IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/113984.html
   My bibliography  Save this paper

Optimal capacity allocation in a vertical industry

Author

Listed:
  • Antelo, Manel
  • Bru, Lluís

Abstract

We examine how a social planner should allocate productive capacity in a downstream industry when, upstream, there is an efficient supplier and a set of less efficient suppliers of an essential input. We show that optimal allocation consists of setting a large quota and small quotas for the remaining capacity. This allows the planner, without necessarily harming consumers, to reap licensing rents above those that would be obtained in a competitive downstream market or under public management of capacity. We also discuss circumstances under which a use-or-lose requirement for the large quota is welfare enhancing or welfare reducing, and under which banning price discrimination in the intermediate market may be socially optimal.

Suggested Citation

  • Antelo, Manel & Bru, Lluís, 2022. "Optimal capacity allocation in a vertical industry," MPRA Paper 113984, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:113984
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/113984/1/MPRA_paper_113984.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Krishna, Kala, 1990. "The Case of the Vanishing Revenues: Auction Quotas with Monopoly," American Economic Review, American Economic Association, vol. 80(4), pages 828-836, September.
    2. Svetlana Ikonnikova & Gijsbert T.J. Zwart, 2014. "Trade Quotas And Buyer Power, With An Application To The E.U. Natural Gas Market," Journal of the European Economic Association, European Economic Association, vol. 12(1), pages 177-199, February.
    3. Ken Binmore & Paul Klemperer, 2002. "The Biggest Auction Ever: the Sale of the British 3G Telecom Licences," Economic Journal, Royal Economic Society, vol. 112(478), pages 74-96, March.
    4. Krishna, Kala, 1993. "Theoretical Implications of Imperfect Competition on Quota License Prices and Auctions," The World Bank Economic Review, World Bank, vol. 7(1), pages 113-136, January.
    5. repec:bla:etrans:v:9:y:2001:i:1:p:1-27 is not listed on IDEAS
    6. Bertero, Elisabetta & Rondi, Laura, 2000. "Financial pressure and the behaviour of public enterprises under soft and hard budget constraints: evidence from Italian panel data," Journal of Public Economics, Elsevier, vol. 75(1), pages 73-98, January.
    7. Gahvari, Firouz, 1989. "Licensing and Nontransferable Rents: Comment," American Economic Review, American Economic Association, vol. 79(4), pages 906-909, September.
    8. Ian Gale & Daniel P. O'Brien, 2013. "The Welfare Effects of Use-or-Lose Provisions in Markets with Dominant Firms," American Economic Journal: Microeconomics, American Economic Association, vol. 5(1), pages 175-193, February.
    9. Karl-Kiên Cao & Johannes Metzdorf & Sinan Birbalta, 2018. "Incorporating Power Transmission Bottlenecks into Aggregated Energy System Models," Sustainability, MDPI, vol. 10(6), pages 1-32, June.
    10. Xu, Cheng-Gang & Maskin, Eric, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers 2715, C.E.P.R. Discussion Papers.
    11. Cunha, Luis Campos e & Santos, Vasco, 1996. "Sleeping quotas, pre-emptive quota bidding and monopoly power," Journal of International Economics, Elsevier, vol. 40(1-2), pages 127-148, February.
    12. Lott, John R, Jr, 1987. "Licensing and Nontransferable Rents," American Economic Review, American Economic Association, vol. 77(3), pages 453-455, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shumei Gao & Jihe Song, 2004. "Quota Use under VERs: A theoretical framework and some evidence on MFA quota use," Working Papers E03, Department of Economics, School of Management and Languages, Heriot Watt University.
    2. James Lake & Maia Linask, 2015. "Costly distribution and the non-equivalence of tariffs and quotas," Public Choice, Springer, vol. 165(3), pages 211-238, December.
    3. J. Kornai & E. Maskin & G. Roland, 2004. "Understanding the Soft Budget Constraint," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 11.
    4. Elisabetta Bertero & Laura Rondi, 2002. "Does a Switch of Budget Regimes Constrain Managerial Discretion?: Evidence for Italian Public Enterprises' Investment," WIDER Working Paper Series DP2002-29, World Institute for Development Economic Research (UNU-WIDER).
    5. Elisabetta Bertero & Laura Rondi, 2002. "Hardening a Soft Budget Constraint Through 'Upward Devolution' to a Supranational Institution: The Case of Italian State-Owned Firms and the European Union," WIDER Working Paper Series DP2002-16, World Institute for Development Economic Research (UNU-WIDER).
    6. Kornai, János & Maskin, Eric & Roland, Gérard, 2022. "A puha költségvetési korlát - II [The soft budget constraint II]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 94-132.
    7. Skully, David W., 1999. "The Economics Of Trq Administration," Working Papers 14584, International Agricultural Trade Research Consortium.
    8. Geoffrey Bannister, 1994. "Rent sharing in the multi-fibre arrangement: The case of Mexico," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 130(4), pages 800-827, December.
    9. Yuya Wakabayashi & Ryosuke Sakai & Shigehiro Serizawa, 2022. "A Characterization of the Minimum Price Walrasian Rule with Reserve Prices for an Arbitrary Number of Agents and Objects," ISER Discussion Paper 1161, Institute of Social and Economic Research, Osaka University.
    10. Carlo Cambini & Yossi Spiegel, 2016. "Investment and Capital Structure of Partially Private Regulated Firms," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(2), pages 487-515, April.
    11. Gils, Hans Christian & Gardian, Hedda & Kittel, Martin & Schill, Wolf-Peter & Zerrahn, Alexander & Murmann, Alexander & Launer, Jann & Fehler, Alexander & Gaumnitz, Felix & van Ouwerkerk, Jonas & Bußa, 2022. "Modeling flexibility in energy systems — comparison of power sector models based on simplified test cases," Renewable and Sustainable Energy Reviews, Elsevier, vol. 158(C).
    12. Ingebretsen Carlson, Jim, 2015. "An Approximate Auction," Working Papers 2015:19, Lund University, Department of Economics.
    13. Jaime de Melo & David Tarr, 2015. "VERs under imperfect competition and foreign direct investment: A case study of the US–Japan auto VER," World Scientific Book Chapters, in: Modeling Developing Countries' Policies in General Equilibrium, chapter 22, pages 461-483, World Scientific Publishing Co. Pte. Ltd..
    14. Klemperer, Paul, 2002. "Some Observations on the British and German 3G Telecom Auctions," CEPR Discussion Papers 3605, C.E.P.R. Discussion Papers.
    15. Janssen, Maarten C.W. & Karamychev, Vladimir A. & Maasland, Emiel, 2011. "Auctions with flexible entry fees: A note," Games and Economic Behavior, Elsevier, vol. 72(2), pages 594-601, June.
    16. Hernando-Veciana, Angel & Michelucci, Fabio, 2018. "Inefficient rushes in auctions," Theoretical Economics, Econometric Society, vol. 13(1), January.
    17. Koessler, Frédéric & Lambert-Mogiliansky, Ariane, 2013. "Committing to transparency to resist corruption," Journal of Development Economics, Elsevier, vol. 100(1), pages 117-126.
    18. Last Name, First Name, 2009. "Distributional Impacts of Carbon Pricing Policies in the Electricity Sector," RFF Working Paper Series dp-09-43, Resources for the Future.
    19. Hervé Guyomard & Catherine Laroche & Chantal Le Mouel, 1998. "Marché contingenté à l'importation et marché des droits à importer en concurrence imparfaite [Le cas de la banane dans l'Union européenne ]," Économie rurale, Programme National Persée, vol. 243(1), pages 47-55.
    20. Karel Janda, 2004. "Bankruptcy Procedures with Ex Post Moral Hazard," Working Papers IES 61, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2004.

    More about this item

    Keywords

    Capacity allocation; dominant firm; use-or-lose requirement; price discrimination; quota licence; soft-budget constraint;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:113984. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.