Industrial organization.

• Author: Rose, Nancy L.
• Position: Program Report - Company overview

The NBER's Program on Industrial Organization (IO) celebrates its fifteenth anniversary this year. Researchers in the IO program explore a wide range of topics within the field. Rather than attempting to skim the full scope of program activity, this report highlights work in three broad areas: regulation and antitrust policy; pricing behavior by firms; and auctions markets. (1) Discussion of the substantial body of research on technology and technical change is deferred to reports of the Productivity Program and the NBER Project on Industrial Technology and Productivity. Those interested in learning more about the IO program may visit the NBER website for links to the full set of Industrial Organization Working Papers: http://www.nber.org/programs/io/io.html

Regulatory and Antitrust Policy

When markets deviate from competitive ideals, assessing the desirability of government intervention requires a careful assessment of the costs of market failures relative to the benefits of imperfect regulation. The recognition that even imperfect markets may be preferable to regulated outcomes accompanied a dramatic transformation in the nature and extent of government intervention across a broad range of markets over the past thirty years. Many industries long subject to price and entry regulation in the United States--among them airlines, trucking, railroads, and banking--were deregulated. Telecommunications and electric utilities have been vertically disintegrated and structurally competitive segments were opened to market-based outcomes. Privatization of state-owned enterprises outside the United States has substantially increased reliance on market outcomes in many sectors, although regulators in some cases have replaced government managers in providing oversight. Where government intervention has been maintained, various forms of incentive-based regulation increasingly have replaced state ownership or traditional cost-of-service rate determination.

IO program members are among the leading scholars of antitrust and regulatory policy, and many have been directly involved in the design or implementation of reforms through their government service, advice to regulatory agencies, or consulting to affected firms. In the face of continuing policy debates over regulatory reform, highlighted more than a decade ago by Paul Joskow and Roger Noll in the NBER's 1994 American Economic Policy in the 1980s, the NBER recently sponsored a research project designed to leverage this expertise. Project participants were asked to identify key issues in economic regulation, assess the impact of regulatory reforms across a variety of industries, and evaluate significant contemporary concerns about these reforms. Two dozen scholars assembled for a September 2005 conference in Cambridge to discuss the results of this project, to be assembled in an NBER volume on "Economic Regulation and Its Reform: What Have We Learned?" This project complements a substantial body of primary research by NBER associates on regulatory and antitrust policy. A selection of research from the conference and from NBER working papers is described below.

Economic Regulation and Its Reform

Electricity Restructuring: Competition and Incentive Regulation

NBER researchers continue in the vanguard of research, market design, and implementation of electricity restructuring. Much of the empirical work to date has focused on restructured generation markets, in which prices generally are determined through a competitive bidding process. Frank Wolak (2) describes the evolutionary nature of the restructuring process, emphasizing the tension between an imperfectly competitive market and an imperfect regulatory process in providing incentives for least-cost supply at various stages of the production process. In one of the first empirical analyses of restructuring supply-side benefits (11001), the potential for these incentives to reduce costs is highlighted: Kira Fabrizio, Catherine Wolfram, and I show that restructuring is associated with increased productivity, documenting generating-plant efficiency gains in the use of labor and materials input from replacing a regulated monopoly with market competition. As Wolak points out, though, the technical characteristics of electricity supply and demand suggest that market power may be of particular concern, limiting the benefits of restructuring. Joskow (8442) discusses the role of market power and other contributors to the 2000--1 California electricity crisis; All Hortacsu and Steven Puller (11123) measure efficiency losses from strategic bidding in the Texas ERCOT market; and Dae-Wook Kim and Chris Knittel (10895) compare direct measures of markups to those inferred from oligopoly models of market power in California generation markets. Wolak also describes market design and regulatory policies that limit the ability of suppliers to exercise unilateral market power--such as forward contracting, horizontal divestitures, demand-side participation, and local market power mitigation--and uses examples from worldwide wholesale electricity markets to illustrate the importance of effectively addressing each aspect of the market design process to ensure the maximum benefits of electricity restructuring.

While early empirical electricity research focused predominantly on generation markets, researchers increasingly have turned their attention to retail markets and demand-side policy. Peter Reiss and Matthew White (8687, 9986) use data from San Diego households to measure consumer responsiveness to changing electricity prices and conservation programs enacted during the California electricity crisis. They argue that consumers may be more responsive to price fluctuations than previously thought. Severin Borenstein and Stephen Holland (9922) suggest that substantial efficiency gains could be obtained from shifting even modest shares of relatively price-insensitive customers from fixed retail electricity prices to those that reflect time-varying wholesale electricity prices. Borenstein (11594) provides insight into continued resistance to real-time pricing, highlighting substantial distributional effects of real-time prices across heterogeneous industrial and commercial customers that may make it difficult to gain political support without some system to compensation losers.

For services such as transmission and distribution, which typically remain subject to regulation even in restructured markets, innovations have shifted the focus from cost-based price setting toward incentive mechanisms...