Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Tuesday, January 17, 2012

Marching Through the Next Twenty Years: Recent Developments of the Taiwan Fair Trade Law

Posted by D. Daniel Sokol

Andy Chen, Chung Yuan Christian University has written on Marching Through the Next Twenty Years: Recent Developments of the Taiwan Fair Trade Law.

ABSTRACT: The year 2012 marks the 20th anniversary of the enactment of the Taiwan Fair Trade Law ("FTL"). Since its inception, the law has undergone five major changes, including the most recent amendments of 2011. Recent developments of the FTL reflect both the experiences of the Taiwan Fair Trade Commission ("TFTC") and its intention to improve the effectiveness of law enforcement.

January 17, 2012 | Permalink | Comments (0) | TrackBack (0)

Entry and Competition in Differentiated Products Markets

Posted by D. Daniel Sokol

Catherine Schaumans, Tilburg University and Frank Verboven, Catholic University of Leuven (KUL) - Department of Applied Economics describe Entry and Competition in Differentiated Products Markets.

ABSTRACT: We propose a methodology for estimating the competition effects from entry when firms sell differentiated products. We first derive precise conditions under which Bresnahan and Reiss' entry threshold ratios (ETRs) can be used to test for the presence and to measure the magnitude of competition effects. We then show how to augment the traditional entry model with a revenue equation. This revenue equation serves to adjust the ETRs by the extent of market expansion from entry, and leads to unbiased estimates of the competition effects from entry. We apply our approach to seven different local service sectors. We find that entry typically leads to significant market expansion, implying that traditional ETRs may substantially underestimate the competition effects from entry. In most sectors, the second entrant reduces markups by at least 30%, whereas the third or subsequent entrants have smaller or insignificant effects. In one sector, we find that even the second entrant does not reduce markups, consistent with a recent decision by the competition authority.

January 17, 2012 | Permalink | Comments (0) | TrackBack (0)

Monday, January 16, 2012

Mergers, Market Dominance and the Lundbeck Case

Posted by D. Daniel Sokol

Herb Hovenkamp (Iowa Law) has written on Mergers, Market Dominance and the Lundbeck Case.

ABSTRACT: In Lundbeck the Eighth Circuit affirmed a district court’s judgment that a merger involving the only two drugs approved for treating a serious heart condition in infants was lawful. Although the drugs treated the same condition they were not bioequivalents. The Eighth Circuit approved the district court’s conclusion that they had not been shown to be in the same relevant market.

Most mergers that are subject to challenge under the antitrust laws occur in markets that exhibit some degree of product differentiation. The Lundbeck case illustrates some of the problems that can arise when courts apply ideas derived from models of perfect competition to settings where they do not apply. Customer evidence produced in the litigation indicates that user responses in such situations will be arrayed over space and time in a complex fashion – a fact confirmed by the defendant’s own marketing strategies. This is not a situation in which virtually all customers immediately drop one brand in response to the other’s price cut, or where none of them does. As soon as we know that differentiation exists it makes little sense to state categorically that two products are not in the same market until we can ascertain with some certainty that the demand for one is unresponsive – across the full range of consumers – to the price of the other. As soon as we know that some customers are on the margin, however, then it becomes necessary to determine whether they are a sufficient constraint on pricing to warrant merger concern. The enormous post-merger price increase in the Lundbeck case provides a clear answer.

By relying on the testimony of a small group of customers – essentially permitting them to speak for all – the district court erroneously applied a tool that might make sense in a market for a fungible product to one that was in fact significantly differentiated. Even assuming that the two products were not in the same market, however, Lundbeck represents an acquisition of a potentially competing drug by a monopolist – something that should invite harsh antitrust scrutiny, particularly in a case such as this one where there were no serious claims of efficiencies.

January 16, 2012 | Permalink | Comments (0) | TrackBack (0)

Antitrust Enforcement and Marginal Deterrence

Posted by D. Daniel Sokol

Harold E. D. Houba, VU University Amsterdam - Department of Econometrics, Tinbergen Institute, Evgenia Motchenkova, VU University Amsterdam - Department of Economics, TILEC, and Quan Wen, Vanderbilt University - College of Arts and Science - Department of Economics have written on Antitrust Enforcement and Marginal Deterrence.

ABSTRACT: We study antitrust enforcement in which the fine must obey four legal principles: punishments should fit the crime, proportionality, bankruptcy considerations, and minimum fines. We integrate these legal principles into an infinitely-repeated oligopoly model. Bankruptcy considerations ensure abnormal cartel profits. We derive the optimal fine schedule that achieves maximal social welfare under these legal principles. This optimal fine schedule induces collusion on a lower price making it more attractive than on higher prices. Also, raising minimum fines reduces social welfare and should never be implemented. Our analysis and results relate to the marginal deterrence literature by Shavell (1992) and Wilde (1992).

January 16, 2012 | Permalink | Comments (0) | TrackBack (0)

Wireless Carriers’ Exclusive Handset Arrangements: An Empirical Look at the iPhone

Posted by D. Daniel Sokol

Ting Zhu, University of Chicago, Hongju Liu, University of Connecticut, and Pradeep K. Chintagunta, University of Chicago have written on Wireless Carriers’ Exclusive Handset Arrangements: An Empirical Look at the iPhone.

ABSTRACT: Since the Apple iPhone’s first launch in 2007 with an exclusive arrangement with AT&T, it has garnered overwhelmingly positive responses from consumers and from the media. With its success, exclusive contracts between handset makers and wireless carriers have come under increasing scrutiny by regulators and lawmakers. Such practices have been criticized by regulators, by the media, and by “locked-out” consumers, due to the fact that a consumer has to subscribe to a particular service provider if he or she strongly prefers one handset to others. In this paper, we empirically examine the impact of handset exclusivity arrangements on consumer welfare. First we study consumers’ purchase decisions in mobile services that include the choice of a handset and of a service provider. We do so by combining survey data on consumers’ purchase decisions with supplemented data on prices and features of common handsets. Next, assuming a Stackelberg leader-follower relationship between the handset manufacturers and the service providers, and using our demand estimates, we recover the marginal costs for the players in the market. We then simulate what would have happened in the counterfactual scenario when the iPhone is available from all carriers. Our results suggest that, if we take into account price adjustments from handset manufacturers and service providers in response to the change in market structure, consumer welfare will increase by $326 million without the exclusive arrangement. We view our analysis as a starting point to a more complete characterization of consumer behavior and the complex relationships among players in this industry.

January 16, 2012 | Permalink | Comments (0) | TrackBack (0)

Entry and Exit Behavior in the Absence of Sunk Costs: Evidence from a Price Comparison Site

Posted by D. Daniel Sokol

Michelle Haynes, University of Nottingham and Steve R. Thompson, University of Nottingham have written on Entry and Exit Behavior in the Absence of Sunk Costs: Evidence from a Price Comparison Site.

ABSTRACT: This paper explores entry and exit at a price comparison site (PCS) where the sunk costs of participation are effectively zero. We first use a panel of 295 products on NexTag.com to estimate an error correction model of net entry. While the results support our characterization of the PCS as a zero sunk cost market in which potential sellers behave as Kirznerian entrepreneurs, in responding to opportunities, it is clear the net entry flow involves participants with widely differing behavior. This is investigated by examining exit and re-entry decisions at the seller level which reveal that size and reputation determine individual responses to market opportunities.

January 16, 2012 | Permalink | Comments (0) | TrackBack (0)

Sunday, January 15, 2012

Introducing Another Sokol (or Why I Don't Sleep)

Posted by D. Daniel Sokol

You would not notice by the posts (which are set automatically to appear every day through mid-February) but the Sokol family has big news to report. My wife and I are the proud parents of a baby girl. This makes us three for three in the girl department. I need sleep and have not slept much at all for the last few days. You would think that with the third child I knew what I was getting into this time. However, the lack of sleep the last two times made me forget. What this sounds like is the beginning of a Garcia Marquez story ... What it means is that ultimately the loss of sleep is irrelevant.

5 Sokols

January 15, 2012 | Permalink | Comments (9) | TrackBack (0)