Substantial Market Power Research Articles

The efficiency and market‐power interpretations of the multinational enterprise: Two out of three ain't bad

AbstractResearch SummaryWe contend that contemporary scholarship must embrace the foundational approach in global business and strategy to consider the relevance of both efficiency and market‐power effects in factoring the implications of multinational activity. We empirically test the degree to which efficiency and market‐power effects manifest in a comprehensive sample of 4,370 cross‐border acquisitions materializing between 1986 and 2010. Specifically, we employ three different measurement approaches to distinguish efficiency enhancing from market‐power increasing cross‐border acquisitions. Empirical results indicate that efficiency enhancing transactions manifest in two‐thirds and market‐power increasing transactions manifest in one‐third of our sampled activities. Accordingly, our results affirm the literature's focus on efficiency effects, yet market‐power effects are sufficiently sizable to merit scholarly attention.Managerial SummaryContemporary wisdom generally considers multinational activities to be characterized by efficiency properties. While it is understood that market power may manifest in multinational activity, most observers implicitly assume that anti‐competitive effects are dominated by more‐healthy efficiency effects. Yet, the justification behind the prior that efficiency effects dominate market‐power effects is not evident, as multinational activities conceivably involve substantial market power. Accordingly, we test the received wisdom regarding the dominance of efficiency effects in an extensive sample of cross‐border investments. Our empirical results affirm prevailing assumptions as efficiency enhancing transactions constitute the majority of cross‐border investment activities. However, market‐power increasing transactions manifest as a sizable minority of cross‐border investments; thus, market‐power effects should not be neglected.

Spillover parking

Parking space near popular destinations is often scarce or expensive. Instead, visitors may park in adjoining locales where they impede through traffic, take parking space from other users, and create environmental externalities. We develop a model to study spillover parking generated by a major retailer (e.g., a mall) that provides limited on-site parking. Some customers park at the mall, some park on the street, and others who live or work nearby visit the mall on foot. The retailer chooses its parking lot capacity, the parking fee, and the retail markup. We compare the effectiveness of four policies for dealing with spillover parking: on-street parking fees, on-street parking bans (aka residential parking permits), regulating mall parking fees, and regulating mall parking capacity (aka minimum/maximum parking requirements). Policy effectiveness depends on the severity of congestion, the amount of mall shopping by local and nonlocal shoppers, and the mall’s market power. A curbside parking ban is harmful unless congestion is severe. If the mall has no market power, both on-street parking fees and mall parking fee regulation can support the social optimum, whereas mall parking lot capacity regulation is useless. In contrast, if the mall has substantial market power, capacity regulation in the form of a minimum parking requirement can be the most effective policy. The benefits of implementing pairs of policies can be larger, or smaller, than the sum of the benefits from applying them individually.

Assessing the degree of competitiveness in the market for outpatient hospital services

We assess the level of competition in the market for outpatient hospital services in the State of California using popular new empirical industrial organization measures, such as the Bresnahan-Lau method, Lerner index, and the Boone indicator. We match county-level data from Area Health Resources Files (AHRF) with hospital-level data from the California’s Office of Statewide Health Planning and Development (OSHPD). All three methods suggest that hospitals enjoy substantial market power. The relationship between the degree of spatial competition and the average markups is rather weak.

Price transmission in the presence of a vertically integrated dominant firm: Evidence from the gasoline market

The present paper provides an empirical examination of cost pass-through on a market with a vertically integrated firm which has substantial market power in wholesale and faces competition in retail. Our investigation focuses on gasoline pricing in Hungary, where a court-case against the dominant firm on the market provides us with detailed evidence regarding the price-setting behavior of the vertically integrated agent. We find that when market power is stronger at the wholesale level, the company is likely to raise prices in response to cost increases faster than it adjusts them downwards in case of cost decreases on the wholesale market. This process is known as “asymmetric cost pass-through”. Our findings suggest that regulatory efforts on the market should not only encompass differences in firm mark-ups between franchisees of the firm and competitors in order to prevent foreclosure, but should also seek to evaluate the wholesale price margins applied to all firms. We supplement our results with an analysis of the behavior of the firm after an investigation into its pricing behavior and find that pass-through asymmetry decreases substantially on the wholesale level in the period after the investigation.

The spread and internationalisation of South African retail chains and the implications of market power

ABSTRACT The retail space has seen significant changes in post-apartheid business. Spurred by the end of apartheid urban laws, rising urbanisation and increased per capita income, large South African retailers, especially supermarkets, have increased their footprint, diversified their formats and started targeting low-income segments of the population. The large chains have made substantial investments in distribution and procurement systems and in retail space in shopping malls to realise economies of scale and scope. They have also grown in southern Africa, shaping markets across countries. This paper assesses the drivers of these changes and the extent to which substantial market power in retail lies with the main groups. It evaluates the ways in which market power has been exerted and the impact supermarket growth has had on the competitive landscape including on independent rivals. The implications on suppliers, as supermarkets are increasingly important routes to market for processed food and household consumable products, are evaluated, in addition to the impact of buyer power. The paper explores the implications for regulation, competition policy and industrial policy.

Taxation and Market Power in the Legal Marijuana Industry

In 2012 the state of Washington created a legal framework for production and retail sales of marijuana. Ten other U.S. states and Canada have followed. These states hope to generate tax revenue for their state budgets while limiting harms associated with marijuana sales and consumption. We use a unique administrative dataset containing all transactions in the history of the industry in Washington to evaluate the effectiveness of different tax and regulatory policies under consideration by policymakers and study the role of imperfect competition in determining these results. We use both a reduced form sufficient statistic approach and structural methods to show a number of results. First, Washington's strict cap on firm entry has resulted in retailers with substantial market power. This market power has immediate consequences for both state tax revenue and consumer welfare. Second, because these entry restrictions have caused retailers to behave like local monopolists, the state could substantially increase revenue generated from marijuana legalization by acting as the retailer itself, as it did for alcohol sales until 2012, without a large increase in prices. Third, despite having the nation's highest tax rate at 37%, marijuana in Washington is not overtaxed as many policymakers in other states have argued. The high taxes do not result in lower revenue or a substantial black market. Instead Washington is still on the upward sloping portion of the Laffer curve and the amount of revenue generated by a tax increase is significantly larger due to retailer market power than it would be under perfect competition. Our results suggest there is not widely available black market marijuana competing with legal retail sales. Finally, the high excise tax is primarily borne by consumers and not by firms, and there is a large social cost associated with each dollar raised.

Private Equity Buyouts: Anti- or Pro-Competitive?

Private equity firms have become common owners of established firms in concentrated markets. Antitrust authorities therefore intervene in mergers and acquisitions involving PE firms. In this article, we discuss the antitrust implications of an active PE market and whether there are any special characteristics of PE ownership that are important for antitrust regulation and enforcement. To gain some perspective, we approach the question from three pillars of industrial organization: (i) identifying and blocking mergers that create substantial market power; (ii) detecting and preventing predatory behavior; and (iii) detecting and preventing collusive behavior.

IMPERFECT COMPETITION IN CHINA'S IMPORT MARKET OF ROUNDWOOD AND LUMBER PRODUCTS

AbstractChina has become the largest importer of roundwood and lumber products in recent years. In this study, the degree of competition among major supplying countries in China's import market is measured through the inverse residual demand elasticity over 1995–2015. Time-series properties of the data are considered through the autoregressive distributed lag model. The analysis reveals that market power exists in roundwood and lumber markets for a few supplying countries. The suppliers in the lumber import market have more market power than those in the roundwood market. Individual countries with substantial market power have more fluctuations in trading volumes.

Assessing the market power of mineral commodity producers

The major producers of most mineral commodities possess large market shares and so can raise the market price by restricting their output. For this reason, many assume that they possess market power. However, this article argues that there are two necessary conditions for market power: a market share sufficient to raise the market price is the first; the second is the incentive to do so. Firms that fulfill the first condition do not necessarily satisfy the second. This is because maximizing profits this year by restricting output and raising the market price usually has negative consequences for future profits. In particular, a price higher than the competitive price over time reduces market demand below what it otherwise would be by encouraging consumers to switch to substitute materials and to introduce material-saving new technologies. The higher price also encourages rival firms to increase their capacity and output. The result is a smaller market share and lower, even possibly negative, profits in the future. Failure to recognize the second necessary condition for market power provides a plausible explanation for the widespread perception that the major mineral producers—both firms and countries—possess substantial market power, even where hard evidence of such power is lacking.

Tying and the Rule of Reason: Understanding Leverage, Foreclosure, and Price Discrimination

Many tying arrangements are used by firms that do not have substantial market power in either of the two markets linked together by the tie. Their function must be something other than the enlargement or perpetuation of power. A few ties do involve fairly explicit exercises of market power, but they need not be used for a different purpose than the ties imposed by more competitive firms. This paper considers firms’ use of ties to exploit whatever power they already have over the tying product. The leverage theory sees ties as exploiting customers as a group via higher prices, whether or not the tie excludes any rival. By contrast, the foreclosure theory of ties is concerned with exclusion of rivals, mainly in the tied product market, with extension or perpetuation of monopoly as a long term goal. The dominant explanation for variable proportion ties is price discrimination, although it explains some fixed proportion ties as well. Like leveraging, price discrimination results in some customer exploitation. However, while some customers are injured, most price discrimination ties benefit an even larger number of customers and by a greater amount. As a result they are beneficial under both general welfare and consumer welfare antitrust tests. Also like leveraging, a tying firm can profit from price discrimination without foreclosing any rival. Indeed, even firms with small amounts of tying product market power can use price discrimination ties. Although a price-discriminating tie might cover most purchasers of a tied product and thus foreclose a substantial share of the tied market, effective price discrimination neither requires nor typically generates a significant foreclosure or other impairment of the tied market's structure or performance. Indeed, in many litigated cases the tying product was a common commodity such as dry ice, salt, or ordinary printing ink. The least warrant for antitrust intervention occurs when higher tied product prices fail to result from foreclosure of rivals and are not reflected in customer prices that are not higher overall. For example, most ties of complementary products (1) fail to foreclose any rival from anything because the tied product is a common ingredient or other common expendable input; and also (2) fail to result in higher consumer prices for the tying/tied combination because the firm is in competition with other firms and could not assess a monopoly price increase. The last conclusion is true even though a price discrimination tie typically results in higher prices for the tied product alone. Finally, an even stronger case for lower prices results in situations where the tied product is a manufactured good sold at prices above cost. In those cases tying can eliminate double marginalization, thus benefiting both consumers and the tying seller.

The Antitrust Standard for Unlawful Exclusionary Conduct

This essay considers the general definition of unlawful exclusionary practices under Section 2 of the Sherman Act as acts that: (1) are reasonably capable of creating, enlarging or prolonging monopoly power by impairing the opportunities of rivals; and (2) that either (2a) do not benefit consumers at all, or (2b) are unnecessary for the particular consumer benefits claimed for them, or (2c) produce harms disproportionate to any resulting benefits. An important purpose of this progression of queries is to permit the court to avoid balancing, although balancing certainly cannot be avoided in some close cases. The given definition is very general, in the sense that it does not provide precise tests for specific practices, such as improper patent infringement suits or predatory pricing. Numerous definitions of exclusionary conduct have been proposed that are more focused or more technical, and some of these may be more useful for analyzing specific exclusionary practices than the very general definition offered here. However, as this paper develops, these definitions are also incomplete, in the sense that they do not account for every type of exclusionary conduct that the law of monopolization should condemn. Proof of actual consumer harm is generally unnecessary to the definition, but the challenged conduct must be of a type that the anticipated end result is actual consumer harm. Of course, the private plaintiff must prove the requisite actual or threatened harm to itself. Most importantly, the given definition of monopolizing conduct is flexible and frees the court of doctrinal rigidity, but it requires an extremely careful determination that the defendant has substantial market power.

Measuring market power and the efficiency of Alberta's restructured electricity market: An energy‐only market design

AbstractWe measure the degree of market power execution and inefficiencies in Alberta's restructured electricity market. Using hourly wholesale market data from 2008 to 2014, we find that firms exercise substantial market power in the highest demand hours with limited excess production capacity. The degree of market power execution in all other hours is low. Market inefficiencies are larger in the high demand hours and elevate production costs by 6.7%–19% above the competitive benchmark, with an average of 13%. This reflects 2.1% of the average market price across all hours. A recent regulatory policy clarifies that certain types of unilateral market power execution is permitted in Alberta. We find evidence that suggests that strategic behaviour changed after this announcement. Market power execution increased. We illustrate that the observed earnings are often sufficient to promote investment in natural gas based technologies. The rents from market power execution can exceed the estimated capacity costs for certain generation technologies. However, we demonstrate that the energy market profits in the presence of no market power execution are generally insufficient to promote investment in new generation capacity. This stresses the importance of considering both short‐run and long‐run electricity market performance measures.

Keeping it fresh: Strategic product redesigns and welfare

Product redesigns happen across virtually all types of products, yet there is little evidence on the market and welfare effects of redesigns. We develop a model of redesign decisions in a dynamic oligopoly model and use it to analyze redesign activity in the U.S. automobile market. We find automobile model redesigns are frequent despite an estimated average cost around $1 billion. Our estimates also suggest that redesigns lead to large increases in profits and welfare due to the strong preferences consumers have for redesigns. We show that welfare would be improved if redesign competition were reduced, allowing redesign activity to be more responsive to the planned obsolescence channel. The net effect of these changes would reduce total redesigns by roughly 10%, increasing total welfare by roughly 3%. The high valuation that consumers put on newly-designed models drives frequent redesigns and gives automobile manufacturers fairly substantial market power, with a 2-to-1 ratio of firm profits to consumer surplus.

How do nonprofits respond to negative wealth shocks? The impact of the 2008 stock market collapse on hospitals

The theory of cost shifting posits that nonprofit firms “share the pain” of negative financial shocks with their stakeholders, for example, by raising prices. We examine how nonprofit hospitals responded to the sharp reductions in their assets caused by the 2008 stock market collapse. The average hospital did not raise prices, but hospitals with substantial market power did cost shift in this way. We find no evidence that hospitals reduced treatment costs. Hospitals eliminated but left unchanged their offerings of profitable services. Taken together, our results provide mixed evidence on whether nonprofits behave differently from for‐profits.

Domestic Market Power in the International Airline Industry

We posit and empirically test the hypothesis that airlines are able to charge a fare premium in markets that originate in their domestic country relative to similar markets that originate in foreign countries. To this end, we focus on intercontinental one-stop air travel trips for which the main, intercontinental, flight legs are identical, while the feeder legs depart from a mixture of domestic- and foreign origins. We collect a unique database of published fares for such trips and estimate reduced form fare regressions with main flight leg fixed effects. We find that trips from and to domestic airports (compared with foreign airports) are characterized by about 9.5 per cent higher fares, even after adding controls for airport dominance, trip operating costs, the competitive environment and origin catchment area characteristics. These findings demonstrate that airlines have substantial domestic market power, enabling them to raise fares at their domestic airports irrespective of aforementioned market conditions. The magnitude of this domestic country effect is large relative to the traditional airport dominance effect, suggesting that the distinction between domestic- and foreign origins is a crucial determinant of the degree of market power that airlines can exert in the international airline industry.

Banking on Deposits: Maturity Transformation Without Interest Rate Risk

We show that maturity transformation does not expose banks to significant interest rate risk---it actually hedges banks' interest rate risk. We argue that this is driven by banks' deposit franchise. Banks incur large operating costs to maintain their deposit franchise, and in return get substantial market power. Market power allows banks to charge depositors a spread by paying deposit rates that are low and insensitive to market rates. The deposit franchise therefore works like an interest rate swap where banks pay the fixed-rate leg (the operating costs) and receive the floating-rate leg (the deposit spread). To hedge the deposit franchise, banks must therefore hold long-term fixed-rate assets; i.e., they must engage in maturity transformation. Consistent with this view, we show that banks' aggregate net interest margins have been highly stable and insensitive to interest rates over the past six decades, and that banks' equity values are largely insulated from monetary policy shocks. Moreover, in the cross section we find that banks match the interest-rate sensitivities of their income and expenses one-for-one, and that banks with less sensitive interest expenses hold substantially more long-term assets. Our results imply that forcing banks to hold only short-term assets (narrow banking) would make banks unhedged and, more broadly, that the deposit franchise is what allows banks to lend long term.

Zero Rating: Evil or Savior? Data Access and Competition Aspects

Zero rating programs enable mobile Internet users to download and upload online content without being charged for it or having their usage counted towards their data allowances. Such programs have become increasingly popular as they are regarded as a possible solution for closing the digital divide, especially in developing countries. The public and private sectors as well as civil society organizations have been trying to work on the universal access issue for a long time, but the largest part of the population still remains unconnected. Whereas zero rating programs might be helping to close the digital divide, there is a concern that they might pose serious harms, especially in the medium-long run. In fact, countries like Chile, Slovenia and the Netherlands have already banned some forms of the zero rating on net neutrality and freedom of expression grounds. Scholars vary in their interpretation of the issue, but many of them agree on that some of the questions to be raised by zero rating programs are hard to be anticipated. Before allowing or preventing operators to offer zero rating programs, regulators need to understand the implications of such business models. Most of the policy research is currently focusing on freedom of expression issues, whereas other important aspects such as privacy and competition have been less discussed. Privacy implications of zero rating are various. The amount of data collected by the companies offering zero rated deals is enormous. One of the many questions raised by big data is whether companies will use the information they retain to more efficiently discriminate prices. Moreover, Zero rating programs route all browsing through a proxy, which does not allow for encryption. There is also a debate on whether social networks do or do not violate competition laws when they do not provide or support data portability tools. Furthermore, some services are offered under a “real identity” policy, meaning that users are prohibited to use different names or in some cases other types of identification in order to make use of such services. Moreover, as zero rating programs ultimately mean that only a few services are accessed, not only users are more easily tracked but the issue of surveillance also appears as most of the largest Internet companies already share such information with governments. Zero rating programs have implications related to competition. One example is the ability of companies to have exclusionary effects while implementing zero rating programs. Exclusionary conducts are not exhaustively catalogued, but are different ways through which a firm might try to gain market power by excluding its rivals. As pointed out by Gavil, Kovacic and Baker (2008), such improper behavior depends not only on the substantial market power of companies but also if the conduct is anticompetitive. In the case of zero rating programs, this means that, through an antitrust perspective, the mere fact that the companies entering in such agreements are companies with a prevalence in their markets does not mean that such are agreements cannot be held as a problem per se. The proposed research aims at exploring “Free Basics”, a major project by Facebook and an effort to make affordable basic internet services available to everyone in the world. More specifically, the proposed research will look into the control of user personal data of zero rating programs and the likelihood of Free Basics to exert exclusionary power over their competitors in Latin American and the Caribbean countries. Through this analysis it will be possible to have a better understanding of whether there is a need for banning such programs as well as if alternative solutions to banning could be used instead.

The Changing Strategies of Large Corporations in South Africa Under Democracy and the Role of Competition Law

We assess the relationships between the strategies of large corporations, increased participation and investment in improved productive capabilities, and competition through a case study of South Africa. South Africa is a particularly pertinent case study as the economic reform process undertaken by successive democratic governments from 1994 can be understood as the application of a ‘good governance’ agenda, establishing independent institutions and drawing up rules, while implementing far-reaching liberalisation. The paper gives a brief background on the structure and concentration of the South African economy, and provides an overview of the competition regime. Three sectors are then examined in detail to assess the way in which firms with substantial market power, individually and in tight knit groups, resulting from their positions under apartheid prior to 1994, have responded to liberalisation and the introduction of the Competition Act of 1998. In light of the industry cases the competition regime in South Africa is critically assessed.

An Economics-Based Approach to ‘Effective Competition’ in Mexico’s Telecommunications Sector

Our paper seeks to define the term effective competition as used in Mexico’s telecommunications sector and implemented through two main regulatory tools: the determination of preponderance and the subsequent imposition of asymmetric measures. To lift, modify or deepen these measures, we argue, it will be necessary to determine the existence (or absence) of agents with substantial market power in telecommunications markets as well as to consider the relationship between the static and dynamic components of efficiency and effective competition. We use the European experience as a benchmark for the implementation and measurement of effective competition, including the definition of relevant markets where substantial market power or lack of effective competition can be found. In doing so, we offer suggestions on possible methodologies that could be used in Mexico to determine said markets and review both markets and the effectiveness of asymmetric policies aimed at more efficient telecommunication markets. In light of this analysis we offer recommendations and thoughts on the use and analysis of effective competition.

Stabilitas Bank, Tingkat Persaingan Antar Bank dan Diversifikasi Sumber Pendapatan: Analisis Per Kelompok Bank di Indonesia

. TheCompetition-fragility view and The Competition-stability view has a contrary logical flow in predicting the relationship between bank stability and competition among banks. According to Berger et al (2009), these two views differ on credit risk aspect of loan portfolio, but on the risks faced by the bank as a whole, these two views have the same prediction. In the credit market which is dominated by few banks with substantial market power, the risk of bank credit portfolio increases as predicted by the view competition-fragility, but the bank's overall risk does not always go up with the jump in credit portfolio risk. The paper shows that empirical test of the Indonesian banking system support this hypothesis, except in foreign bank group that has its own business model. The relationship of competition and the credit risk of banks in Indonesia also have a U -shape pattern that increasing competition in the early stages can reduce credit risk, which is due to increasing income diversification and diversification of bank credit type, but at a certain point the increasing competition has worsened the quality of bank credit portfolio.