Abstract This paper asks when member governance can substitute for external regulation in consumer-owned natural monopolies. Holding quantities fixed, usage-proportional patronage refunds neutralize the transfer motive for monopoly over-pricing, shifting the welfare margin toward operating efficiency. In a principal-agent model, a cooperative board supports and monitors a risk-averse manager under a linear cost-based incentive contract. Regulation reduces the variance of realized operating costs and supports stronger incentives, but it also imposes a compliance burden and displaces the board’s own support and monitoring. Exemption therefore raises effort only when burden relief and stronger internal governance outweigh the loss of external information. Welfare dominance further requires the operating-cost gain to cover changes in effort disutility, governance costs, risk-bearing, and the social value of discretion rents. The case for exemption is therefore conditional rather than categorical and supports hybrid oversight that retains regulatory reporting, auditing, and benchmarking while relaxing behavioral constraints.
We analyze a model in which firms compete to develop a technology involving possible accident risks under alternative liability rules (regulation modes). As a benchmark, we first consider a monopoly R&D market in which the monopolist is the sole developer, and obtain an invariance result that the monopolist chooses both the efficient investment in R&D and the efficient investment in its safety under both the strict liability rule and the negligence rule. Then, we consider a patent race model in which the first inventor gets the whole prize (monopoly rent) but is exposed to risks of accidents due to the technology. We show that firms have an incentive to invest for both R&D and safety too much in this patent race game under strict liability. Under negligence rule (regulation-first policy), they still overinvest for R&D but less severely, while they invest for safety efficiently. This model can be applied to regulation of AI innovation posing significant safety challenges.
The rapid advancement of artificial intelligence (AI) relies on a complex supply chain comprising five key layers: hardware, cloud infrastructure, training data, foundation models and AI applications. This paper examines the market structure of each layer and highlights the economic forces shaping them: rapid technological change, high fixed costs, economies of scale, network effects and in some cases, strategic behaviour by dominant firms. We also highlight the expanding influence of big tech companies across the AI supply chain. We discuss the challenges for consumer choice, innovation, operational resilience, cybersecurity and financial stability.
This study investigates quality choices when a product version is outsourced compared to full in-house production of all product versions. Our findings suggest that outsourcing the high-end version leads to improvements in the quality of the low-end version, as the firm seeks to strengthen its bargaining position with the contractor to secure a lower wholesale price for the outsourced high-end version. In situations involving asymmetric information, this effect can help alleviate the downward distortion of low-end quality, thereby enhancing overall welfare. However, outsourcing may also result in a level of low-end quality that exceeds the socially optimal level. The key drivers of this trade-off are the proportion of high-type versus low-type consumers, which determines who is served in the event of a negotiation failure, and the relative bargaining power of firms and contractors, which defines the relative weight of the agreement and disagreement payoffs in setting quality. On the other hand, outsourcing low-end versions is less likely to contribute to social welfare improvement, as it diminishes the quality of the in-house, high-end versions. The study also shows that while outsourcing affects quality choice, the outcomes are largely unaffected by the specifics of outsourcing arrangements and game timing.
We empirically assess the impact of ride-hailing platforms on the incidence of drunk-driving fatal crashes and fatalities in Chile. Using a difference-in-differences approach, we study heterogeneous effects in fatalities by gender and role in the crash (driver or passenger). Our results suggest that the introduction of ride-hailing platforms has significantly reduced fatal crashes and fatalities, especially the number of female passengers' fatalities and the number of male drivers' fatalities at night. The former result may evidence that ride-hailing platforms like Uber can contribute to the mitigation of the mobility bias against women in the traditional transport sector.
Generative AI (GenAI) systems raise fundamental challenges for copyright law at both the input and output stages. On the input side, legal uncertainty surrounds the large-scale scraping of copyrighted data for model training, with divergent rules across jurisdictions and limited transparency on how data is sourced. On the output side, courts struggle to determine when AI-assisted creations are sufficiently human to merit protection, leading to inconsistent or unclear legal outcomes. This paper outlines the “AI copyright conundrum” and examines its impact on the incentives to create, the accessibility of high-quality datasets, and the sustainability of cultural production. We discuss policy options and open questions for research.
Railroads remain a critical transportation mode for the movement of U.S. agricultural freight. Within much of the northwest and mid-central U.S., rail is often the only viable mode to transport bulky agricultural commodities, including wheat. With the potential for exploitation of market power by railroads over such movements, regulations exist that are designed to mitigate the effects of monopoly railroad situations. But what of duopoly railroad markets? Economic theory offers reliable predictions of firm behavior when there are either many firms serving a market, or conversely when there is just a single firm serving the market. But behavioral predictions are not as straightforward when evaluating oligopolistic market structures. Relevant to this research, it is not clear a priori what kind of firm and market behavior might emerge under a duopoly. Clarifying what happens in such cases ultimately becomes an empirical issue. In this paper, we investigate a significant U.S. wheat transportation market currently served by a Class 1 railroad duopoly, but railroad behavior in this market may also be moderated by intermodal competition from water barge. While our findings about railroad behavior over time indicate a tendency towards Cournot duopoly behavior, latent variable analysis offers a more granular understanding of how both intra- and inter-modal competition affect the chosen transportation market. With only a very limited number of Class 1 railroads left serving the entire country, the future of U.S. freight transportation by rail will be comprised of numerous important products and regions served by only one or two railroads. While some of the methods we use in this analysis are novel to the industrial economics literature, we believe this effort will help better inform future regulatory policy design for rail, further strengthening market vigilance for freight shippers who are destined to transport goods in increasingly concentrated railroad markets.
This study examines the impact of price-cap regulation and subsidies for truthful reporting on media bias in a duopolistic market with both traditional and digital media. While subsidies reduce bias and promote balanced news coverage, price-cap regulation exacerbates online polarization and displaces traditional media. These findings provide valuable insights for policy discussions on fact-checking, reporting standards, and social media regulation.
In this paper, we consider a platform that sells both the first-party product and the third-party product. The product recommendation of such a platform is interpreted as cheap talk, because it is unbinding and costless. We show that if the consumer has the outside option to exit from the platform, there exists a partially revealing communicative equilibrium in which the platform makes a biased recommendation with some positive probability while the consumer follows the platform’s self-referencing recommendation with some probability and takes the outside option to exit from the platform with the remaining probability. In this equilibrium, self-preferencing occurs. Thus, the consumer’s exit option is essential to this self-preferencing equilibrium. We also show that both the platform and the consumer are made better off in this partially revealing self-preferencing equilibrium than in an uninformative equilibrium or without using the search engine. We also extend our arguments to the Hotelling model with consumers’ exit option and draw an interesting policy implication that if a platform’s commission fee is regulated, it can increase the platform’s self-preferencing bias.
Banks lend through syndicates to diversify risk, but co-lending relationships are sticky. This paper finds a “co-lender effect”, namely that banks’ lending volumes are impacted by shocks to co-lenders. We create a new database of cross-border syndicated lending to developing countries from 1993 to 2020. We characterize the network and, as suggested by theory, find both resilience and fragility. Central players propagate shocks, while the impacts of fringe banks are negligible. The global financial crisis and the growth of South-South lenders prompted a decline in network centrality and higher network density with more connections between a declining number of participants. We find further support for a co-lender effect, compounding the sharp fall in lending during the Covid-19 crisis, employing a different methodology.
This paper studies an empirical model of shoe-leather cost applied to consumer cash withdrawal. The unique feature is to estimate the effect of shoe-leather cost from the cash inventory model by filtering out free-type consumers who do not incur shoe-leather costs. When compared to the costly-type consumers, the free-type do not need to go out of their ways from home to visit banks to withdraw cash because they can economise their travel costs by combining withdrawals with other activities, such as, one-stop multi-purpose trip on either their ways to work or shopping. We find that the cash withdrawal frequency significantly decreases with the travel distance; otherwise the estimated shoe-leather cost without distinguishing between free- and costly-types is close to zero and insignificant. This finding suggests that in order to maintain cash accessibility, the policy need not only consider the supply of physical branch infrastructure, but also account for consumer's travel pattern.
The deregulation of the electricity sector in Europe since the early 1990s led to new challenges. In particular, investors are increasingly exposed to risk and mothballing is an option of increasing interest and regulatory scrutiny. I argue that mothballing can be used to avoid losing the war of attrition of a standard exit game, by decreasing the value of rivals and driving them to quit earlier than if the plant was retired. I describe this phenomenon through the lens of simple game-theoretical settings, and propose a real-options game-theoretic model to describe and quantify the effects of mothballing.
Critical mass is central to the development of two-sided platforms. It is the level of participation on both sides that is required to have the platform grow on its own force to a mature equilibrium. Despite this commonly understood dynamic, a formal definition of critical mass is missing in the literature on two-sided platforms, except for a proposal by Evans and Schmalensee (2010. "Failure to Launch: Critical Mass in Platform Businesses." Review of Network Economics 9 (4)) who defined critical mass not as a single combination of platform sizes, but as a frontier in the two-dimensional space of those levels. We set out a demand model for two-sided platforms, propose a measure for the strength of the externalities between the sides and define critical mass in terms of this externality parameter. Our definition is more in line with the way critical mass is defined for one-sided networks. We also set out the conditions that must be met for the occurrence of critical mass.
This article shows that the possibility of preemption depends on the form of demand evolution and of the cost function. It characterizes the Markov perfect and open-loop equilibria of a two period game of capacity accumulation. When there is no demand evolution, there is no possibility of preemption under linear prices of investment. Preemption only appears when the demand shock between both periods is large enough.
Beginning with two Hotelling duopolies where demand for the product in each market is independent of demand for the product in the other, the paper examines the price, profit and welfare consequences that result when first one firm in a market merges with a firm in the other market creating a single two-product firm and then the remaining two firms merge - resulting in a duopoly of two-product firms. The paper demonstrates how to compute the equilibrium in each market structure. Assuming that firms cannot commit not to use all the pricing instruments at their disposal, mixed bundling by two-product firms emerges following each merger. While such behavior is a unilateral best response, the equilibrium consequences of these choices end up lowering total profits and welfare compared to the pre-merger markets suggesting that the opportunity to engage in mixed bundling cannot be the sole motivation for such mergers.
We study price-cap regulation in a market in which a vertically integrated upstream monopolist sells an essential input to a downstream competitor. In the absence of regulation, entry benefits both firms, but may harm downstream consumers because the upstream monopolist can set a high input price that would push downstream prices above the unregulated monopoly level. However, if a regulator caps the incumbent’s upstream and downstream prices, consumers and firms are better off after entry than under a price-cap monopoly. We extend our model to examine the concern that price caps may induce incumbents to forgo cost-reducing investments and dampen entrants’ incentives to self-provision the input.
Yardstick competition as a tool to set the prices of regional natural monopolies is now an established tool. After 30 years of application to the water industry in England and Wales, this article takes a critical look at how yardstick competition has been implemented in the latest Price Review 2019 (PR19). It proposes reforms to ensure that in the next Price Review 2024 (PR24) and/or beyond the efficiency challenges are appropriately set and the degree of information at the regulator's disposal is maximised.
In recent years, there have been rapid technological innovations in retail payments. Such dramatic changes in the economics of payment systems have led to questions regarding whether there is consumer demand for cash. The entry of these new products and services has resulted in significant improvements in the characteristics of existing methods of payment, such as tap-and-go technology or contactless credit and debit cards. In addition, the introduction of decentralized digital currencies has raised questions about whether there is a need for a central bank digital currency (CBDC) and, if so, what its essential characteristics should be. To address these questions, we develop and estimate a structural model of demand for payment instruments. Our model allows for rich heterogeneity in consumer preferences. Identification of the distribution of consumer heterogeneity relies on observing individual-level consumer decisions at the point of sale. Using parameter estimates, we conduct a counterfactual experiment of an introduction of CBDC and simulate post-introduction consumer adoption and usage decisions. We also provide insights into the potential welfare implications of the introduction of new payment instruments.
This paper investigates the relationship between competition intensity and the security level provided by software vendors, in particular when the software is free of charge to users. We examine the case of web browsers, a key component of internet security where vendors compete on quality and generate revenue through advertising. Using a pooled cross-sectional dataset on web browser security patch releases from 2009 to 2018, we analyze how competition affects the promptness of these releases. Our findings reveal that higher market concentration can enhance a vendor's responsiveness in addressing vulnerabilities, though this positive effect weakens when a vendor becomes excessively dominant.
In many markets, empirical evidence suggests that positive production cost shocks tend to be transmitted more quickly and fully to final prices than negative ones. This article explains asymmetric price adjustment as caused by firms imperfectly colluding on supra-competitive price levels. I consider an equilibrium in which positive cost shocks are transmitted instantaneously, whereas downward price adjustments only occur once aggregate market demand turns out unexpectedly low. This equilibrium exists whenever demand is sufficiently stable and negative cost shocks are not too large.
