Antitrust & Competition Policy Blog

Do Antitrust Agencies Facilitate Meetings in Smoke-Filled Rooms?

Posted by D. Daniel Sokol

Bos Iwan, Peeters Ronald, Pot Erik (all METEOR) ask the provacative question Do Antitrust Agencies Facilitate Meetings in Smoke-Filled Rooms?

ABSTRACT: The theory of industrial collusion generally does not distinguish between tacit and explicit collusion. We show that if tacit collusion is not sustainable, firms may still be willing and able to collude explicitly when demand is viscous, the expected antitrust penalty is limited and antitrust agencies are sufficiently effective in detecting and prosecuting cartels.

Optimal Price Setting with Observation and Menu Costs

Posted by D. Daniel Sokol

Fernando Alvarez (University of Chicago), Francesco Lippi (University of Sassari, EIEF), and Luigi Paciello (EIEF) discuss Optimal Price Setting with Observation and Menu Costs.

ABSTRACT: We study the price setting problem of a firm in the presence of both observation and menu costs. In this problem the firm optimally decides when to collect costly information on the adequacy of its price, an activity which we refer to as a price “review”. Upon each review, the firm chooses whether to adjust its price, subject to a menu cost, and when to conduct the next price review. This behavior is consistent with recent survey evidence documenting that firms revise prices infrequently and that only a few price revisions yield a price adjustment. The goal of the paper is to study how the firm’s choices map into several observable statistics, depending on the level and relative magnitude of the observation vs the menu cost. The observable statistics are: the frequency of price reviews, the frequency of price adjustments, the size-distribution of price adjustments, and the shape of the hazard rate of price adjustme! nts. We provide an analytical characterization of the firm’s decisions and a mapping from the structural parameters to the observable statistics. We compare these statistics with the ones obtained for the models with only one type of cost. The predictions of the model can, with suitable data, be used to quantify the importance of the menu cost vs. the information cost. We also consider a version of the model where several price adjustment are allowed between observations, a form of price plans or indexation. We find that no indexation is optimal for small inflation rates.

Relative and Absolute Preference for Quality

Posted by D. Daniel Sokol

Constantine Angyridis and Debapriya Sen (both Ryerson University) describe Relative and Absolute Preference for Quality.

ABSTRACT: This paper seeks to explain two related phenomena: (i) it is often the case that when the new variety of a product is launched, some consumers do not purchase the latest variety and (ii) the quality of the latest variety of a product is often not significantly superior compared to the existing variety. We consider a simple model of monopoly with two types of consumers: "regular" (type R) who cares only about the absolute quality of the product and "fastidious" (type F) who cares about the relative quality vis-a-vis the existing variety. We show that it is never optimal for the monopolist to exclusively serve type F. Moreover, we identify situations where although it is optimal for the monopolist to upgrade the quality of the product, this upgrade is not sufficient to meet the standards of type F. As a result, only type R buys the upgraded variety while type F chooses not to buy it.

Bundling without Price Discrimination

Posted by D. Daniel Sokol

Andrés Carvajal (Department of Economics, University of Warwick), Marzena Rostek (Department of Economics, University of Wisconsin-Madison), and Marek Weretka (Department of Economics, University of Wisconsin-Madison) offer the possibility of Bundling without Price Discrimination.

ABSTRACT: This paper examines the optimal bundling strategies of a multiproduct monopoly in markets in which a seller cannot monitor and thereby restrict the purchases of buyers to a single bundle, while buyers have resale opportunities. In such markets, the standard mechanism through which bundling increases seller profits, based on price discrimination, is not feasible. The profit-maximizing bundling strategy is characterized, given the restrictions on pricing policies resulting from resale and a lack of monitoring. The welfare implications of optimal bundling are analyzed. 

The strategic effect of bundling: a new perspective

Posted by D. Daniel Sokol

Andrea Mantovani (Department of Economics, University of Bologna) discusses The strategic effect of bundling: a new perspective.

ABSTRACT: This paper investigates the strategic effect of bundling when a multi-product firm producing two complements faces competition in both markets. I consider a demand structure where both Cournot and Bertrand competition can be evaluated. Bundling is completely ineffective when firms compete in quantities. On the contrary, under Bertrand competition, selling the two goods in a package is profitable when the goods produced by the rivals are perceived as close substitutes to those produced by the multi-product firm. Bundling drives prices up, and not only consumer surplus, but also social welfare shrinks, thus calling for the intervention of the antitrust agency.

Buyer Power in Health Plan Mergers

Posted by D. Daniel Sokol

Cory S. Capps, Bates White, LLC has a forthcoming article on Buyer Power in Health Plan Mergers.

ABSTRACT: In light of recent increased policy attention directed toward health insurance, the next significant health plan merger is almost certain to receive close scrutiny from many quarters, including representatives of providers, such as the American Medical Association and the American Hospital Association, and the U.S. Department of Justice. In this paper, I review the key buy-side economic questions and analytic frameworks that are likely to be at the forefront in future investigations of health plan mergers. In particular, I explain how industry structure implies that shares of purchases from individual providers as well as area-wide shares of purchases are likely to inform antitrust analysis of potential monopsony harm in health plan mergers. I also discuss the appropriate treatment of government payers in calculating and assessing buy-side market shares. I conclude with a discussion of how competition and market power in downstream markets for the sale of commercial insurance interact with the potential exercise of monopsony power in upstream markets for the purchase of provider services.

MOFCOM released provisional regulations on the handling of divestiture of assets to comply with a merger approval

Posted by D. Daniel Sokol

MOFCOM released provisional regulations on the handling of divestiture of assets to comply with a merger approval.  See here.

HT: Paul Jones

7/12/10 Update: Beth Farmer has provided an unofficial translation.  See the attachment below.

Download New MOFCOM Rules Translation