Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Saturday, March 7, 2009

The Whole Foods Saga Ends

Posted by D. Daniel Sokol

The FTC can raise its victory flag in Whole Foods (at least for a partial victory).  Whole Foods and the FTC entered into a settlement with Whole Foods.  As the FTC press release explains:

The consent order will restore competition in 17 geographic markets that were impacted by the acquisition. In addition to requiring the transfer or divestiture of all rights to 32 stores, Whole Foods also is required to divest related Wild Oats intellectual property, including unrestricted rights to the “Wild Oats” brand, which retains significant name recognition and loyalty among consumers. These assets will allow one or more Commission-approved buyers to re-establish competition with Whole Foods in the majority of the markets in which the agency alleged the acquisition would reduce competition and harm consumers through higher prices and reduced quality and services.

March 7, 2009 | Permalink | Comments (0) | TrackBack (0)

Friday, March 6, 2009

An Equilibrium Analysis of Antitrust as a Solution to the Problem of Patent Hold-Up

Posted by D. Daniel Sokol

Luke Froeb, Vanderbilt University - Owen Graduate School of Management and Bernhard Ganglmair, University of Zurich have a  new insightful paper on An Equilibrium Analysis of Antitrust as a Solution to the Problem of Patent Hold-Up.

ABSTRACT: After downstream manufacturers make relationship-specific investments to develop products using upstream patented technology, they can be "held-up" by patentees, sometimes called "patent ambush." If manufacturers anticipate hold-up, they will be reluctant to make relationship-specific investments which, in turn, reduces the innovator's incentive to create patented technology. Offering manufacturers access to antitrust courts to address the problem of hold-up can improve welfare. However, in contrast to the default rules provided by contract law, parties are unable to contract around mandatory laws like antitrust. This raises the possibility that antitrust would disrupt other, more efficient contractual and organizational solutions to the problem of hold-up. In this paper, we analyze the equilibrium bargaining that occurs between the creators and users of patented technology and find that antitrust does displace more efficient simple contracts, i.e., ones that give innovators the incentive to innovate and manufacturers the incentive to develop products using patented technology.

 

 

March 6, 2009 | Permalink | Comments (0) | TrackBack (0)

Heterogeneous Firms, the Structure of Industry, and Trade under Oligopoly

Posted by D. Daniel Sokol

Eddy Bekkers (Department of Economics - Johannes Kepler University) and Joseph Francois (Department of Economics - Johannes Kepler University) provide insights into Heterogeneous Firms, the Structure of Industry, and Trade under Oligopoly.

ABSTRACT: We develop a model with endogeneity in key features of industrial structure linked to heterogeneous cost structures under Cournot competition. We use the model to explore issues related to cross-country differences in industry structure and the impact of globalization on markups and pricing, concentration, and productivity. The model nests two workhorse trade models, the Brander & Krugman reciprocal dumping model and the Ricardian technology-based trade model, as special cases. We examine both free entry and limited entry (free exit) cases. The model generates clear testable predictions on the probability of zero trade flows and the pattern of export prices, and on cross-country and industry variations in industrial structure controlling for openness. Market prices decline as a result of trade liberalization, the least productive firms get squeezed out of the market, exporting firms gain market share, and more firms become trade oriented. In addition, depending on the strength of underlying cost heterogeneity, falling prices are consistent with both increasing and falling industry concentration following episodes of integration. Welfare rises with trade liberalization, unless trade costs decline from a prohibitive level in the short run free exit case. Variation across industries and markets in markups, concentration, and pricing structures is otherwise a function of market size and the variation in cost heterogeneity across industries.   

March 6, 2009 | Permalink | Comments (0) | TrackBack (0)

Sunk Costs and Risk-Based Barriers to Entry

Posted by D. Daniel Sokol

Robert S. Pindyck, MIT Sloan School of Management discusses Sunk Costs and Risk-Based Barriers to Entry.

ABSTRACT:  In merger analysis and other antitrust settings, risk is often cited as a potential barrier to entry. But there is little consensus as to the kinds of risk that matter - systematic versus non-systematic and industry-wide versus firm-specific - and the mechanisms through which they affect entry. I show how and to what extent different kinds of risk magnify the deterrent effect of exogenous sunk costs of entry, and thereby affect industry dynamics, concentration, and equilibrium market prices. To do this, I develop a measure of the "full," i.e., risk-adjusted, sunk cost of entry. I show that for reasonable parameter values, the full sunk cost is far larger than the direct measure of sunk cost typically used to analyze markets.

March 6, 2009 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 5, 2009

Patent Thickets and the Market for Innovation: Evidence from Settlement of Patent Disputes

Posted by D. Daniel Sokol

Alberto Galasso (University of Toronto - School of Management) and Mark Schankerman (LSE - Economics) write about Patent Thickets and the Market for Innovation: Evidence from Settlement of Patent Disputes.

ABSTRACT: We study how fragmentation of patent rights (‘patent thickets’) and the formation of the Court of Appeal for the Federal Circuit (CAFC) affected the duration of patent disputes, and thus the speed of technology diffusion through licensing. We develop a model of patent litigation which predicts faster settlement agreements when patent rights are fragmented and when there is less uncertainty about court outcomes, as was associated with the ‘pro-patent shift’ of CAFC. The model also predicts that the impact of fragmentation on settlement duration should be smaller under CAFC. We confirm these predictions empirically using a dataset that covers nearly all patent suits in U.S. federal district courts during the period 1975-2000. Finally, we analyze how fragmentation affects total settlement delay, taking into account both reduction in duration per dispute and the increase in the number of required patent negotiations associated with patent thickets. 

March 5, 2009 | Permalink | Comments (0) | TrackBack (0)

Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory

Posted by D. Daniel Sokol

Elhaugee Einer Elhauge of Harvard Law School discusses Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory.

ABSTRACT: Chicago School theorists have argued that tying cannot create anticompetitive effects because there is only a single monopoly profit. Some Harvard School theorists have argued that tying doctrine's quasi-per se rule is misguided because tying cannot create anticompetitive effects without foreclosing a substantial share of the tied market. This article shows both positions are mistaken. Even without substantial tied foreclosure, tying by a firm with market power generally increases monopoly profits and harms consumer welfare, absent offsetting efficiencies. Current doctrine is thus correct to require tying market power and a lack of offsetting efficiencies, but not substantial tied foreclosure. Doing so does not really apply a quasi-per se rule, but rather correctly identifies the conditions for the relevant anticompetitive effects. However, there should be an exception to this rule when the products are used or bundled in a fixed ratio and lack separate utility, because those conditions negate anticompetitive effects absent substantial tied foreclosure.

Bundled discounts can produce the same anticompetitive effects as tying without substantial tied foreclosure, but only when the unbundled price exceeds the but-for price. Thus, when the unbundled price exceeds the but-for price, bundled discounts should be condemned based on market power and a lack of offsetting efficiencies, absent the conditions that negate nonforeclosure effects. When the unbundled price is lower than the but-for price, bundled discounts should be condemned only when there is substantial foreclosure or direct proof of anticompetitive effects. Alternative tests for judging bundled discounts, such as comparing incremental prices to costs, are not only underinclusive, but perversely exempt the bundled discounts with the worst anticompetitive effects

March 5, 2009 | Permalink | Comments (1) | TrackBack (0)

The Effects of Past Entry, Market Consolidation, and Expansion by Incumbents on the Probability of Entry

Posted by D. Daniel Sokol

Robert M. Adams (Federal Reserve Board) and Dean F. Amel (Federal Reserve Board - Financial Structure Section) discuss The Effects of Past Entry, Market Consolidation, and Expansion by Incumbents on the Probability of Entry.

ABSTRACT: The threat of entry is an important factor in the evaluation of the potential competitive effects of proposed mergers and acquisitions. In the evaluation of proposed bank mergers, a high probability of entry, or strong potential competition, is often found to mitigate the potential anticompetitive effect of a proposed horizontal merger. Because the probability of entry is not directly observed for each local market, variables such as per capita income, population growth and past entry are typically used to predict the probability of future entry. This study extends previous research on the determinants of entry into local banking markets. In addition to variables considered by past research, such as market demographic characteristics, branching deregulation and past merger activity, this study considers the effects on future entry of past entry and strategic barriers to entry, which are proxied by changes in incumbent branching, the presence of small incumbent firms and market concentration. The analysis uses data that allow a broader definition of entry than that used in most past research. In most of the previous studies, bank entry is defined as the creation of a new banking institution. We show that this definition is problematic and misses entry due to branch network extension by existing banks, which is substantial. Results of our analysis are consistent with past research where past research exists. In addition, we find significant negative relationships between strategic barriers to entry and entry. Assessment of the quantitative significance of the results, however, finds that very large changes in the explanatory variables are needed to cause substantial changes in the probability of entry into banking markets.

March 5, 2009 | Permalink | Comments (0) | TrackBack (0)

Exclusive Contracts, Innovation, and Welfare

Posted by D. Daniel Sokol

Yongmin Chen (University of Colorado - Economics) and David E. M. Sappington (University of Florida - Economics) have a wonderful paper on Exclusive Contracts, Innovation, and Welfare.

ABSTRACT: We extend Aghion and Bolton (1987)’s classic model to analyze the equilibrium incidence and impact of exclusive contracts in a setting where research and development (R&D) drives industry performance. An exclusive contract between an incumbent supplier and a buyer arises when inno- vation protection and/or the incumbent’s R&D ability are su¢ ciently pronounced. The exclusive contract generally reduces the entrant’s R&D, and sometimes also reduces the incumbent’s R&D. Exclusive contracts reduce welfare if patent protection for innovation or the incumbent’s R&D ability is su¢ ciently limited. Exclusive contracts increase welfare if patent protection and the incumbent’s R&D ability are both su¢ ciently pronounced.

March 5, 2009 | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 4, 2009

The Dynamics of Automobile Expenditures

Posted by D. Daniel Sokol

Adam Copeland of the Department of Commerce has an interesting new working paper on The Dynamics of Automobile Expenditures.

ABSTRACT: This paper presents a dynamic demand model for light motor vehicles. Consumers solve an optimal stopping problem to decide if they want a new automobile and when in the model year to purchase it. This dynamic approach allows us to determine how the mix of consumers evolves over the model year and to measure consumers’ substitution patterns across products and time. We find that temporal substitution is significant, driving substitution patterns to a much greater extent than cross-sectional substitution or the entry and exit of consumers from the market. Through counterfactuals, we show that because consumers will temporally substitute to a large degree, not accounting for automakers’ dynamic pricing strategies will substantially overstate the gains to using pricing incentives. Further, we show that the large price discounts that automakers’ typically offer at the end of the model year result in price discrimination, by inducing price-sensitive consumers to delay their new vehicle purchase until the latter months of the model year. Keywords: price

March 4, 2009 | Permalink | Comments (0) | TrackBack (0)

Sunk Costs and Real Options in Antitrust Analysis

Posted by D. Daniel Sokol

Robert S. Pindyck, MIT Sloan School of Management has a new paper on Sunk Costs and Real Options in Antitrust Analysis.

ABSTRACT: In merger analysis and other antitrust settings, risk is often cited as a potential barrier to entry.  But there is little consensus as to the kinds of risk that matter - systematic versus non-systematic and industry-wide versus firm-specific - and the mechanisms through which they affect entry.  I show how and to what extent different kinds of risk magnify the deterrent effect of exogenous sunk costs of entry, and thereby affect industry dynamics, concentration, and equilibrium market prices.  To do this, I develop a measure of the "full," i.e., risk-adjusted, sunk cost of entry.  I show that for reasonable parameter values, the full sunk cost is far larger than the direct measure of sunk cost typically used to analyze markets.

March 4, 2009 | Permalink | Comments (0) | TrackBack (0)

Market Frictions: A Unified Model of Search and Switching Costs

Posted by D. Daniel Sokol

Chris Wilson, Department of Economics, Loughborough University, presents Market Frictions: A Unified Model of Search and Switching Costs.

ABSTRACT: Despite the existence of two vast literatures, very little is known about the potential di¤erences or interactions between search and switch- ing costs. This paper demonstrates the bene…ts of examining the two frictions in unison. First, the paper shows how subtle distinctions between the two costs can provide important di¤erences in their e¤ects upon consumer behaviour and market prices. In many cases, policy makers may prefer to reduce search costs rather than switching costs. Second, the paper illustrates a simple methodology for estimating the magnitude of both costs while demonstrating the potential bias that can arise from a single-cost approach.

March 4, 2009 | Permalink | Comments (0) | TrackBack (0)

International Consumer Advocacy for Competition Policy: Learning from the AAI Model

Posted by D. Daniel Sokol

Bert Foer has a forthcoming article in the Boletin LatinoAmericano de Competencia on International Consumer Advocacy for Competition Policy: Learning from the AAI Model.

ABSTRACT:  In June, 2008, the American Antitrust Institute, known around the world as “AAI,”,celebrated its tenth anniversary as a not-for-profit independent education, research, and advocacy organization. The booklet we created for this event summarizes our decade of experience as a leading advocate of post-Chicago, activist antitrust policy. For those who might be contemplating the creation of a pro-consumer Non-Governmental Organization (“NGO”) in the rapidly developing field of competition policy, please review this booklet on our homepage, www.antitrustinstitute.org. We do not claim that the AAI model is appropriate in all circumstances, but something similar to AAI, customized to local needs, would seem beneficial in every nation that has adopted a competition policy. In this paper, we will describe the salient features of AAI, suggest why similar organizations are needed, comment on some lessons we have learned that might be useful to competition NGO’s, and offer our assistance to NGO’s that are moving in a comparable direction.

March 4, 2009 | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 3, 2009

Department Stores On Sale: An Antitrust Quandry

Posted by D. Daniel Sokol

Bauer Mark Bauer of Stetson Law School describes Department Stores On Sale: An Antitrust Quandry.

ABSTRACT: In 2005, Macy's bought its largest competitor, May Department Stores, for $17 billion. The resulting combination created a department store behemoth with over one thousand stores across the United States. Despite protests by the attorneys general of a number of states, and consumers and advocacy groups around the country, the Federal Trade Commission ("FTC") blessed this merger without requiring any modification in its terms. And according to law and economics scholars, this merger had no substantive impact on consumers, competition or consumer welfare. My empirical research, published in an earlier law review article, showed that Macy's now charges consumers 13% more than it did before the merger, and was featured in a page one New York Times article.

My empirical research, however, was an observation. This article tells the heart of a very compelling story behind that empirical research and critically analyzes important legal questions. Department stores are an important part of the fabric of American life. For example, more than two years after Macy's changed the name of all Marshall Field's stores in Chicago, people are still picketing the store - in fact they led a large protest at Macy's most recent annual stock holder's meeting. Barely a day goes by without a major newspaper featuring a story on the plight of American department stores and consumer angst over these destructive changes.

The FTC, which investigated Macy's acquisition of May, may have erred. This article explains the relevant history of department stores, analyzes the FTC's flawed investigation of the deal, and critiques the narrowly applied law and economics analysis that led to these incorrect conclusions.

March 3, 2009 | Permalink | Comments (0) | TrackBack (0)

Strategic Supply Function Competition with Private Information

Posted by D. Daniel Sokol

Xavier Vives (IESE Business School) writes on Strategic Supply Function Competition with Private Information.

ABSTRACT: A Bayesian supply function equilibrium is characterized in a market where firms have private information about their uncertain costs. It is found that with supply function competition, and in contrast to Bayesian Cournot competition, competitiveness is affected by the parameters of the information structure: supply functions are steeper with more noise in the private signals or more correlation among the costs parameters. In fact, for large values of noise or correlation supply functions are downward sloping, margins are larger than the Cournot ones, and as we approach the common value case they tend to the collusive level. Furthermore, competition in supply functions aggregates the dispersed information of firms (the equilibrium is privately revealing) while Cournot competition does not. The implication is that with the former the only source of deadweight loss is market power while with the latter we have to add private information. As the market grows large the equilibrium becomes competitive and we obtain an approximation to how many competitors are needed to have a certain degree of competitiveness.

March 3, 2009 | Permalink | Comments (0) | TrackBack (0)

Making Sense of Non-Binding Retail-Price Recommendations

Posted by D. Daniel Sokol

Stefan Buehler (University of St. Gallen, ENCORE, Centre for Industrial Economics, University of Copenhagen) and Dennis L. Gartner (University of Zurich) think about Making Sense of Non-Binding Retail-Price Recommendations.

ABSTRACT: This paper provides a theoretical rationale for non-binding retail price recommendations (RPRs) in vertical supply relations. Analyzing a bilateral manufacturer-retailer relationship with repeated trade, we show that linear relational contracts can implement the surplus-maximizing outcome. If the manufacturer has private information about production costs or consumer demand, RPRs may serve as a communication device from manufacturer to retailer. We characterize the properties of efficient bilateral relational contracts with RPRs and discuss extensions to settings where consumer demand is affected by RPRs, and where there are multiple retailers or competing supply chains.

March 3, 2009 | Permalink | Comments (0) | TrackBack (0)

The Undetected Elephant in the Room: An Analysis of DG Competition’s Preliminary Report on the Pharmaceutical Sector Inquiry

Posted by D. Daniel Sokol

James Killick (White & Case) and Anthony Dawes (White & Case) have posted The Undetected Elephant in the Room: An Analysis of DG Competition’s Preliminary Report on the Pharmaceutical Sector Inquiry.

ABSTRACT: On November 28, 2008, DG Competition’s (“DG COMP”) published its Preliminary Report (“the Report”) on the pharmaceutical sector inquiry. The Report claims that Research & Development (“R&D”)-based pharmaceutical companies (“originator companies” ) have recourse to a toolbox (“toolbox”) of practices in order to delay the entry of generic medicines onto the market and that these practices, where successful, result in significant additional costs for public health budgets and reduce incentives to innovate. The Report also states that originator companies applied defensive patenting strategies, primarily aimed at blocking other originator companies in the development of new medicines.

However, when one looks behind these headlines, it becomes clear that the [Pharmaceutical] Report is almost entirely silent on the key issue of causality, i.e. whether there can be said to be a causal link between the potentially anticompetitive practices which the Report identifies and the alleged resulting delays. This article analyzes this issue of causality in an attempt to understand why the Report does not address this fundamental issue.

March 3, 2009 | Permalink | Comments (0) | TrackBack (0)

Monday, March 2, 2009

Compatibility with Firm Dominance

Posted by D. Daniel Sokol

Maria Fernanda Viecens of FEDEA analyzes Compatibility with Firm Dominance.

ABSTRACT: This paper analyzes the effect of firm dominance on the incentives to become compatible and how compatibility decisions affect investment incentives. We will consider compatibility in two dimensions: compatibility of the complementary good and inter-network compatibility. We show that if products are substitutes, compatibility tends to be welfare decreasing with the potential negative consequences of increasing compatibility being more likely when asymmetries are strong. We also find that in many instances the dominant firm’s interests regarding compatibility are in line with those of users, and are opposite to those of the weak firm, which will always demand more compatibility to be enforced. Finally we show that compatibility may harm innovation, particularly for the dominant firm.

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

The Empagran Exception: Between Illinois Brick and a Hard Place

Posted by D. Daniel Sokol

Victor Goldberg of Columbia Law School has a short new piece on The Empagran Exception: Between Illinois Brick and a Hard Place.

ABSTRACT: In F. Hoffmann-La Roche Ltd. v. Empagran S.A., the Supreme Court interpreted the Foreign Trade Antitrust Improvements Act ("FTAIA") to bar an antitrust suit by foreign plaintiffs against foreign defendants despite the fact that the foreign and domestic markets were interconnected. I identify one narrow class of cases that would satisfy the statutory exception. Rather than focusing on the interrelatedness of the foreign and domestic prices, the inquiry centers on the resale of goods to the domestic market. The argument is a variant on Illinois Brick.

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

The Chicago School and Exclusionary Conduct

Posted by D. Daniel Sokol

Judge Frank H. Easterbrook (University of Chicago law) wrote a piece on The Chicago School and Exclusionary Conduct in honor of Robert Bork in the Harvard Journal of Law and Public Policy.

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

Competition Policy, Industrial Policy and National Champions

Posted by D. Daniel Sokol

One issue discussed at the OECD Eighth Global Forum on Competition (February 19-20) was Competition Policy, Industrial Policy and National Champions.  This background note summarizes the key issues that emerged in that discussion.

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