Low Marginal Cost Research Articles

Thought Experiment: Marginal Cost versus John M. Clark’s Workable Competition Pricing

This article compares numerical results for an original model of an industry using marginal cost pricing versus workable competition pricing with fluctuating demand with two alternative technologies. The article is a thought experiment in economics, carried out only in the imagination. The article presents a detailed numerical model of a basic industry, cement manufacturing with large numbers of sellers, cement manufacturers, and large numbers of buyers, the construction industry, operating independently with full knowledge of supply and demand conditions. In the model cement plants have linear total cost functions with absolute capacity limits. The article considers two alternative technologies: 1) plantL old plants with low fixed costs and high marginal costs and 2) plantK new plants with high fixed costs and low marginal costs. This study argues in support of John M. Clark (1884-1963) workable competition theory in contrast to marginal cost competition theory. The study examines likely equilibrium conditions under two alternate pricing systems: a) short-run marginal cost pricing and b) John M. Clark’s concept of workable competition. Workable competition raises prices above marginal costs in the off peak period and lowers prices in the peak periods. The study assumes frequency of off periods 6/7 and frequency of peak periods 1/7. The study claims, under the assumptions of the model, workable competition pricing add to consumer surplus over the cycle.

The Merit-Order Effect of Load-Shifting: An Estimate for the Spanish Market

Abstract Renewable producers can offer selling bids with very low marginal cost since they are not obliged to include on any cost related to the use of energy from the wind or sun. Accordingly, when the Market Operator integrates a renewable bid in the merit-order generation curve, all the generators based on conventional technologies, with higher marginal cost due to the cost of fuels, are displaced to the right. The right-shifting of the merit-order generation curve leads to a lower clearing price, a small increment of the traded energy (almost inelastic demand curve), and a reduction of the total cost of the energy traded in the wholesale market. This is the key mechanism of the well-known merit-order effect of renewables. Load-shifting (demand-side management) plans are expected to yield a reduction of the cost of the traded energy for the customers, since the cost-saving due to the energy eschewed at peak hours would be greater than the extra cost due to the increased demand at off-peak hours. This work will show that the main effects of load-shifting on the market are qualitatively similar to that of renewables, which exemplify the existence a “merit-order effect of load-shifting”. To analyse the characteristics of the merit-order effect of load-shifting, a simplified model has been developed, based on the displacement of the generation and demand curves. A set of scenarios has been generated in order to quantify the main effects on the Spanish/Iberian market for 2015.

Intangible Investment and Low Inflation: A Framework and Some Evidence

Intangible investment is growing as a share of economic activity. We present a simple framework incorporating its distinguishing characteristic of generally greater scalability and lower marginal costs than tangible investment. We show evidence that this may have contributed to more elastic aggregate supply in recent years, which is consistent with lower inflation and a flattening of the Phillips curve. This framework also highlights the channels through which technological change, a large constituent of intangible investment, may be leading to wage stagnation and greater market concentration.

Disclosure of Investment Information in a Vertically Related Industry

This study investigates the strategic disclosure of a downstream firm’s information regarding cost-reducing investment in a vertically related industry. Disclosing information affects an (common) upstream firm’s input price (i.e., vertical strategic effects) and a rival downstream firm’s output level (i.e., horizontal strategic effects). We show that the downstream firm is willing to withhold its information as the products become more differentiated because the horizontal strategic effects decrease with the products differentiation degree. This implies that non-disclosure, rather than disclosure, can convey an aggressive investment (i.e., lower marginal costs) to a rival downstream firm when the products are sufficiently differentiated. Moreover, we show that the downstream firm may disclose its information and pursue its investment at a minimum level when the products are extremely differentiated. In this case, they desire to reveal high marginal costs (i.e., a low investment level) to the upstream firm to reduce the input price, regardless of horizontal market competition.

Should Competing Firms Cooperate to Reduce Congestion?

Consider two profit-maximizing service firms in the presence of congestion-sensitive customers. Firms set their prices and compete to capture market share. We compare cases where the firms can invest either independently (competition) or jointly (co-opetition) in congestion-reduction (CR) activities. Using a stylized analytical model, we find that when the market is covered (that is when everyone buys a product), the firm with a lower marginal CR cost earns more profit under competition than under co-opetition. When the market is uncovered, co-opetition is more profitable if the joint marginal CR cost is less than a threshold. We find that when the market is covered, neither firm makes any CR investment but when the market is uncovered, there will be a CR investment provided the marginal CR cost is lower than a threshold. Our analysis shows that when prices are regulated, firms under competition make CR investments but firms under co-opetition do not. The impact of proximity on each firm's choice of the location under competition and co-opetition is different. We find that if the marginal CR cost under joint investment is larger than a cutoff, then social welfare is also higher under competition than under co-opetition.

Designing Electricity Markets for High Penetrations of Zero or Low Marginal Cost Intermittent Energy Sources

This article explores key market design issues to be addressed in future electricity markets dominated by intermittent renewable generation with near zero private marginal costs for generating electricity. Changing technology mixes will change market outcomes, but they do not change the fundamental economic principles behind market design. Market-clearing prices in such a market are not necessarily mostly zero even in an energy-only market, especially with grid scale storage, an active demand side of the market, and scarcity pricing. However, increasing intermittent generator penetration increases the importance for adequately pricing scarcity and all network constraints and services. Such pricing is required to deliver investment incentives for the right technologies to locate at the right locations to efficiently maintain a stable and reliable electrical network.

Regulating Ride-sourcing Services with Product Differentiation and Congestion Externality

This paper proposes a model of the ridesourcing market in presence of traffic congestion and with the provision of both solo and pooling services. Our analysis of the first-best solution shows that, under a highly congested scenario, the ridesourcing platform may enjoy non-negative profits. However, when congestion is low, the ridesourcing market must be subsidized due to low marginal costs of operation. This mirrors previous findings in the traditional taxi literature. We also demonstrate that a commission cap on the solo service combined with a congestion toll (however small) on ridesourcing vehicles can induce any desired, sustainable equilibrium under the assumption of homogeneous value of travel time and sufficient supply of homogeneous drivers. Furthermore, numerical experiments suggest that the most important problem that a regulator should address when faced with a monopoly may not be that of congestion but rather that of market power. Indeed, when congestion is high, similar to previous findings in the literature, decisions by the monopolist tend to mirror that of the regulator. This is because customers on the platform must also bear the congestion cost, which hurts the platform’s revenues. Additionally, numerical examples reveal that, even when accounting for heterogeneity in the value of travel time, the commission cap is able to achieve the second-best–whether combined with a toll or not. This confirms the effectiveness of the commission cap strategy illustrated in previous literature and provides decision makers with a simple, non-intrusive mechanism for regulating the market.

Tethered Durable Goods and Installed Base Degradation via Software Updates

In this paper we study a monopolist technology vendor's decision to degrade their installed base when they release their newer version. An installed base of products that are technologically tethered, whether digital products such as smartphones or predominantly non-digital products such as automobiles, can be degraded in performance through software updates. This raises new possibilities and temptations for sellers, and therefore new questions not hitherto addressed in the literature on durable goods and innovation, on the optimal product policy for durable goods monopolists. In contrast to the traditional planned obsolescence literature, where the seller has to introduce novel versions (novel in either fashion or functional features) to obsolete their installed base of older versions, in the changed scenario when a seller can degrade their installed base via a software update, they don't have to rely on product novelty to encourage consumers to buy the new product. In a two-period setting featuring a monopolist selling a durable good to a unit mass of consumers with uniformly distributed valuation for the good, we show that installed base degradation can emerge in equilibrium, with or without innovation. In the absence of innovation (i.e. same durable good available for sale in both periods), our model first finds that the seller is mostly better off not degrading their installed base in period 2, except for products with very low marginal cost relative to value, which should be leased and not sold. Nevertheless, the seller faces a commitment problem and is tempted to degrade the installed base in period 2, for a substantial part of the parameter space. Next, in the presence of innovation, we find that the seller is better off not degrading the earlier version in the later period, when the marginal cost is high relative to product value, and innovation is low, or when marginal cost is very low and innovation is very high. But there exists a substantial region in the middle, when marginal cost is low to medium, and innovation is medium to high, when the seller earns a higher profit overall by degrading their installed base in period 2, which explains why durable goods vendors may face incentives to engage in this practice. With innovation, there also exists a region in the parameter space where the seller faces a commitment problem and achieves sub-optimal profit by degrading their installed base in period 2, when they could earn a higher profit by refraining from doing so. Even when the seller degrades the installed base, they choose a sub-optimal price, due to a different kind of commitment problem. In the no-innovation scenario, installed base degradation is mostly sub-optimal to the seller due to the commitment problem, whereas in the innovation scenario, installed base degradation is mostly optimal with a relatively smaller sub-optimal region.

Micro Smart Micro-grid and Its Cyber Security Aspects in a Port Infrastructure

Maritime ports are intensive energy areas with a plenty of electrical systems that require an average power of many tens of megawatts (MW). Competitiveness, profits, reduction of pollution, reliability of operations, carbon emission trading are important energy related considerations for any port authority. Current technology allows the deployment of a local micro-grid of the size of tenths of MW, capable of islanded operation in case of emergency and to grant an increasing energy independency. Ownership of the grid permits a large flexibility on prices of energy sold inside the port, trading on local electric market and reduction of pollution. Renewable energy generation has a large impact on costs since features a low marginal cost. Unfortunately the smart grid is a critical asset within the port infrastructure and its intelligence is a high-level target for cyber-attacks. Such attacks are often based on malicious software (malware), which makes use of a controlling entity on the network to coordinate and propagate. In this document, we will outline some features of a port smart grid and typical characteristics of cyber-attacks including potential ways to recognize it and suggestion for effective countermeasures.

The Impact of the ECB's Targeted Long-Term Refinancing Operations on Banks’ Lending Policies: The Role of Competition

We assess the impact of the Eurosystem’s Targeted Long-Term Refinancing Operations (TLTROs) on the lending policies of euro area banks. To guide our empirical research, we build a theoretical model in which banks compete a la Cournot in the credit and deposit markets. According to the model, we distinguish between direct and indirect effects. Direct effects take place because bidding banks expand their loan supply due to the lower marginal costs implied by the TLTROs. Indirect effects on non-bidders operate via changes in the competitive environment in banks’ credit and deposit markets and are a priori ambiguous. We then test these theoretical predictions with a sample of 130 banks from 13 countries and the confidential answers to the ECB’s Bank Lending Survey. Regarding direct effects on bidders, we find an easing impact on margins on loans to relatively safe borrowers, but no impact on credit standards. Regarding indirect effects, there is a positive impact on the loan supply on non-bidders but, contrary to the direct effects, the transmission of the TLTROs takes place through an easing of credit standards, and it is mainly concentrated in banks facing high competitive pressures. We also find evidence of positive funding externalities.

Scalable Prediction of Acute Myeloid Leukemia Using High-Dimensional Machine Learning and Blood Transcriptomics.

SummaryAcute myeloid leukemia (AML) is a severe, mostly fatal hematopoietic malignancy. We were interested in whether transcriptomic-based machine learning could predict AML status without requiring expert input. Using 12,029 samples from 105 different studies, we present a large-scale study of machine learning-based prediction of AML in which we address key questions relating to the combination of machine learning and transcriptomics and their practical use. We find data-driven, high-dimensional approaches—in which multivariate signatures are learned directly from genome-wide data with no prior knowledge—to be accurate and robust. Importantly, these approaches are highly scalable with low marginal cost, essentially matching human expert annotation in a near-automated workflow. Our results support the notion that transcriptomics combined with machine learning could be used as part of an integrated -omics approach wherein risk prediction, differential diagnosis, and subclassification of AML are achieved by genomics while diagnosis could be assisted by transcriptomic-based machine learning.

Elecxit: The cost of bilaterally uncoupling British-EU electricity trade

The UK's withdrawal from the European Union could mean that it leaves the EU's Internal Energy Market for electricity (Elecxit). This paper develops methods to study the longer-term consequences of this electricity market disintegration, especially the end of market coupling. Before European electricity markets were coupled, different market closing times forced traders to commit to cross-border trading volumes based on anticipated market prices. Interconnector capacity was often under-used, and power sometimes flowed from high- to low-price areas. A model of these market frictions is developed, empirically verified on 2009 data (before French and British market coupling) and applied to estimate the costs of market uncoupling in 2030. A less efficient market and the abandonment of some planned interconnectors would raise generation costs by €700 m a year (2%) compared to remaining in the Internal Energy Market. This result is sensitive to how the British and French electricity systems develop over the coming decades. Economic losses are four times greater (€2700 m a year) if France retains substantial nuclear capacity due to its low marginal costs. Conversely, losses are reduced by two-thirds if UK weakens its decarbonisation ambitions, as lower carbon prices subsidise British fossil fuel generation, allowing electricity prices to converge with those in France. A Hard Elecxit would make British prices rise and French prices fall in three of our four scenarios, with the opposite movements in the fourth scenario.

U.S. Maritime Policy and Economic Efficiency

Critics argue that maritime policy is protectionist legislation that restricts competition and reduces economic efficiency. In this paper, I argue the contrary. I begin with the premise that the primary role of the state is to provide national defense. A country must be able to protect its wealth, and therefore its capital, from plunder and/or destruction. This implies that a sufficient level of defense spending is increasing in the capital stock. An efficient solution is to tax capital to finance defense. Nonetheless, there is reason to believe that capital devoted to shipping imposes a lower marginal defense cost than other forms of capital because ships can be used as a naval auxiliary. If so, then one would expect that the optimal tax rate on shipbuilding and the merchant marine would be lower than other capital-intensive firms. Put differently, maritime subsidies during peacetime can be understood as the result of a Coaseian bargain in which the government compensates shipbuilders and the merchant marine during peacetime in exchange for their services during wartime. I argue that the history of U.S. maritime policy is broadly consistent with my theory. I conclude by discussing the current state of the merchant marine and maritime policy.

Let Artificial Intelligence Be Your Shelf Watchdog: The Impact of AI-powered Shelf Monitoring on Product Sales

We collaborate with Danone, a leading fast-moving consumer goods (FMCG) manufacturer, to study how AI-based shelf monitoring helps with manufacturers' shelf management efforts by using data from a quasi-experiment and a field experiment. We find that AI-powered shelf monitoring significantly and consistently improves product sales; that said this effect is only partially persistent in that it diminishes after monitoring is terminated. We further reveal that this positive effect can be attributed to independent retailers rather than chained retailers. Since the major difference with respect to shelf monitoring between these retailers is the degree of heterogeneity in shelf space rental contracts, this finding indicates that AI-powered monitoring is more effective than human monitoring in managing more heterogeneous shelf displays. More broadly, the finding further suggests that AI-powered monitoring is more scalable, allowing manufacturers to cope more effectively with more heterogeneous objects. Finally, the low marginal costs and great benefits that manufacturers earn from implementing AI-powered shelf monitoring suggest both its long-term applicability and its capacity to generate incremental value. Our research contributes to several literature streams as well as generates managerial insights for practitioners who consider AI-driven operating models.

Monopoly and Anti‐Monopoly in China Today

AbstractFor three decades after liberation in 1949, the Chinese economy consisted almost entirely of state monopolies. Economic reforms, starting in 1979, sought to increase the efficiency of the economy by introducing competitive practices in many sectors of the economy. But the Chinese economy has been partially administered by the state for over two millennia. As a result, both state‐managed and private monopolies are still an intrinsic part of the Chinese economy today. Despite two decades of anti‐monopoly reforms, state‐owned enterprises (SOEs) continue to dominate key sectors of the economy, particularly in resource extraction and financial services. The government is aware of the inefficiencies and corruption caused by monopolies, both public and private. But Chinese tradition takes a balanced view of social harms and weighs the damage caused by monopoly against the stability that SOEs have provided China in recent decades. There is less reason for China to tolerate private monopolies, but most of them have arisen in conjunction with digital technology because of its distinctive cost structure (high entry costs, low marginal costs). China has made some use of antitrust law, but most economic regulation in China is administrative. Thus the anti‐monopoly activities that are used to restrain monopoly power in China are different from Western practices.

Unintended Impacts of the Abolition of Copayment on Outpatient Utilization in South Korea: Evidence from a Regression Discontinuity in Time

In June 2007, the South Korean government, hoping to reduce the state's share of health care costs, passed an amendment to the state-run health care system to transition from a copay system to a coinsurance system for outpatient services. This new policy effectively increased the out-of-pocket health care costs of outpatient services to South Koreans from 22 percent to 30 percent. This paper estimates the impact of the health insurance reform on outpatient health care utilization. Using a regression discontinuity in time design, I find that the abolition of the copayment program significantly increased system-wide outpatient health care utilization by up to 90 percent and reduced medical expenditures by 23 percent per visit. The copayment abolition incentivized beneficiaries to obtain more medical treatments during the grace period and enroll in supplemental private health insurance covering patient-sharing medical costs, allowing access to more medical services with lower marginal costs. Therefore, the abolition of the copayment and emergence of supplemental private insurance caused moral hazard and adverse selection problems, leading South Korea to become the country with the highest per capita utilization of outpatient health services worldwide since 2012.

The marginal-cost pricing for a competitive wholesale district heating market: A case study in the Netherlands

District heating represents a viable way to reduce carbon dioxide emissions in the built environment. This paper aims to assess the extent to which the market revenues of multiple heat production technologies can cover their fixed costs in a competitive wholesale district heating market. Marginal-cost pricing is applied in a case study of the Netherlands. A linear programming model incorporating heat supply and demand is developed to obtain hourly dispatch and heat market prices. It is concluded that low carbon heat generation technologies tend to have low short-run marginal costs. All examined heat producers have an under-recovery of fixed costs in a range between 60% and 90% except the waste incineration combined heat and power plant. It has an overall return on investment of 44% and 12% within the reference and heat pump scenario respectively. Although marginal-cost pricing may ensure cost-efficient dispatch, the market revenues are far from enough to recoup the investment costs for the majority of the heat producer, let alone the network costs. Significant additional remuneration is required to sustain a competitive heat market and ensure sufficient investment in new generation capacity in the long run.

Measuring the cost-effectiveness of electric vehicle subsidies

Despite the prevalence of plug-in electric vehicle (PEV) subsidies, research on improving their cost-effectiveness and impact remains limited. To assess the scope for improving their cost-effectiveness, we develop a vehicle choice model-based counterfactual simulation using a large-scale nationally representative sample of U.S. new car buyers. Results suggest that existing federal incentives are expensive, $36k per additional PEV, as every buyer gets the subsidy. The cost-effectiveness can be improved by twofold by targeting incentives by income, vehicle disposal, geography, and/or vehicle miles traveled. Preserving the federal policy's assignment of larger subsidies for PEVs with larger battery capacities results in greater battery electric vehicle (BEV) adoption, while policies not discriminating by battery capacity result in greater plug-in hybrid electric vehicle adoption. The reduction in gasoline consumption is the same in both the cases, with a slightly lower marginal cost for the latter.

Triple function substation and high-efficiency micro booster heat pump for Ultra Low Temperature District Heating

District-Heating (DH) covers around the 9% of the total heat demand in the EU, with a proven highperformance levels and low operational costs. DH may suffer adaptations in order to maintain competitiveness with individual heating systems. The most important one is the reduction of supply temperatures up to 50°C, emerging the concept of Ultra Low Temperature (ULT) DH. ULT DH allows the transmission and distribution heat losses minimization, since heat losses are proportional to the temperature-gradient between supply line the ambient, increasing overall system performance. Furthermore, enables the integration of low-grade energy sources with low marginal costs, such as solar thermal energy or waste heat from industrial and commercial buildings. This study presents the combination of a novel 3 function-scheme (3FS) substation and a micro booster heat pump for domestic hot water. The novel design of the substation allows different operation modes between the grid and the building according to the temperature level and demand range every moment. Regarding the microbooster, this unit is used directly to lift the temperature of the domestic hot water (DHW), so that risk of legionella is avoided and that the required comfort temperature is reached. Preliminary test for the energy performance of the booster heat pump was measured on serially produced units according to tapping profiles and methodologies of standard EN16147. DHW coefficients of performance of 5.2 and 8.5 were measured for heat source supply temperatures respectively of 25 and 40 °C and return temperatures of 22 and 30 °C. This paper explores the possible operational modes of a 3FS in combination with a Building Integrated Solar Thermal System (BISTS) and a Microbooster heat pump.

(Invited) Nanostructured Silicon Integrated Circuit Thermoelectric Generators with High Specific Power Generation Capacity

Microelectronic thermoelectric (TE) devices aimed at integrated circuit (IC) and sensor applications such as on-chip thermal management, bio-thermal power for wearable electronics, and microwatt level sustainable power sources for internet-of-things (IoT) sensors have grown in recent interest. While silicon CMOS by far dominates microelectronics technology, Si has historically not been considered as a viable TE material because bulk Si has a very low TE figure-of-merit ZT ~ 10–3 to 10–2 near room temperature. By contrast, modern “high ZT” materials such as the (Bi,Sb)2(Se,Te)3 family have ZT ≈ 1. However, these materials are incompatible with Si CMOS processing and so have not gained widespread adoption into microelectronic ICs. In 2008 two groups [Hochbaum, et al. Nature 451, 163; Boukai, et al. Nature 451, 168] reported that Si nanowires (NWs) can have ZT up to 0.6. Nevertheless, numerous efforts to develop microelectronic TE generators (TEG) using Si NWs or other nano-structured Si thermopiles have not achieved efficiencies better than what is consistent with ZT ~ 10–2. In practice, efficiency is not necessarily the primary concern in many applications but rather how much power a TEG of given size generates from a temperature difference ∆T, as well as cost per Watt generated. Since the maximum power P max generated is proportional both to (∆T)2 and to cross-sectional area A for heat flow, a performance metric of more direct practical interest is the specific power generation capacity Γ P = P max/[A·(∆T)2], as this measures TEG output power scaled to device size and to ∆T. Γ P is an extrinsic device metric that can be engineered by circuit design and management of parasitic impedances, in contrast to ZT which is an intrinsic material characteristic. In this presentation we will describe IC TEGs using nanostructured silicon thermopiles fabricated on an industrial “65 nm” technology node Si CMOS process line following standard CMOS process design rules. The thermopile elements are nanostructured n- and p-type Si “blades” nominally 80 nm wide x 750 nm long x 320 nm tall, with a typical total thermopile area of 48 µm x 36 µm. Depending on design layout and doping, these Si IC TEGs show high Γ P, up to 29 µW·cm–2K–2, with most designs having Γ P near 8.5 µW·cm–2K–2 using a cold side heat sink at room temperature. In terms of power generation ability a Γ P of order 10 µW·cm–2K–2 makes these Si IC TEGs competitive with (Bi,Sb)2(Se,Te)3 based TEGs, although the net efficiency of these Si IC TEGs is still low. Engineering a high Γ P despite low efficiency results from the ability of Si CMOS processing to fabricate a high areal density of thermocouples while still maintaining a low areal packing fraction, that is, to make uniformly a very large number of very small things in a given area, and to carefully control both intrinsic and parasitic electrical and thermal impedances. We find that TEG power increases significantly with decreasing thermocouple width, giving a fabrication path to further improvements. Unlike (Bi,Sb)2(Se,Te)3 TEGS, these Si IC TEGs can be seamlessly integrated into large scale Si CMOS microelectronic circuits at very low marginal cost.