Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Saturday, July 6, 2013

Competition and Payment Systems

Posted by D. Daniel Sokol

The OECD has published a policy roundtable on Competition and Payment Systems.

July 6, 2013 | Permalink | Comments (0) | TrackBack (0)

Friday, July 5, 2013

Airlines' Strategic Interactions and Airport Pricing in a Dynamic Bottleneck Model of Congestion

Posted by D. Daniel Sokol

Hugo E. Silva (VU University Amsterdam) Erik T. Verhoef (VU University Amsterdam) and Vincent A.C. van den Berg (VU University Amsterdam) address Airlines' Strategic Interactions and Airport Pricing in a Dynamic Bottleneck Model of Congestion.

ABSTRACT: This paper analyzes airlines' strategic interactions and airport efficient pricing, with a deterministic bottleneck model of congestion, in Cournot-Nash competition and in sequential competition where a Stackelberg leader interacts with perfectly competitive airlines. We show that the internalization of self-imposed congestion by non-atomistic carriers is consistent with earlier literature based on static models of congestion, but the congestion tolls are not. The tolls derived for fully atomistic airlines achieve the social optimum, when charged to all carriers, in the simultanous setting as well as in the sequential setting. We also find that alternative efficient pricing schemes exist for the sequential competition between a dominant airline and a competitive follower. The analysis suggests that airport congestion pricing has a more signicant role than what previous studies have suggested. Moreover, the financial defi! cit under optimal pricing may be less severe than what earlier studies suggest, as congestion toll revenues may cover optimal capacity investments. Political feasibility would be enhanced as ecient congestion charges do not depend on market shares and therefore may not be perceived as inequitable.

July 5, 2013 | Permalink | Comments (0) | TrackBack (0)

Competition in Multi-Modal Transport Networks: A Dynamic Approach

Posted by D. Daniel Sokol

Adriaan Hendrik van der Weijde (VU University Amsterdam), Erik T. Verhoef (VU University Amsterdam), and Vincent van den Berg (VU University Amsterdam) describe Competition in Multi-Modal Transport Networks: A Dynamic Approach.

ABSTRACT: We analyse the behaviour of market participants in a multi-modal commuter network where roads are not priced, but public transport has a usage fee, which is set while taking the effects on the roads into account. In particular, we analyse the difference between markets with a monopolistic public transport operator, which operates all public transport links, and markets in which separate operators own each public transport link. To do so, we consider a simple transport network consisting of two serial segments and two parallel congestible modes of transport. We obtain a reduced form of the public transport operator's optimal fare setting problem and show that, even if the total travel demand is inelastic, serial Bertrand-Nash competition on the public transport links leads to different fares than a serial monopoly; a result not observed in a static model. This results from the fact that trip timing decisions, and therefor! e the generalized prices of all commuters, are influenced by all fares in the network. We then use numerical simulations to show that, contrary to the results obtained in classic studies on vertical competition, monopolistic fares are not always higher than duopolistic fares; the opposite can also occur. We also explore how different parameters influence the price differential, and how this affects welfare.

July 5, 2013 | Permalink | Comments (0) | TrackBack (0)

Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending

Posted by D. Daniel Sokol

Stefan Arping (University of Amsterdam) has written on Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending.

ABSTRACT: In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships become "too cozy", interest rates rise, and loan performance deteriorates.

July 5, 2013 | Permalink | Comments (0) | TrackBack (0)

Thursday, July 4, 2013

Devising Loyalty Rebates that Comply with the As-Efficient-Competitor Test

Posted by D. Daniel Sokol

Hans Zenger (CRA) is Devising Loyalty Rebates that Comply with the As-Efficient-Competitor Test.

ABSTRACT: This article discusses the use of the as-efficient-competitor test in the assessment of single-product rebates under Article 102 TFEU. Section I first summarizes the practical experience with the test three years after its official introduction. Section II then outlines how firms can devise pro-competitive rebates that comply with the as-efficient-competitor test in an effective way. Section III, finally, assesses what regulators can do to ensure legal certainty under the effects-based approach toward loyalty rebates.

July 4, 2013 | Permalink | Comments (0) | TrackBack (0)

The Role of Switching Costs in Antitrust Analysis: A Comparison of Microsoft and Google

Posted by D. Daniel Sokol

Aaron Edlin (Berkeley) and Robert G. Harris (Berkeley) have an interesting paper on The Role of Switching Costs in Antitrust Analysis: A Comparison of Microsoft and Google.

ABSTRACT: Is Google the new Microsoft? Many think it is, and in particular there has been a chorus of competition complaints (ironically many originating from Microsoft) that assert that Google's conduct and position today is quite parallel to Microsoft's position in the "Microsoft case," the case brought by the Department of Justice in 1998.

We contend in this article, however, that there is a central difference which should remain in constant focus in any antitrust analysis. The cost of a user switching from Google Search to another search engine is trivial compared to the cost of a user switching from Microsoft Windows to another operating system in 1998. Moreover, in the Microsoft case, the government's theory was that Microsoft was taking strategic actions to maintain high switching costs by maintaining an "applications barrier to entry." There is no parallel with Google, and the implication as we shall explain is that Google Search, if it poses any threat today, does not pose the same antitrust threat that Microsoft Windows posed in 1998. In this article we explore the importance of high switching costs in the Microsoft case and in antitrust cases more generally; we shall also explain the criticality of the absence of significant costs for users switching from Google Search.

July 4, 2013 | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 3, 2013

Screening for Collusion: A Spatial Statistics Approach

Posted by D. Daniel Sokol

Pim Heijnen (University of Groningen), Marco A. Haan (University of Groningen) and Adriaan R. Soetevent (University of Amsterdam) offer Screening for Collusion: A Spatial Statistics Approach.

ABSTRACT: We develop a method to screen for local cartels. We first test whether there is statistical evidence of clustering of outlets that score high on some characteristic that is consistent with collusive behavior. If so, we determine in a second step the most suspicious regions where further antitrust investigation would be warranted. We apply our method to build a variance screen for the Dutch gasoline market.

July 3, 2013 | Permalink | Comments (0) | TrackBack (0)

Defensive Disclosure under Antitrust Enforcement

Posted by D. Daniel Sokol

Ajay Bhaskarabhatla (Erasmus University Rotterdam) and Enrico Pennings (Erasmus University Rotterdam) explore Defensive Disclosure under Antitrust Enforcement.

ABSTRACT: We formulate a simple model of optimal defensive disclosure by a monopolist facing uncertain antitrust enforcement and test its implications using unique data on defensive disclosures and patents by IBM during 1955-1989. Our results indicate that stronger antitrust enforcement leads to more defensive disclosure, that quality inventions are disclosed defensively, and that defensive disclosure served as an alternative but less successful mechanism to patenting at IBM in appropriating returns from R&D.

July 3, 2013 | Permalink | Comments (0) | TrackBack (0)

Information Acquisition and Innovation under Competitive Pressure

Posted by D. Daniel Sokol

Andrei Barbos (Department of Economics, University of South Florida) understands Information Acquisition and Innovation under Competitive Pressure.

ABSTRACT: This paper studies information acquisition under competitive pressure and proposes a model to examine the relationship between product market competition and the level of innovative activity in an industry. Our paper offers theoretical support for recent empirical results that point to an inverted-U shape relationship between competition and innovation. The model presents an optimal timing decision problem where a firm endowed with an idea trades the benefits of waiting for additional information on whether this idea can be converted into a successful project against the cost of delaying innovation: a given firm's profit following innovation is decreasing in the number of firms that invested at earlier dates. By recognizing that a firm can intensify its innovative activity on two dimensions, a risk dimension and a quantitative dimension, we show that firms solve this trade-off precisely so as to generate the inverted-U shape relationship.

July 3, 2013 | Permalink | Comments (0) | TrackBack (0)

Monopolistic Competition: A Dual Approach

Posted by D. Daniel Sokol

Paolo Bertoletti (Department of Economics and Management, University of Pavia) and Federico Etro (Department of Economics, University of Venice Ca' Foscari) describe Monopolistic Competition: A Dual Approach.

ABSTRACT: We study monopolistic competition under indirect additivity of preferences. This is dual to the Dixit-Stiglitz model, where direct additivity is assumed, with the CES case as the only common ground. Other examples include (perceived) demand functions that are exponential or linear. Our equilibrium results are generally in contrast with those received by the literature. An increase of the number of consumers never affects prices and firms’ size, but increases proportionally the number of firms, creating pure gains from variety. An increase in individual income increases prices (and more than proportionally the number of varieties) and reduces firms’ size if and only if the price elasticity of demand is increasing. We also study the endogenous market structure with Bertrand competition (in which a pro-competitive effect of market size arises) and the case for inefficient entry.

July 3, 2013 | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 2, 2013

Search Costs, Demand-Side Economies and the Incentives to merge under Bertrand Competition

Posted by D. Daniel Sokol

Jose L. Moraga-Gonzalez (VU University Amsterdam) and Vaiva Petrikaite (University of Groningen) explore Search Costs, Demand-Side Economies and the Incentives to merge under Bertrand Competition.

ABSTRACT: This paper studies the incentives to merge in a Bertrand competition model where firms sell differentiated products and consumers search for satisfactory deals. In the pre-merger symmetric equilibrium, the probability that a firm is the next one to be visited by a consumer is equal across firms not yet visited. However, in the short-run after a merger, because insiders raise their prices more than what the outsiders do, consumers start searching for good deals at the non-merging stores. Only when they do not find any product satisfactory enough, they continue searching at the merging stores. When search costs are sufficiently large, consumer traffic from the non-merging firms to the merged ones is so small that mergers become unprofitable. This new merger paradox, which is more likely the higher the number of non-merging firms, can be overcome in the medium to long-run if the merging firms choose to stock their shelves wit! h all the products of the constituent firms, which generates sizable search economies. Such demand-side economies can confer the merging firms a prominent position in the marketplace, in which case their price may even be lower than the price of the outsiders. In that case, consumers visit first the merged entity and the firms outside the merger lose out. Search cost economies may render a merger beneficial for consumers and so overall welfare may increase.

July 2, 2013 | Permalink | Comments (0) | TrackBack (0)

Market Power in Bilateral Oligopoly Markets with Nonexpandable Infrastructures

Posted by D. Daniel Sokol

Yukihiko Funaki (Waseda University), Harold Houba (VU University Amsterdam) and Evgenia Motchenkova (VU University Amsterdam) address Market Power in Bilateral Oligopoly Markets with Nonexpandable Infrastructures.

ABSTRACT: We consider price-fee competition in bilateral oligopolies with perfectly-divisible goods, non-expandable infrastructures, concentrated agents on both sides, and constant marginal costs. We define and characterize stable market outcomes. Buyers exclusively trade with the supplier with whom they achieve maximal bilateral joint welfare. Prices equal marginal costs. Threats to switch suppliers set maximal fees. These also arise from a negotiation model that extends price competition. Competition in both prices and fees necessarily emerges. It improves welfare compared to price competition, but consumer surpluses do not increase. The minimal infrastructure achieving maximal aggregate welfare differs from the one that protects buyers most.

July 2, 2013 | Permalink | Comments (0) | TrackBack (0)

Capacity Choice under Uncertainty with Product Differentiation

Posted by D. Daniel Sokol

Christiaan Behrens (VU University Amsterdam) and Mark Lijesen (VU University Amsterdam) understand Capacity Choice under Uncertainty with Product Differentiation.

ABSTRACT: This article analyses the capacity-then-price game for a duopoly market. We add to the literature by explicitly taking product differentiation into account. We study the impact of capacity costs, demand uncertainty, and vertical and horizontal product differentiation on equilibrium capacities, efficiency, and price dispersion. We identify a minimum degree of vertical product differentiation, relative to horizontal product differentiation, for which the subgame perfect Nash equilibrium in pure strategies is guaranteed to exist. We find that if firms' quality differences exactly offset cost differences, asymmetric outcomes in the capacity stage arise, with the low-cost, low-quality firm providing more capacity than its competitor. We show that the highest level of efficiency is reached at the degree of vertical product differentiation where it would be optimal for welfare if firms had equal capacities. Furthermore, our mod! el provides an explanation for ambiguous results in empirical research on price dispersion.

July 2, 2013 | Permalink | Comments (0) | TrackBack (0)

Market Definition Alchemy

Posted by D. Daniel Sokol

Louis Kaplow, Harvard Law School conjures up Market Definition Alchemy.

ABSTRACT: In a recent series of articles, I argue that the market definition/market share paradigm should be abandoned entirely. Among my central claims are that: (1) as a matter of economic logic, there exists no valid way to infer market power from the market shares in redefined (non-homogeneous-goods) markets — short of entirely reversing the market redefinition; and (2) choosing a best market requires already having in hand one’s best estimate of market power, rendering the exercise pointless — actually worse, since the market power inference from the chosen market is inferior to the estimate with which one began. Not surprisingly, criticisms advanced in this Symposium and elsewhere do not succeed in repealing the laws of logic, any more than medieval alchemists were able to overturn the laws of nature.

July 2, 2013 | Permalink | Comments (0) | TrackBack (0)

Monday, July 1, 2013

The Impact of Mobile Number Portability on Price, Competition and Consumer Welfare

Posted by D. Daniel Sokol

Daegon Cho, Carnegie Mellon University - H. John Heinz III School of Public Policy and Management, Pedro Ferreira, Carnegie Mellon University - H. John Heinz III School of Public Policy and Management; Carnegie Mellon University - Department of Engineering and Public Policy and Rahul Telang, Carnegie Mellon University - H. John Heinz III School of Public Policy and Management discuss The Impact of Mobile Number Portability on Price, Competition and Consumer Welfare.

ABSTRACT: This paper examines the effect of Mobile Number Portability (MNP) on market price, competition and consumer welfare. MNP allows consumers to keep their phone number when they change carrier thus reducing switching costs. However, theory shows that the market equilibrium price can either increase or decrease when switching costs reduce and thus empirical tests are necessary to better understand their effect on market performance. Most European countries introduced MNP in the early 2000s, which provides an opportunity to study the relationship between switching costs and price. MNP in Europe has been mandated by the European Commission and enacted in each country as an exogenous shock. In fact, we perform a number of tests showing that the introduction of MNP is unrelated to local market conditions. Using quarterly data from 47 mobile carriers in 15 European countries between 1999 and 2006, we show that MNP intensified competition leading to an increase in consumer surplus. On average, the introduction of MNP decreased price by 7.9%. Policies that require faster and cheaper MNP were also more effective in this respect. Furthermore, market followers seem to have decreased price more than incumbents did when MNP was introduced. MNP also increased competition by reducing the incumbent's market power and by tightening the range of prices practiced. We measure changes in consumer surplus by estimating the price elasticity of demand. Our results suggest that, on average, MNP increased consumer welfare by 2.86 euros per person. Our study shows that MNP is an effective policy to reduce price and increase consumer surplus and that the European experience can be used as an example of a best practice by other countries that plan to introduce MNP in the near future.

July 1, 2013 | Permalink | Comments (0) | TrackBack (0)

Barriers to Entry and Competitive Behavior: Evidence from Reforms of Cable Franchising Regulations

Posted by D. Daniel Sokol

Sutirtha Bagchi, The Stephen M. Ross School of Business at the University of Michigan and Jagadeesh Sivadasan, University of Michigan - Stephen M. Ross School of Business analyze Barriers to Entry and Competitive Behavior: Evidence from Reforms of Cable Franchising Regulations.

ABSTRACT: Between 2005 and 2008, 19 of the 50 states of the U.S. reformed the franchising process for cable television, signi cantly easing entry into local markets. Using a difference-in-differences approach that exploits the staggered introduction of reforms, we find that prices for "Basic" service declined systematically by about 5.5 to 6.8 percent following the reforms, but we find no statistically significant effect on average price for the more popular "Expanded Basic" service. We also find that the reforms led to increased actual entry in reformed states, by about 11.6% relative to non reformed states. Our analysis shows that the decline in price for "Basic" service holds for markets that did not experience actual entry, consistent with limit pricing by incumbents. To control for potential state-level shocks correlated with the reforms, we undertake a sample-split test examining changes in local markets which faced a greater threat of entry (because they were close to a prominent second entrant); we find larger declines in prices, for both "Basic" and "Expanded Basic" services in these markets. Our results are consistent with limit pricing models that predict incumbents respond to increased threat of entry, and suggest that the reforms facilitated entry and modestly benefitted consumers in reformed states.

July 1, 2013 | Permalink | Comments (0) | TrackBack (0)

Missing the Forest for the Trolls

Posted by D. Daniel Sokol

Mark A. Lemley, Stanford Law School and Doug Melamed, Intel Corporation discuss Missing the Forest for the Trolls.

ABSTRACT: Trolls are a significant feature of the patent system. They account for a large number of suits, now a majority of all patent assertions in the country and an even higher percentage in the information technology (IT) industries. They win both larger judgments and larger settlements than do “practicing entities” (“PEs”) -- those that practice patents and are not principally in the business of collecting money from others that practice them. And they do so despite complaints that trolls assert weak patents and some evidence that troll patents are more likely to lose in court.

Nonetheless, we think the focus on patent trolls obscures a more complex set of challenges confronting the patent system. In this paper, we make three points. First, patent trolls are not a unitary phenomenon. We see at least three different troll business models developing, and those models have different effects on the patent system. Second, patent assertions by practicing entities can create just as many problems as assertions by patent trolls. The nature of many industries obscures some of the costs of those assertions, but that does not mean they are cost-free. In addition, practicing entities are increasingly engaging in “patent privateering,” in which product-producing companies take on many of the attributes of trolls. Put differently, while trolls exploit problems with the patent system, they are not the only ones that do so. Third, many of the problems associated with trolls are in fact problems that stem from the disaggregation of complementary patents into too many different hands. That in turn suggests that groups like Intellectual Ventures might be reducing, not worsening, these problems (though, as we will see, the overall effects are ambiguous), while “patent privateers” that spin off patents in order for others to assert them might make things worse. For this reason, patent reformers and antitrust authorities should worry less about aggregation of patent rights and more about disaggregation of those rights, sometimes accomplished by spinning them out to others.

Understanding the economics of patent assertions by both trolls and practicing entities allows us to move beyond labels and the search for “bad actors,” focusing instead on aspects of the patent system itself that give rise to the problems and on specific, objectionable conduct in which both trolls and practicing entities sometimes engage. Patent trolls alone are not the problem; they are a symptom of larger problems with the patent system. Treating the symptom will not solve the problems. In a very real sense, critics have been missing the forest for the trolls. Exposing the larger problems allows us to contemplate changes in patent law that will actually tackle the underlying pathologies of the patent system and the abusive conduct they enable.

July 1, 2013 | Permalink | Comments (0) | TrackBack (0)

Market Definition

Posted by D. Daniel Sokol

Louis Kaplow, Harvard Law School; National Bureau of Economic Research (NBER) discusses Market Definition.

ABSTRACT: Market definition has long held a central place in competition law. This entry surveys recent analytical work that has called the market definition paradigm into question on a number of fronts: whether the process is feasible, whether market share threshold tests are coherent, whether the hypothetical monopolist test in merger guidelines is counterproductive, and whether and when the frequent focus on cross-elasticities is useful.

July 1, 2013 | Permalink | Comments (0) | TrackBack (0)

Sunday, June 30, 2013

Interview with Dan Sjoblom and Christine Meyer, Directors General of the Swedish and Norwegian Competition Authorities

Posted by D. Daniel Sokol

The Antitrust Source provides an interview with Dan Sjoblom and Christine Meyer, Directors General of the Swedish and Norwegian Competition Authorities.

June 30, 2013 | Permalink | Comments (0) | TrackBack (0)