Antitrust & Competition Policy Blog

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

Saturday, November 13, 2010

The Indian Competition Act: An Overview and Preliminary Analysis

Posted by D. Daniel Sokol

Achintya Nath Sexena, Rajiv Gandhi School of Intellectual Property Law, IIT-Kharagpur discusses The Indian Competition Act: An Overview and Preliminary Analysis.

ABSTRACT: The newly enacted (2002), and partially implemented Competition Act of India marks a shift in the Indian economic policy from prevention of monopoly to promotion of competition in its domestic markets as part of the new era of economic liberalization. The Act contains various provisions for promotion and enforcement of competitive behaviour in the domestic markets and prescribes various criteria for the determination of anti-competitive behaviour. This paper analyzes the various provisions of the Indian Competition Act, amendments to the Act and the author hopes to add to the work by updating and dealing with various issues relating to competition in Indian markets in future.

November 13, 2010 | Permalink | Comments (0) | TrackBack (0)

Friday, November 12, 2010

Competition and cost pass-through in differentiated oligopolies

Posted by D. Daniel Sokol

Paul R. Zimmerman and Julie A. Carlson (both FTC) Competition and cost pass-through in differentiated oligopolies.

The impact that competition exerts on the incentives of firms to pass through reductions in their marginal costs is an important consideration in assessing the performance of alternate market structures. This paper examines the role of product differentiation on firm-specific and industry-wide pass-through rates. Relying on Shubik’s (1980) model of differentiated Cournot competition with linear demand, we show that there exists an initial critical range over which the firm-specific cost pass-through rate decreases in the number of firms. Beyond this range the rate continually increases – approaching 50 percent as the number of firms goes to infinity. This contrasts with a model of differentiated Bertrand competition in which cost pass through monotonically decreases in the number of firms. The disparate effects across the Cournot and Bertrand models are shown to stem from the influence of competition and product differentiation on the respective firm reaction functions. Suggestions for future empirical work based upon the models’ predictions and implications for antitrust policy are also discussed.

November 12, 2010 | Permalink | Comments (0) | TrackBack (0)

Imperfect Platform Competition: A General Framework

Posted by D. Daniel Sokol

Alexander White, Harvard University Department of Economics and E. Glen Weyl, Harvard University - Society of Fellows, Toulouse School of Economics discuss Imperfect Platform Competition: A General Framework.

ABSTRACT: We propose a general model of imperfect competition among multi-product firms, the consumption of whose goods yields externalities from one consumer to another. We extend the allocation approach of Weyl (2010)’s monopoly model, proposing a solution concept, Insulated Equilibrium, that allows for tractable analysis of competition. In such an equilibrium each firm’s price on one side of the market adjusts to all firms’ participation levels on the other side, so as to insulate its own allocation. This eliminates both the indeterminacy of consumer reactions once platforms have set their tariffs and the multiplicity of reaction functions that platforms can have to one another’s tariffs. Our approach allows us to derive intuitive first-order conditions characterizing equilibrium without restrictive assumptions and to analyze the effects of competition, mergers and regulation.

November 12, 2010 | Permalink | Comments (0) | TrackBack (0)

Merger Simulation in a Two-Sided Market: The Case of the Dutch Daily Newspapers

Posted by D. Daniel Sokol

Lapo Filistrucchi, Department of Economics, CentER & TILEC, Tilburg University, Dipertimento di Scienze Economiche, University of Florence; Tobias J. Klein, Tilburg University, Tilburg University - Center for Economic Research (CentER), Institute for the Study of Labor (IZA), Netspar; and Thomas Michielsen, Tilburg University discuss Merger Simulation in a Two-Sided Market: The Case of the Dutch Daily Newspapers.

ABSTRACT: We develop a structural econometric framework that allows us to simulate the effects of mergers among two-sided platforms selling differentiated products. We apply the proposed methodology to the Dutch newspaper industry. Our structural model encompasses demands for differentiated products on both sides of the market and profit maximization by competing oligopolistic publishers who choose subscription and advertising prices, while taking the interactions between the two-sides of the market into account. We measure the sign and size of the indirect network effects between the two sides of the market and simulate the effects of a hypothetical merger on prices and welfare.

November 12, 2010 | Permalink | Comments (0) | TrackBack (0)

Thursday, November 11, 2010


Posted by D. Daniel Sokol


Stanford Law School and Harvard Law School have established an International Junior Faculty Forum. The idea behind this is to stimulate exchange of ideas and research, among younger scholars in the academy, from all parts of the world; and to encourage younger scholars in their work. We live today in a global community - especially a global legal community - and it is important to develop legal scholarship on a transnational basis. Scholars in different countries are often divided by barriers of time and space, as well as barriers of different legal traditions and cultures. We hope that the Forum will be a step in the direction of surmounting these barriers. The papers at the 2010 Forum were on a very wide range of subjects, from the treatment of science by the World Trade Organization, to the concept of evil in German and American law, to the role of Islam in the development of national legal system. The young scholars came from many different countries, as did the senior scholars. In all, five continents and a wide range of viewpoints and methodologies were represented.

The sponsors, Harvard and Stanford law schools, are pleased to announce plans for the fourth International Junior Faculty Forum. The Forum will be held in November 17 - 19, 2011 at the Harvard Law School, Cambridge, MA.

In order to be considered for the 2011 International Junior Faculty Forum, authors must meet the following criteria:

    • Citizen of a country other than the United States.
    • Home academic institution is outside of the U.S.
    • Have held a faculty position or its equivalent (including positions comparable to junior faculty positions in research institutes) for less than seven years as of 2011.
    • Last degree earned less than ten years earlier than 2011.

Papers may be on any legally relevant subject. We especially welcome work that is interdisciplinary. The papers can make use of any relevant approach; they can be quantitative or qualitative, sociological, anthropological, historical, or economic. The sponsoring schools would like to emphasize that they welcome papers from junior scholars from all parts of the world. No country or group of countries has a monopoly of talent. Please note that already published papers are not eligible to be considered.

The first step is to submit an abstract of the proposed paper. We would like these to be no more than four (4) pages and be in English. Tell us what you plan to do; lay out the major argument of the paper, say something about the methodology, and what you think will be the paper's contribution to scholarship. The due date for the abstracts is January 17, 2011, although earlier submissions are welcomed. Please submit the abstract electronically to both schools-- at Harvard, to Juliet Bowler (, and at Stanford, to Lisa Woodcock ( with the subject line: International Junior Faculty Forum. The abstract should contain the author's name, home institution, and the title of the proposed paper. Please also send a current CV.

After the abstracts have been reviewed, we will in February invite a number of junior scholars to submit full papers of no more than 15,000 words, electronically (in English) by May 31, 2011. Please include a word count for final papers.

An international committee of legal scholars, who themselves come from across the globe, and represent many different styles and approaches, will review the papers. In the end, about ten of the papers will be chosen for presentation at the conference. And, as before, at the conference itself, two senior scholars, will comment on each paper. After the commentators give their remarks, all of the participants, junior and senior alike, will have a chance to join in the discussion. Meeting junior and senior colleagues, and talking about your work and theirs, may be one of the most valuable - and enjoyable-- aspects of the Forum.

The sponsoring schools will cover expenses of travel, including airfare, lodging, and food, for each participant. Questions should be directed to Juliet Bowler ( or Lisa Woodcock (

November 11, 2010 | Permalink | Comments (0) | TrackBack (0)

The Economics of Antitrust and Intellectual Property Rights

Posted by D. Daniel Sokol

Mariateresa Maggiolino, Bocconi University - Department of Law takes on the weighty topic of The Economics of Antitrust and Intellectual Property Rights.

ABSTRACT: Economics studies the market conduct of agents, such as individuals, firms, and institutions; it describes the consequences of these behaviors and, if its explanations are successful, it may even provide forecasts and policy suggestions. Therefore legal scholars, who wish to offer well-founded and reliable policy suggestions as to the proper way of shaping, interpreting and enforcing statutes, may find it useful to employ economics to ‘bridge’ legal rules with the empirical phenomena these rules address.

Competition and innovation are, as a matter of fact, the two empirical phenomena that antitrust, patent and copyright provisions address. Therefore, legal scholars, who want to elaborate well-founded and reliable policy suggestions about antitrust and IP statutes, may profitably employ economics to understand how competition and innovation develop.

Like any other social science, economics encompasses both a 'hard core' of well-established principles and concepts, and a ‘fringe’ of new models and insights, which introduce new research questions and explore some of the issues that hard core theories cannot solve.

Usually, scholars that use economics as a bridge between legal provisions and empirical phenomena rely on these hard core theories, because they already belong to common knowledge and, hence, are more administrable for lawyers, judges, and jurors. In fact, textbook economics of IP is quite basic: although the Chicago school has described it only recently, it is rooted in the instrumental/utilitarian approach and in the cost-benefit analysis of neo-classic economics, as well as in the transaction costs insights that derive from the Coase theorem. Likewise, the current textbook economics of antitrust law consists of various industrial organization models, which originate from the application of the above mentioned principles of neo-classic economics to imperfect market realities.

Yet, competition and innovation are kaleidoscopic phenomena that, sometimes, extend beyond the reach of these hard core economic theories. For instance, the industrial organization models that nowadays shape antitrust law are so focused on short-run price and output effects that they cannot fully explain how innovation causes economic growth by changing the long-run performance of firms and markets. And this is an issue (!), especially when antitrust enforcers confront business conduct that involves IPRs - whether agreements, monopolists’ conduct, or mergers - because this conduct produces both short run and long run effects on both competition and innovation. Likewise, despite what orthodox economics suggests, some empirical studies show that in specific industries there is no linear relationship between the scope of IPRs and innovation. And this is an issue too (!), because if broader and stronger IPRs do not boost innovation, the recent propertization phenomenon may turn out to be counterproductive.

As a consequence, some scholars have recently began to look at ‘fringe’ economic theories in order to provide a better ‘bridge’ between antitrust and IP rules, on the one hand, and competition and innovation, on the other hand.

While not attempting to provide an exhaustive discussion of past and current economic theories, the chapter explores the mainstream economic backbone of present antitrust and IP laws (Part A and B) and what future developments these legal rules could undergo because of the influence of some fringe economic theories (Parts C and D). Part A explains that the present antitrust discourse mirrors the ‘normative meaning’ of the perfect competition model, but employs industrial organization models - sometimes, far too sophisticated and complex models - in order to explain firms’ actual behaviors. Part B discusses how neo-classic economics justifies the existence of patents and copyrights by using both the appropriability theory and the Coase theorem. Then, given that industrial organization models cannot fully explain dynamic efficiency and long run phenomena, Part C looks at some heterodox economic theories that place innovation and change at the heart of the competitive process. Similarly, given that arguably the neo-classic justification for IPRs does not always support a proper set of incentives for follow-on inventions and derivative creations, Part D describes how one of those heterodox economic theories, that is to say, evolutionary economics, seems to be capable of striking a better equilibrium between present and future innovation, by elaborating on the ideas of knowledge and learning processes. The chapter concludes with the finding that no drastic change is required in order to apply these fringe economic theories to an understanding of present antitrust and IP rules.

November 11, 2010 | Permalink | Comments (0) | TrackBack (0)

Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol

Posted by D. Daniel Sokol

Scott K. Shriver (Stanford - Graduate School of Business) discusses Network Effects in Alternative Fuel Adoption: Empirical Analysis of the Market for Ethanol.

ABSTRACT: This paper investigates the importance of network e¤ects in the demand for ethanol-compatible vehicles and the supply of ethanol fuel retailers. An indirect network effect, or positive feed- back loop, arises in this context due to spatially-dependent complementarities in the availability of ethanol fuel and the installed base of ethanol-compatible vehicles. Marketers and social planners are interested in whether these effects exist, and if so, how policy might accelerate adoption of the ethanol fuel standard within a targeted population. To measure these feedback e¤ects, I develop an econometric framework that considers the simultaneous determination of ethanol-compatible vehicle demand and ethanol fuel supply in local markets. The demand-side of the model considers the automobile purchase decisions of consumers and fleet operators, and the supply-side model considers the ethanol market entry decisions of competing fuel retailers. I propose new estimators that address the endogeneity induced by the co-determination of alternative fuel vehicle demand and alternative fuel supply. I estimate the model using zip code level panel data from six states over a six year period. I find the network effect to be highly significant, both statistically and economically. Under typical market conditions, entry of an additional ethanol fuel retailer leads to a 12% increase in consumer demand for ethanol-compatible vehicles. The entry model estimates imply that a monopolist requires a local installed base of at least 204 ethanol-compatible vehicles to be profitable. As an application, I demonstrate how the model estimates can inform the promotional strategy of a vehicle manufacturer. Counter-factual simulations indicate that subsidizing fuel retailers to offer ethanol can be an effective policy to indirectly increase ethanol-compatible vehicle sales.

November 11, 2010 | Permalink | Comments (0) | TrackBack (0)

Merger Policy and the 2010 Merger Guidelines

Posted by D. Daniel Sokol

Herb Hovenkamp (Iowa Law) explains Merger Policy and the 2010 Merger Guidelines.

ABSTRACT: New Horizontal Merger Guidelines were issued jointly by the Antitrust Division and the Federal Trade Commission in August, 2010, replacing Guidelines issued in 1992 that no longer reflected either the law or government enforcement policy. The new Guidelines are a striking improvement. They are less technocratic, accommodating a greater and more realistic variety of theories about why mergers of competitors can be anticompetitive and, accordingly, a greater variety of methodologies for assessing them.

The unifying theme of the Horizontal Merger Guidelines is to prevent the enhancement of market power that might result from mergers. The 2010 Guidelines state that “[a] merger enhances market power if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.” The focus on enhancement of market power is not limited to price. Both the 1992 and 2010 Guidelines expressed a concern about mergers that might restrain innovation, but the emphasis in the 2010 Guidelines is greatly expanded.

The agencies are increasingly concerned about excessive reliance on market definition mechanisms that are, at best, rough approximations of reality. This increases the relative weight that will be given to other factors. That is not to suggest that the Agencies will not employ technical methodologies. Indeed, the economic methodologies for delineating markets have become more technical and precise over time, thanks in large part to economists that have been working on merger analysis, whether independently or under the aegis of one of the Agencies.

Rather, the Guidelines indicate a broader range of approaches. Under the 2010 Guidelines market definition essentially plays two roles: “First, [it] helps specify the line of commerce and section of the country in which the competitive concern arises. . . . Second, [it] allows the Agencies to identify market participants and measure market shares and market concentration.” Market definition (and the measuring of market shares and concentration) is no longer an end in itself, though it is “useful to the extent it illuminates the merger’s competitive effects.” The 2010 Guidelines also place a heavier emphasis on direct evidence of competitive effects in defining markets: “[e]vidence of competitive effects can inform market definition, just as market definition can be informative regarding competitive effects.”

This essay attempts to integrate the 2010 Guidelines into merger enforcement policy in the United States, highlighting the most important differences between the approach taken in the 2010 Guidelines and that taken by both previous Guidelines, the enforcement agencies, and the courts.

November 11, 2010 | Permalink | Comments (0) | TrackBack (0)

Screens for Conspiracies and Their Multiple Applications

Posted by D. Daniel Sokol

Rosa Abrantes-Metz (LECG) & Patrick Bajari (Univ. of Minnesota) describes Screens for Conspiracies and Their Multiple Applications.

ABSTRACT: A screen is a statistical test designed to detect conspiracies aimed at illegally manipulating a market. Competition authorities, academics, and consultants have designed a variety of screens to detect competition problems, and the use of such screens has been increasing.  In this paper, we first describe screens designed to detect bid-rigging, price-fixing, market- allocation schemes, and commodity-market manipulation.  Next, we discuss the ways in which screens can be used by plaintiffs and defendants in antitrust cases.  These include: (i) class certification, (ii) motions to dismiss after Twombly;  (iii) estimating the effects and damages of collusion; (iv) assisting companies in deciding when and whether to file a leniency application; (v) assisting in disproving the existence of a conspiracy and manipulation or establishing its immateriality; and (vi) assisting managers in large companies to monitor for data manipulation (e.g. falsified reimbursement or accounting statements) and price-fixing in purchasing.

November 11, 2010 | Permalink | Comments (0) | TrackBack (0)

The High Economic Costs of Cartels: Can Private Enforcement Help?

Posted by D. Daniel Sokol

John Connor (Purdue Ag Econ) asks The High Economic Costs of Cartels: Can Private Enforcement Help?

ABSTRACT:This chapter examines anti-cartel enforcement in selected jurisdictions around the world, paying particular attention to the role of private court actions in attaining optimally deterring sanctions. The principal conclusions are as follows. There are numerous indicators that enforcement in North America comes closest to optimal deterrence of illegal cartel conduct. Monetary penalties are roughly commensurate with the economic injuries imposed on customers by price fixers. Since about 2000, the European Union – both the European Commission and its National Competition Authorities – have pulled ahead of North America in the size of fines imposed on cartels. While there are glimmers of change afoot, the EU's fight against cartel violators is hampered by court rules that severely limit the rights of cartel victims to seek compensation in private actions. Unlike the United States, EU law does not permit sanctions to be imposed on cartel managers, nor is this frequent in all but a few of its Member States. Cartel enforcement is weakest in Asia, Africa, and Latin America. There are a few rising stars on these continents, but government entities rarely see their efforts complemented by significant private settlements or damages awards to aggrieved cartel victims.

November 11, 2010 | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 10, 2010

Do Merger Guidelines Revise or Describe Policy: The Case of the 1997 Efficiency Revision

Posted by D. Daniel Sokol

Malcolm B. Coate (FTC) has an interesting new paper that asks Do Merger Guidelines Revise or Describe Policy: The Case of the 1997 Efficiency Revision.

ABSTRACT: The 1997 Merger Guidelines appeared to significantly expand the role of efficiency considerations in merger analysis. However, it is possible that the revision simply memorialized existing policy and thus served more to improve transparency than reform policy. By combining an existing review of Federal Trade Commission merger studies after the 1997 reform, with a new review of merger studies from the five years prior to the revision, it is possible to shed some light on this question. In general, the FTC efficiency analyses did not change after the reform, and the bulk of the considerations noted in the Guidelines appear in the files over the entire sample period. Only the study of merger specific efficiencies seemed to change in 1997, as the revised Guidelines mandated that alternative methods to achieve the efficiency must be practical given the market considerations. Overall, the impact of efficiencies on the merger challenge decision appeared to date to the arrival of Chairman Pitofsky at the FTC. Interestingly, this change also supported giving consideration to fixed cost savings, but seemed to insist on some evidence of pass-through to consumers for the fixed cost claims to “count.”

November 10, 2010 | Permalink | Comments (0) | TrackBack (0)

Injunctions, Hold-Up, and Patent Royalties

Posted by D. Daniel Sokol

Casrl Shapiro (Berkeley Hass School of Business and DOJ) discusses Injunctions, Hold-Up, and Patent Royalties.

ABSTRACT: A simple model is developed to study royalty negotiations between a patent holder and a downstream firm whose product is more valuable if it includes a feature covered by the patent. The downstream firm must make specific investments to develop, design, and sell its product before patent validity and infringement will be determined. The hold-up component of the negotiated royalties is greatest for weak patents covering a minor feature of a product with a high margin between price and marginal cost. For weak patents, the hold-up component of negotiated royalties remains unchanged even if negotiations take place before the downstream firm designs its product. The analysis has implications for the use of injunctions in patent infringement cases.

November 10, 2010 | Permalink | Comments (0) | TrackBack (0)

Duopoly in the Japanese Airline Market: Bayesian Estimation for the Entry Game

Posted by D. Daniel Sokol

Shinya Sugawara (Graduate School of Economics, University of Tokyo) and Yasuhiro Omori (Faculty of Economics, University of Tokyo) explore Duopoly in the Japanese Airline Market: Bayesian Estimation for the Entry Game.

ABSTRACT: This paper provides an econometric analysis on a duopoly game in the Japanese domestic airline market. We establish a novel Bayesian estimation approach for the entry game, which is free from the conventional identification problem and thus allows the incorporation of flexible inference techniques. We find asymmetric strategic interactions between Japanese firms, which implies that competition will still be influenced by the former regulation regime. Furthermore, our prediction analysis indicates that the new Shizuoka airport will suffer from a lack of demand.

November 10, 2010 | Permalink | Comments (0) | TrackBack (0)

Competition and Productivity: Evidence from the Post WWII U.S. Cement Industry

Posted by D. Daniel Sokol

Timothy Dunne (Federal Reserve Bank of Cleveland), Shawn Klimek (U.S. Census Bureau) and James Schmitz, Jr. (Federal Reserve Bank of Minneapolis) describe Competition and Productivity: Evidence from the Post WWII U.S. Cement Industry.

ABSTRACT: In the mid 1980s, the U.S. cement industry faced a large increase in foreign competition. Foreign cement producers began offering cement at very large discounts on U.S. prices. We show that productivity (measured by TFP) in the industry was falling during the 1960s and 1970s, but that following the increase in competition, productivity has reversed course and is growing strongly. When foreign competition was weak, productivity fell. When it was strong, productivity grew robustly. We explore the reasons for the large productivity increase. We argue that a large share of the productivity gains resulted from significant changes in management practices at plants.

November 10, 2010 | Permalink | Comments (0) | TrackBack (0)

Janet D. Steiger Fellowship Project is Receiving Applications for the Summer of 2011 Fellowships

Posted by D. Daniel Sokol

The Section of Antitrust Law sponsors a summer fellowship program, named the Janet D. Steiger Fellowship Project, honoring the memory of the late Chairman of the Federal Trade Commission.  Each of the 20 selected students will serve for a minimum of eight weeks in the consumer protection department of one of the participating State Attorney General Offices during the summer of 2011:

Phoenix, Arizona                          Little Rock, Arkansas                    California (LA or SF)

Denver, Colorado                         Des Moines, Iowa                         Topeka, Kansas

Baltimore, Maryland                      Jackson, Mississippi                      Helena, Montana                             

Lincoln, Nebraska                          Concord, New Hampshire             Newark, New Jersey

Santa Fe, New Mexico                   New York, New York                    Columbus, Ohio               

Portland, Oregon                          Nashville, Tennessee                     Salt Lake City, Utah

Montpelier, Vermont                     Richmond, Virginia                                                      

Each selected student will receive a $5,000 stipend for the summer (administered through the offices of the state attorneys general and subject to certain federal taxes).  The program also offers an optional small supplemental housing/travel allowance for those students who are not living at home for the summer (administered through the American Bar Association).  This supplemental allowance will not be considered until after Fellows have been selected.

The application period is (November 15, 2010 until January 31, 2011).  Applications will not be accepted beyond the January 31, 2011 deadline date.  Students must submit: (1) the application form; (2) resume; (3) writing sample; and (4) statement of interest.  The application form is attached and is also available at


November 10, 2010 | Permalink | Comments (0) | TrackBack (0)

Essential Facility Doctrine in Brazilian Telecommunications Sector

Posted by D. Daniel Sokol

José Antonio Batista de Moura Ziebarth, CADE and Gabriel Nascimento Pinto, University of Sao Paulo - Law and CADE describe Essential Facility Doctrine in Brazilian Telecommunications Sector.

ABSTRACT: The telecommunications system went through a huge transformation during the 1990’s going from a constitutional based state monopoly to a private competitive structure, which required the creation of an independent regulatory body, ANATEL. This essay analyzes the consequences of this transformation as well as the application of the essential facilities doctrine in Brazil.

November 10, 2010 | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 9, 2010

Pandora's Box Opened: The New Horizontal Merger Guidelines

Posted by D. Daniel Sokol

Gary Zanfagna (Honeywell) addresses Pandora's Box Opened: The New Horizontal Merger Guidelines.

November 9, 2010 | Permalink | Comments (0) | TrackBack (0)


Posted by D. Daniel Sokol

23 November 2010 – Marriott Hotel, 3-7 Rue August Orts, 1000 Brussels
18:45 – 19:00: Registration
19:00 – 19:45: Talk by Prof. Damien Neven
19:45 – 20:00: Questions
20:00 – 21:00: Cocktail
Global Competition Law Centre
College of Europe, Bruges
Fax : 32 (0)50477400

Download GCLC - 3rd Evening Policy Talk - Damien Neven - Four Years As The Chief Competition Economist

November 9, 2010 | Permalink | Comments (0) | TrackBack (0)

A Contest Model of a Professional Sports League with Two-Sided Markets

Posted by D. Daniel Sokol

Helmut Dietl (Institute for Strategy and Business Economics, University of Zurich), Tobias Duschl (Institute for Strategy and Business Economics, University of Zurich), Egon Franck (Institute for Strategy and Business Economics, University of Zurich), and Markus Lang (Institute for Strategy and Business Economics, University of Zurich) provide A Contest Model of a Professional Sports League with Two-Sided Markets.

ABSTRACT: This paper develops a model of a professional sports league with network externalities by integrating the theory of two-sided markets into a contest model. In professional team sports, leagues function as a platform that enables sponsors to interact with fans. In these league-mediated interactions, positive network effects operate from the fan market to the sponsor market, while negative network effects operate from the sponsor market to the fan market. Clubs react to these network effects by charging higher (lower) prices to sponsors (fans). Our analysis shows that the size of these network effects determines the level of competitive balance within the league. Traditional models, which do not take network externalities into account, under- or overestimate the actual level of competitive balance, which may lead to wrong policy decisions. Moreover, we show that clubs benefit from stronger combined network effects through ! higher profits. Finally, we derive policy recommendations for improving competitive balance by taking advantage of network externalities.

November 9, 2010 | Permalink | Comments (1) | TrackBack (0)

Rockets and Feathers in the Laboratory

Posted by D. Daniel Sokol

Ralph-C Bayer (School of Economics, University of Adelaide) and Changxia Ke (Max Planck Institute) describe Rockets and Feathers in the Laboratory.

ABSTRACT: Consumers often complain that retail prices respond faster to increases in wholesale prices than to decreases. Despite many empirical studies confirming this 'Rockets-and-Feathers' phenomenon for different industries, the mechanism driving it is not well understood. In this paper, we show that, in contrast to the theoretical prediction, asymmetric price adjustment to cost shocks, as well as price dispersion, arises in experimental Diamond (1971) markets. The analysis of individual behavior suggests that the observed price dispersion can be explained by bounded rationality, as our data are well explained by Quantal Response Equilibrium (McKelvey and Palfrey 1995). Asymmetric price adjustment is caused by the updating speed of buyers with adaptive expectations being different after positive and negative cost shocks.

November 9, 2010 | Permalink | Comments (0) | TrackBack (0)