Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Monday, December 14, 2009

Switching Costs in Network Industries

Posted by D. Daniel Sokol

Jiawei Chen (Department of Economics, University of California-Irvine) explains Switching Costs in Network Industries.

ABSTRACT: In network industries, switching costs have two opposite effects on the tendency towards market tipping. First, the fat-cat effect makes the larger firm price less aggressively and lose consumers to the smaller firm. This effect tends to prevent tipping. Second, the network-solidifying effect reinforces network effects by making a network size advantage longer-lasting and hence more valuable, thus intensifying price competition when networks are of comparable size. This effect tends to cause tipping. I find that when switching costs are high, the fat-cat effect dominates and an increase in switching costs can change the market from a tipping equilibrium to a sharing equilibrium. When switching costs are low, the network-solidifying effect dominates and an increase in switching costs can change the market from a sharing equilibrium to a tipping equilibrium. Policy intervention to remove switching costs in network industri! es may substantially reduce the likelihood of market tipping.

December 14, 2009 | Permalink | Comments (0) | TrackBack (0)

China’s Antimonopoly Law—One Year Down: Part 3. The AML As a Protectionist Tool?

Posted by Wentong Zheng

In my last two posts on this space, I provided a summary of the new developments of China’s Antimonopoly Law (“AML”) (see here) and an analysis of China’s new merger review regime under the AML (see here).  One concern that is often voiced about the AML is that the AML may become or may have become a protectionist tool against foreign investment.  This concern was first raised when the AML was still being drafted.  It was magnified less than one year after the AML went into effect, when MOFCOM issued its controversial decision to block Coca-Cola’s acquisition of Huiyuan Juice Group, China’s largest fruit juice maker, in March 2009.

 

In its brief decision in Coca-Cola/Huiyuan (see herefor the decision in Chinese), MOFCOM stated that it decided to block the proposed deal for three reasons.  First, the deal would allow Coca-Cola to leverage its dominant position in the carbonated soft drink market to lessen competition in the fruit juice market.  Second, the deal would allow Coca-Cola to own two popular fruit juice brands in China and therefore would significantly raise the barrier to market entry.  Finally, the deal would severely limit the ability of China’s small- and medium-sized fruit juice companies to engage in innovation and competition in the fruit juice market.

 

MOFCOM’s decision in Coca-Cola/Huiyuan is troubling.  Although MOFCOM did not conduct an explicit market definition analysis, apparently it believed that carbonated soft drink and fruit juice belong to different product markets.  A merger between firms that do not compete with each other in the same market—or a conglomerate merger—does not usually raise antitrust concerns.  Especially, when the products of the merging firms are complementary, as seems to be the case in Coca-Cola/Huiyuan, the merger would actually lead to lower prices according to the “Cournot effect” and thus would benefit consumers.  Therefore, if the goal of antitrust is to protect competition and enhance consumer welfare, a conglomerate merger should not be viewed as anticompetitive merely if it will lead to elimination of some competitors.

 

Many commentators, understandably, have suspected that the real reason behind MOFCOM’s decision is protectionism and nationalism.  Huiyuan Juice is a household name in China, and given the rising economic nationalist sentiments in China in recent years, it would not be surprising if MOFCOM blocked the Coca-Cola/Huiyuan deal out of nationalist concerns.  Furthermore, it is widely known that China’s domestic fruit juice industry, which would stand to lose if the Coca-Cola/Huiyuan deal went through, lobbied hard against the deal before MOFCOM.

 

However, absent direct evidence of MOFCOM’s protectionist intent in blocking the deal, proving the protectionism charge would be very difficult, as it would entail proving the negatives, i.e., that MOFCOM did not block the deal for any other reasons.  Could MOFCOM have blocked the Coca-Cola/Huiyuan deal out of genuine antitrust concerns, even if its rationales do not comport with the “correct” view of conglomerate mergers?  As the Chinese business media reported (see herefor the report in Chinese), MOFCOM’s Coca-Cola/Huiyuan decision is indeed modeled after a 2003 decision by the Australian Competition and Consumer Commission to block the proposed acquisition of Australia’s largest fruit juice maker by Coca-Cola’s subsidiary in Australia (the Australian decision can be found here).  And as my co-author Sun Su pointed out here, MOFCOM’s rationales in Coca-Cola/Huiyuan are similar to some of the rationales upheld by the United States Supreme Court in FTC v. Proctor & Gambleback in 1967.  And of course, another famous—or infamous, depending on your point of view—example of a conglomerate merger being blocked is the European Union’s rejection of the GE/Honeywell merger in 2001.  Certainly, the fact that there are close parallels between MOFCOM’s rationales and rationales employed in other jurisdictions does not necessarily make MOFCOM’s rationales any less protectionist.  But it does show that MOFCOM’s decision joins a line of merger decisions by world’s major antitrust authorities that indicate differences of opinion as to the anticompetitive effects of conglomerate mergers.

 

In addition, one has to look beyond one specific case to determine whether there is a pattern or trend of protectionism under the AML.  There may be strong suspicions, if not strong evidence, that MOFCOM acted out of protectionist concerns in the Coca-Cola/Huiyuan case.  But suspicions of protectionism will become less strong if the frame of reference is extended to all of the mergers that have been reviewed by MOFCOM so far.  As we know, of all of the mergers for which review has been concluded, MOFCOM approved the vast majority of them without conditions.  We do not know the identity of the parties to those approved mergers, because MOFCOM did not publish its merger decisions for them.  However, there is indication that a significant number of mergers reviewed by MOFCOM—if not all of them—involve foreign investors.  Domestic Chinese enterprises that are large enough to meet the merger notification thresholds are typically state-owned-enterprises.  As I will lay out in more details in a future post, mergers between China’s state-owned-enterprises likely do not undergo formal merger review by MOFCOM.  The Coca-Cola/Huiyuan merger turns out to be the only blocked foreign-related merger out of many that have been reviewed by MOFCOM.

 

The picture becomes even more favorable for the argument of little or no protectionism if the frame of reference is extended to all aspects of the AML, not just merger review.  Before the AML took effect, the fears of the international business community were largely about proactive enforcement actions against multinational corporations such as Microsoft under the new law (see herefor a report of a possible investigation against Microsoft one month before the AML took effect).  More than one year later, however, none of the feared enforcement actions has taken place.  The Chinese media reported that certain disgruntled consumers have filed lawsuits against Microsoft or petitioned government agencies to launch investigations into Microsoft.  But as of now, the courts and the government have not acted on any of such lawsuits or petitions.

 

As conclusion, a final point that will help us keep things in perspectives is that whether the AML itself harbors a protectionist agenda does not tell the whole story in a country like China where numerous government restraints on competition exist outside of the purview of formal antitrust law.  The Chinese government has so many ways to limit foreign competition that in many situations it does not even need to resort to the AML to keep unwelcome foreign investors away.  Chief among the non-AML hurdles to foreign competition are market entry prohibitions in various industries.  Although China made commitments at the World Trade Organization to ease some of its market entry restrictions, many of them are not affected and will be here to stay.  Furthermore, the Chinese government can always call off a proposed merger between a foreign investor and a state-owned-enterprise through exercising its power as the owner and as the political superior of that state-owned-enterprise.  It is no coincidence that the Coca-Cola/Huiyuan merger—the only merger that has been blocked under the AML so far—involves a private Chinese company in an industry that has no market entry restrictions.  It is an irony that in this sense, a rejection of a merger under the AML—meaning there are no other ways for the government to reject the merger—perhaps should be viewed as a sign of progress.

 

Next, we will survey the scene of China’s dominance law more than one year after the AML went into effect.  Stay tuned.

 

 

 

December 14, 2009 | Permalink | Comments (0) | TrackBack (0)

Fines, Leniency and Rewards in Antitrust: an Experiment

Posted by D. Daniel Sokol

Maria Bigoni, University of Padua - Department of Economics, Sven-Olof Fridolfsson, Research Institute of Industrial Economics, Chloe Le Coq, Stockholm School of Economics, and Giancarlo Spagnolo, University of Tor Vergata, Stockholm School of Economics discuss Fines, Leniency and Rewards in Antitrust: an Experiment.

ABSTRACT: This paper reports results from an experiment studying how fines, leniency programs and reward schemes for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation, but increases cartel prices: subjects use costly fines as (altruistic) punishments. Leniency further increases deterrence, but stabilizes surviving cartels: subjects appear to anticipate harsher times after defections as leniency reduces recidivism and lowers post-conviction prices. With rewards, cartels are reported systematically and prices finally fall. If a ringleader is excluded from leniency, deterrence is unaffected but prices grow. Differences between treatments in Stockholm and Rome suggest culture may affect optimal law enforcement.

December 14, 2009 | Permalink | Comments (0) | TrackBack (0)

It's Coming - 3rd Annual Best Antitrust and Competition Policy Article of the Year

Posted by D. Daniel Sokol

The annual tradition is back.  We will announce winners at 11:00am EST on December 26, 2009.  For previous winners see the 2008 and 2007 lists.

December 14, 2009 | Permalink | Comments (0) | TrackBack (0)

A Simple Theory of Predation

Posted by D. Daniel Sokol

Chiara Fumagalli (Istituto di Economia Politica - Econ) and Massimo Motta (EUI - Econ) propose A Simple Theory of Predation.  This paper is worth a read.

ABSTRACT: We propose a simple theory of predatory pricing, based on scale economies and sequential buyers (or markets). The entrant (or prey) needs to reach a critical scale to be successful. The incumbent (or predator) is ready to make losses on earlier buyers so as to deprive the prey of the scale it needs, thus making monopoly profits on later buyers. Several extensions are considered, including markets where scale economies exist because of demand externalities or two-sided market effects, and where markets are characterised by common costs. Conditions under which predation may take place in actual cases are also discussed.

December 14, 2009 | Permalink | Comments (0) | TrackBack (0)

Antitrust in a Globalized Economy: The Unique Enforcement Challenges Faced by Small and by Developing Jurisdictions

Posted by D. Daniel Sokol

Michal Gal (Haifa, Law) has posted the interesting Antitrust in a Globalized Economy: The Unique Enforcement Challenges Faced by Small and by Developing Jurisdictions.

ABSTRACT: The increase in global trade has intensified the challenges involved in regulating anti-competitive conduct that takes place, in whole or in part, outside one's borders. While much has been written on international antitrust, not much scholarship has focused on the unique enforcement challenges faced by small and by developing jurisdictions in such a globalized world. This article addresses this challenge. It analyzes the near-futility of the current regime of unilateral enforcement and limited national vis

December 14, 2009 | Permalink | Comments (0) | TrackBack (0)