Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Monday, May 14, 2012

Credit Rating Agencies and Competition Law

Posted by D. Daniel Sokol

Nicolas Petit & Norman Neyrinck (University of Liege School of Law (ULg) discuss Credit Rating Agencies and Competition Law. ABSTRACT: It will have taken policy makers an extra financial crisis to realize that financial markets should not be hostage of the predictions of the "big three" credit rating agencies (the "CRAs"), i.e. Moody's Investors Services, Standard & Poor's, and Fitch ratings. Pluralism in ratings is the new mantra of regulatory proposals in the European Union ("EU") and the United States. And controversial proposals abound, with calls to dismantle the existing CRAs or to set-up public, State-sponsored rating agencies.

Interestingly, while all the evidence points to the existence of a competition problem in the rating industry, almost nothing has been written on whether the CRAs could be amenable to antitrust scrutiny. This is all the more surprising. From an economic standpoint, the credit rating industry exhibits structural-i.e., a tight oligopoly-and behavioral-i.e., ratings parallelism-features that routinely give rise to antitrust concerns. And from a legal standpoint, the competition rules are a very elastic instrument, which can: (i) be triggered ex officio under flexible conditions and at little costs; and (ii) lead to the adoption of remedies that often come close to standard regulatory obligations.

In this context, this paper seeks to assess the possibility of competition intervention in the credit ratings industry. Given that competition law does not prohibit oligopolistic market structures as such, a necessary trigger for antitrust enforcement is the existence of a course of conduct that either constitutes unlawful collusion under Article 101 the Treaty on the functioning of the EU ("TFEU"), or abuse of dominance under Article 102 TFEU. In the following sections we formulate hypothesis of infringements under Articles 101 and 102 TFEU, gauge their factual plausibility, and assess their legal vulnerability to competition proceedings. Obviously, it would be beyond the scope of this paper to screen the various activities of CRAs that may give rise to a competition infringement. We thus focus only on whether CRAs' recent downgrading of sovereign ratings can trigger antitrust liability.

May 14, 2012 | Permalink | Comments (0) | TrackBack (0)

Howard Shelanski named Director of FTC Bureau of Economics

Posted by D. Daniel Sokol

Howard Shelanski (Georgetown Law), perhaps the best antitrust law scholar of his generation will rejoin the FTC as the Director of FTC's Bureau of Economics. See here for the press release. This is Howard's second stint at the FTC. He recently returned to Georgetown after a stint as Deputy Director for Antitrust in the FTC's Bureau of Economics. Howard is incredibly smart and has pushed his scholarship in innovative and policy relevant ways in the areas of antitrust-innovation, transaction cost economics, and antitrust-regulated industries. Additionally, Howard is a really nice guy and a great communicator of economic ideas to legal practice. Howard is the co-author of one of the leading (and my understanding, the best selling) antitrust case book Antitrust Law, Policy and Procedure: Cases, Materials, Problems with Tom Sullivan and Herb Hovenkamp. This is an excellent choice for the FTC.

May 14, 2012 | Permalink | Comments (0) | TrackBack (0)

Driving competition in local gasoline markets

Posted by D. Daniel Sokol

Jordi Perdiguero (Universitat de Barcelona) and Joan-Ramon Borrell (Universitat de Barcelona) describe Driving competition in local gasoline markets.

ABSTRACT: Relevant market definition is still a key element of economic analysis of competition in the gasoline market. It is particularly difficult to handle when competition is local and market power is geographically constrained like is the case in the gasoline market. We analyse how the application of the hypothetical monopolist or Small but Significant Non-Transitory Increase in Prices (SSNIP) test performs for defining isochrones using only information on prices and distance among competitors. We conclude that geographic information systems can be very successfully used to define more precisely relevant geographic market in the gasoline retailing. The application to the Spanish gasoline market concludes that geographic relevant market is composed by 5-6 minutes of travel time. Localised market power should be taken into account when analysing the adverse effects of mergers and entry regulations in gasoline retailing. Only dr! awing small enough isochrones will drive competition in local markets because it is just close rivals that compete effectively with each other.

May 14, 2012 | Permalink | Comments (0) | TrackBack (0)

A Model of Recommended Retail Prices

Posted by D. Daniel Sokol

Dmitry Lubensky (Department of Business Economics and Public Policy, Indiana University Kelley School of Business) offers A Model of Recommended Retail Prices.

ABSTRACT: Manufacturers frequently use list prices, suggested retail prices, or other similar forms of non-binding public price recommendations. Despite the prevalence of this practice, why manufacturers make these recommendations and what effect they have on actual prices is still not well understood. I present a model in which price recommendations convey information to consumers about aggregate market conditions. The manufacturer uses recommendations to directly affect consumers' search decisions and thus to indirectly affect the prices set by retailers. The manufacturer faces a tradeoff when influencing search: inducing lower reservation prices reduces retailer markups but also inhibits the manufacturer's ability to extract surplus from consumers with a high willingness to pay. I show that the manufacturer can credibly provide information through cheap talk. Furthermore, I find that a ban on recommendations can be welfare reducing, harming both consumers and the manufacturer. Lastly, I argue that price recommendations are not simply a substitute for price restraints and allow the manufacturer to achieve outcomes that are not attainable with resale price maintenance alone.

May 14, 2012 | Permalink | Comments (0) | TrackBack (0)

Hospital competition with soft budgets

Posted by D. Daniel Sokol

Kurt R. Brekke (Dept. of Economics, Norwegian School of Economics and Business Administration), Luigi Siciliani (University of York) and Odd Rune Straume (University of Minho) discuss Hospital competition with soft budgets.

ABSTRACT: We study the incentives for hospitals to provide quality and expend cost-reducing effort when their budgets are soft, i.e., the payer may cover deficits or confiscate surpluses. The basic set up is a Hotelling model with two hospitals that differ in location and face demand uncertainty, where the hospitals run deficits (surpluses) in the high (low) demand state. Softer budgets reduce cost efficiency, while the effect on quality is ambiguous. For given cost efficiency, softer budgets increase quality since parts of the expenditures may be covered by the payer. However, softer budgets reduce cost-reducing effort and the profit margin, which in turn weakens quality incentives. We also find that profit confiscation reduces quality and cost-reducing effort. First best is achieved by a strict no-bailout and no-profit-confiscation policy when the regulated price is optimally set. However, for suboptimal prices a more lenient bailout policy can be welfare improving.

May 14, 2012 | Permalink | Comments (0) | TrackBack (0)

Can competition reduce quality?

Posted by D. Daniel Sokol

Kurt R. Brekke (Dept. of Economics, Norwegian School of Economics and Business Administration) and Luigi Siciliani (University of York), Odd Rune Straume (University of Minho) ask Can competition reduce quality?

ABSTRACT: We study the e¤ect of competition on quality in markets such as health care, long-term care and education, when providers choose both prices and quality in a setting of spatial competition. We o¤er a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and risk-averse. Our proposed mechanism can help explain several empirical findings of a negative e¤ect of competition on quality.

May 14, 2012 | Permalink | Comments (0) | TrackBack (0)

Sunday, May 13, 2012

Reasons to Reject a "No Injunctions" Rule for SEPS and FRAND-Obligated Patents

Posted by D. Daniel Sokol

Hill Wellford (Bingham McCutchen) offers Reasons to Reject a "No Injunctions" Rule for SEPS and FRAND-Obligated Patents.

ABSTRACT: Government officials, academics, and some industry participants recently have suggested that holders of so-called "standards-essential patents" ("SEPs"), meaning patents that are technically essential to the practice of technology standards, should be prohibited from seeking injunctive relief against products that infringe by implementing such standards. This prohibition would apply particularly with respect to patents that are subject to FRAND (fair, reasonable and non-discriminatory) licensing commitments and would apply in all situations, including defensive use and use during cross-licensing negotiations.

In my view, such a rule would be misguided. This no-injunction idea appears to spring from a serious misunderstanding of the nature of FRAND obligations, the likely long-term consequences of imposing additional burdens on innovators who participate in the standard-setting process, and the current state of technology markets. The misunderstanding appears to derive from five basic errors, which I hope to help correct by discussing each below.

May 13, 2012 | Permalink | Comments (0) | TrackBack (0)