In a setting with Hotelling differentiation and weak network effects: When the market is already covered, duopoly adoption of compatibility leads to a price increase, can reduce user surplus and thus tends to be welfare-reducing. We show that this welfare result can be reversed if the market is not covered under incompatibility.
We model a linear city with duopoly both upstream and downstream. Consumers pay a transportation cost when they buy from a retailer and so do retailers when they buy from a wholesaler. All location and pricing decisions are endogenous. When the wholesalers choose their locations first, they locate closer to the center relative to the retailers, and relative to when all firms move simultaneously. Each wholesaler locates closer to the center in order unilaterally to strengthen the strategic position of its retailer by pulling that retailer towards the market center; however, this results, in equilibrium, in a greater intensity of competition. All firms locate farther away from the market center and industry profits are higher under linear pricing relative to two-part tariffs and, in turn, relative to vertical integration.
Economists in the U.S. Federal Trade Commission’s Bureau of Economics conduct a broad array of analytical work to advance the Commission’s mandates to protect consumers and preserve competitive markets. Their analyses inform significant policy and enforcement decisions across multiple domains. This article presents examples in which the Bureau’s work has contributed to investigations of deceptive pricing and of vertical restraints. The first example develops a framework for estimating consumer injury from deceptive delivery-fee advertising, accounting for both consumers who abandon their purchases and those who complete them despite the unexpected fees. The second example uses a model of interconnected equipment and repair markets to show how restrictions on aftermarket competition can reduce consumer welfare even when manufacturers lower upfront equipment prices.
Reducing the level of carbon dioxide (CO2) emissions in air transport calls for policies that support less polluting fuels. The International Civil Aviation Organization and the European Union have launched policies to support the adoption of sustainable aviation fuels (SAFs). Although Article 15 of the 1944 Chicago Convention forbids the use of discriminatory charges, Article 3 of the European Union’s Airport Charges Directive allows charge modulation if related to matters of public interest – such as climate change mitigation. Recently, Lyon, Stuttgart, and airports within the Swedavia AB have implemented a CO2-based aeronautical charges modulation. Our paper studies the effect of authorizing such differentiated charges in the context of intermodal competition. We find that with uniform tariffs, airlines have no incentive to use SAFs. However, if a regulator authorizes discriminatory aeronautical charges, airlines may have the incentive to use more environmentally friendly fuel. Furthermore, when the cost of SAF is small compared to passengers’ disutility from not traveling with their preferred transportation mode, then discriminatory charges increase air transportation’s market share.
This article highlights three key projects on which economists at the UK’s Competition and Markets Authority (CMA) have worked over the past year: First, we discuss our veterinary services market investigation, where our package of remedies was informed by economic analysis that identified the effect of independent practices’ being bought by larger groups. Second, we examine our civil engineering market study: We focus on the role of government in shaping demand and the importance of issues such as pipeline certainty and public sector capability. Third, we present empirical research that has been undertaken by the CMA Microeconomics Unit on supply chains and market power, including new evidence on supply chain length, sector centrality, and how distortions can accumulate through supply linkages.
