Monopoly Production Research Articles

The role of discounts and loss leaders in medicine procurement in Austrian hospitals - a primary survey of official and actual medicine prices

BackgroundKnowledge about the prices of medicines used in hospitals, particularly the actually achieved ones, is scant. There are indications of large discounts and the provision of medicines cost-free to Austrian hospitals. The study aims to survey the official and actual prices of medicines procured by Austrian hospitals and to compare them to the out-patient prices.MethodsPrimary price collection of the official hospital list prices and the actually achieved prices for 12 active ingredients as of the end of September 2009 in five general hospitals in Austria and analysis of the 15 most commonly used presentations.ResultsThe official hospital list prices per unit differed considerably (from 1,500 Euro for an oncology medicine to 0.20 Euro for a generic cardiovascular medicine). For eight on-patent medicines (indications: oncology, anti-inflammatory, neurology-multiple sclerosis and blood) actual hospital medicine prices equaled the list prices (seven medicines) or were lower (one medicine) in four hospitals, whereas one hospital always reported higher actual prices due to the application of a wholesale mark-up. The actual hospital prices of seven medicines (cardiology and immunomodulation) were below the official hospital prices in all hospitals; of these all cardiovascular medicines were provided free-of-charge. Hospital prices were always lower than out-patient prices (pharmacy retail price net and reimbursement price).ConclusionThe results suggest little headroom for hospitals to negotiate price reductions for “monopoly products”, i.e. medicines with no therapeutic alternative. Discounts and cost-free provision (loss leaders) appear to be granted for products of strategic importance for suppliers, e.g. cardiovascular medicines, whose treatment tends to be continued in primary care after discharge of the patient.

Diversity of Rare Earth Deposits: The Key Example of China

As a source of strategic commodities for high technologies, the deposits of rare earth elements (REEs) in China are a world-class phenomenon. The combination of the world's largest accumulation of REEs in the Bayan Obo deposit and the low cost of mining the extremely valuable heavy REEs from residual deposits makes China almost a monopoly producer. Research on a range of Chinese deposits shows that not only hypogene but also secondary processes create economic REE deposits. These deposits have characteristic REE distribution patterns, which range from primary light REE enrichment in carbonatites from the Himalayan Mianning–Dechang orogenic belt and in metamorphosed carbonatite and polyphase mineralization at Bayan Obo, through unusual flat REE patterns in carbonatites from the Qinling orogenic belt, to strong secondary heavy REE enrichment in residual clays from southern China.

Luxury goods, vertical restraints and internet sales

We propose a model describing consumer demand for a luxury good, in which the perceived quality of the good is related to its scarcity. We use this model to analyze the optimal production and price setting decisions of a luxury good manufacturer and contrast them with the decisions that would be made by a social planner. We show that irrespective of the way social welfare is defined, a monopoly producer of the luxury good may select socially optimal prices and quantity. Thus the incentives of the monopolist and the social planner may to some extent be aligned. We also analyze whether the producer and social planner would be willing to sell the luxury good over the internet if this allowed to increase the number of potential customers for the product. We show that under reasonable assumptions the monopoly producer would not oppose the introduction of internet sales, whilst the social planner may do so, depending on the specification of the model’s parameters. This result is important in the light of the recent revision by the European Commission of its Guidelines on Vertical Restrains (2010).

Governance Heterogeneity and Performance at US Stock Exchanges: Evidence from Regulation NMS

Regulation NMS, announced in June 2005 by the SEC, was intended to generate competition with the New York Stock Exchange (NYSE). The NYSE had for many decades maintained a near monopoly on the trading of securities initially listed on the exchange. Reg. NMS allowed trades on electronic communications networks (ECNs) without considering prices on the NYSE trading floor. With Reg. NMS in place, the NYSE immediately began losing market share and average bid-ask spreads for NYSE-listed shares increased, sometimes getting significantly closer to the average spreads for shares listed on the traditionally more volatile Nasdaq. What explains this outcome? The conventional wisdom predicts that consumers (here, investors) would benefit as the profits of a monopoly producer (here, dealers executing trades) declined, but evidence of wider spreads suggests the opposite. The literature relies on a standard model of a member-governed non-profit in which broker-dealers own the exchange. But that standard model fails to capture the actual heterogeneity in governance structure: the Nasdaq fits this model, but the NYSE does not. Thus, we consider an alternative to the standard model in which underwriters are owners, for which there is anecdotal evidence. However, a statistical test is possible because of the starkly different objective function that underwriters would have as compared with dealers; for underwriters, efficient trading is an input to their production function where for dealers, trading is the primary source of profits. Using panel data of Corwin-Schultz bid-ask spreads, we measure differences in market quality between the NYSE and Nasdaq, which the new regulation allows because NYSE-listed shares trade on multiple new venues after Reg. NMS but Nasdaq-listed shares do not trade on the NYSE. A difference-in-differences test finds that spreads for NYSE-listed shares increased after Reg. NMS issue to resemble more closely spreads for Nasdaq-listed shares.

Bundling strategy and product differentiation

The existing literature shows that a decrease in the degree of substitutability increases a monopoly’s incentive to bundle. This paper in addition takes into account competition in the second product market and then re-examines how intra-brand and inter-brand product differentiations affect the incentive to bundle. In order to formally examine the above conjectures, this research builds up a two-firm, two-product model in which product 1 (monopoly product) is produced only by the bundling firm and product 2 (competing product) is produced by both firms. The analysis shows that under both Bertrand and Cournot competitions the incentive to bundle does not necessarily increase with the degree of intra-brand differentiation, while it strictly decreases with the degree of inter-brand differentiation. Moreover, under Bertrand competition bundling always decreases consumer surplus, but may increase the competitor’s profit and social surplus. Under Cournot competition bundling always reduces the opponent’s profit and social welfare, but may increase consumer surplus.

The Economics of Luxury Goods: Utility Based on Exclusivity

We propose a model describing consumer demand for a luxury good, in which the perceived quality of the good is related to its exclusivity, that in turn depends on the number of consumers buying it. We use this model to analyze the optimal production and price setting decisions of a luxury good manufacturer and contrast them with the decisions that would be made by a social planner. We show that irrespective of the way social welfare is defined, a monopoly producer of the luxury good may select socially optimal prices and quantity. Thus the incentives of the monopolist producer and the social planner may to some extent be aligned.

Distribution Channel Management in an Internet Age: Equilibrium and Social Welfare

This paper considers the conditions under which a monopoly manufacturer selling through independent retailers in a spatial market will add an Internet distribution channel (an e-channel), and analyzes the effect this would have on consumer surplus and social welfare. We find that an e-channel will be added only if consumer’s travel costs are high and the e-retailer’s delivery costs are low. Such double-channel operation will decrease consumer surplus if in the pre-entry case the market is fully covered by brick-and-mortar retailers. If instead the market is partially covered and delivery costs are sufficiently high, it will not decrease any consumer’s surplus. When delivery costs are low, social welfare will be improved by profitable double-channel operation even if consumer surplus is harmed by it. Finally, double-channel operation could be Pareto superior even if delivery costs are high.

Internet Channel Entry

By analyzing various alternative mixed channel structures composed of a monopoly manufacturer and online and offline outlets, we investigate how the specific channel structure and varying market co...

Internet Channel Entry: A Strategic Analysis of Mixed Channel Structures

By analyzing various alternative mixed channel structures composed of a monopoly manufacturer and online and offline outlets, we investigate how the specific channel structure and varying market conditions moderate the impact of Internet channel entry on the channel members and consumers. As an extension of Balasubramanian's model [Balasubramanian, S. 1998. Mail versus mall: A strategic analysis of competition between direct marketers and conventional retailers. Marketing Sci. 17(3) 181–195], our game-theoretic model captures the fundamental difference between two different channel types and consumer heterogeneity in preference for the Internet channel use. The equilibrium solutions indicate that Internet channel entry does not always lead to lower retail prices and enhanced consumer welfare. We also find that an independent retailer might become worse off after adding its own Internet outlet under certain market conditions. We find that the impact of the Internet channel introduction substantially varies across channel structures and market environments. We explain these varied results by proposing a framework of five key strategic forces that shape the overall impact of the Internet channel introduction.

Political Economy of Anglo-French Trade, 1689-1899: Agricultural Trade Policies, Alcohol Taxes, and War

Britain contrary to received wisdom was not a free trader for most of the 1800s and, despite repeal of the Corn Laws, continued to have higher tariffs than the French until the last quarter of the century. War with Louis fourteenth from 1689 led to the end of all trade between Britain and France for a quarter of a century. The creation of powerful protected interests both at home and abroad led to the imposition of prohibitively high tariffs on French imports notably on wine and spirits, when trade with France resumed in 1714. Protection of domestic interests from import competition allowed the state to raise domestic excises which provided increased government revenues despite almost no increases in the taxes on land and income in Britain. The state ensured compliance not simply through the threat of lower tariffs on foreign substitutes but also through the encouragement of a trend towards monopoly production in brewing and restricted retail sales of beer. This history is analyzed in terms of its effects on British fiscal and commercial policy from the early 1700s to the end of the nineteenth century. The result is a fuller, albeit revisionist account of the rise of the modern state that calls into question a variety of theses in economics and political science that draw on the naive view of a liberal Britain unilaterally moving to free trade in the nineteenth century.

Sensitivity of equilibrium behavior to higher-order beliefs in nice games

We analyze “nice” games (where action spaces are compact intervals, utilities continuous and strictly concave in own action), which are used frequently in classical economic models. Without making any “richness” assumption, we characterize the sensitivity of any given Bayesian Nash equilibrium to higher-order beliefs. That is, for each type, we characterize the set of actions that can be played in equilibrium by some type whose lower-order beliefs are all as in the original type. We show that this set is given by a local version of interim correlated rationalizability. This allows us to characterize the robust predictions of a given model under arbitrary common knowledge restrictions. We apply our framework to a Cournot game with many players. There we show that we can never robustly rule out any production level below the monopoly production of each firm.

A Monopolist in Public Transport: Undersupply or Oversupply?

textabstractA monopolist in public transport may oversupply frequency relative to the social optimum, as van Reeven (2008) demonstrates with homogeneous consumers. This result generalizes for heterogeneous consumers who know the timetable. Whether a monopolist oversupplies or undersupplies frequency depends on the degree of consumers’ heterogeneity as reflected in the distribution of consumers’ reservation prices. Oversupply is likely to occur when this distribution is peaked, and undersupply is likely to occur when this distribution is rather flat. In particular, monopoly production results in the oversupply of frequency when consumers’ reservation prices are concentrated around the entry costs of the private car, being the main alternative to public transport.

Monopoly behaviour with speculative storage

We analyze the effects of competitive storage when the production of the good is controlled by a monopolist. The existence of competitive storers serves to reduce the monopolist's effective demand when speculators are selling and to increase it when they are buying. This results in the monopolist manipulating the frequency of stockouts, and hence the price-smoothing effects of competitive storage. We find that competitive storage affects both the level and the volatility of price under monopoly. The average price level is higher with storage due to the monopolist's desire to induce stockouts by occasionally keeping the price just at the level that induces a stockout. Although storage does reduce the volatility of prices under monopoly production, prices are more volatile than they would be under perfectly competitive production, even though stockouts occur less frequently under monopoly. These results are demonstrated through closed-form solutions of the two-period version of the model and computational solutions to the infinite horizon version of the model.

COMPETITION OR MONOPOLY? COMPARING PRIVATIZATION OF LOCAL PUBLIC SERVICES IN THE US AND SPAIN

Differences in national traditions of public intervention, institutional arrangements and public service markets make local public services an area of great diversity. In this paper we undertake a comparative study of how local governments arrange for delivery of water and waste services in the US and Spain. We find levels of privatization are higher in Spain than in the US. We review organizational reform in the two contexts and compare service delivery data using national surveys from each country. We find lower and less stable privatization in the US stems in part from adherence to public choice emphasis on the benefits of market competition over public monopoly. By contrast, Spanish municipalities reflect an industrial organization approach, and create hybrid public/private firms which benefit from both market engagement and economies of scale available under monopoly production. We conclude that managing monopoly may be more important than competition in local service delivery.

DURABLE-GOODS MONOPOLY WITH MAINTENANCE

A two-period durable-goods monopoly product model with a competitive maintenance market is examined. Three types of monopoly solutions are calculated and contrasted to the social optimum: rentals, committed sales and uncommitted sales. Among other things, it is shown that contrary to the conventional wisdom a seller with committed power does not wish to commit ‘to act like a renter’ when maintenance is performed by buyers. This is due to the different objective functions of the buyer and seller. Furthermore, unlike earlier works, it is shown that the socially optimal amount of maintenance/repair does not occur in any sales case.

Research Note—The Effects of Costs and Competition on Slotting Allowances

We consider the optimal two-part tariff contract between a manufacturer and a retailer. We show that retail competition (in the presence of either fixed costs or bargaining power) may lead to slotting allowances in an optimal contract, even with a monopoly manufacturer and no information asymmetry. On the other hand, slotting allowances do not arise with a monopoly retailer and no information asymmetry, whether the manufacturer is a monopoly or not. We also show that more intense retail competition, higher retail bargaining power, larger retailer fixed costs, lower marginal costs of retailing, as well as larger relative retailer size (whether coming from a location or operating advantage), have a positive impact on the incidence and the magnitude of slotting allowances. The opposing effects of the fixed and marginal operating costs on slotting allowances, as well as the impact of competition and bargaining power on profits, underscore the importance of careful definitions of these variables in empirical research.

Introduction: Global actors, markets and rules driving the diffusion of genetically modified (GM) crops in developing countries

The theme of this special issue – genetically modified (GM) crops – goes to the heart of the process of globalisation, technology and development. This introductory essay explains how this new technology is being driven by the actors (multinational corporations), markets (large global markets) and rules (intellectual property) of globalisation. But it is also shaped by the other national and global actors (farmers, research scientists, anti-globalisation and environmental NGOs), markets (national priorities) and rules (national biosafety). The papers in this issue address some policy questions for developing countries: markets that are too small for corporate sector, or to be kept GM free, or dominated by monopoly products; the rules of intellectual property rights and the enforcement of biosafety regulation. Developing countries need to develop policy approaches that are specific to its own unique set of circumstances.

Equilibrium in a durable goods market with lumpy adjustment

Durable goods are an important component of the business cycle. Equilibrium models of durable goods markets are made difficult by the lumpy nature of individual purchases. We show that a straightforward approximation of the distribution of durable goods holdings gives rise to a tractable equilibrium model. We analyze the case of competition as well as that of a monopoly producer.

Privatised provision of essential plant breeding infrastructure*

As private plant breeding replaces public programs, the efficient provision and utilisation of key enabling technologies for crop breeding, which are largely knowledge based and provide the foundation for variety improvement, might be at risk. Typically, such inputs are non‐rival in use and are therefore termed essential plant breeding infrastructure (EPBI). Specific threats include the possibility of wasteful duplication in production, under‐production, under‐utilisation of produced EPBI because of price rationing, and anticompetitive outcomes in plant breeding and downstream markets. The likely level of under‐investment in hypothetical molecular‐marker technology by a profit‐maximising monopoly producer, charging uniform prices for access, is analysed using results from the published literature on excludable public goods.

Network externalities, price discrimination and profitable piracy

Recent papers have argued that a monopoly firm might be able to maximize its profit by allowing some customers to steal its product. In particular, with network externalities, it is claimed that allowing piracy can be profitable because it increases the user base of the product and raises the willingness-to-pay of other customers. In this paper we analyze these claims when the producer can freely choose the degree of piracy prevention. We consider profit maximizing equilibria and show that allowing piracy cannot raise profits if the monopoly producer can directly price discriminate between potential-pirates and other customers. In the absence of price discrimination, allowing piracy will only maximize profits when the ability to pirate is inversely related to customer willingness-to-pay. Even in this situation, there is no profit maximizing equilibrium where some potential pirates buy while others pirate the product. Thus, even though potential pirates differ in their ability to illegally gain the product, the profit maximizing outcome involves either no piracy or complete piracy.