Monday, July 6, 2015
Patrick Andreoli-Versbach, Max Planck Institute for Innovation and Competition & University of Munich and Jens-Uwe Franck, University of Mannheim provide ECONOMETRIC EVIDENCE TO TARGET TACIT COLLUSION IN OLIGOPOLISTIC MARKETS.
ABSTRACT: Tacit collusion may reduce welfare comparably to explicit collusion, but remains mostly unaddressed by antitrust enforcement that greatly depends on evidence of explicit communication. We propose to target specific elements of firms' behavior that facilitate tacit collusion by providing quantitative evidence that links these actions to an anticompetitive market outcome. We apply our approach to incidents on the Italian gasoline market, where the market leader unilaterally announced its commitment to a policy of sticky pricing and large price changes that facilitated price alignment and coordination of price changes. Antitrust policy must distinguish such active promotion of a collusive strategy from passive, best-response, alignment. Our results imply the necessity of stronger legal instruments that target unilateral conduct that aims at bringing about collusion.
Sunday, July 5, 2015
Herbert J. Hovenkamp, University of Iowa - College of Law has posted Brulotte's Web.
ABSTRACT: Kimble v. Marvel Entertainment held that stare decisis required the Supreme Court to adhere to the half century old, much criticized rule in Brulotte v. Thys. Justice Douglas' Brulotte opinion concluded that license agreements requiring royalties measured by use of a patent after its expiration are unenforceable per se. The court need not inquire into market power nor anticompetitive effects, effects on innovation, and it may not accept any defense. Congress can change the rule if it wants to, but has resisted many invitations to do so.
Under Brulotte a hybrid license on a patent and a trade secret requires a royalty reduction when the patent expires. But there is little reason for thinking that a process is worth more to a licensee when it is covered by both a patent and a trade secret than when it is covered by only a single right. What the licensee wants is access to a technology that reduces its costs or improves the quality of its output. Those numbers are determined by market value and product competition, and are not obviously affected by the number and kind of IP rights that they embody. For example, the price I am willing to pay for a patented weed killer for my back yard is not higher because I know that production of the weed killer is protected by a trade secret as well as a patent.
One area where Brulotte/Kimble threatens efficient risk sharing is reach through royalties. Researchers in some areas often require costly patented research tools, or inputs, that may produce considerable value once a successful product has been developed. The research might succeed in producing a valuable drug but there is also a high chance that it will fail. A rational way to price out such an asset is conditionally, perhaps with little or no royalty during the research period, but a substantial royalty down the road if the project succeeds. Depending on the age of the patent and the timeline for the project, this can contemplate royalties on the pharmaceutical drug long after the patent on the research tool expires.
A lively debate has emerged about the economics of reach through royalties, with some believing that they contribute to a patent "thicket" that is difficult for researchers to negotiate, and others arguing that they constitute a reasonable form of risk sharing. That issue is a serious one and should never be addressed by any rule as ham handed as the Brulotte per se rule against post-expiration royalties.
One problematic effect of Kimble is that antitrust tying law is undergoing a process of revision that is coming close to removing per se illegality. That has largely happened for just the reasons that the Court suggested: the underlying economic theory has changed, de-emphasizing harmful leverage and emphasizing efficiencies. By contrast, the patent law of tying arrangements -- heavily borrowed from antitrust -- remains stuck in a time warp until Congress gets around to changing it.
In defending its rule of stare decisis, the Kimble Court also observed that the challenged practice involved two areas of law, property and contract, where stare decisis has traditionally been regarded as strong because of reliance interests. A legal regime that previously permitted unlimited licensing but then adopted the Brulotte rule could certainly upset many reliance interests. When the legal change is in the other direction, however the weight of reliance interests is less clear. The real impact of overruling would be on those people, who like the parties in Kimble, wrote their agreements in ignorance of Brulotte. In such cases the effect of overruling would be that these parties would get precisely what they bargained for.
The Kimble Court rejected Kimble's proposed alternative -- namely, that post-expiration royalty extensions be addressed under a rule of reason. The Court found this unacceptable, substituting a bright line (although ill conceived) rule for something as complex and indeterminate as antitrust's rule of treason. But nearly every commercial transaction in the country is subject to antitrust evaluation under Section 1 of the Sherman Act. Agreements requiring post-expiration payments would join the general run of agreements that are nearly always legal.
Friday, July 3, 2015
Lijun Pan, Nagoya University describes Horizontal Merger of Big Firms with Product Choice in the Presence of Small Firms.
ABSTRACT: We extend Shimomura and Thisse (2012) to investigate how the bilateral merger between big firms with the choice on product range affects the competitive fringe and social welfare. The comparison of the marginal cost synergy to fixed cost determines whether the merged big firm (insider) withdraws a brand or maintains two brands. In addition, the insider's different product choices generate opposing impacts on the competitive fringe and social welfare.
Erik N. Hovenkamp, Northwestern University, explains How Reasonable Royalties Suppress Patent Licensing.
ABSTRACT: Patent remedies are essential to maintain a well-functioning patent system, but if not properly fashioned they may interfere with the dissemination of patented inventions and thereby foreclose many opportunities for mutually-beneficial licensing. This paper addresses two attributes of patent damages awards that engender such effects. The first is the monopoly fallacy: the tendency to overstate a patent holder’s market power in its licensing market by discounting or disregarding alternative options or potential workarounds, effectively allowing a plaintiff to recover a monopoly price for a license that would command only a competitive price if exchanged at arm’s length. As a result, settlements or judgments secured from unintentional infringers become a patent holder’s most lucrative means of licensing, and this substantially lessens its interest in actively disseminating its invention by seeking out potential licensees ex ante. In fact, if expected damages are sufficiently high in relation to the market value of a license, the patent holder’s most profitable strategy is to deliberately refrain from approaching known licensing candidates in the hope that some fraction of them will unintentionally infringe. Consequently many opportunities for efficient licensing are ultimately missed, and many of those deals that do occur could have been executed earlier and more efficiently. A second problem is the courts’ reliance on precedential royalties, or reasonable royalty damages based on an established royalty for the infringed patent. While administratively convenient, the results of this approach will often be woefully imprecise, as there are many variables relating to the parties, the licensee’s intended licensing application, and the competitive landscape that collectively create a significant disparity in the licensing terms a patent holder would reach with different licensees or at different times in the patent term. Because a precedential royalty rule ignores these differences, the terms of a licensing contract may work against the licensor in its future dealings or disputes with other parties. Patent holders thus have a strong interest in not setting a bad precedent, and will reject many mutually-beneficial deals simply because the royalty rate would not appear particularly high. The result is that patent holders are induced to cut off a large segment of the market, even though they could have benefitted from these forgone transactions – an outcome that injures inventors, firms, and consumers.
Mathilde Stenersen and Vincent Wellens (NautaDutilh Avocats) have written on Unjustified Public Monopolies: The Necessity to Remain Vigilant (Luxembourg).
ABSTRACT: Under the rules of competition, public bodies cannot reserve to themselves the exercise of activities that are economic in nature. Enshrined in European competition law, that principle has been applied recently, in Luxembourg, by the Competition Council, against the City of Luxembourg, in a health-related market (transportation of human bodies).
Thursday, July 2, 2015
Maarten Pieter Schinkel, University of Amsterdam - Amsterdam Center for Law & Economics (ACLE); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA), Lukas Toth, University of Amsterdam - Amsterdam Center for Law & Economics (ACLE), and Jan Tuinstra, University of Amsterdam - Department of Quantitative Economics (KE); Tinbergen analyze Institute Discretionary Authority and Prioritizing in Government Agencies.
ABSTRACT: Government agencies typically have a certain freedom to choose among different possible courses of action. This paper studies agency decision-making on priorities in a principal-agent framework with multi-tasking. The agency head (the principal) has discretion over part of the agency's budget to incentivize his staff (agents) in the pick-up of cases. The head is concerned with society's benefits from the agency's overall performance, but also with the organization's public image as formed from its case record and various non-case specific activities. Based on their talent and the contracts offered by the head, staff officials choose which type of task to pursue: complex major, yet difficult to complete cases with an uncertain outcome, or basic minor and simple cases with a much higher probability of success. The size of the agency's discretionary budget influences not only the scale, but also the type of tasks it will engage in. Social welfare is non-monotonic and discontinuous in the agency's budget. Small changes in the budget may cause extensive restructuring from major to minor tasks, or vice versa. A budget cut can improve welfare more than extra budget would, even if resources are below the welfare-maximizing level. For lower binding budgets, the head continues to suboptimally incentivize work on complex tasks, when the agency should have shifted down to simpler tasks. Yet a reluctant head may need to be nudged with more resources to pursue productive cases. In determining the discretionary space of the agency head, government can limit the extraction of resources, but thereby also benefits less from the head's expertise. Antitrust authorities serve as one illustration of policy implications for institutional design.
Promoting or restricting competition?: Regulation of the UK retail residential energy market since 2008
Stephen Littlechild, Cambridge asks Promoting or restricting competition?: Regulation of the UK retail residential energy market since 2008.
ABSTRACT: Since 2008 UK energy regulator Ofgem has imposed increasingly severe restrictions on suppliers to the domestic (residential) retail market. Initially, non-discrimination conditions aimed to “remove unfair price differentials”, particularly between suppliers’ prices between regions, totalling £0.5 bn. This actually envisaged increasing prices to other customers by £0.5 billion, to maintain revenue neutrality. In the event, competition reduced, customer switching fell by half, and profits of major suppliers increased by nearly £1 billion, at the expense of customers. Later, restrictions on the number and types of tariffs aimed to encourage customers to engage in the market. However, there is no empirical evidence to justify this, and the policy prohibits many discounts and tariff types that customers value, especially vulnerable customers. Perhaps Ofgem felt pressed to Do Something in the face of an unprecedented increase in energy prices. Successive Governments have supported its interventions, but cannot be blamed for designing them. The decline of economists in senior positions at Ofgem removed an important ‘sanity check’. But Ofgem itself bears responsibility for its change in policy since 2008. It may have been well-meaning, attempting to protect the interests of vulnerable customers, but inappropriate restrictions have made customers worse off. Should other regulators follow suit? No. Hopefully the CMA market investigation will reveal this and bring to an end one of the most misguided episodes in the modern history of UK regulation.
The Impact of Service Bundling on Consumer Switching Behaviour: Evidence from UK Communication Markets
Tim Burnnett, Centre for Market and Public Organisation University of Bristol discusses The Impact of Service Bundling on Consumer Switching Behaviour: Evidence from UK Communication Markets.
ABSTRACT: This paper empirically analyses the impact of the bundling of four common home communication services with a single supplier on the probability that an individual changes supplier using a survey-elicited dataset of 2,871 individuals. Implementing a random effects probit approach to control for individual heterogeneity, the results strongly show that when individuals bundle their service then they are significantly less likely to change supplier. A second result indicates that service- and supplier- related variables are better predictors of an individual's likelihood of switching than are the characteristics of the individual, suggesting that future research in this area should prioritise their inclusion.
Wednesday, July 1, 2015
ABSTRACT: Agri-food sectors are commonly considered as highly regulated, traditional and of strategic importance, mainly due to the food security issues. Changes in the related market structures are subject of constant interest because of their importance for competition and economic welfare of food producers and consumers. In Poland, a rising concentration among various branches of the food industry can be observed. The main objective of the article was to depict the changes of the market power execution in the Polish food sector and its branches in the period 2002-2013. As a measure of this phenomenon the markups of price above the marginal cost were applied and for their estimation two methods were used, namely the Roeger method involving primal and dual Solow residuals and the method based on the marginal cost of labor. Yearly data for 32 food sector branches and various accounting categories were used in the calculations. It was found that in the analyzed period the markup over marginal cost on average amounted to 10.4% and it was increasing over time. The labor input category seemed to be not sufficient for the markup calculation. The evolution of the monopolistic power in the Polish food sector appears to be associated not only with the business cycle, but also with the sector developments accelerated by the accession to the EU. Moreover, the differences in results for the branches indicate a considerable heterogeneity in the Polish food industry companies pricing practices.
Eduardo P. S. Fiuza and Fabiana F. M. Tito (both Ipea) explain Time Series Econometrics in a Post-acquisition Antitrust Analysis: the Brazilian Iron ore Market.
ABSTRACT: In Brazil, mergers and acquisitions are usually analyzed by the Antitrust Authorities ex post, following a SCP framework close to the Merger Guidelines applied in the USA. However, this framework was unable to address a set of acquisitions of four mining companies by the newly privatized national champion CVRD. The present article reports an econometric exercise undertaken by the Brazilian Ministry of Justice, which came to reinforce the definition of the relevant geographic market and to test for structural breaks in the price series. Though international prices Grangercaused domestic prices in Brazil, they explain less than a third of the variance. A price surge on the acquired miners’ series was observed above the export price increase not long after the acquisitions, such that a structural break could not be rejected.
- Joseph Murphy, Jun 30, 2015
No matter what an agency may say in speeches about the importance of compliance and ethics efforts, if it ignores good programs in practice, then businesses will correctly read the real message: programs do not count. Joe Murphy (Compliance Strategists)
- Theodore Banks, Jun 30, 2015
The monitor then can become a kind of insurance policy. Theodore L. Banks (Scharf Banks Marmor)
- Keith Hylton, Jun 30, 2015
It is time for courts to start questioning requests for monitors under the Sherman Act. Keith N. Hylton (Boston University)
- Rosa Abrantes-Metz, Elizabeth Prewitt, Jun 30, 2015
Antitrust Compliance 2.0: The Use of Structural Analysis and Empirical Screens to Detect Collusion and Corruption in Bidding Procurement Processes
A compliance program, with the use of screening, helps position a company to win a race for leniency. Rosa M. Abrantes-Metz (Global Economics Group & New York Univ.) & Elizabeth Prewitt (Hughes Hubbard & Reed)
- Florence Thepot, Jun 30, 2015
Different liability regimes may explain why, in some jurisdictions, competition law and anti-corruption agencies have very contrasted approaches to compliance programs. Florence Thépot (University College London)
- Nathalie Jalabert-Doury, David Harrison, Jens Peter Schmidt, Jun 30, 2015
Enforcers’ Consideration of Compliance Programs in Europe: A Long and Winding—but Increasingly Interesting—Road
Although the European Commission's position remains that compliance programs are beneficial in assisting companies to avoid breaches of competition law, the increasing willingness of other competition authorities in Europe to take compliance measures into account in decisions relating to liability provides a further compelling reason to implement rigorous, bespoke compliance arrangements, in case the worst should happen. Nathalie Jalabert-Doury, David Harrison, & Jens-Peter Schmidt (Mayer Brown)
- Javier Tapia, Jun 30, 2015
I think there are compelling reasons for paying more attention to compliance programs, even over fundamental reforms to the statutes. It is time to make a profound paradigm-shift. Javier Tapia (Chilean Competition Tribunal)
Jörg Oechssler, University of Heidelberg, Alex Roomets, Franklin and Marshall College, and Stefan Roth, Universitat Pompeu Fabra, Barcelona offer From Imitation to Collusion - A Comment.
ABSTRACT: In oligopoly, imitating the most successful competitor yields very competitive outcomes. This theoretical prediction has been conﬁrmed experimentally by a number of studies. A recent paper by Friedman et al. (2015) qualiﬁes those results in an interesting way: while they replicate the very competitive results for the ﬁrst 25 to 50 periods, they show that when using a much longer time horizon of 1200 periods, results slowly turn to more and more collusive outcomes. We replicate their result for duopolies. However, with 4 ﬁrms none of our oligopolies becomes permanently collusive. Instead, the average quantity always stays above the Cournot-Nash equilibrium quantity. Thus, it seems that “four remain many” even with 1200 periods.
Oleksandr Shcherbakov and Naoki Wakamori, both University of Mannheimm offer A simple way to identify the degree of collusion under proportional reduction.
ABSTRACT: Proportional reduction is a common cartel practice, in which cartel members reduce their output by the same percentage. We develop a simple method to quantify this reduction relative to a benchmark market equilibrium scenario. Our measure is continuous, has a simple interpretation as the â€œdegree of collusion" and nests the earlier models in the existing literature. More importantly, by exploiting firms ex post heterogeneity and optimality conditions, Corts (1999) critique can be addressed by estimating time-varying degree of industry monopolization from a short panel of firm-level observations. We illustrate the method in Monte-Carlo simulations and in application to the data from the Joint Executive Committee railroad cartel.
Tuesday, June 30, 2015
Eduardo P. S. Fiuza, Ipea offers Relevant Market Delineation and Horizontal Merger Simulation: A Unified Approach.
ABSTRACT: While often times the Hypothetical Monopolist Test (HMT) utilized in relevant market delineation is implemented with uniform price increases throughout all the goods in the candidate relevant market, since 1984 the versions of the U.S. Merger Guidelines have emphasized that these small but significant and non-transitory increase in prices (SSNIP) should be profit-maximizing, what would result in uniform increases only under very particular conditions. Such increases could then be analyzed–sufficient data existing for such–in the same manner as the simulations of unilateral effects of mergers, introduced in the 1980s and further developed in the 1990s. Thus, in this article, building on structural models of demand and supply and on recent contributions to the literature, we propose a unified framework for merger simulations and for the so-called HMT in its diversity of versions implemented in various countries along the years, and we better detail their differences. To illustrate those differences, we report the results of a Monte Carlo experiment using three demand specifications: isoelastic, linear and linearized Almost Ideal Demand System (AIDS), all of them in a two-stage budget setting. We conclude that the choice of the test version and of the demand specification may affect significantly the size of the relevant market found, depending on the distribution and magnitude of cross and own price elasticities in the potential market.
When Regulation Protects Privilege Instead of People: Government Restraints of Trade – A Competition Enforcer’s Perspective
FTC Commissioner Maureen Ohlhausen gave a speech When Regulation Protects Privilege Instead of People: Government Restraints of Trade – A Competition Enforcer’s Perspective.
Brent Snyder, DOJ has a speech up on Leniency in Multi-Jurisdictional Investigations: Too Much of a Good Thing?
Benjamin Eden (Vanderbilt University) explores Price dispersion and demand uncertainty: Evidence from US scanner data.
ABSTRACT: I use the Prescott (1975) hotels model to explain variations in price dispersion across goods sold by supermarkets in Chicago. I extend the theory to accounts for the monopoly power of chains and for non-shoppers. The main empirical finding is that the effect of demand uncertainty on price dispersion is highly significant and quantitatively important: More than 50% of the cross sectional standard deviation of log prices is due to demand uncertainty. I also find that price dispersion measures are negatively correlated with the average price but are not negatively correlated with the revenues from selling the good (across stores and weeks) and with the number of stores that sell the good.
Zoltan Racz, Corvinus University of Budapest and Attila Tasnadi, Corvinus University of Budapest offer A Bertrand-Edgeworth oligopoly with a public firm.
ABSTRACT: We determine conditions under which a pure-strategy equilibrium of a mixed Bertrand-Edgeworth oligopoly exists. In addition, we determine its pure-strategy equilibrium whenever it exists and compare the equilibrium outcome with that of the standard Bertrand-Edgeworth oligopoly with only private firms.