Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Saturday, June 19, 2010

We need a New Ag/DOJ Hearing on Competition in Agriculture

Posted by D. Daniel Sokol

How about a hearing that focuses on anti-competitive government regulation and steps to take to reduce such regulations?  See this proposed rule from Friday as an example.  Price increases would end up being passed onto the consumers for this attempt to stop "unfair" competition.  If the Administration has confidence in DOJ Antitrust (which it should, there are some really great people there), then the Administration should let DOJ bring cases against monopolistic practices in agriculture.  Instead, the Administration has proposed a protection of small farmers regulation, which will raise prices for consumers.  I hope that being captured by small producer interests is worth it for the administration politically as a trade-off for the rest of us paying higher prices.  This is yet another example of public choice problems.  Elsewhere I have explained how this process affects antitrust.  We need some visibility to anti-competitive regulation and some competition advocacy. 

June 19, 2010 | Permalink | Comments (1) | TrackBack (0)

Competition Issues in Restructuring Ports and Railways, Including Brief Consideration of these Sectors in India

Posted by D. Daniel Sokol

Russell Pittman (Director of Economic Research, Antitrust Division, U.S. Department of Justice) explores Competition Issues in Restructuring Ports and Railways, Including Brief Consideration of these Sectors in India.

ABSTRACT: One important issue facing reformers considering the restructuring of the seaports and freight railways sectors of a developing country is the creation of competition or, alternatively, avoiding the creation or preservation of monopoly power. In seaports a crucial distinction is often that between intraport and interport competition; in freight railways, between competition among train operating companies over a monopoly track and competition among vertically integrated railways. In both cases it is useful to frame the issue as one of competition at the component level within an open system versus competition between closed systems. In both cases as well, the market definition paradigm suggested by the Horizontal Merger Guidelines of the U.S. competition agencies provides a useful framework for analysis.

June 19, 2010 | Permalink | Comments (0) | TrackBack (0)

Friday, June 18, 2010

Vertical Agreements: New Competition Rules for the Next Decade

Posted by D. Daniel Sokol

Magdalena Brenning-Louko, Andrei Gurin, Luc Peeperkorn, & Katja Viertiö (DG Comp) provide an overview of Vertical Agreements: New Competition Rules for the Next Decade.

ABSTRACT: On 20 April 2010 the Commission adopted a new Block Exemption Regulation applicable to vertical agreements (hereinafter "the Regulation"). At the same time it adopted the contents of accompanying Guidelines on vertical restraints ("the Guidelines"), which were subsequently formally adopted in all official languages of the Union by Vice-President Almunia on behalf of the Commission on 10 May 2010. Both of these instruments will be applicable from 1 June 2010.

The competition rules embodied in these instruments are particularly important given the pervasiveness of vertical agreements. Vertical agreements are agreements between firms operating at different levels of the production or distribution chain for the sale and purchase of intermediate products and the purchase and resale of final products. Typical examples of vertical agreements are distribution agreements between manufacturers and distributors, or supply agreements between a manufacturer of a component and a producer of a product using that component. Because each firm has to purchase certain inputs and most firms need to sell their products to producers further downstream or to distributors, most companies are concerned by these rules.

These instruments also play an important part in ensuring a consistent approach to vertical restraints under Article 101 of the Treaty on the Functioning of the European Union, as enforcement has mostly been carried out by the national competition authorities and national courts since the 2004 decentralisation. Vertical restraints are restrictions of competition included in vertical agreements which may foreclose and/or segment markets and facilitate collusion. For instance, vertical agreements which have as their main element the fact that the manufacturer sells to only one buyer or a limited number of buyers (exclusive distribution or selective distribution) may lead to foreclosure of other buyers and/or to collusion between buyers. Similarly, non-compete obligations which prohibit distributors from purchasing and reselling competing products may foreclose new manufacturers and make the market positions of incumbent manufacturers rigid.

The new rules were adopted following a review process that was launched in the spring of 2008 because of the expiry of the Block Exemption Regulation of 1999 ("the 1999 Regulation") on 31 May 2010. The Commission services took stock of enforcement with the national competition authorities and a consensus was quickly reached confirming that the architecture put in place in 1999 had worked well and only needed some up-dating and clarification. This was subsequently confirmed by a public consultation which elicited a very high response rate.

The 1999 Regulation and Guidelines on vertical restraints formed the very first package of a new generation of block exemption regulations and guidelines inspired by a more economic and effects-based approach, which was subsequently implemented in other antitrust areas. Under this approach, in order to conduct a proper assessment of a vertical agreement, it is necessary to analyse its likely effects on the market. For companies lacking significant market power (i.e. whose market share is below 30 percent), the 1999 Regulation provided for a block exemption, because it is presumed that vertical agreements concluded between such companies will either have no anticompetitive effects or, if they do, that the positive effects will outweigh any negative ones. In contrast, for vertical agreements concluded by companies whose market share exceeds 30 percent, there is no such safe harbour, but there is no presumption that the agreement is illegal either: it is necessary to assess the agreement's negative effects and positive effects on the market (under Article 101(1) and Article 101(3), respectively). The 1999 Regulation was accompanied by Guidelines which assist companies in making this assessment, and which have proved particularly important since the discontinuation, in 2004, of the former notification system whereby companies had to notify their agreements to the Commission in order to obtain an exemption.

It was decided to maintain this architecture, but to adapt and update it in the light of two major developments since 1999, namely a considerable increase in online sales, and enforcers' increased attention to and experience with the possible anticompetitive effects of a buyer's market power. This short article does not deal with all the aspects of the Regulation and Guidelines, but focuses instead on the novelties and clarifications introduced by these recently adopted texts.

June 18, 2010 | Permalink | Comments (0) | TrackBack (0)

Oligopoly and price transmission in Turkey's fluid milk market

Posted by D. Daniel Sokol

Hasan Tekguc, Department of Economics, University of Massachusetts Amherst has some findings on Oligopoly and price transmission in Turkey's fluid milk market.

ABSTRACT: Farmers and consumers suspect that processing firms abuse their power in the milk marketing chain. We employ threshold autoregressive and moment threshold autoregressive tests and contrary to expectations find evidence of a downward trend in UHT milk real price without a corresponding decline in farm-gate prices. The downward trend coincides with increased competition in the dairy industry and with the growing market share of the formal sector at the expense of the informal sector. Major dairy processing firms expand their market share and still enjoy healthy profits thanks to increasing returns to scale in processing and distribution in a growing market.

June 18, 2010 | Permalink | Comments (0) | TrackBack (0)

Backward Compatibility to Sustain Market Dominance – Evidence from the US Handheld Video Game Industry

Posted by D. Daniel Sokol

Jörg Claussen Tobias Kretschmer Thomas Spengler (all ICE, LMU Munich) have a new paper on Backward Compatibility to Sustain Market Dominance – Evidence from the US Handheld Video Game Industry.

ABSTRACT: The introduction of a new product generation forces incumbents in network industries to rebuild their installed base to maintain an advantage over potential entrants. We study if backward compatibility can help moderate this process of rebuilding an installed base. Using a structural model of the US market for handheld game consoles, we show that backward compatibility lets incumbents transfer network effects from the old generation to the new to some extent but that it also reduces supply of new software. We also find that backward compatibility matters most shortly after the introduction of a new generation. Finally, we examine the tradeoff between technological progress and backward compatibility and find that backward compatibility matters less if there is a large technological leap between two generations. We subsequently use our results to assess the role of backward compatibility as a strategy to sustain a dominan! t market position.

June 18, 2010 | Permalink | Comments (1) | TrackBack (0)

Mobile Termination and Mobile Penetration

Posted by D. Daniel Sokol

Sjaak Hurkensy (Institute for Economic Analysis (CSIC) and IESE) and Doh-Shin Jeon (Toulouse School of Economics and Universitat Pompeu Fabra) explain Mobile Termination and Mobile Penetration.

ABSTRACT: In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes.

June 18, 2010 | Permalink | Comments (0) | TrackBack (0)

Antitrust Merger Enforcement Was Not Weaker Under Bush

Posted by D. Daniel Sokol

I have just posted my forthcoming article,Antitrust, Institutions, and Merger Control.  In it, I have a broad discussion on institutional analysis in antitrust across domestic and international institutions and across public and private rights.  As part of the in depth analysis I include a discussion of institutional issues that emerge in merger control.  One thing that I include (and I realize for lots of practitioner readers, you are not going to read the entire 96 pages so let's cut to the chase) is data from both quantitative and qualitative surveys of antitrust practitioners.  What emerges among Chambers ranked practitioners from every state in which Chambers ranks antitrust practitioners who are merger specialists (at least 40 percent of their work in the last two years has been in mergers), slightly over half of such practitioners witnessed no change whatsoever under Bush than under previous administrations on their specific deals (ie, the ones in which they had the best knowledge, not ones that they read about in the paper).  Of the remainder, most witnessed a drop of enforcement only at the margins-- first requests that didn't go to second requests and second requests that did not get challenged, especially when there was a good efficiency story.  Now, it may be that at the margins is most of antitrust change from one administration to the next.  However, these findings go against the prevailing antitrust discourse that there was a significant reduction in enforcement under Bush.  These findings were counter-intuitive and surprised me. Download it while it is hot.  If you read the entire paper and the footnotes you will find citations to a relevant Simpsons episode, post-modernist philosopher Michel Foucault, and 80s rock band Wang-Chung along with the usual antitrust suspects in law and economics.

Basically, I think that the article makes two important contributions.  The first is that it lays out the interplay of various antitrust institutions at state, federal and international levels.  Second, it provides new survey data that challenges the antitrust narrative of the past few years in the area of mergers.

ABSTRACT: This article provides a descriptive, analytical overview of the various institutions to better frame the larger institutional interrelations for a comparative institutional analysis. In the next Part it examines mergers as a case study of how one might apply antitrust institutional analysis across these different kinds and levels of antitrust institutions. The Article utilizes both quantitative and qualitative methods based on survey data of antitrust practitioners on merger issues to better understand institutional choice and the decision-making process. The surveys reveal results that run counter to the popular antitrust discourse about the level of merger enforcement under Bush. Slightly more than half of all practitioners surveyed found no change in merger enforcement under Bush in their own practice and the vast majority of the rest found a change in enforcement to be merely at the margins. The Article concludes with observations from the case study and appeals for more theoretical and empirical works in antitrust institutional analysis.

June 18 Update:

Someone asked if they there is time to provide comments before publication.  The answer is yes (but hurry).  I am happy to receive any comments and will try my best to incorprate them.

June 18, 2010 | Permalink | Comments (1) | TrackBack (0)

Unilateral Effects for Differentiated Products: Theory, Assumptions, and Research

Posted by D. Daniel Sokol

David Scheffman (Conerstone Research) and Joseph Simons (Paul Weiss) have written an interesting article on Unilateral Effects for Differentiated Products: Theory, Assumptions, and Research.

ABSTRACT: Oocus of the potential revision of the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines is unilateral effects analysis in markets with differentiated products. Unilateral effects analysis was first introduced to the Guidelines in the 1992 revisions. The reliability of the predictions of post-merger prices arising from the economic models underlying that unilateral effects analysis, however, has been the subject of substantial controversy. Specifically, it has long been well known that these models predict that any merger between sellers of competing differentiated products will lead to a price increase absent offsetting efficiencies.

There has been considerable discussion, including recently, of what role these underlying economic models should have, including potentially superseding market definition and providing a presumption of anticompetitive effects. In our view, reliance on these models for either purpose is not justified. We will explain in this article that the theoretical economic models underlying the Guidelines unilateral effects analysis for differentiated products make a subtle, but strong and critical mathematical assumption that is not likely to be satisfied in real world situations. Without this assumption, the prediction of price increases based on margins and diversion ratios or simulations, as suggested by these models, is not justified.

Download Scheffman_Simons_ATSource_Apr10[1]

June 18, 2010 | Permalink | Comments (0) | TrackBack (0)

Welfare and Pricing of Mail in a Communications Market

Posted by D. Daniel Sokol

Philippe De Donder (Toulouse School of Economics), Helmuth Cremer (Toulouse School of Economics), Paul Dudley (Royal Mail Group) and Frank Rodriguez (Oxera) discuss Welfare and Pricing of Mail in a Communications Market.

ABSTRACT: We build a model where a postal incumbent offering single piece, transactional and advertising mail competes with postal entrants and with a firm offering an alternative medium. We solve for the optimal prices under various competition assumptions. We calibrate the model and provide numerical simulations in order to shed light on the impact of these assumptions on volumes and welfare levels.

June 18, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, June 17, 2010

Retail Price Regulation and Innovation: Reference Pricing in the Pharmaceutical Industry

Posted by D. Daniel Sokol

D. Bardey (University of Rosario (Bogota) and Toulouse School of Economics), A. Bommier (Toulouse School of Economics), and B. Jullien (Toulouse School of Economics) explain Retail Price Regulation and Innovation: Reference Pricing in the Pharmaceutical Industry.

ABSTRACT: Our paper is a first attempt to evaluate the long run impact of reference pricing on pharmaceutical innovation, health and expenditures. The model is based on a dynamic game involving three types of agents: pharmaceutical firms, consumers and a regulatory entity. Pharmaceutical firms choose the level of research in- vestment and its innovative content, then negotiate introductory prices for new drugs with the regulator. Reference pricing affects negatively the intensity of research and it also modifies the types of innovations that are brought to the market, detering small innovations. The model is calibrated with a small data on statin in France. Our results suggest that reference pricing typically generates a decline in health, whereas discounted expenditures may decrease or increase, depending on to the degree of deterence of cost reducing innovations.

June 17, 2010 | Permalink | Comments (0) | TrackBack (0)

Does Competition Among Medicare Advantage Plans Matter?: An Empirical Analysis of the Effects of Local Competition in a Regulated Environment

Posted by D. Daniel Sokol

Abe Dunn (Economist, Antitrust Division, U.S. Department of Justice) asks Does Competition Among Medicare Advantage Plans Matter?: An Empirical Analysis of the Effects of Local Competition in a Regulated Environment.

ABSTRACT: The regulatory oversight of the private Medicare Advantage (MA) program makes the role of competition in this market unclear. This paper empirically examines the impact of competition by measuring the effects of changes in market structure on enrollment. The study examines competition in local geographic markets using county-level enrollment data from 2001-07. I find that an increase in the number of competitors results in an increase in the number of enrollees served consistent with competition motivating firms to provide more generous benefits. Competition also results in an increase in product proliferation, which highlights a dimension of competition not previously examined. Overall, the results are similar to what one might expect in an unregulated environment, suggesting that there are benefits from competition that are not realized by regulation alone.

June 17, 2010 | Permalink | Comments (0) | TrackBack (0)

Maurice Stucke is renting his house in Knoxville for the fall 2010

Posted by D. Daniel Sokol

Maurice Stucke (behavioral antitrust law prof maven) and family will be in China in the fall.  They are looking to rent their house in Knoxville, TN.  He promises me a case of beer if someone responds to this ad.

http://knoxville.craigslist.org/apa/1795467284.html

June 17, 2010 | Permalink | Comments (0) | TrackBack (0)

Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers

Posted by D. Daniel Sokol

Gerald R. Bodisch (Economic Analysis Group, Antitrust Division, U.S. Department of Justice) has an interesting paper on the Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers.

ABSTRACT: State franchise laws prohibit auto manufacturers from making sales directly to consumers. This paper advocates eliminating state bans on direct manufacturer sales in order to provide automakers with an opportunity to reduce inventories and distribution costs by better matching production with consumer preferences.

June 17, 2010 | Permalink | Comments (0) | TrackBack (0)

New Chambers USA Rankings Are Out - Florida Antitrust Elite Edition

The Impact of Mergers on the Degree of Competition in the Banking Industry

Posted by D. Daniel Sokol

Vittoria Cerasi (Department of Statistics, Bicocca University), Barbara Chizzolini (Department of Economics, Bocconi University) and Marc Ivaldi (Toulouse School of Economics) provide some empirical answers on The Impact of Mergers on the Degree of Competition in the Banking Industry.

ABSTRACT: This paper analyses the relation between competition and concentration in the banking sector. The empirical answer is given by testing a monopolistic competition model of bank branching behaviour on individual bank data at county level (départements and provinces) in France and Italy. We propose a measure of the degree of competiveness in each local market that is function also of market structure indicators. We then use the econometric model to evaluate the impact of horizontal mergers among incumbent banks on competition and discuss when, depending on the pre-merger structure of the market and geographic distribution of branches, the merger is anti-competitive. The paper has implications for competition policy as it suggests an applied tool to evaluate the potential anti-competitive impact of mergers.

June 17, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 16, 2010

Who Are You Calling Irrational? Marginal Costs, Variable Costs, and the Pricing Practices of Firms

Posted by D. Daniel Sokol

Russell Pittman (Director of Economic Research, Economic Analysis Group, Antitrust Division, U.S. Department of Justice) asks Who Are You Calling Irrational? Marginal Costs, Variable Costs, and the Pricing Practices of Firms.

ABSTRACT: Economists sometimes decry the persistence with which firms set prices above marginal cost and thus, according to the economists, fail to maximize profits. But it is the economists who have it wrong – first, because variable accounting costs are not always a good proxy for marginal economic costs, but more importantly because in an industry with U-shaped cost curves, a firm at a long-run sustainable equilibrium faces increasing marginal costs – i.e., a rising shadow price on some constrained input – i.e., in general, acost of capital. A corollary is that in such an industry the equilibrium mark-up over variable cost varies directly with capital intensity.

June 16, 2010 | Permalink | Comments (0) | TrackBack (0)

Empirical Evidence on the Role of Non Linear Wholesale Pricing and Vertical Restraints on Cost Pass-Through

Posted by D. Daniel Sokol

Celine Bonnet (Toulouse School of Economics), Pierre Dubois (Toulouse School of Economics) and Sofia B. Villas Boas (Berkeley) provide Empirical Evidence on the Role of Non Linear Wholesale Pricing and Vertical Restraints on Cost Pass-Through.

ABSTRACT: How a cost shock is passed through into final consumer prices may relate to nominal price stickiness and rigidities, the existence of non adjustable cost components, strategic mark-up adjustments, or other contract terms along the supply distribution chain. This paper presents a simple framework to assess the potential role of non linear pricing contracts and vertical restraints such as resale price maintenance or wholesale price discrimination in the supply chain in explaining the degree of pass-through from upstream cost shocks in the ground coffee category to downstream retail prices. We do so in the German coffee market where both upstream and downstream firms make pricing decisions allowing for non linear pricing and vertical restraints. Using counterfactual simulations of an upstream coffee cost shock, we find that the existence of resale price maintenance between manufacturers and retailers increases pass through rate by more than 10 points relative to the case when this assumption is not allowed with non linear pricing or when double marginalization along the distribution chain is present. The intuition for our findings is that resale price maintenance restrictions make it less possible for retailers to perform strategic mark-up adjustments when faced with a cost shock. We also find that the larger the simulated cost shocks or the less concentrated upstream sector, and also when faced with less elastic demands, the larger the role of vertical restraints in preventing retailers to perform strategic mark-up adjustments, and thus the higher the pass-through increases.

June 16, 2010 | Permalink | Comments (0) | TrackBack (0)

Quantification of Damages in Exclusionary Practice Cases

Posted by D. Daniel Sokol

Paolo Buccirossi (Lear) provides an explanation of Quantification of Damages in Exclusionary Practice Cases.

ABSTRACT: In order to make better use of economic tools in assessing damages resulting from exclusionary conduct there needs to be greater consideration of the ‘theory of harm’, which sharpens the understanding of how and why a rival's profitability has been damaged. This article argues for the necessity of ensuring a complete theory of harm and suggests practical ways in which this can be arrived at when some, or all, of the information is missing.

June 16, 2010 | Permalink | Comments (0) | TrackBack (0)

Explaining the Importance of Public Choice for Law

Posted by D. Daniel Sokol

I have a book review forthcoming in the Michigan Law Review.  The piece is titled Explaining the Importance of Public Choice for Law.

ABSTRACT: The next generation of government officials, business leaders and members of civil society likely will draw from the current pool of law school students. These students often lack a foundation of the theoretical and analytical tools necessary to understand law’s interplay with government. This highlights the importance of public choice analysis. By framing issues through a public choice lens, these students will learn the dynamics of effective decision-making within various institutional settings. Filling the void of how to explain the decision-making process of institutional actors in legal settings is Public Choice Concepts and Applications in Law by Maxwell Stearns and Todd Zywicki.

Because of its analytic depth, Public Choice Concepts is likely to be recognized as the leading work on the subject for some time. Stearns and Zywicki’s contribution to public choice scholarship is important and compelling. Part I of this review addresses common misperceptions about public choice, provides a descriptive summary of the book, explains its important implications, and suggests some limitations. Part II takes issue with Stearns and Zywicki on one important ground - their failure to adequately consider public choice issues in an international context. A number of issues of international importance, such as trade, environmental and financial regulation, have become daily staples in policy debates. This Part describes how an understanding of public choice can offer insights into international antitrust.

June 16, 2010 | Permalink | Comments (0) | TrackBack (0)

Why Prices Rise Faster than they Fall

Posted by D. Daniel Sokol

Sheldon Kimmel (Economic Analysis Group, Antitrust Division, U.S. Department of Justice) explains Why Prices Rise Faster than they Fall.

ABSTRACT: For decades the fact that input price hikes are passed on faster than input price cuts was thought to be well explained by the assumption that competitive firms fully pass on all input price changes, so they can't price asymmetrically, so asymmetric pricing behavior is limited to oligopolies, firms that do all sorts of bizarre things (finding yet another one being no big deal). However, Peltzman found no effect of concentration on such asymmetric pricing, raising the puzzle of why competitive industries generally price asymmetrically. This paper solves that puzzle.

June 16, 2010 | Permalink | Comments (0) | TrackBack (0)