EFFICIENT USER CHARGES IN A RENT-SEEKING MODEL

This paper examines efficient user charges on governmentally provided facilities in the presence of rent seeking. We find that the efficient user charge depends upon the relative slopes of the demand curve for the use of the facility and the corresponding marginal cost curve, as well as the level of rent seeking over the revenue raised. Except for a special case, the efficient user charge is found to differ from the charge indicated by the intersection of demand and marginal cost curves. Examples show that actual user charges on government facilities are often set at inefficient levels.     

CONSUMER SEARCH COSTS AND MARKET PERFORMANCE

We conduct laboratory markets to evaluate the effects of consumer search costs on market performance. The primary research goal is to assess the behavioral relevance of Diamond's [1971] paradoxical conclusion that the injection of a small consumer search cost alters the equilibrium price prediction from competitive to monopoly levels. Although monopoly prices are not consistently observed, we find that search costs do tend to raise prices. Additional experimentation indicates that below-monopoly prices are not explained by buyer avoidance of high-pricing sellers, but that prices increase as search costs are raised.     

CAPACITY CONSTRAINED EXPORTERS: IDENTIFYING INCREASING MARGINAL COST

This study revisits a central assumption of standard trade models: constant marginal cost technology. The presence of increasing marginal costs for exporters introduces significant market interdependence across borders missing from traditional models of international trade that rely on constant marginal cost technology. Such market interdependence represents an additional channel through which local shocks are transmitted globally. To identify increasing marginal cost at the level of the firm, we build in flexible production assumptions that nest increasing, decreasing, and constant marginal cost technology to an otherwise standard international trade model. We derive an estimating equation that can be taken directly to the data. Our structural equation explicitly guides our inference on the shape of the marginal cost curve from estimated coefficients. The results suggest that increasing marginal cost is predominant at the firm level. Moreover, utilizing plant‐level information on physical and financial capacity constraints, we find that the degree of increasing marginal cost is significantly exacerbated by both types of constraints. The evidence suggests that access to larger markets through greater international integration may not have the expected welfare gains typically predicted in standard models. (JEL F12, F14)     

LEFT FOR DEAD: ANTI‐COMPETITIVE BEHAVIOR IN ORBITAL SPACE

In a dynamic investment framework with depreciation, we show incumbent satellite operators have incentives to “warehouse” a fraction of their assigned spectrum and orbital slots, keeping nonoperational assets in place, which reduces output, increases prices, and diminishes social welfare. Exploring three distinct market structures, we model firms' incentives to warehouse, and show conditions under which firms choose to warehouse rather than replace nonfunctioning satellites. We find a dominant firm with a competitive fringe produces more and longer duration warehousing relative to perfect competition or monopoly. Regulators could remediate warehousing by increasing a firm's marginal costs, or by increasing the probability of reallocating orbital slots that do not have a fully functioning satellite. (JEL L9, L5)     

MONOPOLY, MONOPSONY AND CONTESTABILITY IN HEALTH INSURANCE: A STUDY OF BLUE CROSS PLANS

As dominant sellers of health insurance and buyers of health services, Blue Cross and Blue Shield have potential monopoly and monopsony power. The credible threat of entry resulting from the increased competitiveness of these markets in the 1980s may have produced competitive outcomes—reduced prices, improved quality and efficient cost structures—even in a concentrated market. We find the plans used economies of scale and monopsony power to reduce administrative costs, provide payments and consumer premiums. Our findings suggest that steps to enhance the contestability of health markets may be a better response than regulation.     

State Failure in the South Caucasus: Proposals for an Analytical Framework

The paper examines state failure in the South Caucasus. First, it determines a general system of 13 categories for analyzing the failure of states. Second, it applies these categories to the three internationally recognised South Caucasian states Armenia, Azerbaijan, and Georgia. The main focus lies on the state monopoly on the use of force in the entire territory of a country. If the government does not fulfil this condition, it faces a lot of severe consequences for many spheres of state performance and societal activity. In the South Caucasus, only Armenia managed to maintain the state monopoly on the use of force. In contrast, the establishment of separatist state entities (Abkhazia, South Ossetia, Nagorno Karabakh) led to the de facto collapse of the Georgian and Azerbaijani statehood. Thus, Georgia and Azerbaijan may be considered as failed states also due to the fact that in the foreseeable future there is no apparent chance to restore their territorial integrity.     

NONLINEAR PRICING STRATEGIES AND COMPETITIVE CONDITIONS IN THE AIRLINE INDUSTRY

This paper empirically examines the effect of competitive conditions on nonlinear pricing strategies in the airline industry. We use a unique data set to analyze the impact of concentration and the competitive pressures generated by Southwest and other low cost carriers on the relative prices within a menu of fares. The menu orders tickets by quality based upon cabin and ticket restrictions. We analyze the ratio of fares charged for various qualities within the menu to the fares charged for the lowest quality nonrefundable, restricted tickets. We observe a fare compression for only the highest fares on only the most concentrated (i.e., monopoly) routes. This result is something of a puzzle given a monopolist's market power. We find, however, that actual and potential competition from Southwest reduces low end fares and generally leads to substantial fare compression throughout the fare menu. (JEL L11, L93)     

Does International Outsourcing Really Lower Workers’ Income?

We analyze the impact of international outsourcing on income, if the domestic labor market is imperfect, i.e. there is a bilateral bargaining between a firm and a labor union. In our analysis we distinguish between the cases where the parties negotiate over the wage only and where they negotiate over both wage and profit sharing. We find in the first case that outsourcing has an ambiguous effect on the workers’ income, while it increases the workers’ income in the second case. For the optimal amount of international outsourcing, we find that, depending on the wage effect of outsourcing, in a pure wage bargaining system it can be higher or lower than the level where domestic and foreign marginal labor costs are the same. In contrast, in a wage and profit share bargaining system, the amount of outsourcing lies below this level.     

BETA, FIRM SIZE, and CONCENTRATION

The asset beta of a firm is defined as the uncertainty about the firm's future value scaled by its current value. Empirically, beta is negatively related to a firm's size and concentration in its major product market. This relation has been interpreted as evidence that monopoly power affects beta. This paper shows that this empirical result is also consistent with competitive product markets where greater firm size and concentration are due to greater efficiency in production. Thus, the correlation between beta, firm size and concentration is not prima facie evidence of widespread monopoly power.     

Latent Class Marginal Models for Cross-Classifications of Counts

The standard latent class model is a finite mixture of indirectly observed multinomial distributions, each of which is assumed to exhibit statistical independence. Latent class analysis has been applied in a wide variety of research contexts, including studies of mobility, educational attainment, agreement, and diagnostic accuracy, and as measurement error models in social research. One of the attractive features of the latent class model in these settings is that the parameters defining the individual multinomials are readily interpretable marginal probabilities, conditional on the unobserved latent variable(s), that are often of substantive interest. There are, however, settings where the local-independence axiom is not supported, and hence it is useful to consider some form of local dependence. In this paper we consider a family of models defined in terms of finite mixtures of multinomial models where the multinomials are parameterized in terms of a set of models for the univariate marginal distributions and for marginal associations. Local dependence is introduced through the models for marginal associations, and the standard latent class model obtains as a special case. Three examples are analyzed with the models to illustrate their utility in analyzing complex cross-classifications.     

Potential of decentralized wastewater management for urban development: Case of Bangkok

Decentralized wastewater management (DWWM) has recently gained much attention in wastewater management (WWM) due to its build-as-you-go principal. Rapid urban development and the widespread impact of wastewater require sustainable ways to test the DWWM approach. This paper aims to examine and discuss the potential of Bangkok’s current WWM approaches for urban development, focusing on decentralized management approaches. General WWM approaches were examined using case study research methods. Three WWM cases were selected for detailed investigation. Residential wastewater user surveys and expert interviews were used to support system performance findings of service providers and recipients, as well as to draw lessons learned. Results show that DWWM is economically and technically efficient, demonstrating potential for sustainable urban development (SUD) in the study area. The competitive cost found is a result of less sewer line, simple technology, and limited additional costs, while the high efficiency is a result of good operation and maintenance. Also the reclaimed water has been used for landscape irrigation of the urban greenery. Sustainability of the system lies in social value of public amenity it provides, and the urban planning implication that it could be an option for smart growth. The results also show that even in an inner urban area DWWM does not conflict with any SUD considerations. Thus, the study recommends using DWWM for new development within both public and private properties based on Bangkok’s case as part of long-term urban development.     

LABOR MARKET SHARE CONTRACTS WHEN THE FIRM HAS TWO VARIABLE INPUTS

This paper extends Weitzman's analysis of share contracts. Firstly, a second variable input is introduced into a firm's production technology. Some share contracts give the firm an incentive to reduce worker compensation by manipulating the second variable input. This implies that contracts which possess this property cannot support the same long-run equilibrium as would be achieved with a wage contract. Secondly, a positively sloped labor supply curve is introduced. It is shown that while share contracts reduce involuntary unemployment, they may not reduce total unemployment vis-a-vis wage contracts. The paper identifies the factors which determine relative employment variability.     

CONTRACT DESIGN AND SELF‐CONTROL WITH ASYMMETRIC INFORMATION

We study optimal contracting by a monopolistic seller of investment goods to a time‐inconsistent consumer and, in doing so, introduce asymmetric information to the model of DellaVigna and Malmendier (2004) . We find (1) the below‐marginal‐cost‐pricing rule may fail for a low‐value consumer; (2) the firm's profit is no longer unaffected by the consumer's short‐run impatience, as the latter is sophisticated. We find that there is an important threshold value of short‐run patience. When the consumer's short‐term patience is below this level, then, as the patience increases, the firm suffers. When the consumer's short‐run patience is above this threshold, then, as it increases, the firm benefits. Finally, we show that unlike monopoly, perfect competition with asymmetric information achieves the first‐best outcome. (JEL D03, D82, D91)     

Incremental cost sharing: Characterization by coalition strategy-proofness

Each one of n users consumes an idiosyncratic commodity produced in indivisible units. The n commodities are jointly produced by a central facility and total cost must be shared by the users.  A “sequential stand alone mechanism” shares costs incrementally according to a fixed ordering of the users: the first user always pays stand alone cost, the second pays the stand alone cost of the first two users minus that of the first and so on. If the second derivatives of costs are of a constant sign, such a method yields a unique strong equilibrium at every profile of convex preferences in the game where each user chooses his own demand. This equilibrium, in turn, defines a coalition strategy-proof social choice function.  Under decreasing marginal costs and submodular costs, the sequential stand alone mechanisms are almost characterized by these properties; the only exception is the binary demand case (each agent consumes zero or one unit) where a rich family of cost sharing methods (the Shapley value among them) yields a coalition strategy-proof equilibrium selection. Under increasing marginal costs and supermodular costs, coalition strategy-proofness characterizes a richer family of cost sharing methods: they give out one unit at a time while charging marginal costs, with the users taking turns according to a sequence fixed in advance. These methods contain serial cost sharing as a limit case. Received: 8 July 1997/Accepted: 22 January 1998     

TWO-PART PRICING FOR A MULTI-PRODUCT MONOPOLIST

This paper examines profit-maximizing multi-part pricing arrangements by multi-product monopolists. The results indicate that prices set by such firms will deviate from the marginal-cost-pricing efficiency norm when multi-part tariffs can be set on only a subset of the firm's product line. Per unit prices will be set above marginal cost when the monopolist sells goods that are substitutes, while per unit prices for complements may be set above or below marginal cost. In either case, the pricing strategy will involve increasing the demand for goods on which an entry fee can beset.     

Product selection and costs in a partially unionized industry

This paper examines differences in costs among union and nonunion firms operating in the multiple and competitive lumber markets; develops a model of output and product selection decisions; and then estimates the cost function implied by the model for a sample of sawmills that produce green and dry lumber. Overall, the average variable costs for the green technology are about 67 percent higher for union mills and, for the dry technology, costs are about 30 percent higher. However, differences inminimum average variable costs are negligible in the dry market but are significant in the green market. The results suggest that some union mills may be able to coexist with nonunion mills in a competitive industry by specializing in market niches determined by comparative cost advantages. The authors gratefully acknowledge comments from James Bennett, Jo Anna Gray, Chris Ellis, Stephen Haynes, Joe Kerkvliet, and an anonymous referee.     

A model of monopoly and “efficient” unions with endogenous union coverage: Positive and normative implications

We present a model of a rent-maximizing union that organizes to increase its coverage of an industry and analyze monopoly and “efficient” unions in this setting. Our model is unique in that we allow for a competitive industry with free entry and find union and nonunion firms coexisting with product market equilibrium. This is achieved by incorporating the insight that firms are heterogeneous in productive characteristics. An important implication of our model is that an “efficient” union that covers a nontrivial share of the market is not efficient and may in fact be less efficient than a monopoly union.     

Willingness to pay tax: The Laffer curve revisited for 12 OECD countries

According to Laffer, economic activities are a decreasing function of the taxation rate. As a consequence, total tax revenue increases with the taxation rate at its lower levels and decreases against it at its higher levels. The result is the Laffer curve. According to him, the reason for this decrease lies in decreasing economic activities. Although this may be true for activities in the official (white) sector, in the unofficial (black) sector they can increase under the influence of an increasing taxation rate. Part of the Laffer effect may be nothing more than an activity switch away from the white towards the (hidden) black sector. This paper takes both effects into account: decreasing activities in the white sector combined with increasing activities in the black sector. It examines the computation of the maximum tax revenue generating taxation rate for a number of OECD countries. It concludes that, with the exception of Sweden, the marginal taxation rate in these countries is below its optimum.     

INFLATION DYNAMICS AND SUBJECTIVE EXPECTATIONS IN THE UNITED STATES

We estimate a forward‐looking New Keynesian Phillips Curve (NKPC) for the United States using data from the Survey of Professional Forecasters as proxy for expected inflation. We obtain significant and plausible estimates for the structural parameters independently of whether we use the output gap or unit labor costs as a measure of marginal costs. Moreover, when estimating a Phillips curve where lagged inflation enters due to price indexation by nonreoptimizing firms, we obtain significant parameter estimates of the sign predicted by theory independently of the marginal cost measure used. (JEL E31)     

SCARCITY AND RICARDIAN RENTS FOR CRUDE OIL*

This paper estimates scarcity rent/user cost and Ricardian rent for crude oil in Oklahoma. A model of firm behavior is proposed incorporating both development and production decisions considering crude oil as a nonrenewable natural resource. Profit maximization conditions derived from the model are applied to take into account cost differentials associated with oil found at varying depths. It is shown that oil with the highest cost is the marginal unit and it is the marginal output that determines Ricardian rent. Time series data is used to estimate equations derived from the necessary conditions. It is found that scarcity rent is a significant proportion of the price of crude oil and has increased in the past decade.