Antitrust & Competition Policy Blog

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

Monday, July 16, 2018

A Note on Stable Cartels

Liang Mao offers A Note on Stable Cartels.

ABSTRACT: In non-cooperative open membership cartel formation games, it is usually assumed that cartel members will maximize their joint payoffs. Through an example, this note shows that this assumption is problematic, because it imposes some unnecessary restrictions on cartel members' actions. We recommend that the cartel agreement should be endogenously determined in future studies.

July 16, 2018 | Permalink | Comments (0)

Friday, July 13, 2018

Disclosure and Pricing of Attributes

Alex Smolin explains Disclosure and Pricing of Attributes.

ABSTRACT: A monopolist seller owns an object that has several attributes. A buyer is privately informed about his tastes and uncertain about the attributes. The seller can disclose attribute information to the buyer in a form of a statistical experiment. The seller offers a menu of call options varying in upfront payments, experiments, and strike prices. I study revenue-maximizing menus and show that optimal experiments belong to a simple class of linear disclosures. I fully characterize an optimal menu for a class of single-minded buyers. Surprisingly, the menu is nondiscriminatory and can be implemented by a single partial disclosure followed by a posted price.

July 13, 2018 | Permalink | Comments (0)

Secret contracting in multilateral relations

Patrick Rey (Toulouse School of Economics, University Toulouse Capitole) and Thibaud Vergé (CREST; ENSAE) theorize about Secret contracting in multilateral relations.

ABSTRACT: We develop a general but tractable framework of multilateral vertical contracting between upstream and downstream ?firms, without any restriction on tariffs, and yet taking into account their impact on downstream competition. In equilibrium, tariffs are cost-based and replicate the outcome of a multi-brand oligopoly, a finding in line with the analysis of a recent merger. To illustrate its versatility, we use this framework to analyze the effect of vertical restraints (resale price maintenance and retail price parity clauses) and of alternative business models (resale vs. agency). Finally, we extend the framework so as to endogenize the market structure.

July 13, 2018 | Permalink | Comments (0)

Removing geo-blocking: What are the effects on innovation for vertically differentiated goods?

Hamelmann, Lisa and Klein, Gordon J. ask Removing geo-blocking: What are the effects on innovation for vertically differentiated goods?

ABSTRACT: At present, there is a wide debate on regulating geo-blocking, an online practice that prevents consumers from buying or having access to products and services from another country. This practice is not only used by retailers, but is also of great importance in the market for digital visual broadcasting. We develop a model to identify the cases, in which firms have an incentive to include geo-blocking clauses in their licensing agreements. In addition, we analyze the effects of restricting geo-blocking on the level of innovation of two vertically differentiated goods and on the overall product variety. Our results show that the market outcome primarily depends on the level of competition between the two goods. For instance, regulatory changes do not have any impact if competition is very low or very high. However, if competition is sufficiently high, the removal of geo-blocking decreases the level of innovation of the good that is traded. The product quality of the other firm, instead, increases - as long as R&D costs are sufficiently high. Putting both effects together, it becomes evident that the quality gains do not compensate for the quality losses. In addition, the removal of geo-blocking affects the product variety as well - a lower level of competition increases the product variety and vice versa.

July 13, 2018 | Permalink | Comments (0)

Thursday, July 12, 2018

Product Differentiation with Multiple Qualities

Francesca Barigozzi (Department of Economics, University of Bologna) and Ching-to Albert Ma (Boston University) explore Product Differentiation with Multiple Qualities.

ABSTRACT: We study subgame-perfect equilibria of the classical quality-price, multistage game of vertical product differentiation. Each firm can choose the levels of an arbitrary number of qualities. Consumers' valuations are drawn from independent and general distributions. The unit cost of production is increasing and convex in qualities. We characterize equilibrium prices, and the effects of qualities on the rival's equilibrium price in the general model. We present necessary and sufficient conditions for equilibrium differentiation in any of the qualities.

July 12, 2018 | Permalink | Comments (0)

Signals Sell: Product Lines when Consumers Differ Both in Taste for Quality and Image Concern

Jana Friedrichsen (Humboldt-Universität zu Berlin) analyzes Signals Sell: Product Lines when Consumers Differ Both in Taste for Quality and Image Concern.

ABSTRACT: This paper analyzes optimal product lines when consumers differ both in their taste for quality and in their desire for social image. The market outcome features partial pooling and product differentiation that is not driven by heterogeneous valuations for quality but by image concerns. A typical monopoly outcome is a two-tier product line resembling a \"masstige\" strategy as observed in luxury goods markets. Products can have identical quality and differ only in price and image, thereby rationalizing quality-equivalent line extensions. Under competition, both average quality and market coverage are (weakly) higher but monopoly can yield higher welfare than competition.

July 12, 2018 | Permalink | Comments (0)

Collusion in Markets with Syndication

John William Hatfield, University of Texas at Austin, Scott Duke Kominers, Harvard University, Richard Lowery, University of Texas-Austin, and Jordan M. Barry, University of San Diego School of Law explore Collusion in Markets with Syndication.

ABSTRACT: Many markets, including the markets for IPOs and debt issuances, are syndicated, in that a bidder who wins a contract will often invite competitors to join a syndicate that will fulfill the contract. We model syndicated markets as a repeated extensive form game and show that standard intuitions from industrial organization can be reversed: Collusion may become easier as market concentration falls, and market entry may in fact facilitate collusion. In particular, price collusion can be sustained by a strategy in which firms refuse to join the syndicate of any firm that deviates from the collusive price, thereby raising total production costs. Our results can thus rationalize the apparently contradictory empirical facts that the market for IPO underwriting exhibits seemingly collusive pricing despite its low level of market concentration.

July 12, 2018 | Permalink | Comments (0)

Wednesday, July 11, 2018

The fall and rise of market power in Europe

John P. Weche (Leuphana University Lueneburg, Germany; Monopolies Commission, Bonn, Germany) and Achim Wambach (Monopolies Commission, Bonn, Germany; Centre for European Economic Research (ZEW), Mannheim, Germany) explore The fall and rise of market power in Europe.

ABSTRACT: This paper presents an analysis of the recent developments of average market power in Europe by using a broad firm-level database for EU member states. To indicate competitive pressure at the firm-level, markups are estimated following De Loecker (2011), and De Loecker and Warzynski (2012). The analysis reveals a sharp drop in markups during the crisis, followed by a post-crisis increase. The European average has not yet reached its pre-crisis level, which is in contrast to results for the US, where average markups have climbed to pre-crisis levels already in 2011. There is significant heterogeneity among European economies and the pre-crisis levels do have been exceeded in some countries.

July 11, 2018 | Permalink | Comments (0)

Market Structure and Investment in the Mobile Industry

François Jeanjean (Orange Labs - Orange Labs [Belfort] - France Télécom) and Georges Vivien Houngbonon (LGI - Laboratoire de Genie Industriel - CentraleSupélec) analyze Market Structure and Investment in the Mobile Industry.

ABSTRACT: The impact of market structure, that is the number of firms and asymmetry , on investment is an important topic in the mobile industry. However, previous literature remains ambiguous about the direction of the relationship. This paper provides an empirical evidence of the impact of market structure on investment in the European mobile industry. The empirical assessment is based on a Salop model with vertical differentiation. Consistently with the prediction of this model, we find that both the number of operators and market share asymmetry have significant effects on investment. In symmetric markets, investment per operator falls with the number of operators, with larger effects for operators that lose market share more than the average. The industry investment rises with the number of operators in the short run, but eventually falls in the long run due to significant adjustment costs of investment in the mobile industry. These findings suggest that investment should be taken into account when analysing the welfare effects of market structure in the mobile industry.

July 11, 2018 | Permalink | Comments (0)

Efficiency in large markets with firm heterogeneity

Dhingra, Swati and Morrow, John examine Efficiency in large markets with firm heterogeneity.

ABSTRACT:  Empirical work has drawn attention to the high degree of productivity differences within industries, and its role in resource allocation. In a benchmark monopolistically competitive economy, productivity differences introduce two new margins for allocational inefficiency. When markups vary across firms, laissez faire markets do not select the right distribution of firms and the marketdetermined quantities are inefficient. We show that these considerations determine when increased competition from market expansion takes the economy closer to the socially efficient allocation of resources. As market size grow large, differences in market power across firms converge and the market allocation approaches the efficient allocation of an economy with constant markups

July 11, 2018 | Permalink | Comments (0)

Tuesday, July 10, 2018

Bargaining over Collusion Profits under Cost Asymmetry and Demand Uncertainty

Ismael Saglam is Bargaining over Collusion Profits under Cost Asymmetry and Demand Uncertainty.

ABSTRACT: In this paper we borrow from Ciarreta and Gutierrez-Hita (2012) a duopolistic industry structure with cost asymmetry and demand uncertainty, and using this structure we build a bargaining model to study the division of collusion profits -obtained from the joint selection of supply functions- under the possibility of side payments. In our model, we consider potential disagreement points obtained from the non-cooperative equilibrium of either the quantity competition or the supply function competition, and potential bargaining solutions splitting the gains from agreement either equally or proportionally according to the relative disagreement payoffs of the duopolists. Given any of these disagreement points and any of these bargaining solutions, we find that each duopolist has always incentive to join a collusive agreement. On the other hand, irrespective of whether the bargaining solution splits the gains from agreement equally or proportionally respecting the relative disagreement payoffs, the more efficient firm (the less efficient firm) in the cartel always obtains a higher agreement payoff when the disagreement point is obtained from the equilibrium of supply function competition (quantity competition). Given the studied disagreement points and bargaining solutions, we also find that bargaining over collusion profits always makes the more efficient firm worse off and the less efficient firm better off in comparison to a collusive agreement equalizing the marginal costs of these two firms.

July 10, 2018 | Permalink | Comments (0)

A general model of price competition with soft capacity constraints

Cabon-Dhersin Marie-Laure (Université de Rouen Normandie ; CREAM) and Drouhin Nicolas (Ecole Normale Supérieure Paris-Saclay) offer A general model of price competition with soft capacity constraints.

ABSTRACT: We propose a general model of oligopoly with firms relying on a two factor production function. In a first stage, firms choose a certain fixed factor level (capacity). In the second stage, firms compete on price, and adjust the variable factor to satisfy all the demand. When the factors are substitutable, the capacity constraint is "soft", implying a convex cost function in the second stage. We show that there is a unique equilibrium prediction in pure strategies, whatever the returns to scale, characterized by a price that increases with the number of firms up to a threshold. The main propositions are established under the general assumption that the production function is quasi-concave but the paper provides a general methodology allowing the model to be solved numerically for special parametrical forms.

July 10, 2018 | Permalink | Comments (0)

Price-Cost Tests and Loyalty Discounts

Giacomo Calzolari, University of Bologna and Vincenzo Denicolò, University of Bologna examine Price-Cost Tests and Loyalty Discounts. Worth downloading!

ABSTRACT: We analyze, by means of a formal economic model, the use of price-cost tests to assess the competitive effects of loyalty discounts. In the model, a dominant firm enjoys a competitive advantage over its rivals and uses loyalty discounts as a means to boost the demand for its product. We show that in this framework price-cost tests are misleading or, at best, completely uninformative. Our results cast doubts on the applicability of price-tests to loyalty discount cases.

July 10, 2018 | Permalink | Comments (0)

Monday, July 9, 2018

Department of Justice Seeks to Terminate “Legacy” Antitrust Judgments in Federal District Court in Washington, D.C.

Department of Justice Seeks to Terminate “Legacy” Antitrust Judgments in Federal District Court in Washington, D.C.  See here for the press release.

July 9, 2018 | Permalink | Comments (0)

Do Agency Contracts Facilitate Upstream Collusion?

Yoshifumi Hino, Vietnam National University (VNU) - Vietnam-Japan University Susumu Sato, University of Tokyo - Graduate School of Economics and Yusuke Zennyo, Graduate School of Business Administration, Kobe University ask Do Agency Contracts Facilitate Upstream Collusion?

ABSTRACT: This paper studies whether the agency contract facilitates upstream collusion as compared to the wholesale contract. To this end, we first develop an infinitely repeated game with a monopoly platform and multiple manufacturers. We derive the critical discount factors, above which the upstream collusion can be sustained, for each contract. The analysis shows that, without platform competition, the critical discount factor is higher under the agency contract than under the wholesale contract, which indicates that the agency contract does not facilitate the upstream collusion, because the monopoly platform has no incentive to foster the collusion among manufacturers. By contrast, in the extended model with competing platforms, the agency contract does facilitate the upstream collusion. This is because, with the platform competition, upstream collusion under the agency contract works as a coordination device to ease the platform competition, leading the platforms to accept it. Our analysis provides an important policy implication such that the agency contract itself is not anticompetitive, but should be regulated when there exists the platform competition.

July 9, 2018 | Permalink | Comments (0)

Excessive Pricing Enforcement in Dynamic Sectors: Should You Stop Reading Now?

Gönenç Gürkaynak, ELIG Gürkaynak Attorneys-at-Law Merve Bakırcı, ELIG, Attorneys-at-Law and Sevgi Mutafoğlu, ELIG, Attorneys-at-Law ask Excessive Pricing Enforcement in Dynamic Sectors: Should You Stop Reading Now?

ABSTRACT: Excessive pricing has long been a disputed topic particularly based on the ambiguity when a price could be considered as excessive. It is even more challenging to determine whether excessive pricing constitutes a form of abuse of dominance when it comes to dynamic markets. This is mainly due to the fact that there are significant complications that stem from the impracticality of applying the legal tests to real-world situations. Throughout this article, we argued that the legal tests applied in excessive pricing cases are insufficient and therefore implementation of such tests in dynamic sectors is even more risky. Accordingly, as it is highly difficult in dynamic sectors to determine whether an undertaking is dominant and the prices are excessive, it can be concluded that undertakings should be liberal to determine a pricing strategy that enables them to obtain sufficient returns on their investments.

July 9, 2018 | Permalink | Comments (0)

Bank Cartels and Monetary Policy Revisited

Maarten Pieter Schinkel, University of Amsterdam - Amsterdam Center for Law & Economics (ACLE); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) has a new paper on Bank Cartels and Monetary Policy Revisited.

ABSTRACT: Monetary policy affects the cost of capital, and thereby conditions for collusion in loan markets – which in turn influence the transmission of policy rates. Bagliano et al. (2000) observe that stronger countercyclical interest rate policy responses increase the scope for bank cartels on loan markets by decreasing the critical discount factor. They however also affects the actual discount factor by (partial) pass-through of the marginal cost of banking in loan market rates. When down-turns occur sufficiently often, the combined effect is to increase the space for stable bank cartels. Monetary policy can instead constrain collusion in money markets if crises are infrequent, so that it increases the expected cost of capital. With a short-run policy rate decrease in down-turns that in size relative to the increase in up-turns is inversely related to the frequency of crises occurring, central banks can neutralize their policy's stimulus to bank cartels. Overshooting the mark in crises leaves countercyclical monetary policy conducive to collusion.

July 9, 2018 | Permalink | Comments (0)

Sunday, July 8, 2018

Algorithms as Illegal Agreements

Michal Gal, University of Haifa has posted Algorithms as Illegal Agreements.

ABSTRACT: Despite the increased transparency, connectivity, and search abilities that characterize the digital marketplace, the digital revolution has not always yielded the bargain prices that many consumers expected. What is going on? Some researchers suggest that one factor may be coordination between the algorithms used by suppliers to determine trade terms. Simple coordination-facilitating algorithms are already available off the shelf, and such coordination is only likely to become more commonplace in the near future. This is not surprising. If algorithms offer a legal way to overcome obstacles to profit-boosting coordination, and create a jointly profitable status quo in the market, why should suppliers not use them? In light of these developments, seeking solutions – both regulatory and market-driven – is timely and essential. While current research has largely focused on the concerns raised by algorithmic-facilitated coordination, this article takes the next step, asking to what extent current laws can be fitted to effectively deal with this phenomenon.

To meet this challenge, this article advances in three stages. The first part analyzes the effects of algorithms on the ability of competitors to coordinate their conduct. While this issue has been addressed by other researchers, this article seeks to contribute to the analysis by systematically charting the technological abilities of algorithms that may affect coordination in the digital ecosystem in which they operate. Special emphasis is placed on the fact that the algorithms is a “recipe for action”, which can be directly or indirectly observed by competitors. The second part explores the promises as well as the limits of market solutions. In particular, it considers the use of algorithms by consumers and off-the-grid transactions to counteract some of the effects of algorithmic-facilitated coordination by suppliers. The shortcomings of such market solutions lead to the third part, which focuses on the ability of existing legal tools to deal effectively with algorithmic-facilitated coordination, while not harming the efficiencies they bring about. The analysis explores three interconnected questions that stand at the basis of designing a welfare-enhancing policy: What exactly do we wish to prohibit, and can we spell this out clearly for market participants? What types of conduct are captured under the existing antitrust laws? And is there justification for widening the regulatory net beyond its current prohibitions in light of the changing nature of the marketplace? In particular, the article explores the application of the concepts of plus factors and facilitating practices to algorithms. The analysis refutes the Federal Trade Commission’s acting Chairwoman’s claim that current laws are sufficient to deal with algorithmic-facilitated coordination.

July 8, 2018 | Permalink | Comments (0)

Friday, July 6, 2018

Job posting: FTC NY Office

Public Policy in an AI Economy

Austan Goolsbee (University of Chicago) offers thoughts on Public Policy in an AI Economy.

ABSTRACT: This paper considers the role of policy in an AI-intensive economy (interpreting AI broadly). It emphasizes the speed of adoption of the technology for the impact on the job market and the implications for inequality across people and across places. It also discusses the challenges of enacting a Universal Basic Income as a response to widespread AI adoption, discuss pricing, privacy and competition policy the question of whether AI could improve policy making itself.

July 6, 2018 | Permalink | Comments (0)