Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Friday, January 2, 2009

ICN Seminar on Competition Agency Effectiveness

Posted by D. Daniel Sokol

This seminar will constitute a forum for exchange of ideas and brainstorming on different organisational and planning tools and methods in use in competition agencies and their relative merits.

The seminar will take place in Brussels on 22nd and 23rd January 2009. It is hosted by DG Competition of the European Commission.

The agenda is available here.

January 2, 2009 | Permalink | Comments (0) | TrackBack (0)

Evaluating Market Power with Two-Sided Demand and Preemptive Offers to Dissipate Monopoly Rent: Lessons for High-Technology Industries from the Antitrust Division's Approval of the XM-Sirius Satellite Radio Merger

Posted by D. Daniel Sokol

In a new paper, Greg Sidak (Criterion Economics) and Hal Singer (Empirus) discuss Evaluating Market Power with Two-Sided Demand and Preemptive Offers to Dissipate Monopoly Rent: Lessons for High-Technology Industries from the Antitrust Division's Approval of the XM-Sirius Satellite Radio Merger.

ABSTRACT: Can the standard merger analysis of the Department of Justice's and Federal Trade Commission's Horizontal Merger Guidelines accommodate mergers in high-technology industries? In its April 2007 report to Congress, the Antitrust Modernization Commission (AMC) answered that question in the affirmative. Still, some antitrust lawyers and economists advocate exceptions to the rules for particular transactions. In the proposed XM-Sirius merger, for example, proponents argue that the Merger Guidelines be relaxed to accommodate their transaction because satellite radio is a nascent, high-technology industry characterized by dynamic demand. We argue that the AMC correctly refrained from recommending high-tech exceptions for defining markets in merger proceedings. Merger proponents naturally seek to expand the relevant product market as much as possible. But if alternative products are included in the relevant market without a showing of significant cross-price elasticities - that is, without evidence of buyer substitution between the two products in response to a relative change in prices - then market definition is unbounded. The XM-Sirius merger also follows a recent trend of prosecutorial inaction in merger reviews. The Antitrust Division's use of a higher standard for intervention than the incipiency standard in Section 7 of the Clayton Act increases the risk of false negatives. Finally, the XM-Sirius merger exemplifies the use of preemptive offers of merger conditions by the merger parties to gain political favor and to allocate postmerger rents to influential third-party intervenors. The most significant preemptive concessions were XM's and Sirius's offer to freeze the monthly subscription price at the premerger monthly rate of $12.95 and to offer a variety of new tiered program packages that XM and Sirius characterized as à-la-carte. These offers presumably were intended to neutralize the traditional antitrust concerns that a merger among direct competitors leads to higher prices and to win the support of certain vital constituencies. To the contrary, we argue that the offer to freeze prices could reduce welfare and that the Federal Communications Commission and the Department of Justice lack the authority to create a rate-regulated monopoly for satellite radio. Furthermore, because the à-la-carte offering would not hold constant other nonprice factors, consumer surplus could fall.

January 2, 2009 | Permalink | Comments (0) | TrackBack (0)

The Assessment of Collective SMP: Lessons Learned from the First Round of Market Review

Posted by D. Daniel Sokol

127leonLiyang Hou of the Katholieke Universiteit Leuven's Interdisciplinary Centre for Law and ICT reviews The Assessment of Collective SMP: Lessons Learned from the First Round of Market Review.

ABSTRACT: The legal uncertainty in the application of collective dominance by competition authorities under EU competition law raises an interesting question on how its equivalent concept, collective significant market power, should be employed by the national regulatory authorities in the context of the EU 2003 Regulatory Framework in the electronic communications sector. This article aims to shed some light on the implementation of collective significant market power from an empirical point of view. It will first examine the decisions of the European Commission that involve the assessment of collective significant market power under Article 7 of the Framework Directive in the first round of market review, and then provide a general overview of the application of collective significant market power based on these decisions, following a four-step analysis: (1) conduciveness to tactic coordination, (2) ability and incentives to detect deviation, (3) ability and incentive to retaliate, and (4) an SMP position.

January 2, 2009 | Permalink | Comments (0) | TrackBack (0)

Thursday, January 1, 2009

Can the Threat of Entry Reduce Competition?

Posted by D. Daniel Sokol

Martin C. Byford, University of Melbourne - Melbourne Business School and Joshua S. Gans, University of Melbourne - Melbourne Business School, University of Melbourne - Department of Economics ask Can the Threat of Entry Reduce Competition?

ABSTRACT: This paper is the first to provide a general context whereby potential entry can permanently reduce the intensity of competition in a market. All previous results found that potential entry would lead to lower prices and greater competition. Examining markets where entry occurs by the acquisition of access rights from existing incumbents, we demonstrate that, when competitive choices are strategic complements, a more efficient entrant may be unable to acquire those rights from a less efficient incumbent due to the accommodating behavior of efficient incumbents. Similarly, such accommodating behavior may deter efficient investment by an incumbent or mergers that would generate social welfare improvements. These results have implications as to how economists view potential entry and its benefits.

January 1, 2009 | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 31, 2008

Wall Street Journal Weighs in on the "Whole Foods Fiasco"

Posted by D. Daniel Sokol

Today's Wall Street Journal has an editorial titled Whole Foods Fiasco.  The Journal's conclusion is "The Whole Foods fiasco is an embarrassment for the Bush Administration's antitrust policy."

December 31, 2008 | Permalink | Comments (0) | TrackBack (0)

Consumer Choice and Merchant Acceptance of Payment Media

Posted by D. Daniel Sokol

Wilko Bolt, Bank of the Netherlands - Research Department and Sujit Chakravorti, Federal Reserve Bank of Chicago - Research Department discuss Consumer Choice and Merchant Acceptance of Payment Media in their new working paper.

ABSTRACT: We study the ability of banks and merchants to influence the consumer's payment instrument choice. Consumers participate in payment card networks to insure themselves against three types of shocks - income, theft, and their merchant match. Merchants choose which payment instruments to accept based on their production costs and increased profit opportunities. Our key results can be summarized as follows. The structure of prices is determined by the level of the bank's cost to provide payment services including the level of aggregate credit loss, the probability of theft, and the timing of income flows. We also identify equilibria where the bank finds it profitable to offer one or both payment cards. Our model predicts that when merchants are restricted to charging a uniform price for goods that they sell, the bank benefits while consumers and merchants are worse off. Finally, we compare welfare-maximizing price structures to those that result from the bank's profit-maximizing price structure.

December 31, 2008 | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 30, 2008

Graduate Diploma in Competition Policy

Posted by D. Daniel Sokol

The Center for Competition Policy (Centro de Libre Competencia) of the Catholic University of Chile has announced a new program for a graduate diploma in competition policy, which incorporates classes in both competition law and economics.  See the course brochure here.

December 30, 2008 | Permalink | Comments (0) | TrackBack (0)

A Proposed Test for Separating Pro-Competitive Loyalty Rebates from Anti-Competitive Ones

Posted by D. Daniel Sokol

Damien Geradin, Tilburg University - Tilburg Law and Economics Center (TILEC) and College of Europe is approaching a Posner level of productivity in terms of the number of articles he turns out a year.  Geradin's most recent is A Proposed Test for Separating Pro-Competitive Loyalty Rebates from Anti-Competitive Ones.

ABSTRACT: While the granting of rebates is a common commercial practice largely used by dominant and non-dominant firms, the assessment of rebates seems to be one of the most complex and unsettled areas of competition law. In the EU, for instance, the decisional practice of the European Commission and the case-law of the Community courts have been harshly criticized as being unnecessarily strict, following a form-based approach that sits uneasily with modern economic theory. In response to such criticisms, DG COMP published in December 2005 a Discussion Paper, which promotes an effects-based approach to the assessment of rebates. US courts have generally shown greater deference to loyalty rebates adopted by dominant firms, but the case-law remains unsettled, notably in the area of bundled rebates. Against this background, this paper proposes a framework, based on a three-step test, designed to separate pro-competitive rebates from anti-competitive ones. While each of the components of this test is reviewed, a particular emphasis will be placed on the treatment of single product all-unit rebates, which create complex issues discussed at length in the Commission's Discussion Paper and the US Department of Justice's September 2008 Report on Single-Firm Conduct under Section 2 of the Sherman Act.

December 30, 2008 | Permalink | Comments (0) | TrackBack (0)

How the Chicago School Overshot the Mark: The Effect of Conservative Economic Analysis on U.S. Antitrust

Posted by D. Daniel Sokol

Bob Pitofsky (Georgetown Law) put together an interesting edited volume on How the Chicago School Overshot the Mark: The Effect of Conservative Economic Analysis on U.S. Antitrust.

BOOK ABSTRACT: How the Chicago School Overshot the Mark is about the rise and recent fall of American antitrust. It is a collection of 15 essays, almost all expressing a deep concern that conservative economic analysis is leading judges and enforcement officials toward an approach that will ultimately harm consumer welfare.

For the past 40 years or so, U.S. antitrust has been dominated intellectually by an unusually conservative style of economic analysis. Its advocates, often referred to as "The Chicago School," argue that the free market (better than any unelected band of regulators) can do a better job of achieving efficiency and encouraging innovation than intrusive regulation. The cutting edge of Chicago School doctrine originated in academia and was popularized in books by brilliant and innovative law professors like Robert Bork and Richard Posner. Oddly, a response to that kind of conservative doctrine may be put together through collections of scores of articles but until now cannot be found in any one book. This collection of essays is designed in part to remedy that situation.

The chapters in this book were written by academics, former law enforcers, private sector defense lawyers, Republicans and Democrats, representatives of the left, right and center. Virtually all agree that antitrust enforcement today is better as a result of conservative analysis, but virtually all also agree that there have been examples of extreme interpretations and misinterpretations of conservative economic theory that have led American antitrust in the wrong direction. The problem is not with conservative economic analysis but with those portions of that analysis that have "overshot the mark" producing an enforcement approach that is exceptionally generous to the private sector. If the scores of practices that traditionally have been regarded as anticompetitive are ignored, or not subjected to vigorous enforcement, prices will be higher, quality of products lower, and innovation diminished. In the end consumers will pay.

December 30, 2008 | Permalink | Comments (0) | TrackBack (0)

Monday, December 29, 2008

Managing the Financial Crisis in Europe: Why Competition Law is Part of the Solution, Not of the Problem

Posted by D. Daniel Sokol

Damien Gerard (University of Louvain) has posted Managing the Financial Crisis in Europe: Why Competition Law is Part of the Solution, Not of the Problem.

ABSTRACT: EU Competition Commissioner Kroes likes to use catchphrases to encapsulate policy statements. Since early October, one of her favorite lines is that competition law, and State aid law in particular, is part of the solution to the financial crisis, not part of the problem. Understand: competition rules do not stand in the way of a solution to the crisis, they are part of that solution. She used it for the first time on October 2 when announcing the approval of a Euro 35 billion aid package laid down by Germany to rescue Hypo Real Estate Holding AG, a German bank holding that became troubled as a result of its involvement in the national and international mortgage business and its short-term refinancing strategy. She repeated it on October 6 in an address to the Economic and Monetary Affairs Committee of the European Parliament outlining her enforcement priorities in the framework of the financial crisis. She resorted to it again on December 2 to defend her record in front of the 27 EU Economics and Finance Ministers, some of them clearly upset at the Commission’s active involvement in the design of general financial recovery plans and individual rescue measures.

Indeed, within the European Union, economic and financial policy remains first and foremost a competence belonging to each of the 27 Member States; there is nothing like an EU Treasury, a centralized EU economic policy institution, or a common EU financial services regulator. Some economic coordination takes place at the EU level, though, notably in the framework of the so-called “Stability and Growth Pact," but it is driven by Member States’ representatives seating in the Economic and Financial Affairs Council (ECOFIN). As a result, in mid-September, when the crisis spread to the whole financial system following the bankruptcy filing of Lehman Brothers, thus affecting credit institutions across Europe, Member States remained in front to devise urgent recovery measures. It was at the ECOFIN meeting of October 7 that Member States came together to devise common principles to guide their respective reactions to the crisis. Those principles were turned into a concerted action plan on October 10 by the Eurogroup, (a meeting of those EU countries that share the Euro as currency), which was then endorsed by the European Council of October 15, 2008.

Originally, in the design of a coordinated effort to contain the financial crisis, the Commission appeared to be largely only a witness to the Member States’ initiatives, under the leadership of the French Presidency. However, in parallel, it was also taking steps to preserve the possibility of playing its own role in managing the crisis, notably to ensure compliance of Member States’ measures with EU single-market principles. The European Council’s support for the continued implementation of EC competition rules in spite of the exceptional circumstances, including “the principles of the single market and the system of State aids," combined with a lack of resources at ECOFIN’s level to monitor Member States’ adherence to the concerted action plan, in effect enabled the Commission to play a critical role in the design of the general recovery plans and individual rescue measures envisaged by various Member States. Eventually, the circumstances led to the emergence of State aid rules as a conduit for “positive” economic policy coordination rather than solely for “negative” control of compliance with the EC Treaty. Some Member States consider such de facto evolution as undue encroachment on their competences while the Commission finds its action legitimized by the magnitude of the amounts at stake and the associated potential for competition distortive effects due, notably, to the massive flow of money to banks benefiting from State backing and the disparity in Member States’ resources to address the challenges posed by the crisis.

This paper describes three factors that contributed to shaping the role played so far by the Commission in its capacity as the major antitrust enforcement authority in the management of the financial crisis in Europe and, hence, the contribution of EC competition law to a solution of the crisis, as advocated by Commissioner Kroes.
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December 29, 2008 | Permalink | Comments (0) | TrackBack (0)

Does Product Complexity Matter for Competition in Experimental Retail Markets?

Posted by D. Daniel Sokol

Stefania Sitzia, University of East Anglia and Daniel John Zizzo, University of East Anglia ask Does Product Complexity Matter for Competition in Experimental Retail Markets?

ABSTRACT: We describe a first experiment on whether product complexity affects competition and consumers in retail markets. We are unable to detect a systematic effect of product complexity on prices, except insofar as the demand elasticity for complex products is higher. However, there is qualified evidence that complex products have the potential to induce consumers to buy more than they would otherwise. In this sense, consumer exploitability in quantities cannot be ruled out. We also find evidence for shaping effects: consumers' preferences are shaped by past experience with prices, and firms may in principle exploit this to sell more.

December 29, 2008 | Permalink | Comments (0) | TrackBack (0)