Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Friday, June 3, 2011

Firm Characteristics and the Cyclicality of R&D Investments

Posted by D. Daniel Sokol

Spyros Arvanitis (KOF Swiss Economic Institute, ETH Zurich, Switzerland) and Martin Woerter (KOF Swiss Economic Institute, ETH Zurich, Switzerland) explore Firm Characteristics and the Cyclicality of R&D Investments.

ABSTRACT: Aim of this study is to combine micro-aspects of firm behaviour with macro-aspects of business development and identify market conditions (for example, price competition) and firm characteristics (for example, type of R&D partners) that enable a firm to have a procyclical, anti-cyclical or non-systematic R&D investment behaviour. New elements of our analysis are: (a) the identification in our data of the above three main types of R&D behaviour with respect to the fluctuation of overall economic activity as measured by a standard composite indicator of the business conditions at industry level and (b) the investigation of a series of hypotheses as to innovation-relevant firm characteristics that underline the three different behaviour categories. The empirical results confirm to large extent our hypotheses and allow us to make profiles of the three types of R&D behaviour.

June 3, 2011 | Permalink | Comments (0) | TrackBack (0)

Paying for prominence

Posted by D. Daniel Sokol

Jidong Zhou (UCL Econ) and Mark Armstrong (UCL Econ) explain Paying for prominence.

ABSTRACT: We investigate three ways in which firms can become "prominent" and thereby influence the order in which consumers consider options. First, firms can affect an intermediary's sales efforts by means of commission payments. When firms pay commission to a salesman, the salesman promotes the product with the highest commission, and steers ignorant consumers towards the more expensive product. Second, sellers can advertise prices on a price comparison website, so that consumers investigate the suitability of products in order of increasing price. In such a market, equilibrium prices are lower when search costs are higher since a firm's benefit from being investigated first increases with search costs. Finally, consumers might first consider their existing supplier when they purchase a new product, which suggests a relatively benign rationale for the prevalence of cross-selling in markets such as retail banking.

June 3, 2011 | Permalink | Comments (0) | TrackBack (0)

Intertemporal Price Discrimination in Storable Goods Markets

Posted by D. Daniel Sokol

Igal Hendel Northwestern University and Aviv Nevo Northwestern University have an interesting paper on Intertemporal Price Discrimination in Storable Goods Markets.

ABSTRACT: We study intertemporal price discrimination when consumers can store for future consumption needs. To make the problem tractable we offer a simple model of demand dynamics, which we estimate using market level data. Optimal pricing involves temporary price reductions that enable sellers to discriminate between price sensitive consumers, who anticipate future needs, and less price-sensitive consumers. We empirically quantify the impact of intertemporal price discrimination on profits and welfare. We find that sales: (1) capture 25-30% of the profit gap between non-discriminatory and third degree price discrimination profits, and (2) increase total welfare.

June 3, 2011 | Permalink | Comments (0) | TrackBack (0)

Thursday, June 2, 2011

Quality competition with motivated providers and sluggish demand

Posted by D. Daniel Sokol

Luigi Siciliani (Department of Economics and Centre for Health Economics, University of York, Heslington), Odd Rune Straume (Universidade do Minho - NIPE), and Roberto Cellini (Department of Economics, University of Catania) explain Quality competition with motivated providers and sluggish demand.

ABSTRACT: We study incentives for quality provision in markets where providers are motivated (semi-altruistic); prices are regulated and firms are funded by a combination of block grants and unit prices; competition is based on quality, and demand adjusts sluggishly. Health or education are sectors in which the mentioned features are the rule. We show that the presence of motivated providers makes dynamic competition tougher, resulting in higher steady-state levels of quality in the closed-loop solutions than in the benchmark open-loop solution, if the price is sufficiently high. However, this result is reversed if the price is sufficiently low (and below unit costs). Sufficiently low prices also imply that a reduction in demand sluggishness will lead to lower steady-state quality. Prices below unit costs will nevertheless be welfare optimal if the providers are sufficiently motivated.

June 2, 2011 | Permalink | Comments (0) | TrackBack (0)

Entry and Competition in Differentiated Products Markets

Posted by D. Daniel Sokol

Catherine Schaumans, Tilburg University and Frank Verboven, Catholic University of Leuven (KUL) - Faculty of Business and Economics (FBE) have posted Entry and Competition in Differentiated Products Markets.

ABSTRACT: We propose a methodology for estimating the competition effects from entry when firms sell differentiated products. We first derive precise conditions under which Bresnahan and Reiss' entry threshold ratios (ETRs) can be used to test for the presence and to measure the magnitude of competition effects. We then show how to augment the traditional entry model with a revenue equation. This revenue equation serves to adjust the ETRs by the extent of market expansion from entry, and leads to unbiased estimates of the competition effects from entry. We apply our approach to seven different local service sectors. We find that entry typically leads to significant market expansion, implying that traditional ETRs may substantially underestimate the competition effects from entry. In most sectors, the second entrant reduces markups by at least 30%, whereas the third or subsequent entrants have smaller or insignificant effects. In one sector, we find that even the second entrant does not reduce markups, consistent with a recent decision by the competition authority.

June 2, 2011 | Permalink | Comments (0) | TrackBack (0)

Airline Alliances with Low Cost Carriers

Posted by D. Daniel Sokol

Tomohiko Kawamori, Faculty of Economics, Osaka University of Economics and Ming Hsin Lin, Faculty of Economics, Osaka University of Economics have written on Airline Alliances with Low Cost Carriers.

ABSTRACT: A major carrier operates one hub linking multiple non-hub cities. It forms an alliance with a low cost carrier whose nonstop service competes with its one-stop service. The alliance’s joint profit is maximized by withdrawing the competing one-stop (nonstop) service when the major carrier’s operating cost and connecting passengers’ hub-through additional time costs are large (small). The realized alliance is welfare-improving (welfare-decreasing) when these costs are large or small (intermediate). These findings suggest the necessity of alliance regulation. In some regions, the necessity of regulation does not monotonically change as the network size increases.

June 2, 2011 | Permalink | Comments (0) | TrackBack (0)

Do Patents Matter? Empirical Evidence on the Incentive Thesis

Posted by D. Daniel Sokol

Jonathan Barnett, USC Law School asks Do Patents Matter? Empirical Evidence on the Incentive Thesis.

ABSTRACT: The incentive thesis supplies the primary rationale for the patent system: without an exclusionary right, firms will decline to invest in innovations that are subject to expropriation. Empirical inquiry into the incentive thesis’ scope of application has yielded complex results, which are often selectively cited or described incompletely in policy debates. This literature review broadly surveys relevant empirical studies. Taken as a whole, the evidence supports three propositions with a reasonable degree of confidence. First, patents’ incentive effect is a positive function of the difference between innovation costs and imitation costs. Second, patents’ incentive effect is an inverse function of the “appropriation strength” of alternative non-patent instruments by which to increase third-parties’ imitation costs. Third, patents’ incentive effect is a diminishing marginal function of patent strength and, in some cases, can even be reversed beyond a certain level of patent strength.

June 2, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 1, 2011

SSRN TOP 10 Papers for Journal of Antitrust: Antitrust Law & Policy eJournal April 2, 2011 to June 1, 2011

Posted by D. Daniel Sokol

Rank Downloads Paper Title
1 657 Economic Analysis of Claims in Support of the ‘Durbin Amendment’ to Regulate Debit Card Interchange Fees
David S. Evans, Howard H. Chang, Margaret Morgan Weichert,
University of Chicago Law School, Global Economics Group, LLC, Market Platform Dynamics,
Date posted to database: May 23, 2011
Last Revised: May 23, 2011
2 231 Antitrust Merger Efficiencies in the Shadow of the Law
D. Daniel Sokol, James A. Fishkin,
University of Florida - Levin College of Law, Dechert LLP,
Date posted to database: April 4, 2011
Last Revised: April 7, 2011
3 217 Antitrust Review of the AT&T/T-Mobile Transaction
Allen P. Grunes, Maurice E. Stucke,
Brownstein Hyatt Farber Schreck, LLP, University of Tennessee College of Law,
Date posted to database: May 31, 2011
Last Revised: May 31, 2011
4 174 Choosing Among Tools for Assessing Unilateral Merger Effects
Gregory J. Werden, Luke Froeb,
U.S. Department of Justice - Antitrust Division, Vanderbilt University - Owen Graduate School of Management,
Date posted to database: April 6, 2011
Last Revised: May 25, 2011
5 172 Saving the First Amendment from Itself: Relief from the Sherman Act Against the Rabbinic Cartels
Barak D. Richman,
Duke University - School of Law,
Date posted to database: April 13, 2011
Last Revised: May 4, 2011
6 170 Evaluating Leniency and Modeling Cartel Durations: Time-Varying Policy Impacts and Sample Selection
J. Zhou,
Bonn University, Wirtschaftspolitische Abteilung,
Date posted to database: March 31, 2011
Last Revised: May 10, 2011
7 155 Antitrust Economics of Free
David S. Evans,
University of Chicago Law School,
Date posted to database: April 18, 2011
Last Revised: May 24, 2011
8 130 Search Engine Competition with Network Externalities
Cédric Argenton, Cédric Argenton, Jens Prufer,
Tilburg University - Center and Faculty of Economics and Business Administration, Tilburg University - Tilburg Law and Economics Center (TILEC), TILEC and CentER, Department of Economics, Tilburg University,
Date posted to database: April 19, 2011
Last Revised: April 19, 2011
9 109 If Search Neutrality is the Answer, What's the Question?
Geoffrey A. Manne, Joshua D. Wright,
Executive Director, International Center for Law & Economics (ICLE), George Mason University - School of Law, Faculty,
Date posted to database: April 14, 2011
Last Revised: April 14, 2011
10 102 Reassessing Tying Arrangements at the End of AT&T's iPhone Exclusivity
Jeffrey Paul Jarosch,
Searle Center on Law, Regulation, and Economic Growth, Northwestern University School of Law,
Date posted to database: April 20, 2011
Last Revised: May 4, 2011

June 1, 2011 | Permalink | Comments (0) | TrackBack (0)

The Changing Patterns of Internet Usage

Posted by D. Daniel Sokol

Christopher S. Yoo, University of Pennsylvania Law School, University of Pennsylvania - Annenberg School for Communication describes The Changing Patterns of Internet Usage.

ABSTRACT: The Internet unquestionably represents one of the most important technological developments in recent history. It has revolutionized the way people communicate with one another and obtain information and created an unimaginable variety of commercial and leisure activities. Interestingly, many members of the engineering community often observe that the current network is ill-suited to handle the demands that end users are placing on it. Indeed, engineering researchers often describe the network as ossified and impervious to significant architectural change. As a result, both the U.S. and the European Commission are sponsoring "clean slate" projects to study how the Internet might be designed differently if it were designed from scratch today. This Essay explores emerging trends that are transforming the way end users are using the Internet and examine their implications both for network architecture and public policy. These trends include Internet protocol video, wireless broadband, cloud computing programmable networking, and pervasive computing and sensor networks. It discusses how these changes in the way people are using the network may require the network to evolve in new directions.

June 1, 2011 | Permalink | Comments (0) | TrackBack (0)

Evergreening, Patent Challenges, and Effective Market Life in Pharmaceuticals

Posted by D. Daniel Sokol

C. Scott Hemphill, Columbia University - Law School and Bhaven N. Sampat, Columbia University - Mailman School of Public Health analyze Evergreening, Patent Challenges, and Effective Market Life in Pharmaceuticals.

ABSTRACT: The Hatch-Waxman Act permits a generic drug maker to enter the market for a patented drug, prior to patent expiration, by asserting that one or more patents are invalid or not infringed. Observers worry that generic patent challenges are on the rise, increasingly come early after branded drug approval, and reduce the effective market life of drugs. A particular concern is that challenges disproportionately target high-sales drugs, reducing market life for these “blockbusters.” To study this question, we examine a new dataset of all new molecular entities for which first generic approval occurred between 2001 and 2010. Our results show that challenges are much more common for higher sales drugs. We also demonstrate a slight increase in challenges over this period, and a sharper increase for early challenges (those commencing within five years of drug approval). Despite this, effective market life is stable across drug sales categories, and has hardly changed over the decade. To help understand this surprising result, we examine a second new dataset identifying which patents are challenged on each drug. Exploiting within-drug variation in patent type and expiration date, we find that lower quality and later expiring patents disproportionately draw the challenges. Taken together, this evidence suggests that patent challenges serve to maintain, rather than reduce, the historical baseline of effective market life, by responding to and reducing the effectiveness of evergreening by branded drug makers.

June 1, 2011 | Permalink | Comments (0) | TrackBack (0)

Selection Biases in Complementary R&D Projects

Posted by D. Daniel Sokol

Jay Pil Choi, Michigan State University - Department of Economics and Heiko A. Gerlach, University of Queensland - School of Economics explain Selection Biases in Complementary R&D Projects.

ABSTRACT: This paper analyzes selection biases in the project choice of complementary technologies that are used in combination to produce a final product. In the presence of complementary technologies, patents allow innovating firms to hold up rivals who succeed in developing other system components. This hold-up potential induces firms to preemptively claim stakes on component property rights and excessively cluster their R&D efforts on a relatively easier technology. This selection bias is persistent and robust to several model extensions. Implications for the optimal design of intellectual property rights are discussed. We also analyze selection biases that arise when firms differ in research capabilities.

June 1, 2011 | Permalink | Comments (0) | TrackBack (0)

Is the Internet a Maturing Market? If So, What Does that Imply?

Posted by D. Daniel Sokol

Christopher S. Yoo, University of Pennsylvania Law School, University of Pennsylvania - Annenberg School for Communication asks Is the Internet a Maturing Market? If So, What Does that Imply?

ABSTRACT: Network providers are experimenting with a variety of new business arrangements. Some are offering specialized services the guarantee higher levels of quality of service those willing to pay for it. Others are entering into strategic partnerships that allocate more bandwidth to certain sources. Interestingly, a management literature exists suggesting that both developments may simply reflect the ways that the nature of competition and innovation can be expected as markets mature. The real question is not if the nature of competition and innovation will change, but rather when and how. This theory also suggests that policymakers should be careful not to lock the Internet into any particular architecture or to reflexively regard deviations from the status quo as inherently anti-competitive. Instead, they should focus on creating regulatory structures that preserve industry participants’ freedom to tussle with new solutions and to adapt to changing market conditions. Any other approach risks precluding the industry from following its natural evolutionary path.

June 1, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 31, 2011

Demand Spillovers and Market Outcomes in the Mutual Fund Industry

Posted by D. Daniel Sokol

Alessandro Gavazza (NYU Stern School) analyzes Demand Spillovers and Market Outcomes in the Mutual Fund Industry.

ABSTRACT: When consumers concentrate their purchases at a single firm, a firm that offers more products than its rivals can gain market share for all its other products, as well. These spillovers induce firms to compete by offering a greater variety of products rather than lower prices, and a natural form of industry concentration with few large firms offering many products can arise if spillovers are strong enough. This paper presents a simple model that illustrates this mechanism explicitly. The empirical analysis documents strong demand spillovers in the retail segment of the U.S. mutual fund industry, in which fees are non-trivial, families offer a large number of funds, and the market is quite concentrated. Instead, spillovers are weaker, fees are lower, families offer fewer funds, and the market structure is more fragmented in the institutional segment. The current design of employer-sponsored defined-contribution retireme! nt plans likely accounts for these differential demand patterns between the retail and the institutional segments.

May 31, 2011 | Permalink | Comments (0) | TrackBack (0)

Dynamic Competition in Electricity Markets: Hydroelectric and Thermal Generation

Posted by D. Daniel Sokol

Talat S. Genc (Department of Economics,University of Guelph) and Henry Thille (Department of Economics, University of Guelph) analyze Dynamic Competition in Electricity Markets: Hydroelectric and Thermal Generation.

ABSTRACT: We study competition between hydro and thermal electricity generators that face uncertainty over demand and water flows where the hydro generator is constrained by water flows and the thermal generator by capacity. We compute the Feedback equilibrium for the in?nite horizon game and show that there can be strategic withholding of water by the hydro generator. When water inflow is relatively low, however, the hydro generator may use more water than efficient as it faces an inefficiently low shadow price of water in this case. The inefficiency of the market outcome is tempered by the capacity constraints: for a large range of possible thermal production capacities and water flow levels, welfare loss under the duopoly market structure is much less than would occur in the absence of water and capacity constraints.

May 31, 2011 | Permalink | Comments (0) | TrackBack (0)

On the effect of prospective payment system on hospital efficiency and competition for patients in Germany

Posted by D. Daniel Sokol

Helmut Herwartz and Christoph Strumann (both Christian-Albrechts-Universitat zu Kiel) write On the effect of prospective payment system on hospital efficiency and competition for patients in Germany.

ABSTRACT: The introduction of hospital reimbursement based on diagnosis related groups (DRG) in 2004 has been a conspicuous attempt to increase hospital efficiency in the German health sector. In this paper changes of hospital efficiency, quantified as a Malmquist index decomposition in pure technical efficiency change, are analyzed for periods before and after the reform. We implement a two-stage semi-parametric efficiency model that allows for spatial interdependence among hospitals. The results reveal an enhancement in overall efficiency after the DRG introduction. Moreover, an increase in the magnitude of negative spatial spillovers among German hospital performance can be diagnosed. This result is in line with a rise of competition for (low cost) patients.

May 31, 2011 | Permalink | Comments (0) | TrackBack (0)

Consumer behavior towards on-net/off-net price differentiation

Posted by D. Daniel Sokol

Justus Haucap, and Ulrich Heimeshoff (Heinrich-Heine-University of Duesseldorf, Duesseldorf Institute for Competition Economics) explore Consumer behavior towards on-net/off-net price differentiation.

ABSTRACT: This paper explores how consumers react towards price differentiation between on-net and off-net calls in mobile telecommunications - a pricing policy that is common in many mobile telecommunications markets. Based on a survey of 1044 students we demonstrate that some consumers may suffer from a 'price differentiation bias', i.e., a fair number of consumers may overestimate the savings that result from reduced on-net and/or off-net charges, as they do not appear to weigh the prices with the probabilities of placing off-net and on-net calls. This may help to explain why it have been the smaller operators in various countries who have introduced on-net/off-net price differentiation. We also discuss the implications that such a consumer bias may have for market competition.

May 31, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, May 30, 2011

Martijn A. Han awarded the 2011 Robert F. Lanzillotti Prize

Posted by D. Daniel Sokol

Congrats to Martijn Han, who was awarded the 2011 Robert F. Lanzillotti Prize at the annual International Industrial Organization Conference (IIOC) organized in Boston on 8-10 April. I saw Bob Lanzillotti in April. He is doing great and is still doing antitrust consulting well past the time that many people of similar age are retired. Congrats to Martijn. His paper is really good. Lamentably, I did not get a chance to tell this to Martijn live when I was at U. Amsterdam last Friday giving a talk.

May 30, 2011 | Permalink | Comments (0) | TrackBack (0)

Managerial ownership, entrenchment and innovation

Posted by D. Daniel Sokol

Mila Beyer, Dirk Czarnitzki, and Kornelius Kraft (ZEW) have an interesting paper on Managerial ownership, entrenchment and innovation.

ABSTRACT: Principle-agent theory suggests managers might under-invest into R&D for reasons of risk tied to project failure, such as reduced remuneration and job loss. However, managers might over-invest into innovation for reasons of growth implying higher remuneration, power and prestige. Using a sample of 1,406 Belgian firms, we find, first, that managers holding no company shares under-invest into R&D compared to owners giving rise to the risk argument. Second, we find an inverse u-shaped relationship between the degree of managerial ownership and R&D. Thus, managers become entrenched, i.e. powerful enough to pursue their own interests. When entrenched, managers do not fear detrimental effects of risky innovation projects on their career, and hence tend to over-invest into innovation.

May 30, 2011 | Permalink | Comments (0) | TrackBack (0)

Defensive strategies in the quality ladders

Posted by D. Daniel Sokol

Ivan Ledezma (CES - Centre d'économie de la Sorbonne) describes Defensive strategies in the quality ladders.

ABSTRACT: This paper analyses the potentially defensive behaviour of successful innovators and its effect on aggregate R&D effort. It proposes a quality-ladders model that endogenously determines leader's technology advantages and who innovate (the leader firm or its competitors). Regulation can have either a positive or a negative effect on R&D intensity. It can be negatively associated to aggregate innovative effort in higly deregulated economies. In more regulated ones, where deterring strategies are constrained, it yields incentives to innovate. These predictions are consistent with data on manufacturing industries of 14 OECD countries between 1987-2003.

May 30, 2011 | Permalink | Comments (0) | TrackBack (0)

Evolution of behavior when duopolists choose prices and quantities

Posted by D. Daniel Sokol

Khan Abhimanyu and Peeters Ronald (METEOR) have posted Evolution of behavior when duopolists choose prices and quantities.

ABSTRACT: We study duopolistic competition in a differentiated market with firms setting prices and quantities, without explicitly imposing market clearing. Unlike the commonly adopted assumption of profit maximizing firms, we assume firm behavior to be shaped by a Darwinian dynamic: the less fitter firm imitates the fitter firm and occasionally firms may experiment with a random price and/or quantity. Our two main findings are that: (i) a market clearing outcome always belongs to the set of feasible long run outcomes, but may co-exist with non-market clearing outcomes with as well excess supply as excess demand being possible; and (ii) there exist parameter configurations for which the only feasible outcomes imply prices above monopoly level.

May 30, 2011 | Permalink | Comments (0) | TrackBack (0)