Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Wednesday, April 23, 2014

Bargaining power in manufacturer-retailer relationships

Haucap, Justus; Heimeshoff, Ulrich; Klein, Gordon J.; Rickert, Dennis; and Wey, Christian discuss Bargaining power in manufacturer-retailer relationships.

ABSTRACT: Research on bargaining power in vertical relationships is scarce. It remains particularly unclear which factors drive bargaining power between the two negotiating parties in a vertical structure. We use a demand model where the consumer demand determines the total pie of industry profits. Moreover, we apply a bargaining concept on the supply side to analyze how profit is split between retailers and manufacturers. Estimates show that bargaining power can be explained by several decision variables for retailers and manufacturers. Options for both indicate that any analysis of bargaining power has to consider a dynamic view on the relevant parameters.

April 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Cooperation and competition in markets with network externalities or learning curves

Karl Morasch (Munich) examines Cooperation and competition in markets with network externalities or learning curves.

ABSTRACT: The related phenomena of learning curve and network effects are quite common in oligopolistic markets. In this context the present paper discusses the incentives of a technological leader to share its exclusive technology with potential competitors. An alliance may be preferable because partner firms may be blocked. On the other hand competition between the alliance partners will be intensified. It is shown that a alliance solution will be chosen for medium values of learning curve or network effects. In almost all cases where firms decide to form an alliance this well enhance welfare.

April 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Gun Jumping?

With my semester finally done, I can devote more time to following events as they happen.  Asia is a particular focus, especially given the great upcoming ABA Antitrust in China conference next month. 

I noticed with great interest this post on the Microsoft Blog by GC Brad Smith:

Today we are excited to share that we have completed the steps necessary to finalize Microsoft’s acquisition of the Nokia Devices and Services business. The transaction will be completed this Friday, April 25, when we’ll officially welcome the Nokia Devices and Services business as part of the Microsoft family.

Given that the Microsoft/Nokia deal has not closed in Korea, is this possible gun-jumping by Microsoft?

One thing to watch when the KFTC makes its decision is the difference in treatment in terms of remedies between Asian jurisdictions (Taiwan and China) versus the US and EU, where the merger was cleared without conditions. Will Korea follow the Asian model?

April 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Cannibalization may Allow a Cost-inefficient Firm to Earn more than a Cost-effcient Firm in a Duopoly with Two Vertically Differentiated Goods

Ryoma Kitamura (Graduate School of Economics, Kwansei Gakuin
University) and Tetsuya Shinkai (School of Economics, Kwansei Gakuin University) write that Cannibalization may Allow a Cost-inefficient Firm to Earn more than a Cost-effcient Firm in a Duopoly with Two Vertically Differentiated Goods.

ABSTRACT: We consider cannibalization in a duopoly model in which firms with different costs supply two vertically differentiated products in the same market. We find that an increase in the difference in quality between the two goods or a decrease in the marginal cost of the high-quality goods leads to cannibalization, such that the high-quality goods keep out the low-quality goods from the market. We show that, in equilibrium, cannibalization aspects the product line of firms. As a result, an inefficient firm may earn more than the efficient firm. If the difference in the quality of the two goods is small enough, an increase in the production costs of the inefficient firm improves social welfare.

April 23, 2014 | Permalink | Comments (0) | TrackBack (0)

We're Number 1: Price Wars for Market Share Leadership

Luis Cabral (NYU) discusses We're Number 1: Price Wars for Market Share Leadership.

ABSTRACT: examine the dynamics of oligopolies when firms derive subjective value from being the market leader. In equilibrium, prices alternate in tandem between high levels and occasional price wars, which take place when market shares are similar and market leadership is at stake. The stationary distribution of market shares is typically multimodal, that is, much of the time there is a stable market leader. Even though shareholders do not value market leadership per se, a corporate culture that values market leadership may increase shareholder value. From a competition policy point of view, the paper implies that price regime change dynamics and parallel pricing are consistent with competitive behavior | in fact, hyper-competitive behavior.

April 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 22, 2014

Inter-format competition among retailers: The role of private label products in market delineation

Justus Haucap, Ulrich Heimeshoff, Gordon J. Klein, Dennis Rickert, and Christian Wey analyze Inter-format competition among retailers: The role of private label products in market delineation.

ABSTRACT: This paper analyses the extent of inter-format retail competition between supermarkets, discounters and drugstores in Germany, using data from the German market for diapers. We estimate a random coefficient logit model at the individual household level. Based on consumer substitution patterns, we calculate manufacturers' and retailers' estimated marginal costs and margins and, based on these margins, apply standard market delineation techniques which suggest that the strongest substitution patterns are between the leading manufacturer brand and private labels sold at drugstores and discounters. This finding contrasts with recent speculations by competition authorities that private label products may belong to a different antitrust market than manufacturers' brands.

April 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Cooperating with the Competition: Efficient Patent Pooling and the Choice of a New Standard

Nancy Gallini (UBC) explores Cooperating with the Competition: Efficient Patent Pooling and the Choice of a New Standard.

ABSTRACT: I examine the private and social efficiency of patent pools in a setting in which owners of intellectual property (IP), are both vertically and horizontally related. The relationship is vertical through the ownership of complementary IP and horizontal in that at least one member owns a competing product. For this hybrid structure referred to as overlapping ownership I analyze the interplay between two organizational decisions: the standard-setting process in which participants choose a product type (indexed by its differentiation from the current standard), and the subsequent patent pooling decision. Consumers can be better off with patent pooling as a result of lower prices (the complements effect) and greater product variety (the differentiation effect), even when a pool member is also a competitor of the new standard. However, in comparing new product collaborations across ownership regimes, consumers prefer those that admit no overlapping ownership. These results yield insights for antitrust rules promoting efficient IP agreements.

April 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Explicit Collusion under Antitrust Enforcement

Igor Mouraviev (Center for Mathematical Economics, Bielefeld University) examines Explicit Collusion under Antitrust Enforcement.

ABSTRACT: The article seeks to fill the gap between tacit and explicit collusion in a setting where firms observe only their own output levels and a common price, which includes a stochastic component. Without communication, firms fail to discriminate between random shocks and marginal deviations, which constrains the scope for collusion. By eliminating uncertainty about what has happened, communication facilitates detection of deviations but reduces collusive profits due to the risk of exposure to legal sanctions. With the optimal collusive strategy, firms communicate only if the market price falls somewhat below the trigger price. Moreover, they tend to communicate more often as they become less patient, a cartel grows in size, or demand uncertainty rises.

April 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Shedding Some Light on the Dark Matter of Competition: Insights from the Strategic Management and Organizational Science Literature for the Consideration of Diversity Aspects in Merger Review

Benjamin Kern (University of Marburg) and Malte Ackermann (University of Marburg) have an interesting paper on Shedding Some Light on the Dark Matter of Competition: Insights from the Strategic Management and Organizational Science Literature for the Consideration of Diversity Aspects in Merger Review.

ABSTRACT: A merger between two innovation competitors is often suspected to reduce the variety of heterogeneous entities which are currently undertaking R&D or which are well situated to undertake R&D in a certain field. The consequential reduction of “diversity” can be detrimental to innovation because it reduces the number of independent sources for possible future innovations and might furthermore lead to an alignment of formerly different R&D programs. However, if “diversity” indeed benefits innovative performance, even merged firms should have an incentive to maintain it in-house. Therefore, this article aims to bring to light whether firms can indeed be expected to create or maintain “diversity” post-merger. By focusing on the strategic management and organizational science literature we will demonstrate that the creation/maintenance of independent entities is indeed considered as an important determinant for the innovativeness and general performance of firms. Nevertheless, we will also show that this strategy has several grave implementation problems and might be hampered by certain trade-offs. As a consequence, competition authorities cannot presume that a reduced “inter-firm diversity” will get substituted by an increased “intra-firm diversity” without fail.

April 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, April 21, 2014

Hub and spoke collusion by embargo

Patrick VAN CAYSEELE and Simon MIEGIELSEN describe Hub and spoke collusion by embargo.

ABSTRACT: A common supplier (the hub) could try to enforce a collusive outcome between his buyers (the spokes) if they are unable to sustain such an agreement among themselves. We derive necessary and sufficient conditions under which the hub is willing to assume the policing role in a cartel.

April 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Welfare Improving Discrimination based on Cognitive Limitations

Oktay Surucu (Center for Mathematical Economics, Bielefeld University) has written on Welfare Improving Discrimination based on Cognitive Limitations.

ABSTRACT: This paper is concerned with the situation in which a profit-maximizing monopolist faces consumers that are diverse not only in their preferences but also in their levels of bounded rationality. The behavioral phenomenon considered here is the attraction effects when choices are made across categories. Using the standard second-degree price discrimination model, the optimal menu of contracts that screens consumers' types is characterized. The benefit of discriminating consumers based on their preference and cognitive limitation is always higher than its cost. In other words, the monopolist can exploit consumers and increase his profit with this contract. The model provides a possible explanation for the apparent puzzle why one may observe that the same quality products are priced differently under different labels. Moreover, this contract is welfare improving.

April 21, 2014 | Permalink | Comments (0) | TrackBack (0)

A Note on Networks of Collaboration in Multi-market Oligopolies

Pascal Billand (GATE Lyon Saint-Etienne), Christophe Bravard (GATE Lyon Saint-Etienne), Subhadip Chakrabarti (Queen's University Belfast), Sudipta Sarangi (Louisiana State University) offer A Note on Networks of Collaboration in Multi-market Oligopolies.

ABSTRACT: In this note, we extend the Goyal and Joshi's model of network of collaboration in oligopoly to multi-market situations. We examine the incentive of firms to form links and the architectures of the resulting equilibrium networks in this setting. We also present some results on efficient networks.

April 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Competition and Cooperation in Network Games

Alexander Konovalov (Department of Economics, School of Business, Economics and Law, Goteborg University) explores Competition and Cooperation in Network Games.

ABSTRACT: We consider games where agents are embedded in a network of bilateral relationships and have multivariate strategy sets. Some components of their strategies correspond to individual activities, while the other strategic components are related to joint activities and interaction with the partners. We introduce several new equilibrium concepts that account for the possibility that players act competitively in individual components of their strategy but cooperate on the components corresponding to joint activity or collaboration. We apply these concepts to the R&D collaboration networks model where firms engage in bilateral joint projects with other firms. The analysis shows that investments are highest under bilateral cooperation and lowest under full cooperation because the spillovers associated to bilateral collaboration are bound to the partnership. This leads to welfare being maximized under bilateral collaboration! when there are a few firms in the market and under non-cooperation in markets with many firms; full cooperation is never social welfare maximizing. Investigating the issue of endogenous network formation, we find that bilateral cooperation increases (lowers) the profits of more (less) connected firms. However, this does not always lead to a denser stable network of R&D collaboration under bilateral cooperation.

April 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, April 18, 2014

Second Degree Price Discrimination in a Market for Credence Goods

Dulleck, Uwe (QUT School of Economics and Finance), Kerschbamer, Rudolf (Dept of Economics, University of Innsbruck and CEPR) and Konovalov, Alexander (Department of Economics, School of Business, Economics and Law, Goteborg University) describe Second Degree Price Discrimination in a Market for Credence Goods.

ABSTRACT: This article studies second-degree price-discrimination in markets for credence goods. Such markets are affected by asymmetric informationbecause expert sellers are better informed than their customers about the quality that yields the highest surplus from trade. We show that discrimination regards the amount of advice offered to customers and that it leads to a different equilibrium distortion depending on the main source of heterogeneity among consumers. If consumers differ mainly in the expected cost needed to generate consumer surplus, the inefficiency occurring at the bottom of the type distribution involves overprovision of quality. By contrast, if consumers differ in the surplus generated whenever the consumer’s needs are met, the inefficiency involves underprovision of quality.

April 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Analyzing competitive effects between fixed and mobile broadband

Jochen Wulf and Walter Brenner, University of St. Gallen are Analyzing competitive effects between fixed and mobile broadband.

ABSTRACT: The diffusion of mobile broadband, which use cellular mobile communication technology, is at an advanced state in many countries. It is, however, unclear how mobile broadband diffusion affects other broadband services, and fixed broadband access in particular. Following the definition of ITU (2012) we define broadband as a high speed access to the Internet with download speeds of greater or equal to 256 kbit/s. Fixed broadband includes wired technologies such as cable, DSL and FTTH. Mobile broadband enables a non-stationary Internet access based on cellular mobile communication technologies (such as LTE, UMTS or WIMAX). Competitive effects between different broadband access technologies are of high importance for regulation as well as for competitive strategy: With regard to regulations, technology platform competition can have an effect on the competitive behavior in the individual markets. With regard to competitive strategy, competitive or complementarity effects between different access technologies significantly determine the success of service bundeling strategies. The goal of our research is twofold. Firstly, want to gain a deeper understanding of how mobile and fixed broadband diffusion affect each other based on the latest country level panel data (ITU 2012, World Bank 2013). A second objective of our research is to deepen the understanding of factors moderating the competitive relationship between fixed and mobile broadband. We therefore present a methodology for moderation analysis and exemplarily demonstrate its application.

April 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Spectrum licensing, policy instruments and market entry

Gary Madden, Department of Econometrics and Quantitative Modelling, Curtin University, Australia, Erik Bohlin, Department of Technology Management and Economics, Chalmers University of Technology, Sweden, Thien Tran, Communication Economics and Electronic Markets Research Centre, Curtin University, Australia and Aaron Morey, Department of Economics, University of Melbourne, Australia analyze Spectrum licensing, policy instruments and market entry.

ABSTRACT: Competition policy attempts to address the potential for market failure by encouraging competition in service markets. Often, in wireless communication service markets, national regulatory authorities seek to encourage entry via the spectrum assignment process. Instruments used include the assignment mode (auction or beauty contest), setting aside licenses and providing bidding (price and quantity) credits for potential entrants, and making more licenses (spectrum blocks) available than incumbent firms (excess licenses). The empirical analysis assesses the effectiveness of these policy instruments on encouraging entry. The econometric results show that the probability of entry is enhanced by using auction assignments and excess licenses. Furthermore, quantity, but not price, concessions encourage entry.

April 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, April 17, 2014

The impact of regulation and competition on the adoption of fibre-based broadband services: Recent evidence from the European Union member states

Wolfgang Briglauer, Vienna University of Economics and Business discusses The impact of regulation and competition on the adoption of fibre-based broadband services: Recent evidence from the European Union member states.

ABSTRACT: Fibre deployment of next-generation high-speed broadband networks is considered to be a decisive development for any information-based society, yet investment activities and especially the adoption of fibre-based broadband services take place only very gradually in most countries. This work employs static and dynamic model specifications and identifies the most important determinants of the adoption of fibre-based broadband services with recent panel data from the European Union member states for the years from 2004 to 2012. The results show that the more effective previous broadband access regulation is, the more negative the impact on adoption, while competitive pressure from mobile networks affects adoption in a non-linear manner. It appears that the approach of strict cost-based access regulation embedded in the EU regulatory framework is at odds with the targets outlined in the European Commission's Digital Agenda. Finally, we also find evidence for substantial network effects underlying the adoption process.

April 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Collusion to Control a Powerful Customer: Amazon, E-Books, and Antitrust Policy

John B. Kirkwood, Seattle University School of Law discusses Collusion to Control a Powerful Customer: Amazon, E-Books, and Antitrust Policy.

ABSTRACT: In July 2013 a federal judge held that Apple had violated antitrust law by conspiring with publishers to raise e-book prices. Many critics contended that the case targeted the wrong parties; the real threat to competition was not the publishers and Apple, but Amazon. According to the critics, Amazon’s predatory pricing and aggressive use of buyer power were likely to create a monopoly, lead to even higher prices in the long run, and deprive publishers and authors of the revenues needed to develop a rich array of new titles.

The evidence, however, indicates the opposite: Amazon was almost certainly engaged in procompetitive loss leading, not predatory pricing, and fears of an eventual Amazon monopoly were largely unfounded. Amazon’s buyer power, moreover, was not monopsony power, which is frequently harmful, but countervailing power, which can lead to lower consumer prices. Finally, there was no evidence that Amazon’s exercise of this power had adversely affected the number or variety of new books. While the e-books conspiracy was unjustified, the larger issue remains: whether collusion to control a powerful customer can ever be justified. This article concludes, contrary to prevailing law, that it can. It also develops, in more detail than any prior effort, a workable defense for such behavior. The defense is demanding, but when the facts are established, it would provide a remedy for anticompetitive buyer power that antitrust law would otherwise not reach.

April 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Does one more or one less mobile opertor affect prices? A comprehensive ex-post evaluation of entries and mergers in European mobile telecommunication markets

Gergely Csorba, Centre for Economic and Regional Studies of the Hungarian Academy of Sciences and Zoltan Papai, Infrapont Economic Consulting ask Does one more or one less mobile opertor affect prices? A comprehensive ex-post evaluation of entries and mergers in European mobile telecommunication markets.

ABSTRACT: This paper estimates the impact of entries and mergers on the price of mobile voice services in a panel database of 27 European Member States between 2003 and 2010. Our difference-in-differences econometric methodology exploits the variance in different structural changes between countries to separate the respective effects. Our results show that the effect of entry crucially depends on the number of active operators and the type of entrant, and not controlling for these differences might lead to misleading conclusions. We find no robust evidence that entry has a price-decreasing effect on markets with originally 2 operators. However, the entry of a 4th operator does have a price-decreasing effect, but with different dynamics concerning the entrant's type. When we separate entry effects for the subsequent years, we show that the significant price-decreasing effects for local operators entering occur only in the first year after entry, while the price-decreasing effects for multinational entries are significantly larger on the long-run. Last, we find no price-increasing effects of 5-to-4 mergers, but a long run price-increasing effect of a 4-to-3 merger.

April 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Complement or substitute? The Internet as an Advertising Channel, Evidence on Advertisers on the

Marco Gambaro, DEAS, Universita degli Studi di Milano and Riccardo Puglisi, DESED, Universita di Pavia and Centro Studi Luca d'Aglianov explore Complement or substitute? The Internet as an Advertising Channel, Evidence on Advertisers on the Italian Market, 2005-2009.

ABSTRACT: During the last decade the internet has been the fastest growing segment in advertising. Exploiting Nielsen data, we analyze the advertising pattern displayed by the population of organizations (i.e. companies, non-profit institutions and public entities) that were active on the Italian national market during the period 2005-2009. Some reduced form evidence shows that - during this time period - smaller firms increased their ads investment on newspapers, magazines cinema comparatively more than larger firms. Radio and the internet display an opposite pattern, whereas are larger firms increasing their expenses more than smaller firms. In the lack of firm specific output data, we also estimate a homothetic advertising cost function for different subsets of the sample. We find that media segments are (loose) substitutes, in that the estimated cross-price elasticities are positive but decidedly less than one.

April 17, 2014 | Permalink | Comments (0) | TrackBack (0)