Sunday, June 17, 2007
Posted by D. Daniel Sokol
Roman Inderst of Goethe University Frankfurt and London School of Economics and Tommaso M. Valletti of Imperial College London and University of Rome have a fascinating forthcoming article in the Journal of Competition Law and Economics on how to analyze issues of indirect constraints and captive sales titled Market Analysis in the Presence of Indirect Constraints and Captive Sales.
ABSTRACT: In antitrust cases as well as for regulated industries, the question of how to treat indirect constraint and captive sales correctly has become of major importance in Europe. The (im-)proper treatment of indirect constraints has lead the CFI to overturn the Commission's decision in the proposed merger of Schneider and Legrand. Moreover, with regards to the definition of wholesale broadband access markets, there is an ongoing controversy between the Commission and some National Regulatory Authorities, centering on the question of whether to incorporate indirect constraints already at the stage of market definition. To inform this debate, we present in this article some of the insights from a detailed formal analysis into markets with indirect constraints and captive sales. We show how indirect constraints are appropriately taken into account through the elasticity of derived demand and comment also on the informativeness of concentration measures on both the wholesale and retail market. We further derive insights into when indirect constraints may be more or less important compared with direct constraints. Finally, we also discuss the more practical difficulties that are encountered when analyzing (or estimating) market structures where forward integrated firms also sell to other, competing retail firms.