Upstream Price Research Articles

Pricing above value: Selling to a market with selection problems

This paper shows that selection incentives in downstream markets distort upstream prices. It is possible for inputs to be priced above the value that the good has for final consumers. We apply this idea to pharmaceutical companies selling drugs to a health insurance market with selection problems. We specify the conditions under which drugs are sold at prices exceeding treatment value. Another feature of the model is an excessive private incentive to reduce market size, e.g. in the form of personalized medicine.

Willingness to Pay for Greener Electricity Among Non-Subsidized Residential Consumers in Indonesia: A Discrete Choice Experiment Approach

By 2021, fossil fuels still dominated Indonesia’s energy source by generating 87% of electricity and constituting 88.5% of the national energy mix. This achievement is far from the government’s target of 23% renewables in the national energy mix by 2025. The main obstacle is the low electricity price that discourages investors from entering the green electricity business. Increasing the electricity price has been the government’s last option, socially and politically. Indonesia’s electricity industry is highly regulated, including the selling price at retail and upstream (independent power producers) levels. The current pricing is cost-based and does not thoroughly consider consumers’ preferences and willingness to pay (WTP). This research aims to estimate the WTP for greener electricity among non-subsidized residential consumers in Indonesia. Residential consumers have dominated the market by using 46% of the generated electricity. We use the discrete choice experiment assuming a mixed multinomial logit choice behavior model and employ the Bayesian method to estimate the model parameters. We found that more than 95% of respondents are willing to pay up to 40% higher than the current price for greener electricity. We also found that the WTP for greener electricity increases with the proportion of renewables. Using the latent class method, we identified three residential consumer segments: Status Quo, Greenie, and Unsatisfied Median, and found significant WTP differences among them. Considering the WTP alone, the result suggests that increasing the electricity retail selling price is justifiable. Further research is needed to develop a pricing strategy that considers the interrelatedness between retail and upstream pricing.

Effects of Diesel Price on Changes in Agricultural Commodity Prices in Bulgaria

The aim of this article is to supply the first empirical research inspecting how changes in diesel prices influence the prices of four agricultural commodities in Bulgaria. For this purpose, using a VECM and monthly agricultural commodity prices between January 2011 and July 2022, we estimated short-run and long-run changes in producer and retail prices of cow’s milk, chicken eggs, greenhouse tomatoes and cucumbers due to the change in average monthly diesel prices. The Granger causality test indicates that diesel prices cannot be used to forecast the behavior of producer and retail prices in the four markets considered. Diesel prices can be used to forecast the behavior of producer prices in only the cow’s milk market, and the diesel price predicts retail prices in the chicken egg and greenhouse cucumber markets. The results of the response of the researched prices of agricultural commodities to diesel price shocks indicate a positive response of both upstream and downstream prices of cow’s milk and chicken egg markets and upstream prices of the greenhouse tomato market despite the initial negative shock.

When Paying for Reviews Pays Off: The Case of Performance-Contingent Monetary Rewards

Product review platforms in online marketplaces differ with respect to the granularity of product quality information they provide. While some platforms provide a single overall rating for product quality (also referred to as the single-dimensional rating scheme), others provide a separate rating for each individual quality attribute (also referred to as the multidimensional rating scheme). The multidimensional rating scheme is superior to the single-dimensional rating scheme, ceteris paribus, in reducing consumers’ uncertainty about product quality and value. However, we show that, when sellers respond to product ratings by adjusting their prices, compared to the single-dimensional rating scheme, the multidimensional rating scheme does not always benefit consumers, nor does it necessarily benefit sellers or society. The uncertainty associated with quality attribute rating and the extent of differentiation between competing products determines whether a finer-grained multidimensional rating scheme is superior to a coarser-grained single-dimensional rating scheme from the consumer, seller, and social planner perspectives. The main driver of the results is that more (less) granular and less (more) uncertain information exposes (hides) underlying differentiation, or a lack thereof, between competing products, which, in turn, alters upstream price competition in the presence of heterogeneous consumer preferences. The results demonstrate that focusing on the information transfer aspect of rating schemes provides only a partial understanding of the true impacts of rating schemes.

Online Product Reviews: Is a Finer-Grained Rating Scheme Superior to a Coarser One?

Product review platforms in online marketplaces differ with respect to the granularity of product quality information they provide. While some platforms provide a single overall rating for product quality (also referred to as the single-dimensional rating scheme), others provide a separate rating for each individual quality attribute (also referred to as the multidimensional rating scheme). The multidimensional rating scheme is superior to the single-dimensional rating scheme, ceteris paribus, in reducing consumers’ uncertainty about product quality and value. However, we show that, when sellers respond to product ratings by adjusting their prices, compared to the single-dimensional rating scheme, the multidimensional rating scheme does not always benefit consumers, nor does it necessarily benefit sellers or society. The uncertainty associated with quality attribute rating and the extent of differentiation between competing products determines whether a finer-grained multidimensional rating scheme is superior to a coarser-grained single-dimensional rating scheme from the consumer, seller, and social planner perspectives. The main driver of the results is that more (less) granular and less (more) uncertain information exposes (hides) underlying differentiation, or a lack thereof, between competing products, which, in turn, alters upstream price competition in the presence of heterogeneous consumer preferences. The results demonstrate that focusing on the information transfer aspect of rating schemes provides only a partial understanding of the true impacts of rating schemes.

The Law and Economics of Non-Exclusionary Price Floors

This paper integrates two separate branches of the law and economics literature to demonstrate the two-sided risk of market exclusion by a vertically-integrated firm (VIF) with upstream and downstream market power. The ratio of downstream (retail) to upstream (wholesale) price margins is key to the analysis. A margin ratio that is “too low” can result in a vertical price squeeze. This occurs when a relatively efficient rival cannot secure the bottleneck input at a price that enables it to compete in the downstream market. A margin ratio that is “too high” creates incentives for the VIF to engage in non-price discrimination (sabotage). By raising its rivals’ costs, and in turn it downstream price, the VIF can divert demand from its rivals to itself. Displacement ratios delineate the range of safe harbor margin ratios within which neither form of market exclusion arises. The admissible range of these margin ratios is decreasing in the degree of product substitutability and reduces to a single ratio in the limit as the competing products become perfect substitutes. The challenge for policymakers is to apply these pricing constraints judiciously to prevent market exclusion in accordance with a consumer-welfare standard, while recognizing the risk that these protections can be appropriated and used strategically in the errant pursuit of a competitor-welfare standard.

Estimating retail gasoline price dynamics: The effects of sample characteristics and research design

The study shows that much of the variation in the findings of the literature on retail gasoline price dynamics is systematic rather than sample variation from using different data. Estimates of pass-through rates depend systematically on research design and features of the data, such as the sampling frequency, the choice of upstream price, whether taxes are included or not, the sample length, and the postulated lag structure. In addition, there are systematic differences between time periods and countries. Using a 20 year-long dataset of 28 European Union countries we quantify the extent of estimate variation that arises from the choice of data structure from that arising from temporal and country heterogeneity and sampling variation. We also show that country heterogeneity itself has systematic components, with wealthier countries experiencing slower adjustments. Our results inform the interpretation of results on pass-through rates derived from Error Correction Models. They are also of relevance for the broader literature estimating the transmission of price shocks in the economy.

A Note on the Efficiency Gains from a Refusal to Deal in a Bertrand-Nash Framework

Abstract A vertically integrated provider (VIP) initially has a duty to deal with a rival at unregulated upstream and downstream prices in a Bertrand-Nash framework. The duty to deal is subsequently terminated which enables the VIP to acquire the rival and serve as a two-product, downstream monopolist. We find that the refusal to deal is efficiency-enhancing, given that prices decrease while profits increase ex post.

Research on Risk Diffusion Mechanism of Logistics Service Supply Chain in Urgent Scenarios

Although there are some studies on the risk management of logistics service supply chain (LSSC), we still know little about the effects of risk evolution and interactional mechanism of subjects in different urgent scenarios of logistics service supply chain from a micro perspective. Based on the structures of the LSSC, this study thus analyzed the risk evolution and the main actors’ reactions in the LSSC, including categorizing the urgent scenarios, analyzing their impacts on the diffusion intensity of pricing, profit and demand, and verifying the models’ validity with the numerical analysis. The results indicate divergent impacts of the different urgent scenarios on the logistics service supply chain: the price fluctuation can cause similar profit declines of the supplier and integrator, the reduced capacity can cause the supply chain’s price increase by 50%, and the demand risks can lead to similar changes of the upstream orders, prices and profits. The findings may provide clues for firms to develop effective countermeasures against the risks.

Integrating P2P Energy Trading With Probabilistic Distribution Locational Marginal Pricing

This paper proposes a new local energy market design for distribution systems, which integrates peer-to-peer (P2P) energy trading and probabilistic locational marginal pricing. Distribution locational marginal pricing and P2P energy trading have each been proposed as potential alternatives to traditional retail pricing, to improve coordination between prosumers with distributed energy resources. Unidirectional locational pricing provides a scalable approach for coordinating demand, considering constraints and losses; while P2P energy trading allows prosumers to negotiate mutually beneficial bilateral energy transactions that increase the utilisation of their flexible energy resources. This paper proposes a market design combining the benefits of these two strategies. First, a new strategy for day-ahead locational marginal pricing is developed, which manages the uncertainty associated with local generation, demand and upstream prices by introducing a spread between the prices charged for energy imports and paid for energy exports. Then, local P2P energy trading platforms are integrated to additionally enable direct prosumer-to-prosumer trading, with transaction fees penalising energy transfers according to probabilistic differential locational marginal prices. Case studies are presented for a multi-phase low voltage distribution network, showing how the design can create value for prosumers, and the system as a whole, by reducing the curtailment of renewable generation.

Simulating Vertical Mergers and the Vertical GUPPI Approach

Moresi and Salop (2013) have extended the “upward pricing pressure” approach used in analyzing horizontal mergers to the analysis of vertical mergers. They present test expressions called the vGUPPIu and vGUPPId to see if the upstream and downstream prices will rise as a result of the merger. This approach has gained acceptance. In this paper we present the results of Monte Carlo simulations of a vertical merger for a simple setup with one upstream monopolist and two downstream firms. In the simulations, the upstream price paid by the remaining downstream rival can either rise or fall. The downstream price always falls. The downstream rival may exit even when the upstream price falls. Based on these simulations, we see if the Moresi and Salop formulas predict the directions of price changes correctly. We also derive a variation on the Moresi and Salop formulation, arriving at different vGUPPI formulas. Overall, neither approach does well. Both versions of the vGUPPIu predict upstream price increases, whereas the simulations show many decreases. The merged firm’s downstream price always falls in the simulations. The Moresi and Salop downstream price test is correct 82.1% of the time, whereas the variant is correct 100% of the time.

Simulating Vertical Mergers and the Vertical GUPPI Approach

Moresi and Salop (2013) have extended the “upward pricing pressure” approach used in analyzing horizontal mergers to the analysis of vertical mergers. They present test expressions called the vGUPPIu and vGUPPId to see if the upstream and downstream prices will rise as a result of the merger. This approach has gained acceptance. In this paper we present the results of Monte Carlo simulations of a vertical merger for a simple setup with one upstream monopolist and two downstream firms. In the simulations, the upstream price paid by the remaining downstream rival can either rise or fall. The downstream price always falls. The downstream rival may exit even when the upstream price falls. Based on these simulations, we see if the Moresi and Salop formulas predict the directions of price changes correctly. We also derive a variation on the Moresi and Salop formulation, arriving at different vGUPPI formulas. Overall, neither approach does well. Both versions of the vGUPPIu predict upstream price increases, whereas the simulations show many decreases. The merged firm’s downstream price always falls in the simulations. The Moresi and Salop downstream price test is correct 82.1% of the time, whereas the variant is correct 100% of the time.

The welfare gains from a refusal to deal

ABSTRACTA vertically integrated provider (VIP) initially has a duty to deal with a rival at unregulated upstream and downstream prices. The duty to deal is subsequently terminated which enables the VIP to acquire the rival and serve as a two-product, downstream monopolist. We find that the refusal to deal is welfare-enhancing given that consumer and producer surplus increase.

Optimal Export Policy With Upstream Price Competition

We present a third‐market model with a vertical trading structure, in which upstream input suppliers engage in homogeneous price competition. We show that, under downstream Bertrand competition, a non‐monotonic export policy may result. Specifically, the optimal policy of the exporting country can turn into a tax–subsidy–tax as the degree of product substitutability rises. We also confirm the conventional result for which the optimal policy is an export subsidy (tax) if there is Cournot (Bertrand) competition downstream, provided that the number of domestic suppliers is at an intermediate level. We further discuss bilateral policy interventions when both exporting countries offer a subsidy/tax to their domestic downstream firms. We show that a non‐monotonic export policy (tax–subsidy–tax) can arise even in this extended setting.

Accommodation effects with downstream Cournot competition

In a two‐tier industry where a vertically integrated firm sells input to and competes against a downstream rival, we show that, when the upstream division of the integrated firm chooses its input quantity, the downstream division credibly accommodates rival sales despite downstream competition being Cournot. Even taking rival quantity as given, the downstream division knows that, by limiting its own final‐good quantity, it can increase rival revenue, and therefore willingness‐to‐pay for the input. Upstream price setting leaves no room for downstream accommodating behavior implying that for a vertically integrated input monopolist, setting input price or input quantity makes crucial difference.

Upstream Pricing Schemes, Trade Liberalization, Trade and Environmental Policies of Downstream Countries

Trade liberalization has a significant impact on the environment and social welfare of countries. In the real world, almost all industries exist upstream and downstream firms but the existing literature on the impact of trade liberalization rarely discuss the interaction between upstream and downstream firms. The goal of this study is to analyze the effects of trade liberalization on the trade policies, environmental policies and social welfare of downstream exporting countries when different pricing schemes (uniform pricing vs. discriminatory pricing) are implemented by upstream monopoly firms. By constructing a three-stage dynamic game model we found that, regardless of pricing schemes, trade liberalization leads to increase both environmental taxes and import taxes. Trade liberalization increases the social welfare of downstream countries under discriminatory pricing, while trade liberalization first reduces and then increases the social welfare of downstream countries under uniform pricing. The results indicate that the downstream countries always have the incentive to participate in trade agreements that integrate markets when discriminatory pricing schemes will be implemented by upstream firms. This finding is the most significant contribution of this paper which has not been addressed in the previous literature.

Estimating Retail Gasoline Price Dynamics: The Effects of Sample Characteristics and Research Design

The study shows that much of the variation in the findings of the literature on retail gasoline price dynamics is systematic rather than sample variation from using different data. Estimates of pass-through rates depend systematically on research design and features of the data, such as the sampling frequency, the choice of upstream price, whether taxes are included or not, the sample length, and the postulated lag structure. In addition, there are systematic differences between time periods and countries. Using a 20 year-long dataset of 28 European Union countries we quantify the extent of estimate variation that arises from the choice of data structure from that arising from temporal and country heterogeneity and sampling variation. We also show that country heterogeneity itself has systematic components, with wealthier countries experiencing slower adjustments. Our results inform the interpretation of results on pass-through rates derived from Error Correction Models. They are also of relevance for the broader literature estimating the transmission of price shocks in the economy.

Single-Dimensional Versus Multi-Dimensional Product Ratings in Online Marketplaces

Product review platforms in online marketplaces differ with respect to the granularity of product quality information they provide. While some platforms provide a coarse single overall rating for product quality (also referred to as single-dimensional rating scheme), others provide a more granular rating - a separate rating for each individual quality attribute (also referred to as multi-dimensional rating scheme). A multi-dimensional rating scheme is superior to a single-dimensional rating scheme, ceteris paribus, in reducing consumers' uncertainty about product quality and value. However, we show that, when sellers respond to product ratings by adjusting their prices, compared to the single-dimensional rating scheme, the multi-dimensional rating scheme does not always benefit consumers, nor does it necessarily benefit the sellers or the society. The uncertainty associated with quality attribute rating and the extent of differentiation between competing products determine whether a fine-grained multi-dimensional rating scheme is superior to the coarse-grained single-dimensional rating scheme from the consumers', sellers' or a social planner's perspective. The main driver of the results is that the more (less) granular and less (more) uncertain information exposes (hides) underlying differentiation, or lack of it, between competing products, which, in turn, alters the upstream price competition in the presence of heterogeneous consumer preferences. The results demonstrate that focusing on the information transfer aspect of rating schemes provides only a partial understanding of the true impact of rating schemes.

Market-Based Transfer Pricing: An Evaluation of Alternative Market Prices

We investigate a transfer pricing problem between two divisions within a decentralized firm. An upstream division produces an intermediate good that is transferred to another division within the firm and is also sold in an external market, where the firm competes with a rival who sells a differentiated substitute product. Assuming that headquarters has imperfect information about the upstream division's marginal production costs, we identify conditions under which a market-based transfer price based on the rival's external market price is a viable alternative to a market-based transfer price based on the upstream division's external market price. The two transfer prices differ in their ability to convey private-cost information and in their effect on the upstream division's competitive behavior in the intermediate market. We find that the relative performance of the two transfer pricing regimes depends on the relative levels of internal and external demand for the intermediate product, on the intensity of competition with the rival in the intermediate market, and on the degree of uncertainty about the upstream division's costs. We also extend our main analysis by relaxing our assumptions about information and intermediate market competition and by allowing specific investments. Overall, our analysis provides new insight into how alternative market-based transfer prices can be used to coordinate decentralized decision-making in the absence of a perfectly competitive intermediate market.

The existence of buyer power in the Italian fresh milk supply chain

Purpose – Buyer power can be defined as the ability to obtain trade terms more favourable than a supplier’s normal trade terms. The purpose of this paper is to estimate existence of buyer power in the Italian market of fresh milk. The sector is characterised by high industrial and retail firms concentration and a significant gap between the downstream and upstream prices exists. Design/methodology/approach – The authors applied the “first-pass” test proposed by Lloyd et al. (2009) on a set of monthly price indexes series from 2000 to 2013 in order to estimate if a buyer power exists in this sector. This in order to verify how prices are transmitted along the supply chain and to determine if buyer power contributes in conditioning the retail-producer price spread. Findings – Estimated results suggest that buyer power exists in the Italian fresh milk supply chain and oligopsonistic behaviour affects the spread between downstream and upstream prices. Originality/value – The paper gives a contribute on estimation of buyer power in the agro-food supply chains. However, more research needs to be carried out in order to precisely evaluate the nature and the causes of presence of buyer power.