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 10, 2011

Thomas Cheng on Criminalising Cartels

Posted by Thomas Cheng

Professor Maurice Stucke's chapter on the application of behavioral economics to cartel enforcement makes an important contribution to the existing literature on cartels. What is clear after reading the chapter is how little we know about the mechanics of cartel formation and maintenance. Invoking relevant behavioral economic concepts, Stucke insightfully points out that cartels are not necessarily formed in a smoke-filled room on one discrete occasion. Instead, cartel members may drift into a cartel through gradually intensifying cooperation, which may have started off as a completely innocuous information exchange.

What is equally clear is that one of the main reasons for our paltry understanding of cartel mechanics is the rational behavior assumption of neo-classical economic theory, which has reduced cartel members to little more than a calculator of expected costs and benefits. This assumption has led us antitrust scholars and enforcers to neglect the very important sociological and cultural dimensions of cartels. After all, cartels are ultimately group interaction. It should be small surprise that factors that usually affect group dynamics, such as social norms and trust, play an important role in the formation and maintenance of cartels. As urged by Professor Stucke, it is critically important that we go beyond the neo-classical understanding of cartels and improve our understanding of cartel mechanics by incorporating insights from behavioral economics, social and cultural psychology.

This task is doubly important because there are clear limitations to the enforcement strategy prescribed by the neo-classical theory. If it is true that current cartel enforcement has failed to achieve optimal deterrence, fines would need to be raised so that the expected costs of cartel participation outweigh the expected gains. While this may be sound in theory, it is clear that fines cannot rise indefinitely. The level of fines imposed by antitrust authorities is constrained by societal norms about proportionality. Over the last few years, there have been increasing complaints that the fines imposed by the European Commission have become excessive. This view is strongly held by many corporations and private practitioners. One may argue that it is to some extent shared by the European courts as well, as evidenced by the repeated reduction of fines by the General Court on appeal of Commission decisions.

Members of society have an innate sense of proportionality between the severity of crime and punishment. This sense of proportionality does not seem to be linear in nature. Beyond a certain point, despite the level of harm created by the conduct, members of society seem to deem certain level of fine to be excessive. If there is a curve that represents this sense of proportionality, it clear flattens out at the top. There seems to be no exact way to determine this, but at some point, our gut feeling tells us “this fine is too much”. Even if this gut feeling of most members of society is inconsistent with neoclassical economic learning, antitrust enforcers cannot ignore it, lest the antitrust enterprise will lose its legitimacy in the eyes of the public.

One new line of inquiry that Stucke’s book chapter opened is the relationship between culture and cartel enforcement. At various points, Stucke emphasizes the importance of social or group norms to the formation and maintenance of cartels. Social norms and the trust shared by industry members may facilitate the formation and maintenance of cartel. Social norms differ across cultures. Cultural psychologists such as Geert Hofstede have documented the differences across cultures in their business behavior, including the extent of individualism and collectivism that permeates a particular culture. Group norms are obviously different in a collectivist culture as opposed to an individualistic culture. It would thus be interesting to examine the extent to which cartel formation and maintenance differs across cultures. This difference of course should not be overstated. There have been numerous instances of successful international cartels spanning across cultures. Yet the point remains that there may be differences in the formation and maintenance of more localized cartels that are confined within national borders. A deeper understanding of the relationship between cultural norms and the mechanics of cartel will allow different jurisdictions to tailor their cartel enforcement policies according to local circumstances and hopefully improve their effectiveness.

 

June 10, 2011 | Permalink | Comments (0) | TrackBack (0)

Merger simulations with observed diversion ratios

Posted by D. Daniel Sokol

Lars Mathiesen (Dept. of Economics, Norwegian School of Economics and Business Administration), Øivind Anti Nilsen (Dept. of Economics, Norwegian School of Economics and Business Administration) and Lars Sørgard (Dept. of Economics, Norwegian School of Economics and Business Administration) discuss Merger simulations with observed diversion ratios.

ABSTRACT: A common approach to merger simulations used in antitrust cases is to calibrate demand from market shares and a few additional parameters. When the products involved in the merger case are differentiated along several dimensions, the resulting diversion ratios may be very different from those based upon market shares. This again may affect the predicted post-merger price effects. This article shows how merger simulation can be improved by using observed diversion ratios. To illustrate the effects of this approach we use diversion ratios from a local grocery market in Norway. In this case diversions from the acquired to the acquiring stores were considerably smaller than suggested by market shares, and the predicted average price increase from the acquisition was 40 % lower using this model rather than a model based upon market shares. This analysis also suggests that even a subset of observed diversion ratios may signifi! cantly change the prediction from a merger simulation based upon market shares.

June 10, 2011 | Permalink | Comments (0) | TrackBack (0)

Profitability of Horizontal Mergers in the Presence of Price Stickiness

Posted by D. Daniel Sokol

Hamideh Esfahani (University of Bologna) addresses Profitability of Horizontal Mergers in the Presence of Price Stickiness.

ABSTRACT: In this paper, we investigate the profitability of horizontal mergers of firms with price adjustments. We take a di¤erential game approach and both the open-loop as well as the closed-loop equlibria are considered. We show that the merger incentive is determined by how fast the price adapts to the equilibrium level.

June 10, 2011 | Permalink | Comments (0) | TrackBack (0)

Antitrust Markets and ACOs

Posted by D. Daniel Sokol

David Argue & John Gale (Economists, Inc.) explain Antitrust Markets and ACOs.

ABSTRACT: The Affordable Care Act signed into law in March 2010 has promised that the concept of accountable care organizations ("ACOs") will transform how medical care is provided and paid for in the United States. As befits their role as enforcers of the antitrust laws, the Federal Trade Commission ("FTC") and the Department of Justice ("DOJ") have raised concerns that certain ACOs may reduce competition and harm consumers through higher prices and lower quality of care.
To address that issue, the antitrust Agencies propose a "shares" screen in their recently published draft Policy Statement to identify and evaluate those ACOs that may be problematic.
The draft Policy Statement identifies three ranges of shares: one level above which an automatic review by the antitrust Agencies is triggered before participation in the Medicare Shared Savings Program is permitted, one below which a safety zone is in place, and a middle range of shares for which a proposed ACO has the option to request an antitrust review. Thus the share calculations described in the draft Policy Statement are a critical aspect of achieving the antitrust clearance needed for an ACO to participate in the Shared Savings Program. Calculating shares is a common aspect of an antitrust analysis, though usually in the context of properly defined antitrust product and geographic markets. The draft Policy Statement uses the concepts of "Common Service" and "Primary Service Area" for determining shares, but it avows that these are not necessarily the same as antitrust product and geographic markets. Indeed, court decisions have affirmed that service areas and geographic markets are not necessarily the same, and at least one decision states that they may even be thought of as opposite concepts.
Nevertheless, a great deal of attention is paid in the draft Policy Statement regarding the details of how the Common Service and PSA are to be determined and how shares within PSAs are to be calculated. Shares must be calculated for each Common Service in each participant's PSA, meaning that, in all likelihood, an ACO will not have a single, simple share but rather, in many cases, an ACO will likely have dozens of shares. Even an ACO with only two parties and one Common Service will be required to make two share calculations. If any of these shares falls above the 50 percent threshold, then an antitrust review by the FTC or DOJ is triggered. Notwithstanding the draft Policy Statement's disavowals, it seems likely that the Agencies could begin to adopt Common Services and PSAs as antitrust markets more frequently in their full-fledged competition analyses as they become accustomed to reviewing submitted materials that present shares of Common Services in PSAs. Consequently, it makes sense to consider these concepts and the related calculations more carefully.

June 10, 2011 | Permalink | Comments (0) | TrackBack (0)

Thursday, June 9, 2011

Private Benefits and Product Market Competition

Posted by D. Daniel Sokol

Jacques Thépot, University of Strasbourg has written on Private Benefits and Product Market Competition.

ABSTRACT: The impact of private benefits extraction on the values of oligopolistic firms is analyzed. Private benefits are assumed to generate costs which are passed through the organizational structure and create price distortion in the downstream product market. For a wide range of industry concentrations, we prove that this may affect the profit (i.e. the value) of the firms in a positive sense since the intensity of rivalry is curbed by the cost increase. This reduces incentive to merge in the industry ; antitrust implications are therefore discussed. In oligopoly, private benefits extraction may enhance the profits while still generating a welfare loss: this suggests that corporate governance cannot be divorced from competition policy in industries where managerial opportunism generates expropriation costs.

June 9, 2011 | Permalink | Comments (0) | TrackBack (0)

Article 82, Sector-Specific Regulation, Microsoft and Telefonica: Really a New Economic Understanding of Abusive Practices Under EC Law?

Posted by D. Daniel Sokol

Fernando Diez, University of Antonio de Nebrija asks Article 82, Sector-Specific Regulation, Microsoft and Telefonica: Really a New Economic Understanding of Abusive Practices Under EC Law?

ABSTRACT: Article 82 of EC Treaty prohibits any abuse by one or more undertakings of a dominant position; the examples contained of “abuse” reflect a variety of public policies that have led European antitrust authorities in several directions simultaneously, indicating also a highly regulatory policy of control of the adverse effects of market power in the EU. The lack of guidance in this field both for undertakings and enforcers led the European Commission to issue in 2005 the well known Discussion Paper on exclusionary abuses; although also announced, a further notice on the so-called exploitative abuses is still waited. Besides, a more economic approach to abusive practices is preached from virtually all the communitarian instances. However, two recent decisions – the fine imposed in July 2007 to Telefonica for practicing excessive prices in the form of margin squeeze in the broad band market in Spain, and the confirmation in September 2007 by the Court of First Instance of the fine imposed to Microsoft in 2004 for two allegedly anticompetitive practices (tying and refusal to supply) - suggest that this new economic understanding is either still forthcoming or not yet understood as such by everybody.

In this paper we take all this considerations into account when analyzing two features of the current understanding of abusive practices under EC law. First, the evolution from early decisions finding excessive prices and refusals to deal – which were mostly vertical in nature- to the latest pronouncements show a shift to horizontal effects. In addition to it, the ex ante regulation of certain industries – e.g. telecommunications - has certainly altered the way in which antitrust ex post intervention is conducted. Both phenomena are illustrated respectively by the Telefonica and Microsoft cases, and need to be assessed under the new economic approach to Article 82 practices.

June 9, 2011 | Permalink | Comments (0) | TrackBack (0)

Pharmaceutical Use Following Generic Entry: Paying Less and Buying Less

Posted by D. Daniel Sokol

Peter J. Huckfeldt (RAND Corporation) and Christopher R. Knittel (Christopher R. Knittel) discuss Pharmaceutical Use Following Generic Entry: Paying Less and Buying Less.

ABSTRACT: We study the effects of generic entry on prices and utilization using both event study models that exploit the differential timing of generic entry across drug molecules and cast studies.  Our analysis examines drugs treating hypertension, high blood pressure, type 2 diabetes, and depression using price and utilization data from the Medical Expenditure Panel Survey.  We find that utilization of drug molecules starts decreasing in the two years prior to generic entry and continues to decrease in the years following generic entry, despite decreases in prices offered by generic versions of a drug.

This decrease coincides with the market entry and increased utilization of branded reformulations of a drug going off patent.  We show case study evidence that utilization patterns coincide with changes in marketing by branded drug manufacturers.  While the reformulations---often extended-release versions of the patent-expiring drug---offer potential health benefits, the FDA does not require evidence that the reformulations are improvements over the previous drug in order to grant a patent.  Indeed, in a number of experiments comparing the efficacies of the patent-expiring and reformulated drugs do not find statistical differences in health outcomes calling into question the patent-extension policy.

June 9, 2011 | Permalink | Comments (0) | TrackBack (0)

MARKET SHARE THRESHOLDS: ON THE CONFLATION OF EMPIRICAL ASSESSMENTS AND LEGAL POLICY JUDGMENTS

Posted by D. Daniel Sokol

Louis Kaplow (Harvard Law) has an interesting piece (highly recommended) on MARKET SHARE THRESHOLDS: ON THE CONFLATION OF EMPIRICAL ASSESSMENTS AND LEGAL POLICY JUDGMENTS

ABSTRACT: In competition law, market power requirements are often articulated in terms of market shares. The use of market share thresholds, however, conflates two distinct questions: First, how much market power exists in a given situation? Second, how much market power should the law require? As a consequence, neither question is answered, or even directly illuminated. Furthermore, because market shares are not themselves measures of market power but instead merely a factor that bears on its magnitude in a given setting, they are inapt answers to both inquiries. Their use involves a category mistake. The identified problems are illustrated by unpacking Learned Hand's famous pronouncement in Alcoa of the market shares required for the offense of monopolization, but the core defects characterize all market share declarations.

June 9, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 8, 2011

Imelda Maher Elected to Royal Irish Academy

Posted by D. Daniel Sokol

Competition law Professor Imelda Maher (UC Dublin Law) has been elected to the prestigious Royal Irish Academy.  See the press release here.

June 8, 2011 | Permalink | Comments (0) | TrackBack (0)

ALLIANCES, CODESHARING, ANTITRUST IMMUNITY, AND INTERNATIONAL AIRFARES: DO PREVIOUS PATTERNS PERSIST?

Posted by D. Daniel Sokol

Jan K. Brueckner (UC Irvine), Darin N. Lee (Compass Lexicon) and Ethan S. Singer (University if Minnesota) ask ALLIANCES, CODESHARING, ANTITRUST IMMUNITY, AND INTERNATIONAL AIRFARES: DO PREVIOUS PATTERNS PERSIST?

ABSTRACT: This paper revisits the effect of airline cooperation on international airfares, using a panel data set from 1998 to 2009. The findings mostly confirm previous results, showing that full airline cooperation lowers the fares paid by interline passengers, and that incremental improvements to cooperation individually lead to fare reductions. The results, which show that codesharing, alliance service, and antitrust immunity each separately reduces fares below the traditional interline level, overturn contrary and counterintuitive findings in recent U.S. Department of Justice (DOJ) studies. The findings thus buttress the consumer-benefit arguments used in many past antitrust-immunity cases, which were called into question by the DOJ studies.

June 8, 2011 | Permalink | Comments (0) | TrackBack (0)

Parent's Liability: New case extending the presumption of liability of a parent company for the conduct of its wholly owned subsidiary

Posted by D. Daniel Sokol Antoine Winckler (Cleary Gottlieb) discusses Parent's Liability: New case extending the presumption of liability of a parent company for the conduct of its wholly owned subsidiary. ABSTRACT: Despite paying lip-service to the principle of personal liability, Quimica confirms that one can be held liable without being guilty under European competition law.

June 8, 2011 | Permalink | Comments (0) | TrackBack (0)

Highway 102: A Nice Turn with Still some Miles to Go

Posted by D. Daniel Sokol

Jean-Yves Art (Microsoft) has written on Highway 102: A Nice Turn with Still some Miles to Go.

ABSTRACT: Are the European courts injecting some economics in Article 102 TFEU and turning that provision into an instrument of sound competition policy? The judgments recently rendered by the Court of Justice in Deutsche Telekom and TeliaSonera indicate an encouraging inflection in the case law, which should be praised … and pursued. Both cases concern the same pricing practice by two companies deemed to be dominant in the provision of some telecommunications services at the wholesale and the retail level, according to which the difference between the wholesale and retail prices charged by the dominant undertaking allegedly did not enable rivals from competing in the retail market. Through different avenues, both cases ended up at the Court of Justice which was thus called upon to rule on the conditions under which such ‘margin squeeze’ amounts to an abuse prohibited by Article 102 TFEU. In both cases, the Court embraced the ‘as efficient competitor’ test set out by the European Commission in its Guidance Paper and in substance ruled that a margin squeeze arises when the spread between the retail prices applied by a dominant undertaking and the wholesale prices it charges its competitors for comparable services is insufficient.

June 8, 2011 | Permalink | Comments (0) | TrackBack (0)

Introducing the Concept of ‘Predatory Entry’ in European Competition Law: The Flybe Case Recently Decided by the Office of Fair Trading in the United Kingdom

Posted by D. Daniel Sokol

Jeremy Robinson (Bird & Bird) is Introducing the Concept of ‘Predatory Entry’ in European Competition Law: The Flybe Case Recently Decided by the Office of Fair Trading in the United Kingdom.

ABSTRACT: The case raises questions about whether, and in what circumstances, a new entrant can commit predatory pricing, and how it should properly be remedied. The case ended with a “no grounds for action” decision The theory of “predatory entry” is likely to survive for future cases, but should it?

June 8, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 7, 2011

Latest Issue of the American Economic Review Has a Mini Symposium - Evaluating Empirical Tools for Horizontal Merger Analysis

Posted by D. Daniel Sokol

Evaluating Empirical Tools for Horizontal Merger Analysis



Does Concentration Matter? Measurement of Petroleum Merger Price Effects (pp. 45-50)
Daniel Hosken, Louis Silvia and Christopher Taylor

More Evidence on the Performance of Merger Simulations (pp. 51-55)
Matthew C. Weinberg

Challenges in Merger Simulation Analysis (pp. 56-59)
Christopher R. Knittel and Konstantinos Metaxoglou

June 7, 2011 | Permalink | Comments (0) | TrackBack (0)

Cloud Computing: Architectural and Policy Implications

Posted by D. Daniel Sokol

Christopher S. Yoo, University of Pennsylvania Law School, University of Pennsylvania - Annenberg School for Communication examines Cloud Computing: Architectural and Policy Implications.

ABSTRACT: Cloud computing has emerged as perhaps the hottest development in information technology. Despite all of the attention that it has garnered, existing analyses focus almost exclusively on the issues that surround data privacy without exploring cloud computing’s architectural and policy implications. This article offers an initial exploratory analysis in that direction. It begins by introducing key cloud computing concepts, such as service-oriented architectures, thin clients, and virtualization, and discusses the leading delivery models and deployment strategies that are being pursued by cloud computing providers. It next analyzes the economics of cloud computing in terms of reducing costs, transforming capital expenditures into operating expenditures, aggregating demand, increasing reliability, and reducing latency. It then discusses the architectural implications of cloud computing for access networking (focusing on bandwidth, reliability, quality of service, and ubiquity) and data center interconnectivity (focusing on bandwidth, reliability, security and privacy, control over routing policies, standardization, and metering and payment). It closes by offering a few observations on the impact of cloud computing on the industry structure for data centers, server-related technologies, router-based technologies, and access networks, as well as its implications for regulation.

June 7, 2011 | Permalink | Comments (0) | TrackBack (0)

Irish Competition Authority - Vacancies

Posted by D. Daniel Sokol

The Irish Government has announced vacancies for the Chairmanship of the Irish Competition Authority and for the three Member (Director) positions. 

The announcement and job description for the Chairmanship can be found at http://www.publicjobs.ie/publicjobs/en/star/goToJobDetails.do?id=1411;  the announcement and description of the Member positions can be found at http://www.publicjobs.ie/publicjobs/en/star/goToJobDetails.do?id=1431.   Please note that the positions opened for application on June 3 and will close on June 23.  Compensation for the Chairman is set at Euros 176,800.00 and for Members at Euros 137,554.00 plus some retirement benefit. 

HT: Terry Calvani

June 7, 2011 | Permalink | Comments (0) | TrackBack (0)

Market Size and Pharmaceutical Innovation

Posted by D. Daniel Sokol

Oliver de Mouzon, Toulouse School of Economics (GREMAQ, IDEI), Pierre Dubois, University of Toulouse 1 - Toulouse School of Economics (TSE), Fiona Scott Morton, Yale School of Management, and Paul Seabright, University of Toulouse I - Industrial Economic Institute (IDEI), explore Market Size and Pharmaceutical Innovation.

ABSTRACT: This paper quantifies the relationship between market size and innovation in the pharmaceutical industry. We estimate the elasticity of innovation, as measured by the number of new chemical entities appearing on the market for a given disease class, to the potential market size represented by the willingness of sufferers of diseases in that class (and others acting on their behalf such as insurers and governments) to spend on their treatment during the patent lifetime. We find positive significant elasticities with a point estimate under our preferred specification of 25.2%. This suggests that at the mean market size an additional $1.8 billion is required in additional patent life revenue to induce the invention of one additional new chemical entity. An elasticity substantially and significantly below one-half is also a plausible implication of the hypothesis that innovation in pharmaceuticals is becoming more difficult and expensive over time, as costs of regulatory approval rise and as the industry runs out of "low hanging fruit."

June 7, 2011 | Permalink | Comments (0) | TrackBack (0)

Implementing Relevant Market Tests in Antitrust Policy: Application to Computer Servers

Posted by D. Daniel Sokol

Marc Ivaldi, Toulouse School of Economics and Szabolcs Lorincz, European Commission, Directorate-General Competition have written on Implementing Relevant Market Tests in Antitrust Policy: Application to Computer Servers.

ABSTRACT: The paper defines, implements and compares two empirical tests of relevant markets. While the SSNIP test compares an initial industry equilibrium to an out-of-equilibrium situation, the 1984 US Merger Guidelines test compares the same initial equilibrium to a second equilibrium outcome. We define these concepts formally and apply them to the computer server industry by estimating a model on a large dataset. We find several smaller relevant markets in the low-end segment of servers. In addition, we find that the results might be quantitatively significantly different between the two approaches as the SSNIP test changes prices uniformly and does not take into account the multi-product pricing strategies of the firms.

June 7, 2011 | Permalink | Comments (0) | TrackBack (0)

Russia, China and India: Designing Compliance Programs for Developing Antitrust Enforcement Regimes - Today (There is still time to register)

Posted by D. Daniel Sokol

Russia, China and India:

Designing Compliance Programs for Developing Antitrust Enforcement Regimes


Date: Tuesday, June 7, 2011
Format: Live Webinar and Teleconference
Duration: 90 minutes


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Sponsors:

The American Bar Association Section of Antitrust Law Corporate Counseling Committee, Young Lawyers Division and the ABA Center for Continuing Legal Education

11:00 AM-12:30 PM Eastern

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Program Description

Given the size of the economies and the relative youth of their antitrust agencies, compliance with competition law in Russia, China and India presents significant potential issues for any
in-house lawyer.

The purpose of this program is to provide corporate counsel with an overview of how to manage compliance with these legal systems. The panel will address not just the application of the laws, but will also discuss the political and economic factors that may influence enforcement priorities in these countries.

Program Faculty

D. Daniel Sokol (Moderator), Assistant Professor of Law, University of Florida Levin College of Law Holland Law Center, Gainesville, FL

Pallavi Shroff , Partner, Amarchand & Mangaldas & Suresh A Shroff & Co, New Delhi, India

Susan Ning, Partner, King & Wood, Beijing, PRC

Maria Ankoudinova, Counsel, Jones Day, Moscow, Russia

Mark Whitener, General Electric Company, Washington, DC

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1.5 hours of CLE credit in 60-minute states/1.8 hours of CLE credit in 50-minute states have been requested in states accrediting ABA live webinars and teleconferences.

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June 7, 2011 | Permalink | Comments (0) | TrackBack (0)

Buyer Power and Price Discrimination: The Case of the UK Care Home Market

Posted by D. Daniel Sokol

Morten Hviid, University of East Anglia - Centre for Competition Policy (CCP) and Ruth Hancock, University of Essex - Department of Health and Human Sciences provide an example of Buyer Power and Price Discrimination: The Case of the UK Care Home Market.

ABSTRACT: UK Local Authorities purchase care home places on behalf of a large group of people following an assessment of their ability to meet the care home fee from their income and wealth. All other buyers of care home services are atomistic and the care home market is characterised by a large number of relatively small providers. This may give local authorities buyer power. We show the consequences of substantial buyer power by one consumer when sellers are competitive but each faces capacity constraints. In the free entry equilibrium we show that any abuse of this buyer power may lead to part of the market, “the squeezed middle” not being served. We use a microsimulation model to quantify the size of the squeezed middle and assess the implications of the form of the assessment of people’s ability to meet care home fees, for local authorities’ ability to exercise buyer power.

June 7, 2011 | Permalink | Comments (0) | TrackBack (0)