Jason Pearcy

Bargains Followed by Bargains: When Switching Costs Make Markets More Competitive

In markets where consumers have switching costs and firms cannot price discriminate, firms have two conflicting strategies. A firm can either offer a low price to attract new consumers and build future market share or a firm can offer a high price to exploit the partial lock-in of their existing consumers. This paper develops a theory of competition when overlapping generations of consumers have switching costs and firms produce differentiated products. Competition takes place over an infinite horizon with any number of firms. This paper shows that the relationship between the level of switching costs, firms’ discount rate, and the number of firms determines whether firms offer low or high prices. Similar to previous duopoly studies, switching costs are likely to facilitate lower (higher) equilibrium prices when switching costs are small (large) or when a firm’s discount rate is large (small). Unlike previous studies this paper demonstrates that the number of firms also determines whether switching costs are pro- or anti-competitive, and with a sufficiently large (small) number of firms switching costs are pro- (anti-) competitive.

Tradable Emissions Permits with Offsets

This chapter extends the existing theory of tradable emissions permit markets to allow for tradable permits and offsets. Offsets are currently incorporated into the EU ETS, and in the future similar assets will likely become a feature of many pollution control systems. A model is developed with multiple compliance assets, offset quotas, and different transaction costs across compliance assets. Either offset usage quotas or additional transaction costs associated with surrendering offsets can lead to an equilibrium price difference between permits and offsets, as experienced in the EU ETS. Another result of the chapter shows that offset usage quotas alone cannot explain observed offset behavior in the EU ETS, but combining offset usage quotas with firm-level heterogeneity in transaction costs can be consistent with observed EU ETS behavior. Annual compliance data from Phase I and II of the EU ETS are used to support the consistency of the theory.

Arriving in Time: Estimation of English Auctions with a Stochastic Number of Bidders

We develop a new econometric approach for the estimation of second-price ascending-bid auctions with a stochastic number of bidders. Our empirical framework considers the arrival process of new bidders as well as the distribution of bidders’ valuations of objects being auctioned. By observing the timing of bidder arrival, the model is identified even when the number of potential bidders is stochastic and unknown. The relevance of our approach is illustrated with an empirical application using a unique dataset of art auctions on eBay. Our results suggest a higher impact of sellers’ reputation on bidders’ valuations than previously reported in cross-sectional studies but the impact of reputation on bidder arrival is largely insignificant. Interestingly, a seller’s reputation impacts not only the actions of the bidders but the actions of the seller as well. In particular, experience and a good reputation increase the probability of a seller posting items for sale on longer-lasting auctions, which we find inc...

The Tangled Web of Agricultural Insurance: Evaluating the Impacts of Government Policy

This paper examines the effects of changes in major elements of the U.S. federal crop insurance program on the structure of the agricultural insurance industry. We model the interactions between farmers, insurance agents and insurance companies. Two symmetric equilibria are determined: one with competitive insurance companies and one where insurance companies form a collusive monopsony. We evaluate how marginal changes in government policy (changes in the premium subsidy rate, A&O subsidy rate, and loading factor) affect the insurance premium rate, agent compensation rates, agent effort levels, and market demand for crop insurance. Conditional on no prior government policy, farmers prefer a marginal increase in the premium subsidy rate. This change has the lowest associated net social cost, but is the policy least preferred by insurance companies. The insurance companies’ most preferred policy is a marginal increase in the A&O subsidy rate, which has the highest associated net social cost, the highest cost to the government, and does not benefit farmers. We also evaluate the consequences of changes in crop prices. If the market for insurance agent services is competitive, then a change in crop prices does not change agent compensation rates, but otherwise the agent compensation rate will change. This result suggests an empirical test regarding insurance company market performance.

Distortion Minimizing Classified Land Taxation

While there is a rich literature on both the spatial impact of taxation and the optimal composition of differential classified taxes, there is a paucity of research on the role of spatial land competition in the choice of these taxes. This paper analyzes the distortion minimizing choice of a classified land tax under differing types of spatial competition through the use of open or closed monocentric city models with absentee landowners or pubic landownership. A key result of this analysis is that optimal classified land taxes may be distortionary with public landownership; taxes result in changes in population, resident utility, and land usage. Comparing an open and closed city with absentee landowners, differential tax rates are set in a closed city, but it is never optimal to have differential tax rates in an open city.

Steam Coal at an Arms Length: An Evaluation of Proposed Reform Options for US Coal Used in Power Generation

The ONRR has proposed to reform federal coal valuation policy for royalty assessment and in this paper we estimate the expected changes associated with different reform options. We find that if royalty revenues are determined using the delivered price of coal instead of prices used in non-arm’s length transactions, royalty revenues from domestic sales to power generators would increase by

The Effects of International Simple Resale on Prices in International Telecommunications Markets

141 million per year. The associated price effect is an increase of 23 cents per ton (0.89%) and the effect on the quantity is a decrease of 971 thousand tons per year (-0.17%). In addition to using delivered prices for royalty valuation if transportation costs that exceed 50% of the net delivered price are included in royalty payments, royalty revenues from domestic sales to power generators are expected to increase by

Dynamic Pricing: When to Entice Brand Switching and When to Reward Consumer Loyalty

517 million per year. This change would increase the average price of coal by 88 cents per ton (3.36%), decrease the quantity extracted by 3.7 million tons per year (-0.65%), and reduce severance and income tax collections by

Tradable Emissions Permits with Osets y

13 million per year.

Supplementary Appendix to \Actual and Potential Competition in International Telecommunications"

This paper empirically investigates the effect of international simple resale (ISR) authorization on the prices for international message telephone service (IMTS). We compile a firm-level panel data set for over 200 United States-foreign country bilateral markets from 1995 to 2004. These data provide detailed information on prices, variable costs, fixed costs and market shares for 75 firms for each bilateral market, as well as the timing of ISR authorization by the Federal Communications Commission for each bilateral market. Estimates from a difference-in-differences model show that ISR authorization, and the associated lowering of barriers to entry, almost always results in lower prices for all markets. Additionally, we find evidence that ISR authorization alters the relationship between market concentration and price. Prior to ISR authorization more concentrated markets have higher prices. ISR authorization dampens this effect and in some cases reverses the relationship so that market concentration is negatively correlated with IMTS prices set by incumbent firms.