regulatory reform in britain regulatory reform in britain john kay and john vickers major sectors of the british economy are currently undergoing far reaching regulatory reform deregulation removal of barriers to competition and the introduction of new methods of regulation are occurring notably in financial services some of the professions and in utility industries such as telecommunications gas and electricity this paper gives an economic assessment of these developments the authors examine the root causes of market failure that call for regulation externalities monopoly and information problems and the pros and cons of various regulatory responses a broad distinction is drawn between structural regulation the determination of which firms or types of firms can engage in which activities and conduct regulation the control of how firms behave in their chosen activities recent examples of deregulation plus re regulation in britain are seen in part as a shift from structural to conduct regulation the relative merits of the two modes of regulation are complex to assess but it is argued that some recent regulatory reforms are placing undue reliance on conduct regulation as well as assessing individual industries the authors draw general conclusions about the desirability of regulatory solutions that make full use of market forces

the american business cycle continuity and change in recent decades the american economy has experienced the worst peace time inflation in its history and the highest unemployment rate since the great depression these circumstances have prompted renewed interest in the concept of business cycles which joseph schumpeter suggested are like the beat of the heart of the essence of the organism that displays them in the american business cycle some of the most prominent macroeconomics in the united states focuses on the questions to what extent are business cycles propelled by external shocks how have post 1946 cycles differed from earlier cycles and what are the major factors that contribute to business cycles they extend their investigation in some areas as far back as 1875 to afford a deeper understanding of both economic history and the most recent economic fluctuations seven papers address specific aspects of economic activity consumption investment inventory change fiscal policy monetary behavior open economy and the labor market five papers focus on aggregate economic activity in a number of cases the papers present findings that challenge widely accepted models and assumptions in addition to its substantive findings the american business cycle includes an appendix containing both the first published history of the nber business cycle dating chronology and many previously unpublished historical data series

emission taxes and optimal refunding schemes with endogenous market structure the purpose of this paper is to investigate optimal schemes for refunding the emission tax in a free entry market where the production process generates emissions we consider the regulation by a three part tax policy the government sets an emission tax a refunding scheme and an entry license tax in contrast to the case of the two part tax refund policy under no entry we show that even if it is impossible to obtain subsidies from outside the first best outcome is always attained further the government s budget constraint is binding under the optimal schemes our result implies that the tax refund system works effectively in a market with endogenous entry

measuring the liquidity effect this paper measures the effect on the federal funds rate of an open market operation the paper deals with simultaneous equations bias by developing a proxy for the errors the federal reserve makes in forecasting the extent to which treasury operations will add or drain reserves available to private banks these errors induce fluctuations in bank reserves which have measurable consequences for the federal funds rate the paper estimates that a reduction in nonborrowed reserves of 30 million if sustained for an entire fourteen day reserve maintenance period will cause the federal funds rate to rise by ten basis points copyright 1997 by american economic association

long run welfare effect of energy conservation regulation we investigate the long run effect of energy conservation regulation which forces firms to raise energy saving investment above the cost minimizing level if pigovian tax is imposed additional regulation always harms social welfare under perfect competition while it can improve welfare under imperfect competition our result under imperfect competition holds regardless of whether strategies are strategic substitutes or complements in contrast to direct entry regulation

the liquidity trap and u s interest rates in the 1930s most current literature assumes that a central bank loses the ability to influence interest rates through variations in reserve supply as soon as overnight rates have been driven to zero i argue that reserve supply can be directly related to longer term rates when overnight rates are zero because banks reserve demand is then defined by the role of cash as an asset free of interest rate risk i present evidence that reserve supply affected longerterm interest rates in the u s from 1934 through 1939 while overnight rates were at the zero floor even when the changes in reserve supply reflected factors unlikely to have affected expectations of future overnight rates

endogenous quality differentiation in congested markets firms selling a product with congestion externalities to a heterogeneous population of customers have an incentive to offer differentiated levels of quality in a price competitive market differentiation arises endogenously through the prices chosen by firms in equilibrium firms offer a range of prices which induce an efficiency improving range of quality levels and allow customers to self select their preferred price quality combinations additional results suggest that with many firms in the market the choice of prices dominates the choice of service capacities in determining congestion levels copyright 1991 by blackwell publishing ltd

multi market competition r d and welfare in oligopoly we investigate a multi market cournot model with strategic process research and development r d investments wherein a multi market firm meets new competitors that enter one of the markets we show that entry can enhance the total r d expenditures of the multi market firm moreover the incumbent s profit nonmonotonically changes as the number of entrants increases depending on the fixed entry costs and r d technologies both insufficient and excess entry can appear our results imply that diversification of their products can be a useful strategy for firms

tariffs versus quotas with strategic investment the relative efficiency of tariffs versus quotas is analyzed in a cournot oligopoly with strategic investment introducing quota licence fees to neutralize the international distributional effect when such licence fees remove quota rents from foreign firms then for the case of constrained entry with a sufficiently large number of firms quotas frequently hold a welfare advantage since tariffs relatively aggravate the inefficiency from overinvestment in the case of free entry and exit however tariffs hold a welfare advantage since there is greater benefit of increasing returns to scale to the economy by avoidance of excessive entry of firms

how do competitive pressures affect incentives to innovate when there is a market for inventions competition and intellectual property ip protections are complements in stimulating innovation when ip is appropriable a market for inventions forms and competitive pressures increase incentives to innovate competition among producers the demand side of the market for inventions and competition among inventors the supply side of the market for inventions create incentives to innovate when ip is not fully appropriable markets for inventions are limited and competitive pressures can decrease incentives to innovate firms vertically integrate r d and production and share technology to appropriate the returns to ip this implies that antitrust policy and ip protections are complements

inefficiency of subgame optimal entry regulation the literature on excess entry shows that the free entry equilibrium number of firms may be greater than is socially optimal and proposes government entry regulation as a remedy this article tries to show that such a policy recommendation is misleading a two period three person entry game model which explicitly includes second best government shows that entry regulation aimed at preventing excess entry actually induces the incumbent to behave strategically against the government and makes the final outcome socially suboptimal compared to cases in which there is no government intervention entry regulation is subgame optimal however it is globally suboptimal

quantitative easing in the 1930s during the 1934 39 recovery from the u s great depression overnight interest rates were usually at a lower bound meanwhile american monetary authorities followed policies related to today s debates on quantitative easing they tried to stabilize yields on treasury bonds with open market operations they created rapid growth in high powered money and they allowed transitory factors to affect high powered money effects of these policies on bond yields reveal a portfolio effect of short duration asset supply on term premiums this portfolio effect helps explain why high powered money growth was associated with recovery of real activity over 1934 39

great expectations and the end of the depression what ended the great depression in the united states this paper suggests that the recovery was driven by a shift in expectations this shift was triggered by president franklin delano roosevelt s fdr policy actions on the monetary policy side roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre depression levels on the fiscal policy side roosevelt expanded real and deficit spending which helped make his policy objective credible the key to the recovery was the successful management of expecta tions about future policy roosevelt s rise to power is modeled as a policy regime change as in thomas sargent 1983 and peter temin and barry wigmore 1990 this paper formalizes temin and wigmore s argu ment in a repeated game setting using a dynamic stochastic general equilibrium dsge model and argues that the regime change can account for the recovery in the model a regime change means the elimination of certain policy dogmas that constrain the actions of the government the regime change generates an endogenous shift in expectations due to a coordination of mon etary and fiscal policy this coordination ended the great depression by engineering a shift in expectations from contractionary i e the private sector expected future economic contrac tion and deflation to expansionary i e the public expected future economic expansion and inflation the expectation of higher future inflation lowered real interest rates thus stimulating demand while the expectation of higher future income stimulated demand by raising permanent income

low inflation pass through and the pricing power of firms abstract recently there has been a significant decline in the degree to which firms pass through changes in costs to prices a decline that is frequently characterized as a reduction in the pricing power of firms the decline appears to be associated with the decline in inflation in many countries the decline has important implications for monetary policy because it affects both forecasts of inflation and the effects of changes in monetary policy on inflation some have argued that the decline in pricing power helped to keep inflation low in the face of apparently strong demand pressures in the united states in the late 1990s this paper puts forth the view that the decline in pass through or pricing power is due to the low inflation environment that has recently been achieved in many countries first a microeconomic model of price setting is used to show that lower pass through is caused by lower perceived persistence of cost changes evidence is then presented showing that inflation is positively correlated with persistence of inflation suggesting that the low inflation itself has caused the low pass through an economy wide model consistent with the micromodel is then presented to illustrate how such changes in pricing power affect output and inflation dynamics in favorable ways but can disappear quickly if monetary policy and expectations change

industry profits and competition under bilateral oligopoly abstract we show that contrary to the key result of the standard cournot nash oligopoly model industry profits can increase with the number of firms if input prices are not exogenous but are determined by bargaining in bilateral oligopoly

can vertical integration by a monopsonist harm consumer welfare abstract vertical integration by a monopsonist is generally believed not to harm consumers this paper demonstrates in a natural economic setting that this conventional wisdom may not hold we model one on one bargaining between a monopsonist and independent suppliers when the set of suppliers cannot be expanded easily ex post and show that a vertically separated monopolist is vulnerable to holdup without integration we demonstrate that a bottleneck monopsonist has an incentive to encourage more upstream entry than would arise in a pure neoclassical monopoly having more suppliers mitigates the holdup power of any one this however distorts the cost structure of the industry toward greater industry output and hence lowers final good prices vertical integration mitigates the hold up problem faced by the monopsonist it allows it to generate and appropriate a greater level of industry profits at the expense of consumers

inflation and imported input prices in some inflationary latin american economies this paper first updates to 1980 the estimates of the harberger inflation model for argentina brazil chile colombia and uruguay and shows that all the hypotheses of this model hold and the reaction to monetary growth is fairly rapid an aggregate supply function including imported inputs is then hypothesized following recent theoretical work this yields two testable propositions on the reduced form estimates of inflation a the relation between inflation and monetary growth should be less than proportional and the income coefficient should be insignificant contrary to the harberger model and b inflation should be a weighted average of monetary growth and imported inflation assuming the underlying aggregate production function is homogenous of degree zero in prices tests on the same data base support both hypotheses these results also explain the similar results of many of the previous estimates of the harberger inflation equation which included the rate of devaluation in an ad hoc fashion

free entry and social efficiency under vertical oligopoly we analyze a successive vertical oligopoly model that incorporates vertical relationships between industries and demonstrate that free entry in an industry that produces a homogeneous product can lead to a socially insufficient number of firms this is in contrast with the proevious findings that under cournot oligopoloy with fixed set up costs level of entry in the free entry equilibrium is socially excessive it has often been argued that this result can provide a justification for apparently anticompetitive entry regulations our finding yields an important policy implication that such a justification is not necessarily valid when vertical relationships ar taken into account

the comparison between ad valorem and specific taxation under imperfect competition abstract this paper compares ad valorem and specific taxation in two models of oligopoly with and without free entry predominantly ad valorem taxation implies a relatively low consumer price high tax revenue and when entry is precluded low profits ad valorem taxation dominates specific taxation from the welfare perspective the set of circumstances under which with free entry specific taxation raises welfare is a strict subset of that in which ad valorem taxation is welfare improving and in both models the maximisation of consumer welfare subject to a binding revenue constraint requires maximum reliance on ad valorem taxation

monopoly and soft budget constraint a benevolent government may decide to subsidize an unprofitable monopoly whose profits do not capture all the social surplus from its production anticipating this the firm may underinvest in order to become unprofitable and extract state subsidies the resulting welfare loss may exceed by many times the deadweight cost of monopoly pricing committing the firm to a price ceiling may soften its budget constraint and thus reduce welfare competition can harden budget constraints in industries in which free entry is socially excessive

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

welfare losses under cournot competition abstract in a market for a homogeneous good where firms are identical compete in quantities and produce with constant returns the percentage of welfare losses pwl is small with as few as five competitors for a class of demand functions which includes linear and isoelastic cases we study markets with positive fixed costs and asymmetric firms we provide exact formulae of pwl and robust constructions of markets were pwl is close to one in these two cases we show that the market structure that maximizes pwl is either monopoly or dominant firm depending on demand finally we prove that pwl is minimized when all firms are identical a clear indication that the assumption of identical firms biases the estimation of pwl downwards

sectoral shocks learning and aggregate fluctuations we present a model in which sectoral shocks have aggregate consequences the model relies on irreversible investment and imperfect information to slow the adjustment of expanding industries we show that this gradual expansion is sub optimal

flow effects of central bank asset purchases on sovereign bond prices evidence from a natural experiment we estimate the response of sovereign bond prices to net supply shocks caused by purchase operations under the ecb s public sector purchase programme pspp to avoid simultaneity bias in the estimated relationship between prices and purchases we exploit a pspp feature that renders securities temporarily ineligible for reasons unrelated to their prices using these purchase restrictions as an instrument to identify exogenous variation in purchase volumes we find that pspp causes statistically significant and economically relevant upward price impacts the impacts are short lived and concentrated in securities issued by higher yield jurisdictions and characterized by higher maturity and lower liquidity

bilateral monopolies and incentives for merger the paper presents a model of duopoly in which firms acquire inputs through bilateral monopoly relations with suppliers it combines a bargaining model with a duopoly model to examine how input pri

excess entry vertical integration and welfare this article provides a systematic analysis of the welfare effects of vertical integration by a monopolist input supplier into a monopolistically competitive downstream industry we give sufficient conditions on consumer preferences that lead to pareto improving vertical integration and demonstrate a close relationship between assumptions on preference for variety excess entry in monopolistically competitive markets and the welfare effects of vertical integration excess entry in downstream markets tends to give rise to pareto improving vertical integration we extend the analysis to vertical oligopoly and access price regulation

money demand in the dominican republic this paper investigates a demand for money relationship for the dominican republic the financial system of the dominican republic is underdeveloped and there are no suitable domestic data on the opportunity cost of holding money economic links with the usa suggest a possible role for a foreign interest rate effect and a currency substitution effect in the demand for domestic money a long run demand for money relationship is developed from the perspective of alternative estimation methodologies and it is shown that a literature standard specification augmented by foreign monetary variables is robust the ensuing short run dynamic model is adequate stable and suggests an important role for expected inflation and a real bilateral exchange rate with the usa a number of policy implications for the dominican republic are drawn from the results

the economics of casino taxation in this article a model of the costs of a casino is developed that focuses on the implications for economic welfare of different taxation schemes for casinos the situation being considered is in a country where casinos cater exclusively to foreign tourists the goal of the country is to determine the maximum amount of taxes that can be extracted from the activities of this sector under different systems of taxation when the price of gambling is set by regulation above its competitive level the economic losses created by excessive investment in the sector can be reduced by taxation a turnover tax on the amount gambled can maximize both tax revenue and the economic welfare of the country due to administrative constraints a number of countries rely on the taxation of the casinos fixed assets or a combination of a turnover tax and a tax on fixed costs the model is applied to the situation in north cyprus the annual economic efficiency loss from its poorly designed tax policies on casino gambling is

producer opportunism in retailing contracts this paper analyzes the role of ex post producer opportunism on the optimal design of vertical restraints it considers vertical contracts as starting points of ex post renegotiation it shows that the alleged room for franchisor opportunism that seems quite important in franchising contracts can be seen as an insurance device when part of the goal of the contract is to provide a stable payoff to the franchisee this conclusion holds for various opportunistic strategies direct eviction of initial retailers excessive entry of new retailers on the market or resale price maintenance used to encourage voluntary exit of initial retailers

endogenous timing with infinitely many firms abstract a model with constant marginal costs is considered where firms choose first a period for production and then the amount to produce when competing in the market according to the resulting timing decisions multiple equilibria arise allowing for infinitely many industry output configurations encompassing one limit output dominant firm and the cournot equilibrium with free entry as extreme cases at each of these equilibria a firm produces a positive amount only if this firm commits to produce at period one both stackelberg and cournot like outcomes are sustainable as equilibria however when the number of leaders is given production at subsequent periods is always prevented and industry output is sometimes larger than the entry preventing level

speculative profits innovation and growth when technological change affects the prices of tradeable assets innovators can obtain speculative profits by exploiting their inside information as to the occurrence of innovations we propose a tractable model of endogenous growth that formalizes this argument originally due to hirshleifer 1971 we then use the model to assess two claims advanced by hirshleifer namely that speculative profits can generate excessive investment in r d when they add to monopoly rents guaranteed by patent protection or else even in a perfectly competitive economy the analysis confirms the first claim but casts doubts on the second one jel o30 o40

entry barriers and economic welfare the relationship between economic welfare and the number of firms in a quasi cournot market is examined in the first place we presuppose the existence of a strong first best government that can enforce the marginal cost principle to the firms along with regulating the number of firms it is shown that there exist excessive number of firms at the free entry quasicournot equilibrium vis a vis the first best welfare maximizing number of firms the thrust of this result essentially survives even if we replace a utopian first best government by a secondbest government that leaves the firms to pursue their respective profit maximization freely and engages solely in regulating the number of firms it can be shown that the excess entry prevails again in this second best world recent studies in the theoretical industrial organization literature have uncovered several instances which cast serious doubt on the reasonableness of a widespread belief that increasing competition will increase welfare stiglitz 1981 p 184 it has been shown that there are cases which are not altogether unreasonable where social welfare will be increased by strengthening rather than weakening the protection of incumbent firms from the threat of potential entry this is in sharp contrast with the traditional belief 2 what is not known however is how robust these pathologies in fact are we intend to settle this problem by proving two excess entry theorems in the quasi cournot parametric conjectural variations homogeneous oligopoly model seade 1980a b in the first place we presuppose the existence of a strong first best government that could costlessly enforce the marginal cost pricing principle by firms in an oligopolistic market and regulate entry in pursuit of first best social welfare optimization it is shown that the number of firms at the free entry equilibrium exceeds the first best welfare optimizing number of firms the result has already been noted by von weizsacker 1980a b and others in terms of numerical examples our theorem 1 asserts that this phenomenon always holds true for the family of quasi cournot models at hand an implication of this result is that the existence of entry barriers which protect incumbent firms from potential competitors is not necessarily welfare decreasing in sharp contrast with the traditional belief a problem remains with theorem 1 however in that an omnipotent first best government does not exist in reality and the first best ideal is unrealizable in the actual economy therefore even if the intervention by a first best government with a view to restricting the number of firms within an industry may be welfare improving it does

vertical integration in the presence of upstream competition we analyse vertical integration when there is upstream competition and compare outcomes to the case where upstream assets are owned by a single agent i e upstream monopoly in so doing we make two contributions to the modelling of strategic vertical integration first we base industry structure namely the ownership of assets firmly within the property rights approach to firm boundaries second we model the potential multilateral negotiations using a fully specified non cooperative bargaining model designed to easily compare outcomes achieved under upstream competition and monopoly given this we demonstrate that vertical integration can alter the joint payoffs of integrating parties in ex post bargaining however this bargaining effect is stronger for firms integrating under upstream competition than upstream monopoly we also consider the potential for integration to internalise competitive externalities in manner that cannot be achieved under non integration we demonstrate that ex post monopolization is more likely to occur when there is an upstream monopoly than when there is upstream competition our general conclusion is that the simple intuition that the presence of upstream competition can mitigate and reduce the incentives for socially undesirable vertical integration is misplaced and depending upon the strength of downstream competition i e product differentiation the opposite could easily be the case journal of economic literature classification number l42

public monopoly and economic efficiency evidence from the pennsylvania liquor control board s entry decisions we estimate a spatial model of liquor demand to analyze the impact of government controlled retailing on entry patterns in the absence of the pennsylvania liquor control board the state would have roughly 2 5 times the current number of stores higher consumer surplus and lower payments to liquor store employees with just over half the number of stores that would maximize welfare the government system is instead best rationalized as profit maximization with profit sharing government operation mitigates but does not eliminate free entry s bias against rural consumers we find only limited evidence of political influence on entry jel d42 d72 l11 l12 l43 l81

multiunit bargaining in oligopolistic industries a model of wage determination in unionized oligopolistic industries is developed and used to compare the outcome of collective bargaining under two different bargaining structures one in which the workers of each firm are represented by separate and independent unions local bargaining and one in which a national union represents all workers in the industry in both cases the bargaining problem has a unique outcome with industrywide bargaining resulting in higher wages in addition industrywide unions are inherently stable in that there are no incentives for independent unions to attempt to cheat on the collusive agreement

final and intermediate goods taxation in an oligopolistic economy with free entry abstract optimal tax rules are analyzed in an oligopolistic economy with free entry the initial market allocation has two types of distortion price is set above marginal cost by the oligopolistic behavior and the advantage of increasing returns to scale is left to be unexploited by excessive entry of oligopolists with production subsidy accompanied by a self financing lump sum franchise tax on oligopolistic firms pareto efficient allocation could be restored without a lump sum tax on oligopolists however the second best optimum requires taxing intermediate inputs used in the oligopolistic industry the optimal intermediate goods taxation follows the production side ramsey rule to encourage the use of intermediate inputs elastic to output level and vice versa

regulation competition and liberalization in many countries throughout the world regulators are struggling to determine whether and how to introduce competition into regulated industries this essay examines the complexities involved in the liberalization process while stressing the importance of case specific analyses this essay distinguishes liberalization policies that generally are procompetitive from corresponding anticompetitive liberalization policies

welfare optimal patent royalties when imitation is costly we identify welfare optimal patent royalties in a model of costly imitation entry and imperfect competition when the social planner may impose a compulsory license optimal royalties either blockade imitation facilitating unregulated monopoly or yield an aggregate zero profit efficient duopoly when duopoly is optimal the optimal per unit royalty pins the equilibrium price at the aggregate average cost and the optimal fixed royalty shifts surplus so the patentee and imitator break even efficient duopoly yields higher welfare than monopoly for sufficiently low invention cost and may also yield higher welfare than a prize system interestingly royalty payments may be negative because of this efficient duopoly may not be feasible if the planner must instead direct the courts to use such royalties

inflation dynamics in a small emerging market this study investigates the determinants of inflation in the dominican republic during 1991 to 2002 a period characterized by remarkable macroeconomic stability and growth by developing a parsimonious and empirically stable error correction model using quarterly observations the study finds that inflation is explained by changes in monetary aggregates real output foreign inflation and the exchange rate long run relationships in the money and traded goods markets are found to exist but only the disequilibrium from the money market exerts a significant impact on inflation

the future of monetary aggregates in monetary policy analysis this paper considers the role of monetary aggregates in modern macroeconomic models of the new keynesian type the focus is on possible developments of these models that are suggested by the monetarist literature and that in addition seem justified empirically both the relation between money and inflation and between money and aggregate demand are considered regarding the first relation it is argued that both the mean and the dynamics of inflation in present day models are governed by money growth this relationship arises from a conventional aggregate demand channel claims that an emphasis on the link between monetary aggregates and inflation requires a direct channel connecting money and inflation are wide of the mark the relevance of money for aggregate demand in turn lies not via real balance effects or any other justification for money in the is equation but on money s ability to serve as a proxy for the various substitution effects of monetary policy that exist when many asset prices matter for aggregate demand this role for monetary aggregates which is supported by empirical evidence enhances the value of money to monetary policy

social efficiency of entry in a vertically related industry we provide a new perspective to the literature on social desirability of entry by showing that if the input supplier has market power social desirability of entry of the final goods producers depends on returns to scale entry in the final goods market can be socially insufficient under constant returns to scale technology but it can be socially excessive under decreasing returns to scale technologies if the cost of entry is low so that the final goods market is sufficiently competitive hence the anti competitive entry regulation policies are more justifiable if the final goods market is characterised by decreasing returns to scale technologies

the costs of free entry an empirical study of real estate agents in greater boston this paper studies the consequences of xed commissions and low entry barriers in greater boston s real estate brokerage industry from 1998 2007 a period with substantial agent turnover we nd that entry is not associated with increased sales probabilities or reduced sales time instead it decreases the market share of experienced agents and reduces average service quality we develop a dynamic empirical model motivated by these patterns to study the extent of ineciency in the current system compared to alternatives to accommodate a large state space we approximate the value function using sieves and impose the bellman equation as an equilibrium constraint if commissions are cut in half there would be 40 fewer agents implying social savings of 23 of industry revenue and the average agent would facilitate 73 more transactions house price appreciation of 50 during our sample period accounts for a 24 increase in the number of agents and a 31 decline in average agent productivity finally improving information about past agent performance can increase productivity and generate signicant social savings

equilibrium product bundling this article offers an equilibrium theory of product bundling by rival firms in several models where a primary good is produced in a duopoly market and one or more other goods is produced under perfectly competitive conditions bundling is shown to emerge as an equilibrium strategy of one or both of the duopolists for its role as a product differentiation device when the rival firms can commit to bundling sales their profits are higher but social welfare is reduced copyright 1997 by university of chicago press

social efficiency of entry in a vertically related industry revisited abstract we revisit the social desirability of entry in a vertical structure by showing that if the input supplier has market power social desirability of entry of downstream producers depends on the asymmetric marginal costs among competing firms under constant returns to scale entry in the final goods market can be socially insufficient when entrants are inefficient but it can be socially excessive if the cost of entrants is sufficiently low compared to the incumbents

market r d allocations when research paths are product specific a compared to the social optimum individual firms undertook too little rd b too many firms entered the competition to undertake rd2 c if the elasticity of demand were sufficiently low aggregate rd

social desirability of free entry a bilateral oligopoly analysis abstract this paper explores the social desirability of free entry by analyzing a bilateral oligopoly model with bargaining that incorporates the entry process of firms we demonstrate that free entry in an industry producing a homogeneous final product leads to a socially insufficient number of firms when the suppliers of the intermediate products have sufficiently strong bargaining power this is in contrast to previous findings in the theoretical industrial organization literature which demonstrate that in homogeneous final product markets with cournot oligopoly and fixed set up costs level of entry in the free entry equilibrium is always socially excessive our analysis yields an important policy implication given that the standard excess entry result has often been used as a justification for apparently anti competitive entry regulations

the federal reserve s large scale asset purchase programmes rationale and effects we provide empirical estimates of the effect of large scale asset purchases lsaps on longer term us treasury yields within a framework that allows for several transmission channels including the scarcity channel associated with the preferred habitat literature and the duration channel associated with interest rate risk we also clarify lsaps role in the broader context of historical monetary policy strategy results indicate that lsap style operations mainly impact longer term rates via the nominal term premium within that premium the response is predominantly embodied in the real term premium the scarcity and duration channels both seem to be of considerable importance

price fixing policy abstract the prohibition against price fixing is competition law s most important and least controversial provision yet there is far less consensus than meets the eye on what constitutes price fixing and prevalent understandings cannot be reconciled with principles of oligopoly theory this article 1 presents a fundamental reconceptualization of our understanding of horizontal agreements 2 develops a systematic analysis of price fixing policy that focuses on its deterrence benefits and chilling costs and 3 compares this direct approach to commentators favored formulations that typically involve some sort of formalistic communications based prohibition by targeting a subset of means rather than the illicit ends conventional formulations tend to impose liability in cases with lower deterrence benefits and greater chilling costs than those reached under a direct approach and to incur greater administrative costs as well

product differentiation search costs and competition in the mutual fund industry a case study of s p 500 index funds we investigate the role that non portfolio fund differentiation and information search frictions play in creating two salient features of the mutual fund industry the large number of funds and the sizeable dispersion in fund fees in a case study we find that despite the financial homogeneity of s p 500 index funds this sector exhibits the fund proliferation and fee dispersion observed in the broader industry we show how extra portfolio mechanisms explain these features these mechanisms also suggest an explanation for the puzzling late 1990s shift in sector assets to more expensive and often newly entered funds an influx of highinformation cost novice investors

competition and regulation in vertically related markets in an industry where naturally monopolistic and competitive activities are vertically related should the natural monopolist be allowed also to operate in the deregulated competitive sector unlike much of the literature on vertical integration this paper assumes that monopoly pricing behaviour is regulated and therefore the effect of vertical integration on the task of regulation is central to the analysis in the model there is both imperfect information and imperfect competition when vertical integration by the monopolist is allowed the regulator s task is made harder insofar as the monopolist has anticompetitive incentives to raise rivals costs on the other hand integration may lead to there being fewer firms in the deregulated sector and hence less duplication of fixed costs the overall welfare comparison between separation and integration is ambiguous as two simple examples illustrate various extensions to the analysis are also considered one of the central questions in debates on regulatory reform is how to organize industries that contain both naturally monopolistic and potentially competitive activities electricity transmission and distribution are characterized by natural monopoly cost conditions but electricity generation is not in the gas industry pipeline services may be naturally monopolistic but supply to larger customers is not in telecommunications natural monopoly is more a feature of local network operations than of long distance operations and is not present in apparatus manufacture and supply or in the provision of value added services in railways while the infrastructure of track and stations is naturally monopolistic the supply of train services might not be policy developments notably those associated with privatization in britain and deregulation in the united states have sometimes led to radical structural reform in these industries at t for decades a vertically integrated monopolist was required under the 1982 settlement of its long running antitrust case against the u s government to divest itself of its local network operations the central electricity generating board cegb in england and wales was restructured both vertically transmission grid activities were separated from generation and horizontally before privatization in 1990 1991 by contrast british telecom was privatized as a vertically integrated dominant firm bt now faces competition from mercury and others especially in the long distance market but its dominance of local network operations might affect competition there and in other areas such as apparatus supply the local network monopoly would of course have to be regulated in any event but its link via ownership to vertically related and potentially competitive activities poses additional regulatory questions many of the efforts of the regulatory body oftel notably in relation to interconnection between bt s and rivals 1 for a general account of the theory and british experience of regulatory reform in the utility industries

dynamic competition and intellectual property rights in a model of product development we study innovation timing and socially optimal intellectual property rights iprs when firms facing market uncertainty invest strategically in product development if demand growth and volatility are high attrition occurs and iprs should ensure the cost of imitation attains a lower bound we identify if demand growth and volatility are low then provided that the private imitation incentive is socially excessive iprs should set the cost of imitation high enough to induce preemption and possibly winner take all preemption moreover the welfare achieved with optimal iprs is then greater with endogenous innovation than if firm roles are predetermined illustrating the importance of fostering dynamic competition in extensions we show how firms benefit from open standards takeovers have ambiguous welfare effects and simple licensing schemes are welfare improving

a tale of two market failures technology and environmental policy abstract market failures associated with environmental pollution interact with market failures associated with the innovation and diffusion of new technologies these combined market failures provide a strong rationale for a portfolio of public policies that foster emissions reduction as well as the development and adoption of environmentally beneficial technology both theory and empirical evidence suggest that the rate and direction of technological advance is influenced by market and regulatory incentives and can be cost effectively harnessed through the use of economic incentive based policy in the presence of weak or nonexistent environmental policies investments in the development and diffusion of new environmentally beneficial technologies are very likely to be less than would be socially desirable positive knowledge and adoption spillovers and information problems can further weaken innovation incentives while environmental technology policy is fraught with difficulties a long term view suggests a strategy of experimenting with policy approaches and systematically evaluating their success

market structure and casino taxation in tourist resorts this article examines the association of tax effects with market structure for casino gaming we show that if market structure is uncompetitive much of casino taxation falls on tourists whose demand is inelastic relative to supply the tax is likely to be efficient under strong external demand if imposed on oligopoly casinos with a monopoly location in a cross border market the likelihood of economically good taxation is greater under oligopoly than under competition but lower than under monopoly casino taxes should be lowered in a more competitive market with weaker external demand our prediction is consistent with the evidence found from casino tourism development in macao with high gambling taxes

what does monetary policy do to long term interest rates at the zero lower bound this article uses a structural var with daily data to identify the effects of monetary policy shocks on various longer term interest rates since the federal funds rate has been stuck at the zero lower bound the var is identified using the assumption that monetary policy shocks are heteroskedastic monetary policy shocks have especially high variance on days of fomc meetings and certain speeches while there is otherwise nothing unusual about these days a complementary high frequency event study approach is also used i find that stimulative monetary policy shocks lower treasury and corporate bond yields but the effects die off fairly fast

quantitative easing and unconventional monetary policy an introduction this article assesses the impact of quantitative easing and other unconventional monetary policies followed by central banks in the wake of the financial crisis that began in 2007 we consider the implications of theoretical models for the effectiveness of asset purchases and look at the evidence from a range of empirical studies we also provide an overview of the contributions of the other articles in this feature

have we underestimated the likelihood and severity of zero lower bound events prior to the financial crisis most economists probably did not view the zero lower bound zlb as a major problem for central banks using a range of structural and statistical models we find that previous research understated the zlb threat by ignoring uncertainty about model parameters and latent variables focusing too much on the great moderation experience and relying on structural models whose dynamics cannot generate sustained zlb episodes our analysis also suggests that the federal reserve s asset purchases while materially improving macroeconomic conditions did not prevent the zlb constraint from having first order adverse effects on real activity and inflation