Antitrust & Competition Policy Blog

A Competition Perspective on Patent Law: The Federal Trade Commission's Report on the Evolving IP Marketplace

Posted by D. Daniel Sokol

Edith Ramirez (FTC) and Lisa Kimmel (FTC) have written on A Competition Perspective on Patent Law: The Federal Trade Commission's Report on the Evolving IP Marketplace.

Side Effects of Competition: the Role of Advertising and Promotion in Pharmaceutical Markets

Posted by D. Daniel Sokol

Guy David (Wharton) and Sara Markowitz (Emory) explain Side Effects of Competition: the Role of Advertising and Promotion in Pharmaceutical Markets.

ABSTRACT: The extent of pharmaceutical advertising and promotion can be characterized by a balancing act between profitable demand expansions and potentially unfavorable subsequent regulatory actions. However, this balance also depends on the nature of competition (e.g. monopoly versus oligopoly). In this paper we model the firm’s behavior under different competitive scenarios and test the model’s predictions using a novel combination of sales, promotion, advertising, and adverse event reports data. We focus on the market for erectile dysfunction drugs as the basis for estimation. This market is ideal for analysis as it is characterized by an abrupt shift in structure, all drugs are branded, the drugs are associated with adverse health events, and have extensive advertising and promotion. We find that advertising and promotion expenditures increase own market share but also increase the share of adverse drug reactions. Competi! tors’ spending decreases market share, while also having an influence on adverse drug reactions.

Barriers to Entry, Deregulation and Workplace Training

Posted by D. Daniel Sokol

Andrea Bassanini (OECD) and Giorgio Brunello (University of Padova) discuss Barriers to Entry, Deregulation and Workplace Training.

ABSTRACT: We study the impact of regulatory barriers to entry on workplace training. We develop a model of training in imperfectly competitive product and labour markets. The model indicates that there are two contrasting effects of deregulation on training. As stressed in the literature, with a given number of firms, deregulation reduces the size of rents per unit of output that firms can reap by training their employees. Yet, the number of firms increases following deregulation, thereby raising output and profit gains from training and improving investment incentives. The latter effect prevails. In line with the predictions of the theoretical model, we find that the substantial deregulation in the 1990s of heavily regulated European industries (energy, transport and communication) increased training incidence.

Sharis Pozen Named Acting Head of DOJ Antitrust

Posted by D. Daniel Sokol

It is official. Sharis Pozen has been named the Acting Assistant Attorney General for the Antitrust Division of the Department of Justice.

Private Agreements for Coordinating Patent Rights: The Case of Patent Pools

Posted by D. Daniel Sokol

Nancy Gallini (UBC) has an interesting paper on Private Agreements for Coordinating Patent Rights: The Case of Patent Pools.

ABSTRACT: Inventors and users of technology often enter into cooperative agreements for sharing their intellectual property in order to implement a standard or to avoid costly litigation. Over the past two decades, U.S. antitrust authorities have viewed pooling arrangements that integrate complementary, valid and essential patents as having procompetitive benefits in reducing prices, transactions costs, and the incidence of legal suits. Since patent pools are cooperative agreements, they also have the potential of suppressing competition if, for example, they harbor weak or invalid patents, dampen incentives to conduct research on innovations that compete with the pooled patents, foreclose competition from downstream product or upstream input markets, or raise prices on goods that compete with the pooled patents. In synthesizing the ideas advanced in the economic literature, this paper explores whether these antitrust concerns apply to pools with complementary patents and, if they do, the implications for competition policy to constrain them. Special attention is given to the application of the U.S. Department of Justiceâ€Federal Trade Commission Guidelines for the Licensing of Intellectual Property (1995) and its companion Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (2007) to recent patent pool cases.

Classical vs. Neoclassical Conceptions of Competition

Posted by D. Daniel Sokol

Lefteris Tsoulfidis (Department of Economics, University of Macedonia) addresses Classical vs. Neoclassical Conceptions of Competition.

ABSTRACT: This article discusses two major conceptions of competition, the classical and the neoclassical. In the classical conception, competition is viewed as a dynamic rivalrous process of firms struggling with each other over the expansion of their market shares. This dynamic view of competition characterizes mainly the works of Smith, Ricardo, J.S. Mill and Marx; a similar view can be also found in the writings of Austrian economists and the business literature. By contrast, the neoclassical conception of competition is derived from the requirements of a theory geared towards static equilibrium and not from any historical observation of the way in which firms actually organize and compete with each other.

Consumer behavioural biases in competition: A survey

Posted by D. Daniel Sokol

Steffen Huck and Jidong Zhou (both University College London Econ) have written on Consumer behavioural biases in competition: A survey.

ABSTRACT: This is a survey of studies that examine competition in the presence of behaviourally biased or boundedly rational consumers. It will tackle questions such as: How does competition and pricing change when consumers are biased? Can inefficiencies that arise from consumer behavioural biases be mitigated by lowering barriers to entry? Do biased consumers make rational ones better or worse off? And will biased consumer behaviour be overcome through learning or education?

The effect of vertical knowledge spillovers via the supply chain on location decision of firms

Posted by D. Daniel Sokol

Mohammad Ali Kashe, Bielefeld Graduate School of Economics and Management studies The effect of vertical knowledge spillovers via the supply chain on location decision of firms.

ABSTRACT: In this paper a game theoretic model is employed to analyze the relationship between strategic location decision of firms in the supply chain considering the role of horizontal and vertical knowledge spillovers, and numerical approach is applied to characterize the equilibria of the considered multi-stage game. Geographical concentration or isolation as equilibrium outcome is determined based on our different parameterizations and two scenarios each consists of two separated cases, which we establish according to the location of our agents. In the first scenario both suppliers are supposed to be located in different regions while in the second one they act in a same region. In addition, first case of each scenario considers geographical isolation of two producers whereas second case investigates the geographical concentration. Furthermore, the effect of different technological level of our agents on their final location ! decision is investigated.

Competition Leverage: How the Demand Side Affects Optimal Risk Adjustment

Posted by D. Daniel Sokol

Michiel Bijlsma, Jan Boone, Gijsbert Zwart (Tilburg University, Center for Economic Research) explore Competition Leverage: How the Demand Side Affects Optimal Risk Adjustment.

ABSTRACT: We study optimal risk adjustment in imperfectly competitive health insurance markets when high-risk consumers are less likely to switch insurer than low-risk consumers. First, we find that insurers still have an incentive to select even if risk adjustment perfectly corrects for cost differences among consumers. Consequently, the outcome is not efficient even if cost differences are fully compensated. To achieve first best, risk adjustment should overcompensate for serving high-risk agents to take into account the difference in mark- ups among the two types. Second, the difference in switching behavior creates a trade off between efficiency and consumer welfare. Reducing the difference in risk adjustment subsidies to high and low types increases consumer welfare by leveraging competition from the elastic low-risk market to the less elastic high-risk market. Finally, mandatory pooling can increase consumer surplus even fur! ther, at the cost of efficiency.

Supplier Responses to Wal-Mart's Invasion of Mexico

Posted by D. Daniel Sokol

Leonardo Iacovone (World Bank), Beata Smarzynska Javorcik (Oxford), Wolfgang Keller (Princeton), and James R. Tybout (Penn State) have an interest in Supplier Responses to Wal-Mart's Invasion of Mexico.

ABSTRACT: This paper examines the effect of Wal-Mart's entry into Mexico on Mexican manufacturers of consumer goods.  Guided by firm interviews that suggested substantial heterogeneity across firms in how they responded to Wal-Mart's entry, we develop a dynamic industry model in which firms decide whether to sell their products through Walmex (short for Wal-Mart de Mexico), or use traditional retailers.  Walmex provides access to a larger market, but it puts continuous pressure on its suppliers to improve their product's appeal, and it forces them to accept relatively low prices relative to product appeal.

Simulations of the model show that the arrival of Walmex separates potential suppliers into two groups.  Those with relatively high-appeal products choose Walmex as their retailer, whereas those with lower appeal products do not.  For the industry as a whole, the model predicts that the associated market share reallocations, adjustments in innovative effort, and exit patterns increase productivity and the rate of innovation.  These predictions accord well with the results from our firm interviews.  The model's predictions are also supported by establishment-level panel data that characterize Mexican producers' domestic sales, investments, and productivity gains in regions with differing levels of Walmex presence during the years 1994 to 2002.

Market Power, Efficiency and Performance of Indonesian Banks

Posted by D. Daniel Sokol

Fadilla Dwi Ardianty, Universitas Indonesia and Viverita Viverita, University of Indonesia (UI) - Graduate School of Management, Faculty of Economics discuss Market Power, Efficiency and Performance of Indonesian Banks.

ABSTRACT:This study aims to examine the existence of the two common hypothesis in banking industry, i.e: the Structure Conduct Performance (SCP) Hypothesis and the Efficient Structure (EFS) Hypothesis by analyzing the impact of market power and efficiency on performance of public banks in Indonesia for the period of 2003-2009. The estimation of efficiency is obtained by using two difference approaches: a parametric Stochastic Frontier Analysis (SFA) and non-parametric Data Envelopment Analysis (DEA). Findings of the study support the Structure Conduct Performance hypothesis, where market power is the most significant factor that influences banking performance. Furthermore, the results also support a quiet life hypothesis where the banks enjoy the advantages of market power in terms of foregone revenues or cost savings.

Anti-Monopoly Law and Practice in China

Posted by D. Daniel Sokol

H. Stephen Harris (Baker McKenzie), Peter J. Wang (Jones Day), Mark A. Cohen (Jones Day), Yizhe Zhang (Jones Day) and Sebastien J. Evrard (Jones Day) have put out Anti-Monopoly Law and Practice in China.

BOOK ABSTRACT: The China Anti-Monopoly Law (AML), which became effective August 1, 2008, is the first comprehensive competition law enacted by China. The AML prohibits a broad array of agreements between competitors and commercial counterparties, as well as competitive conduct by single firms that may harm the competitive process. In addition, it establishes a mandatory administrative review procedure for mergers and acquisitions between companies meeting certain sales thresholds, globally or in China. Beyond these fundamental provisions, the AML prohibits certain types of administrative abuses believed to be prevalent in China and establishes a complex set of administrative agencies with broad powers to enforce the law. Anti-Monopoly Law and Practice in China is the first comprehensive treatment of the AML and the practice of antitrust law under this new system. Each chapter on the substantive provisions of the law includes practical advice on approaches to meeting the challenge of complying with the law's requirements, including analysis of likely interpretations and applications of the AML based on precedents in related economic laws and actions by other administrative agencies. Where policy choices are uncertain, the text will explore probable developments in China based on comparable applications of competition laws in other jurisdictions.

Table of Contents:

Introduction
Legislative history
Monopoly Agreement
Abuses of Dominant Position
Merger Review
Cases Involving Governmental and Quasi-Governmental Entities
Intellectual Property
Enforcement
Courts
Other Competition-Law Related Statutes

Libor Litigation and the Role of Screening: The Need for Enhanced Compliance Programs

Posted by D. Daniel Sokol

Rosa Abrantes-Metz (AFE Consulting) has a new article on Libor Litigation and the Role of Screening: The Need for Enhanced Compliance Programs.

The U.S. Department of Justice, the Securities and Exchange Commission, and other regulatory agencies have recently made allegations of a possible conspiracy to manipulate the U.S. dollar Libor rate ("Libor") by several major banks. These allegations followed the application of empirical methods known as screens to flag unexpected patterns in the Libor.Screens use commonly available data such as prices, costs, market shares, bids, transaction quotes, spreads, volumes, and other data to identify patterns that are anomalous or highly improbable. A survey of screening methodologies and their multiple applications can be found in Abrantes-Metz & Bajari (2009, 2010) and Harrington (2008). The use of these methods in litigation is detailed in the 2010 volume Proof of Conspiracy under Antitrust Federal Laws, by the American Bar Association.

Competition authorities and other agencies worldwide have started to use screens to detect market conspiracies and manipulations. The question we will address in this article is whether such screens can supplement the internal monitoring and compliance efforts of private companies. Using the Libor litigation as our example, we explore whether the banks themselves could have used screens to help avoid the current investigations some are now facing, at least to some extent.

Competition and interest rates in the Dutch mortgage market: an econometric analysis over 2004-2010

Posted by D. Daniel Sokol

Machiel Mulder and Mark Lengton (Netherlands Competition Authority) analyze Competition and interest rates in the Dutch mortgage market: an econometric analysis over 2004-2010.

ABSTRACT: Triggered by evidence that the mortgage interest margins have risen since 2009, an econometric analysis is conducted to explain the interest rates in the Dutch mortgage market at the bank level ver 2004 – 2010. Controlling for the influence of costs, risks and also for some regulatory measures, we find statistically significant evidence that the degree of competition in the Dutch mortgage market (measured by C3 or HHI) affected the level of the mortgage interest rates. An increase in market concentration equal to the size of its standard deviation over the period of analysis raised the mortgage interest rate by approximately 0.10 to 0.20 percentage points. The impact of costs as well as risks appears to be about twice as large as the impact of market concentration.

Trade-Induced Technical Change? The Impact of Chinese Imports on Innovation, IT, and Productivity

Posted by D. Daniel Sokol

Nicholas Bloom (Stanford), Mirko Draca (LSE), and John Van Reenen (LSE) have an interesting paper on Trade-Induced Technical Change? The Impact of Chinese Imports on Innovation, IT, and Productivity.

ABSTRACT: We examine the impact of Chinese import competition on patenting, IT, R&D and TFP using a panel of up to half a million firms over 1996-2007 across twelve European countries. We correct for endogeneity using the removal of product-specific quotas following China’s entry into the World Trade Organization. Chinese import competition had two effects: first, it led to increases in R&D, patenting, IT and TFP within firms; and second it reallocated employment between firms towards more innovative and technologically advanced firms. These within and between effects were about equal in magnitude, and appear to account for around 15% of European technology upgrading between 2000-2007. Rising Chinese import competition also led to falls in employment, profits, prices and the skill share. By contrast, import competition from developed countries had no effect on innovation. We develop a simple “trapped factor” model of innovation that is consistent with these empirical findings.

Natural Barrier to Entry in the Credit Rating Industry

Posted by D. Daniel Sokol

Doh-Shin Jeon (Toulouse School of Economics) and Stefano Lovo (HEC) examine Natural Barrier to Entry in the Credit Rating Industry.

ABSTRACT: We present an infinite horizon model that studies the competition between a relatively ineffective incumbent Credit Rating Agency (CRA) and a sequence of entrant CRAs that are potentially more e¤ective but whose ability in appraising default risk is unproven at the time they enter the market. We show that free entry competition in the credit rating business fails in selecting the most competent CRA as long as two conditions are met. First, investors and issuers trust the incumbent CRA to provide a sincere, although imperfect, assessment of issuersdefault risk. Second, CRAs cannot charge higher fees for low rating than for high rating. Under these conditions a rather incompetent CRA can dominate the market without being worried about potentially more competent entrants. We derive policy implications.

Price Setting in a Leading Swiss Online Supermarket

Posted by D. Daniel Sokol

Martin Berka (Massey University) Michael B. Devereux (University of British Columbia) and Thomas Rudolph (University of St.Gallen) analyze Price Setting in a Leading Swiss Online Supermarket.

ABSTRACT: We study a newly released data set of scanner prices for food items in a large Swiss online supermarket. We find that average prices change about every two months, but when we exclude temporary sales, prices are extremely sticky, changing on average once every three years. Non-sale price behavior is broadly consistent with menu cost models of sticky prices. When we focus specifically on the behavior of sale prices, however, we find that the characteristics of price adjustment seems to be substantially at odds with standard theory.

The 'Best Practices for Expert Economic Opinions' by the Bundeskartellamt in international Context

Posted by D. Daniel Sokol

Arndt Christiansen, Bundeskartellamt - German Federal Cartel Office discusses The 'Best Practices for Expert Economic Opinions' by the Bundeskartellamt in international Context.

ABSTRACT: The overarching trend in Europe and, indeed, worldwide has recently been the increasing importance of economic analysis in competition law and policy. This has led inter alia to a growing number of expert economic opinions submitted in competition law proceedings both before authorities and before courts. They constitute a potentially important “input channel” for (new) theoretical and empirical economic insights. From the Bundeskartellamt’s experience a significant part of the submissions has, however, failed to meet certain minimum quality standards. Therefore, the necessity for a binding statement arose which resulted in the publication of “Best Practices for expert economic opinions” in October 2010. In addition to sketching the structure and content of the Bundeskartellamt’s notice this article aims at putting it into the international context. It demonstrates that the “Best Practices” are broadly in line with guidance documents issued by other competition authorities worldwide. The underlying fundamental issue is the proper integration of economic expertise in competition law enforcement.

The Empirics of Vertical Integration and Foreclosure

Posted by D. Daniel Sokol

Emmanuel Frot, Microeconomix, Stockholm School of Economics explains The Empirics of Vertical Integration and Foreclosure.

ABSTRACT: Economic theory underlines that vertical mergers are very likely to lead to efficiencies and benefit consumers. On the other hand, more recent research found that vertical integration can also be used as an anti-competitive tool by firms, and harm consumers, notably through foreclosure. These opposing effects make the assessment of vertical mergers a subtle exercise. This article argues that because of the complexity of the issue, it is important to rely on empirical studies to understand in practice the consequences of vertical integration. It reviews three recent articles on vertical mergers to better illustrate what can be learned ex post from such studies and the methods employed. It then looks at the TomTom/Tele Atlas merger where the European Commission ex ante conducted an evaluation of the incentives to foreclose by the new proposed entity. Econometric tools provide interesting insights on the mechanisms at play in vertical mergers, both ex ante and ex post, and therefore usefully complete economic theory.

Cartel Regulation in Three Emerging BRIC Economies: Cartel and Competition Policies in South Africa, Brazil and India - A Comparative Overview

Posted by D. Daniel Sokol

Sascha-Dominik Oliver Vladimir Bachmann, University of Portsmouth - School of Law and Sashalee Stephanie Afrika, Stellenbosch Univeristy - Faculty of Law explore Cartel Regulation in Three Emerging BRIC Economies: Cartel and Competition Policies in South Africa, Brazil and India - A Comparative Overview.

ABSTRACT:The benefits of bilateral agreements in regard to international cartels are clear: only a synchronized and international approach will help the developing nations in protecting their markets from unfair competition practices. This article shows the state of anti-cartel policies and legislation in selected jurisdictions, the present state of the coordination of competition policies through promotion and cooperation at the bi-national and international level and highlighted some examples of more publicized anti competition cases. One observation is that more could be done by the developing NIC nations to increase the collaborative ties of their anti competition policies and organs as well as ensure that they fall under the wider umbrella of regional competition regimes such as in the case of South Africa and the European Union. The necessity to safeguard consumer welfare through effective domestic anti competition frameworks was highlighted in the discussed cartel cases. Time will tell whether the emerging economies will be able to balance competition policy and consumer welfare in an effective and progressive way without affecting their trade and investment policies.