Do MRSPs (manufacturer suggested retail prices) have an impact on prices?

In some countries, manufacturers are allowed to suggest to retailers how to price their goods. What does this do to prices? It may increase them if it reduces competition and the MRSP is set high. It could also increase competition if set low, as retailers may find it difficult to sell at a higher price than printed on the packaging.

Babur de los Santos, In Kyung Kim and Dmitry Lubensky report on a natural experiment in South Korea where MRSPs were banned and then allowed within a one-year span. The ban increased prices on average by 2.3%, the reintroduction reduced them by 2.6%, from which you can conclude that MRSPs increase competition. Prices were significantly below MRSPs, so it is not likely MRSPs acted as price ceilings. Rather, the authors conjecture that MRSPs help consumers in forming expectations of prices at other retailers once they see the mark-down at the current retailer. Absent the MRSP, the consumer faces higher search costs, and the retailers takes advantage by increasing the price. To be convinced of this argument, I would have liked to see some estimates by product category. Different mark-downs must have had different implications for price changes, and those should help us distinguish theories better than aggregate results.

Do clean-car subsidies disguise protectionism?

The US has complained for decades that Japan is making it difficult for American companies to export cars there. The complaints were about regulation, prices, and subsidies. Japan has had a rather easy time dismissing these complaints with the mere fact that US car companies are very reluctant to build right-hand driven cars, which are required for driving on the left side of the road in Japan. The latest US complaint is about subsidies for clean cars, which again are supposed to favor Japanese cars. I would answer that the US could maybe build cleaner cars, but let us have another look at the issue.

Taiju Kitano studies the current Japanese subsidies and the American proposal on how the subsidies should be structured. The subsidy is for scrapping old cars for replacement by fuel-efficient ones. At issue is the method for determining which fuel-efficient cars qualify. Japan has its own method for setting fuel efficiency, but this is not calculated for cars with low production or imports, like US models. That disqualifies them for the subsidy. Later, foreign ratings have been accepted for qualification, but the US complained that its city-driving standard is used, while a city/highway combination were more appropriate. Japan claims its standard is close to the city standard in the US.

The use is not solely about calculation of fuel-efficiency standards, it also about potential market shares. Kitano thus estimates an oligopolistic model to determine demands in each market and thus demanded quantities under different policies. If the goal is to improve overall fuel efficiency, both policies score equivalently. The US one would be, however, much cheaper because new cars become eligible and they substitute for cars that command larger subsidies. The US is thus mainly helping Japan reduce its expenses, while having no impact on pollution or even a positive one on profits of Japanese car makers.

How to make a profit through price obfuscation

The standard model of competition with a homogeneous good tells us that every supplier will apply the same, low price. This situation of perfect competition arises because there is no good differentiation and suppliers cannot exploit any market power, because they have none. They end up with little profit.

Suppose they can now artificially differentiate the good. Ioana Chioveanu and Jidong Zhou say this could happen in the way the price information is presented, for example by omitting taxes, or slicing the price in pieces for various components of the service, like for some flights, hotel nights or shipping fees. All this leads to price obfuscation. firms then start to compete on price and price "frame." Just look on Amazon.com how participating resellers can offer very different prices by adding wildly different shipping pricing. Or how sellers may add coupons for future purchases. And there are plenty of other examples.

Chioveanu and Zhou that within such a framework various competitive equilibria can result because consumer may get confused and fail to buy the best deal. This is equivalent to saying consumers are irrational, and of course anything can then happen. What is more interesting is that there is still competitive pressure, as suppliers may converge to more transparent pricing. Equilibria are such that firm randomize both price and price frames. If more firms enter the market (as it supports more profits), it becomes more difficult to obfuscate prices using price frames, so firms make those even more complex, resulting paradoxically in more profits.

I think it has been very welcome that in the US airline ticket prices now need to include all taxes and fees. It would not hurt if other prices could also include all taxes, but as this model shows, this needs to be initiated by the government, as the industry will not do it voluntarily. And this also shows that there is some good to say about the European Union's efforts into standardizing goods and price frames.

When do employers support minimum wages?

Germany does not have minimum wages, but there is currently a renewed debate about their introduction. As collective bargaining is largely handled at the sectoral level, one idea is to adopt sectoral minimum wages, for example by negotiating them within collective bargaining. In some sectors, there is already an informal wage this way, but this could be formalized. Given this idea of sectoral minimum wages, it is of interest to see which sectors would support them.

Ronald Bachmann, Thomas Bauer and Hanna Kröger use a survey of 800 firms in 8 sectors and uncover some interesting patterns. It looks like minimum wages are most supported where they would raise barriers of entry for competitors. This means that agreeing on a minimum wage is getting very close to cartelization. This is a feature of the fact that negotiations are done at the sectoral level. It would lead to a reduction in the number of firms, and likely to a reduction in employment as well, but for a different reason than usual with minimum wages: the cartelization reduces output and thus the labor force required for production. I suspect that if the minimum wage were set nationwide, though, this kind of support would largely vanish.

Market competition and product quality

There is common perception that more competition can lead to lower quality, as firms try to lower prices. Of course, this presupposes that buyers do not require quality, or that the trade-off between prices and quality is tilted towards giving up quality. Thus, a lowering of quality cannot be a general phenomenon, but must be limited to some good. One area where we would think that quality is important and would not be traded off is health care. Yet there is evidence that where competition increased, lower quality has been provided. How could that be?

Kurt R. Brekke, Luigi Siciliani and Odd Rune Straume provide a theory that can can explain this under particular circumstances: First, sellers need to be motivated in the sense that they care for quality. Second the marginal utility they get from profits is decreasing as they make higher profits, which implies risk-aversion. These assumption does not seem unreasonable, especially for health care provision (but not for the financial industry, for example, where the bonus payment is so important). The intuition of more competition yielding lower quality is rather twisted: increase competition, and prices fall. Profit margins are smaller, hence also profits. With a higher marginal utility of profit, sellers try harder to increase profits, and quality is a dimension that is available. How to counteract this? Make people care more about quality (how?), tax lower quality (how?). Not obvious.

Shopping hours competition

Firms not only compete with prices, but also with product characteristics. In the retail market, an important characteristic is the opening times. In some areas, for example in much of Europe, shopping times are regulated, the motivation being to give retail workers somewhat "normal" working hours. In some countries, for example the United States, there is much less regulation, and shops have extensive if not around-the-clock hours to satisfy King Customer.

Miguel Flores, who must have won the award for the shortest paper title, studies whether regulation is welfare enhancing when incumbent retailers can prevent entry of competitors by strategically choosing opening times. This essentially comes down to a model of competition through product differentiation. The standard result that regulation is bad when there is little diversity (regulation cannot promote differentiation) and good when there is a lot of it still holds here. The subtlety of the paper is to consider a situation where the incumbent chooses hours of operation, the competitor chooses to enter and its hours, and then they compete on hours. It is thus a two-dimensional space with entry deterrence on one.