Antitrust & Competition Policy Blog

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

Tuesday, May 24, 2011

Daniel Sokol Book Symposium Comments on Criminalising Cartels: Critical Studies of an International Regulatory Movement

Posted by D. Daniel Sokol

I applaud Caron and Ariel for their edited volume Criminalising Cartels: Critical Studies of an International Regulatory Movement. As someone who edits books myself (shameless plugs for my Stanford University Press series, previous edited volume, and a volume in the works on antitrust/competition economics with Oxford University Press), I know how difficult it can be to get a volume to be coherent. There are different analytical approaches, writing styles and themes for coverage to include. I liked nearly all of the chapters and believe that cover to cover, this is the best contemporary book on cartels. There are so many things worth mentioning about the book. Let me highlight just two.

1. We have seen that over time antitrust (and I use the US term for a reason), have become global. Perhaps the most important antitrust norm to be diffused elsewhere has been the push to criminalize collusion offenses. A number of chapters of the book suggest limits to the transplant effect of a US based legal concept onto different legal systems (including Kovacic's excellent chapter that explains why things have worked as well as they have in the US). This set of reactions provide an excellent case study on the limits in practice of good ideas in one jurisdiction of taking root in others.

2. The assumptions behind criminalization may not be accurate. Antitrust has not focused its attention in the compliance context on the various components within a firm. Instead, antitrust often treats the corporation as a “black box” in which it assumes away the internal workings of the firm and focuses instead at the firm level. Both theoretical and empirical work in a number of different fields, including economics, accounting, finance, organizational theory and sociology, provide important insights indicating that a firm is not merely a single entity in its actions. Rather, a firm has a number of various components, each of which has its own incentives that shape behavior. This literature suggests that organizational subunits and individuals within them need to be addressed. The organization’s environment and the amount of individual discretion offered affect decision-making for the entire organization and may constrain decision-making of individuals within them. I mention these other literatures because many IO economists and antitrust/competition law professors ignore the inner workings of the firm. As a result, there are a number of assumptions about how individuals and firms respond to punishment that may be wrong. Required reading for anybody writing on cartels should be Christine Parker's chapter (Chapter 11), where she provides a literature review of antitrust empirical work on cartels. One minor problem with her literature review is that she seems to be unaware of the growing literature in experimental economics on collusion. However, Parker does include some seminal works in organizational theory and sociology that often gets overlooks by economists. Maurice Stucke in his chapter points to some problems based on his behavioral antitrust model. Much of the insights he provides are interesting. Even if these are true, none of his recommendations are things that traditional rational choice types would find disagreement with - more empirical studies, improved compliance, and more informed merger review. What I would like to see is a set of policy recommendations that are workable unique to behavioral law and economics.

Where I disagreed with various authors on their analysis or conclusions (and I do not mean to pick on Christine and Maurice - both contributed very good chapters and my comments are meant with regard to the entire volume and collection of authors) it is because they grappled with topics that are not easy. The various authors in this volume challenged some of my assumptions and understandings. In doing so, they did their job. I highly recommend this book.

May 24, 2011 | Permalink | Comments (0) | TrackBack (0)

Competitor Collaborations in Health Care: Understanding the Proposed ACO Antitrust Review Process

Posted by D. Daniel Sokol

Tasneem Chipty (Analysis Group, Inc.) describes Competitor Collaborations in Health Care: Understanding the Proposed ACO Antitrust Review Process.

ABSTRACT: Health care markets involve a complex interaction of facilities, physicians, and health plans to deliver patient care. Under ideal circumstances, the forces of competition would lead inevitably to appropriate, high quality patient care at low prices. The competitive process, however, requires sufficient flow of information and aligned incentives. Absent these conditions, the competitive process can (and has been known to) break down. Indeed, the last decade has seen a dramatic increase in the United States' cost of health care as a percentage of gross domestic product. Health care commentators trying to understand this growth have pointed to increases in the price and use of certain services, which they attribute to a number of factors such as an aging population and at times, use of unnecessary care and insufficient competitive pressure. To address some of these issues, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 encourage providers to better coordinate patient care through competitor collaborations called Accountable Care Organizations ("ACOs").

By incenting otherwise independent health care providers (through the Medicare Shared Savings Program) to better coordinate on patient care, the policy goal is to improve the quality and reduce the cost of health care. Unchecked, however, the same policy could facilitate competitor coordination on pricing and other aspects of behavior that may result in unintended and potentially undesirable effects. To address this concern, the Department of Justice and Federal Trade Commission ("the Agencies") have set forth a proposed antitrust policy statement regarding ACOs that describes a rule of reason approach to balance potential harm to competition from competitor collaboration in the form of an ACO with potential pro-competitive benefits to consumers.

While it is too early to know what type of antitrust scrutiny ACOs will receive in practice, the Agencies' Proposed Policy contains some important structural guidance. In particular, the Proposed Policy contains behavior requirements to which ACO participants must adhere along with three tiers of antitrust review. Among them is the creation of safe harbors that appear to mirror the three tiers of antitrust review contained in the Agencies' Merger Guidelines.

From a policy perspective, it is unclear whether the ACO review should be more or less stringent than the merger review process. On the one hand, one might expect the ACO review to be more stringent because of the financial incentives to participate in the Medicare Shared Savings Program. On the other hand, one might expect the reverse because, all else equal, the added behavioral stipulations by design help ensure that formation of an ACO presents less competitive risk than does a merger of the participants to a fully integrated firm.

This article uses numerical simulations to compare the proposed thresholds for ACO antitrust review to those established in the Merger Guidelines. For relatively unconcentrated markets, whether the ACO review process is more stringent than the merger review process depends on how restrictive the behavioral requirements are for the ACO participants. If they are not binding, the numerical simulations suggest that the ACO review process should be no more stringent than the merger review process for relatively unconcentrated markets and less stringent in relatively more concentrated markets. Otherwise, the ACO review may be more restrictive for some scenarios.

May 24, 2011 | Permalink | Comments (2) | TrackBack (0)

On the timing of vertical relationships

Posted by D. Daniel Sokol

Etienne Billette de Villemeur (Toulouse School of Economics, IDEI & GREMAQ), Richard Ruble (EMLYON Business School), and Bruno Versaevel (EMLYON Business School & CNRS) provide their thoughts On the timing of vertical relationships.

ABSTRACT: In a real option model, we show that the standard analysis of vertical relationships transposes directly to investment timing. Thus, when a firm undertaking a project requires an outside supplier (e.g., an equipment manufacturer) to provide it with a discrete input to serve a growing but incertain demand, and if the supplier has market power, investment occurs too late from an industry standpoint. The distortion in firm decisions is characterized by a lerner-type index, and we show how market growth rate and volatility affect the extent of the distortion. If the initial market demand is high, greater volatility increases the effective investment cost and results in lower value for both firms. Vertical restraints can restore efficiency. For instance, the upstream firm can induce entry at the correct investment threshold by selling a call option on the input. Otherwise, if two downstream firms are engaged in a preemption r! ace, the upstream firm sells the input to the first investor at a discount which is chosen in such a way that the race to preempt exactly offsets the vertical distortion, and this leader invests at the optimal time.

May 24, 2011 | Permalink | Comments (0) | TrackBack (0)

More on AT&T - Greg Rosston Examines the Competitive Implications of the Proposed Acquisition of T-Mobile by AT&T Mobility

Posted by D. Daniel Sokol

Technology Acamdeics Policy (TAP) has an interesting piece by Greg Rosston (Deputy Director and a Research Fellow at Stanford Institute for Economic Policy Research (SIEPR)) on the propsoed AT&T/T-Mobile merger. See here.

May 24, 2011 | Permalink | Comments (0) | TrackBack (0)

Strategic Separation from Suppliers of Vital Complementary Inputs: A Dynamic Markovian Approach

Posted by D. Daniel Sokol

Didier Laussel (Groupement de Recherche en Économie Quantitative d'Aix-Marseille (GREQAM)) and Ngo Van Long (McGill) discuss Strategic Separation from Suppliers of Vital Complementary Inputs: A Dynamic Markovian Approach.

ABSTRACT: In a model where a monopolistic downstream firm (assembler) negotiates simultaneously with each of its intermediate-input suppliers the prices of the complementary components which enter its product, we analyze the process by which the assembler separates from its suppliers as a Markov Perfect equilibrium. Due to a negative strategic effect (the prices and profits of independent suppliers decrease when their number increases), the assembler's marginal return from keeping an upstream subsidiary is lower than its market value as an independent supplier. Separation is immediate when the downstream firm's initial number of upstream subsidiaries is below a critical level. It is progressive in the reverse case and eventually leads to a mixed strategy whereby it keeps all the remaining subsidiaries with some probability, and sells all them off in one go with the complementary probability.

May 24, 2011 | Permalink | Comments (0) | TrackBack (0)

Changes in Concentration Across Vertically Related Industries

Posted by D. Daniel Sokol

Mary J. Becker, University of Pittsburgh - Katz Graduate School of Business and Shawn E. Thomas, University of Pittsburgh - Finance Group explore Changes in Concentration Across Vertically Related Industries.

ABSTRACT: We investigate the magnitude, timing, and direction of the association between changes in concentration across vertically related industries over the period 1978-2008. We find robust evidence that changes in an industry’s level of concentration are significantly positively related to prior and simultaneous changes in the concentration of their customer industries. We find weaker evidence that changes in an industry’s level of concentration are related to changes in the concentration of their supplier industries. Thus, the association between changes in concentration across vertically related industries appears stronger in the upstream direction than in the downstream direction. We find that increased concentration across vertically related industries, perhaps reflecting countervailing power effects, explains in part the observed positive association between changes in concentration; however, we also find robust evidence that decreases in concentration, perhaps reflecting the effects of technological innovation in vertically related industries, are also important determinants of the observed association.

May 24, 2011 | Permalink | Comments (0) | TrackBack (0)

Anestis Papadopoulos Book Symposium Comments on Criminalising Cartels: Critical Studies of an International Regulatory Movement

Posted by Anestis Papadopoulos

“Criminalising Cartels: Critical Studies of an International Regulatory movement” has been a very interesting, informative and useful reading. The major strength of this work is that it offers a clear presentation and analysis of the historical development of the move towards criminalization of cartels, and the lively debate that has been developed in recent years and has generated arguments in favour of and against the adoption and application of penal law provisions in the field of competition law and policy.

This analysis has been carried out through the lens not only of competition law experts, but also through the lens of other areas of law, such as criminal law, human rights, and the regulation of institutions that enforce the law. The discussion is also informed by experts from other areas of political and social sciences, such as political economy and behavioral economics. These perspectives give a broader understanding of the various facets of the general theme under examination in the book.

 The analysis has been further strengthened by the presentation of the way in which criminal cartel laws have been applied in particular industrialized states, and the implications of the criminalization of cartels in the international competition law arena.

What clearly emerges from the book is that as with any major development in the field of competition law and policy, this trend towards criminalization of cartels originates from the US. With the exception of Germany where, as Wagner von-Papp shows, sanctions have been imposed for participation in bid rigging, and less so in the UK and Ireland where a broader cartel offence has been adopted but imprisonment of cartel participants has been rare, the US is the only country where the criminal law provisions (other than ones imposition of criminal fines) have been practically applied. As noted in the chapter of Ezrachi and Kindl, over 99% of the time served in jail by competition law violators around the world has been served in the US.

Donald Baker and William Kovacic discuss the way in which the prosecution of individual cartel participants has evolved in the US. They both show that the development of cartel criminalization has taken place at a slow pace, which has given the opportunity to academia, government, and the courts to develop the norms and improve the institutional framework in such a way so as to achieve more efficient enforcement of the relevant provisions. 

The major question that arises nevertheless is whether this trend towards cartel criminalization should be followed by other states. In more particular, whether states that have recently embarked in the adoption and/or consistent application of competition laws should move towards the criminalization of cartels. As noted, various contributors to this book develop a number of arguments made in favor of criminalization, the most common of which is that criminal sanctions may increase the deterrent effect of the relevant competition rules. Without underestimating these arguments, it has to be admitted that from the perspective of a practitioner from a jurisdiction (Greece) where the broader understanding about competition law in general is low and criminal sanctions for cartels infringements were included in the law only recently (in 2009), and have not been applied as yet, certain arguments raised in the book, which illustrate the concerns expressed in relation to the application of criminal rules in competition cases seem to be more persuasive.

In particular, as Cristine Parker notes, there are a number of questions that have not been addressed as yet regarding the criminalization of cartels, the most important of which asks ‘to what extent is criminalization morally appropriate’. This is a question also raised by Maurice Stucke and Rebecca Williams, and the answer to the question is important in view of the basic principle that imprisonment should be limited to practices that are socially considered not only as immoral but also as crimes. In a similar context, Ezrachi and Kindl note that the effectiveness of cartel criminalization may only be achieved through social acceptance of cartels as crimes.

Nonetheless, as also becomes evident from the book, such common understanding as to the morality of cartels criminalization is not clear, even in countries like the UK where there has been strong political support in the last few years for including cartels in the list of crimes. As Andreas Stephan, a supporter of criminalization, notes, in a 2007 survey in the UK, only 10% of the respondents felt that imprisonment was an appropriate sanction for cartel offenders. In a more judgmental manner, Stephen Wilks concludes his contribution by stating that “The US- style criminal cartel offence simply underlines the obsessive preoccupation for punishing cartels and the careless inattention given to abuse of dominance by large corporations…”

Irrespective from whether one agrees with this position, what goes beyond doubt is that there is a long way to go before criminalization of cartels is socially considered a criminal offence in a number of countries that have recently adopted competition rules, or have recently started applying competition rules in a consistent manner.

It should be noted that 72% of the 111 countries that had competition law in place in 2008, adopted such law recently, and in particular after 1991. Thus, it has been pointed out that in the vast majority of countries with competition law, courts have not had the time to review many competition cases, relevant academia has not had the time to examine and develop competition related principles, and agencies have not had much time to apply competition policy widely. Against this background, it seems that from a comparative and international competition law perspective, it is more important to achieve convergence in the analysis and understanding of the main practices covered by competition law, i.e. anticompetitive agreements (primarily cartels), abuse of dominance and the review of mergers.

Put differently, it seems that at least in countries that are at the early stages of competition law enforcement, it is vital to persuade politicians to support the transparent enforcement of competition laws, include competition law in the curricula of universities so as to produce competition experts and explain to market participants and consumers why cartels are bad for the economy and, in more general, for the society. Criminalisation of cartels is something that should chronologically follow these basic steps.

That said, works like the one edited by Caron Beaton Wells and Ariel Ezrachi are most welcomed, and should be the basis for further research that would examine the particular issues arising from the process of adoption and/or application of criminal sanctions for cartel conduct in more states, including developing countries.   

May 24, 2011 | Permalink | Comments (0) | TrackBack (0)

Call for papers: Competition and regulation in network industries 25 November 2011 Brussels, Belgium

Posted by D. Daniel Sokol

Fourth Annual Conference on
Competition and Regulation in Network Industries

Europe and beyond

Brussels, Belgium - November 25, 2011

Main information

The liberalization process that has transformed network industries during the past decades is by no means limited to Europe or the United States. Emerging markets are undergoing a similar transition to more market-based forms of regulatory governance. In spite of notable differences across sectors, actors (governments, operators, regulators and other stakeholders) often find themselves faced with similar issues to tackle, such as regulation of monopolies, safeguarding of social service obligations, or definition of public values and national interests. Signification variations in institutional frameworks also impact the scope and speed of the reforms.

The conference takes a multi-disciplinary approach and explores the legal, economic, institutional and public policy aspects of this fundamental reform of network industries. In doing so, it highlights dominant current trends and issues affecting network-based and network-related industries in parallel sessions, including but not restricted to:


  • Challenges in network industry regulation
  • Inter/supra-nationalization of infrastructures
  • Investments and innovation in network industries
  • Liberalization models in network industries
  • Sector-specific issues (electricity, gas, railways, telecom, post, water, aviation, transport, Internet, ...)
  • Measuring network performance
  • Network industries in emerging markets
  • Urban network infrastructures
  • Keynote speakers (to be announced)

    For questions, please contact Marc Laperrouza

    Paper proposals should be between 600 and 1000 words long. The proposal should include:

  • Title of the paper
  • Name of the author(s) and full address of the corre-sponding author (postal, phone, fax and email)
  • The aim and methodology of the study
  • Results obtained or expected
  • A few keywords
  • We also encourage the submission of panel proposals.

    Important dates
    Deadline for panel submission: 1 May 2011
    Deadline for paper proposals: 1 June 2011
    Notification of acceptance: 1 July 2011
    Final paper submission (guidelines): 1 October 2011
    Deadline for registration and payment: 1 November 2011
    Deadline powerpoint presentation: 21 November 2011

    Member of academic/non-profit institution; EUR150.-
    Member of business community: EUR 250.-
    A number of fee waiver are available for students - please contact Marc Laperrouza

    Residence Palace, Rue de la Loi 155, 1040 Brussels (how to get there)

    The CRNI Award will be given to the best paper

    Organizing Committee
    Matthias Finger (EPFL), Editor-in-Chief
    Rolf Künneke (Delft University of Technology), Editor-in-Chief
    Marc Laperrouza (EPFL), Managing Editor
    Daniel Scholten (Delft University of Technology), Assistant Editor

    May 24, 2011 | Permalink | Comments (0) | TrackBack (0)

    Do Cost-Sharing and Entry Deregulation Curb Pharmaceutical Innovation?

    Posted by D. Daniel Sokol

    Volker Grossmann, University of Fribourg - Faculty of Economics and Social Science asks Do Cost-Sharing and Entry Deregulation Curb Pharmaceutical Innovation?

    ABSTRACT: This paper examines the role of both cost-sharing schemes in health insurance systems and entry regulation for pharmaceutical R&D expenditure, drug prices, aggregate productivity, and income. The analysis suggests that both an increase in the coinsurance rate and stricter price regulations adversely affect R&D spending in the pharmaceutical sector. In contrast, entry deregulation may lead to quality-improvements of pharmaceuticals, despite reducing price-setting power of pharmaceutical companies. Extension to an endogenous growth context suggests that, when individual labor supply depends on health status, both cost-sharing and entry barriers in the pharmaceutical sector also affect aggregate productivity and wage rates.

    May 24, 2011 | Permalink | Comments (0) | TrackBack (0)

    Reassessing Tying Arrangements at the End of At&T's iPhone Exclusivity

    Posted by D. Daniel Sokol

    Jeffrey Paul Jarosch, Searle Center on Law, Regulation, and Economic Growth, Northwestern University School of Law is Reassessing Tying Arrangements at the End of At&T's iPhone Exclusivity.

    ABSTRACT: Tying arrangements are common in the wireless telecommunications industry. Wireless networks compete for exclusive contracts to offer popular mobile devices. In January 2011, one of the most notorious exclusivity contracts ended when Apple announced that the iPhone would be available on the Verizon network, ending four years of iPhone exclusivity on AT&T. This long-anticipated move has been hailed as progress for consumer choice and competition in the industry. Such enthusiasm is rooted in the Supreme Court’s enduring stance against tying arrangements - a position that is based on unreasonable goals and illusory harms. This Article examines the Supreme Court’s tying jurisprudence in order to understand the harms that the Court seeks to combat. It then applies that understanding to a context-specific analysis of tying arrangements in the wireless telecommunications industry. In finding that AT&T’s iPhone exclusivity has had significant pro-competitive effects and has fostered innovation in the industry, the Article exposes the misguided basis of the Court’s tying doctrine and argues that it is time to reform the Court’s stance against tying.

    May 24, 2011 | Permalink | Comments (0) | TrackBack (0)

    Monday, May 23, 2011

    Comments of Richard Brunell on At&t/T-Mobile Merger

    Posted by Richard Brunell

    The relevant geographic market may be an important consideration in evaluating the merger because if there is anational market for wireless services, then the merger reduces the number of players from 4 to 3[1] – suggesting a fairly strong presumption of illegality – and the potential remedy of divestitures to local or regional carriers in certain local markets would be ineffective because it would not replace the loss of a national competitor.

    The relevant geographic markets are likely to be both local and national. While some competition for wireless services is local, other competition (among the national carriers) is primarily national, as illustrated by the billions of dollars spent in national advertising. In its acquisition of the regional carrier Centennial, AT&T claimed that “the predominant forces driving competition operate at the national level. . . . AT&T establishes its rate plans and pricing on a national basis . . . in response to competitive conditions and offerings at the national levels – primarily the plans offered by the other national carriers.”[2] AT&T explained that its plans were uniform throughout the country for efficiency and marketing reasons, and that “[v]ery infrequently,” it may offer a local promotion.[3] In contrast, in its current application to acquire T-Mobile, AT&T emphasizes the “the local nature of this marketplace,” but does not suggest that pricing of its service plans is done on anything other than a national basis. Rather, any local promotions appear to be limited to handsets and peripheral devices.[4]

    In the past, the DOJ and FCC have considered only local geographic markets in wireless mergers, but that is because they have not previously reviewed a merger between two national carriers. Indeed, in recent wireless mergers, the DOJ has emphasized that “[t]he existence of local markets does not preclude the possibility of competitive effects in a broader geographic area, such as a regional or national area . . . .”[5] Insofar as competitive effects may occur on a national level, it is appropriate to define a relevant market that is national in scope. This is consistent with the revised Horizontal Merger Guidelines, which provide that “The hypothetical monopolist test . . . does not lead to a single relevant market. The Agencies may evaluate a merger in any relevant market satisfying the test, guided by the overarching principle that the purpose of defining the market and measuring market shares is to illuminate the evaluation of competitive effects.” U.S. Dept of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 4.1.1 (Aug. 19, 2010). It is also consistent with United States v. Grinnell Corp., 384 U.S. 563, 575-76 (1966), in which the Supreme Court held that the relevant geographic market for accredited central station protection services was national because it “reflect[ed] the reality of the way in which” the business was built and operated, even though the service was provided on a local basis.

    Regional and local wireless carriers are not participants in the national market because they do not offer services on a national basis. (They offer national roaming but that does not mean a person located in a roaming area can become a subscriber.) Moreover, their local offerings do not appear to affect the national post-paid plans offered by the national carriers. Indeed, the regional carriers like MetroPCS and Leap/Cricket offer a different product and serve different market segments. They offer only pre-paid, non-contract services, and tend to serve customers with poor credit histories; they do not market to businesses. Further, smaller and regional carriers are limited in the competition they can provide to the national carriers because they lack brand names like those of the national carriers built up by years of intensive advertising, lack the array of smartphones offered by the national carriers, their networks are perceived to be of inferior quality, and they must depend on expensive roaming agreements with the national carriers. Accordingly, even if geographic markets are defined as local, the competitive significance of the local and regional carriers on the AT&T/T-Mobile combination is probably minimal.

    -------------------------------------------------------------------------------- [1] Or, as the American Antitrust Institute (AAI) said, “more realistically, [from 4 to] 2 1/2, since the merger may have the effect of marginalizing Sprint as a competitor.” Letter from the American Antitrust Institute to Chairman Herb Kohl, May 16, 2011, available at [2] Merger of AT&T Inc. and Centennial Comm’cns Corp., Description of Transaction, Public Interest Showing and Related Demonstrations 28-29 (Nov. 21, 2008). AT&T stated it “focuses on the other national carriers in its competitive decision-making and does not consider Centennial in deciding on pricing and service offerings.” Id. at 37. AT&T made a similar claim when it acquired the regional carrier Dobson in 2007, explaining, “Where national competitive forces determine prices and the same products are offered nationwide at the same price, the relevant geographic market is national, rather than local.” Merger of AT&T Inc. and Dobson Comm’cns Corp., Description of Transaction, Public Interest Showing and Related Demonstrations 19 n.74 (July 13, 2007). [3] Description of AT&T/Centennial Transaction, Declaration of David Christopher Chief Marketing Officer ¶ 6. [4] See Acquisition of T-Mobile USA, Inc. by AT&T Inc., Description of Transaction, Public Interest Showing and Related Demonstrations 74 (April 21, 2011). [5] United States et al. v. Verizon Commc’ns Inc. and Alltel Corp., No. 1:08-cv-01878, Competitive Impact Statement at 7 n.2 (Oct. 30, 2008); United States et al. v. AT&T and Centennial Commc’ns Corp., No. 1:09-cv-01932, Competitive Impact Statement at 6 n.2 (Oct. 13, 2009) (same).

    May 23, 2011 | Permalink | Comments (1) | TrackBack (0)

    Intellectual Property Rights, Institutional Quality and Economic Growth

    Posted by D. Daniel Sokol

    Irem Demirkan, International Business and Strategy Group, College of Business Administration, Northeastern University Sebahattin Demirkan, Bentley University - Department of Accountancy address Intellectual Property Rights, Institutional Quality and Economic Growth.

    ABSTRACT: We consider the role of intellectual property rights (IPRs) in a Schumpeterian growth model in which patent holders face the threats of profit loss due to imitation and complete replacement due to successful outside innovation. In this setting stronger IPR enforcement has both imitation and innovating deterring effects. We disaggregate IPR policies by distinguishing between two features of IPRs protection. The first is the intensity of IPR enforcement, which is determined by the fraction of resources allocated to innovation and imitation deterrence. The second is the quality of the IPR regime, which reflects the ability of the IPR regime to shift enforcement resources away from innovation deterrence and towards imitation deterrence. We find that an increase in the quality of the IPR regime unambiguously promotes growth. However, an increase in the intensity of IPR enforcement increases growth if and only if the threat of imitation is above a threshold level. We show that there exists a growth-maximizing level of IPR enforcement intensity, which is decreasing in institutional quality. We also show that countries with sufficiently low quality institutions will be trapped in a no-growth boundary equilibrium, regardless of the intensity of IPR enforcement. Simulation exercises indicate that welfare-maximizing policies follow patterns similar to growth-maximization policies. The economy can have too much or too little IPR enforcement intensity. For countries with sufficiently low institutional quality, welfare is maximized by completely foregoing IPR protection and eliminating monopolistic markets, even though positive growth may be feasible with appropriate intensity of IPR enforcement.

    May 23, 2011 | Permalink | Comments (0) | TrackBack (0)

    Technology, Business Models and Network Structure in the Airline Industry

    Posted by D. Daniel Sokol

    Xavier Fageda, University of Barcelona - Department of Economic Policy and Ricardo Flores-Fillol, Universitat Rovira i Virgili (URV) describes Technology, Business Models and Network Structure in the Airline Industry.

    ABSTRACT: Network airlines have increasingly focused their operations on hub airports through the exploitation of connecting traffic. This has allowed them to take advantage of economies of traffic density, the existence of which is beyond dispute in the airline industry. Less attention has been devoted to airlines' decisions on thin point-to-point routes, which can be served using different aircraft technologies and different business models. This paper examines, both theoretically and empirically, the impact on airlines' networks of the two major innovations in the airline industry of the last two decades: regional jet technology, and the low-cost business model. We show that, under certain circumstances, direct services on thin point-to-point routes can be viable, and that as a result airlinesmay be interested in diverting passengers away from the hub.

    May 23, 2011 | Permalink | Comments (0) | TrackBack (0)

    Comments of Allen Grunes and Maurice Stucke on the AT&t/T-Mobile Proposed Merger

    Editor's Note. I asked Maurice for around 800 words on the merger. Maurice responded that he and Allen would write something a bit longer. I received a 29 page article from them. I love Maurice. The link to the entire are is here. I have excerpted a portion of the article below.

    Posted by Allen Grunes and Maurice Stucke


    Under well-established U.S. law, there is a strong presumption of illegality when the merging firms’ market shares are significant in an industry with high entry barriers. As the Supreme Court said, “a merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effects.”5 Consistent with the legislative intent of the Clayton Act, courts have regarded a transaction that would lead to further concentration in an already highly concentrated market as presumptively illegal under Section 7.6 In United States v. Philadelphia National Bank, the Court held that a merger resulting in a single firm controlling 30 percent of a market trending toward concentration in which four firms controlled 70 percent of the sales was presumptively illegal.7 Unless the merging parties “meet their burden of rebutting this presumption, the merger must be enjoined.”8 That presumption applies to the AT&T/T-Mobile merger in an already highly concentrated industry with high entry barriers,

    A. AT&T’s Post-Merger Market Share Would Exceed 40 Percent The likely candidate product market is the market for “mobile wireless telecommunications services.” This was the market definition used in prior DOJ cases such as U.S. v. AT&T and Dobson Communications (2007)9 and U.S. v. Verizon and Rural Cellular (2008).10 In those cases, DOJ noted that there were no cost-effective alternatives to mobile wireless telecommunications services, and it is unlikely that a sufficient number of customers would switch away from mobile wireless telecommunications services to make a small but significant non-transitory price increase in those services unprofitable.

    This candidate product market includes voice, text messaging and data services. The data component of mobile wireless services has been rapidly growing in the past few years. There has been a high smartphone adoption and upgrade rate (close to 50% in 2009 according to the FCC’s latest Mobile Wireless Competition Report11). There has also been an expansion in the number of non-smartphone handsets that are subject to mandatory data plans. Data plans for mobile phones are typically sold as part of a bundle. At the end of the day, the DOJ’s likely product market candidate, which includes voice, messaging and data, is defensible.

    The candidate geographic markets potentially include both local and national markets. Historically, viewed from the consumer perspective, geographic markets were local. This was because consumers purchasing mobile wireless telecommunications services chose among the providers that offered services where they lived, worked and traveled on a regular basis. Historically, providers offered different promotions, discounts, calling plans, and equipment subsidies in different geographic areas, varying the price for customers by geographic area.

    However, by the end of 2008, there were four facilities-based mobile wireless service providers that industry observers typically described as “nationwide”: AT&T, Sprint Nextel, T-Mobile, and Verizon Wireless.12 In 2008, unlimited national flat-rate calling plans were launched by all the nationwide operators.13 Consumers increasingly have shifted away from restricted plans that included separate roaming charges and into these unlimited service options, and the focus of price competition has shifted accordingly.14 It now appears that pricing is for the most part set nationally by the four nationwide carriers, and regional and local competitors do not act as significant constraints on national pricing.

    Indeed, in its FCC public interest statements in the both the Dobson15 and Centennial16 acquisitions, AT&T acknowledged that the geographic market is national precisely for these reasons. As AT&T wrote in its Centennial statement, supported by a declaration from its Chief Marketing Officer, “[i]n the mainland U.S., AT&T establishes its rate plans and pricing on a national basis, without reference to market structure at the CMA [Cellular Market Area] level.”17 AT&T’s statement continues: “One of AT&T’s objectives is to develop its rate plans, features and prices in response to competitive conditions and offerings at the national levels [sic] – primarily the plans offered by the other national carriers.”18

    Although pricing by the four nationwide operators appears to be largely national, there may be promotions or discounts (e.g. of handsets) that occur on a local basis. How much of these promotions and discounts are driven by competition, and how big a factor they play in the overall pricing picture, needs to be looked at. For example, if a 2-year wireless plan costs $1200/year, but there is a $50 discount available in some cities on a new phone, that would amount to about a 2% discount over 2 years and would probably be small enough not to undercut the overall national pricing picture.

    Viewed from the standpoint of business customers, the same conclusion appears likely: the geographic market is national. Similarly, viewed from the standpoint of suppliers (e.g., handset manufacturers), the geographic market is undoubtedly national. It is interesting to note that, according to an AT&T executive, Apple apparently approached Verizon, Sprint, AT&T and T-Mobile about the original iPhone.19 Consequently, under this proposed market definition, the merging parties will have a significant market share. As Senator Herb Kohl observed at the recent hearings on this merger, “The proposed merger between AT&T and T-Mobile will bring together two of the four remaining national cell phone carriers to create the nation’s largest cell phone network, with an estimated 43 percent market share. Should this deal be approved, AT&T and Verizon will control close to 80 percent of the national cell phone market.”20

    May 23, 2011 | Permalink | Comments (0) | TrackBack (0)

    Comments of Roger Noll on the Proposed AT&T/T-Mobile Merger

    Posted by Roger Noll

    Superficially, the proposed acquisition appears to run seriously afoul of the merger policy of the antitrust enforcement agencies. The first step in merger analysis is typically to measure concentration—an indicator of the extent of competition. The standard measure of concentration is the Hirschman- Herfindahl Index (HHI), which is the sum of the squares of the market shares of the sellers in the market. According to the Federal Trade Commission and Antitrust Division Merger Guidelines, if the post-acquisition HHI exceeds 2500, an acquisition that causes the HHI to increase by more than 200 is likely to cause a significant reduction in competition if the market also has substantial barriers to entry. At present, nationwide concentration in wireless telecommunications services is roughly equal to the 2500 threshold, and the acquisition would increase the HHI by more than 600. These numbers probably understate the effective concentration in the industry for two reasons. First, only the four major carriers can serve customers who seek mobile access in most of the nation. For connections outside their service territories, smaller carriers often resell Sprint’s service. Second, the available data do not distinguish between mobile voice service, which is more competitive, and high-speed data service, which is more concentrated. Based on the high concentration of the industry, the Antitrust Division will try to determine if the merger would cause an increase in consumer prices. Agency staff will examine the degree of competition between AT&T and T-Mobile. T-Mobile generally charges lower prices than the other major carriers. Whether T-Mobile’s low-price strategy is disciplining the prices and service offerings of the other major carriers is an empirical question. For example, if AT&T serves mostly high-end consumers and competes most intensively with Verizon, while T-Mobile serves low-end consumers and competes most intensively with Metro PCS and other smaller carriers, the merger would not be viewed as having the same anticompetitive effects as it would if AT&T and T-Mobile compete intensively for the same customers. Because wireless carriers provide numerous products, determining how and why customers switch from one provider to another seemingly is difficult; however, due to number portability, most customers who switch providers keep their wireless numbers. As a result, it may be possible to estimate empirically and precisely the competition between AT&T and T-Mobile because the Antitrust Division will have access to data about customer switching behavior between carriers. Another concern of the Antitrust Division will be the effect of acquisition on competition in specific local markets. While several carriers operate in major metropolitan areas, smaller cities generally have fewer carriers. The nationwide concentration of the industry reflects an average between less concentrated major markets and more concentrated small towns and rural areas. In the past, the Antitrust Division has approved some wireless mergers only after requiring divestiture of one party’s assets in local markets where the merging firms have high market shares. For example, in its acquisition of Alltel, Verizon agreed to spin off assets in 85 markets in which the two companies overlapped. This kind of compromise is less likely for the AT&T/T-Mobile deal because, as discussed elsewhere, the principal rationale for the deal is to enable AT&T to obtain more spectrum in areas where it currently has capacity constraints.

    May 23, 2011 | Permalink | Comments (0) | TrackBack (0)

    Comments of Harry First of Proposed AT&T/T-Mobile Merger

    Posted by Harry First

    Four Things For Antitrust Enforcers To Keep In Mind for the AT&T/T-Mobile Merger

    As we all know, modern merger enforcement is a fact-intensive effort, involving the ins-and-outs of specific (sometimes arcane) markets, an understanding of the technology of the industry involved, and some appreciation of the economic models that will be used to predict competitive effects. Without access to all the relevant information, outside observers are at a disadvantage in making enforcement calls. It’s easy to opine on legality of a merger, harder to be sure you are right. Rather than opining, I’ll make four general suggestions for the antitrust enforcers who are taking up this effort. And here I include the FCC as an “antitrust enforcer,” for I take the decision to hire a top-rate antitrust lawyer as Senior Counsel to the Chairman to mean that the FCC may prefer antitrust enforcement to a version of one of my favorite TV programs, “Let’s Make A Deal.”

    First: You Can Say No. Enforcement of Section 7—which used to be called an “antimerger law”—has basically turned into a regulatory exercise in which most mergers are approved. Some mergers get challenged, of course. The Department is now challenging a chicken processor merger in the Shenandoah Valley, a 3-2 merger if the Shenandoah Valley really is a properly defined market. Chicken feed, you might say. But the very real threat to challenge NASDAQ’s bid for the NYSE, a merger to monopoly according to the Department, was not chicken feed. So, government enforcers can say no, they just need to say it more often. Relying on regulatory decrees, particularly ones that require continuing supervision, is not antitrust’s first-best approach to remedies. If a merger gives the merged firms incentives to engage in anticompetitive conduct, a fix that doesn’t alter those incentives is good only until the fix expires, five years in some cases. The promise to behave nicely lasts only so long.

    Second: This Is Not A Supermarket Merger. According to the Wall Street Journal, AT&T’s CEO had his lawyers do a “market-by-market” analysis of where the overlap with T-Mobile was largest. He concluded that the antitrust risk was “bearable” because AT&T was willing to make “substantial” divestitures in local markets, presumably of subscribers. This is how supermarket mergers get done. The lawyers come in with maps of overlaps in small geographic areas and then offer to divest as many overlapping stores as is necessary. These divestitures not only don’t leave competition as healthy as it was before, they also miss the point that not all competition is local when networks are involved. Even more so for wireless. Competition certainly takes place on a local level. But it also takes place on the level of national networks. A big challenge for enforcers is to move past the fixation on local markets and look at the obvious here: how competition takes place nationally. And if competition is national, that would mean a merger producing two firms with roughly 75 percent of all subscribers in the U.S. Surely that’s a problem.

    Third. Don’t Forget Handsets. Complementary products are very important for innovation in telecommunications and maybe the most important one today is smartphones. Wireless carriers distribute them on a variety of price and product quality terms. This competition not only produces a product that is better for consumers (lower priced and with increased functionality) but also affects the “subsidy” the carriers pay to the handset makers for the handsets themselves—a form of buyer power. If we really want innovation in handsets, attention needs to be paid to how the loss of T-Mobile as a distributor/buyer will affect not only consumer pricing but also the incentives for handset-maker innovation. Remember POTS (plain-old-telephone-service)? The last time that AT&T controlled handsets (through its ownership of Western Electric) all we had were black rotary-dial phones. A turquoise Princess phone was considered an innovation. We really can’t have a 21st Century version of this type of market control.

    Fourth. Don’t Forget The Systemic Effect of Merger Enforcement. When the Clayton Act was amended in 1950 there was much talk about the “triggering effect” that mergers can have. If we let two firms in an industry merge, then the next two will want to merge, then the next two, and so on. The 21st Century version of this is no longer restricted to the industry involved in the merger. It’s more systemic, involving a general sense of the appropriate scale and size of business enterprises today plus a prediction of enforcement response. Press reports indicate that AT&T was “encouraged” by the approval of the NBC/Comcast merger, “because it felt regulators weren’t about to blanket-ban big mergers.” True, these systemic effects may be hard to quantify or predict—deterrence always is—and may be harder to work into a legal theory under Section 7. But if enforcers are on the line about whether to bring suit, it’s certainly appropriate to let this factor tip the prosecutorial scales to a “no.”

    May 23, 2011 | Permalink | Comments (0) | TrackBack (0)

    A Simple Model of Health Insurance Competition

    Posted by D. Daniel Sokol

    Alexander Kemnitz, Dresden University of Technology - Faculty of Economics and Business Management suggests A Simple Model of Health Insurance Competition.

    ABSTRACT: This paper investigates competition between health insurance companies under different financing regulations. We consider two alternatives advanced in recent German health care reform discussions: competition by contribution rates (health contributions) and by fees (health premia). We find that contribution rate competition yields lower company profits and higher consumer welfare than premia competition when switching between insurance companies is costly.

    May 23, 2011 | Permalink | Comments (2) | TrackBack (0)

    Antitrust in Hi-Tech Industries May 29-30, 2011, University of Haifa

    Posted by D. Daniel Sokol

    The revised program is below.

    Download Program_2011update[1]

    May 23, 2011 | Permalink | Comments (0) | TrackBack (0)

    Early Settlements and Errors in Merger Control

    Posted by D. Daniel Sokol

    Luke Garrod and Bruce Lyons (University of East Anglia) address Early Settlements and Errors in Merger Control.

    ABSTRACT: We develop a model of remedy offers made to an expert agency which has powers to act before any harm is experienced and is required to decide on the basis of tangible evidence. The model provides a relationship between the factors determining the probability of delay and the type of error in early settlements (i.e. insufficient versus excessive remedy). We apply the model using data from European Commission merger settlements. Our econometric analysis confirms the importance of delay costs and the uncertainty associated with the agency’s findings. Our results are also consistent with the prediction that delay is not systematically related to the inherent competitive harm of the merger proposal. We use our results to identify specific cases of insufficient remedy in early settlements.

    May 23, 2011 | Permalink | Comments (0) | TrackBack (0)

    Sunday, May 22, 2011

    This Week on the Blog - AT&T/T-Mobile Symposium and Part II of Criminilising Cartels Symposium

    Posted by D. Daniel Sokol

    This week we have two interesting symposia:

    First, we have a symposium on the proposed A&T/T-Mobile. Later in the week we will conclude the symposium book review Criminalising Cartels.

    May 22, 2011 | Permalink | Comments (0) | TrackBack (0)