Consumer Rationing and Cournot Outcomes: Experimental Evidence

[Author Affiliation]Charlene M Kalenkoski, Department of Economics, Ohio University, Bentley Annex 351, Athens, OH 45701, USA; kalenkos@ohio.eduDonald J Lacombe, Department of Economics, Ohio University, Bentley Annex 345, Athens, OH 45701, USA; lacombe@ohio.edu; corresponding author[Acknowledgment]The authors gratefully acknowledge invaluable comments from Barry Hirsch, Jim LeSage, and an anonymous reviewer, and would also like to thank Tatevik Sekhposyan and Nicholas Prala for their excellent research assistance.1. IntroductionRight-to-work (RTW) laws prohibit the requirement that a person become a union member as a condition of employment. Such a prohibition, if effective, raises the cost of union organizing activity, leading to a decline in union membership and thus in union bargaining power. To the extent that this reduction in the bargaining power of unions occurs, firms considering locating in an RTW state may expect lower wages and a more favorable business climate than would be the case in a non-RTW state, leading to greater employment in RTW states, all else equal. Therefore, it is important to determine whether these laws are effective.Many studies have documented a negative correlation between RTW laws and unionization rates, suggesting that RTW laws do indeed decrease unionization rates, although some of this correlation is thought to be due to negative public perceptions of unions in right-to-work states rather than the effect of the laws themselves. There have also been a few studies that have investigated the effects of RTW legislation on the level of and growth in manufacturing employment, but the results of these studies are mixed, with the results hinging on the particular econometric specification used. A regression of the manufacturing employment share on an RTW dummy variable often suffers from omitted variable bias, and each study attempts to deal with this bias differently. Potential omitted variables are climate, soil quality, the availability of natural and labor resources, infrastructure, and public attitudes toward unions and business, all of which are thought to be determinants of employment but are not easily measured. If public attitudes are probusiness, then omitting measures of public attitudes may positively bias the RTW coefficient. This is because probusiness attitudes may lead both to passage of RTW legislation and to other probusiness policies that increase employment. Another example may be the percentage of the population that consists of recent immigrants. Businesses that employ recent immigrants may be more likely to vote for RTW legislation and may employ more people. In addition, there may also be spatial correlation in the errors, because these omitted variables are likely correlated across counties. Weather, resources, infrastructure, and public attitudes usually do not change abruptly at political borders, and therefore these omitted factors would necessarily be geographically correlated. Another possibility is that manufacturing employment itself may be correlated across counties as a result of agglomeration economies, which are cost savings that result when firms locate in close proximity to one another. For example, firms may locate close to bodies of water such as rivers to take advantage of natural shipping routes, and any variables associated with firm activities would be geographically correlated. Finally, measurement error is also a possibility if the relevant unit of measurement is the city but we are measuring our variable at the county level.1 The potential presence of omitted variables bias and spatial dependence and the techniques used to address them are the primary concern of this paper.As will be seen in the literature review below, manufacturing has been the primary industry of interest with respect to analyzing the effects of RTW legislation because of the high percentage of manufacturing workers that are unionized. …

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Residual demand curves (RDCs) can be used to represent the strategic interaction of participants in electricity markets. RDCs relate the energy that an agent can buy or sell in one hour with the clearing market price that would be obtained in such hour, assuming the market is organized as simple bid independent auctions. Despite the fact that they have been widely used in the literature, the existence of time and/or spatial constraints in the market clearing algorithm makes the RDCs not directly applicable. This paper tries to overcome these difficulties by extending the concept of RDCs to zonal pricing markets where complex offering conditions and transmission constraints are taken into account. Therefore, the RDCs are redefined in order to capture such effects, which are usually neglected or oversimplified. A new method for computing the redefined RDCs is established and its application to the Iberian electricity market is presented. The results show that modeling complex conditions and transmission constraints in RDCs can have a significant effect when compared to the standard approach found in the literature. Therefore, the method presented in this paper modeling the effect of firm's decisions on market prices in a more accurate way.

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In this paper we analyze the joint implications of two effects: (a) inserting independent profit-maximizing retailers into the channel system provides “buffering” to the manufacturers from price competition when their products are highly substitutable and intrachannel contracts are observable (as shown by McGuire and Staelin 1983 under the assumption of constant marginal production costs), and, (b) lack of channel coordination results in a reduction in manufacturer's incentives to invest in efforts to reduce production costs (as shown by Jeuland and Shugan 1983 for the case of bilateral monopoly). We show that both these results are robust in the sense that the first holds even in the presence of the vertical externality of manufacturer's effort reduction in a noncoordinated channel, and the second holds regardless of the degree of substitutability between the competing channel's products. Specifically, we analyze a four-stage game with two manufacturers and two retailers, where the intrachannel contracts are linear and observable and manufacturers make investments in process improvements to reduce their production costs. We find that the optimal channel structure decision depends on interactions between two parameters: the degree of substitutability between products and the level of investments required to achieve production cost reduction. These parameters represent what have been widely interpreted in the management literature as the two primary “generic strategies” that most organizations follow in order to gain competitive advantage: cost leadership and product differentiation (Porter 1980). Thus, our analysis brings out the strategic and interdisciplinary nature of the channel structure decision that can significantly affect firm profitability. Our main results are as follows. First, we find that decentralized, noncoordinated channels appear as more profitable equilibrium than integration (or perfectly coordinated channels) at high product substitutability even when process innovation dimension is accounted for, in agreement with the literature. However, the range of substitutability over which decentralization is an equilibrium strategy is smaller the easier it is to reduce production costs. Intuitively, the easier the cost reduction, the larger the cost penalty that the channel incurs as a result of not coordinating investment and pricing decisions between channel members, and thus smaller the range over which decentralization is an equilibrium. This implies that there is an explicit tradeoff between efficiency and strategic incentives in distribution channel design. Second, we show that decentralized manufacturers invest less in process innovation than integrated manufacturers do, regardless of the structure of the competing channel and the degree of substitutability between products. Consequently, a decentralized channel has higher costs, charges higher prices, and produces lower quantities than an integrated channel does. Moreover, these differences get larger the easier the cost reduction. The effect on manufacturer profits, however, is not that clear. Manufacturers make higher profits by decentralizing if products are highly substitutable, in agreement with McGuire and Staelin (1983) and Coughlan and Wernerfelt (1989). However, we also find that the relative profitability of decentralization at high substitutability (and of integration at low substitutability) increases the easier the cost reduction. Moreover, the range of substitutability over which decentralization is more profitable than integration is itself larger the easier the cost reduction (though decentralization is an equilibrium strategy over a smaller range). Thus, process innovation accentuates the profit difference between integrated and decentralized channels and makes the Prisoner's Dilemma situation worse in the choice of distribution channel structure. Finally, we analyze two examples of coordinated decision making in a channel: a divisional integrated system and franchising. In the first case, we find that decentralization can emerge as a unique (and more profitable) equilibrium at high product substitutability, in contrast to McGuire and Staelin (1983). In the second case, we find that decentralization is not always a unique equilibrium and it is not always more profitable than integration, in sharp contrast to the results by Coughlan and Wernerfelt (1989). Thus, franchising does not provide a sure way of achieving channel coordination when marginal production costs are not constant. In sum, this paper highlights the importance of simultaneously considering both the horizontal and the vertical dimensions of interorganizational relations on one hand and, on the other, paying attention to cross-functional interactions across marketing and operational decisions to better understand the underlying incentives that shape firm and market structures; conventional focus of marketing on demand side effects and of operations on cost side effects can lead to suboptimal decisions.

This paper contains two examples of static, symmetric, positive-sum games with two strategic players and a play by nature: (1) a microeconomic game between duopolists with joint costs facing uncertain demands for differentiated goods and (2) a macroeconomic game between two countries' with inflation-bias preferences confronting uncertain demands for moneys. In both examples, each player can choose either of two variables as an instrument, and reaction functions are linear in the chosen instruments. With no uncertainty, there are four (Nash) equilibria, one for each possible instrument pair, because each player is indifferent between instruments given the instrument choice and instrument value of the other player. With uncertainty in the form of an additive disturbance, there are fewer equilibria because each player is not indifferent between instruments. These results are in accordance with the logic of Poole (1970) and Weitzman (1974) as explained by Klemperer and Meyer (1986) using examples of differentiated duopoly games with independent costs. In their main example with linear reaction functions, there is always a unique equilibrium. In contrast, in each of our examples with uncertainty, there is a unique equilibrium for some parameter values, but there are two equilibria for others. It is somewhat surprising that in both the Klmperer and Meyer example and our examples with unique equilibria, for some parameter values with the smallest amount of uncertainty the symmetric instrument pair chosen in the unique equilibrium is the one that yields the lower payoff with no uncertainty.

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