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  5. Economic Impacts of Regulation
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Economic Impacts of Regulation

Paper Session

Sunday, Jan. 9, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: Industrial Organization Society
  • Chair: Nancy Rose, Massachusetts Institute of Technology

Energy Transitions in Regulated Markets

Gautam Gowrisankaran
,
University of Arizona
Ashley Langer
,
University of Arizona
Mar Reguant
,
Northwestern University

Abstract

Regulated U.S. electricity markets have transitioned from coal to natural gas more slowly than restructured markets. This contrasts with the predictions from canonical models of regulation that regulated utilities would over-invest in new capital because they are allowed a fair rate of return on capital. In addition, observers have alleged that regulated utilities are operating coal plants even when this is inefficient because they are subject to a “used and useful” standard the only allows them a return on power plants that they use sufficiently. The paper develops and estimates a dynamic model of energy transitions in regulated electricity markets that can explain these stylized facts. In the model of the authors, regulators reimburse utilities for the use of productive assets, while aiming to keep electric rates low by limiting returns on capital when prices to electricity consumers are high. In the short-run, utilities make hourly dispatch decisions to maximize profits given incentives set up by the regulatory structure. This regulatory structure provides two opposite incentives: utilities will overuse expensive coal plants to meet the used and useful standard but this overuse will be constrained to the extent that it results in high electricity prices. In the long-run, utilities decide which plants to retire and in which new technologies to invest. The authors show that regulation slowed the energy transition from coal to natural gas, and that it may have important consequences for the transition to renewable electricity generation.

Regulating Platform Fees under Price Parity

Renato Gomes
,
Toulouse School of Economics
Andrea Mantovani
,
Toulouse Business School

Abstract

Online marketplaces, such as Amazon, or online travel agencies, such as Booking.com, greatly expand consumer information about market offers, but also raise firms' marginal costs by charging high commissions. To prevent show-rooming, platforms adopted price parity clauses, which restrict sellers' ability to offer lower prices in alternative sales channels. Whether to uphold, reform, or ban price parity has been at the center of the policy debate, but so far little consensus has emerged. In this paper, we investigate a natural alternative to lifting price parity; namely, we study how to optimally cap platforms' commissions. The optimal cap reflects the Pigouvian precept according to which the platform should not charge fees greater than the externality that its presence generates on other market participants. Employing techniques from extreme-value theory, we are able to express the optimal cap in terms of observable quantities. In an application to online travel agencies, we find that current average fees are welfare increasing only if platforms at least double consumers' consideration sets (relative to alternative ways of gathering information online). This suggests that, in some markets, regulation capping commissions should bind if optimally set.

Equilibrium Effects of Food Labeling Policies

Nano Barahona
,
University of California-Berkeley
Cristobal Otero
,
University of California-Berkeley
Sebastian Otero
,
Stanford University
Joshua Kim
,
Facebook

Abstract

We study a regulation in Chile that mandates warning labels on products whose sugar or calorie concentration exceeds certain thresholds. We document an overall decrease in sugar and calorie intake of 7-9%. To reveal mechanisms, we focus on breakfast cereal. On the demand side, consumers substitute from labeled to unlabeled products, a pattern that is mostly driven by products which consumers mistakenly believed to be healthy. On the supply side, we find substantial reformulation of products and bunching at the thresholds. We develop and estimate an equilibrium model of demand for food and firms' pricing and nutritional choices. We find that food labels increase consumer welfare by 3.8% of total expenditure, and that these effects are enhanced by firms' responses. We then use the model to study alternative policy designs. Under optimal policy thresholds, food labels and sugar taxes generate similar gains in consumer welfare but food labels benefit the poor relatively more.

Discussant(s)
Steve Cicala
,
Tufts University
Justin Johnson
,
Cornell University
Hunt Allcott
,
Microsoft Research and MIT
JEL Classifications
  • L5 - Regulation and Industrial Policy
  • L1 - Market Structure, Firm Strategy, and Market Performance