David L. Kaserman

The Impact of the Automatic Adjustment Clause on Fuel Purchase and Utilization Practices in the U. S. Electric Utility Industry

The purpose of this paper is to examine the combined influence of the search and switching effects of the automatic fuel-adjustment clause on the prices paid by utilities for the aggregate-fuel input. Then, given this combined effect, an attempt is made to separate the individual influences of the two-component effects. Findings indicate that the presence of an automatic fuel-adjustment clause leads the regulated firm to pay a higher price for the aggregate-fuel input than would be paid in the absence of the clause. The severity of this aggregate-fuel input than would be paid in the absence of the clause. The severity of this aggregate-fuel price differential is estimated to be on the order of 6 cents/10/sup 6/ Btu, or approximately 10% of the average fossil-fuel price. Moreover, this aggregate effect is found to result from the induced disincentive to switch to less-expensive fuels rather than the payment of higher prices for the individual-component fuels. 21 references, 5 tables.

Ownership and control in the modern corporation: Antitrust implications

Abstract As Adam Smith, in The Wealth of Nations, noted over 200 years ago, if a firms manager is not also its owner, there is a possibility that the manager will not act strictly in the interests of the owners. Following the publication of Berle and Means influential study, considerable professional attention has been directed toward Adam Smiths observation. What consensus has emerged on the so-called separation of ownership and control issue? What are the antitrust consequences of the separation of ownership and control? Answers to these questions are suggested. Finally, the significance of the recent theoretical contributions of Alchian and Demsetz and Fama are reviewed and policy implications are discussed.

To which fiddle does the reculator dance? some empirical evidence

This paper presents an empirical test of the economic theory of regulation which holds that regulators behave as optimizers facing pressures from opposing interest groups. The data employed pertain to the decisions made in the early 1970s by state public service commissions to award or reject automatic fuel adjustment clauses for 34 electric utilities located in the northeast. A probit model of this binary decision outcome is specified, incorporating those variables suggested by the economic theory of regulation. The results obtained provide empirical support for that theory. Moreover, the results strongly reject what has come to be known as the simple capture theory of regulation which holds that regulators unerringly dance to the industrys fiddle.

A note on vertical integration as entry

Abstract This paper examines the incentive for an intermediate product monopolist to integrate forward into a competitively-structured final product industry when that industry has failed to achieve a position of long-run equilibrium. It is shown that the upstream monopolists profits are increased more by entering the downstream industry than are the profits of other firms unrelated to this industry. Consequently, the monopolist is more likely to overcome whatever entry barriers might exist at the downstream stage. The welfare effects of this form of integration are shown to be positive, and a theoretical foundation is provided for the policy distinction commonly made between vertical integration by a major acquisition versus integration through internal expansion or a toehold acquisition followed by expansion.

Vertical Integration without Contractual Alternatives

This chapter elaborates vertical integration without contractual alternatives. Several potential incentives for vertical control exist where there is no obvious contractual alternative to ownership integration. The chapter discusses several incentives such as single stage rate-of-return regulation, monopsony power over input purchases, price discrimination in intermediate-good sales, and persistent long-run disequilibrium. In situations in which these incentives are operative, common ownership of the relevant stages of production should be expected. Given the original market situation, it can be seen that the welfare effects of adopting an integrated structure may be positive, negative, or indeterminate according to which particular incentive is providing the motivation for vertical integration. The efficiency of resource utilization requires that a monopoly position be obtained by the firm. Uninhibited by regulatory constraint, such a firm could be expected to exercise full monopoly power in the output market and would not have any incentive to integrate backward into input supply unless some market imperfection existed at the intermediate-product stage.

Vertical Integration under Uncertainty

This chapter discusses the vertical integration under uncertainty. The role that uncertainty plays in influencing the decisions of firms to integrate vertically is both diverse and pervasive. It is found that the myriad sources of uncertainty that are typically encountered can create a host of incentives for vertical integration that are independent of traditional transaction cost considerations. The study is concerned primarily with vertical integration in agricultural product markets and views vertical integration as a method for reducing the variability of supply and/or demand at vertically related stages of production. As such variability imposes real resource costs in the form of stockpiles, insurance schemes, and product spoilage, any reduction obtained increases the profits of one or more of the parties to the transaction. The extent of the variation that is experienced in the absence of vertical integration is directly related to the perishability of the product and the discreteness of the production process involved.

Per Se Illegal Contractual Controls

This chapter discusses the different aspects of per se illegal contractual controls. The legal status of the contractual alternatives to vertical ownership integration varies from per se illegality to presumptive legality. Three contractual alternatives that suffer per se illegality include maximum-resale price fixing, resale price maintenance, and tying arrangements. Per se illegality makes employing these methods of vertical control extremely hazardous. A plaintiffs burden in such situations is greatly reduced because the court will infer the adverse economic effect from the mere existence of the business practice. It is found that as these three business practices are hard to disguise, the firm employing such devices is vulnerable to legal proceedings from several directions. The antitrust authorities can charge the firm and the individuals involved with violating the Sherman Act, the Clayton Act, or the Federal Trade Commission Act. In the case of Sherman Act prosecution, the potential penalties can be quite severe. It is found that while the economic analysis of resale price maintenance may not lead to unambiguous conclusions regarding consumer welfare, the judicial history is quite clear.

Variable Proportions and Contractual Alternatives

This chapter describes the variable proportions and contractual alternatives. As the downstream industry is able to employ the monopolized input in variable proportions, the intermediate-product monopolist has an incentive to vertically integrate forward. It is argued that, as an alternative to vertical integration, the intermediate-good monopolist could obtain an equivalent result by tying the purchase of nonmonopolized substitutable inputs to the purchase of the monopolized input. It is argued that the upstream firm could, through tying, exercise the requisite vertical control necessary to achieve the same result as that available through the successful monopolization of the downstream industry by ownership integration. Under the assumptions of the variable proportions model, vertical integration and tying are economically equivalent, that is, these strategies yield identical results with respect to both efficiency of input utilization and profitability to the intermediate-good monopolist. The optimal use of the tying alternative results in the downstream producers return to the efficient expansion path that competitively determined prices would generate. In the model, this requires that the monopolist adjust the price of all tied inputs such that the relative prices remain the same as competitively determined relative prices.

Legal Treatment of Ownership Integration

This chapter describes the legal treatment of ownership integration. The two avenues to higher profits include the reduction of costs permitted by vertical integration and the enhanced exploitation of existing market power. The first alternative is one that should be applauded, as it clearly leads to increases in consumer welfare. Provided that the existing market power is legal, the second option may or may not be of antitrust concern depending upon the effect on social welfare. If the existing market power is not legal, that fact should be challenged directly and treated as the horizontal issue that it is. In interpreting the antitrust laws, the courts have raised several objections to vertical integration based upon this possibility. The major objection involves vertical market foreclosure, which allegedly occurs when a supplier acquires one of its customers because the suppliers rivals are foreclosed from competing for the acquired firms business. The courts persist in employing the notion of vertical market foreclosure when deciding vertical control cases. The court seems to think that vertical integration could create monopoly power by denying competitors access to essential inputs.

Fixed Proportions and Contractual Alternatives

This chapter describes the fixed proportions and contractual alternatives. A striking characteristic of many vertical restraints is that they involve products that do not change physically as they move from the manufacturer through the distributor to the retail customer. The retail sellers of television set, refrigerators, automobile tires, electric typewriters, newspapers, stereo equipment, and myriad other consumer goods simply perform a distribution function. These sellers do not alter the product physically, which is not to say that no useful function is performed. These sellers add important services to the wholesale product in converting it to retail good. In this situation, there is a so-called fixed proportions relationship between one of the inputs and the output. It is assumed that the manufacturer is interested in maximizing profits. In an effort to accomplish this objective, the manufacturers optimal strategy is to select an output such that marginal production costs are equal to the marginal revenue associated with the derived demand. The unfortunate consequence of the local monopoly power is that each distributor will maximize its profit by restricting output below the level that the manufacturer finds optimal.