price discrimination and investment incentives abstract we examine a model of a monopolist selling to two segments of consumers with different preferences for quality we show that if the firm is unable to price discriminate between the segments then there is less investment in quality we find that both consumer segments and society overall may suffer if the firm is unable to price discriminate we extend the model to duopoly competition and find that our results still hold

discriminatory dealing with downstream competitors evidence from the cellular industry one concern about regulated monopolies entering unregulated vertically related markets is that they will discriminate against competitors of their unregulated affiliates however prohibiting regulated monopolies from offering related goods may preclude production by the most efficient provider we take advantage of variation across geographic cellular phone markets in the us to examine the effect of integration on output quality and prices we find some evidence consistent with efficiencies greater concentration of lines to users is associated with greater output and higher quality and some consistent with discrimination greater interconnection facility ownership concentration is associated with lower output and quality

why aren t developed countries saving abstract national saving rates differ enormously across developed countries but these differences obscure a common trend namely a dramatic decline over time france and italy for example saved over 23 and 19 of national income in 1970 but only 9 and 4 respectively in 2008 japan saved almost 33 in 1970 but only 7 in 2008 and the u s saved around 11 in 1970 but only 1 in 2008 what explains these international and intertemporal differences is it demographics government spending productivity growth or preferences for the u s and france whose saving behavior we study preferences appear to be an important factor american and french societies are placing increasing weight on the welfare of those currently alive particularly contemporaneous older generations government spending also appears to be one of the reasons why france is saving at much lower rates these conclusions emerge from estimating two models in which society makes consumption and labor supply decisions in light of uncertainty over future government spending productivity and social preferences the two models differ in terms of the nature of preference uncertainty and the extent to which current society can control future societies spending and labor supply decisions

the welfare effects of third degree price discrimination with nonlinear demand functions the welfare effects of third degree price discrimination are analyzed when demand in one market is an additively shifted version of demand in the other market and both markets are served with uniform pricing social welfare is lower with discrimination if the slope of demand is log concave or the convexity of demand is nondecreasing in the price the demand functions commonly used in models of imperfect competition satisfy at least one of these sufficient conditions

budget deficits and national saving are politicians exogenous during the thirty five year period following world war ii the federal budget deficit averaged less than one percent of net national product never once exceeding five percent for the five year period from 1982 86 the budget deficit never once fell below five percent of net national product there have been some modest cutbacks recently and the deficit is likely to fall to about four percent of net national product in 1988 further declines are now projected in the congressional budget office 1988 baseline forecast of the implications of present policies but both 1988 presidential candidates suggested many more policies that would increase than decrease the deficit these numbers indicate that after years of relative abstinence the united states has experimented with persistent budget deficits on a rather massive scale in the 1980s economists have generally been quite critical of this fiscal policy though there are at least three respectable minority views arguing that federal deficits are not so bad and quite possibly better than likely corrective measures the rationale for economists general opposition comes from those who hold what is called the neoclassical view of deficits according to this view if the united states should be treated as a closed economy persistent deficits will raise interest rates and lower investment if the united states should be treated as a small open economy persistent deficits will leave real interest rates and investment unchanged but the drop in national saving would be financed by higher foreign borrowing accomplished through a rise in the dollar and a drop in net exports either way net national saving falls and consumption rises at the expense of some combination of investment and net exports as a result living standards are higher in the present but lower in the future compared to what they would be in a world of no deficits

market power price discrimination and allocative efficiency in intermediate goods markets we consider a monopolistic supplier s optimal choice of two part tariff contracts when downstream firms are asymmetric we find that the optimal discriminatory contracts amplify differences in downstream firms competitiveness firms that are larger either because they are more efficient or because they sell a superior product obtain a lower wholesale price than their rivals this increases allocative efficiency by favoring the more productive firms in contrast we show that a ban on price discrimination reduces allocative efficiency and can lead to higher wholesale prices for all firms as a result consumer surplus industry profits and welfare are lower

pricing to preclude sabotage in regulated industries abstract we characterize the optimal access price and retail price for a vertically integrated incumbent supplier v that faces limited competition from a new entrant in the retail sector the optimal prices provide v with a relatively high wholesale profit margin and a relatively low retail profit margin consequently v has no incentive to raise the costs of its retail rival

models of vertical market relations abstract i contrast various models of vertical contracting that view upstream interactions either through the lenses of bilateral contracting and negotiations or through the lenses of a market interface with uniform contractual terms existing models contrast starkly in their policy implications in particular when imperfect horizontal competition on either the upstream or the downstream level interacts with differential buyer power depending on industry characteristics different assumptions on contracting may be appropriate even though the quest for an all encompassing modelling framework seems vain existing models can still be made more flexible so as to be of greater practical usage

discriminatory nonlinear pricing fixed costs and welfare in intermediate goods markets abstract we investigate the welfare effects of third degree price discrimination in input markets when nonlinear wholesale tariffs are feasible after accepting their respective wholesale contracts two downstream firms have to pay a fixed cost in order to become active in the downstream market if the downstream firm with lower marginal cost has significantly higher fixed cost uniform pricing leads to lower marginal wholesale prices for all downstream firms and thus higher quantities of the final product being produced this in turn implies that banning price discrimination improves welfare and consumer surplus if the downstream firm with lower marginal cost has only weakly higher or even lower fixed cost banning price discrimination deteriorates welfare and consumer surplus

deficits and inflation an open economy model of the united states the deficit debate is a recurring theme in academic and political circles the controversy is over the effect of deficits on inflation and interest rates the existing body of empirical evidence does not resolve the controversy this paper focuses on the inflationary impact of deficits the model used is derived from a comprehensive is lm analysis which incorporates a foreign trade sector and a general price adoptive expectation adjustment mechanism we test the model using time series data for the united states from our results we conclude that nia deficits have no significant bearing on the rate of inflation

a theorem of voting rules and budget deficits abstract a theorem showing that deficits under a procedure requiring expenditures to accompany revenues as they are enacted followed by a vote on the size of deficit are smaller than under current procedure in which votes on expenditures and taxes are unlinked

separation of regulators against collusive behavior we show that the separation of powers in regulation may act as a commitment against the threat of regulatory capture splitting regulatory tasks and monitoring technologies among several nonbenevolent regulators may reduce their discretion in engaging in socially wasteful activities when regulators make collusive offers that are accepted by the agent whatever his characteristics competition between regulators relaxes collusion proofness constraints and improves social welfare this result is robust to different specifications of the agent s preferences and to the timing of the game as long as one insists on safe side contracting offers we also discuss how separation affects both allocative efficiency and the distribution of rents in the economy

budget balance through revenue or spending adjustments abstract the paper provides a historical perspective on the issue of whether budget deficits are typically eliminated by increased taxes or by reduced spending by examining u s budget data from 1792 1988 i conclude that about 50 65 of all deficits due to tax cuts and about 65 70 of all deficits due to higher government spending have been eliminated by subsequent spending cuts while the remainder was eliminated by subsequent tax increases in contrast to previous studies the empirical analysis uses error correction models in a way that the intertemporal budget constraint is imposed in the estimation stage

debt neutrality theory and evidence from developing countries this paper reviews the ricardian barro hypothesis and tests the basic postulate of the model for a sample of developing countries including mexico and venezuela two specifications are utilized the first is based on the simple consumption model associated with the work of kormendi 1983 the alternative is based on a model developed by haque and montiel 1987 the outcome of the two stage least square estimation technique rejected the hypothesis in mexico trinidad and tobago and venezuela all countries which underwent adjustment programmes however these results were reversed when the alternative model was utilized due to liquidity constraint and possibly the yaari blanchard effect the contradictory outcome alludes to the sensitivity of the results to the model specified

cost pass through and inverse demand curvature in vertical relationships with upstream and downstream competition this paper provides two characterizations of the retailer s markup relative to the manufacturer s markup in vertical relationships with homogeneous manufacturers and homogeneous retailers we first show that retailer s relative markup is equal to the ratio of the retail pass through to the wholesale pass through multiplied by the number of manufacturers relative to the number of retailers we then provide its expression in terms of the inverse demand curvature

fiscal policy and national saving this paper uses structural vector autoregressions along with structural measures of fiscal policy to measure the dynamic impact of fiscal policy shocks on the output gap and national saving positive shocks to government purchases and negative shocks to real net taxes are found to increase the output gap positive shocks to the government s structural surplus increases national saving although the effects are small positive shocks to government purchases are found to substantially reduce national saving negative shocks to real net tax revenues as a share of potential gdp have a small negative impact on national saving

vertical integration foreclosure and productive efficiency we analyze the consequences of vertical integration by a monopoly producer dealing with two retailers downstream firms of varying efficiency via secret two part tariffs when integrated with the inefficient retailer the monopoly producer does not foreclose the rival retailer due to an output shifting effect this effect can induce the integrated firm to engage in below cost pricing at the wholesale level thereby rendering integration procompetitive output shifting arises with homogeneous and differentiated products moreover we show that integration with an inefficient retailer emerges in a model with uncertainty over retailers costs and this merger can be procompetitive in expectation

the welfare effects of third degree price discrimination in intermediate good markets the case of bargaining this article examines the welfare effects of third degree price discrimination by a monopolist selling to downstream firms with bargaining power one of the downstream firms the chain store can integrate backward at lower cost than rivals bargaining powers also depend on disagreement profits bargaining weights and concession costs if the chain s integration threat is not credible price discrimination reduces the input price charged symmetric downstream firms and often reduces the average input price charged asymmetric downstream firms

do revenues or expenditures respond to budgetary disequilibria the post world war ii increase in the size of the federal government has led to a number of theoretical and empirical investigations of the sources of this growth in particular economists have questioned whether increases in the size of the federal budget tend to be initiated by changes in expenditures followed by revenue adjustments by the reverse sequence or both friedman for example argues that governments adjust expenditures to the level of revenues so that control of taxation is essential to limit growth in government 13 alternatively the spend and tax model posits that revenues will be adjusted to finance any politically chosen level of expenditures a third perspective reflecting the institutional separation of allocation and taxation functions of the federal government hypothesizes the independent determination of revenues and expenditures the goal of this investigation is to test these three alternative theories of the budgetary process for the united states

price discrimination in input markets quantity discounts and private information we consider a monopolistic supplier s optimal choice of wholesale tariffs when downstream firms are privately informed about their retail costs under discriminatory pricing downstream firms that differ in their ex ante distribution of retail costs are offered different tariffs under uniform pricing the same wholesale tariff is offered to all downstream firms in contrast to the extant literature on price discrimination with nonlinear wholesale tariffs we find that banning discriminatory wholesale contracts often improves welfare this also holds if the manufacturer is not an unconstrained monopolist moreover uniform pricing increases downstream investments in cost reduction in the long run

timing of investments and third degree price discrimination in intermediate good markets abstract this paper studies the discriminatory pricing of an intermediate good and compares two models with a different timing of investments undertaken by the downstream firms before or after the upstream monopolist sets the input prices when the more efficient downstream firm is charged a higher price than the less efficient firm in the first model in the second model when investments are made after input prices are set it may be charged a lower price due to the additional indirect effect of input prices on derived demands via the change of investment incentives it is illustrated that with linear market demand and quadratic investment cost whether a lower or higher price is charged to the more efficient firm depends on the ratio of the linear and quadratic coefficients in the cost function

opportunism in multilateral vertical contracting nondiscrimination exclusivity and uniformity comment an input supplier selling to competing downstream firms would benefit from publicly committing at the outset to all contracts efficient commitment however would require complete contracts the authors study instead bilateral contracting without commitment regarding others terms each firm then fears that the supplier might opportunistically renegotiate another s contract to increase bilateral profit at the firm s expense the authors show that nondiscrimination clauses generally cannot curb such third party opportunism even with symmetric firms to reassure firms crude forms of commitment may be adopted this could explain the pervasiveness of exclusivity arrangements and the striking uniformity and intertemporal rigidity of franchise contracts copyright 1994 by american economic association

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

a new approach in analyzing the effect of deficit announcements of interest rates using alternative methods the authors find less support than previous authors for significant interest rate responses to deficit announcements the main results are that interest rates respond only 40 percent of the time to deficit announcements and when they do respond the impact is only temporary lasting between one to six days and involving a 0 25 basis point response per percentage change in the deficit copyright 1994 by ohio state university press

why is the u s current account deficit so large evidence from vector autoregressions most observers consider large u s current account deficits to have been the main contributor to world macroeconomic imbalance in the 1980s the implications of continuing u s current account deficits of 100 to 200 billion dollars per year are troubling other countries must adjust to the scarcity of capital as the united states acquires a significant portion of the world s savings at the same time u s companies seek protection from unfair foreign competition as foreign companies increase market share in the united states determining the source of the problem and designing the correct solution are therefore major objectives of economic research policymakers and economists have suggested a number of reasons for the sudden jump in the current account deficit different schools of thought have therefore proposed different policy responses ranging from doing nothing to radically altering the country s commercial policy debate has centered on the proposed policies with little attention paid to comparing the explanatory power of the underlying hypotheses

price discrimination in input markets we analyze the short and long run implications of third degree price discrimination in input markets in contrast to the extant literature which typically assumes that the supplier is an unconstrained monopolist in our model input prices are constrained by the threat of demand side substitution in our model the more efficient buyer receives a discount a ban on price discrimination thus benefits smaller but hurts more efficient larger firms it also stifles incentives to invest and innovate with linear demand a ban on price discrimination benefits consumers in the short run but reduces consumer surplus in the long run which is once again the opposite of what is found without the threat of demand side substitution

upfront payments and exclusion in downstream markets although upfront payments are often observed in contracts between manufacturers and retailers little is known about their competitive effects or the role retailers play in securing them in this article we consider a model in which two competing retailers make take it or leave it offers to a common manufacturer we find that upfront payments are a feature of equilibrium contracts and in all equilibria only one retailer buys from the manufacturer these findings support the claims of small manufacturers who argue that they are often unable to obtain widespread distribution for their products because of upfront payments copyright 2007 rand

third degree price discrimination in input markets output and welfare if price discrimination is realized the economy shifts from one equilibrium to another it clearly involves welfare effects the price discriminator clearly gains some consumers may also gain from the price cut but others may lose faced with higher prices etc traditionally the change in social welfare is known to be closely related to the change in total output in the case of third degree price discrimination it is well known that an increase in total output is a necessary condition for welfare improvement richard schmalensee 1981 proves this fact in a model in which the monopolist with constant marginal cost can perfectly separate markets further hal r varian 1985 extends this result to the case of interdependent markets permnitting increasing marginal cost of the monopolist and finally the assumption of nondecreasing marginal cost is eliminated by marius schwartz 1990 roughly speaking this proposition says that if there is a welfare gain from price discrimination there has to be some gain to offset the distortion involved on the other hand the vast majority of legal and other policy disputes over the price discrimination concern input markets not final good markets thus it seems important to investigate the situation in which a discriminating monopolist is not a final good supplier but an input supplier and the buyers of the input are downstream producers of a final good as is assumed in this paper if the downstream firms have different technologies their input demand functions will be different and thus the monopolist has an incentive to price discriminate in this scenario michael l katz 1987 and patrick degraba 1990 study the effect of inputmarket price discrimination and show that price discrimination always lowers welfare because it involves the distortion that a lower cost downstream firm is assigned a higher price unfortunately in their simple settings on the technology of downstream industry price discrimination can never change total output of the input or of the final good 1 thus we must say that welfare effect of input market price discrimination remains open to question if it has some effect on total output in particular we are curious as to whether we can obtain some close relationship between the changes in welfare and total output as we have obtained in the final good market settings with this motivation we will construct a model which involves change in total output of the final good in the next section the model and assumptions are provided in section ii after we extend the result of katz 1987 and degraba 1990 we find a relationship between the changes in welfare and total output strikingly it states that an increase in the total output of the final good is a sufficient condition for welfare deterioration this result contrasts with that obtained by schmalensee 1981 varian 1985 and schwartz 1990 from usual models of price discrimination in a final good market section iii concludes the analysis

bilateral control with vertical contracts when a manufacturer contracts secretly with competing retailers he is subject to opportunism and linear or non linear tariffs may not allow the manufacturer to maintain monopoly prices to analyse the effects of rpm o brien shaffer 1992 use a concept of contract equilibrium which concentrates on pairwise deviations thereby questioning the robustness of the analysis this paper emphasises the distinction between the contract equilibrium and standard non cooperative concepts we advocate for some caution in the use of the former concept as if overlooks an inexistence problem we then confirm the intuition that rpm can help solve the manufacturer s commitment problem this confirms that o brien shaffer s insight is robust and validates the courts reluctance against rpm

input market price discrimination and the choice of technology recent concerns over the effects of the robinson patman act and so called priceprotection policies such as most favoredcustomer clauses mfc s 2 on market performance have given economists new reasons to examine the welfare effects of third degree price discrimination in order to assess these effects correctly it is imperative that one understand how price discrimination influences market behavior joan robinson s 1933 work launched the formal inquiry into the welfare effects of third degree price discrimination building on the intuition presented by arthur pigou 1932 she showed that if a monopolist faces two independent linear demand curves the use of price discrimination will not affect industry output but will reduce welfare richard schmalensee 1981 extends these results to nonlinear demand curves and shows that an increase in total industry output is a necessary condition for price discrimination to be welfare improving hal varian 1985 broadens these results by deriving upper and lower bounds on the welfare change due to the use of price discrimination he shows that these results can be applied to markets in which there are nonzero cross price effects all of this work examines how the ability of a monopolist to price discriminate will affect the market outcome when all other characteristics of the market are treated as exogenous recently two lines of research have extended this inquiry beyond the case of a monopolist in a market with exogenously fixed parameters the first line considers the case of oligopoly the work of charles holt and david scheffman 1985 and thomas cooper 1986 has shown that restrictions on price discrimination imposed by the use of mfc s can facilitate collusion between oligopolists attempting to restrict output this implies that third degree price discrimination can be welfare improving the second line of research shows that price discrimination by a firm can affect nonprice decisions made by other market participants thus affecting the market outcome michael katz 1987 presents a model in which a large firm s ability to vertically integrate backward into the production of an input allows it to obtain a lower per unit price from the supplier of the input than can be obtained by smaller firms without this ability he shows that third degree price discrimination reduces welfare unless it prevents inefficient backward integration degraba 1987 shows that the use or nonuse of price discrimination by a national firm can affect nonprice decisions made by local firms that compete with the national firm in this situation third degree price discrimination is welfare reducing because it induces local firms to produce a product that is overly differentiated from the product of the national firm in all of the work cited above price discrimination is important when sellers set prices in separate markets or charge different prices to different customers in the same market the following analysis which can be considered a contribution to the second line of research suggests that price discrimination can be important even when a seller faces a single market in which all customers are identical the intuition behind this result is that nonprice decisions made by downstream producers such as the choice of technology can be affected by the use or johnson graduate school of management cornell university ithaca ny 14853 i thank robert frank robert smiley richard thaler and the participants of the jgsm applied microeconomics workshop for their helpful comments see william baldwin 1987 pp 438 40 for a good summary of the debate 2see john kwoka and lawrence white 1989 pp 196 7