Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Monday, March 27, 2017

CUTS 5th Biennial Competition, Regulation & Development Conference 09-11 November, 2017 Jaipur, India

CALL FOR PAPERS


I. INTRODUCTION


CUTS and CIRC invite papers for the 5th Biennial Competition, Regulation & Development Conference to be held on 09-11 November, 2017 in Jaipur (India). Interested scholars and practitioners are invited to submit a 500 word abstract for a chance to participate in this Conference and present their paper.


The abstract should be based on any one of the four plenaries of the Conference (below) and should be submitted to the undersigned, along with a brief CV (not more than 2 pages) of the author. Authors are requested to mention the specific ‘Plenary’ their paper is based on while submitting the abstract.


Authors of selected abstracts would be invited to submit full conference papers (3,000 to 4,000 words) for a chance to participate in this conference. On successful selection, the organisers will provide support to the author (air travel, accommodation and meals) to participate in the conference, and present the paper.


II. PLENARY SESSIONS


The abstract/paper should target any one of the following four plenaries of the conference.
Plenary 1
:
Revisiting IPR and Competition
Plenary 2
:
Disruptive Technologies and Economic Regulations
Plenary 3
:
Building Organisational capacities for tackling policy and regulatory uncertainty
Plenary 4
:
Challenges and Opportunities of Development Financing for Fostering an Innovation based Ecosystem


For more information, please visit:
Call for Papers https://goo.gl/1yMK3L
Background Note https://goo.gl/pFfby9


III. IMPORTANT DATES AND DEADLINES


The following dates/deadlines need to be noted:
 Last date for submission of Abstract (500 words) is 15th April 2017
 Selection of successful Abstract will be done by 30th April 2017
 Last date of submission of Full paper (3,000 to 4,000 words) is 30th June 2017
 Selection of successful papers will be done by 31st August 2017


IV. FURTHER INFORMATION AND CONTACTS


All submission and further queries should be directed to Mr. Ashutosh Soni (ash@cuts.org) and Mr. Parveer Ghuman (psg@cuts.org)

March 27, 2017 | Permalink | Comments (0)

Grounds for Private Enforcement of Albanian Competition Law

Ermal Nazifi, Albanian Competition Authority and Petrina Broka, University of Tirana - Faculty of Law offer Grounds for Private Enforcement of Albanian Competition Law.

ABSTRACT: Infringements of competition law can cause serious harm to both consumers and undertakings. Aside from the development of public enforcement of competition law, much focus has been placed in recent years in the European Union on private competition law enforcement. Lawsuits raised by undertakings that sustained damages from anti-competitive practice concerning the compensation of such damages have historically not been widespread in Europe.

No such cases have been recorded in Albania at all yet, despite the fact that its competition protection legislation has provided this possibility since 1995. The main causes of the lack of private competition law enforcement in Albania include the absence of judicial practice and doctrinal approaches in this area. Relevant here is also the inability of Albanian businesses and consumers to react to competition protection cases as they still lack competition law knowledge and as a result of the absence of an appropriate legal framework for class actions.

The scope of this article is to analyze the current situation of private competition law enforcement in Albania. The paper emphasizes the current legal framework including existing obstacles to private competition law enforcement and improvements that should be introduced in the context of its competition law, the law of civil procedures and the law of obligations.

March 27, 2017 | Permalink | Comments (0)

When Multiple Merged Entities Lead in Stackelberg Oligopolies: Merger Paradox and Welfare

Walter Ferrarese, University of Rome, Tor Vergata - Department of Economics, Law and Institutions discusses When Multiple Merged Entities Lead in Stackelberg Oligopolies: Merger Paradox and Welfare.

ABSTRACT: The merger paradox refers to the fact that in a symmetric static Cournot oligopoly horizontal mergers are generally unprofitable. Moreover, even in case of profitable mergers, remaining outside the merger is better than participating (free-riding issue). In this paper we tackle both issues in a model with linear inverse demand, in which we allow for multiple simultaneous mergers from a static symmetric Cournot market. Once the mergers occur, each merged entity acquires the right of becoming the leader over the remaining firms outside the mergers (outsiders). We allow the leaders to be heterogeneous in the number of members (insiders). Our model connects and extends Liu and Wang (2015), who are the first to explore the feature of the leadership acquisition. They show that if a unique merged entity acquires the leadership, then there is always an incentive for such merger to occur. However, they do not tackle the free riding aspect of mergers. We obtain that the case of a unique leader is the only one in which the merged entity has always an incentive to form. We carry out a welfare analysis and show that, in our setting, despite the symmetry of firms total output can often rise and make consumers better off. Moreover, the adoption of consumers surplus only or consumer surplus plus industry profits as welfare measures does not change the set of welfare improving mergers. This suggests that the common view on horizontal mergers among symmetric firms being unambiguously welfare reducing requires, in some cases a deeper analysis, since the change in the market structure alone can be enough to increase welfare. It also suggests parsimony for the antitrust authorities in evaluating the welfare implications of mergers.

March 27, 2017 | Permalink | Comments (0)

Friday, March 24, 2017

Upstream Monopoly and Downstream Information Sharing

Pio Baake, German Institute for Economic Research (DIW Berlin) and Andreas Harasser, German Institute for Economic Research (DIW Berlin) analyze Upstream Monopoly and Downstream Information Sharing.

ABSTRACT: We analyze a vertical structure with an upstream monopoly and two downstream retailers. Demand is uncertain but each retailer receives an informative private signal about the state of the demand. We construct an incentive compatible and ex ante balanced mechanism which induces the retailers to share their information truthfully. Information sharing can be profitable for the retailers but is likely to be detrimental for social welfare.

March 24, 2017 | Permalink | Comments (0)

Vertical Integration and Product Availability in the Movie Theater Industry

In Kyung Kim, Nazarbayev University and Vladyslav Nora, Nazarbayev University examine Vertical Integration and Product Availability in the Movie Theater Industry.

ABSTRACT: We examine the effects of integration between distribution and exhibition on product mix and availability in the movie theater industry. Our model predicts that integrated theaters engage in foreclosure, but also have higher incentives to acquire demand information. We estimate that integrated theaters allocate more seats to their own titles, mostly at the expense of small independent movies. However, we find that despite this foreclosure effect integrated theaters match demand better turning away significantly fewer consumers and achieving higher consumer welfare than independent theaters. Our results suggest that the efficiency gains of vertical integration dominate the losses from foreclosure.

March 24, 2017 | Permalink | Comments (0)

Sokol's Guide to the ABA Section of Antitrust Law Spring Meeting

Next week is the ABA Antitrust Law 2017 Spring Meeting.  It is an amazing event and kudos to the ABA leadership and staff for putting together such a wonderful set of programs.  The ability to manage such a large conference is quite amazing and I cannot begin to fully describe how much planning goes into successfully pulling it off.

I have some general thoughts about the Spring Meeting worth sharing and very few of them go to the substantive program:

  1. You really don't need to pay to eat or drink for the entire week as so many different law firms and economic consulting firms have receptions and parties.
  2. There is way too much food so don't eat too much. Stay away from: anything fried, any dips (too salty and/or too fatty), too much bread (white bread equals empty carbs which equals the need to get a larger pant size).  Drink more water and eat more vegetables.  
  3. Stay away from sauces because invariably you are going to spill something on yourself.  The additional warning is that you should pack an extra shirt as accidents happen.
  4. Try to exercise.  DC is a great city for runners and in case the weather is not great, do not forget to hit the hotel gym.
  5. Most people have no clue how to exude confidence. If you do nothing else, watch this Ted Talk by Harvard Business School Professor Amy Cuddy - Your body language shapes who you are.  It will transform your life.
  6. How best to moderate alcohol consumption - I find too many junior lawyers travel in packs and end up doing shots together.  If you want to drink, fine.  However, do not do shots at the event.  You are less likely to moderate your drinking and your current and potential future employers are also at these events.  Nobody likes a sloppy drunk.
  7. Show some style.  Most men dress far too conservatively at the Spring Meeting.  This is not a mid level manager meeting at IBM circa 1982.  I am amazed by how so many men who make over $1 million a year dress so badly and with such ill fitting suits.  Maybe this means most law firm partners need to lead a less sedentary life.
  8. Show some style part 2.  Some women have extraordinary style in terms of clothes and shoes. Cristina Caffarra of CRA, an amazing economist, is also unparalleled in terms of her style.  My advice to women more generally -  women tend to dress a little better than the men but after a while, there really must be more to life than black suit pants and either a white or french blue blouse. I want to see some color! I also notice that many women try to dress up with 3 in or higher heels to try to stand out but that very few know how to walk well with such shoes.
  9. Moisturizer. After the long flight from Asia or Europe, your skin is as dry as the Sahara and your eyes are puffy from the lack of sleep.  Please spend time properly moisturizing for your face and hands and using lip balm.
  10. Coffee is your friend.  There are an increasing number of studies that show the health benefits of coffee.
  11. At events, do your best to stay interested in what people are saying. Do not constantly look around to see who else you know. 
  12. Many of the best panels leave time for questions. If you are going to ask one in a room of 250 people, make sure it is a good one that shows insight and that leads to additional commentary.
  13. Some of the best discussion at the Spring Meeting happens in the hallways rather than the panel discussions. 
  14. This is an endurance conference.  If you are staying at the conference hotel, consider taking a 20 minute power nap in the afternoon.
  15. Have fun and meet new people. 
  16. Lots of people come from outside the United States for the conference.  Do your best to try to interact with them.
  17. Be nice.
  18. One year someone in my row clipped their fingernails during a presentation.  This is not only gross but it is noisy.
  19. Do not wear excessive perfume or cologne.  I do not want to smell you from 200 ft away and in today's world, there are also people with lots of allergies. 
  20. You are special, so be you.

 

March 24, 2017 | Permalink | Comments (0)

Why Incentives for 'Patent Holdout' Threaten to Dismantle FRAND, and Why it Matters

Richard A Epstein, New York University School of Law and Kayvan B Noroozi, Noroozi PC argue Why Incentives for 'Patent Holdout' Threaten to Dismantle FRAND, and Why it Matters.

ABSTRACT: An increasing number of judges, legislators and scholars wrongly believe that the FRAND commitment was principally created to advance the interests of technology implementers, and should be interpreted by giving a presumptive preference toward those interests. That premise has led courts to take a categorically hostile view toward awarding injunctions against implementers under all circumstances. Some courts have even allowed implementers to sue innovators for making an opening licensing offer that is “too high,” without making any counteroffer. An implementer-centric view of FRAND has also caused courts to conclude that innovators are not entitled to any share of the commercial benefits arising from the standardization of their technologies.

We demonstrate that an implementer-centric view of FRAND’s origins and purposes is false. FRAND is a contractual agreement that reflects a voluntary reciprocal exchange of benefits and obligations driven by the need to solve significant coordination problems in the face of otherwise prohibitive transaction costs. As part of that bargain, innovators agree to disclose their latest, confidential discoveries to standard-development organizations, and to waive their injunction rights as to eventual patents on those discoveries, in exchange for contractual protection against patent holdout by implementers who in turn are permitted to use standard-essential patents only on their willingness to pay fair and adequate royalties for that use.

Accordingly, we stress that implementers owe a significant duty to negotiate FRAND licenses in good faith, which courts have largely overlooked and under-enforced. We demonstrate that implementers’ good faith obligations are a critical component of basic FRAND architecture that is strictly necessary to the development of innovation-driven standards. We further observe that the FRAND bargain gives implementers access to otherwise confidential discoveries — inventions too recent to be disclosed in patents or published applications. In this way, FRAND supplies a solution to an iteration of Kenneth Arrow’s paradox of information, enabling the standards development effort to yield commercial benefits that would not exist absent innovators’ voluntary participation. We show both theoretically and empirically that courts’ failure to appreciate these aspects of the FRAND bargain, combined with their over-reliance on liability rules, i.e., damages over injunctions, incentivizes the very patent holdout problem FRAND was intended to avoid. That outcome, in turn, has motivated innovators to reduce their participation in FRAND bargains, threatening to unravel a massive innovation-commercialization marketplace, and its innumerable positive externalities to all parties.

To reverse these harms, we recommend that courts automatically issue an injunction where an implementer is found to infringe FRAND-committed patents that it did not attempt to license in good faith. We also recommend that a proper FRAND licensing rate should include some portion of the benefits achieved through standardization of the innovation(s) in question.

More broadly, we suggest that courts, policymakers, and academic commentators have wrongly favored implementation over innovation — “things” over ideas — unwisely frustrating the emergence of an “ideas economy” that correctly assigns profits to upstream innovators, and not to the low-margin firms that specialize in developing their commercial embodiments.

March 24, 2017 | Permalink | Comments (0)

Thursday, March 23, 2017

The Patent Damages Gap: An Economist's Review of U.S. Patent Damages Apportionment Rules

Anne Layne-Farrar explains The Patent Damages Gap: An Economist's Review of U.S. Patent Damages Apportionment Rules.

ABSTRACT: As an economist, I find the current state of the law regarding damages for patent infringement – most particularly that relating to apportionment – frustrating at best and woefully incomplete at worst. Namely, damages case law for utility patent infringement provides two very different, but insufficient, guidance frameworks for calculating damages: the entire market value rule (EMVR) versus the smallest salable patent practicing unit (SSPPU) principle. The modern pair of EMVR and SSPPU options is far narrower than the approaches afforded by the original 1884 Supreme Court ruling establishing apportionment for damages, Garretson. In this paper, I present the economic case for expanding the allowable damages frameworks beyond EMVR or SSPPU, to fill in the gap in reasonable damages approaches created by an EMVR and SSPPU dichotomy.

March 23, 2017 | Permalink | Comments (0)

Toward a Coherent Policy on Cartel Damages

Jens-Uwe Franck, University of Mannheim and Martin Peitz, University of Mannheim - Department of Economics move us Toward a Coherent Policy on Cartel Damages.

ABSTRACT: The focus of cartel damages law is on the recovery of the cartel overcharge. Parties other than purchasers are often neglected, not only as a matter of judicial practice, but also due to legal restrictions. We argue that a narrow concept of standing—which excludes parties that supply either the cartel or the firms that purchase from the cartel with complementary product components—falls short of achieving effective antitrust enforcement and corrective justice in the best possible way. We provide a framework with two complementary products and show that under neither competition nor cartelization do the allocation and the distribution of surpluses depend on the market organization in place. Thus, we argue that prima facie producers of complements should be treated alike, regardless of whether they purchase from the cartel or supply the cartel or the cartel’s customers. Moreover, based on various factors that determine the enforcement effect of antitrust damage claims and their role as an instrument to achieve corrective justice, we show that a broad concept of standing is, indeed, the preferable legal solution. While its implementation required a change of the position by the U.S. federal courts, we submit that it would amount to a consistent completion of the legal framework within the EU.

March 23, 2017 | Permalink | Comments (0)

The Intersection of Antitrust and Market Manipulation Law

Shaun D. Ledgerwood, The Brattle Group and Jeremy A. Verlinda, The Brattle Group discuss The Intersection of Antitrust and Market Manipulation Law.

Abstract The antitrust laws are increasingly used to prosecute alleged acts of market manipulation, particularly against firms in the banking and energy industries. Both industries are now regulated subject to fraud-based market manipulation rules, but antitrust remains a vehicle on which private claims are based. If anti-manipulation enforcement wanes (or its legal foundation is eroded) with political change, private antitrust actions might fill the void — if such claims are substitutable. As economists practicing in these fields, we address in this paper whether manipulation claims brought under the antitrust laws are substitutable for those actionable under the manipulation rules.

March 23, 2017 | Permalink | Comments (0)

Evaluating Measures of Hospital Quality

Joseph J. Doyle, Jr., John A. Graves, and Jonathan Gruber are Evaluating Measures of Hospital Quality.

ABSTRACT: In response to unsustainable growth in health care spending, there is enormous interest in reforming the payment system to "pay for quality instead of quantity." While quality measures are crucial to such reforms, they face major criticisms largely over the potential failure of risk adjustment to overcome endogeneity concerns. In this paper we implement a methodology for estimating the causal relationship between hospital quality measures and patient outcomes. To compare similar patients across hospitals in the same market, we xploit ambulance company preferences as an instrument for patient assignment. We find that a variety of measures used by insurers to measure provider quality are successful: assignment to a higher-scoring hospital results in better patient outcomes. We estimate that a two-standard deviation improvement in a composite quality measure based on existing data collected by CMS is causally associated with reductions in readmissions and mortality of roughly 15%.

March 23, 2017 | Permalink | Comments (0)

Wednesday, March 22, 2017

Antitrust Analysis of Hub-and-Spoke Conspiracies

Ben Klein, UCLA offers an Antitrust Analysis of Hub-and-Spoke Conspiracies.

ABSTRACT: This paper clarifies the relation between per se hub-and-spoke and vertical rule of reason antitrust analysis, the tension between which is illustrated with a detailed examination of the Apple e-books case.

 

March 22, 2017 | Permalink | Comments (0)

Do vertical relations matter to fund flows under oligopolistic market structures?

Kang Baek (Hanbat National University) asks Do vertical relations matter to fund flows under oligopolistic market structures?

ABSTRACT: Uninformed investors preferentially select distribution companies to purchase funds that suit their investment objectives, because they cannot evaluate each product themselves. Thus, the investment decision depends significantly on their chosen fund distributor's recommendation. It may lead to conflicts of interest between fund distributors and their customers because distribution professionals and their affiliated financial companies have an incentive to prioritize their profits over investors under oligopolistic market structures. This study demonstrates that money flows into a fund, fund management company and fund distributor have significantly different patterns according to distribution channels, and this distinction is affected by vertical relations among financial companies. Money flows from affiliated distribution channels are less sensitive to the determinants of investment decision compared with non-affiliated ones. This result contributes by providing the insight that changes in the incentive structure of distribution channels result in different outcomes in terms of investor protection and market competition under oligopolistic distribution structures.

March 22, 2017 | Permalink | Comments (0)

Consumer preferences and implicit prices of smartphone characteristics

José A. Montenegro (Department of Computer Science, University of Málaga) and José L. Torres (Department of Economics, University of Málaga) think about Consumer preferences and implicit prices of smartphone characteristics.

ABSTRACT: This paper applies the hedonic pricing approach to study the implicit prices of smartphone characteristics and consumer preferences. Currently, mobile phones are the most widespread technological product worldwide and their performance and technical characteristics have changed dramatically over a short period. The development of smartphones has been a revolution in itself in the mobile telecommunication industry, expanding the capabilities of handsets beyond those of a simple mobile phone. Competition between smartphone producers is erce and knowledge concerning consumers' preferences regarding smartphone features is vital to survival in this fast-changing market. This paper uses a hedonic pricing model to estimate the implicit prices of smartphone characteristics. A large set of characteristics are analysed including design, communication, connectivity, camera, display, hardware, multimedia, and power. The characteristics most valued by consumers are the screen, followed by memory, battery capacity, and weight. Consumers are willing to pay up to a 95% premium for an Apple smartphone.

March 22, 2017 | Permalink | Comments (0)

Analysis on lock-in effects by estimating for the switching costs in telecommunications bundles

Hyungjin Kim (Sungkyunkwan University) and Hyunchul Kim (Sungkyunkwan University) provide an Analysis on lock-in effects by estimating for the switching costs in telecommunications bundles.

ABSTRACT: As digital convergence is spreading more than ever, the lock-in effects of bundled services in the broadcasting and telecommunication market are receiving considerable attention. Antitrust authorities have questioned whether lock-in effects impede competition in telecommunications markets. However, the answer to this question remains indecisive because few studies have attempted to quantify the switching costs in bundles. We use novel consumer level data to examine switching costs of bundled products. We use the mixed logit model to estimate the demand for bundled packages, which include mobile, Internet, and paid-TV services. We measure switching cost by the decrease in utility when consumers change their service providers from period t-1 to period t. The results show that consumers experience additional costs when they switch from bundles. Our estimates indicate that consumers pay 3,238 KRW (about 3 USD) per month for changing from Double Play Service (paid TV with Internet) to other services and 3,510 KRW for Triple Play Service. The estimates of switching costs are smaller for the bundles without any commitment period requirement. This implies that stipulated service period and penalty intensify the lock-in effects. In the counterfactuals where we remove the penalty for switching from bundles, we find that consumer surplus increases by 3,714 KRW per month. We proposed policies which reduce penalties for cancellations or shorter stipulated service periods in order to reduce switching costs.

March 22, 2017 | Permalink | Comments (0)

Tuesday, March 21, 2017

Product Variety, Across-Market Demand Heterogeneity, and the Value of Online Retail

Thomas W. Quan (University of Georgia) and Kevin R. Williams (Cowles Foundation, Yale University) examine Product Variety, Across-Market Demand Heterogeneity, and the Value of Online Retail.

ABSTRACT: Online retail gives consumers access to an astonishing variety of products. However, the additional value created by this variety depends on the extent to which local retailers already satisfy local demand. To quantify the gains and account for local demand, we use detailed data from an online retailer and propose methodology to address a common issue in such data - sparsity of local sales due to sampling and a significant number of local zeros. Our estimates indicate products face substantial demand heterogeneity across markets; as a result, we find gains from online variety that are 30% lower than previous studies.

March 21, 2017 | Permalink | Comments (0)

Sustainability of Product Market Collusion Under Credit Market Imperfections

Sugata Marjit, Centre for Studies in Social Sciences, Calcutta; City University of Hong Kong (CityUHK) - Department of Economics & Finance, Arijit Mukherjee, University of Nottingham - School of Economics, and Lei Yang , Hong Kong Polytechnic University examine Sustainability of Product Market Collusion Under Credit Market Imperfections.

ABSTRACT: We study the implications of credit constraints for the sustainability of product market collusion in a bank-financed oligopoly in which firms face an imperfect credit market. We consider two situations, without and with credit rationing, i.e., with a binding credit limit. When there is credit rationing, a moderately higher cost of external financing may affect the degree of collusion, but a substantial increase keeps it unaffected relative to the no-constraint case. A permanent adverse demand shock in this setup does not affect the possibility of collusion, but may aggravate financing constraints and eventually lead to collusion. We consider both Cournot and Bertrand models, and the results are qualitatively the same.

March 21, 2017 | Permalink | Comments (0)

Distorted monopolistic competition

Behrens, Kristian ; Mion, Giordano ; Murata, Yasusada ; Suedekum, Jens characterize Distorted monopolistic competition.

ABSTRACT: We characterize the equilibrium and optimal resource allocations in a general equilibrium model of monopolistic competition with multiple asymmetric sectors and heterogeneous firms. We first derive general results for additively separable preferences and general productivity distributions, and then analyze specific examples that allow for closed-form solutions and a simple quantification procedure. Using data for France and the United Kingdom, we find that the aggregate welfare distortion due to inefficient labor allocation and firm entry between sectors and inefficient selection and output within sectors is equivalent to the contribution of 68% of the total labor input.

March 21, 2017 | Permalink | Comments (0)

Just Markets Distributional Effects of Competition Policy & Economic Regulation 15 - 16 June 2017

REGISTRATION OPEN | CCP 13th Annual Conference: Just Markets

 


CCP 13th ANNUAL CONFERENCE

Just Markets

Distributional Effects of Competition Policy
& Economic Regulation

15 - 16 June 2017
The Enterprise Centre, University of East Anglia, Norwich NR4 7TJ

REGISTRATION NOW OPEN | Early bird rates available until 1 May 2017

 

Traditional analysis of markets has focused on the total (efficiency) gains available from improving markets, with particular emphasis on making markets work well for consumers. This has raised many questions such as:

  • Should the focus be on average or vulnerable consumers?
  • If the playing field is to be leveled should the focus be on access to markets or market outcomes?
  • How should distributional considerations influence the design of remedies?
  • How do the designs of institutions affect how benefits are distributed?
  • What is the empirical evidence that market opening and agency interventions have benefited different groups?
  • How may disruptive technologies change the distribution of benefits and what interventions are appropriate?

This conference will explore all these issues by bringing together legal, political science and economic perspectives on how these principles and evidence should inform competition and regulatory policy. The programme will include contributions by leading academics, policymakers, suppliers, consultancies and regulators such as Ofgem and Ofwat, as well as the first presentation of results from the CCP project on Equity and Justice in Energy Markets funded by the UK Energy Research Centre (UKERC). 

Confirmed academic speakers include Severin Borenstein, Haas Businsess School, University of California; Michael Trebilcock, Faculty of Law, University of Toronto; Sean Ennis, Organisation for Economic Co-operation and Development (OECD); Tembinkosi Bonakele, Competition Commission South Africa; Mattia Guidi, LUISS Guido Carli, Rome; Ruth Hancock, Norwich Medical School, UEA; Eugenio Miravete, University of Texas & Centre for Competition Policy, UEA and also from CCP: Morten Hviid, David Deller, Liz Errington, Noel Longhurst, Stephen Davies & Peter Ormosi.  

March 21, 2017 | Permalink | Comments (0)

Monday, March 20, 2017

Why Mixed Qualities May Not Survive at Equilibrium: The Case of Vertical Product Differentiation

Georgi Burlakov explains Why Mixed Qualities May Not Survive at Equilibrium: The Case of Vertical Product Differentiation.

ABSTRACT: In the classical literature on vertical differentiation, goods are assumed to be single products each offered by a different firm and consumed separately one from another. This paper departs from the standard setup and explores the price competition in a vertically differentiated market where a firm's product is consumed not separately but in fixed one-to-one ratio with another complementary type of good supplied by a different producer. An optimal solution for market setting with two entrants of a type is proposed, to show that there could be an equilibrium at which the so-called "mixed-quality combinations", consisting of one high-quality good and one low-quality good each, remain unsold. For such an equilibrium to exist, it is suffcient the mixed-quality combinations to be at least as di erentiated from the best as from the worst combination which retains its positive market share. Thus, the mixed-quality exclusionary outcome appears as a further form in which the well-known maximum- differentiation principle could be implemented in a multi-market setting. It provides a new explanation of the self-selection bias in consumption observed in some industries for complementary goods.

March 20, 2017 | Permalink | Comments (0)