Search

A fully unbundled, regulated network firm of unknown efficiency level can untertake unobservable effort to increase the likelihood of low downstream prices, e.g. by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the firm contingent on realized downstream prices. Alternatively, the regulator can force the firm to sell the following forward contracts: the firm pays the downstream price to the owners of a contract, but recieves the expected value of the contracts when selling them to a competivitve financial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic propability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.

I. INTRODUCTION Technological advancement allows firms to closely monitor their workers' actions more than ever before. For instance, firms can acquire worker monitoring software to monitor activities on computers or cell phones. Such software enables firms to assess whether workers play games on their computers or surf the internet, instead of working productively, and even to track workers' exact locations. Similarly, firms scan emails or use video surveillance to monitor their workers' behavior. Unsurprisingly, the growing use of monitoring technologies has led to a debate on how closely firms should be allowed to monitor their workers' actions and on whether government intervention is needed to protect workers' privacy. At first sight, it appears that this debate centers around two different kinds of arguments: economic arguments (e.g., higher worker productivity) in favor of extensive worker monitoring, against ethical issues according to which workers' privacy must be protected. Schmitz (2005), however, demonstrates that this is not necessarily true. In a contract-theoretical model, he finds that firms employ monitoring technologies not to increase efficiency but rather to reduce rents that must be paid to the workers in the case of imperfect monitoring. He concludes that monitoring technologies may lead to inefficiencies and thus calls for laws protecting workers' privacy. Whereas worker protection in the United States is rather weak in this respect, it is typically stronger within the European Union. In Germany, for instance, works councils are important institutions that provide workers with power on the firm level, particularly with respect to working conditions. Within the system of "co-determination" works councils have legally guaranteed influence on management decisions concerning working conditions within a firm. For instance, the law prescribes that worker representatives must consent to any introduction of technologies that monitor the workers' effort and output. (1) Given these rights of works councils, it may be puzzling that firm owners do not (more strongly) oppose this limitation of their control rights. In this paper, we offer an explanation to resolve this puzzle by analyzing the interaction between internal organization and market conduct. We argue that works councils and their right to block monitoring of workers can act as a commitment device of firms to mitigate product market competition. As relaxed competition increases profits, and because workers receive an information rent from their co-determination rights, workers and firms have aligned interests in establishing works councils, at the expense of consumers. We derive these results in a simple model of two competing firms where each firm faces a moral hazard problem with its workforce that could be solved by installing a monitoring technology. Without monitoring, inducing high effort by workers is more costly. As a result, effort levels will be lower and so will be output. This may serve a similar purpose as quantity reduction in a cartel, and it may thereby increase firm profits. (2) However, similar to quantity reduction in a cartel, also with respect to monitoring there is a danger that a single firm deviates and installs the monitoring technology. Consequently, the deviator can produce higher output more cheaply and free-rides on the lower output of its competitor. Thus, firms would like to ex ante commit not to use a monitoring technology. Usually, no such commitment is possible. However, works councils may serve this (unintended) purpose, because they must give their consent to monitoring technologies. This provides them with a property right on the information rent arising in case of nonmonitoring. To receive their consent, the firm must offer the workers compensation for the foregone rent. This additional cost of monitoring makes deviation from a nonmonitoring situation less attractive, implying that works councils may serve as the desired commitment device. …

Liberalization of network industries frequently separates the network from the other parts of the industry. This is important in particular for the electricity industry where private firms invest into generation facilities, while network investments usually are controlled by regulators. We discuss two regulatory regimes. First, the regulator can only decide on the network extension. Second, she can additionally use a “capacity market” with payments contingent on private generation investment. For the first case, we find that even absent asymmetric information, a lack of regulatory commitment can cause inefficiently high or inefficiently low investments. For the second case, we develop a standard handicap auction which implements the first best under asymmetric information if there are no shadow costs of public funds. With shadow costs, no simple mechanism can implement the second best outcome.

Joint control reserve procurement and activation by several Transmission System Operators can have significant technical and economic benefits. In congested transmission networks, however, the activation of control reserve can be constrained by impending overloads. In this paper the benefits of an optimization to coordinate control reserve activation and grid management considering uncertainties caused by forecast errors is outlined. The effect of these uncertainties are measured by using probabilistic load flow methods based on convolution technique. A joint optimization is presented to minimize the costs of supplying control reserve and conducting redispatch, taking into account HVDC lines, variable costs of power plants and the impact of control reserve activation on lines instead of optimizing it separately as it is the current proceeding by European Transmission System Operators. In addition, a method to determine the solution space for permissible control reserve distributions is presented. In a case study of the German transmission grid for the year 2024 the costs of the joint optimization are contrasted to the costs using the normal merit order and additional redispatch as it is the current market scheme. With the simulation for one year, the solution spaces are calculated to show, which power plants can supply control reserve in every hour without causing redispatch measures and whether the existing power plants in 2024 are sufficient to provide control reserve activation without impending overloads.

We study an industry with a monopolistic bottleneck (e.g. a transmission network) supplying an essential input to several downstream firms. Under legal unbundling the bottleneck must be operated by a legally independent upstream firm, which may be partly or fully owned by an incumbent active in downstream markets. Access prices are regulated but the upstream firm can perform non-tariff discrimination. Under perfect legal unbundling the upstream firm maximizes only own profits; with imperfections it considers to some extend also the profits of its downstream mother. We find that reducing imperfections in legal unbundling (keeping ownership fixed) generally increases total output. Increasing the incumbent's ownership share increases total output if imperfections are sufficiently small, otherwise the effects are ambiguous. Surprisingly, higher ownership shares of the downstream incumbent may sometimes lead to lower degrees of imperfections. Our analysis suggests that consumers may benefit most from legal unbundling with strong regulation and parts of ownership given to a minority outside shareholder.

Linear demand formulations for price competition in horizontally differentiated products are sometimes used to compare situations where additional varieties become available, e.g. due to market entry of new firms. We derive a consistent demand system to analyze such situations and highlight potential problems that can arise from an inconsistent approach.

We provide an estimation of the additional need for underground storage facilities in northwestern Europe until 2030. Storage is one important source to provide supply flexibility in order to match the seasonal demand for natural gas. However, this supply flexibility is now largely provided in northwestern Europe by indigenous production. Declining reserves will increase the dependency on imports from far-off sources, which are less flexible. Hence, flexibility must be provided by additional storage. Our estimation is based on production and consumption forecasts for natural gas and observations of the relationship between the supply and demand of gas and the supply and demand of flexibility in the period 1995–2005. We provide different scenarios to check for the robustness of our results. We estimate that by 2030, between 10.2 (with no strategic storage) and 29.0 billion cubic meters (BCM) of working gas volume (with 10 percent strategic storage for imports from non-EU countries) will be required, in addition to the existing 40 BCM. We conclude that, with well-functioning markets for flexibility, market forces could close a storage gap of 10.2 BCM in time. Strategic storage obligations would require state intervention and a well-balanced relation between a regulated part of the storage market for strategic reserves and the market for the operational use of storage.

Competition between parallel infrastructures incorporates opposing welfare effects. The gain from reduced deadweight loss might be outweighed by the inefficient duplication of an existing infrastructure. Using data from broadband internet access for Western Europe 2000-2004, this paper investigates which effect prevails empirically. Infrastructure competition between DSL and cable TV had a significant and positive impact on the broadband penetration. Comparing the additional social surplus attributable to cable competition with the cable investments, we conclude that infrastructure competition has not been welfare enhancing. A theoretical model is provided, formalizing why the effect of competition on penetration might be limited.

Lange Zeit favorisierte das Bundesministerium für Wirtschaft und Energie eine zusätzliche Klimaabgabe für alte Kohlekraftwerke zur Erreichung der deutschen Klimaziele. Mit dem Kompromiss vom 1. Juli scheint dieser Vorschlag jetzt vom Tisch zu sein. Sind die Alternativvorschläge zur Erreichung der mittel- bis langfristigen klimapolitischen Ziele effektiver? Für Erik Gawel und Sebastian Strunz, Helmholtz-Zentrum für Umweltforschung – UFZ, Leipzig, ist die vom Koalitionsausschuss favorisierte Variante »die schlechteste« – ohne Stilllegung von CO2-Zertifikaten würden Altkraftwerke in einer überdies kurz- und mittelfristig gar nicht benötigten Kapazitätsreserve gehalten, die strukturellen Anreize für den Stromsektor dürften stark begrenzt sein. Der ursprüngliche Vorschlag des Bundeswirtschaftsministeriums hätte dagegen emissionsintensive Kraftwerke belastet, samt Stilllegung von Zertifikaten. So wäre der jüngsten Renaissance der Braunkohleverstromung strukturell entgegengesteuert worden. Auch nach Ansicht von Sonja Peterson, Institut für Weltwirtschaft an der Universität Kiel, gehen die Vorschläge, die jetzt alternativ zur Klimaabgabe diskutiert werden, in die falsche Richtung: »Sie kosten die deutschen Steuerzahler viel Geld, vergrößern die Ineffizienzen in Deutschland und der EU und sparen am Ende EU-weit keinerlei Emissionen ein.« Die diskutierte Klimaabgabe gehe immerhin in die richtige Richtung. Für Hartmut Möllring, Minister für Wissenschaft und Wirtschaft in Sachsen-Anhalt, ist dagegen die Ablehnung des Klimabeitrags »eine gute Nachricht«. Der angedachte Klimabeitrag sei ordnungspolitisch und verfassungsrechtlich bedenklich, ohne dass damit tatsächlich ein Beitrag zum Klimaschutz geleistet worden wäre. Carl-Friedrich Elmer, Martin Faulstich und Christian Hey, Sachverständigenrat für Umweltfragen (SRU), sehen in den an Stelle des Klimabeitrags beschlossenen Alternativen weniger effiziente und effektive Einzelmaßnahmen. Dessen ungeachtet könnte aber der Klimabeitrag

Ramsey-Boiteux prices and monopoly prices are frequently regarded as being similar. This might suggest that, in particular in network industries with large fixed costs, sometimes monopoly pricing is close to the Ramsey-Boiteux second best and welfare superior to imperfectly regulated prices. This paper tries to specify what is meant by "being similar", and it analyzes the welfare implications that can be drawn from comparing both sets of prices. Interdependence of demand and the impact of competition are discussed. We reinforce the view that monopoly prices are usually not "similar", and even if they are, this implies no positive welfare judgments on monopoly pricing.

If a manager stays in office for a long time he will have learned much about his subordinates. Thus competition among them will be weak as the manager has made up his mind who is suited best for which position. With a new manager the “race” for favorable tasks is restarted leading subordinates to exert higher effort. But for the firm-owner the trade-off arises that with a new manager effort is larger but the quality of task allocation is worse since information is lost. The optimal dismissal policy will be nonmonotonic in the expected heterogeneity of the subordinates’ abilities.

Private operation of port facilities is becoming increasingly common worldwide. We investigate the effect of port privatization in a setting with two ports located in different countries, each serving their home market but also competing for the transshipment traffic from a third region. Each government chooses whether to privatize its port or to keep port operations public. We show that there exist equilibria in which the two governments choose privatization and the national welfare of each port country is higher relative to a situation where ports are public. This is because privatization is a commitment to increase charges relative to public port charges, which allows for a better exploitation of the third region. For some parameter regions, port countries non-cooperatively choose public port operations, while they would be better off if both ports were private. However, customers of the third region are always better off if port operations are public. We further show that the port country with the smaller home market has a relatively strong incentive to choose private port operation.

The Journal of Law, Economics, and Organization, 27 (1), ISSN:8756-6222, ISSN:1465-7341

A fully unbundled, regulated network fi?rm of unknown efficiency level can undertake unobservable effort to increase the likelihood of low downstream prices, e.g., by facilitating downstream competition. To incentivize such effort, the regulator can use an incentive scheme paying transfers to the ?firm contingent on realized downstream prices. Alternatively, the regulator can propose to the ?firm to sell the following forward contracts: the fi?rm pays the downstream price to the owners of a contract, but receives the expected value of the contracts when selling them to a competitive fi?nancial market. We compare the two regulatory tools with respect to regulatory capture: if the regulator can be bribed to suppress information on the underlying state of the world (the basic probability of high downstream prices, or the type of the firm), optimal regulation uses forward contracts only.

We study an industry in which an upstream monopolist supplies an essential input at a regulated price to several downstream firms. Legal unbundling means in our model that a downstream firm owns the upstream firm, but this upstream firm is legally independent and maximizes its own upstream profits. We allow for non-tariff discrimination by the upstream firm and show that under quite general conditions legal unbundling never yields lower quantities in the downstream market than ownership separation and integration. Therefore, typically, consumer surplus will be largest under legal unbundling. Outcomes under legal unbundling are still advantageous when we allow for discriminatory capacity investments, investments into marginal cost reduction and investments into network reliability. If access prices are unregulated, however, legal unbundling may be quite undesirable.

We study an industry in which an upstream monopolist supplies an essential input at a regulated price to several downstream firms. Legal unbundling means that a downstream firm owns the upstream firm, but this upstream firm is legally independent and maximizes its own upstream profits. We allow for non-tariff discrimination by the upstream firm and show that under quite general conditions legal unbundling yields (weakly) higher quantities in the downstream market than vertical separation and integration. Therefore, typically, consumer surplus will be largest under legal unbundling. Outcomes under legal unbundling are still advantageous when we allow for discriminatory capacity investments, investments into marginal cost reduction and investments into network reliability. If access prices are unregulated, however, legal unbundling may be quite undesirable.

In some markets vertically integrated firms sell directly to final customers but also to independent downstream firms with whom they then compete on the downstream market. It is often argued that resellers intensify competition and benefit consumers, in particular when wholesale prices are regulated. However, we show that (i) resale may increase prices and make consumers worse off and that (ii) standard "retail minus X regulation" may increase prices and harm consumers. Our analysis suggests that this is more likely if the number of integrated firms is small, the degree of product differentiation is low, and/or if competition is spatial.

The seasonal demand for natural gas requires supply flexibility. This “swing” is now largely provided in northwestern Europe by indigenous production. Declining reserves will increase the dependency on imports from far-off sources, which are less flexible. Hence, flexibility must be provided by additional storage. We estimate that in 2030 between 10 (with no strategic storage) and 29 (with 10 per cent strategic storage for imports from non-EU countries) billion cubic meter of working gas volume will be required, in addition to the existing 40 billion cubic meters. This estimation is based on production and consumption forecasts for natural gas and observations of the relationship between the supply and demand of gas and the supply and demand of flexibility in the period 1995-2005. We provide different scenarios to check for the robustness of our results. We discuss the impact of third-party access to storage facilities on incentives to close the storage gap, as well as policy implications of strategic storage obligations.

Scarce interconnector capacities are a severe obstacle to transregional competition and a unified market for electricity in the European Union. However, physically the interconnectors are rarely used up to capacity. This is due to the fact that the current allocation schemes make only limited use of the fact that currents in opposing directions cancel out. We propose a "netting" auction mechanism which makes use of this and in which even small transmission capacities can generate large competitive pressure in adjacent markets. Netting increases the usage of capacity and reduces the auctioneer's incentive to withhold capacity from the auction.

While humans often care about sunk investment, animals are not subject to this sort of sunk cost behavior or “Concorde fallacy”. This paper investigates a simple two stage decision problem under uncertainty. At the second stage, subjects can commit the Concorde fallacy by sticking to the first stage decision, independent of the state of nature revealed in-between. We investigate whether this can be beneficial in a standard payoff monotonic adaptation process. Committing the Concorde fallacy reduces the payoffs but accelerates the adaptation since it acts like “self-punishment”. It will, however, not only reduce the population growth rate in the long run but also the population size at any point in time in a biological evolutionary process. In this sense, animals can never benefit from the Concorde fallacy. Risk aversion gives an extra benefit to a behavior that more rapidly learns to avoid bad outcomes. If the wrong initial decision leads occasionally, albeit very infrequently, to a very low payoff, then risk averse humans will be better off by committing the Concorde fallacy.

This paper studies profit-maximizing seller behavior when brand image affects demand. We consider a seller facing a population of consumers with heterogeneous tastes regarding product quality and brand image. First, we analyze "active branding" by the seller through costly advertising. Our analysis shows that advertising, price and profits are all increasing in the average valuation of brand image in the population. Second, we examine the role of "passive branding" emanating from the population's consumption of the product. We find that seller profits increase in the average degree of conformity in the population whereas the price remains unaffected