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 24, 2012

Entry and Competition in Differentiated Products Markets

Posted by D. Daniel Sokol

Catherine Schaumans, Tilburg University and rank Verboven, Katholieke Universiteit Leuven - Faculty of Business and Economics (FBE) have written on 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 24, 2012 | Permalink | Comments (0) | TrackBack (0)

Firm Market Power and the Earnings Distribution

Posted by D. Daniel Sokol

Douglas A. Webber, Cornell University explores Firm Market Power and the Earnings Distribution.

ABSTRACT: Using the Longitudinal Employer Household Dynamics (LEHD) data from the United States Census Bureau, I compute firm-level measures of labor market (monopsony) power. To generate these measures, I extend the dynamic model proposed by Manning (2003) and estimate the labor supply elasticity facing each private non-farm firm in the US. While a link between monopsony power and earnings has traditionally been assumed, I provide the first direct evidence of the positive relationship between a firm's labor supply elasticity and the earnings of its workers. I also contrast the semi-structural method with the more traditional use of concentration ratios to measure a firm's labor market power. In addition, I provide several alternative measures of labor market power which account for potential threats to identification such as endogenous mobility. Finally, I construct a counter-factual earnings distribution which allows the effects of firm market power to vary across the earnings distribution. I estimate the average firm's labor supply elasticity to be 1.08, however my findings suggest there to be significant variability in the distribution of firm market power across US firms, and that dynamic monopsony models are superior to the use of concentration ratios in evaluating a firm's labor market power. I find that a one-unit increase in the labor supply elasticity to the firm is associated with wage gains of between 5 and 18 percent. While nontrivial, these estimates imply that firms do not fully exercise their labor market power over their workers. Furthermore, I find that the negative earnings impact of a firm's market power is strongest in the lower half of the earnings distribution, and that a one standard deviation increase in firms' labor supply elasticities reduces the variance of the earnings distribution by 9 percent.

January 24, 2012 | Permalink | Comments (0) | TrackBack (0)

AAI White Paper on Restrictive Paperless Tickets

Posted by D. Daniel Sokol

The American Antitrust Institute presented the U.S. Federal Trade Commission and several State Attorneys General a 71-page white paper. Download it here.

January 24, 2012 | Permalink | Comments (0) | TrackBack (0)

Inefficiencies in the sale of ideas: theory and empirics

Posted by D. Daniel Sokol

Marie-Laure Allain (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X),Emeric Henry (Sciences Po - Department of Economics) and Margaret Kyle (TSE - Toulouse School of Economics - Toulouse School of Economics) discuss Inefficiencies in the sale of ideas: theory and empirics.

ABSTRACT: The sale of ideas (e.g. through licensing) facilitates vertical specialization and the division of labor between research and development. This specialization can improve the overall efficiency of the innovative process. However, these gains depend on the timing of the sale: the buyer of an idea should assume development at the stage at which he has an efficiency advantage. We show that in an environment with asymmetric information about the value of the idea and where this asymmetry decreases as the product is developed, the seller of the idea may delay the sale to the more efficient firm, thus incurring higher development costs. We obtain a condition for the equilibrium timing of the sale and examine how factors such as the intensity of competition between potential buyers influence it. Empirical analysis of licensing contracts signed between firms in the pharmaceutical industry supports our theoretical predictions.

January 24, 2012 | Permalink | Comments (0) | TrackBack (0)

Monday, January 23, 2012

Learning and Collusion in New Markets with Uncertain Entry Costs

Posted by D. Daniel Sokol

Francis Bloch (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X), Simona Fabrizi (Massey University - SIERC) and Steffen Lippert (University of Otago - Department of Economics) address Learning and Collusion in New Markets with Uncertain Entry Costs.

ABSTRACT: This paper analyzes an entry timing game with uncertain entry costs. Two firms receive costless signals about the cost of a new project and decide when to invest. We characterize the equilibrium of the investment timing game with private and public signals. We show that competition leads the two firms to invest too early and analyze collusion schemes whereby one firm prevents the other firm from entering the market. We show that, in the efficient collusion scheme, the active firm must transfer a large part of the surplus to the inactive firm in order to limit preemption.

January 23, 2012 | Permalink | Comments (0) | TrackBack (0)

Measuring Consumers' Attachment to Geographical Indications: Implications for Competition Policy

Posted by D. Daniel Sokol

Daniel Hassan TSE (GREMAQ-INRA), Sylvette Monier-Dilhan TSE (GREMAQ-INRA) and Valerie Orozco TSE (GREMAQ-INRA) have written on Measuring Consumers' Attachment to Geographical Indications: Implications for Competition Policy.

ABSTRACT: Geographical Indications (GIs) are considered as upmarket products because they are based on tradition and convey information about their geographical origin. Otherwise, the limitation of the geographical areas devoted to GIs and the exclusivity they benefit on the product lead to suspicions of monopoly power. Quality and market power should however reflect a stronger attachment, making consumers less price sensitive than for standard goods. This research aims to compare theses conjectures to empirical measures concerning the French cheese market. Price elasticities are computed from a demand model on 21 products, 11 Protected Designation of Origin (PDO) products and 10 non PDOs. The results are counterintuitive, PDOs being as price elastic as or more price elastic than standard products. This finding thus challenges the widespread idea that PDOs systematically correspond to high quality. It also has important implications in terms of competition policy, showing that PDO cheeses suppliers cannot decide on price increases without suffering large reductions in demand.

January 23, 2012 | Permalink | Comments (0) | TrackBack (0)

Does Inter-Market Competition Lead to Less Regulation?

Posted by D. Daniel Sokol

Sarah Draus (CSEF) asks Does Inter-Market Competition Lead to Less Regulation?

ABSTRACT: This paper presents a model to analyze the consequences of competition in order-flow between a profit maximizing stock exchange and an alternative trading platform on the decisions concerning trading fees and listing requirements. Listing requirements, set by the exchange, provide public information on listed firms and contribute to a better liquidity on all trading venues. It is sometimes asserted that competition induces the exchange to lower its level of listing standards compared to a situation in which it is a monopolist, because the trading platform can free-ride on this regulatory activity and compete more aggressively on trading fees. The present analysis shows that this is not always true and depends on the existence and size of gains related to multi market trading. These gains relax competition on trading fees. The higher these gains are, the more the exchange can increase its revenue from listing and trading ! when it raises its listing standards. For large enough gains from multi-market trading, the exchange is not induced to lower the level of listing standards when a competing trading platform appears. As a second result, this analysis also reveals a cross - subsidization effect between the listing and the trading activity when listing is not competitive. This model yields implications about the fee structures on stock markets, the regulation of listings and the social optimality of competition for volume.

January 23, 2012 | Permalink | Comments (0) | TrackBack (0)

Evaluation of the Risks of Collective Dominance in the Audit Industry in France

Posted by D. Daniel Sokol

Olivier Billard (Bredin Prat), Marc Ivaldi (Toulouse School of Economics) and Sebastien Mitraille (Toulouse Business School) discuss Evaluation of the Risks of Collective Dominance in the Audit Industry in France.

ABSTRACT: The financial crisis drew attention to the crucial role of transparency and the independence of financial certification intermediaries, in particular, statutory auditors. Now any anticompetitive practice involving coordinated increases in prices or concomitant changes in quality that impacts financial information affects the effectiveness of this intermediation. It is therefore not surprising that the competitive analysis of the audit market is a critical factor in regulating financial systems, all the more so as this market is marked by various barriers to entry, such as the incompatibility of certification tasks with the preparation of financial statements or consulting, the expertise on (and the ability to apply) international standards for the presentation of financial information, the need to attract top young graduates, the prohibition of advertising, or the two-sided nature of this market where the quality of fina! ncial information results from the interaction between the reputation of auditors and audited firms. Against this backdrop, we propose a legal and economic study of the risks of collective dominance in the statutory audit market in France using the criteria set by Airtours case and, in particular, by analyzing how regulatory obligations incumbent on statutory auditors may favour the appearance of tacit collusion. Our analysis suggests that nothing prevents collective dominance of the auditors of the Big Four group in France to exist, which is potentially detrimental to the economy as a whole as the audit industry may fail to provide the optimal level of financial information.

January 23, 2012 | Permalink | Comments (0) | TrackBack (0)