Thursday, July 23, 2015
José L. Moraga-González (VU University Amsterdam, the Netherlands); Zsolt Sándor (Sapientia University, Rumania); and Matthijs R. Wildenbeest (Indiana University, United States) examine Prices, Product Differentiation, and Heterogeneous Search Costs.
ABSTRACT: We study price formation in the standard model of consumer search for differentiated products but allow for search cost heterogeneity. In doing so, we dispense with the usual assumption that all consumers search at least once in equilibrium. This allows us to analyze the manner in which prices affect the decision to search rather than to not search at all, which is an important but often neglected aspect of the price mechanism. Recognizing the role the equilibrium price plays in consumers' participation decisions turns out to be critical for understanding how search costs affect market power. This is because the two margins that determine prices the intensive search margin, or search intensity, and the extensive search margin, or search participation may be affected in opposing directions by a change in search costs. When search costs go up, fewer consumers decide to search, which modifies the search composition of demand such that demand can become more ! elastic. At the same time, the consumers who choose to search reduce their search intensity, which makes demand less elastic. Whether the effect on the extensive or the intensive search margin dominates depends on the range and shape of the search cost density. We identify conditions for higher search costs to result in higher, constant, or lower prices. Similar results are obtained when the marginal gains from search vary across consumers
Sylvia Bleker (VU University Amsterdam, the Netherlands); Christiaan Behrens (VU University Amsterdam, the Netherlands) ; Paul Koster (VU University Amsterdam, the Netherlands); and Erik T. Verhoef (VU University Amsterdam, the Netherlands) describe Market Structure and the Pricing of New Products: A Nested Logit Approach with Asymmetric Firms.
ABSTRACT: This article investigates competition in a market with an emerging technology using a discrete choice model to analyze demand and welfare. We focus on industry structure and investigate the impact of different market structures on demand for the new technology and on welfare. The car market serves as a prime example of such a market, where electric vehicles (EV’s) represent the new technology competing with standard cars with internal combustion engines (ICV’s). To analyze such a market, we use a nested logit model. In contrast to earlier literature, we allow firms to be asymmetric and active in multiple nests, with different numbers of variants in each nest, which can add up to any market share. Additionally, we add to existing literature by considering the case where substitutability between firms is stronger than between technologies, by nesting products by technology instead of by firm. We find implicit analytical solutions for the equilibrium mar! k-ups which can be used when there are two nests in the market; within that restriction firms can be asymmetric. Numerically, we find that EV sales are higher if offered by a new entrant only selling EV’s as opposed to when it is supplied by a firm selling variants of both types. We present an index based on mark-up differences between variants in the market, which can be used to a priori determine whether a change in market structure would increase or decrease welfare. These results are general to the nested logit model, and the index can thus be used in any market, as long as the market is sufficiently accurately described by the nested logit model.
I have just returned from Australia where I taught a short course on comparative cartels with Caron Beaton-Wells at the University of Melbourne. The University of Melbourne is a marvelous university and the competition law LLM is a well structured program and one that I recommend highly based on the Melbourne and global faculty.
Above is a photo of Andy McBride (BHP Billiton), myself and Caron Beaton-Wells (University of Melbourne). I gave a talk on my cartel research at the Competition Law & Economics Network. A number of practitioners, econ profs and law professors from Melbourne and other Australian universities attended the talk and provided thoughtful feedback. Andy gave an amazing guest lecture on the BHP compliance program, a program that other companies may want to emulate.
ABSTRACT: This paper extends Hotelling's model of price competition with quadratic transportation costs from a line to graphs. We derive an algorithm to calculate firm-level demand for any given graph, conditional on prices and firm locations. These graph models of price competition may lead to spatial discontinuities in firm-level demand. We show that the existence result of D'Aspremont et al. (1979) does not extend to simple star graphs and conjecture that this non-existence result holds more generally for all graph models with two or more firms that cannot be reduced to a line or circle.
ABSTRACT: We introduce a cost of location into Hotelling’s (1929) spatial duopoly. We derive the general conditions on the cost-of-location function under which a pure strategy price-location Nash equilibrium exists. With linear transportation cost and a suitably specified cost of location that rises toward the center of the Hotelling line, symmetric equilibrium locations are in the outer quartiles of the line, ensuring the existence of pure strategy equilibrium prices. With quadratic transportation cost and a suitably specified cost of location that falls toward the center of the line, symmetric equilibrium locations range from the center to the end of the line.
Wednesday, July 22, 2015
On endogenous Stackelberg leadership: The case of horizontally differentiated duopoly and asymmetric net work compatibility effects
Tsuyoshi Toshimitsu (School of Economics, Kwansei Gakuin University) provides comments On endogenous Stackelberg leadership: The case of horizontally differentiated duopoly and asymmetric net work compatibility effects.
ABSTRACT: Introducing product compatibility associated with network externalities (hereafter, network compatibility effects) into a horizontally differentiated duopoly model, we consider how network compatibility effects and the level of product substitutability affect endogenous timing decisions in the cases of quantity- and price-setting competition. In particular, we demonstrate the following. First, given asymmetric network compatibility effects between the products of the firms, there is Stackelberg equilibrium where the firm providing a product with a larger network compatibility effect than some certain level of product substitutability emerges as a leader (follower), whereas the firm providing a product with a smaller network compatibility effect than some certain level of product substitutability emerges as a follower (leader) in the case of quantity (price)-setting competition. Second, the Stackelberg equilibrium is Pareto-superior for both firms compared! with other equilibria. However, with alternative formulation determining network size, with respect to the endogenous Stackelberg leader−follower relationship, the revers holds.
Christiaan Behrens (VU University Amsterdam) and Mark Lijesen (VU University Amsterdam) examine Capacity Choice under Uncertainty with Product Differentiation.
ABSTRACT: We explore the characteristics of a capacity-then-price game for a duopoly market with product differentiation and stochastic demand. The analysis shows that a minimum threshold value for the level of vertical product differentiation exists, relative to horizontal product differentiation, for which existence of a Nash equilibrium in pure strategies is guaranteed. We find that when the quality and cost differences between the firms exactly offset each other, demand uncertainty causes equilibrium outcomes in capacities to become asymmetric. Without demand uncertainty, only a symmetric equilibrium can be established. This difference between stochastic and deterministic demand is the main driver behind our finding that if the regulator ignores the stochastic nature of demand, regulation lowers welfare for a large range of parameters, that is for approximately 10 per cent of the plausible parameter space.
William H. Page, University of Florida - Fredric G. Levin College of Law describes Signaling and Agreement in Antitrust Law.
ABSTRACT: Oligopolists look for signals from one another in planning their strategies. Some signals solicit cooperation from rivals and a still smaller number succeed in achieving noncompetitive equilibria. But only a subset of these noncompetitive outcomes involve agreements under Section 1 of the Sherman Act. In this essay, I try to identify what sorts of signaling fall within this last and narrowest category: signaling that brings about agreement. Conventional signals are actions, like nods of the head, that a culture has recognized as having a specific meaning; prearranged signals are outwardly benign actions or events that parties have agreed to treat as having special significance for them. Both conventional and prearranged signals may form or implement an express agreement under Section 1 in the same way as words, although rivals sometimes prefer to use the signals rather than words in order to conceal a surreptitious conspiracy. Still more important for antitrust law in practice are implicit signals — actions with general, often benign meanings for more than one audience, but that rivals understand as conveying a special meaning for them. Where the action’s multiple meanings for multiple audiences have important efficiency consequences — like a bare public announcement about present or even future prices — courts do not treat the specialized meaning for rivals as triggering a Sherman Act agreement, even if the conduct facilitates noncompetitive pricing. On the other hand, even a formally public announcement may bring about an agreement, if its implicit meaning targets rivals without providing useful information to other audiences.
Aurelien Leroy, University of Orleans - Laboratoire d'economie d'Orleans and Yannick Lucotte, ESG Management School ask Is There a Competition-Stability Trade-Off in European Banking?
ABSTRACT: The trade-off between bank competition and financial stability has always been a widely and controversial issue, both among policymakers and academics. This paper empirically re-investigates the relationship between competition and bank risk across a sample of 54 European listed banks over the period 2004-2013. However, in contrast to most extant literature, we consider both individual and systemic dimension of risk. Bank-individual risk is measured by the Z-score and the Distance-to-default, while we consider the SRISK as a proxy for bank systemic risk. Using the Lerner index as an inverse measure of competition and after controlling for a variety of bank-specific and macroeconomic factors, our results suggest that competition encourages bank risk-taking and then increases individual bank fragility. This result is in line with the traditional "competition-fragility" view. Our most important findings concern the relationship between competition and systemic risk. Indeed, contrary to our previous results, we find that competition enhances financial stability by decreasing systemic risk. This result can be explained by the fact that competition encourages the banks to take on more diversified risks, and thus tends to reduce the correlation in the risk-taking behavior of banks.
Tuesday, July 21, 2015
Alexander Kihm, German Aerospace Center, Nolan Ritter, Rhine-Westphalia Institute for Economic Research (RWI-Essen), and Colin Vance , Rhine-Westphalia Institute for Economic Research (RWI-Essen) ask Is the German Retail Gas Market Competitive?
ABSTRACT: We explore whether non-competitive pricing prevails in Germany’s retail gasoline market by examining the influence of the crude oil price on the retail gasoline price, focusing specifically on how this influence varies according to the brand and to the degree of competition in the vicinity of the station. Our analysis identifies several factors other than cost – including the absence of nearby competitors and regional market concentration – that play a significant role in mediating the influence of the oil price on the retail gas price, suggesting price setting power among stations.
José Luis Moraga-Gonzalez, VU University Amsterdam, Zsolt Sandor, Sapientia University; Sapientia-Hungarian University of Transylvania, and Matthijs R. Wildenbeest, Indiana University - Kelley School of Business - Department of Business Economics & Public Policy analyze Prices and Heterogeneous Search Costs.
ABSTRACT: We study price formation in a model of consumer search for differentiated products when consumers have heterogeneous marginal search costs. We provide conditions under which a symmetric Nash equilibrium exists and is unique. Search costs affect two margins the intensive search margin (or search intensity) and the extensive search margin (or the decision to search rather than to not search at all). These two margins affect the elasticity of demand in opposite directions and whether lower search costs result in higher or lower prices depends on the properties of the search cost density. When the search cost density has the increasing likelihood ratio property (ILRP), the effect of lowering search costs on the intensive search margin has a dominating influence and prices decrease. By contrast, when the search cost density has the decreasing likelihood ratio property (DLRP), the effect on the extensive search margin is dominant and lower search costs result in higher prices. We compare these results with those obtained when consumers have heterogeneous fixed search costs.
Merger Control in Times of Financial Crisis: An Expedient Instrument to Heal the Fledgling Economy or an Object of Abuse?
Kalpana Tyagi, Max Planck Institute for Innovation and Competition asks Merger Control in Times of Financial Crisis: An Expedient Instrument to Heal the Fledgling Economy or an Object of Abuse?
ABSTRACT: In times of crisis, there is reduced demand for consumer durables and the manufacturing industry tends to suffer from excess capacity. Due to liquidity problems, the banking sector too suffers critically. Generally, one observes an accelerated merger control activity across all the sectors, but banking and manufacturing, tend to be most active in terms of merger and acquisitions during times of economic and financial crisis. The present article discusses the substantive and procedural issues in merger control and how the competition authorities respond to crisis by showing flexibility in merger control. The present article presents a critical analysis of treatment of efficiencies and the failing firm defence, with examples of case laws from both sides of the Atlantic. The article concludes by contemplating how merger control can be a constructive instrument to drive the economy towards better macroeconomic fundamentals, without itself being a subject of abuse in the hands of opportunistic enterprises.
First Ever State Aid Sector Investigation: Electricity Producers Targeted by the European Commission
Philip Torbol and Alessandro Di Mario, both K&L Gates, describe the First Ever State Aid Sector Investigation: Electricity Producers Targeted by the European Commission.
ABSTRACT: On 29 April 2015, the European Commission (‘Commission’) launched its first ever sector inquiry under State aid rules, which will assess the measures put in place by the EU Member States to ensure an adequate production of electricity at all times (‘capacity mechanisms’). This could be the first step towards new rules on aid to electricity production. Another possible outcome is the opening of State aid proceedings against specific Member States’ subsidies to electricity producers.
Monday, July 20, 2015
Commissioner Vestager has a new op-ed on My competition philosophy In Europe, companies must play by Europe’s rules.
Some choice passages:
I find it only natural that competition policy is political: protecting consumers, creating jobs, and promoting economic growth is at the center of the goals we work toward...However, when it comes to the individual cases of competition enforcement, independence remains non-negotiable. There, the role of competition authorities is to enforce the law and serve the common interest. We are committed to the principles of fairness, good administration, transparency and due process. There is simply no room for political interference. Our actions have to be solely based on impartiality and rigor: On the facts, on the economics, and on the law.
Does rhetoric reflect reality? My sense is not always.
Florian Neumayr and Sarah Baumgartner, both bpv Hugel Rechtsanwalte OG, discuss Access to File for Damage Claimants in Competition Law Cases (Austria).
ABSTRACT: Under European competition law, claiming for damages after an infringement of competition rules must not be made practically impossible or be unnecessarily hampered. In that regard, the Austrian Supreme Court has made it clear that third parties must have the possibility to access the file relating to (fine) proceedings on competition law infringements. To access the file, the criteria to fulfil cannot impose an excessive burden on those seeking redress. If they refuse their consent to access, the parties involved in the fine proceedings are to give substantiated reasons.
Wouter P. J. Wils, King's College London; European Commission asks Ten Years of Commitment Decisions Under Article 9 of Regulation 1/2003: Too Much of a Good Thing?
ABSTRACT: Article 9 of Regulation 1/2003 created a new mechanism, allowing the European Commission to close an investigation into a suspected infringement of the antitrust prohibitions contained in Articles 101 and 102 TFEU by making commitments offered by the companies concerned binding on those companies ("commitment decisions"). Leaving aside the area of cartels, for which commitment decisions are not available, more than half of the formal decisions adopted by the Commission in the ten years since the entry into force of Regulation 1/2003 have been commitment decisions. Several commentators have expressed concerns about the risk of excessive use of the instrument of commitment decisions. To what extent are these concerns justified?
Vertical Effects in Competition Law and Regulatory Decisions in Pay-Television: France, the United Kingdom and the United States
Agustin Diaz Pines, Ecole Polytechnique, Centre de Recherche en Gestion; OECD and Yuri Biondi, French National Center for Scientific Research (CNRS) describe Vertical Effects in Competition Law and Regulatory Decisions in Pay-Television: France, the United Kingdom and the United States.
ABSTRACT: This paper examines vertical effects in competition law and regulatory decisions in pay-television markets in France, the United Kingdom and the United States, with a focus on vertical input and customer foreclosure, exclusive dealing, countervailing buyer power and some aspects of the implementation of remedies. Its inception in the discussion surrounding convergence is justified by the importance of vertical effects in consolidation and vertical integration trends between the telecommunication and pay-television industries. Although convergence between these two industries may be considered both from the vertical (vertical integration) and horizontal (service bundling) perspective, this paper only addresses its vertical aspects. Among all types of vertical effects, only those judged more relevant by the authorities, and subject to a greater degree of scrutiny are being addressed, as explained in Section 1.
First, we examine the different treatments of buyer power and its use as an argument to justify relaxing requirements for the authorisation of mergers in France and the United Kingdom (countervailing buyer power). Second, we conduct an exhaustive assessment of vertical foreclosure (both input and customer foreclosure) in relation to its regulatory treatment in these countries. In a separate section, exclusive dealing and related competition law practice are assessed in order to discern in which situations it can be pro- or anti-competitive, including future market structures. Finally, a section discusses the pros and cons of having wholesale reference offers for pay-television content against the use of arbitration mechanisms to prevent vertical foreclosure.
The overall conclusion of the paper is that, while the United States has been moving away from stringent ex-ante regulation in pay-television markets, justified by an improvement in competition dynamics, France and United Kingdom have only partially succeeded in addressing these concerns – in many ways more serious that in the United States – due to a lack of a legal framework to issue ex-ante regulation.
The empirical evidence for this paper is based on an exhaustive assessment of all related competition law and regulatory decisions in pay-television markets in France, the United Kingdom and the United States. The Annex includes a summary of vertical effects in antitrust and merger decisions in these countries from 1996 to 2014.
John M. Connor, Purdue University; American Antitrust Institute (AAI) discusses Antitrust Developments in Food and Pharma.
ABSTRACT: Closing the loopholes of downstream application of the Capper-Volstead exemption in the food system and pay-for-delay in pharmaceuticals is an important advance in US and EU antitrust norms. First, pay-for-delay conduct has been harmful for pharmaceuticals customers. After ten years of litigation that divided circuit courts, the Supreme Court decreed that payments to generic drug sellers by the patent holders of the brand equivalent that are aimed at delaying entry are illegal, but did so under a structured rule-of-reason approach. EU competition authorities treat such payments as per se civil infractions. Second, until court decisions made in 2011-2014, the reach of the Capper-Volstead Act and the legality of pay-for-delay conduct in the drug industry were in doubt. In 2015, the courts in most federal circuits now clearly agree that, at a minimum, acreage restrictions by marketing cooperatives are per se illegal. Moreover, any manipulation by farmers’ cooperatives of upstream supply is also likely to be illegal.
Saturday, July 18, 2015
D. Daniel Sokol, University of Florida, has a new paper on Analyzing Robinson-Patman.
Abstract: The Robinson-Patman Act protects inefficient competitors rather than consumers. The possibility of a suit brought under Robinson-Patman increases the costs of efficient competitors. As such, Robinson-Patman shifts the benefit of antitrust from consumers to less efficient competitors. The Act is fundamentally in tension with contemporary antitrust policy. This article explores the history of Robinson-Patman, shifts in Robinson-Patman case law, and how the FTC may have aided (or not) the change in legal outcomes of Robinson-Patman cases.
Friday, July 17, 2015
Steve Cernak (Schiff Harden) has an excellent new book geared towards practitioners - Antitrust in Distribution and Franchising. His is the first book launched from a new LEXISNEXIS ANTITRUST LAW & STRATEGY SERIES for which I serve as the consulting editor.
BOOK ABSTRACT: Antitrust in Distribution and Franchising is accessible and actionable information primarily about antitrust law in the context of various aspects of distribution system agreements. The goal of Antitrust in Distribution and Franchising is to provide high-level practical and conceptual guidance and general training for use in understanding the concepts and protocols involved in vetting distribution and franchising agreements and practices for antitrust law compliance.
Some topics in Antitrust in Distribution and Franchising include: determining the relevant market; resale price maintenance agreements and other vertical restraints; tying; price discrimination; state antitrust laws, etc., and other antitrust issues related to different categories of distribution and franchising arrangements. Its aim is to provide a practically oriented frame of reference for reaching a working hypothesis on whether a distribution or franchise agreement reduces rivalry resulting in likely appreciable anticompetitive effects and, if so, whether those effects are outweighed by pro-competitive efficiency gains benefitting customers.