Antitrust & Competition Policy Blog

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

Tuesday, February 9, 2010

Pricing payment cards

Posted by D. Daniel Sokol

Özlem Bedre-Defolie (Toulouse School of Economics) and Emilio Calvano (Department of Economics, Harvard University have written on Pricing payment cards.

ABSTRACT: In a payment card association such as Visa, each time a consumer pays by card, the bank of the merchant (acquirer) pays an interchange fee (IF) to the bank of the cardholder (issuer) to carry out the transaction. This paper studies the determinants of socially and privately optimal IFs in a card scheme where services are provided by a monopoly issuer and perfectly competitive acquirers to heterogeneous consumers and merchants. Different from the literature, we distinguish card membership from card usage decisions (and fees). In doing so, we reveal the implications of an asymmetry between consumers and merchants: the card usage decision at a point of sale is delegated to cardholders since merchants are not allowed to turn down cards once they are affiliated with a card network. We show that this asymmetry is sufficient to induce the card association to set a higher IF than the socially optimal IF, and thus to distort the ! structure of user fees by leading to too low card usage fees at the expense of too high merchant fees. Hence, cap regulations on IFs can improve the welfare. These qualitative results are robust to imperfect issuer competition, imperfect acquirer competition, and to other factors affecting final demands, such as elastic consumer participation or strategic card acceptance to attract consumers.

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

Optimal Collusion with Internal Contracting

Posted by D. Daniel Sokol

Gea M. Lee (Singapore Management University) explains Optimal Collusion with Internal Contracting.

ABSTRACT: In this paper, we develop a model of collusion in which two firms play an infinitelyrepeated Bertrand game when each firm has a privately-informed agent. The colluding firms, fixing prices, allocate market shares based on the agent's information as to cost types. We emphasize that the presence of privately-informed agents may provide firms with a strategic opportunity to exploit an interaction between internal contracting and market-sharing arrangement- the contracts with agents may be used to induce firms' truthful communication in their collusion, and collusive market-share allocation may act to reduce the agents' information rents.

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

Monday, February 8, 2010

Competition and Economic Growth: an Empirical Analysis for a Panel of 20 OECD Countries

Posted by D. Daniel Sokol

Alessandro Diego Scopelliti (University of Warwick, Department of Economics) has written on Competition and Economic Growth: an Empirical Analysis for a Panel of 20 OECD Countries.

ABSTRACT: This paper aims at analyzing, from an empirical point of view, the relationship between product market competition and economic growth, using the data on multi-factor productivity for a panel of 20 OECD countries over a period 1995-2005, and considering the role of the distance from the technological frontier in the growth process. Section A examines the impact of economic freedom and of the distance to frontier on the level and on the growth rate of multi-factor productivity. The analysis distinguishes between the indicators of business freedom and trade freedom, as proxies for the competitive pressures coming from domestic market and from foreign market. Then, trade liberalizations are more beneficial for the countries far from the frontier, because they can exploit the opportunities given by international trade also in order to adopt the existing technologies developed by the advanced economies. On the other hand, bus! iness liberalizations are more advantageous for the countries close to the frontier, because the elimination of regulatory barriers increases the possibility of entry in the market and then rises the potential competition to the incumbent firms. Section B studies the effect of product market regulation, employment protection legislation and of the distance to frontier on the level and on the growth rate of multi-factor productivity. Product market liberalization as well as labour market deregulation determine an increase of total factor productivity: moreover, the interaction of market rigidities with the distance to the frontier mostly displays an innovationenhancing effect, since the positive effect of market liberalizations on TFP is higher for the countries close to the frontier, where the existing technology level would reinforce the incentive for innovation.

February 8, 2010 | Permalink | Comments (0) | TrackBack (0)

Price regulation in oligopoly

Posted by D. Daniel Sokol

Luis Corchón (Universidad Carlos III, Madrid- Econ) and Félix Marcos (Universidad Complutense de Madrid - Econ) analyze Price regulation in oligopoly.

ABSTRACT: In this paper we consider price regulation in oligopolistic markets when firms are quantity setters. We consider a market for a homogeneous good with a special form of the demand function (?-linearity), constant returns to scale and identical firms. Marginal costs can take two values only: low or high. The regulator knows all parameters except marginal costs. Assuming that the regulator is risk neutral, we characterize the optimal policy and show how this policy depends on the basic parameter of demand and costs.

February 8, 2010 | Permalink | Comments (0) | TrackBack (0)

Credit card interchange fees

Posted by D. Daniel Sokol

Jean-Charles Rochet (Toulouse School of Economics) and Julian Wright (Department of Economics, National University of Singapore explain Credit card interchange fees.

ABSTRACT: We build a model of credit card pricing that explicitly takes into account credit functionality. We show that a monopoly card network always selects an interchange fee that exceeds the level that maximizes consumer surplus. If regulators only care about consumer surplus, a conservative regulatory approach is to cap interchange fees based on retailers’ net avoided costs from not having to provide credit themselves. In the model, this always raises consumer surplus compared to the unregulated outcome, sometimes to the point of maximizing consumer surplus.

February 8, 2010 | Permalink | Comments (0) | TrackBack (0)

The effects of airline alliances: What do the aggregate data say

Posted by D. Daniel Sokol

Phillipe Gagnepain and Pedro L. Marín (both Universidad Carlos III de Madrid - Econ) note The effects of airline alliances: What do the aggregate data say.

ABSTRACT: We consider an empirical model of worldwide airline alliances that we apply to a large set of companies for the period 1995-2000. Using observations at the companies level, we estimate a cost, capacity, and demand system that accounts for cross-price elasticities. From the estimates, we shed light on the fact that many airlines involved in the same alliances are potential substitutes. We also test for the effects of alliances on airlines’ fares and suggest that airlines inside alliances cut prices by 5% on average compared to airlines outside alliances. Finally, we construct price-cost margins for each airlines and suggest that current pricing habits are not uniform and vary from one alliance to another.

February 8, 2010 | Permalink | Comments (0) | TrackBack (0)