James D. Reitzes

The Impact of Quotas and Tariffs on Strategic R&D Behavior

Quotas and tariffs are compared in a two-stage Cournot duopoly game where R&D is chosen initially and output is selected subsequently. Imposing a quota at or below the free-trade import level results in either a pure-strategy or a mixed-strategy equilibrium. Compared to an equally restrictive tariff, a quota leads to higher domestic profits, but lower domestic output and R&D (in a pure-strategy equilibrium). Furthermore, a quota and a tariff may often produce opposite effects on domestic R&D. A quota set above the free-trade import level may become binding and may lead to multiple equilibria. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Product Differentiation and the Ability to Collude: Where Being Different Can Be an Advantage

The 1984 Department of Justice Merger Guidelines provides a framework for economic analysis, see Salop, Symposium on Mergers and Antitrust, 2 J. ECON. PERSPECIlVES 3 (1987). While the Guidelines do not espouse a single model of anticompetitive behavior, much of the analysis relies on a model of explicit or implicit collusion. See especially sections 3.41-3.44. In the recently issued 1992 DoJ and FTC Merger Guidelines, greater attention is given to other types of behavior, including unilateral actions by firms producing close substitutes. R. POSNER, ANrnRUST LAw 60-61 (1976), and R. BORK, THE ANrnRUST PARADOX (1978), claim that antitrust should be concerned almost exclusively with the threat of collusion.

Input-Quality Sabotage and the Welfare Consequences of Parity Rules

We analyze the welfare effects of “parity” rules that force a vertically-integrated input monopolist (VIM) to treat downstream affiliates and competitors alike in terms of price and quality. We find that input-quality parity can lower social welfare when input pricing is unregulated. In contrast, the VIM may either find it profitable to engage in “rival sabotage” or even “self sabotage” which can be welfare maximizing. When parity input prices are set at marginal cost, the input monopolist has an incentive to degrade the input sold to its downstream rival, and possibly to excessively upgrade the quality supplied to its affiliate. Thus, the desirability of input-quality parity is highly dependent on the nature of the input pricing policy. We additionally find that input quality parity not only creates an incentive for the VIM to set a higher input price to its retail rivals, but to price above marginal cost to its affiliate as well.

International Perspectives on Electricity Market Monitoring and Market Power Mitigation

We review the different market monitoring and market-power mitigation policies that arise in world electricity markets. Regulators for electricity markets apparently respond to differences in underlying market structure and design features when choosing between ex-ante (that is, rule-based) behavioral restrictions as opposed to ex-post enforcement (that is, investigations and sanctions) as the principal means for deterring abuses of market power. Particular design features that influence market-monitoring policies are whether the market is one-part (energy only) versus two-part (energy and capacity), and whether there is centralized or bilateral trading. Information-disclosure requirements also are a key element of market monitoring.

Deregulation and Monitoring of Electric Power Markets

Abstract As “ideal” competition is either an unattainable or unsustainable goal, market monitoring activities should focus on the achievable alternative of “workable” competition.

Market-share quotas

Abstract Anecdotal evidence reveals that an import quota is not always filled when the quota is specified in terms of a market-share limit instead of a quantity limit. In a simple Cournot duopoly, we show that imposing a market-share quota eliminates pure-strategy equilibria. Instead, a mixed-strategy equilibrium occurs where the quota is not binding under one of the two equilibrium domestic strategies. Compared with a tariff that restrains the foreign market share to an equivalent level, domestic output (and social welfare) may be higher under a market-share quota.

Domestic versus International Capital Mobility: Some Empirical Evidence

This paper develops an empirical test to determine whether, on average, capital moves more easily between industries within a country or between coun tries within an industry. The test is applied using cross-section dat a on accounting rates of return to capital of U.S. multinational corp orations in 1966 and 1977. It is found that international capital mob ility was greater in the earlier period, but domestic capital mobilit y tended to dominate in the later period. These findings are of parti cular importance to the field of international economics, since compe ting trade models use opposite assumptions as regards which type of c apital mobility is greater.

Designing Standard-Offer Service to Facilitate Electric Retail Restructuring

Abstract The treatment of SOS is the lynchpin to achieving retail competition, particularly for certain customer classes. Thus, the design of an effective strategy for achieving competition depends on the ability of regulators and retailers to recognize differences in transaction costs and switching behavior across different classes.

Downstream price-cap regulation and upstream market power

Under “partial separation,” it is increasingly common for a utility’s upstream affiliate (e.g., an electric generation supplier) to be unregulated while its downstream affiliate (e.g., the distribution company offering retail service) is subject to regulation. When choosing the optimal form of downstream regulation, regulators may be confronted with the potential exercise of market power by the upstream affiliate. This paper finds that the imposition of a downstream price cap with an appropriate profit-sharing rate can eliminate the upstream affiliate’s exercise of market power. However, it is less desirable to fully mitigate affiliate market power when upstream rivals also behave strategically.

Lessons from the first year of competition in the California electricity markets

Abstract The start of the California markets generally has been successful, with no large problems in the mechanics of their operation. But the data provides grounds for some concern about market power, particularly during high-load periods, and about efficiency in the ancillary services markets.