Horizontal Market Power Research Articles

Investigating market power in the Belgian pork production chain

Belgian pork production has faced stagnating prices for decades. It remains unclear whether excessive market power from slaughterhouses or meat retailers has played a role in this trend. While market power studies can reveal some of the market dynamics in this setting, this type of research has not yet been applied to the Belgian pork market. The present paper investigates oligopolies and oligopsonies in the pork production sector. We build a new model that focuses on market power dynamics in the market for live pigs and distinguishes horizontal and vertical market power parameters, both for pig farmers and for slaughterhouses. The results follow from an empirical application using unique slaughterhouse data for 2001–2015. The results indicate that the farmers benefit from a significant power advantage in the live pig market, when very modest price demands are taken as a reference. The final market price of live pigs approaches the price requested by the farmers. On the other hand, the measured vertical market power also suggests that a pig farmer does not receive the (modest) full-wage-based salary. The market power of the slaughterhouses is also limited. Market power as a result of collusion—that is, horizontal market power—is present, but is not strong. However, there are significant differences between the slaughterhouses in terms of mark-up on the input prices. These differences reflect differences in company strategy, and this diversity further reduces the possibility to create sector-wide collusive behaviour.

Impediments to the Ability of Canadian Food‐Processing Firms to Compete: Evidence From a Survey on Innovation

ABSTRACTFactors that impede Canadian food‐processing firms’ ability to compete in domestic and international markets are explored. Business micro‐data were obtained from the Survey on Innovation in the Food Processing Industry in 2004 (n = 809). A higher Canadian dollar against the U.S. dollar was judged to be the most severe of the 10 impediments to the ability of Canadian food processors to compete. Two broader categories of the 10 impediments emerged from a principal component analysis. One category of the impediments relates to private and public standards, while the other relates to vertical and horizontal market power issues. The severity of these impediments is not significantly different among the different size classes of food processors. Subsequent clustering procedures based on these impediments found that the food processors in one cluster were more constrained by all these impediments than their counterparts in the other cluster. Establishment characteristics, such as food subsector classification, and firm strategies, such as export orientation and engagement in R&D activities, were systematically associated with a firm's likelihood of being in the cluster that perceived the impediments to be more severe. Exporting firms are more likely than other firms to perceive each one of the impediments as a constraint. [EconLit Subject Matter Areas: D220; L200; L660].

Consolidation and ownership trends of nonfederal hydropower generating assets, 1980–2003

This paper analyzes ownership trends of nonfederal hydropower generating assets from 1980–2003. Previous research has shown that the overall electricity industry is unique in that, because of the extreme inelasticity of demand for power, even small sectors of the industry have the potential to exhibit substantial price setting behavior. Hydropower assets especially, with their unique ability to “shift” electricity between time periods, have the potential to be used to exhibit horizontal market power. For this reason, an analysis of consolidation trends of hydropower assets is important. Our empirical results show that from 1980–2003, while transfer rates of nonfederal hydropower dams have been substantial (at 46%), there is little evidence of consolidation leading to the potential exercise of horizontal market power as a result of this. A detailed look at the data reveals that it is smaller dams, with less power production capacity, that have tended to be transferred more than other dams over this time period, and that it is private industrial owners and private utilities that are selling dams to private non-utility generation companies. This suggests that a realignment of hydropower assets, most likely in response to state-and federal-level regulatory initiatives, is taking place, but that increasing consolidation along with this is currently not a threat.

Two-settlement electricity markets with price caps and Cournot generation firms

We compare two alternative mechanisms for capping prices in two-settlement electricity markets. With sufficient lead time, forward market prices are implicitly capped by competitive pressure of potential entry that will occur when forward prices rise above some backstop price. Another more direct approach is to cap spot prices through a regulatory intervention. In this paper we explore the implications of these two alternative mechanisms in a two-settlement Cournot equilibrium framework. We formulate the market equilibrium as a stochastic equilibrium problem with equilibrium constraints (EPEC) capturing congestion effects, probabilistic contingencies and horizontal market power. As an illustrative test case, we use the 53-bus Belgian electricity network with representative generator costs but hypothetical demand and ownership structure. Compared to a price-uncapped two-settlement system, a forward cap increases firms’ incentives for forward contracting, whereas a spot cap reduces such incentives. Moreover, in both cases, more forward contracts are committed as the generation resource ownership structure becomes more diversified.

Cournot equilibria in two-settlement electricity markets with system contingencies

We study Nash equilibrium in two-settlement competitive electricity markets with horizontal market power, flow congestion, demand uncertainties and probabilistic system contingencies. The equilibrium is formulated as a stochastic Equilibrium Problem with Equilibrium Constraints (EPEC) in which each firm solves a stochastic Mathematical Programme with Equilibrium Constraints (MPEC). We assume a no-arbitrage relationship between the forward prices and the spot prices. We find that, with two settlements, the generation firms have incentives to commit forward contracts, which increase social surplus and decrease spot energy prices. Furthermore, these effects are amplified when the markets become less concentrated.

05/01578 Beyond market shares and cost-plus pricing: Designing a horizontal market power mitigation framework for today's electricity markets

05/01578 Beyond market shares and cost-plus pricing: Designing a horizontal market power mitigation framework for today's electricity markets

Beyond Market Shares and Cost-Plus Pricing: Designing a Horizontal Market Power Mitigation Framework for Today's Electricity Markets

Without proper market definition, any diagnostic tests for market power and market pricing safeguards could create more long-term harm than good. FERC needs to supplant its default market definition approach with a prescribed set of market definition techniques, then allow stakeholders to implement these techniques to define the relevant markets in which they participate.

Deregulation in the Electric Utility Industry: Excess Capacity and the Transition to a Long‐Run Competitive Market

ABSTRACT Existing analyses of electricity deregulation have focused on situations where horizontal market power is present. This paper instead evaluates a market where a competitive outcome is more likely. Competitive market supply and demand curves for electricity have been simulated for a twenty‐state region. These simulated supply and demand curves are used to predict short‐run and long‐run prices for electric power. Many consumers will see a drop in the portion of their electric bills accounted for by the current economic costs of supplying them with electricity. Adjustments to consumers’ bills for stranded cost recovery will be determined by legislators and regulators on a state‐by‐state and utility‐by‐utility basis. Because of excess capacity that currently exists in the industry, the decline in prices will be greater in the short run than in the long run.

The electricity market game

This paper examines the effects of imperfect competition in unregulated electricity markets from a general equilibrium perspective, and demonstrates that horizontal market power can explain both the large peak-period price spikes observed recently in California and elsewhere, and the marked reduction in addition to capacity that have also occurred during the transition to competitive markets.

The Design of Tests for Horizontal Market Power in Market-Based Rate Proceedings

By incorporating demand characteristics, transmission limitations, and a behavioral model of the decision to exercise market power, FERC’s SMA Order is an improvement over the previous hub-and-spoke test. However, it appears that the simple mechanical application of the SMA is unlikely to yield satisfactory results.

Will Cross-Ownership Re-Establish Market Power in the Nordic Power Market?

The integration of the power markets in Norway and Sweden in 1996 significantly constrained the major power companies’ ability to exercise market power within their national borders. In recent years, however, mergers and reciprocal acquisition of shares have reduced the number of independent players on the Norwegian-Swedish power market. The aim of this paper is to explore to what extent increasing cross-ownership among the major power companies in Norway and Sweden might re-establish the market power that was lost when the two national power markets were integrated. The analysis is based on a numerical model, assuming Cournot quantity setting behavior, of the Norwegian-Swedish power market. The simulation results suggest that partial ownership relations between generators tend to increase horizontal market power and thus the market price of electricity.

Market Power in Electricity Markets: Beyond Concentration Measures

The wave of electricity market restructuring both within the United States and abroad has brought the issue of horizontal market power to the forefront of energy policy. Traditionally, estimation and prediction of market power has relied heavily on concentration measures. In this paper, we discuss the weaknesses of concentration measures as a viable measure of market power in the electricity industry, and we propose an alternative method based oil market simulations that take advantage of existing plant level data. We discuss results from previous studies the authors have performed, and present new results that allow for the detection of threshold demand levels where market power is likely to be a problem. In addition, we analyze the impact of that recent divestitures in the California electricity market will have on estimated market power. We close with a discussion of the policy implications of the results.

The Analytical Approach to Measuring Horizontal Market Power in Electric Utility Markets: A Historical Perspective

Market power remains an important issue in electricity markets. FERC has taken important steps to clarify the process it uses in analyzing market power in merger, market-pricing, and ISO settings. Further change may be expected, although the policy goals remain the same: ensuring that consumer interests are protected and that competition may thrive.

A Market Power Model with Strategic Interaction in Electricity Networks

When transmission constraints limit the flow of power in an electric network, there are likely to be strong interaction effects across different parts of the system. A model of imperfect competition with strategic interactions in an electricity transmission network illustrates a possible exercise of market power that differs from the usual analysis of imperfect competition in more familiar product markets. Large firms could exercise horizontal market power by increasing their own production, lowering some prices, and exploiting the necessary feasibility constraints in the network to foreclose competition from others. This behavior depends on the special properties of electric networks, and reinforces the need for market analysis with more realistic network models.

Market power and strategic interaction in electricity networks

Special conditions in electric networks complicate the analysis of the geographic scope of the horizontal market power. Unlike the conventional setting where a firm exercises market power by restricting its own production, there could be situations in constraining electrical networks where a generator would exercise market power by increasing its production in order to block transmission of a disproportionate amount of competing generation. A model with a set of Cournot firms, a collection of competitive fringe participants and an explicit representation of the electrical network illustrates the possible strategic interactions.

Double Marginalization and Vertical Integration: New Lessons from Extensions of the Classic Case

Although firms have a variety of motives for merger and other restrictions, a traditional issue, which permeates much of the literature on integration, is how the existence of horizontal market power in one or more vertically-related industries creates motives for them to vertically integrate [13, 187-89]. The classic case is double marginalization. Suppose that an upstream industry sells an intermediate good to a downstream industry, which in turn produces a final product that it sells to consumers. Then, because the upstream and downstream industries independently engage in noncompetitive pricing, the firms in each industry only see the effect of their output restriction on their own profits, and do not see that their output restriction also affects the profits of the firms in the other industry. This myopia creates a vertical externality that integration would internalize. In the simplest case, when the products are homogeneous and final production has fixed input proportions, the conventional wisdom about double marginalization is that .. the integrated industry makes more profit than the nonintegrated industry, and the consumer price is lower in the case of the integrated industry. These two properties are very general.. . [15, 175]. The implication is that integration of two noncompetitive industries would not be anticompetitive, contradicting the traditional antitrust hostility toward integration. In fact, what is crucial for double marginalization to have any relevance for antitrust policy is the conjunction of the welfare and profitability properties. No matter how beneficial or damaging a particular behavior might be, if that behavior is unprofitable it has little relevance for antitrust policy, because it either would not occur or would be self-correcting. Rational public policy would not be concerned about what firms have no incentive to do. Consequently, profitability is a crucial methodological requirement of models that analyze integration.

Exclusive Dealing Contracts in a Successive Duopoly with Side Payments

Exclusive dealing is a way of securing partial vertical integration through contract. A exclusive dealing contract (EDC) is said to exist when a manufacturer (upstream) offers a sales contract to a buyer (downstream) conditioned upon the agreement that the buyer will not purchase goods from the manufacturer's competitor. Thus, with a downward EDC, the dealer is tied to the supplier. Alternatively, an upward exclusive dealing contract exists when the buyer wishes to obtain an exclusive supply from the manufacturer so that its downstream rivals are foreclosed from that part of the upstream market.' Two possible reasons have been suggested as to why an exclusive dealing contract may exist: 1) there may be a possibility of gaining horizontal market power through vertical market foreclosure, 2) an exclusive dealing contract may create superior efficiency. It is apparent that these two conflicting views support completely opposite antitrust policies regarding exclusive dealings. In order to better understand the issue, let us review some of these opposing viewpoints. A proponent of the original (now discredited) market foreclosure theory, Phillip Areeda [ 1 ], claimed that EDCs are predatory because they unfairly exclude rival firms from obtaining that part of the market. Areeda's viewpoint came under intense attack by Robert Bork [2] who suggested that there exists no market power creation with EDCs, but only superior efficiencies. Bork argues that an EDC simply results in a realignment of the shipping patterns between upstream firms and downstream firms, and induces no welfare loss for consumers. Furthermore, even if there were a predatory intent behind EDCs, it would not be effective, since the excluded rival firms may contract with the remaining firms to contest the predatory tactic. Because in Bork's view the excluded firm has this counter-strategy available, unfair exclusion is no longer a valid rationale for accusing EDCs of being predatory. However, implicit in Bork's argument is the assumption that the counter-contracting by the excluded firm would somehow neutralize the adverse effect that market foreclosure may have on consumer welfare. This assumption is valid, if and only if, the

Tying Arrangements and Reciprocity: A Lawyer's Comment on Professor Ferguson's Analysis

Perhaps in no area save the arena of mental responsibility in the criminal law does the average attorney find himself confronted with the rigors of such an explosive and often self-contradictory discipline as in the field of antitrust law. Recent litigation in the federal courts and before the Federal Trade Commission signals the opening of a fresh assault on the business community by a concerned government and public. Having survived the enthusiasm of such trustbusters as Teddy Roosevelt and Thurman Arnold, our business giants have been forced to seek more acceptable means of exerting their market power so as to maximize profits within the framework of the existing antitrust laws. If provisions written into sales contracts by firms with weighty horizontal market power provide an example of the more sophisticated approach adopted by the business world, the reaction of the modern trustbusters and ultimately of the Supreme Court demonstrates an equally ingenious application of antitrust doctrine.1 Professor Ferguson has suggested that the antitrust decisions of the courts reflect social policy weighed in equal measure with economic factors in arriving at a particular determination. It is the purpose of this comment to suggest that such a phenomenon is not new and indeed that such a result is the natural and unavoidable consequence of our system, which forces upon bench and bar the adversary roles in all fields of socio-economic decision. The Ferguson article propounds an economic analysis of two of the more modern business practices that have come under attack by the Government, the so-called tying contract and the practice of reciprocity in buying and selling.