Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Wednesday, December 5, 2012

Collusion and the Organisation of the Firm

Posted by D. Daniel Sokol

Alfredo Burlando and Alberto Motta, University of New South Wales address Collusion and the Organisation of the Firm.

ABSTRACT: Collusive behavior is commonplace in large firms and other complex organizations. This paper shows that the threat of collusion can influence a number of organizational dimensions including outsourcing, allocation of decision rights, and scope of supervision. We use a standard asymmetric information model where a principal hires a productive agent and a manager, and cannot avoid collusion between the two. The optimal response to collusion is a contract that lets the productive agent choose between producing as an independent contractor (no supervision, and no decision rights) or as employee (supervision and decision rights), and eliminates rents from collusion.

December 5, 2012 | Permalink | Comments (0) | TrackBack (0)

Exclusionary Vertical Restraints and Antitrust: Experimental Law and Economics Contributions

Posted by D. Daniel Sokol

Claudia M. Landeo, University of Alberta - Department of Economics, Harvard University - Law School, Yale University - Law School addresses Exclusionary Vertical Restraints and Antitrust: Experimental Law and Economics Contributions.

ABSTRACT: Vertical restraints have been subject of lively policy and academic discussions. Scholars associated with the Chicago School challenged early foreclosure doctrines by arguing that vertical restraints primarily reflected efficiency considerations. More recently, industrial organization economists have used the tools of game theory and information economics to show that these business practices might actually serve anticompetitive purposes. The influence of the new economic theories on antitrust policies has been limited by the complexity of the models and the scarcity of empirical evidence. Experimental law and economics might advance the knowledge of the factors that affect the anticompetitive effects of vertical restraints. Hence, it might strengthen the contributions of academic work to the design and implementation of antitrust policies. This chapter is intended to contribute to the discussion of the exclusionary effects of vertical restraints, and the role of experimental law and economics in antitrust law. Special attention is devoted to vertical integration, exclusive dealing contracts, and tying and bundling practices. Although the experimental literature on exclusionary vertical restraints is relatively recent, the findings from these studies provide important insights. First, this research indicates that vertical restraints might indeed be used as market foreclosure mechanisms. Second, this work identifies previously non-modeled factors that might influence the effects of these business practices. My analysis underscores the importance of combining experimental and behavioral observation with theoretical modeling.

December 5, 2012 | Permalink | Comments (0) | TrackBack (0)

The LIBOR Scandal and Lessons for Antitrust Compliance Programs

Posted by D. Daniel Sokol

David Flower (Grant Thornton) theorizes on The LIBOR Scandal and Lessons for Antitrust Compliance Programs.

ABSTRACT: In June of 2012, when regulators in the United States and United Kingdom announced settlements totaling USD $451,000,000 with Barclays Bank, news that a large bank apparently falsified its submissions used to set the LIBOR index outraged lawmakers and the public in both countries. The revelations, for those just hearing them, seemed particularly shocking-one of the world's largest banks deliberately misstated information used to set the interest rate index relied upon by hundreds of trillions of dollars' worth of financial instruments, consumer and residential loans, and public financing arrangements. That some bank personnel were so cavalier in doing this, reflected in the now all too familiar e-mails ("Always happy to help, leave it with me, sir" and "Done . . . for you big boy" being but two examples of statements from helpful LIBOR submitters) only inflamed a public perception that at least some people at a powerful financial institution had seemingly gone off the ethical rails.

As eye-opening as the LIBOR scandal was for the general public, it was old news for the banking industry, which had been expecting the hammer to eventually drop ever since the Commodity Futures Trading Commission in the United States and the Financial Services Authority in the United Kingdom began large scale LIBOR investigations of a number of large banks in late 2008 and early 2009. That Barclays had long been viewed as possibly one of the least egregious LIBOR manipulators no doubt made the public relations disaster that befell it, as the bank that settled first, all the more painful for that organization.

What is also old news is the apparent compliance and ethical gaps that damaged Barclays-and the broader incentives in the industry that apparently created the environment for such problems at many of the LIBOR panel banks. Although the LIBOR scandal on the surface might strike many outside the industry as a complicated issue involving obscure interest rates, trading and banking issues, and financial products, the story is actually fairly simple: it appears that certain professionals in positions of opportunity, unchecked by adequate internal controls or oversight, falsified information in order to self-deal on behalf of their institutions, and placed information in the public that presented their institutions in a better light.

What can advisors and attorneys counseling companies on antitrust compliance, or the compliance professionals within such companies, take away from this story? The lessons of LIBOR for compliance and ethical professionals are particularly sharp and disappointingly familiar.

December 5, 2012 | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 4, 2012

The effects of price regulation of pharmaceutical industry margins: A structural estimation for anti-ulcer drugs in France

Posted by D. Daniel Sokol

Pierre Dubois (Toulouse) & Laura Lasio (Toulouse)describe The effects of price regulation of pharmaceutical industry margins: A structural estimation for anti-ulcer drugs in France.

ABSTRACT: The objective of this paper is to study the e¤ects of price regulation on competition in the pharmaceutical industry. We provide a method allowing to identify margins in an oligopoly price competition game even when prices may not be freely chosen by …firms. We use our identi…cation strategy to study the effects of regulatory constraints on prices in the pharmaceutical industry which is heavily regulated in particular in France. We use data from the US, Germany and France to identify country speci…c demand models and then recover price cost margins under the regulated price setting constraints on the French market. To do so, we estimate a structural model on the market for anti- ulcer drugs in France that allows us to explore the drivers of demand, to identify whether regulation really a¤ects margins and prices and to relate regulatory reforms to industry pricing equilibrium. We provide the …rst structural estimation of price-cost margins on a regulated market with price constraints and show how to identify unknown possibly binding constraints thanks to three di¤erent markets (US, German and France) with varying regulatory constraints. The identi…ed margins show that margins have increased over time in France but that …rms were specially constrained in price setting after 2004.

December 4, 2012 | Permalink | Comments (0) | TrackBack (0)

Competition and the railroads: A European perspective

Posted by D. Daniel Sokol

Gunter Knieps (Freiberg) explores Competition and the railroads: A European perspective.

ABSTRACT: The reform of European railroads is a time-consuming process strongly characterized by its path-dependency. Firstly, a short outline of the historical roots of the controversial debates on the role of the state and the markets, and the organization of competition in European railroad industries is provided. Secondly, the opening of the market for train services in the context of the liberalization of European transport markets since 1985 is characterized and the regulatory preconditions for competition on the tracks are presented. Thirdly, the evolution of track access regulation in Europe during the last decades is analyzed, differentiating between the period of negotiated third party access since 1991, the introduction of ex ante regulation by the first railroad infrastructure package in 2001, and the danger of overregulation posed by the recent Draft Directive of July 2012 establishing a single European railway area. Fourthly, the role of competition on the markets for rail services and the reform process of interoperability requirements are considered. Finally, competition on the markets for rail services and public subsidies for rail infrastructures as well as subsidies for train services are evaluated.

December 4, 2012 | Permalink | Comments (0) | TrackBack (0)

Non-linear price schedules, demand for health care and response behavior

Posted by D. Daniel Sokol

Helmut Farbmacher (Munich Center for the Economics of Aging) and Joachim Winter (University of Munich, Department of Economics) discuss Non-linear price schedules, demand for health care and response behavior.

ABSTRACT: When health insurance reforms involve non-linear price schedules tied to payment periods (for example, a quarter or a year), the empirical analysis of its effects has to take the within-period time structure of incentives into account. The analysis is further complicated when demand data are obtained from a survey in which the reporting period does not coincide with the payment period. We illustrate these issues using as an example a health care reform in Germany which imposed a perquarter fee of E10 for doctor visits and additionally set an out-of-pocket maximum. This co-payment structure results in an effective spot price for a doctor visit which decreases over time within each payment period. Using this variation, we find a substantial effect of the new fee, in contrast to earlier studies of this reform. Overall, the probability of visiting a physician decreased by around 2.5 percentage points in response to the new fee for doctor visits. We verify the key assumptions of our approach using a separate data set of insurance claims in which the reporting period effects are absent by construction.

December 4, 2012 | Permalink | Comments (0) | TrackBack (0)

The limitations of European Union control of state aid

Posted by D. Daniel Sokol

Alberto Heimler (Scuola Superiore della Pubblica Amministrazione) and Frederic Jenny (ESSEC Business School) analyze The limitations of European Union control of state aid.

ABSTRACT: The European Union (EU) is one of the few jurisdictions in the world that has introduced specific legal provisions for controlling state aid. The treaty provisions are structured in such a way that the Commission is in principle obliged to authorize every single grant of aid. This has proved to be practically impossible, the more so with 27 members of the EU. As a result, the Commission has issued a number of exemption and de minimis rules, for which notification is not required, that suggest that the bulk of state aid is beneficial. In order for state aid policy to become more rigorous, the 2005 State Aid Action Plan rightly enhanced the role of economic analysis. This means rethinking the exemption regulations and the way individual decisions are taken. One important step forward would be to make sure that distortions of competition are noticeable before a state measure is declared incompatible. As a result, at least with respect to individual decisions, EU policy would stop addressing cases where the distortions of competition are minimal. Furthermore, the Commission would stop imposing irrelevant constraints on subsidized forms. This is particularly the case for restructuring aid, where the restoration of the healthiness of the firm is the final objective of the aid. However, even in recent decisions taken as a result of the financial crisis, the Commission uses competition-type considerations only to overcome moral hazard by attaching a number of intrusive conditions to its authorization decisions (prohibition of reducing prices before a competitor does, introduction of capacity or sales caps, merger prohibitions, caps on managers’ salaries, etc.). Very often these conditions reduce, not increase, the probability that these companies restructure successfully. Moral hazard can only be eliminated by not allowing the aid, by limiting the aid to what is strictly necessary, or by making sure that it is a once-and-for-all option, and not by constraining the company from competing.

December 4, 2012 | Permalink | Comments (0) | TrackBack (0)

Quantity Competition vs. Price Competition under Optimal Subsidy in a Mixed Duopoly

Posted by D. Daniel Sokol

Marcella Scrimitore (University of Salento)explains Quantity Competition vs. Price Competition under Optimal Subsidy in a Mixed Duopoly.

ABSTRACT: This paper reconsiders the literature on the irrelevance of privatization in mixed markets, addressing both quantity and price competition in a duopoly with differentiated products. By allowing for partially privatizing a state-controlled firm, we explore competition under different timings of firms’ moves and derive the conditions under which an optimal subsidy allows to achieve maximum efficiency. We show that, while the ownership of the controlled firm is irrelevant when firms play simultaneously, it matters when firms compete sequentially, requiring the leader to be publicly-owned for an optimal subsidy to restore the first-best allocation, irrespective of the mode of competition. The paper also focuses on the extent to which a subsidy is needed to attain the social optimum, highlighting the equivalence between a price (quantity) game with public leadership or simultaneous moves and a quantity (price) game with pri! vate leadership.

December 4, 2012 | Permalink | Comments (0) | TrackBack (0)

Monday, December 3, 2012

From Imitation to Collusion: Long-run Learning in a Low-Information Environment

Posted by D. Daniel Sokol

Daniel Friedman (UCSC), Stephen Huck (WZB and UCL), Ryan Oprea (UBC), and Simon Weidenholzer (U Essex) discuss From Imitation to Collusion: Long-run Learning in a Low-Information Environment.

ABSTRACT: We study long-run learning in an experimental Cournot game with no explicit information about the payout function. Subjects see only the quantities and payouts of each oligopolist after every period. In line with theoretical predictions and previous experimental findings, duopolies and triopolies both reach highly competitive levels, with price approaching marginal cost within 50 periods.

Using the new ConG software, we extend the horizon to 1,200 periods, far beyond that previously investigated. Already after 100 periods we observe a qualitative change in behavior, and quantity choices start to drop. Without pausing at the Cournot-Nash level quantities continue to drop, eventually reaching almost fully collusive levels in duopolies and often reaching deep into collusive territory for triopolies. Fitted models of individual adjustment suggest that subjects switch from imitation of the most protable rival to other behavior that, intentionally or otherwise, facilitates collusion via eective punishment and forgiveness. Remarkably, subjects never learn the best-reply correspondence of the one-shot game. Our results suggest a new explanation for the emergence of cooperation.

December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

Welfare Analysis in Games with substitutabilities

Posted by D. Daniel Sokol

Yann Rebille (LEMNA) and Lionel Richefort (LEMNA) address Welfare Analysis in Games with substitutabilities.

ABSTRACT: This paper investigates the social optimum in network games of strategic substitutes and identifies how network structure shapes optimal policies. First, we show that the socially optimal profile is ob-tained through a combination of two opposite network effects, generated by the incoming and the outgoing weighted Bonacich centrality measures. Next, three different policies that restore the social optimum are derived, and the implications of the predecessor(s)-successor(s) relationship between the agents on each policy instrument are explored. Then, the link between optimal taxes and the density of the network is established.

December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

Competition versus Collusion: The Impact of Consumer Inertia

Posted by D. Daniel Sokol

Bos Iwan, Peeters Ronald and Pot Erik (all Maastricht University) explain Competition versus Collusion: The Impact of Consumer Inertia.

ABSTRACT: We consider a model of dynamic price competition to analyze the impact of consumer inertia on theability of firms to sustain high prices. Three main consequences are identified: (i) maintaininghigh prices does not require punishment strategies when firms are sufficiently myopic, (ii) ifbuyers are sufficiently inert, then high prices can be sustained for all discount factors, and(iii) the ability to maintain high prices may depend non-monotonically on the level of thediscount factor. These results provide a number of valuable insights with regard to competitiveand collusive pricing behavior. For example, our findings suggest that measures aiming at loweringthe degree of consumer inertia may in fact facilitate collusion in network industries.

December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

Powerful Buyers and Merger Enforcement

Posted by D. Daniel Sokol

John B. Kirkwood, Seattle University School of Law has written on Powerful Buyers and Merger Enforcement.

ABSTRACT: Although large buyers like Walmart and Tyson Foods occupy important positions in the American economy, antitrust law remains focused on the conduct of sellers. Moreover, when mergers of buyers have been challenged, the cases have been based on a single theory – that the merger would create a dominant buyer (or group of buyers) that would exploit small, powerless suppliers. Most powerful buyers, however, face suppliers with power of their own, and in such cases, the buyers exert “countervailing power,” which can also be anticompetitive. Yet buyer mergers that reduce competition through the exercise of countervailing power are not addressed by the government’s guidelines, the leading treatises, or the case law.

This article provides a comprehensive analysis of the role of buyer power in merger enforcement. It defines the types of buyer power, describes their competitive effects, and reviews an array of evidence. It also discusses the traditional approach to buyer mergers, suggesting modifications to better reflect the true dynamics of buyer power. Most important, it recommends that courts and enforcement agencies halt mergers that enhance anticompetitive countervailing power. Because many buyer combinations that increase such power are beneficial, the article identifies ten situations in which a merger that augments countervailing power would reduce competition and diminish the welfare of consumers, suppliers, or society.

December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

Response to FairSearch's Remedy Proposals

Posted by D. Daniel Sokol

David Balto offers a Response to FairSearch's Remedy Proposals.

December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

8th International Summer School & Conference in Competition & Regulation - CRESSE 2013

Posted by D. Daniel Sokol

CALL FOR APPLICATIONS
8th International Summer School & Conference in Competition & Regulation
CRESSE 2013
Corfu, Greece, June 29th – July 12th, 2013 (Conference 5th -7th July 2013)
Venue: GRECOTEL CORFU IMPERIAL EXCLUSIVE RESORT

THE CRESSE SUMMER SCHOOL
(29th June to 12th July 2013)
The Athens University of Economics and Business is happy to announce the 8th European Summer School and Conference in
Competition and Regulation
(CRESSE) that will be held in the island of Corfu (Greece), from June 29th to July 12th 2013.
As in previous years, the CRESSE 2013 Summer School aspires to provide an intellectually and professionally rewarding experience for all its participants.
The
CRESSE Faculty consists of some of the very top European and USA economists and legal experts in Competition and Regulation (including J. Harrington, B. Lyons, M. Peitz, F. Verboven) from over 25 distinguished Universities as well as from law practices, authorities and economic consultancies.

December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

Market Power, Efficiencies, and Entry - Evidence from an Airline Merger

Posted by D. Daniel Sokol

Kai Huschelrath, Centre for European Economic Research (ZEW) and Kathrin Mueller, Centre for European Economic Research (ZEW) provide Market Power, Efficiencies, and Entry - Evidence from an Airline Merger.

ABSTRACT: We investigate the competitive effects of the merger between Delta Air Lines and Northwest Airlines (2009) in the domestic U.S. airline industry. Applying fixed effects regression models we find that the transaction led to short term price increases of about 11 percent on overlapping routes and about 10 percent on routes which experienced a merger-induced switch of the operating carrier. Over a longer period, however, our analysis reveals that both merger efficiencies and post-merger entry by competitors initiated a downward trend in prices leaving consumers with a small net price increase of about 3 percent on the affected routes.

December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

Quantification of Harm to Competition by National Courts and Competition Agencies

Posted by D. Daniel Sokol

Competition authorities and courts are often called upon to quantify the harm to competition or the damages suffered by private parties due to anticompetitive conduct. An OECD roundtable discussion among competition authorities revealed that there is little disagreement about the quantitative methods used to measure harm, but some disagreement about whether it is useful for competition agencies to quantify harm in the first place.

Quantification of Harm to Competition by National Courts and Competition Agencies is a compilation of the materials presented and discussed at a Competition Committee roundtable held in February 2011. This publication includes: a background note by Hans W. Friederiszick and Elisabeth Fugger, an executive summary, an aide-mémoire of that discussion, a contribution from Prof. Herbert Hovenkamp as well as 17 national contributions.

December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

Brand Name and Private Label Price Setting by a Monopoly Store

Posted by D. Daniel Sokol

Jeffrey M. Perloff (Berkeley), Jeffrey T. LaFrance (Monash University) and Hayley H. Chouinard (Washington State University) discuss Brand Name and Private Label Price Setting by a Monopoly Store.

ABSTRACT: A monopoly that sells to brand-name loyal customers and to price-sensitive customers must decide whether to carry both name-brand and a private-label products and how much to charge. The monopoly may charge either more or less for the brand name if it carries a private label, and the price differential between the products is sensitive to cost and taste parameters.

December 3, 2012 | Permalink | Comments (0) | TrackBack (0)

Sunday, December 2, 2012

International Co-operation in Cartel Investigations

Posted by D. Daniel Sokol

The OECD has published Improving International Co-operation in Cartel Investigations, a compilation of the materials presented and discussed at a Global Forum on Competition roundtable held in February 2012. This publication includes an executive summary and a summary of discussion, over 25 national contributions and a background note by the OECD Secretariat.

December 2, 2012 | Permalink | Comments (0) | TrackBack (0)