Exclusive Territories and Manufacturers’ Collusion

This paper highlights the rationale for exclusive territories in a model of repeated interaction between competing supply chains. We show that with observable contracts exclusive territories have two countervailing effects on manufacturers' incentives to sustain tacit collusion. First, granting local monopolies to retailers distributing a given brand softens inter- and intrabrand competition in a one-shot game. Hence, punishment profits are larger, thereby rendering deviation more profitable. Second, exclusive territories stifle deviation profits because retailers of competing brands can adjust their pricing decisions to the wholesale contract offered by a deviant manufacturer, whilst intrabrand competition prevents such `instantaneous reaction'. We show that the latter effect tends to dominate the former, whereby making exclusive territories a more suitable organizational mode to sustain upstream cooperation. These insights carry over when manufacturers voluntarily decide whether to disclose contracts and can change the distribution mode every period; moreover, they strengthen under imperfect intrabrand competition. Finally, we extend the model to allow for retailers' service investments. Here a novel effect emerges under exclusive territories: a retailer of the deviant manufacturer increases its service investment as a response to a lower wholesale price. This renders deviation more profitable, thereby softening the pro-collusive effect of exclusive territories.Exclusive territories, supply chains, tacit collusion, information sharing, vertical restraints.

Structural Separation Models and the Provision of ‘Dark Fibre’ for Broadband Networks: The Case of CityLink

Fibre broadband networks are widely presumed to become the dominant form of fixed-line broadband access. However, the spectre of fibre firms gaining market power, such has been evidenced in legacy copper-based telecommunications networks, has led some policy-makers to suggest imposing separation mandates (either functional or structural) on the owners of fibre networks yet to be built, in order to militate against the creation of a new set of firms with market power. Whilst conceptually separation of the „dark fibre? data transportation core from network intelligence and retail functions echoes the computer technology-centric view of the internet as a „dumb core? and an „intelligent fringe?, and replicates the separation mandates currently proposed as a means of preventing integrated legacy copper-based providers from foreclosing retail competition, the ensuing structures likely exacerbate the chilling effect of access regulation on network investment observed in most markets where it has been applied. The chilling effects arise because of an investment horizon mismatch (hold-up) between infrastructure operators with large fixed and sunk costs, and retailers (and arguably even end consumers) with freedom to switch between retailers and network infrastructures. The usual resolution to such problems requires customers to make a credible commitment to purchase services via relationship-specific investments or contractual commitments. Whereas access regulation precludes the contractual resolution of the hold-up problem, separation mandates preclude their resolution by consumer-owners vertically integrating upsteam into elements of infrastructure ownership. Consequently, it appears unlikely that the level of investment in separated fibre networks providing dark fibre connections will be optimal. Indeed, under competitive circumstances and high levels of demand uncertainty, there may be no private sector investment forthcoming for dark fibre infrastructures. By examining the business model of CityLink, a firm that since 1995 has been successfully supplying dark fibre in a highly competitive broadband market segment, it is confirmed that long-term financial viability of dark fibre-producing firms is feasible when utilising a mix of both contractual and asset ownership mechanisms that bind end consumers into credible commitments sufficient to justify the firm?s deployment of new network infrastructure capacity. The institutional arrangements that led to the development of this firm?s successful business model draw their inspiration more from the flexible and collaborative commercial interaction of the information technology community rather than the adversarial and prescriptive regulatory environment of the telecommunications industry. It is concluded that if policy-makers wish to encourage the creation of a truly „dark fibre-based? fixed line broadband environment, then in the initial stages of network deployment at least, arrangements similar to those of CityLink are more likely to induce sufficient and timely private sector investments than the rigid and rigorous separation and access regulation arrangements common in the recent history of the telecommunications industry.

Retail Electricity Competition

We analyze a number of unstudied aspects of retail electricity competition. We first explore the implications of load profiling of consumers whose traditional meters do not allow for measurement of their real time consumption, when consumers are homogeneous up to a scaling factor. In general, the combination of retail competition and load profiling does not yield the second best prices given the non price responsiveness of consumers. Specifically, the competitive equilibrium does not support the Ramsey two-part tariff. By contrast, when consumers have real time meters and are billed based on real time prices and consumption, retail competition yields the Ramsey prices even when consumers can only partially respond to variations in real time prices. More complex consumer heterogeneity does not lead to adverse se1ection and competitive screening behavior unless consumers have real time meters and are not rational. We then examine the incentives competitive retailers have to install one of two types of advanced metering equipment. Competing retailers overinvest in real time meters compared to the Ramsey optimum, but the investment incentives are constrained optimal given load-profiling and retail competition. Finally effects of physical limitations on the ability of system operators to cut off individual customers. Competing retailers have no incentive to determine the aggregate value of non-interruption of consumers in the zones they serve instead to free ride on other retailers serving consumers in the same zones.

‘Retail Electricity Competition’

We explore the implications of load profiling of consumers whose traditional meters do not allow for measurement of their real time consumption. We find the competitive equilibrium does not support the Ramsey two-part tariff. By contrast, when consumers are billed on real time prices and consumption, retail competition yields the Ramsey prices even when consumers can only partially respond to variations in real time prices. We then examine the incentive competitive retailers have to install one of two types of advanced metering equipment. Competing retailers overinvest in real time meters compared to the Ramsey optimum, but investment incentives are constrained optimal given load-profiling and retail competition. Finally, we consider the effects of physical limitations on the ability of system operators to cut off individual customers. Competing retailers have no incentive to determine the aggregate value of non-interruption of consumers, preferring instead to free-ride on other retailers serving the same zone.

Essays on Timing of Firm Actions in Industrial Economics

The timing of actions by firms plays an important role in industrial economics. It is key to strategic advantage in oligopoly models whether firms compete on quantity or on price. In a vertical relationship between input suppliers and final-good manufacturers, a firm which chooses a strategy first will take into account the response by those firms moving second and different sequence of play leads to different market outcomes. In my dissertation, I study the determinants and implications of the timing of firm actions in a variety of scenarios. In my first two essays, I examine how market leadership may arise endogenously in oligopoly models and focus on the effect of information about uncertain market demand. My first essay studies a quantity game and I identify the circumstance under which a perishable information asymmetry regarding stochastic demand causes market leadership. In an information acquisition game, I show that Stackelberg equilibrium in the full game is supported only when firms have different costs of information. My second essay considers a duopoly in which firms supply a differentiated product and compete on price. I find that different equilibrium outcomes arise under different information structures. Under asymmetric information, a firm’s information advantage leads to a strategic disadvantage of leading in the price game. The time value of information may well be negative, contrasting with results in the first essay. In my third essay, I consider a vertical relationship in which a supplier sets the price of an input and the firm that produces the final good must choose how much to invest in some complementary input or process. Two models with different sequence of firm actions are studied and yield different pricing strategies for the upstream monopolist. Interestingly, a change of the sequence from one model (the upstream firm commits to input prices first) to the other (the upstream firm sets input prices after investments are made) benefits all parties including the upstream monopolist, the downstream firms and the consumers

The Future of Nuclear Power in A Restructured Electricity Market

Restructuring is causing fundamental changes in the market for electricity across North America including changes in the framework for decisions about investment in generation capacity. In a restructured market the generator is no longer guaranteed a reasonable rate of return on assets; instead new investments will earn whatever the spot market or contract market will pay. The market price will be determined by the marginal cost of existing price setting units, the market structure, demand, and the cost of new capacity. Environmental regulations may have a significant impact on that price. This paper summarizes the principal features of restructured electricity markets and their implications for the future price of electricity and for the future of nuclear power, using the emerging rules for the Ontario electricity market as an example.electric utilities, electricity restructuring, nuclear power, nuclear generation, air pollution, emission trading, Ontario, spot market

How To Seize a Window of Opportunity: The Entry Strategy of Retail Firms into Transition Economies

In most western countries, grocery retailers are faced with maturing domestic markets with a year-to-year sales growth close to zero. Moreover, most Western-European markets are characterized by a high concentration rate, with a combined market share of the top five players easily exceeding 70%. One important outcome of this evolution has been a growing interest in cross-border initiatives. However, even though the industry gained importance, retailers are still struggling to develop the competencies to compete and survive in this new, more global, arena. In this paper, we study entry investments into Central and Eastern-European transition economies to unveil when, to what extent, and to which retailer the strategic window in these different markets opens. We develop and empirically test a set of hypotheses on factors that affect (1) the speed (timing) and (2) size of retailers’ decisions to enter Central and Eastern European markets. A conceptual framework is proposed which looks at strategic decisions through the option lens. This perspective offers an economic rationale for the behavioral process of major resource allocations. The resulting hypotheses are tested, using a joint hazard/poisson-regression framework, on a data set covering all entry decisions of the top 75 European grocery retailers towards Central and Eastern Europe. We find that in these transition economies important legitimization effects can be derived from rivals’ actions. Especially the moves, made and anticipated, by home rivals are carefully monitored. This reflects the idea that retailers are motivated not only by the chance of creating value in these new markets, but also by the fear of being left out

Retail Electricity Competition

We explore the implications of load profiling of consumers whose traditional meters do not allow for measurement of their real time consumption. We find the competitive equilibrium does not support the Ramsey two-part tariff. By contrast, when consumers are billed on real time prices and consumption, retail competition yields the Ramsey prices even when consumers can only partially respond to variations in real time prices. We then examine the incentive competitive retailers have to install one of two types of advanced metering equipment. Competing retailers overinvest in real time meters compared to the Ramsey optimum, but investment incentives are constrained optimal given load-profiling and retail competition. Finally, we consider the effects of physical limitations on the ability of system operators to cut off individual customers. Competing retailers have no incentive to determine the aggregate value of non-interruption of consumers, preferring instead to free-ride on other retailers serving the same zone

A Simple Theory of Predation

We propose a simple theory of predatory pricing, based on scale economies and sequential buyers (or markets). The entrant (or prey) needs to reach a critical scale to be successful. The incumbent (or predator) is ready to make losses on earlier buyers so as to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including markets where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterised by common costs. Conditions under which predation may take place in actual cases are also discussed.Anticompetitive Behaviour, Exclusion, Below-Cost Pricing, Antitrust

Structural Separation versus Vertical Integration: Lessons for Telecommunications from Electricity Reforms

Structural separation between network and retail functions is increasingly being mandated in the telecommunications sector to countervail the market power of incumbent operators. Experience of separation in the electricity sector offers insights for telecommunications. Despite apparent competitive benefits the costs of contracting increase markedly when short-term focused electricity retail operations are separated from longer-term generation infrastructure investments (which require large up-front fixed and sunk cost components). The combination of mismatches in investment horizons entry barriers and risk preference and information asymmetries between generators and retailers leads to thin contract markets increased hold-up risk perverse wholesale risk management incentives and bankruptcies. Direct parallels in the telecommunications sector (e.g. separated retail and infrastructure functions) indicate exposure to similar complications intensifying many of the contractual risks arising from regulated access arrangements. In both sectors competition between vertically integrated providers appears more likely to efficiently and sustainably induce both investment and competition than separation