Reduce Consumer Welfare Research Articles

Has competition law enforcement been effective in South Africa?

ABSTRACT The South African Competition Act was crafted on the basis that it could be used to address distortions and inequalities in the market through enforcing competition. A question which has arisen is whether competition enforcement has been effective given that many economic sectors are still largely dominated by monopolies, duopolies or oligopolies. In this study, I assess whether competition enforcement has reduced inequality in South Africa by studying the link between market power and inequality, following a competition intervention in selected product markets. Using the nonlinear autoregressive distributed lag model, I assess whether competition enforcement in the market for bread, maize meal, and sunflower oil, has been effective in increasing consumer welfare, by lowering income inequality through lower prices. The findings of this study suggest that firms in these markets abuse their market power even post-intervention, such that they can raise prices and reduce consumer welfare, increasing inequality indirectly.

Cash holding by consumers: The role of the perceived characteristics of money

AbstractThis study examined why consumers who typically pay electronically at points of sale still carry cash and explained the inertia of demand for cash by considering the additional (perceived by consumers) characteristics of cash. The research was motivated by the growing discussion on why cash, despite the increasing importance of e‐payments, remains a significant part of the demand for money. The study focused on psychological factors and consumers' perceptions of certain features of cash, which make it an attractive additional option for precautionary reasons, and therefore, explored beyond the typical discussion of money as a means of payment. The structural equation modeling based on data collected as part of a survey of Polish consumers was used to verify the hypotheses. It was revealed that cash becomes a reserve solution for consumers, which is kept “just in case” to expand the scope of personal freedom and flexibility in making payments and protect against various potential restrictions and threats related to e‐payments. Consumers' holding of cash as an additional option depends on three key factors: attitude toward cash, particularly the flexibility it offers, unusual purchasing situations, and perceived card or mobile payment risk, considered as a moderator. In the debate on the future of cash, the study supports the position that cash has a place in the modern payment system, although it plays a different role. Cash is a supportive backup solution. Eliminating cash significantly reduces consumer welfare.

Sales‐based compensation and collusion with heterogeneous firms

AbstractPricing and output decisions are often delegated to managers compensated on the basis of sales. Prior literature has shown that when firms are homogeneous, the delegation of pricing or output decisions to managers, compensated on the basis of sales, does not facilitate collusion. We show that when firms are heterogeneous, either in marginal cost or product quality, sales‐based compensation can facilitate collusion under both price and quantity competition. As a result, compensating managers on the basis of sales can increase firm profits and reduce consumer welfare. Additionally, we find that owners can strategically design managerial compensation structures to incentivize collusion between rival managers.

Policy-induced expansion of organic farmland: implications for food prices and welfare

Abstract Public policies increasingly support the expansion of organic agriculture as part of a menu of food and environmental initiatives. A little-studied yet crucial element of such expansion, especially in light of scientific evidence on lower yields of organic crops, is its impact on overall food production and food prices, especially for poorer households. In this paper, we first establish a positive empirical relationship between countries’ propensity to produce and consume organic foods and their per-capita income. Such correlation suggests that, even if rich countries’ consumers can benefit from an increase in the organic farmland share, poor countries’ consumers would likely face higher conventional food prices. We then develop and calibrate a model of world food demand and supply to assess the implications of a policy-driven expansion in organic farmland. Our results for four major grains and oilseeds show that raising the organic cropland share in rich countries from 3 to 15 per cent increases food prices in poor countries by up to 6.3 per cent, with central values of 1.2–2.5 per cent, and a commensurate reduction in consumer welfare. Model parameterisations indicate that farmers in poor countries benefit from higher crop prices, while consumers in rich countries are largely unaffected and sometimes benefit. In all cases, poor countries’ consumers bear most of the distortion burden. In our preferred parameterisation, a 3 per cent increase in cropland in rich countries is needed to offset the food price increase in poor countries.

The economic response of the Israeli government to a rapid influx of immigrants by the founding of the state, 1948–1953: Expansionary fiscal policy and rationing

ABSTRACT Israel was founded in 1948, and immediately afterwards, numerous immigrants came to the country. The Israeli government decided to provide provisions to these immigrants, along with trying to develop the country and investing in the military. This fiscal expansion was funded by seigniorage, and the government attempted to restrain inflation by imposing price controls and rationing food and other consumer goods. This policy failed to stop inflation, and there were persistent shortages of many goods in the country, except for bread which was not rationed. There were even shortages of eggs, which were all produced domestically and whose output increased on a per capita basis by more than 250% in comparison to the number of eggs produced prior to the founding of the state. This indicates that the shortages in the stores were due to the rationing. The shortages led to a flourishing black market, and a reduction in consumer welfare. The rationing made a difficult situation worse and the government began to end the rationing in 1952.

Should antitrust regulators be wary of inter-firm coordination agreements through a tourism destination card?

Inter-firm coordination agreements through a destination card (DC) are a widespread profit-increasing strategy in tourism destinations. Literature on tourism economics argues that this type of coordination increases social efficiency. However, industrial organization studies consider heterogeneous consumers and warn that a DC-type agreement can be welfare impairing. Conflicting views have become an issue for tourism destinations, as collusion is in the crosshairs of antitrust regulators. This paper aims to clarify these contradictory results by developing a duopoly model with heterogeneous tourists. A sensible demand structure is assumed which, unlike previous literature, includes loyal demand segments. A policy prescription is obtained, namely, a DC alliance is welfare enhancing if DC price is equal to or lower than the cost of joint consumption under no coordination. However, a greater total surplus in markets may be accompanied by a reduction in consumer welfare, which differs from the conventional view in tourism economics.

Quantifying policy gaps for achieving the net-zero GHG emissions target in the U.S. light-duty vehicle market through electrification

The U.S. light-duty vehicle (LDV) industry, a major greenhouse gas (GHG) emitting sector, is embracing decarbonization. Considering only electrification pathways, this study uses publicly-available tools – MA3T and VISION on vehicle market penetration, fleet accounting and life-cycle analysis to quantify the policy gaps for LDVs to achieve the net-zero GHG emissions target in nine vehicle penetration cases under two electricity mix scenarios, including the U.S. administration's decarbonization strategy – 100% clean electricity by 2035. The MA3T model is a multinomial discrete choice model for market share projection by vehicle technology, and the VISION is a vehicle stocks and GHG emissions projection model by using vehicle and travel characteristics. This study projects the impacts of technology and policy enforcement on shaping the dynamics and decarbonization of the LDV market. Achieving the expected improvement of battery technology and charging infrastructure is critical but can only reduce the 2050 GHG emissions to 48–54% of the 2020 level under the electricity renewable mix scenario. It is almost impossible to achieve a 100% battery electric vehicle stock by 2050 and the 2050 net-zero target in the LDV industry unless ban of internal combustion engine technology is implemented starting in 2035 and under the 2035 100% clean electricity scenario. These extreme conditions also sacrifice most from the consumer welfare perspective. A greater policy forcing intensity accelerates plug-in electric vehicle penetration, while with declining marginal effect and reduced consumer welfare. Among the investigated policy scenarios, the policy forcing intensity equivalent to a fuel tax of $1–2 per gasoline gallon reduces the most GHG emissions while keeping a positive consumer welfare.

Wine: The punching bag in trade retaliation

Wine is an extensively traded product that is a common target for retaliation in trade disputes. We analyze the impact of tariffs and tariff retaliation by estimating a structural gravity model of global wine trade. We then simulate the effects of tariffs and tariff retaliation, as well as the effects of trade liberalization, on trade and welfare in the international market for wine. We show that recent trade disputes threaten to reduce wine trade by nearly $340 million annually and significantly reduce consumer welfare, while complete trade liberalization would expand trade by roughly $76 million.

Fading Choice: Transport Costs and Variety in Consumer Goods

The lack of market development in remote areas is usually measured by spatial variation in prices for a given set of consumer goods. We focus instead on the way distance constrains the choices consumers can make. We construct a model of monopolistic competition between traders moving goods from market towns to rural areas. An increase in transport costs reduces consumer welfare not only through lower incomes for farm households and higher prices for manufactures but also through reduced availability of manufactures: choice fades with distance. The model allows for heterogeneity of villages in terms of market size and the distribution of income. We test the model using data from a purpose-designed survey of shops and consumers in rural villages in Ethiopia. Falling transport costs, larger market size and higher inequality dramatically raise variety of items and brands available locally. We use data on prices of matched source and destination goods to estimate similar tastes for variety across space and estimate an average markup of 10-15 percent. We use these results to estimate the welfare costs of falling variety at between 5-7 percent of expenditures on manufactured consumer goods. Our results suggest ignoring the costs of lower variety in remote places will mean that the level of poverty is underestimated while the rate at which poverty declines is underestimated as well.

The competitive effects of declining entry costs over time: Evidence from the static random access memory market

We focus on the estimation of market entry costs that are declining over time and evaluate their impact on competition and market performance. We employ a dynamic oligopoly model in which firms make entry, exit, and production decisions in the presence of declining entry costs and learning by doing effects. Focusing on the static random access memory industry, we show that entry costs decline drastically by approximately 2 percent or $40 million per quarter. We conduct a simulation exercise in which a social planner can protect an incumbent from subsequent entrants for different lengths of time. Based on declining entry costs over time, our results show that entry regulation can increase producer and total surplus since regulation can prevent firms from entering too early at overly high entry costs. If own learning and spillover learning are eliminated, total welfare gains are realized already for short lengths of entry protection. We also show that tax (subsidy) policies of entry costs have positive (negative) effects on total surplus while reducing (improving) consumer welfare. Finally, once we assume constant entry costs over time, we find that entry regulation reduces consumer, producer, and total welfare.

Content-distribution strategies in markets with locked-in customers

We study how the presence of locked-in customers in a downstream market affects the distribution choice of an upstream content provider. Two asymmetric distributors compete in a mature market and the content provider sells its rights using lump-sum fees. A higher number of locked-in customers reduces the need to resort to exclusivity to relax downstream competition. The content provider therefore sells its rights to both distributors when there is a sufficiently-high proportion of locked-in customers. We show that an exclusive affiliation with the smaller rather than the larger distributor facilitates distributors’ rent-extraction, in particular for low-quality content. When there are few locked-in customers, the content provider sells low-quality content to the smaller distributor and high-quality content to the larger distributor. Our results suggest that competition authorities should cautiously evaluate the effects of lower switching costs on consumer welfare. By encouraging exclusive distribution, a lower proportion of locked-in customers may reduce consumer welfare.

Which Combination of Property Rights Can Tame the Internet Giants?

The internet technology allows the harvesting, storage, and processing of large datasets about individuals and things. When new datasets are derived from the raw data, new information is generated, which can be both privately profitable and socially productive, serving to realize economies of scope and a better allocation of resources. Or these practices can amount to a mere unproductive transfer of wealth and facilitate unfair trade practices. The raw data often contain protected information on individuals. Internet regulation must therefore achieve three policy goals. It must protect the privacy of internet users, which is derived not from economic goals but from basic human rights. It must incentivize the production and use of derived datasets and open secondary markets for data. And it must effectively prevent the use of data for unproductive purposes. The current global legal situation achieves none of these goals. It allows the internet giants to reap monopoly profits, achieve market dominance, divert income streams, and reduce consumer welfare. And it does not sufficiently protect personal data. The efficient use of information cannot be achieved by competition law but rather through a combination of different property rights, an alienable erga omnes right for the subjects of information to protect their privacy, and an open data rule for depersonalized datasets, which would remove the current de facto property of data controllers. Processed and newly derived datasets should however be protected by copyright law.

When prohibiting wholesale price-parity agreements may harm consumers

We study the competitive and welfare effects of wholesale price-parity agreements. These contracts prevent a monopolist, who sells its product to final consumers both directly and indirectly through alternative distribution channels, to charge different input (wholesale) prices to competing intermediaries (e.g., platforms). In a multi-channel and multi-layered industry, organized as an agency business model, we find that the monopolist and the intermediaries do not necessarily have aligned incentives concerning the introduction of wholesale price-parity. While these agreements always hurt the monopolist, they may benefit the intermediaries when competition between the direct and the indirect distribution channels is sufficiently intense. Moreover, when this is the case, in contrast to retail price-parity agreements that typically reduce consumer welfare, wholesale price-parity may also benefit consumers.

Evidence Production in Merger Control: The Role of Remedies

We analyze evidence production in merger control as a delegation problem in an inquisitorial competition policy system. The antitrust agency’s incentives to produce evidence on the efficiency of a merger proposal depend critically on its action set. Allowing for a compromising remedy solution reduces information acquisition incentives, and could therefore reduce consumer welfare. The effort-frustrating effect of the remedy solution can be eliminated if a remedy solution can be implemented only after evidence on the efficiency of a merger proposal has been produced.

Welfare impacts of increasing teff prices on Ethiopian consumers

AbstractTeff is an ancient grain primarily produced in Ethiopia and providing more than 10% of the total calories consumed in the country. The grain is considered as “super grain” due to its nutritional qualities, and it has seen an increase in its demand and price in recent years. These trends raise public concerns about the affordability of the grain and the prevalence of food insecurity in Ethiopia. Therefore, we investigate the impacts of increasing teff prices on consumers’ welfare by regions. Using data from two waves of the Ethiopia Socioeconomic Survey 2013–2014 and 2015–2016, we examine the consumption patterns of cereals in Ethiopia and estimate a two‐stage structural demand system. We find that teff is the most own‐price inelastic grain in Ethiopia and an increase of 10% in teff prices will reduce consumer welfare by 0.81, 1.29, and 1.73 Birrs per week for the average rural, town, and urban consumers, respectively. These estimates correspond to 1.64, 2.31, and 2.46% of their weekly food budgets. We also find the negative effects of an increase in teff prices are smaller for the lower‐income groups as they have relatively lower expenditures on teff. Additionally, we analyze the effects of simultaneous changes in wheat and teff prices to measure the extent to which Ethiopia's food policy of distributing subsidized wheat could offset the consumer welfare loss due to an increase in teff prices.

Hidden European Union Trade Regulations: The Case of the Banana Import Regime and the Lack of Perception

Given the current Trump´s stated trade policy it is interesting how the EU has established silently in the past trade barriers. The banana regime (BR) has been one of the most politically sensitive, technically complicated and economically complex legal disputes. The BR has started after WWII as a protection measure for former European colonies. With the single European market, a European-wide import regime was established. BR was introduced, even though the EC had to know that it conflicted with international trade rules. The paper shows the various effects caused by the banana import regime. The banana price increase reduced the banana consumption, which led to a dead-weight loss in the EU and welfare losses of the exporting countries. On the other side, the demand for substitutes (e.g., apple, pears) increased. The efficiency of the supply chain was impaired leading to additional environmental pollution. The regulation created incentives for customs fraud. The organized crime (Mafia) received an enormous cash inflow. The BR is a deliberate violation of international law; it reduces consumer welfare, it harms environment and sustainability and leads to an inequality of income distribution. Against this background, the paper examines why neither consumers nor European politicians perceived the BR as a problem, why was there no public pressure, why there was no ecological resistance, and why the WTO-negotiations could be delayed so long.

When Prohibiting Wholesale Price-Parity Agreements Harms Consumers

We study the competitive and welfare effects of wholesale price-parity agreements. These contracts prevent a monopolist, who sells its product to final consumers both directly and indirectly through alternative distribution channels, to charge different input (wholesale) prices to competing intermediaries (e.g., platforms). In a multi-channel and multi-layered industry, organized as an agency business model, we find that the monopolist and the intermediaries do not necessarily have aligned incentives concerning the introduction of wholesale price-parity. While these agreements always hurt the monopolist, they may benefit the intermediaries when competition between the direct and the indirect distribution channels is sufficiently intense. Moreover, when this is the case, in contrast to retail price-parity agreements that typically reduce consumer welfare, wholesale price-parity benefits consumers.

Power imbalances in French food retailing: Evidence from a production function approach to estimate market power

We analyze whether an association of firms to the dominant oligopoly of food retail groups is related to higher oligopoly market power. We apply a production function approach for the estimation of firm-level markups to a sample of 3,366 French food retailers over the period 2006–2014. The results suggest the presence of power imbalances between firms of the dominant oligopoly and fringe firms. We also detect a positive connection between markups and profitability pointing to a reduction in consumer welfare due to retailers’ oligopoly market power.

Broadband Mergers and Dynamic Bargaining: An Application to Netflix

I measure how mergers in the market for broadband internet service affect short-run welfare. Mergers between internet service providers (ISPs) with non-overlapping markets may decrease welfare by increasing ISP bargaining leverage against content providers. However, study of this welfare channel has been stymied by a lack of data on interconnection fees between content and internet service providers. I estimate an industry model of demand, plan choice, pricing and interconnection bargaining using data on plan prices, consumer choice sets and bargaining delays between major U.S ISPs and the leading purveyor of streaming video content, Netflix. Intuitively, if delaying agreement over interconnection degrades quality of service to subscribers, then the opportunity cost of lost subscriptions identifies the fee. To map disagreement times and ISP competition into interconnection fees, I develop a multilateral dynamic bargaining model with asymmetric information. ISPs make take-it-or-leave it offers to learn about Netflix’s benefit from interconnection, while simultaneously competing for subscribers who value Netflix quality of service. I structurally estimate the model and recover fixed interconnection fees ranging from 44 to 69 million USD. I find that a proposed merger between TimeWarner and Comcast that was challenged by the Federal Communications Commission would have slightly raised interconnection fees and bargaining length, reducing consumer welfare by 1.9 percent.

A “parasite market”: A competitive market of energy price comparison websites reduces consumer welfare

This article is about energy price comparison websites (PCWs). Using the example of Great Britain, it studies whether a competitive market of energy PCWs or a single non-commercial PCW can serve consumers better. Results are unambiguous. Households currently pay more than £100 million per year through their energy bills to commercial energy PCWs. The business model of these PCWs is largely based on creating deviations from consumer choice considered ideal by the regulator. As a result, people overpay for energy and retail market competition is adversely affected. Furthermore, commercial PCWs do not efficiently increase consumer engagement, so more households are on expensive tariffs than in the alternative system. Commercial PCWs also introduce a number of risks. As trade-offs in the competitive case are unavoidable, regulatory changes cannot make the market better than the one-non-profit-site solution. A single non-commercial PCW, such as the one operated by Citizens Advice, can provide a higher quality service at a substantially lower cost. Therefore, the interests of consumers can best be protected by shutting down commercial PCWs. A theoretical insight is that a competitive market of PCWs emerges if not explicitly prohibited by regulation, but reduces consumer welfare: this should be considered a “parasite market”.