market exclusion.

Study on Mergers of Large Scale Corporations in Steel Industry Based on the Perspective of Uncertainty of Market Demand

This article applies Continuous Duopoly Model of HT (1990) to analyze the cost asymmetry of the upstream enterprises as well as the downstream price being subjected to market constraints two factors. After the study of two aspects on market demand deficiency and demand surplus during the mergers of large scale corporation in steel industry, authors conclude that upstream capacity constraints can play a key role in the mergers of large scale corporations in Steel Industry.

Forecasting the OillGasoline Price Relationship: Should We Care About the Rockets and the Feathers?

According to the Rockets and Feathers hypothesis (RFH), the transmission mechanism of positive and negative changes in the price of crude oil to the price of gasoline is asymmetric. Although there have been many contributions documenting that downstream prices are more reactive to increases than to decreases in upstream prices, little is known about the forecasting performance of econometric models incorporating asymmetric price transmission from crude oil to gasoline. In this paper we fill this gap by comparing point, sign and probability forecasts from a variety of Asymmetric-ECM (A-ECM) and Threshold Autoregressive ECM (TAR-ECM) specifications against a standard ECM. Forecasts from A-ECM and TAR-ECM subsume the RFH, while the ECM implies symmetric price transmission from crude oil to gasoline. We quantify the forecast accuracy gains due to incorporating the RFH in predictive models for the prices of gasoline and diesel. We show that the RFH is useless for point forecasting, while it can be exploited to produce more accurate sign and probability forecasts. Finally, we highlight that the forecasting performance of the estimated models is time-varying.

Adverse Effects of Patent Pooling on Product Development and Commercialization

AbstractThe conventional wisdom is that the formation of patent pools is welfare enhancing when patents are complementary, since the pool avoids a double-marginalization problem associated with independent licensing. This conventional wisdom relies on the effects that pooling has on downstream prices. However, it does not account for the potentially significant role of the effect of pooling on downstream product development and commercialization. We consider development technologies that entail spillovers between rivals and assume that final-demand products are imperfect substitutes. When pool formation facilitates information sharing and spillovers in development, then decreases in the degree of product differentiation can adversely affect welfare by reducing the incentives towards product development and product market competition – even with perfectly complementary patents. The analysis modifies and even negates the conventional wisdom for some settings and suggests why patent pools are uncommon in science-based industries such as biotech and pharmaceuticals that are characterized by tacit knowledge and incomplete patents.

Forecasting the Oil-Gasoline Price Relationship: Should We Care About the Rockets and the Feathers?

According to the Rockets and Feathers hypothesis (RFH), the transmission mechanism of positive and negative changes in the price of crude oil to the price of gasoline is asymmetric. Although there have been many contributions documenting that downstream prices are more reactive to increases than to decreases in upstream prices, little is known about the forecasting performance of econometric models incorporating asymmetric price transmission from crude oil to gasoline. In this paper we fill this gap by comparing point, sign and probability forecasts from a variety of Asymmetric-ECM (A-ECM) and Threshold Autoregressive ECM (TAR-ECM) specifications against a standard ECM. Forecasts from A-ECM and TAR-ECM subsume the RFH, while the ECM implies symmetric price transmission from crude oil to gasoline. We quantify the forecast accuracy gains due to incorporating the RFH in predictive models for the prices of gasoline and diesel. We show that the RFH is useless for point forecasting, while it can be exploited to produce more accurate sign and probability forecasts. Finally, we highlight that the forecasting performance of the estimated models is time-varying.

Collaborate or Consolidate: Assessing the Competitive Effects of Production Joint Ventures

We analyze a symmetric joint venture in which firms facing external competition collaborate in input production. Under standard regularity conditions, the collaboration leads to higher profits than a horizontal merger, whereas the effect on prices and quantities depends on the form of downstream competition. When firms compete in prices, downstream prices for all firms are higher following a symmetric joint venture than following a merger. The reverse result may obtain under quantity competition. In light of our results regarding profits, we provide reasons why firms might still wish to merge: imperfect information, cost synergies, and organizational asymmetries.

A Primer on Damages of Cartel Suppliers Determinants, Standing US vs EU and Econometric Estimation

While private actions for damages by customers against price-cartels receive much attention, the treatment of other groups affected by such conspiracies is largely unresolved. This article narrows the research gap with respect to suppliers to a downstream price cartel. First, we show that such suppliers incur losses driven by a direct quantity, a price and a cost effect. We then analyze whether suppliers are entitled to claim these losses as damages in the two leading competition law regimes. We find that, while the majority view in the US denies standing, the emerging position in the EU and important member states is to grant supplier standing. We argue that this can indeed be justified in view of the different institutional context and the goals assigned to the right to damages in the EU. We finally present an econometric approach based on residual demand estimation that allows to quantify all determinants of cartel suppliers’ damages, thereby showing that supplier damage claims are a viable option in practice that can contribute to full compensation and greater cartel deterrence.

Margin Squeeze in a Regulatory Environment: An Application to Differentiated Product Markets

This paper analyses the effects of banning pricing policies that lead to margin squeezes when the upstream good is imperfectly regulated. The analysis relies on a modelling with a vertically integrated upstream monopolist that faces competition by an unintegrated downstream competitor. It shows that for differentiated goods in the downstream market, a margin squeeze can be observed as the competitive outcome rather than exclusionary conduct. If upstream market regulation is non-constraining, a margin squeeze ban induces the vertically integrated firm to increase its own downstream price (this is, a price umbrella), but also to review its upstream pricing behavior and reduce the upstream price charged to the retail competitor. This decreasing rivals' costs effect (DRC-effect) allows the integrated firm to maximise its profits given the constraint on the downstream price, and allows the downstream competitor to set a lower retail price. However, when constraining upstream regulation and a ban are implemented jointly, the DRC-effect vanishes and downstream prices may to rise, leading to a decrease of consumer surplus. This analysis tends to back up the American way of handling margin squeezes in a regulated environment.

Countervailing Power and Chain Stores

The countervailing power of large buyers subdues the market power of sellers, but price concessions won by large buyers in upstream markets may or may not translate into lower prices downstream as Galbraith (American capitalism: The concept of countervailing power. Houghton Mifflin, Boston, 1952, Am Econ Rev 44:1–6, 1954) once contended. This paper presents a model that formalizes certain previously neglected elements of Galbraith’s argument, and shows that upstream price concessions may lead to lower downstream prices. In this model, a large retail chain store with countervailing power plays one large supplier off against another to win lower prices. An indirect effect of these interactions is that small retailers also pay lower prices, although not as low as the chain. Finally, competition among the retailers drives retail prices lower. The retail-price-restraining effect of the chain is stronger than the effect that is produced by the entry of an additional supplier.

Colluding through suppliers

This article investigates downstream firms’ ability to collude in a repeated game of competition between supply chains. We show that downstream firms with buyer power can collude more easily in the output market if they also collude on their input supply contracts. More specifically, an implicit agreement on input supply contracts with above‐cost wholesale prices and negative fixed fees (that is, slotting fees) facilitates collusion on downstream prices. Banning information exchange about wholesale prices decreases the scope for collusion. Moreover, high downstream prices are more difficult to sustain if upstream rather than downstream firms make contract offers.

Abuse of dominance and licensing of intellectual property

We examine the impact of the licensing policies of one or more upstream owners of essential intellectual property (IP hereafter) on the variety offered by a downstream industry, as well as on consumers and social welfare. When an upstream IP monopoly increases the number of licenses, it enhances product variety, adding to consumer value, but it also intensifies downstream competition, and thus dissipates profits. As a result, the upstream IP monopoly may want to provide too many or too few licenses relative to what maximizes consumer surplus or social welfare.With multiple IP owners, royalty stacking increases aggregate licensing fees and thus tends to limit the number of licensees, which can also reduce downstream prices for consumers. We characterize the conditions under which these reductions in downstream prices and variety are beneficial to consumers or society.

Colluding through Suppliers

This article investigates downstream firms' ability to collude in a repeated game of competition between supply chains. We show that downstream firms with buyer power can collude more easily in the output market if they also collude on their input supply contracts. More specifically, an implicit agreement on input supply contracts with above-cost wholesale prices and negative fixed fees (that is, slotting fees) facilitates collusion on downstream prices. Banning slotting fees or information exchange about wholesale prices decreases the scope for collusion. Moreover, high downstream prices are more difficult to sustain if upstream rather than downstream firms make contract offers.

Congestion-Dependent Pricing and Forward Contracts for Complementary Segments of a Communication Network

Congestion-dependent pricing is a form of traffic management that ensures the efficient allocation of bandwidth between users and applications. As the unpredictability of congestion prices creates revenue uncertainty for network providers and cost uncertainty for users, it has been suggested that forward contracts could be used to manage these risks. We develop a novel game-theoretic model of a multiprovider communication network with two complementary segments and investigate whether forward contracts would be adopted by service providers. Service on the upstream segment is provided by a single Internet service provider (ISP) and priced dynamically to maximize profit, while several smaller ISPs sell connectivity on the downstream network segment, with the advance possibility of entering into forward contracts with their users for some of their capacity. We show that the equilibrium forward contracting volumes are necessarily asymmetric, with one downstream provider entering into fewer forward contracts than the other competitors, thus ensuring a high subsequent downstream price level. In practice, network providers will choose the extent of forward contracting strategically based not only on their risk tolerance, but also on the market structure in the interprovider network and their peers' actions.