Antitrust & Competition Policy Blog

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

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Monday, July 21, 2014

A New European Competition Policy for Growth Driven by Profitable Investments. The European Commission's Policy In Light of the Modern Economic Growth Theories

Stephane Ciriani, Orange, Regulatory Affairs and Marc Lebourges, France Telecom offer A New European Competition Policy for Growth Driven by Profitable Investments. The European Commission's Policy In Light of the Modern Economic Growth Theories.

ABSTRACT: 1. Although market dominance is not illegal in the European Union, European Commission’s doctrine regards exercise of market power as economically inefficient. Its economic policy is meant to push markets towards perfect competition, but ignores that investments required for dynamic efficiency are financed by the profits they create.

Although under the European law market power is not illegal by itself, the economic doctrine of the Commission considers, however, that the exercise of market power, i.e. charging supra-competitive prices, lead to inefficient market outcomes. The economic policy of the European Union is a competition policy which aims to make markets tend towards a perfectly competitive frame, where profit margins are eliminated and prices tend towards marginal costs. The Commission monitors and controls market structures to ensure that competition drives growth by selecting the most efficient companies and sectors. The Commission regards competition as the major driver of competitiveness and growth provided it is supported by competition policy which makes markets efficient under the criteria of a static economic analysis. Its purpose is to raise competition intensity in the intermediate markets to allow producers of final goods to benefit from lower input price to improve their efficiency. In addition, it aims at promoting the mobility of factors of production, transferring them from the less efficient to the most efficient and productive sectors.

The Commission argues that under the guidance of competition authorities, competition leads to cost efficiency, raises the amount of resources available to leading sectors and at the same time promotes investment through the “escape from competition” effect.

This doctrine has, however, important shortcomings. It ignores the fact that lower profits can hamper investment and that companies with negative expectations on profitability will not invest. The European Commission is unclear about whether competition should be seen as a process or a steady state. When politically advocating its competition policy, the European Commission depicts competition as an evolutionary dynamic that promotes efficiency, investment and innovation. However, when actually implementing its policy, the European Commission aims to make markets tend towards a steady state of maximum level of static competitive intensity (with no technological progress) by eliminating market power and ensuring the most perfect competitive frame possible. The pursuit of the maximum level of static competitive intensity might then deter investment, which is the driver of dynamic efficiency, and eventually economic growth.

2. The European competition authorities’ policy is to prevent exercise of market power whereas the purpose of US competition authorities is to maintain undertakings’ incentives to invest in order to gain market power.

The European Commission intervenes ex-ante through policies promoting market entry in order to prevent the formation of a market power likely to be exercised and  relies on antitrust action to remove it ex-post. In their practical approach, the competition authorities ban mergers that bring market power arguing that intermediate and final consumers would face higher prices and lower innovation. They approve consolidations provided merged companies commit to transfer productive assets to direct competitors. They consider that temporary rents from investment and innovation efforts distort competition because they grant dominant positions and thus have to be tackled by the enactment of competition law. As the practical approach of competition authorities is to reach the maximum level of static competitive intensity, (where prices equal marginal production costs), their focus is on the upward price pressures that mergers would trigger in the short term.

The European competition authorities do not spontaneously consider the positive effects on investment and efficiency that could stem from a merger. They are sceptical about the arguments put forward by companies in support of these effects. Therefore, when evaluating mergers, the authorities do not consider the value that corporate investment in quality and quantity (stemming from higher expected profitability) can bring to the consumer. The same reasoning is applied to the analysis of abuse of dominant position. The appraisal of market dominance and of the exercise of market power by the European authorities might hamper the incentives of private companies to invest and innovate. The US competition authorities apply a different antitrust policy with regards to maintaining a competitive market structure. Contrary to the European competition authorities they do not consider that the dominant firm is liable for the competitive market structure or responsible for maintaining its competitors on the market. They give priority to returns on investment and incentives to invest over forcing companies to share their assets with their competitors to preserve static competition. They thus favour the growth of market players (hence to market power) over maintaining a perfectly competitive market structure.

The US competition authorities and policymakers consider market power in the form of mark-ups over competitive prices both a condition for returns on prior investment and a condition of future investments. As a result, they are more likely to foster incentives to invest and innovate, as investors do not necessarily expect both their assets and their returns to be transferred to competitors.

In Europe, the willingness of competition authorities to eliminate profit margins, to limit capital intensity favored by mergers, and to ban large companies from acquiring competitive advantages can deprive these companies of prospects which motivate their investments, as expectations regarding profitability become negative.  This has an overall deterrent effect on investment and innovation, and in turn undermines economic growth in the European Union. 

3. The European Commission acknowledges investment as a driver of macroeconomic growth undermined by poor profitability but ignores this point concerning the provision of intermediary goods by high technology industries in the internal market.

The European Commission acknowledges that the European Union’s macroeconomic weaknesses, although worsened by the financial crisis, have structural causes. The European Union has slower productivity growth than the United States, especially in high-tech sectors, and a weaker industrial sector. According to the Commission, Europe has been losing competitiveness because of high labour costs and companies’ difficulties in specialising in fast growing sectors, exporting their goods and services, and accessing sources of funding.

To restore competitiveness, productivity and growth in the Union, the Commission recommends strengthening high productivity industries and companies exposed to international competition. It posits that raising the share of the manufacturing sector in the aggregate added value should raise productivity gains in the global economy. The policy of the European Union consists in fostering transfers of inputs from the non-tradable sector (mainly services) to the tradable sector (industry). Structural reforms are thus designed to reduce labour costs through tax shifts and to decrease the prices of intermediate inputs in market services (sheltered from international competition) through stronger competitive pressure. The Commissions posits that exporting industrial companies would then be able to restore their profit margins and therefore the investment capacities needed to bring technological progress to the internal market. The Commission thereby recognises both the need for profit margins to finance current corporate investment and the need for sufficient expected returns to commit to new investments.

However, it still enforces the ban on the exercise of market power as the essential component of its competition policy, relying on the “escape-competition effect” to foster investment when competition is intense. The Commission thereby ignores that investment in market services can be slowed down due to negative expectations on revenues and profit margins which will limit the capacity of companies to finance themselves. The Commission suggests that increased competition in the banking sector might raise the credit supply and overcome the shortage of internal resources, but, by doing so, the Commission seems to confuse financing issues and profitability issues. For the Commission, internal resources to finance investment will not come from competitive advantages (as fair reward from investment) but from lower input costs due to increased competitive pressure.

4. Economic growth results from improved productivity due to investments incorporating technical progress in the production system. Investments decisions by market players are subject to expected profits and cannot be achieved when competition intensity exceeds its optimal threshold. A growth-supportive competition policy should adjust competitive intensities to maximise the contribution investments in each industry to maximise the contribution investments in each industry provide to productivity and growth.

The European competition authorities advocate monitoring markets to ensure that an evolutionary process leads companies to invest and innovate. But in the Commission’s doctrine, technological progress is regarded as exogenous to the market. The European doctrine focuses on static efficiency, making prices converge towards marginal costs, thereby eliminating mark-ups over steady state competitive prices. By doing so, it rejects the endogenous drivers of dynamic efficiency.

Endogenous growth theory has shown that technological progress is not brought to the market, but is instead created by the market. It is the result of private investment decisions. It stems from the accumulation of knowledge and capital goods by private companies. Mark-ups over competitive prices are both the result of past investment and the precondition for future investment. Private investors are willing to bear the cost of investment provided they are granted temporary rents to reward their capital expenditure. Investments cannot be made without a prospect of profit.  Internal resources can provide critical contribution to the financing of future investment. A certain degree of imperfect competition is thus needed to foster accumulation of fixed capital (which incorporates technological progress).
A competition policy pushing markets towards perfect competition is thus likely to hamper investment and growth. This is why the pursuit of “perfect” markets might not be the soundest policy choice when the objective is to promote growth through private investment.

Provisions to remove structural entry barriers and price-cost margins removes at the same time both the incentives and the internal resources needed to invest. Recent empirical studies have evidenced that competition might harm investment and innovation above an optimal threshold. Thus, when competition exceeds it, it is unlikely that proceeding with a competition policy that unconditionally attempts to eliminate all abilities to exercising market power remains the most suitable choice to promote investment and growth.

In Europe competition policy is applied uniformly irrespective of the specific rate of technological progress of industries. This practice is not consistent with the fact that corporate investment that embodies technological evolution is endogenous to market competition. Private investment can only be sustained over time, let alone increased, provided sufficient levels of cash flow are forecasted to justify capital expenditure. This requires sufficient expected profits and mark-ups over competitive prices. Some sectors, including services markets, are highly capital-intensive and evolve rapidly with technological change.  These sectors accumulate fixed capital which incorporates the technological progress and contribute to the growth of productivity. They do need sufficient profitability to fund their current investments and to consider future investments as well. Under the European Commission’s doctrine that aims to maximise static competitive intensity, such sectors will hardly be fully efficient and provide a full contribution to economic growth through the accumulation of technological progress.
The intensity of use of new technologies matters more for economic growth than the timing of their emergence. Thus a competition policy conducive to growth needs to attach at least as much importance to corporate investments in fixed capital goods that embody the new technologies as it does to investments in the creation of new technologies (i.e. R&D activities).

As private incentives to invest are endogenous to the market structure, the intensity of investment needed to improve competitiveness could only be reached and maintained if capital-intensive industries restore their profit margins. The framework of analysis and the implementation rules of European competition policy need to be updated. The European economic policy could usefully update its views on the aims and practical implementation of its competition policy. It could do so by taking account of the specific industrial and financial constraints of companies that provide technological progress through the investments. Their expenditures on fixed capital need sufficient self-financing capacities and thus mark-ups over competitive prices.

July 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Search Engines and Data Retention: Implications for Privacy and Antitrust

Lesley Chiou, Occidental College - Department of Economics and Catherine Tucker, Massachusetts Institute of Technology (MIT) analyze Search Engines and Data Retention: Implications for Privacy and Antitrust.

ABSTRACT: This paper investigates whether larger quantities of historical data confer a competitive advantage to firms that offer Internet search. We study how the length of time that search engines retained their server logs affected the apparent accuracy of subsequent searches. Our analysis exploits changes in these policies prompted by the actions of the European Commission. We find little empirical evidence that reducing the length of storage of past search engine searches affected the accuracy of search. Our results suggest that the possession of historical data confers less of a competitive advantage than is sometimes supposed. Our results also suggest that limits on data retention may impose fewer costs in instances where overly long data retention leads to privacy concerns such as an individual's "right to be forgotten."

July 21, 2014 | Permalink | Comments (0) | TrackBack (0)

Friday, July 18, 2014

The Current State of Mexico's Telecom Reform: A Clash between Reforms and Competition

Ramiro Tovar Landa, Instituto Tecnologico Autonomo de Mexico (ITAM) explains The Current State of Mexico's Telecom Reform: A Clash between Reforms and Competition.

ABSTRACT: Speech about Telecommunications Reform in México and their industrial policy elements which lie up in income transfers from the incumbent to its competitors and rules that rewards the lack of investment by new competitors and erase incentives to the incumbent reaching confiscatory measures. The reform is guided to service based competition rather than facilities based. Mexico is about to test a regulatory policy failure when the investment by both, incumbent and entrants, is needed to reach the higher grow to the Mexico' economy.

July 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Weak versus Strong Net Neutrality

Joshua S. Gans, University of Toronto - Rotman School of Management describes Weak versus Strong Net Neutrality.

ABSTRACT: This paper provides a framework to classify and evaluate the impact of net neutrality regulations on the allocation of consumer attention and the distribution of surplus between consumers, ISPs and content providers. While the model provided largely nests other contributions in the literature, here the focus is on including direct payments from consumers to content providers. With this additional price it is demonstrated that the type of net neutrality regulation (i.e., weak versus strong net neutrality) matters for such regulations to have real effects. In addition, we provide support for the notion that strong net neutrality may stimulate content provider investment while the model concludes that there is unlikely to be any negative impact from such regulation on ISP investment. Counter to many claims, it is argued here that ISP competition may not be a substitute for net neutrality regulation in bringing about these effects.

July 18, 2014 | Permalink | Comments (0) | TrackBack (0)

MARKET DEFINITION IN TWO-SIDED MARKETS: THEORY AND PRACTICE

Lapo Filistrucchi, University of Florence, Damien Geradin,Tilburg University, Eric van Damme, Tilburg University and Pauline Affeldt, E.CA Economics discuss MARKET DEFINITION IN TWO-SIDED MARKETS: THEORY AND PRACTICE.

ABSTRACT: Drawing from the economics of two-sided markets, we provide suggestions for the definition of the relevant market in cases involving two-sided platforms, such as media outlets, online intermediaries, payment cards companies, and auction houses. We also discuss when a one-sided approach may be harmless and when instead it can potentially lead to a wrong decision. We then show that the current practice of market definition in two-sided markets is only in part consistent with the above suggestions. Divergence between our suggestions and practice is due to the failure to fully incorporate the lessons from the economic theory of two-sided markets, to the desire to be consistent with previous practice, and to the higher data requirements and the higher complexity of empirical analysis in cases involving two-sided platforms. In particular, competition authorities have failed to recognize the crucial difference between two-sided transaction and non-transaction markets and have been misled by the traditional argument that where there is no price, there is no market.

July 18, 2014 | Permalink | Comments (0) | TrackBack (0)

Thursday, July 17, 2014

CPI Antitrust Chronicle Viva Latin America Issue is Out

JUL-14(1)

Summer 2014, Volume 7 Number 1

 
In this issue:

With all eyes on the Americas for the World Cup (many congratulations to Brazil for such a successful job hosting), it's a good time to take a quick survey of the latest antitrust happenings in Latin America. We start with a strong indication of just how seriously the region is taking the subject, surveying the extent of cooperation among the agencies, followed by a look at the challenges of dealing with a "sluggish" judiciary in many of the countries of the region. We continue with three interesting country case studies: two perspectives on Mexico's just-enacted major—and controversial—changes to their competition regime, lessons learned after ten years of a restructured Chilean regime, and a look at how Brazil's two-year-old New Law is maturing.

Latin America Update
  1. Julian Pena, Jul 16, 2014

    Greater Cooperation Among Competition Agencies in Latin America

     

    Anyone doing business in the region should be aware of the increased cooperation among competition agencies, as this new reality will have an increasing influence on decision-making. Julián Peña (Allende & Brea)

  2. Paulo Furquim de Azevedo, Jul 16, 2014

    What’s the Role of Judicial Review in Latin American Countries?

     

    The effects of judicial review depend on how firms act strategically given the option to challenge agencies’ decisions in courts. Paulo Furquim de Azevedo (Sao Paulo School of Economics)

  3. Gerardo Calderon-Villegas, Jul 16, 2014

    Comments on the New Mexican Competition Law

     

    The new Mexican Antitrust Law introduces novel concepts aimed at increasing competition in all product and service markets. Gerardo Calderon (Baker & McKenzie)

  4. Victor Pavon-Villamayor, Jul 16, 2014

    Essential Inputs and Antitrust Barriers in the Mexican Economic Competition Regime

    According to the new law, a barrier to competition and free entry is also, literally, anything that limits or distorts the process of competition and free entry. Víctor Pavón-Villamayor (Oxford Competition Economics)

  5. Claudio Agostini, Manuel Willington, Jul 16, 2014

    A Decade of Significant Changes in Competition Policies in Chile

     

    The last decade in Chile has seen, more than in the previous 50 years, a significant improvement in terms of antitrust policies and associated enforcement institutions. Claudio A. Agostini & Manuel Willington (Universidad Adolfo Ibañez)

  6. Paulo Leonardo Casagrande, Jul 16, 2014

    The New Brazilian Competition Law—Two Years On

    CADE, with its now integrated configuration, has succeeded in implementing the new statute, especially when it comes to the modernized merger control regime. Paulo Leonardo Casagrande (Pereira Neto, Macedo Advogados)

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Georgetown Law 8th Annual Global Antitrust Enforcement Symposium, 10 September 2014

8th Annual Global Antitrust Enforcement Symposium

 

The lawyers in the Antitrust, Competition and Economic Regulation practice at Hogan Lovells are proud to co-sponsor the Georgetown Law 8th Annual Global Antitrust Enforcement Symposium on Wednesday, 10 September 2014. Join leading international competition enforcement officials, industry professionals, and academics as they discuss and debate antitrust’s

cutting-edge issues.

 


Speakers include

  • Joaquín Almunia, Vice President, Commissioner for Competition, European Commission
  • William Baer, Assistant Attorney General, Antitrust Division, U.S. Department of Justice
  • Deborah L. Feinstein, Director, Bureau of Competition, U.S. Federal Trade Commission
  • David I. Gelfand, Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice
  • Renata Hesse, Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice
  • Herbert Hovenkamp, Professor, University of Iowa, College of Law
  • Aimee L. Imundo, Associate General Counsel, Antitrust, General Electric
  • John Pecman, Commissioner of Competition, Competition Bureau, Canada
  • Edith Ramirez, Chairwoman, U.S. Federal Trade Commission
  • Brent Snyder, Deputy Assistant Attorney General, Antitrust Divison, U.S. Department of Justice
  • Josh Wright, Commissioner, U.S. Federal Trade Commission

Click to download the program.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Inter-Firm Price Coordination in a Two-Sided Market

Hans Jarle Kind, Norwegian School of Economics & Business Administration (NHH); CESifo (Center for Economic Studies and Ifo Institute); Norwegian School of Economics (NHH) - Department of Economics, Tore Nilssen, University of Oslo - Department of Economics, Lars Sorgard , Norwegian School of Economics and Business Administration (NHH); Norwegian School of Economics (NHH) - Department of Economics discuss Inter-Firm Price Coordination in a Two-Sided Market.

ABSTRACT: In many two-sided markets we observe that there is a common distributor on one side of the market. One example is the TV industry, where TV channels choose advertising prices to maximize own pro…t and typically delegate determination of viewer prices to independent distributors. We show that in such a market structure the stronger the competition between the TV channels, the greater will joint pro…ts in the TV industry be. We also show that joint pro…ts might be higher if the wholesale contract between each TV channel and the distributor consists of a simple fi…xed fee rather than a two-part tariff.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Measuring bank competition in China: A comparison of new versus conventional approaches applied to loan markets

Bing Xu (Universidad Carlos III), Adrian van Rixtel (Bank for international settlements) and Michiel van Leuvensteijn (All pensions group) are Measuring bank competition in China: A comparison of new versus conventional approaches applied to loan markets.

ABSTRACT: Since the 1980s, important and progressive reforms have profoundly reshaped the structure of the Chinese banking system. Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition concluded that bank competition in China declined during the past decade, despite these reforms. In this paper, we show both empirically and theoretically that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar- Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the relatively new Profit Elasticity (PE) approach that was introduced in Boone (2008) as Relative Profit Differences (RPD) does not evidence these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996-2008, we show that competition actually increased in the past decade when the PE indicator is used. We provide additional empirical evidence that supports our results. We find that these, firstly, are in line with the process of financial reform, as measured by several indices, and secondly are robust for a large number of alternative specifications and estimation methods. All in all, our analysis suggests that bank lending markets in China have been more competitive than previously assumed.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Uncertain Costs and Vertical Differentiation in an Insurance Duopoly

Radoslav S. Raykov, Bank of Canada explores Uncertain Costs and Vertical Differentiation in an Insurance Duopoly.

ABSTRACT: Classical oligopoly models predict that firms differentiate vertically as a way of softening price competition, but some metrics suggest very little quality differentiation in the U.S. auto insurance market. I explain this phenomenon using the fact that risk-averse insurance companies with uncertain costs face incentives to converge to a homogeneous quality. Quality changes are capable of boosting as well as reducing profits, since quality differentiation softens price competition, but also undermines the lower-end firm’s ability to charge the markup commanded by risk aversion. This can make differentiation suboptimal, leading to a homogeneous quality; the outcome depends on consumers’ quality tastes and on how costly quality is. Additional trade-offs between quality costs, profits and profit variances compound this effect, resulting in equilibria at very low quality levels. I argue that this provides one explanation! of how insurer competition drove quality down in the nineteenth-century U.S. market for fire insurance.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

The Economics of Margin Squeeze

Bruno Jullien, Toulouse, Patrick Rey, Toulouse, and Claudia Saavedra describe The Economics of Margin Squeeze.

ABSTRACT: The paper discusses economic theories of harm for anti-competitive margin squeeze by unregulated and regulated vertically integrated firms. We review both predation and foreclosure theories, as well as the mere exploitation of upstream market power. We show that foreclosure provides an appropriate framework in the case of an unregulated firm, whereas a firm under tight wholesale regulation should be evaluated under the predation paradigm, with an adequate test that we characterize. Finally, although non-exclusionary exploitation of upstream market power may also induce a margin squeeze, banning such a squeeze has ambiguous effects on the competitive outcome; hence, alternative measures, such as a cap on the access price, may provide a better policy.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Price leadership and unequal market sharing: Collusion in experimental markets

P.T. Dijkstra (Groningen University) addresses Price leadership and unequal market sharing: Collusion in experimental markets.

ABSTRACT: We consider experimental markets of repeated homogeneous price setting duopolies. We investigate the effect on collusion of sequential versus simultaneous price setting. We also examine the effect on collusion of changes in the size of each subject's market share in case both subjects set the same price. Our results show that sequential price setting compared with simultaneous price setting facilitates collusion, if subjects have equal market shares or if the follower has the larger market share. With sequential price setting, we find more collusion if subjects have equal market shares rather than unequal market shares. We observe more collusion if the follower has the larger market share than if the follower has the smaller market share.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 16, 2014

A note on consumer flexibility, data quality and collusion

Irina Hasnas, Heinrich Heine University of Dusseldorf provides A note on consumer flexibility, data quality and collusion.

ABSTRACT: In this note we analyze the sustainability of collusion in a game of repeated interaction where firms can price discriminate among consumers based on two types of customer data. This work is related to Liu and Serfes (2007) and Sapi and Suleymanova (2013). Following Sapi and Suleymanova we assume that consumers are differentiated both with respect to their addresses and transportation cost parameters (flexibility). While firms have perfect data on consumer addresses, data on their flexibility is imperfect. We use three collusive schemes to analyze the impact of the improvement in the quality of customer flexibility data on the incentives to collude. In contrast to Liu and Serfes in our model it is the customer flexibility data which is imperfect and not the data on consumer addresses. However, our results support their findings that with the improvement in data quality it is more difficult to sustain collusion. --

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Comparing Mobile Communication Service Prices Among Providers: A Hedonic Approach

Olivier Schoni (Friburg) and Lukas Seger (Friburg) are Comparing Mobile Communication Service Prices Among Providers: A Hedonic Approach.

ABSTRACT: The present article proposes a new approach to compare mobile communication service prices among different communications service providers. To this end, a hedonic model based on monthly phone bills is employed that relates billed amounts and the quantities of consumed mobile communication services. A linear hedonic regression model is separately estimated for each provider and then used to estimate prices. Laspeyres, Paasche, and Fisher double-imputed price indices are then used to compare prices across communications service providers on an aggregate level. The sensitivity of these indices in relation to the estimated hedonic functions is investigated using a generalized additive model.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Postal-Sector Policy: From Monopoly to Regulated Competition and Beyond

Christian Jaag, Swiss Economics SE AG explores Postal-Sector Policy: From Monopoly to Regulated Competition and Beyond.

ABSTRACT: This paper discusses the main aspects of the competitive and regulatory state of the postal sector. It presents the different models for postal competition and regulation in the EU and the US and their history, together with their implications on regulation, with a focus on universal services and network access. While postal monopolies used to be the main source of funding for universal service obligations, the need for alternative funding sources after full liberalization has increased the interest of regulators and the public in knowing the cost of these obligations. In parallel, new means of electronic communication and consumer needs call the traditional scope of universal services into question. This paper outlines the economic rationale of current policies and directions for future postal regulation to strengthen the postal services’ commercial viability in a competitive age, while safeguarding their relevant cha! racteristics for the economy.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Provider competition and over-utilization in health care

Jan Boone, Tilburg and Rudy Douven, CPB Netherlands Bureau for Economic Policy Analysis, Erasmus University Rotterdam and Harvard Medical School explain Provider competition and over-utilization in health care.

ABSTRACT: This paper compares the welfare effects of three ways in which health care can be organized: no competition (NC), competition for the market (CfM) and competition on the market (CoM) where the payer offers the optimal contract to providers in each case. We show that CfM is optimal if the payer either has contractible information on provider quality or can enforce cost efficient protocols. If such contractible information is not available NC or CoM can be optimal depending on whether patients react to decentralized information on quality differences between providers and whether payer’s and patients’ preferences are aligned.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 15, 2014

Why are product prices in online markets not converging?

Takayuki Mizuno, University of Tokyo and Tsutomu Watanabe, University of Tokyo ask Why are product prices in online markets not converging?

ABSTRACT: Why are product prices in online markets dispersed in spite of very small search costs? To address this question, we construct a unique dataset from a Japanese price comparison site, which records price quotes offered by e-retailers as well as customers' clicks on products, which occur when they proceed to purchase the product. We find that the distribution of prices retailers quote for a particular product at a particular point in time (divided by the lowest price) follows an exponential distribution, showing the presence of substantial price dispersion. For example, 20 percent of all retailers quote prices that are more than 50 percent higher than the lowest price. Next, comparing the probability that customers click on a retailer with a particular rank and the probability that retailers post prices at a particular rank, we show that both decline exponentially with price rank and that the exponents associated with the ! probabilities are quite close. This suggests that the reason why some retailers set prices at a level substantially higher than the lowest price is that they know that some customers will choose them even at that high price. Based on these findings, we hypothesize that price dispersion in online markets stems from heterogeneity in customers' preferences over retailers; that is, customers choose a set of candidate retailers based on their preferences, which are heterogeneous across customers, and then pick a particular retailer among the candidates based on the price ranking.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Behaviour-Based Price Discrimination under Advertising and Imperfectly Informed Consumers

Rosa-Branca Esteves (Universidade do Minho - NIPE) and Sofia Cerqueira (Universidade do Minho) analyze Behaviour-Based Price Discrimination under Advertising and Imperfectly Informed Consumers.

ABSTRACT:  This paper is a first look at the dynamic effects of BBPD in a horizontally differentiation product market, where firms need to invest in advertising to generate awareness. When a firm is able to recognize customers with different purchasing histories, it may send them targeted advertisements with different prices. In comparison to no discrimination, it is shown that firms reduce their advertising efforts, charge higher first period prices and lower second period prices. In comparison to no discrimination, in contrast to the profit and consumer welfare results obtained under full informed consumers, it is shown that BBPD boosts industry profits and harms consumers.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

The Air Cargo Cartel: Lessons for Compliance

How can you find a good compliance program?  I spent hours (along with Howard Bergman) intervieiwing the Lufthansa team that uncovered the air cargo cartel.  This is a very capable group that believes in compliance and ethics and created an effective program that caught the air cargo cartel (leading to a rush to leniency in a number of jursidictions). We wrote this up as a case study of an anatomy of cartel compliance and detection. We think that it will have appeal to both practitioner and academic audiences.

Howard Bergman (George Mason) and D. Daniel Sokol (University of Florida) offer The Air Cargo Cartel: Lessons for Compliance.

ABSTRACT: Cartel enforcement and leniency are issues of increased academic attention. Most of the academic work in this area focuses on scholarship regarding formal modeling of leniency, empirical work, and analyses of broader legal theories, analytical trends and specific decisions. Scholarship has not focused on how leniency works in practice to detect wrongdoing and how robust and effective compliance programs may be used as a tool to take advantage of leniency. This chapter fills in the gap by offering a case study of an effective compliance program that uncovered what was at the time the largest ever international cartel. To do so, the authors undertook interviews with the legal team of Lufthansa, the leniency applicant in the air cargo conspiracy.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Product Upgrades and Posted Prices

Mustafa Dogan (Department of Economics, University of Pennsylvania) discusses Product Upgrades and Posted Prices.

ABSTRACT: We consider the dynamic pricing problem of a durable good monopolist with full commitment power, when a new version of the good is expected at some point in the future. The new version of the good is superior to the existing one, bringing a higher ow utility. If the arrival is a stationary stochastic process, then the corresponding optimal price path is shown to be constant for both versions of the good, hence there is no delay on purchases and time is not used to discriminate over buyers, which is in line with the literature. However, if the arrival of the new version occurs at a commonly known deterministic date, then the optimal price path may be decreasing over time, resulting in delayed purchases. For both stochastic and deterministic arrival processes, posted prices is not the optimal mechanism, which on the other hand, involves into bundling of both new and old versions of the good and selling them only together.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)