Investment, Dynamic Consistency and the Sectoral Regulators - PowerPoint PPT Presentation

Introduction Model Equilibrium Examples Extensions Conclusion Investment, Dynamic Consistency and the Sectoral Regulator’s Objective Duarte Brito 1 Pedro Pereira 2 João Vareda 2 1 UNL, 2 AdC May 19th, 2010 Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Introduction Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Investment in many regulated industries incumbents make large investments Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Regulatory Trade-o¤ static e¢ciency : control market power and dynamic e¢ciency : promote investment Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Dynamic Consistency Problem e.g.: access prices before investment: high access prices after investment: low access prices Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Dynamic Consistency Problem reduces investment Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Solution distort Regulator’s Objective Function Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Solution ensure Regulator’s decision without commitment same with commitment Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Requirements exists Third Party that: 1 sets Regulator’s Objective Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Requirements exists Third Party that: 1 sets Regulator’s Objective 2 immune to dynamic consistency Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Third Party: Legislator legislative cycle longer regulatory cycle Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Overview of Presentation 1 Model Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Overview of Presentation 1 Model 2 Equilibrium Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Overview of Presentation 1 Model 2 Equilibrium 3 Examples Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Overview of Presentation 1 Model 2 Equilibrium 3 Examples 4 Extensions Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Introduction Overview of Presentation 1 Model 2 Equilibrium 3 Examples 4 Extensions 5 Conclusion Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 1: Players 1 Duopoly: incumbent, entrant Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 1: Players 1 Duopoly: incumbent, entrant 2 Regulator Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 1: Players 1 Duopoly: incumbent, entrant 2 Regulator 3 Legislator Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 2: Incumbent 1 vertically integrated: wholesaler+retailer Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 2: Incumbent 1 vertically integrated: wholesaler+retailer 2 invests ( " quality; # marginal costs) Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 2: Incumbent 1 vertically integrated: wholesaler+retailer 2 invests ( " quality; # marginal costs) 3 wholesaler produces essential input Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 2: Incumbent 1 vertically integrated: wholesaler+retailer 2 invests ( " quality; # marginal costs) 3 wholesaler produces essential input 4 access price � price of essential input : α Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 3: Entrant 1 retailer Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 3: Entrant 1 retailer 2 needs access to essential input Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 4: Regulator 1 sets access price: α Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 4: Regulator 1 sets access price: α 2 unable to commit to access price Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 4: Regulator 1 sets access price: α 2 unable to commit to access price 3 Objective Function: Γ = θ i Π i ( α ) + Π e ( α ) + θ c CS ( α ) Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 5: Legislator 1 sets Regulator’s objective function: f θ i , θ c g Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 5: Legislator 1 sets Regulator’s objective function: f θ i , θ c g 2 able to commit to weights (change laws harder than change access price) Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 6: Timing 1 Legislator sets Objective Function Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 6: Timing 1 Legislator sets Objective Function 2 Incumbent invests Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 6: Timing 1 Legislator sets Objective Function 2 Incumbent invests 3 Regulator sets access price Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 6: Timing 1 Legislator sets Objective Function 2 Incumbent invests 3 Regulator sets access price 4 Duopolists play market game Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 7: Main Assumptions 1 Incumbent’s pro…t increasing in α Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 7: Main Assumptions 1 Incumbent’s pro…t increasing in α 2 consumer surplus decreasing in α Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Model Model 7: Main Assumptions 1 Incumbent’s pro…t increasing in α 2 consumer surplus decreasing in α n o 3 weights vary w/ investment: θ j i , θ j c j j = n , o Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011

Introduction Model Equilibrium Examples Extensions Conclusion Equilibrium Equilibrium Duarte Brito, Pedro Pereira , João Vareda UNL, AdC ACORN-REDECON, Lima, 2011