August 17, 2010
Market Structure and Market Access
Posted by D. Daniel Sokol
ABSTRACT: We explore an issue at the nexus of domestic competition policy and international trade, the interaction between goods trade and market power in domestic trade and distribution sectors. We examine the effect of variations in conditions of domestic competition in services on trade volumes in goods in the cases of both linear and nonlinear import demand, including standard form CES-based gravity models of bilateral trade flows. Theory suggests a set of linkages between service-sector pricing and goods trade supported by econometrics involving imports of 22 OECD countries vis-a-vis 69 exporters. Competition in distribution services affects the volume of trade in goods. Additionally, because of interaction between tariffs and pricing, the market structure of the domestic service sector becomes increasingly important as tariffs are reduced. Indeed, depending on the degree of competition, market access concessions on tariffs may be effectively undone in some cases by changes in margins. For exporters, we find that service competition in destination markets matters most for exporters from smaller, poorer countries. Our results also suggest that while negotiated agreements leading to cross-border services liberalisation may boost goods trade as well, they may also lead to a fall in goods trade when such liberalisation involves FDI leading to increased service sector concentration.
A Tale of Two Games: Membership Versus Usage in Platform Competition
Posted by D. Daniel Sokol
Pai-Ling Yin (MIT Sloan) discusses A Tale of Two Games: Membership Versus Usage in Platform Competition.
ABSTRACT: Demand in platform competition is characterized by a 2-stage game: first, demanders decide whether to adopt a platform, and THEN they decide how much to use the platform. However, with the exception of Bedre & Calvano (2010) and Estelle & Yin (2008), the distinction between membership demand and demand for usage is typically ignored. Consumers are assumed to make their membership choice only after considering usage. If membership and usage are perfectly correlated and simultaneous, there is no loss from simply treating membership and usage as the same or ignoring membership altogether. However, this article will illuminate the ways in which membership is distinct from usage, leading to important strategic and policy implications from distinguishing between membership and usage in platform competition.
August 16, 2010
Cruz on Global Competition: Law, Markets and Globalization
Posted by M. Elina Cruz
David Gerber's book begins by discussing the uprising and downfall of several projects that proposed the implementation of a global competition law framework. Certainly, if this were any ordinary work, the reader (interested in competition law) might feel discouraged to keep reading. Except- there is nothing ordinary or common about Global Competition: law, markets, and globalization. The book transforms the failed attempts made to achieve a global competition law, into lessons to be learned and -by the last chapter- a particularly cynical reader of global law (such as myself) finds that there is not only hope- but a clear pathway to achieve the goal of having a global competition framework.
As an academic in competition law from a developing country, from the team of the "other players”, identified by the author- one of the first ideas that caught my attention was the horizontal versus vertical approach towards globalization of antitrust. As explained in the book, Latin America has been one of the examples of verticality, in the sense that we have received a strong influence from US competition law into our legislations. In this regard, Gerber proposes a more egalitarian design of global competition law: a process in which the US and the EU are essential, but not necessarily imposing the particular characteristics of their experiences. I believe this view is consistent with the fact that in developing countries (as well as developed) the value of competition sometimes needs to be balanced with other relevant goals. Additionally, in general, there is a lack of awareness of the importance and benefits of competition law in developing countries, so proposing a global approach poses a harder challenge.
Another important issue discussed in this book is that global competition law -achieved either through convergence, agreements or pathways- requires not only the text of competition law as a common denominator, but also that the implementation of such law must be similar throughout the world. Gerber’s pathway concept is built on having the same set of objectives, designing the steps towards these objectives and acquiring an obligation to follow these steps. In connection to this point, it is important -for the sake of the debate- to note that the “implementation step” (or obligation to follow the steps in the case of a pathway) is not always easy, particularly in Latin America. At least in this region of the world, as Sokol as shown, competition clauses contained in multilateral or bilateral agreements are usually not followed or applied (unlike the treaty itself). A challenge remains as to investigate the reasons that explain this unenforceability.
Gerber’s book is not only an excellent work by itself, but also leads the way to discuss new ideas related to the goal of having global competition law. In this sense, it is interesting to note that the verticality (referred to above) has now merged into each country’s tradition and culture. This is shown in the fact that verticality between the US and Latin America is really an influence of common law over civil law jurisdictions, producing unexpected outcomes in the legal landscape of countries in which case-law has no value given by legislation. The reception of US competition law has created “common law oasis”, where previous decisions are relevant for future decisions (unlike other fields of the law), but where these decisions have to be coherent with a civil law system. This is yet another proof that competition law can break national barriers, even differences between common law and civil law jurisdictions.
The last paragraph of the book reads “The development of legal regime capable of effectively combating anti-competitive conduct of global markets may be a key to two central challenges of the twenty-first century -achieving and maintaining economic prosperity and harnessing prosperity in ways that foster the development of human capacities and freedoms everywhere”. And for once, as a reader, I have to say I completely agree. Moreover, I strongly recommend this work to academics, practitioners and anyone interested in competition law, especially those who –like me- had already started to lose faith on international solutions for international issues.
 Order without (Enforceable) Law: Why Countries Enter into Non-Enforceable Competition Policy Chapters in Free Trade Agreements. D. Daniel Sokol. Chicago-Kent Law Review, Vol. 83, 2008
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Gerard on Global Competition: Law, Markets and Globalization
Posted by Damien Gerard
In his new book, Professor David Gerber displays once again this rare ability to combine historical and sociological, together with legal and economic, considerations in support of his views, this time on the evasive – if not frustrating – topic of “global competition”, i.e., the design of competition principles for the global economy.
The starting point of the reasoning is the well-know paradox of global markets regulated by the laws of individual states, and the alleged prevalence of those legal systems that have sufficient economic leverage to reach outside their borders. As Gerber acknowledges upfront, the paradox is two-fold: (i) national laws reflect the needs, interests and values of the states in which they operate rather than the needs and characteristics of global markets; while (ii) any body of global competition principles also ought to be “responsive to the needs of people everywhere”.
From there, the book unfolds in three parts. The first one offers an in-depth historical account of past attempts at building a global competition regime, of unilateral strategies to expand the scope of domestic laws and of new approaches developed in the context of the “turn to the market” that has characterized the late 20th – early 21st century. In doing so, Gerber provides a welcome sense of perspective and highlights the path-dependency of the modern dichotomy between convergence avenues and multilateral compacts, which is further discussed in Part 3.
Parts one and two form the background for the third part, which develops the core policy-oriented thesis of the book, namely that an approach based on a new form of multilateral agreement – called “commitment pathway” – is likely to be more effective at triggering the emergence of global competition principles than voluntary convergence strategies. The commitment pathway is described as a multilateral framework aimed to coordinate individually set short-term and long-term objectives and associated implementation processes, with a view to moving towards shared goals and creating an effective regime for global competition. In turn, the instrument would be supported by regular and extensive feedback exchanges among participants, allowing for the development of network relationships and trust among participants.
In essence, to achieve global principles likely to benefit all participants, Gerber advocates a model of multilateral cooperation combining substantive principles and procedural means to move towards shared goals. To move or to converge? (…) Here lays, in my view, the main ambiguity in the reasoning: even though he offers a rare discussion of convergence as a concept, Gerber adopts a narrow definition of convergence as based on independent choices by states that are “not the subject of agreement”. In turn, he dismisses convergence as an effective strategy or, at least, presents it as a suboptimal option. Yet, convergence hardly occurs in a vacuum; rather, it is the outcome of convergence mechanisms, which often involve cooperative schemes of some sort, even if of a pure procedural nature, i.e., targeted at the implementation rather than the design of competition rules. In other words, it is doubtful that the contrast between “loose” convergence and “hard” cooperation is as decisive as Gerber contends. In fact, in outlining his proposal, Gerber could have moved beyond the dichotomy between convergence paths and agreed solutions and explored the relationship between substantive outcomes and procedural means. Likewise, some of the criticisms he addresses to convergence strategies, e.g., as to the need for identifiable points of convergence, could be opposed in a somewhat similar way to his “commitment pathway” model. Moreover, Gerber does not study the functioning of existing cooperation agreements, mostly of a bilateral nature, and their impact on the emergence of converging global competition principles. Eventually, those critiques are somehow reassuring: there is still scope for another book developing an inductive reasoning starting with existing cooperative schemes, identifying their achievements and shortcomings and extrapolating recommendations for improved processes, knowing that global principles would in any event take time to surface and are inherently contingent on the convergence of economic fundamentals.
Overall, Professor Gerber’s book provides a thoughtful account of where we come from and where we stand on the way toward global competition principles. It challenges wisely common assumptions and convenient proposals and raises sharp questions informed by the study of a broad range of materials, in relation to a topic that is not ripe yet for clear answers anyway. “Global Competition” sets the stage, suggests innovative solutions and calls for renewed policy initiatives.
Gal on Global Competition: Law, Markets and Globalization
Posted by Michal Gal
The development of a global legal regime, capable of effectively combating anti-competitive conduct on global markets, is not only necessary to meet the central challenges of the twenty-first century, but is also doable. This is the optimistic conclusion of Prof. David Gerber's thorough, thoughtful and thought-provoking new book. While most scholars would agree with the first part of the conclusion- that a global legal regime is necessary to effectively combat global anti-competitive conduct and overcome the significant limits of unilateral enforcement- the practicality of a global solution is still highly debatable. Indeed, many antitrust scholars, officials and lawyers emphasize the many obstacles that stand in the way of such a global solution. Accordingly, Gerber's conclusion is quite radical. But Gerber holds his ground firmly and provides a thorough and sometimes provocative analysis of both the motivations and the obstacles to such a regime, to conclude that the former may well overcome the latter. The analysis is well grounded, like all of Gerber's work, in a meticulous analysis which encompasses, inter alia, historical attempts to reach a global solution, a comparative analysis of the experience of different jurisdictions with competition law which shapes motivations and abilities to participate in such a project, and the effects of the increased interconnectedness of markets on such motivations.
To overcome some of the apparent obstacles, Gerber proposes a flexible approach- which he calls a "commitment pathway". This approach attempts to bridge differences in goals, institutional capacities and normative prohibitions among different jurisdictions by creating a long-run process that would not require harmonization as a starting point, but strives to achieve it in the long run. This pathway would require states to commit to walking together along a pathway towards commitment, but would not mark at the outset the details of the final resulting legal regime. By so doing, the agreement would use a temporal dimension to reduce the pressure of early commitment that would limit the incentives of some countries to participate.
One of the main strengths of the book is that it dispels some of the assumptions wrongly made with regard to the possibility of reaching an international agreement, and thus clears the way for a fresh discussion of the possibility of its creation. Most interestingly, it provides us with a first-rate analysis of the perceived failure of two past attempts to reach a global competition law regime (the World Economic Conference and the Havana Charter). The analysis clearly and convincingly indicates that it was not the intrinsic qualities of a global competition law regime that stood in the way of reaching a global agreement, but rather external non-competition-related events such as the beginning of the World War II and later the cold war. Moreover, Gerber emphasizes that the two attempts played an important role in carving the way for current efforts, by demonstrating that such a project can generate broad international political support and by promoting competition law efforts and experiments in many countries. Accordingly, these examples should not be used to indicate failures to reach an international agreement, but rather as playing an important catalyst role in the road towards a global competition law agreement.
the fact that so many jurisdictions have experimented with competition laws
since the efforts to reach a global competition law agreement after WWII have
taken place, has changed the scene dramatically and limit the predictive value
of past efforts. No more do most countries await an international joint
authority to create limits on anti-competitive conduct. Rather, the current
international regime is based on parallel unilateral enforcement by different
jurisdictions. The challenge is, thus, to make a case for a global competition
agreement in such an environment. The book addresses this challenge by offering
a comparative analysis of the experiences of different jurisdictions with
competition law under the current unilateral enforcement regime. This
comparative perspective serves to crystallize the differences as well the
similarities among competition cultures, and to understand the challenges, as
well as the motivations, to take the next step in global competition law.
Indeed, Gerber provides an excellent analysis of such experiences, especially
Based on this historic and comparative background, the third and last part of the book is an analysis of two basic modes of cooperation: convergence and a global agreement. As Gerber observes, the limits of the former strengthen the need for the latter. In my view, the two might well be interconnected, as the former can serve as an important step towards reaching the latter.
The strength and contribution of this part lie in the analysis of the conditions necessary in order to reach a global agreement. The analysis is extremely thoughtful and meticulous and sets the stage the discussion. The commitment pathway method, suggested by Prof. Gerber, is an important contribution to our thinking. The downside, however, is that the focus of the discussion is mainly on the method of reaching such an agreement and conditions, rather than on its content. What is missing is an analysis of different modes of agreements. For example, comparison of an agreement under which each jurisdiction continues to apply its own competition law unilaterally, but would be required to meet certain standards (as was proposed by the EU in the case of the WTO) and an agreement which establishes a global antitrust authority (similar to the EU model). Each of these modes of cooperation creates a different set of benefits, but also a different set of problems. Such an analysis would have further strengthened the superb analysis of the book.
Indeed, specifying (or not specifying) the mode of cooperation would certainly affect the motivation of countries to join the commitment pathway, as the end goal affects their motivation to join in the first place. To give but one example, one of the main obstacles to creating an international competition law framework within the WTO was the strong resistance of developing countries. Such resistance was based on the mode of agreement suggested. While developing countries undoubtedly stand to benefit from stronger anti-cartel enforcement at the global level, they feared that the suggested mode of agreement would exacerbate their problems rather than solve them. One of the main suggestions in the negotiations involved a requirement that each country enforce its own laws to prevent cartels occurring from within its jurisdiction that affect international trade and enabled the use of WTO institutions in order to punish countries not fulfilling their enforcement duties. Given their limited enforcement resources, many developing countries feared that they would not be able to meet this requirement and then be sanctioned by the WTO. Alternatively, they would have to spend their limited resources on prosecuting international cartels, rather than domestic one, in order to avoid such sanctions, even if setting such a priority is otherwise inefficient. Although discussions also involved technical assistance to developing jurisdictions in enforcing their own laws, they may have feared that such assistance would not actually materialize. Accordingly, it was the mode of the proposed agreement, rather than the motivation to reach it, that stood in the way of a WTO agreement on competition law.
Another obstacle that might stand in the way of reaching an international competition law agreement when using the commitment pathway might result from the fear of being the first to commit, without being sure that others will follow. In some regional agreements the first mover does not necessarily gain more and might even lose from his relatively higher level of commitment. For example, the commitment of Senegal to the SADC agreement, which required it to abolish its operational competition authority and instead rely on a joint authority, which has yet to prove the right of its existence, serves as such an example. One way to mitigate this concern is by creating, where possible, an evolutionary pathway that would increase not only commitments but also benefits. That is, only countries that commit to a higher level of cooperation and coordination will be able to use the joint mechanisms and gain more from their commitments. Yet this will not solve all problems, especially if the commitment has a positive network externality- as the number and size of countries that commit increases, so does the value of the network to all and the higher the motivation to join in the first place.
Only time will tell whether Prof. Gerber's cautiously optimistic conclusion will indeed materialize and a global competition agreement could be reached. Personally, I believe that such an agreement could eventually be reached only with regard to hard-core cartels, and that coordination among dominant jurisdictions and regional agreements among the weaker ones will dominate other areas of competition law. Yet the analysis in all three parts of the book is eye opening and serves as an important and unparalleled basis for future discussions on the subject.
 It should be noted, however, that with regard to the Havana Charter, the question still stands why such an agreement was not reached among Western states, as it evolved in other areas of international trade.
Refusal to Supply and Innovation: Past, Present and Future
Posted by D. Daniel Sokol
Michael Potter, Tilburg Law and Economics Center (TILEC), describes Refusal to Supply and Innovation: Past, Present and Future.
ABSTRACT: The effects of competition rules on innovation can be very far reaching and may be seen as a hindrance to one of its foundational aims; increasing consumer welfare. The aim of this discussion is to provide the reader with sufficient background knowledge of unilateral refusal to supply pursuant to Article 102 TFEU. The piecemeal legal principles show the development of this murky area. Having set the scene, it will look at one of the more prominent cases in the area; the Commission decision against Microsoft. Law and economics overlap greatly, especially where competition policy is concerned and this discussion will highlight the ongoing legal and economic debates underlying the Microsoft decision. More recent developments in the area of unilateral refusal to supply will be highlighted followed by a comparative discussion on how this area is tackled in the United States with special emphasis on the Trinko decision.
Vertical Control of a Distribution Network - An Empirical Analysis of Magazines
Posted by D. Daniel Sokol
Stijn Ferrari, Catholic University of Leuven (KUL) and Frank Verboven, Catholic University of Leuven (KUL) - Faculty of Business and Economics (FBE) address Vertical Control of a Distribution Network - An Empirical Analysis of Magazines.
ABSTRACT: How does an upstream firm determine the size of its distribution network, and what is the role of vertical restraints? To address these questions we develop and estimate two models of outlet entry, starting from the basic trade-off between market expansion and fixed costs. In the coordinated entry model the upstream firm sets a market-specific wholesale price to implement the first-best number of outlets. In the restricted/free entry model the upstream firm has insufficient price instruments to target local markets. It sets a uniform wholesale price, and restricts entry in markets where market expansion is low, while allowing free entry elsewhere. We apply the two models to magazine distribution. The evidence is more consistent with the second model where the upstream firm sets a uniform wholesale price and restricts the number of entry licenses. We use the model to assess the profitability of modifying the vertical restraints. A government ban on restriced licensing would reduce profits by a limited amount, so that the business rationale for restricted licensing should be sought elsewhere. Furthermore, introducing market-specific wholesale prices would implement the first-best, but the profit increase would be small, providing a rationale for the current uniform wholesale prices.
When Should a Platform Give People Fewer Choices and Charge More for Them?
Posted by D. Daniel Sokol
Hanna Halaburda and Mikolaj Jan Piskorski (Harvard Business School) ask When Should a Platform Give People Fewer Choices and Charge More for Them?
ABSTRACT: Existing economic wisdom offers unequivocal advice to managers seeking to establish new platform businesses: Invest to acquire users as quickly as possible and make sure that they have unrestricted access to each other. Since the value of participating in a platform often depends on the number of choices offered, a platform offering unrestricted access should quickly displace a platform that restricts choice. After all, Facebook would not stay around for very long if it amassed a large number of users, but would then only let them interact with a small number of others. It would be equally counterproductive for a game console to build a large user base, and ensure that a large selection of games exists, only to announce that every user can choose at most five games. In both cases, a less restrictive platform would quickly eclipse the one limiting choice.
However, in some markets we observe that unrestricted-choice platforms do not win over restricted-choice ones. If anything, platforms restricting choice perform better in that they are able to charge higher prices than the unrestricted-choice platforms. This is very salient, for example, in the on-line dating market, where most sites give its members unrestricted access to all members. However, some sites, such as eHarmony, give its members no more than 7 potential dating candidates at a time. And despite offering limited choice, eHarmony charges up to a 25 percent premium over its closest competitor, Match.
Similarly, labor markets feature platforms, such as Monster, that offer unrestricted access to everyone. However, these platforms have not eliminated headhunting firms. The later offer very few candidates to firms, and expose candidates to only a limited number of firms, and yet charge more than the unrestricted-choice platforms do. Finally, in the housing market, buyers and sellers have the choice of using the For Sale By Owner database ("FSBO") or broker's services. Even though FSBO could give people broader exposure to everyone on the platform, it has not displaced brokers, who show only a few houses to a buyer, and expose every house to a limited number of clients. Academic studies have shown that broker-mediated transactions and FSBO transactions result in similar house sale prices. Given that brokers do not generate higher sale prices, but charge a 6 percent commission, they are the more expensive market option.
These examples present a puzzle for us to solve: How can some platforms offer less choice and yet charge more to participate?
Sponsored Search Auctions: Simple Economics and Implications for Antitrust Policy
Posted by D. Daniel Sokol
Renato Gomes, Toulouse School of Economics has written on Sponsored Search Auctions: Simple Economics and Implications for Antitrust Policy.
ABSTRACT: The most valuable asset of many two-sided platforms is their user base. In a celebrated example, Internet search engines (such as Google, Yahoo! or Bing) derive most of their revenue from selling the eyeballs of millions of searchers to advertisers. For each query entered by searchers, search engines return a list of sponsored links displayed to the right of the algorithmic (also called organic) search results. The knowledge of what searchers are looking for enables search engines to create very precise matches between searchers and advertisers.
The ability to target consumers has great value to advertisers. The average price of a click on a sponsored link from Google in 2006 was $2.00 and, for certain keywords, a click may cost more than $100. On aggregate, keyword advertising has impressive figures: in 2007, the U.S. search traffic totaled more than eighty billion queries, of which 40 percent have commercial potential. The total revenue generated by keyword advertising alone amounted to more than 20 billion dollars in 2007.
Recently, the three major search engines announced plans to collaborate in search technology and advertising. In June 2008, Google and Yahoo! issued a proposal according to which Google would deliver ads next to Yahoo's search results. In July 2009, Microsoft and Yahoo! announced a deal to share search technology and to join forces in search-generated advertising. The Department of Justice raised concerns about the anticompetitive effects of such partnerships, which were ultimately aborted. Still, the prospect of future mergers brings many new questions to the antitrust debate in online advertising. Would a merger between the leading search engines be beneficial to searchers or advertisers? How would market conditions affect the pricing and the selection of sponsored search ads?
Search engines have traditionally employed auctions to sell sponsored links to advertisers. The use of auctions in two-sided markets is a novel phenomenon, and its antitrust implications have no parallel in one-sided settings. In this short note, I review the simple economics of sponsored search auctions, and describe its main insights for antitrust policy. Surprisingly, concentrated markets can be welfare-improving when search engines are not able to subsidize (or charge) searchers for their clicking behavior.
August 15, 2010
Price Signals in Two-Sided Markets
Posted by D. Daniel Sokol
Joshua Gans, University of Melbourne discusses Price Signals in Two-Sided Markets.
ABSTRACT: Two-sided platforms have represented an antitrust challenge in a similar way to the challenge posed by innovation and dynamics. Put simply, a seeming lack of price competition to one set of consumers may mask competition for another, related set of consumers. That is, low competition within one side of the market may simply reflect intense competition for the other side of the market. This notion has been traditionally a focus in media markets where media outlets have been seen to charge higher prices to advertisers in order to access consumers (treating them as any monopolist would). However, the very fact that an outlet can earn monopoly rents from advertisers for each consumer they have, means that they will have strong incentives to compete for those very consumers. Those consumers will face much lower prices (perhaps none at all) as a consequence. For any antitrust analysis, it is therefore important to consider both sides of such markets.
A similar effect has been observed in credit card associations-a focus of much antitrust and regulatory attention over the past decade. For such platforms, it is the merchants who perhaps face monopolistic service charges when allowing credit card transactions while their customers face low prices that are, in fact, inducements to put more and more transactions on their cards. While this appears to be similar to the situation in media markets, there are some important differences.