Research

Private Monopoly and Restricted Entry: Evidence from the Notary Profession  (with Frank Verboven)

accepted at the Journal of Political Economy

We study entry restrictions in a private monopoly: the Latin notary system. Under this widespread system, the state appoints notaries and grants them exclusive rights to certify various important economic transactions, including real estate, business registrations, and marriage and inheritance contracts. We develop an empirical entry model to uncover the current policy goals behind the geographic entry restrictions. The entry model incorporates a spatial demand model to infer the extent of market expansion versus business stealing from entry, and a multi-output production model to determine the markups for real estate and other transactions. We find that the entry restrictions primarily serve producer interests, and give only a small weight to consumer surplus, even conditional on the current high markups. We subsequently perform policy counterfactuals with welfare-maximizing and free entry. We show how reform would generate considerable welfare improvements, and imply a substantial redistribution towards consumers without threatening geographic coverage.

Income Inequality and Product Variety: Empirical Evidence (with Dieter Pennerstorfer, Nora Schindler and Christoph Weiss)

This article investigates the relationship between income inequality and firms' locations and product choices. Using detailed information on income at a regionally disaggregated level and individual data on Austrian restaurants, we demonstrate that firm conduct crucially depends on the distribution (in addition to the level) of income. Local markets with higher income inequality are characterized by a larger number of firms, offering a broader range of products and product variants that are on average less common. These findings indicate that local demand is substantially in influenced by the heterogeneity in consumers' income endowments, resulting in large differences in product variety. 

When Time is of the Essence: Pharmacy Opening Hours in a Deregulated Environment (with Agnes Kügler, Martin Labaj, Peter Silanic and Christoph Weiss)

The paper provides strong empirical evidence for firms using opening hours as a strategic instrument. Using data from the pharmacy market in Slovakia, we find a significant relationship between the opening hours of each seller and those of the local competitors. This complementarity, coupled with indications that firms under competitive pressure tend to set longer working hours, suggests that liberalization initiatives in pharmacy services are likely to lead not only to an increase in the number of sellers but also in the temporal availability of pharmacy services. Additionally, our results contribute to the theoretical debate regarding quality choices on markets with imperfect competition.

Frequency of Price Adjustment and Market Power (with Dieter Pennerstorfer and Christoph Weiss)

The paper analyzes the role of market power in determining the frequency of price adjustment using daily data on retail prices for a major Austrian gasoline retailer. In particular, we investigate the effects of consumer information, production costs and competitive pressure on the likelihood of frequent price changes using survival analysis. In light of recent regulatory attempts on the retail gasoline market, the paper complements the literature dealing with the speed of adjustment by specifically focusing on the duration of stable prices (the subject of the aforementioned regulation). Similarly to findings of the literature on the speed of adjustment we observe that negative cost shocks lead to a lower frequency of price changes than cost increases. Furthermore, we find support for consumer search theories, which suggest that the share of informed consumers increases the frequency of price changes and decreases pass-through asymmetry. Weak evidence for theories of tacit collusion is also present in the data.

The price of change: Evidence for excess entry in a deregulated industry (with Richard Kalis)

The paper analyses the effects of deregulated entry on a retail pharmacy market. Using data from the Slovak healthcare market, we demonstrate that additional entry leads to substantial market expansion for the first additional entrant. Furthermore, the entry of a first competitor doubles firm fixed costs. The current entry level on the market is substantially higher than it would be if the firms were maximizing profits jointly. In a counterfactual analysis, we evaluate how the prevalence of chains may counteract the incentive for excess entry. The welfare outcomes in each regulatory regime depend crucially on the kind of investment behavior engaged by the firms.

Green Car Adoption and the Supply of Alternative Fuels (with Giulia Pavan and Andre Romahn)

See Giulia Pavan's original paper here.  The analysis aims to evaluate the role of alternative fuel supply in promoting the adoption of environmentally friendly vehicles. The aim of the project is to estimate a joint model of demand for cars and the supply of alternative fuels by gasoline stations, in order to compare the effectiveness of a subsidy to consumers who buy cars that run on alternative fuels to that of a subsidy to gas stations installing alternative fuel pumps.

Consumer Search and the Speed of Price Transmission (with Daniela Rroshi, Jens-Peter Loy, Dieter Pennerstorfer and Christoph Weiss), Journal of Industrial Economics (forthcoming)

We investigate how consumer information affects price adjustment in the Austrian retail gasoline market. Our measure of consumer information is obtained from detailed census data on commuting behavior, as commuters can freely sample prices on their commuting route and are thus better informed about prices. A threshold error-correction model suggests that prices adjust more quickly if cost shocks exceed certain thresholds. Parametric and semiparametric regressions show that a larger share of informed consumers increases both transmission speed and pass-through elasticity. Better informed consumers reduce the asymmetry in thresholds, but have no effect on the asymmetry in the speed of adjustment. 

Local Market Definition in Competition Analysis: an Application to Entry Models (with Dieter Pennerstorfer), Economics Letters (2021), 198: 109678. 

This article presents a novel method of market delineation, which generates virtually isolated residential clusters using data on the spatial distribution of the population. The performance of this approach is evaluated by contrasting it with traditional delineation techniques based on municipal boundaries. The estimation of simple entry models for five industries shows that markets defined using micro-level residence information perform better in terms of reducing cross-border spatial spillovers and predicting the equilibrium number of firms on the market more accurately. Additionally, the estimated entry threshold ratios using this method successfully reflect our expectations based on models consisting of geographically isolated markets, as well as ex-ante knowledge about the investigated industries.

Information and Price Dispersion: Theory and Evidence (with Dieter Pennerstorfer, Philipp Schmidt‐Dengler, Nicolas Schutz and Christoph Weiss), International Economic Review (2020), 61: 871-899. 

Limited information is the key element generating price dispersion in models of homogeneous‐goods markets. We show that the global relationship between information and price dispersion is an inverse‐U shape. We test this mechanism for the retail gasoline market using a new measure of information based on commuter data from Austria. Commuters sample gasoline prices on their commuting route, providing us with spatial variation in the share of informed consumers. Our empirical estimates are in line with the theoretical predictions. We also quantify how information affects average prices paid and the distribution of surplus in the gasoline market. 

Price Transmission in the Presence of a Vertically Integrated Dominant Firm: Evidence from the Gasoline Market (with Richard Farkas), Energy Policy (2019), 126: 223-237.

The paper provides an empirical examination of cost pass-through on a market with a vertically integrated firm which has substantial market power in wholesale and faces competition in retail. Our investigation focuses on gasoline pricing in Hungary, where a court-case against the dominant firm on the market provides us with detailed evidence regarding the price-setting behavior of the vertically integrated agent. We find that when market power is stronger at the wholesale level, the company is likely to raise prices in response to cost increases faster than it adjusts them downwards in case of cost decreases on the wholesale market. This process is known as “asymmetric cost pass-through”. Our findings suggest that regulatory efforts on the market should not only encompass differences in firm mark-ups between franchisees of the firm and competitors in order to prevent foreclosure, but should also seek to evaluate the wholesale price margins applied to all firms. We supplement our results with an analysis of the behavior of the firm after an investigation into its pricing behavior and find that pass-through asymmetry decreases substantially on the wholesale level in the period after the investigation. 

Market Structure and Competition in Transition: Results from a Spatial Analysis (with Martin Labaj, Karol Morvay, Peter Silanic and Christoph Weiss), Applied Economics (2018), 50.15: 1694-1715.

The article provides microlevel (indirect) empirical evidence on changes in entry barriers, the determinants of firm profitability as well as the nature of competition for a transition economy. We estimate size thresholds required to support different numbers of firms for several retail and professional service industries in a large number of geographic markets in Slovakia. The 3 time periods in the analysis (1995, 2001 and 2010) characterize different stages of the transition process. Specific emphasis is given to spatial spill-over effects between local markets. Estimation results obtained from a spatial ordered probit model suggest that entry barriers have declined considerably (except for restaurants) and that the intensity of competition has increased on average. We further find that demand spill-overs and/or the effects associated with a positive correlation in unobservable explanatory variables seem to outweigh negative spill-over effects caused by competitive forces between neighbouring cities and villages. The importance of these spatial spill-over effects differs across industries. 

Market Structure and Competition in the Health-care Industry: Results from a Transition Economy (with Martin Labaj, Peter Silanic and Christoph Weiss), European Journal of Health Economics (2018), 19: 1087–1110 

The paper provides empirical evidence on the relationship between market size and the number of firms in the healthcare industry for a transition economy. Entry thresholds are calculated for three occupations in the healthcare industry in a large number of distinct geographic markets in Slovakia, taking into account the spatial interaction between local markets. The empirical analysis is carried out for three separate regulatory regimes. Our results suggest that the relationship between market size and the number of firms differs both across industries and across periods. In particular, we find that pharmacies, as the only completely liberalised market in our dataset, experience the largest change in competitive behaviour during the transition process. Furthermore, we find evidence for correlation in entry decisions across administrative borders, suggesting that future market analysis should aim to capture these regional effects. 

The Belgian Notary Profession in a European Context - Descriptive Evidence Against the Background of Proposals for Reform (with Frank Verboven)

Under the Latin notary system notaries produce authentic deeds to certify various important economic transactions. The system exists in 22 out of the 28 member states of the European Union and in 87 countries worldwide. The state typically appoints the notaries and grants them territorial restrictions and exclusive rights to produce the authentic deeds at fixed prices. The Belgian government is currently considering possibilities to reform the notary profession. The note presents the notary profession in a broader European context. In addition, it discusses the size of the notary profession in Belgium and the heterogeneity between notaries. Finally, it summarizes our current findings and provides some concluding remarks on possibilities for reform.