Local Monopoly Power Research Articles

The property rights theory of production networks

This paper investigates the formation of production and trading networks in economies with general interdependencies and complex property rights. We argue that the right to exclude, a core tenet of property, grants asset owners local monopoly power that is amplified by an economy's endogenous production network. Our analysis generalizes the exclusion core, a cooperative solution concept based on the right to exclude, to markets with production. We identify sufficient (and essentially necessary) conditions for the nonemptiness of the exclusion core. Multisourcing and a bias toward shorter supply chains emerge in exclusion‐core outcomes. As a methodological contribution, we generalize the top trading cycles algorithm to a production economy and we show that it identifies outcomes in an economy's exclusion core.

Bertrand–Edgeworth competition with substantial horizontal product differentiation

Since Kreps and Scheinkman’s seminal article (1983) a large number of papers have analyzed capacity constraints’ potential to relax price competition. However, the majority of the ensuing literature has assumed that products are either perfect or very close substitutes. Therefore very little is known about the interaction between capacity constraints and local monopoly power. The aim of the present paper is to shed light on this question using a standard Hotelling setup. The high level of product differentiation results in a variety of equilibrium firm behavior and it generates at least one pure-strategy equilibrium for any capacity level.

The Property Rights Theory of Production Networks

This paper investigates the formation of production and trading networks in an economy with general interdependencies and complex property rights. We argue that the right to exclude, a core tenet of property, grants asset owners local monopoly power that is both amplified and constrained by an economy's endogenous production network. Supply multisourcing and a bias toward shorter supply chains emerge in equilibrium. As a methodological contribution, we generalize the top trading cycles algorithm to a production economy. Applications of the framework include the study of vertical integration and government intervention in supply chains.

Search and Equilibrium Prices: Theory and Evidence from Retail Diesel

We examine the relation between consumer search and equilibrium prices when collusion in endogenously determined. We develop a theoretical model and show that average price is a U-shaped function of the measure of searchers: prices are highest when there are no searchers (local monopoly power) or when there are many searchers (and sellers opt to collude). We test this prediction with diesel retail prices in Dortmund, Germany. We estimate a U-shaped relation with statistical precision and a Euro .025/liter price variation due to the variation in the measure of searchers.

Private road supply in networks with heterogeneous users

We study different mixes of private and public supply of roads in a network with bottleneck congestion and heterogeneous users. There are two parallel links for one origin and destination pair and two groups of travellers, where the group with the higher value of time also has higher schedule delay values. Previous scholars argued that as users become more heterogeneous, they benefit more from product differentiation, making private supply of roads more efficient. However, we find that local monopoly power might also increase if there is a ‘separating equilibrium’, which is an equilibrium where at least one group only uses one private road due to the different combinations of toll and congestion of the two roads. The private road can thus increase its toll without worrying about the competition from the other road for this group: it has a local monopoly over them. This lowers the efficiency of private supply. The problem is especially severe with flat tolls, which are constant over the peak. With fine tolls – which vary continuously over the day – there tends to be a pooling equilibrium – where both types use both roads – and competition remains intense. Flat tolling is also worse for users than fine tolling, as it has higher generalized prices.

Competitive Search with Ex-post Opportunism

Abstract:We consider a frictional market where an element of the terms of trade (price or quantity) is posted ex-ante (before the matching process) while the other is determined ex-post. By doing so, sellers can exploit their local monopoly power by adjusting prices or quantities once the local demand is realized. We find that when sellers can adjust quantities ex-post, there exists a unique symmetric equilibrium where an increase in the buyer-seller ratio leads to higher quantities and prices. When buyers instead can choose quantities ex-post, a higher buyer-seller ratio leads to higher prices but lower traded quantities. These equilibrium allocations are generically constrained inefficient in both intensive and extensive margins. When sellers post ex-ante quantities and adjust prices ex-post, a symmetric equilibrium exists where buyers obtain no surplus from trade. This equilibrium allocation is not constrained efficient either. If buyers choose prices ex-post, there is no trade in equilibrium when entry is costly.

Private Road Supply in Networks with Heterogeneous Users

We study different mixes of private and public supply of roads in a network with bottleneck congestion and heterogeneous users. There are two parallel links for one origin and destination pair and two groups of travellers, where the group with a higher value of time also has higher schedule delay value. Previous scholars argued that as users become more heterogeneous, they benefit more from product differentiation, making private supply of roads more efficient. However, we find that local monopoly power might also increase. This may occur if one group prefers one road over the other as the two offer different combinations of toll and travel delay. The private supplier can thus increase the toll on its link without worrying that the targeted travellers will move to the other link. This can undermine the efficiency of private supply of roads. The problem is especially severe with flat tolls. With queue-eliminating tolls, both types tend to travel on both roads, and competition remains relatively intense. Flat tolling is always worse for users than time-variant tolling as it has the higher generalized prices, and it also leads to a lower welfare.

The Domestic and International Effects of Interstate U.S. Banking

This paper studies the domestic and international effects of national bank market integration in a two-country, dynamic, stochastic, general equilibrium model with endogenous producer entry. Integration of banking across localities reduces the degree of local monopoly power of financial intermediaries. The economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account deficit. The foreign economy experiences a long-run increase in GDP and consumption. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Bank market integration thus contributes to moderation of firm-level and aggregate output volatility. In turn, trade and financial ties allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. These results are consistent with features of U.S. and international fluctuations after the United States began its transition to interstate banking in the late 1970s.

The domestic and international effects of interstate U.S. banking

This paper studies the domestic and international effects of national bank market integration in a two-country, dynamic, stochastic, general equilibrium model with endogenous producer entry. Integration of banking across localities reduces the degree of local monopoly power of financial intermediaries. The economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account deficit. The foreign economy experiences a long-run increase in GDP and consumption. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Bank market integration thus contributes to moderation of firm-level and aggregate output volatility. In turn, trade and financial ties allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. These results are consistent with features of U.S. and international fluctuations after the United States began its transition to interstate banking in the late 1970s.

The Domestic and International Effects of Interstate U.S. Banking

This paper studies the domestic and international effects of national bank market integration in a two-country, dynamic, stochastic, general equilibrium model with endogenous producer entry. Integration of banking across localities reduces the degree of local monopoly power of financial intermediaries. The economy that implements this form of deregulation experiences increased producer entry, real exchange rate appreciation, and a current account deficit. The foreign economy experiences a long-run increase in GDP and consumption. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Bank market integration thus contributes to moderation of firm-level and aggregate output volatility. In turn, trade and financial ties allow also the foreign economy to enjoy lower GDP volatility in most scenarios we consider. These results are consistent with features of U.S. and international fluctuations after the United States began its transition to interstate banking in the late 1970s.

The impact of airport competition on technical efficiency: A stochastic frontier analysis applied to Italian airport

We investigate how the intensity of competition among airports affects their technical efficiency by computing airports’ markets on the basis of a potential demand approach. We find that the intensity of competition has a negative impact on airports’ efficiency in Italy from 2005 to 2008. This implies that airports belonging to a local air transportation system where competition is strong exploit their inputs less intensively than do airports with local monopoly power. Further, we find that public airports are more efficient than private and mixed ones. Hence, policy makers should provide incentives to implement airports’ specialization in local systems where competition is strong and monitor the inputs’ utilization rate even when private investors are involved.

A Model of State Infrastructure with Decentralized Public Agents: Theory and Evidence

The imperative of the state, irrespective of its organization, is to provide law and order, contract enforcement, and property rights. The government provides the foundation for markets to function and for society to prosper. A common thread in any government is that, for a given society, the state holds a monopoly over most of its services. Although the state may choose not to exploit this market power, the public agents that represent the state within the aggregate production process, necessarily will. The following paper presents a macroeconomic framework that explicitly considers the local monopoly power of public agents. In the context of a representative agent model, I consider a private sector production function versus a public sector production function in which both sectors compete over labor and capital. Estimates are made of the productivity of private versus public capital, of private versus public labor, and of public infrastructure within the private sector production function. The theoretical implications of decentralized public agents are then analyzed within an endogenous growth framework. The results suggest that the elasticity of public infrastructure is significantly lower than previous estimates. They also confirm that the elasticity of private infrastructure is country specific. The theoretical results suggest that decentralization of public agents which, intuitively is greater in less developed countries than industrialized ones, is associated with steeper growth paths that lead to lower steady state capital labor ratios and per capita consumption levels. This implies that shocks to less developed countries have more dramatic effects but shorter life spans than shocks to industrialized countries, or more simply, business cycles in developing countries are shorter but more volatile.

Information, Nonexcludability, and Financial Market Structure

We study the determinants of market structure in financial intermediation markets when property rights over information are weak. We show that incentives to gather information to screen firms can be preserved in decentralized markets with more than one intermediary. Local monopoly power is sustained by an aggregate oligopolistic market structure, where intermediaries voluntarily refrain from free riding. We find that this market structure is robust to entry and does not change with market size. We apply our theory to two markets--investment banking and venture capital--and use it to organize and interpret the evidence. Copyright 2000 by University of Chicago Press.

L'économique politique simplifiée du « mammouth »

We propose an exploratory model of the contractual relationships of Universities and the State. We more particularly consider the case of a University with local monopoly power, which grants a « professional » degree, and facing identical students. The University and the Ministery of Higher Education are linked by an agency relationship characterized by a moral hazard problem : the Principal does not observe the effort expanded by the teachers to improve teaching quality. The academic effort variable is assumed to affect both the demand for studies and the rate of employment of students. We show that the system used in France to compute the amounts of public financing of Universities induces perverse incentives and can be held responsible for some majore inefficiencies (in particular the process known as « screening by means of failure »). We propose a reform in which the amount of public funding would depend on the number of students who graduate and find a job.

Local governments' monopoly power and local tax reform: Theory and evidence from the U.K.

This paper hypothesises the existence of several sources of monopoly power for local governments when the system of local taxation is reformed, by central government. In particular we argue that information asymmetries between tax-payers and (central and local) government at the time of reform provide opportunities for local politicians to set tax levels which differ from those expected in a full information setting. We predict that, compared to pre-reform tax levels, local tax levels post-reform will differ according to four local government characteristics: (i) the size of the seat majority of the ruling local party; (ii) whether the party controlling local government is the same as, or is different from, the ruling party of central government; (iii) whether the local government structure has one or two ‘tiers’ and whether the same party controls both ‘tiers’; and (iv) the degree of indebtedness of the local authority. Testing the model on the U.K. local tax reform of 1990, we find strong evidence consistent with the hypothesis that inter-authority differences in local tax levels reflect differences in the degree of local political monopoly power resulting from information asymmetries. This monopoly power appears to have been used generally, but not exclusively, to raise tax levels.

Product Variety and Firm Agglomeration

For the purpose of explaining interindustry variation in the geographic distribution of firms, we explore the impact of product heterogeneity on the incentives for firms to cluster in the presence of a ubiquitous periphery of stand-alone firms. Our analysis revolves around two counteracting forces. Greater product heterogeneity increases consumer search, which raises the amount of shopping at a cluster. Since this results in greater demand for a firm that joins the cluster, this effect increases the incentive to cluster. However, greater product heterogeneity gives stand-alone firms more local monopoly power. Since this raises their price-cost margins, this effect increases the incentive for a firm to stand alone. Our analysis shows that the former effect typically dominates, so that greater firm agglomeration is associated with industries characterized by greater product heterogeneity.

Local Monopsony, Free Riding, and Antitrust Policy

This paper models the development of market structure in industries which are characterized by upstream economies of scale in the distribution of differentiated products to retail firms having local monopoly power within separate geographic areas. Examples are cable television and other mass media. Local retailers have an incentive to exert monopsony power against sellers because of the divergence between average and marginal costs of distributing inputs from upstream. The retailers can increase their ability to exert monopsony power by forming coalitions (that is, chains) across markets. Such coalitions may force input price below the seller's average cost, thus free riding on the level of product variety supported by other retail firms. Myopic input price setting by separate retailer coalitions with monopsony power may reduce product variety below industry profit maximizing levels, suggesting that vertical integrations and cartels or other forms of industry-wide cooperative behavior are means to control the level of product variety. Such behavior may increase welfare by restoring the level of product variety toward its socially optimum level. Antitrust applications to the cable television, motion picture, and newspaper industries are discussed.

Product Portfolios and the Introduction of New Products: An Example from the Insecticide Industry

This article explores how the introduction of new products by multiproduct firms might be affected by existing goods in each firm's portfolio. A logit analysis is conducted to estimate the effects of local monopoly power, cost advantages, and learning. Characteristics theory is used to determine whether the addition of a new product by a firm's existing portfolio creates the potential for local monopoly power. While the chemical similarity of products has the largest effect, results nonetheless indicate the empirical significance of potential monopoly power in influencing product introductions by multiproduct firms.

A model of vertical integration and economies of scale in information product distribution

The author investigates theoretical conditions under which vertical integration between a retailer (such as a cable television system, newspaper, or movie theater) with local monopoly power and the...

Competition in the UK National Health Service: Mission impossible?

Despite the dominant ideology of the 1980s being libertarian, pragmatism triumphed and, despite several attempts to privatise the UK National Health Service, the Thatcherite reforms maintained public finance and sought to create competition in the supply of health care. Even this partial reform was radical and has led to major changes in structure and process. However, the Government has refused to evaluate both the cost and the outcome of the reforms. Furthermore, with minimal definition of how the ‘internal market’ was to work, the Government has regulated the competitive processes in an ad hoc manner, often responding to obvious but unforeseen problems (e.g. local monopoly power). Competition is costly to create, requiring large investments in managerial personnel and information technology, and difficult to sustain because of the propensity of capitalists, through self interest, to destroy capitalism. Problems such as quality, equity and the closure of excess capacity were well defined prior to the NHS reforms and have not yet been resolved following the reforms. Whether adversarial rather than collaborative relationships are more efficient in the health care sector is unknown. Indeed there remains little evidence to sustain the claims of political rhetoric that competition ‘works’ i.e. increases efficiency, enhances equity and contains costs. Despite this reformers seek to create competition and complete mission impossible.