Monopoly Level Research Articles

Price-Cap Regulation of Firms That Supply Their Rivals

Abstract We study price-cap regulation in a market in which a vertically integrated upstream monopolist sells an essential input to a downstream competitor. In the absence of regulation, entry benefits both firms, but may harm downstream consumers because the upstream monopolist can set a high input price that would push downstream prices above the unregulated monopoly level. However, if a regulator caps the incumbent’s upstream and downstream prices, consumers and firms are better off after entry than under a price-cap monopoly. We extend our model to examine the concern that price caps may induce incumbents to forgo cost-reducing investments and dampen entrants’ incentives to self-provision the input.

INFORMATION ACQUISITION AND DIFFUSION IN MARKETS

AbstractConsumers acquire information through their own search efforts or through word‐of‐mouth communication within their social network. Information diffusion leads to free‐riding and less active search. Free‐riding consumers also create important positive externalities, however, as they are more likely to compare prices, imposing competitive pressure on firms. We show how market prices depend on network characteristics and search cost. For example, if search cost becomes small, price dispersion disappears, while prices converge to the monopoly level, with expected prices decreasing for small search cost. Prices are lower in societies with more connections, while price dispersion remains even in fully connected societies.

Imposing Choice on the Uninformed: The Case of Dynamic Currency Conversion

Over the course of the past two decades, it has become a common experience for consumers authorizing an international transaction via credit card to be invited to choose the currency in which they wish the transaction to be executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we argue that the opposite is the case. In fact, the unique pure-strategy equilibrium in a natural fee-setting game, with uninformed and possibly inattentive consumers, turns out to be highly asymmetric, entailing fees for the service provider that persistently exceed the monopoly level. Although losses in welfare may be substantial, a regulatory solution is unlikely to come about due to a global free-rider problem.

The impact of artificial intelligence design on pricing

AbstractThe behavior of artificial intelligence (AI) algorithms is shaped by how they learn about their environment. We compare the prices generated by AIs that use different learning protocols when there is market interaction. Asynchronous learning occurs when the AI only learns about the return from the action it took. Synchronous learning occurs when the AI conducts counterfactuals to learn about the returns it would have earned had it taken an alternative action. The two lead to markedly different market prices. When future profits are not given positive weight by the AI, (perfect) synchronous updating leads to competitive pricing, while asynchronous can lead to pricing close to monopoly levels. We investigate how this result varies when either counterfactuals can only be calculated imperfectly and/or when the AI places a weight on future profits. Lastly, we investigate performance differences between offline and online play.

Analysis of gambier monopoly index in West Sumatra Province

Gambier production in Indonesia comes from smallholder plantations. West Sumatra Province is the leading producer of gambier, with a supply of around 80-90 per cent of the total national gambier production. Based on empirical data, when the selling price of gambier exports increases or fluctuates, the selling price of gambier farmers does not increase as much as the price increase at the level of exporter traders. This condition creates marketing inefficiency. The monopoly index (MPI) is one way to measure marketing efficiency based on the performance of each marketing agency. In this regard, the current business environment is also affected by the Covid-19 pandemic. This study analyzed the monopoly level on the Gambier marketing channel in West Sumatra during the covid 19 pandemic. A survey was conducted in this study. The type of data used in this research is cross-section data. Respondents in this study were gambier farmers, gambier traders, and gambier exporters in Padang City, Lima Puluh Kota, and Pesisir Selatan Regency. The analytical method used in this study is using the Lerner index. Based on the analysis of the monopoly index, it is known that exporters have an enormous monopoly index value compared to other marketing institutions, where the collecting trader has a monopoly index of 4.84, inter-regional traders have 2.09, and exporters have 12.81 MDI. These values showed that exporters dominate gambier marketing in West Sumatra Province. The strong position of exporters in determining prices and marketing gambier is also influenced by cooperation with inter-regional traders (IRT).

Competing auctions with non-identical objects

We study a competition model with two sellers that auction non-identical objects, unlike most of the literature on competing auctions. Each bidder has bidimensional private information, his values for the objects, and chooses the auction in which he participates (if any) after each seller has set a reserve price for her auction. We show that in some cases the duopoly reserve price is greater than the reserve price for a monopolist auctioning a single object; thus, an increase in the number of sellers may make some bidder’s types worse off. In our analysis we first characterize the unique symmetric equilibrium for the game of auction choice played by the bidders and investigate its features. Then for the game of reserve price setting played by the sellers, we show that in each symmetric equilibrium the reserve price level is determined by the interplay of two effects, a virtual value effect and a business stealing effect. The former tends to lift the equilibrium reserve price above the monopoly level, the latter may drive the equilibrium reserve price significantly below the monopoly level when the number n of bidders is small. For a large n we find that different reserve prices in the two auctions have little effect on bidders’ auction choices. As a consequence, when n is large the business stealing effect weakens with respect to the virtual value effect, and for the cases we consider the equilibrium reserve price is above the monopoly level.

Artificial Intelligence, Algorithm Design, and Pricing

We calculate the time path of prices generated by algorithmic pricing games that differ in their learning protocols. Asynchronous learning occurs when the algorithm only learns about the return from the action it actually took. Synchronous learning occurs when the artificial intelligence conducts counterfactuals to learn about the returns it would have earned had it taken an alternative action. In a simple market setting, we show that synchronous updating can lead to competitive pricing, while asynchronous updating can lead to pricing close to monopoly levels. However, building simple economic reasoning into the asynchronous algorithms significantly modifies the prices it generates.

Imposing Choice under Ambiguity: The Case of Dynamic Currency Conversion

It is a common experience for present-day consumers making an international payment via credit or debit card to be invited to choose the currency in which they wish to have the transaction executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we show that the opposite is the case. In fact, the unique pure-strategy Nash equilibrium in anatural fee-setting game turns out to be highly asymmetric, entailing fees for the service provider that always exceed the monopoly level. Although losses in welfare may be substantial, a regulatory solution is unlikely to come about due to a global free-rider problem.

Competitive Information Disclosure in Search Markets

Buyers often search across sellers to learn which product best fits their needs. We study how sellers manage these search incentives through their disclosure strategies (e.g., product trials, reviews, and recommendations) and ask how competition affects information provision. If sellers can observe the beliefs of buyers or can coordinate their strategies, then there is an equilibrium in which sellers provide the “monopoly level” of information. In contrast, if buyers’ beliefs are private, then there is an equilibrium in which sellers provide full information as search costs vanish. Anonymity and coordination thus play important roles in understanding how advice markets work.

Equality of bargaining power in contracts for international liner shipping

Mandatory rules exist in contracts for international liner shipping primarily because of imbalances and non-equity in the allocation of contract responsibilities. The superior bargaining position owned by the carriers depends largely upon liner market monopoly levels, the supply and demand balance between the shipper and carrier, and the cargo volume size of the shippers. With the development of shipping technologies, mode of transport, and shipping competition policy, the unequal comparison of bargaining forces between shippers and carriers changes. When the existing mandatory rule was deemed no longer necessary due to changing circumstances, legislation requirements to restore freedom to contract became apparent. When both sides have equal bargaining power, adoption of the principle of freedom of contract for their business relationships is suitable. The Rotterdam Rules concerning freedom of volume contract construction is based on equal bargaining powers between both sides and responds to the evolving situation of the industry. The Rules represent the development trend of today’s theory of contracts for international liner shipping and the demand for legal and institutional changes.

ANALYSIS OF BEEF MARKETING IN LAFIA METROPOLIS OF NASARAWA STATE, NIGERIA

Purpose: The study analysed the marketing of beef in Lafia metropolis. Specifically, the study described the socio-economic characteristics of beef marketers in the area, analysed the market structure for beef, assessed the marketing cost and profit, and estimated the operational efficiency of beef marketing and its determinants. It also identified the constraints faced by beef marketers in the area. Methodology: Data used for the study were generated through administration of well structured questionnaire to 60 respondents made up of 20 wholesalers and 40 retailers randomly selected from 4 major beef markets in the study area. Data were analysed using descriptive statistics, budgeting, concentration ratios, Gini coefficient, operational efficiency and regression technique. Results: Results showed variation in marketing cost, marketing margin and marketing profit for both wholesale and retail beef markets. Results also indicated that wholesale beef market operated at a monopoly level while the retail beef market showed perfect competition. The Gini coefficient for wholesalers of 0.47, which is above 0.35 indicates high level of market concentration and high inequality in wholesale beef market, while retail market with a value of 0.29 shows low level of market concentration and low level of inequality. Wholesalers were also more operationally efficient than retailers. The result further showed that transportation cost had significant effects on marketing efficiency for the wholesale market. But transportation cost, record keep, level of education and packaging cost has significant effect on operational efficiency of beef retail market. Results also indicated that marketers both wholesalers and retailers complained of inadequate capital as a very serious constraint; transportation cost and inadequate storage facilities, as serious constraints; risk of spoilage, low patronage as not serious constraints, and market charges as not very serious constraints.

Regulating monopoly price discrimination

A monopolist sells its product in separated markets. The effects of requiring a uniform profit margin instead of monopoly pricing are assessed. A margin equal to the output-weighted arithmetic mean of the monopoly margins raises consumer surplus but reduces total output. When the margin equals the (lower) harmonic mean total output exceeds the monopoly level if the demand functions are convex, and social welfare rises. Extensions cover a uniform price-marginal cost ratio and a uniform margin when the initial price is uniform and costs differ. The analysis uses convexity relations and the implications of profit-maximization.

Drip Pricing When Consumers Have Limited Foresight: Evidence from Driving School Fees

This paper empirically investigates the add-on or drip pricing behavior of firms. We present a model in which consumers purchase a base product and, with some probability, an add-on product from the same firm, but are not always aware of the possible need for the add-on product. We show that a loss leader pricing strategy emerges whereby firms price the base product below single-product pricing levels, but price the add-on at monopoly levels. We test the implications of the model in the Portuguese market for driving instruction where students are frequently forced to pay for additional lessons and repeat driving exams upon failing their initial exam. We benefit from a detailed snapshot of industry data on student characteristics and preferences, school attributes including fees and costs, and market demographics for a cross-section of local markets with differing numbers of school competitors. We find evidence in support of the model predictions. Most notably, prices for the base course of instruction, but not the add-on repeat courses, decline in the number of competitors a firm faces. A consumer survey suggests that approximately one quarter of students are inattentive to repeat fees when making their school choice. This result has important policy implications regarding the cross-subsidization of students who are aware of the add-on by those who are not.

Optimal pricing/ordering and advertising investment strategies for a capital-constrained retailer

Abstract This paper studies a stylized two-period model with a capital-constrained retailer who attempts to achieve its short-term survival and long-term profitability by implementing the associated marketing/operational strategy. Given the demand information, we analyze the problem for three scenarios: (1) basic model; (2) competition; and (3) uncertain advertising effectiveness. The results suggest that the retailer should place the retail price and order quantity at the monopoly level, and adopt the “invest-all-or-none” advertising investment strategy for different market situations. When the market demand is stochastic, however, the optimal policies obtained in deterministic demand case may fail. Alternatively, we propose two operational strategies, i.e., low-risk strategy and high-risk strategy, to balance the pricing, ordering and advertising investment decisions through an appropriate manner. We numerically investigate the impacts of market parameters on the optimal decisions under demand uncertainty, and show that many results obtained in deterministic demand case continue to hold and present some other interesting observations. Finally, we extend our model to consider the independent exclusive advertising effect with competition, the saturation effect of advertising investment, and the multi-period case.

High Generic Drug Prices and Market Competition

Prices for some generic drugs have increased in recent years, adversely affecting patients who rely on them. To determine the association between market competition levels and the change in generic drug prices in the United States. Retrospective cohort study. Prescription claims from commercial health plans between 2008 and 2013. The 5.5 years of data were divided into 11 study periods of 6 months each. The Herfindahl-Hirschman Index (HHI)-calculated by summing the squares of individual manufacturers' market shares, with higher values indicating a less competitive market-and average drug prices were estimated for the generic drugs in each period. The HHI value estimated in the baseline period (first half of 2008) was modeled as a fixed covariate. Models estimated price changes over time by level of competition, adjusting for drug shortages, market size, and dosage forms. From 1.08 billion prescription claims, a cohort of 1120 generic drugs was identified. After adjustment, drugs with quadropoly (HHI value of 2500, indicating relatively high levels of competition), duopoly (HHI value of 5000), near-monopoly (HHI value of 8000), and monopoly (HHI value of 10000) levels of baseline competition were associated with price changes of -31.7% (95% CI, -34.4% to -28.9%), -11.8% (CI, -18.6% to -4.4%), 20.1% (CI, 5.5% to 36.6%), and 47.4% (CI, 25.4% to 73.2%), respectively, over the study period. Study findings may not be generalizable to drugs that became generic after 2008. Market competition levels were associated with a change in generic drug prices. Such measurements may be helpful in identifying older prescription drugs at higher risk for price change in the future. None.

Manufacturer collusion: Strategic implications of the channel structure

AbstractWe investigate how the structure of the distribution channel affects tacit collusion between manufacturers. When selling through a common retailer, we find—in contrast to the conventional understanding of tacit collusion that firms act to maximize industry profits—that colluding manufacturers strategically induce double marginalization so that retail prices are above the monopoly level. This lowers industry profits but increases the profit share that manufacturers appropriate from the retailer. Comparing common distribution with independent (exclusive) distribution, we show that the latter facilitates collusion. Despite this result, common retailing leads to lower welfare because a common retailer monopolizes the downstream market. For the case of independent retailing, we also demonstrate that contract offers that are observable to the rival retailer are not necessarily beneficial for collusive purposes.

Collusion Under Risk Aversion and Fixed Costs

We analyze collusion under demand uncertainty by risk‐averse cartels that care about the utility derived from profits. With sufficient risk aversion and non‐trivial fixed operating costs, it becomes difficult for cartels to collusively restrict output both when demand is low and marginal dollars are highly valued, and when demand is high and potential defection profits are high: output relative to monopoly levels becomes a U‐shaped function of demand. Greater risk aversion or higher fixed operating costs make collusion more difficult to support in recessions, but easier to support in booms.

Communication in vertical markets: Experimental evidence

An upstream monopolist supplying competing downstream firms may fail to monopolize the market because it is unable to commit not to behave opportunistically. We build on previous experimental studies of this well-known commitment problem by introducing communication. Allowing the upstream firm to chat privately with each downstream firm reduces total offered quantity from near the Cournot level (observed in the absence of communication) halfway toward the monopoly level. Allowing all firms to chat together openly results in complete monopolization. Downstream firms obtain such a bargaining advantage from open communication that all of the gains from monopolizing the market accrue to them. A simple structural model of Nash-in-Nash bargaining fits the pattern of shifting surpluses well. Using third-party coders, unsupervised text mining, among other approaches, we uncover features of the rich chat data that are correlated with market outcomes. We conclude with a discussion of the antitrust implications of open communication in vertical markets.

Wholesale Competition, Open Access Regulation and Tacit Collusion

Although the regulation of access to an essential upstream resource is a perennial issue for policymakers and industry stakeholders, a set of new issues arises when there is more than one vertically integrated access provider such that competition at the wholesale level may emerge in addition to retail competition. Especially in the likely case of a highly concentrated (duopoly) wholesale market the question arises whether regulatory intervention is (still) warranted. Evidently, the answer to this question will have direct ramifications on how regulators and competition authorities should deal with this kind of market structure, but also on whether authorities should promote the entry of a second integrated access provider in markets in which the essential input is currently supplied monopolistically.Albeit not confined to this context, the analysis of this market scenario of competing access providers is particularly relevant for the telecommunications industry. Due to technological progress and consolidation both the fixed and the mobile industries are characterized by few vertically integrated firms, as well as several non-integrated resellers that rely on access to an upstream resource. On the one hand, with respect to fixed networks, technological progress led to the roll out of new fiber-optic networks as well as the evolution of broadband cable networks, which both created new vertically integrated firms that compete most notably in densely populated urban areas with the traditional telecommunications incumbent. On the other hand, mobile telecommunications markets recently experienced a wave of mergers and acquisitions that reduced the number of independent operators maintaining a distinct cellular infrastructure, thus increasing market concentration at the wholesale level. We consider the market scenario where wholesale access for a non-integrated reseller is provided competitively by two vertically integrated firms. In a continuous-time economic laboratory experiment with both student and expert participants we compare market outcomes under different modes of wholesale competition as well as under an open access regulation preventing a margin squeeze. In this vein and in the spirit of a more behaviorally oriented regulation, this experimental analysis serves as a regulatory testbed, which points at possible behavioral issues that may arise in practice. We find that wholesale competition can facilitate tacit collusion, which yields wholesale and retail prices even above the monopoly level. We draw on the literature on upstream collusion and show in a theoretical analysis that incentives for tacit collusion are actually higher under wholesale competition if an infinitely repeated game context is considered. We demonstrate that wholesale competition may be intensified by a simple price commitment rule, which in turn restores the theoretical prediction to the extent that access prices are lower than under a wholesale monopoly. Moreover, the experimental results give a clear indication regarding the theoretically ambiguous effect of margin squeeze regulation on retail market prices, showing that consumers are never better off compared to no regulation in both the monopoly and the duopoly wholesale scenario.

Wholesale Competition and Open Access Regimes: Experimental Evidence

We consider the market scenario where wholesale access for a non-integrated reseller is provided competitively by two vertically integrated firms. In a continuous-time economic laboratory experiment with both student and expert participants we compare market outcomes under different modes of wholesale competition as well as under an open access regulation preventing a margin squeeze. We find that wholesale competition can facilitate tacit collusion, which yields wholesale and retail prices even above the monopoly level. However, we show that a simple price commitment rule can substantially reduce tacit collusion. Moreover, we do not find evidence that margin squeeze regulation benefits consumers.