Kenneth Fjell

A Mixed Oligopoly in the Presence of Foreign Private Firms

In this paper, a mixed oligopoly model is considered in which a state-owned public firm competes with both domestic and foreign private firms. Previous articles on mixed oligopoly did not include foreign private firms. The effect on the equilibrium involves a lower price and a different allocation of production (relative to the case when all private firms are domestically owned). In addition, issues such as the effects of an open door policy allowing foreign firms to enter and the effects of foreign acquisition of domestic firms are discussed.

Public Stackelberg Leadership in a Mixed Oligopoly with Foreign Firms

This is the first paper to consider a mixed oligopoly in which a public Stackelberg leader competes with both domestic and foreign private firms. The welfare maximising leader is shown to always produce less than under previous Cournot conjectures. Introducing leadership also alters previous public pricing rules resulting in prices that may be either greater than or less than marginal cost depending on the relative number of domestic firms. Furthermore, entry of a foreign firm will increase welfare only when the relative number of domestic firms is small, but that share is shown to be larger than has been indicated without leadership. Unlike previous models, the influence on public profit of a foreign acquisition is ambiguous and is related to the relative number of domestic firms. Finally, the consequences of privatisation are shown, for the first time, to depend on the relative number of domestic firms.

A Cross-Subsidy Classification Framework

Cross-subsidization is a frequent topic in public debates and often stigmatized in the wake of deregulation. Public monopolies increasingly find themselves operating not only in regulated markets, but in non-regulated markets where they are accused of illegally using resources from the regulated market to stifle competition. Similar anticompetitive allegations can be made against private multiservice firms with market power. However, definitions of cross-subsidization are many and this affects the debate about the issue and possible strategic motives behind cross-subsidization, its possible consequences for competition, and measures that might be taken against it. This paper organizes definitions that regulators are likely to encounter into three types involving cost transfer, temporary loss or permanent loss. Based on these distinctions, a novel classification framework is developed according to underlying motivation and consequences for competition. The four cases arising from the framework are subsequently discussed in terms of relevancy for public and private firms, and consequences for competition and welfare.

Elasticity based pricing rules: a cautionary note

The inverse elasticity rule is all too often described in a way that implies a myopic application, sometimes with a numerical example with input values for price elasticity of demand and marginal cost thus determining profit maximizing price. Conversely, the rules shortcomings are not given deserved attention. This is unfortunate, as the rule may be adopted at face value, which will lead to erroneous pricing. If marginal cost and price elasticity depend on price, as is usually the case, a myopic application of the rule will, in most cases, lead to a bypassing of optimal price; if the initial price were too low, then the prescribed price would be too high, and vice versa. Continued myopic use may even lead to divergence from the profit maximizing price. Only if both price elasticity of demand and marginal cost are constant, which is rarely the case, will the rule return the optimal price.

On the Choice of Royalty Rule to Cover Fixed Costs in Input Joint Ventures

Abstract In a model where two competing downstream firms establish an input joint venture (JV), we analyze how different royalty rules for covering fixed costs affect channel profits. Under running royalties, the downstream firms’ perceived marginal costs are above the true marginal costs since fixed costs are incorporated. We find that tougher competition between the JV partners may actually increase channel profit under such a scheme. However, lump-sum royalties are preferable if the competitive pressure is weak.

The Role of Costs in Industrial Pricing

Based on a large survey of firms in Norwegian industry, in line with earlier studies, we find that the majority (68.7%) use some form of cost based pricing. In contrast to earlier studies, variable cost is the dominant cost base (32%). Only about 20% of firms use fully distributed cost compared to 30-41% reported in previous studies. Also, the share of firms practicing strict cost based pricing with little or no regard to market factors is marginal and considerable lower than found earlier. We find that costs play a larger role for small and medium sized firms, and for firms which emphasize fairness in pricing. In contrast, firms’ emphasis on the competitive situation and customer value are both negatively related with the role of costs.

How to Test for Abuse of Dominance

According to Article 82 of the EC Treaty, abuse of dominance is prohibited. The case law of the Court of Justice and the Court of First Instance of the European Community gives some guidance concerning whether a certain practice by a dominant firm is abusive or not; however, there is still some uncertainty concerning the exact definition of abusive behaviour. For example, several commentators claim that the court decision in Michelin II left unanswered many questions concerning which rebates are legal and which are banned.1 In December 2005 DG Competition published a discussion paper on exclusionary abuses. The discussion paper supplements the existing case law and ensures a consistent treatment of Article 82. It proposes an overall approach to the treatment of exclusionary abuses: “The central concern of Article 82 with regard to exclusionary abuses is thus foreclosure that hinders competition and thereby harm consumers.”2 This suggests that consumer harm is the overall criterion for deciding whether a dominant firm’s behaviour is abusive or not.3 Furthermore, the discussion paper in general proposes an effect-based approach. This implies that one should consider the likely effects on the market of a certain type of behaviour by a dominant firm. According to such an overall approach, the appropriate test for abuse would be to check whether consumers are harmed. However, in the

Internal Pricing in Supply Chains

Managing a supply chain concerns environments in which there are multiple decision makers, which may be different firms or different divisions within a single firm. In a supply chain, behaviour that is locally rational can be inefficient from a global perspective. Thus, management attention has to be focused on methods or mechanisms that improve system efficiencies. In this paper we propose a novel negotiated two-part tariff scheme for use by management. It combines earlier results in the literature as well as introduces a reversed use of two-part tariffs in the presence of shortfall in deliveries. We argue that negotiated two-part tariffs can be used for internal pricing as a means to achieve “channel coordination”, both under normal delivery and under shortfall, as well as for risk sharing when parties differ in risk aversion.