Antitrust & Competition Policy Blog

Research Topics in Unilateral Effects Analysis

Posted by D. Daniel Sokol

Jonathan B. Baker, American University - Washington College of Law and David Reitman, Charles River Associates, Inc. have drafted a great resource in Research Topics in Unilateral Effects Analysis.

ABSTRACT: This chapter has been prepared for inclusion in the RESEARCH HANDBOOK ON THE ECONOMICS OF ANTITRUST LAW (Einer Elhauge, ed.). It first explains why unilateral effects may result from horizontal mergers, and then describes several key models that have been developed to gauge the likelihood and/or magnitude of unilateral effects, focusing on mergers in differentiated product Bertrand markets. The remaining sections discuss extensions to these models and measurement issues that arise when implementing unilateral effects analysis in practice, highlighting ongoing and potential future topics for research.

9th Global Forum on Competition, 18-19 February 2010, Paris

Posted by D. Daniel Sokol

9th Global Forum on Competition
18-19 February 2010, Paris

The 9th OECD Global Forum on Competition will focus on Competition, State aids and Subsidies, as well as on Collusion and Corruption in Public Procurement. Participants will also discuss a peer review of competition law and policy in Brazil.

Please note that participation to the Forum is by invitation only. It is restricted to government representatives and selected invitees from the business community and civil society. For further information on this aspect and on the Forum in general, please access our Practical information website.

Preliminary Agenda

Opening session	Opening remarks by Mr. Angel GURRIA OECD Secretary General Introductory comments by Mr. Frédéric JENNY Chairman of the Competition Committee
Session I	Roundtable on Competition, State aids and Subsidies [Call for Countributions/ Appel à contributions]
Session II	Peer review of Competition Law and Policy in Brazil [Open only to country representatives and intergovernmental organisations]
Session III	Breakout sessions on Collusion and Corruption in Public Procurement Value of Certificates of Independent Bid Determination (“CIBD”) and similar tools Discussion on the usefulness of guidelines in Public Procurement Experiences on working with other parts of government to fight bid rigging
Session IV	Fifth anniversary of the OECD-Hungary Regional Centre for Competition
Session V	Roundtable on Collusion and Corruption in Public Procurement [Call for Countributions/ Appel à contributions]
Final session	Evaluation and Future work

Static and Dynamic Merger Effects: Evidence from the Divestiture of Texaco's Canadian Assets

Posted by D. Daniel Sokol

Mikko Packalen, University of Waterloo - Department of Economics and Anindya Sen, University of Waterloo - Department of Economics examine Static and Dynamic Merger Effects: Evidence from the Divestiture of Texaco's Canadian Assets.

ABSTRACT: Dynamic merger effects from potential efficiencies created by mergers are a core concept in standard merger theory and merger policy. While these efficiencies will likely arrive mostly in the long run, empirical merger analyses have generally focused on short-run effects. We estimate merger effects from the divestiture of Texaco's Canadian assets. Our main emphasis is on estimating short and long-run merger impacts on market shares. Standard merger theory predicts that merger efficiencies will be reflected in market shares: the presence of merger efficiencies determines whether the merged firm regains market share in the long run. Results from two difference-in-difference specifications show that the short-run merger impact on the merging firms' combined market share was small but in the long run the merged firm experienced a large decline in its market share. These results demonstrate both that dynamic merger effects can be important, and that dynamic merger effects do not necessarily arise from efficiencies created by a merger.

Network Effects, Market Structure and Industry Performance

Posted by D. Daniel Sokol

Rabah Amir (Department of Economics, University of Arizona) and Natalia Lazzati (Department of Economics, University of Arizona) have a paper on Network Effects, Market Structure and Industry Performance.

ABSTRACT: This paper provides a thorough analysis of oligopolistic markets with positive demand-side network externalities and perfect compatibility. The minimal structure imposed on the model primitives is such that industry output increases in a firm's rivals' total output as well as in the expected network size. This leads to a generalized equilibrium existence treatment that includes guarantees for a nontrivial equilibrium, and some insight into possible multiplicity of equilibria. We formalize the concept of industry viability and show that it is always enhanced by having more firms in the market. We also characterize the effects of market structure on industry performance, with an emphasis on departures from standard markets. As per-firm profits need not be monotonic in the number of competitors, we revisit the concept of free entry equilibrium for network industries. The approach relies on lattice-theoretic methods, which a! llow for a unified treatment of various general results in the literature on network goods. Several illustrative examples with closed-form solutions are also provided.

Waiting to imitate: on the dynamic pricing of knowledge

Posted by D. Daniel Sokol

Emeric Henry (Sciences Po - Econ), Carlos Ponce (Universidad Carlos III de Madrid - Econ) explain Waiting to imitate: on the dynamic pricing of knowledge.

ABSTRACT: We study the problem of an inventor who brings to the market an innovation that can be legally copied. Imitators may 'enter' the market by copying the innovation at a cost or by buying from the inventor the knowledge necessary to reproduce and use the invention. The possibility of contracting affects the need for patent protection. Our results reveal that: (i) Imitators wait to enter the market and the inventor becomes a temporary monopolist; (ii) The inventor offers contracts which allow resale of the  knowledge acquired by the imitators; (iii) As the pool of potential imitators grows large, the inventor may become a permanent monopolist.

Switching Costs in Network Industries

Posted by D. Daniel Sokol

Jiawei Chen (Department of Economics, University of California-Irvine) explains Switching Costs in Network Industries.

ABSTRACT: In network industries, switching costs have two opposite effects on the tendency towards market tipping. First, the fat-cat effect makes the larger firm price less aggressively and lose consumers to the smaller firm. This effect tends to prevent tipping. Second, the network-solidifying effect reinforces network effects by making a network size advantage longer-lasting and hence more valuable, thus intensifying price competition when networks are of comparable size. This effect tends to cause tipping. I find that when switching costs are high, the fat-cat effect dominates and an increase in switching costs can change the market from a tipping equilibrium to a sharing equilibrium. When switching costs are low, the network-solidifying effect dominates and an increase in switching costs can change the market from a sharing equilibrium to a tipping equilibrium. Policy intervention to remove switching costs in network industri! es may substantially reduce the likelihood of market tipping.

China’s Antimonopoly Law—One Year Down: Part 3. The AML As a Protectionist Tool?

Posted by Wentong Zheng

In my last two posts on this space, I provided a summary of the new developments of China’s Antimonopoly Law (“AML”) (see here) and an analysis of China’s new merger review regime under the AML (see here).  One concern that is often voiced about the AML is that the AML may become or may have become a protectionist tool against foreign investment.  This concern was first raised when the AML was still being drafted.  It was magnified less than one year after the AML went into effect, when MOFCOM issued its controversial decision to block Coca-Cola’s acquisition of Huiyuan Juice Group, China’s largest fruit juice maker, in March 2009.

 

In its brief decision in Coca-Cola/Huiyuan (see herefor the decision in Chinese), MOFCOM stated that it decided to block the proposed deal for three reasons.  First, the deal would allow Coca-Cola to leverage its dominant position in the carbonated soft drink market to lessen competition in the fruit juice market.  Second, the deal would allow Coca-Cola to own two popular fruit juice brands in China and therefore would significantly raise the barrier to market entry.  Finally, the deal would severely limit the ability of China’s small- and medium-sized fruit juice companies to engage in innovation and competition in the fruit juice market.

 

MOFCOM’s decision in Coca-Cola/Huiyuan is troubling.  Although MOFCOM did not conduct an explicit market definition analysis, apparently it believed that carbonated soft drink and fruit juice belong to different product markets.  A merger between firms that do not compete with each other in the same market—or a conglomerate merger—does not usually raise antitrust concerns.  Especially, when the products of the merging firms are complementary, as seems to be the case in Coca-Cola/Huiyuan, the merger would actually lead to lower prices according to the “Cournot effect” and thus would benefit consumers.  Therefore, if the goal of antitrust is to protect competition and enhance consumer welfare, a conglomerate merger should not be viewed as anticompetitive merely if it will lead to elimination of some competitors.

 

Many commentators, understandably, have suspected that the real reason behind MOFCOM’s decision is protectionism and nationalism.  Huiyuan Juice is a household name in China, and given the rising economic nationalist sentiments in China in recent years, it would not be surprising if MOFCOM blocked the Coca-Cola/Huiyuan deal out of nationalist concerns.  Furthermore, it is widely known that China’s domestic fruit juice industry, which would stand to lose if the Coca-Cola/Huiyuan deal went through, lobbied hard against the deal before MOFCOM.

 

However, absent direct evidence of MOFCOM’s protectionist intent in blocking the deal, proving the protectionism charge would be very difficult, as it would entail proving the negatives, i.e., that MOFCOM did not block the deal for any other reasons.  Could MOFCOM have blocked the Coca-Cola/Huiyuan deal out of genuine antitrust concerns, even if its rationales do not comport with the “correct” view of conglomerate mergers?  As the Chinese business media reported (see herefor the report in Chinese), MOFCOM’s Coca-Cola/Huiyuan decision is indeed modeled after a 2003 decision by the Australian Competition and Consumer Commission to block the proposed acquisition of Australia’s largest fruit juice maker by Coca-Cola’s subsidiary in Australia (the Australian decision can be found here).  And as my co-author Sun Su pointed out here, MOFCOM’s rationales in Coca-Cola/Huiyuan are similar to some of the rationales upheld by the United States Supreme Court in FTC v. Proctor & Gambleback in 1967.  And of course, another famous—or infamous, depending on your point of view—example of a conglomerate merger being blocked is the European Union’s rejection of the GE/Honeywell merger in 2001.  Certainly, the fact that there are close parallels between MOFCOM’s rationales and rationales employed in other jurisdictions does not necessarily make MOFCOM’s rationales any less protectionist.  But it does show that MOFCOM’s decision joins a line of merger decisions by world’s major antitrust authorities that indicate differences of opinion as to the anticompetitive effects of conglomerate mergers.

 

In addition, one has to look beyond one specific case to determine whether there is a pattern or trend of protectionism under the AML.  There may be strong suspicions, if not strong evidence, that MOFCOM acted out of protectionist concerns in the Coca-Cola/Huiyuan case.  But suspicions of protectionism will become less strong if the frame of reference is extended to all of the mergers that have been reviewed by MOFCOM so far.  As we know, of all of the mergers for which review has been concluded, MOFCOM approved the vast majority of them without conditions.  We do not know the identity of the parties to those approved mergers, because MOFCOM did not publish its merger decisions for them.  However, there is indication that a significant number of mergers reviewed by MOFCOM—if not all of them—involve foreign investors.  Domestic Chinese enterprises that are large enough to meet the merger notification thresholds are typically state-owned-enterprises.  As I will lay out in more details in a future post, mergers between China’s state-owned-enterprises likely do not undergo formal merger review by MOFCOM.  The Coca-Cola/Huiyuan merger turns out to be the only blocked foreign-related merger out of many that have been reviewed by MOFCOM.

 

The picture becomes even more favorable for the argument of little or no protectionism if the frame of reference is extended to all aspects of the AML, not just merger review.  Before the AML took effect, the fears of the international business community were largely about proactive enforcement actions against multinational corporations such as Microsoft under the new law (see herefor a report of a possible investigation against Microsoft one month before the AML took effect).  More than one year later, however, none of the feared enforcement actions has taken place.  The Chinese media reported that certain disgruntled consumers have filed lawsuits against Microsoft or petitioned government agencies to launch investigations into Microsoft.  But as of now, the courts and the government have not acted on any of such lawsuits or petitions.

 

As conclusion, a final point that will help us keep things in perspectives is that whether the AML itself harbors a protectionist agenda does not tell the whole story in a country like China where numerous government restraints on competition exist outside of the purview of formal antitrust law.  The Chinese government has so many ways to limit foreign competition that in many situations it does not even need to resort to the AML to keep unwelcome foreign investors away.  Chief among the non-AML hurdles to foreign competition are market entry prohibitions in various industries.  Although China made commitments at the World Trade Organization to ease some of its market entry restrictions, many of them are not affected and will be here to stay.  Furthermore, the Chinese government can always call off a proposed merger between a foreign investor and a state-owned-enterprise through exercising its power as the owner and as the political superior of that state-owned-enterprise.  It is no coincidence that the Coca-Cola/Huiyuan merger—the only merger that has been blocked under the AML so far—involves a private Chinese company in an industry that has no market entry restrictions.  It is an irony that in this sense, a rejection of a merger under the AML—meaning there are no other ways for the government to reject the merger—perhaps should be viewed as a sign of progress.

 

Next, we will survey the scene of China’s dominance law more than one year after the AML went into effect.  Stay tuned.

 

 

 

Fines, Leniency and Rewards in Antitrust: an Experiment

Posted by D. Daniel Sokol

Maria Bigoni, University of Padua - Department of Economics, Sven-Olof Fridolfsson, Research Institute of Industrial Economics, Chloe Le Coq, Stockholm School of Economics, and Giancarlo Spagnolo, University of Tor Vergata, Stockholm School of Economics discuss Fines, Leniency and Rewards in Antitrust: an Experiment.

ABSTRACT: This paper reports results from an experiment studying how fines, leniency programs and reward schemes for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation, but increases cartel prices: subjects use costly fines as (altruistic) punishments. Leniency further increases deterrence, but stabilizes surviving cartels: subjects appear to anticipate harsher times after defections as leniency reduces recidivism and lowers post-conviction prices. With rewards, cartels are reported systematically and prices finally fall. If a ringleader is excluded from leniency, deterrence is unaffected but prices grow. Differences between treatments in Stockholm and Rome suggest culture may affect optimal law enforcement.

It's Coming - 3rd Annual Best Antitrust and Competition Policy Article of the Year

Posted by D. Daniel Sokol

The annual tradition is back.  We will announce winners at 11:00am EST on December 26, 2009.  For previous winners see the 2008 and 2007 lists.

A Simple Theory of Predation

Posted by D. Daniel Sokol

Chiara Fumagalli (Istituto di Economia Politica - Econ) and Massimo Motta (EUI - Econ) propose A Simple Theory of Predation.  This paper is worth a read.

ABSTRACT: We propose a simple theory of predatory pricing, based on scale economies and sequential buyers (or markets). The entrant (or prey) needs to reach a critical scale to be successful. The incumbent (or predator) is ready to make losses on earlier buyers so as to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including markets where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterised by common costs. Conditions under which predation may take place in actual cases are also discussed.

Antitrust in a Globalized Economy: The Unique Enforcement Challenges Faced by Small and by Developing Jurisdictions

Posted by D. Daniel Sokol

Michal Gal (Haifa, Law) has posted the interesting Antitrust in a Globalized Economy: The Unique Enforcement Challenges Faced by Small and by Developing Jurisdictions.

ABSTRACT: The increase in global trade has intensified the challenges involved in regulating anti-competitive conduct that takes place, in whole or in part, outside one's borders. While much has been written on international antitrust, not much scholarship has focused on the unique enforcement challenges faced by small and by developing jurisdictions in such a globalized world. This article addresses this challenge. It analyzes the near-futility of the current regime of unilateral enforcement and limited national vis

Getting Linkedin to Antitrust and Competition Issues

Posted by D. Daniel Sokol

Ever wonder who the other readers of the blog are and your potential opportunities to network with them?  I have created a Linkedin site for readers of the blog to network and post announcements on substantive issues and also on any job announcements and tenders.  Click here to join.  If anyone can create a logo for the site, please let me know.

Communication, Renegotiation, and the Scope for Collusion

Posted by D. Daniel Sokol

David Cooper, Florida State University - Econ and Kai-Uwe Kühn, University of Michigan - Econ address Communication, Renegotiation, and the Scope for Collusion.

ABSTRACT: We use experiments to analyze what type of communication is most effective in achieving cooperation in a simple collusion game. Consistent with the existing literature on communication and collusion, even minimal communication leads to a short run increase in collusion. However, in a limited message-space treatment where subjects cannot communicate contingent strategies, this initial burst of collusion rapidly collapses. When unlimited pre-game communication is allowed via a chat window, an initial decline in collusion is reversed over time. Content analysis is used to identify multiple channels by which communication improves collusion in this setting. Explicit threats to punish cheating prove to be by far the most important factor to successfully establish collusion, consistent with the existing theory of collusion. However, collusion is even more likely when we allow for renegotiation, contrary to standard theories of renegotiation. What appears critical for the success of collusion with renegotiation is that cheaters are often admonished in strong terms. Allowing renegotiation therefore appears to increase collusion by allowing for an inexpensive and highly effective form of punishment.

Brand Protection and Competition

Posted by D. Daniel Sokol

The Office of Fair Trading and UCL’s Institute of Brand and Innovation Law would like to invite you to an early evening event entitled BRAND PROTECTION AND COMPETITION Date:      27 January 2010 Time:      4.30pm (registration), 5.00 to 7.30 pm,                followed by a drinks reception. Venue:    University College London, Gower Street, WC1E 6BT The aim of the event is to bring together competition and IP specialists and industry experts to stimulate discussion on: the protection of brand value under the competition rules; the interaction of the competition rules with intellectual property law; and L’Oreal v Bellure and other recent developments in the law.  Confirmed speakers include: Philip Collins (Chairman, OFT) The Rt Hon Lord Justice Jacob Deborah Majoras (Procter & Gamble) Michael Miller (Amazon) Ali Nikpay (Senior Director, OFT) The Hon Mr Justice Roth Dr Christopher Stothers (UCL & Milbank Tweed Hadley & McCloy)   This seminar is accredited with 2.5 CPD hours by the Solicitors Regulation Authority (SRA - our course provider reference is IU/UCL) and the Bar Standard Board. It is also accredited by ITMA and constitutes relevant CPD for CIPA Fellows. This event is free of charge. Places are strictly limited at this event so please secure your place by clicking on the link below.   You are invited to the following event: IBIL & OFT Seminar: Brand Protection and Competition Date: Wednesday, January 27, 2010 at 4:30 PM (GMT) Location: UCL Jeremy Bentham Room UCL Central Campus Gower Street London, London WC1 United Kingdom

Can you attend this event?  Respond Here

A Fallacy of Division: The Failure of Market Concentration as a Measure of Competition in U.S. Banking

Posted by D. Daniel Sokol

Jaap W.B. Bos (Utrecht - Economics), Ivy Chan (Utrecht - Economics), Jiang Yuan (Utrecht - Economics), and James W. Kolari (Texas A&M - Mays School of Business) have some interesting thoughts on A Fallacy of Division: The Failure of Market Concentration as a Measure of Competition in U.S. Banking.

ABSTRACT: Empirical literature and related legal practice using concentration as a proxy for competition measurement are prone to a fallacy of division, as concentration measures are appropriate for perfect competition and perfect collusion but not intermediate levels of competition. Extending the classic Cournot-type competition model of Cowling and Waterson (1976) and Cowling (1976) used to derive the Hirschman-Herfindahl Index (HHI) of market concentration, we propose an adaptation of this model that allows collusive rents for all, none, or some of the firms in a market. Application of our model to data for U.S. commercial banks in the period 1984-2004 confirms that concentration measures are unreliable competition metrics. While collusion is prevalent in the banking industry at the state level, the critical market shares at which market power is achieved, rents earned from collusion, and collusive concentration levels vary wid! ely across states. These and other results lead us to conclude that a fallacy of division exists in concentration-based competition tests.

Happy Chanukah From the Youngest Reader of the Antitrust and Competition Policy Blog

Posted by D. Daniel Sokol

Anthony Chavez (Exxon Mobil) shares a picture of daughter Samantha Rachel Chavez wishing everyone a Happy Chanukah.  With a planned DOJ Antitrust workshop in Madison, WI on competition in dairy, the writing on her shirt is very appropriate.  Phil Weiser, I hope you are reading this so that you can order similar shirts for your team.

Price Controls and Consumer Surplus

Posted by D. Daniel Sokol

Jeremy Bulow (Stanford - Graduate School of Business) and Paul Klemperer (Oxford - Econ) p

rovide thoughts on Price Controls and Consumer Surplus.

ABSTRACT: The condition for when a price control increases consumer welfare in perfect competition is tighter than often realised. When demand is linear, a small restriction on price only increases consumer surplus if the elasticity of demand exceeds the elasticity of supply; with log-linear or constant-elasticity, demand consumers are always hurt by price controls. The results are best understood - and can be related to monopoly-theory results - using the fact that consumer surplus equals the area between the demand curve and the industry marginal-revenue curve.

Competition Policy Trends and Economic Growth: Cross-National Empirical Evidence

Posted by D. Daniel Sokol

Joseph A. Clougherty (WZB - Econ) has an interesting paper on Competition Policy Trends and Economic Growth: Cross-National Empirical Evidence.

ABSTRACT: Motivated by the general lack of empirical scholarship concerning the cross-national environment for competition policy, I present measures here of the overall resources dedicated to competition policy and the merger policy work-load for thirty-two antitrust jurisdictions over the 1992-2007 period. The data allow analysing a number of perceived trends in competition policy over the last two decades, and allow the generation of some factual insights concerning these trends: e.g., the budgetary commitment to competition policy in the cross-national environment for antitrust has substantially increased over this period; budgetary increases appear to be commensurate with increased antitrust workloads; yet, the role of economics does not appear to have substantially increased relative to the role of law. Moreover, I am also able to provide some evidence that budgetary commitments to antitrust institutions yield economic benefits in terms of improved economic growth: i.e., higher budgetary commitments to competition policy are associated with higher levels per-capita GDP growth.

On Polarized Prices and Costly Sequential Search

Posted by D. Daniel Sokol

Ruth G. Gilgenbach (SMU - Econ) writes On Polarized Prices and Costly Sequential Search.

ABSTRACT: This paper presents a homogenous goods duopoly model of costly sequential consumer search with three classes of consumers: costless searchers; moderately costly searchers; and consumers for whom search costs are extremely high--higher than the value they attach to the good. Under certain conditions, the mixed-strategy Nash equilibrium price distribution is one where low and high, but never moderate, prices are charged. In equilibrium, free searchers will always search for both prices, very costly searchers

Post Doctoral Research Fellow at UEA Centre for Competition Policy

Posted by D. Daniel Sokol

FACULTY OF SOCIAL SCIENCES
ESRC CENTRE FOR COMPETITION POLICY
Post Doctoral Research Fellow

● Ref: RA625

£29,704 to £35,469 per annum

The Centre

is a focus of research into Competition and Regulation across a range of disciplines, and welcomes applications in the area of competition or regulation policy from within the economics, competition law, political science and/or management disciplines. You will be expected to contribute to the Centre’s research individually, develop joint research with other Centre members, and undertake some teaching.

This is a three year post doctoral research training post for individuals wishing to develop an academic career. You must have submitted your thesis for a doctoral degree by the time you take up the appointment, and if you already have a doctoral degree, you should be within three years of the date of its award; and be able to satisfy all the essential criteria detailed in the person specification for this training post.

The appointment is available on a full-time, fixed-term basis for a period of three years from 1 September 2010.

Closing Date: 12 noon on 14 January 2010.

Further particulars and an application form are available on our website:

www.uea.ac.uk/hr/jobs/

or Tel. 01603 593493.