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This paper derives the optimal capital structure of a firm whose earnings follow a geometric Brownian motion with a lower reflecting barrier. The barrier can be interpreted as a market intervention threshold (e.g., a price floor) by the government or an exit threshold of weak competitors in the market. Unlike in the standard model with no barrier, the firm is able to issue riskless debt to a certain capacity determined by the barrier. The higher the barrier, the larger the riskless debt capacity, and the firm prefers riskless capital structure rather than risky capital structure. Notably, with intermediate barrier levels, the firm can choose riskless capital structure with lower leverage than the level with no barrier. This mechanism can help explain debt conservatism observed in practice. The paper also entails several implications of public intervention by examining the lowest barrier (i.e., the weakest intervention) to achieve riskless capital structure.

Learning outcomes The learning outcomes of this paper are as follows: to understand the characteristics of a natural monopoly such as telecommunications sector and impact of “network externality”; to understand the role of a regulator in maintaining a balance between competition and consolidation of telecom sector; to understand the importance of first-mover advantage in telecom sector and coping mechanism of late entrants; to understand different pricing mechanisms of “natural monopolies” that can be adopted to remain profitable; to understand social cost of price floor in telecommunications sector. Case overview/synopsis Indian telecom sector is going through a downturn where most of the private sector telecom service providers have reported huge losses, failed to pay adjusted gross revenue (AGR) dues and reported decline in average revenue per user over a period of 3–4 years. Fierce competition in the sector leads to rock bottom calling and data charges. Bharti Airtel benefitted for being the first mover in terms of market share but with entry of JIO in 2016, the service providers have entered a price war. As a result, service providers have requested Mr. R.S. Sharma, Chairman of Telecom Regulatory Authority of India (TRAI) to come up with a floor on calling charges and requested the government for a bailout package. Currently, Mr. R.S. Sharma, Chairman TRAI is facing a dilemma whether to regulate and come up with a floor on calling and data charges or leave the sector for market correction. Mr. Sharma can also recommend to amend the definition of AGR. Telecommunications sector exhibit the characteristics of a natural monopoly where there is a need of a regulator to introduce “competition for the sector” and “competition in the sector.” In India, TRAI is the regulatory body responsible for introducing “competition for the sector” by auction and “competition in the sector” by deregulating calling and data charges, maintaining at least three private and one public service provider, decreasing “switching cost” of the customers, etc. The case deals with the issues of why there is a need of a regulator in natural monopolies, how different chairmen of TRAI have successfully introduced competition “for” and “in” the sector, and how Indian telecom sector went through a downturn? What should TRAI do to maintain competition in the sector? Complexity academic level The case deals with the issue of managing telecommunications sector (a natural monopoly) by a regulator in the context of India. The regulator had successfully introduced “competition in the sector” and “competition for the sector.” This led to sharp increase in subscriber base and decrease in calling and data charges. Presently, fierce competition in the sector has left the service providers cash crunched. The case deals with the dilemma faced by the chairman of the regulatory body in India on whether the regulator should come up with a price floor or market correction. Study level: MBA, Executive MBA. Supplementary materials Teaching Notes are available for educators only. Subject code CSS 10: Public sector management.

This paper investigates the existence of a nondegenerate pure-strategy Bayesian-Nash equilibrium in a double auction between one seller and several heterogeneous buyers in the independent private value framework. It begins with three examples describing some of the model’s particular features. After studying a number of continuity-related properties of the interim payoff functions, we construct a sequence of strategy profiles that converges to a nondegenerate monotone Bayesian-Nash equilibrium of the game under some strict monotonicity conditions. The equilibrium existence result is applied to a double auction with risk-averse bidders.

Empirical results about the effect of open reserve price on ending prices in auctions are mixed, with some researchers finding a positive effect on ending price and others reporting a negative or no effect. The objective of this research is to propose a new theoretical framework. First, without an open reserve price, auctions attract more bidders, resulting in increased competition and higher ending prices—a so-called competition effect. Second, a high open reserve price may serve as a price floor or a reference price, influencing bidders' valuations and increasing ending prices. Quantile regression is used, which has the advantage of providing robust parameter estimates of the effect of open reserve prices on ending prices for different levels of the reserve price. Estimates of a longitudinal data set for four products collected over a period of one year show an u-shaped relationship between open reserve prices and ending prices, where either no reserves or high reserves results in higher ending prices. By comparing ending prices of auctions with an open reserve versus a secret reserve, it is shown that open reserve prices have a reference-price effect rather than a price-floor effect.

Tariffs or price control has been a controversial subject in recent years. The debate between legal experts and economists is still a hot topic in any discussion. Tariff control regulated in the work creation omnibus law seems to be a topic that must be discussed again regarding this regulation’s urgency. Are specific prices so impressive that the government can intervene in regulating them? This article examines the urgency of rules regarding price controls to create a healthy competitive environment. After conducting a critical literature review, it was analyzed with critical analysis and looking at the objective of competition law was to maximize welfare by protecting competition. The results in this article indicated that the government could only intervene in regulating price-fixing only if companies’ pricing could harm the country’s economy and consumer welfare. The government, therefore, had an interest in regulating the price ceiling. Meanwhile, the price floor, which was believed to be pro-consumer and could promote consumer welfare had no interest and should not have been limited by the government.

This study examines how the rules of origin (RoO) of a free trade agreement (FTA) affect firms' pricing strategies. The value‐added criterion (VAC) of the RoO requires firms to add more than a certain level of value within an FTA when firms use inputs originating from outside the FTA. The VAC may work as a price floor, and the resulting increases in prices can benefit all firms if it induces an offshoring firm to manipulate its output price. Meanwhile, a consumer‐hurting FTA formation is possible, even if all firms make tariff‐free exports. Furthermore, such an FTA formation may worsen total welfare.

The price of permits in the European Union Emissions Trading System (EU ETS) has historically been highly sensitive and prone to jumps. We consider different stochastic processes to model the price of permits, and show that the Variance Gamma (VG) model provides the best fit for the price distribution, among a selection of infinite activity processes. Using this result as a starting point, we assess the effects of the EU ETS in delivering low-carbon investments at the firm level, by modeling a price taker electricity producer subject to the EU ETS jurisdiction. We compute, via Least Squares Monte Carlo, the value of the real option the greenhouse gas emitter has, consisting in the opportunity to switch from its current high-carbon technology to a cleaner one. We use a VG specification for carbon prices, and a mean-reverting (Brennan-Schwartz) process for the price of fuel. Moreover, we further analyze the investment decision problem, in case of a CO 2 price stabilization mechanism in the form of a price floor, by explicitly computing the expected value of the investment project by means of Fourier methods. Our results show that the introduction of the price stabilization mechanism significantly affects the timing of the investment decision, and supports emission-related investments.

In July 2020, the Executive Power submitted Bill no. 3887-2020 as the first step towards a wide reform of the Brazilian tax system. It will replace the current PIS/COFINS (charged on turnover of companies) by the CBS (a tax on goods and services), which includes a special regime for cigarettes. The novelty is that the specific cigarette tax will be charged on the highest retail price per cigarette brand across the country. This research simulates three scenarios that differ according to the price-setting strategy of the tobacco industry in reaction to the proposed tax reform. In all simulations, the tax reform would result in considerably higher cigarette prices, lower cigarette consumption, higher tax collection, and an implicit minimum price that is far above the current official price floor. Furthermore, the price dispersion and cross-border shopping across states would be reduced because prices and tax burden per brand would tend to be the same across the country due to the dominant price-setting strategy in the cigarette industry.

We examine the planner’s dynamic regulation problem in an emission trading system (ETS) with allowance banking. The planner sets the emissions cap for the next period after the current period allowance market has cleared, but before knowing the next period’s abatement cost realization. This creates a time consistency problem when banking is possible. We examine two policies to overcome the consistency problem: a commitment solution and the Markov perfect solution. We show that the endogenous price floor generated by the banking demand becomes an integral feature of the two policies. Hence, they can be best described as hybrid policies that combine elements from emissions taxes and tradable allowances. This reveals new welfare implications that have an influence on instrument choice in the traditional prices versus quantities setup. We compare the expected welfare outcomes of four different policy instruments: the commitment policy, the Markov policy, a Pigouvian tax, and a no-banking ETS. We show that allowing banking can yield welfare gains compared to tax and quantity regulation, with or without commitment.

Several years of very low allowance prices in the EU emissions trading scheme (ETS) have motivated calls to introduce a price floor to correct potential underlying distortions and design flaws, including (i) the political nature of allowance supply and related credibility issues, (ii) potential myopia of market participants and firms, and (iii) waterbed and rebound effects resulting from policy interactions. In the wake of the recent EU ETS reform, allowance prices have sharply increased. This raises the question of whether the case for introducing a price floor in the EU ETS remains valid. We argue that such a price floor, also adopted in several other greenhouse gas cap-and-trade systems worldwide, remains an important improvement in the design of the system, as long as the above-mentioned distortions and design flaws persist. An EU ETS price floor can safeguard against these issues and provides more explicit guidance on the minimum allowance price policymakers consider acceptable. Either as a complement or substitute to the current Market Stability Reserve (MSR), a price floor would thus make the EU ETS less prone to future revision in case of unexpectedly low prices. We identify and confront four prominent arguments against the introduction of an EU ETS price floor. Key policy insights An EU ETS price floor would be an important institutional innovation enhancing political and economic stability, and predictability of the EUA price The recent Market Stability Reserve (MSR) reform has not removed the need for a carbon price floor. Introducing an element of price responsiveness into the so far purely quantitative design of the EU ETS would help to preserve its integrity In contrast to conventional wisdom, legal analysis reveals that an EU ETS price floor can be legally feasible Political support for a carbon price floor is gaining traction across Europe.

The U.S. Supreme Court on June 14, 2018, reversed the Second Circuit’s 2016 decision to vacate a $147 million judgment against two Chinese companies, who allegedly fixed vitamin C prices. The high court held that courts should give foreign governments’ statements “respectful consideration” but are not bound by another country’s description of its own laws. Going forward, courts will need to evaluate a foreign government’s statements when defendants claim a contradiction between U.S. law and foreign regulations as a defense. When government regulation and private cartelization overlap, complications arise because the foreign companies may be liable for their anticompetitive conduct that was beyond the requirement of and might even have influenced foreign government policies. Using two illustrative cases ( In Re Vitamin C Antitrust Litigation and Resco Products v. Bosai Minerals), we analyze the impact of the price floor and export quotas and propose a new, workable methodology for measuring antitrust damages attributable to the private cartel in the presence of foreign regulation.

First published: 01 April 2019 Emission Trading Systems (ETSs) are today regarded as the pillar of market‐based environmental policies in many countries. This paper studies the impact of an ETS on the dynamics of the market made up of two types of firms: clean and dirty. Using an evolutionary context, we study how the share of clean firms evolves at different parameter values, such as increasing values of the permits’ price floor, and show that an ETS can have positive effects on the diffusion of the clean technology. However, numerical simulations show that under specific parameter values the opposite result may emerge with clean firms leaving the market.

This study employed a model of two-period in which the manufacturer determines a price floor and drafts output of production precedently to the attainment of certainty by demand. In addition, the closer the distance between the minimum price and the price during the high phase of demand, the higher is the degree of price inertia. This model first assumes that the manufacturer sells products to consumers directly and then introduces competing retailers who have the right to return unsold goods at the minimum resale price specified by the manufacturer. By solving for the minimum resale price and production output, the model’s results indicate that vertical market linkages influence the market power–price inertia relation and that asymmetric price transmission could be symbolic of competitive markets. Further, study reveals that the retail price in a highly concentrated retail market might be lower than that in a retail market with fierce competition. In addition, high product durability, low demand uncertainty, low return credit, and long contract duration between upstream and downstream members lead to price inertia rising during economic recessions compared with booms. The relationship between price adjustments and market competition, therefore, suggests that the reasons underlying price inertia should be considered when formulating antitrust and monetary policy.

This study develops a two-period model in which the manufacturer determines a price floor and sets production output before demand becomes certain. The model defines the distance between price floor and high-demand-state price in concern to the degree of price flexibility. While conflicting empirical results underscore the importance of theoretical underpinnings, this study shows that economies of scale determine the relation between market competition and price rigidity. A decline in output leads to higher average costs in the industry characterised by economies of scale, a hike in average costs adds pressure on the inventory liquidation that drives price cutting in the low-demand state. Prices tend to more fluctuate as the product becomes more homogeneous or more players enter into the industry. The knowledge of the relationship between market competition, product homogeneity, and price rigidity is critical in formulating antitrust and monetary policies.

Households are key actors in decarbonizing our economy, especially when it comes to investments in a decentralized energy system, such as solar photovoltaics (PV). The phasing-out of feed-in tariffs, and unexpected policy changes in the wake of an increasingly polarized climate debate, require residential PV investors to bear new risks. Conducting a discrete choice experiment coupled with a randomized informational treatment among potential residential solar investors in Switzerland, we test whether policy and market risks deter households from investing in solar. We find that salient policy risk reduces households' intention to invest in solar, especially for risk-averse individuals. Conversely, households seem less sensitive to market risk: residential solar investors accept volatile revenues, as long as a price floor for excess electricity sold to the grid is guaranteed. Our study suggests that keeping perceived policy uncertainty low is more important for residential solar investors than fully hedging against electricity market risk.

This paper examines the effect of antidumping (AD) law on the pricing behavior of foreign and domestic firms prior to the filing of an AD action. AD law affects firms in very different ways almost always distorting the foreign firm's strategy but often not altering the domestic firm's. We show that AD law creates a price floor for the foreign firm and causes it to raise its price. The domestic firm's response is significantly more complicated, in many instances resulting in feigned injury. These diverse effects imply that AD law has impor tant welfare consequences even if duties are never levied.

Revisiting research from the 1990s from Castillo-Freeman and Krueger, I use the synthetic control method of Abadie et al. to estimate the impact of the most recent increase in the federal minimum wage on employment in Puerto Rico. I estimate that the employment/population ratio of various groups in Puerto Rico was significantly lower than that of a data-constructed synthetic Puerto Rico which did not raise its minimum wage. Placebo tests on other donor units, time periods, and population groups suggest that a significant portion of this gap is a result of the minimum wage. Groups with greater exposure to the minimum wage, such as teens and restaurant workers, experienced proportionally greater declines in employment. My results suggest an own-wage elasticity of employment in Puerto Rico of −0.68, higher than estimates from the mainland, which suggests that the employment response to minimum wages may be more dramatic at higher relative minimum wages.

GDP-linked bonds (GLBs) have been the subject of recurrent debates among economists and financial market participants but no major debt office has so far decided to launch them. Issuers remain skeptical about the practical feasibility or desirability of these securities, citing potentially high risk premia and various technical issues, including GDP data integrity and revisions, moral hazard and adverse selection. Against this backdrop, we discuss the key features of these securities and we argue that technical difficulties can be resolved, especially if standardized terms are agreed at the international level and statistical offices agree to publish dedicated GDP series. From the standpoint of investors, GLBs would provide direct exposure to GDP growth of a country or basket of countries without running into the more complex valuation issues that characterize equities. Long-dated GLBs also have the interesting feature that their duration may offset the impact of changes in GDP growth expectations. For issuers, regular issuance of long-dated GLBs would gradually raise the share of liabilities indexed to GDP. In the event of a major economic downturn, the debt-to-GDP ratio would rise more moderately than if all debt consisted of conventional bonds. In the limit case of GLBs accounting for the whole stock of public debt and without a price floor, the debt-to-GDP ratio would not change at all apart from the cyclical change in the budget balance.

First published online: March 2020 This paper studies the evolutionary dynamics of a market regulated by an auctioned emission trading system with a price floor in which there exist three populations of firms that interact strategically : (i) non-polluting, (ii) polluting and compliant, (iii) polluting but non-compliant. Firms that adopt a non-polluting technology need no permits to operate, while firms that use a polluting technology can either buy the required permits (and be compliant) or not (being non-compliant). The latter do not buy emission permits and face the risk to be sanctioned if discovered. From the analysis of the model emerges that all three types of firms coexist at the equilibrium only under specific parameter values. More precisely, it can generically be excluded the coexistence between non-polluting firms and non-compliant polluting ones. The regulatory authority can favor the extinction of non-compliant firms by increasing their probability of being discovered and/or the sanction level. Moreover, the regulatory authority can favor the diffusion of innovation by increasing the permits price floor since polluting-compliant firms exit the market and new non-polluting firms enter the market. However, this policy instrument should be used with caution because it tends to increase also the number of non-compliant firms.

Revenue management (RM) is the concept of systematically increasing the revenue streams in an organization. The concept utilizes systematic analytics that predict consumer behaviour at the micro-market levels and optimize product availability and price to maximize revenue growth (Wikipedia 2020). RM is mainly applied in industries like aviation or hospitality area with service offerings. RM is associated with earnings, profits and any sort of income by the use of smart and intelligent tools or algorithms. It means the strategic orientation of product or service in the market and the long-term planning of sales and sales activities (Gallego and Topaloglu 2019). This includes cost calculations such as break-even calculations, price floor calculations, capacity analyses and sales costs. The ultimate goal is to increase earnings (Landmann 2019). Major objectives in RM are

Australia’s east-coast gas market has undergone significant transformation in the past decade. The discovery of non-conventional coal-seam gas reserves led to investment in three ‘lumpy’ LNG export facilities in Gladstone, Queensland. Drilling activity has subsequently slowed, a direct result of a soft global price for LNG. This slowdown, in an environment of a tripling of east-coast gas demand, has resulted in concerns about domestic gas shortages. To be clear, there is no lack of gas resources. Instead, the problem relates to the relative lumpiness of capital allocation and temporal instability driven by changing global circumstances. Utilising a simple partial equilibrium model, various options for overcoming these problems are analysed. Of these options, developing import infrastructure appears to be a ‘no regrets’ option that would ensure that the price floor, the LNG netback price, also becomes the market price cap.

In this study, we investigate the investment behavior of small-scale coffee farmers in central Uganda in an experimental setting. We consider a situation in which farmers are asked to make an investment under uncertainty and analyze whether and to what extent the Real Options Approach can predict the investment behavior of farmers and whether these predictions are better than those derived from the Net Present Value Approach. We also investigate whether the presence of a price floor has an effect on farmers’ investment behavior. Our results suggest that the Real Options Approach more accurately predicts the decision-making behavior of farmers than the Net Present Value Approach. However, the results also show that neither of the approaches entirely explains the observed investment behavior. Specifically, the presence of a price floor does not significantly affect the investment behavior. The latter is, however, significantly determined by the order in which treatments with and without price floor are introduced, alongside various demographic and socio-economic characteristics.

The feed-in tariff (FIT) program is a popular policy for incentivizing new renewable energy projects because it establishes a long-term contract with renewable energy investors. This paper presents a novel model to analyze a FIT contract with a minimum price guarantee (i.e., a price-floor regime) from an investor's perspective. The results show that a perpetual guarantee only induces investment for prices below the price floor when offering a risk-free investment opportunity. In contrast, the finite guarantee may induce investment even when the revenue from the guarantee is lower than the investment cost. When an investor faces a scenario with regulatory uncertainty, a higher and more likely reduction in the price floor induces earlier investment. For all cases, investors postpone an investment decision when market conditions present a higher price volatility. (C) 2018 Elsevier B.V. All rights reserved., The authors gratefully acknowledge the anonymous reviewers for the many useful suggestions that greatly improved this article. This work was supported by a PhD scholarship provided by Fundacao para a Ciencia e a Tecnologia (FCT) through the MIT Portugal program under project SFRH/BD/52086/2013, and was supported by national funds through Fundacao para a Ciencia e a Tecnologia (FCT) with reference UID/CEC/50021/2013. In addition, this work was carried out within the funding with COMPETE reference no POCI-01-0145-FEDER-006683 (UID/ECO/03182/2013), with the FCT/MEC's (Fundacao para a Cincia e a Tecnologia, I.P.) financial support through national funding and by the ERDF through the Operational Programme on "Competitiveness and Internationalization - COMPETE 2020" under the PT2020 Partnership Agreement.

In this article, we examine resale price maintenance (RPM) in a classic model of downstream retailers engaging in spatial price discrimination. We show that a resale price floor increases the total profit of the upstream monopoly when transport cost (product differentiation) is relatively low. Importantly, this profitable RPM floor can also enhance social welfare and even consumer surplus. A resale price ceiling can also be profitable and always improves consumer surplus and social welfare. We argue that such findings support a rule of reason approach to RPM.

Canadian provinces are required to phase in a minimum price of CAN $50 per tonne on carbon dioxide emissions by 2022. This paper discusses the rationale for, and design of, the price floor requirem...

In December 2014, the U.S. and Mexico agreed to a suspension agreement that set a $22.25/cwt import price floor on U.S. sugar imports from Mexico. A partial equilibrium trade model was developed to estimate the economic impact the agreement would have had if it had been in effect from 2008 to 2014. In years when the price floor would have been binding, on average, U.S. producers would have gained $138 million and Mexican producers would have lost $218 million. However, total Mexican welfare would have actually increased by $11.5 million. Furthermore, the average price floor that would have maximized total Mexican welfare over that period is $22.76/cwt. Also, under certain supply and demand elasticity conditions, the average price floor that would have maximized joint U.S. and Mexican producer welfare over that period is $21.91/cwt. The latter two estimates are both close to the actual price floor agreed to in the 2014 Suspension Agreement.

Rail transport plays an important role in port-based freight flows. In the context of port competition, the change of inland transport modes would directly influence pricing strategies and profits of ports. Therefore, this paper provides a method to analyze how the introduction of rail transport services affect port competition. Firstly, a two-stage game model is constructed based on a Hotelling model, which consists of two ports and one rail operator. Then, this paper demonstrates how the existence of pure strategy equilibrium prices of ports depends on the value of marginal profits of rail transport services. After comparing the results of different situations, our analysis shows there is a negative effect on ports' service prices and profits when the rail transport services are introduced in the port. As shown in the numerical example, the profits of ports would be reduced by about 10% (when rail transport services are only provided to one port) and 20% (provided to both ports) respectively. From the perspective of government, there exists an incentive to support the development of rail transport due to the promotion of social welfare. In addition, the rail operator is also likely to expand rail services in order to improve profits. Finally, the effect of economies of scale of rail transport is extendedly analyzed and three policies are proposed to weaken the loss of ports’ profits, including implementing refunding scheme, setting price floor on port service price and providing government subsidy. The findings in this paper could provide support for the decision making towards comprehensive transportation management in coastal zone.

The German energy and climate policy mix is failing to decarbonize electricity production until now, with only 6% overall CO2 emissions reductions since 2005. Using empirical methods and hourly market data, we estimate the aggregate supply curve of the German power market and simulate the effect of a 20€/tCO2 and 40€/tCO2 carbon price floor on the German power market and on the renewable subsidy scheme. With the 40€/tCO2 carbon price floor, median prices increase by 37€/MWh and average price peaks by 50€/MWh. At the wholesale level, the market's annual volume increases by some €18 billion to €39 billion. At the retail level, however, the net cost to consumers is moderated due to costs savings from the renewable subsidy scheme worth some €4 billion, or roughly one-fifth. The same ratio applies to a price floor at 20€/tCO2.

This paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add-on insurance for their products at the point of sale. We develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown. Some consumers do not pay attention to extended warranties before making a base product choice, but they overestimate the value of such warranties at the point of sale. Under retail competition, if the resulting extended warranty profits are sufficiently high, a no-arbitrage condition prevents the full profits from being redistributed to consumers via a lower base product price. Inducing competition in the extended warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard, which can even reduce consumer surplus. The results of the paper are consistent with the effects of recent changes regarding extended warranty regulation by UK legislators.