Antitrust & Competition Policy Blog

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

A Member of the Law Professor Blogs Network

Monday, July 28, 2014

Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals

Pierre Dubois, Toulouse and Laura Lasio are Identifying Industry Margins with Unobserved Price Constraints: Structural Estimation on Pharmaceuticals.

ABSTRACT: We provide a method allowing to identify margins in an oligopoly price competition game when prices may not be freely chosen in some markets, for example due to regulation. We use our identification strategy to study the effects of regulatory constraints in the pharmaceutical industry, which is heavily regulated in some countries, and particularly in France. We use data from the US, Germany and France to identify country-specific 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 that allows us to explore the drivers of demand, to identify whether regulation in France truly affects margins and prices and to relate regulatory reforms to industry pricing equilibrium. We provide the first 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 different markets (US, Germany and France) with varying regulatory constraints. Empirical results show that margins have increased over time in France but that firms were especially constrained in price setting after the different reforms in price setting that occurred in 2004. Counterfactual simulations show that overall total spending has significantly increased over the 2004-2007 period because of new regulation of price setting that reduced branded drugs prices but increased sales quantities by displacing part of the demand from generics to branded drugs.

July 28, 2014 | Permalink | Comments (0) | TrackBack (0)

Monopoly Insurance with Endogenous Information

Johan N. M. Lagerlof and Christoph Schottmuller describe Monopoly Insurance with Endogenous Information.

ABSTRACT: We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance. The reason is that underinsurance at the top discourages information gathering. We identify a sorting effect that explains why the insurer wants to discourage information acquisition. Moreover, a public policy that decreases the information gathering costs can hurt both parties. Lower information gathering costs can harm consumers because the insurer adjusts the optimal contract menu in an unfavorable manner.

July 28, 2014 | Permalink | Comments (0) | TrackBack (0)

Dynamic Oligopoly Pricing: Evidence from the Airline Industry

Caspar Siegert, University of Munich and Robert Ulbricht, Toulouse School of Economics explore Dynamic Oligopoly Pricing: Evidence from the Airline Industry.

ABSTRACT: We explore how pricing dynamics in the European airline industry vary with the competitive environment. Our results highlight substantial variations in pricing dynamics that are consistent with a theory of intertemporal price discrimination. First, the rate at which prices increase towards the scheduled travel date is decreasing in competition, supporting the idea that competition restrains the ability of airlines to price-discriminate. Second, the sensitivity to competition is substantially increasing in the heterogeneity of the customer base, reflecting further that restraints on price discrimination are only relevant if there is initial scope for price discrimination. These patterns are quantitatively important, explaining about 83 percent of the total within-flight price dispersion, and explaining 17 percent of the observed cross-market variation of pricing dynamics.

July 28, 2014 | Permalink | Comments (0) | TrackBack (0)

Pricing Internet Traffic: Exclusion, Signalling and Screening

Bruno Jullien (Toulouse) and Wilfried Sand-Zantman address Pricing Internet Traffic: Exclusion, Signalling and Screening.

ABSTRACT: We consider a network that intermediates traffic between free content providers and consumers. While consumers do not know the traffic cost when deciding on consumption, a content provider knows his cost but may not control the consumption. We study how pricing consumers' and content providers' sides allows both profit extraction from the network and efficient information transmission. In the case of uniform tariff, we argue that a positive price-cap on the charge to content is optimal (with no constrain on the consumer side). Proposing menus helps signaling useful information to consumers and therefore adjusting consumption to traffic cost. In the case of menus, we show that optimal mechanisms consist in letting the content producers choose between different categories associated with different prices for content and consumers. Our results are robust to competition between ISPs and to competition between contents. We al! so show that when (competitive) content providers choose at small cost between a pay and a free business model, a price-cap at cost on the price for content improves efficiency.

July 28, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, July 25, 2014

Competition Law in Leisure Markets - Competition Law Scholars Forum XXIII Workshop - 26 September 2014

Competition Law in Leisure Markets

Competition Law Scholars Forum XXIII Workshop

26 September 2014

Download Program XXIII clasf madrid

 

July 25, 2014 | Permalink | Comments (0) | TrackBack (0)

Market Outcomes and Dynamic Patent Buyouts

Alberto Galasso, Matthew Mitchell, and Gabor Virag address Market Outcomes and Dynamic Patent Buyouts.

ABSTRACT: Patents are a useful but imperfect reward for innovation. In sectors like pharmaceuticals, where monopoly distortions seem particularly severe, there is growing international political pressure to identify alternatives to patents that could lower prices. Innovation prizes and other non-patent rewards are becoming more prevalent in government's innovation policy, and are also widely implemented by private philanthropists. In this paper we describe situations in which a patent buyout is effective, using information from market outcomes as a guide to the payment amount. We allow for the fact that sales may be manipulable by the innovator in search of the buyout payment, and show that in a wide variety of cases the optimal policy still involves some form of patent buyout. The buyout uses two key pieces of information: market outcomes observed during the patent's life, and the competitive outcome after the patent is bought out. We show that such dynamic market information can be effective at determining both marginal and total willingness to pay of consumers in many important cases, and therefore can generate the right innovation incentives.

July 25, 2014 | Permalink | Comments (0) | TrackBack (0)

Profiting from Innovation: Firm Level Evidence on Markups

Bruno Cassiman, IESE Business School and Stijn Vanormelingen discuss Profiting from Innovation: Firm Level Evidence on Markups.

ABSTRACT: While innovation is argued to create value, private incentives of firms to innovate are driven by what part of the value created firms can appropriate. In this paper we explore the relation between innovation and the markups a firm is able to extract after innovating. We estimate firm-specific price-cost margins from production data and find that both product and process innovations are positively related to these markups. Product innovations increase markups on average by 5.1% points by shifting out demand and increasing prices. Process innovation increases markups by 3.8% points due to incomplete pass-through of the cost reductions associated with process innovation. The ability of the firm to appropriate returns from innovation through higher markups is affected by the actual type of product and process innovation, the firm's patenting and promotion behavior, the age of the firm and the competition it faces. Moreover,! we show that sustained product innovation has a cumulative effect on the firm's markup.

July 25, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, July 24, 2014

Reputation and Entry in Procurement

Jeff Butler, Enrica Carbone, Pierluigi Conzo, and Giancarlo Spagnolo (Stockholm School of Economics, Universita di Roma Tor Vergata) discuss Reputation and Entry in Procurement.

ABSTRACT: There is widespread concern that favoring suppliers with good past performance, a standard practice in private procurement, may hinder entry by new firms in public procurement markets. In this paper we report results from a laboratory experiment exploring the relationship between reputation and entry in procurement. We implement a repeated procurement game with reputational incentives for quality and the possibility of entry. We allow also the entrant to start off with a positive reputational score. Our results suggest that while some past-performance based reputational mechanisms do reduce the frequency of entry, appropriately designed mechanisms can significantly increase it. Moreover, the reputational mechanism we investigate typically increases quality but not prices, suggesting that well designed mechanisms may generate very large gains for buyers and taxpayers.

July 24, 2014 | Permalink | Comments (0) | TrackBack (0)

Transparency in Buyer-Determined Auctions: Should Quality be Private or Public?

Sebastian Stoll, University of Munich and Gregor Zottl, University of Erlangen/Nuremberg ask Transparency in Buyer-Determined Auctions: Should Quality be Private or Public?

ABSTRACT: We study non-binding procurement auctions where both price and non-price characteristics of bidders matter for being awarded a contract. The outcome of such auctions critically depends on how information is distributed among bidders during the bidding process. As we show theoretically, whether it is in the buyer's interest to conceal or to disclose non-price information most importantly depends on how important the quality aspects of the good to be procured are to the buyer: The more important the quality aspects are to the buyer, the more interesting concealment becomes. We then empirically study the impact of a change in the information structure using data from a large European online procurement platform for different categories of goods. In a counterfactual analysis we analyze the reduction of non-price information available to the bidders. In the data we find that the choice of information structure indeed matters.! Confirming the hypothesis obtained in our theoretical framework, we find that in auction categories where bidders' non-price characteristics are of little importance for the decisions of the buyers, concealment of non-price information decreases buyers' welfare by up to 6% due to reduced competitive pressure leading to higher bids. In contrast, for categories where bidders' non-price characteristics strongly influence buyers' decisions concealment of non-price information increases buyers' welfare by up to 15%.

July 24, 2014 | Permalink | Comments (0) | TrackBack (0)

The Strength of the Waterbed Effect Depends on Tariff Type

Steffen Hoernig, Nova School of Business and Economics, Universidade Nova de Lisboa discusses The Strength of the Waterbed Effect Depends on Tariff Type .

ABSTRACT: We show that the waterbed effect, i.e. the pass-through of a change in one price of a firm to its other prices, is much stronger if the latter include subscription rather than only usage fees. In particular, in mobile network competition with a fixed number of customers, the waterbed effect is full under two-part tariffs, while it is only partial under linear tariffs.

July 24, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 23, 2014

Institutional Authority and Collusion

Axel Sonntag (University of East Anglia) and Daniel John Zizzo (University of East Anglia) discuss Institutional Authority and Collusion.

ABSTRACT: A 'collusion puzzle' exists by which, even though increasing the number of firms reduces the ability to tacitly collude, and leads to a collapse in collusion in experimental markets with four or more firms, in natural markets there are such numbers of firms colluding successfully. We present an experiment showing that, if managers are deferential towards an authority, firms can induce more collusion by delegating production decisions to middle managers and providing suitable informal nudges. This holds not only with two but also with four firms. We are also able to distinguish compliance effects from coordination effects from the nudges.

July 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Mergers between regulated firms with unknown efficiency gains

Raffaele Fiocco, University of Mannheim and Gongyu Guo, Humboldt University of Berlin discuss Mergers between regulated firms with unknown efficiency gains.

ABSTRACT:  In an industry where regulated firms interact with unregulated suppliers, we investigate the welfare effects of a merger between regulated firms when cost synergies are uncertain before the merger and their realization becomes private information of the merged firm. The optimal merger policy trades off potential cost savings against regulatory distortions from informational problems. We show that, as a consequence of this trade-off, more intense competition in unregulated segments of the market induces a more lenient merger policy. The regulated firms' diversification into a competitive segment of the market can lead to a softer merger policy when competition is weaker.

July 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Fight Cartels or Control Mergers? On the Optimal Allocation of enforcement Efforts within Competition Policy

Andreea Cosnita (Universite Paris X) and Jean-Philippe Tropeano (Sorbonne) ask Fight Cartels or Control Mergers? On the Optimal Allocation of enforcement Efforts within Competition Policy.

ABSTRACT: This paper deals with the optimal enforcement of competition law between merger and anti-cartel policies. We examine the interaction between these two branches of antitrust, given the budget constraint of the public agency, and taking into account the ensuing incentives for firms in terms of choice between cartels and mergers. To the extent that a tougher anti-cartel action triggers more mergers and vice-versa, we show that the two antitrust branches are complementary. However, if the merger's coordinated effect is taken into account, then for a sufficiently large such effect the agency may optimally have to refrain from controlling mergers and instead spend all resources on fighting cartels.

July 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy

Ben Mermelstein, Volker Nocke, University of Mannheim, Mark Satterthwaite, and Michael Whinston, MIT offer Internal versus External Growth in Industries with Scale Economies: A Computational Model of Optimal Merger Policy.

ABSTRACT: We study optimal merger policy in a dynamic model in which the presence of scale economies implies that firms can reduce costs through either internal investment in building capital or through mergers. The model, which we solve computationally, allows firms to invest or propose mergers according to the relative profitability of these strategies. An antitrust authority is able to block mergers at some cost. We examine the optimal policy when the antitrust authority can commit to a policy rule and when it cannot commit, and consider both consumer value and aggregate value as possible objectives of the antitrust authority. We find that optimal policy can differ substantially from what would be best considering only welfare in the period the merger is proposed. We also find that the ability to commit can lead to a significant welfare improvement. In general, antitrust policy can greatly affect firms' optimal investment behavior, and firms' investment behavior can in turn greatly affect the antitrust authority's optimal policy.

July 23, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 22, 2014

Cartel Size and Collusive Stability with Non-Capitalistic Players

Flavio Delbono, Bologna and Luca Lambertini, Bologna explore Cartel Size and Collusive Stability with Non-Capitalistic Players.

ABSTRACT: A well established belief both in the game-theoretic IO and in policy debates is that market concentration facilitates collusion. We show that this piece of conventional wisdom relies upon the assumption of profit-seeking behaviour, for it may be reversed when firms pursue other plausible goals. To illustrate our intuition, we investigate the incentives to tacit collusion in an industry formed by Labor-Managed (LM) enterprises. We characterize the perfect equilibrium of a supergame in which LM firms play an infinitely repeated Cournot game. We show that the critical threshold of the discount factor above which collusion is stable (i) is lower in the LM industry than in the capitalistic one; (ii) monotonically decreases with the number of firms.

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Heterogenous switching costs

Gary Biglaiser, Jacques Cremer, Gergely Dobos have written on Heterogenous switching costs.

ABSTRACT: We consider a simple two period model where consumers have different switching costs. Before the market opens, there was an incumbent who sold to all consumers. We identify the equilibrium both with Stackelberg and Bertrand competition and show how the presence of low switching cost consumers benefits the incumbent, despite the fact that it never sells to any of them.

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Global Antitrust Challenges for the Pharmaceutical Industry Tuesday, September 23, 2014

Global Antitrust Challenges for the Pharmaceutical Industry

Agenda

 
  • Tuesday, September 23, 2014
  8:00 AM                                                           -   8:30 AM
Breakfast
J.W. Marriott Hotel, Salon II
                             
  8:30 AM                                                           -   8:40 AM
Welcome and Introduction
J.W. Marriott Hotel, Salon I
Host:                               
  • Damien Geradin                                    
                             
  8:40 AM                                                           -   9:20 AM
Keynote Address
J.W. Marriott Hotel, Salon I
Keynote Speaker:                               
  • Edith Ramirez                                    
                             
  9:20 AM                                                           -  10:40 AM
Panel 1: Competition Policy and Life-Cycle Management Strategies
J.W. Marriott Hotel, Salon I
Speaker:                               
  • Michael A. Carrier,                                    
  • Ingrid Vandenborre                                    
Panelist:                               
  • Eric J. Stock,                                    
  • Aaron Gal,                                    
  • Heather M. Johnson                                    
Chair:                               
  • James M. Spears                                    
                             
11:00 AM                                                           -  12:20 PM
Panel 2: Antitrust and Reverse Settlements: Unsettled Issues
J.W. Marriott Hotel, Salon I
Speaker:                               
  • Markus H. Meier,                                    
  • Henri Piffaut                                    
Panelist:                               
  • Yoonhwan Hwang,                                    
  • Marc E. Levin,                                    
  • Sumanth Addanki                                    
Chair:                               
  • Henry N. Butler                                    
                             
12:20 PM                                                           -   1:30 PM
Luncheon
J.W. Marriott Hotel, Salon II
Keynote Speaker:                               
  • John Pecman                                    
                             
  1:30 PM                                                           -   2:40 PM
Panel 3: Antitrust in Pharmaceutical Markets: When the Government is the Consumer
J.W. Marriott Hotel, Salon I
Speaker:                               
  • Herbert Hovenkamp,                                    
  • Giovanni Pitruzzela                                    
Panelist:                               
  • Claudia Berg,                                    
  • Kees Hellingman,                                    
  • John D. Graubert                                    
Chair:                               
  • Jonathan B. Baker                                    
                             
  3:00 PM                                                           -   4:10 PM
Panel 4: Rebates and Tying: Implications for Pharmaceutical Competition
J.W. Marriott Hotel, Salon I
Speaker:                               
  • Joshua D. Wright,                                    
  • Damien Geradin                                    
Panelist:                               
  • Abbott B. Lipsky, Jr.,                                    
  • Hal J. Singer,                                    
  • D. Daniel Sokol                                    
Chair:                               
                             
  4:10 PM                                                           -   5:30 PM
Panel 5: Merger Control in the Pharmaceutical Industry
J.W. Marriott Hotel, Salon I
Speaker:                               
  • Michael R. Moiseyev,                                    
  • Paul Csiczár                                    
Panelist:                               
  • Ilene K. Gotts,                                    
  • Monica Noether,                                    
  • George S. Cary                                    
Chair:                               
  • Timothy J. Muris                                    
                             
  5:30 PM                                                           -   6:30 PM
Reception
J.W. Marriott Hotel, Lounge
                             
  6:30 PM                            
Adjourn

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

More on University of Arkansas and Antitrust

Jim Fiskin notes that the most important person to teach antitrust at Arkansas was Bill Clinton. See here.

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Can competition reduce quality?

Kurt Richard Brekke, Luigi Siciliani, and Odd Rune Straume ask Can competition reduce quality?

ABSTRACT: In a spatial competition setting there is usually a non-negative relationship between competition and quality. In this paper we offer a novel mechanism whereby competition leads to lower quality. This mechanism relies on two key assumptions, namely that the providers are motivated and risk-averse. We show that the negative relationship between competition and quality is robust to any given number of firms in the market and whether quality and price decisions are simultaneous or sequential. We also show that competition may improve social welfare despite the adverse effect on quality. Our proposed mechanism can help explain empirical findings of a negative effect of competition on quality in markets such as health care, long-term care, and higher education.

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)

Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing

Eugenio J. Miravete, University of Texas at Austin; Centre for Economic Policy Research (CEPR), Katja Seim, University of Pennsylvania - Business & Public Policy Department, and Jeff Thurk, University of Notre Dame explore Complexity, Efficiency, and Fairness of Multi-Product Monopoly Pricing.

ABSTRACT: The Pennsylvania Liquor Control Board administers the purchase and sale of wine and spirits and is mandated to charge a uniform 30% markup on all products. We use an estimated discrete choice model of demand for spirits, together with information on wholesale prices, to assess the implications of this policy. We find that failure to account for the correlation between demographics and consumption patterns leads to lower prices than those charged by a profit-maximizing, multi-product monopolist. Using product-specific markups leads to higher prices on average, less quantity consumed, an 11% increase in total profits, and greater welfare. The current one-size-fits-all pricing rule ignores variations in demand elasticities resulting in the implicit taxation of high-income and educated households by raising the prices of spirits they prefer (vodka and whiskey) while lowering the price of products favored by low-income and minority households (gin and rum).

July 22, 2014 | Permalink | Comments (0) | TrackBack (0)