Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Tuesday, June 12, 2012

Asymetric switching costs can improve the predictive power of shy's model

Posted by D. Daniel Sokol

Evens Salies (Observatoire Francais des Conjonctures Economiques) discusses Asymetric switching costs can improve the predictive power of shy's model.

ABSTRACT: Economists Oz Shy introduced the definition of undercut-proof property (“UPP”) prices in a model of Bertrand competition involving loyal consumers (‘A quick-and-easy method for estimating switching costs’, International Journal of Industrial Organization, Vol. 20, pp. 71-87, 2002). Shy’s seminal paper allows applied researchers to measure the switching costs faced by locked-in consumers. Although there is increasing interest in demonstrating consumer inertia in retail markets opened up to competition, Shy’s approach has not received much attention. The present paper shows that the UPP’s lack of appeal in this context stems from a strong assumption of identical switching costs in the theoretical model, whereas real data are more likely to reveal asymmetric values for these costs. We revisit the UPP by considering asymmetric switching costs straight from the theoretical model. Doing so enables us to show that! more rigorous conditions relating the values of switching costs to market shares are necessary in order for UPP prices to be valid predictions of these costs, which consequently increases the predictive power of Shy’s model. This improvement is illustrated with two examples borrowed from Shy’s paper.

June 12, 2012 | Permalink | Comments (0) | TrackBack (0)

Adam Smith on Monopoly Theory. Making good a lacuna

Posted by D. Daniel Sokol

Neri Salvadori (Pisa) and Rodolfo Signorino (Palermo) have written on Adam Smith on Monopoly Theory. Making good a lacuna.

ABSTRACT: The paper analyzes Adam Smith’s views on monopoly focusing on Book IV and V of The Wealth of Nations and argues that Smith has left his analysis of monopoly in an embryonic form while the majority of scholars have assessed it starting from premises different from those, actually though implicitly, used by Smith to approach this subject. We show that Smith makes use of the word ‘monopoly’ to refer to a heterogeneous collection of market outcomes, besides that of a single seller market, and that Smith’s account of monopolists’ behavior is richer than that provided by later monopoly theorists.

June 12, 2012 | Permalink | Comments (0) | TrackBack (0)

Mixed Oligopoly and Entry

Posted by D. Daniel Sokol

John Bennett (Brunel University) and Manfredi La Manna (St. Andrews) address Mixed Oligopoly and Entry.

ABSTRACT: We analyze a mixed oligopoly with free entry by private firms. It is assumed that a state-owned enterprise (SOE) maximizes an increasing function of output, subject to a break-even constraint. We first show that, because of instability, the industry cannot contain more than one SOE. Then we establish an irrelevance result: if the SOE's cost disadvantage relative to private firms is not too large, then aggregate output, aggreagte costs and welfare are the same with and without the SOE. However, for this range of cost disadvantage an SOE monopoly yields higher welfare. Implications for privatization policy are suggested.

June 12, 2012 | Permalink | Comments (0) | TrackBack (0)

Monday, June 11, 2012

Cartels, Corporate Compliance and What Practitioners Really Think About Enforcement

Posted by D. Daniel Sokol

Out this week is the newest issue of the Antitrust Law Journal. In it is the article D. Daniel Sokol, Cartels, Corporate Compliance and What Practitioners Really Think About Enforcement. I want to be clear about the article to blog readers. I think that DOJ Antitrust has excellent people working for it and has done wonderful work in uncovering lots of global cartels. The surveys I did in the article, however, suggest some problems with the current structure of the leniency program. I do not think that the leniency program is rotten. However, I do think that some additional tinkering may be necessary.

ABSTRACT: This article shows the limitations to the optimal deterrence-inspired cartel enforcement policy currently used by the Department of Justice Antitrust Division. This article employs both quantitative and qualitative survey evidence of cartel practitioners to shed light upon the realities of US cartel enforcement policy. The empirical evidence provided by the practitioner surveys challenges the traditional assumptions behind the success of the DOJ’s cartel program. Perhaps the most interesting finding is that firms regularly game the leniency program to punish their competitors. For various reasons, firms and the DOJ have strong incentives to settle rather than to litigate cases in which the legality of cartel conduct may be in doubt. The surveys also expose limitations to the optimal deterrence framework for firms and individuals regarding incentives and behavior. These findings suggest the need for an enforcement focus on sub-units within the firm as well as various processes to change behavior that would improve enforcement and deterrence. Finally, the surveys suggest certain structural limitations in organizational behavior within firms that have prevented antitrust compliance programs from becoming embedded in a way that would reduce cartel activity. Additionally, this article provides an analysis of media coverage of cartel enforcement from 1990-2009. The analysis suggests that successful enforcement has not created sufficient awareness of cartel behavior among the public. Relative to other types of financial crimes, such as accounting fraud, the public seems unaware or uninterested in cartel activity. The conclusion summarizes the article’s findings and outlines potential future steps in cartel research.

June 11, 2012 | Permalink | Comments (0) | TrackBack (0)

Chile's FNE releases Competition Guidelines for Compliance

Posted by D. Daniel Sokol

The FNE, the Chilean competition law agency, has launched the definitive version of their Guidelines on Competition Law Compliance.

You can find the guidelines here (in Spanish).

The press release and further documents are here (also in Spanish).

The Guidelines are a state-of-the-art document -- they even include the chance to use screens internally to detect cartels. I discuss cartel guidelines and other issues related to detection in my article here.

HT: Javier Tapia

June 11, 2012 | Permalink | Comments (0) | TrackBack (0)

Optimal collusion with limited liability

Posted by D. Daniel Sokol

Etienne Billette de Villemeur, Université de Lille, EQUIPPE, Laurent Flochel, Charles River Associates International and Bruno Versaevel, EMLYON Business School & CNRS, GATE discuss Optimal collusion with limited liability.

ABSTRACT: Collusion sustainability depends on firms' aptitude to impose sufficiently severe punishments in case of deviation from the collusive rule. We extend results from the literature on optimal collusion by investigating the role of limited liability. We examine all situations in which either structural conditions (demand and technology), financial considerations (a profitability target), or institutional circumstances (a regulation) set a lower bound, possibly negative, to firms' profits. For a large class of repeated games with discounting, we show that, absent participation and limited liability constraints, there exists a unique optimal penal code. It commands a severe single-period punishment immediately after a firm deviates from the collusive stage-game strategy. When either the participation constraint or the limited liability constraint bind, there exists an infinity of multi-period punishment paths that permit firms! to implement the optimal collusive strategy. The usual front-loading scheme is only a specific case and an optimal punishment profile can take the form of a price asymmetric cycle. We characterize the situations in which a longer punishment does not perform as a perfect substitute for more immediate severity. In this case the lowest discount factor that permits collusion is strictly higher than without the limited liability constraint, which hinders collusion.

June 11, 2012 | Permalink | Comments (0) | TrackBack (0)

Vertical relations and number of channels in quality-differentiated markets

Posted by D. Daniel Sokol

Emanuele Bacchiega (Univetsity of Grenoble) Olivier Bonroy (Univetsity of Grenoble) address Vertical relations and number of channels in quality-differentiated markets.

ABSTRACT: Double marginalization causes inefficiencies in vertical markets. This paper argues that such inefficiencies may be beneficial to final consumers in markets producing vertically differentiated goods. The rationale behind this result is that enhancing efficiency in high-quality supply chains through vertical integration may drive out of the market low-quality ones, thus affecting market structure. As a consequence, restoring-efficiency vertical integration may reduce consumer surplus, even in the absence of foreclosure strategies by the newly integrated firms. From a policy standpoint, our paper suggests that input and/or customer foreclosure should not be considered as the only source of antitrust concern when assessing the effects of vertical integration.

June 11, 2012 | Permalink | Comments (0) | TrackBack (0)

Why Do Firms Own Production Chains?

Posted by D. Daniel Sokol

Enghin Atalay University of Chicago - Department of Economics, Ali Hortacsu University of Chicago - Department of Economics, Chad Syverson University of Chicago - Department of Economics ask Why Do Firms Own Production Chains? This paper is worth a download.

ABSTRACT: We use broad-based yet detailed data from the economy’s goods-producing sectors to investigate firms’ ownership of production chains. It does not appear that vertical ownership is primarily used to facilitate transfers of goods along the production chain, as is often presumed: Roughly one-half of upstream plants report no shipments to their firms’ downstream units. We propose an alternative explanation for vertical ownership, namely that it promotes efficient intra-firm transfers of intangible inputs. We show evidence consistent with this hypothesis, including the fact that upon a change of ownership, an acquired plant begins to resemble the acquiring firm along multiple dimensions.

June 11, 2012 | Permalink | Comments (0) | TrackBack (0)

Sunday, June 10, 2012

Google in the Crosshairs: To accommodate rent-seeking is the modern function of antitrust. It's no use pretending otherwise.

Posted by D. Daniel Sokol

WSJ Columnist Holman Jenkins offers his thoughts on Google and Antitrust issues in his column Google in the Crosshairs: To accommodate rent-seeking is the modern function of antitrust. It's no use pretending otherwise.

June 10, 2012 | Permalink | Comments (0) | TrackBack (0)