Local Market Power Research Articles

Do Rockets Rise Faster and Feathers Fall Slower in an Atmosphere of Local Market Power? Evidence from the Retail Gasoline Market

This study explores the possibility that local market power influences the observed asymmetric relationship between changes in wholesale gasoline costs and changes in retail gasoline prices. I exploit an original data set of weekly gas station prices in Southern California from September, 2002 to May, 2003, and take advantage of detailed station and local market level characteristics to determine the extent to which geographic and product differentiation influence price response asymmetry. I find that brand identity, proximity to rival stations and local market features and demographics each influence a station's predicted price-response asymmetry.

Asymmetries in Retail Gasoline Price Dynamics and Local Market Power

Using monthly data from the 48 contiguous states (except Nevada) for the 1988-2002 period, it is shown that retail gasoline prices respond faster to wholesale price increases than to equivalent wholesale price decreases. Moreover, markets with high average retail-wholesale margins experience a slower adjustment and a higher degree of asymmetry. These results are robust to whether or not an error correction term is used, and to a number of other specifications. Since gasoline is the only variable input, one could reasonably assume that average margins in a state reflect the degree of market power at the retail level. This suggests that sticky prices and response asymmetries in the gasoline market are, at least partially, a consequence of retail market power, raising the possibility that slow price adjustments and asymmetric price responses could be used as an indicator of potential departure from perfect competition. It is also shown that out-of-sample forecasts based on asymmetric models yield substantially better predictions for the path of retail prices than forecasts based on the symmetric models. This result is robust to different measures of forecast accuracy. The higher accuracy of the out-of-sample forecasts based on asymmetric models indicates that these asymmetries are not just an outcome of fitting to a particular sample but represent the underlying data generating process.

Multiple Banking Relationships and Credit Market Competition: What Benefits the Firm?

This paper empirically addresses the question of which are the benefits for a firm to borrow from multiple banks, by explicitly correcting the potential endogeneity of the firm's decision of whether to rely on (and on how may) multiple relationships through a two-stage conditional maximum likelihood (2SCML) estimation technique. The estimation procedure also allows an in-depth analysis of the determinants of the multiple banking choice. The results are consistent with the hypothesis that the likelihood of credit tightening is lower for firms having more lending relationships, and located in less concentrated credit markets. Banking power at firm level and at market level is detrimental to the firm, as it increases the probability of credit constraints. However, firms that engage in multiple relationships benefit from competition among lending banks in terms of a lower probability of tightening, though such competition does not fully outweigh the marginal effect of local banking market power. As for the multiple banking choice, larger, riskier, less profitable and more opaque firms prefer more lending ties, and the number of relationships is also positively related with credit market concentration. I interpret the findings as providing evidence that a key reason why firms rely on multiple banking is their desire to reduce the hold-up costs and the risk of being credit constrained.

Leviathan in the Crosshairs

Following in the spirit of the Leviathan hypothesis, this paper empirically examines how the degree of local government market power influences efficiency in the local public sector. Market power is measured by the number and relative size distribution of similar government units in the same market area. To avoid confusing market power with the comparative efficiency or superiority of larger sized organizations, the relative size distribution of the individual government unit is held constant in the empirical analysis. In the empirical test, aggregate property values serve as the measure of efficiency. The empirical results suggest that aggregate property values are lower and thus efficiency suffers, in more concentrated municipal market areas, ceteris paribus, thus providing some evidence for Leviathan-type governments in Connecticut.

When Redistribution Leads to Regressive Taxation

We introduce labor contracts in a framework of optimal redistribution: firms have some local market power and try to discriminate among heterogeneous workers. In this setting we show that if the firms have perfect information, i.e., they perfectly discriminate against workers and take all the surplus, the best tax function is flat. If firms have imperfect information, i.e., if they offer incentive contracts, then (under some assumptions) the best re-distributive taxation is regressive.

The Precompetitive Interest in Intellectual Property Law

The conventional wisdom that antitrust is less tolerant of monopoly than is intellectual property (IP) law is sometimes true, but there is another side of the coin that is less frequently commented upon and that deserves further scrutiny. On occasion, IP law condemns conduct on the part of IP owners - or excuses otherwise infringing activity on the part of IP defendants - expressly for the purpose of promoting competition, even though antitrust law (if it were to apply at all) would not find anticompetitive harm absent a more thorough analysis of whether the antitrust defendant possesses power over a well-defined market. Salient examples include the misuse doctrines in patent and copyright law; some applications of merger and fair use in copyright; and trademark law's functionality doctrine. In this paper, I develop an explanation for this divergence between antitrust and IP. Specifically, I argue that in some limited contexts the expected social costs (including error costs) of ruling for IP defendants are relatively low in comparison with the expected anticompetitive harm from ruling for IP plaintiffs. As a result, it is sometimes welfare-enhancing for IP courts to be less concerned than antitrust courts about the expected costs of false positives, that is, cases wrongly decided against the party defending the allegedly anticompetitive conduct. Thus, in an appropriate case courts should deploy IP doctrine to prevent harms that would be deemed unduly speculative, or not cognizable at all, in the analogous antitrust context, including (1) harms stemming from the exercise of small-scale, transitory, or localized market power; (2) harms that are individually of little competitive significance, but which in the aggregate threaten a substantial reduction in consumer welfare; (3) threats to dynamic efficiency stemming from the reduction of competition in innovation markets; and (4) potential reductions in expressive output that, for reasons rooted in the First Amendment, may be qualitatively, but not quantitatively, significant. I further contend, however, that such cases probably are more common in the copyright than in the patent law context, and that even in copyright contexts courts should be cautious about casually inferring anticompetitive harm; but that the analysis provides a rationale for a relatively expansive definition of trademark functionality.

04/02633 The social benefit of the limited exercise of local market power: Falk, J. The Electricity Journal, 2004, 17, (4), 12–23

04/02633 The social benefit of the limited exercise of local market power: Falk, J. The Electricity Journal, 2004, 17, (4), 12–23

The Social Benefit of the Limited Exercise of Local Market Power

Current practice is excessively fearful of market power. It risks causing disruptive situations in which markets would actually work quite well if only allowed to do so, and it invites second-guessing by both generators and loads, depending on who feels wronged in a particular circumstance. More light-handed application promises substantial benefits, albeit at the price of some market power.

Higher prices at Canadian gas pumps: international crude oil prices or local market concentration? An empirical investigation

There is little consensus on whether higher retail gasoline prices in Canada are the result of international crude oil price fluctuations or local market power exercised by large vertically-integrated firms. I find that although both increasing local market concentration and higher average monthly wholesale prices are positively and significantly associated with higher retail prices, wholesale prices are more important than local market concentration. Similarly, crude oil prices are more important than the number of local wholesalers in determining wholesale prices. These results suggest that movements in gasoline prices are largely the result of input price fluctuations rather than local market structure.

Regulation and the Leverage of Local Market Power in the California Electricity Market

Author(s): Bushnell, James; Wolak, Frank A. | Abstract: Regulators of electricity markets around the world continue to struggle with the problem of incentivizing generators whose output, due to their location in the grid, has no viable substitutes. Such generators possess 'local' market power. Since these generators also compete in broader regional markets, the actions taken to exploit their local market power can also effect market outcomes over larger areas. In California, a contract structure known as the reliability must-run (RMR) contract was developed to address the problem of local market power. However, the contract form that was in place during 1998 created serious incentive problems. We find that, during the months of June through September 1998, RMR contracts had the effect of raising overall supply bid prices from most producers, thereby leading to higher energy prices in the California regional market.

Competition in gas markets

This paper discusses some of the current regulatory issues that arise in gas markets under perfect or imperfect competition. It first presents a benchmark model of gas transportation pricing, when all markets are competitive. Optimal prices and capacities are characterized both without and with a break-even constraint for the transportation operator. Elaborating on this framework, it then studies the appropriate dimensioning of the transportation network when an otherwise unregulated supplier exerts market power. Specifically, it points to the possibility of building up “excess” transmission capacity in order to mitigate local market power.

Market Power in Electricity Supply

Restructuring of the power industry worldwide has brought the issue of market competitiveness to the forefront. While vertical market power has been limited by disaggregating generation and transmission, nondiscriminatory access to the transmission system by power suppliers, and the creation of the independent system operator (ISO), horizontal and localized market power still survives. In the last few years, the issue of a small number of generators exercising market power has received a great deal of attention, and much has been published on how to identify and mitigate such abuse by market management measures. This paper focuses on the analysis and mitigation of market power in electricity supply.

Physician Market Power—Evidence From the Allocation of Malpractice Premiums

Based on evidence from variations in malpractice premiums, physicians have local market power, at least in some dimensions. It is observed that higher‐cost physicians pass on a significant portion of idiosyncratic costs to patients as higher prices. I test two hypothesized sources of this market power: barriers to entry from specialization and relatively inelastic firm‐level demand for certain services. Examining the relationship of physician‐specific malpractice premiums to fees, I find no observable difference in the ability of surgeons and nonsurgeons to pass on these costs; however, both types of physicians pass them on more to surgical than to nonsurgical patients.

Market Power in Regional Retail Gasoline Markets? An Empirical Analysis / Marktmacht auf regionalen Märkten. Eine empirische Analyse am Beispiel des Kraftstoffmarktes in der Bundesrepublik Deutschland

Zusammenfassung Der vorliegende Beitrag befaßt sich mit der Beziehung zwischen Treibstoffpreisen und der Marktstruktur im deutschen Tankstellensektor. Aufbauend auf ein Cournot-Modell wird getestet, ob die zumeist bundesweit agierenden Mineralölunternehmen auf lokalen Märkten Marktmacht ausüben. Die häufig geäußerte Vermutung, daß aufgrund einer relativ hohen Konzentration auf Bundesebene und einer vielfach noch höheren regionalen bzw. lokalen Konzentration Mineralölfirmen Marktmacht ausüben, konnte empirisch nicht belegt werden. Auch einige Modellvariationen führten nicht zu grundsätzlich anderen Ergebnissen. Da allerdings weitere Konzentrationstendenzen auf dem Tankstellenmarkt zu beobachten sind, bleibt abzuwarten, ob eine empirische Uberprüfung mittels aktueller Daten nicht zu einer Veränderung der Ergebnisse führt.

Transmission Constraints and Imperfect Markets for Power

This article argues that, while most of the economic gains from the restructuring of the power industry will be achieved in electricity generation, trading and retailing, the transmission grid holds the keys to an important share of the economic value created by the process. Using a simple three-node network, this article shows that an increase in transmission capacity has two effects: (1) cheaper power can be used, and (2) competition among generators is increased. This carries three policy implications: first, policy makers can and should use transmission expansion to increase competition in generation. Second, generators will not necessarily finance nor advocate optimal transmission expansion: they may prefer to keep the rents derived from local market power, rather than gain better access to markets, even if they receive transmission payments corresponding to their investment, as suggested in parts of the United States. Finally, this work provides support for the vertical separation between generation and transmission, beyond the traditional foreclosure argument.

Restructuring Financial Regulation in the European Monetary Union

This article argues that present financial regulatory arrangements within the European Monetary Union are not adequate either to preserve stability or to foster financial integration. Reform of financial regulation should concentrate on •establishing clear procedures for crisis lending and management, with the European Central Bank at the center; •preparing the ground for more centralized supervisory arrangements in banking, insurance, and securities; and •establishing and consolidating an active domestic and European Union-wide competition policy that limits local market power and national champions that are too big to fail.

Product Differentiation and Market Power in the California Gasoline Market

This paper applies a model of market power measurement under product differentiation to the case of the gasoline market in California, using data for the period 1983–1989. Our results show that there is a considerable degree of product differentiation among major brands. This allows firms to exercise local market power over their own specific products, but there are also signals of an important degree of global market power. However, none of the four pure market structures analyzed (price taking, monopolistic competition, Cournot oligopoly and collusion) seems able to explain by itself the behavior of the whole market.

Agro-commodity chains, market power and territory: re-regulating South African citrus exports in the 1990s

Using the filiere or agro-commodity chain framework, this paper examines the organisation and restructuring of South African citrus exports. It argues that the single desk exporter of South African citrus, Outspan International, has exercised considerable market power over citrus production through state regulations and the control of infrastructure for exports. This power has provided the foundation on which it has built a global market strategy and points to the important link between Outspan’s local market power and its global market strategies. A second theme in the paper is the territorial configuration associated with the filiere which has both territorialised and deterritorialised citrus production in South Africa. The re-regulation of the citrus filiere in the 1990s will force Outspan to restructure its global strategy. A new regulatory environment which opens the way for the fragmentation of the citrus filiere is also likely to usher in a new territorial configuration of citrus production.

How integrated are the money market and the bank loans market within the European Union?

This paper estimates cointegration vectors of the time series of money market interest rates and bank lending rates. The study includes six member countries of the European Union (EU) and covers a period of 10 years, from 1985 to 1994. During this period, significant steps were taken that intensified financial integration in the EU, including the free flow of capital, a system of stable exchange-rate parities and the implementation of a single market for banking services. We conclude that the domestic money markets are closely linked, but the domestic banking markets are segmented. Preliminary investigation of international differences in the capital structure of firms, on the one hand, and of domestic business cycle conditions, on the other hand, do not seem to explain differences in bank spreads across countries. The results point to other directions, presumably to local market power and to differences in the role of lender monitoring.

Branch Banking and the Geography of Bank Pricing

We show that bank branching tends to mitigate localized market power by broadening the geographic scope of competition among banks, even though branch banking allows banks to differentiate themselves through their choices of branch locations. Banking services at peripheral locations will be priced more competitively when those locales are served by branch networks. We develop a theoretical model in support of this view and offer empirical evidence.