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Abstract:
This paper analyzes the problem of price discrimination in a market where consumers have heterogeneous preferences both over a horizontal parameter (brand) and a vertical one (quality). Discriminatory contracts are characterized for different market structures. It is shown that price dispersion, i.e., the observed range of prices for each class of customers, increases almost everywhere as competition is introduced in the market. The findings are discussed with reference to the U.K. mobile telecommunications market.

Abstract:
Failure to properly design access rules is a key reason the potential gains from restructuring essential network facilities are not maximized or shared fairly between facility users and owners. This survey provides policymakers and regulators with an overview of relevant theory on access pricing, to solidly ground the practical debate.

An important component of policies to promote effective competition among all segments of network industries (such as electricity, telecommunications, or railways) is a regulatory environment guaranteeing that competitors have access to the services of potential bottleneck facilities too costly to duplicate. Rules covering fair access to these facilities-including fair access prices-generally improve economic efficiency by easing competition in markets both upstream and downstream from the bottleneck.

Appropriate access pricing rules are especially needed when a dominant firm controls the supply of one or more inputs-for example, gas transportation, electricity transmission, local telecommunications access, or railway track-vital for its competitors.

Access pricing is part of the antitrust concern central to the so-called essential facilities doctrine covered by U.S. legislation. It is also related broadly to such competition policy issues as quantity discounts, cross-subsidies, tie-ins, refusals to deal or unbundle, exclusive dealing, and predatory pricing.

Access pricing is one of the most important and controversial questions in regulating infrastructure services. This complexity stems partly from the practical fact that access rules can be discussed only with reference to the rest of the regulatory environment, since regulators have many goals and constraints.

In their survey of access pricing, Valletti and Estache try to make it clear that access rules should not be assigned too many expectations. There are a few things access prices already do, however, and should continue doing until an all-encompassing solution comes along.

Their survey covers access rules for both vertically unbundled and vertically integrated industries. It addresses the question: what happens if access is left unregulated? And it discusses the main challenges to implementation: calculating and allocating costs, finding a usage-based solution to the access pricing problem (the global price cap), and monitoring anticompetitive behavior (partial caps or adjusted global caps).

This paper - a product of the Governance, Regulation, and Finance Division, World Bank Institute - is part of a larger effort in the institute to disseminate best practice and best theory in the regulation of infrastructure. The authors may be contacted at t.valletti@lse.ac.uk or aestache@worldbank.org.

Abstract:
Regulators have long been aware of the social aspects of communication. In the past, regulated monopolists have provided Universal Service Obligations, typically funded via a system of cross-subsidies. In this paper, we first review the rationale for imposing Universal Service Obligations, based both on theoretical arguments and empirical results. We then address some of the new questions raised by the ongoing liberalisation process. Regulators now face the challenging problem of organising the provision and financing of universal service in a competitive environment.

Universal Service Obligations, Regulation, Competition

Abstract:
This Paper analyses the incentives that operators have to invest in facilities with different levels of quality. A network of better quality is more expensive but may give an important edge to an operator when competing against a rival. We extend the framework of Armstrong-Laffont-Rey-Tirole by introducing an investment stage, prior to price competition. We show that the incentives to invest are influenced by the way termination charges are set. In particular, when the quality of a network has an impact on all calls initiated by own customers (destined both on-net and off-net), we obtain a result of 'tacit collusion' even in a symmetric model with two-part pricing. Firms tend to under invest in quality, and this would be exacerbated if they can negotiate reciprocal termination charges above cost. We also show that when the quality of off-net calls depends on the interaction between the quality of the two networks, there is another serious problem, namely that no network has an incentive to jump ahead of the rival.

Telecommunication, interconnection, two-way access charges, investment quality

Abstract:
This paper analyzes the incentives that network operators have to invest in facilities with different levels of quality. We extend the framework of Armstrong-Laffont-Rey-Tirole by introducing an investment stage, prior to price competition, and we study the dynamic aspects of two-way access charge regulation. When the quality of a network has an impact on all calls initiated by own customers (destined both on-net and off-net), we obtain a result of "tacit collusion" even in a symmetric model with two-part pricing. Firms tend to under-invest in quality, and this would be exacerbated if they can negotiate reciprocal termination charges above cost. On the contrary, below-cost access charges would improve social welfare. We also show that when the quality of off-net calls depends on the interaction between the quality of the two networks, there is another serious problem, namely that no network has an incentive to jump ahead of its rival by investing more.

Telecommunications, Interconnection, Two-way Access Charges, Investment, Quality

Abstract:
The problem of a monopolist firm that supplies an essential input to other firms that compete in the final downstream market is crucial in many utility industries that use a network. When downstream firms have different degrees of efficiency, then it could be feasible to charge them different access prices for the essential input. This is a typical problem of third-degree price discrimination that has been extensively analyzed when it is practiced upon final consumers. If discrimination occurs in the wholesale market, then firms are customers with interrelated demand, a feature that distinguishes the problem from final goods price discrimination. In the current phase of liberalization of the telecommunications industry, regulatory constraints are being progressively removed as competition develops. This paper deals with one of such constraints, namely whether input price discrimination is likely to improve social welfare.

I consider a vertically separated industry with an upstream monopolist who supplies an essential input to two downstream Cournot firms. Since non-linear pricing occurs more often in intermediate markets than in final good markets, I allow for more complex tariffs. The contribution of the paper is twofold. In the first part it solves the problem of regulated access pricing with two-part discriminatory tariffs. In line with the intuition, these access schemes correspond to an increase in the number of regulatory tools, so that they can be used to increase social welfare. In the second part, a similar problem is analyzed in an unregulated setting. It is found that discrimination may produce adverse welfare effects when it is practiced by the unregulated upstream firm. The results depend on the cost functions of downstream producers and on the concavity of the demand function. I show conditions under which welfare is reduced with price discrimination that generalize previous results in the literature.

Abstract:
This paper considers a vertically separated industry with an upstream monopolist who supplies an essential input to two downstream Cournot firms. This situation is relevant to a number of sectors, including the telecommunications industry where trunk operators must have access to the local network of an incumbent firm to provide their long-distance service. The paper analyzes two-part access pricing and input price discrimination under different regulatory settings, and it finds that discrimination may produce adverse welfare effects when it is practiced by the unregulated upstream firm.

Abstract:
How regulation has evolved in the United Kingdom, with an emphasis on how telecommunication regulators determine access (interconnection) charges.

Telecommunications was the first network utility to be privatized in the United Kingdom. Drawing on 15 years' experience and discussion in the field, Valletti shows the economic principles of regulation in general and access pricing in particular that have been implemented.

British Telecommunications (BT), formed as a public enterprise in 1980-81, was privatized in 1984. Since then the approaches to regulation have changed in three broad periods: the duopoly, the transition to competition, and the recently introduced normalization phase.

Dealing with each period, Valletti focuses on how the actual implementation of access charges are determined, at the same time providing background needed on regulatory intervention generally.

Rather than follow the model of competition for a common infrastructure, Oftel has encouraged competition between alternative networks, which benefits customers but involves duplication of fixed costs. As a result of Oftel's approach, consumers have seen their bills reduced 50 percent in real terms since privatization.

It is difficult to know how much to attribute this remarkable result to technological progress (BT halved its workforce in the same period), to regulatory intervention (Oftel set string caps until 1997), or to competition (there are hundreds of players in the market). Valletti contends more weight should probably be given to the first two.

Entrants have not achieved big market shares, if one considers the asymmetric regulation that has been in place for more than a decade. Indirectly, at least, competition benefited consumers by applying discipline to BT's behavior.

Oftel's approach was interventionist until 1997, when it began trying to normalize the industry, as authority overseeing competition. The odds on complete deregulation are slight, and some controls on industry will remain.

In the longer term, Oftel should especially monitor anticompetitive practices and collusive behavior among the bigger players (BT, CWC, and cellulator operators).

The United Kingdom's interconnection experience demonstrates the complexity of the problem and its relationship to other topics, such as tariff rebalancing, access deficit, and universal service. Although a bit ad hoc, the recent incentive regulation, with a network cap based on proper accounting procedures and engineering models, may represent the best practice available today in the telecommunications industry, says Valletti.

This paper - a product of the Regulatory Reform and Private Enterprise Group, Economic Development Institute - is part of a larger effort in the institute to increase understanding of infrastructure regulation.

Abstract:
This paper examines the impact of regulatory intervention to cut termination rates of calls from fixed lines to mobile phones. Under quite general conditions of competition, theory suggests that lower termination charges will result in higher prices for mobile subscribers, a phenomenon known as the "waterbed" effect. The waterbed effect has long been hypothesized as a feature of many two-sided markets and especially the mobile telephony industry. Using a uniquely constructed panel of mobile operators' prices and profit margins across more than twenty countries over six years, we document empirically the existence and magnitude of this effect. Our results suggest that the waterbed effect is strong, but not full. We also provide evidence that both competition and market saturation, but most importantly their interaction, affect the overall impact of the waterbed effect on prices.

Abstract:
Unresolved regulatory issues, particularly those relating to interconnection agreements, hamper progress in Internet adoption in Latin America.

Estache, Manacorda, and Valletti review the stylized facts on regulatory reform in telecommunications and its effects on telecommunications development and Internet penetration in Latin America. Relying on data from the International Telecommunication Union, the Information for Development Program (InfoDev), and the World Bank for 1990-99, the authors then test econometrically the determinants of the differences in Internet penetration rates across Latin America.

The results show that effective implementation of the reform agenda in telecommunications regulation could accelerate adoption of the Internet in Latin America - even though it is only part of the solution (income levels, income distribution, and access to primary infrastructure are the main determinants of growth in Internet connections and use).

Regulation will work by cutting costs. Cost cutting will require that regulators in the region take a much closer look at the design of interconnection rules and at the tradeoffs that emerge from the complex issues involved. It will also require a commitment to developing analytical instruments, such as cost models, to sort out many of the problems. Appropriate cost models will generate benchmarks that are much more consistent with the local issues and with the local cost of capital than international benchmarks will ever be for countries in unstable macroeconomic situations. Cost cutting will require an equally strong commitment to imposing regulatory accounting systems that reduce the information asymmetries that incumbents use to reduce the risks of entry.

All these changes will ultimately require a stronger commitment by competition agencies, since in many countries a failure to negotiate interconnection agreements will raise competition issues just as often as it will raise regulatory questions.

This paper - a product of the Governance, Regulation, and Finance Division, World Bank Institute - is part of a larger effort in the institute to increase understanding of infrastructure regulation. The authors may be contacted at aestache@worldbank.org, m.manacorda@lse.ac.uk, or t.valletti@ic.ac.uk.

Abstract:
This paper analyses the issue of parallel trade (arbitrage) for products protected by intellectual property rights. We discuss a basic trade-off that arises between the ex post better allocation that typically occurs under parallel trade when demand dispersion is not too high, and the ex ante reduced product quality because of lower investment. We show that the size of the welfare effects is significantly affected by the presence of a 'generic' product, which represents a form of competition for the monopolist. The monopolist will introduce a 'fighting brand' to compete with the generic, which dilutes but does not eliminate the result on the adverse effects of parallel trade on investments.

Abstract:
This paper analyses the issue of parallel trade (arbitrage) for products protected by intellectual property rights. We discuss a basic trade-off that arises between the ex post better allocation that typically occurs under parallel trade when demand dispersion is not too high, and the ex ante reduced product quality because of lower investment. We show that the size of the welfare effects is significantly affected by the presence of a "generic" product, which represents a form of competition for the monopolist. The monopolist will introduce a "fighting brand" to compete with the generic, which dilutes but does not eliminate the result on the adverse effects of parallel trade on investments.

Parallel trade, price discrimination, investments

Abstract:
This paper analyzes the issue of parallel trade (arbitrage) for products protected by intellectual property rights. Many countries have traditionally allowed owners of intellectual property rights to prohibit arbitrage in the face of international price discrimination. In a well-known paper Malueg and Schwartz (1994) showed that this policy decreases social welfare when the same markets are served in both regimes, with and without arbitrage. Their model considered only the setting of prices, and not investment in product development. We consider a two-stage game where firms choose quality first and then prices. Since the threat of arbitrage ex post reduces the incentive to invest ex ante, the net benefits of parallel trade may vanish. We also show that the size of the welfare effects is significantly affected by the presence of a 'generic' product, which represents a form of competition for the monopolist. The monopolist will introduce a 'fighting brand' to compete with the generic, which dilutes but does not eliminate the result on the adverse effects of parallel trade on investments.

Parallel trade, price discrimination, investments

Abstract:
Mobile telephony is described as a two-sided market where customers are seen as senders and receivers of communications that are mutually beneficial both to callers and receivers. This has implications in terms of market definition and market power. The economics of mobile call termination is discussed in this context.

mobile telephony, market definition and call termination

Abstract:
We analyze the short- and long-run implications of third-degree price discrimination in input markets where downstream firms differ in their efficiency. In contrast to the extant literature, where the supplier is typically an unconstrained monopolist, in our model input prices are constrained by the potential for demand-side substitution. This modification has far-reaching consequences. We show that more efficient firms receive lower input prices under price discrimination, and that the imposition of uniform pricing could stifle incentives to reduce own marginal costs. If downstream firms compete in the same market, we also find a waterbed effect, in that a reduction in a firm's own marginal costs not only reduces its own input price, but increases the input price of its competitors.

Price Discrimination, Uniform Pricing, Input Market

Abstract:
We develop a model of logit demand that extends to a multi-firm industry the traditional duopoly framework of network competition with access charges. Firstly, we show that, when incumbents do not face the threat of entry and compete in prices, they inefficiently establish the reciprocal access charge below cost. This inefficiency disappears if incumbents compete in utilities instead of prices. Secondly, we study how incumbents change their choices under the threat of entry when they determine an industry-wide (non-discriminatory) access charge. We show how incumbents may accommodate all possible entrants, only a group of them, or may completely deter entry. When entry deterrence is the preferred option, incumbents distort upwards the access charges.

Telecommunications, Interconnection, Entry deterrence

Abstract:
We develop a model of logit demand that extends to a multi-firm industry the traditional duopoly framework of network competition with access charges. Firstly, we show that, when incumbents do not face the threat of entry and compete in prices, they inefficiently establish the reciprocal access charge below cost. This inefficiency disappears if incumbents compete in utilities instead of prices. Secondly, we study how incumbents change their choices under the threat of entry when they determine an industry-wide (non-discriminatory) access charge. We show how incumbents may accommodate all possible entrants, only a group of them, or may completely deter entry. When entry deterrence is the preferred option, incumbents distort upwards the access charges.

Telecommunications, interconnection, entry deterrence

Abstract:
The European institutions are currently debating the desirability of imposing restrictions on the way in which internet service providers (ISPs) in the EU can manage their networks and develop their offerings, under the broad heading of 'network neutrality'.

In our opinion, so far, the need for new legislation on network neutrality in Europe is unproven, and the unintended consequences on restricting variety, competition and innovation are too big for comfort. We believe that some of the amendments put forward by the EP and Council are premature and will prove detrimental to long term end user interests in the EU, and urge that they be not adopted. The only reasonable course for the time being is to strengthen transparency towards end-users and for the rest rely on existing legislation.

Abstract:
This paper tests the presence of multiple independent submarkets in the Italian motor insurance industry. Independence is motivated by administrative boundaries among provinces and by further locational reasons. We find that the independence effects are sufficient to induce a minimum degree of inequality in the size distribution of firms once submarkets are aggregated. These results are fully consistent with the predictions of Sutton (1998). At the submarket level, some degree of inequality can be explained by a model of equilibrium price dispersion based on costly consumer search. However, strategic effects alone cannot explain the observed level of inequality in each province, supporting the hypothesis that independence effects are already at work within each province. We also show that the degree of inequality in the firm size distribution is mainly related to the population living in an area, to its density and to the flow of commuters.

Size distribution of firms, Independent submarkets, Insurance companies, Price dispersion

Abstract:
We present a simple model where the growth of one downstream firm generates lower wholesale prices for this firm but higher wholesale prices for its competitors (the waterbed effect). We derive conditions for when, even though firms compete in strategic complements, this harms consumers. This is more likely if larger firms already obtain substantial discounts compared to their smaller competitors. Furthermore, the identified waterbed effect holds irrespective of whether a firm grows by acquisition or organically by becoming more efficient.

buyer power, retail concentration

Abstract:
By any measure, the communication sector is important. It is no surprise, then, that the communication sector has attracted the attention of both policy-makers and economists. In this paper, we argue that four characteristics of the networks that deliver communication services make this area of particular interest. We analyse the implications of networks' cost structures; the strong complementarity between their components; the demand-side externalities that arise from consumption of their services; and the social obligations attached to them. Despite the attention that the communication sector has received, many aspects of competition between networks are still poorly understood. We identify some of the key issues that will continue to trouble regulators and interest academics.

Abstract:
We propose a distinction between active waste and passive waste as determinants of the cost of public services. Active waste entails utility for the public decision maker (as in the case of bribery) whereas passive waste does not (as in the case of inefficiency due to red tape). To assess the empirical relevance of both forms of waste, we analyze purchases of standardized goods by Italian public bodies and exploit a policy experiment associated with a national procurement agency. A revealed preference argument implies that if public bodies with higher costs are more likely to buy from the procurement agency rather than from traditional suppliers, cost differences are more likely to be due to passive waste. We find that: (i) Some public bodies pay systematically more than others for observationally equivalent goods and such price differences are sizeable; (ii) Differences are correlated with governance structure: the central administration pays at least 22% more than semi-autonomous agencies (local government is at an intermediate level); (iii) The variation in prices across public bodies is principally due to variation in passive rather than active waste; (iv) Passive waste accounts for 83% of total estimated waste.

Abstract:
I consider the case for imposing uniform pricing on a monopolist in a setting where markets can be segmented according to differences in marginal costs and/or consumer demand. I also analyze the ex ante impact on incentives to invest in R&D. I show how two opposite trade-offs arise. When differential pricing is demand-based, uniform pricing has good ex-post welfare properties but leads to lower investment ex ante. Conversely, when differential pricing is cost-based, uniform pricing has bad ex-post welfare properties but leads to higher investment ex ante.

price discrimination, parallel trade, investment

Abstract:
We consider a market where consumers mix content offered by different firms. We show how tariff structures have an impact on firms' profits and efficiency. As compared to pure linear pricing, when firms charge two-part tariffs they make higher profits, while consumers are worse off and the allocation is not first-best since too little mixing occurs. Flat subscription fees make mixing unattractive and are Pareto-dominated by all the other types of tariffs.

Two-part tariffs, flat fees, combinable products, pay-per-view

Abstract:
We compare the advertising intensity and content of programming in a market with competing media platforms. With pay-tv, media platforms have two sources of revenues, advertising revenues and revenues from viewers. With free-to-air media, platforms receive all revenues from advertising. We show that if viewers strongly dislike advertising, the advertising intensity is greater under free-to-air television. We also show that free-to-air television tends to provide more similar content whereas pay-tv stations differentiate their content. In addition, we compare the welfare properties of the two different schemes.

Advertising, media, product differentiation, two-sided markets

Abstract:
We consider a media market where consumers mix content offered by different firms and firms charge two-part tariffs. As compared to pure linear pricing (pay-per-view), firms make higher profits, while consumers are worse off and the allocation is not first-best. We also consider flat subscription fees and show that they make mixing unattractive. Both two-part tariffs and pay-per-view Pareto-dominate flat fees.

Two-part tariffs, pay-per-view, flat fees, combinable products

Abstract:
Most of the contest literature deals with first prizes; this Paper deals with the optimality of second prizes. We show that in a three-person contest where one contestant is very strong, a second prize can be optimal from the point of view of eliciting maximum effort from every contestant. Moreover, we consider the desirability of second prizes from the point of view of competitive balance, which matters for contests such as sports competitions.

Imperfectly discriminating (logit) contests, prizes

Abstract:
This Paper addresses the question of third-degree price discrimination in input markets. I propose a solution that relies on a method that decomposes the upstream monopolist's profit into two parts, one that depends on average input prices, and one that depends on their distribution. I am able to obtain rather general results, and, in the linear demand case, I obtain a full characterization of the equilibria in the two regimes of price discrimination and price uniformity, generalizing the findings of Yoshida (2000). Under reasonable assumptions, input price discrimination negatively affects both consumer surplus and total welfare.

input price discrimination

Abstract:
Universal service objectives are pervasive in telecommunications, and have gained new relevance after liberalization and the introduction of competition in many markets. Despite their policy relevance, little work has been done allowing for a thorough discussion of instruments designed to achieve universal service objectives under competition. We intend to fill this gap, and consider various policy instruments, such as constraints on pricing and coverage. It is shown that these are not competitively neutral and may have far-reaching strategic effects. Equilibrium coverage of both incumbent and entrant may be lower than without regulation, and firms may even (noncooperatively) leave each others' markets to lessen competitive pressure in their remaining markets. These effects depend on which measures are imposed at the same time, thus no single measure can be evaluated in isolation. We also point out that different groups of consumers are affected in different ways, making welfare comparisons difficult.

Competition, coverage constraint, uniform pricing constraint, universal service

Abstract:
We develop a model of information exchange between calling parties. We characterize the equilibrium when two interconnected networks compete for such users by charging both for outgoing and incoming calls. We show that networks have reduced incentives to use off-net price discrimination to induce a connectivity breakdown when calls originated and received are complements in the information exchange. This breakdown disappears if operators are allowed to negotiate reciprocal access charges. We also show that a 'bill-and-keep' system over access charges can approximate an efficient regime and we discuss when this system emerges from private negotiations.

Interconnection, access charges, reception charges, bill-and-keep, information exchange

Abstract:
Sutton (1998) has recently proposed a theoretical lower bound to firm size inequality when a market is made of several independent submarkets. His results are valid asymptotically, as the number of submarkets becomes arbitrarily large. We show that, in small samples, his results can be interpreted as a positive relationship between an index of firm size inequality and the number of submarkets. We also test this relationship in the Italian motor insurance market.

Abstract:
This Paper tests the presence of multiple independent submarkets in the Italian motor insurance industry. Independence is motivated by administrative boundaries among provinces and by further locational reasons. We find that the independence effects are sufficient to induce a minimum degree of inequality in the size distribution of firms once submarkets are aggregated. These results are consistent with the predictions of Sutton (1998). At the submarket level, some degree of inequality can be explained by a model of equilibrium price dispersion based on costly consumer search. Our findings show that Sutton's limiting approach and one based on a game theoretical analysis of an industry are good complements when the industry is made of several independent submarkets.

Size distribution of firms, independent submarkets, insurance companies, price dispersion

Abstract:
Books reviewed:

Frederic E. Sautet, An Entrpreneurial Theory of the Firm

David M. Newbery, Privatization, Restructuring and Regulation of Network Utilities

G. C. Peden, The Treasury and British Public Policy, 1906-59

Karl-Heinz Paque', Structural Unemployment and Real Wage Rigidity in Germany

Abstract:
Parallel trade is the resale of a product by a wholesaler in a market other than that intended by the manufacturer. One of its consequences is that manufacturers may be prevented from price discriminating between markets that have different willingness to pay for the product in question. Some legal regimes give the manufacturer the right to prohibit parallel trade, but others do not. We examine the policy implications of parallel trade in a world in which manufacturers invest in product quality, and have the possibility to develop different quality variants of their goods. We also consider the possibility that the authorities may impose price caps and compulsory licensing (as commonly occurs for some pharmaceutical products). We find that taking investment incentives into account makes parallel trade much less likely to enhance overall welfare, which implies that parallel trade in products intensive in R&D, such as pharmaceuticals, is less desirable than in fields such as branded consumer products. We also find that, somewhat surprisingly, the threat of parallel trade does not induce firms to market inferior versions of their products in poor countries. However, parallel trade is less likely to be detrimental to welfare when there are price caps, since compulsory licensing can mitigate the major cost of parallel trade (namely a refusal to supply a poor country market).

Abstract:
In antitrust cases as well as for regulated industries, the question of how to treat indirect constraint and captive sales correctly has become of major importance in Europe. The (im-)proper treatment of indirect constraints has lead the CFI to overturn the Commission's decision in the proposed merger of Schneider and Legrand. Moreover, with regards to the definition of wholesale broadband access markets, there is an ongoing controversy between the Commission and some National Regulatory Authorities, centering on the question of whether to incorporate indirect constraints already at the stage of market definition. To inform this debate, we present in this article some of the insights from a detailed formal analysis into markets with indirect constraints and captive sales. We show how indirect constraints are appropriately taken into account through the elasticity of derived demand and comment also on the informativeness of concentration measures on both the wholesale and retail market. We further derive insights into when indirect constraints may be more or less important compared with direct constraints. Finally, we also discuss the more practical difficulties that are encountered when analyzing (or estimating) market structures where forward integrated firms also sell to other, competing retail firms.

Abstract:
We propose a distinction between active waste and passive waste as determinants of the cost of public services. Active waste entails utility for the public decision maker (as in the case of bribery) whereas passive waste does not (as in the case of inefficiency due to red tape). To assess the empirical relevance of both forms of waste, we analyze purchases of standardized goods by Italian public bodies and exploit a policy experiment associated with a national procurement agency. A revealed preference argument implies that if public bodies with higher costs are more likely to buy from the procurement agency rather than from traditional suppliers, cost differences are more likely to be due to passive waste. We find that: (i) Some public bodies pay systematically more than others for observationally equivalent goods and such price differences are sizeable; (ii) Differences are correlated with governance structure: the central administration pays at least 22% more than semi-autonomous agencies (local government is at an intermediate level); (iii) The variation in prices across public bodies is principally due to variation in passive rather than active waste; (iv) Passive waste accounts for 83% of total estimated waste.

government spending, waste

Abstract:
For an assessment of market power on the wholesale (or merchant) market in the presence of vertically integrated firms, we analyze the interaction of direct constraints, arising from competition on the wholesale market, and of indirect constraints, arising from substitution on the retail market. A vertically integrated firm that still participates in the merchant market exerts both direct and indirect constraints. We analyze the factors that determine the importance of indirect constraints. We find that, in contrast to a common presumption, indirect constraints are sometimes more powerful than direct constraints. We furthermore analyze the incentives of integrated firms to still participate in the merchant market, provided that this is technologically feasible.

Abstract:
We develop a model of information exchange between calling parties. We characterize the equilibrium when two interconnected networks compete by charging both for outgoing and incoming calls. We show that networks have reduced incentives to use off-net price discrimination to induce a connectivity breakdown when calls originated and received are complements in the information exchange. This breakdown disappears if operators are allowed to negotiate reciprocal access charges. We also study the relationship between sending and receiving retail charges as a function of the level of access charges. We identify circumstances where private negotiations over access charges induce first-best retail prices.

Abstract:
We develop a model of logit demand that extends the traditional duopoly framework of network competition to a multi-firm industry. First, we show that incumbents establish the reciprocal access charge inefficiently below cost when they compete in prices but they behave efficiently if they compete in utilities. Secondly, we study how incumbents determine the industry-wide access charge under the threat of entry. We show that incumbents may accommodate all possible entrants, only a group of them, or may completely deter entry. When entry deterrence is the preferred option, incumbents distort the access charge upwards.