Opportunistic Behavior and Legal Disputes in the Chilean Electricity Sector

In this paper I analyze post-contractual disputes in the newly privatized electricity sector in Chile. I discuss the presumption that opportunistic behavior and disputes arise due to inadequate market design, ambiguous regulation, and institutional weaknesses. I also assess the presumption that a large number of legal (public) disputes are inhibited by the nonexistence of institutions able to verify and enforce contracts. An in-depth analysis of 6 cases of open con‡ict provides support to such presumptions and highlights the crucial role of an adequate (preprivatization) market design. In addition, it concludes that the reduced number of open con‡icts observed in Chile is probably due to institutional weaknesses, which induces the parties to use private con‡ict resolution mechanisms.

Alternative Institutional Arrangements in Network Utilities: An Incomplete Contracting Approach

This paper presents a theoretical assessment of the efficiency implications of privatizing natural monopolies which are vertically related to potential competitive industries (network utilities). Based on the incomplete contracts and asymmetric information paradigm, I develop a model that analyzes the relative advantages of different institutional arrangements - alternative ownership and market structures in the industry - in terms of their allocative (static) and productive (dynamic) efficiencies. The main policy conclusion of this paper is that both ownership and the existence of conglomerates in network industries matter. Among other conclusions, this paper provides an economic rationale for mixed economies when the network is public and both vertical separation and full concentration of the industry when the natural monopoly is regulated under private ownership.

Toward a Modern State in Chile: Institutions, Governance, and Market Regulation

Chile, as most Latin American countries, inherited the language, religion, and the institutions from 16th century Spanish conquerors. Most institutions have not changed since. This paper examines the institutional and economic structure of the State in Chile. It concludes that in several dimensions the current structure is incompatible with an adequate functioning of market economies, as those intended by the economic reforms implemented during the last three decades of the last century. The country needs to implement reforms in the administration of the State, the working of the Judiciary system, and the incentives and operation of regulatory agencies. Their combined negative effects imply that the benefits of reforms, privatization and market liberalization are partially dissipated in the form of inefficiency and rent seeking behaviour. In turn, this suggest that it is unlikely that the Chilean economy will reach the high growth rates necessary to overcome under development. Our main conclusion is that, in order to implement a framework in which the State acts mainly as regulator and competition supporter, it is necessary to undertake profound changes in the structure of incentives in which it currently operates. Five elements are at the center of this far-reaching evolution away from centralism, stagnation, and inefficiency: (1) the divestiture of state-owned enterprises, (2) the upgrade and update of regulatory agencies and the institutional framework in which they operate, (3) the improve of competition policy institutions, (4) the improvement of consumer rights protection, and (5) a substantial improvement in the working of the Judiciary system

Vertical Integration and Shared Facilities in Unregulated Industries

I this paper we consider a market situation in which initially there is an unintegrated monopoly upstream entry and vertical integration. The equilibrium entry mode -sharing the incumbent facility or building a new facility- is derived as well as the equilibrium market structure. Several policy prescriptions are set forth.Esencial facilities, shared facilities agreements, vertical integration, strategic substitutes

Entry, Cream Skimming, and Competition: Theory and Simulation for Chile's Local Telephony Market

After privatizing local exchange companies (LEX), many countries are introducing competition in local telephony in order to encourage both allocative and productive efficiency. However, enormous sunk costs, and scale, scope and network economies cannot guarantee perfect competition. This paper shows that depending upon characteristics of the market - such as market structure or demand - competition may be complete, partial, or even nonexistent. We use a game theoretical three-step model in which an entrant firm cream skims the market. We illustrate our results by using consistent Chilean data, and the model predicts that Chile's local telephony market will not become a deeply competitive market. This result is robust to changes in the model, in particular to price cap regulation. This model provides us with two interesting economic policy conclusions. First, cream skimming makes more profitable the entrance in the market, but this practice reduces the possibility of full competition in the market. Second, Santiago's local telephony market should not be fully liberalized in the near future and prices of the dominant firm should still be regulated.

Toward a Modern State in Chile: Institutions, Governance, and Market Regulation.

Chile, as most Latin American countries, inherited the language, religion, and the institutions from 16th century Spanish conquerors. Most institutions have not changed since. This paper examines the institutional and economic structure of the State in Chile. It concludes that in several dimensions the current structure is incompatible with an adequate functioning of market economies, as those intended by the economic reforms implemented during the last three decades of the last century. The country needs to implement reforms in the administration of the State, the working of the Judiciary system, and the incentives and operation of regulatory agencies. Their combined negative effects imply that the benefits of reforms, privatization and market liberalization are partially dissipated in the form of inefficiency and rent seeking behaviour. In turn, this suggest that it is unlikely that the Chilean economy will reach the high growth rates necessary to overcome under development. Our main conclusion is that, in order to implement a framework in which the State acts mainly as regulator and competition supporter, it is necessary to undertake profound changes in the structure of incentives in which it currently operates. Five elements are at the center of this far-reaching evolution away from centralism, stagnation, and inefficiency: (1) the divestiture of state-owned enterprises, (2) the upgrade and update of regulatory agencies and the institutional framework in which they operate, (3) the improve of competition policy institutions, (4) the improvement of consumer rights protection, and (5) a substantial improvement in the working of the Judiciary system.Modernization, Institutions, Regulation, Governance

The Effects of Vertical Integration on the Release of New Films

This paper both theoretically and empirically addresses how a vertical structure in the motion-pictures industry determines the number of prints a distributor releases of a new film. A simple theoretical model shows that the optimal number of copies is increasing on the expected demand for the film and the revenue share of the distributor, and decreasing on the cost of each copy. The model also predicts that the optimal number of copies will decrease with the number of theaters that are vertically integrated with the distributor, as long as running a cinema requires financing a non-negligible cost of capital. The theoretical results are empirically tested using a very rich dataset of films exhibition patterns in the major Chilean markets. The empirical results show that, on average, a non-integrated distributor releases 8 more copies than an integrated distributor.Motion-Pictures, Vertical Integration, Release of New Films

Collusion in the Private Health Insurance Market: Empirical Evidence for Chile

In September 2005, the Chilean Competition Authority filed a complaint against the 5 largest private health insurance providers for violation of antitrust laws. The 5 providers were accused of colluding to reduce the coverage of the plans offered to customers between March 2002 and March 2003. The main fact is that during that period these 5 providers reduced the coverage offered from 100% for hospitalization and 80% for ambulatory care to 90% and 70% respectively. As usual the observation of parallel conduct is not enough to infer collusion and it is required to observe additional factors that allow us to reject the hypothesis of providers behaving competitively. In this paper, we show that some specific characteristics of the health insurance markets generate barriers to entry and switching costs that allow the possibility of a collusive agreement. Then, we adapt an imperfect competition model of product differentiation to derive some testable propositions that allow us to distinguish between competition and collusion outcomes in the health insurance market in Chile. Finally, we show econometric evidence consistent with a collusive agreement among the 5 largest providers and inconsistent with a competitive equilibrium. . In particular, by comparing the prosecuted and non-prosecuted open Isapres before and during the collusive period, we show that sales efforts of the accused Isapres were reduced during the transition period toward lower-quality plans, that the profitability of the two groups of Isapres increased, and that the rate of transfers within the group of accused Isapres fell during the transition period.Tacit Collusion, Isapres, Health Insurance, Conscious Parallelism, Plus Factors.