Marginal Cost Of Production Research Articles

Redesigning automated market power mitigation in electricity markets

Electricity markets are prone to the abuse of market power. Several U.S. markets employ algorithms to monitor and mitigate market power abuse in real-time. The performance of automated mitigation procedures is contingent on precise estimates of firms' marginal production costs. Currently, marginal cost is inferred from the past offers of a plant. We present new estimation approaches and compare them to the currently applied benchmark method. We test the performance of all approaches on auction data from the Iberian power market. The results show that our novel approaches outperform the benchmark approach significantly, reducing the mean (median) absolute estimation error from 11.53 (6.08) €/MWh in the benchmark to 4.03 (2.64) €/MWh for our preferred approach. This approach also performs best in our subsequent simulation of mitigation procedures. Here we find large welfare transfers from supplier to buyer surplus as well as a robust overall welfare gain, stemming from both productive and allocative efficiency gains. Our research contributes to accurate monitoring of market power and improved automated mitigation. Although we focus on power markets, our findings are applicable to monitoring of renewable energy tenders or market power surveillance in rail and air traffic.

Short- and long-term effects of carbon taxation on the prices of products shipped by sea

This study analyzes econometrically the effect of fuel carbon taxation on the prices of internationally traded goods transported by the maritime sector. Around 80% of global trade by volume is transported by sea, contributing to a nontrivial level of carbon emissions. This study is the first to analyze the effect of carbon taxation on the prices of export products transported by sea, using detailed data for the heaviest 6-digit products from 21 industries that account for 75% of the total weight of goods transported by sea. The results reveal that the closer a product is to the core competence of the exporting firm (lowest marginal production costs), the weaker the effect of the carbon tax will be on prices. This effect on export prices will be even weaker for products of certain industries that have the highest unit sales value/weight ratios. To contribute to decarbonizing the maritime sector, a carbon tax should be maintained uninterruptedly to fully internalize the awareness that improving fuel consumption competitiveness by considering the distance traveled and weight of traded products to ultimately reduce carbon tax costs.

Does digital-industrial technology integration reduce corporate carbon emissions?

The integration of digital technology and industrial technology emerges as a pivotal avenue for enterprises to attain Sustainable Development Goals (SDGs), promoting the transition towards a sustainable and green trajectory of development. The panel data utilized in this paper encompasses financial, operational, and carbon emission metrics of publicly listed companies in China from 2008 to 2019. This longitudinal dataset enables us to perform robust statistical analyses to evaluate the impacts of Digital-Industrial technology integration on carbon emission intensity over time. The results indicate that: (i) Digital-Industrial technology integration significantly reduces the carbon emission intensity of enterprises, the conclusion remains robust when subjected to endogeneity and sensitivity analyses. (ii) Digital-Industrial technology integration mainly reduces the marginal cost of production and enhances the accumulation of knowledge to reduce the carbon emission intensity of enterprises. (iii) Digital-Industrial Technology Integration manifests more pronounced effects in curbing carbon emissions in regions characterized by robust property rights protection and well-developed digital infrastructure. (iv) Further research finds that Digital-Industrial technology integration increases the green technology innovation and ESG (Environmental, Social, and Governance) performance of enterprises. The results of this study provide empirical evidence for the carbon emission reduction function of the Digital-Industrial technology integration, and also verify the positive externality impact of the Digital-Industrial technology integration on the enterprise green innovation and SDGs.

Welfare reducing vertical integration in a bilateral monopoly under Nash bargaining

AbstractWe consider a bilateral monopoly where a linear input price is determined by Nash bargaining. We show, with an increasing marginal cost of input production, that vertical integration reduces consumer surplus and welfare compared with bilateral monopoly if the bargaining power of the input supplier is low. This result is important for competition policies as it questions the common wisdom suggesting vertical integration increases welfare by eliminating the problem of double marginalization. Overproduction under bilateral monopoly compared with vertical integration is the reason for our result. Interestingly, consumer surplus and welfare can be higher under a linear input price compared with a two‐part tariff input price.

Reward-Based Crowdfunding Versus Initial Coin Offerings

Inspired by emerging financing techniques that offer additional financing options for entrepreneurs, we establish a stylized model to compare two prevalent crowdfunding strategies: Reward-based crowdfunding and Initial Coin Offerings (ICOs). First, we highlight that the fundamental difference between reward-based crowdfunding and ICO lies in the distinct types of price distortion, resulting in different agency costs. Specifically, compared to the first-best benchmark, reward-based crowdfunding sets a lower funding price to attract more consumers to pre-order, while ICO sets a higher market price due to speculators’ revenue-sharing in the market stage. Second, we show that the financing limit (i.e., the maximum funds raised) of reward-based crowdfunding is driven by the platform traffic, whereas that of ICO is driven by the marginal production cost. Therefore, even with numerous speculators, ICO may result in a lower financing limit than reward-based crowdfunding when the platform traffic or the marginal production cost is high. Third, we explore how products’ cost structures shape entrepreneurs’ financing preferences. ICO suits intangible products with high fixed cost and low marginal production cost, while reward-based crowdfunding aligns better with products exhibiting the opposite cost structure. Finally, we extend our model to show the robustness of our findings and offer some additional insights. For example, ICO may amplify the risk of market uncertainty compared to reward-based crowdfunding; Security Token Offerings (STO) benefits from the absence of agency costs between the entrepreneur and speculators compared to ICO while it may suffer from equity loss, particularly in risky and regulated markets, etc.

Lifespan increase of electrical terminal crimping punches for the automotive industry

In the Automotive Industry (AI), and in all other industries linked to it, the increase in competitiveness and the compliance with environmental requirements are mandatory. Thus, the efforts to increase the lifespan of fabrication equipment and tooling are greater than ever. This work was developed around this real need, seeking to increase the lifespan of electrical terminal crimping punches for the AI. The process to achieve the objective of the practical work began with the collection of samples from the main competitors in the market, to be able to analyze and characterize them. Subsequently, brainstorming sessions were carried out, enabling to choose which alternative samples would be produced, analyzed, and characterized. New crimping punches were then characterized at different stages of production, to study the importance and impact of the finishing stages of the production process. Finally, new samples were produced, put to the test at a real customer and advanced characterization tests were done, which allowed a better understanding of the evolution of tool wear during its lifetime. This work contributed to a better clarification of the lifespan of crimping punches, making it possible to identify potential wear mechanisms and, consequently, propose a solution that maximizes the lifespan of crimping punches. Moreover, significant lifespan improvements were attained with marginal production cost variation.

Decency or devilment: the impact of blockchain technology on product line design

ABSTRACT Blockchain is a secure database shared across a network of all participants, characterised by immutability, openness, transparency, and traceability. Therefore, blockchain technology is widely used in supply chain management, which can increase consumers' understanding of product information when goods arrive at the consumer end and increase the risk of consumer privacy information leakage. Considering a supply chain system that consists of a manufacturer and a platform, this paper studies the strategic interactions between the platform's adoption of blockchain technology and the manufacturer's product line design based on blockchain's positive and negative impacts on consumers. We examine the driving factors of the platform's use of blockchain technology, which are related to the effect of information transparency and privacy concerns caused by blockchain and the marginal production cost coefficient. In particular, a higher marginal production cost coefficient could make the platform more likely to use blockchain technology. We also find that the practice of blockchain technology may incentivize a manufacturer to extend its product line.

Profitable gray market with asymmetric costs

ABSTRACT When manufacturers sell their branded goods at different prices in different markets or channels, gray marketers buy goods in the low-priced market and resell them in the high-priced market to compete with the manufacturers’ authorized sellers. Conventional wisdom suggests the lost sales in the high-priced market resulting from the gray market’s diversion always make manufacturers worse off. However, by purely considering the marginal production cost in the high-priced market is higher than the low-priced market, we show that the manufacturer can gain from gray markets, which contradicts to the conventional result. It happens when the production is significantly less efficient in the high-priced market than in the low-priced market.

Financing Supplier Through Retailer’s Credit

This study examines two retailer-initiated pre-shipment financing programs to assist capital-constrained suppliers in securing external funds for production. The first program is retailer-sponsored financing (RSF), an emerging practice in developing economies. Under RSF, the retailer commits to sharing the loan repayment obligation with the supplier by agreeing to pay up to a specific portion of the supplier’s bank loan repayment. The second program is advance payment (AP), a common payment arrangement wherein the retailer pays a part of the wholesale amount upfront to support the supplier’s production costs. We analyze a supply chain comprising a supplier and retailer. The retailer must choose between offering RSF, AP, or neither. Without RSF or AP, the supplier must opt for bank-direct financing when it is short of funds and bear the full responsibility of repaying the loan principal and interest. Our findings reveal a divergence in supplier and retailer preferences. Specifically, the supplier favors RSF as it not only lowers the marginal production cost but also permits the supplier to charge a higher risk premium to the retailer compared to AP. Conversely, the retailer prefers AP primarily due to the latter reason. Our research underscores the significance of RSF as a distinct financing alternative, enabling retailers to aid a supplier segment that cannot rely solely on AP. RSF also proves to be advantageous for banks by expanding their supplier clientele and boosting their lending volume. Interestingly, the supplier’s and retailer’s bankruptcy risks tend to have opposite impacts on the value of RSF.

Horizontal mergers with Bertrand competition and convex costs

We discuss horizontal mergers in a homogeneous good industry where firms compete à la Bertrand with increasing marginal production costs. We show that profitable mergers can occur even for lower post-merger prices with respect to the pre-merger scenario, thus implying an increase in consumer surplus. The driving force of the result is the ability of the merged entity cutting production costs by sharing the output among its plants. This output rationalization effect can compensate for the revenue loss due to the merged entity producing less than the cumulated pre-merger production of the merging parties.

The economic viability of the sharing economy business model and its environmental impact

The sharing economy refers to a business model where access to products or services is shared among consumers through an online platform. This model has recently received much attention to determine whether it is economically viable and environmentally friendly. The main trade-off is this: a decrease in production volume possibly favoring the environment while reducing the manufacturer’s profits versus an increase in product usage potentially harmful to the environment while enhancing the manufacturer’s profits from increased margins. Furthermore, the sharing economy may prod the manufacturer to either elevate product efficiency so as to justify a higher selling price or to reduce it with the intent of cutting production costs. Given these arguments, we investigate both economic and environmental impacts of the sharing economy business model for comparison with the traditional models of pure sales and servicizing. We find that the manufacturer may prefer peer-to-peer product-sharing over pure sales or hybrid servicizing under two sets of conditions: (1) either consumers are sufficiently heterogeneous in their product usage needs, while concurrently the size of high-usage consumers being relatively small, or consumers are sufficiently homogeneous in their product usage needs, while concurrently consumer segments with different usage needs being similar in size, and (2) the marginal cost of production (per unit of efficiency) and the manufacturer’s ability to pool consumers’ needs are both sufficiently low. The sharing economy can also environmentally outperform traditional business models, especially for products where environmental impact accrues mostly at production/disposal than at usage. As a result, the sharing economy can yield a win–win outcome as to manufacturer’s profits and environmental impact.

Computational Performance Enhancement Strategies for Risk-Averse Two-Stage Stochastic Generation and Transmission Network Expansion Planning

This paper proposes a new acceleration technique and a representative day aggregation procedure for the risk-averse two-stage stochastic generation and transmission network expansion planning problem, in which the conditional value-at-risk is used. We use a finite set of scenarios to model uncertainty in the peak demand level of loads, along with the capacity and marginal production cost of generating units. Moreover, we use representative days to model the operational variability of the electrical demand and renewable generation. The combination of scenarios and representative days involves many variables and constraints, which may lead to computationally intractable problems. Therefore, we propose a new relaxed version of the constraint generation-based algorithm that reduces the computational time of the problem. We additionally present a two-stage aggregation procedure that combines the modified maximum dissimilarity algorithm and the priority chronological time-period clustering in order to reduce the resolution of the representative days and to pay attention to extreme conditions. The numerical results of modified versions of the IEEE 24-bus Reliability Test System and the IEEE 118-bus Test System show reductions in the computational time of more than 89% for the relaxed constraint generation-based algorithm, and of more than 94% for the two-stage aggregation procedure.

Techno-economic and environmental assessment of solar-based electrical vehicles charging stations integrated with hydrogen production

With the growing interest in adopting both commercial and residential electric vehicles (EVs) utilizing green renewable energy, the techno-economic assessment of EV charging stations with solar energy is a critical aspect of the transition to sustainable transportation. However, battery storage capacity for variable solar energy production is becoming increasingly less cost-effective due to the higher Lithium price. Complementing solar energy production and battery storage, the potential of combining green hydrogen fuel energy integration with solar energy for EV charging stations can provide a sustainable alternative to reach carbon-free transportation. This research aims to assess the technical and economic viability of grid-connected Photovoltaic (PV)-based EV charging stations across Kentucky based on existing EV load profiles. The study considers different PV system sizes, locations, orientations, and the impact of net metering policies and electricity tariffs on the profitability of the PV systems. Using excess PV energy, Lithium-Ion batteries will be charged, which will be assessed considering the techno-economic and environmental impacts of green EV charging stations. To further enhance green renewable energy production, we also investigated the feasibility of on-grid PV-based EV charging stations with Lithium-Ion batteries charged during low tariff periods. In comparison with these scenarios, we studied the potential benefits of integrating green hydrogen energy production using excess solar energy with and without governmental incentives. Furthermore, we assess the environmental impact of these green EV charging stations across Kentucky. Our study indicates that EV stations across Kentucky have similar techno-economic feasibility with insignificant deviation in the levelized cost of electricity, payback period, and PV energy fraction with/without Li-Ion batteries. However, with green hydrogen production, the marginal H2 production cost indicates the first scenario (on-grid PV energy charging) is the most significant, roughly 10 USD/Kg, which is ∼1.5 times higher than the second (charging during low-tariff periods) and the third scenarios (power grid to satisfy the demand deficit – approximately 6.5 USD/Kg). From the environmental perspective, the second scenario would be a good option for either hybrid EV/H2 or EV charging stations in Kentucky, factoring in the hydrogen production cost and the carbon footprint.

Corporate profit tax, managerial delegation and multinational firm's transfer pricing

AbstractThis paper analyzes the transfer pricing decision of the multinational firm. There are differences in profit tax rates between home‐country and host‐country. The multinational firm determines the transfer price to its overseas affiliate and delegates the responsibility of deciding on the final sales to its affiliate manager. We find that: (1) The multinational firm will set a higher transfer price if its affiliate hires a manager. If the host‐country firm also hires a manager, the managerial delegation may lead to an asymmetry “prisoner's dilemma”. (2) When home‐country's tax rate is higher than that in the host‐country, multinational firm tends to set a lower transfer price relative to the marginal production cost. (3) When host‐country's tax rate is higher than that in the home‐country, an increase in the host‐country corporate tax rate decreases multinational firm's profit and the consumer surplus, while its impact on the host‐country firm's profit is non‐monotone; an increase in the home‐country tax rate decreases host‐country firm's profit, increases consumer surplus, but has a non‐monotone impact on multinational firm's profit.

Consumption taxation to finance pension payments

To assess how a permanent shift from financing a public pay-as-you-go pension by direct taxation toward financing it by indirect taxation affects the economy and welfare, we use an overlapping-generations-augmented two-region general equilibrium framework with search frictions on the labor market. The analyzed tax reform partially shifts the tax burden from domestic to foreign producers, lowers marginal costs of domestic production and generates positive domestic macroeconomic effects. Furthermore, the partial postponement of a household’s tax burden to retirement leads to higher savings and increases domestic assets; however after the implementation of the tax reform, the policy-induced increase in consumption costs makes retirees and households close to retirement worse off. Moreover, the increase in domestic net foreign assets implies that consumption of foreign households eventually falls, which contradicts results commonly found in models without an endogenous savings motive.

A case for higher spending on public goods

A case for higher spending on public goods Yew-Kwang Ng, Emeritus Professor in the Department of Economics at Monash University in Australia, argues in favor of increased spending on public goods. An important issue in public policy is how much we should spend on public goods. A pure public good has the characteristic that its usage by some does not reduce its availability to others. Examples include defense, broadcasting, publication, and research. Private goods (subsuming services) like apples or haircuts are typically paid for by consumers. In a market economy, their provision and prices are thus typically determined by the balance of supply and demand. The demand is in accordance with the willingness to pay by the consumers; this, in turn, depends on their marginal valuation (the additional value provided by consuming another unit). On the other hand, the supply depends on the marginal costs of production (the additional costs of producing another unit).

How does firms’ cost structure affect their quality–price mix? An experimental analysis

Experimental literature on product differentiation is scarce and mostly focused on horizontal product differentiation. This paper focuses on vertical product differentiation considering a quality-then-pricing duopoly game and exploring how firms’ cost structure affects firms’ decisions and market structure. Two scenarios are considered, differing in the way quality affects production costs: in the first, quality is costless, while, in the second, marginal production costs increase with quality. We explore the impacts on market coverage, qualities, product differentiation, prices, and intensity of competition (assessed by price-cost margins). Our experimental results confirm the (theoretically proved) need to endogenize the market structure, as a duopoly with full coverage emerges when quality is costless, but a duopoly with partial coverage emerges when quality is costly. We also find that quality differentiation is lower in the lab than what is theoretically predicted, and lower in the costless quality treatment. The intensity of competition is higher when quality is costly, as price-cost margins are lower in this case.

Monopoly pricing with dual‐capacity constraints

AbstractThis paper studies the price‐setting behavior of a monopoly facing two capacity constraints: one on the number of its consumers, and the other on the amount of products it can sell. The characterization of the firm's optimal pricing and optimal customer mix as a function of its two capacities reveals a rich structure. In contrast to the results under one‐dimensional capacity constraints with constant marginal cost of production, a firm may optimally respond to an exogenous reduction in one of its capacities by decreasing one of its prices. Moreover, neglecting the existence of the second capacity constraint can reverse some policy interventions' effects on consumer welfare. In particular, easing a regulatory restriction on one of the constraints may harm the average consumer.

Blockchain-Empowered Distributed Additive Manufacturing-as-a-Service: An Architectural Perspective

Additive Manufacturing (AM) is transforming the way that we fabricate, deliver, and consume a wide range of products and components, including those for consumers, medical devices, automobiles, and aircraft. In AM, 3D-printers are used to fabricate products by depositing material in a layer-by-layer fashion, leading to extremely low marginal production costs and significantly simplifying the manufacturing supply chain by providing the opportunity for production that is much closer to consumers. With extremely low marginal costs, AM facilities can quickly scale their production up and down, or redirect their resources to produce entirely different types of goods to meet dynamic market demands. However, most AM companies that employ 3D-printers have not yet upgraded their operations in a way that improves their supply chain. In this paper, we first offer an overview on the state-of-the-art of AM supply chains and then present a novel blockchain-empowered system architecture, namely, Additive Manufacturing-as-a Service (AMaaS), that can facilitate the speedy adoption of AM in manufacturing industries. Finally, we identify several major research challenges in terms of market design, control algorithms, and security, as well as research directions to tackle them.

Expansion planning of the transmission network with high penetration of renewable generation: A multi-year two-stage adaptive robust optimization approach

This paper addresses the multi-year two-stage expansion planning of the transmission network of a power system with high penetration of renewable generation modeling long-term uncertainty by using adaptive robust optimization. The multi-year nature of the problem is modeled by considering a comprehensive view of the planning horizon. A cardinality-constrained uncertainty set is used to model the future worst-case uncertainty realization of the peak power consumption of loads, along with the capacity and marginal production cost of generating units. Unlike previous works, we model certain features of the operation that are typically ignored in multi-year robust transmission network expansion planning problems, namely, the operational variability of renewable generating units, the operational flexibility of conventional generating units, and the non-convex operational feasibility sets of storage facilities. The solution procedure employed for this multi-year two-stage robust problem, which is formulated as a three-level problem, is based on the combination of the nested column-and-constraint generation algorithm with two exact acceleration techniques. We analyze the performance of the proposed model through the use of the IEEE 24-bus Reliability Test System and the IEEE 118-bus Test System. Numerical results show that the use of the multi-year approach leads to reductions in the total worst-case cost of up to 7% in comparison with the static and sequential static procedures. Moreover, an underestimation of the total worst-case cost of more than 8% is attained when ignoring certain operational constraints of conventional generating units and storage facilities. Lastly, a sensitivity analysis is presented in order to illustrate the impact of the maximum deviations of the uncertain parameters on the total worst-case cost.