Every so often I plunge into the Wayback Machine to search for “ancient” economics course materials from as far back as the 1990’s. Today I return with a syllabus, suggested readings for presentations and for paper topics, and some final examination questions for what has/had been the traditional second course in the field of industrial organization that covers regulation and competition policy.
The course instructor at UC Berkeley was Glenn Woroch who had received his Ph.D. in economics from the University of California, Berkeley in 1983. According to his August 2013 homepage he taught that graduate course “Regulation and Antitrust” three times (Spring 1994, 1996, 1997).
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Glenn Woroch: Short Bio
Dr. Glenn Woroch is Adjunct Professor of Economics, University of California, Berkeley, and Executive Director of the Center for Research on Telecommunications Policy. Dr. Woroch is an internationally recognized expert in the economics of the telecommunications industry, and has served as a consultant to governments and the private sector on a wide range of telecommunications issues.
Dr. Woroch has published numerous articles on industrial organization, regulation, antitrust, corporate strategy and intellectual property. He served on the editorial boards of Information Economics & Policy, the Journal of Regulatory Economics, and Telecommunications Policy and was a founding member of the International Telecommunications Society.
Dr. Woroch is regularly retained as an economic expert witness on litigation matters involving monopolization claims, mergers, intellectual property infringement, and economic damages. Besides his expertise in telecommunications, Dr. Woroch has extensive experience in the broadcast and cable television, computer software, personal computer, computer networking, ecommerce, electric power and food and beverage industries. Dr. Woroch has been an economic advisor to government agencies including the U.S. Departments of Energy and Justice and the Office of Technology Assessment. In addition to his U.S. engagements, he has consulted to private and public sector clients in Latin America, the Pacific Rim and Western Europe.
Previously, Dr. Woroch taught economics at the University of Rochester and Stanford University, and was Senior Member of Technical Staff at GTE Laboratories. He holds a Ph.D. in Economics and M.A. in Statistics from Berkeley.
Source: Short bio of Glenn Woroch linked to his August 2013 webpage. Archived copy at the Wayback Machine internet archive.
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Department of Economics
University of California
Economics 220B, Spring 1996
REGULATION & ANTITRUST
Glenn Woroch
Description. This is the second of two graduate courses in industrial organization. It will cover regulation and antitrust policy, concentrating on control of natural and artificial monopoly in theory
and in practice. Emphasis will be on theoretical developments although an occasional empirical study or case study will illustrate key points.
Instructor. Glenn Woroch, 669 Evans, 642-4308, glenn@econ.berkeley.edu.
Office hours: Wednesday, 2:30-4:00 PM.
Textbooks. No textbook is assigned for this course, but several books cover large portions of the material and have been put on reserve:
Sandy Berg and John Tschirhart, Natural Monopoly Regulation, Cambridge University Press.
Alfred Kahn, The Economics of Regulation, volumes I and II, (2nd edition) John Wiley, 199?.
Jean-Jacques Laffont and Jean Tirole, A Theory of Incentives in Procurement and Regulation, 1993.
William Sharkey, The Theory of Natural Monopoly, Cambridge University Press, 1982.
Daniel Spulber, Regulation and Markets, MIT Press, 1991.
Kenneth Train, Optimal Regulation, MIT Press, 1991.
Assignments. Students will select a paper, either one of the optional readings or a paper that we agree upon, and present it to the class. Each student will also write a paper of moderate length on a topic
related in some manner to the economics of regulation. I will distribute a list of suggested topics shortly. Lastly, there will be a final exam.
READING LIST
* – required, in reader. + – recommended for presentation.
I. NATURAL MONOPOLY AND ITS REGULATION
1. Natural Monopoly
* Panzar, J., “Technological determinants of firm and industry
structure,” Chapter 1 in Handbook of Industrial Organization, (Vol.
1) North-Holland, 1989.
* Faulhaber, G., “Cross-subsidization: pricing in public enterprises,”
American Economic Review, 1975.
Baumol, W., “On the proper cost tests for natural monopoly in a
multiproduct industry,” American Economic Review, December 1977.
Faulhaber, G., and S. Levinson, “Subsidy free prices and anonymous
equity,” American Economic Review, 1981.
+ Evans, D. and J. Heckman, “Multiproduct cost function estimates and
natural monopoly tests for the Bell System,” in Breaking Up Bell,
edited by David Evans, 1983.
2. Efficient Pricing
* Baumol, W. and D. Bradford (1970), “Optimal departures from marginal
cost pricing,” American Economic Review, June.
* Willig, R., “Pareto-superior nonlinear outlay schedules,” Bell
Journal of Economics, 1979.
Baumol, W., E. Bailey and R. Willig, “Weak invisible hand theorems on
the sustainability of prices in a multiproduct monopoly, American
Economic Review, 1977.
Braeutigam, R., “Optimal policies for natural monopoly,” in Handbook
of Industrial Organization, (Vol. 2) 1989.
+ Brock, W., and W.D. Dechert, “Dynamic Ramsey pricing,” William Brock
and W. D. Dechert, International Economic Review, October 1985.
+ Braeutigam, R., “Optimal pricing with intermodal competition,”
American Economic Review, 38-49, 1979.
+ Panzar, J., “The Pareto domination of usage-sensitive pricing,” in
Proceedings of the 6th Telecommunications Policy Research
Conference, H. Dordick (ed.) 1979.
3. Reality Check: Alternative Explanations of Regulatory Policy
* Stigler, G., “The Theory of Economic Regulation,” The Bell Journal of
Economics, 1971.
* Peltzman, S., “The economic theory of regulation after a decade of
deregulation,” Brookings Papers: Microeconomics, 1989.
* Joskow, P., “Pricing decision of regulated firms: a behavioral
approach, Bell Journal of Economics, 1973.
Peltzman, S., “Towards a more general theory of regulation,” Journal
of Law & Economics.
Noll, R., “Economic perspectives on the politics of regulation,” in
Handbook of Industrial Organization (Vol. 2) 1989.
Posner, R., “Taxation by regulation,” Bell Journal of Economics,
1971.
+ Winston, C., “Economic deregulation: days of reckoning for
microeconomists,” Journal of Economic Literature, September 1993.
II. REGULATION IN PRACTICE
1. Rate of Return Regulation
* Baumol, W. and A. Klevorick, “Input choices and rate of return
regulation: an over of the discussion,” Bell Journal of Economics,
1970.
* Averch, H. and L. Johnson, “Behavior of the firm under regulatory
constraint,” American Economic Review, December, 1962.
* Spence, A.M., “Monopoly, quality and regulation,” Bell Journal of
Economics, Autumn 1975.
+ Petersen, C., “An empirical test of regulatory effects,” Bell Journal
of Economics, Spring 1975.
+ Bailey, E., “Regulation and innovation,” Journal of Public Economics,
December 1974.
2. Contracting vs. Administration
* Demsetz, H., “Why regulate utilities?” Journal of Law & Economics,
1968
* Goldberg, V., “Regulation and administered contracts,” Bell Journal
of Economics, 1976.
* Williamson, O., “Franchise bidding for natural monopoly: in general
and with respect to CATV, Bell Journal of Economics, 1976.”
+ Zupan, M. “The efficacy of franchise bidding schemes in the case of
cable TV: Some systematic evidence,” Journal of Law and Economics,
October 1989.
3. Price Cap and Benchmark Regulation
* Brennan, T., “Regulation by capping prices,” Journal of Regulatory
Economics, 1989.
* Brauetigam, R., and J. Panzer, “Effects of the change from rate of
return to price cap regulation,” American Economic Review, 1993.
* Shleiffer, A. “A theory of yardstick competition,” Rand Journal of
Economics, 1985.
Vogelsang, I., “Price cap regulation of telecommunications services:
a long-run,” Rand Report, 1988.
+ Cabral, L. And M. Riordan, “Incentives for cost reduction under price
cap regulation,” Journal of Regulatory Economics, 1989.
+ Sappington, D., and D. Sibley, “Strategic nonlinear pricing under
price-cap regulation,” Rand Journal of Economics, Spring 1992.
+ Armstrong, M., S, Cowan and J. Vickers, “Nonlinear pricing and price
cap regulation,” Journal of Public Economics, September 1995.
III. DESIGN OF OPTIMAL REGULATORY MECHANISMS
1. Iterative and Dynamic Mechanisms
* Vogelsang, I. and J. Finsinger, “A regulatory adjustment process for
optimal pricing by multiproduct monopoly firms, Bell Journal of
Economics, 1979.
* Sappington, D., “Strategic firm behavior under a dynamic regulatory
adjustment process,” Bell Journal of Economics, Spring, 1980.
Salant, D., and G. Woroch, “Trigger price regulation,” Rand Journal
of Economics, Spring 1992.
+ Gilbert, R., and D. Newbery, “The dynamic efficiency of regulatory
constitutions,”Rand Journal of Economics, Winter 1994.
+ Blackmon, G., and R. Zeckhauser, “Fragile commitments and the
regulatory process,” Yale Journal on Regulation, 9:1, Winter, 1992.
+ Logan, J., R. Masson and R. Reynolds, “Efficient regulation with
little information: reality in the limit?” International Economic
Review, 30:4 November 1989.
2. Agency Approach
* Loeb, M., and W. Magat, “A decentralized method for utility
regulation,” Journal of Law & Economics, 1979.
* Baron, D., and R. Myerson, “Regulating a monopolist with unknown
costs,” Econometrica, July 1982.
* Laffont, J.-J., “The new economics of regulation ten years after,”
Econometrica, 1994.
Laffont, J.-J., and J. Tirole, “Using cost observation to regulate
firms,” Journal of Political Economy, 1986.
Baron, D., “Design of regulatory mechanisms and institutions,” in
Handbook of Industrial Organization, (Vol. 2), 1989.
+ Lewis, T., and D. Sappington, “Regulating a monopolist with unknown
demand,” American Economic Review, December 1988.
+ Wolak, F., “An econometric analysis of the asymmetric information
regulator-utility interaction,” draft.
IV. DEREGULATION
1. Regulation with Horizontal Competition
+ Auriole, E., and J.-J. Laffont, “Regulation by duopoly,” Journal of
Economic Management and Strategy, 1993.
+ Riordan, M., “Regulation and preemptive technology adoption,” Rand
Journal, Autumn 1992.
Biglaiser, G., and A. Ma, “Regulating a dominant firm: unknown demand
and industry structure.” Rand Journal of Economics, Spring 1995.
2. Regulation with Vertical Competition
* Laffont, J.-J. and J. Tirole, “Optimal bypass and creamskimming,”
American Economic Review, 1990.
* Panzar, J., “Sustainability, efficiency and vertical integration,” in
Regulated Industries and Public Enterpirse, edited by Paul
Kelindorfer and Bridger Mitchell, 1979.
Vickers, J., “Competition and regulation in vertically-related
markets,” Review of Economic Studies, January 1995.
Baumol, W. “Some Subtle Pricing Issues in Railroad Regulation,”
International Journal of Transport Economics, August 1983.
+ Gilbert, R., and M. Riordan, “Regulating complementary products: a
problem of institutional choice,” Rand Journal of Economics, 1995.
+ Laffont, J.-J. and J. Tirole, “Access pricing and interconnection,”
European Economic Review, 1994.
VI. ANTITRUST POLICY
1. Predation
* McGee, John, (1958), “Predatory Price Cutting: The Standard Oil
(N.J.) Case,” Journal of Law and Economics, pp. 137-169.
* Ordover, J., and G. Saloner, “Predation, monopolization and
antitrust,” chapter 9 in Handbook of Industrial Organization,
(Vol. 2) 1989.
Milgrom, P., and J. Roberts, “Limit pricing and entry under
incomplete inforamtion: an equilibrium analysis,” Econometrica,
1982.
Ordover, J., and R. Willig, “An economic definition of predation:
pricing and product innovation,” Yale Law Journal, 1981.
2. Merger to Monopoly
* Department of Justice, “The Merger Guidelines.”
* Farrell, J., and C. Shapiro, “Horizontal mergers,” American Economic
Review.
+ Baker, J., and T. Bresnahan, (1985), “The Gains from Merger or
Collusion in Product Differentiated Industries,” Journal of
Industrial Economics, 33:4, pp. 427.
3. Exclusion and Foreclosure
* Krattenmaker, T., and S. Salop, “Anticompetitive exclusion: raising
rivals’ costs to achieve power over price,” Yale Law Journal, 1986.
* Ordover, J., G. Saloner, and S. Salop, “Equilibrium Vertical
Foreclosure,” American Economic Review, 1990.
Ordover, J., A. O. Sykes and R. Willig, “Nonprice Anticompetitive
Behavior by Dominant Firms toward the Producers of Complementary
Products,” in Antitrust Regulation: Essays in Memory of John J.
McGowan, Franklin Fisher (ed.), 1985
Whinston, M., “Tying, Foreclosure, and Exclusion,” American Economic
Review, 1990.
+ Salinger, M., “Vertical mergers and market foreclosure,” Quarterly
Journal of Economics, 1988.
+ Economides, N., and G. Woroch, “Interconnection and foreclosure of
network competition,” draft, 1995.
Source: Spring Semester 1996 syllabus archived at the Wayback Machine.
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Department of Economics
University of California
Economics 220B, Spring 1996
ADDITIONAL READINGS FOR PRESENTATIONS
Glenn Woroch
Lawrence Pulley and Yale Braunstein, “A Composite cost function for multiproduct firms with an application to economies of scope in banking,” Review of Economics & Statistics, 1992.
Besanko, David and Donnefeld, Shabtai, and Lawrence J. White, “The Multiproduct Firm, Quality Choice, and Regulation,” Journal of Industrial Economics, 1990, vol. 36, pp. 411-429.
Ma, Ching-to Albert and James Burgess, “Regulation, Quality Competition, and Price in the Hospital Industry,” mimeo, 1991.
Fudenberg, Drew and Jean Tirole, “‘A Signal-Jamming’ Theory of Predation,” Bell Journal of Economics, 1986, vol. 17, no. 3, pp. 366-376.
Ordover, Janusz and Robert Willig, “Antitrust for High Technology Industries: Assessing Research Joint Ventures and Mergers,” Journal of Law and Economics, 1985, vol. 28, pp. 311-333.
Guerin-Calvert, Margaret, “Vertical Integration as a Threat to Competition: Airline Computer Reservations Systems,” in L. White and J. Kwoka Jr. (eds.), The Antitrust Revolution, (pp. 338-370). 1989.
Sappington, David, and David Sibley, “Regulating without cost information: the incremental surplus subsidy scheme,” International Economic Review, 29:2, May 1988.
Frank Matthewson and Ralph Winter, “An economic theory of vertical restraints,” Rand Journal of Economics.
Ralph Bradburd, “Privatization of natural monopoly public enterprises: the regulation issue,” Review of Industrial Organization, 1995, 247-67.
Michael Whinston, “Tying foreclosure and exclusion,” American Economic Review, Sept 1990.
Paul Joskow and Richard Schmalensee, “Incentive regulation for electric utilities,” Yale Journal on Regulation, 4:1, Fall 1986.
Baron, David, “Price regulation, quality and asymmetric information,”American Economic Review, March 1981.
Harris, R., and E. Weins, “Government enterprise: an instrument for the internal regulation of industry,” Canadian Journal of Economics, February 1980.
Source: Additional Readings for Presentations from the Spring Semester 1996 archived at the Wayback Machine.
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Department of Economics
University of California
Economics 220B, Spring 1996
SUGGESTIONS FOR TERM PAPER TOPICS
Glenn Woroch
The miscellaneous topics listed below are intended to get you thinking about a term paper. Most are applications to specific industries or specific regulatory policies. There are many more possibilities for research in theoretical aspects of regulation.
Problems of erecting incentives for efficient investment and operation of natural monopoly facilities placed under common ownership in a specific case such as an electric power grid or an internet backbone.
Efficient design of auctions to assign rights to common property resources such as radio spectrum or mineral/grazing rights.
Compare the trend toward re-emergence of end-to-end monopoly in telephone with the vertical divestiture in electric power in terms of the tradeoff between vertical economies and anticompetitive behavior.
Efficient design of duopoly policy in markets that are potentially natural monopoly (e.g., cellular telephone)
The increased concentration of hospitals and HMOs through mergers and joint ventures and the implications for the price and availability of health services.
Potential of labor and management sharing in the rents that accrue in trucking, railroad or other regulated industries.
Motivation and long-run sustainability of bypass in the natural gas distribution industry under different regulatory regimes.
Winners and losers from price ceilings, rationing and strategic reserves in the market for oil and gas.
Effectiveness of different ratemaking practices (e.g., ROR vs. price caps) to encourage adoption of new technologies in a specific industry (e.g., electric power, telephone, health care).
Apply principles of economic models of regulation to understand the passage of a particular piece of legislation that regulates, deregulates or re-regulates an industry (e.g., Airline Deregulation Act of 1978, Cable Act of 1992, Telecom Act of 1996).
Cross country comparison (e.g., U.S. vs. Japan) of policy formation on a specific regulatory issue (e.g., regulation of nuclear power or deregulation of telephones), and the relation between the outcome and the possibilities for rent seeking under the different political systems.
Policy alternatives toward a dominant firm that achieves a de facto standard in an industry exhibiting strong complementaries among component products (e.g., Microsoft and Intel).
The use of structural separations or Chinese walls to guard against leveraging market power into complementary product markets.
Compare performance of public enterprises relative to regulated private firms within or across industries (e.g., water, electric power, cable TV, airlines) and relate to management incentives and/or regulatory policies.
Success of regulatory policy that uses a government-owned firm to compete against a dominant private firm.
The relative effectiveness of alternative regulatory mechanisms to elicit relevant information, e.g., yardstick vs. iterative mechanisms.
Success of privatization initiatives based on the nature of the post-privatization regulatory scheme especially with regards to rate regulation and the ease of competitive entry.
Creating efficient incentives for disposal of nuclear and other kinds of hazardous waste.
Tradeoff between efficiency and anti-competitiveness of mergers/alliances/joint ventures among local/long distance/cable/wireless companies aimed at exploiting multimedia opportunities.
Comparison of solutions to pricing interconnection sold to competitors across different industries (e.g., phone v. electric power) or for a single industry across different countries.
Source: Suggested Paper Topics from the Spring Semester 1996 archived at the Wayback Machine.
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Department of Economics
University of California
Economics 220B
Glenn Woroch
TAKEHOME FINAL EXAM
Spring 1996
INSTRUCTIONS: Answer each of the first four questions and then choose just one of the last two questions In each case keep you answers concise. Due the end of business on Friday, May 17th.
- Suppose that all firms have available the technology characterized by the cost function:
C(y1, y2) = a y1 + b y2 + c max {y1, y2}
where y1 and y2 are quantities of the two goods, 1 and 2. Further suppose that the market demand for y1 exceeds that for y2 at all relevant output prices.
(a) For y1 > y2 > 0, determine whether this cost function exhibits economies of scope, economies of scale over the entire product set, economies of scale specific to good 1 or economies of scale specific to good 2.
(b) Find the first-best output price for the industry to charge for the two goods. Determine the configuration of firms in the industry that products the corresponding industry wide outputs at least cost for the industry.
(c) Prove that the industry configuration and prices given in you answer to part (b) satisfies the requirements of sustainability
(d) Describe in words what kinds of circumstances might lead to cost functions like this one.
- A regulated firm produces two products: A and B. The firm is required by regulators to earn no more than is necessary to cover its operating costs plus a competitive return on invested capital.
Assume that product B exhibits constant marginal cost of production equal to cB.
(a) Describe the solution to the Ramsey pricing problem. In the process be certain to make explicit whatever demand and cost assumptions you need to support your answer.
(b) Now suppose that an unlimited number of unregulated firms can enter into the market for product B at a constant marginal cost of cE where cE > cB. How does this affect the regulated firm’s pricing, and what is the effect on consumer welfare?
(c) Now suppose that cE < cB. Demonstrate that the regulated firm might gain by selling product B at a price (slightly) below cE.
(d) Since, in general, the regulator does not know the relative sizes of cB and cE , what are the pros and cons of allowing the regulated firm to produce B?
- Many schemes for regulating natural monopolies have been tried, and many more have been proposed. Listed below are some the schemes studied in this class.
(i) Rate-of-return regulation
(ii) Vogelsang-Finsinger iterative mechanism
(iii) Yardstick regulation
(iv) Price cap regulation
(v) Demsetz-type franchise auction
Choose two off of this list, and compare their relative merits in terms of each of the following criteria:
(a) short-run allocative efficiency,
(b) speed and likelihood of achieving first/second best outcomes over the long run,
(c) cross subsidization across products
(d) the rents that accrue to producers,
(e) vulnerability to political influence by producers and/or consumers,
(f) incentives to invest in cost-reducing innovations,
(g) informational requirements for implementing the mechanism.
- [WARNING: THIS PROBLEM HAD SPECIAL CHARACTERS THAT DID NOT SURVIVE THE ASCII FORMAT SAVE. WHERE YOU SEE A “z”, I HAVE ONLY GUESSED.] Consider the application of the Baron-Myerson Bayesian incentive mechanism to the following special situation. Suppose that production requires an unknown constant marginal cost and a
known fixed cost: C(y, z) = z y + F, where z is distributed uniformly over the unit interval [0,1]. Let demand for the single product be linear: D(p) = a – bp. Assume that a/b > 1. Finally, assume that the weight attached to consumer surplus, V(p(z),t(z)), is one and the weight attached to firm z’s profit is � where 0 < � < 1.
(a) Find the optimal two-part pricing rule: p(z), t(z). What values do they take on at the extreme of least cost z = 0 and at highest cost z = 1?
(b) At the optimal solution compute the consumer surplus and the firm’s profit as a function of . Again find the values they take on at the extreme of least cost = 0 and at highest cost = 1.
(c) Describe the unit price, fixed fee, consumer surplus and firm profit as z approaches 1.
(d) Compute the profit-maximizing uniform price p(z). Find values for z and for which this unregulated monopoly price is less than the regulated price.
- Choose one of the following industries and periods:
(i) Electric power generation and distribution in the 1960s
(ii) Long distance telephone service in the 1970s
(iii) Passenger air transportation in the 1980s
(iv) For-profit hospitals in the 1990s
In that case describe what economic research has to say about the presence of economies of scale and scope, vertical economies and the prevalence of transactions costs. Describer the predominant form of regulation in that industry during that period in the U.S. Evaluate the match between the cost conditions and the form of regulation based on efficiency criteria.
- Intense debate has broken out over the years over whether certain industry practices represent an efficient response to market conditions, or an expression of anti-competitive behavior. Identify one of the following practices:
(i) predatory pricing
(ii) exclusive dealing
(iii) product bundling or tying
(iv) resale price maintenance
For the practice that you chose, describe the current antitrust treatment based on court decisions and policies of antitrust authorities. (These may not be unambiguous.) Report the positions of the different sides of the debate, especially the arguments that view the practice as efficiency enhancing and as competitively harmful. Make a persuasive argument for one of these two positions, or for a third position.
Source: Takehome Final Exam from the Spring Semester 1996 archived at the Wayback Machine.
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Department of Economics
University of California
Economics 220B
Glenn Woroch
FINAL EXAM
Spring 1994
INSTRUCTIONS: The exam has FOUR parts. Please answer each one. To
guide your time allocation, a total of 100 points is distributed as
follows:
Part I: 24 points (= 6 x 4 points)
Part II: 30 points
Part III: 28 points
Part IV: 18 points
- Answer TRUE or FALSE and EXPLAIN with 2 or 3 sentences.
- If an industry configuration is sustainable, then
production is cost efficient. - A Ramsey price vector is necessarily subsidy free.
- In Peltzman’s private interest model applied to monopoly
regulation, price obeys an inverse elasticity rule typical
of efficiency but income distribution may be skewed. - In Joskow’s behavioral model of rate-of-return regulation,
rate reviews do not occur when unit costs are rising. - Producer and consumer surplus increase with the HH Index in
a Cournot oligopoly. - The so-called “double markup” that results from monopoly
power at both the manufacturing and the retail levels can
be eliminated with a two-part tariff.
- If an industry configuration is sustainable, then
- Two schemes that are designed to regulate natural monopoly
are:
(i) Rate-of-return regulation
(ii) Vogelsang-Finsinger iterative mechanism
Evaluate each of the schemes relative to the unregulated
outcome in terms of their effects on:
(a) short-run allocative efficiency,
(b) the rents that accrue to producers,
(c) the welfare of consumers.
- Auctioning off monopoly franchises has often been proposed
as a way to inject some competition into natural monopoly
markets.
-
- In terms of economic efficiency, compare the following two
rules for awarding the franchise: give it to the bidder
with the most attractive price-service-quality package, or
give it to the bidder that offers the largest cash payment
for the franchise. - What are the informational requirements needed to implement
the schemes proposed by Demsetz and by Loeb and Magat? - What difficulties arise over the course of the franchise
contract that hamper the performance of this scheme? - Under what conditions will the outcome be improved as the
length of the firm-regulator relationship becomes infinite?
- In terms of economic efficiency, compare the following two
- Consider the Baron-Myerson approach to regulating a firm
with private cost information. For concreteness, let the
cost function of the firm be C(y,b) which is increasing
in output of the good y and a cost parameter b.
1. What is meant by an “information rent”? How is it paid to
the firm in the Baron-Myerson scheme?
2. In what sense does a cross subsidization occur across
different cost realizations?
3. What additional features do Laffont and Tirole build into
their model of regulation that generalizes Baron-Myerson?
How does their pricing optimum differ?
Source: Wayback Machine Archived copy June 1, 2002.
Image Source: Glenn A. Woroch’s Berkeley webpage (modified 13 Jan 1999). Archived copy at the Wayback Machine internet archive.