Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Monday, July 26, 2010

The Impact of Competition on Management Quality: Evidence from Public Hospitals

Posted by D. Daniel Sokol

Nicholas Bloom (Stanford - Econ) Carol Propper (Imperial College - Econ), Stephan Seiler (LSE - Econ), and John Van Reenen (LSE - Econ) explore The Impact of Competition on Management Quality: Evidence from Public Hospitals.

ABSTRACT: In this paper we examine the causal impact of competition on management quality. We analyze thehospital sector where geographic proximity is a key determinant of competition, and English publichospitals where political competition can be used to construct instrumental variables for marketstructure. Since almost all major English hospitals are government run, closing hospitals in areaswhere the governing party has a small majority is rare due to fear of electoral punishment. We findthat management quality - measured using a new survey tool - is strongly correlated with financialand clinical outcomes such as survival rates from emergency heart attack admissions (AMI). Moreimportantly, we find that higher competition (as indicated by a greater number of neighboringhospitals) is positively correlated with increased management quality, and this relationshipstrengthens when we instrument the number of local hospitals with loca! l political competition.Adding another rival hospital increases the index of management quality by one third of a standarddeviation and leads to a 10.7% reduction in heart-attack mortality rates.

July 26, 2010 | Permalink | Comments (0) | TrackBack (0)

The Economics of Payment Card Interchange Fees and the Limits of Regulation

Posted by D. Daniel Sokol

Todd Zywicki has an interesting piece on The Economics of Payment Card Interchange Fees and the Limits of Regulation.

ABSTRACT: Fresh off of the most substantial national liquidity crisis of the last generation and the enactment of sweeping credit card regulation in the form of the Credit CARD Act, Congress continues to deliberate, with a continuing drumbeat of support from lobbyists, a set of new regulations for credit card companies. These proposals, offered in the name of consumer protection, seek to constrain the setting of “interchange fees” - transaction charges integral to payment card systems - through a range of proposed political interventions. This article identifies both the theoretical and actual failings of such regulation. Payment cards are a secure, inexpensive, welfare-increasing payment mechanism largely unlike any other in history. Rather than increasing consumer welfare in any meaningful sense, interchange fee legislation represents an attempt by some merchants to shift costs away from their businesses and onto card issuing banks and cardholders. In particular, bank-issued credit cards offer a dramatic improvement in the efficiency and availability of consumer credit by shifting credit risk from merchants onto banks in exchange for the cost of the interchange fee - currently averaging less than 2% of purchase value. Merchants’ efforts to cabin these fees would harm not only consumers but also the merchants themselves as commerce would depend more heavily on less-efficient paper-based payment systems. The consequence of interchange fee legislation, as Australia’s experiment with such regulation demonstrates, would be reduced access to credit, higher interest rates for consumers, and the return of the much-loathed annual fee for credit cards. Interchange fee regulation threatens to constrain credit for consumers and small businesses as the American economy begins to convalesce from a serious “credit crunch,” and should be accordingly rejected.

July 26, 2010 | Permalink | Comments (0) | TrackBack (0)

Comparing Monopoly and Duopoly on a Two-Sided Market without Product Differentiation

Posted by D. Daniel Sokol

Enrico Böhme and Christopher Müller (Johann Wolfgang Goethe-University, Frankfurt) explore Comparing Monopoly and Duopoly on a Two-Sided Market without Product Differentiation.

ABSTRACT: We propose both a monopoly and a duopoly model of a two-sided market. Both settings are fully comparable, as we impose a homogeneous good produced at zero costs without capacity constraints, as well as identical parameterization of market sizes. We determine the duopoly equilibrium and the monopoly optimum in terms of the parameters and obtain solutions with and without subsidization (prices below marginal cost) of one market side. We show that there exists a continuum of economically plausible parameter sets for which duopoly equilibrium prices exceed optimal monopoly prices and one with no observable price effect of competition, i.e. one where optimum and equilibrium prices become equal. Despite the fact that virtually everything except for the number of platform operators is identical in the latter situations, total demand on both market sides in the duopoly market exceeds total demand in the monopoly market. Furtherm! ore, even though there is no observable price effect, there is still a competitive effect in so far that total profits in the duopoly equilibrium are strictly smaller than monopoly profits. The relationship of total welfare is ambiguous in subsidization cases, while it is strictly greater in duopoly, if no subsidization takes place. Our results sharply contradict economic intuition and common economic knowledge from one-sided markets.

July 26, 2010 | Permalink | Comments (0) | TrackBack (0)

Downstream labeling and upstream price competition

Posted by D. Daniel Sokol

Olivier Bonroy & Stéphane Lemarie (both Université Grenoble 2) discuss the implications of Downstream labeling and upstream price competition.

ABSTRACT: The paper analyses the economic consequences of labeling in a setting with two vertically related markets. Labeling on the downstream market affects upstream price competition through two effects : a differentiation effect and a ranking effect. The magnitude of these two effects determines who in the supply chain will receive the benefits and who will bear the burden of labeling. For instance, whenever the ranking effect dominates the differentiation effect, the low quality upstream firm loses from labeling while all downstream actors are individually better off. By decreasing the low quality input price, the label acts then as a subsidy which assures an increase of the downstream market welfare. This analysis furthers our understanding of the economic consequences of the public labeling in cases like restaurants or GMOs.

July 26, 2010 | Permalink | Comments (0) | TrackBack (0)

Competition Policy and the Transition to a Low-Carbon, Efficient Electricity Industry

Posted by D. Daniel Sokol

John E. Kwoka, Jr., Northeastern University - Department of Economics and Diana L. Moss, American Antitrust Institute (AAI) explain Competition Policy and the Transition to a Low-Carbon, Efficient Electricity Industry.

ABSTRACT: U.S. industries are facing intense pressures to become more energy efficient, driven by the need to lower the carbon footprints of energy-intensive sectors and to achieve energy security. A successful transition to a new era of efficient, low-carbon electricity production and usage will require fundamental changes in the way we plan for, produce, deliver, and price a critically important commodity. The purpose of this article is to explore the importance of competition policy in a transitioning electricity industry. It starts by setting out the important precondition of the new era: market participants have fundamentally different objectives than in the old regime, and these changed objectives need to be recognized in order to fashion appropriate policy. Next, the paper presents some of the major competitive issues that are likely to arise in the new era, including: access and demand response technologies, the design of markets for CO2 emissions allowances, and transmission planning. The paper concludes with a number of recommendations for how competition policy can best promote a successful transition.

July 26, 2010 | Permalink | Comments (0) | TrackBack (0)