Exercise Of Market Power Research Articles

Antitrust & Privacy: It's Complicated

It has become almost an article of faith that large, zero-price platforms, such as Facebook and Google, exercise market power by offering lower levels of privacy. Yet, a rigorous examination of the assumptions underlying this data-price analogy is seriously lacking. Even more important, almost no empirical work has been done in this area. This Article contributes to the debate by filling these important gaps in the literature. After presenting a theoretical examination of the relationship between privacy and competition, we provide empirical evidence on the relationship between market power and privacy. First, using data from PrivacyGrade.org, we find no relationship between privacy grades and our proxies for market concentration—the Herfindahl-Hirschman Index (HHI) and market shares based on Google Play Store categories. Second, we collected website traffic data from SimilarWeb and matched it to DuckDuckGo’s privacy ratings for sites in thirty-seven website categories. Again, the data suggest a lack of a reliable relationship between privacy ratings and market concentration. Our theoretical analysis and empirical results cast serious doubt on the notion that firms exercise market power by reducing privacy levels. Challenging conventional wisdom, our results suggest that antitrust is a poor tool to address perceived privacy problems. Instead, if markets produce less than optimal levels of privacy, it is likely due to informational problems that have no relationship with competition. Accordingly, we conclude that privacy regulation and competition policy might be complementary, but only in one direction: consumer protection designed to increase consumer access to information about firms’ privacy practices—and firms’ ability to credibly commit to these promises—could help foster competition over privacy, but the converse is not true.

Impacts of LNG Export and Market Power on Australian Electricity Market Dynamics, 2016–2019

Purpose of ReviewSupply-side shocks in concentrated energy markets provide opportunity for exercise of market power, especially in markets undergoing transition due to imperatives such as decarbonisation. In Australia, the recent linkage of international gas markets with the electricity market provides a useful example to review these dynamics.Recent FindingsUsing the intersections between gas and electricity markets in Australia, we explore how (1) supply constraints associated with commencement of Liquefied Natural Gas (LNG) exports, and (2) market concentration due to closure of old coal plant, contributed to effect a doubling of wholesale electricity prices. The recent Australian experience highlights the disproportionate impact of gas generation on electricity prices due to its price-setting role. The price impact of the tightened gas market on electricity prices has been significantly exacerbated through the exercise of market power, especially via the practise of ‘shadow pricing’. In the Australian case, the potential adverse intersectional impacts of LNG exports could have been substantially adverted with enforced domestic reservation of about 6% of LNG export volumes.SummaryCompetition issues and gaming opportunities, which have accompanied the increased market concentration that accompanied the withdrawal of capacity, have exacerbated the price impacts of the supply-side shock stemming from the evolving gas market.

Deregulation, contestability and market structure for banks in Taiwan

This is the first study to integrate structural and non-structural approaches into the evaluation of competitive conditions for banks in Taiwan. It is found that the results of structural and non-structural approaches are compatible. This study finds that market share may not have a significant impact on banks’ efficiency but may significantly impact profitability. This implies that banks are willing to sacrifice something to expand their market share, such as not enforcing minimum cost targets and wasting resources to raise an already unrealistic market share target. Furthermore, it is essential to pay attention to the observation that the degrees of competition deteriorated after the Global Financial Crisis (GFC). This argues that the transmission mechanism from market structure to performance occurring through product differentiation is able to exercise market power in banks products and earn supernormal profit, which is normally associated with dominant banks and not with collusive behaviour.

Entry Timing in the Face of Switching Costs and its Welfare Effects: Evidence from Same-Day Grocery Delivery Platforms

The online grocery market has seen significant entry over the last five years by firms with different business models. Most firms offer subscriptions, and, in the data, consumers rarely switch between them. I find that switching costs significantly affect consumer platform choice, suggesting potential for future exercise of market power. I estimate the welfare impact of the acquisition of a national grocery chain by of a major online retailer and highlight the role played by this feature of demand and by delivery cost structures. I model competition between two large platforms. The first is the major online retailer engaging in the merger. The rival is an independent platform with low entry costs. The platforms compete in a dynamic entry game, and two opposing forces influence entry timing. I find that firms chase a first-mover advantage resulting from consumer lock-in at the expense of higher entry costs, leading to significant costs of early entry. I estimate that, before the acquisition, the major online retailer had very large entry costs. The acquisition reduced this cost, posing a competitive threat to the rival. Consumer lock-in then contributed to raising the stakes of early entry for both firms, accelerating entry across new markets and generating over \$ 800 M in welfare gains to consumers due to earlier entry. Further, I find that a merger between the two platforms, resulting in a monopoly, would delay entry significantly. These results show that strategic competition in entry timing plays an important role in mergers' welfare effect.

Market power analysis in power systems using PSO based must run indices

The development of restructuring has encouraged and brought up competitive markets in power systems. However, the exercise of market power evokes monopoly into the power system and tends to decrease competitiveness. This article assesses the market power of a generating company in a power system using must run indices and proposes a method to mitigate market power. Modified must run generation, must run share (MRS) and nodal must run share indices are used to quantify the market power of generating companies. Phase shifting transformers (PST) are installed in selected lines for mitigating the market power. Particle swarm optimization is used in the determination of must run indices and optimizing the angle of Phase Shifting Transformers. IEEE 14 bus test system is used to illustrate the proposed technique. The analysis also includes the impact of contingencies. Sensitivity analysis is performed to analyze the impact of phase shifting angle variation on MRS. The results clearly quantifies the market power of a generating company and show that the market power incurred by the generating companies can be minimized by installing PST with optimum phase shift angle.

From Competition to Conspiracy: Accessing the Federal Trade Commission’s Merger Policy in the Pharmaceutical Sector

Prescription drugs safeguard Americans from numerous life-threatening maladies. Competition in pharmaceutical R&D, and for generic entry, produces essential drugs and ensures that medications are accessible and affordable. That promise is fading. There is mounting evidence that connects high market concentration and high drug prices. Price gouging for important drugs, conspiracies to fix generic drug prices, and ever more innovative schemes by branded drug manufacturers to keep generic rivals out of the market put merger control at center stage.The AAI White Paper “From Competition to Conspiracy: Accessing the Federal Trade Commission’s Merger Policy in the Pharmaceutical Sector” examines a major root of this problem—the Federal Trade Commission’s (FTC’s) policy of settling virtually all challenged horizontal pharmaceutical mergers with consent orders requiring divestitures. This stands in contrast to agency decisions to seek injunctions to stop highly concentrative, harmful mergers—arguably the most effective remedy for fully restoring competition. AAI’s macro-analysis of pharmaceutical mergers challenged by the FTC between 1994-2020 (to date) reveals that many drug makers engaged in serial mergers and/or repeatedly went to the till to purchase divestiture assets in other challenged mergers. Many of these firms were subsequently acquired by other pharmaceutical manufacturers, sometimes shortly after purchasing divestiture assets.The effect of the FTC’s policy has been the swapping of assets within a relatively small group of large and increasingly powerful firms. Just under 20% of all unique branded and generic firms that engaged in repeated mergers and acquisitions (M&A) and/or purchases of divestiture assets account for almost 45% of pharmaceutical assets “changing hands” from 1994-2020. Many of the very firms that were the most active in M&A, and as purchasers of divestiture assets, appear as defendants in private, state, and federal non-merger antitrust litigations and in federal criminal indictments. These accumulating lawsuits serve as powerful evidence that something has gone awry with merger policy in the pharmaceutical sector, leading to the exercise of market power by dominant firms and oligopolies.The FTC’s role in managing the allocation and ownership of important pharmaceutical assets through its extraordinary approach toward merger control has unduly involved it in shaping the industry. This resembles a form of “industrial planning” rather than antitrust law enforcement, which is designed to deter future anticompetitive conduct and relies on market forces to determine market structures. The FTC’s policy has also deprived the antitrust community and public of important transparency. Because no challenged merger between 1994-2020 was litigated in federal court, there is no judicial record detailing how highly concentrative mergers were likely to have survived a presumption of illegality. There is thus no way to evaluate claims that pharmaceutical mergers were likely to have delivered lower prices through claimed cost savings or consumer benefits due to improved quality and innovation.This White Paper begins with background on drug pricing and competition in the pharmaceutical supply chain. It then turns to the drug mergers themselves and the asset divestitures required in FTC consent orders. Next is an assessment of private, state, and federal antitrust cases against the companies involved in M&A and as buyers of divestiture assets. It concludes with policy recommendations on reframing competition policy in the pharmaceutical sector. The FTC, which has devoted considerable resources and expertise to understanding the pharmaceutical sector, should take the lead in reforming its own policy on merger control.Competition problems in pharmaceuticals now rise to the level a public policy concern, addressable only through a coordinated policy response, of which stronger antitrust enforcement and legislative reform should be central components. The imperative for wholesale change in the FTC’s merger policy in the pharmaceutical sector is more pressing than ever. Only robust competition among drug makers will result in the availability and affordability of drugs more generally, but also essential drug therapies and vaccines relating to the COVID-19 pandemic.

Capacity Market Mechanism Analyses: a Literature Review

This paper focuses on providing an overview of research into different capacity market mechanisms. Beginning with the idea of the energy-only market and the resulting potential concerns of the missing money problem, this survey overviews a variety of studies of different capacity mechanisms, considering issues such as market power, risk attitudes, uncertainty, and pricing rules. Papers of specific interest to particular ISOs/RTOs are also discussed. Previous studies tend to show the advantages of utilizing capacity market mechanisms in lieu of relying solely upon energy-only markets, particularly in the presence of risk-averse investors or the potential exercise of market power. The findings discussed herein indicate the continued importance of studying capacity market mechanisms, particularly as electricity markets continue to evolve with the advent of increasing levels of renewable regeneration and the potential of storage.

Strategic bidding of distributed energy resources in coupled local and central markets

This paper explores a revenue maximization problem for distributed energy resources in a local day-ahead and balancing market. The local market creates opportunities for competition among distributed energy resources, however it may also lead to exercising market power. In the day-ahead market, the strategic revenue maximization of the distributed energy resources is modelled through a bi-level optimization. The upper-level in the bi-level optimization is from the strategic distributed energy resource’s perspective and the lower-level problem is from the local market operator’s perspective. The balancing market (where there is perfect competition) is modelled by the shrinking rolling horizon approach. A wind farm with a storage system is considered as a case study of a strategic distributed energy resource to evaluate its profitability within the proposed revenue maximization problem. The revenue of the wind farm in the local market is compared with the one in a (business-as-usual) centralized market where it cannot exercise market power. Sensitivity analysis regarding the effect of changing the distribution system parameters e.g. the branch resistances and the loads, on the revenue of the wind farm and its bidding behaviour is performed. Moreover, the role of the storage system on the revenue of the wind farm is studied. Results show that an overloaded or weak distribution system will positively influence the strategic position of the wind farm. Finally, it is shown that depending on the existence of market power, a storage system can bring extra revenues for the wind farm, by hedging against its uncertain output. • Formulation of a bi-level shrinking horizon bidding strategy for DERs in local markets. • Application of the bidding strategy problem to a combined wind and storage system. • A comparison between DER revenue in the local market versus the centralized market. • Study of distribution network parameters on DER’s ability to exercise market power. • Paper shows the application of market power in the local market.

Fake News in Social Media: A Supply and Demand Approach

We introduce a model of a platform in which users encounter news of unknown veracity. Users vary in their propensity to share news and can learn the veracity of news at a cost. In turn, the production of fake news is both more sensitive to sharing rates and cheaper than its truthful counterpart. As in traditional markets, the equilibrium prevalence of fake news is determined by a demand and supply of misinformation. However, unlike in traditional markets, the exercise of market power is generally limited unless segmentation methods are employed. Combating fake news by lowering verification costs can be ineffective due to the demand for misinformation only being weakly reduced. Likewise, the use of algorithms that imperfectly filter news for users can lead to greater prevalence and diffusion of misinformation. Our findings highlight the important role of natural elasticity measures for policy evaluation.

Agroholdings and land rental markets: a spatial competition perspective

Abstract With the emergence of large, horizontally integrated farm enterprises especially in Eastern European countries, the question arises whether these agroholdings exercise market power in (local) land markets. Using a theoretical framework of spatial competition that accounts for the presence of multi-farm agroholdings, we derive equilibrium prices under alternative spatial competition settings. Based on the investigation of Ukrainian farms, we provide theoretical explanations and empirical support for farms affiliated with an agroholding possessing (ceteris paribus) more land and setting higher land rental prices compared to independent farms. The results indicate that agroholdings may act as price leaders in local land markets.

A Blockchain-Enabled Multi-Settlement Quasi-Ideal Peer-to-Peer Trading Framework

The concept of peer-to-peer (P2P) trading, or transactive energy (TE), is gaining momentum as a future grid restructure. It has the potentials to utilize distributed energy resources (DERs), proactive demand side management (DSM), and the infusion in information and communication technologies (e.g., blockchain and Internet of Things (IoT)) for promoting the technical and economic efficiency of the system in its entirety. An efficient market framework is vital for the successful and sustainable implementation of such a concept. This article proposes a P2P energy trading framework enabled by blockchain. It consolidates bilateral contracts, an electronic-commerce platform, a double-auction Vickrey-Clarke-Groves (VCG) mechanism, and trading functionalities with the main grid. Through these multi-layer mechanisms, various trading preferences and attributes of electricity generation and/or consumption are accommodated. Meanwhile, the VCG mechanism eliminates any potential for market power exercise via incentivizing truthful bidding of participants. Different remedies are proposed to overcome the drawback of VCG, i.e., the lack of balanced-budget property. Accordingly, the proposed trading framework is described as multi-settlement and quasi-ideal. Case studies are conducted to analyze and evaluate the proposed trading framework and demonstrate the effectiveness of the proposed remedies in handling probable market deficiencies.

Competition Conditions and Market Power in the Mexican Commercial Banking Market. A Microeconomic Theoretical Approach

This study assesses, from a microeconomic theoretical perspective, competition conditions and market power in the Mexican commercial banking market. Our econometric estimations, using time series, indicate a low price elasticity of demand for bank credit, which, in combination with high market shares and according to the Lerner index, indicates that major banks have elevated market power; the profferedvalues of the Lerner index range between (0.11) and (0.68) for the seven leading banks, (0.00) for small banks, and (0.34) for the weighted average of the entire market. On the other hand, the estimated competition indicators confirm the exercise of market power and the lack of a competitive market, during at least the last decade, resulting in a large fraction of unserved economic agents by commercial banks.

Joint Oligopsony‐Oligopoly Power in Food Processing Industries: Application to the us Broiler Industry

Food manufacturers and retailers mediate transactions between farm product markets and finished product markets for a large number of agricultural products. In such settings, producers at the intermediary stages of the supply chain have the potential to exercise market power jointly over agricultural producers in the upstream farm product market and over consumers in the downstream market for finished goods. In this paper, we examine settings in which food processors jointly exercise oligopsony power over farmers in the upstream market and oligopoly power over consumers in the downstream market. We demonstrate how forward contracts in the procurement market affect equilibrium prices in the downstream consumer market, allowing food processors to raise margins by leveraging oligopsony power. We apply our model to the US broiler industry and show that tournament contracts for live chicken procurement can be employed as an instrument to extend spatial oligopsony power in the upstream procurement market to soften price competition in the downstream processed goods market.

A Structural Characterization of Market Power in Electric Power Networks

We consider a market in which capacity-constrained generators compete in scalar-parameterized supply functions to serve an inelastic demand spread throughout a transmission constrained power network. The market clears according to a locational marginal pricing mechanism, in which the independent system operator (ISO) determines the generators' production quantities to minimize the revealed cost of meeting demand, while ensuring that network transmission and generator capacity constraints are met. Under the stylizing assumption that both the ISO and generators choose their strategies simultaneously, we establish the existence of Nash equilibria for the underlying market, and derive an upper bound on the allocative efficiency loss at Nash equilibrium relative to the socially optimal level. We also characterize an upper bound on the markup of locational marginal prices at Nash equilibrium above their perfectly competitive levels. Of particular relevance to ex ante market power monitoring, these bounds reveal the role of certain market structures---specifically, the \emph{market share} and \emph{residual supply index} of a producer---in predicting the degree to which that producer is able to exercise market power to influence the market outcome to its advantage. Finally, restricting our attention to the simpler setting of a two-node power network, we provide a characterization of market structures under which a Braess-like paradox occurs due to the exercise of market power---that is to say, we provide a necessary and sufficient condition on market structure under which the strengthening of the network's transmission line capacity results in the (counterintuitive) increase in the total cost of generation at Nash equilibrium.

Imperfect Competition in Electricity Markets with Renewable Generation: The Role of Renewable Compensation Policies

We analyze the effects of commonly employed renewable compensation policies on firm behavior in an imperfectly competitive market. We consider a model where firms compete for renewable capacity in an auction prior to choosing their forward positions and competing in wholesale markets. We focus on fixed and premium-priced feed-in tariff (FIT) compensation policies. We demonstrate that compensation policies impact both the types of resources that win the auction and subsequent competition. While firms have stronger incentives to exercise market power under a premium-priced FIT, they also have increased incentives to sign pro-competitive forward contracts. In net firms have stronger incentives to exercise market power under the premium-priced policy. We find conditions under which renewable resources that are more correlated with market demand are procured under a premium-priced design, while the opposite occurs under a fixed-priced policy. If the cost efficiencies associated with the “more valuable” renewable resources are sufficiently large, then welfare is higher under the premium-priced policy despite the stronger market power incentives in the wholesale market.

Dynamic Costs and Market Power: Rooftop Solar Penetration in Western Australia

Production from zero marginal cost solar panels reduces the amount of energy produced by fossil-fuel-fired power plants during the day. Yet, we find that the operating profits earned by fossil-fuel plants in Western Australia increased by 15% coincident with the doubling of rooftop solar capacity from 2015-2018 to world-leading solar penetration levels. We estimate that the fossil-fuel plants displaced by solar production during the day must incur substantial start-up and ramping costs to effectively compete at sunset. Results from both a regression framework and least-cost simulations indicate that, due to this reduction in effective competition, increases in solar capacity result in increases in the exercise of market power, operating profits and wholesale prices in the evening. Our findings highlight the importance of designing electricity markets that properly compensate flexibility in production and consumption.

Offer Price Information and the Exercise of Market Power: The Effect of the Publication of the Historical Trading Report on Competition in the Alberta Electricity Market

This paper considers the effect of the publication of offer price information on unilateral market power in Alberta’s electricity market. This market is an hourly auction characterized by repeated interaction among a small number of producers, common knowledge of costs and production capabilities, and price inelastic demand. For the period July 13, 2000 to May 18, 2017, offer prices for each hour were published by the market operator, the Alberta Electric System Operator (AESO), in the Historical Trading Report (HTR) after the end of the hour. Using counter-factual analysis from 2010 to 2015 (52,584 hours), the paper finds that the effect of offer price changes after the HTR publication was to raise the average hourly price for electricity in Alberta by $2.48/MWh or about 4.2%, which raised the cost of electricity for Alberta consumers during the six-year period by approximately $1.14 billion. Based on an earlier version of this paper, the AESO was instructed by Alberta’s utilities regulator to cease publication of the HTR.

Forward Contracts, Market Structure and the Welfare Effects of Mergers

We examine how forward contracts affect economic outcomes under generalized market structures. In the model, forward contracts discipline the exercise of market power by making profit less sensitive to changes in output. This impact is greatest in markets with intermediate levels of concentration. Mergers reduce the use of forward contracts in equilibrium and, in markets that are sufficiently concentrated, this amplifies the adverse effects on consumer surplus. Additional analyses of merger profitability and collusion are provided. Throughout, we illustrate and extend the theoretical results using Monte Carlo simulations. We discuss the practical relevance for antitrust enforcement.

Joint Response to the House Judiciary Committee on the State of Antitrust Law and Implications for Protecting Competition in Digital Markets

Economic research establishes that market power is now a serious problem. Growing market power harms consumers and workers, slows innovation, and limits productivity growth. Market power is on the rise in a number of major industries, including, for example, airlines, brewing, and hospitals, where multiple horizontal mergers that were allowed to proceed without antitrust challenge have markedly increased concentration in important markets and facilitated the exercise of market power. Exclusionary conduct by dominant companies that stifles competition from actual and potential rivals — including nascent rivals with capabilities for challenging a dominant firm’s market power and firms with competing R&D efforts — impairs what is often the most important economic force creating competitive pressure for dominant firms. This concern exists in digital marketplaces. Platforms are often insulated from platform competition to a substantial extent by substantial scale economies in supply and demand (network effects) combined with customer switching costs. Courts have contributed to increased monopoly power through decisions that have weakened the prohibitions against anticompetitive exclusionary conduct and anticompetitive mergers. The antitrust laws, as interpreted and enforced today, are inadequate to confront and deter growing market power in the U.S. economy and unnecessarily limit the ability of antitrust enforcers to address anticompetitive conduct. Many key antitrust precedents — particularly those precedents governing exclusionary conduct — rely on unsound economic theories or unsupported empirical claims about the competitive effects of certain practices. In part for this reason, the antitrust rules constructed by the courts reflect a systematically skewed error cost balance: they are too concerned to avoid both chilling procompetitive conduct and the high costs of litigation, and too dismissive of the costs of failing to deter harmful conduct. Excessively permissive precedents and unsound or unsupported economic claims have, in turn, encouraged overly cautious enforcement policies and overly demanding proof requirements and have discouraged government enforcers and private plaintiffs from bringing meritorious exclusionary conduct cases. The statement discusses a number of legal rules that are unsupported by or inconsistent with sound economic research that have contributed to overly permissive rules. The signatories to this letter strongly believe that antitrust enforcement has become too lax, in large part because of the courts and that Congress must act to correct this problem. The statement suggests a number of reforms could be considered. We do not collectively or unanimously endorse any of these, though some of us have done so in other contexts. We do believe that Congress has a historic opportunity to identify adverse trends in judicial interpretation of the antitrust and correct problems—not just by overriding damaging precedents, but also by reshaping the antitrust laws more broadly to enhance deterrence of anticompetitive conduct.

Two Sides to the Story: An Economic Critique of Ohio vs. Amex

The attractiveness of a platform to one side depends on the number of users on the other side. Platforms use pricing strategies — i.e., they offer lower/zero prices to one side and charge users on the other side — to attract users on one side. Successful platforms tend to grow because of network effects. While traditional antitrust would have viewed conduct by “dominant” entities stringently, recent antitrust enforcement has considered the economics behind such platforms and netted the harm to one side against the benefits to the other side when evaluating conduct. We explore whether this stylised view of the economics of platform markets has come at the expense of effects-based analysis of alleged anti-competitive conduct. Specifically, we analyse the Amex vs. Ohio case which dealt with whether anti-steering provisions instituted by credit card companies are anti-competitive. The US Supreme Court evaluated the anti-steering provisions in the context of a two-sided platform and ruled that Amex charged merchants higher fees to provide a more robust rewards program to its cardholders and “evidence of price increases on one side of a two-sided platform cannot be construed as an anticompetitive exercise of market power.” Effects-based analysis of Amex’s conduct would reveal that its outcome is the stifling of competition in terms of fees charged between credit card networks for usage by merchants. We contend that the US Supreme Court’s decision was akin to a template-based application of economic theory.