Marginal Cost Functions Research Articles

Shipment Frequency of Exporters and Demand Uncertainty

This paper analyzes how firms adjust to differences in market size and demand uncertainty by changing the frequency and size of their export shipments. In our inventory model, transportation costs and optimal shipment frequency are determined on the basis of demand as well as inventory and per shipments costs. Using a cross section of detailed monthly firm-product-destination level French export data we show that, in line with the predictions of the model, firms adjust on both margins for market size. In a stochastic setting, increased demand uncertainty is associated with larger logistics costs as well as a more convex marginal cost function. Firms adjust to increased uncertainty by reducing their sales and, for a given export volume, by reducing their number of shipments and increasing their shipment size. We show that these predictions of the model are in line with patterns in the data.

Analysis of the Restructured Energy Market in the Framework of Game Theory: Iran's Power Industry

Restructuring of electricity market in Iran has been accepted and operationalized following the power market in industrial countries. Increasing of efficiency through insertion of economic considerations and transition from monopoly to more competitive conditions in order to become closer to the optimal status are the basis to accept restructuring. Given to the market structure, imperfect competition is ultimately fulfilled in this market that games theory solutions should be used to analyze it. On the other side, given to bidding and pay-as-bid (PAB) in Iran's electricity market, supply function equilibrium (SFE) models is suitable for analysis. Therefore, having proposed function and the suitable theoretical model and estimated marginal cost function and uncertainty demand parameters, in the framework of SFE approach, the optimal supply function equilibrium of one of the firms of the electricity market in Isfahan was extracted by means of MATLAB software. Then it was compared with the proposed supply function. The obtained results revealed that the current proposed supply function does not conform to the theoretical optimal supply function in Nash equilibrium.

What really drives inflation?

We derive a broad measure of real marginal cost which features the labour share, output gap and supply shock variables. We evaluate the contribution of each of these components of real marginal cost as driving forces for inflation. We find that supply shock variables dominate the output gap and the labour share in driving inflation dynamics. This finding suggests that a more elaborate real marginal cost function should be considered by the new Keynesian literature. Tests of the new Keynesian Phillips curve that are based on the restrictive one-factor production technology should therefore be reconsidered. In the light of this, forecast-based policy rules require more serious study, since they permit more flexibility to respond to supply shocks without generating significant output loss.

Toll pricing framework under logit‐based stochastic user equilibrium constraints

SUMMARYThis paper addresses the toll pricing framework for the first‐best pricing with logit‐based stochastic user equilibrium (SUE) constraints. The first‐best pricing is usually known as marginal‐cost toll, which can be obtained by solving a traffic assignment problem based on the marginal cost functions. The marginal‐cost toll, however, has rarely been implemented in practice, because it requires every specific link on the network to be charged. Thus, it is necessary to search for a substitute of the marginal cost pricing scheme, which can reduce the toll locations but still minimize the total travel time. The toll pricing framework is the set of all the substitute toll patterns of the marginal cost pricing. Assuming the users' route choice behavior following the logit‐based SUE principle, this paper has first derived a mathematical expression for the toll pricing framework. Then, by proposing an origin‐based variational inequality model for the logit‐based SUE problem, another toll pricing framework is built, which avoids path enumeration/storage. Finally, the numerical test shows that many alternative pricing patterns can inherently reduce the charging locations and total toll collected, while achieving the same equilibrium link flow pattern. Copyright © 2013 John Wiley & Sons, Ltd.

Nutrient Abatement Potential and Abatement Costs of Waste Water Treatment Plants in the Baltic Sea Region

We assess the physical potential to reduce nutrient loads from waste water treatment plants in the Baltic Sea region and determine the costs of abating nutrients based on the estimated potential. We take a sample of waste water treatment plants of different size classes and generalize its properties to the whole population of waste water treatment plants. Based on a detailed investment and operational cost data on actual plants, we develop the total and marginal abatement cost functions for both nutrients. To our knowledge, our study is the first of its kind; there is no other study on this issue which would take advantage of detailed data on waste water treatment plants at this extent. We demonstrate that the reduction potential of nutrients is huge in waste water treatment plants. Increasing the abatement in waste water treatment plants can result in 70 % of the Baltic Sea Action Plan nitrogen reduction target and 80 % of the Baltic Sea Action Plan phosphorus reduction target. Another good finding is that the costs of reducing both nutrients are much lower than previously thought. The large reduction of nitrogen would cost 670 million euros and of phosphorus 150 million euros. We show that especially for phosphorus the abatement costs in agriculture would be much higher than in waste water treatment plants.

Investments in next generation access infrastructures under regulatory uncertainty

This article studies the impact of regulatory uncertainty on an incumbent’s incentives to undertake the socially optimal investments in NGA networks. Thus, a regulatory non-commitment setting in which the regulator sets the access price after the deployment of the NGA network is used. In particular, it is assumed that the regulator sets the access price at the marginal cost of providing the access with some probability and gives an access markup, which equals the average cost of the investments, with the complementary probability. It is found that when the slope of the marginal investment cost function is not particularly steep in relation to the impact of investments on demand, the incumbent underinvests compared to the socially optimal investment level. On the contrary, in a more realistic case when the impact of investments on demand is low in relation to the slope of the marginal investment cost function, the incumbent may overinvest or underinvest depending on the probability of incorporating an access markup into the access price.

Parameterization of Linear Supply Functions in Nonlinear AC Electricity Market Equilibrium Models—Part I: Literature Review and Equilibrium Algorithm

The linear supply function equilibrium (SFE) model can be used to investigate bid-based electricity pool markets. Several studies assume that the market players construct optimal strategic bids by parameterizing the linear marginal cost function of their generating units. Four different types of parameterization are possible, for which the slope and/or the intercept of the marginal cost functions are varied. This paper reviews the existing literature and proposes a primal-dual nonlinear interior point algorithm to solve a bi-level market problem with AC network representation, using any of the parameterization methods. Part II of this paper uses the proposed algorithm to examine the effects of the different parameterizations on the resulting SFE solutions, the role of network complexity and the nature of the equilibrium points.

Parameterization of linear supply functions in nonlinear AC electricity market equilibrium models - Part II: Case studies

This study utilizes the primal-dual nonlinear interior point algorithm formulated in Part I of this two-series paper, to obtain electricity market supply function equilibrium solutions for the bi-level market problem of nonlinear power systems with AC meshed networks. The strategic offers of the market players are modeled by parameterizing the generation marginal cost functions using any of the four available parameterization methods to obtain profit-maximizing linear supply function bids. The analysis takes into account a variety of test systems and examines the relation between the equilibrium solutions obtained from the different parameterization methods and the role of network complexity. An analysis of multiple equilibria in AC network constrained systems is also provided.

Agricultural monopolistic competitor and the Pigovian tax

A monopolistically competitive agricultural market structure has some features of competition and some features of monopoly. Monopolistic competition has the following attributes: (a) many sellers; (b) product differentiation; and (c) free entry. In the long-run equilibrium, price equals average total cost, and the agricultural firm earns zero economic profit. The aim of this paper is to construct a relatively simple chaotic long-run monopolistic competitor’s agricultural output growth model that is capable of generating stable equilibria, cycles or chaos. A key hypothesis of this work is based on the idea that the coefficient plays a crucial role in explaining local stability of the monopolistic competitor’s agricultural output, where d is the coefficient of the marginal cost function of the agricultural monopolistic competitor; b is the coefficient of the inverse demand function; a is the coefficient of average cost growth; m is the Pigovian tax rate; and e is the coefficient of the price elasticity of demand.

Agricultural monopolistic competitor and the Pigovian tax

A monopolistically competitive agricultural market structure has some features of competition and some features of monopoly. Monopolistic competition has the following attributes: (a) many sellers; (b) product differentiation; and (c) free entry. In the long-run equilibrium, price equals average total cost, and the agricultural firm earns zero economic profit. The aim of this paper is to construct a relatively simple chaotic long-run monopolistic competitor’s agricultural output growth model that is capable of generating stable equilibria, cycles or chaos. A key hypothesis of this work is based on the idea that the coefficient plays a crucial role in explaining local stability of the monopolistic competitor’s agricultural output, where d is the coefficient of the marginal cost function of the agricultural monopolistic competitor; b is the coefficient of the inverse demand function; a is the coefficient of average cost growth; m is the Pigovian tax rate; and e is the coefficient of the price elasticity of demand.

Horizontal mergers, efficiency gains and remedies

The combination of structural remedies and efficiency gains in a merger may lead to pro-competitive outcomes, thus maintaining pre-merger prices. Two types of efficiencies are necessary. The first corresponds to a flatter marginal cost function, the second to a decrease in the intercept of the marginal cost curve. If these efficiency gains are not sufficient to keep the post-merger price at the pre-merger level, then divestitures by the resultant merged entity are adopted. This paper allows a comparison between two kinds of divestitures and it can be shown that, depending on the efficiency gains, divested capital distributed among the remaining competitors in the market is optimal when compared to divested capital being placed on the hands of a single competitor.

English

  A monopolistically competitive market structure has some features of competition and some features of monopoly. Monopolistic competition has the following attributes: (i) many sellers; (ii) product differentiation; and (iii) free entry. In the long run equilibrium, price equals average total cost, and the firm earns zero economic profit. This paper want to show that  the well known neoclassical microeconomics model on monopolistic competition implicitly has chaotic characteristics. The basic aim of this paper is to construct a relatively simple chaotic long-run monopolistic competitors's output growth model that is capable of generating stable equilibria, cycles, or chaos. A key hypothesis of this work is based on the idea that the coefficient, , plays a crucial role in explaining local stability of the monopolistic competitior's output,  where, d – the coefficient of the marginal cost function of the monopolistic competitor, b- the coefficient of  the inverse demand function, a - the coefficient of  average cost growth.   Key words: Monopolistic competition, long-run, equilirbrium conditions, chaos.

The value of travel time variability with trip chains, flexible scheduling and correlated travel times

This paper extends the analysis of the value of mean travel time (VMTT) and day-to-day travel time variability (VTTV) from single, isolated trips to daily trip chains, considering the effects of flexibility in activity scheduling and within-day correlation of travel times. Using a multi-stage stochastic programming approach, we show that the VMTT and VTTV on a trip is conditional on the realized travel times on preceding trips, first through the arrival time to the preceding activity and second through the information provided about subsequent travel times. Analytical formulas for the VMTT and VTTV are obtained for two special cases with piecewise constant and linear marginal cost functions, respectively. With flexible scheduling, there is typically a cost associated with a positive correlation of travel times, arising from persistent deviations from typical travel demand or supply on a given day. However, there is also a strict benefit in the dependence since it allows for a more efficient scheduling of later trips.

ClimatePolicy, Uncertainty,and theRole ofTechnologicalInnovation

AbstractWe study how uncertainty about climate change severity affects the relative benefits of early abatement and a portfolio of research and development (R&D) in lowering future abatement costs. Optimal early abatement depends on the curvature of the marginal benefit and marginal abatement cost (MAC) functions and how the uncertain parameter affects marginal benefits. R&D in a particular technology depends on whether uncertainty increases early abatement; whether investment lowersmarginalcosts for that technology; whether R&D lowers theslopeof that technology's MAC function; and the shape of that technology's MAC function. We illustrate, focusing on the role of backstop technologies.

Fiscal federalism and interjurisdictional externalities: New results and an application to US Air pollution

The economics of fiscal federalism has identified two book-end departures from first-best provision of a public good. Local governments may respond to local conditions, but ignore inter-jurisdictional spillovers. Alternatively, central governments may internalize spillovers, but impose uniform incentives ignoring local heterogeneity. We provide a simple model that demonstrates that the choice of pricing policy also depends crucially on a third factor, the shape of marginal costs of providing the public good. If marginal costs are convex, then marginal abatement cost elasticities will be higher around the local policies. This increases the deadweight loss of those policies relative to the centralized policy, ceteris paribus. If they are concave, then the opposite is true.Using a detailed simulation model of the US electricity sector, we then empirically explore these tradeoffs for US air pollution. We find that US states acting in their own interest lose about 31.5% of the potential first-best benefits, whereas the second-best uniform policy loses only 0.2% of benefits. The centralized policy outperforms the state policy for two reasons. First, inter-state spillovers are simply more important that inter-state heterogeneity in this application. Second, because of the convexity of the marginal cost functions, elasticities are much lower over the range relevant to the centralized policy, dampening the distortions.

Strategic bidding in vertically integrated power markets with an application to the Italian electricity auctions

In this paper we apply a model of optimal bidding behavior to the Italian wholesale electricity market under three hypotheses: i) costs of generation are private knowledge, ii) firms can be vertically integrated, and iii) firms can sell part of their production in advance with bilateral contracts. We first use optimal bid functions and market data to retrieve time-varying marginal cost functions, price–cost margins and Lerner Indexes of market power for a sample of Italian companies. Then, we use estimated costs and actual equilibrium prices to evaluate the elasticity of these series to fuel price variations and estimate a possible differential impact of the dynamics of input expenditures (fuel price above all) on generation costs and final electricity prices. Our estimates suggest that the elasticities of costs and equilibrium prices with respect to oil price are virtually the same and, therefore, that the auction mechanism per se does not limit the extent to which cost increases are transferred to prices.

Endogenous market power

Abstract In this paper we develop a framework to study markets with heterogeneous atomic traders. The competitive model is augmented as we provide traders with correct beliefs about their price impacts to define equilibrium with endogenously determined market power and show that such equilibrium exists in economies with smooth utility and cost functions and is generically determinate. Tradersʼ price impacts depend positively on the convexity of preferences or cost functions of the trading partners and are subject to mutual reinforcement. Compared to the competitive model, the volume of trade is reduced, and hence is Pareto inefficient. The price effects of non-competitive trading depend on the convexity of marginal utility or cost function.

Pricing In The Case Of Privately-Owned Water Utilities

This paper is concerned with the extent of price discrimination among customer classes for privately-owned water utilities that are regulated by state commissions. The test of price discrimination requires the specification and estimation of long-run marginal cost functions for each class of customer and prices of service. This procedure yields the price-long-run marginal cost ratios for each customer class required to test for price discrimination. We examine whether the rates afforded the respective customer classes are set in accordance with variations in the elasticity of demand of the respective customer classes. In so doing, we proceed to test the existence of Ramsey pricing.

Using an Allowance Reserve to Manage Uncertain Costs in a Cap-and-Trade Program for Greenhouse Gases

This paper investigates the design and performance of an allowance reserve in the context of a cap-and-trade program for greenhouse gases. We use a Monte Carlo approach in which the parameters of the marginal abatement cost function, and the supply of offsets, are drawn from specified distributions. Our framework focuses on the potential impact of “medium-run shocks” to abatement cost and offset supply, as opposed to either short-run volatility or permanent shifts in the cost curve. Our model suggests that under reasonable (and even fairly conservative) assumptions about abatement cost and offset supply, an allowance reserve broadly similar to recent proposals for US climate legislation can be effective in containing allowance prices. In our core policy scenario, with a trigger price equal to US $32 in 2015, we estimate that the probability of drawing on the allowance reserve is <25% and the probability of requiring more than 7 GT of reserve tons over 20 years is <5%. We also use the model to explore the trade-off among three features of the reserve that are most relevant to policy makers: the total size of the reserve, the trigger price, and the degree of confidence that the reserve will be large enough to limit allowance prices to the target level. Our essential result is that a lower trigger price, or a higher degree of confidence, requires a larger reserve.

Cost-based Phillips Curve forecasts of inflation

It is a well-established idea that prices are a function of marginal cost, yet estimating a reliable measure of marginal cost is difficult to do. Stock and Watson (1999) use the Phillips Curve to forecast inflation for a variety of existing activity variables that researchers commonly use to proxy for marginal cost. This paper uses a similar type of approach to examine the performance of a new candidate for the activity variable, which is marginal cost measured following the theoretical methodology of Bils (1987), which we find to be simple yet powerful when implemented empirically. We then use the Phillips Curve to conduct pseudo out-of-sample inflation forecasts for the US using: output, unemployment, hours, the labor share, the capacity utilization rate, and the new measure of marginal cost. For almost all cases, forecast errors are lowest in the regressions with the new marginal cost variable, indicating that this new measure is an improvement over previous attempts to proxy for marginal cost.