Presence Of Market Power Research Articles

The Concept of Dominance in Article 82

The concept of dominance in EC competition law is a mixture of criteria relevant to determining the presence of market power and criteria relevant to finding commercial power. The current concept of dominance is consistent with an ordoliberal interpretation of Article 82 whereby dominant firms have special responsibilities because their presence in the market damages competition as an institution. The Commission appears intent upon narrowing the concept of dominance to instances where an undertaking has substantial market power. The effect of this is that the scope of application of Article 82 is narrowed down considerably. However the Commission's position is enigmatic because the Discussion Paper is an ambiguous mixture of passages that restate the current law and passages that seem to develop new approaches, with no explanation of where the policy changes occur or an explanation of why they take place. In fact, on another reading, the Discussion Paper seems to widen the concept of dominance. The failure to communicate the nature and scope of the reform process in a clear manner is to be regretted because the central theme (that dominance means substantial market power) is a promising premise to accompany the reform of the abuse doctrine.

Optimal Allocation of Tradable Pollution Rights and Market Structures

Tradable environmental rights are increasingly pursed as a regulatory instrument, to control for environmental quality. However, in the presence of market power, regulation through an allocation of tradable rights generally yield inefficient outcomes. This article analyzes the effect of the initial distribution of tradable rights on the firms’ strategies and performance in abatement and production, and proposes an efficient criterion for the allocation of tradable rights among firms with market power and competitive fringe firms. The suggested criterion maximizes efficiency of the market based regulation. A simple numerical example illustrates the theoretical discussion.

Anticipation effects of technological progress on capital accumulation: a vintage capital approach

Due to embodied technological progress new generations of capital goods are more productive. Therefore, in order to study the effects of technological progress, a model must be analyzed in which different generations of capital goods can be distinguished. We determine in what way the firm adjusts current investments to predictions of technological progress. In the presence of market power we show that a negative anticipation effect occurs, i.e. current investments in recent generations of capital goods decline when faster technological progress will take place in the future, because then it becomes more attractive to wait for new generations of capital goods. In case that only investments in new machines are possible, actually a whole wave of anticipation phases arises.

Conflicts of Interest, Information Provision and Competition in Banking

In some markets, such as the market for drugs or for financial services, sellers have better information than buyers regarding the matching between the buyer's needs and the good's actual characteristics. Depending on the market structure, this may lead to conflicts of interest and/or the under-provision of information by the seller. This paper studies this issue in the market for financial services. The analysis presents a new model of competition between banks, as banks' price competition influences the ensuing incentives for truthful information revelation. We compare two different firm structures, specialized banking, where financial institutions provide a unique financial product, and one-stop banking, where a financial institution is able to provide several financial products which are horizontally differentiated. We show first that, although conflicts of interest may prevent information disclosure under monopoly, competition forces full information provision for sufficiently high reputation costs. Second, in the presence of market power, one-stop banks will use information strategically to increase product differentiation and therefore will always provide reliable information and charge higher prices than specialized banks, thus providing a new reason for the creation of one-stop banks. Finally, we show that, if independent financial advisers are able to provide reliable information, this increases product differentiation and therefore market power, so that it is in the interest of financial intermediaries to promote external independent financial advice.

Equilibrium Forward Contracts on Nonstorable Commodities in the Presence of Market Power

Bilateral supply contracts are widely used despite the presence of spot markets. In this paper we provide a potential explanation for this prevalence of supply contracts even when spot markets are liquid and without delivery lag. Specifically, we consider the determination of an equilibrium forward contract on a nonstorable commodity between two firms that have mean-variance preferences over their risky profits and negotiate the forward contract through a Nash bargaining process. We derive the unique equilibrium forward in closed form and provide an extensive analysis of the equilibrium contract. We show that it is the risk hedging benefit from a forward that justifies its prevalence in spite of liquid spot markets. In addition, while a forward does not affect production decisions due to the presence of spot markets, it does affect inventory decisions of the storable input factor due to its hedging effect against the inventory risk. We also show that price volatilities and correlations are important determinants of the equilibrium contract. In particular, the equilibrium forward price can be nonmonotonic in the spot price volatility and can decrease as the initial spot price increases.

Equilibrium Forward Contracts on Nonstorable Commodities in the Presence of Market Power

Bilateral supply contracts are widely used despite the presence of spot markets. In this paper, we provide a potential explanation for this prevalence of supply contracts even when spot markets are liquid and without delivery lag. Specifically, we consider the determination of an equilibrium forward contract on a nonstorable commodity between two firms that have mean-variance preferences over their risky profits and negotiate the forward contract through a Nash bargaining process. We derive the unique equilibrium forward contract in closed form and provide an extensive analysis. We show that it is the risk-hedging benefit from a forward that justifies its prevalence in spite of liquid spot markets. In addition, while a forward does not affect production decisions due to the presence of spot markets, it does affect inventory decisions of the storable input factor due to its hedging effect against the inventory risk. We also show that price volatilities and correlations are important determinants of the equilibrium contract. In particular, the equilibrium forward price can be nonmonotonic in the spot price volatility and can decrease as the initial spot price increases.

Auction Design for the Allocation of Emission Permits in the Presence of Market Power

To the extent that emission permits have been allocated using market mechanisms, this has been done using a sealed-bid auction design, typically with discriminatory prices. However, several authors have recommended the ascending auction format. Basically, two “competing” ascending auction designs have been suggested, the standard ascending auction (with clock or demand schedules), or an alternative ascending-clock implementation of Vickrey-pricing. The latter design was introduced as a response to problems of bid shading under the sealed-bid and the standard ascending auction format. The purpose of this paper is to investigate the allocation of permits under these two alternative mechanisms. The auction process and the resulting market outcome in the presence of oligopolistic competition are simulated. In this setting, it is not obvious that bid shading is the optimal strategy under the standard design, nor is it obvious that sincere bidding is the optimal strategy under the alternative ascending auction design. The alternative auction format makes it less costly to pursue a strategy to increase market shares through the acquisition of emission permits, thus increasing the competitor's costs, leading to overbidding as the optimal strategy.

Distribution of gains from research and promotion in the presence of market power

AbstractThis article evaluates how marginal returns to producers from promotion and research are affected when market intermediaries have market power in the retail market. Using an equilibrium displacement model, the relative importance of market power is evaluated for a “typical” food‐processing industry, and the empirical analysis focuses on how much profits from advertising, off‐farm research, and farm research are affected by a one dollar increase in check‐off funds, assuming equal efficiency in funds spent at each level of the marketing channel. The empirical analysis systematically considers alternative values of the underlying structural parameters of the model using Monte Carlo simulations to generate confidence intervals of marginal returns from each alternative use of the funds. Important findings are that the results with market power are indistinguishable from those obtained under pure competition and the results are most affected by input substitutability. [EconLit citations: L660]. © 2003 Wiley Periodicals, Inc. Agribusiness 19: 301–314, 2003.

Enforcing transferable permit systems in the presence of market power

We derive an enforcement strategy for a transferable permit system in the presence of market power that achieves complete compliance in a cost-effective manner. We show that the presence of a firm with market influence makes designing an enforcement strategy more difficult than enforcing a perfectly competitive system. We also re-consider Hahn's (1984) suggestion that a firm with market influence should be allocated permits so that it chooses to not participate in the permit market. When enforcement and its costs are taken into account, Hahn's suggestion does not hold except in a very special case. The presence of market power will limit the extent to which transferable emissions permit systems can fulfill their theoretical promises. Hahn (1984) was the first to show that permit trading in the presence of market power cannot be expected to result in a distribution of emissions that minimizes aggregate abatement costs. Furthermore, the distribution of emissions will never be completely independent of the initial allocation of permits. Modeling a transferable permit system in which one firm has market power while the rest are perfect competitors (a dominant firm/competitive fringe model), Hahn demonstrated that aggregate abatement costs are minimized only when the dominant firm is allocated exactly the number of permits it will choose to hold in equilibrium. Simply, aggregate abatement costs are minimized only when a firm that can manipulate the permit price does not because it chooses to not trade permits. Like most of the theoretical literature on transferable permit systems, Hahn ignored the fact that compliance in a permit system must be enforced. Recognizing this important omission, van Egteren and Weber (1996) extended Hahn's work to

Designing emissions trading programs in Canada: the implications of market power on economic and environmental outcomes

Environmental policy often assumes that firms will participate in a competitive emissions trading market to cost-effectively achieve their emission reduction constraint. Indeed, the competitive market assumption is central to the notion that emission trading is the least-cost management option to achieve an environmental objective. This paper uses two optimisation models based on marginal abatement cost functions to investigate how market power distortions within an emission trading system can impact overall compliance costs and environmental performance. One model is based on the solvent degreasing sector in Canada and the other is for the Parties to the Kyoto Protocol. The analysis indicates that the presence of market power can result in a sub-optimal economic outcome while improving environmental performance. Given this result, policy makers should consider the implications of market power when designing emissions trading programmes. This is particularly the case if a few firms control a large share of the overall emission reduction target.

Did tough antitrust policy lead to lower mark-ups in the US manufacturing industry?

This paper tests whether antitrust policy in the US has an impact on the price cost margin. Using a unique database the methodology developed by Domowitz et al. [Review of Economics and Statistics, 70 (1988) 55–66] is applied to find estimates of the price cost margin. The estimates indicate presence of market power in many industries but also substantial heterogeneity of behaviour, both across time and industries. Finally, it confirms the hypothesis that mark-ups were lower when the antitrust policy was very tough.

Wanted: A Market Definition Paradigm for Monopolization Cases

For the wide range of antitrust cases involving allegations of monopoly or monopolization (or variations on that theme), the presence of market power is a necessary prerequisite for finding liability. In turn, the definition or delineation of a relevant market is essential for measuring a defendant's market share -- a key determinant of the presence or absence of market power. Unfortunately, there are few or no intellectual underpinnings for the market definition process in monopolization cases. This void contrasts sharply with the substantial conceptual developments of the past two decades with respect to the market definition process in antitrust merger analysis, as embodied in the Merger Guidelines of the U.S. Department of Justice. This article contrasts the achievements in the merger analysis area with the continuing dilemmas and conundrums in the monopolization area with respect to market definition. In the latter area the cellophane fallacy (which is explained), combined with the frequently cloudy state of firm-level profit data, continues to create confusion as to when the presence of competitors is an indication of the absence of market power and when their presence is the consequence of the exercise of market power. Underlying this confusion is the absence of a clear market definition paradigm for these monopolization cases. Until such a paradigm is developed, the confusion will persist, as will a pattern of erratic and inconsistent outcomes in alleged monopolization cases.

Monetary and Real Shocks, Productive Capacity and Exchange Rate Regimes

where producers may diversify internationally. International diversification is shown to inuuce a positive correlation between the volatility of productivity shocks and investment. In the presence of a Phillips curve, the expected GNP is lower under a floating exchange rate regime than under a fixed exchange rate regime. This result applies both for real and monetary shocks. Attempts to reduce foreign direct investment by capital controls will tend to reduce welfare, without affecting our results regarding the ranking of exchange rate regimes. implies that, in the presence of market power, uncertainty tends to reduce investment. In the first part of the paper I demonstrate the international diversi- fication of production modifies this result. Foreign direct investment tends to offset the impact of market power on the concavity of the profit function, by weakening the relative price effect associated with output changes, and by increasing the flexibility of adjusting the variable input. Hence international diversification of production is shown to induce a positive correlation between the volatility of productivity shocks and investment. The second part of the paper utilizes the framework presented in Section I to re-examine the welfare ranking of exchange rate regimes in the presence of capital mobility. As is well appreciated, a one-dimensional answer regarding the merits of a fixed exchange rate regime will not do justice to the host of issues relevant for making the choice between exchange rate regimes. The second part of the paper focuses on one aspect of the debate: the linkages between volatility, domestic and foreign direct investment, and productive capacity. A frequent argument in favour of exchange rate stability relates to the potential cost of exchange rate volatility, which may work to increase the cost of international trade and to reduce its volume. Yet efforts to detect the adverse effects of exchange rate volatility on trade volumes in the last two decades have not delivered clear-cut results. In fact, the experience of international trade among the United States, Canada, Europe and Japan suggests that there is no natural

Heckscher-Ohlin theory in the presence of market power ∗

Heckscher-Ohlin theory in the presence of market power ∗

Comment on the Moral Foundations

Professor Danner presented a very interesting and well-argued paper. [Danner, this issue] Therefore, I invite serious trouble by disagreeing with him. The major question is whether gain-seekers can really form true community. Prof. Danner's answer is yes, mine is no. Making the case that the pursuit of gain is a social and not an individual activity, Danner first points to the limits to available gains, suggesting that gain is not unlimited, but is faced with external and internal limitations. The trouble is that most of these limits are indeed external, that is, outside the decision-making process of individuals and firms in the normal market context. Very few, if any, gain-seekers take account of the effects of their own actions on the aggregate limits of the economy. That would require them to calculate the effects their own actions have on changes in prices, particularly in input markets, and very few groups are large enough for that to matter. The same is true when exploitative gains are considered. Though gain at the expense of others is ultimately self-limiting, no single individual or group need fear that it will single-handedly kill the goose that produces all those golden eggs. So the limits of the economy simply do not provide limits to the gain-seeking activities of its constituents. The second step in this argument claims that all gain-seeking is premised on the gains of others. This seems to deny that any exploitative gain is possible. But even conventional economic theory recognizes that in the presence of market power, gain can be had at the expense of others. And less conventional, institutional approaches to economics suggest that firms and other groups can gain by appealing to the darker, more self-interested side of human nature. Recent work on internal labor markets suggests that cooperation within the firm can only be achieved by suspending the rules of competitive gain-seeking. I would claim that gain-seeking is inherently self-centered, though in some cases, it may, by the strictly unconscious operation of the invisible hand, produce benefits beyond the intentions of the actors involved, as Adam Smith observed. The third part of the argument makes a sharp distinction between economic means and social ends and identifies the discipline of eco? nomics strictly with questions of means. This denies the uniform prac