Antitrust & Competition Policy Blog

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

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Thursday, July 30, 2015

Loyalty Programs and Consumer Behaviour: The Impact of FFPs on Consumer Surplus

Christiaan Behrens (VU University Amsterdam) and Nathalie McCaughey (Monash University, United States) address Loyalty Programs and Consumer Behaviour: The Impact of FFPs on Consumer Surplus.

ABSTRACT: Frequent Flier Programs (FFPs) are said to impact airline consumer behaviour such that revenue of sponsoring airlines increases. Prior research relies on aggregate industry data to study FFPs. We examine the impact of FFPs on individual consumer behaviour in a quasi-natural experimental set-up using a combined discrete choice and count data model. We exploit an unanticipated change in the FFP to avoid self-selection bias. We derive the causal effect of redesigning a frequency reward program into a customer tier program on average transaction size, purchase frequency, revenues of the sponsoring airline, and compensating variation. We find that, on average, revenues increased by 8$ per member over a 16 month period. The welfare impact is small but positive. We find that, on average, consumer surplus increased by 5$ per member over a 16 month period. The results vary substantially across individuals. In line with previous studies, our results suggest that moderate buyers increase their average transaction size and purchase frequency most due to the introduction of the customer tier program.

July 30, 2015 | Permalink | Comments (0)

Dynamic Equilibrium at a Congestible Facility under Market Power

Erik T. Verhoef (VU University Amsterdam, the Netherlands) and Hugo E. Silva (VU University Amsterdam, the Netherlands) describe Dynamic Equilibrium at a Congestible Facility under Market Power.

ABSTRACT: Various contributions to the recent literature on congestion pricing have demonstrated that when services at a congestible facility are provided by operators with market power, the case in point often being a few airlines jointly using a congested airport, optimal congestion pricing rules deviate from the familiar Pigouvian rule that tolls be equal to the marginal external costs. The reason is that an operator with market power has an incentive to internalize the congestion effects that its customers and vehicles impose upon one-another, so that Pigouvian tolling would lead to overpricing of congestion. More recent contributions to this literature, however, have brought to the fore that when congestion at the facility takes on the form of dynamic bottleneck congestion a la Vickrey (1969), where trip scheduling is the key behavioural margin, there may exist no Nash e quilibrium in arrival schedules for oligopolistic operators also under rather plausible assumptions on parameters. This paper investigates whether in such cases, an equilibrium does exist for another congestion technology, namely the Henderson-Chu dynamic model of flow congestion. We find that a stable and unique equilibrium exists also in cases where it fails to exist under bottleneck congestion (notably when the value of schedule late exceeds the value of travel delays). Our results suggest that self-internalization with only two firms leads to a considerable efficiency gain compared to the atomistic equilibrium (83% or more of the gain from first-best pricing in our numerical exercises).

July 30, 2015 | Permalink | Comments (0)

Innovation and Legal Enforcement for Competition Policy: Theory and international evidence from overseas subsidiaries of the Japanese auto-parts suppliers

 TAKEDA Yosuke and UCHIDA Ichihiro have a new paper on Innovation and Legal Enforcement for Competition Policy: Theory and international evidence from overseas subsidiaries of the Japanese auto-parts suppliers.

ABSTRACT: Do legal enforcements for competition policy have differential effects on innovative research and development (R&D) activities? Taking into account both strategic R&D competition between incumbent and entrant, and government's optimal choice of legal schemes, we first present a game-theoretic model of innovation and legal enforcement (Glaeser and Shleifer, 2003; Schwartzstein and Shleifer, 2013; Segal and Whinston, 2007). The model suggests that there are in subgame-perfect equilibria some relations concerning average treatment effects of legal enforcement on entrant's R&D or incumbent's deterrence activities, conditional on law and order degree in host countries (World Bank Worldwide Governance Indicators). Second, focusing on overseas subsidiaries of the Japanese auto-parts suppliers that have international deployments with different legal origins in locations, we use a pooled data set of the Basic Survey of Overseas Business Activities and the Basic Survey of Japanese Business Structure and Activities. The average multi-valued treatment effect estimation shows positive results for the model. It suggests that under regulation as a legal enforcement scheme instead of strict liability or negligence, even in countries with low degree of law and order, R&D activities would be more enhanced and R&D-deterrent ones be further suppressed on average. Legal enforcement for competition policy does matter for innovation.

July 30, 2015 | Permalink | Comments (0)

Can market power be controlled by regulation of core prices alone?: An empirical analysis of airport demand and car rental price

Achim I. Czerny (VU University Amsterdam, the Netherlands); Zijun Shi (Carnagie Mellon University, United States) and Anming Zhang (University of British Columbia, Canada) ask Can market power be controlled by regulation of core prices alone?: An empirical analysis of airport demand and car rental price.

ABSTRACT: Many firms offer “core” and “side” goods in the sense that side-good consumption is conditional on core-good consumption. Airports are a common example where the supply of runway and terminal capacity is the core good and the supply of various concession services (for example, car rental services) is the side good. While side-good supply can be responsible for a major share in total revenue, monopoly regulation typically concentrates on the control of core-good prices (“core prices” in short). Whether market power can indeed be effectively controlled by the regulation of core prices alone then depends on whether core-good consumption is a function of the price for side goods. This study empirically shows that a one-dollar increase in the daily car rental price reduces passenger demand at 199 US airports by more than 0.36 percent. A major implication of our findings is that for the case of airports, the effective control of market power may require regulation of both prices for core and side goods.

July 30, 2015 | Permalink | Comments (0)

Wednesday, July 29, 2015

Does Competition make Banks more Risk-seeking?

Stefan Arping (University of Amsterdam) asks Does Competition make Banks more Risk-seeking?

ABSTRACT: This article presents a model in which, contrary to conventional wisdom, competition can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet, at the same time, banks become riskier. This is because the direct, destabilizing effect of lower margins outweighs the disciplining effect of competition; moreover, a substantial rise in competition reduces banks’ incentive to build precautionary capital buffers. A key implication is that the effects of competition on risk-taking and on failure risk can move in opposite directions.

July 29, 2015 | Permalink | Comments (0)

Price Differentiation and Discrimination in Transport Networks

Adriaan Hendrik van der Weijde (VU University Amsterdam) explores Price Differentiation and Discrimination in Transport Networks.

ABSTRACT: This paper analyzes the effects of price differentiation and discrimination by a monopolistic transport operator, which sets fares in a congestible network. Using three models, with different spatial structures, we describe the operator’s optimal strategies in an unregulated market, a market where price differentiation is not allowed (i.e., ticket prices must be the same for all users), and a market where price discrimination is illegal (i.e., ticket prices must only differ with the marginal external costs of users), and analyze the welfare effects of uniform and non-discriminatory pricing policies. The three models allow us to consider three different forms of price differentiation and discrimination in networks: by user class, by origin-destination pair, and by route. We generalize the existing literature, in which groups usually only differ in their value of time, and hence, there is no distinction between differentiation and discrimination. In our models, users may also have different marginal external costs; we show how these two differences interact. We also show how non-differentiated and non-discriminatory policies may increase or decrease welfare, and that non-discrimination can be worse than non-differentiation. The network models show that results obtained for a single-link network can be generalized to a situation where operators price-discriminate or differentiate based on users’ origins and destinations, but not directly to a situation in which differentiation is based on route choices.

July 29, 2015 | Permalink | Comments (0)

Airline Route Structure Competition and Network Policy

Hugo Emilo Silva (VU University Amsterdam); Erik T. Verhoef (VU University Amsterdam); and Vincent van den Berg (VU University Amsterdam) analyze Airline Route Structure Competition and Network Policy.

ABSTRACT: This paper studies whether a regulator needs to correct the route structure choice by carriers with market power in the presence of congestion externalities, in addition to correct their pricing. We account for passenger benefits from increased frequency, passenger connecting costs, airline endogenous hub location and route structure strategic competition. We find that, for some parameters, an instrument directly aimed at regulating route structure choice may be needed to maximize welfare, in addition to per-passenger and per-flight tolls designed to correct output inefficiencies. This holds true when the regulator is constrained to set non-negative tolls, but also for the case of unconstrained tolling.

July 29, 2015 | Permalink | Comments (0)

Penalizing Cartels: The Case for Basing Penalties on Price Overcharge

Yannis Katsoulacos (Athens University of Economics and Business, Greece); Evgenia Motchenkova (VU University Amsterdam) and David Ulph (University of St Andrews, United Kingdom) are Penalizing Cartels: The Case for Basing Penalties on Price Overcharge.

ABSTRACT: In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than those based on profit)while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.

July 29, 2015 | Permalink | Comments (0)

Tuesday, July 28, 2015

Maximum Likelihood Estimation of Search Costs

Jose Luis Moraga-Gonzalez (University of Groningen) and Matthijs R. Wildenbeest (Erasmus University Rotterdam) are estimating Maximum Likelihood Estimation of Search Costs.

ABSTRACT: In a recent paper Hong and Shum [2006. Using price distributions to estimate search costs. Rand Journal of Economics 37, 257–275] present a structural method to estimate search cost distributions. We extend their approach to the case of oligopoly and present a new maximum likelihood method to estimate search costs. We apply our method to a data set of online prices for different computer memory chips. The estimates suggest that the consumer population can be roughly split into two groups which either have quite high or quite low search costs. Search frictions confer a significant amount of market power to the firms: Despite more than 20 firms operating in each of the markets, we estimate price-cost margins to be around 25%. The paper also illustrates how the structural method can be employed to simulate the effects of the introduction of a sales tax.<

July 28, 2015 | Permalink | Comments (0)

CPI Antitrust Chronicle JUL-15(2)Summer 2015, Volume 7 Number 2

Antitrust Antipasto

  1. David Balto, James Kovacs, Jul 24, 2015

    Healthcare Merger Antitrust Review: Increased Scrutiny for Any Provider Merger

    Whereas previously the focus of the Commission and other enforcement agencies has been on horizontal mergers, there is also now increasing interest in vertical combinations. David Balto & James Kovacs (Law Offices of David A. Balto)

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  2. Ananya Gaur, Jul 24, 2015

    Arbitrariness in Imposition of Penalties by the Competition Commission of India: The Need for Penalty Guidelines

    There does not appear to be any logical pattern in the levy of penalties by the CCI, plus these do not seem to follow the global trend of penalizing cartels heavily, and they seem arbitrary. Ananya Gaur

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  3. H. Stephen Harris, Jr., Jul 24, 2015

    An Overview of the NDRC Decision in the Qualcomm Investigation

    This landmark case provides much needed guidance on the approach the NDRC will take to analyzing complex issues at the intersection of antitrust and intellectual property law. H. Stephen Harris, Jr. (Winston & Strawn)

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  4. Heather Irvine, Jul 24, 2015

    The Future of African Antitrust Enforcement

    There is the potential for regional bodies to act as a cheaper and faster one-stop-shop for merger clearances and to build up significant economic and technical expertise. Heather Irvine (Norton Rose Fulbright)

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  5. Pete Levitas, Farrell Malone, Jul 24, 2015

    Section 5 Enforcement: Common Law Guidance

    Recent FTC enforcement actions and the Commissioners’ statements in those actions are the best “roadmap” for Section 5 enforcement. Pete Levitas & Farrell Malone (Arnold & Porter)

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  6. Marcela Mattiuzzo, Jul 24, 2015

    Online Advertising Platforms and Personal Data Retail: Consequences for Antitrust Law

    Treating online platforms as two-sided in all cases does not yield the best possible results for antitrust analysis and, as such, one should question whether continuing to apply it without qualification is the most suitable course forward. Marcela Mattiuzzo (CADE, Brazil)

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  7. Diego Perez-Ordonez, Luis Marin Tobar, Jul 24, 2015

    Ecuadorean Merger Control Regulation

    From a perspective of global transactions being cleared in different jurisdictions, merger notification should be filed in Ecuador far ahead of other jurisdictions. Diego Pérez-Ordóñez & Luis Marín Tobar (Pérez Bustamante & Ponce)

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  8. Richard Stark, Jul 24, 2015

    Debunking the Smallest Salable Unit Theory

    The arguments advanced in support of the SSPPU theory fail at every level: law, fact, policy, history, and practicality. Richard J. Stark (Cravath, Swain, and Moore)

July 28, 2015 | Permalink | Comments (0)

Incentives for Process Innovations Under Discrete Structural Alternatives of Competition Policy

Andrey E Shastitko and Alexander Kurdin (National Research University Higher School of Economics) explore Incentives for Process Innovations Under Discrete Structural Alternatives of Competition Policy.

ABSTRACT: This study analyses the incentives for process innovations under different conditions determined by the competition policy for intellectual property rights (IPR) and particular features of markets and technologies. Competition policy is defined by the presence or absence of compulsory licensing, markets are characterized by technological leadership or technological competition. The results of modelling show that the uncertainty engendered by technological competition may lower the intensity of innovative activities, if there are no mechanisms of coordination between participants. Voluntary licensing generally improves social welfare but does not guarantee an increase in innovative efforts. Compulsory licensing can impede innovations due to the opportunistic behaviour of market participants but certain measures of state policy can prevent this negative effect

July 28, 2015 | Permalink | Comments (0)

On the use of price-cost tests in loyalty discounts: Which implications from economic theory?

Chiara Fumagalli (Bocconi) and Massimo Motta (Barcelona GSE) provide thoughts On the use of price-cost tests in loyalty discounts: Which implications from economic theory?

ABSTRACT: Recent cases in the US (Meritor, Eisai) and in the EU (Intel) have revived the debate on the use of price-cost tests in loyalty discount cases. We draw on existing recent economic theories of exclusion and develop new formal material to argue that economics alone does not justify applying a price-cost test to predation but not to loyalty discounts. Still, the latter contain features (they reference rivals and allow to discriminate across buyers and/or units bought) that have a higher exclusionary potential than the former, and this may well warrant closer scrutiny and more severe treatment from antitrust agencies and courts.

July 28, 2015 | Permalink | Comments (0)

Industry structure and collusion with uniform yardstick competition

Peter Dijkstra, Marco A. Haan, and Machiel Mulder (Groningen University) offer Industry structure and collusion with uniform yardstick competition.

ABSTRACT: We study cartel stability in an industry that is subject to uniform yardstick regulation. In a theoretical model, we show that the number of symmetric firms does not affect collusion. In a laboratory experiment, however, we do find an effect. If anything, increasing the number of firms facilitates collusion. Our theory suggests that an increase in heterogeneity increases the regulated price if firms do not collude, but also makes collusion harder, rendering the net effect ambiguous. Our experiment suggests that the effect of collusion is stronger.

July 28, 2015 | Permalink | Comments (0)

Monday, July 27, 2015

Consumer Search and Prices in the Automobile Market

Jose Luis Moraga-Gonzalez (VU University Amsterdam); Zsolt Sandor (Sapientia Hungarian University of Transylvania, Romania) and Matthijs R. Wildenbeest (Indiana University, United States) research Consumer Search and Prices in the Automobile Market.

ABSTRACT: In many markets consumers have imperfect information about the utility they derive from the products that are on offer and need to visit stores to find the product that is the most preferred. This paper develops a discrete-choice model of demand with optimal consumer search. Consumers first choose which products to search; then, once they learn the utility they get from the searched products, they choose which product to buy, if any. The set of products searched is endogenous and consumer specific. Therefore imperfect substitutability across products does not only arise from variation in their characteristics but also from variation in the costs of searching them. We apply the model to the automobile industry. Our search cost estimate is highly significant and indicates that consumers conduct a limited amount of search. Estimates of own- and cross-price elasticities are lower and markups are higher than if we assume consumers have full information.

July 27, 2015 | Permalink | Comments (0)

Global Antitrust Enforcement Symposium Tuesday, September 29, 2015

Georgetown Law presents

Global Antitrust Enforcement Symposium

 
Washington, DC

Tuesday, September 29, 2015

The Global Antitrust Enforcement Symposium is a leading forum for lawyers, policymakers, corporate executives, economists, and academics to address current issues in competition law and policy. The faculty includes current and former enforcement officials from the United States, European Commission, Germany, France, Brazil and Mexico. The faculty will focus on the areas of greatest concern to multinational enterprises: what is new in global merger enforcement; cartel enforcement and policy; the range of permissive and questionable vertical restraints by companies with and without market power; perspectives and best practices from leading in-house counsel; and “hot topics” on the global enforcement agency agendas.

Tuesday, September 29

8:00-8:30 am: Registration & Continental Breakfast
8:30-8:45 am: Welcome & Introduction William M. Treanor, Dean, Georgetown Law
8:45-9:15 am: Keynote Address Edith Ramirez, Chairwoman, U.S. Federal Trade Commission
9:15–10:30 am: Panel 1 - Global Enforcers Roundtable Panelists: Bruno Lasserre, President Competition Authority, France Vinícius Marques de Carvalho, President, Administrative Council for Economic Defense (CADE), Brazil Andreas Mundt, President, Federal Cartel Office, Germany Alejandra Palacios Prieto, President, Federal Economic Competition Commission, Mexico John Taladay, Partner, Baker Botts

10:30-10:45 am: Networking Break
10:45 - 11:15 am: Perspective from the European Commission Margrethe Vestager, Commissioner for Competition, European Commission

11:15 am–12:30 pm: Panel 2 - Collaboration, Conversations, and Cartels Panelists: Leslie M. Marx, PhD, Partner, Bates White Sharis A. Pozen, Vice President, Global Competition and Antitrust, General Electric Brent C. Snyder, Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice Ingrid Vandenborre, Partner, Skadden Phillip H. Warren, Partner, Covington
12:30–1:45 pm: Luncheon and Address William Baer, Assistant Attorney General, Antitrust Division, U.S. Department of Justice
1:45-2:45 pm: Panel 3 - Hot Topics in U.S. Enforcement and Policy Panelists: Renata Hesse, Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice Herbert Hovenkamp, Professor, University of Iowa, College of Law A. Douglas Melamed, Visiting Professor of Law, Stanford Law School Leigh L. Oliver, Partner, Hogan Lovells Steven C. Salop, Professor of Economics and Law, Georgetown Law
2:45-3:00 pm Networking Break
3:00-4:15 pm: Panel 4 - Hot Topics in International Enforcement and Policy Panelists: Frédéric Jenny, Chairman, Competition Law and Policy Committee, OECD, Professor of Economics & Director of International Relations, ESSEC Business School Cecilio Madero Villarejo, Deputy Director-General for Antitrust, European Commission’s Competition Directorate-General Frank P. Maier-Rigaud, Ph.D., Director, Head of Competition Economics Europe, NERA Johan Ysewyn, Partner, Covington Adrian Emch, Partner, Hogan Lovells 4:15-5:30 pm: Panel 5 - Merger Enforcement and Policy Panelists: Deborah Feinstein, Director, Bureau of Competition, Federal Trade Commission Thomas Fina, Partner, Baker Botts David I. Gelfand, Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice John H. Lyons, Partner, Skadden 5:30 pm: Closing Remarks and Cocktail Reception

July 27, 2015 | Permalink | Comments (0)

Price-Quantity Competition of Farsighted Firms: Toughness vs. Collusion

Marina S. Sandomirskaia (National Research University Higher School of Economics) describes Price-Quantity Competition of Farsighted Firms: Toughness vs. Collusion.

ABSTRACT: The paper examines an interaction of boundedly rational firms that are able to calculate their gains after reaction of an opponent to their own deviations from the current strategy. We consider an equilibrium concept that we call a Nash-2 equilibrium. We discuss the problem of existence and possible multiplicity of such equilibria, relation to infinite rationality approach of folk theorem and security considerations of equilibrium in secure strategies. For a number of models (Bertrand with homogeneous and heterogeneous product, Cournot, Tullock competition) the Nash-2 equilibrium sets are obtained and considered as tacit collusion or strong competition in dependence of additional security considerations

July 27, 2015 | Permalink | Comments (0)

IV Lisbon Conference on Competition Law and Economics

On 22-23 October 2015, the Portuguese Competition Authority will host the IV Lisbon Conference, a unique opportunity to stay up-to-date on the latest trends and debates. Pre register to keep updated on the Conference.

Speakers

Rosa Abrantes-Metz

Managing Director, Global Economics Group and Adjunct Professor, NYU Stern School of Business, New York

 

Joaquim Nunes de Almeida

Director, DG GROW, European Commission

 

David Anderson

Partner, Berwin Leighton Paisner LLP, Brussels

 

Gilvandro Vasconcelos Coelho de Araújo

 Commissioner, Administrative Council for Economic Defence, Brazil

 

John Davies

Head, Competition Division, OECD

 

Frédéric Jenny

Chairman of the OECD’s Competition Law and Policy Committee and Professor of Economics at the ESSEC Business School, Paris

 

Eduardo Prieto Kessler

Competition Director, National Commission for Markets and Competition, Spain

 

Kinavuidi Kiako

Director, Institute of Prices and Competition, Ministry of Finance, Angola

 

John Kirkpatrick

Senior Director, Research, Intelligence and Advocacy, Competition and Markets Authority, UK

 

William Kovacic

Global Competition Professor of Law and Policy at George Washington University Law School, Washington, D.C., and Non-Executive Director of the Board, Competition and Markets Authority (CMA), UK

 

Bruno Lasserre

President, Autorité de la concurrence, France

 

Helena Abreu Lopes

Judge, Court of Auditors, Portugal

                         

Guillaume Loriot

Director, DG COMP, European Commission

 

Mark MacGann

Head of Public Policy EMEA, Uber, Amsterdam

 

Guilherme d’Oliveira Martins

President of the Court of Auditors, Portugal

 

Amilcar Aristides Monteiro

Director General for Industry and Trade, Ministry of Tourism, Investments and Business Development, Cabo Verde

 

Teresa Moreira

Director-General for Consumer, Portugal

 

Jorge Padilla

Senior Managing Director and Head of Compass Lexecon Europe, Madrid

 

Luc Peeperkorn

Principal Expert in Antitrust Policy, DG COMP, European Commission

 

Andrea Gomes da Silva

Senior Legal Director, Markets, Mergers and Sector Regulation, Competition and Markets Authority, UK

 

Giancarlo Spagnolo

Professor of Economics, SITE –Stockholm School of Economics & University of ‘Tor Vergata’ – DEF and Research Fellow, C.E.P.R., London & E.N.C.O.R.E, Amsterdam

 

Theodor Thanner

Director General, Austrian Competition Authority, Austria

 

Hal Varian

Chief Economist, Google, and Emeritus Professor at the University of California, Berkeley, California

 

Stanley Wong

Chief Executive Officer, Competition Commission, Hong Kong

July 27, 2015 | Permalink | Comments (0)

Output Commitment through Product Bundling: Experimental Evidence

Jeroen Hinloopen (University of Amsterdam); Wieland Mueller (Vienna University); and Hans-Theo Normann (Heinrich-Heine University) describe Output Commitment through Product Bundling: Experimental Evidence.

ABSTRACT: This discussion paper resulted in a publication in <I>European Economic Review</I> (2014), 164-180.<P> We analyze the impact of product bundling in experimental markets. One firm has monopoly power in a first market but competes with another firm in a second market. We compare treatments where the multiproduct firm (i) always bundles, (ii) never bundles, and (iii) chooses whether or not to bundle. We also contrast the simultaneous and the sequential order of moves in the duopoly market. Our data indicate support for the theory of product bundling: with bundling and simultaneous moves, the multiproduct firm offers the predicted number of units. When the multiproduct firm is the Stackelberg leader, the predicted equilibrium is better attained with bundling, especially when it chooses to bundle, even though in theory bundling should not make a difference here. In sum, bundling works as a commitment device that enables the transfer of market! power from one market to another.

July 27, 2015 | Permalink | Comments (0)

In Defense of Trusts: R&D Cooperation in Global Perspective

Jeroen Hinloopen (University of Amsterdam); Grega Smrkolj (University of Amsterdam) and Florian Wagener (University of Amsterdam) have written In Defense of Trusts: R&D Cooperation in Global Perspective.

ABSTRACT: We present a continuous-time generalization of the seminal R&D model of d’Aspremont and Jacquemin (American Economic Review, Vol. 78, No. 5) to examine the trade-off between the benefits of allowing firms to cooperate in R&D and the corresponding increased potential for product market collusion. We consider all trajectories that are candidates for an optimal solution as well as initial marginal cost levels that exceed the choke price. Firms that collude develop further a wider range of initial technologies, pursue innovations more quickly, and are less likely to abandon a technology. Product market collusion could thus yield higher total surplus.

July 27, 2015 | Permalink | Comments (0)

Friday, July 24, 2015

Competition in the Presence of Individual Demand Uncertainty

Marc Möller (University of Bern, Switzerland) and Makoto Watanabe (VU University Amsterdam) explore Competition in the Presence of Individual Demand Uncertainty.

ABSTRACT: This paper sheds light on a recent empirical controversy about the effect of competition on price discrimination in airline markets (Borenstein and Rose (1994), Gerardi and Shapiro, (2009)). We introduce individual demand uncertainty into Hotelling’s model of horizontal product differentiation and show that in equilibrium, firms offer advance purchase discounts. Consumers trade–off an early (uninformed) purchase at a low price against a late (informed) purchase at a high price. Relative to a (multi-product) monopolist, competing firms offer larger discounts, leading to an intertemporal distribution of sales that is more skewed towards low prices. We show that whether competition has a positive or a negative effect on the Gini coefficient of price dispersion depends on the degree of product differentiation and the level of demand uncertainty.

July 24, 2015 | Permalink | Comments (0)