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Sustainability in a multiproduct context

Sustainability in a multiproduct context. Competition Policy and Market Regulation MEFI – Università di Pavia. Properties of a sustainable allocation ( multiproduct context and contestable markets ). If a sustainable allocation exists it has the following properties :

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Sustainability in a multiproduct context

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  1. Sustainability in a multiproductcontext Competition Policy and Market Regulation MEFI – Università di Pavia

  2. Propertiesof a sustainableallocation (multiproductcontext and contestablemarkets) • If a sustainableallocationexistsithas the followingproperties: • A single firmtakesadvantageofcostsub-additivity • The firmsearns zero profits (break-even) • No cross-subsidization (the price chargedforanyproduct or subset ofproductscovers the incrementalcost) • The price ofeachproduct (subset ofproducts) isgreaterthan MC • The firmmayvoluntarycharge the second best linearprices (P = AC in the single product case) Sub-additivityof the multiproductcostfunctiondoesnotassurethat a sustainable zero-profit (break-even) configurationexists

  3. Sustainableconfigurations and sustainabletariffs: a multiproductexample • Case of localtransports: 3 towns (or areas of one city) are linked with a bus service3 markets: a, b, c • The demandoftransportservicesisinelasticto price: D(P) =1 • CostFunction: C(a) = C(b) = C(c ) = 10 C(a, b) = C (b, c) = C (a, c) = 18 C( a, b, c) = 24 a c b Sub-additivecostfunction

  4. Sustainabletariffs • CostRecovery • Non-profitable Entry in one ore more marketsPricesnotgreaterthan stand-alone cost • Pa ≤ 10, Pb ≤ 10, Pc ≤ 10 • Pa + Pb ≤ 18, Pa + Pc ≤ 18, Pb + Pc ≤ 18 • Pa + Pb + Pc= 18 Pi ≤ Viforany i (willingnesstopay) Va = Vb = Vc= 11

  5. Solutions • Onesustainableconfigurationis: • Pa = Pb = Pc = 8 • A non-sustainableconfiguration: • Pa < 6, Pb +Pc > 18

  6. Case for a non-sustainableconfiguration • Pa < 6, Pb +Pc > 18 • Let’suppose Vc = 5, then set Pc = 5 implying Pa = Pb= 9.5 (toget Pa + Pb + Pc= C(abc)= 24) • Market C issubsidizedby A and B • Pa + Pb= 19 > 18 = C(ab): stand-alone cost • Entry becomespossible in markets b and c, withprices Pa = Pb= 9,5 – ε “CreamSkimming” • Non sustainablenaturalmonopoly: monopolyisfeasibleifcoupledwithlegalbarriersto entry

  7. Shouldwesupplytransportservicesto market C? Efficiency and Social Issues • Remember: Vc = 5 while Va = Vb = 11 • Efficiencycriteriamaximizationof net total benefit: • Supplyallmarkets: ( Va + Vb + Vc ) – C (abc) = 27 -24 = 3 • Supplyonlymarkets a and b:( Va + Vb ) – C(ab) = 22-18 = 4 Efficiencycriteria do notjustifytransportlinksto market C

  8. Shouldwesupplytransportservicesto market C? Efficiency and Social Issues • Let’introduce equityissues (social protectionofconsumers in market C) • Forexample: universal service obligation • Transportservicessuppliedto market C maybejustified on thisground • Butthencross-subsidies are required, leadingto entry and creamskimmingwhichreduces the revenuesof the incumbent in market b and c • Toavoid entry - and preservemonopoly - legalbarriersto entry are required

  9. Generalconditionsforsustainabletariffs (pricingwithoutcross-subsidies) • N marketssuppliedby a monopolist • S: subset of the N markets • C(S) = minimum cost of supplying S separately from the other subset of markets (N/S), knownas STAND ALONE COST • ∑i€S pi ≤ C(S) (pricesshouldnotexceed Stand Alone costs) • ∑i€N pi = C(N) (break-even constraint)

  10. General conditions for sustainabletariffs (pricingwithout cross-subsidies) • N/S complementarysubsetofmarkets • Costrecoveryrequires: • ∑i€Npi = ∑i€N/Spi+ ∑i€Spi= C(N) To get:∑i€Spi= C(N) - ∑i€N/Spi • Aswerequire: ∑i€N/Spi ≤ C(N/S) • Weobtain: ∑i€Spi≥ C(N) - C(N/S) In eachsubmarketPricesshouldnot be lowerthanincrementalcosts

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