Antitrust & Competition Policy Blog

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

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Monday, April 9, 2012

Mergers and difference-in-difference estimator: why firms do not increase prices?

Posted by D. Daniel Sokol

Juan Luis Jimenez (Facultad de Economía, Empresa y Turismo Universidad de Las Palmas de Gran Canaria) and Jordi Perdiguero (Faculty of Economics, University of Barcelona) ask Mergers and difference-in-difference estimator: why firms do not increase prices?

ABSTRACT: Difference-in-Difference (DiD) methods are being increasingly used to analyze the impact of mergers on pricing and other market equilibrium outcomes. Using evidence from an exogenous merger between two retail gasoline companies in a specific market in Spain, this paper shows how concentration did not lead to a price increase. In fact, the conjectural variation model concludes that the existence of a collusive agreement before and after the merger accounts for this result, rather than the existence of efficient gains. This result may explain empirical evidence reported in the literature according to which mergers between firms do not have significant effects on prices.

April 9, 2012 | Permalink | Comments (0) | TrackBack (0)

Price and quality decisions under network effects

Posted by D. Daniel Sokol

Noemi Navarro (Departement d’economique and GREDI, Universite de Sherbrooke) analyzes Price and quality decisions under network effects.

ABSTRACT: I analyze monopoly pricing and quality decisions under network effects. High quality premium and low quality punishment are found to depend on how the impact of marginal costs on quality relates to the intensity of the network effect and the optimism of the producer about final demand. More precisely, marginal costs have to be low enough (but not too low) with respect to the intensity of the network effects and/or the optimism about final demand so that higher prices reflect higher quality. A similar conclusion can be drawn about incentives for quality provision, whenever quality is considered endogenous together with price.

April 9, 2012 | Permalink | Comments (0) | TrackBack (0)

Search Costs, Demand-Side Economies and the Incentives to merge under Bertrand Competition

Posted by D. Daniel Sokol

Search Costs, Demand-Side Economies and the Incentives to merge under Bertrand Competition.

ABSTRACT: Jose L. Moraga-Gonzalez (VU University Amsterdam) and Vaiva Petrikaite (University of Groningen) address Search Costs, Demand-Side Economies and the Incentives to merge under Bertrand Competition. ABSTRACT: This paper studies the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search for satisfactory deals. In the pre-merger symmetric equilibrium, the probability that a firm is the next one to be visited by a consumer is equal across firms not yet visited. However, in the short-run after a merger, because insiders raise their prices more than what the outsiders do, consumers start searching for good deals at the non-merging stores. Only when they do not find any product satisfactory enough, they continue searching at the merging stores. When search costs are sufficiently large, consumer traffic from the non-merging firms to the merged ones is so small that mergers become unprofitable. This new merger paradox,which is more likely the higher the number of non-merging firms, can be overcome in the mediumto long-run if the merging firms choose to stock their shelves wit! h all the products of the constituent firms, which generates sizable search economies. Such demand-side economies can confer the merging firms a prominent position in the marketplace, in which case their price may even be lower than the price of the outsiders. In that case, consumers visit first the merged entity and the firms outside the merger lose out. Search cost economies may render a merger beneficial for consumers and so overall welfare may increase.

April 9, 2012 | Permalink | Comments (0) | TrackBack (0)

Sunday, April 8, 2012

Net Neutrality in the United States and Europe

Posted by D. Daniel Sokol

Jan Kramer, Lukas Wiewiorra, & Christof Weinhardt (KIT) discuss Net Neutrality in the United States and Europe.

ABSTRACT: The Net Neutrality ("NN") movement essentially believes that the traditions of the internet ecosystem should not be altered. The NN debate originated in the United States, and particularly gained momentum after it became public that large Internet Service Providers ("ISPs") overtly or covertly tried to change some of these traditions. The most prominent acts of alleged NN violations that especially stimulated the debate in the United States were:

The 2005 Madison River Communications case, which accused Madison of blocking voice-over-IP ("VoIP") internet traffic because it was in competition with Madison's regular telephone service; The 2008 Comcast case, which accused Comcast of restricting the flow of peer-to-peer ("P2P") traffic in its networks in order to reduce costs; and The 2005 statement of former ATT CEO Ed Withacre, who announced that, in order to refinance the networks, content and service providers ("CSPs)" should pay an additional fee to the eyeball ISPs where the CSP's traffic terminated.

To understand why these acts are considered a violation of NN, it is important to recapitulate two fundamental traditions of the internet that built the foundation of the NN movement. The first is the best-effort principle, which means that intermediate network nodes (routers) forward internet messages (packages) on a first-come-first-served basis. If routers' queues are full, new incoming packages are deleted and must be resent, again according to first-come-first-served. Therefore, due to the best-effort principle, all packages should be treated equally, independent of their source, destination, or content. Thus, the first and second cases cited above are seen as a violation of the best-effort principle. Second, there is a tradition that CSPs pay only once for being connected to the internet, and not again for being able to deliver their traffic to end customers. The problem is that CSPs usually have a contract with some backbone ISP, who grants them access to the network, but not with the eyeball ISP, who has a terminating monopoly over the end customers. Thus, in the third case, the eyeball ISP wanted to exercise this market power and demanded extra fees from the CSPs.

In this article, we shall look briefly behind the rationale of such violations of NN and discuss whether they are specific to the U.S. internet market, or whether they apply in Europe as well. Finally, we conclude by summarizing the current state of legislation with respect to NN in the United States and Europe.

April 8, 2012 | Permalink | Comments (0) | TrackBack (0)