Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Friday, February 1, 2013

Minimum wages and competition: The case of the German roofing sector

Posted by D. Daniel Sokol

Kornelius Kraft, Christian Rammer, and Sandra Gottschalk (all ZEW) Minimum wages and competition: The case of the German roofing sector.

ABSTRACT: This paper analyses the effects of minimum wages on competition in the German roofing sector. The case is particularly interesting since this sector is faced with a uniform minimum wage despite significant regional disparities in productivity and wages. As a control industry we take the plumbing sector, which shows a similar market structure and demand trend but is not subject to a minimum wage. Employing a comprehensive firm panel data and using a difference-in-difference approach, we estimate the impacts of minimum wages on market entries and exits and firms' profitability. We find significant effects for East Germany which point to a substantial shift in industry structure. Minimum wages decreased both market entries and exits for roofing firms while they increased entries of sole traders. A decreasing number of non-sole traders lowered competition for this group of firms and helped them to increase profitability. The increasing share of sole traders may indicate some type of evasion strategy in eastern Germany, particularly since wages for skilled roofers declined towards the minimum wage. In the western part of the country minimum wages had no impact on competition.

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

Network effects, Customer Satisfaction and Recommendation on the Mobile Phone Market

Posted by D. Daniel Sokol

Thomas Cadet (University of Rennes), Sophie Larribeau (University of Rennes) and Thierry Penard (University of Rennes) discuss Network effects, Customer Satisfaction and Recommendation on the Mobile Phone Market.

ABSTRACT: On mobile phone markets that have reached the maturity stage, customer recommendation becomes a critical focus for operators to attract subscribers from rival operators. Referral propensity is also an indicator of subscriber satisfaction and loyalty. The aim of this paper is to examine the factors that influence customer recommendation. Precisely, we want to know whether referral propensity is more driven by supply-side effects (i.e. characteristics of mobile services) or demand-side effects (i.e. network effects). We use data from French subscriber surveys. The main findings are that referrals depend primarily on supply-side effects: operators’ brand image, the price and quality of services, and customer relations. Price, however, is considered to be a less significant factor than the quality of service when it comes to recommending an operator. Also, information on services and the variety of offerings available, as well as network effects, do not seem to influence referral propensity.

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

Baer says no to Beer merger

Posted by D. Daniel Sokol

Bill Baer has been active in his first 30 days. Yesterday DOJ Antitrust issued a press release about how it was going to try to block the proposed Ambev/Grupo Modelo merger. Also yesterday in my antitrust mergers class (3 credits of the best antitrust class in the US, no question as it is also the only antitrust mergers class in the US) we discussed Staples/Office Depot with some help from Jim Fishkin of Dechert who worked on the case with none other than the very same Bill Baer who now heads DOJ Antitrust and who was in 1997 head of the Bureau of Competition at the FTC. It is a wonderful case and I think the most transformative merger case of a generation.  Thank you Jim, Bill, then Chairman Bob Pitofsky and Judge Hogan.

My merger class got me thinking about what the press got wrong about both Staples then and now Ambev.  One thing that has bothered me about the business press on the Ambev deal is the importance that they give to the dollar amount of the deal.  Journalists, the size of the deal is not of consequence for an antitrust challenge.  It is about the competitive effects - are consumers worse off because of the merger.  There are plenty of large deals that have little antitrust risk.  What makes Ambev/Grupo Modelo significant is that there are potentially significant anti-competitive effects to the merger. 

From the academic perspective, I hope for a litigated case as we need more court guidance on the application of the 2010 Horizontal Merger Guidelines.  Also, from a teaching perspective, retail mergers are fun because the students get into the material.  For this reason I dropped Arch Coal (students are not so interested about coal) and replaced it with Universal/EMI (students love the music industry).

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

Who gains and who loses from the 2011 debit card interchange fee reform?

Posted by D. Daniel Sokol

Oz Shy (Federal Reserve Bank of Boston) asks Who gains and who loses from the 2011 debit card interchange fee reform?

ABSTRACT: In October 2011, new rules governing debit card interchange fees became effective in the United States. These rules limit the maximum permissible interchange fee that an issuer can charge merchants for a debit card transaction. This paper provides simple calculations that identify the transaction values for which merchants pay higher and lower interchange fees under the new rules. The paper then uses new data from the Boston Fed’s 2010 and 2011 Diary of Consumer Payment Choice to identify the types of merchants who are likely to pay higher and lower interchange fees under the new rules.

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

Thursday, January 31, 2013

Optimal Access Regulation with Downstream Competition

Posted by D. Daniel Sokol

Flavio Menezes (School of Economics, The University of Queensland), John Quiggin (School of Economics, The University of Queensland) and Tina Kao theorize Optimal Access Regulation with Downstream Competition.

ABSTRACT: We analyze the setting of access prices for a bottleneck facility where the facility owner also competes in the deregulated downstream market. We consider a continuum of market structures from Cournot to Bertrand. These market structures are fully characterized by a single parameter representing the intensity of competition. We first show how the efficient component pricing rule (ECPR) should be modified as the downstream competitive intensity changes. We then analyse the optimal access price where a regulator trades off production efficiency and pro-competitive effects to maximize total surplus.

January 31, 2013 | Permalink | Comments (0) | TrackBack (0)

Price Response, Asymmetric Information, and Competition

Posted by D. Daniel Sokol

Joshua Sherman and Avi Weiss (Bar-Ilan University) offer thoughts on Price Response, Asymmetric Information, and Competition.

ABSTRACT: We compare predictions from a theoretical model based on the structure of the main outdoor retail market in Jerusalem with the results of an empirical analysis of price response to changes in cost. We find that firms without adjacent competition exhibit both upward and downward price rigidity, an outcome we ascribe to asymmetric information between the consumer and the firm. Given that previous studies have focused on downward price rigidities of firms with market power, our findings highlight the importance of accounting for transitory information asymmetries between the consumer and the firm when studying price rigidity.

January 31, 2013 | Permalink | Comments (0) | TrackBack (0)

Collusion through joint R&D: An empirical assessment

Posted by D. Daniel Sokol

Tomaso Duso Duesseldorf Institute for Competition Economics, Heinrich-Heine University, Lars-Hendrik Roller, European School of Management and Technology (ESMT) and Jo Seldeslachts, University of Amsterdam and KU Leuven have an interesting paper on Collusion through joint R&D: An empirical assessment.

ABSTRACT: This paper tests whether upstream R&D cooperation leads to downstream collusion. We consider an oligopolistic setting where firms enter in research joint ventures (RJVs) to lower production costs or coordinate on collusion in the product market. We show that a sufficient condition for identifying collusive behavior is a decline in the market share of RJV-participating firms, which is also necessary and sufficient for a decrease in consumer welfare. Using information from the U.S. National Cooperation Research Act, we estimate a market share equation correcting for the endogeneity of RJV participation and R&D expenditures. We find robust evidence that large networks between direct competitors - created through firms being members in several RJVs at the same time - are conducive to collusive outcomes in the product market which reduce consumer welfare. By contrast, RJVs among non-competitors are efficiency enhancing.

January 31, 2013 | Permalink | Comments (0) | TrackBack (0)

On the Optimal Number of Firms in the Commons: Cournot vs Bertrand

Posted by D. Daniel Sokol

Davide Dragone, University of Bologna, Luca Lambertini, University of Bologna, Arsen Palestini, University of Rome La Sapienza and Alessandro Tampieri, University of Bologna provide thoughts On the Optimal Number of Firms in the Commons: Cournot vs Bertrand.

ABSTRACT: We revisit the debate on the optimal number of firms in the commons in a differential oligopoly game in which firms are either quantity- or price-setting agents. Production exploits a natural resource and involves a negative externality. We calculate the number of firms maximising industry profits, finding that it is larger in the Cournot case. While industry structure is always inefficient under Bertrand behaviour, it may or may not be so under Cournot behaviour, depending on parameter values. The comparison of private industry optima reveals that the Cournot steady state welfare level exceeds the corresponding Bertrand magnitude if the weight of the stock of pollution is large enough.

January 31, 2013 | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 30, 2013

Productivity and the Product Scope of Multi-product Firms: A Test of Feenstra-Ma

Posted by D. Daniel Sokol

Horst Raff (University of Kiel, Germany) and Joachim Wagner (Leuphana University Lueneburg, Germany) analyze Productivity and the Product Scope of Multi-product Firms: A Test of Feenstra-Ma.

ABSTRACT: Feenstra and Ma (2008) develop a monopolistic competition model where firms choose their optimal product scope by balancing the profits from a new variety against the costs of “cannibalizing” sales of existing varieties. While more productive firms always have a higher market share, there is no monotonic relationship between firms’ productivity level and their choices of product scope. In the model having a higher market share means that firms are hurt more by the “cannibalization effect”. Therefore, the incentive to add more products weakens as productivity rises. This leads to Lemma 3 in Feenstra and Ma (2008): There is an inverted U-shaped relationship between firms’ productivities and the range of varieties they choose to produce. This empirical note takes this Lemma to the data for firms from German manufacturing industries. Empirical evidence is in line with the results from the theoretical model.

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

The Robustness of Exclusion in Multi-dimensional Screening

Posted by D. Daniel Sokol

Paulo Barelli (University of Rochester), Suren Basov (La Trobe University), Mauricio Bugarin (Insper Institute) and Ian King (University of Melbourne) explore The Robustness of Exclusion in Multi-dimensional Screening.

ABSTRACT: We extend Armstrong’s result on exclusion in multi-dimensional screening models in two key ways, providing support for the view that this result holds true in a large class of models and is applicable to many different markets. First, we relax the strong technical assumptions he imposed on preferences and consumer types. Second, we extend the result beyond the monopolistic market structure to some oligopoly settings. We illustrate the results with several examples and applications.

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

Why Some Platform Businesses Face Many Frivolous Antitrust Complaints and What to Do About It

Posted by D. Daniel Sokol

David Evans (Global Economics Group, U Chicago, UCL) explains Why Some Platform Businesses Face Many Frivolous Antitrust Complaints and What to Do About It.

ABSTRACT: In the last decade a number of internet-based multi-sided platforms have emerged that provide free services to, in some cases, millions of businesses. This article argues that under current norms in adversarial proceedings these platforms are likely to face large numbers of complaints in multiple jurisdictions, a substantial likelihood that at least one of these complaints will result in a false-positive decision against the platform, and material risk of a false-positive decision that results in catastrophic consequences. These effects result from a combination of business users of free services receiving a free litigation option they can pursue if they have any complaints; an adverse-selection problem that results from free services being particularly attractive to start-ups that do not have or want to invest capital in their businesses; and the sheer number of free-business users resulting in a high cumulative probability of at least one false-positive decision. After documenting these phenomena, this article argues that government policymakers, including competition authorities and courts, should adopt a heightened level of scrutiny concerning complaints from free business users. This heightened level of scrutiny is necessary to counteract the impact of excessive litigation on innovation by multi-sided platforms.

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

Plurality Regulations – Still a Wise Market Intervention?

Posted by D. Daniel Sokol

Robert Kenney (Communications Chambers) asks Plurality Regulations – Still a Wise Market Intervention?

ABSTRACT: Plurality rules have long been used to ensure diverse ownership of media, with the expectation that this leads to the availability of diverse news coverage to citizens, which in turn supports democratic discourse. In several countries there is current debate as to whether plurality rules need to be strengthened, and particularly so in the United Kingdom, where News' bid for Sky and the subsequent phone-hacking scandal have brought plurality issues to the fore. However, fundamental developments in the market mean that the costs of plurality interventions are rising, and the benefits are falling. This paper examines how the costs and benefits of plurality regulation are changing, using the United Kingdom as a case study.

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

Tuesday, January 29, 2013

Media Plurality: Under the Skin of Control - Concept, Context, and Reform

Posted by D. Daniel Sokol

Antonio Bavasso (A&O) discusses Media Plurality: Under the Skin of Control - Concept, Context, and Reform.

ABSTRACT: The concept of media plurality has achieved a remarkable degree of prominence recently, particularly in the United Kingdom and more generally in Europe. This article looks at the U.K. experience and, on that basis, it aims to illustrate how the legal concept and policy aims have been affected by transformational effects of new media forms. The first section considers the current regulatory regime applicable to traditional media and the concept of media plurality the regime aims to protect, and illustrates the wide range of interventions already in place. The second section argues for the importance of judging the plurality of media, and thus the need for any further intervention, on the basis of a cross-media assessment, rather than taking individual types of media in isolation. The third section considers how technological developments are shaping the outlook for media plurality today. Based on this analysis, I question whether the regulatory regime relating to plurality requires either a major overhaul and/or the emphasis that it currently attracts in the regulatory reform agenda. On the other hand, it seems clear that we need to remain vigilant about new and more subtle forms of influence on public discourse that flow from the evolving methods of news distribution and consumption.

January 29, 2013 | Permalink | Comments (0) | TrackBack (0)

Antitrust and Nonexcluding Ties

Posted by D. Daniel Sokol

Herb Hovenkamp has written on Antitrust and Nonexcluding Ties.

ABSTRACT: Notwithstanding hundreds of court decisions and scholarly articles, tying arrangements remain enigmatic. Conclusions that go to either extreme, per se legality or per se illegality, invariably make simplifying assumptions that frequently do not obtain. For example, by ignoring double marginalization or tying product price cuts it becomes very easy to prove that a wide-range of ties are anticompetitive. At the other extreme, by ignoring foreclosure possibilities one can readily conclude that ties are invariably benign. Even when one considers consumer welfare alone, the great majority of ties very likely are competitively benign, with a few exceptions that involve realistic threats of anticompetitive foreclosure.

January 29, 2013 | Permalink | Comments (0) | TrackBack (0)

Tying–Still a Competitive Evil

Posted D. Daniel Sokol

Peter Carstensen (Wisconsin) argues Tying–Still a Competitive Evil.

ABSTRACT: This article examines the unavoidable adverse effects on consumer choice, consumer prices, and competition in the market for the tied (as well as the tying good) that necessarily result from unjustified tying by any firm with any appreciable capacity to affect competition in the markets for either good. My thesis is not that all tying is or should be absolutely illegal, but rather it ought to remain presumptively illegal and should be condemned after only a "quick look" unless the defendant can plead and prove a legitimate justification, i.e., one that does not involve primarily exploiting customers or excluding competitors.

January 29, 2013 | Permalink | Comments (0) | TrackBack (0)

Brantley Versus NBC Universal: Where’s the Beef?

Posted by D. Daniel Sokol

Dennis Carlton (U Chicago) and Michael Waldman (Cornell) ask Brantley Versus NBC Universal: Where’s the Beef?

ABSTRACT: As with other important cases involving firms such as Kodak and Microsoft, the recent Brantley case raises interesting questions concerning appropriate antitrust policy in situations where firms practice a form of tying. Such cases are particularly difficult from an antitrust perspective because tying is pervasive in the economy and in many cases-actually probably most-the tying behavior has an efficiency justification. Even in cases where the justification may not be efficiency, as might occur in some instances where tying enables price discrimination, the practice may have nothing to do with harming competition. So the difficult issue faced by the courts in analyzing tying under the antitrust laws is to prohibit tying which harms competition and welfare without prohibiting tying that has an efficiency justification and thus improves welfare or where tying has a justification that is unrelated to harming competition. In this short paper we discuss the specific issues raised by the Brantley case. We begin by describing the case in more detail and then discuss the relevant economic theories that have been developed to understand the type of tying behavior practiced in the case. We then discuss appropriate antitrust policy and end with a concluding discussion.

January 29, 2013 | Permalink | Comments (0) | TrackBack (0)

Monday, January 28, 2013

Broadband Internet and Firm Entry: Evidence from Rural Iowa

Posted by D. Daniel Sokol

Younjun Kim and Peter Orazem (Iowa State) examine Broadband Internet and Firm Entry: Evidence from Rural Iowa.

ABSTRACT: The availability of broadband Internet service should have increased firm productivity and lowered firm entry costs. However, validating the broadband effect is complicated by the rapid deployment of broadband Internet service across metropolitan areas, removing meaningful variation in broadband availability. Deployment in rural markets was much more uneven, suggesting that the presence or absence of broadband service may have altered the site selection of firms targeting rural markets. We investigate the effect of broadband availability on firm location decision in rural Iowa. We establish a counterfactual baseline firm entry rate for each zip code area in rural counties by showing how the presence of broadband service in a ZIP code in 2001 affected firm entry in 1990-1992 before Broadband was available. We then measure how the actual presence of broadband service in the same ZIP code affected firm entry in 20! 00-2002. We show that the difference in estimated probability of entry between the counterfactual baseline and the actual response ten years later is the Difference-in-Differences estimate of the effect of broadband deployment on firm start-ups. We find that broadband availability in a rural ZIP code has a positive and significant effect on firm entry in the ZIP code but only in rural markets adjacent to a metropolitan area or with a larger urban population. Broadband access does not affect new firm entry in more remote rural markets.

January 28, 2013 | Permalink | Comments (0) | TrackBack (0)

The economics of two-sided payment card markets: pricing, adoption and usage

Posted by D. Daniel Sokol

James McAndrews (Federal Reserve Bank of New York) and Zhu Wang (Federal Reserve Bank of Richmond) describe The economics of two-sided payment card markets: pricing, adoption and usage.

ABSTRACT: This paper provides a new theory for two-sided payment card markets. Adopting payment cards requires consumers and merchants to pay a fixed cost, but yields a lower marginal cost of making payments. Analyzing adoption and usage externalities among heterogeneous consumers and merchants, our theory derives the equilibrium card adoption and usage pattern consistent with empirical evidence. Our analysis also helps explain the card pricing puzzles, particularly the high and rising merchant (interchange) fees. Based on the theoretical framework, we discuss socially desirable payment card fees as well as the interchange fee cap regulation.

January 28, 2013 | Permalink | Comments (0) | TrackBack (0)

Consumer confusion over the profusion of eco-labels: lessons from a double differentiation model

Posted by D. Daniel Sokol

Dorothee Brecard (LEMNA) presents Consumer confusion over the profusion of eco-labels: lessons from a double differentiation model.

ABSTRACT: How are eco-label strategies affected by consumer confusion arising from the profusion of eco-labels? This article provides a theoretical insight into this issue using a double differentiation framework. We assume that consumers perceive a label as a sign of quality compared to an unlabeled product, but that they can't distinguish the environmental quality associated with each label. They only perceive each label as a particular variety of the product. We deduce preferences for two types of label: a health label and an eco-label. We analyze pricing strategies of three firms each providing one product: a health labeled, eco-labeled or an unlabeled product. We infer lessons for eco-labeling policies, through effects of ecolabeling on welfare components, according to the identity of the certifying organization: the regulator, who aims at enhancing welfare, an NGO, which attempts to enhance the quality of the environment, an! d the firms, which seek to maximize their profits. We show that the firm supplying the eco-labeled product is weakened by consumer confusion while the firms selling the unlabeled product suffers from strict labels, to the benefit of the firm supplying the health labeled product. All label policies imply, whatever the certifying organization, high identical environmental quality of the labeled products, which leads to a reduction in the market share of the unlabeled product or even to its extinction.

January 28, 2013 | Permalink | Comments (0) | TrackBack (0)

Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context

Posted by D. Daniel Sokol

Patricia M. Danzon, University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER), Adrian Towse, Office of Health Economics and Jorge Mestre-Ferrandiz discuss Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context.

ABSTRACT: This paper analyzes pharmaceutical pricing between and within countries to achieve second best static and dynamic efficiency. We distinguish countries with and without universal insurance, because insurance undermines patients’ price sensitivity, potentially leading to prices above second-best efficient levels. In countries with universal insurance, if each payer unilaterally sets an incremental cost effectiveness ratio (ICER) threshold based on its citizens’ willingness to pay for health; manufacturers price to that ICER threshold; and payers limit reimbursement to patients for whom a drug is cost-effective at that price and ICER, then the resulting price levels and use within each country and price differentials across countries are roughly consistent with second best static and dynamic efficiency. These value-based prices are expected to differ cross-nationally with per capita income and be broadly consistent with Ramsey Optimal Prices. Countries without comprehensive insurance avoid its distorting effects on prices but also lack financial protection and affordability for the poor. Conditions for efficient pricing in these self-pay countries include that consumers are well-informed about product quality and firms can price discriminate between rich and poor subgroups within and between countries.

January 28, 2013 | Permalink | Comments (0) | TrackBack (0)